18224 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 5, 1998 22 18225 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 18226 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 . 18227 1 2 INDEX OF PROCEEDINGS 3 4 VIVIAN CARLTON 5 Continued Examination by Mr. Blankenstein..18229 6 Examination by Mr. Keeton..................18347 7 Further Examination by Mr. Guido...........18360 8 Examination by Mr. Nickens.................18437 9 Further Examination by Mr. Eisenhart.......18460 10 Further Examination by Mr. Blankenstein....18468 11 Further Examination by Mr. Guido...........18469 12 Further Examination by Mr. Nickens.........18471 13 . 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 18228 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 back on the record. 5 Mr. Veis? 6 MR. VEIS: Thank you, Your Honor. We 7 have one preliminary matter. 8 This morning, Mr. Blankenstein brought 9 to my attention that Exhibit A14087, the copy we 10 submitted to the Court and the witness, is cut off 11 at the bottom on several of the pages. 12 Mr. Blankenstein was good enough to provide us 13 with a somewhat reduced copy which is not cut off 14 at the bottom. And we have agreed that with the 15 Court's permission, we would like to substitute 16 the new version for the one that we had previously 17 submitted to the Court. 18 THE COURT: All right. 19 MR. VEIS: Thank you, Your Honor. I'm 20 going to hand the new version to Ms. Carlton. 21 THE COURT: Are there other matters? 22 MR. BLANKENSTEIN: I don't believe so, 18229 1 Your Honor. 2 THE COURT: Mr. Blankenstein, you may 3 continue with your cross-examination. 4 MR. BLANKENSTEIN: Thank you, Your 5 Honor. 6 7 CONTINUED EXAMINATION 8 9 Q. (BY MR. BLANKENSTEIN) Good morning, 10 Ms. Carlton. How are you? 11 A. Just fine. How are you? 12 Q. Looking over the transcript of 13 yesterday's testimony, I noticed an inconsistency 14 in an answer that you gave to me and an answer you 15 gave to Mr. Veis in connection with, I think, the 16 same type of question. It was probably some 17 confusion caused by the nature of my question and 18 the context; but if we can clear up that matter 19 for the record, would that be all right with you, 20 Ms. Carlton? 21 A. Yes. 22 Q. Mr. Veis asked you at Page 17319 of the 18230 1 record, "Is salary and compensation an issue 2 that's reviewed during an examination" and you 3 said, "Yes, all the time." 4 Do you remember that testimony? 5 A. Yes. 6 Q. And yesterday afternoon, I asked you, 7 "Now, was compensation review a regular part of an 8 examination?" 9 And you said, "In institutions where it 10 was questioned or warranted. It's not in every 11 examination, but there were in several -- in 12 several institutions, we did that." 13 Now, was salary and compensation review 14 something you did on a regular basis when you 15 examined a savings and loan institution? 16 A. Right. You have a special page within 17 the report in which we have to compile the 18 information to the management analysis to which 19 you address the detail in which we did when it 20 came to doing -- conducting the job description by 21 type and by -- to the detail on the agreements 22 that was beyond what we typically did. 18231 1 Q. So, salary and bonus was one of the 2 things that you kept in mind when you -- during 3 the course of the examination determined whether a 4 salary and bonus was in keeping with what was 5 reasonable and commensurate; is that correct? 6 A. Correct. 7 Q. And you would look at this during the 8 course of the examination; is that right? 9 A. Right. 10 Q. I'd like you to turn to A11051, if you 11 would. I think it's before you. 12 A. I have it. 13 Q. And Ms. Carlton, can you -- I believe 14 this is the -- I believe this is in evidence, and 15 I believe this is your review of the board of 16 directors meeting; is that right? 17 A. Yes. 18 Q. And this -- and the first page has a 19 chart of the attendance of the members of the 20 board of directors at the various meetings that 21 you reviewed; is that right? 22 A. Right. 18232 1 Q. And again, you record their presence or 2 absence from meeting; is that right? 3 A. Right. 4 Q. Do you review the board minutes in 5 order to get a good overview of the issues that 6 had occurred and were being discussed by the board 7 since the last examination? 8 A. Right. 9 Q. And in -- you summarized the minutes 10 that you reviewed; is that right? 11 A. Right. 12 Q. Sometimes I notice here you just attach 13 segments of those minutes; is that correct? 14 A. Correct. 15 Q. When -- and other times, I notice that 16 you provided a handwritten summary of the meeting; 17 is that right? 18 A. Right. 19 Q. When do you decide to provide a 20 summary, and when do you decide simply to attach 21 an excerpt or the entire meeting of the board -- 22 the minutes of the entire meeting? 18233 1 A. It can vary from time constraints. It 2 can vary from if the data is too much to sit and 3 reduplicate and it's easier and you have access to 4 a copier, it's easier to copy. There -- it could 5 be due to a special subject matter that I want the 6 record as is versus transcribed. It varies. 7 Q. But in both instances, the point is to 8 identify what you believe was important that 9 occurred at that particular meeting; is that 10 right? 11 A. It's not -- it's just a matter of 12 gathering the information that possibly will or 13 can be needed in some respect later on. If I 14 obtain that information up front, then I don't 15 have to go back and do duplicate requests to get 16 information later. 17 Q. But you don't select all of the 18 information that was set out in the minutes; is 19 that correct? 20 A. Not -- no, not in all cases. 21 Q. And so, at least when you do your 22 handwritten summaries, you make a decision as to 18234 1 what you thought was significant for the purpose 2 of the examination in the future? 3 A. Right. 4 Q. If you could turn to the last page of 5 Exhibit A11051, Imaging No. OW129399. 6 Do you have that, Ms. Carlton? 7 A. Yes. 8 Q. And is that your handwritten summary of 9 the board of directors meeting of USAT that was 10 held on November 10th, 1987? 11 A. Yes. 12 Q. And in the second paragraph on that 13 page, you noted matters involving compensation; is 14 that right? 15 A. Right. 16 Q. And let me just read it -- this brief 17 paragraph quickly into the record. "Bob Whatley 18 reviewed the compensation committee's action on 19 proposed bonuses. The bonuses would be paid to 20 approximately 70 employees, and the dollar amount 21 would be less than $2 million. It was stated that 22 the bonuses were attempts to achieve market-based 18235 1 compensation." 2 A. Right. 3 Q. And you selected that because you 4 thought that was a significant event during the 5 course of that board meeting? 6 A. Right. 7 Q. Now, do you remember who Mr. Whatley 8 was? 9 A. He was one of the board of directors. 10 Q. Was he a member of the compensation 11 committee? 12 A. I think he was. 13 Q. Now, you say that the -- you record 14 here that it was stated in the minutes that the 15 bonuses were attempts to achieve market-based 16 compensation? 17 A. Right. 18 Q. At that time, did you -- had you 19 reviewed the salaries of the members of the 70 20 individuals in order to make a determination as to 21 whether the action of USAT to try and achieve 22 market-based compensation for those employees was 18236 1 in keeping with safety and soundness practices? 2 A. No. 3 Q. But you did notice that they were going 4 to pay substantial bonuses to those individuals; 5 is that correct? 6 A. Right. 7 Q. Let's take a look at Exhibit T8028 8 which is already in evidence. 9 Do you have that, Ms. Carlton? 10 A. Yes. 11 Q. And those are the minutes of the board 12 of directors meeting of November 10th, 1987? 13 A. Right. 14 Q. And the compensation and the bonus 15 issue is discussed on the second page; is that 16 right? 17 A. Yes. 18 Q. And the minutes record that 19 Mr. Silverman, who was also a member of the 20 compensation committee, spoke with regard to the 21 bonuses; is that right? 22 A. Yes. 18237 1 Q. And he stated that the bonuses were an 2 attempt -- were attempts to achieve market-based 3 compensation and that the executives who were 4 receiving such bonuses/compensation had taken on 5 more duties over the last year or so. He also 6 noted that it would cost the association 7 significant amounts of money to replace these 8 people and that the bonuses were an attempt to 9 make sure that there was adequate minimum 10 compensation for key executives. 11 Do you remember reading that? 12 A. It's here, yes. 13 Q. And were the reasons that Mr. Silverman 14 gave for awarding those bonuses consistent with 15 some of the criteria that are set out in R42, 16 which are the guidelines for determining 17 compensation for executives at a savings and loan? 18 A. Yes. 19 Q. And one of the things Mr. Silverman 20 noted was that the individuals had taken on more 21 duties; is that right? 22 A. Right. 18238 1 Q. And that's one of the factors to be 2 considered under R42? 3 A. Right. 4 Q. And market based -- and trying to 5 achieve market-based compensation is another 6 factor? 7 A. Right. 8 Q. And Mr. Silverman also noted that 9 trying to replace these individuals would cost the 10 institution even more money; is that right? 11 A. Right. 12 Q. And that was another appropriate 13 consideration under the R42 factors; is that 14 right? 15 A. Right. 16 Q. Now, at this time in November of -- did 17 you understand that the bonuses that were awarded 18 at the November 1987 meeting would be paid to the 19 employees in 1988? 