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 purported that data 20 to me as being from USAT as the bonuses, salaries, 21 and remunerations. 22 Q. So, you knew that the salary and the 18322 1 bonuses that were specified in the contracts were, 2 in fact, being paid by USAT? 3 A. I'm not talking about contracts. I'm 4 talking about the information that was provided 5 for us in the report that we had requested. 6 Q. Did the contracts that you reviewed 7 provide for salary? 8 A. These contracts here were with UFG. 9 Q. But did you ever -- did you inquire as 10 to who was, in fact, going to pay the salary and 11 the bonuses specified in those contracts? 12 A. They said the contract was with UFG. 13 If the contract is with UFG, that was who they 14 said paid it. 15 Q. But it was for services to be provided 16 to -- to USAT; isn't that right? 17 A. The individuals were employed with 18 USAT. 19 Q. And they were going to provide 20 services -- 21 A. Right. 22 Q. -- to -- employment services to USAT? 18323 1 A. Right. 2 Q. Did you inquire as to whether -- as to 3 who was going to pay the amount specified in the 4 contract? 5 A. They said UFG. 6 Q. I guess did you inquire from management 7 of USAT -- 8 A. I inquired and was told these contracts 9 which would provide the payment were with UFG. 10 Q. I understand that. But my question is: 11 Did you inquire as to who was going to, in fact, 12 pay the salaries specified? 13 MR. VEIS: Asked and answered, Your 14 Honor. 15 A. That's what I just said, that the 16 contracts -- that UFG was the entity that was 17 going to pay the contracts because that's who the 18 contract is with. That's what I was told. 19 Q. (BY MR. BLANKENSTEIN) Now -- 20 MR. BLANKENSTEIN: Just a moment, Your 21 Honor. If I can find my document. 22 THE COURT: Were you, in effect, told 18324 1 that these people were getting two salaries? 2 THE WITNESS: No, Your Honor. When we 3 inquired about the contracts, we were told that 4 these were the only contracts that the management 5 had, and those were the going-forward contracts, 6 and that those contracts were to be -- were going 7 to be paid by the holding company and that they 8 did not have any contracts with the institution 9 themselves. And once I was made aware of that, my 10 continued consideration of any impact at that 11 point was -- it was immaterial if the holding 12 company -- if the contracts were with the holding 13 company, what they did with their funds was not an 14 impact on the thrift. What we were trying to do, 15 because the institution was being declared -- 16 projected to be insolvent, is to determine what, 17 you know -- those would be conditions for 18 discontinued once that institution was inducer 19 insolvent. 20 THE COURT: But you were also told, 21 were you not, that USAT was paying salaries for 22 these people? 18325 1 THE WITNESS: The salaries that we had 2 for the period of the examination report that we 3 provided in the '87 report, those salaries were 4 purported to have been paid by the institution, 5 USAT. 6 Q. (BY MR. BLANKENSTEIN) Well, let's take 7 a look at what you provided in your employment 8 contract analysis, which is Exhibit A14086. 9 Now, you specify what the salary and 10 bonuses were to be -- 11 A. Right. 12 Q. -- is that right? And I'm going to 13 show you, as well, what's set out in the report of 14 examination, which is Exhibit 14073. And I'm 15 going to ask you to turn to Page A-212 -- 211, 16 which is Imaging Page OW077152. 17 And why don't you read out what you 18 have as the salary for Michael Crow on your 19 contract analysis. 20 A. For Michael Crow, we have no less 21 than -- 22 Q. No. The salary. 18326 1 A. 171,656. 2 Q. And in your examination report for 3 1987, you list the salaries on Page A2.1 of 4 Michael Crow as $171,656; is that right? 5 A. Correct. 6 Q. And you understood that that amount was 7 being paid by USAT, correct? 8 A. Right. 9 Q. Now, if you read out Mr. Crow's bonus, 10 what was the amount of Mr. Crow's bonus that you 11 have on your contract analysis? 12 A. 62,000. 13 Q. And Mr. Crow -- the amount of the bonus 14 set forth in the '87 report for Mr. Crow? 15 A. 62,000. 16 Q. And let's just check with Mr. Jackson. 17 You have Mr. Jackson, as well? 18 A. Right. 19 Q. And what's the amount of the salary for 20 Mr. Jackson that's set out on your contract 21 analysis? 22 A. 136,656. 18327 1 Q. And what's the amount of the salary 2 that's set forth on -- in the '87 report that's to 3 be paid to Mr. Jackson by USAT? 4 A. 60,000. 5 Q. No. The amount of the salaries. If 6 you look here -- 7 A. 136,656. 8 Q. Yes. What's the amount that you set 9 out in your '87 report for Mr. Jackson? 10 A. 136,656. 11 Q. And that's the same amount? 12 A. Right. 13 Q. And you understood that 136,656 that 14 you set out in your examination report was to be 15 paid by USAT; isn't that right? 16 A. Correct. 17 Q. And if you can just quickly look, isn't 18 it the case, Ms. Carlton, that all of the 19 amounts -- the base salary and the bonus -- the 20 minimum bonuses that are set out in Exhibit 14086, 21 which is your contract analysis, are identical to 22 the salaries set forth in the '87 schedule for 18328 1 those individuals? 2 A. Right. 3 Q. And that's true with the bonuses, as 4 well? 5 A. Right. 6 Q. And you knew that those salaries and 7 bonuses were, in fact, going to be paid by USAT? 8 A. Right. But you have a legal document. 9 Institutions -- 10 Q. Thank you. 11 A. -- legally -- if that document, if 12 UFG -- 13 THE WITNESS: Then legally, in those 14 instances, you have separate corporate identities, 15 Your Honor. And if a document is in an agreement 16 with the institution and that agreement is with 17 UFG, that institution is to maintain a separate 18 corporate identity, meaning that that corporate 19 veil should not be pierced with documents with the 20 holding company of obligations of the institution 21 and obligations of the institution which are 22 obligations of the -- of the holding company. And 18329 1 that's a question -- once it's with the holding 2 company under the corporate shield, then that 3 separates obligations at USAT. 4 THE COURT: Did you find that these 5 separate identities were being blurred here? 6 THE WITNESS: If he is saying that this 7 document is really meaning for USAT, then that's 8 what you have. We considered it as being 9 separate. Therefore, in our consideration, 10 because it was with UFG, we meant it to be just 11 that; that those contracts were not going to pay 12 for the services, although you have identical data 13 as far as the terms and the amounts that should -- 14 that piercing of the corporate veil should not 15 exist, and it was my understanding it didn't. 16 THE COURT: Excuse me, 17 Mr. Blankenstein. 18 Q. (BY MR. BLANKENSTEIN) You didn't think 19 that Mr. Crow was going to receive $171,656 in 20 base salary from USAT and another $171,656 from 21 UFG, did you? 22 A. I was just reading what was presented. 18330 1 If that's what they wanted to pay and it was not 2 out of the thrift, fine. 3 Q. So, you thought that he was going to 4 get that salary twice; is that right? 5 A. You do have instances where you have 6 that. So, it's not an unseen situation. 7 Q. Did you find that to be an -- did you 8 find that to be an anomalous situation? 9 A. Once the contracts were purported to be 10 with UFG, I no longer questioned it. 11 Q. Now, you said that you weren't aware of 12 any USAT contracts; is that right? 13 A. They did not provide any for us during 14 the request. 15 Q. Well, I think you said that you don't 16 remember ever being in a meeting in which there 17 was any discussion of USAT contracts; is that 18 right? 19 A. Where are you talking about now? 20 Q. Do you remember ever being in a meeting 21 where there was a discussion of USAT contracts? 22 A. Not to my knowledge. 18331 1 Q. Do you remember we looked at the notes 2 of the interview with Mr. Gross? 3 Do you remember that, Ms. Carlton? 4 A. Yes. 5 Q. And I think it's Exhibit A11039. 6 A. Yes. 7 Q. And the last sentence says -- of the 8 fourth paragraph -- says, "In addition, USAT has 9 also retained Hewitt & Company to evaluate its 10 employees' and officers' compensation package 11 including contracts which provide for bonuses"? 12 A. Right. 13 Q. So, you knew that USAT was going to 14 provide contracts for its employees that provided 15 for bonuses; isn't that right? 16 A. Right. 17 Q. So, you knew before the close of the 18 examination that there was going -- that there 19 would be USAT contracts? 20 A. Right. 21 Q. And did you ever make a request to see 22 a copy of those contracts? 18332 1 A. We did. 2 Q. Did you make a request to see a copy of 3 those contracts after -- 4 MR. VEIS: Excuse me, Your Honor. I 5 think Mr. Blankenstein is misleading the witness 6 when he asks about whether she knew before the 7 close of the examination. 8 The record will show the examination 9 closed March 30th. The interview itself took 10 place on April 14th, and I believe the premise of 11 the question is misleading. 12 Q. (BY MR. BLANKENSTEIN) Did you know 13 before you prepared your report of the 1986 14 examination that there were USAT contracts? 15 A. Whatever the date is on -- in January. 16 We had -- you had the contract. Not with -- you 17 mean USAT? 18 Q. Yes. 19 A. No. 20 Q. This -- if you look at the interview of 21 Mr. Gross, whoever prepared these notes and sat at 22 that interview recites that USAT has retained 18333 1 Hewitt to evaluate its employees' and officers' 2 compensation package, including contracts which 3 provide for bonuses; isn't that right? 4 A. I think this top document is just made 5 a part of that. 6 Q. But you reviewed this. Right? Your 7 initials are on it? 8 A. Right. But I don't know what time and 9 period that it is on. 10 Q. It says April 14th, 1988. 11 A. Right. Well, we knew, based on this -- 12 well, we didn't know -- we had employment 13 contracts with UFG. 14 Q. But these say that they are USAT 15 contracts. Right? Isn't that what it says? 16 A. We did not have a copy of -- once -- 17 when we requested this request, we asked for USAT 18 and UFG. They told us when they provided the UFG 19 that they didn't have any more contracts, 20 irregardless of what this data states here. 21 Q. Okay. Now, we looked at the request 22 control log which -- in which you -- which shows 18334 1 when you requested those contracts; is that right? 2 A. Right. 3 Q. And do you have it before you, 4 Ms. Carlton? If not, I can just show it to you. 5 It shows a request on December 12th -- 6 December 16th, 1987, and that you received the 7 contracts on January 7th, 1988? 8 A. That's correct. 9 Q. Well, let's see whether we can 10 establish when the USAT contracts were first 11 brought up. 12 Do you remember that you attended a 13 board meeting of USAT on -- in February of 1988? 14 February 11th, I believe, is the date. 15 A. No. 16 Q. Well, let me show you the minutes of 17 that board meeting. 18 Do you have that there, Ms. Carlton? I 19 can't seem to find my copy; so, I'm going to come 20 around and look over your shoulder if that's okay. 21 A. Yes. 22 Q. Do you remember Mr. Veis showed these 18335 1 to you? 2 A. Yes. 3 Q. And in the first paragraph, it shows 4 that you were in attendance? 5 A. Right. 6 Q. And -- 7 MR. VEIS: What exhibit number is this? 8 MR. BLANKENSTEIN: 1141. 9 Q. (BY MR. BLANKENSTEIN) And on Page 27, 10 it contains a discussion of contracts with USAT 11 and various executive officers? 12 A. Right. 13 Q. And this is -- and the board is 14 authorizing such contracts at this February 11th, 15 1988 meeting; is that right? 16 A. Right. 17 Q. So, this was after your request and 18 after you received the contracts that you 19 requested; isn't that right? 20 A. Right. 21 Q. Now, if we go back to the notes of the 22 interview with Mr. Gross, in those notes -- we've 18336 1 gone over that. It speaks about USAT contracts? 2 A. Right. 3 Q. And you reviewed that; is that right? 4 You reviewed this -- you reviewed this memorandum, 5 correct? 6 A. Yes. 7 Q. So, you knew on April 14th or 8 thereabouts that there were USAT contracts, 9 correct? 10 A. When I left the institution, we were 11 not aware of USAT contracts. 12 Q. I'm asking whether you were aware on or 13 about April 14th that there were USAT contracts. 14 A. I don't -- that's beyond even that 15 examination. So, I don't know what -- I know that 16 later on, Neil received additional contracts; but 17 that was not a part of my examination. 18 Q. Now, if you had been told that there 19 were no USAT contracts, were you surprised when 20 you read this memorandum that there were, in fact, 21 USAT contracts? 22 A. If I had been -- I had been told that 18337 1 there were no UFG -- no USAT contracts. If I had 2 attended a meeting in which I had heard that, it 3 would have raised my attention that -- 4 Q. Okay. 5 A. -- all of a sudden, where are they if 6 you didn't have them? 7 Q. Now, after your April 14 -- after you 8 read this memo on April 14th that talks about USAT 9 contracts, did you make a subsequent request to 10 USAT to produce the USAT contracts? 11 A. I did not. The request for USAT did 12 not come from me. 13 Q. Did -- you weren't surprised, were you, 14 that there were these contracts in existence 15 because they had been discussed at the 16 February 11th, 1988 meeting which you attended; 17 isn't that right? 18 A. I attended the meeting. I do not 19 recall the discussion of USAT contracts. If I 20 would have, I would have asked for the contracts 21 because that was one of the items we had been 22 asked to be provided with. 18338 1 Q. So, you found out on April 14th that 2 there were such contracts, and you didn't do 3 anything to inquire further; is that right? 4 A. That's the date on this memo. On 5 April 14, I was at University Savings. 6 Q. But you reviewed this memo, and you 7 read it; is that right? 8 A. My initials are on it, but I don't know 9 what time and period. For you to put it back as a 10 part of the examination, it could have come back 11 through correspondence and not been a part of that 12 examination. I think you are mis -- you've got an 13 April 14th date, the last -- I mean, when you are 14 putting it in sequence for information that we 15 had, I know that when I finished United, we were 16 not aware of contracts with USAT. The supervisory 17 agent later received that information. I did not 18 and was not aware of it. 19 Q. But this was prepared by someone on 20 your management team; is that right? 21 A. I don't know who prepared the document. 22 Q. There is a reference in your final 18339 1 report to information contained in the summaries, 2 isn't there? Didn't you go over that with 3 Ms. Clark the other day? 4 A. I could have. I don't recall. 5 Q. So, you drew on this information in the 6 preparation of your final report for the 1987 7 examination. Right? 8 A. I did not draw -- about the contracts? 9 No. 10 Q. But you drew on this document, the 11 information contained in these interview notes? 12 A. From the interview notes, yes. 13 Q. And -- so -- and these were all 14 together. Right? 15 A. Because they are together here in court 16 does not mean they were together in the work 17 papers. Those work papers have been connected in 18 so many different ways than when they were first 19 originated. 20 Q. So, you just don't think you saw this 21 at the time you -- 22 A. I would say that -- 18340 1 Q. -- you looked -- you prepared your '87 2 report? Is that your testimony? 3 A. I am saying that at the time I closed 4 out the USAT exam, I was not aware of any 5 contracts with USAT. The management had reported 6 they had none. 7 Q. That was in January of 1988. We see in 8 February of '88 a board meeting that you recorded 9 as attending that makes specific reference to 10 those contracts; isn't that right? 