18476 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 6, 1998 22 18477 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 18478 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 18479 1 2 INDEX OF PROCEEDINGS 3 Page 4 ARTHUR BERNER 5 Examination by Mr. Rinaldi..............18481 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 18480 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:00 a.m.) 3 THE COURT: Be seated, please. The 4 hearing will come to order. 5 Mr. Eisenhart, you have a matter? 6 MR. EISENHART: I do, Your Honor. 7 I've been detailed by our side on 8 behalf of those who are traveling tomorrow to 9 raise with the Court -- to inquire as to the 10 Court's schedule for tomorrow so that people can 11 arrange their travel plans. 12 THE COURT: Any objection to adjourning 13 at 4:00 o'clock? 14 MR. RINALDI: We have no objection. I 15 think Mr. Eisenhart had indicated it would be 16 helpful to adjourn an hour or two earlier for 17 people to pack up and get back. We have no 18 objection one way or the other. 19 THE COURT: All right. 20 MR. EISENHART: Whatever the Court's 21 preference, Your Honor. 22 THE COURT: 4:00 o'clock. 18481 1 MR. EISENHART: 4:00 o'clock. 2 THE COURT: Mr. Rinaldi, you're going 3 to be the OTS representative? 4 MR. RINALDI: Yes, sir. We would like 5 to call Art Berner, Arthur Berner, as the OTS' 6 next witness. 7 THE COURT: Would you take the oath, 8 please? 9 ARTHUR BERNER, 10 was called as a witness and, having been first 11 duly sworn, testified as follows: 12 13 THE COURT: Be seated, please. 14 MR. RINALDI: Just one moment, 15 Your Honor. 16 17 EXAMINATION 18 19 Q. (BY MR. RINALDI) Would you state your 20 full name for the record, please? 21 A. Arthur Samuel Berner. 22 Q. Mr. Berner, can you relate to the Court 18482 1 what your prior work experience has been? 2 A. I started working in 1967 at Cahill, 3 Gordon, Sonnett, Reindel & Ohl, which is a 4 New York law firm. In mid-1970, I became general 5 counsel for Inexco, I-N-E-X-C-O, Oil Company. And 6 then in October, end of September, October of 7 1985, I went to United Financial Group. And then 8 in 1991 to the law firm of Winstead Sechrest 9 & Minick. 10 Q. And are you still employed or working 11 with Winchrest (sic) -- 12 A. Winstead. 13 Q. Winstead, Sechrest & Minick. Are you 14 still employed by them? 15 A. Yes, sir, I am. 16 Q. Now, you are licensed to practice as an 17 attorney, correct? 18 A. Yes, sir. 19 Q. Now, when you first went to work with 20 Cahill Gordon, I believe you said you remained 21 there until 1977? 22 A. No. 1970 -- the middle of 1970, 18483 1 towards the end of 1970. 2 Q. What was the nature of the practice 3 that you engaged in while you were there? 4 A. It was basically corporate securities 5 work, merger and acquisition work. 6 Q. In that connection, was there any 7 particular area of specialty that you were 8 involved in? 9 A. As I said, mostly securities work, 10 general corporate work. 11 Q. When you say "securities work," what 12 does that entail? Preparing filings for the SEC? 13 A. Filings, registration statements to the 14 SEC, yes, sir. 15 Q. What would be the nature of those 16 filings? 17 A. Back then, they would be annual reports 18 which are usually the Form 10K, quarterly reports. 19 Q. Those are 10Qs? 20 A. Yes. Proxy statements, registration 21 statements when people are selling stock, merger 22 documents, or when there's an acquisition that's 18484 1 going on. 2 Q. In connection with preparing those 3 things, were you charged with reviewing them for 4 their adequacy and their -- their truthfulness? 5 A. That was one of my jobs. I was a 6 junior associate, yes, sir. 7 Q. And as a junior associate, what role 8 did you play in the preparation of those kinds of 9 submissions? 10 A. I would do the -- a lot of the due 11 diligence work. I would do the drafting, the 12 initial drafts of some of the documents, and 13 reviewing the documents and sit in on part of the 14 meetings when these documents were discussed and 15 reviewed. 16 Q. When you say you did the due diligence 17 work, what did you mean by that? 18 A. In transactions, very often you have to 19 go and read contracts and read minutes of board 20 meetings and just essentially learn about the 21 company that you're dealing with; and that's 22 called due diligence work. 18485 1 Q. In connection with filings, were you 2 responsible for summarizing activities that went 3 on with various corporations for purposes of 4 reporting in the filings with the SEC? 5 A. Well, I was responsible for drafting -- 6 if we would be discussing a particular matter, I 7 would help to draft that -- that discussion of 8 that matter. 9 Q. In drafting those matters, was there 10 some rule of thumb you had to follow in 11 determining what would be included or what 12 wouldn't be included in a public disclosure 13 document? 14 A. You tried to include those things that 15 you believed were material and to disclose 16 whatever you could. The goal was disclosure. 17 Q. Okay. When you say "material," what do 18 you mean by the term "material"? 19 A. Sir, I think that's kind of an 20 undefined term. It's that which somebody would 21 think is important. 22 Q. And that would be the definition that 18486 1 you applied in complying with the securities laws? 2 A. I'm not sure I actually ever tried to 3 define it. I mean, it was just a loose 4 understanding as to what you believed was 5 important to be disclosed or described in a 6 document. 7 Q. Okay. Now, prior to joining Cahill 8 Gordon, had you attended law school? 9 A. Yes, sir, I had. 10 Q. And where did you attend law school? 11 A. New York University Law School. 12 Q. And when did you graduate? 13 A. 1967. 14 Q. As soon as you left law school, did you 15 then go to work for Cahill Gordon? 16 A. Yes, sir, I did. 17 Q. After you left Cahill Gordon, I believe 18 you said you went to a company called Inexco? 19 A. That's correct. 20 Q. What was Inexco? 21 A. Inexco was an oil company, an 22 exploration and production oil company. 18487 1 Q. Now, am I correct in assuming that 2 Cahill Gordon is a New York City law firm? 3 A. Yes, sir. 4 Q. And you were working in New York City 5 for Cahill Gordon? 6 A. Yes, sir, I was. 7 Q. Did Inexco have its offices in 8 New York? 9 A. No. At that time, Inexco had its 10 offices in Denver, Colorado. 11 Q. So, you moved out to Denver in what 12 year? 13 A. The end of 1970, I think it was. 14 Q. Then you stayed with Inexco, I believe, 15 until 1987? 16 A. 1985, sir. 17 Q. '85. Sorry. I wrote down the number 18 wrong. 19 A. I think maybe I wish I had stayed there 20 until 1987. 21 Q. Okay. You're right. It would have 22 been difficult. You would have been working two 18488 1 jobs at once, I suppose. 2 What was the nature of the work that 3 you were doing for Inexco? 4 A. I was general counsel at Inexco doing 5 general counsel work. 6 Q. Was Inexco a publicly-traded company? 7 A. Yes, sir, it was. 8 Q. How would you characterize the nature 9 of the work that you did as general counsel? 10 A. I would supervise all of the legal 11 work. There was a staff of -- well, it varied 12 from time to time -- anywhere from three to eight 13 lawyers. I would help prepare the securities 14 filings generally with outside counsel. I would 15 supervise or be responsible for the litigation, 16 knowing what was going on with outside counsel on 17 any litigation we had. 18 Generally, as general counsel, I would 19 be the guy that tried to spot all the issues to 20 figure out where -- what outside counsel we would 21 use on various matters or if we were going to do 22 something in-house. And I was also involved in 18489 1 the -- with the top management of the company. 2 Q. And what was the nature of Inexco's 3 business? 4 A. It was an oil and gas exploration and 5 production company. 6 Q. In connection with that, did you have 7 occasion, then, to review oil and gas leases or 8 contracts? 9 A. Oil and gas leases rarely. Generally, 10 I would have somebody on my staff that would do 11 the -- what I would call the hard-core oil and gas 12 legal work. Contracts -- more often, I would look 13 at gas contracts, gas purchase and sales 14 contracts. Again, I had staff people that did 15 most of that. 16 Q. In connection with your work at either 17 Cahill Gordon or Inexco, did you have any occasion 18 to draft employment contracts? 19 A. Yes, sir, I did. 20 Q. Okay. And can you describe that 21 experience? 22 A. There were two or three occasions where 18490 1 I drafted employment contracts for senior 2 executives of Inexco and, in one case, one of its 3 subsidiaries. 4 Q. And on those occasions, did you draft 5 the contracts yourself; or did you seek the 6 assistance of outside counsel to assist you with 7 the drafting of the contracts? 8 A. I don't remember. 9 Q. Okay. Now, you indicated also that you 10 were responsible at Inexco for supervising 11 litigation. 12 Do you recall that? 13 A. Outside counsel would handle 14 litigation. I was responsible for knowing what 15 was going on in the litigation. 16 Q. Was most of the legal work done by 17 Inexco handled by outside legal counsel? 18 A. It's hard to -- it's hard to say. 19 Certainly, all of the litigation was handled by 20 outside counsel. Securities work, depending on 21 the type of work, it would either be done all 22 in-house or with outside counsel. 18491 1 Q. Okay. 2 A. I would say probably 60 percent, maybe 3 more, was handled by outside counsel in the course 4 of a year. 5 Q. And when you say "security work," 6 again, Inexco would have been doing 10Ks, 10Qs, 7 proxy statements, annual reports? 8 A. Right, and securities offerings. 9 Q. When you say "securities offerings," 10 you mean they would be selling the shares of 11 Inexco or offering them publicly? 12 A. They would be selling shares. 13 Initially, they were selling oil and gas limited 14 partnership interests. At various times, they 15 sold interests in oil and gas drilling well 16 leases. 17 Q. Okay. Now, after you left Inexco, your 18 next employment was with -- well, tell me, what 19 was your next employment? 20 A. With United Financial Group. 21 Q. Okay. Now, United Financial Group was 22 a savings and loan holding company; is that 18492 1 correct? 2 A. Yes, sir, that's correct. 3 Q. Now, prior to joining United Financial 4 Group, had you had any legal experience in working 5 with insured depository institutions? 6 A. No, sir, I had not. 7 Q. Did you have any experience in dealing 8 with the regulations that covered savings and loan 9 institutions prior to going to UFG? 10 A. No, sir, I did not. 11 Q. Now, can you describe for me, please, 12 how you initially became involved with UFG? In 13 other words, the process by which you were hired? 14 A. It was sometime in the middle of 1985. 15 I received a call from Kenny Friedman. Kenny 16 Friedman is a lawyer at Mayor, Day, Caldwell & 17 Keeton; and he has been a close friend of mine for 18 now 25 years. He called me at Inexco and 19 mentioned that United Financial Group was looking 20 for a general counsel and wanted to know if I knew 21 of anyone that might be available. And I told him 22 that I would get back to him in a couple of days. 18493 1 Then I thought about it and called him back and 2 told him that I thought I might be interested in 3 that job. 4 Q. Was Mr. Friedman, if you know -- does 5 he have any relationship to Charles Hurwitz? 6 A. I believe his ex-wife was Mr. Hurwitz' 7 cousin. 8 Q. Now, after you told -- determined that 9 you were interested in the UFG job, what occurred 10 next? 11 A. At some point later on -- I don't know 12 if it was a few days or a week later -- I received 13 a call from Dr. Barry Munitz, and he and I had a 14 meeting. And then there was a series of meetings 15 that I had with the senior executives at United 16 Financial Group over the course of about a month, 17 I think, month and a half. 18 Q. Okay. 19 A. And then I met with Mr. Pledger, and 20 then I was offered the job. 21 Q. Okay. Now, who did you meet with at 22 UFG before you were hired? 18494 1 A. I met with Gerry Williams on a couple 2 of occasions, maybe three or four occasions. I 3 met with Charles Hurwitz on one occasion. I met 4 with Jenard Gross on, I believe, one occasion. I 5 met with Dr. Munitz, I think, one more time, maybe 6 twice. And I'm not sure -- I might have met with 7 Mike Crow. I don't think so. And then I met with 8 Jim Pledger. 9 Q. Now, who was Mr. Pledger at this point 10 in time? 11 A. He was the general counsel at United 12 Savings, and he might have been also general 13 counsel at United Financial Group. I don't know 14 if he had that title. 15 Q. Now, you've said that you were 16 originally discussing your employment with United 17 Financial Group. 18 What did you understand the position 19 would entail when you joined United Financial 20 Group? 21 A. It was my understanding that I was 22 going to be general counsel at United Financial 18495 1 Group, that all of the lawyers at United Savings 2 would be reporting to me, that -- that Jim Pledger 3 would continue to be general counsel at United 4 Savings, and that I would essentially be in charge 5 of the securities work and any kind of 6 transactional work that they were doing and, 7 again, just to be a general counsel for a public 8 company. 9 Q. You were going to be the general 10 counsel of UFG; is that correct? 11 A. Yes, sir. 12 Q. Were you going to hold any other 13 positions at UFG? 14 A. At UFG? 15 Q. Yes. 16 A. Well, I was elected an officer of UFG. 17 Q. Do you remember what position that was? 18 A. I think it was senior vice president, 19 but it might have been some other title. It was 20 some fairly high title. 21 Q. And what about with respect to UFG? 22 Did you have a title -- I mean USAT. 18496 1 A. With USAT, I think, initially, I didn't 2 have a title. And within a very short period of 3 time, I was elected a vice president, I believe, 4 and then at some subsequent time, senior 5 vice president. 6 Q. And at the point in time you were 7 hired, did you understand you were going to be an 8 employee of UFG or an employee of USAT? 9 A. I don't think that was really ever 10 discussed. I know -- I don't think initially that 11 was really discussed at all. It didn't make any 12 difference. 13 Q. Well, initially, who paid your salary? 14 UFG or USAT? 15 A. UFG paid my salary initially. 16 Q. And you were hired, I believe, sometime 17 in the latter part of 1985? 18 A. That's correct, sir. 19 Q. Do you remember the date? 20 A. I started on September 30th. Actually, 21 it was a Monday. 22 Q. And you would have started working for 18497 1 UFG at that time as well as USAT? 2 A. Yes, sir. I think that's right, sir. 3 Q. Now, when you first started, what 4 portion of your time did you devote to your work 5 for UFG as opposed to USAT? 6 A. I've never really thought about that. 7 I don't -- I think -- truly, I've never thought 8 about it. Probably more than 50 percent of my 9 time was spent on USAT stuff. 10 Q. And in terms of your office, were there 11 separate offices for UFG and USAT? 12 A. No. No there weren't. 13 Q. So, the UFG senior executives were all 14 commingled with the USAT senior executives? 15 A. Yes. That's my recollection, sir. 16 Q. Okay. Now, what were your duties with 17 respect to UFG at the outset? 18 A. Again, I was general counsel; so, I 19 would be responsible for all of the -- ultimately, 20 all of the legal work. I was also working on 21 transactional work that was being done at USAT in 22 that initial period of time. And as I said, I had 18498 1 the -- all the lawyers were reporting to me 2 initially. 3 Q. And when you say "all the lawyers," did 4 UFG at that point in time have a legal staff? 5 A. No, UFG did not. 6 Q. Did USAT have a legal staff? 7 A. Yes, sir, it did. 8 Q. And how large was USAT's legal staff? 9 A. Again, this was -- it was about four or 10 five lawyers. 11 Q. When UFG had some securities filings or 12 an application to file, who would prepare that 13 application? 14 A. When UFG, did you say? 15 Q. Yes. 16 A. Initially, it might have been prepared 17 by -- there was a lawyer on staff named Marge 18 Kulik, and she might have taken the first crack at 19 drafting something and given it to me. 20 Q. Now, was Ms. Kulik an employee of UFG 21 or USAT? 22 A. I don't know. I think USAT, but I'm 18499 1 not sure. 2 Q. So, it was -- is it fair to say that 3 when you joined USAT and UFG, that USAT had a 4 legal staff that did legal work for both USAT and 5 UFG? 6 A. That is correct. 7 Q. Now, when you joined USAT, was there 8 anybody on the staff that had any particular 9 expertise in the area of savings and loan 10 regulations? 11 A. When I joined, Jim Pledger had -- had 12 expertise in savings and loan regulations, and I 13 believe also Debra Ruby had savings and loan 14 expertise. There was another lawyer there. I 15 don't know if he had expertise or not. 16 Q. I want to start with Ms. Ruby. How 17 long had she been engaged in savings and loan 18 work? 19 A. I don't recall. 20 Q. Okay. And how about Mr. Pledger? 21 A. Again, I don't know how many years he 22 was engaged in savings and loan. 18500 1 Q. Was Mr. Pledger quite experienced in 2 the area of savings and loan regulations? 3 A. Yes, sir, he was. 4 Q. Now, after you joined USAT, did 5 Mr. Pledger do most of the savings and loan 6 regulatory work associated with USAT? 7 A. He was responsible for it, yes, sir. 8 Q. And if a savings and loan issue came up 9 with respect to UFG, the holding company, would he 10 also do that work? 11 A. Yes, sir. Either he or outside counsel 12 would. 13 Q. Okay. Now, how long did Mr. Pledger 14 stay at USAT? 15 A. He left in the mid-part of 1986, I 16 believe. Somewhere in the June or July or August 17 time frame. 18 Q. So, that would have been a little less 19 than a year after you arrived? 20 A. Yes, sir, that's correct. 21 Q. Okay. And do you know why it was that 22 Mr. Pledger decided to leave USAT? 18501 1 A. I believe he was going to work for the 2 Texas Savings and Loan Commission. 3 Q. Was he going to be the commissioner of 4 the Texas Savings and Loan Commission? 5 A. I don't think at that time he was. I 6 think he got that job later. I may be mistaken on 7 that. I think he was going to the Texas Savings 8 and Loan Commission; and, ultimately, he became 9 Commissioner. 10 Q. After Mr. Pledger left, was there a 11 hole at USAT in terms of savings and loan legal 12 expertise? 13 A. That's hard to say because we -- we 14 utilized outside counsel extensively for the 15 savings and loan expertise. There was nobody on 16 staff. 17 Q. But prior to Mr. Pledger's leaving or 18 subsequent to Mr. Pledger's leaving, did the 19 reliance upon outside counsel with respect to 20 savings and loan matters increase? 21 A. I don't know how much Mr. Pledger 22 relied on outside counsel; so, I can't answer 18502 1 that. 2 Q. But Mr. Pledger worked for you for 3 nearly a year, didn't he? 4 A. Yes, sir. 5 Q. And during the period of time 6 Mr. Pledger worked for you, most of his work was 7 in the area of savings and loan regulations, 8 wasn't it? 9 A. Yes, sir. 10 Q. So, is it fair to say that after 11 Mr. Pledger left, that there was a greater 12 reliance upon outside counsel for savings and loan 13 expertise? 14 A. Again, I just don't know how much 15 Mr. Pledger relied on outside counsel, you know, 16 to answer his questions; so, I don't know. 17 Q. I see. Now, were there any outside 18 counsel that you used in connection with savings 19 and loan matters? 20 A. Initially, we used Bob Pozen at Caplan 21 & Drysdale. 22 Q. And how did you come into contact with 18503 1 Mr. Pozen? Had you known him previously? 2 A. No, I had not known him before. United 3 Savings was using Caplan & Drysdale and Mr. Pozen 4 before I got there. 5 Q. Did Mr. Pozen also provide savings and 6 loan expertise as outside counsel for UFG? 7 A. To the extent it needed it, yes, he 8 did. 9 Q. And you indicated that, initially, you 10 worked with Mr. Pozen. 11 Did there come a time when you began to 12 use other outside counsel for savings and loan 13 matters? 14 A. Yes, sir. 15 Q. And who did you then begin to use? 16 A. Tom Leahey at Kirkpatrick & Lockhart. 17 Q. And why was it that you shifted from 18 Mr. Pozen at Caplan & Drysdale to Tom Leahey of 19 Kirkpatrick & Lockhart? 20 A. Mr. Pozen left Caplan & Drysdale. 21 Q. Okay. Did he go to another firm? 22 A. He went to Fidelity Investments. 18504 1 Q. Okay. Now, as the -- I believe you 2 said you were general counsel of USAT; is that 3 correct? 4 A. At what point? 5 Q. After Mr. Pledger left. 6 A. After Mr. Pledger left, yes, I was 7 named general counsel of USAT, also. 8 Q. Okay. Prior to his leaving, were you 9 the executive vice president for legal matters at 10 USAT? 11 A. Prior to his leaving? 12 Q. Yes. 13 A. I don't believe so. 14 Q. Did there ever come a time when you 15 became the executive vice president for legal? 16 A. I think so, yes, sir. 17 Q. Was that the title you were given when 18 Mr. Pledger left? 19 A. I'm not sure if I was given that title 20 at that time or a subsequent time. 21 Q. But you do recall at some point in time 22 shortly after you arrived at USAT, you became an 18505 1 officer? 2 A. Of USAT? 3 Q. Uh-huh. 4 A. I believe I was elected an officer. 5 Q. Was that immediately, or was there some 6 hiatus? 7 A. I think there was some hiatus. 8 Q. Now, as an officer of USAT, did you 9 serve on any committees? 10 A. As an officer of USAT? 11 Q. Yes. 12 MR. VILLA: Do you mean this time 13 frame? 14 MR. RINALDI: Right. We'll go through 15 it all. 16 MR. VILLA: Thank you. 17 Q. (BY MR. RINALDI) When you first 18 arrived there, did you serve on any committees? 19 A. There was a strategic planning 20 committee. I don't know when that started. So, 21 when I first arrived, I'm not sure if I served on 22 any committees or not. 18506 1 Q. Okay. In 1986, were you appointed to 2 serve on any committees that you recall? 3 A. Yes, sir, I was. 4 Q. And what committees did you begin to 5 serve on in 1986 that you recall? 6 A. I served on the investment committee. 7 I was on the strategic planning committee, and I 8 think that may be the only committees in 1986. 9 But if you have anything to show me -- that's all 10 I can recall right now. 11 Q. Did there come a time when you also 12 became a member of the executive committee of 13 USAT? 14 A. The executive committee? 15 Q. Uh-huh. 16 A. I don't believe -- well, I might have 17 been -- in 1988, it's possible. 18 Q. How about the -- well, besides the 19 investment committee and the strategic planning 20 committee, were there any other committees that 21 you served on at USAT, just over time? If they 22 came on, just tell me approximately when you would 18507 1 have served in that capacity. 2 A. I believe in 1988, I served on a real 3 estate investment committee or one or two real 4 estate committees. And there might have been 5 other committees that I served on in the 1988 time 6 frame. 7 Q. Did you -- if you recall, did you also 8 serve in any capacity as -- well, did there come a 9 time when you became a director at USAT? 10 A. Yes, sir. 11 Q. And when was that? 12 A. That was in February of 1988. 13 Q. Now, what about UFG? Did you serve on 14 any committees of UFG? 15 A. I believe there was the investment 16 committee I served on and, again, the strategic 17 planning committee. I'm not sure if UFG had a 18 strategic planning committee or if it was a 19 combined committee. And it's -- that's all I can 20 recollect right now. 21 Q. Do you recall whether you were on the 22 executive committee of UFG? 18508 1 A. It's possible in 1988 I was, but I 2 don't recall it. 3 Q. Okay. Who was John H. Palmer? 4 A. John Palmer was an attorney that worked 5 on staff for some short period of time at USAT. 6 Q. He worked under your supervision, 7 didn't he? 8 A. Yeah, that's correct. 9 Q. Let me hand you a copy of what's been 10 previously marked as Tab 1130, and it's 11 Exhibit B1741. It's not in those books. We'll 12 get to the books in a moment. 