20 A. Yes. 21 Q. Now, at the time you were reviewing 22 these minutes, you had already come to a 18239 1 conclusion in that USAT had failed its regulatory 2 capital requirements; is that right? 3 A. Right. 4 Q. And that was -- you had made that 5 judgment -- at least, you had made that judgment 6 back in the 1986 report? 7 A. Right. 8 Q. But you didn't feel it was a violation 9 of safety and soundness principles to award these 10 bonuses at a time when the institution was below 11 its regulatory net worth; is that right? 12 A. No. 13 THE COURT: I'm not sure that question 14 and answer is clear. I think you'd better clear 15 that up. 16 MR. BLANKENSTEIN: Okay. 17 Q. (BY MR. BLANKENSTEIN) Now, you didn't 18 think it was inappropriate or in violation of 19 either the guidelines of R42 or Section 563.17(b), 20 which deals with compensation, for USAT to pay 21 bonuses to the 70 individuals while it was in 22 violation of its net worth requirements; is that 18240 1 right? 2 MR. VEIS: Excuse me, Your Honor. If 3 we're seeking clarity here, that question, I 4 think, is about triply compounded. If he wishes 5 to ask about particular items, maybe that would be 6 more appropriate. 7 Q. (BY MR. BLANKENSTEIN) Let me try and 8 break it up for you. 9 At the time in November of 1987, you 10 had concluded that USAT had failed its net worth 11 requirements; is that right? 12 A. That's right. 13 Q. And they awarded bonuses to 70 14 individuals; is that right? 15 A. Right. 16 Q. And would you characterize the total 17 amount of those bonuses to be substantial? 18 Something less than $2 million? 19 A. We don't do ratios on bonuses. 20 Q. I'm just saying the total amount I 21 think was -- I think you noted in your -- in your 22 summary that it was something less than 18241 1 $2 million; is that right? 2 A. What are you saying is substantial? 3 Net worth or -- 4 Q. No. 5 A. If I looked at it to your net worth, 6 it's substantial. 7 Q. And you didn't believe that the award 8 of those bonuses at that time was in violation of 9 563.17(b) or the R42 guidelines; is that right? 10 A. I felt it was unsafe and unsound. 11 Q. Awarding the bonuses at that time you 12 thought was unsafe and unsound? 13 A. Correct. 14 Q. Did you notify -- did you record that 15 finding in any examination report or interim 16 report that you made during the course of the 1987 17 examination? 18 A. No. 19 Q. Was -- when you provided an interim -- 20 when you prepared an interim report, was it your 21 practice to identify the problems that you had 22 discovered at the institution between the time you 18242 1 began the examination and the time of the interim 2 report? 3 A. Yes. 4 Q. Now, I think we looked at your interim 5 report of January 15th, 1988. 6 Do you remember that yesterday? 7 A. Yes. 8 Q. And do you remember that we hadn't -- 9 we looked at that and you could find no criticism 10 of compensation? 11 A. Right. 12 Q. Is that right? 13 A. (Witness nods head affirmatively.) 14 Q. So, does -- and if you had, in fact, 15 made that finding that you said about the award of 16 bonuses at a time when USAT was failing its net 17 worth, wouldn't you have recorded that finding in 18 that interim report consistent with your practice? 19 A. I did not, no. 20 Q. Did you advise management of USAT of 21 your conclusion in that regard? 22 A. I did conduct a meeting with management 18243 1 in which they were informed. 2 Q. Did you do that in the period of 3 November/December of 1987? 4 A. I don't know the exact date. It was a 5 status management meeting, and we discussed it. 6 Q. And you told them that they shouldn't 7 be awarding those bonuses? 8 A. We questioned that. We questioned 9 their bonuses and salaries as being excessive. 10 Q. Now, we discussed your chart. 11 Do you remember the salary comparison? 12 A. Right. 13 Q. And that wasn't done until March of 14 1988; isn't that right? 15 A. Right. 16 Q. So, was the meeting in which you 17 questioned the bonuses and the salary a meeting 18 that occurred after this chart was prepared? 19 A. I'm not sure exactly when the date of 20 the meeting took place. 21 Q. You have memory of a meeting that 22 occurred before this chart was prepared? 18244 1 A. I'm saying I don't know the exact date 2 of the meeting, but I know that we did discuss 3 with management their salaries and bonuses because 4 I know that in response to that, management agreed 5 to go out and hire their own firm to do a separate 6 analysis. I do recall that. 7 Q. We'll get to that. 8 What I'm trying to focus on now is your 9 reaction in November and December of 1987 after 10 you reviewed the minutes where you found out that 11 USAT had awarded bonuses. 12 A. We were still just gathering the 13 information. One of the final things we do at the 14 end of the report is put together that page. So, 15 at that point, we were just gathering information. 16 Q. So, you didn't make a judgment that the 17 simple award of the bonuses at that time was an 18 unsafe and unsound condition that needed remedial 19 action; is that right? 20 A. A part of that analysis goes into the 21 end of the examination once you determine your net 22 worth, once you determine your operation losses. 18245 1 All of that goes into assessing your safeness and 2 soundness, and that's completed as one of the last 3 things you do. 4 Q. Are you -- is one of your tasks during 5 the examination, if you find an unsafe and unsound 6 condition that can be corrected, to advise 7 management about that so they take -- can take 8 appropriate remedial action? 9 A. That's correct. 10 Q. And you understood that the bonuses 11 that were to be awarded in -- that were awarded at 12 the November 1987 meeting were to be paid in 13 January of 1988. I remember you telling me that. 14 A. Right. 15 Q. But you didn't take any steps between 16 November of 1987 and sometime in 1988, at or about 17 the time this salary comparison schedule was 18 prepared, to advise management of your belief that 19 the award of bonuses was improper, did you? 20 A. I did. I told you I had a meeting with 21 them in which we discussed we had received a copy 22 of the UFG contracts, and that whole discussion 18246 1 was a part of it. So, they were well aware of the 2 questions and concerns that we had. 3 Q. And do you remember when you received 4 the USAT contracts -- excuse me -- the UFG 5 contracts? 6 A. There's an exception request that can 7 verify those dates. I don't recall. 8 Q. Now, I think I have a copy of the 9 request control log here. It's Exhibit B3972, 10 which I believe is already in evidence. 11 And if you take a look at Item No. 48, 12 that shows the date you requested employment 13 contracts; is that right? 14 A. Right. 15 Q. And it shows that you received them on 16 January 7th, 1988? 17 A. That's correct. 18 Q. And you analyzed those contracts, 19 correct? 20 A. Right. 21 Q. And let me turn you to an old familiar 22 friend, Exhibit A14086. 18247 1 And the second, third, and fourth pages 2 of this exhibit are the contract analysis that you 3 undertook; is that right? 4 A. It's also included -- wherever you had 5 a contract, it was noted as a contract. Sandra 6 Laurenson also had a contract. 7 Q. Right. And what's the date in which 8 you looked at these contracts? 9 A. January the 20th. Looks like the 20th. 10 It looks like January the 20th. 11 Q. And is that the date you started that 12 review? 13 A. I couldn't say now. 14 Q. So, you got the contracts on 15 January 7th. You reviewed them beginning on 16 January 20th; is that right? 17 A. Right. 18 Q. And so, the meeting with management 19 that you're talking about occurred after you 20 reviewed those contracts; is that right? 21 A. I don't know exactly when the meeting 22 was. 18248 1 Q. Well, I thought you said you talked to 2 them about the contracts. 3 A. I had had -- we had several 4 conversations about the contracts. We had one 5 conversation, "Do you have contracts?" And we 6 talked salary compensation. And then we requested 7 the contracts, and we had conversations later on 8 about the contracts. 9 Q. I thought -- maybe I misheard you. I 10 thought you said you had the meeting where you 11 talked to them about -- you criticized their award 12 of bonuses after you had received the employment 13 contracts. 14 A. And we did have continued meetings 15 about it. Whenever you have status meetings with 16 the institution, you go through the whole 17 sequence. You continue to talk about your net 18 worth. So, you don't just have one meeting and 19 you drop a subject in every case. So, to say 20 exactly when is difficult to say when you have a 21 lot of meetings. And to put what subject at what 22 meeting is difficult to say. And to put them in 18249 1 time frames. I can say that I wouldn't have 2 discussed the contents of the contracts if I 3 didn't have the contracts. So, I know that the 4 conversation would have been after this meeting in 5 which I discussed the detail of the contracts. 6 But once we were aware of contracts, that was 7 prior to the actual acceptance or receipt of the 8 contracts. 9 Q. So, you can't fix in time when you 10 might have had the meeting in which you discussed 11 the bonuses as a separate issue? 12 A. No. 13 Q. It could have happened after you 14 reviewed the contracts in January; is that right? 15 A. Right. 16 Q. It could have been after you completed 17 the salary schedule in March; is that right? 18 A. It could have been. 19 Q. Now, if you knew that the bonuses were 20 going to be paid in the early part of January of 21 1988 and you thought that the payment of those 22 bonuses was an unsafe and unsound practice, would 18250 1 you have advised your supervisor in Dallas of that 2 concern? 