11 A. I see the minutes. I was not 12 privileged -- I attended. I do not recall the 13 discussion of that, although you have minutes now 14 that reflect that. When we attend minutes, or 15 meetings, the minutes are drafted later. So, to 16 say that was a part of that meeting is -- I was -- 17 I did not reflect in any notes that those 18 contracts were there. 19 Q. It was -- 1988 was a long time ago? 20 A. You're right. 21 Q. And you don't remember? 22 A. That's right. 18341 1 Q. You don't remember other things that -- 2 A. That's what I told you. 3 Q. You don't remember other things that 4 may have occurred during that meeting; is that 5 right? 6 A. This was a critical issue. I think I 7 would have remembered at that point to note that 8 they had provided incorrect information in 9 reference to contracts when we had asked several 10 times about it. I may not remember now; but I 11 think at the meeting at that point with it being 12 the issue that it was and the condition of the 13 institution, I think I would have recalled that at 14 that time. 15 Q. Let's go back to your request. Your 16 request was in January; isn't that right? 17 A. Right. 18 Q. In December. And you received the 19 contracts in January? 20 A. Right. 21 Q. That was before the USAT contracts were 22 first authorized at the February 11th, 1988 board 18342 1 meeting; is that right? 2 A. Correct. 3 Q. So, in January at least, there were no 4 contracts with USAT to give you; is that right? 5 A. Right. 6 Q. And USAT wasn't hiding the fact that 7 there were contracts -- employment contracts that 8 it had with its senior executives. Mr. Gross 9 noted that in his interview; isn't that right? 10 A. I cannot attest to what United would 11 not do. We had asked for the contracts. If it's 12 the spirit of them, they should have provided them 13 before the exam left. 14 Q. But Mr. Gross noted that there were 15 those contracts. Right? 16 A. But I can't attest to whether they were 17 hiding them or not. I can't attest to that. 18 Q. Well, if he told one of the management 19 team about the existence of the contracts, he 20 couldn't have been hiding them. Right? 21 A. Well, if they were approved in 22 February, they may have been drafted sometime 18343 1 prior to that. I can't attest to that. 2 Q. But he wasn't hiding them. Right? 3 A. I can't attest to that. I don't know 4 what Mr. Gross was doing. 5 Q. He told someone on your team about the 6 contracts. Right? 7 A. I cannot attest to that. I can only 8 attest to what I know. 9 Q. Do you think this is a fabricated note? 10 A. I can only attest to what I know, 11 regardless of what you have before you. 12 Q. You have no reason to believe that a 13 member of your team would say something incorrect 14 here about the existence of USAT contracts? 15 A. I'm not commenting one way or the 16 other. You are presenting that I knew. All I'm 17 attesting to is what I knew, and I'm relaying to 18 you what I didn't know. 19 Q. Okay. But we know that you read these? 20 A. Right. 21 Q. Now, there was going to be a Southwest 22 examination that was going to follow up your 18344 1 examination; is that right? 2 A. One did follow. 3 Q. Right. And did you -- and one of the 4 first things that is done in connection with an 5 examination is to review the board minutes? 6 A. On a regular exam. Southwest exams, 7 that's different. 8 Q. You don't think they would have 9 reviewed the board minutes? 10 A. They -- all -- you said -- on Southwest 11 exams, we had different guidelines for reviewing 12 the Southwest exams. The minutes was probably one 13 of those things. 14 Q. Okay. So, USAT, by putting the fact 15 that they had contracts in the February 11th board 16 meeting minutes, which they knew were going to be 17 reviewed in connection with the Southwest 18 examination, couldn't possibly have been hiding 19 the fact that there were those contracts; is that 20 right? 21 A. No. 22 Q. Well, let's see if we can -- I can do 18345 1 that again. Maybe I can be clearer. 2 USAT knew there was going to be a 3 Southwest exam; is that right? 4 A. I don't know what USAT knew. 5 Q. Was there traditionally an examination 6 in connection with applications for participation 7 in the Southwest Plan? 8 A. I don't know exactly the procedures. 9 Q. You know there was a Southwest 10 examination that was conducted; is that right? 11 A. Yes. 12 Q. And you knew that USAT had an 13 application for participation in the Southwest 14 Plan; isn't that right? 15 A. Right. 16 Q. And participation in the Southwest Plan 17 was something that the regulators, the examiners, 18 and supervisory agent looked at carefully; isn't 19 that right? 20 A. They reviewed it. 21 Q. So, it would be likely that there would 22 be a separate examination in connection with the 18346 1 Southwest Plan; is that right? Would you agree 2 with that? 3 A. There could be. 4 Q. And one of the things that is 5 traditional in examinations is a review of the 6 board minutes; isn't that right? 7 A. Yes. 8 Q. So, if USAT put a reference to the 9 employment contracts with USAT and its executive 10 officers, it wouldn't be hiding those contracts 11 from the regulators; is that right? 12 A. Assuming that they reviewed the 13 minutes, no. 14 Q. And USAT had no reason to believe that 15 the examiners of the Southwest Plan wouldn't have 16 reviewed those minutes; isn't that right? 17 A. I don't know what USAT regarded as far 18 as our review. 19 Q. But that's a reasonable expectation, 20 that one of the things examiners do is review the 21 minutes of the board meetings. Right? 22 A. Right. 18347 1 Q. So, they had that reasonable 2 expectation, correct? 3 A. Right. 4 MR. BLANKENSTEIN: No further 5 questions, Your Honor. 6 THE COURT: All right. We'll adjourn 7 until 1:30. 8 9 (A luncheon recess was taken from 10 11:55 a.m. to 1:30 p.m.) 11 12 THE COURT: Be seated, please. We'll 13 be back on the record. 14 Mr. Keeton, you have some 15 cross-examination? 16 MR. KEETON: A few Your Honor, please. 17 18 EXAMINATION 19 20 Q. (BY MR. KEETON) Ms. Carlton, my name is 21 Richard Keeton; and I represent Charles Hurwitz in 22 this matter. I have a few questions, a few areas 18348 1 to cover, hopefully not very long. 2 Mr. Blankenstein has already covered 3 with you the fact of your observation that Jenard 4 Gross appeared to have a conflict of interest with 5 respect to his service on the board of Weingarten 6 Realty. 7 You recall that examination, I assume? 8 A. Yes. 9 Q. You observed in your papers at the same 10 time that you observed Mr. Gross had a conflict or 11 appeared to have a conflict that Mr. Hurwitz did, 12 too. We've covered the basis for why you made the 13 comment with respect to Mr. Gross. 14 Why is it that you made that same 15 comment with respect to Mr. Hurwitz? 16 A. We made the same comment because he was 17 also on the board and also a shareholder of that 18 Weingarten. 19 Q. Mr. Hurwitz was a shareholder of 20 Weingarten? 21 A. No. I mean that he was also on the 22 board of Weingarten. 18349 1 Q. Right. I'm asking you -- 2 A. The institution was investing in 3 profits from Weingarten. 4 Q. And as we've seen, they brought in 5 $24.5 million worth of profits from Weingarten, 6 didn't they? 7 A. That's correct. 8 Q. But I'm trying to explore why you 9 thought that it might be a conflict for 10 Mr. Hurwitz, as fiduciary for the parent company 11 and, I guess, maybe derivatively for the 12 institution, to serve on the board of Weingarten 13 to look after that investment? 14 A. If he was sitting on that board for 15 reasons in which he could take advantage of his 16 position on that board along with his positions 17 with the institution in bringing those profits due 18 to some type of insider information, that although 19 it was a profit, you still would have an 20 individual -- you would have profits taken on 21 under a condition that is not prudent, safe, and 22 sound. 18350 1 Q. I guess we could have a conspiracy 2 theory of the world, but did you find anything 3 that he did improper -- he, Mr. Hurwitz -- by 4 serving on this board? 5 A. No. 6 Q. Okay. Now, you also mentioned in the 7 papers that Mr. Hurwitz, who at the time was the 8 chairman of UFG, the parent of USAT, attended two 9 USAT board meetings and discussed matters relating 10 to a possible investment or an investment in 11 Castle & Cooke. 12 Do you remember that? 13 A. Yes. 14 Q. Now, do you think there's anything 15 improper about Mr. Hurwitz attending a board 16 meeting to tell the board of USAT of an investment 17 opportunity that might occur? 18 A. No. If he's not using his influence in 19 any manner to persuade the bank to purchase that, 20 just based on his influence and knowledge of the 21 interest. 22 Q. And I looked at the board minutes; and 18351 1 I did not see him seconding anything or making a 2 motion in those, did you? 3 A. No. 4 Q. And, in fact, the investment in 5 Castle & Cooke, as it worked out, proved again to 6 be a several-million-dollar profit for the 7 institution. Right? 8 A. Again, not -- you can have an -- 9 Q. You can answer my question, and then 10 I'll give you a chance to explain it if you want a 11 speech. 12 The institution made a 13 several-million-dollar profit on that investment, 14 didn't it? 15 A. I don't recall. 16 Q. You just don't know? 17 A. I don't recall. 18 Q. Okay. Now, you also mentioned that 19 there were other USAT board meetings that 20 Mr. Hurwitz attended. Right? 21 A. Right. 22 Q. Now, in each instance other than the 18352 1 two I've just mentioned, isn't it true that they 2 were either joint meetings or meetings held 3 contemporaneously? For instance, UFG would have a 4 meeting followed the same day by a USAT board 5 meeting? 6 A. There were joint meetings held. 7 Q. And you have no objection to joint 8 meetings as you told us in your deposition; isn't 9 that correct? 10 A. As long as whatever the minutes and 11 whatever the business are separated and denoted as 12 either joint or separate meetings and not 13 commingled. 14 Q. Now, the one matter that you did raise 15 a question about -- it is shown in one of these 16 joint or contemporaneous meetings involving UFG 17 and USAT -- is that Mr. Hurwitz is shown at the 18 front of the meeting as making a motion to approve 19 the last month's financials or the financials for 20 the previous period, actually seconding that. 21 Do you recall that? 22 A. No. 18353 1 Q. You don't recall that he is listed in 2 one USAT board meeting as seconding the approval 3 of financials from a meeting of May 8, 1986? 4 A. No. 5 Q. Okay. Now, you've told us actually 6 this morning that minutes sometimes get written up 7 after the fact. Right? 8 A. Right. 9 Q. And the fact that it might show 10 Mr. Hurwitz as seconding that, it might have 11 happened or not. Right? 12 A. It's possible. 13 Q. And in the four years of reviewing 14 meetings of USAT minutes, did you ever see any 15 action of Mr. Hurwitz other than this one 16 ministerial second that drops in there? 17 A. I don't know -- what do you mean? 18 Q. Making a motion, seconding a motion, 19 voting on a motion. 20 A. We noted whatever we saw. 21 Q. And you didn't note anything else. 22 So, I assume that in the four years, 18354 1 there's nothing else. Right? 2 A. No. You can assume it. 3 Q. You have no contrary information, do 4 you? 5 A. No. 6 Q. And there were, in fact, a number of 7 USAT board meetings that Mr. Hurwitz did not 8 attend; isn't that true? 9 A. Right. 10 Q. And your notes have been displayed 11 showing attendance, I believe. On the two 12 checklists you showed, he only attended one; and 13 that's shown as a joint meeting. 14 A. Okay. 15 Q. This is off my notes, and I neglected 16 to check the transcript from yesterday. But 17 somewhere during the day, my notes say you made 18 the comment -- and I believe it was to 19 Ms. Clark -- discussing Couch Mortgage. And I 20 don't want to get into Couch Mortgage any more 21 than we have, and you probably don't either. 22 Right? 18355 1 A. Whatever you ask, I'll try to answer. 2 Q. Okay. But my notes said that the bank 3 or the institution was aware of the double selling 4 of mortgages by Couch. If my notes are correct, 5 you weren't trying to say that USAT knew it was 6 being defrauded at the time, are you? 7 A. They were aware of their double sales 8 to Couch as to swaps, yes. 9 Q. What you're calling a double sale is 10 where they sold some properties or mortgages to 11 Couch and they bought back some mortgages or 12 something from Couch. Right? 13 A. Right. 14 Q. That's what you're calling a double 15 sale? 16 A. Right. 17 Q. Well, it's my problem. I thought, you 18 know, the problem in Couch or one of the big 19 problems was Mr. Couch apparently sold the same 20 mortgage two or three times. 21 You're not telling me that USAT knew 22 Mr. Couch was doing that, are you? 18356 1 A. I don't know what USAT knew -- 2 Q. Okay. 3 A. -- about the situation. 4 Q. That's fine. I just didn't want it -- 5 I wanted it clear that you're not saying USAT knew 6 it. 7 Another question, you made mention that 8 one of your duties was to look for planes and 9 boats -- and I don't know if you said ski 10 lodges -- but things like that on the 11 institution's books or that the institution had 12 such things. 13 You didn't find any such things on this 14 institution, did you? 15 A. No. I don't even think I said that. 16 Q. You said planes and boats, and I don't 17 know if you said cars or what else you said. 18 A. We look for those -- 19 Q. Yes. 20 A. If it's a part of their lending 21 activity, we look for it. 22 Q. I'm asking a different question. I 18357 1 thought that part of your examination -- because 2 we've all read about some of the institutions that 3 have used their trust and spent very lavishly on 4 vacation homes and planes and things. 5 You didn't have anything like that 6 here, did you? 7 A. I didn't get into the personal lives of 8 the individuals at USAT. 9 Q. I'm not talking about personal. I'm 10 talking about using the institution's funds to buy 11 those things and then letting the officers or 12 directors use them. 13 A. We didn't get into an investigation 14 like that. 15 Q. So, you didn't find anything like that? 16 A. No. 17 MR. KEETON: That's all I have. Thank 18 you. 19 THE COURT: Mr. Nickens, do you have 20 cross? 21 MR. NICKENS: No, Your Honor. I don't. 22 THE COURT: Thank you. Ms. Carlton, I 18358 1 have a question that refers to a statement I 2 believe you made that these examinations were 3 reflected in your performance reports or something 4 like that. 5 THE WITNESS: Right. 6 THE COURT: Was the reference favorable 7 or unfavorable? 8 THE WITNESS: You had a reference on 9 the rating of the institution. It was 10 unfavorable. 11 THE COURT: You were criticized for 12 rating it a 3? 13 THE WITNESS: No. It was a matter 14 of -- the SA questioned me concerning the rating, 15 to find out that the rating was changed at the 16 field manager level. And that field manager 17 reflected that it was not a chain of command. He 18 did not -- when the SA communicated with the field 19 manager, I guess he asked him questions about the 20 rating. And at the time, I didn't know anything 21 about it. When I knew the rating was changed was 22 when I saw it in my performance review. 18359 1 THE COURT: So, it was -- it was 2 changed by whom? 3 THE WITNESS: The field manager. 4 THE COURT: He didn't tell you to 5 change it? 6 THE WITNESS: No. 7 THE COURT: I thought you were saying 8 one of the ratings, you were ordered to change it. 9 THE WITNESS: No. The rating, when it 10 was changed, I was not aware of the change in the 11 rating until the SA called me and asked me about 12 the rating. I told him that's what is on the 13 report. He said that's not what he received. 14 THE COURT: All right. Thank you. 15 Mr. Guido, you have some redirect? 16 MR. GUIDO: Yes, Your Honor. 17 THE COURT: Proceed. 18 MR. NICKENS: Your Honor, Mr. Veis, of 19 course, handled the direct; and I understand 20 Mr. Guido is going to handle the redirect. He has 21 indicated to me that he will be the only counsel 22 questioning the witness on redirect. On that 18360 1 basis, we have no objection to this procedure. 