13 Now, I realize that this is only a 14 snapshot and that things change over time. But 15 this purports to be a memorandum drafted by 16 John H. Palmer on September the 9th, 1987; and 17 it's a revised UFG and subsidiaries directory. 18 Do you see that? 19 A. Yes, sir, I do. 20 Q. And if you turn to Page 7 -- is it 7? 21 I'm sorry -- to the first full page of that, it 22 starts off with "United Financial Group's officers 18509 1 and directors." And this is, again, a snapshot at 2 the end of 1987. 3 And it indicates there that you were 4 senior vice president and corporate counsel -- 5 A. Sir, I'm lost. I don't know which page 6 you're looking at. 7 Q. I'm sorry. It's Page -- I apologize. 8 It's Page US2021552. 9 Do you see the little Bates stamp in 10 the corner? 11 A. Okay. 12 Q. It's the first page of the document. 13 A. Yes, sir. 14 Q. This purports to set out the officers 15 and directors of UFG on September the 9th, 1987. 16 Do you see that? 17 A. Yes, sir, I do. 18 Q. Do you have any reason to doubt that 19 Mr. Palmer's, you know, listing of the officers 20 that appears in this document is accurate? 21 A. Do I have any reason to doubt that it's 22 accurate? 18510 1 Q. Yeah. 2 A. No. I think it is accurate. 3 Q. And it indicates on the first page of 4 the UFG directors and officers, which is O21522, 5 that you were the senior vice president, corporate 6 counsel, and secretary of UFG. 7 Do you see that? 8 A. Yes, sir. 9 Q. How long had you held those positions, 10 just approximately? 11 A. For UFG? 12 Q. Yeah. 13 A. Probably since I started working there. 14 Q. Okay. And then if you turn to the next 15 page, it indicates that you were also a member of 16 the executive committee. 17 Do you see that? 18 A. Well, actually, I was secretary. I 19 wasn't a member of the committee. 20 Q. Okay. That was going to be my next 21 question. 22 When it indicates that you are the 18511 1 secretary to the committee, does the secretary 2 play any role with respect to the operations of 3 the committee; or does the secretary merely take 4 the notes of meetings? 5 A. Again, I was not a member of the 6 committee; so, I would have taken the notes of the 7 minutes of the meeting. I wasn't a member. 8 Q. Okay. So, anywhere it indicates that 9 you were secretary, it doesn't necessarily mean 10 you were on the committee? 11 A. It doesn't necessarily mean that, 12 that's correct, sir. 13 Q. Now, I notice that you said you thought 14 you were on the investment committee of UFG. 15 Do you recall that? 16 A. Yes, sir. 17 Q. Now, here it says "investment 18 committee"; and it lists you as secretary. 19 How can I tell when it lists you as 20 secretary whether you're a full member or simply 21 there to take the notes? 22 A. From this document, I'm not sure that 18512 1 you can. 2 Q. Is there any document from which I 3 could make that determination? 4 A. Yeah. I think you would have to -- 5 yes. I think the answer is yes. 6 Q. Okay. What would that be? 7 A. Probably go back to the minutes when 8 these committees were formed to see who the 9 members are of the committees. 10 Q. So, with respect to the executive 11 committee of UFG, it's your recollection that the 12 only thing you did was take the notes? 13 A. Yeah. It's my recollection that I was 14 not a member of that committee. 15 Q. Okay. And what -- what was the 16 function of the executive committee, sir? 17 A. Oh, I -- I mean, I'm giving this off 18 the top of my head. Obviously, it was spelled out 19 in the minutes. 20 Q. Well, I'm just talking sort of 21 generally. 22 A. Generally, it would have the authority 18513 1 to act in place of the board, to do anything that 2 the board could do when the board wasn't in 3 session. 4 Q. Okay. And in September of 1987, the 5 members would have been Mr. Munitz, Mr. Gross, 6 Mr. Hurwitz, and Mr. Whatley; is that correct? 7 A. Well, I believe this is a correct 8 document. I don't have a recollection of that, 9 but I have no reason to think this is wrong. 10 Q. But as the secretary of the executive 11 committee, you would have participated in all of 12 their meetings and would have been aware of what 13 was going on at those meetings, correct? 14 A. Again, generally, that is correct. If 15 I was there, I would have been aware of what was 16 going on, yes, sir. 17 Q. In fact, you were charged with 18 recording what occurred and the votes that were 19 taken and preparing the minutes, weren't you, as 20 secretary? 21 A. Right. That's what I said. If I was 22 there, I would have known what they were doing. 18514 1 Q. And with respect to the investment 2 committee, you indicated that you were a member as 3 well as being the secretary? 4 A. Yes, sir. 5 Q. Okay. So, you would have been aware of 6 everything that was going on at the investment 7 committee, as well; is that correct? 8 A. Generally, that's correct, sir. 9 Q. And this would have covered the period 10 from the date you began at UFG through to the date 11 you terminated, whenever that might have been? 12 A. No. That's not totally correct. 13 Q. Well, how long -- how long would you 14 have remained on these committees? 15 A. Well, now, the investment committee 16 wasn't formed until some time after I came to UFG. 17 Q. Okay. And the record will reflect when 18 it was formed. But whatever date that was formed, 19 you would have been on that committee and remained 20 on that committee from the date of its formation 21 through what date? 22 A. On the investment committee, I think 18515 1 through December 30, 1988. 2 Q. Okay. And on December 30, 1988, that's 3 the date that USAT went into receivership, 4 correct? 5 A. That's correct, sir. Yes, sir. 6 Q. Now, did you then terminate your 7 involvement with the investment committee at UFG 8 when USAT went into receivership? 9 A. After December 30th, I don't have a 10 recollection that we had investment committees at 11 UFG. 12 Q. Okay. Now, it goes on. And the next 13 page indicates that you were a director of Group 14 Investors Trust Company. 15 Do you see that? 16 A. Yes, sir. 17 Q. Were you then involved with the UFG's 18 employees' savings plans -- 19 A. No. 20 Q. -- in that capacity? 21 A. No, sir, I was not. 22 Q. All right. Well, let's move on, then, 18516 1 to the United Savings Association of Texas which 2 is at Page 7 and Bates stamped O21258. 3 A. Did you say Page 7. 4 Q. It's Page 7, and it's Bates stamped 5 021258. 6 Do you have that? 7 A. Yes, sir. 8 Q. This purports to be a listing of the 9 directors of United Savings Association of Texas 10 in September 1987. And it indicates, again, that 11 you were on the executive committee as secretary. 12 Do you see that? 13 A. Yes, sir, I do. 14 Q. Was there a separate executive 15 committee for both USAT and UFG? 16 A. Yes, sir, I believe so. 17 Q. Okay. Now, were you simply on the 18 executive committee of USAT for purposes of taking 19 notes and recording what occurred at the committee 20 meetings; or did you serve as a member? 21 A. I was not a member of the committee. 22 Q. Okay. Now, with respect to the 18517 1 investment committee, were you a member of that 2 committee? 3 A. Yes, sir, I was. 4 Q. And from the date of its inception on 5 forward? 6 A. I believe so, sir. Yes, that's 7 correct. 8 Q. Until USAT failed? 9 A. Yes, sir. 10 Q. And in that capacity, you also served 11 as secretary? 12 A. Yes, sir, that's correct. 13 Q. So, you would have been aware of all of 14 the decisions that took place at the investment 15 committee from the date of its inception all the 16 way through to USAT's failure at the end of 1988, 17 correct? 18 A. For the meetings that I was there, 19 that's correct, sir. 20 Q. Now, when you weren't there, did you 21 have some responsibility to make sure that someone 22 else on your staff took the notes and prepared the 18518 1 minutes? 2 A. No, sir. 3 Q. Who would take the notes and prepare 4 the minutes when you weren't there? 5 A. Somebody else that was on the committee 6 would take the notes. 7 Q. And if you missed a meeting, at the 8 subsequent meeting, were the minutes of the prior 9 meeting approved? 10 A. I don't believe the minutes were 11 actually approved. They were circulated. I don't 12 think there was actually a formal approval of the 13 minutes. 14 Q. Well, if you missed a meeting, would 15 you be then advised at the subsequent meeting of 16 what had occurred and what you had missed? 17 A. I would have received minutes of that 18 meeting at some point. 19 Q. And would it have been your practice to 20 review the minutes to inform yourself as to what 21 occurred in your absence? 22 A. Generally, I would scan the minutes. 18519 1 Q. Now, on Page 9, which is Bates stamped 2 O21530, it indicates that under "legal," that you 3 were an executive vice president, general counsel, 4 and secretary of USAT. 5 Do you see that? 6 A. Yes, sir, I do. 7 Q. And then below that, it lists 8 Mr. Palmer and Ms. Ruby who you mentioned 9 previously and the other members of your staff in 10 September of 1987; is that correct? 11 A. Yes, sir. 12 Q. Okay. Now, did you serve -- and does 13 this accurately reflect what positions you held at 14 USAT? 15 A. I believe so. I believe that -- 16 Q. And for what period of time did you 17 hold these positions? 18 A. Again, I'm not sure when I was elected 19 to that position at USAT. It was sometime after 20 Pledger left. It would be reflected in the 21 minutes. 22 Q. Okay. Now, if we move on, then, to 18520 1 Page 12, do you recall that USAT had a number of 2 subsidiaries? 3 A. Yes, sir, I do. 4 Q. And did you serve as a director for 5 most, if not all, of those subsidiaries? 6 A. I believe so. 7 Q. Okay. And just to save a little time, 8 on the front page that is the table of contents 9 which is the third page into the document, it 10 lists 14 subsidiaries of United Savings 11 Association of Texas. 12 Do you see that? 13 A. Yes, sir. 14 Q. Were you a director with respect to all 15 of those? 16 Do you recall? 17 A. I really have no recollection. I would 18 have to go look. 19 Q. But if we flip through here and -- this 20 would indicate whether you were a director or not? 21 I mean, you see on Page 12, which is the United 22 capital management, for example, which had the 18521 1 purpose of soliciting large accounts on behalf of 2 USAT, you were the director and a vice president 3 and a secretary. 4 Do you see that? 5 A. Yes, sir, I do. 6 Q. Now, when it says "vice president," 7 that means that you were -- you performed some 8 function with respect to this subsidiary? 9 A. Probably not in this case. 10 Q. Did the subsidiaries have regular 11 meetings? 12 A. I don't believe they had regular 13 meetings, no. 14 Q. To the extent that the subsidiaries 15 kept minutes, was that your responsibility as 16 secretary? 17 A. Yes, sir. 18 Q. Okay. Are you aware of any subsidiary 19 of USAT as to which you were not a director and 20 did not serve as secretary? 21 A. I am not aware one way or the other. 22 We would have to go through this and look. 18522 1 Q. I have looked through this, and it's my 2 distinct recollection in every instance, you were 3 listed as a director and an officer; and in one or 4 two cases, you were not listed as secretary. If 5 you would take a moment to look from Page 12 to 6 Page 20, perhaps you can verify that you served as 7 a director in all the subs of USAT. 8 A. (Witness reviews the document.) Okay. 9 Q. Now -- and does it reflect that you 10 were a director of all of the subs of USAT? 11 A. Well, the ones you told me to look at, 12 yes, sir. 13 Q. Take a look at Page 19, United 14 Mortgage -- United MBS Corporation. 15 Do you see that? 16 A. Yes, sir. 17 Q. Okay. Were you a director of United 18 MBS? 19 A. Yes, sir, I was. 20 Q. Okay. And what was the nature of 21 United MBS's business? 22 A. It was a -- well, acquisition and 18523 1 disposition of corporate debt obligations. I 2 think it dealt mostly in mortgage-backed 3 securities. 4 Q. Now, you were reading from the document 5 when you gave that answer. 6 A. Right. 7 Q. Do you recall that United 8 Mortgage-Backed Security was a -- an entity which 9 dealt in mortgage-backed securities? 10 A. United MBS? 11 Q. Yes. 12 A. That's my recollection. 13 Q. Okay. And is that the subsidiary for 14 which Sandra Laurenson worked? 15 A. Well, she actually worked for United 16 Savings. 17 Q. And do you know if Sandra Laurenson was 18 a senior vice president of United MBS? 19 A. Again, it says it here. I have no 20 reason to doubt this is incorrect. 21 Q. Did United MBS have periodic meetings? 22 A. I don't recall it having any meetings, 18524 1 actually. 2 Q. And you don't recall ever having taken 3 any minutes as secretary? 4 A. No, I don't recall. 5 Q. Okay. Then I notice at Page 22 and 23, 6 there is USAT Finance II and USAT Finance III; and 7 you were a director of both of those -- I'm sorry. 8 You were not a director of USAT Finance II but -- 9 I'm sorry. 10 You were a director of both of those, 11 correct? 12 A. Yes, sir. 13 Q. Did those subsidiaries have regular 14 meetings or meetings at all, if you recall? 15 A. I would have to look at the minutes. I 16 don't recall them having meetings, but they may 17 have. 18 Q. In your experience, how did all these 19 subs carry out their business if they didn't have 20 meetings? 21 A. Again, we would have to look at what 22 the sub was responsible for doing to see if they 18525 1 had a regular business. 2 Q. Well, United MBS was engaged in 3 purchasing mortgage-backed securities, correct? 4 A. Yes, sir. 5 Q. And that was pretty much a regular 6 business at USAT, wasn't it? 7 A. At some point in time, yes, sir, that's 8 correct. 9 Q. Well, in 1987, was it? 10 A. Yes, sir. 11 Q. But you don't recall whether there were 12 periodic meetings or regular meetings of United 13 MBS? 14 A. I certainly don't. 15 Q. Okay. Now, take a look at Page 25. 16 What's United Mortgage Finance? 17 Do you recall that? 18 A. No, sir, I don't. 19 Q. It indicates it was a finance 20 subsidiary. 21 Do you see that? 22 A. Yes, sir. 18526 1 Q. But you don't have any idea as to the 2 nature of the business it was engaged in? 3 A. At this point in time, no, sir, I 4 don't. 5 Q. Okay. And would the same be true with 6 respect to the next page, United Mortgage 7 Securities, Inc.? 8 A. I don't have a specific recollection. 9 I could guess, but I don't want to. 10 Q. And then on the next page, it makes 11 reference to United Financial Corporation 12 subsidiaries. 13 Do you see that? What was United 14 Financial Corporation? That was a subsidiary of 15 USAT? 16 A. I believe that's correct, but I -- I 17 would have to take a look through here. 18 Q. Okay. And do you recall whether you 19 were a director of United Financial Corporation? 20 Take a look at Page 14. 21 A. (Witness reviews the document.) Yes, 22 sir. 18527 1 Q. You were a director; is that correct? 2 A. That is correct, sir. 3 Q. Now, do you recall as you sit here 4 today anything about the nature of the business of 5 United Financial Corporation? 6 A. No, sir, I don't. 7 Q. Okay. You can put that aside, I think, 8 for the time being. 9 Now, all of these -- you indicated that 10 you were not a director of USAT or UFG until, I 11 think you said, February of 1988; is that correct? 12 A. Yes, sir. 13 Q. Okay. Can you describe the 14 circumstances under which you became a director of 15 USAT and UFG? 16 A. I was asked to join the board. 17 Q. Okay. And how did that -- who asked 18 you to join the board? 19 A. I'm not sure if it was Jenard Gross or 20 Charles Hurwitz. One or the other. 21 Q. Okay. And when either Jenard or 22 Mr. Hurwitz came to you, what did they tell you? 18528 1 A. That they wanted me to serve on the 2 board, the boards. 3 Q. Did you feel you had any choice in the 4 matter? 5 A. No, sir. 6 Q. And why was that? 7 A. Well, I had signed the contract in 8 September of the previous year which said that, if 9 requested, I would serve on the board of United 10 Financial Group or any of its subsidiaries. 11 Q. And that was a contract you entered 12 into with which entity? 13 A. United Financial Group, sir. 14 Q. And that was entered into in September, 15 you said, of 1987? 16 A. That's my recollection. 17 Q. Okay. Did anyone else join the board 18 of either USAT or UFG at that time? 19 A. Mike Crow joined the board of, I 20 believe, UFG. I don't think he joined USAT. 21 Q. Did Mr. Crow, if you recall, have a 22 provision in his contract that required him to 18529 1 join the board of UFG? 2 A. I believe he did, sir. 3 Q. Did you draft that contract, sir? 4 A. Yes, sir, I did. 5 Q. And is there a reason why Mr. Crow 6 joined the UFG board but did not join the USAT 7 board? 8 A. I don't know. 9 Q. Okay. Was Mr. Crow, to your knowledge, 10 approached by either Mr. Gross or Mr. Hurwitz and 11 asked to join the board, as well? 12 A. I don't know. 13 Q. Now, did anyone else join the board at 14 or about the time that you joined the board? 15 A. I believe Paul Schwartz joined the 16 board of UFG. He might have also joined USAT. 17 I'm not sure. 18 Q. Okay. Now, who was Mr. Schwartz? 19 A. He was an executive at MAXXAM. 20 Q. And what was MAXXAM? 21 A. MAXXAM was a publicly-held corporation. 22 Q. And what was MAXXAM's relationship to 18530 1 USAT and UFG? 2 A. MAXXAM was the largest stockholder of 3 UFG. 4 Q. And UFG was a 100 percent shareholder 5 of USAT, correct? 6 A. Yes, sir, that's correct. 7 Q. And who was the controlling shareholder 8 of MAXXAM? 9 A. I think it's Charles Hurwitz, but I -- 10 I mean, I have no specific recollection. I think 11 Charles Hurwitz is the controlling shareholder. 12 Q. Do you know how it was that 13 Mr. Schwartz came to be placed on the UFG board? 14 A. No, sir, I don't. 15 Q. And what was it that caused 16 Mr. Schwartz, yourself, and Mr. Crow to go onto 17 the USAT -- I mean the UFG board? 18 A. As I said, we were asked to join the 19 board. And in my case and in, I believe, 20 Mr. Crow's case, we had a contract that said we 21 would have to serve on the board if asked. 22 Q. Well, had some event triggered that? 18531 1 A. Other than being asked? No, I don't 2 believe so. 3 Q. Was there a shortage of directors on 4 the UFG board? 5 A. There were a number of directors that 6 had resigned, but certainly there was a -- I think 7 there were four or five -- four directors at that 8 time. 9 Q. Do you recall, after you joined the UFG 10 board, whether Mr. Hurwitz remained on the board? 11 A. I think he resigned just before I got 12 on or immediately after I got on, right around 13 that time. 14 Q. So, as soon as Mr. Schwartz and 15 yourself and Mr. Crow went on the UFG board, 16 Mister -- at or about that same time, Mr. Hurwitz 17 left; is that correct? 18 A. The UFG board, yes, sir, that's 19 correct. 20 Q. Okay. Now, in connection with your 21 work at USAT, what was the nature of the legal 22 work that you did there? 18532 1 A. Which time frame? 2 Q. Well, let's start with 1985 and work 3 forward. 4 A. When I first got there, one of the 5 first things I know I worked on was their CMO -- 6 they were doing a collateralized mortgage 7 obligation transaction. That started somewhere in 8 the late 1985, early 1986 time frame. 9 I was also working on -- I'm trying to 10 remember. I think it was the Yellow Cab 11 transaction that I was working on. I believe that 12 was around at that time. 13 There was a securities offering that 14 they were doing that was called the DARTs or the 15 AMPs, one or the other. I was working on that. 16 In the beginning of 1986, I started 17 working on the subordinated debt obligation. They 18 were trying to raise some additional capital for 19 United Savings. 20 There may have been other things. 21 Those are the only things I can think of right 22 now. 18533 1 Q. Now, with respect to the subordinated 2 debt application, did USAT have to apply to the 3 Federal Home Loan Bank of Dallas for permission to 4 issue subdebt? 5 A. That's my recollection. 6 Q. And were you involved in the activities 7 related to any applications that might have been 8 made to the Federal Home Loan Bank of Dallas 9 relating to that subdebt application? 10 A. Yes, sir, I was. 11 Q. And that would have occurred in 12 approximately what period of time? 13 A. It was the -- again, my recollection 14 was it was the beginning of -- the first part of 15 1986. 16 Q. We'll come back to that later. 17 Were there any other applications that 18 you recall with respect to the Federal Home Loan 19 Bank of Dallas that you may have participated in? 20 A. I don't recall any right now. 21 Q. At the end of 1985 when you first 22 arrived at USAT, do you recall whether USAT was 18534 1 having a problem with its liability growth? 2 A. I believe that's right. 3 Q. Okay. And though you were newly 4 arrived there, did you become involved in any way 5 with the liability growth application? 6 A. I don't recall being involved in it. 7 Q. Do you recall whether an application 8 was filed with the Federal Home Loan Bank of 9 Dallas? 10 A. I don't have a specific recollection of 11 that, no, sir. 12 Q. Okay. Would that have then been 13 handled by Mr. Pledger? 14 A. I believe so, yes, sir. 15 Q. But at that point in time, he would 16 have been acting under your direction? 17 A. Well, he was general counsel at USAT; 18 so, it's hard to say if he was acting under my 19 direction. I mean, that was his responsibility. 20 Q. But it was your responsibility to 21 supervise Mr. Pledger at that point in time, was 22 it not? 18535 1 A. I don't think I supervised him on 2 regulatory matters. 3 Q. He was on his own? 4 A. He had -- he reported to -- he had -- 5 Gerry Williams was above him; and, certainly, they 6 did a lot of discussions. And it would be hard 7 for me to be supervising Mr. Pledger on regulatory 8 matters. 9 Q. Did there come a time when Mr. Pledger 10 reported to you as the -- 11 A. He officially reported to me, but he 12 wouldn't have dealt with regulatory issues. He 13 wouldn't have come to me for input on regulatory 14 matters. 15 Q. But he officially reported to you. If 16 he had a regulatory question, though, he might go 17 to someone other than you; is that fair? 18 A. I think that's -- that's fair. 19 Q. In connection with regulatory 20 submissions, would he discuss them with you or -- 21 as the head of -- of the legal department at USAT, 22 did you review any of those submissions? 18536 1 A. He probably would have told me about 2 them, and I'm sure he would have copied me on 3 anything. 4 Q. Now, do you recall, at the end of or 5 the beginning of 1986, a direct investment 6 application being made to the Federal Home Loan 7 Bank of Dallas? 8 A. I don't have a specific recollection of 9 that, no, sir. 10 Q. Now, other than the CMO obligations and 11 the subdebt application that you referenced in 12 1986, do you recall -- what was the nature of the 13 work that you performed in '86 and into '87? 14 A. For? 15 Q. USAT. 16 A. Goodness. I mean, certainly after 17 Mr. Pledger left, you know, I was responsible for 18 all of the legal work at USAT, so -- I mean, I was 19 responsible for all of it. 20 Q. And you believe that he left sometime 21 in June or July of 1986? 22 A. That's my recollection. Sometime in 18537 1 the middle of 1986, sir. 2 Q. Okay. And at the same time, you were 3 also providing -- you were supervising all of the 4 legal work of UFG; is that correct? 5 A. Yes, sir. 6 Q. And that would have included filing all 7 of their public disclosure materials? 8 A. Yes, sir, that's correct. 9 Q. Now, with respect to the public 10 disclosure materials, were those prepared by 11 outside counsel; or did you take an active role in 12 preparing them? 13 A. I took an active role. 14 Q. Okay. Let's start with the 10K. My 15 recollection is that the 10K has a lot of 16 narrative in it; and then, usually, at the end, it 17 has an auditor's report -- I'm sorry -- annual 18 report. 