3 A. Yes. 4 Q. And if I remember right, you prepared 5 an interim report that was dated January 15th, 6 1988; is that right? 7 A. Right. 8 Q. And that report was one that was called 9 for because the examination had been -- was going 10 on for about 60 days; is that right? 11 A. Which exam are you -- which year? 12 Q. The November exam. An interim report 13 is supposed to be prepared if an examination is 14 going to last more than 60 days; is that right? 15 A. Or due to subject matters. 16 Q. Now, do you remember whether your 17 preparation of the interim report on January 15th, 18 1988, was due to the subject matter or because of 19 the passage of time? 20 A. I don't -- it was just -- I don't know 21 exactly what the situation was. Once you start 22 the preparation of the report and once you get 18251 1 within close proximities of that time and the 2 subject matters, it's issued. 3 Q. And I think as we've determined -- 4 A. I think if you go back and if you go 5 back and calculate -- and I don't have that in 6 front of me -- whatever the days were from 7 commencement of the exam and go out your 60 days 8 and see if it falls within that category. 9 Q. I think the examination commenced on 10 November 16th, 1987. If you'll take a look at 11 Exhibit 11051. I believe it's this one. If 12 you'll look on the first page. 13 A. Okay. 14 Q. Does that refresh your recollection 15 that the exam commenced on November 16th, 1987? 16 A. Yes. 17 Q. Now, in connection with the 18 January 15th, 1988 interim report, I think we've 19 established that it doesn't contain any mention of 20 compensation or bonuses; is that right? 21 A. Right. 22 Q. So, you didn't advise your supervisors 18252 1 in the context of this interim report of your 2 concerns about an award of bonuses; is that right? 3 A. Right. 4 Q. I know it's a long time ago, 5 Ms. Carlton. Does this refresh your recollection 6 that at least in the November/December of -- in 7 November/December of 1987 and into January of 8 1988, you didn't believe that the award of 9 bonuses, at the time USAT was failing its net 10 worth requirements, was an unsafe and unsound 11 practice? 12 A. Any time an institution is failing its 13 net worth requirement and they continue to issue 14 high bonuses, compensations, and other items that 15 can deplete the assets, that's an unsafe and 16 unsound practice, be it at the beginning of the 17 exam or the end of the exam. 18 Q. But again, you didn't advise your 19 supervisors of your concerns so they could take 20 remedial -- direct remedial actions to try and 21 prevent this unsafe and unsound practice from 22 being completed by the payment of those bonuses in 18253 1 January of 1988; is that right? 2 A. If they are aware of it -- they were 3 aware of it, and it's management's and the board's 4 responsibility to make sure that those are carried 5 out. They have first-line authority -- 6 responsibility. 7 Q. Now, Ms. Carlton, you testified, I 8 think, yesterday and again today that you remember 9 a meeting where you criticized the salaries and 10 bonuses and USAT agreed that it would conduct a 11 salary review, retain an outside compensation 12 expert to review their salary and compensation 13 structure; is that right? 14 A. Correct. 15 Q. And you can't remember when that 16 meeting occurred? 17 A. No. 18 Q. But you do know that it was sometime 19 after the contract analysis that you undertook -- 20 is that right -- because one of the things that 21 you discussed in that connection was contracts? 22 A. I know that we had a discussion about 18254 1 the contracts. I also know that we discussed 2 bonus and salaries. If I can't put one date with 3 one, I can't put one date with contract 4 discussions. 5 Q. Was it one meeting that you had in 6 which they told you they were going to retain 7 Hewitt, or do you remember a specific meeting? 8 A. No, I do not. 9 Q. Let's talk about what you brought to 10 the attention of management in the way of 11 management meetings that -- meetings that you had 12 with management and the board of directors. 13 Do you remember -- is it normal at the 14 end of an examination to meet with management and 15 the board of directors separately to advise them 16 of the results of the examination? 17 A. Yes, it is. 18 Q. And do you remember whether you did 19 that with USAT in connection with the 1987 exam? 20 A. Yes, we did. 21 Q. And this meeting would have occurred 22 towards the end of the examination; is that right? 18255 1 A. That's correct. 2 Q. Is it your normal practice to prepare 3 an agenda for those meetings? 4 A. The exit meetings, yes. 5 Q. And what sort of items would you put on 6 the agenda? 7 A. You would go through your different 8 CAMEL areas, all of your CAMEL areas, and address 9 issues with those areas. 10 Q. And if I remember this right, M in 11 CAMEL stands for management? 12 A. Yes. 13 Q. And one of the management issues would 14 be compensation? 15 A. Right. 16 Q. So, if you had some concerns about the 17 compensation that USAT was paying to its 18 executives, you would have noted that on the 19 agenda for those various meetings? 20 A. Not necessarily. The agenda didn't 21 address everything that we discussed. It's a 22 judgment call as to what goes on agenda from 18256 1 agenda. 2 Q. Would you put on matters that you 3 thought constituted safe -- unsafe and unsound 4 practices? 5 A. It's based on subject matter. They 6 vary from agenda to agenda. If you notice the 7 agenda from one management meeting to the board 8 meeting, it's not a science, exact -- that is 9 exact. Each situation is a judgment call based on 10 the time. 11 Q. Now, I'm going to show you the agenda 12 for the management meeting of March 28th, 1988. I 13 believe you have it in front of you. It's Exhibit 14 A14071. 15 MR. BLANKENSTEIN: Your Honor, I don't 16 believe this is in evidence. I move it into 17 evidence. 18 THE COURT: I believe it is in 19 evidence. 20 MR. BLANKENSTEIN: Oh, I'm sorry. Then 21 I withdraw my request. 22 THE COURT: Granted. 18257 1 MR. BLANKENSTEIN: Thank you, Your 2 Honor. 3 Q. (BY MR. BLANKENSTEIN) This is the 4 agenda that you prepared for the meeting with 5 management on March 28th, 1988? 6 A. Right. 7 Q. And what's the purpose of having 8 separate meetings with management and a separate 9 meeting with the board of directors? 10 A. So that we can be assured that the 11 findings of the examination are presented directly 12 to the board of directors. 13 Q. Are the subject matters different at 14 the board of directors meeting than they are at 15 the management meeting? Do you exclude certain 16 matters? Do you go into less detail with regard 17 to certain matters? 18 A. We go into less detail when we conduct 19 the meetings with the board than we do with 20 management. 21 Q. Are there certain issues that you would 22 discuss with the board that you wouldn't discuss 18258 1 with management? 2 A. There could be, yes. 3 Q. What sort of issues would that be? 4 A. It could vary. It varies based on 5 institutions as far as what subject matters are 6 being presented. It, again, is not a standard -- 7 when you're doing your meetings, it's based on the 8 institution. 9 Q. Would criticisms of management be 10 something that you would discuss at the board 11 level and not at the management meeting? 12 A. There are cases we do that. 13 Q. And if you had some concerns about 14 compensation being paid to the senior executives, 15 would you discuss that at the board level? 16 A. If we have gotten answers from 17 management and feel that they are going to take 18 corrective actions, we can just leave it at the 19 management level and just make the board aware of 20 it, that those were some items that we have 21 addressed with management. We go and highlight 22 over the exceptions that we have conducted with 18259 1 management, and we make them aware that in all the 2 violations that have been cited during the 3 examination, management would have a copy of all 4 of those exceptions, and they would also have a 5 copy of those violations. And if they wanted to 6 see the details of information, to obtain that 7 information from their management. 8 Q. Now, I wasn't sure which management you 9 were talking about. Management of the institution 10 or management of -- 11 A. Meaning the board themselves. We do a 12 high-level summary with them. 13 Q. With the board of directors? 14 A. With the board of directors. If 15 they -- they are made aware that the president, 16 managing officer, chairman of the board, whatever 17 the next in line high-ranking position is, have a 18 copy of all the exceptions and deficiencies noted 19 during the exam. And if they want details of 20 those, they can obtain them from that individual 21 which is the person I'm talking about of the 22 institution that's managing the institution. 18260 1 Q. And an exception is something that's in 2 writing; is that correct? 3 A. That's correct. 4 Q. And it needs to be acknowledged by 5 someone -- a manager of the institution designated 6 to receive those exceptions? 7 A. Right. 8 Q. Do you remember whether you prepared a 9 written exception in connection with your concerns 10 about the payment of bonuses? 11 A. I don't recall. 12 Q. Did you ever follow up to determine 13 whether USAT paid the bonuses that they authorized 14 in November of '87? 15 A. No. I did that -- once they are part 16 of the report, I move on to the next exam. And 17 the supervisory agents, they pick up whatever 18 issues outstanding between exams. I don't go back 19 and follow up on issues. 