2 MR. GUIDO: I think my response was 3 that assuming that I understand the compensation 4 part, Your Honor. I do intend to do the entire 5 redirect under the conditions of the rule that 6 allows that. 7 THE COURT: All right. 8 9 FURTHER EXAMINATION 10 11 Q. (BY MR. GUIDO) I would like to ask you 12 a few questions about the examination process to 13 follow up on what Ms. Clark asked you about the 14 process and what are the significances of matters 15 appearing or not appearing in the examination 16 report. 17 Are examiners responsible for making 18 the management's decisions at an institution? 19 A. No, we're not. 20 Q. Are the examiners charged in examining 21 the institution to see whether it can ascertain 22 whether there are any improprieties or breaches of 18361 1 rules and regulations in the management of the 2 association? 3 A. That's our charge, yes. 4 Q. Okay. And in your experience, have 5 there been occasions where examiners have looked 6 at an institution and not found something and then 7 subsequently violations of rules and regulations 8 come to light? 9 A. Yes. 10 Q. And during the 1985, '86, '87 time 11 period, were there a -- was there an enormous 12 amount of pressure on the examiners given the 13 amount of examinations that had to be done at that 14 point in time? 15 A. Yes, there was. 16 Q. Can you tell us a little bit about what 17 those time pressures were and resource pressures 18 that you felt in the course of your 1986 and 1987 19 exams? 20 A. During that period of time, we were 21 grossly understaffed as far as the examination 22 staff. Institutions were failing, and the FSLIC 18362 1 fund was being depleted faster than we could get 2 around to the institutions in an effort to examine 3 them. Even with the use of auditors, we were 4 still falling behind as far as completing the 5 examination cycle as the operation results were 6 coming in denoting institutions with problems. 7 A good example was even as EIC of USAT 8 which was a large institution, I was also EIC of 9 another large institution simultaneously which 10 was -- it was unusual for a person to have to do 11 back in those times. 12 Q. Which exam was that that occurred? 13 A. The '87 exam. 14 Q. Now, during that period of time, did 15 you have to be back and forth from different 16 sites? 17 A. Right. 18 Q. And you were essentially supervising 19 two staffs -- 20 A. Correct. 21 Q. -- that were doing simultaneous 22 examinations? 18363 1 A. That's correct. 2 Q. One of the sets or series of -- long 3 series of questions that have been asked of you 4 led or gave the impression that if you didn't find 5 something and object to it, you concluded that 6 that was a safe and sound practice. 7 Would that be a fair characterization 8 of your view of the process? 9 A. No, it's not. The only way that could 10 happen is if we did a 100 percent review of 11 everything. As examiners, we go in; and you have 12 a snapshot period of time in which we review as of 13 a period of time. And we randomly select our 14 sample of loans to review, and we randomly select 15 items and issues that we review. 16 So, there's no way we can cover or 17 discover all the violations within an institution. 18 We pull a sample to see if it gives us an idea of 19 the financial condition of the institution. We 20 also rely on their internal auditors, along with 21 the external auditors, as being other policing 22 authorities to give some assurance that the books 18364 1 and records reflect accurately the business of the 2 institution. 3 Q. Now, are the auditors dependent upon 4 the accuracy of the books and records of the 5 association so that they can ascertain whether or 6 not there's any need to report improprieties or 7 violations of rules and regulations? 8 MR. NICKENS: Objection, Your Honor. 9 The question is leading and suggestive. 10 THE COURT: Sustained. 11 Q. (BY MR. GUIDO) What is the significance 12 of the books and records for an examiner, 13 Ms. Carlton? 14 A. The books and records are the backbone 15 of any examination. If the books and records are 16 not accurate, you can't rely on any analysis that 17 you use those records for. It starts and ends at 18 your books and records. And if those are not 19 accurate, any conclusions that you draw on those 20 will not be accurate either. 21 Q. What about the significance of minutes? 22 What is the significance of minutes to an 18365 1 examiner? 2 A. The minutes is -- is kind of a road map 3 of showing the activities of an institution when 4 it takes place, who is responsible for actually 5 making those decisions, and kind of gives a trail 6 of when a situation exists and when transactions 7 are made and the whole approval process in which 8 the directors are providing guidance. And it also 9 gives you a picture by packages of what 10 information is provided to the board as far as 11 what do they actually see and hear from 12 management. 13 Q. Now, if you'll recall, Ms. Clark asked 14 you some questions about committees; and she asked 15 you whether or not you had reviewed any committee 16 minutes. 17 Do you recall those questions that she 18 asked you? 19 A. Yes. 20 Q. Now -- and you reviewed a number of 21 documents with her about various committees. 22 How did you ascertain what committees 18366 1 to look to or to ask for the minutes of? 2 A. We asked the institution to provide us 3 a copy of their major operational committees. And 4 they provided that list to us, and we make it a 5 part of the report. And from those are the 6 committees that we decide that we will focus on 7 based on the identification of the institution. 8 Q. Have you ever audited an institution 9 where you found that the minutes had been 10 fabricated to reflect something that had not 11 transpired? 12 A. Yes, I have. 13 Q. And what was your finding with regard 14 to that when you found that to be the case? 15 MR. NICKENS: Your Honor, I object to 16 the relevancy of this if there's no such finding 17 with regard to USAT. What she may have found in 18 other institutions is not relevant to the 19 proceeding here. We have not been charged with 20 fabricating any minutes or records that I'm aware 21 of. 22 MR. GUIDO: Your Honor, Ms. Clark went 18367 1 into great detail of putting a lot of documents 2 into the record; and I believe I'm entitled to 3 pursue that line of questioning. I'm just 4 beginning that line of questioning in response to 5 Ms. Clark's putting into the record and asking 6 questions to elicit from this witness whether or 7 not those books and records accurately reflect 8 what had transpired. 9 THE COURT: Your inquiry's going to be 10 into whether these minutes and records we've been 11 looking at -- 12 MR. GUIDO: You've heard testimony 13 about some particular sets of minutes, and I'm 14 going to bring to the Court's attention through 15 the questions and this witness the context of 16 those minutes. 17 MR. NICKENS: Your Honor, my objection 18 is about other institutions. 19 THE COURT: Okay. Let's stick with 20 this institution. 21 MR. GUIDO: Okay. 22 Q. (BY MR. GUIDO) Now, with regard to the 18368 1 1987 examination, you remember that Ms. Clark 2 asked you a number of questions about the 3 completion of that examination, the field work for 4 that examination? 5 Do you recall that? 6 A. Yes. 7 Q. And do you recall that she asked you a 8 number of questions about when something had 9 occurred with Couch Mortgage? 10 Do you recall that series of questions? 11 A. Right. 12 Q. I would like to show you a document 13 that is A14019, which is Tab No. 1460A and also 14 show you Tab No. 1493, which is A14063. 15 MS. CLARK: Mr. Guido, could we have a 16 copy of A14019? We don't seem to have one here. 17 MR. NICKENS: The difficulty, 18 Your Honor, is that apparently this was an exhibit 19 that was introduced in the last few days; and it 20 has not been put in our books. 21 MR. GUIDO: Your Honor, I could read 22 along with Ms. Clark. I'm only going to look at 18369 1 the last page of the document, Your Honor. 2 MS. CLARK: Thank you. We know what it 3 is, and we'll get it. 4 Q. (BY MR. GUIDO) You'll notice on the 5 last page of Exhibit 14019, it makes reference 6 to -- it says, "The field work is" -- "The field 7 work of the examination is complete." 8 Do you see that reference? 9 A. Yes, I do. 10 Q. Is that in your handwriting? 11 A. Yes, it is. 12 Q. I think you were asked some questions 13 about that by Ms. Clark. 14 I would like to then direct your 15 attention to Tab 1493, which is A14063, and direct 16 your attention to Page 3, which is -- of that 17 exhibit, which is at OW128998. And do you see 18 the -- the middle of the page, do you see the 19 paragraph of "additional concern is United's 20 investments"? 21 A. Right. 22 Q. "Subinvestment grade high-yield bonds." 18370 1 Then it says, "While the examiner did a cursory 2 review of the investments of the association, the 3 resources and time were not sufficient to allow a 4 full review of this area." 5 Do you see that? 6 A. Yes. 7 Q. Now, that's making reference to the 8 investments. Now, the memo dated October 10th 9 when you say "The field work is complete and 10 this" -- 11 MR. NICKENS: Your Honor, I object to 12 the preface in that Mr. Guido indicated that that 13 sentence was referring to the investments when it 14 says "investments and subinvestment grade 15 high-yield bonds." The implication of the 16 question was that it was in some broader 17 investments as he summarized, and I object to that 18 summary. 19 MR. GUIDO: Your Honor, the sentence 20 says, "While the examiner did a cursory review of 21 the investments of the association." It doesn't 22 limit itself to the paragraph before. I did read 18371 1 into the record the previous sentence. I had 2 that. Mr. Nickens may disagree with the 3 characterization of the document, but the document 4 can speak for itself. 5 My question is -- was with regard to 6 whether or not this witness can explain the -- 7 whether or not there's any discrepancy between her 8 statement in Exhibit A14019, Your Honor, that the 9 field work was complete and this view of the 10 supervisory agent that a cursory review of 11 investments of the association was done because 12 resources and time were not sufficient to allow 13 that. 14 Q. (BY MR. GUIDO) Ms. Carlton, can you 15 explain those two statements to us? 16 A. When I make the statement "The field 17 work of the examination is complete," that means 18 that the field work that we had been guided to 19 conclude at that time was complete as directed 20 only to do a cursory review and close out the exam 21 prior to completing all the areas of the exam. 22 Q. Okay. So, your reference to the field 18372 1 work being complete would be the completion of the 2 cursory review that Mr. Twomey is referring to? 3 MR. NICKENS: Objection. Leading and 4 suggestive. 5 THE COURT: I believe that's what she 6 said. Denied. 7 Q. (BY MR. GUIDO) Now, I would like to 8 direct your attention now to your statement in the 9 exam where Ms. Clark asked you questions about; 10 and that is at A14020, Tab 1461. 11 Now, do you see the reference in there 12 to the -- the Page 25 of that document? 13 A. (Witness reviews the document.) Okay. 14 Q. Do you see where the third paragraph 15 from the bottom says, "Non-operating income is 16 comprised of gains of loan sales, sales of 17 branches, mortgage-backed securities, corporate 18 bonds, and equity securities"? 19 A. Right. 20 Q. "98 percent of non-operating income was 21 derived from the sale of MBS and equity securities 22 totaling 48 million and 30 million for the 18373 1 quarters ending" -- 2 A. Correct. 3 Q. Now, when you looked at the exam -- 4 when you did the 1986 exam, I think you testified 5 to Ms. Clark that you asked for auditors' work 6 papers. 7 Do you recall? 8 A. That's correct. 9 Q. And that you also asked to see various 10 schedules or you had schedules of transactions 11 that you asked to be prepared. 12 Do you recall that testimony? 13 A. Yes. 14 Q. And that you also testified that you 15 had available to you the business plan of USAT 16 when you did that examination. 17 Do you recall that testimony? 18 A. Correct. 19 Q. I would like to show you that business 20 plan which is at Tab 886. It's A10663. I think I 21 have the wrong tab number for the document. 22 MS. CLARK: I believe it's Tab 184. 18374 1 MR. GUIDO: 184. 2 Q. (BY MR. GUIDO) I would like to direct 3 your attention to Page 4 of that document. 4 Do you see in that document where it 5 explains the -- 6 MR. GUIDO: May I approach the witness, 7 Your Honor? 8 A. Sure. 9 Q. (BY MR. GUIDO) Under the "structured 10 arbitrage program," do you see the paragraph that 11 starts with, "While the structured arbitrage is an 12 attempt to provide earnings"? 13 Do you see that paragraph? 14 A. Right. 15 Q. Then it says -- about the middle of the 16 paragraph, it says, "As interest rates have fallen 17 since the latter part of 1985, prepayment of 18 mortgage-backed securities purchased in the 19 program have accelerated requiring the association 20 to dispose of certain mortgage-backed securities 21 and reinvest the proceeds at lower yields." 22 Do you see that? 18375 1 A. Yes. 2 Q. And that -- is that information that 3 was available to you at the time that you prepared 4 your report? 5 A. Yes. 6 Q. Okay. Is that your understanding of 7 the reasons for the gains that are referred to on 8 Page 25 of Exhibit A14020, your examination 9 report? 10 A. Right. 11 Q. Now, I would like to direct your 12 attention to -- 13 MR. NICKENS: Your Honor, I would point 14 out for the record that this document is dated 15 August 29th, 1986, and, therefore, could not have 16 referred to gains thereafter. The report is dated 17 April 16th, 1987. 18 MR. GUIDO: I'm sorry. I think -- 19 MR. NICKENS: He's asking the witness 20 to make a link that cannot factually be made. 21 THE COURT: Well, the exam report that 22 he's reading from is dated April -- the cover 18376 1 letter is dated April 16, 1987. The business plan 2 is dated August 1986. 3 MR. NICKENS: Yes, sir. That's my 4 point, Your Honor. He asked her were the gains 5 referred to in the report of examination the ones 6 referred to in the business plan, whether that was 7 the explanation for those gains. And we know that 8 there were gains taken in the latter part of 1986 9 that the business plan could not possible have 10 been referring to and that are included within the 11 examination. That's my point. 12 THE COURT: All right. Thank you. 13 MR. GUIDO: Your Honor, I'm sorry. I 14 didn't understand what Mr. Nickens' objection was. 15 When I read the paragraph in the exam report, I 16 was only addressing the transactions that are 17 referred to through June 30, 1986, Your Honor. 18 Q. (BY MR. GUIDO) I was going to the next 19 question, which is: Can you take a look at the 20 exam report, Ms. Carlton? It says, "The net 21 operating income for the quarter September 30, 22 '85, was 925 million." And then it goes on, and 18377 1 it talks about March '86 and June of '86. The -- 2 that time period all pre-dates the -- the business 3 plan that you received, does it not? 4 A. Yes. 5 Q. Okay. Now -- and if you look at the -- 6 those transactions, are those transactions that 7 were designed to protect the association from any 8 additional interest rate exposure? 9 MR. NICKENS: Your Honor, I object to 10 the question as being leading and suggestive; and 11 I don't know what transactions he's referring to. 12 THE COURT: All right. Sustained. Can 13 you restate the question? 14 Q. (BY MR. GUIDO) The transactions that 15 are referred to in the business plan, Page 4 of 16 the business plan, which resulted in the gains 17 that are referred to on Page 25 of the examination 18 report. 19 Is it your understanding that those 20 transactions were entered into for the purpose of 21 protecting the association from additional 22 interest rate risk exposure? 18378 1 MR. NICKENS: Objection. It's still 2 leading. It's the same question. 3 THE COURT: Denied. 