19 Is that fair to say? 20 A. Is it fair to say that it has a 21 narrative and then financial statements? 22 Q. Yes. 18538 1 A. Yes, sir. 2 Q. Would you be involved in reviewing the 3 financial statements with respect to an annual 4 report? 5 A. I would certainly look at them, but I 6 wouldn't be responsible for them. 7 Q. That would be the responsibility of 8 someone else. Right? 9 A. Yes, sir. 10 Q. And who would it be normally? 11 A. The chief financial officer. 12 Q. Which would be Mr. Crow? 13 A. Right. 14 Q. Now, with respect to the narrative 15 portion of it, would you take a role in drafting 16 the narrative? 17 A. Yes, sir. 18 Q. And was -- were you ultimately 19 responsible for signing off on the narrative 20 portions of the annual reports of UFG? 21 A. The board of directors was ultimately 22 responsible. 18539 1 Q. Did you sign off as the 2 attorney-in-fact on the annual reports? 3 A. I'm not sure I understand your 4 question. 5 Q. Are you familiar with the term 6 "attorney-in-fact"? 7 A. Yes, sir. 8 Q. What does it mean? 9 A. It means someone who has the power of 10 attorney to sign someone else's name. 11 Q. So, did you sign the annual reports on 12 behalf of the board of directors? 13 A. I don't have a recollection one way or 14 the other. 15 Q. Okay. Now, would your answers be the 16 same with respect to other securities filings that 17 were made on behalf of UFG? 18 A. Which answers? 19 Q. Were you principally involved in 20 drafting the narrative portions of those 21 documents? 22 A. I believe so, yes, sir. 18540 1 Q. And you would review the financial 2 materials enclosed in those documents, but that 3 would also be the subject of review by Mr. Crow; 4 is that correct? 5 A. Yes, sir. 6 Q. Okay. Now, did you play any role at 7 USAT with respect to dealings with the Federal 8 Home Loan Bank of Dallas or the Federal Home Loan 9 Bank Board in Washington? 10 A. During the whole -- 11 Q. Well, just describe for me what, if 12 any, role you played in dealing with either of 13 those entities? 14 A. Goodness. Over the three-year period? 15 At various times, I would have discussions with 16 people at the Federal Home Loan Bank of Dallas and 17 the Federal Home Loan Bank Board in Washington, 18 meeting with them. 19 Q. When regulatory matters came up or 20 legal issues associated with the rules and 21 regulations governing savings and loans, were you 22 the person that would take the lead in dealing 18541 1 with the Federal Home Loan Bank of Dallas? 2 A. Initially, it was Jim Pledger. 3 Q. Okay. And sometime in June or July of 4 1986, you've testified Mr. Pledger left. 5 After Mr. Pledger's departure, would 6 you then have taken a lead role in dealing with 7 legal matters associated with the operations of 8 USAT as they pertained to the Federal Home Loan 9 Bank of Dallas? 10 A. I would have used outside counsel, but 11 I was the responsible person in-house. 12 Q. Okay. And you say you would use 13 outside counsel. But I'm talking about 14 communicating with the Federal Home Loan Bank of 15 Dallas. 16 Would you typically participate in the 17 communications with the Federal Home Loan Bank of 18 Dallas? 19 A. Certain things I would participate in, 20 and certain things I wouldn't. 21 Q. What kinds of things would you 22 participate in? 18542 1 A. There would be meetings or telephone 2 calls with the supervisory agent and other people 3 on their staff. And some of those I would be 4 involved in, and some I wouldn't. 5 Q. When the supervisory agent in the 6 Federal Home Loan Bank of Dallas wanted to make an 7 inquiry regarding a regulatory matter with respect 8 to USAT, were you the person that they would 9 contact first? 10 A. Yeah. I think on some things, they 11 would contact me first; and some things, they 12 wouldn't. 13 Q. Well, was there any standing rule as to 14 whether people who were contacted by the Federal 15 Home Loan Bank of Dallas regarding regulatory 16 issues had to contact you and advise you that 17 there had been a contact with them? 18 A. I don't believe there was a rule to 19 that effect, no. 20 Q. Okay. What was the practice? 21 A. Generally, I would find out. 22 Q. You mean they would report it to you? 18543 1 A. Generally but not all the time. 2 Q. Well, is there any person at USAT that 3 acted as the principal liaison between USAT and 4 the Federal Home Loan Bank of Dallas? 5 A. Well, I think after -- well, the answer 6 is yes. Yes, sir. 7 Q. Who would that person have been? 8 A. That person probably was me after 9 Pledger left. 10 Q. And in connection with dealing with the 11 Federal Home Loan Bank of Dallas, who did you deal 12 with? 13 A. Oh, goodness. Neil Twomey, Ginger 14 Baugh. There was a whole bunch of other people 15 that would -- primarily, it was those two during 16 the time that I was there. 17 Q. And what was your understanding of the 18 position that Mr. Twomey held? 19 A. He was the supervisory agent over 20 United, United Savings. 21 Q. And what does that mean, "the 22 supervisory agent over United Savings"? 18544 1 A. He was the one who was responsible for 2 making sure that -- whatever the Federal Home Loan 3 Bank Board wanted to know about United Savings, it 4 would go through him. 5 Q. So, if there was any inquiry or 6 questions regarding what USAT was doing, it would 7 generally come from Mr. Twomey? 8 A. Not necessarily, no. 9 Q. Okay. Did Mr. Twomey have someone that 10 assisted him? You mentioned a Ginger Baugh? 11 A. Yes. 12 Q. What did you understand was the role of 13 Ms. Baugh? 14 A. She worked for Mr. Twomey. She 15 reported to Mr. Twomey. 16 Q. And what was your -- can you just sort 17 of generally describe what, if any, involvement 18 you had with Ms. Baugh? 19 A. She would call up every now and then 20 and ask questions or send letters, and we would 21 have those sort of communications. 22 Q. How would you characterize the 18545 1 communications or the amount of communications? 2 Did you generally communicate with Mr. Twomey 3 directly, or was it usually through Ms. Baugh? 4 A. I think it was more often with 5 Mr. Twomey directly, at least my communications. 6 Q. Now, if you -- when you say your 7 communications, what do you mean by that? 8 A. I think there were communications with 9 other people at USAT. 10 Q. Okay. When you say your 11 communications, you mean if you had to initiate 12 communication with the Federal Home Loan Bank of 13 Dallas, you would go to Mr. Twomey? 14 A. Sometimes, and sometimes Ms. Baugh. 15 Q. Okay. Was there anyone else that you 16 would go to at USAT -- I mean at the Federal Home 17 Loan Bank of Dallas? 18 A. At various times, there were other 19 people, yes, sir. 20 Q. And were they people that were higher 21 up in the supervisory structure than either 22 Ms. Baugh or Mr. Twomey? 18546 1 A. I'm not sure what the -- sometimes they 2 were higher up, and sometimes -- I don't know 3 where they were in the hierarchy. 4 Q. Well, if you went to Mr. Twomey and 5 didn't get a satisfactory response, would you then 6 go to Ms. Baugh; or did you perceive Mr. Twomey to 7 be higher up in the supervisory structure? 8 A. I think Mr. Twomey was higher up than 9 Ms. Baugh. 10 Q. And if you went to Mr. Twomey, did 11 there ever come occasions when you didn't get what 12 you thought was a satisfactory response from 13 Mr. Twomey and you had to go to other persons? 14 A. I'm sure there were. I don't recall 15 them right now but -- 16 Q. And do you recall the identities of the 17 persons you might have gone to? 18 A. Again, I don't have a specific 19 recollection; but I know we talked to other 20 people. 21 Q. Do you recall Daniel Thomas? 22 A. Yes, sir, I do. 18547 1 Q. And what do you recall about 2 Mr. Thomas? 3 A. I remember he was at the Federal Home 4 Loan Bank of Dallas. 5 Q. Do you remember whether you had 6 communications with him periodically? 7 A. Sporadically. 8 Q. And do you recall whether that was in 9 connection with any particular matters? 10 A. He -- I remember -- yes, sir. 11 Q. And what do you recall? 12 A. He was involved with the -- one of the 13 exams, maybe both of the exams; and there might 14 have been other issues that he was involved in. 15 Q. Okay. And when you say he was involved 16 with one or both of the exams, what do you mean by 17 that? 18 A. Again, I think -- I remember him being 19 involved in coming to meetings in connection with 20 the Federal Home Loan Bank examinations of United 21 Savings. 22 Q. Now, you brought up the subject of the 18548 1 examinations of USAT. 2 Do you recall that there were several 3 examinations of USAT during the period that you 4 were the general counsel of USAT? 5 A. During the period that I was general 6 counsel? 7 Q. Uh-huh. 8 A. There were, I think, two or three. 9 Q. Okay. And after Mr. Pledger left -- 10 and let me say that there was an exam that began 11 in 1986 while Mr. Pledger was still there but that 12 shortly after, he left. I mean shortly after its 13 commencement, he left, just as a reference. 14 What role would you have played 15 vis-a-vis the examination? 16 A. I was there to answer any questions 17 that anybody would have -- that they would ask me 18 about. 19 Q. Were you the principal point of contact 20 for the examiners? 21 A. I don't believe so. 22 Q. Who would that have been? 18549 1 A. I think after Pledger left -- now, it 2 was Pledger when he was there. I think after 3 Pledger left, it was Jim Wolfe. 4 Q. So, if an examiner had a question 5 regarding some aspect of the examination, they 6 would first go to Mr. Wolfe? 7 A. Again, that's my recollection; but 8 that -- I don't know. 9 Q. Mr. Wolfe was the controller, correct? 10 A. That's right. 11 Q. And did he, then, work for Mr. Crow? 12 A. He reported to Mr. Crow, yes, sir. 13 Q. Okay. And what kinds of issues during 14 the examination would be brought to you? 15 A. I don't recall. 16 Q. Do you recall that during the 17 examinations, once -- do you recall that during 18 the examinations, the examiners would meet with 19 officers of USAT periodically to discuss their 20 ongoing examination? 21 A. Yes, sir. 22 Q. Were those meetings that you 18550 1 participated in? 2 A. I participated in one or more of those 3 meetings, yes, sir. 4 Q. Well, did you consider it part of your 5 job to involve yourself in the examination 6 process? 7 A. To involve myself, yes, sir. 8 Q. And did you also consider it part of 9 your job to assist the examiners in resolving any 10 issues that might arise during the course of their 11 examinations? 12 A. I think it's everybody's job, yes, sir. 13 Q. You indicated that the -- you may have 14 participated in several meetings with examiners. 15 Did you, to your recollection, attempt 16 to attend any meetings that were called or 17 requested by the examiners to discuss the 18 examination findings? 19 A. I'm not sure -- if I were told about a 20 meeting and if they asked me to be there, I would 21 certainly be there. 22 Q. When you say if they asked you to be 18551 1 there -- 2 A. The examiners. 3 Q. If the examiners didn't ask you to be 4 there, you wouldn't go? 5 A. If I knew about a meeting and thought I 6 would be helpful, I would go. 7 Q. So, is it fair to say that you didn't 8 play a -- a lead role in communicating with the 9 examiners with respect to the examination? 10 A. I'm not sure I understand what you mean 11 when you say "lead role." 12 Q. How would you characterize your 13 involvement with the examination? That's all I'm 14 trying to get at. 15 MR. VILLA: Object, Your Honor. He's 16 described it. He's now trying to characterize a 17 period that takes four months. I mean, the 18 witness has described factually what he's done. 19 He's now trying to boil it down to one word. 20 MR. RINALDI: Your Honor, I'm not 21 trying to boil it down to one word. I'm looking 22 for a narrative from him as to what is involved 18552 1 and would have been in the examination process. 2 He's told me that, occasionally, he would have 3 attended meetings if someone requested him to. 4 THE COURT: All right. I'll deny the 5 objection. You may answer. 6 A. Could you repeat the question? 7 Q. (BY MR. RINALDI) Could you generally 8 characterize what role you played with respect to 9 the examinations? 10 A. If requested to attend meetings, I 11 would go to those meetings. If anyone wanted 12 documents that I could provide them, I would make 13 sure that they would be provided to them. Just 14 generally be helpful, get it done. 15 Q. Now, do you recall that at the -- that 16 periodically during the examinations, there would 17 be communications -- written communications back 18 and forth between the Federal Home Loan Bank of 19 Dallas and United Savings Association of Texas? 20 A. Yeah. Yes, I do, sir. 21 Q. And with respect to any written 22 communication between the Federal Home Loan Bank 18553 1 of Dallas and USAT, what would your involvement be 2 regarding those communications associated with an 3 examination? 4 A. It's hard to say. You would have to 5 show me something, and I would be able to perhaps 6 tell you what my involvement was. 7 Q. Okay. Generally, did you write letters 8 or review the contents of letters which were sent 9 to the Federal Home Loan Bank of Dallas? 10 A. Again, if you showed me a specific 11 letter, I might be able to tell you what my 12 involvement was in that. 13 Q. If your signature appears on a letter 14 that was sent to the Federal Home Loan Bank of 15 Dallas, would that indicate that that was a matter 16 in which you were actively involved; or did you 17 typically just have someone draft the letter and 18 you would sign it as chief counsel? 19 A. It would be a combination of both of 20 those. 21 Q. But you wouldn't just sign a letter 22 regarding a matter in which you were not involved 18554 1 in, would you? 2 A. Would I sign a letter without reading 3 it? 4 Q. No, no. If you were not involved in a 5 matter, you wouldn't sign a letter with regard to 6 the issue, would you? 7 A. That's not necessarily true. 8 Q. Now, do you recall that at the 9 conclusion of each of the examinations, the board 10 of directors would meet with the examiners and 11 would receive a presentation regarding the 12 examination findings? 13 A. Yes, sir, I do. 14 Q. Now, that would take place at a board 15 meeting of USAT, wouldn't it? 16 A. Yes, sir. 17 Q. Do you recall that they would call 18 sometimes a special board meeting so that the 19 directors could hear the findings of the 20 examiners? 21 A. Yes, I do. 22 Q. And you were the secretary that 18555 1 participated at those board meetings and kept the 2 minutes, weren't you? 3 A. Yes, sir. 4 Q. Now, following -- so, you were aware, 5 then, what the examiners' conclusions had been at 6 each of the examinations that were conducted, 7 weren't you? 8 A. At that time, yes, sir. 9 Q. Okay. And after the examination was 10 presented to the board, was there some process by 11 which the board had to sign off and indicate that 12 they had received the exam and understood its 13 contents? 14 Do you recall that? 15 A. I don't recall one way or the other. 16 Q. Do you recall that after the 17 examinations were received by USAT, whether any 18 responses were supplied by USAT to the Federal 19 Home Loan Bank of Dallas regarding any of the 20 examinations? 21 A. I believe so. 22 Q. And do you believe that that occurred 18556 1 with respect to all of the examinations that you 2 were involved in? 3 A. I don't know if that's true. 4 Q. Now, with respect to any correspondence 5 responding to an examination, what role would you 6 participate in that? 7 A. I would certainly review it. I might 8 draft portions of it, again depending on what we 9 were responding to. 10 Q. Well, you were the chief counsel. And 11 if the response was being submitted on behalf of 12 the board, is that something that would have been 13 prepared in your office? 14 A. Again, I think portions would have been 15 prepared in my office. Portions would have been 16 prepared by the various departments in the 17 institutions. 18 Q. Well, did the directors actually have 19 the -- you know, some office that prepared their 20 correspondence for them; or was, generally, the 21 directors' correspondence prepared by the legal 22 department that you directed? 18557 1 A. Again, I'm not sure I understand the 2 question. 3 Q. Well, when I say "the directors," I 4 mean -- if the board of directors wanted to send a 5 letter to some individual at the Federal Home Loan 6 Bank of Dallas, did the board of directors sit 7 down and draft that themselves; or was that 8 drafted in the office of the general counsel? 9 A. Again, it depends upon what the letter 10 would be. The board of directors would have 11 reviewed any letter that went out over their 12 signature. Whether the letter was drafted in my 13 office or somebody else's office would depend on 14 what the letter was about. 15 Q. If the letter dealt with regulatory 16 issues, would it generally have been drafted in 17 your office? 18 A. Again, it would have come out over my 19 signature. Whether it was drafted in my office 20 would depend on what we were dealing with or just 21 what the matter was that the letter was dealing 22 with. 18558 1 Q. When a letter came out over your 2 signature, did that mean that you had read the 3 contents of the letters and were familiar with the 4 representations that were made in the letter? 5 A. I would say that's generally true. 6 Q. Now, you indicated that at the 7 outset -- and maybe you gave the answer to this 8 question, but let me just wrap it up here -- you 9 began by working at UFG and being paid by UFG. 10 Do you recall that? 11 A. Yes, sir. 12 Q. Did there come a time after you joined 13 UFG and USAT when USAT took on the obligation of 14 paying your salary? 15 A. I thought so. 16 Q. And when would that have been? 17 A. I thought it happened sometime in 1986 18 or 1987. 19 Q. Okay. And after 1986 or '87, did USAT 20 thereafter continue to pay your salary? 21 A. Well, that was my recollection at the 22 time. 18559 1 Q. Okay. Now, with respect to bonuses 2 that you received, were those bonuses that were 3 paid by USAT? 4 A. Again, that was my recollection. 5 Q. And your checks came out of the USAT 6 payroll account; is that right? 7 A. I don't know. 8 Q. Well, we'll show you some later; and 9 maybe that will refresh your recollection. 10 MR. RINALDI: Your Honor, I'm about to 11 start into a new area. Would this be an 12 appropriate place to take a break? 13 THE COURT: All right. We'll take a 14 short recess. 15 16 (Whereupon, a short break was taken 17 from 10:25 a.m. to 10:49 a.m.) 18 19 THE COURT: Be seated, please. We'll 20 be back on the record. 21 Mr. Rinaldi. 22 Q. (BY MR. RINALDI) Mr. Berner, before 18560 1 we broke we had been discussing or had discussed 2 the departure of Mr. Pledger. 3 Why was it that you were hired by UFG 4 when Mr. Pledger was already the general counsel 5 and very knowledgeable of regulatory affairs? 6 A. Well, he was at USAT. 7 Q. Yes. 8 A. Why was I hired? I think they were 9 looking for someone that had more of a business 10 background and a securities background. 11 Q. And why was it that they were 12 interested in someone with a securities 13 background? 14 A. I really don't know. 15 Q. When you first joined USAT, was USAT 16 becoming more involved in securities transactions? 17 A. Well, they were doing the CMO 18 transactions and the DARTs and the AMPs 19 transactions. 20 Q. And was that something that Mr. Pledger 21 had any expertise in? 22 A. I don't believe so. 18561 1 Q. So, was it your understanding, then, 2 that one of the reasons you were brought on is to 3 assist in the securities issues that might arise 4 at USAT and UFG? 5 A. Yes, sir. 6 Q. Okay. Now, we had talked a moment ago 7 about the examination process. 8 Would you take a look at the document 9 that I put before you? This is Tab 395. It's 10 Exhibit T8014. This is a letter dated April 16th, 11 1987, to the board of directors of USAT; and it's 12 from Daniel A. Thomas, the senior supervisory 13 agent. 14 Do you see that? 15 A. (Witness reviews the document.) 16 Q. And in particular, I wanted to direct 17 your attention to the fourth full paragraph on the 18 first page. 19 Do you see that? 20 A. Yes. 21 Q. And it talks there about USAT failing 22 to meet its net worth. 18562 1 Do you see that? 2 A. Uh-huh, I see that. 3 Q. Do you recall that in about April of 4 1987, USAT was advised by examiners that the 5 examiners had concluded that USAT was failing its 6 minimum net worth requirements? 7 A. Yes, I do. 8 Q. Okay. And as the secretary to the 9 board, did you periodically receive reports 10 regarding the financial condition of USAT? 11 A. As secretary to the board? 12 Q. Uh-huh. 13 A. I received the reports, yes. 14 Q. Well, correct me if I'm wrong, but in 15 each of the board minutes I've seen for USAT, at 16 the beginning of the board meeting, there appears 17 to be a presentation made. And, generally, it's 18 made by the chief financial officer who, at this 19 period of time, I believe, would have been 20 Mr. Crow. 21 Do you recall that there was such a 22 presentation generally made at the USAT board 18563 1 meetings? 2 A. That's right. 3 Q. Okay. And, generally, what was the 4 nature of that financial presentation? 5 A. Mr. Crow would go over the balance 6 sheet and the income statement and would go over 7 various regulatory ratios that we were required to 8 meet and where we stood on various things, just a 9 general overall financial report. 10 Q. And one of those regulatory ratios that 11 was periodically reviewed was the capital 12 requirement of USAT; isn't that correct? 13 A. Right. 14 Q. And do you recall that when USAT was 15 advised by the examiners in T8014 that the 16 examiners believed USAT had failed their net worth 17 requirement as of June 30th by $10.5 million, do 18 you recall what the reaction of the board was? 19 A. My recollection is that we disagreed 20 with that conclusion. 21 Q. Okay. And when you say "we," did you 22 have occasion to discuss this with anyone at USAT? 18564 1 A. Yes, I did. 2 Q. And who would you have discussed it 3 with? 4 A. At various times, I discussed it with 5 the senior officers, some of the senior officers; 6 and then it was discussed at board meetings, a 7 board meeting. 8 Q. Was that of serious concern to USAT? 9 A. That it was below -- that it disagreed 10 with the Federal Home Loan Bank Board? 11 Q. Well, that the Bank Board at least 12 believed USAT was failing to meet its minimum 13 capital requirement as of June 30th, 1986? 14 A. Yes, it was. 15 Q. And as the chief counsel, do you recall 16 what, if any, impact that may have had upon USAT 17 if, in fact, they were failing their minimum 18 capital requirement? 19 A. Well, again, I don't think we agreed 20 with that conclusion. 21 Q. I understand you didn't agree. But did 22 you understand at this point in time that if, in 18565 1 fact, the examiners were correct, that it could 2 have some impact upon USAT? 3 A. Yes. 4 Q. Okay. 5 A. I'm not sure it was at this point in 6 time; but I know at some point, I was aware that 7 it could have an impact. 8 Q. What was your understanding as to the 9 impact a net worth failure could have on the 10 institution? 11 A. Unfortunately, I don't remember right 12 now what it was. 13 Q. Do you recall whether it could have 14 limited the types of investments that USAT could 15 have made? 16 A. Again, at this point in time, I really 17 don't recall. 18 Q. Do you recall that USAT was involved in 19 making something called direct investments? 20 A. Yes. 21 Q. All right. Do you recall whether a net 22 worth failure could potentially result in a 18566 1 limitation on direct investments that the 2 institution could make? 3 A. I don't have specific recollection 4 right now. 5 Q. Okay. Now, you indicated that USAT 6 disputed the finding of a net worth failure that's 7 reflected in T8014. 8 Do you recall that? 9 A. Yes, yes. 10 Q. Can you describe for me in your own 11 words what occurred after USAT received T8014? 