20 Q. But I think we've established that 21 there is no mention of compensation in any of your 22 written reports, and I think you testified that 18261 1 although you can't remember when it occurred, you 2 had a meeting -- 3 A. We -- 4 Q. You had a meeting in which you 5 specifically discussed the issue of the payment of 6 bonuses authorized in November of 1987. 7 Did I understand your testimony 8 correctly? 9 A. Right. 10 Q. And did you ever follow up to determine 11 whether, despite those criticisms, they paid those 12 bonuses? 13 A. I did not. 14 Q. Did you report that criticism to your 15 superiors in Dallas? 16 A. Right. 17 Q. And would you -- and do you remember 18 when you may have reported those criticisms? 19 A. No. 20 Q. Would you have reported those 21 criticisms before you knew those bonuses were 22 scheduled to be paid? 18262 1 A. The salary compensation was a special 2 issue from the supervisory agent of USAT. They 3 were well aware -- they followed up, even after I 4 received these contracts, on additional 5 information. 6 So, they followed up as far as the 7 salary and the contracts that were actually 8 outstanding and who those contracts were with. 9 They picked up that level of monitoring. 10 Q. I'm just talking about the bonuses now. 11 You knew that bonuses were authorized in November 12 of '87. You knew they were going to be paid 13 sometime in January of '88. 14 Did you tell your supervisors in Dallas 15 in November/December of 1988 that bonuses were to 16 be paid by USAT at a time when it was failing its 17 net worth and that was an unsafe and unsound 18 practice? 19 A. They were aware of the bonuses. 20 Q. They -- 21 A. I did not follow up on the bonuses. 22 Q. You told -- 18263 1 A. Payments. 2 Q. You told your supervisors in Dallas 3 sometime in November or December of '87 of the 4 award of those bonuses and that those bonuses were 5 to be paid in January of '88; is that right? 6 A. The report, that page, outlines the 7 bonuses. That's a part of the report. I told my 8 supervisor. I did not do any more follow-up work 9 on it. 10 Q. Now, the report that you prepared of 11 the 1987 examination wasn't sent until July 28, 12 1988; isn't that right? 13 A. Right. 14 Q. And the bonuses that you list in the 15 report were the bonuses that were paid in 1987 for 16 work done in 1986; isn't that correct? 17 A. They were aware of the -- of the 18 information that was there. 19 Q. The bonuses -- let me show you a copy 20 of the 1987 examination report. This one doesn't 21 have the schedule. 22 MR. BLANKENSTEIN: Mr. Veis, if you 18264 1 have the one that has the salary schedule -- if 2 you don't have it, you can follow along from here. 3 On Page A2.1. 4 MR. VEIS: Thank you. I've got that. 5 Thank you. 6 Q. (BY MR. BLANKENSTEIN) Now, this salary 7 schedule points out -- that's the base salary and 8 bonuses; is that right? 9 A. Right. 10 Q. And the bonus amount is the amount that 11 was awarded in 1986 and paid in 1987; is that 12 correct? 13 A. Correct. 14 Q. Okay. Now, we're talking about bonuses 15 that were awarded in 1987 for payment in 1988. 16 When did you notify your supervisors 17 about that bonus award and payment? 18 A. Those bonuses would be subject to the 19 next examination. 20 Q. So, you never notified your supervisors 21 of any concerns that you had about the November 22 '87 bonuses; is that right? 18265 1 A. We -- if you look at the scope, one of 2 the things we had to do was a complete management 3 analysis. That information, the schedules that 4 you have here along with the minutes approving 5 bonus and salaries, was provided to management, my 6 management. They were well aware of those 7 salaries and bonuses. 8 THE COURT: I'm not sure who "they" is, 9 Ms. Carlton. 10 THE WITNESS: The supervisory agent. 11 That information was passed on to them. 12 Q. (BY MR. BLANKENSTEIN) And that 13 information was the information in your report, 14 the final report. Is that the information you 15 passed on to them? 16 A. We had oral communications and other 17 communications with Ginger Baugh and Neil. Any 18 time they called and wanted information concerning 19 that, we provided whatever they asked for. 20 Q. And do you remember them ever calling 21 you and asking you about the compensation being 22 paid to -- by USAT to its executives? 18266 1 A. Yes. We had several conversations. 2 Q. And you told them about the award of 3 those bonuses in 1987 to be paid in 1988; is that 4 right? 5 A. We recorded -- yes. 6 Q. And you did that in November or 7 December of 1987? 8 A. I'm not -- I don't know -- I keep 9 saying I do not know a date. That has not 10 changed. If I didn't know the date ten minutes 11 ago, I don't know the date. 12 Q. All right. Let's take a look at that 13 agenda item, which is the management meeting. 14 Now, do you recognize this, 15 Ms. Carlton? 16 A. Yes. 17 Q. And this is something you prepared, 18 correct? 19 A. Yes. 20 Q. And is there any discussion of any 21 compensation matter or any bonus matter on this 22 agenda? 18267 1 A. No. 2 Q. Let me show you what's Exhibit 14074. 3 This is the agenda for the March 30th, 4 1988 meeting of the board of directors of USAT? 5 A. Yes. 6 Q. And is this an agenda that you 7 prepared? 8 A. Yes. 9 Q. And -- 10 MR. VEIS: Excuse me, Your Honor. I 11 believe that -- I believe that Mr. Blankenstein 12 misspoke when he identified the exhibit number. 13 MR. BLANKENSTEIN: Did I missread it? 14 MR. VEIS: I think it's 14072. Did you 15 read it as 4? I've got other copies. 16 MR. BLANKENSTEIN: I may have misread 17 that. I'm sorry. It's 072. 18 I believe this is in evidence, as well. 19 THE COURT: It looks like they are the 20 same exhibits, A14072 and A14074. They look like 21 the same exhibit. All right. 22 MR. BLANKENSTEIN: A1407 -- I'm told 18268 1 that A14072 is the agenda item -- the agenda for 2 the board of directors meeting of March 30th, 3 1988, that Ms. Carlton prepared. It's difficult 4 to read, Your Honor, from my copy, whether this is 5 the last numbers are 2 or 4. Mr. Veis informs me 6 it's 2. 7 MR. VEIS: There is no Exhibit A14074 8 by our records. I believe I had marked a document 9 that I did not ultimately use with that number. 10 Q. (BY MR. BLANKENSTEIN) And again, 11 Ms. Carlton, there is no discussion of 12 compensation -- 13 A. Right. 14 Q. -- on the agenda? 15 A. Right. 16 Q. -- for the board of directors. 17 Now, does the final report of an 18 examination require you to fill out, I think, a 19 MACRO rating? 20 A. Right. 21 Q. Is there an attachment to the final 22 report or an appendix in which you set out the 18269 1 MACRO rating in each of the various categories? 2 A. Yes. 3 Q. And, for example, management is broken 4 down into different categories -- 5 A. Right. 6 Q. -- for the management rating? And from 7 that breakdown, you would provide a composite 8 rating for management; is that right? 9 A. Right. 10 Q. I'm going to bring to your attention 11 the 1987 report of examination. 12 THE COURT: Do you have an exhibit 13 number? 14 MR. BLANKENSTEIN: Yes. It's 14073, 15 Your Honor. 16 Q. (BY MR. BLANKENSTEIN) Now, Ms. Carlton, 17 while Mr. Perry is bringing that to your 18 attention, do you always rate management in each 19 of the various categories that are set forth? 20 A. No. 21 Q. And if there is no rating, does that 22 mean -- for that particular category, does that 18270 1 mean that you didn't examine management in 2 connection with that category? 3 A. No. 4 Q. Why would you then not put a rating for 5 a particular category? 6 A. It varied based on what you were 7 reviewing at that time. 8 Q. All right. Why don't we take a look at 9 Imaging No. OW077256. 10 A. Okay. 11 Q. And if we're on the same page, this is 12 the MACRO rating for management, asset quality, 13 capital adequacy, risk management, and operating 14 results; is that right? 15 A. Right. 16 Q. And under each one of those MACRO 17 categories, there is a further breakdown into 18 subcategories? 19 A. Right. 20 Q. And you rate in each one of the 21 subcategories, as well? 22 A. In some of them, they are rated. 18271 1 Q. And with regard to the management 2 category and the subcategories, in the 1987 exam, 3 did you provide any rating in connection with 4 compensation? 5 A. No. 6 Q. Does that mean that you didn't reach 7 any conclusions with regard to management with 8 respect to compensation issues? 9 A. No. 10 Q. So, you just decided not to rate them 11 even though you did reach some firm conclusions 12 about compensation? 13 A. That's what's indicated here. 14 Q. Is that a normal practice? 15 A. Well, you'll find several other items 16 that -- for example, records systems and control 17 was a major issue. It's not rated either. 18 Q. But it's discussed extensively, is it 19 not, in the report of examination? 20 A. Right. That's the point I'm making. 21 Q. But compensation is not discussed 22 extensively in the report of examination? 18272 1 A. What I'm saying is that you cannot tell 2 based on the subratings, based on what material 3 either was or is not in the report in every case 4 because for the institution, we only back then 5 provided the composite rating. And that would be 6 your first number. And the ratings disclosed on 7 the other categories were not disclosed to the 8 institution. 9 Q. Do you remember after the March 30th 10 meeting, you had a series of interviews with some 11 of the principal officers of USAT? 12 A. I recall having interviews. 13 Q. And did you conduct some of those 14 interviews yourself? 15 A. I may have sat in on one or two of 16 them. 17 Q. Do you remember meeting with Mr. Gross? 