4 A. That's what the business plan 5 purported. 6 Q. (BY MR. GUIDO) That's your 7 understanding of the business plan? 8 A. Yes. 9 MR. NICKENS: Objection, Your Honor. 10 She answered the question, and then he purports to 11 summarize it in a slightly different way. And 12 that is leading and suggestive. 13 MR. GUIDO: Your Honor, I didn't think 14 that that was leading and suggestive. 15 THE COURT: All right. Denied. 16 Q. (BY MR. GUIDO) I would like to direct 17 your attention to two other documents and ask you 18 some questions about that. 19 One is at Tab 329, which is T4333. And 20 the other is a memo dated September 17th, 1985, 21 from Jenard Gross to the distribution. 22 MR. GUIDO: And it's at Exhibit B697, 18379 1 Your Honor. 2 MR. NICKENS: Tab 1310. 3 Q. (BY MR. GUIDO) Do you have B697 in 4 front of you, Ms. Carlton? 5 A. Yes. 6 Q. It's a one-page memo from Jenard Gross. 7 Now, do you recall that Ms. Clark asked 8 you if you had any questions during the 1986 or 9 '87 examinations about any transactions, that you 10 would just go and ask people at the association 11 for their -- their views on something if you had a 12 question about it? 13 Do you recall those questions that she 14 asked you? 15 A. Yes. 16 Q. And you testified that, yes, you would 17 go and you would ask people questions. 18 Do you recall that? 19 A. Right. 20 Q. And was Mr. Gross one of those people 21 that you would discuss matters with? 22 A. Yes, he was. 18380 1 Q. Okay. Did you discuss any of the gains 2 that were reflected in your examination report 3 with Mr. Gross? 4 A. We had general meetings on the 5 operations of the institution and the fact that 6 the gains were brought in through operations as 7 non-operating items. 8 Q. And did you express that as a concern 9 to Mr. Gross and others at USAT? 10 A. We had discussions with -- when we got 11 into the review of the hedging activity as far as 12 the gains that were being taken. 13 Q. Now, did -- did Mr. Gross ever tell you 14 that the gains that were recorded and are 15 reflected in your examination report were offset 16 by losses on the swaps in 1985 -- the 1985 time 17 period as a cut-off? 18 A. No, I don't recall that statement. 19 Q. Did he ever tell you that the gains 20 that were recorded on those transactions reflected 21 in between December 31st, 1985, and June 30, 1986, 22 were offset by losses on the swaps? 18381 1 A. No, I don't recall that. 2 Q. Did he ever tell you that the profits 3 that are reflected in your examination report were 4 the result of any accounting anomalies? 5 A. What do you mean by that? 6 Q. That there's something peculiar about 7 the accounting rules that made it possible to 8 defer losses on swaps, for example, and recognize 9 the gains on mortgage-backed securities? 10 A. We had discussions with them on their 11 hedging activity as to whether they were properly 12 matched from a hedge macro standpoint. 13 Q. You're talking about the risk analysis. 14 You're not talking about whether or not the 15 accounting for the mortgage-backed securities was 16 somehow not matched with the accounting for the 17 swaps, are you? 18 A. No. We -- when we talked about 19 accounting on the mortgage-backed securities, that 20 was when we asked them questions about the 21 restatement of the earnings in the '86 period. 22 Q. And when you asked them about the 18382 1 restatement of the earnings, what did they tell 2 you was the reason that they had initially 3 deferred the gains? 4 A. We were told that it had been a 5 decision by the accountants that they were 6 properly accounted and that decision had been 7 reversed and, as such, they restated the earnings. 8 Q. Did they tell you they wanted to 9 initially defer the gains because they wanted to 10 maintain a net interest spread on the portfolio? 11 A. No. 12 Q. Now, the -- look at the -- the document 13 T4333 at the last paragraph. This memo is 14 essentially talking about hiring somebody to 15 manage the high-yield bond portfolio. And it says 16 in that paragraph -- it says, "On the other hand, 17 part of the problem we are faced with today is the 18 fact that we really rushed into our existing 19 portfolio without the advice on the shape of the 20 CD maturity stream against the shape of the bond 21 stream." It's talking about high-yield bonds. 22 "The end result is that we're having a lot of 18383 1 bonds called away, but we're not having the CDs 2 rolling off because they are longer term." And 3 this sentence, "Just like our swaps were not 4 designed properly and didn't give any thought to 5 the possibility of prepayments. That's how we got 6 killed in the mortgage-backed security area." 7 At the time that you were preparing the 8 1986 exam, did anyone tell you that the 9 mortgage-backed security portfolio, that they had 10 gotten killed by it? 11 A. We did have a correspondence memo in 12 which an individual had stated that it had failed 13 as far as their matching -- their efforts had not 14 been achieved. 15 Q. Do you recall who that individual was? 16 A. McCain or McCane, something. 17 Q. McCann? 18 A. McCann. 19 Q. Did you follow up on that? 20 A. We followed up on it as a part of our 21 analysis in the hedge where we tried to ask them 22 to provide us documentation to, indeed, show that 18384 1 the hedge had been effective. From what we were 2 seeing, we felt it was not effective. 3 Q. Okay. And you tried to follow up with 4 Mr. McCann? 5 A. Right. 6 Q. Did you attempt to ascertain why the 7 hedge hadn't worked? 8 A. He provided information to us, but we 9 were never -- and we took that information and did 10 correlation analysis, and we concluded that it was 11 more -- appeared to have been speculation more so 12 than actually being a proper hedge. 13 MR. NICKENS: Your Honor, could we 14 determine what examination period? I believe 15 she's talking about 1987 and not 1986. 16 MR. GUIDO: I think Mr. Nickens is 17 correct. 18 Q. (BY MR. GUIDO) I'm focusing on this 19 1985 time period. I'm not talking about the 1987 20 exam. We'll get to that. I think you're talking 21 about correlations on futures contracts sometime 22 in the future. We're talking about essentially 18385 1 the swaps that were in effect. 2 Did anyone ever tell you that the -- 3 that the sales of mortgage-backed securities to 4 stem prepayments that are reflected in the 5 August 29th, 1986 business plan that you relied 6 upon for your '86 exam had occurred too late? 7 A. No. 8 Q. Did you ever ascertain why there had 9 been some sort of a failure to anticipate the 10 prepayments to protect the portfolio from loss? 11 A. No. 12 Q. Did you know that the gains that are 13 reflected in your examination report were far 14 exceeded by the losses, mark-to-market losses on 15 the swaps? 16 A. Yes. I knew a comparison, yes. 17 Q. You knew that the swaps losses 18 outweighed the gains on the mortgage-backed 19 securities? 20 A. Right. 21 Q. And what was their explanation for 22 that? 18386 1 A. They really didn't provide an 2 explanation. It's just those were the numbers -- 3 when we conduct our financial analysis, you could 4 see -- when you got down to the net income 5 numbers, you could see the differences between the 6 losses and the gains that had been taken in 7 through the operations of the institution. 8 Q. Did you adopt any additional 9 procedures, or was this one of the incidents where 10 you had to leave the institution and not complete 11 the exam? 12 A. We noted it just in the comments, the 13 percentage of the earnings that were brought in 14 through and broke that percentage down by the 15 amount of the gain for those periods of time. 16 Q. But were you, in the examination, 17 concluding that the management of that portfolio 18 had been safe and sound practices? 19 A. When we looked at the losses, we felt 20 it was not effective in initiating profit, which 21 is a measurement that we use. 22 Q. And did you go beyond that conclusion? 18387 1 A. No. 2 Q. Now, I would like to move on to the '87 3 examination and address that, if we might. The 4 '87 examination. At Tab 1496 is the interim 5 report which is A14069. It's dated January 15th, 6 1988. I would also like to show you the 14068 7 along with that 14069, which is at Tab 1501 and 8 that's dated 5/1/88. 9 MR. BLANKENSTEIN: Mr. Guido, can you 10 describe the second exhibit? 11 MR. GUIDO: The second exhibit is, I 12 think, the significant supervisory cases document 13 dated May 1st, 1988. It's -- OW128962 is the 14 first page. It's one of the four documents that 15 Ms. Clark showed the witness. 16 Q. (BY MR. GUIDO) I would like to direct 17 your attention to A14069, Ms. Carlton, and direct 18 your attention to the fourth page in the document 19 which is Bates stamped OW128895. 20 Do you see that? 21 A. Right. 22 Q. Now, that says, "For the period July 1, 18388 1 '86, through September 30, '87, USAT earned 2 $3,005,000. Although USAT has remained marginally 3 profitable, this profitability has been maintained 4 by generating significant amounts of non-operating 5 income." 6 Do you see that? 7 A. Yes. 8 Q. And then you indicate on the last page 9 of the document about the books and records. 10 Do you see that, Ms. Carlton? 11 A. Yes. 12 Q. Which is OW128898, which says that "The 13 proper establishment and maintenance of books and 14 records were not in conformance with 15 Section 563.17-1(c) during the last exam." Then 16 "USAT has established policies and procedures and 17 now appears to have knowledgeable personnel in 18 positions to implement the compliance of that 19 regulation." 20 Do you see that? 21 A. Yes. 22 Q. Now, what was it about the books and 18389 1 records that was of concern to you in the 1986 2 examination? 3 A. In the 1986 examination, we could not 4 reconcile the data that was provided to the OTS 5 back to its general ledger on any quarter-end 6 period of time. 7 Q. Did you also find it difficult to 8 ascertain what the purposes of transactions were 9 by looking at the books and records of USAT? 10 A. Yes. 11 Q. Okay. Was that something that you 12 raised with the management in 1986? 13 A. Yes, it was. 14 Q. All right. And did -- was that 15 something that they indicated they understood what 16 your concerns were? 17 A. They did understand, yes. 18 Q. Now, in 1987, when you did the exam in 19 1987, you looked at a number of matters to 20 determine whether or not the association's 21 profitability was reflected through non-operating 22 income as opposed to what is referred to as 18390 1 operating income. 2 Do you recall that? 3 A. Yes. 4 Q. And that in 1987, as in 1986, you 5 expressed concern about the dependence upon 6 non-operating income. 7 Do you recall that? 8 A. Yes. 9 Q. And what was the association's response 10 to your concerns about -- about that matter? 11 A. They had diversified into the 12 securities areas and, based on the current market 13 with the lending and the number of foreign assets 14 at that time, they could not continue to bring in 15 profits under the normal course of business. 16 Therefore, they had resorted to diversifying the 17 portfolio into the securities areas with 18 high-yield benefits. 19 Q. Okay. Now, you indicate that you -- in 20 this report, you indicate that you recognized that 21 there's a dependence on non-operating income to 22 maintain the profitability of the association. 18391 1 And I would like to now show you Exhibit A14070, 2 which is dated March 10th, 1988; and it's another 3 one of the interim reports. This is at Tab 1497. 4 Now, I would like to direct your 5 attention to the third page of the document. And 6 do you see at the top of the page, it says, "The 7 review of the association's investment securities 8 activity is incomplete. Our review disclosed that 9 the association's investment securities activity 10 for the most part has been conducted within the 11 association's wholly-owned subsidiaries. 12 Moreover, the association's records, specifically 13 for its financial futures and options 14 transactions, are not being maintained in a manner 15 which will readily disclose the association and 16 its subsidiaries' outstanding position." 17 Do you see that? 18 A. Yes. 19 Q. Then look down below. It goes three 20 paragraphs down. It says, "In consultations with 21 the association's independent auditors, Peat, 22 Marwick & Main revealed that the association has 18392 1 properly accounted for its investment securities 2 and hedge accounting activities." 3 Do you see that? 4 A. Yes. 5 Q. Now, you indicated that you had limited 6 resources as an examiner when Ms. Clark and 7 Mr. Veis were asking you questions; and you said 8 that one of the resources that the examiners 9 relied upon were the outside auditors of an 10 association. 11 Do you recall that testimony? 12 A. That's correct. 13 Q. Okay. Now, at the time you did the 14 audit or the examination, was that a customary 15 practice at the Federal Home Loan Bank Board? 16 A. Not to -- no. 17 Q. And what was it about this situation 18 that led you to rely upon the auditors, the 19 outside auditors, to give you some direction with 20 regard to the accounting for the investments and 21 mortgage-backed securities and the hedging 22 instruments? 18393 1 A. For every criticism that we would make, 2 we felt that either the activity may not have been 3 properly classified, properly accounted for, they 4 would state that the auditors had passed off on 5 the decisions and that the auditors were able to 6 reconcile the information. So, we decided then, 7 well, let's see what the auditors do and what were 8 their opinions of these situations and go directly 9 to the auditors themselves and their work papers. 10 Q. So, you felt that that was a way to 11 reconcile the differences between yourself, the 12 examiners, and the management of the institution 13 was to go to the auditors? 14 A. Correct. 15 Q. And you then went to the auditors, and 16 you asked them for their views. 17 Do you recall that? 18 A. That's correct. 19 Q. And I think that that's reflected in an 20 exception sheet which is Exhibit 1538, which is at 21 A12136. It's an undated one-page exception sheet. 22 Do you recall being asked about that 18394 1 document? 2 A. Yes. 3 Q. And that essentially is repeating what 4 was in your March 10th interim report. Right? 5 A. Yes, it is. 6 Q. And then I would like you to take a 7 look at A12135, which is at Tab 1537, which is 8 dated February 6, 1988. And this is a meeting 9 that you had which Ms. Clark asked you about with 10 the people from Peat Marwick. 11 A. (Witness reviews the document.) 12 Q. Do you have that? 13 A. I have it. 14 Q. Look at "the following items were 15 discussed." Do you see Item No. 4, "securities 16 portfolio"? "The auditors noted no major 17 exceptions in this area." 18 Do you see that? 19 A. Yes, that's correct. 20 Q. Now, can you tell us a little bit more 21 about that conversation? Do you recall what it 22 was that they meant when they said that there were 18395 1 no exceptions? 2 A. They had stated that they were properly 3 recording the securities of the institution and 4 that they had no material information in their 5 findings that would show any indications that the 6 securities portfolio was being utilized in any way 7 that was improper. 8 Q. Okay. I would like to show you a 9 document that has been marked as A15094 (sic) 10 which is at Tab 1512. And it's a cover sheet; and 11 then it has the Peat Marwick February 6, 1987 12 letter attached to it. 13 MS. CLARK: Could Mr. Guido repeat the 14 exhibit number to which he's referring? 15 MR. GUIDO: A14094. 16 MS. CLARK: Thank you. I think it was 17 stated as 15094, and we couldn't find it. 18 MR. GUIDO: I'm sorry. 19 Q. (BY MR. GUIDO) I would like to direct 20 your attention to the -- to the second page of the 21 document up at the top. Are those your initials 22 and the date that you reviewed the document, 18396 1 Page 2 of the exhibit? 2 A. Yes. 3 Q. Now, with -- was this document a 4 document that you reviewed to ascertain what 5 Peat Marwick's views were of the accounting for 6 the investments in mortgage-backed securities? 