12 A. Over a -- over a long period of time, I 13 think like a year or so, there were meetings and 14 discussions with people at the Bank Board: 15 Mr. Twomey and maybe Ms. Baugh. And then my 16 recollection is there was a resolution of that 17 issue. 18 Actually, there was no resolution as to 19 whether or not we had, in fact, failed our net 20 worth at that time; but there was a resolution as 21 to how it would get solved. 22 Q. And in connection with that discussion 18567 1 back and forth between the Federal Home Loan Bank 2 of Dallas and USAT, what role did you play? 3 A. At various times, I was part of that -- 4 that discussion. 5 Q. So, you would participate in the 6 meetings at which the net worth failure were 7 discussed with the Bank Board? 8 A. Yeah. I'm not sure I participated in 9 all of them, by I certainly participated. 10 Q. Do you recall that there was a series 11 of correspondence that went back and forth between 12 USAT and the Federal Home Loan Bank of Dallas? 13 A. Yes, I do. 14 Q. And who was responsible for preparing 15 that correspondence? 16 A. I don't remember right now who was 17 responsible. Certainly, the chief financial 18 officer would have had a major role in it since it 19 had to do with net worth maintenance -- net worth 20 obligations. 21 Q. Did the letters that were prepared and 22 sent to the Federal Home Loan Bank of Dallas 18568 1 emanate out of your office? 2 A. That's very possible. 3 Q. Do you recall that -- whether you 4 signed those letters which were sent to the 5 Federal Home Loan Bank of Dallas in which the 6 issue of the net worth failure was disputed by 7 United Savings Association of Texas? 8 A. I think I signed some letters. I might 9 have -- there might have been other people who 10 signed letters. I don't remember. 11 Q. And when you signed those letters, you 12 would have first reviewed them with other members 13 of executive management to assure that they were 14 factually accurate? 15 A. I would have certainly reviewed it with 16 the person who prepared the factual part of it, 17 yes, sir. 18 Q. And if there was anything in those 19 letters that was inaccurate, you would have made 20 an effort to correct it? 21 A. If I knew about it, yes, sir. 22 Q. Now, you indicated that the dispute 18569 1 over the net worth failure persisted for some 2 period of time; and you indicated that it got 3 resolved ultimately. 4 Do you recall what the resolution was? 5 A. Yeah. The -- the resolution was that 6 United would permit, I think it was, Grant 7 Thornton to come in and review our books and 8 records and somebody else to review the 9 securities -- I think it was junk bond portfolio. 10 Q. But, in fact, there still was a dispute 11 over the net worth question, was there not, 12 notwithstanding the retention of Pru-Bache and an 13 accounting firm to look at the books and records? 14 A. I thought that was the resolution of 15 that dispute. 16 Q. You don't recall that there continued 17 to be a dispute between the Bank Board and USAT 18 over the net worth condition of USAT? 19 A. Again, my recollection is that that was 20 the resolution of that dispute. 21 Q. How would you characterize the 22 condition of USAT at or about the time that this 18570 1 letter is dated; that is, in about April of 1987? 2 A. I would have to look at some financial 3 information to know. 4 Q. Well, what generally do you recall at 5 that point in time? 6 A. Well, generally, you know, Texas was 7 going through a recession or depression, depending 8 on how badly you thought it was. And United 9 certainly was having problems. 10 Q. Do you recall if, at that point, you 11 were projecting that USAT would report a 12 regulatory net loss in the foreseeable future? 13 A. At this time, I think -- I really don't 14 remember specifically. 15 Q. Do you recall that you were -- though 16 you disputed the net worth failure as of 17 June 30th, 1986, that UFG was projecting that in 18 the future, they would fail their minimum capital 19 requirements? 20 A. I believe that's right. 21 Q. And that would have been about the time 22 of this letter, in April or May of 1987? 18571 1 A. I'm not sure of the time frame, but I 2 know it was at some point. 3 Q. Would you take a look at what's 4 previously been marked as Tab 888? And this is 5 Exhibit A12235. 6 MR. VILLA: I'm sorry? 7 MR. RINALDI: 35. 8 MR. VILLA: Could you give me that 9 number again? 10 MR. RINALDI: 12235, Tab 888. 11 A. Do you want me to read this or -- 12 Q. (BY MR. RINALDI) Well, let me ask 13 you: Do you recognize this document, sir? 14 A. Yes, I've seen this document. 15 Q. And it's called "United Savings 16 Association restructuring proposal." 17 Do you see that? 18 A. Yes, sir. 19 Q. And it's dated about six weeks after 20 the 1986 -- I mean the letter wherein the Bank 21 Board communicated to USAT the results of the 1986 22 examination. 18572 1 Do you see that? 2 A. Yes, sir. 3 Q. And if you turn to the second page and 4 the second paragraph beginning with "USAT," do you 5 see that? 6 A. Yes, I do. 7 Q. And it says, "USAT's financial position 8 today is that significant future gains from asset 9 sales are not available." 10 Is that consistent with your 11 recollection of what the position of USAT was at 12 or about May 1987? 13 A. Yes, sir, it is. 14 Q. Okay. Did you draft this document, 15 sir, or participate in its preparation? 16 A. I participated in its preparation. 17 Q. Okay. And prior to it having been -- 18 well, strike that. 19 And then it goes on and says, "Most of 20 the above-water assets have been liquidated, and 21 the remaining assets would not generate a 22 significant profit upon sale." 18573 1 Do you see that? 2 A. Yes. 3 Q. Is that consistent with your 4 recollection of United's condition at or about May 5 or June of 1987? 6 A. It's consistent, yes, sir. 7 Q. Okay. And then if you look at the last 8 sentence, it talks about general -- it talks about 9 problems with the institution. But the last 10 sentence then reads -- or the last two sentences 11 say, "Based on management's projections, USAT will 12 report a regulatory net loss of approximately 13 $18 million per quarter for the foreseeable 14 future. Obviously, with this scenario, USAT will 15 fall below minimum regulatory net worth at some 16 point in the near future." 17 Do you see that? 18 A. Yes, I do. 19 Q. Does that comport with your 20 recollection of the condition of United Savings 21 Association of Texas at or about May 1987? 22 A. Certainly, yes, sir. 18574 1 Q. And you were a member of management of 2 USAT at that time? 3 A. Yes, I was. 4 Q. And at that point in time, management 5 was projecting that in the near future, there 6 would be a net worth failure; is that correct? 7 A. If you assume a regulatory net loss of 8 $18 million per quarter, right. 9 Q. But on the previous page, it said there 10 was very little above-water assets that could be 11 sold; and it indicates that the financial 12 condition of USAT was somewhat dire, was it not? 13 A. Well, I don't know if "dire" is the 14 right word; but it certainly wasn't good. 15 Q. Okay. And you were aware of that at 16 about this point in time; is that correct? 17 A. Yes, I was. 18 Q. Now, did there come a point in time 19 after May of 1987 when you learned that, in fact, 20 USAT had or was about to fail its minimum net 21 worth requirements for capital? 22 A. Yes, yes. 18575 1 Q. And when would that have been, sir? 2 A. My recollection is it was at the end of 3 1987. 4 Q. Okay. And do you recall at that time 5 that you wrote a letter to the -- strike that -- 6 you wrote a memo to a number of other members of 7 executive -- of the senior executives of USAT and 8 UFG and advised them that it appeared that USAT 9 was about to fail its minimum capital 10 requirements? 11 A. I would have to see the memo. 12 Q. Would you take a look at what's been 13 previously marked -- and this will be in the same 14 book. What you ought to do is just set this 15 aside. It will be in Book 1, and you will need to 16 flip forward probably about five or six documents. 17 And you will come to -- yeah. It's four documents 18 ahead. Three documents ahead -- T8022, and it's 19 Tab 396. 20 A. 8022? 21 Q. 8022. 22 A. Okay. 18576 1 Q. And take a moment while the judge gets 2 his copy to look at that memorandum. 3 A. (Witness reviews the document.) Okay. 4 Q. Now, do you recognize that memorandum, 5 sir? 6 A. Yes, I do. 7 Q. Was that drafted by you? 8 A. Yes. It -- well, it was based on a 9 letter I received from outside counsel; but yes, 10 this memo was drafted by me. 11 Q. You say it was based on a letter that 12 you received by outside counsel. 13 Did outside counsel tell you that USAT 14 was about to fail its minimum net worth 15 requirement? 16 A. No. 17 Q. Where did you obtain that information 18 from? 19 A. Well, this was -- what I'm saying here 20 is based on estimates, it looked as if USAT was 21 going to do that on that date. 22 Q. Okay. And was that information that 18577 1 you maintained in the legal office, or would you 2 have obtained that from someone else? 3 A. Oh, I'm sure I obtained that from 4 somebody else. 5 Q. And who would that have been? 6 A. A financial officer or, you know, the 7 finance department. 8 Q. Okay. And was there any particular 9 person or persons that were responsible for 10 monitoring the net worth or the capital position 11 of the institution? 12 A. Yes, there were. 13 Q. And who would that have been? 14 A. I don't know. 15 Q. I'm sorry? 16 A. Mike Crow was in charge of that 17 department. I don't think he was the one that 18 would be responsible for monitoring that. 19 Q. Okay. But Mr. Crow oversaw that. Do 20 you recall whether Mr. Crow would give you updates 21 as a member of executive management on the capital 22 position of USAT? 18578 1 A. Yes. 2 Q. I mean, that was a matter of great 3 concern to USAT during this period of time, wasn't 4 it? 5 A. It was a matter of concern, yes, sir. 6 Q. And it had been a matter of concern 7 from at least April of 1987 when you received the 8 letter from the Federal Home Loan Bank of Dallas 9 advising you of the potential net worth failure; 10 is that fair? 11 A. Yes, sir. 12 Q. Now, you indicated that this document 13 was prepared in connection with a consultation 14 with outside counsel. 15 Who was the outside counsel you 16 consulted with? 17 A. Tom Leahey with Kirkpatrick & Lockhart. 18 Q. What was the nature of the consultation 19 that was made? Did you request that they provide 20 information to you? 21 A. I had requested information as to 22 what -- what happens if you fail to meet your 18579 1 minimum regulatory net worth. 2 Q. Were you concerned about having to 3 report that in public disclosure documents? 4 A. Sure. 5 Q. And were you concerned that if that 6 information was reported in -- strike that. 7 USAT didn't have to file any public 8 disclosure documents, did it? 9 A. No, it did not. 10 Q. But UFG, as the parent of USAT, filed 11 disclosure documents which included disclosures 12 relating to its principal subsidiary, USAT, didn't 13 they? 14 A. Yes, it did. 15 Q. And at this point in time, were you 16 concerned that if USAT's net worth failure were 17 reported in a UFG document, that it would have a 18 potentially adverse impact on either UFG or USAT? 19 A. I think we were concerned that it could 20 have. 21 Q. And what was the nature of the impact 22 that you were concerned about? 18580 1 A. There were lots of impacts. Stock 2 price falling. I believe there was concern about 3 repo lines at the USAT level, other transactions 4 that USAT was doing. 5 Q. Well, now, you mentioned stock prices 6 falling. 7 At this point in time, UFG's stock 8 price was pretty much rock bottom, wasn't it? 9 A. I have no idea what the price was at 10 this time. 11 Q. Okay. We may look at a proxy statement 12 later that will give us some idea. 13 You also made reference to a repo line. 14 What was that in reference to? 15 A. Again, it's my recollection that that 16 was a concern. I didn't have anything to do with 17 repo lines. 18 Q. What is a repo line? 19 A. It's essentially a loan. 20 Q. And a loan from -- do you recall who it 21 was who was making these repo or these loans to 22 USAT? 18581 1 A. No, I don't. 2 Q. Do you recall that as part of a 3 mortgage-backed security risk-controlled 4 arbitrage, USAT had funded the purchase of 5 mortgage-backed securities with reverse repurchase 6 obligations? 7 A. I really don't. 8 Q. I see. But you were on the investment 9 committee, were you not? 10 A. Yes, sir. 11 Q. Okay. And do you recall, was it one of 12 the jobs of the investment committee to oversee 13 the mortgage-backed security activities that were 14 conducted by USAT? 15 A. Yes, sir. 16 Q. But you don't recall anything about the 17 specifics of their mortgage-back activities as 18 they relate to reverse repurchase obligations? 19 A. No, I certainly don't. 20 Q. Okay. Was there a concern that if the 21 reverse repurchase agreements were pulled, that 22 USAT could be forced to sell off its 18582 1 mortgage-backed security portfolio? 2 A. I'm not sure what the result was. I 3 know there was a concern about repo lines being 4 pulled. 5 Q. And how did you come to the conclusion 6 that there was such a concern? Did you discuss it 7 with other members of executive management? 8 A. I believe so, yes, sir. 9 Q. And would that have been the other 10 members of the investment committee? 11 A. I think so. I'm not sure it was all of 12 the members. It was certainly Mr. Crow. 13 Q. Now, you just indicated that you 14 weren't -- you had a -- some understanding of a 15 reverse repo obligation, but I think that you 16 indicated that it wasn't a particularly refined 17 one. 18 Is that being unkind? 19 A. It's not being unkind. That is being 20 very kind actually. 21 Q. Okay. Who on the investment committee 22 would you have relied upon for expertise on the 18583 1 subject of mortgage-backed securities? 2 A. Sandy Laurenson. I think she was still 3 here at that time. 4 Q. Uh-huh. 5 A. Mike Crow, Bruce Williams. I might 6 have relied on Ron Huebsch; but I think Sandy, 7 Bruce, and Mike would be the people I would 8 probably rely on. 9 Q. How about Jenard Gross? Was he 10 knowledgeable about the securities or the 11 mortgage-backed security investments that United 12 Savings Association of Texas was involved in? 13 A. I don't know. 14 Q. Do you recall whether he was on the 15 investment committee? 16 A. Yes, I do. 17 Q. Was he? 18 A. Yes, he was. 19 Q. And -- and how about Charles Hurwitz? 20 Why was this memorandum regarding the net worth 21 failure directed to Mr. Hurwitz? 22 A. He was the chairman of United Financial 18584 1 Group -- 2 Q. Uh-huh. 3 A. -- which was -- he was also the -- 4 that's why it would have been directed to him. 5 Q. But this is talking about USAT's net 6 worth failure. 7 Was it your practice to copy 8 Mr. Hurwitz on matters affecting USAT? 9 A. If I thought it would be something that 10 he would be interested in, I would certainly copy 11 him, yes. 12 Q. And what kind of matters do you recall 13 that Mr. Hurwitz was interested in that related to 14 United Savings Association of Texas? 15 A. Oh, goodness. Meetings with 16 regulators, I would sometimes copy him on. I 17 would have to look at all the memos to see which 18 ones I copied him on. 19 Q. Did Mr. Hurwitz take an active interest 20 in the operation of USAT? 21 A. "In the operation," you mean the 22 day-to-day operation? 18585 1 Q. Well, what was going on at USAT. 2 A. Generally, yes. The -- 3 Q. You started to say "the strategic." 4 What were you about to refer to? 5 A. The policy issues he was certainly 6 involved in. He was not involved in day-to-day 7 operations. 8 Q. So, when you say he wasn't involved in 9 the day-to-day operations, you mean he didn't 10 participate in -- what do you mean by that? 11 A. He wouldn't be involved with what each 12 of the real estate department was doing -- any of 13 the departments were doing on a day-to-day basis, 14 you know, things that were happening at the 15 institution on a day-to-day basis. He would just 16 be involved in helping out on the strategic plans 17 of where the institution was going in a broad 18 picture. 19 Q. When you say "the strategic plans of 20 where the institution was going," what kinds of 21 policy issues would Mr. Hurwitz typically get 22 involved in? 18586 1 A. Oh, some of this pre-dated me. The 2 changing of United Savings into a wholesale 3 institution, that -- you know, whether we should 4 sell branches as part of that philosophy. 5 Q. Were you there when the first branch 6 sale occurred? 7 A. No, I was not. 8 Q. Did there subsequently come a time when 9 there was a subsequent branch sale? 10 A. Yes, there was. 11 Q. And were you involved or were you there 12 when that second branch sale occurred? 13 A. Yes, I was. 14 Q. Okay. And what, if any, role did you 15 have in the branch sale? 16 A. I negotiated the contract with outside 17 help and dealt with the regulators trying to get 18 the branch sale approved. 19 Q. And what, if any, involvement would 20 Mr. Hurwitz have had in USAT's decision to sell 21 branches? 22 A. Well, he had had an involvement earlier 18587 1 on in deciding -- in helping to make the decision 2 that it should be a wholesale institution. That's 3 my recollection, that he didn't have any 4 involvement in the branch sale. 5 Q. Well, were there discussions at the 6 strategic planning committee level of things like, 7 "Should we or shouldn't we sell branches?" 8 A. There may have been. I don't know. 9 Again, I would have to look at the minutes of 10 those meetings to see if there were. 11 Q. Was the sale of branches an effort to 12 increase the capital position at USAT? 13 A. I think that that might have been one 14 of the reasons. I think it really was just a 15 continuation of the wholesale philosophy. 16 Q. And that was a philosophy that had been 17 supported by Mr. Hurwitz? 18 A. Yes. 19 Q. Now, I'm looking at the USAT investment 20 committee, if I can find it; and I wanted to ask 21 you a couple of questions just about the people on 22 the USAT investment committee. Let's see. I 18588 1 believe it's -- here we go. 2 It's -- the members are on Page 7, I 3 believe, of Exhibit B1741. That's Bates stamp 4 US2021528. 5 Do you see that? 6 A. Yes, sir, I do. 7 Q. And did you -- it indicates that -- you 8 identify Mr. Crow and Mr. Huebsch as being on 9 there. 10 Now, I think you said you didn't regard 11 Mr. Huebsch as being particularly knowledgeable 12 about mortgage-backed securities, correct? 13 A. I don't think I said that. I think you 14 asked me who I would go to, and he was the fourth 15 person. 16 Q. The first person would have been 17 Mr. Crow? 18 A. Mr. Crow, Ms. Laurenson, Mr. Williams. 19 Q. How about Mr. Stodart? Was he a 20 mortgage-backed securities person? 21 A. No. 22 Q. What was his involvement with respect 18589 1 to the investment committee? 2 A. He was in charge of the high-yield bond 3 portfolio. 4 Q. What do you recall of Mr. Huebsch? Did 5 he have some area of expertise? 6 A. Yes. 7 Q. And what was that? 8 A. He was in charge of the equity 9 arbitrage portfolio. 10 Q. But you also regarded him as being 11 knowledgeable in the mortgage-backed securities 12 area? 13 A. He knew more than I did. 14 Q. Who did you regard as the least 15 knowledgeable person in the committee on the 16 subject of mortgage-backed securities? 17 A. If it wasn't me, it was pretty close to 18 me. 19 Q. And who after you? 20 A. Probably between Stodart and Jenard 21 Gross. One of those two probably. 22 Q. Now, you indicated, going back to 18590 1 T8022, that in the second paragraph, it talks 2 about potential corrective actions that might be 3 taken in the event of a capital failure. And it 4 talks about corrective actions under 563.13(d). 5 Do you see that? 6 A. The second paragraph? 7 Q. Yes, the second paragraph. 8 A. Okay. Yes, I do. 9 Q. Okay. Now, did Mr. Leahey provide you 10 with a memo of some sort outlining what potential 11 corrective actions could be required under the 12 regulatory provisions in the event of a net worth 13 failure? 14 A. I believe he did. 15 Q. And do the contents of this memo 16 reflect the information that was conveyed to you 17 by Mr. Leahey? 18 A. Again, I think I added to some of it; 19 but yes, it does. 20 Q. And in the third paragraph, it says 21 that in the event an insured institution fails to 22 meet its regulatory capital requirements, certain 18591 1 powers -- the Federal Home Loan Bank Board has 2 certain powers. And it says, "These include 3 requiring the institution to" and then it goes on 4 and it says, "(8) limit operational expenditures 5 to specified limits." 6 Do you see that? 7 A. Yes. 8 Q. Was this the first time you understood 9 that USAT's operational expenditures could be 10 limited by the Bank Board in the event of a net 11 worth failure? 12 A. I'm not sure if this was the first time 13 that I understood that. 14 Q. What were USAT's largest operational 15 expenditures? 16 A. I don't know. 17 Q. Do you recall that the largest single 18 operational expenditure of USAT was, in fact, 19 salaries for employees? 20 A. No, I don't -- I don't recall one way 21 or the other. 22 Q. Then it goes on and it says they 18592 1 could -- "In addition, while an institution is in 2 non-compliance, it will not be able to establish 3 financed subsidiaries or transfer assets to an 4 existing finance subsidiary." 5 Do you see that? 6 A. Yes, I do, sir. 7 Q. What impact would that have had on USAT 8 if they had been limited in that fashion? 9 A. I don't know. 10 Q. Now, Paragraph 7 talks about not being 11 able to accept brokered deposits. 12 Do you see that? It's Paragraph 7 in 13 the lower part of the page. 14 A. Yeah. In excess of 5 percent? 15 Q. Yes, that's correct. 16 A. Yes, sir. I see that. 17 Q. Now, after the branch sales, did USAT 18 have an inordinately large dependence upon 19 brokered deposits? 20 A. I don't know one way or the other. 21 Q. Did USAT accept brokered deposits? 22 A. Yes, it did. 18593 1 Q. And do you recall whether it exceeded 2 5 percent? 3 A. I don't. 4 Q. So, you don't know whether a net worth 5 failure would have impacted their -- USAT's 6 ability to receive or accept brokered deposits? 7 A. At this point in time, I don't, no. 8 Q. Now, on the next page, it talks 9 about -- or you put in here -- it says, "In order 10 for United to meet its minimum capital requirement 11 as of October 31st, 1987, we might want to 12 consider some of the following." And you talk 13 about infusing capital from UFG to USAT. 14 Do you see that? 15 A. Yes, sir. 16 Q. What did you mean by that? 17 A. Taking some money out of UFG and 18 putting it into USAT. 19 Q. Do you recall whether USAT or UFG 20 had -- as a condition of a prior merger of USAT 21 and another institution, whether UFG had committed 22 to maintain the capital requirement of USAT? 18594 1 A. I'm not sure I knew it at this time. I 2 believe I know that now. 3 Q. And it also talks about infusing 4 capital from some other source. 5 Do you see that? 6 A. Yes. 7 Q. MCO or Federated. 8 Did you have occasion to talk to anyone 9 from MCO or Federated regarding the infusion of 10 capital? 11 A. No, I did not. 12 Q. Why did you put down there that MCO or 13 Federated might want to infuse capital into USAT? 14 A. Because they were the largest 15 stockholder of UFGI. 16 Q. And you thought they might want to 17 invest more money into the investment in order to 18 avoid a capital failure? 19 A. I was setting out some possible 20 alternatives. 21 Q. Did you have occasion to discuss that 22 proposal with anyone from Federated or MCO? 18595 1 A. No. 2 Q. After putting that proposal on paper 3 and sending it to the individuals noted on the 4 first page of T8022, did you have any further 5 conversations regarding the subject of your 6 memorandum? 