18 A. I remember having a conversation -- 19 yes. 20 Q. Did you sit in on that interview? 21 A. I'm not sure because he was someone I 22 talked to all the time. So, I kind of was 18273 1 familiar with his line of operation. 2 Q. Do you remember yesterday Ms. Clark 3 showed you the -- a memorandum of the interview 4 with Mr. Gross and then some interview summary 5 forms, as well, of other officials? 6 A. Yes. 7 Q. Now, the first two pages -- and this is 8 Exhibit A11039; is that right? 9 A. Yes. 10 Q. And the first two pages are a typed-up 11 memorandum of the interview with Mr. Gross? 12 A. Yes. 13 Q. Is this something you prepared? Can 14 you tell? 15 A. I can't tell. 16 Q. There's some handwriting -- handwritten 17 corrections in the upper right-hand corner. 18 Do you see that? 19 A. Yes. 20 Q. Does that look like your handwriting? 21 A. I can't tell. 22 Q. Now, did you -- it's indistinct on my 18274 1 copy, but there seems to be some writing in the 2 middle of the first page. 3 Do you see that? Does that look like 4 your initials? 5 MR. VEIS: I don't believe I don't 6 know. 7 A. I don't have any writing on the first 8 page of my copy. 9 MR. VEIS: Mine is even less distinct 10 than Mr. Blankenstein's. 11 Q. (BY MR. BLANKENSTEIN) Now, take a look 12 on the second page. It's also indistinct, but can 13 you tell whether those are your initials at the 14 bottom of that page in the middle? 15 A. It's not legible on mine. 16 Q. I think mine's a little bit better. 17 A. I know I initialed documents. That's 18 my initial, yes. 19 Q. And if you had initialed the second 20 page, you probably initialed the first page? 21 A. It's a possibility. 22 Q. And when you initialed that, that means 18275 1 that you read over this memorandum; is that right? 2 A. I guess. 3 Q. Now -- and you don't remember whether 4 you prepared this or not? 5 A. No, I don't. 6 Q. If you'll look at the fourth paragraph 7 on the first page, it says that "President Gross 8 also stated that USAT currently has a sufficient 9 and qualified staff, save and except for chief 10 executive officer"? 11 A. Right. 12 Q. And he further -- and it goes on to 13 say, "He further stated that USAT is seeking such 14 an individual to fill his position"? 15 A. Right. 16 Q. "This position." I'm sorry. I 17 misspoke again. 18 Wasn't Mr. Gross the chief executive 19 officer at the time? 20 A. Yes. 21 Q. And he wasn't looking to replace 22 himself, but he was looking to replace -- for a 18276 1 new chief operating officer to fill the role that 2 Gerry Williams had played before Mr. Williams left 3 in January of 1987; isn't that right? 4 A. I think that was the person being 5 replaced. 6 Q. It goes on to say, "In addition, USAT 7 has also retained Hewitt & Company to evaluate its 8 employees' and officers' compensation package, 9 including contracts which provide for bonuses"; is 10 that right? 11 A. Correct. 12 Q. Is this the meeting when you learned 13 that USAT had retained Hewitt? 14 A. I have seen it somewhere else, but I 15 can't say which -- I've seen this response 16 somewhere. I don't know exactly where. 17 Q. You've seen other documentation of a 18 meeting that you attended where the -- 19 A. I saw another document that addressed 20 the Hewitt engagement. So, I don't know which one 21 I first knew or was made aware of the situation. 22 Q. And is that a document that you've seen 18277 1 in connection with your testimony? 2 A. I think it was. 3 Q. Excuse me? 4 A. I think it was. 5 Q. So, it's not something you saw at the 6 time; is that right? 7 A. I know that I recall seeing another 8 document. It was not this document. I don't know 9 exactly when or where it was. It would have to be 10 during this process. 11 Q. You think you saw a document during the 12 course of the examination; is that right? 13 A. Right. 14 Q. Other than this document? 15 A. Right. 16 Q. And do you know when -- about when 17 you -- when you may have seen that document? 18 A. No, I don't. 19 Q. Now, we looked at those two agenda 20 items, and there was no discussion of 21 compensation; is that right? 22 A. Right. 18278 1 Q. But you remember some sort of -- some 2 sort of discussion of Hewitt & Associates; is that 3 right? Do you remember some sort of discussion of 4 Hewitt & Associates during those meetings? 5 A. You and associates? 6 Q. Hewitt. I'm sorry. 7 Hewitt & Associates. 8 A. During the exit meetings? 9 Q. During the exit meetings. 10 A. No. I didn't say we had discussion 11 with them on exit meetings. 12 Q. So, there was no discussion during the 13 exit meetings about retaining a compensation 14 specialist; is that right? 15 A. It's not on the agenda; so, I can't 16 attest to -- without recall -- I do not recall. 17 Q. And you don't remember any discussion 18 during the course of that meeting about retaining 19 Hewitt & Associates to review USAT's compensation 20 package? 21 A. No, I do not recall. 22 Q. Let me show you what's been marked as 18279 1 Exhibit T8050, which is already in evidence. 2 This is minutes of a meeting of the 3 UFG/USAT joint compensation committee? 4 A. Right. 5 Q. And there is a discussion there about 6 the status of certain employment contracts; is 7 that right? 8 A. Right. 9 Q. And in the third sentence it says, "The 10 committee requested that Dr. Munitz retain a 11 compensation specialist to pass on the fairness of 12 the proposal"? 13 A. Right. 14 Q. You didn't attend this compensation 15 committee meeting, did you? 16 A. Not that I'm aware of. 17 Q. And there is no mention in the 18 compensation committee meeting minute that you had 19 made any criticism of the compensation package 20 that USAT was proposing for its employees; isn't 21 that right? 22 A. No, it's not noted here. 18280 1 Q. And you can't even be sure, can you, 2 that before March 30th, you had even approached 3 management of USAT to advise them about your 4 concerns regarding their compensation practices; 5 isn't that right? 6 A. Right. 7 Q. Let's turn, Ms. Carlton, to Exhibit 8 A14087, which is the salary comparison schedule. 9 Do you have it? 10 A. Yes. 11 Q. Now, in the upper left-hand margin, 12 there seems to be some writing. 13 Is that your writing? 14 A. The "USAT"? 15 Q. No, in the margin. It's running 16 parallel to the edge of the paper. 17 Do you see that? It says 5,000,800,000 18 assets? 19 A. That's not my writing. 20 MR. VEIS: Your Honor, that's not 21 legible on my copy. Oh, I'm sorry. I'm looking 22 at the wrong place. 18281 1 Q. (BY MR. BLANKENSTEIN) Do you know what 2 that refers to? Is that the size of USAT, the 3 asset size of USAT? 4 A. I don't know just looking at it what 5 that means. 6 Q. And you don't recollect whether that's 7 the approximate size? 8 A. They were about that amount. I don't 9 know based on what quarter numbers. I can't speak 10 to exactness. 11 Q. And the purpose of this schedule was to 12 compare USAT's compensation with those of 13 comparable institutions; is that right? 14 A. Right. 15 Q. And there are four other savings and 16 loans in the Houston area to which USAT is being 17 compared? 18 A. Right. 19 Q. And they are Gibraltar; is that right? 20 A. Right. 21 Q. It's the first one on Page -- the first 22 page of the exhibit going over to the second page; 18282 1 is that right? 2 A. Right. 3 Q. And starting in the middle of the 4 second page, it lists salaries and bonuses for 5 San Jacinto Savings; is that right? 6 A. Right. 7 Q. And then beginning in the middle of the 8 third page, it's a listing for Champions; is that 9 right? 10 A. Right. 11 Q. And then in the middle of the fourth 12 page, there is a listing for University Savings; 13 is that right? 14 A. Right. 15 Q. And that goes over onto the next page; 16 is that right? 17 A. Right. 18 Q. And then on the next-to-the-last page 19 of the exhibit, which is Imaging Page OW128389, 20 there is a listing of the salaries and bonuses for 21 certain executives at USAT; is that right? 22 A. Right. 18283 1 Q. Now, I see initials at the bottom of 2 each page. 3 Are those your initials? 4 A. Yes. 5 Q. Does that mean that you reviewed this 6 document? 7 A. Right. 8 Q. And so, you reviewed this document 9 sometime after March 24th, 1986; is that right? 10 A. I can't say when I reviewed it. 11 Q. Well, it's dated 3/24/86. You couldn't 12 have reviewed it before it was prepared. Right? 13 A. Right. 14 Q. So, it's fair to assume that you 15 reviewed it sometime after March 24th of 1988? 16 A. You can assume that. 17 Q. Do you remember noting in your report 18 the substantial turnover at the senior executive 19 levels of USAT? 20 A. Yes. 21 Q. They were more leanly staffed than some 22 of these other thrifts; is that right? 18284 1 A. Right. 2 Q. Is that one of the considerations that 3 you're supposed to take into account under R42, 4 the scope of the work that the individuals are 5 performing? 6 A. We look at the scope of the work. We 7 look at the tenure. Say, for University, you had 8 a management with lots and lots of years of 9 experience. 10 Q. But if we have fewer people doing the 11 same amount of work, is that a consideration you 12 take into account? 13 A. Right. And we question whether you are 14 adequately staffed. That's a part of management 15 and the board being held responsible, making sure 16 that you have an adequate staff at all times. 17 Q. And you believed that the staff at USAT 18 was skillful and motivated; isn't that right? 19 A. Right. 20 Q. And you had no question about their 21 abilities; is that right? 22 A. We had questions about their abilities 18285 1 based on their performance, the performance of the 2 institution. 3 Q. Well, you thought they were skillful in 4 the areas of their responsibilities; is that 5 right? 