7 A. Yes. 8 Q. And was it reviewed for other purposes, 9 as well? 10 A. Yes. We reviewed it to determine what 11 comments and what deficiencies they had noted and 12 presented to management and to determine if 13 management had taken proper corrective actions to 14 whatever deficiencies were noted by the auditors. 15 Q. Okay. Now, see where it says on Page 3 16 of the document, OW181045 -- do you see that? 17 A. Yes. 18 Q. Look under "trading versus investment 19 accounting treatment for corporate debt 20 mortgage-backed securities." It says, "During 21 1986, all investments in corporate debt in 22 mortgage-backed securities were accounted for on 18397 1 an investment basis." 2 Do you see that? 3 A. Yes. 4 Q. Now, what is your understanding of what 5 kind of portfolios are accounted for on an 6 investment basis? 7 A. Mortgage-backed securities are 8 accounted for on an investment basis and corporate 9 debt high-yield bonds. 10 Q. Well, can they be accounted for as 11 investment securities in some portfolios and as 12 trading securities in another portfolio? 13 A. You have two categories in the 14 accounting process in which if the management 15 makes a decision that if the portfolio is to be 16 held for investment, you set up a special account 17 for those transactions and if that -- if the 18 corporate debt or mortgage-backed securities are 19 accounted for as a trading portfolio, it's so 20 designated through a special account. 21 Q. What's an investment portfolio? 22 A. An investment portfolio is a -- is a -- 18398 1 a portfolio listing instruments in which the 2 institution purchased for a set reason of 3 utilizing it or bringing in to them a certain 4 yield advantage. 5 Q. And what's a trading portfolio in your 6 understanding? 7 A. A trading portfolio would be a purchase 8 of investment instruments in which you would have 9 periodic sales or sales out of that portfolio in 10 order to bring in a profit or bring in income. 11 Q. Now, I would like to show you 12 Exhibit B1410, which is at Tab 510. This is a 13 document I don't think you've seen before. 14 MR. GUIDO: Tab 910? 15 MS. CLARK: 910. 16 Q. (BY MR. GUIDO) Ms. Carlton, this is a 17 memo dated January 5, 1997; and we've gone over it 18 numerous times with the accountants at USAT and 19 Peat Marwick. I'm not going to ask you a lot of 20 questions about it, but there are a couple that I 21 would like to ask you. 22 One of the things that you indicated, I 18399 1 think, in your '86 exam and also when we were 2 looking at your March 10th memorandum, you 3 indicated that the books and records were such 4 that it was difficult to ascertain the purposes of 5 the transactions in USAT's investment portfolio. 6 Do you recall that? 7 A. Yes. 8 Q. Now, I would like you to look at Page 3 9 of this document. And see where it says "PM's 10 recommendations" at KPMG O24415? 11 A. Page 3? 12 Q. Uh-huh. 13 A. Yes. 14 Q. Now, see where it says that, "PM's 15 recommendation: In order to document the 16 propriety of the accounting entry for the junk 17 bond and mortgage-backed securities portfolio, we 18 would recommend" and then there are a number of 19 recommendations there. One is a clear statement 20 of strategy and intent for both the investment and 21 trading portfolios be developed. The second is 22 documentation relating to purchases should be 18400 1 expanded such that it includes a statement of the 2 intent of management in regard to the security 3 purchased and why the purchase is consistent with 4 the association's strategy. And documentation 5 relating to sales resulting in significant gains 6 should be expanded such that it includes a 7 statement as to the intent and strategy supporting 8 the sale. 9 Do you see that? 10 A. Yes. 11 Q. Were those the sorts of things -- 12 expressions of concerns that you were raising in 13 the 1986 and 1987 exam with USAT about its books 14 and records for the investment portfolios that it 15 had? 16 MR. NICKENS: Your Honor, I object to 17 the question in that he's including -- there is no 18 expression of concern about the books and records 19 for 1987. The comment was related to the 1986 20 question, and his question has now expanded it to 21 the 1987 examination for which there is no 22 evidence. 18401 1 MR. GUIDO: Your Honor, I think if you 2 look -- 3 Q. (BY MR. GUIDO) If you go back, 4 Ms. Carlton, to A14070 which is at Tab 1497 which 5 is the March 10, 1988 interim report on Page 3 and 6 Page 5, you'll see references to books and 7 records. 8 MR. NICKENS: Your Honor, those are 9 specifically referencing futures accounts. 10 Mr. Guido is trying to -- those references are to 11 the futures accounting, not to the books and 12 records generally. In fact, this is -- the very 13 comment that he had her quote said that it was 14 related to the last examination. It says, "USAT 15 has established policies and procedures and now 16 appears to have knowledgeable personnel in 17 positions to implement the compliance of this 18 regulation." 19 That's what the finding was in 1987. 20 THE COURT: All right. What's your 21 question? 22 MR. GUIDO: Your Honor, Mr. Nickens 18402 1 just read from the January 15th, 1988 interim 2 report, not the March 10th report. 3 MR. NICKENS: That's correct. I 4 apologize. 5 MR. GUIDO: March 10 does come after 6 January 15, Your Honor. 7 THE COURT: All right. 8 MR. GUIDO: What I'm trying to get is a 9 clarification from the witness of what her 10 understanding was of her concerns in light of 11 having read this memorandum that was prepared by 12 the accountants that expressed concern about the 13 books and records and the ability to ascertain the 14 purposes of the transactions. 15 MS. CLARK: Your Honor, I believe he 16 just established that she had not read this 17 memorandum at the time. 18 MR. GUIDO: That's why I gave it to her 19 to refresh her recollection and asked her whether 20 or not her concerns were the same as the 21 accountants' concerns. That's all I was asking. 22 MR. EISENHART: I don't see how you can 18403 1 refresh a witness' recollection on a document 2 she's never seen before. 3 MS. CLARK: He asked the witness what 4 she recalled about the conversation she had with 5 the auditors, and she testified what she recalled. 6 And now he's putting words into her mouth and 7 asking her questions. 8 THE COURT: I think you have to 9 approach it some other way, Mr. Guido. 10 Q. (BY MR. GUIDO) Ms. Carlton -- 11 THE COURT: You have her report. I 12 think you'll have to focus on that which should 13 reflect her concerns. 14 MR. GUIDO: Okay, Your Honor. I'll do 15 so. 16 Q. (BY MR. GUIDO) Look at the March 10th, 17 1988 report which is at Tab 1497, A14070, 18 Ms. Carlton. 19 Do you have that? 20 A. I have that. 21 Q. Now, that -- at the top, it makes 22 reference on Page 3 to the books and records. 18404 1 Do you see that, "the association's 2 records" -- 3 A. Right. 4 Q. -- up there at the top? And it says, 5 "The association's records, specifically for its 6 financial futures and options transactions, are 7 not being maintained in such a manner which would 8 readily disclose the association's and its 9 subsidiaries' outstanding position." 10 Do you see that? 11 A. Yes. 12 Q. Is that sentence limited to futures 13 contracts? 14 A. No, it's not. Books and records -- all 15 assets and not compliance with books and records. 16 Q. Now, was one of the reasons that you 17 turned to Peat Marwick to get Peat Marwick's views 18 of whether or not the association was properly 19 accounting for its investments in the 20 mortgage-backed securities and the high-yield 21 bonds because you couldn't ascertain from the 22 records whether or not they were doing so 18405 1 properly? 2 A. Right. 3 Q. Okay. And you went to Peat Marwick to 4 get direction on that? 5 A. Right. 6 Q. And Peat Marwick gave you the direction 7 that are reflected in Exhibits A12135, A12136, and 8 in A14097, the February 6th management letter, 9 your exception sheet, and your memo of February 6 10 to the files; is that not correct? 11 A. Yes. The management letter disclosed 12 the method in which they were accounting for their 13 securities, and we used that as our guidance to 14 determine if that was, in fact, accurate. 15 Q. Now, you -- when you did your review 16 for your '87 exam, you were reviewing transactions 17 that occurred during what periods of time? 18 A. During the '87 exam, it -- it started 19 at -- it commenced in November of '87 and came 20 forward into 1988. 21 Q. Now, I think -- did the field work 22 conclude about February 30th, 1988? 18406 1 A. It was about -- in March. 2 Q. In March of 1988. So that you covered 3 the time period back from March 30th, 1988, to 4 when? 5 A. Back to November of '87 -- back to 6 the -- we go back to the previous examination and 7 come forward. 8 Q. So that you would go back to whenever 9 the completion of the previous examination was? 10 A. You go back to the back "as of" date 11 within the exam report of the previous examination 12 and come forward. 13 Q. Okay. So that -- and what was that 14 "as of" date for the '87 -- '86 examination? 15 A. It was March of '86. 16 Q. Okay. So that you would cover March of 17 '86 through March of 1988 in terms of the period 18 of time that you were looking at, correct? 19 A. Yes. 20 Q. Now, during that period of time, 21 Ms. Clark asked you some questions about your 22 observation that there were non-operating income 18407 1 that were used to -- that had the effect of 2 maintaining the profitability of the association. 3 Do you recall those questions? 4 A. That's correct. 5 Q. Okay. Now, were those gains or those 6 non-operating profits -- were you able to 7 ascertain what the purposes for those were 8 separate from what you had learned from 9 Peat Marwick? 10 A. No. All you saw, that you had a great 11 percentage of gains taking place. We could not 12 determine whether they were being properly 13 accounted for based on the strategy that 14 management had presented. 15 Q. So, you didn't know what the purpose of 16 those transactions were, other than from what 17 Peat Marwick told you? 18 A. As far as the proper accounting of 19 those. 20 Q. Okay. You didn't -- do you recall in 21 the 1986 examination, when you looked at those 22 transactions, that you were -- you had the 18408 1 business plan, that they told you that those gains 2 were generated as a consequence of selling 3 mortgage-backed securities from the portfolio to 4 stem prepayments? 5 Do you recall that? 6 MR. NICKENS: This is just all leading. 7 We're not hearing anything from the witness. 8 THE COURT: Sustained. 9 A. Right. 10 THE COURT: Let's restate the question. 11 MR. GUIDO: I'm sorry. 12 Q. (BY MR. GUIDO) In the 1986 examination, 13 you had the business plan that told you what the 14 purposes of the sales were that generated the 15 gains that are reflected in the 1986 exam, 16 correct? 17 MR. NICKENS: Your Honor, that question 18 is just as leading as the one you just sustained. 19 It's the same question. 20 THE COURT: I think we'll have to go to 21 the business plan and see what she relied on. 22 Q. (BY MR. GUIDO) In 1986, what did you 18409 1 rely upon to ascertain the purposes of the 2 transactions that were reflected in your 3 examination report? 4 A. We relied on what was stated in the 5 business plan. 6 Q. Now, with regard to the 1987 exam, what 7 did you rely upon to ascertain the purposes of the 8 gains that were reflected in your 1987 interim 9 report dated January 15th, 1988? 10 A. We used what the auditors had provided 11 as the proper way of accounting for those gains in 12 conjunction with comparing that to what the 13 institution had presented us in their strategy and 14 the business plan. 15 Q. Now, I would like to turn your 16 attention to another set of questions that you 17 were asked about, the books and records issue. 18 Ms. Clark and Mr. Eisenhart pointed you 19 to two documents -- B1791, which is at Tab 1612, 20 and B1894, which is at Tab 283 -- for the -- to 21 ask you some questions about whether or not your 22 views about the books and records were supported 18410 1 by other studies or somehow contradicted by other 2 studies. Let's take the Grant Thornton study to 3 start with. 4 The Grant Thornton study which is at 5 B1791, does that address the question of whether 6 or not the books and records of the association 7 were sufficient for you to ascertain what the 8 purpose of transactions in either the 9 mortgage-backed security or the high-yield bond 10 portfolio was? 11 MR. NICKENS: Your Honor, there's no 12 indication that the witness has even read the 13 document. 14 MR. GUIDO: I think the witness was 15 shown the document and asked questions about the 16 document yesterday, Mr. Nickens. 17 MR. NICKENS: The implication of the 18 question is that the witness is to review the 19 document and to say something is not in there. 20 And I would at least like it established for the 21 record that she has reviewed the document so that 22 you could evaluate, in the weight of such 18411 1 testimony, as to whether or not there's something 2 that's not in there. 3 MR. GUIDO: Let me ask the question 4 again. 5 Q. (BY MR. GUIDO) Would you turn to the 6 third page of the exhibit? 7 Do you have the third page, which is 8 W102849, Ms. Carlton? 9 A. Yes, I have. 10 Q. Look at the first paragraph of that 11 document. 12 Do you have that in front of you? 13 A. Yes, I have. 14 Q. It says, "We have applied certain 15 agreed-upon procedures as discussed" -- 16 THE COURT: Why don't we let the 17 witness read it. 18 MR. GUIDO: Okay, Your Honor. I'm 19 sorry. 20 Q. (BY MR. GUIDO) Just read it to 21 yourself. 22 A. (Witness reviews the document.) I've 18412 1 read it. 2 Q. Does that address the question of 3 whether or not the books and records are adequate 4 to ascertain the purposes of transactions in the 5 mortgage-backed security or high-yield bond 6 portfolio? 7 A. No. It's just to show the 8 reconciliation of certain items back to the 9 quarterly report. 10 Q. Now, I would like to direct your 11 attention to the second document that you were 12 asked to look at. It's at B1894. Or you were 13 asked questions about it. I don't know if you 14 were shown the document. 15 MS. CLARK: Your Honor, just to keep 16 the record straight, it's B1864, I believe. Is 17 this the Prudential-Bache report? 18 MR. GUIDO: This is the Pru-Bache 19 study, Your Honor. It's B1864. It's dated 20 November 24, 1987. 21 A. I have it before me. 22 Q. (BY MR. GUIDO) Do you have that 18413 1 document before you? 2 This document, Page 2, addresses the 3 scope of what Pru-Bache was asked to comment upon. 4 Do you see that? 5 A. Yes. 6 Q. Item No. 1, do you see that? The 7 comparison? 8 A. Yes. 9 Q. It's a comparison of the association's 10 policies with other institutions. Right? 11 A. Yes. 12 Q. And then I would like to direct your 13 attention to Page 4, the first paragraph, and what 14 they say they didn't do. 15 A. Okay. 16 Q. Would you just read that first 17 sentence? 18 A. "We did not investigate whether the 19 association actually followed and observed and 20 practice its various stated objectives, policies, 21 and procedures for investment and trading in and 22 monitoring and review of securities, nor did we 18414 1 independently verify or investigate the 2 backgrounds and experience of the four individuals 3 described above." 4 Q. All right. Now, does that indicate 5 whether or not Pru-Bache had attempted to 6 ascertain whether or not the books and records of 7 USAT reflected what the purposes of the 8 transactions were? 9 A. No, it does not. 10 Q. Now, I would like to move on to another 11 subject; and it's the question of the 12 committees -- 13 THE COURT: Mr. Guido, we'll take a 14 short recess. 15 MR. GUIDO: Okay, Your Honor. 16 17 (Whereupon, a short break was taken 18 from 2:59 p.m. to 3:22 p.m.) 19 20 THE COURT: Be seated, please. We'll 21 be back on the record. 22 Mr. Guido, you may continue. 