7 A. Yes. 8 Q. Okay. And in connection with those 9 discussions, did you ever discuss with Mr. Hurwitz 10 or anyone associated with MCO or Federated whether 11 MCO or Federated was interested in infusing 12 capital into USAT? 13 A. In connection with these discussions 14 here? 15 Q. Yes. 16 A. No, I did not. 17 Q. Did you ever have any discussions along 18 those lines? 19 A. In 1988, there was discussions. 20 Q. But at this point in time, you didn't 21 have any discussions regarding MCO or Federated 22 infusing capital? 18596 1 A. No, sir. 2 Q. Now, do you recall what it was that 3 triggered USAT to suddenly appear as if it was 4 going to fail its regulatory capital requirement? 5 A. Yes, I do. 6 Q. And what was that, sir? 7 A. There was a stock market crash on 8 October 19th of that year. 9 Q. Okay. And after the stock market crash 10 occurred on October 19th, is that when you 11 contacted Mr. Leahey and asked him what the 12 consequence of a net worth failure would be? 13 A. It was sometime after that, that's 14 correct, sir. 15 Q. Okay. Now, why was it that the stock 16 market crash adversely impacted upon USAT? 17 A. I don't remember at this point in time. 18 Q. Well, did the value of some of USAT's 19 investments go down so that it resulted in losses? 20 A. Yes, they did. 21 Q. Do you know which investments had lost 22 money? 18597 1 A. Again, at this point in time, no, I 2 don't. 3 Q. Okay. Do you recall which of the 4 portfolios would have been marked to market? 5 A. I think the equity arbitrage portfolio 6 was marked to market. 7 Q. And that's because it was a trading 8 portfolio. Right? 9 A. I don't know why it was marked to 10 market. 11 Q. What was your understanding of the 12 equity arbitrage? 13 A. You mean my understanding of what 14 equity arbitrage is? 15 Q. Uh-huh. 16 A. Equity arbitrage was the -- when there 17 was a merger or some transaction that was 18 announced, there would generally be a spread 19 between the price of where that announcement was 20 and where the ultimate transaction would take 21 place. And we would be buying that kind of stock 22 to make that arbitrage, to make that spread. 18598 1 Q. And so, you were basically buying 2 shares and trading them and attempting to obtain a 3 profit from the trade of shares in the arbitrage 4 transaction? 5 A. That's right. 6 Q. And do you recall, was that a portfolio 7 that had to be marked to market? 8 A. That's my recollection now, but that 9 may be wrong. 10 Q. Was it losses in the equity arbitrage 11 portfolio that created the financial problems that 12 you -- that led to USAT's failure of its net worth 13 or potential failure of its net worth in October 14 of 1987? 15 A. I'm not positive. I think that's what 16 it was, but I'm not positive on that right now. 17 Q. Okay. Now, do you recall a moment ago, 18 I asked you if the question of the net worth 19 failure in 1986 had ever been satisfactorily 20 resolved? 21 A. Yes, sir. 22 Q. And you said you thought that it had 18599 1 been. 2 Would you turn to the next document, 3 8024? And this is a United Financial Group 4 consolidated statement of operations. And then if 5 you turn to the second page of that document, it 6 has a net worth requirement report there. 7 Do you see that? 8 A. Yes, I do. 9 Q. And do you see as you go down to the 10 footnotes that there were still a number of issues 11 which were being disputed between USAT and the 12 Federal Home Loan Bank Board of Dallas regarding 13 the calculation of USAT's net worth? 14 A. Yes, I do. 15 Q. And USAT was reflecting in October of 16 1987 that they still had excess net worth of 17 $12 million. 18 Do you see that? 19 A. Yes, sir. 20 Q. But there were still a number of 21 write-downs or factors which were being disputed 22 by the Federal Home Loan Bank Board that could 18600 1 have impacted that number; is that fair? 2 A. Yes, sir. 3 Q. Is that what you recall at that point 4 in time? 5 A. I recall that there was still a dispute 6 going on, yes, sir. 7 Q. Do you recall that there came a time 8 when your projections or the projections that we 9 had talked about of a potential net worth failure 10 became a reality? 11 A. Yes, I do. 12 Q. And when would that have been? 13 A. I believe it was December 31, 1987. 14 Q. And that would have, then, been 15 something that you, as the general counsel, would 16 have had to report in UFG's annual report for 17 December 31st, 1987. Correct? 18 A. Yes. 19 Q. Would you turn to Page -- to Document 20 T8033, which is the 1987 annual report. 21 A. 8033? 22 Q. Yes. 18601 1 A. Okay. 2 Q. Now, this has previously been marked as 3 Tab 402; and it is the United Financial Group, 4 Inc. 1987 annual report. 5 Do you recognize this document, sir? 6 A. Yes, I do. 7 Q. And I think if you turn to the last 8 page, it indicates that -- or at least Page 68 -- 9 that it was -- it appears to have been executed by 10 you as attorney-in-fact on March the 28th, 1988? 11 A. Yes. 12 Q. Okay. And was this a document that was 13 prepared in your office or at the offices of USAT 14 under your direction? 15 A. No. 16 Q. Who would have prepared this? 17 A. Well, let me back up. There's an 18 attachment to this document -- 19 Q. Uh-huh. 20 A. -- which is the 10K, the Form 10K. 21 Q. Yes. 22 A. That portion, I would have had 18602 1 responsibility for preparing part of that. 2 Q. Okay. 3 A. But the actual annual report, I was not 4 responsible for. 5 Q. When you say "the actual annual 6 report," are you making reference, then, to the 7 first four pages which constitute the cover page, 8 the corporate profile, and the management letter? 9 A. Yes, sir. 10 Q. And who would have prepared the 11 corporate profile? 12 A. We had a person on staff at the 13 association that did that. 14 Q. And that really reflects information 15 that would have been extracted from the 10K, 16 correct? 17 A. I think some of is, and some of it is 18 also just -- it's a discussion by the president 19 and chairman of the board. So, I'm not sure all 20 of it comes from the 10K. 21 Q. Okay. Now, in the financial 22 highlights, that's certainly information that 18603 1 would have been extracted from the 10K, is it not? 2 A. Yes, sir. 3 Q. And it indicates there that USAT or -- 4 I'm sorry -- UFG had suffered a net loss of almost 5 $118 million in 1987. 6 Do you see that? 7 A. Yes, I do. 8 Q. And what impact did that have on the 9 value of a common share at USAT? 10 A. I'm not sure I understand the question. 11 Q. Well, it says, "Their net loss per 12 common share: 14.53." 13 Does that mean each share of USAT lost 14 $14.53? 15 A. That's 117,980 divided by the number of 16 outstanding shares. 17 Q. So, there was a loss of $14.53 per 18 share? 19 A. Right. 20 Q. And at the end of 1987, the total 21 shareholder equity was a deficit $41.9 million, 22 correct? 18604 1 A. That's correct. 2 Q. Now, if you turn to Page 2 of the -- of 3 the annual report, it indicates that -- 4 A. There aren't any page numbers on this. 5 Q. I'm sorry. I'll use the Bates numbers, 6 and it will make it a lot easier. 7 Turn to Page 19. It's at H0681. 8 Do you see that? 9 A. I assume it's this one. I have 80 and 10 82, but I don't have 81. 11 Q. Yes. It is Page 19 of the report 12 itself. 13 A. All right. 14 Q. Directing your attention to -- there's 15 some underlining there from an undisclosed source; 16 but it indicates that the preliminary findings of 17 the Bank Board of Dallas examiners had resulted in 18 a determination that the association had failed to 19 meet its regulatory capital requirement as of 20 September 30th, 1987, and December 31st, 1987. 21 Do you see that? 22 A. Yes, I do. 18605 1 Q. And do you recall whether management 2 agreed this time with that assessment? 3 A. Yes, I do. 4 Q. And did they? 5 A. I believe management agreed that United 6 had failed to meet its regulatory net worth as of 7 December 31. 8 Q. Was there some dispute as to whether 9 they had failed to meet it on September 30th? 10 A. I don't believe that United felt that 11 it failed to meet it on September 30th. 12 Q. And if you take a look at Page 2 of 13 that document, it indicates there that the 14 association has filed -- I'm sorry. It's the 15 fourth full paragraph down. It talks about the 16 association filing a capital forbearance with the 17 Federal Home Loan Bank of Dallas. 18 Do you see that? 19 A. Yes, sir, I do. 20 Q. What is your understanding of what a 21 capital forbearance is? 22 A. I believe it is a request that -- that 18606 1 the -- the fact that you don't meet your minimum 2 capital -- there's a forbearance from anything 3 happening to you because you failed to meet your 4 capital requirement. 5 Q. So that the horrible things that may 6 have taken place under -- that are listed in your 7 October memorandum would not necessarily take 8 place if there was a forbearance permitted? 9 MR. VILLA: Objection to the 10 characterization. 11 Q. (BY MR. RINALDI) Do you recall in 12 your memorandum, you indicated that there were a 13 number of actions that could be taken by the Bank 14 Board in the event of a net worth failure? 15 A. Yes, I do. 16 Q. Was it your understanding that if a 17 forbearance application were granted by the Bank 18 Board, that it could forbear from engaging in all 19 or some of those actions which could be brought in 20 the event of a net worth failure? 21 A. I'm not sure I understand your 22 question. 18607 1 Q. Well, the Bank Board could take action 2 against USAT if it failed its net worth. Right? 3 A. I believe so, yes. 4 Q. And you listed those in your memo? 5 A. Yes. 6 Q. Was it your understanding that if 7 forbearance was granted, that some or all of those 8 actions could be forborne? 9 A. That's correct, sir. 10 Q. Now, if you go down one full paragraph 11 further, it starts "UFGI." It says, "UFGI, in 12 connection with its becoming a holding company, 13 agreed to maintain USAT's capital above the 14 minimum requirement level." 15 Do you see that? 16 A. Yes. 17 Q. Do you know what that's referring to? 18 A. It's referring to the net worth 19 maintenance. 20 Q. So that by this time, you were aware 21 that UFGI had an obligation to -- had entered into 22 some sort of commitment to maintain the net worth 18608 1 at USAT? 2 A. I believe -- actually, at this time, I 3 thought that they had, that's correct. 4 Q. And it goes on and says, "UFGI has not 5 been requested to provide additional capital to 6 USAT; but if requested, UFGI currently does not 7 have sufficient assets to contribute to maintain 8 USAT above its minimum capital requirement." 9 Do you see that? 10 A. Yes. 11 Q. Is it fair to say, then, that if UFGI 12 had been required to infuse capital into USAT, 13 that it would have resulted in UFGI's insolvency? 14 A. Not necessarily. 15 Q. Under what circumstances wouldn't it 16 have resulted in their insolvency? 17 A. If they found another way to infuse 18 capital into USAT. 19 Q. But when you say if it had found 20 another way to get capital into USAT, what do you 21 mean? 22 A. By either raising capital or having 18609 1 another party contribute capital. 2 Q. Okay. If it had been unsuccessful in 3 raising capital or finding someone else to 4 contribute capital, is it fair to say that if UFGI 5 had been required to infuse capital into USAT 6 under a net worth maintenance obligation, that it 7 would have been insolvent? 8 A. If it had been required to and had done 9 it and that was enforceable, yes, it is fair to 10 say. 11 Q. Now, a moment ago -- earlier this 12 morning, I should say, you indicated that you had 13 entered into an employment contract with UFG. 14 Do you recall that? 15 A. Yes, sir. 16 Q. Now, can you -- and I believe that you 17 indicated that contract was entered into in about 18 September of 1988. 19 Do you recall that? 20 MR. VILLA: I believe you meant '87, 21 didn't you? 22 A. Yes, sir. 18610 1 MR. RINALDI: I'm sorry. I meant '87. 2 Thank you. 3 A. Yes, sir. 4 Q. (BY MR. RINALDI) So, that would have 5 been shortly prior to the date that you penned 6 your October 28th memorandum noting a potential 7 net worth failure, correct? 8 A. It would have been a month before, 9 yeah. 10 Q. And it would have been several months 11 after you discussed in your restructuring proposal 12 management's projections that if losses continued, 13 USAT was likely to have a net worth failure, 14 correct? 15 A. Yes, sir. 16 Q. Now, how did the subject of employment 17 contracts first come up, sir? 18 A. My recollection is that -- I think it 19 was Bruce Williams and Mike Crow started talking 20 about employment contracts at some point in 1987. 21 Q. You know, before I forget, I wanted to 22 ask you one final question on that October memo; 18611 1 and then we'll go on to the employment contracts. 2 The October memo has at the top a 3 designation "privileged and confidential." 4 Do you see that? 5 A. Yes, I do. 6 Q. And we're now looking, so that 7 everybody understands what we're talking about, at 8 T8022 again, the October 29, 1987 memo. 9 Now, was this memo a UFG or a USAT 10 document? Do you know? 11 A. No, I don't. 12 Q. Okay. Now, it indicates at the top 13 that it was privileged and confidential. 14 Do you see that? 15 A. Yes, sir. 16 Q. Okay. Why did you label the document 17 "privileged and confidential"? 18 A. I don't know. 19 Q. You don't know. 20 Periodically, did you -- did matters of 21 importance come up that you felt deserved a 22 "privileged and confidential" label? 18612 1 A. Periodically, yes, I would label memos 2 "privileged and confidential." 3 Q. And what would be the basis for 4 labeling a particular memorandum as being 5 privileged and confidential? 6 A. I'm not sure I know right now. 7 Q. If the document contained something 8 that was particularly sensitive in terms of the 9 financial condition of an -- of the institution, 10 is that something you might label privileged and 11 confidential? 12 A. I don't think that's what I would be 13 thinking about in labeling it "privileged." 14 Q. Did you think that it contained 15 attorney work product or attorney/client 16 communications that were subject to a privilege? 17 A. I think that's possible in this 18 connection, yeah. 19 Q. Now, when a document received a 20 privileged and confidential -- "privileged and 21 confidential" label, was it maintained in any 22 separate file or in any special way because of its 18613 1 privileged and confidential nature? 2 A. I don't believe so. 3 Q. So, you're telling me that the legal 4 department didn't maintain privileged and 5 confidential matters in a special file? 6 A. I don't believe we did. 7 Q. Okay. Now, getting back to what we 8 were talking about a moment ago, the '87 -- 9 September 1987 UFG employment contracts, you were 10 telling me how they first came up. 11 A. Again, my recollection is that the 12 first discussions came up from Bruce Williams and 13 Mike Crow somewhere in the mid-1987. 14 Q. And what was the concern that 15 Mr. Williams and Mr. Crow expressed to you? 16 A. They didn't express it to me. 17 Q. Well, you said that they came up in 18 discussions. 19 Were you party to these discussions? 20 A. No. 21 Q. With who did they raise these issues? 22 A. With Dr. Munitz. 18614 1 Q. And do you know why they raised them 2 with Dr. Munitz? 3 A. Not really, no. 4 Q. What was Dr. Munitz' position at USAT? 5 A. I believe he was chairman of the 6 executive committee, but I'm not positive. I 7 would have -- maybe it's in that other document 8 you showed me. I think that's what he was. 9 Q. Okay. And was -- did Dr. Munitz also 10 hold a position with either MCO or Federated that 11 you're aware of? 12 A. I think he did. Yes, he did. 13 Q. And was it your understanding that 14 Dr. Munitz was a representative of MCO who sat on 15 the board of USAT? 16 A. No. That was not my understanding. 17 Q. What was your understanding of how 18 Dr. Munitz came to be appointed to the board? 19 A. I don't know. He was on the board when 20 I got there. 21 Q. So, you didn't understand that 22 Dr. Munitz was appointed to the board at or about 18615 1 the point in time when MCO acquired a position in 2 UFG's stock? 3 A. I don't know one way or the other. 4 Q. Okay. So, they went to Dr. Munitz. 5 Was there some reason they would have gone to 6 Dr. Munitz instead of Mr. Gross? 7 A. Dr. Munitz generally was the person 8 that dealt with personnel issues, employment 9 issues. 10 Q. Okay. And how did you learn this? 11 A. He told me. 12 Q. Dr. Munitz did? 13 A. Uh-huh. 14 Q. And so, after the meeting with 15 Dr. Munitz and Mr. Crow and Mr. Williams, 16 Mr. Munitz then came to you and discussed his 17 conversation with Crow and Williams? 18 A. Right. We talked about it. 19 Q. Okay. Then what happened? 20 A. I was asked to draft employment 21 agreements, which I did. 22 Q. Okay. Now, you said they came to 18616 1 Dr. Munitz. 2 Did Dr. Munitz indicate to you that 3 there was any special area of concern that either 4 Mr. Crow or Mr. Williams had voiced regarding 5 employment contracts? 6 A. I don't have -- right now -- I don't 7 have a recollection right now. 8 Q. They just wanted to have something in 9 writing? 10 A. I don't remember what Dr. Munitz said 11 as to what their concerns were. I'm sure they had 12 concerns, but I don't remember them right now. 13 Q. As the matter evolved, did you come to 14 have an understanding as to what Mr. Williams' and 15 Mr. Crow's concern was? 16 A. Yes. 17 Q. And what was that? 18 A. That they were concerned that the 19 senior people were being offered jobs and had 20 opportunities to go other places and they wanted 21 to keep their management team intact. They wanted 22 to have something in writing that spelled out what 18617 1 their compensation would be and what would happen 2 if they were severed from the institution. 3 Q. Now, I noticed that the employment 4 contracts had a change of control provision. 5 A. Yes. 6 Q. Do you recall that? 7 A. Yes, I do. 8 Q. What was the nature of the change of 9 control that people contemplated at this point in 10 time that might adversely impact Mr. Crow and 11 Mr. Williams or any of the other executives? 12 A. Somebody taking over UFGI. 13 Q. I see. But we just looked at the 14 financial statement; and UFGI had just lost 114 or 15 $17 million, is that correct, in 1987? 16 A. Yes. Well, actually, it was later than 17 their discussions; but that's correct. 18 Q. And you had been projecting potential 19 net worth failures of its principal subsidiary, 20 USAT, for some period of time. 21 Why would anybody want to take over a 22 failing enterprise? 18618 1 A. Because it could make good economic 2 sense for them to take it over. 3 Q. Was there concern that if USAT failed, 4 that it was possible that USAT might be put into 5 receivership and, in that receivership, they might 6 be terminated? 7 A. I'm not sure that that was a concern at 8 that time. 9 Q. Had -- to your knowledge, had anyone 10 made any overtures to acquire USAT or UFG at or 11 about this point in time? 12 A. I don't believe so. Not to my 13 knowledge. 14 Q. Now, do you recall having drafted a 15 memorandum in which you memorialized the 16 circumstances under which the September 1987 17 employment contracts were entered into? 18 A. You would have to show it to me. 19 Q. Okay. Would you take a look at 20 Exhibit 8054? It's a memorandum dated March 31st, 21 1988. 22 A. 8054? 18619 1 Q. 8054. And it has previously been 2 admitted at Tab 403. 3 Do you recognize that document, sir? 4 A. Yes, I do. 5 Q. Is that a document you prepared? 6 A. Yes, it is. 7 Q. And in the first -- in the second full 8 paragraph, it talks about "The question of 9 employment contracts first arose when a number of 10 executive employees were concerned with the future 11 of UFGI and the association." 12 Do you see that? 13 A. Yes, sir. 14 Q. Okay. And that's the discussion you 15 referred to earlier between Mr. Munitz, Mr. Crow, 16 and Mr. Williams, is it not? 17 A. I'm not sure if that's specifically 18 what I'm referring to here, but it -- 19 Q. It says -- and then it goes on and 20 talks about, "At a number of meetings with Barry 21 Munitz and Jenard Gross, these executives" -- and 22 it lists Mr. Crow, Jackson, Berner, Wolfe, and 18620 1 Williams -- "discussed their concerns for the 2 ongoing viability of the association." 3 A. Yes, sir. 4 Q. So, did you also have the same concerns 5 that Mr. Williams and Mr. Crow had? 6 A. Yes, I did. 7 Q. And at this point in time, were you 8 concerned that some entity would try to come in 9 and take over UFGI or USAT? 10 A. I don't believe I was concerned about 11 that. 12 Q. Were you concerned that USAT might fail 13 its net worth and be placed into receivership and 14 that you would be terminated? 15 A. I don't believe I was concerned about 16 that either. 17 Q. All right. Well, what was it, then, 18 about the viability of the association that was of 19 concern to you? I mean, it says right here -- 20 these are your words -- at a number of meetings, 21 that you discussed your concern or their concern 22 and you were among the people that discussed 18621 1 this -- the ongoing viability of the association. 2 A. I was concerned about the ongoing 3 viability, whether the association would survive 4 or wouldn't survive. 5 Q. You mean you were concerned that the 6 net worth failure might occur that would result in 7 its receivership? 8 A. Well, I was not concerned about it 9 going into receivership. I was concerned about 10 its viability, whether it would survive as an 11 institution. 12 Q. Well, if it went into receivership, it 13 wouldn't survive as an institution, would it? 14 A. I guess that's right. That's right. 15 Q. So, if you were concerned about its 16 viability, you were concerned about whether it 17 would go into receivership. I mean, is that fair? 18 A. I'm telling you that I was not -- at 19 that point, I was not concerned about 20 receivership. I was concerned about viability, 21 whatever happened to it. 22 Q. By "viability," you meant it might go 18622 1 out of business? 2 A. Yes. 3 Q. And if it went out of business, what 4 impact was that going to have on you? 5 A. I'm not sure I knew at this time. 6 Q. Well, it says, "It was decided at this 7 time that an employment contract would be 8 appropriate." 9 Do you see that? 10 A. Yes, sir. 11 Q. Why would it have been appropriate at 12 that point in time to have an employment contract 13 if UFGI and USAT or USAT wasn't viable? 14 A. Because we wanted to keep this 15 management team intact. So, we wanted to provide 16 them with a reason for staying here and not 17 looking for other jobs or taking other job offers. 18 Q. So, because you thought the place might 19 not be viable, you wanted to offer an enticement 20 for people to stay there; is that right? 21 A. Yes, sir. 22 Q. And you thought the appropriate form of 18623 1 enticement would be some kind of employment 2 contract; is that correct? 3 A. Yes, sir. 4 Q. Now, was that employment contract going 5 to be with USAT or UFG? 6 A. With UFG. 7 Q. Okay. Now, if you were worried about 8 USAT's viability, why didn't you have the 9 employment contract with USAT? 10 A. Because if USAT wasn't there, we wanted 11 to make sure that these people stayed and that 12 there would be something there to pay them. 13 Q. Well, if USAT didn't stay there, if it 14 went, why would you need all these people? 15 A. Well, we wouldn't need them if it went; 16 but we would need them to try to prevent it from 17 going. 18 Q. And if it went and they were still 19 there, that was UFG's principal operating 20 subsidiary, wasn't it? 21 A. Absolutely. 22 Q. And UFG would be stuck with a lot of 18624 1 people that they didn't need. Right? 2 A. If USAT went -- 3 Q. Yes. 4 A. -- then UFGI -- well, they wouldn't 5 have a lot of people. They would pay their 6 severance, and these people would go someplace 7 else. 8 But the purpose was to keep them there 9 between this date and when USAT went in the hope 10 that they would keep USAT from going. 11 Q. And you, just a moment ago, made 12 reference to a severance. 