6 A. They were not effective. They were 7 skillful but not effective. 8 Q. I think you testified that the salaries 9 of USAT at the senior executive -- at the senior 10 vice president level were exceeded by one other 11 savings institution; is that right? 12 A. Right. 13 Q. So, of the four, USAT came in second? 14 A. Right. 15 Q. Would it have been useful information 16 to know whether USAT had more or less senior 17 executives than the other institutions to which 18 they were compared? 19 A. I was currently, the last month of that 20 exam, also EIC of University. So, I was well 21 aware from that institution the management 22 structure because I was conducting those two 18286 1 exams. 2 Q. And do you know how many senior 3 executives of University Savings are listed on 4 this chart, this comparison chart? 5 A. We can go ahead and look at them. 6 Q. I think I can count here, and I count 7 17. 8 A. Okay. 9 Q. If you can check that and see if I'm 10 right. 11 A. (Witness reviews the document.) Okay. 12 Q. And I count 18 for Gibraltar. Let's 13 assume for the moment that my counting is correct. 14 A. Okay. 15 Q. And I count 16 for San Jacinto. 16 A. Okay. 17 Q. And 14 for Champions. 18 A. Okay. 19 Q. Now, Champions was a much smaller 20 institution; is that right? 21 A. Correct. 22 Q. Its asset size was not even a billion. 18287 1 Right? 2 A. Right. 3 Q. And how many members of USAT's 4 management, not including directors, do you count 5 on this comparison study? I've got it at 13. 6 A. (Witness reviews the document.) That 7 sounds like the number that's in the report. We 8 did a summary there. 9 Q. And what sort of -- was Champions a 10 traditional savings and loan? 11 A. I don't recall exactly what Champions 12 was. 13 Q. Was University a traditional savings 14 and loan? 15 A. University was an institution that 16 engaged in a lot of joint ventures and major real 17 estate. So, it was not traditional in that it was 18 not into mostly single-family lending. 19 Q. Did it do a lot of securities 20 investments? 21 A. They had limited -- you did not have 22 the -- its structure was not anything like 18288 1 United's. 2 Q. So, United Savings had a more complex 3 operation than University; is that right? 4 A. I wouldn't call it more complex. They 5 had -- you had -- when you get into joint 6 ventures, that's another complex area. So, it's a 7 matter of measuring. I would say they had more 8 diversification in that they had all your 9 different securities. And United also had joint 10 ventures, but not to the magnitude of University. 11 Q. And what about San Jacinto? 12 A. San Jacinto invested in a lot of land 13 development. It also had some securities. They 14 were unique in its own way. Each institution was 15 unique in their own ways. 16 Q. And Gibraltar? 17 A. Gibraltar was also large in single 18 family. It dealt with a lot of land acquisition 19 development. It did have some securities. 20 Nothing to the magnitude of United. 21 Q. So, of the five thrifts on the list, 22 United had the smallest number of senior 18289 1 executives carrying out its operations. Right? 2 A. Right. 3 Q. And you agree that under R42, that's 4 one of the factors that you take into account: 5 The scope of the work that they are performing; is 6 that right? 7 A. Right. You look at the board and 8 management, and they are saying that if you're 9 adequately staffed, then whether it's one more 10 body or one less body, that's up to -- whether 11 it's 13 or 14, that's up to the management and the 12 board to decide by level or by positions how you 13 break those bodies down. 14 Q. Wouldn't you want to know the total 15 amount that was paid in compensation to the senior 16 executives as one of the factors that you wanted 17 to take into account under R42? 18 A. We look at positions and dollar 19 amounts. 20 Q. Would you want to know what the total 21 compensation was? 22 A. We looked at -- that could be a 18290 1 consideration. 2 Q. Is one way to look at compensation and 3 the effectiveness of management by measuring how 4 much is paid in exception as a percentage of gross 5 operating income? 6 A. We always monitored any compensation 7 being driven by profits as a questionable area in 8 that if -- say, you had lending and it was 9 basically driven by profit. You may be forcing 10 individuals to do unsafe and unsound practices in 11 order to jack up the profit, operation profits, in 12 order to receive higher salaries. 13 Q. My only question was: Are you familiar 14 with studies that you view the effectiveness of 15 management by trying to determine the 16 percentage -- what compensation constituted as a 17 percentage of gross income? 18 A. I have seen studies done like that. 19 Q. And are you familiar with a Sheshunoff 20 studies that are done of the Texas Savings and 21 Loan industry? 22 A. Yes, I am. 18291 1 Q. And that's a respected study? 2 A. Yes, it was. 3 Q. And did you rely upon -- strike that. 4 Did the regulators, the examiners, 5 sometimes rely upon the Sheshunoff studies in 6 analyzing thrifts? 7 A. That was one source that was used. The 8 Texas Savings and Loan League had a study, had 9 various studies that was used. 10 Q. Now, Ms. Carlton, I'm going to show you 11 what is a very heavy book called the "Sheshunoff 12 Savings and Loan Associations, Texas, 1988." 13 Do you remember seeing that before? 14 A. No. 15 Q. But you've seen works like this in the 16 past by Sheshunoff? 17 A. We've had -- we had smaller manuals 18 that looked nothing like that. 19 Q. Can you take a look and see if it has 20 the same type of financial information? 21 A. There is no way I can tell because what 22 we had was nothing like this. 18292 1 Q. I prepared a chart that -- taken off of 2 the Sheshunoff studies -- that evaluates or lists 3 compensation as a percentage of operating income. 4 Would that type of information have 5 been of use to you in connection with your 6 evaluation of USAT's employment practices? 7 A. No, because we didn't look at it that 8 way. 9 Q. But would that type of information have 10 been useful for you? 11 A. No. 12 Q. You wouldn't want to know what 13 percentage of -- what percentage compensation was 14 of operating income? You didn't think it had any 15 use in your analysis? 16 A. Not in the analysis we were doing, no. 17 Q. In general, do you think it might fit 18 into one of the R42 factors? 19 A. No. 20 Q. We spoke about a Hewitt & Associates 21 study. 22 Do you remember that? 18293 1 A. Yes. 2 Q. And that was the study that USAT had 3 commissioned in connection with its employment 4 contracts and salaries and bonuses; is that right? 5 A. That's correct. 6 Q. Do you remember ever learning the 7 results of that are study? 8 A. No, I did not. 9 Q. Would that information from Hewitt & 10 Associates have been valuable to you in connection 11 with conclusions that you might have drawn with 12 regard to USAT's compensation? 13 A. It would have been used if I had had it 14 at the time. 15 Q. Well, let's take a look at that study 16 to see what conclusions they drew. 17 MR. VEIS: Your Honor, Ms. Carlton has 18 testified she never saw this study. It's about an 19 inch thick. It's dated, I believe, sometime after 20 her examination closed, and she didn't rely upon 21 it in the examination. 22 I don't see the relevance of any 18294 1 question that Mr. Blankenstein might have for 2 Ms. Carlton on this exhibit. 3 MR. BLANKENSTEIN: She testified, I 4 believe, that this information would have been 5 valuable -- this type of information would have 6 been valuable to her had she had it at the time. 7 She's testified as a quasi expert with regard to 8 these compensation issues. 9 I think it's appropriate to ask her, 10 based upon the review of the Hewitt study, whether 11 or not that would change any of the conclusions 12 that she drew with regard to the compensation 13 practices of USAT. 14 THE COURT: All right. You may ask 15 her. We'll take a short recess. 16 17 (Whereupon, a short break was taken 18 from 10:30 a.m. to 10:54 a.m.) 19 20 THE COURT: Be seated, please. We'll 21 be back on the record. 22 Mr. Blankenstein, you may continue with 18295 1 your cross-examination. 2 MR. BLANKENSTEIN: Thank you, Your 3 Honor. 4 Q. (BY MR. BLANKENSTEIN) Ms. Carlton, 5 before the break, we were talking -- we were going 6 to talk about the Hewitt report. 7 Do you remember that? 8 A. Yes. 9 Q. And that's the report that USAT had 10 commissioned in connection with its executive 11 compensation and contracts; is that correct? 12 A. That's correct. 13 Q. And you never had an opportunity to 14 look at the Hewitt report before you closed down 15 the 1987 examination; is that right? 16 A. That's correct. 17 Q. Why don't you take a look at -- we can 18 go through this very quickly, Ms. Carlton. 19 Why don't you take a look at Page 2 of 20 the body of the report, which starts "management 21 summary." It's about four pages in. It starts 22 "management summary." 18296 1 Do you have that? 2 A. Yes. 3 Q. And if you could take a look at the 4 second page after "management summary." 5 Do you have that? It starts 6 "Reasonableness Considerations"? 7 A. Yes. 8 Q. And it provides that "In evaluating the 9 reasonableness of individual compensation 10 arrangements, several factors should be considered 11 including competitive industry pay practices"; is 12 that right? 13 A. Right. 14 Q. "The estimated value of all of the sum 15 of all compensation components, base pay, annual 16 bonus, et cetera"? 17 A. Right. 18 Q. "The organization size and growth 19 expectations"; is that right? 20 A. Right. 