18415 1 MR. GUIDO: Thank you, Your Honor. 2 Q. (BY MR. GUIDO) Now, I would like to 3 turn now to a document that is A12139 at Tab 1599. 4 It's a document that says, "High-yield securities, 5 junk bonds, investment limits, and operating 6 guidelines." It's a document that Mr. Eisenhart 7 asked you about. 8 Do you see where that lists the three 9 purposes of the high-yield bond portfolio? 10 A. Yes, I see it. 11 Q. And do you remember Mr. Eisenhart asked 12 you questions on how capital appreciation would be 13 done? 14 Do you recall his questions about that? 15 A. Yes. 16 Q. And he suggested that the only way was 17 by the sale of the securities. 18 Do you recall that? 19 A. Yes, I do. 20 Q. Now, did you, when you reviewed USAT's 21 purchases of high-yield bonds, ascertain whether 22 or not those bonds had attached to them warrants 18416 1 which allowed USAT to purchase stock of the issuer 2 of the high-yield bond at a fixed price? 3 A. Restate that. 4 Q. Did you, when you reviewed USAT's 5 high-yield bond portfolio, ascertain whether or 6 not USAT, when it purchased the high-yield bonds, 7 also got a warrant or an option to purchase stock 8 of the issuer at a fixed price? 9 A. It was just a straight purchase of the 10 bond to hold in the portfolio. 11 Q. Okay. If -- so, you didn't -- when you 12 reviewed the -- your understanding of USAT's 13 high-yield bond portfolio is the high-yield 14 bonds -- some of the high-yield bonds didn't come 15 with warrants to purchase stock at a fixed price 16 from the issuer of the high-yield bond? 17 A. That was not my understanding. 18 Q. So, when you answered Mr. Eisenhart's 19 questions with regard to how one would get capital 20 appreciations in the purchase of the high-yield 21 bond, you didn't know anything about whether USAT 22 held high-yield bonds that also had attached to 18417 1 them warrants that gave USAT the right to purchase 2 stock of the issuer of the high-yield bonds at a 3 fixed price? 4 A. No, I was not aware of that. 5 Q. Now, the -- I would like to direct you 6 next to the question of the committees at USAT. 7 The first document I would like to direct your 8 attention to is at -- it's A1211 (sic), and it's 9 Tab 1595. 10 THE COURT: Would you repeat that 11 exhibit number, please? 12 MR. GUIDO: It's Exhibit A12111, 13 Your Honor. 14 THE COURT: Thank you. 15 MR. GUIDO: I'm sorry. 16 Q. (BY MR. GUIDO) Remember at the outset, 17 I asked you about committees and how you would 18 ascertain what the committees were at USAT? 19 Do you recall those questions? 20 A. Yes. 21 Q. Is A12111 an example of how you would 22 ascertain what the committees were at an 18418 1 institution that you were examining? 2 A. Yes. We provided a request and also 3 attached an example of the information in the form 4 in which I needed that information to be provided. 5 Q. Now, this document that has been marked 6 as A1211 (sic) starts out -- and it has a cover 7 page from you to Mike Crow -- 8 THE COURT: Mr. Guido, I think you're 9 leaving off a "1." Could you restate the number 10 again? 11 MR. GUIDO: 12111, Your Honor. I'm 12 sorry, Your Honor. 13 Q. (BY MR. GUIDO) This exhibit, the cover 14 page, is that a request for the description of the 15 functions of the operating committees at USAT? 16 A. Yes, it is. 17 Q. Now, the second page then has two 18 committees listed. 19 Do you see that? 20 A. Yes. 21 Q. Is that a Federal Home Loan Bank Board 22 form? 18419 1 A. Yes, it is. 2 Q. And then attached to that is a memo 3 from somebody named R.C. Henson to Art Berner. It 4 says, "Principal operating committees of UFG, Inc. 5 and USAT." 6 Do you see that? 7 A. Yes. 8 Q. Is that a response to a request for a 9 listing of principal operating committees? 10 A. Yes. This is what they provided us as 11 a list. 12 Q. Now, the -- it lists what are referred 13 to as principal operating committees. Can you 14 tell us what a principal operating committee is? 15 A. The principal operating committees are 16 the main committees that the bank used to operate 17 the majority of their transactions and business 18 within the institution. It would be your -- on 19 your corporate level of activity. 20 Q. Are they required to keep the minutes 21 of those entities? 22 A. Yes, they are. 18420 1 Q. And why is it that they are required to 2 keep the minutes of those entities? 3 A. They are required to keep the minutes 4 so that a third party that comes in at a later 5 date can understand and be able to follow the 6 activity that the institution has engaged in along 7 with the decision-making process that went along 8 with that business operation. 9 Q. Well, let me show you another document 10 which is Tab 1564. It's A12052. It's a one-page 11 document. 12 Do you see that? 13 A. Yes, I do. 14 Q. Is that your understanding of the list 15 of committees that were given to you as an 16 examiner to ascertain what minutes you would like 17 to review? 18 A. Right. This list provides for -- the 19 years that you have checkmarks, those were the 20 only years in which the institution had maintained 21 minutes for those different committees. 22 Q. The -- have you ever heard of a thing 18421 1 called a group managers staff meeting? 2 A. Not in that form, no. 3 Q. Let me show you a document which is 4 A13047 at Tab 1207. This is a -- this group 5 managers bi-weekly staff meeting packet of minutes 6 I gave you are from November 15th, 1984, at 7 CN715716 Bates stamp through January 26, 1987, at 8 CN715549. 9 Do you see that? 10 A. Yes. 11 Q. Have you ever seen these before? 12 A. No, I haven't. 13 Q. Is this an operating committee? 14 A. It was not listed as one. 15 Q. Okay. Well, looking at it, does this 16 cover the sorts of subject matters that you 17 understand a principal operating committee would 18 cover? 19 MR. NICKENS: Your Honor, is he asking 20 her to read the document? 21 MR. GUIDO: Your Honor, I'd like her 22 just to thumb through the document, Your Honor. I 18422 1 mean, it has various categories of the subject 2 matters that are discussed, Your Honor. I think 3 that -- I'm not asking the witness to read the 4 document. 5 A. It covers several subject matters that 6 would be covered in different operational 7 committees. 8 Q. (BY MR. GUIDO) But you've never seen 9 this document before? 10 A. No, I haven't. 11 Q. Okay. Now, the -- I would like to show 12 you another document, which is A1590; and it's at 13 Tab 1295. 14 A. I have it. 15 Q. Have you had a chance to look at that? 16 A. I glanced at it. 17 Q. Take a look at the first page. It says 18 "United Savings Association of" -- "United Savings 19 of Texas, 1986 strategic planning committee, 20 November 17, 1987." 21 Is that covering subject matters that 22 are usually covered by principal operating 18423 1 committees? 2 MR. EISENHART: Your Honor, I believe 3 the date is actually 1985, not '87. 4 MR. GUIDO: I'm sorry. 1985. 5 A. You have subject matters that would 6 involve operational committees, yes. 7 Q. (BY MR. GUIDO) And have you ever seen 8 these -- this document before? 9 A. I don't recall any indication that I 10 have seen this. 11 Q. Okay. Look at the -- back at A12052, 12 your checklist of what was reviewed. 13 Do you see that? 14 A. Yes. 15 Q. Do you see the strategic planning 16 committee mentioned anywhere there? 17 A. No, it's not. 18 Q. Okay. Now, in your review of the -- 19 your work paper files, did you find any document 20 that reflected activities of a strategic planning 21 committee? 22 A. We -- we did have, as a part of the 18424 1 financial package, strategic planning meetings, 2 yes. 3 Q. Okay. And you found -- when you went 4 back and reviewed your files, you found one of 5 those documents? 6 A. Yes. 7 Q. Okay. Did you -- why doesn't it appear 8 on your checklist of minutes that were reviewed in 9 the course of the examination as a principal 10 operating committee? 11 A. Because it wasn't presented as such; 12 so, we didn't review it as such. 13 Q. Okay. So, it is the association that 14 determines whether or not something constitutes a 15 principal operating committee or not and minutes 16 have to be kept? 17 A. Yeah. They themselves know what 18 they -- the committees they engage those 19 activities in. We do not guess what they are. We 20 allow them to tell us what they are. 21 Q. So, they determine that question -- 22 A. Right. 18425 1 Q. -- and you then just examine what it is 2 that they provide to you? 3 Now, I would like to turn to another 4 subject, and that is the question of -- the 5 so-called put/call. 6 Do you remember that Ms. Clark and 7 Mr. Eisenhart asked you questions about the 8 put/call agreement? 9 Do you recall that? 10 A. Right. 11 Q. And you were asked some questions about 12 what your role was in terms of gathering 13 information with regard to the put/call agreement. 14 Do you recall that? 15 A. Yes. 16 Q. Now, it was -- and I would like to -- 17 for you to take a look at one of the documents 18 that was in your file and you were shown, and it's 19 Tab 184. It's A10663. It's that August 29th, 20 1986 business plan that you have in front of you. 21 I would like to direct your attention 22 to the -- Page 18, the Footnote 6. See where it 18426 1 has mention that the put/call -- 2 A. Yes, yes. 3 Q. Would you just read to yourself 4 Footnote 6? I'm going to ask you some questions 5 about that. 6 A. (Witness reviews the document.) That's 7 on Page 18, 485, on No. 6 up above? 8 Q. Yeah. It says, "Based on information 9 provided to UFG..." 10 A. Okay. 11 Q. Just read that to yourself. 12 A. Okay. (Witness reviews the document.) 13 Okay. 14 Q. Okay. Was this the source of your 15 information regarding the put/call agreement that 16 MCO had with Drexel? 17 A. What do you mean? As far as -- 18 Q. The source of your information as the 19 examiner. 20 A. We reviewed this -- this also in line 21 with written correspondence, yes. 22 Q. Pardon? 18427 1 A. We reviewed the information here in 2 line with a -- an offering that they had. 3 Q. Okay. And that subdebt application 4 that they had, is that what you're referring to? 5 A. Right. 6 Q. Anything else? 7 A. That's all I recall as far as the 8 information that we had. 9 Q. Now, does this paragraph make mention 10 to an obligation by MCO to indemnify Drexel 11 Burnham for any losses pursuant to its holdings of 12 stock under that put/call agreement? 13 A. It states that if it does not exercise, 14 it is required to grant Drexel a put option in 15 respect to such shares. 16 Q. Okay. Does it say anything with regard 17 to an indemnification agreement to back up that 18 put option? 19 A. No. 20 Q. Does it say anything about a letter of 21 credit to back up the indemnification agreement 22 that backs up that put option? 18428 1 A. No. 2 Q. What is the function of a letter of 3 credit? 4 MR. NICKENS: Your Honor, what context? 5 Letter of credit could have all kinds of 6 functions. 7 MR. GUIDO: Let me lay the foundation, 8 Your Honor. I'm sorry. That may have been a 9 little too abrupt. 10 THE COURT: All right. 11 Q. (BY MR. GUIDO) Was one of your 12 functions as an examiner to review letters of 13 credit that are issued by various institutions? 14 A. Right. 15 Q. And why are you reviewing those letters 16 of credit? 17 A. We're reviewing letters of credit to 18 determine what outstanding obligations, continued 19 liability obligations that could be outstanding 20 with the institution as far as the possibility of 21 having to pay upon these lines of credit if they 22 are called upon as far as to be paid. 18429 1 Q. What's your understanding of the 2 purposes of that letter of credit? 3 A. To use as a source of backup collateral 4 in the event that a secondary source of repayment 5 is needed or a payment source is needed. 6 Q. The -- 7 A. More like a guarantee. 8 Q. Is it something that you look to to 9 ascertain the strength of the underwriting for 10 various loans? 11 A. If that's used -- if that's addressed 12 as part of the covenants and they are made a part 13 of it, that you will have a letter of credit. We 14 look at the source of that letter of credit to 15 determine whether the financial wherewithal is 16 there in order that that letter of credit could be 17 good if called. 18 Q. Okay. Now, I would like to now go to 19 another topic, if I may; and that is questions 20 that Mr. Blankenstein had asked you regarding the 21 various issues with regard to the compensation 22 questions. 18430 1 Do you recall him asking you questions 2 about that? 3 A. Yes. 4 Q. Okay. Now, do you recall that he asked 5 you about the interview packet that -- that had 6 been put together and marked as Exhibit A11039 in 7 this proceeding? 8 Do you recall that? 9 A. Yes. 10 Q. And do you have that in front of you? 11 A. Yes, I have. 12 Q. Now, remember, he focused your 13 attention on Paragraph 4 of that document. 14 Do you recall that? 15 A. Yes. 16 Q. All right. Where it's making reference 17 to what Mr. Gross said, do you recall that? 18 A. Yes. 19 Q. Okay. And the particular sentence he 20 directed your attention to said, "In addition, 21 USAT has also retained Hewitt & Company to 22 evaluate its employees' and officers' compensation 18431 1 packets, including contracts which provide for 2 bonuses." 3 Do you see that? 4 A. Yes. 5 Q. Is that talking about prospective 6 contracts or contracts that are in existence? Can 7 you tell? 8 A. I can't tell. 9 Q. And that the Hewitt & Company -- is 10 that the Hewitt & Company that he showed you a 11 report from and asked you whether or not that 12 report would be of significance to you in making a 13 determination as to whether or not compensation 14 factors were safe and sound? 15 A. I assume it would be one and the same. 16 Q. Let's look at that. A11130 is the 17 exhibit number that he showed you. 18 A. I have it. 19 Q. Do you have that in front of you? 20 A. Yes. 21 Q. Now, look at the first page of that. 22 It says, "Executive compensation review - United 18432 1 Financial Group, Inc." 2 Do you see that? 3 A. Yes. 4 Q. It doesn't say USAT, does it? 5 A. No. 6 Q. I would like to direct your attention 7 to Page 6 of the document. Do you see Page 6 of 8 the document? It says, "Given UFG's executive 9 compensation objectives..." 10 Do you see that paragraph? 11 A. Yes. 12 Q. It's addressing UFG's salary levels. 13 Do you see that? 14 A. Yes. 15 Q. Does it say anything about USAT and the 16 reasonableness of the USAT salaries? 17 A. No, it does not. 18 Q. Now, going back to Page -- Paragraph 4 19 of Exhibit 11039, the recordation of the interview 20 with Mr. Gross, the first document that I showed 21 you. 22 Is it possible that whoever wrote those 18433 1 notes summarizing that interview could have 2 confused UFG and USAT? 3 MR. NICKENS: Your Honor, I object. 4 THE COURT: Sustained. 5 Q. (BY MR. GUIDO) I would like to -- now, 6 I would like to ask you a different line of 7 questions about the compensation issue, if I may. 8 That is, when you did your salary review, what 9 time period did it cover? 10 Do you recall? 11 A. The -- the salary review that I did 12 covered the time period of -- from November -- the 13 commencement of the exam going backwards, '87. 14 Q. So, it went backwards. So, when 15 Mr. Blankenstein asked you about salary or 16 compensation decisions that were made after the 17 date of that exam, they weren't covered within the 18 terms of the exam, were they? 19 A. No. 20 Q. So, there was no reason for you to put 21 those in any interim reports with regard to the 22 exam, were they (sic)? 18434 1 A. No. 2 Q. And -- but did I hear you correct that 3 you said that you told people at USAT that you 4 still had objections to those compensation 5 packages that they were considering after November 6 of 1987? 7 A. We did. 8 Q. And did you tell them that one of your 9 concerns was the financial condition of USAT with 10 regard to proposed compensation plans after 11 November of 1987? 12 A. Right. When we discussed the -- the 13 salaries and offers, it was during the point in 14 which we were evaluating the institution as rating 15 the institution a 4 and as the institution was 16 being discussed as projecting insolvency. 