13 What does that refer to? 14 A. A severance? 15 Q. Yes. 16 A. If the employment agreement is 17 terminated for whatever reason, they would get a 18 payment, some sort of a payment. 19 Q. I see. And what kind of payment was 20 contemplated that UFGI would make in the event 21 that USAT failed? 22 A. I believe it was two times salary, two 18625 1 years' salary. 2 Q. And at this point in time, was there 3 any decision to increase people's salaries? 4 A. At this point in time? 5 Q. Uh-huh. 6 A. When? In March of 1988? 7 Q. No. At the point in time we're talking 8 about in the second paragraph. 9 A. Okay. 10 Q. And do you know when we're talking 11 about that these meetings occurred? 12 A. It would have been sometime before 13 September of 1987. 14 Q. Okay. And if you turn to the next 15 page, it makes reference to the fact that -- the 16 last sentence in that lead -- in that trailing 17 paragraph, they presented the employment agreement 18 to the board of directors in September '87 and the 19 board unanimously approved entering into the 20 agreements. 21 Do you see that? 22 A. Yes, sir. 18626 1 Q. So, we're talking about the 2 September 1987 UFGI employment contracts? 3 A. That's correct. We're talking about 4 the September UFGI contracts. 5 Q. And as a result of these preliminary 6 discussions with Mr. Munitz, was a presentation 7 then made to the compensation committee; and did 8 they then recommend that UFGI enter into 9 employment contracts? 10 A. Yeah. There were steps in between; but 11 yes, that is correct. 12 Q. And ultimately, UFGI entered into 13 employment contracts with a number of members of 14 senior management, correct? 15 A. Correct. 16 Q. And were you among those people that 17 received a contract? 18 A. Yes, sir. 19 Q. All right. Can we take a look at 20 A11032? I'm not sure of the tab number. 21 A. Is that in this book? 22 18627 1 (Discussion held off the record.) 2 3 MR. RINALDI: This is a document, 4 Your Honor, that was put into -- 5 THE COURT: Would you give us the 6 exhibit number again, please? 7 MR. RINALDI: A11032. It's the packet 8 of -- 9 Q. (BY MR. RINALDI) Would you take a 10 look at what's been marked as A11032? It's Trial 11 Exhibit 483. I'm -- I apologize. I'm trying to 12 find your contract here. 13 A. Do you want me to go through this whole 14 thing? 15 Q. No. I think I can find it because -- 16 well, did you end up entering into a contract, 17 sir? 18 A. Yes, sir. 19 Q. Okay. And let's take a look at the 20 first contract in the package which happens to be 21 yours fortuitously. We're looking at 22 Page OW128391. It's about a dozen pages in. 18628 1 Do you see that? 2 A. Yes, sir. 3 Q. And I think if you turn to the last 4 page of that document, this is an executed 5 version, Page 16? 6 A. Yes, it is. 7 Q. Does that appear to be your signature? 8 A. Yes, it is. 9 Q. Now, under the terms of the agreement, 10 it indicates that the term of employment of the 11 nineteen -- September 1987 agreement would be for 12 slightly over one year. 13 Do you see that in Paragraph 2 on 14 Page 2 of 16? 15 A. Right, yes. 16 Q. And the contract was going to go 17 through December 31st, 1988. 18 Do you see that? 19 A. Yes. 20 Q. Okay. Why was December 31st, 1988, 21 selected as the original date for the term of the 22 contract? 18629 1 A. I don't remember. 2 Q. But this was a document that you 3 drafted, correct? 4 A. Yes, I did. 5 Q. Did Mr. Munitz direct you on the 6 specifics of the content of this, or were you 7 pretty much left to your own devices? 8 A. Well, I drafted this. And then I sent 9 the draft to the compensation committee, and they 10 reviewed it and made comments on it. And we did a 11 final draft, and then it went up to the 12 compensation committee and ultimately to the 13 board. 14 Q. In Paragraph 5 on Page 3 of the 15 contract, it references a salary. Did that 16 represent an increase in salary to you; or was 17 that what you were receiving at or about 18 September 9th, 1987? 19 A. I believe that's what I was receiving 20 at that time. 21 Q. Now, at that point in time, I believe 22 you testified earlier you were being paid a salary 18630 1 by USAT? 2 A. That's my recollection. 3 Q. And under this employment agreement, it 4 says that, "During the period of the executive's 5 employment hereunder, the company shall pay to the 6 executive a salary at a rate of not less than 7 $170,736 per anum." 8 Do you see that? 9 A. Yes, I do. 10 Q. So, as a result of entering into this 11 agreement, was it your understanding that 12 thereafter, UFG was going to be paying your salary 13 rather than USAT? 14 A. No, it wasn't. 15 Q. Why was it saying here that UFG shall 16 pay the executive's salary? 17 A. To some extent, it's sloppy drafting. 18 It was not meant to change who was paying the 19 salary. 20 Q. But this contract does obligate UFG as 21 of September 7 or September 9th, 1987, to pay the 22 salary -- to pay your salary? 18631 1 A. To have my salary paid, yes, that's 2 correct. 3 Q. And this document is identical to the 4 documents that were entered into with the other 5 executive management at that point in time, isn't 6 it? 7 A. Yes, it was. 8 Q. I mean, there would be different salary 9 levels; but the provisions themselves would be the 10 same, correct? 11 A. Yes. 12 Q. And then as you drop down below to 5B, 13 it talks about a bonus. It says, "During the 14 period of the executive's employment hereunder, 15 the company shall pay to the executive an annual 16 bonus to be paid in January of each year 17 subsequent to the year in which bonus is earned in 18 an amount no less than $70,000." 19 Do you see that? 20 A. Yes, I do. 21 Q. Prior to entering into this employment 22 agreement, were there any obligations on the part 18632 1 of either USAT or UFG to pay bonuses to any 2 members of the executive staff? 3 A. Any formal obligation? 4 Q. That's correct. 5 A. No, there was not. 6 Q. So, if you had a bad year and the board 7 of directors felt that it was inappropriate to pay 8 a bonus, the board of directors could simply say, 9 "No bonuses this year"; is that right? 10 A. The board could say, "No bonus," that 11 is correct. 12 Q. Conversely, if you had a great year, 13 they could give you a huge bonus? 14 A. That's correct. 15 Q. So, it had been a discretionary 16 function of the board as to whether executive 17 management would get a bonus, correct? 18 A. Yes, sir. 19 Q. Now, after you entered into this 20 contract with UFGI, UFGI was under a contractual 21 obligation to pay a minimum bonus of $70,000 to 22 you, was it not? 18633 1 A. Again, I think it was USAT; but that is 2 correct. 3 Q. Wait a second. You think it was USAT. 4 Let's turn to the first page of the 5 document because I'm a little confused here. It 6 says, "This agreement was made on the 9th day of 7 September, 1987, by and between UFG and Arthur S. 8 Berner." 9 Do you see that? 10 A. Yes, sir. 11 Q. So, when you entered into this 12 contract, it was UFG that was obligating itself to 13 pay the bonus, correct? 14 A. That's correct. Although, as I said 15 before, there was no intention to change who was 16 going to be paying the -- your salary and bonus. 17 Q. I see. That was just another instance 18 of sloppy drafting? 19 A. It was the same instance of sloppy 20 drafting. 21 THE COURT: We'll take a recess until 22 1:30. 18634 1 MR. RINALDI: Thank you, Your Honor. 2 3 (Whereupon, a lunch break was taken 4 from 12:10 p.m. to 1:36 p.m.) 5 6 THE COURT: Be seated, please. We'll 7 be back on the record. 8 Mr. Rinaldi. 9 MR. RINALDI: Thank you, Your Honor. 10 Q. (BY MR. RINALDI) Mr. Berner, when we 11 broke for lunch, we were looking at your 12 employment agreement that was entered into between 13 yourself and United Financial Corporation. 14 Do you have that in front of you? I 15 believe it's Exhibit A11032. 16 A. Yes, I do. 17 MR. BLANKENSTEIN: Mr. Rinaldi, do you 18 know what tab number that is? 19 MR. RINALDI: Yes. That would be 20 Tab 483. 21 MR. BLANKENSTEIN: Thank you. 22 Q. (BY MR. RINALDI) Now, we've been 18635 1 talking about some terms of the contract. 2 Can you turn to Bates stamp 3 No. OW128391? That's the first page of your 4 contract. 5 Do you have that? 6 A. Yes, I do. 7 Q. Okay. And under "employment," it 8 states that "The company hereby agrees to continue 9 to employ the executive." 10 Do you see that? 11 A. Yes. 12 Q. Okay. So, then, under the terms of 13 this employment agreement, you were to be employed 14 by UFG; is that correct? 15 A. Yes, sir. 16 Q. Okay. And I think if you look at the 17 duties, among the duties on the next page in 18 Paragraph 3, you would provide some services to 19 USAT as well as UFG. 20 Do you see that? 21 A. Yes. 22 Q. But the employment indicated in 18636 1 Paragraph 1 was with UFG; is that correct? 2 A. Yes, sir. 3 Q. Okay. Now, we talked about the salary 4 and that UFG, under contract, was obligated to pay 5 it. And we talked about the bonus and that UFG 6 was similarly obligated to pay it pursuant to the 7 terms of the contract. 8 Now, can we look at the section that 9 starts on Page 7 of the contract that relates to 10 the termination of the executive? 11 Did the new employment contracts have 12 any special provisions relating to the termination 13 of the executive or what would occur if the 14 executive were terminated? 15 A. Yes, it did. 16 Q. Okay. And in -- just in your own 17 words, what do you recall was the thrust of those 18 new termination provisions? 19 A. My recollection is if there was a 20 termination for cause, you wouldn't get anything. 21 And if there was a termination for anything other 22 than cause, you would get -- I think it was two 18637 1 years salary and some other things. 2 Q. Okay. Now, I believe earlier we talked 3 about there was a concern regarding a possible 4 change of control. 5 Do you recall that? 6 A. Yes. 7 Q. You had indicated that that was 8 something that was an issue that was brought up by 9 some of the members of the executive management, 10 had you not? I don't want to put anything in your 11 mouth. 12 A. I'm not sure -- I think we talked about 13 whether or not the institution would be viable. 14 Q. Okay. Well, in the event that -- do 15 you recall that there was a question raised about 16 what would happen if there were a change in 17 control of UFGI? 18 A. Right. 19 Q. And was that something that was 20 discussed with Mr. Munitz and the other members of 21 the executive management? 22 A. I'm not sure we spent a lot of time 18638 1 talking about that. 2 Q. Okay. But you do recall, do you not, 3 that when you drafted the contracts, you put in a 4 provision that would provide for certain benefits 5 in the event of a change of control. 6 Do you recall that? 7 A. Yes, I do. 8 Q. Okay. Now, let's take a look at 9 Page 7, Paragraph D. And it talks about "the 10 executive may terminate his employment here under 11 for good reason." 12 Do you see that? 13 A. Yes. 14 Q. Okay. Now, if you drop down to the 15 next paragraph, it talks about and defines what 16 "good reason" might include. 17 Do you see that? 18 A. Yes, I do. 19 Q. And among the things that are included 20 there is a change of control. 21 Do you see that? 22 A. Change of control, yes, sir. 18639 1 Q. So that an executive could terminate 2 his employment with UFGI for good reason if there 3 were a change of control. 4 Is that the thrust of what I've just 5 shown you there? 6 A. Yes. 7 Q. Okay. Now, did the contract define 8 what constituted a change of control? 9 A. Yes, it did. 10 Q. Okay. And do you recall what the 11 elements of change of control were? 12 A. I don't recall all of them. I recall 13 some of them, yes. 14 Q. Okay. Well, there were several. But 15 I'm interested mainly in the "B" portion which 16 starts the last sentence on Page 7 of your 17 contract. It says -- it talks about -- the 18 paragraph begins, "For purposes of this agreement, 19 the term 'change of control of the company' shall 20 mean" -- and then it goes -- it says, "B, during 21 any period of 24 consecutive months commencing 22 before or after the date of this agreement, 18640 1 individuals who at the beginning of such 24-month 2 period were directors of the company cease for any 3 reason to constitute at least a majority of the 4 board of directors of the company." 5 Do you see that? 6 A. Yes, sir. 7 Q. Okay. And can you explain to me what 8 that meant? 9 A. What it meant was that if people who 10 were on the board at the time that the contract 11 was signed no longer ceased to be a majority, 12 there would be a change of control. 13 Q. Now, I'm curious because it says, 14 "Individuals who at the beginning of such 24-month 15 period" -- I'm sorry. It says, "During any period 16 of 24 consecutive months commencing before or 17 after the date of this agreement." 18 Do you see that? 19 A. Yes, sir. 20 Q. So that you would look to the period of 21 24 months before the commencement of the agreement 22 to see what the constituency of the board was? 18641 1 A. I think that's what this is saying, 2 that's correct. 3 Q. And if that constituency were to change 4 if that -- over a 24-month period of time such 5 that there was no longer a majority of the people 6 who had originally been there, you would have a 7 change of control? 8 A. Yes, sir. 9 Q. And in the event that there was a 10 change of control, does the contract indicate what 11 the consequences would be in terms of UFG's 12 obligation to the employee? 13 A. Again, it gives the employee the right 14 to terminate. 15 Q. Okay. And in the event of termination, 16 does that terminate all of UFG's obligations to 17 make payment to the employee under the contract? 18 A. No. They would have to make -- there 19 is a severance payment they would have to make. 20 Q. Okay. And would you turn to 21 Paragraph 9B2 on Page 9 of the contract? 22 A. 9B2? 18642 1 Q. I believe that's -- D. I'm sorry. 2 A. D. 3 Q. Does that appear to be the severance 4 payment that would be obligated -- that would be 5 the obligation of UFG in the event of a 6 termination for good cause based upon a change in 7 control? 8 A. I think so. 9 Q. Okay. And it indicates in that 10 paragraph that, "In lieu of further salary 11 payments to the executive for periods subsequent 12 to the date of termination, the company shall pay 13 as severance pay to the executive an amount equal 14 to (A) a product of the employee's annual salary 15 rate in effect as of the date of termination 16 multiplied by the number 2." 17 Do you see that? 18 A. Yes, I do. 19 Q. So that -- am I correct that that's 20 saying that if a person is terminated for cause as 21 a result of a change in control, they are entitled 22 to receive two years' annual salary? 18643 1 A. Well, you're mixing things; but you're 2 correct. If a person -- if a person leaves the -- 3 if he terminates himself because of a change of 4 control, he would be entitled to two years' 5 salary. 6 Q. Okay. And in your case, that would 7 have been, what, $340,000 or thereabouts? 8 A. I think that's right. 9 Q. Okay. And does the contract specify 10 when that obligation would be due and owing to the 11 executive from UFG? 12 A. Yes, it does. 13 Q. And when would that be? 14 A. It says if it results from a change of 15 control, it gives it in a lump sum on or about the 16 fifth day following the date of termination. So, 17 within five days. 18 Q. Okay. Now, did this contract of UFGI 19 have any provision for securing the severance 20 benefit? 21 A. It did not. 22 Q. So, in other words, if I were an 18644 1 officer of UFGI and if, for any reason, there were 2 a change of control -- let me just stop for a 3 moment. 4 Did the change of control apply only to 5 UFGI, or did it apply to a change in control of 6 the board of directors of USAT, its principal 7 subsidiary? 8 A. To both. 9 Q. Okay. So, in the event that USAT had 10 gone into receivership and its board no longer 11 ceased to serve as the board, that would have been 12 a change of control, correct? 13 A. I think so. 14 Q. Okay. 15 A. Yes, sir. 16 Q. And in that circumstance, UFGI, under 17 the terms of this agreement, would have been 18 obligated within five days to pay two times the 19 annual salary of each executive who had an 20 employment agreement with UFGI; is that correct? 21 A. Yes, sir. 22 Q. Okay. And in the event that that 18645 1 occurred, if UFGI did not have sufficient assets 2 to pay the severance agreement, what would happen 3 with respect to the employee's claim against UFGI? 4 A. Well, I'm not sure -- when you say 5 "sufficient assets," do you mean cash or -- 6 Q. Cash. 7 A. If it didn't have any cash? 8 Q. Right. 9 A. Well, first of all, if there was a 10 change of control -- let's back up a second. If 11 there was a change of control, the employee didn't 12 have to leave. So, that was at his election. But 13 assuming he wanted to leave and UFGI didn't have 14 the cash to pay him, I assume he wouldn't get 15 paid. 16 Q. So, they would be an unsecured creditor 17 of UFGI; is that correct? 18 A. I don't know. I don't know enough 19 about bankruptcy law to know that. That may be 20 right. I'm not sure. 21 Q. But there was no security in this 22 document that would guarantee the payment in the 18646 1 event of a change of control, was there? 2 A. That's correct. 3 Q. Okay. And -- now, do you recall who 4 the individuals were that had contracts with UFGI? 5 A. I believe I do. 6 Q. Are those the individuals that are 7 listed in 8054 on Page 1 in Paragraph 2? 8 A. What's 8054? 9 Q. 8054 is the memorandum we were looking 10 at that's right -- I hope I can find it. This is 11 your memorandum. You list a group of people. And 12 if you see in the parenthetical clause that's four 13 lines down in Paragraph 2 of Page 1 of T8054, it 14 lists a number of people. 15 Do you see that? 16 A. Right. 17 Q. Were those the people that had 18 contracts with USAT -- with UFGI? 19 A. They did. I think -- well, I know Jeff 20 Gray had a contract with UFGI. And I'm not 21 sure -- I think it was just the six. 22 Q. Okay. Barry Munitz didn't have one? 18647 1 A. At this time, no, Barry Munitz did not. 2 Q. And Jenard Gross? 3 A. At this time, no. 4 Q. Now, after you entered into the new -- 5 the September employment agreement with USAT, do 6 you recall that there came a point in time when a 7 question arose as to whether salaries for 8 employees of USAT should be increased at the end 9 of 1987? 10 A. Yes, I do. 11 Q. And what do you recall of that, sir? 12 A. My recollection, there was a question 13 as to whether or not there should be a salary 14 increase or increases should be deferred until the 15 middle of nineteen -- of the next year, '88. 16 Q. And what was decided? 17 A. Well, at that time, it was decided 18 to -- in order to put everybody on the same 19 payment schedule, to defer the salary increases, 20 the actual payment of the salary increases until 21 the middle of the year. 22 Q. Why did the subject of deferring the 18648 1 salary increases even come up in the first 2 instance? 3 A. I'm not sure. 4 Q. Was it because you were projecting a 5 net worth failure of USAT and you were concerned 6 about the financial condition of USAT and its 7 ability to pay increased salaries? 8 A. My recollection is that the board 9 decided that they wanted to put everybody on the 10 same payment schedule. 11 Q. Whose idea was it to defer the salaries 12 or the salary increases at the end of 1987? 13 A. Well, I don't want to say it was my 14 idea; but I remember talking to Mike Crow about 15 it, about the possibility of doing that. 16 Q. And what was the -- you said they 17 wanted to put everybody on the same pay scale or 18 the same scale in terms of timing of salary 19 increases, correct? 20 A. That's my recollection of what the 21 board wanted to do. 22 Q. Okay. Why was that an important issue 18649 1 at the end of 1987? 2 A. There was some concern that if certain 3 people got pay raises in the early part of the 4 year and then something happened with the 5 institution, they would be treated differently and 6 unfairly or they would be treated more fairly than 7 other people that would get raises later in the 8 year. 9 Q. So, this was another issue that arose 10 out of the potential -- the concern over the 11 future viability of USAT? 12 A. I think that's right. 13 Q. And you indicated that you thought that 14 Mr. Crow and yourself had discussed this concept 15 prior to it being implemented by the board? 16 A. Well, only because I remembered it from 17 my deposition. Actually, I had not remembered 18 until I saw there that I sent a memo to Mr. Crow. 19 Q. I see. Have you recently had an 20 opportunity to review your deposition? 21 A. I have not looked at my deposition. 22 Q. Have you had an opportunity to look at 18650 1 the attachments to the deposition in preparation 2 for the hearing here today? 3 A. I've looked at hundreds of documents. 4 Q. I see. Would you take a look at 5 Exhibit T8023? I think it's a few documents back 6 in your book. And I believe the tab number is 7 408. 8 Do you see that document? 9 A. Yes. 10 Q. Is that something you prepared? 11 A. Yes, it is. 12 Q. Now, I notice that you prepared it the 13 day following the October 29th, 1987 memorandum in 14 which you noted that "It appears as if USAT will 15 fail to meet its minimum regulatory net worth at 16 October 31st, 1987." 17 Do you see that? 18 A. Yes. 19 Q. Does that refresh your recollection 20 that one of the factors for writing this 21 memorandum was that you were concerned about 22 USAT's potential net worth failure and that you 18651 1 wanted to limit the expenditures that they were 2 incurring at that time? 3 A. Again, one of the concerns I had was 4 just a question of fairness; but that wasn't -- I 5 mean, the board -- when the board adopted this 6 proposal, it was for a different reason, I 7 believe. 8 Q. Well, let's take a look at your memo. 9 Do you recall this as something that 10 you drafted? 11 A. Yes. 12 Q. Okay. And the cover memo is to 13 Mike Crow and says, "Attached is a draft 14 memorandum which I propose to send to Jenard and 15 Barry. Please review it and give me your thoughts 16 on the substance and form." 17 And then attached to that is a memo 18 that's entitled -- bears the same date and it's 19 entitled "senior officer salary increases." And 20 in the upper right-hand corner, it has the word 21 "draft." 22 Do you see that? 18652 1 A. Yes. 2 Q. Was this memo ever reduced to a final 3 form and forwarded to Mr. Gross and Mr. Munitz? 4 A. I don't know. 5 Q. Now, it begins by saying "In connection 6 with the discussions had by a number of the senior 7 management, it was decided that we would recommend 8 that no person with the title first vice president 9 or above receive any salary increase at this 10 time." 11 Do you see that? 12 A. Yes. 13 Q. It says, "we believe" -- it's in the 14 second full paragraph -- "that a salary increase 15 for the senior people at this time is 16 inappropriate." 17 Do you see that? 18 A. Yes. 19 Q. What do you mean it was inappropriate 20 to increase the salaries of USAT employees at this 21 point in time? 22 A. I don't remember what I meant at that 18653 1 time. I mean, I think -- obviously, I thought it 2 was inappropriate. 3 Q. And the proposal goes on and says, 4 "However, we would like to suggest that all such 5 persons be reviewed and salary increases be given 6 where merited but that such increases not be paid 7 until such time as the association is profitable 8 or the board of directors determines to make such 9 payments." 10 Do you see that? 11 A. Yes, sir. 12 Q. Does that refresh your recollection 13 that one of the considerations for recommending 14 that salaries not be increased at this time was 15 the fact that USAT was not profitable? 16 A. I think it speaks for itself, yeah. I 17 mean, again, I'm trying to recollect something 18 that I truthfully didn't remember until you showed 19 it to me at my deposition, and I think it just 20 speaks for what it says. 21 Q. Well, as a member of the executive 22 management at USAT, weren't you concerned about 18654 1 the losses that the institution had been 2 incurring? 