21 Q. "Incumbent level of responsibility and 22 job scope"? 18297 1 A. Right. 2 Q. And then on the next page, it says, 3 "Historic pay levels relative to competitive 4 market practices"; is that right? 5 A. Right. 6 Q. And then the last factor is 7 "competitive business environment and operating 8 conditions"; is that right? 9 A. That's correct. 10 Q. Is that -- those considerations reflect 11 the factors set forth in R42? 12 A. Yes. 13 Q. Now, turn towards the appendixes to the 14 document at the end. Can you get to B2? It's 15 about 15 pages from the back of the document. 16 THE COURT: Does that have an imaging 17 number? 18 MR. BLANKENSTEIN: Not on my copy, Your 19 Honor. 20 A. (Witness reviews the document.) 21 Q. (BY MR. BLANKENSTEIN) Do you have that? 22 Let me see if I can help you find it. 18298 1 A. Does it start with "chief financial 2 officer"? 3 Q. Well, let me see if I can help you find 4 it. B2. (Indicating.) 5 A. Okay. 6 Q. That sets out the list of savings and 7 loan associations and holding companies that serve 8 as the comparator group for the Hewitt study; is 9 that right? 10 A. Right. 11 Q. And this is a broader-based group than 12 the one in the salary comparison schedule that 13 your examination team prepared; is that right? 14 A. Right. 15 Q. Would this information have been useful 16 to you in connection with your comparable 17 comparison? 18 A. Not necessarily. 19 THE COURT: Mr. Blankenstein, I'm lost. 20 I don't have the document you're referring to. 21 What is the exhibit number? 22 MR. BLANKENSTEIN: The exhibit number 18299 1 is A11032. I'm sorry. A11030. 2 MR. LANGDON: One more time. 3 MR. BLANKENSTEIN: A11030. I apologize 4 for the confusion, Your Honor. 5 THE COURT: Thank you. 6 MR. BLANKENSTEIN: I'm afraid, Your 7 Honor, that the copies I have don't have any 8 imaging or Bates numbers. 9 THE COURT: Continue. 10 Q. (BY MR. BLANKENSTEIN) We were looking 11 at the B2 page in the appendix that had a list of 12 the comparator groups. 13 A. Right. 14 Q. And that included Gibraltar; is that 15 right? 16 A. Right. 17 Q. And Gibraltar was one of the 18 associations that was included in the chart that 19 the examination team prepared? 20 A. I think this is a different Gibraltar. 21 The president, that name is not familiar. 22 Q. Do you think that might be a different 18300 1 Gibraltar? 2 A. I don't recall that name. 3 Q. You don't know? 4 A. I don't know, but that name as 5 president is not a familiar local name. 6 Q. Why don't you turn to the sixth page of 7 the -- after the management summary, Page 6. 8 Do you see that? It says, 9 "Hewitt & Associates Comments" on top. 10 A. Right. 11 Q. And it concludes that the base salary 12 levels for the various executives are reasonable; 13 is that right? 14 A. Right. 15 Q. Was that -- that would have been 16 information that would have been helpful to you in 17 assessing USAT's compensation practices; is that 18 right? 19 A. Right. 20 Q. Do you know whether the regulators 21 asked USAT to do a second executive compensation 22 survey? 18301 1 A. I don't know. 2 Q. Well, let me show you what's been 3 marked as the Wyatt report, which is B4285 (sic). 4 MR. VEIS: Your Honor, just for the 5 record, I'd like to point out that 6 Mr. Blankenstein now proposes to ask questions of 7 the witness not only of an exhibit that she has 8 never seen but one that she has never heard of. 9 And again, I question the relevance of that. 10 THE COURT: I'm not sure what the 11 exhibit is. 12 MR. BLANKENSTEIN: 2495 is the Wyatt 13 report, Your Honor. 14 THE COURT: Well, you don't have too 15 much to ask her about this? 16 MR. BLANKENSTEIN: No. 17 THE COURT: All right. I'll deny it. 18 Q. (BY MR. BLANKENSTEIN) I just want to 19 show you one chart in the Wyatt report. It's on 20 Page I2. 21 MR. BLANKENSTEIN: My Bates numbers are 22 indistinct, Your Honor. Do you have that page? 18302 1 THE COURT: Yes. 2 Q. (BY MR. BLANKENSTEIN) There is a chart 3 there which compares United with various thrifts 4 in the Houston, Texas area; is that right? 5 A. Yes. 6 Q. Gibraltar, University, and First Texas? 7 A. Right. 8 Q. And is Sunbelt also in the same general 9 area? 10 A. It's in Dallas. 11 Q. And it compares USAT's compensation as 12 a percentage of total assets; isn't that right? 13 A. Right. 14 Q. And it shows that for United its 15 compensation was .388 percent of its total assets? 16 A. Right. 17 Q. And that was the lowest of the group; 18 is that right? 19 A. Right. 20 Q. And it showed that the average of the 21 others was .653 of assets; is that right? 22 A. Right. 18303 1 Q. And that the variance between United 2 and those others was .315 percent; is that right? 3 A. Right. 4 Q. And that was a total savings of 5 $18,277,000; is that right? 6 A. Right. 7 Q. Let's move on to another subject, 8 Ms. Carlton, if we can. 9 We have talked about the contracts that 10 you reviewed; is that right? 11 A. Right. 12 Q. And let's see if we can identify which 13 ones you, in fact, reviewed. 14 Do you have before you A11035? This 15 comes from the work papers of the '87 exam. 16 Do you recognize it, Ms. Carlton? 17 A. Yes. 18 Q. And is this something you prepared? 19 A. The top sheet, yes. 20 Q. And this first page is a schedule of 21 the contracts -- the employment contracts that you 22 reviewed; is that right? 18304 1 A. Right. 2 Q. And it shows that -- and you have on 3 the left column the name of the individual 4 employee; is that right? 5 A. Right. 6 Q. And then whether it's an employment 7 contract, settlement agreement, or consulting 8 contract; is that correct? 9 A. Correct. 10 Q. And you reviewed three consulting 11 contracts? 12 A. Right. 13 Q. Three settlement agreements? 14 A. Right. 15 Q. And nine employment contracts; is that 16 right? 17 A. Yes. 18 Q. And you reviewed the employment 19 contracts of Dominic Bruno, Arthur Berner, Michael 20 Crow, Sandra Laurenson, Bruce Williams, J.J. Gray, 21 Eugene Stodart, James Jackson, and Jim Wolfe; is 22 that correct? 18305 1 A. Correct. 2 MR. VEIS: Excuse me, Your Honor. I 3 don't believe this is in evidence. 4 MR. BLANKENSTEIN: Let me move 11035 5 into evidence. 6 MR. VEIS: Your Honor, we have no 7 objection. I would note for the record that 8 except for the first page, this appears to be 9 identical to A14086 -- 10 THE COURT: All right. Received. 11 MR. VEIS: -- except that it does not 12 include the last two pages of A14086. 13 Q. (BY MR. BLANKENSTEIN) Now, why don't 14 you turn to Exhibit A14086. 15 A. Okay. 16 Q. If you could turn to the second page. 17 THE COURT: What is that document? 18 MR. BLANKENSTEIN: A14086. 19 THE COURT: Can you give me a little 20 more description? 21 MR. BLANKENSTEIN: Yes. It is the -- 22 (indicating) 18306 1 Q. (BY MR. BLANKENSTEIN) The second page 2 has the -- lists the various contracts that you 3 analyzed; is that right? 4 A. Right. 5 Q. And this is your handwriting? 6 A. Right. 7 Q. And that's your initial at the bottom 8 of the page? 9 A. Right. 10 Q. And at the bottom, it says "Exception. 11 Some of the provisions in the contract are 12 nebulous and inexact. This is an unsafe and 13 unsound practice"; is that right? 14 A. Right. 15 Q. Does that reflect your comment with 16 respect to all of the contracts that are set forth 17 on this schedule? 18 A. No. It says some of them. 19 Q. Okay. But is that the only exception 20 that you found after your review of the contracts? 21 A. No. Some of them were excessive in 22 advance of six months. 18307 1 Q. I'm talking just on this first page, on 2 this Page 2 of Exhibit 14086. 3 Do you have that? 4 A. Yes. 5 Q. And the exception that you have at the 6 bottom of that page is in respect to the contracts 7 that are listed on that page? 8 A. Right. 9 Q. And that's the only exception that you 10 found in connection with all of those contracts; 11 is that right? 12 A. Right. 13 Q. Now, you have next to Mr. Williams' 14 name, it says the date of the contract, the term 15 of the contract, the salary schedule, the bonus, 16 and in the last column -- in the next-to-the-last 17 column it says -- under the heading "company," it 18 says "UFG for USAT." 19 Do you see that? 20 A. Yes. 21 Q. Did you mean by that that this is a 22 contract where UFG is the party but the employment 18308 1 services are to be provided at USAT? 2 A. That was the wording on the contract; 3 so, that's what I wrote down. I don't know what 4 the -- I just wrote the wording as described on 5 the contract. 6 Q. And so, that's the wording that you 7 found on Mr. Williams' contract? 8 A. Well, it would have been the wording 9 that described, I guess, whatever the condition 10 was. 11 Q. What did you understand that to mean? 12 A. I didn't know -- I don't -- I don't 13 recall. 14 Q. Did you understand it to mean that 15 Mr. Williams was to provide services, employment 16 services, for USAT? 17 A. He was employed at USAT. 18 Q. And that the contract was one where he 19 was -- it was for the provision of services at 20 USAT; is that right? 21 A. I didn't know. The institution had 22 stated they had no contracts with USAT, that these 18309 1 contracts were with UFG. So, I just wrote down 2 whatever reference and made note of it. 3 Q. And this is a reference you found on 4 the contract itself? 5 A. I won't say it's on the contract. I 6 don't -- I don't have a contract before me. 7 Q. All right. Let me show you those 8 contracts. It's Exhibit A11032. 9 A. It's up here? 10 Q. This is a package of contracts that 11 come out of the work papers. 12 Do you see the first sheet has your 13 initials on it? 14 A. Yes. 15 Q. And the succeeding pages also show your 16 initial on the first page of each of the 17 agreements contained in that package; is that 18 right? 