17 During those terms, any contracts that 18 they had would, first of all, require supervisory 19 approval once the institution is in that state of 20 condition. And we were trying to assess going 21 forward who would have the obligations to pay 22 those contracts. And once we found out they were 18435 1 with UFG, we didn't see them as being an 2 additional financial obligation and something that 3 we would have to address with supervisory agents 4 as far as not paying them because we didn't see 5 the legal liability as being with USAT but, 6 instead, being with UFG. 7 Q. Now, I would like for you to take a 8 look at the February 11th, 1988 minutes. I think 9 it's A1141, Ms. Carlton. 10 MR. GUIDO: It's Tab 99, Your Honor. 11 Q. (BY MR. GUIDO) Now, do you recall that 12 you were asked a number of questions about this 13 document, particularly about the second full 14 paragraph of Page 7? 15 A. Right. 16 Q. And am I correct that your testimony 17 was that you didn't remember any discussions at 18 that board meeting you attended regarding 19 employment contracts between USAT and any of its 20 management and employees? 21 A. No, I do not recall any such 22 conversations. 18436 1 Q. And do I -- did I hear you correctly 2 when you said that that was a significant enough 3 matter that you think you would have recalled 4 that? 5 A. I did say that, and that's what I mean. 6 Q. I would like to show you a document 7 which has been marked as T4476. It's a 8 February 4th, 1988 memo from Mike Crow to Jenard 9 Gross. 10 MR. GUIDO: What's the tab? 11 MR. NICKENS: 404. 12 Q. (BY MR. GUIDO) Have you had an 13 opportunity to review that document? 14 A. Yes, I have. 15 Q. Have you ever encountered a situation 16 prior to your audit of USAT in which they held 17 meetings prior to board meetings to discuss 18 matters that they didn't want to bring up in front 19 of the examiners? 20 A. Yes, I have. 21 Q. And what is your conclusion with regard 22 to the safety and soundness of such practices? 18437 1 A. It is an unsafe and unsound practice, 2 and it warrants you to question the integrity of 3 management. 4 MR. GUIDO: No further questions, 5 Your Honor. 6 MR. NICKENS: I have a few, if I might. 7 THE COURT: All right. 8 9 EXAMINATION 10 11 Q. (BY MR. NICKENS) Have you seen 12 Exhibit 4476 before? 13 A. 4476. 14 Q. That's the document Mr. Guido just 15 asked you about where you indicated that it would 16 lead you to question the integrity of the 17 management? 18 A. I have never seen it before. 19 Q. Has anyone told you that Mr. Crow was 20 asked about the document and testified as to the 21 reasons for having the meeting? 22 A. No, they haven't. 18438 1 Q. So, no one tried to explain to you, 2 before they elicited your testimony that it would 3 raise questions about integrity, as to whether 4 there might be reasons for having a meeting 5 outside the presence of the examiners? 6 A. No. 7 Q. So, you have no idea whether there 8 might be a reasonable basis for conducting such a 9 meeting? 10 A. The question again? 11 Q. You have no idea whether there might be 12 a reasonable basis for conducting such a meeting? 13 A. No. 14 Q. And the attorneys for the Enforcement 15 haven't shared with you any of those reasons 16 before they elicited testimony to the effect that 17 you would question the integrity of management for 18 holding such a meeting? 19 A. No. 20 Q. Can you imagine any reasons that 21 management might want to have a meeting with 22 regard to matters in the institution that were not 18439 1 public information? 2 A. I can't see any reason for the 3 information that's provided here. 4 Q. You don't see anything in the memo? 5 A. Right. 6 Q. And you haven't been given Mr. Crow's 7 testimony about those reasons? 8 A. No. 9 Q. So, you haven't had an opportunity to 10 evaluate whether those reasons were, in fact, a 11 basis for conducting such a meeting? 12 A. No. 13 Q. Now, let me ask you some questions, if 14 I might. 15 Mr. Guido asked you about the purposes 16 for transactions and -- with reference to the 17 business plan? 18 A. Right. 19 Q. Now, you wouldn't want to imply the 20 business plan was the only thing that you relied 21 upon in doing your work with this examination, 22 would you? 18440 1 A. No. 2 Q. I mean, you interviewed people. You 3 attended meetings. You reviewed the minutes of 4 the investment committee, the board of directors, 5 the ALCO minutes. You conducted, over a period of 6 six months, a very extensive examination. Right? 7 A. Right. 8 Q. And so, you're not trying to imply that 9 the only thing that you looked at was the business 10 plan? 11 A. No. 12 Q. Now, let me ask you to look at a 13 document that is the minutes of the investment 14 committee -- let me get the right ones -- of 15 November 5, 1986, which is A1416 at Tab 347. 16 17 (Discussion held off the record.) 18 19 Q. (BY MR. NICKENS) Do you have 20 Exhibit A1416 in front of you? 21 A. Yes, I have. 22 Q. And Ms. Carlton, these are the type of 18441 1 minutes that you and your staff reviewed on a 2 routine basis? 3 A. Yes. 4 Q. And I'm not intending to go through all 5 of the minutes of the investment committee in this 6 examination, but could you look over at 7 Exhibit 3 -- it's Bates numbered 3005047. 8 A. Okay. 9 Q. Now, in terms of answering questions 10 about the purposes of transactions, have you gone 11 back and looked at all of the investment committee 12 minutes to determine whether you can see purposes 13 of transactions? 14 A. You mean did I do that then? 15 Q. Did you do that -- have you done that 16 recently? 17 A. No. 18 Q. And let me ask you to look at this 19 single page out of the minutes of the investment 20 committee. 21 What does it say at the top? 22 A. "Some are swaps to take profits." 18442 1 Q. Now, what would that indicate to you as 2 the purpose of the transactions? 3 A. To take a profit. 4 Q. All right. There isn't any question 5 about that, is there? 6 A. No. 7 Q. Now, let's make sure -- Mr. Guido asked 8 you some questions about your interaction with the 9 independent auditors; in this case, Peat Marwick? 10 A. Right. 11 Q. Now, in the 1986 examination, you 12 looked at -- you asked for and received the work 13 papers of the independent auditors, correct? 14 A. Right. 15 Q. And you examined those yourself, or 16 someone under your direction examined them? 17 A. Right. 18 Q. Then in 1987, you actually met with the 19 independent auditors to ask them questions about 20 their examination of USAT; is that correct? 21 A. Correct. 22 Q. Now, Mr. Guido showed you a document 18443 1 from the accountants' work papers dated January 5, 2 1987, that is Exhibit B1410. And, in fact, the 3 judge sustained an objection. I'm not going to -- 4 I'm just going to -- that -- that's the document 5 that you had not seen before. 6 Do you recall that? 7 A. Yes. 8 Q. And thereafter, you had a meeting with 9 those independent auditors from Peat Marwick, 10 didn't you? 11 A. Right. 12 Q. And you questioned them specifically 13 about the accounting treatment that USAT was 14 following in handling its investment accounts? 15 A. Right. 16 Q. And they told you that it was their 17 judgment that USAT was following the appropriate 18 accounting rules and treatment? 19 A. Right. 20 Q. Now, this was after this memorandum 21 dealing with investment versus trading issues that 22 Mr. Guido showed you? 18444 1 A. Right. 2 Q. And there were some questions raised 3 concerning the committee system at USAT, and 4 Mr. Guido asked you some questions about the 5 strategic planning committee. Let me ask you to 6 look at a document that is at Tab 1397, and it's 7 A14081. A14081 at Tab 1397. 8 Ms. Carlton, let me remove this. I'm 9 going to show you my copy of the document. It has 10 some highlighting that I would ask you to just 11 ignore. I would like you to focus your attention, 12 if you might, on the first page, Paragraph 3. 13 A. (Witness reviews the document.) Okay. 14 Q. First of all, what is the document as 15 far as you can tell? 16 A. It's the investment policy. 17 Q. And this is certainly something that 18 you would look at in terms -- in the course of 19 your examination, correct? 20 A. Yes. 21 Q. Your work procedures required that you 22 determine what the policies are and whether they 18445 1 are being complied with; is that right? 2 A. Correct. 3 Q. And is it set out right there that 4 there is to be a meeting that appears to be the 5 strategic planning committee under the annual 6 meeting? 7 MR. GUIDO: What paragraph are you 8 looking at? 9 MR. NICKENS: Paragraph C under "annual 10 planning." 11 A. "The senior management selected members 12 of USAT board shall meet to determine resource of 13 allocation and cash flows to provide a framework 14 for the company's annual budget." 15 Q. (BY MR. NICKENS) Okay. Now, Mr. Guido 16 showed you some meetings dealing with the 17 strategic planning committee and asked you about 18 the issues examined there. 19 Does it appear that the issues examined 20 under Paragraph C of the document are the types of 21 things addressed in that strategic planning memo? 22 A. What do you mean? Which memo? 18446 1 Q. Let me back up. Mr. Guido showed you a 2 memorandum dealing with the strategic planning 3 meeting, and you indicated that you had received 4 various indications of strategic planning 5 committee meetings; isn't that correct? 6 A. Right. 7 Q. And that you had noted that in various 8 places in the work papers. 9 What I'm asking you is: Does 10 Paragraph C of the investment policy indicate that 11 there is to be a meeting of that sort; that is, of 12 the sort handled under the rubric strategic 13 planning? 14 A. I would need to look at the both of 15 them to see. 16 Q. Let's -- if you were to go back and -- 17 what you would do is you would go back and compare 18 the strategic planning with the purposes set forth 19 in that Paragraph C of the investment policy? 20 A. Correct. 21 Q. Now, the existence of the strategic 22 planning committee was no surprise to you, was it? 18447 1 A. Not once I received the document that 2 showed that it existed, no. 3 Q. Okay. You were asked some questions 4 about Grant Thornton's review. Wasn't it the case 5 that Grant Thornton was sent in or arrangements 6 were made to send in Grant Thornton without your 7 knowledge after you had completed the 1986 8 examination? 9 A. Correct. 10 Q. And that was -- those were arrangements 11 made with the supervisory agent and directly with 12 USAT, correct? 13 A. I wasn't aware of it. I don't know how 14 the arrangements were made. 15 Q. And the purpose of the examination was 16 to deal with the state of the books and records as 17 you had found them, was it not? 18 A. You mean my purpose or their purpose? 19 Q. The purpose of Grant Thornton's 20 examination of the records. 21 A. They had a specialized scope that they 22 were contracted to abide by. 18448 1 Q. What I'm asking you, Ms. Carlton, is: 2 When you eventually found out about it, weren't 3 you told that the purpose was to address the 4 issues that you had identified in your 5 examination? 6 A. Right. 7 Q. This was a follow-up to the problems 8 that you had identified? 9 A. That's what it was purported to be. 10 Q. And they got, more or less, a clean 11 bill of health from Grant Thornton? 12 A. From their limited scope that they did. 13 Q. Well, the scope is identified in 14 Exhibit 1791. 15 A. Correct. 16 Q. We can look at that at a later time to 17 see exactly what it is without going through every 18 paragraph. 19 A. If that's what you would like. 20 Q. Of course we can. My point is that you 21 were told that they were coming in as a follow-up 22 to your examination? 18449 1 A. Right. 2 Q. And the results of that follow-up to 3 your examination was that they got a clean bill of 4 health by Grant Thornton? 5 A. No. 6 Q. Well, would we look at the document to 7 indicate exactly what Grant Thornton found? 8 A. Yes. It was stated in there what they 9 stated. 10 Q. And were you told that Grant Thornton 11 had made their examination and had indicated that 12 the books and records were in a satisfactory 13 condition? 14 A. No, I was not told that. 15 Q. Let me ask you about Prudential-Bache. 16 Mr. Guido asked you some questions concerning that 17 review. 18 A. Okay. 19 Q. That was also a follow-up review to 20 your examination, was it not -- 21 A. Right. 22 Q. -- to deal specifically with junk 18450 1 bonds? 2 A. Correct. 3 Q. Which was a concern of the regulators 4 in Dallas? 5 A. Right. 6 Q. And in that connection, the findings of 7 Pru-Bache were set forth on paragraphs -- excuse 8 me -- on Pages 4 and 5 of Exhibit B1864. 9 Can you agree with me on that? 10 A. Yes. 11 Q. And they concluded, did they not, that 12 the management of USAT's junk bond portfolio was 13 similar to what they had seen at other companies? 14 A. Yes. 15 Q. Now, you were asked some questions 16 about the put/call. This -- Mr. Guido showed you 17 a document describing that. 18 Now, that wasn't the only indication 19 that you had of the so-called Drexel option 20 agreement, was it? 21 A. I referenced other correspondence. 22 Q. And I guess it would be possible for me 18451 1 to ask you what agreements the parties made on 2 Page 4, Paragraph 32, in that agreement; and you 3 wouldn't be able to tell me, would you? 4 A. No, I could not. 5 Q. And I could pick out any number of 6 things to ask you about if you recall seeing; and 7 you wouldn't be able to tell me, would you? 8 A. About the agreement? No, I wouldn't be 9 able to tell you. 10 Q. So, the fact of the matter is after all 11 these years, you haven't gone back to review that 12 agreement, have you? 13 A. No, I haven't. 14 Q. And so, you wouldn't be able to tell 15 the Court whether you were aware of certain 16 Provision A or Provision B of that agreement after 17 all these years? 18 A. No, I could not discuss that. 19 Q. But that's not to suggest that you 20 didn't know about and have access to the agreement 21 at the time of your examination, is it? 22 A. I didn't have a copy of that agreement. 18452 1 Q. You had -- well, we can go back into 2 your work papers and determine what you knew about 3 it, can we not? 4 A. Yes, you can look there. 5 Q. I'm trying to find out what you recall 6 or remember and whether it is significant that 7 some 13 or 14 years after the agreement, that you 8 may not recall all the details of what you once 9 knew? 10 A. I don't understand that. 11 Q. Okay. My point -- let me see. 12 Can you recall the significant terms of 13 the agreement? 14 A. No. 15 Q. And that's because time has passed. 16 Right? 17 A. That's because I don't recall even the 18 agreement. 19 Q. But you were aware of it at the time of 20 your examination because we can see evidence of 21 that in the work papers? 22 A. You see excerpts that are in different 18453 1 documents that address the issue. 2 Q. So, you were aware of it? 3 A. Yes. 4 Q. And if any issue had been raised 5 concerning that agreement, you would, as was your 6 general practice, have looked into it at that 7 time, wouldn't you? 8 A. Those issues were being raised by the 9 supervisory agents and not by the examination 10 staff. 11 Q. Were you not specifically asked to look 12 into the Drexel relationship in the course of your 13 examination? 14 A. Yes. 15 Q. And part of that relationship would 16 have been an agreement between the parties? 17 A. If it -- if an agreement had been 18 presented, yes. 19 Q. But you were aware of the agreement? 20 A. All I saw was the option -- the 21 comments made about an agreement, yes. 22 Q. And if any question had been raised 18454 1 concerning the propriety of that agreement or the 2 effect on the examination, you would have looked 3 into it? 4 A. If it affected the examination, I would 5 have. 6 Q. Now, lastly, Ms. Carlton, if I haven't 7 overlooked something, let me ask you about this 8 meeting of February 11, 1988, the board of 9 directors meeting which you attended. 