3 A. Yes. 4 Q. And as their chief counsel, weren't you 5 concerned about the appropriateness of granting a 6 salary increase at a point in time when the 7 institution was losing money and potentially 8 failing its net worth obligation? 9 A. This is not saying we shouldn't 10 grant -- it's just saying we should defer the 11 payment of the salary increases, that's correct. 12 Q. And it also says that they not be paid 13 unless USAT was profitable. 14 Do you see that? 15 A. Well -- 16 Q. Or the board of directors determines 17 otherwise? 18 A. Right. 19 Q. But the touch phrase there is 20 "profitability," isn't it? 21 A. That or the board of directors 22 determining that -- to make the payments, yes. 18655 1 Q. And isn't it, in fact, true that you 2 thought it was inappropriate to give a raise at 3 that time because USAT was not profitable and was 4 failing its net worth requirement? 5 A. I think I thought it was inappropriate 6 to pay a salary increase at that time until the 7 board determined that it was appropriate to pay 8 those salary increases. 9 Q. And that's because USAT wasn't 10 profitable, correct? 11 A. I'm not sure that USAT wasn't 12 profitable; but I think that may be correct, yes. 13 Q. Well, I thought we just saw the 1987 14 annual report for UFG; and I thought it said that 15 UFG showed losses of $117 plus million for the 16 year 1987? 17 A. That was done months after this. 18 Q. And it's your recollection that on 19 October 30th, UFGI -- I mean USAT was still 20 profitable? 21 A. And I'm saying I didn't -- I don't have 22 a specific recollection. I do not believe it was 18656 1 profitable at that time. 2 Q. Okay. Do you remember I showed you 3 8024, the next document? 4 A. Yes. 5 Q. And that's a consolidated statement of 6 operations for October 31st, 1987. And it shows 7 that -- 8 MR. EISENHART: Your Honor, may we know 9 the tab number on that? Our documents are not 10 organized the way his are. 11 MR. RINALDI: T8024, and I believe it 12 is at Tab 398. 13 Q. (BY MR. RINALDI) And that indicates 14 that as of October 31st, USAT -- or UFG was 15 showing net income for 1987 of negative 16 $101 million. 17 Do you see that? 18 A. Yes, sir. 19 Q. Does that refresh your recollection 20 that when you wrote this memo, you believed it was 21 inappropriate for USAT to pay salary increases 22 because it was not operating profitably and was 18657 1 failing or approaching the failure of its minimum 2 capital requirement? 3 A. I think you're confusing a lot of 4 issues. Again, I think it was not operating 5 profitably; and I did think it was inappropriate 6 to pay a salary increase. 7 Q. Okay. Now, did Mister -- and then you 8 go on and you talk about creating a phantom 9 account. 10 Do you remember what that's all about? 11 A. Yes, I do. 12 Q. Okay. Can you just describe what the, 13 quote, "phantom account" referred to? 14 A. Well, again, the thrust of the memo is 15 not that people don't get salary increases. It's 16 that they don't get paid their salary increase. 17 And the phantom account was you would figure out 18 what their increase was going to be and at the 19 time that the board or somebody determined it was 20 appropriate to pay it, you would know how much 21 these people got paid. 22 Q. And once again, you indicate that 18658 1 whether someone gets paid out of the phantom 2 account will turn on the question of profitability 3 or if the board determines otherwise? 4 A. Right. 5 Q. Okay. So, was it your intent in making 6 this proposal to set aside salary increases but 7 not to pay them until such time as the institution 8 was profitable? 9 A. Or the board in its business judgment 10 decided that that was the right thing to do. That 11 was the intent of this memo, yes. 12 Q. And you felt that at that point in 13 time, it was inappropriate, when the institution 14 was not profitable, to pay those salary increases, 15 didn't you? 16 A. That's one of the factors that the 17 board would have to look at, would be the 18 institution's profitability, yes. 19 Q. Now, let's look at the first page of 20 the memorandum. There is a handwritten note 21 there, and I'm wondering: Do you recognize the 22 handwriting? 18659 1 A. Yes, I do. 2 Q. Okay. And whose is that? 3 A. Mike Crow. 4 Q. Okay. And it says, "Art, my opinion is 5 that we should do nothing and wait until 6/30/88. 6 If at that time things look bleak, we pass on 7 raises. But if they don't, we get raises. 8 M. Crow." 9 Do you see that? 10 A. Yes, I do. 11 Q. Okay. So, Mr. Crow didn't fully concur 12 in your proposal that's contained in the 13 attachment, did he? 14 A. I don't understand what this is saying. 15 I don't -- you can read it one of two ways. 16 Q. Well, what are the two ways you can 17 read it? 18 A. That he's agreeing that we do nothing, 19 we don't pay salary increases, and we wait until 20 June 30. 21 Q. And he says "If things look bleak, we 22 pass on raises," correct? 18660 1 A. Right. So, we -- my view was -- that's 2 right. You wait until June 30 and if at that time 3 things look bleak, we don't pay the raises. 4 Q. So, if USAT wasn't profitable and 5 continued to be unprofitable, it was Mr. Crow's 6 view that no raises should be paid? 7 A. Like I said, you can read this two 8 ways. So, I'm not sure -- 9 Q. What's the second way? 10 A. Well, the second way is to say he 11 doesn't buy into my proposal and that we wait 12 until June 30th to decide if we give raises or 13 not. I don't know what he meant. As I look at it 14 now, I do not know what he meant. 15 Q. He wasn't buying into the phantom 16 account, was he? 17 A. What I'm saying is as I read this now, 18 I don't know what he meant. I'm sure I knew what 19 he meant back then, but I don't know what he meant 20 as I read this now. 21 Q. Well, if reading it now you can't tell 22 what he meant, how could you know back then? I 18661 1 mean, did you discuss it with him? 2 A. Yes. I probably called him up and 3 asked him. 4 Q. Did the board thereafter meet and 5 consider the question of whether it was 6 appropriate to increase salaries as of the end of 7 1987? 8 A. Yes, it did. 9 Q. And do you recall what action the board 10 took at that time? 11 A. Yes, I do. 12 Q. And what was that action, sir? 13 A. The board decided not to pay increases 14 at that time, salary increases. 15 Q. Okay. Is it fair to say, then, that 16 the board agreed with you that it was 17 inappropriate at that point in time to give salary 18 increases? 19 A. Again, my recollection is that the 20 board made its decision based on wanting to get 21 everybody on the same date. 22 Q. Okay. Let's take a look at the -- at 18662 1 Exhibit T8028, and this is the minutes of the 2 board of directors of United Savings Association 3 of Texas dated November 10th, 1987. And it should 4 be Tab No. 397. 5 Do you have that document in front of 6 you, sir? 7 A. Yes, I do. 8 Q. Now, if you turn to the second page of 9 that document, it talks about Mr. Whatley in the 10 second full paragraph and that he discusses a 11 proposal to review all salaries as of July '88 for 12 all employees. 13 Do you see that? 14 A. Yes, sir. 15 Q. And that was unanimously approved. 16 So, is that the action of the board at 17 which they agreed to defer salary increases for -- 18 until July 1988? 19 A. Yes. 20 Q. Okay. And at that same point in time, 21 did they also take up the question of 1987 bonuses 22 that would be paid in 1988? 18663 1 A. Yes. 2 Q. And do you recall what resolution they 3 made with respect to those bonuses? 4 A. Yes, I do. 5 Q. And what was that? 6 A. That the bonuses should be paid. 7 Q. And do you recall the amount that the 8 bonuses would entail? 9 A. No, I don't. 10 Q. It indicates in the minutes that the 11 bonuses were going to approximately 70 people and 12 that the total amount would be less than 13 $2 million. 14 Do you see that? 15 A. Yes, sir. 16 Q. Did you participate in any way in the 17 decision as to how bonuses were allocated between 18 the members of executive -- I mean the employees 19 of USAT? 20 A. No, I did not. 21 Q. I take it that you would have had input 22 with respect to any employees that you supervised? 18664 1 A. Yes. The employees I supervised, I 2 would have had some input. 3 Q. But with respect to the allocation of 4 bonuses among executive -- senior executives of 5 USAT, you wouldn't have participated in that? 6 A. No, sir. 7 Q. Now, in Paragraph 6 -- I'm sorry -- 8 Paragraph 4 of the minutes which we've been just 9 looking at on Page 2, it says, "Mr. Silverman, a 10 member of the compensation committee, said that 11 the bonuses were attempts to achieve market-based 12 compensation." 13 Do you see that? 14 A. Yes, sir. 15 Q. Do you know what he meant by that? 16 A. I think I do. 17 Q. Okay. And what do you think he meant 18 by that? 19 A. United had a philosophy that said 20 that -- when they hired people, as opposed to most 21 companies where you had a base salary which was 22 fairly close to what your real salary would be 18665 1 with small bonuses, United's view was to try to 2 have lower base salaries and higher bonuses. The 3 view was they would be treated like an investment 4 banking firm or Wall Street brokerage firm so that 5 in reality, your base salary and your bonus was 6 really pretty close to what you would be -- what 7 your base salary would be in any other institution 8 or any other job. So -- 9 Q. And what -- I'm sorry? 10 A. That's what I think he meant. 11 Q. And on what did they base the 12 determination of the bonus amount? 13 A. I think they -- I don't know exactly, 14 but I think they looked at comparable companies 15 and merit. 16 Q. Well, was it a performance-based 17 system? I mean, if a person did well, did they 18 get a bigger bonus; and if they didn't do so well, 19 did they get a lesser bonus? 20 A. I believe so. 21 Q. And if the institution did well, did 22 they get a bigger bonus? 18666 1 A. I'm not sure that that's necessarily 2 true. 3 Q. If the institution didn't do well, did 4 they get a smaller bonus? 5 A. Again, it's a question of whether or 6 not it did relatively worse or relatively better 7 at this time in United. 8 Q. Well, did you understand that bonuses 9 were based upon performance at United? 10 A. I believe that's true. 11 Q. So, if performance wasn't so hot, the 12 bonuses would be correspondingly small? 13 MR. VILLA: Excuse me. Did you say 14 performance of United or performance at United? 15 MR. RINALDI: Performance of United. 16 MR. VILLA: Oh. I think the 17 question -- I suggest that the question, the 18 context, was at United, suggesting the performance 19 of the employee rather than performance of the 20 institution. 21 THE COURT: All right. Why don't you 22 restate your question. 18667 1 Q. (BY MR. RINALDI) Okay. At United, 2 were bonuses performance-based? 3 A. Yes. 4 Q. And was one of the criteria with 5 respect to the bonuses paid to the senior 6 executive staff the performance of USAT? 7 A. I don't know. I wasn't on that 8 committee. It's certainly possible. 9 Q. Did you consider yourself to be a 10 member USAT's senior executive staff? 11 A. Yes, I did. 12 Q. And how did you understand your bonus 13 was based? 14 A. On my performance and market salaries 15 for people doing comparable jobs. 16 Q. Did you understand it was also based 17 upon the performance of USAT? 18 A. I think that that was an element in it, 19 yeah. 20 Q. So, if USAT had a year where it didn't 21 earn -- earned lots of money, your bonus might be 22 larger? 18668 1 A. I would think that that's probably 2 true. 3 Q. And conversely, if it had a year where 4 it didn't do so well, the bonus might be 5 correspondingly small? 6 A. I think that that's correct. 7 Q. Okay. Now, you indicated that -- this 8 all started with the idea of achieving a 9 market-based compensation. 10 Did United have a -- do a periodic 11 review of compensation in the industry as being 12 paid by its competitors? 13 A. I don't know. 14 Q. You never saw it? 15 A. I never saw -- well, no. Periodic, I 16 never saw that. 17 Q. Well, let me ask you this: Prior to 18 1988, did you ever see any market-based 19 compensation study done by or for United? 20 A. I didn't see one. 21 Q. So that you're unaware of whether any 22 market-based compensation studies were done in 18669 1 order for United to gauge the size of bonuses or 2 salary increases? 3 A. Yes. I'm unaware of that. 4 Q. Okay. Who would know about that? 5 A. I don't know. Maybe Mr. Silverman, 6 Mr. Whatley. 7 Q. How about Barry Munitz? 8 A. He might. 9 Q. Jenard Gross? 10 A. He might. 11 Q. Would you expect Mike Crow to know 12 something about that? 13 A. No. 14 Q. Now, at the time -- this is 15 November 10th -- that the salary -- I mean, the 16 salaries were deferred and the bonuses were 17 awarded -- strike that. 18 At the time of the board's action on 19 November the 10th, 1987, dealing with the bonuses 20 for 1987 that were awarded in 1988 and the 21 deferral of the salary increases, was the board 22 aware that you were projecting that USAT had 18670 1 failed its minimum capital requirement? 2 A. On November 10th? 3 Q. Yes. 4 A. I'm not sure -- that I was projecting? 5 Q. Yeah. 6 A. Probably not because I don't think -- I 7 don't think it had failed it as of November 10th. 8 Q. Well, let's take a look. Your memo was 9 dated October 29th, wasn't it? That's T8022. 10 That's your October 29th, 1987 memo. 11 A. Right. 12 Q. And it goes to Barry Munitz, 13 Jenard Gross, and Mike Crow, among others, 14 correct? 15 A. Yes. 16 Q. And then I notice when I turn back to 17 T8028, which is the minutes of the November 10, 18 1987 meeting -- that's Tab 397 -- that in the 19 fourth full paragraph of the minutes, it talks 20 about Michael Crow reviewing the financial 21 statement of the association. 22 Do you see that? 18671 1 A. Yes. 2 Q. Wouldn't Mr. Crow have advised the 3 board at that point in time of the financial 4 condition of USAT and that there was concern, as 5 reflected in your memo, that USAT may be failing 6 its net worth requirement? 7 A. Well, my memo was prior to the end of 8 the month. There was a stock market crash; and 9 then from the time of the stock market crash, the 10 market was fluctuating wildly. So, I was saying 11 it looks like it could happen; and it didn't 12 happen. 13 Q. Well, we looked at the 1987 annual 14 report. In effect, it said that the examiners had 15 concluded that it had happened at the end of 16 September as well as December 1987. 17 Do you recall that? 18 A. Yes, I do. 19 Q. And in addition to that, we looked at 20 the 1987 -- I mean October 1987 quarterly report 21 at which there was still a dispute between USAT 22 and the Federal Home Loan Bank Board as to whether 18672 1 there had been a net worth failure. 2 Do you recall that? 3 A. Yes, I do. 4 Q. And are -- is that information that 5 would have been available to the board at the time 6 they voted on the bonuses and the salary on 7 November 10th, 1987? 8 A. I'm sure it was. 9 Q. That's the kind of stuff that Mike Crow 10 always presented to the board, didn't he? 11 A. Yes, it is. 12 Q. Did the board ever ask you whether 13 there was any regulatory problem with them 14 awarding bonuses at or about the point in time 15 when USAT was failing or about to fail its minimum 16 capital requirement? 17 A. I don't believe so. I don't have a 18 recollection of that. 19 Q. And do you recall who was on the board 20 at this point in time? That is on November 10th, 21 1987. 22 A. Of which company? 18673 1 Q. November 10 -- 2 A. No. Which -- United Financial Group? 3 Q. USAT, we're talking about here, because 4 we've been talking about the salary increases that 5 were deferred by USAT and the bonuses that were 6 awarded by USAT. 7 A. The answer is no, I don't. I'd have to 8 look at who was on the board at that time. 9 Q. Let's see. Well, let me ask you this: 10 Was Mr. Gross on the board? 11 A. Yes. 12 Q. Oh, wait. I believe that if you look 13 at Exhibit B1741 and you turn to Page 7 -- 14 A. What was the number? 15 Q. That's this document. It's Tab 1130, 16 and it's the first document I gave you. Okay? 17 And if you take a look at Page 7 of 18 that, I think it lists the board members of United 19 Savings Association of Texas. 20 A. Yeah. That's -- this is done 21 September 9th. So, I don't know if all these 22 people were on the board on November 10th. 18674 1 Q. But you do recall that Mr. Gross was 2 still on the board? 3 A. Yes. 4 Q. Was Mr. Kozmetsky still there? 5 A. Well, the minutes reflect that he was 6 at the meeting; so, I assume he was on the board. 7 Q. And Barry Munitz was on the board? 8 A. Yes. 9 Q. And Mr. Whatley we know remained on the 10 board? 11 A. Right. 12 Q. So that the only ones in question are 13 Mr. Silverman -- 14 A. Well, Silverman is not in question 15 because he's referred to in the second page. 16 Q. Okay. And how about Mr. Keltner? 17 A. He was on the board. 18 Q. And how about, then, Mr. Sterling? 19 A. I don't know. 20 Q. So, Mr. Sterling would be the only one 21 that we're not sure of, correct? 22 A. Yes, sir. 18675 1 Q. And it indicates here that the board 2 unanimously approved the bonuses. 3 Do you see that? 4 A. Yes. 5 Q. Now, earlier, we saw that UFGI had 6 entered into a contract with you to pay you a 7 bonus for $70,000 a year. 8 Do you recall that? 9 A. Yes, sir. 10 Q. Now, was that bonus over and above the 11 bonus that you were going to receive from USAT -- 12 A. No. 13 Q. -- for 1987 to be paid in 1988? 14 A. No. 15 Q. So, in other words, USAT was going to 16 assume the obligation of UFGI under your 17 September 9th, 1987 contract to pay the bonus 18 amount? 19 A. Again, it was always -- it was always 20 assumed that USAT would be paying the salaries and 21 bonuses. 22 Q. Well, if USAT was paying the salaries 18676 1 and bonuses under the UFGI contract, what 2 obligation did UFGI have under the contract? 3 A. Severance payments. 4 Q. So, in other words, the only reason for 5 entering into that employment agreement was to put 6 into effect the severance provision that provided 7 for two years' annual severance. 8 Is that fair? 9 A. No, it's not fair. 10 Q. Well, if there was no obligation of 11 UFGI to pay the salary and there was no obligation 12 of UFGI to pay the bonus, what other obligation 13 did UFGI have under the September 9th, 1987 14 contract? 15 A. Well, there may have been an 16 obligation, if USAT wasn't around, for UFGI to pay 17 the salary and the bonus. And there were lots of 18 other obligations spelled out in the agreement. 19 Q. But the agreement makes it very clear, 20 both as to the bonus and the base salary, that 21 UFGI shall pay those? 22 A. Well, as I told you before, that's what 18677 1 the agreement says. 2 Q. Okay. And that was just a drafting 3 error? 4 A. Yeah. 5 Q. Now, ultimately, you received a bonus 6 in 1988 for your performance in 1987, did you not? 7 A. Yes, I did. 8 Q. Okay. And that was a bonus that was 9 approved by the board on November the 10th, 10 1988 -- '87? 11 A. Yes, sir. 12 Q. Okay. Now, let's take a look at the 13 bonuses that were actually paid. I have a couple 14 of questions I want to ask you about that. 15 If you'll look at Exhibit T8026, and I 16 believe that's Tab 410. 17 Do you have that, sir? 18 A. Yes, I do. 19 Q. Okay. Now, it indicates there that you 20 received a bonus of 114,000. 21 Is that consistent with your 22 recollection? 18678 1 A. I don't have a recollection, but I 2 assume that it's right. 3 Q. Okay. And then it also indicates that 4 Mr. Gross received a bonus of $235,000. 5 Do you see that? 6 A. Yes, sir. 7 Q. Now, in the column to the left, it 8 indicates the percentage or it indicates a 9 percentage. 10 Do you know what that percentage is? 11 A. I believe it's a percentage of base 12 salary. 13 Q. Okay. So, Mr. Gross was receiving an 14 80 percent of base salary bonus for 1987 to be 15 paid in 1988, correct? 16 A. Yes. 17 Q. Okay. Now, was Mr. Gross -- well, let 18 me ask you this: In terms of percentage, does 19 that appear to be -- well, I guess there's one 20 larger. 21 That's one of the largest percentages, 22 is it not? I think it's the second largest. 18679 1 There is an 85 and then an 80, correct? 2 A. Yes. 3 Q. And in terms of numbers, it's the 4 second largest bonus there, isn't it? 5 A. Hum. 6 Q. Isn't there one at the top for 326? 7 A. Yes, that's right. 8 Q. Now, was Mr. Gross among the board 9 members who voted to approve the bonuses? 10 A. I believe so. 11 Q. So, Mr. Gross voted to approve his own 12 bonus, didn't he? 13 A. He voted with the other board members, 14 yes, sir. 15 Q. And did that trouble you, that 16 Mr. Gross voted to approve an action from which he 17 was going to personally benefit from USAT? 18 A. Not particularly, no. 19 Q. You didn't think that that had the 20 appearance of a conflict of interest? 21 A. His interest -- his conflict of 22 interest was clearly known to the other board 18680 1 members. So, no, it didn't bother me at all. 2 Q. Did USAT have an ethics and conflict of 3 interest policy? 4 A. I believe we did. 5 Q. And, in fact, didn't that policy 6 prohibit Mr. Gross from taking any action or 7 voting on any matter from which he would 8 personally benefit financially? 9 A. I don't know. 10 Q. Who drafted that ethics and conflicts 11 policy? 12 A. It was drafted by outside counsel at 13 some point and sent by me. 14 Q. And it was given to you, you reviewed 15 it, and then did you circulate it? 16 A. That's my recollection. 17 Q. And, in fact, as part of the conflicts 18 and ethics policy, it expressly provided that 19 every employee had to read it; isn't that correct? 20 A. I believe so. 21 Q. Let's take a look at that. Take a look 22 at -- it's about the fourth exhibit in. It's 18681 1 Exhibit 8012, T8012. And it's Exhibit 393 -- 2 Tab 393. 3 Do you have that? 4 A. Yes, sir. 5 Q. And it's -- the cover memo is dated 6 January 13th, 1987. 7 Was this the first conflict of interest 8 policy that USAT had? 9 A. I don't recall. 10 Q. And did this policy apply to both USAT 11 and UFG? 12 A. Yes, it did. 13 Q. Now, it says, "I'd like you to 14 distribute to each employee a copy of the business 15 ethics and conflicts of interest policy which I 16 spoke about at the January 12th, 1987 staff 17 meeting." 18 And then on the next page, it says, "On 19 January 8th, 1987, the board of directors of 20 United Financial Group and USAT adopted a business 21 ethics and conflicts of interest policy." 22 Do you see that? 18682 1 A. Yes, sir. 2 Q. And Jenard Gross would have been the 3 chairman of the board of USAT at the time that 4 that conflicts of interest policy was adopted, 5 wouldn't he? 6 A. I believe he was, yes. 7 Q. And then there is attached to the memo 8 the policy. And was every person supposed to sign 9 and indicate that they had received the policy? 10 A. I believe that's correct. 11 Q. And were they supposed to indicate they 12 had read it? 13 A. Yes, sir. 14 Q. Did Mr. Gross send back a note 15 indicating that he had read it? 16 A. I don't have a specific recollection. 17 I'm sure he did. 18 Q. Now, was there an ethics committee that 19 was supposed to monitor this? 20 A. I think there was supposed to be. I'm 21 not sure that there ever was. 22 Q. Okay. And do you know who was supposed 18683 1 to serve on that committee? Take a look at 2 Paragraph 6.1 on Page 10. 3 Do you see that? 4 A. Yes, I do. 5 Q. So, it would have been the chairman of 6 the board of directors. That would have been 7 Jenard Gross? 8 A. Yes. 9 Q. And two other people, correct? 10 A. Two other directors, right. 11 Q. Was an ethics committee ever 12 established to select the other two people? 13 A. I don't believe so. 14 Q. Now, let's look at the conflicts of 15 interest policy. Now, take a look at Section 1.1. 