19 A. It's on some of the sheets. 20 Q. It's on the first page of each of the 21 agreements? 22 A. I don't know. I haven't looked. 18310 1 Q. Well, I can help you a little bit. 2 A. I'm trying to get to your first 3 question. 4 Q. Now, the first one is the contract of 5 Sandy Laurenson; is that right? Ms. Carlton, I 6 have it here for you. 7 A. Yes. 8 Q. Oh, excuse me. Dominic Bruno. Dominic 9 Bruno. I misspoke. I'm sorry. And that's your 10 initials on the first page of that? 11 A. Right. 12 Q. The next contract in the series is 13 on -- starts on Imaging No. OW128391, and it's for 14 Arthur Berner; is that right? 15 A. Right. 16 Q. Your initial is on the first page? 17 A. Right. 18 Q. Does that indicate that you reviewed 19 that contract? 20 A. Right. 21 Q. The next one in the series is of 22 Michael Crow, and you have your initials on it 18311 1 again; is that right? 2 A. Right. 3 Q. And that, again, indicates that you 4 reviewed that contract? 5 A. Right. 6 Q. The next one in the series is for 7 Sandra Laurenson. 8 Do you see that? 9 A. Right. 10 Q. And on my copy it's very indistinct, 11 but it appears that your initials are again on 12 that, on a copy of that contract? 13 A. It probably was. 14 Q. Excuse me? 15 A. It probably was. 16 Q. The next one is a contract for Bruce 17 Williams, and your initials are on it again? 18 A. Right. 19 Q. Now, can you show me where you -- where 20 you said it indicated that this was a contract 21 with UFG for USAT? 22 A. It does not show on here. I do not 18312 1 know -- I don't -- I say it could have been on 2 there. I don't know where that came from. 3 Q. So, do you think it might be a 4 conclusion that you drew from reviewing the 5 contract itself? 6 A. I don't know where it came from. 7 Q. But you reviewed all of these 8 contracts; is that right? 9 A. Right. 10 Q. Just one other question I have for you 11 about these contracts. 12 Now, I'm going to show you -- 13 MR. RINALDI: Sir, what is the page of 14 the Williams contract? The pagination on our copy 15 is out of order. 16 MR. BLANKENSTEIN: For the Crow 17 contract? 18 MR. RINALDI: You were just looking at 19 the Crow contract or the Williams contract? 20 MR. BLANKENSTEIN: The Williams 21 contract. (Indicating) 22 MR. RINALDI: Oh, I'm sorry. 18313 1 Q. (BY MR. BLANKENSTEIN) I'm going to show 2 you the contract for James Wolfe. You initialed 3 that, as well? 4 A. Right. 5 Q. And it's on Imaging Page OW128460? 6 A. Right. 7 Q. And there is a handwritten notation in 8 the upper left-hand corner. 9 Do you see that? 10 A. Right. 11 Q. Is that your handwriting? 12 A. Yes, it is. 13 Q. And it says, "S/B-USAT"? 14 A. Right. 15 Q. What does "S/B-USAT" mean, Ms. Carlton? 16 A. That if those were officers of the 17 institution, then we shouldn't be having a 18 contract with UFG. 19 Q. You're saying this should be USAT? 20 A. The contract should be with -- 21 Q. And that's because Mr. Wolfe was going 22 to provide employment services at USAT; is that 18314 1 right? 2 A. Correct. 3 Q. On Imaging Page OW128643, which is Page 4 4 of Mr. Wolfe's contract, there is another 5 handwritten notation in the middle of the page 6 next to the provision for vacations; is that 7 right? 8 A. Correct. 9 Q. And is that your handwriting? 10 A. Right. 11 Q. And can you read that into the record? 12 A. "Exception. An exact statement." 13 Q. And does that exception apply to the 14 vacation paragraph that it is adjacent to? 15 A. Right. 16 Q. And if we go back to Exhibit 14086, 17 which is the contract analysis that you prepared? 18 A. Right. 19 Q. And if you look at the exception, it 20 says "Some of the provisions in the contract are 21 nebulous and inexact." 22 A. Right. 18315 1 Q. Is that the provision that you're 2 making reference to? 3 A. Yes. 4 Q. Now, you reviewed these contracts for 5 safety and soundness considerations? 6 A. Correct. 7 Q. And the applicable regulation is 8 563.39; is that right? 9 A. Yes. 10 Q. And that's the regulation that you used 11 to -- you measured these contracts against. This 12 is the regulation that governed employment 13 contracts in savings and loans. And when you 14 reviewed those contracts, you had this regulation 15 in mind; is that right? 16 MR. VEIS: Your Honor, I believe this 17 question is misleading. The contracts at issue 18 that Ms. Carlton has been testifying about are 19 not -- with the exception of a couple of them -- 20 contracts with the institution. 21 So, when -- I believe the premise of 22 Mr. Blankenstein's question is misleading the 18316 1 witness. 2 MR. BLANKENSTEIN: I believe I asked 3 her whether she had reviewed all of the contracts 4 with safety and soundness considerations in mind, 5 and she said yes. I'm just asking whether this is 6 the regulation that guided her consideration in 7 that connection. 8 THE COURT: All right. Denied. 9 A. Yes. 10 THE COURT: When you were reviewing 11 these salaries, were you considering them as 12 applicable to USAT or were you considering them to 13 be employees of UFG or -- 14 THE WITNESS: We reviewed just the 15 contracts for text, but we were reviewing them 16 with the fact that they were with UFG. Therefore, 17 they would not apply to any considerations that we 18 had at USAT. Therefore -- because at the time we 19 were projecting insolvency. So, the language of 20 these contracts not being with the institution 21 wouldn't impact that. 22 THE COURT: Okay. 18317 1 Q. (BY MR. BLANKENSTEIN) Were you aware of 2 an opinion of the office of the general counsel of 3 the Federal Home Loan Bank Board that said that 4 contracts at the holding company level for 5 employment services to be provided at the savings 6 and loan company should be considered under 7 563.39? 8 A. We did not do holding company exams at 9 the time; so, I was not aware of that. 10 Q. Well, let me see if I can refresh your 11 recollection in that regard. Let me show you 12 what's been marked as B1520. 13 This is a March 13th, 1987 letter from 14 Julie Williams of the -- who's deputy general 15 counsel for securities and corporate structure of 16 the Federal Home Loan Bank Board in Washington to 17 Gene Miller, associate supervisory counsel of the 18 Federal Home Loan Bank of Seattle; is that right? 19 A. Right. 20 Q. And the subject is employment contract 21 terms? 22 A. Right. 18318 1 MR. BLANKENSTEIN: Your Honor, I would 2 move B1520 into evidence. 3 MR. VEIS: No objection, Your Honor. 4 THE COURT: Received. 5 Q. (BY MR. BLANKENSTEIN) Now, are you 6 familiar with Ms. Williams? 7 A. No, I'm not. 8 Q. The first paragraph says that 9 Ms. Williams is responding to a request for advice 10 with regard to a position taken by the Seattle 11 bank on certain issues with regard to an 12 employment contract and whether that would be 13 consistent with the policies of the Federal Home 14 Loan Bank Board in Section 563.39 of the 15 regulations; is that right? 16 A. Right. 17 Q. And if you look in the second 18 paragraph, it identifies which issues are 19 involved? 20 A. Right. 21 Q. And the first issue is the authority of 22 the Bank Board or the FHLB of Seattle to review an 18319 1 employment contract involving a savings and loan 2 holding company where the savings and loan 3 association is not a party but where the contract 4 provides for services to be rendered to the 5 institution and the institution reimburses the 6 holding company for the employee's salary; is that 7 right? 8 A. Right. 9 Q. Why don't you turn over to Page 2, if 10 you would. Excuse me. Page 4. 11 Now, if you'll look -- the first two 12 paragraphs on that page under the heading 13 "discussion" answers that first question; is that 14 right? 15 A. Answers what question? 16 Q. The first issue to be addressed is 17 whether Section 563.39 applies to employment 18 contracts that are entered into between a savings 19 and loan holding company and an employee for 20 services to be rendered to the holding company's 21 wholly-owned savings and loan association; isn't 22 that right? 18320 1 A. Right. 2 Q. And that's the circumstances involved 3 with the UFG contracts. Right? It's a contract 4 with a holding company for services to be provided 5 at the USAT level, correct? 6 A. Right. 7 Q. And the opinion of the general 8 counsel's office in that regard is that although 9 the savings and loan was not technically a party 10 to the contract, Section 563.39 would apply in 11 those circumstances, especially if the savings and 12 loan would be the company that would pay the 13 salaries; isn't that right? 14 A. I only have the reg. I didn't have 15 this opinion. I've never seen it before. 16 Q. That doesn't refresh your recollection 17 at all? 18 A. No. 19 Q. And you weren't aware that that was the 20 applicable standard? 21 A. This is from another district bank. 22 Q. Now, in response to Judge Shipe's 18321 1 question, I think you said you weren't -- you 2 thought that -- you weren't certain who was paying 3 the salaries, is that right, of the individuals 4 whose contracts you reviewed? Were the salaries 5 being paid by United? United Savings Association 6 of Texas? 7 A. Correct. 8 Q. So, you knew that? 9 A. Correct. 10 Q. You knew that the salaries that were 11 specified in those contracts were paid by United? 12 A. Right. That's what they had purported 13 because they provided that information on the page 14 in the report. And on that page, we asked for 15 USAT, not UFG. 16 Q. And the same -- was the same true for 17 the bonuses to be paid? 18 A. The management of the institution, when 19 they provided that data, they purpor