10 A. Okay. 11 Q. Now, you have indicated -- of course, 12 the minutes indicate that at the meeting, USAT 13 contracts was discussed? 14 A. Right. 15 Q. And you don't recall that? 16 A. No. 17 Q. And it is your current belief that you 18 would have recalled it? 19 A. Yes. 20 Q. Now, what do you recall about the 21 meeting? 22 A. I recall that -- that you had the -- 18455 1 your general business discussions and operations 2 of the bank as far as the loans and your 3 profitability and your operating numbers. But I 4 do not recall any specific committee discussions 5 at that time. 6 Q. You would have to go back to the 7 documents and read it to refresh your recollection 8 to be able to say anything about specifically what 9 happened on February 11th, 1988, wouldn't you? 10 A. Right. 11 Q. Now, are you suggesting that USAT 12 would -- didn't have this discussion and put it in 13 their minutes? 14 A. What I'm suggesting is that I do not 15 recall the meeting addressing contracts. If they 16 had addressed it, I would have come back to them 17 and asked for a copy of the meeting. And I felt 18 if those -- they were aware that that was one of 19 the items that I would ask for. And as a prudent 20 and cooperative working management team, I would 21 have felt they would have provided that 22 information to me. 18456 1 Q. And you know, in fact, that information 2 was provided at a later time to Mr. Twomey; that 3 is, after you completed your examination? 4 A. That's correct. 5 Q. Do you know when those contracts came 6 into existence? 7 A. All I know is what has been presented 8 here in court as to what you-all have purported as 9 to when they came into existence. 10 Q. Now, does it make sense to you that 11 someone would write up the minutes and put 12 something in there that wasn't discussed when 13 they -- to put it in the minutes? 14 A. It may not make sense. But I'm not the 15 person on the other side that had to do that; so, 16 I don't know -- they may have had a driven motive 17 in order to do that. All I can say is what I 18 know. 19 Q. But it seems peculiar, wouldn't you 20 say, that if you're trying to hide something, that 21 you would put it in, of all places, the minutes? 22 A. If you are trying to delay the -- my 18457 1 knowledge of it, knowing that I'm sitting at a 2 meeting and would not obtain copies of the 3 minutes, then that would be the applicable place 4 to put it. 5 Q. But that doesn't make sense to you, 6 does it? 7 A. It makes as much sense as not having it 8 there. 9 Q. Unless it did happen and you had 10 forgotten it? 11 A. If you wanted those minutes to be 12 something that would be picked up at a prior -- at 13 a future examination versus my examination, it 14 would be the place you would put it because they 15 knew our cut-off areas. 16 Q. Ms. Carlton, what makes sense is that 17 you might have forgotten it. Doesn't that make 18 sense? 19 A. Not to me. 20 Q. You can't admit to the possibility that 21 you would have forgotten an agenda item of 22 something that occurred on February 11, 1988? 18458 1 A. I would not have forgotten that because 2 the supervisory agent was asking every day, "Do 3 you have" -- "Do you have other contracts?" That 4 was something when we left -- "Are you sure they 5 do not have a contract?" 6 Q. You just can't -- go ahead. 7 A. So, it was something that if I was 8 aware of it, I felt I would have acknowledged 9 that. 10 Q. You just can't admit the possibility 11 that that's something you might have forgotten? 12 A. It's not a matter of forgetting. I was 13 not aware of it. It's nothing -- I can't forget 14 something I wasn't aware of. 15 Q. You can distinguish here 13 years later 16 between what you were not aware of and what you 17 may have forgotten? 18 A. When it came to those contracts, that's 19 right. 20 Q. So, if I were to question you about 21 things that you remembered or may have forgotten, 22 you could make those distinctions? 18459 1 A. There were some things so dramatic 2 about that examination that I recall this many 3 years later. There are other things that I've had 4 to go back through the work papers for. 5 Q. In this case, you recall what didn't 6 happen? 7 A. That's what I'm saying. 8 MR. NICKENS: Your Honor, that's all I 9 have. 10 THE COURT: Mr. Eisenhart. 11 MR. EISENHART: Thank you, Your Honor. 12 THE COURT: Could I ask you one 13 question about this A14081? I see that is United 14 Financial Group's investment policy. Did that 15 have any significance to you versus USAT? 16 THE WITNESS: Well, that was one of the 17 issues that we addressed with them, was that 18 whenever we asked for USAT information, we were 19 getting UFG's letter description; and they stated 20 that this represented USAT, although it had UFG on 21 it. But, again, that's why we questioned the 22 corporate veil and what was actually United's and 18460 1 what was actually the holding company. 2 When you get to the subsidiary, you had 3 that third level of commingling that was taking 4 place. You had to try to verify what was the 5 institution, what was these other subsidiaries. 6 That was an issue. 7 THE COURT: Mr. Eisenhart. 8 9 FURTHER EXAMINATION 10 11 Q. (BY MR. EISENHART) Ms. Carlton, you 12 remember yesterday, I showed you Exhibit A14020, 13 which is your 1986 examination report? 14 A. Yes. 15 Q. And we looked at Page 3.1 of that 16 report where you had listed the principal owners 17 of UFG stock? 18 A. Right. 19 Q. And that's where we saw that you had 20 Drexel Burnham Lambert listed for 300,000 shares? 21 A. Right. 22 Q. And you'll remember I took you through 18461 1 with the aid of the chart that Mr. Veis had put 2 into evidence the fact that it would appear that 3 this 300,000-share figure is an error, correct? 4 Do you recall that? 5 A. Yes. 6 Q. I think we agreed there are times when 7 they owned less than 300,000, and there are times 8 when they owned more than 300,000. But there 9 doesn't appear to have ever been a time when they 10 owned exactly 300,000 shares? 11 A. That's what they purported there. 12 Q. But I think we agreed yesterday that it 13 would appear from the information we have in the 14 record already that this 300,000-share figure is 15 an error. 16 Would you agree with that? 17 A. If you're telling me that, then I do. 18 When it was reported to me, I didn't know it was 19 an error. 20 Q. I think we were talking about what the 21 source of the information might have been. I 22 thought we were in agreement that that information 18462 1 that they owned exactly 300,000 shares was an 2 error. I thought we had agreed on that. 3 A. I don't recall agreeing to that. 4 Q. Okay. Well, do you see any 5 information -- this is T1412, which was put in the 6 record -- put into the record by OTS counsel. 7 Do you see on that chart any point in 8 time prior to nineteen -- let's say prior to 9 December 31, 1987, where Drexel owned exactly 10 300,000 shares of UFG? 11 A. You're using the green bar. 12 Q. No, ma'am. The total share holdings 13 are the green plus the yellow. And I'm asking 14 prior to that point, which is December 31, 1987, 15 do you see any point at which those total share 16 holdings are ever exactly 300,000 shares? 17 A. Maybe I'm not reading your chart right 18 but -- the chart shows 300 here. 19 Q. Yes, ma'am. But the top of the yellow 20 bar -- 21 A. These are Drexel's ownership in yellow? 22 Q. Yes, ma'am. What I'm asking you is: 18463 1 Do you see any point in time prior to December 31, 2 1987, where their ownership is ever exactly 3 300,000 shares? 4 A. No, there's not. 5 Q. Now, Mr. Guido pointed you toward two 6 documents when he talked to you about this. The 7 first document was the USAT business plan of 8 August 28, 1986; and that's A10663 at Tab 184. 9 I'll give you my copy so you won't have to fish 10 for it. 11 You'll see the information there is 12 highlighted, but I would like to refer you to the 13 sentence prior to the highlighting which starts 14 "based on information." 15 Do you see that? 16 A. Yes. 17 Q. And that says, does it not, that as of 18 June 1, 1986, Drexel was the beneficial owner of 19 488,931 shares of the common stock of UFG? 20 A. That's what it says. 21 Q. Then it goes on to talk about the 22 300,000-share option, as well? 18464 1 A. Right. 2 Q. Would you agree that with that 3 reference to 488,931 shares of common stock of 4 UFG, that this would not have been the source of 5 information that you used to list their ownership 6 at 300,000 shares? 7 A. You'll have to be -- I don't know the 8 date. What's the date compared to -- 9 Q. The date of the business plan is 10 August 28th, 1986. Your chart is not actually 11 dated; so, we can't really -- 12 A. The institution provided me the 13 institution; so, I don't know where they got it 14 from. 15 Q. But would you agree that whatever your 16 source of information is, it wouldn't have been 17 this business plan or you wouldn't have used that 18 number? 19 A. Well, the institution provided it. So, 20 I guess that was not their source from which they 21 obtained the information from. 22 Q. Well, I think we can agree that it's 18465 1 unlikely the business plan was the source? 2 A. Right. 3 Q. The other document Mr. Guido suggested 4 to you was the subordinated debt application of 5 UFG. 6 Do you remember that? 7 A. Yes. 8 Q. And that was a document that you looked 9 at during the course of your examination? 10 A. Right. 11 Q. And the subordinated debt application 12 is in the record. It's Exhibit B954, and it's at 13 Tab 89. And the reference to the Drexel option 14 that's in that document can be found at Pages 86 15 and 87 of the attachment. Again, I'll show you my 16 copy because it's highlighted. 17 You'll see that that says that based on 18 information provided to UFG as of March 1, 1986, 19 Drexel was the beneficial owner of 488,931 shares 20 of UFG stock. 21 Do you see that? 22 A. Yes. 18466 1 Q. Then it goes on to talk about how, in 2 December of 1985, Drexel granted an option for 3 300,000 shares? 4 A. Right. 5 Q. Now, would you agree that, again, given 6 the numbers that are set forth in there, it's 7 unlikely that the subordinated debt application 8 was the source of the information that they owned 9 300,000 shares? 10 A. It's not what -- based on those 11 numbers, that's not what the institution provided 12 to me. 13 Q. So, it doesn't like look the 14 subordinated debt application was the source of 15 the information either then? 16 A. Unless they just picked up the wrong 17 numbers. 18 Q. So, it would appear, then, that your 19 reference to 300,000 shares indicated some source 20 of information that you had during the examination 21 that was not the business plan and was not the 22 subordinated debt application, correct? 18467 1 A. It was provided by the institution. 2 So, the sources for that page was strictly based 3 on what the institution provided me. 4 Q. Well, are you certain of that; or is it 5 possible, as you said yesterday, that you may 6 actually have seen the option agreement itself? 7 A. That -- 8 MR. GUIDO: Objection. That 9 mischaracterizes the witness' testimony. I've 10 looked at the witness' testimony very carefully. 11 She did not testify to that, and Mr. Eisenhart 12 didn't ask her that question yesterday. It's a 13 blatant misstatement of the question, Your Honor. 14 Q. (BY MR. EISENHART) Do you have a clear 15 recollection at this date, Ms. Carlton, 12 years 16 later, that you did not see the option agreement 17 during your examination? 18 A. I can say that I didn't see the option 19 agreement during the examination. 20 Q. And you can say that with 100 percent 21 certainty? 22 A. Nothing is 100 percent certain. 18468 1 MR. EISENHART: That's all I have. 2 Thank you. 3 MR. BLANKENSTEIN: Your Honor, I have a 4 couple of questions. 5 THE COURT: All right. 6 7 FURTHER EXAMINATION 8 9 Q. (BY MR. BLANKENSTEIN) Ms. Carlton, 10 Mr. Guido showed you a copy of the Hewitt report 11 and asked you whether it was for UFG or for USAT. 12 A. The what report? 13 Q. The Hewitt report. 14 A. Okay. 15 Q. Can you just read the first sentence of 16 the first page of the report under the caption 17 about this material out loud, please? 18 A. "United Financial Group, Inc. (UFG) has 19 asked Hewitt Associates to review the compensation 20 arrangements for key executives of the company and 21 its principal, wholly-owned subsidiary, United 22 Savings Association of Texas (USAT)." 18469 1 MR. BLANKENSTEIN: Thank you. No other 2 questions, Your Honor. 3 MR. KEETON: None, sir. 4 MS. CLARK: None, Your Honor. 5 THE COURT: All right. Mr. Guido, do 6 you have a question? 7 MR. GUIDO: Your Honor, I only have one 8 clarifying question. 9 10 FURTHER EXAMINATION 11 12 Q. (BY MR. GUIDO) I'll show the witness a 13 copy of the exhibit. Mr. Eisenhart keeps making 14 reference to the 300,000 shares that have shown up 15 in the report which is A14020. And I just want to 16 direct the witness' attention to 3.1. 17 And is that essentially -- the 3.1, is 18 that essentially the form that the examiners 19 received the information from USAT on the 20 ownership of the stock? 21 A. Yes, it is. 22 Q. Thank you. 18470 1 Isn't that the customary way in which 2 such information is provided in the course of 3 examinations? 4 A. We allow them to provide that. We do 5 not gather that data. 6 Q. Now, you were asked some other 7 questions with regard to that meeting that 8 occurred on February 11th; and I just have one 9 question. 10 Were any USAT contracts given to you 11 after that meeting on February 11th, 1988? 12 A. No, there were not. 13 Q. And were -- was the institution under a 14 continuing obligation under the examination to 15 provide you with such documents that you had 16 previously requested? 17 A. Since that was something that we had 18 requested, if, at a later date, the institution 19 had obtained that information, you would think 20 that the management would provide that information 21 as an effort to comply with a request that had 22 been requested of them earlier. 18471 1 MR. GUIDO: No further questions, 2 Your Honor. 3 4 FURTHER EXAMINATION 5 6 Q. (BY MR. NICKENS) Ms. Carlton, they were 7 given to Mr. Twomey, correct? 8 A. Right. 9 MR. NICKENS: Your Honor, one other 10 clarifying question, if I might. 11 Q. (BY MR. NICKENS) The judge asked you 12 about whether it made a difference about meetings 13 that the minutes indicated was a UFG meeting? 14 A. Right. 15 Q. And you had previously testified that 16 joint meetings such as this were common in your 17 experience, correct? 18 A. Yes. You can have them. 19 Q. There was nothing unusual about that in 20 the circumstances that -- where USAT had common 21 members of the board between the two, correct? 22 A. As long as -- I think I followed up 18472 1 that statement with as long as separate corporate 2 identities -- meaning the minutes reflecting -- if 3 you were having a holding company meeting, you 4 should have minutes for that meeting, cut off 5 those minutes, reflecting the true identity of the 6 discussion. 7 Q. As a documentation matter, you would 8 want to see separate minutes even if it had been 9 conducted as a joint meeting? 10 A. Right. 11 MR. NICKENS: That's all I have. 12 THE COURT: Thank you, Ms. Carlton. 13 You may step down. 14 We'll adjourn until 9:00 o'clock 15 tomorrow. Are there any matters at issue? 16 MR. GUIDO: No, Your Honor. I think 17 we'll be ready to start with Mr. Berner. 18 MR. VILLA: Mr. Berner is available, 19 but he's available to start at 9:00 o'clock as 20 well as 4:30 in the afternoon. 21 THE COURT: All right. We'll adjourn 22 until 9:00. 18473 1 2 (Whereupon at 4:32 p.m. 3 the proceedings were recessed.) 4 . 5 . 6 . 7 . 8 . 9 . 10 . 11 . 12 . 13 . 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 18474 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 5th 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 . 18475 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 5th 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