16 It's "statement of policy." And it states there 17 that -- the second sentence, "Each person has a 18 fiduciary duty to act for the primary benefit of 19 the association in all matters conducted with his 20 or her office of employment." 21 And then it goes on and says, 22 "Accordingly, each director, officer, and employee 18684 1 of the association must conduct himself or herself 2 in such a manner as to avoid any actual or 3 apparent conflict between such person's personal 4 financial interest and the best interest of the 5 association and its depositors." 6 Do you see that? 7 A. Yes, sir. 8 Q. Do you think that Mr. Gross, by voting 9 as a member of the board of directors to approve a 10 bonus program whereby he was going to receive a 11 235,000-dollar bonus, acted with an apparent 12 conflict between his personal financial interest 13 and the interest of the association? 14 A. I'm sorry. Would you -- did I think 15 what? 16 Q. Do you think that by voting for a bonus 17 from which he personally benefited in the amount 18 of $235,000 that Mr. Gross had acted in a manner 19 of apparent conflict between his personal 20 financial interest and the interest of the 21 association? 22 A. I think it's irrelevant. The conflict 18685 1 was known, and it was unanimously approved by the 2 board. 3 Q. Okay. Look at 3.4B on Page 6. It 4 reads, "Directors, officers, and employees of the 5 association must exercise the greatest care to 6 excuse themselves from participating in any 7 association activity or decision affecting any 8 financial interest of such person." 9 Do you see that? 10 A. Yes, I do. 11 Q. Do you think that Mr. Gross, by voting 12 as a member of the board to approve a bonus 13 program from which he received a personal benefit 14 of $235,000, exercised the greatest care to excuse 15 himself from participating in USAT's decision 16 which affected his financial interest? 17 A. Again, I think it's just irrelevant. 18 The board unanimously approving it, something was 19 relevant. 20 Q. So, in other words, even though you had 21 adopted this conflicts of interest policy, they 22 were only applicable if a person thought they were 18686 1 relevant to the activity he was engaging in? 2 A. I'm saying I think at this point in 3 time, it was irrelevant whether he absented or 4 didn't absent himself. It was unanimously 5 approved by the board, and they knew what his 6 position was. 7 Q. Well, apart from whether it was 8 relevant or irrelevant, my question to you is: 9 Does it appear that he excused himself from 10 participating in a decision that affected his 11 financial interest? 12 A. No, he did not. 13 Q. And that would have been contrary to 14 Paragraph 3.4B of the ethics policy, correct? 15 A. Yes, sir. 16 Q. And it would have also been contrary to 17 the general statement of policy that appears in 18 Paragraph 1.1 of that policy, would it not? 19 A. It's possible. I'm not sure that it's 20 contrary to 1.1. 21 Q. And then Paragraph 4.8 states, at 22 Page 10, "All directors, officers, employees, and 18687 1 affiliated persons of the association have a 2 fundamental duty to avoid placing themselves in a 3 position which creates or which leads to or could 4 lead to a conflict of interest or appearance of a 5 conflict of interest. References made to 6 Section 571.7 of the regulations and Federal Home 7 Loan Bank Board memorandum R19A in Appendix A 8 hereof." 9 Do you see that? 10 A. Yes, sir. 11 Q. Did Mr. Gross, by approving a bonus 12 program from which he benefited by the payment of 13 a bonus of $235,000, engage in a conflict or the 14 appearance of a conflict of interest which was 15 contrary to the provision of Paragraph 4.8? 16 A. Well, first of all, he didn't set the 17 bonus. The bonus was set by the compensation 18 committee of which he wasn't a member. All he did 19 was vote to approve their report. 20 Q. You're telling me that Mr. Gross had no 21 role in setting bonuses? 22 A. For himself? 18688 1 Q. Uh-huh. 2 A. I don't know if he did or not. I don't 3 believe he did. 4 Q. I see. 5 Now, was Mr. Munitz on the board that 6 approved that bonus program? 7 A. Yes, he was. 8 Q. Okay. Did Mr. Munitz play any role in 9 approving the bonuses? 10 A. I don't believe he did anything in 11 approving his bonus. 12 Q. Well, how were the bonuses approved? 13 A. Well, the compensation committee set 14 the bonuses. And I don't believe Dr. Munitz was 15 on the compensation committee. And then the board 16 approved their action. 17 Q. And did Mr. Munitz make recommendations 18 to the compensation committee as to the level of 19 bonuses? 20 A. I think he made recommendations for a 21 lot of people. I don't believe he made 22 recommendations -- at least, I don't know if he 18689 1 made a recommendation -- I don't think he made a 2 recommendation for himself. 3 Q. How about Mr. Gross? Did he make 4 recommendations for bonuses? 5 A. I believe he made recommendations for 6 bonuses, but not for himself. 7 Q. Let's move along. 8 Now, following the implementation of 9 the -- or following the approval of the bonuses, 10 you received a bonus in January of 1988, did you 11 not? 12 A. That's correct. 13 Q. And that was paid to you by USAT out of 14 its payroll account? 15 A. I believe that's right, although it -- 16 you know, at my deposition, I think it was you 17 that showed me that my W-2 was from UFG. But I 18 always thought it was from USAT. 19 Q. Okay. Well, let's just take a real 20 quick look here. Look in the last book, Book 21 No. 3, and turn to the last document in Book 22 No. 3. I think that you will find on Page 9 of 18690 1 that document -- 2 MR. VILLA: Sir, you have to give us 3 tab numbers. 4 MR. RINALDI: It's T8034, and it's 5 Tab 479. 6 Q. (BY MR. RINALDI) And I think if 7 you'll take a look at Page 10 -- 8 A. Excuse me. I think I'm confused. 9 Where are we? 479? 10 Q. Yes. And you'll see that there are 11 Bates stamps on this. And if you take a look at 12 Page 9 and then on to Page 10, do you recognize 13 that? 14 A. Yes. 15 Q. Does that appear to be a check paid in 16 the amount of -- well, in the amount of $81,436.50 17 to you on January 4th, 1988, from United Savings 18 Association of Texas? 19 A. Yes. 20 Q. And if you look at the stub on the 21 left-hand side, it shows that that is a bonus of 22 $114,000. And the net amount of 81,000 is after 18691 1 taxes, correct? 2 A. Yes, sir. 3 Q. Now, does that refresh your 4 recollection that the bonus you received was paid 5 by USAT? 6 A. Well, as I said, I always thought it 7 was paid by USAT until you showed me my W-2 which 8 said it was UFG. So, yes, it does. 9 Q. Now -- so that included in this 10 114,000 -- well, let me ask you this. 11 Your employment agreement with UFGI 12 that you entered into on September the 9th, 1987, 13 had a bonus provision of $70,000, correct? 14 A. That was a minimum bonus of 70,000. 15 Q. Okay. Now, how was it that you got 16 from the 70,000-dollar minimum bonus to the 17 114,000? 18 A. That's what the compensation committee 19 granted me. 20 Q. I see. And they decided to give in 21 excess of the minimum bonuses at a point in time 22 when USAT was failing its capital requirement; is 18692 1 that correct? 2 A. Well, again, in November, I'm not sure 3 that they felt it was failing. But yes, it was 4 their decision. 5 Q. Well, they knew there was a problem, 6 didn't they? 7 A. They knew there was a problem, yes. 8 Q. And they knew the payments weren't 9 going to be made until after January, didn't they? 10 A. That's correct. 11 Q. All right. And, in fact, if you take a 12 look at the compensation committee minutes, they 13 even expressed a concern about that and said -- 14 let's take a look at those compensation minutes. 15 And this is 8027, and it would be Tab 409. And 16 it's the minutes of the compensation committee 17 dated November 10th, 1987. 18 And look at the last full paragraph, 19 the last full sentence. It says, "It was noted 20 that such bonuses would not be paid until 21 January '88 and, therefore, no announcement would 22 be made of the bonuses so that in event there were 18693 1 intervening circumstances, they could be taken 2 into consideration at a further meeting." 3 Do you see that? 4 A. Yes, sir. 5 Q. Do you know what they meant by that? 6 A. I can read it. I assume in case 7 something happened between November 10th and 8 January, they would take -- could take that into 9 consideration. 10 Q. You were the secretary of the 11 compensation committee, weren't you? 12 A. I believe that's right. 13 Q. Yeah. And you wrote these minutes, 14 didn't you? 15 A. Yes, sir. 16 Q. And in the first full sentence of that 17 paragraph, it says, "The committee then reviewed 18 all of the other recommended bonuses. They 19 considered the operations of United and the fact 20 that the association was having an operating 21 loss." 22 Do you see that? 18694 1 A. Yes, sir. 2 Q. Was it the committee's intent not to 3 announce the bonuses so that they could consider 4 whether the financial condition of USAT would 5 warrant such bonuses at the end of the year? 6 A. Again, I think there the decision was 7 to -- they would look at anything that took place 8 to see if that would make them change their mind. 9 Q. And I think we're all in agreement that 10 the financial condition of USAT continued to go 11 downhill after November the 10th, 1987, didn't it? 12 A. I think it did. I'm not sure between 13 November 10 and December 31, but I think it did. 14 Q. Well, you had some question as to 15 whether they had violated their minimum capital 16 requirements on October 31st, although you were 17 projecting it. But we know that by December 31st, 18 1987, they, in fact, had failed their minimum 19 capital requirements and that the board agreed 20 with that? 21 A. I don't think that's totally correct. 22 At least, that's not my total recollection of 18695 1 that. 2 Q. Okay. Now -- but we can agree that as 3 of December 31st, 1987, UFG was failing its 4 minimum net worth requirement and that the board 5 concurred in that assessment and that's what you 6 put into the proxy statement, did you not? 7 A. Right, but I think -- 8 Q. I mean the annual report. 9 A. Right. But I think that the decision 10 actually took place -- the recognition of that 11 took place after December 31. 12 Q. Okay. But the knowledge that you were 13 approaching that and it was likely to be -- there 14 was likely to be a capital violation had been 15 known for some time. I mean, we talked about 16 projecting it as far back as April and May of 17 1987, didn't we? 18 A. That's correct. If things didn't get 19 better, sooner or later we would go below minimum 20 regulatory net worth. 21 Q. And the board was told that by Mr. Crow 22 and was very much aware of that? 18696 1 A. I believe so. 2 Q. And that included Mr. Munitz, and that 3 included Mr. Gross? 4 A. Dr. Munitz, yes, that's correct. 5 Q. And that included yourself because you 6 attended all the board meetings? 7 A. Yes. 8 Q. And that included Mr. Crow because he 9 was the one that presented all the financial data 10 to the board at each of the board meetings? 11 A. I believe so. 12 Q. Now, after December 31st, 1987, did 13 there come a time when USAT determined that it was 14 going to enter into employment contracts? 15 A. Yes. 16 Q. Now, tell me what you recall of that. 17 A. Oh, somewhere in the early part of 1988 18 there was concern that -- the purpose of the 19 contract was to try to keep this group of senior 20 executives at United so that -- because United, we 21 were told, was going to be a survivor association. 22 So, the purpose of the contracts was to try to 18697 1 keep them there. 2 At the beginning of 1988, there was a 3 concern that at some point in the future, United 4 Financial Group might not be around or might not 5 be able to pay the contracts. 6 So, there was some discussion and a 7 decision was made to have a backup agreement that 8 in the event United Financial Group wasn't able to 9 satisfy the contract, there would be a backup 10 contract for United Savings. 11 Q. And as a consequence of that, a 12 decision was ultimately made to enter into 13 employment contracts with -- between the same 14 executives that had entered into contracts with 15 UFG to now enter into contracts with USAT? 16 A. Well, to be -- they would be contracts 17 that would become effective if UFGI couldn't pay 18 or couldn't perform under its contract, that's 19 correct. 20 Q. Now, let me just see if I've got this 21 straight. 22 In September of 1987, there was concern 18698 1 that USAT might not be viable. And that's what 2 you state in the second paragraph of T8054, I 3 believe. 4 Do you see T8054? That's your 5 memorandum which has been previously admitted at 6 Tab 403. And that's the memo that you wrote. It 7 has the words "privileged and confidential 8 attorney work product" on the top. 9 A. Yes, sir. 10 MR. VILLA: You know, in fairness, we 11 ought to allow the witness to read it because I 12 don't think the characterization is accurate about 13 what's in the second paragraph. 14 MR. RINALDI: I'm sorry. Is there some 15 part of what I said that wasn't a proper 16 characterization? 17 MR. VILLA: I thought you said that the 18 concern expressed in the second paragraph was that 19 there was a concern about the viability of UFG. 20 And, in fact, the paragraph says UFG and the 21 association and mentions, several times, the 22 association, as well. 18699 1 MR. RINALDI: I said USAT; but if I 2 said UFG, I apologize. 3 THE COURT: Isn't the association USAT? 4 MR. RINALDI: Correct. 5 Q. (BY MR. RINALDI) And in the second 6 paragraph of this document, it says that "The UFG 7 contracts arose out of a concern for the ongoing 8 viability of the association." 9 Do you see that? 10 A. Yes. 11 Q. Okay. 12 A. Well, it says they were concerned with 13 both. And then it says they discussed their 14 concern about the viability of the association, 15 yes. 16 Q. And because there was concern that the 17 association might not be able to pay salaries, the 18 solution was to enter into a contract with the 19 holding company, UFGI, correct? 20 A. Well, there was an ongoing concern to 21 keep these employees at the association. And this 22 was a way to keep them at the association, that's 18700 1 correct. 2 Q. Okay. But the concern that gave rise 3 to this was people thought there might be a 4 question of USAT's future viability? 5 A. Right. But there are two sides to the 6 concern. There is a concern on the employee's 7 side as to viability. There is a concern on the 8 association and UFGI's side to keep these people 9 here. 10 Q. Okay. But my point is now, after a 11 passage of about three or four months, on Page 3 12 of T8054 you indicate that -- 13 A. Hold on. 8054? 14 Q. Yes. I'm sorry. I thought you had it 15 in front of you. 8054. There we go. I should 16 have got you an extra copy. 17 A. The same memo? 18 Q. Oh, yeah. It's the same memo. 19 A. Okay. 20 Q. Nothing new. 21 A. Sorry. 22 Q. Now, directing your attention to Page 18701 1 3, the second full paragraph, it starts out, "In 2 January 1988, the senior executive officers became 3 concerned over UFGI's viability." 4 Do you see that? 5 A. That's correct. 6 Q. "It appeared at that time as if the 7 debts of UFGI would not be repaid since it was 8 possible UFGI would have to put all of its equity 9 into USAT." 10 What were they referring to there? 11 A. Well, what I was referring to there was 12 the fact that there was a possibility that UFGI 13 would be required or would voluntarily put its -- 14 put equity down into USAT if it fell below minimum 15 requirements. 16 Q. And that's because UFGI had entered 17 into a net worth maintenance stipulation whereby 18 it agreed to maintain the net worth of USAT, 19 correct? 20 A. That's correct. 21 Q. And it was felt at that time that if 22 they had to make good on that stipulation, that 18702 1 there would be no money left at the UFGI level to 2 pay the UFGI employment contracts? 3 A. It was a possibility. That was -- that 4 was the concern. There was a possibility that 5 that would happen. 6 Q. And at this point in time, UFG wasn't 7 faring particularly well, was it? 8 A. UFG? 9 Q. Yes. 10 A. Well, it was faring the same as USAT. 11 Q. Well -- but in your memo, you indicate 12 that the debts were in excess of 55 million at a 13 time when UFG had assets other than its ownership 14 of USAT of approximately 35 million? 15 A. In cash, right. 16 Q. So, they had a negative 17 20-million-dollar balance there, didn't they? 18 A. Yes, that's correct. 19 Q. Okay. Then it goes on and says, "Since 20 USAT could not dividend additional cash to UFGI, 21 it appears as if over a long period of time, 22 unless there was a significant change in 18703 1 circumstance, UFGI would not be viable." 2 Do you see that? 3 A. Yes, sir. 4 Q. Why couldn't USAT dividend cash to 5 UFGI? 6 A. It needed its own cash. I mean, it was 7 rapidly going -- if not at this time, I guess it 8 was below its minimum regulatory net worth. There 9 was no conceivable way that it would be 10 dividending money out to the parent. 11 Q. And quite apart from that, there had 12 been a limitation placed upon it by the regulators 13 some years before whereby it could not dividend 14 cash under certain circumstances? 15 A. That's true. 16 Q. So, at this point, people were 17 concerned about whether their contracts with UFGI 18 were worth anything, weren't they? 19 A. That was a concern they had, yes. 20 Q. And so, it was recommended to the USAT 21 compensation committee that USAT should enter into 22 a backup contract. 18704 1 Now, what do you mean by a "backup 2 contract"? 3 A. A backup contract was that if UFGI 4 couldn't perform under its contract, then USAT's 5 contract would become effective and it would 6 perform. 7 Q. I guess I'm -- what bothers me is you 8 say in the sentence above that UFGI has 9 $55 million in liabilities or debts and only 10 $35 million in cash. And it also says that UFGI 11 might have to -- well, it says, "It appeared at 12 that time as if the debts of UFGI would not be 13 repaid since it was possible UFG would have to put 14 all of its equity into USAT." 15 Do you see that? 16 A. Yes, sir. 17 Q. So, there was very little likelihood 18 that UFGI was ever going to be able to pay its 19 contracts at that point in time, was there? 20 A. No, that's not true. 21 Q. Well, if UFGI had so much money and 22 could pay its contracts, why wasn't it paying the 18705 1 salaries and bonuses of the people that were 2 entitled to receive payments from UFGI under the 3 September 9th, 1987 contracts? 4 A. Well, as I explained to you, the salary 5 and bonuses were always paid by USAT. And it was 6 a drafting mistake in not noting that the salary 7 and bonuses would be paid by USAT unless it 8 couldn't pay it. 9 Q. And the compensation committee 10 unanimously approved this proposal; is that 11 correct? 12 A. Which proposal? 13 Q. The proposal that a backup contract be 14 approved. 15 A. Yes, sir. 16 Q. And that was then proposed to the board 17 of UFG -- I mean USAT? 18 A. Yes, sir. 19 Q. And was it approved? 20 A. Yes, it was. 21 Q. Now, at this point in time, were you on 22 the board of USAT? 18706 1 A. Yes, I was. 2 Q. Well, not at the point in time of the 3 memo. At the point in time when UFG -- USAT 4 approved the USAT contracts. 5 A. I believe I was, sure. 6 Q. Let's take a look at Tab 411, T8038, 7 and see if we can't clarify that. 8 A. 8038? 9 Q. Yeah. This is the minutes of the 10 compensation committee. 11 A. Okay. I have it. 12 Q. And I just -- now, the compensation 13 committee talks about, in the second full 14 paragraph, a corollary agreement. 15 Do you see that? 16 A. Yes. 17 Q. And is the corollary agreement the same 18 thing you've described as a backup? 19 A. Yes, sir. 20 Q. And in the line before that, it talks 21 about "It was noted that in view of the economic 22 situation of United Financial Group and the 18707 1 necessity of retaining senior executive officers 2 at United Savings Association of Texas, it was 3 appropriate for the employment contracts..." 4 Do you see that? 5 A. Yes. 6 Q. And that's the financial condition of 7 UFG we've just been talking about where people 8 were concerned that it would have to infuse 9 capital into USAT and would not be in a position 10 to make good on its contracts with the executive 11 officers? 12 A. Right. There was a concern that UFGI 13 wouldn't be able to perform. 14 Q. And then if you look at the next 15 page -- well, first of all, does that refresh your 16 recollection as to the persons who received 17 contracts from USAT -- I mean UFG in 18 September 1989, that list that appears in the 19 middle of T8038? 20 A. Yes, sir. 21 Q. And those were the same ones that were 22 given -- or the compensation committee proposed 18708 1 giving corollary agreements to from USAT? 2 A. Yes, sir. 3 Q. And now, if you turn to the next 4 document, that's T8039; and this is Tab 412. 5 These are the minutes of the United Savings 6 Association of Texas board of directors dated 7 February the 11th, 1988. 8 Now, in the first full -- I mean on the 9 fourth paragraph, Mr. Crow -- well, strike that. 10 In the first -- second paragraph, it 11 talks about Mr. Gross stating that he wanted to 12 welcome Mr. Berner and Mr. Schwartz to the board 13 of directors. 14 Do you see that? 15 A. Yes, sir, I do. 16 Q. Okay. So, does this fix, then, the 17 date upon which you became a member of the board 18 of USAT? 19 A. This doesn't. This is just the date of 20 the first meeting, but it was around this time 21 that I became a member of the board. 22 Q. So, in other words, what you're saying 18709 1 is you might have been on the board prior to that 2 but this would have been the first official 3 meeting? 4 A. That's correct. 5 Q. Okay. And in the fourth full 6 paragraph, Mr. Crow talks about the financial 7 statement of the association. And then he 8 reviewed in detail the regulatory compliance 9 schedule. 10 Do you see that? 11 A. Yes. 12 Q. Now, when you review the regulatory 13 compliance schedule, isn't one of the things you 14 look at is USAT's compliance with its minimum 15 capital requirements? 16 A. Right. 17 Q. Okay. So that at the beginning of the 18 meeting, Mr. Crow informed the members of the 19 board of directors of USAT about their capital 20 compliance or non-compliance. And we know now 21 that at that time they had failed their minimum 22 net worth capital? 18710 1 A. I'm not sure at this time that we knew 2 that because there was a change that took place 3 right around here. 4 Q. Why wouldn't you know that? 5 A. Well, my recollection is that at the 6 end of December, we thought that we had actually 7 not failed our minimum net worth because we were 8 expecting a capital -- based on the branch sale, 9 we were supposed to get a certain kind of capital 10 forbearance and then later on, we didn't get it. 11 I don't know if it was capital forbearance or 12 capital -- some sort of capital calculation. And 13 we didn't get it and that changed our results. 14 And that happened right around this time. 15 Q. Do you recall I showed you a copy of 16 the annual report of UFGI? 17 A. Yes, I do. 18 Q. Okay. And let's take a look at Page 39 19 of that. This is Exhibit No. -- Tab 402. It's 20 T8033, and we're looking at Page 39. 21 THE COURT: Excuse me. The page number 22 again? 18711 1 MR. RINALDI: 39, Your Honor. it's 2 Bates stamped H0701. 3 Q. (BY MR. RINALDI) This is the 4 auditor's report that's attached to the annual 5 report. 6 Do you have that, sir? 7 A. Yes, sir. 8 Q. Okay. Now, in the third paragraph of 9 the auditor's report, it indicates that USAT had 10 failed its capital requirement as of 11 December 31st, 1987. 12 Do you see that? 13 A. Yes, sir. 14 Q. And then it goes on and says, 15 "Accordingly, USAT filed a request for capital 16 forbearance with the Federal Home Loan Bank of 17 Dallas." 18 Do you see that? 19 A. Yes. 20 Q. And if you look at the bottom of that, 21 the auditor's report is dated February the 5th, 22 1988, correct? 18712 1 A. Yes, sir. 2 Q. So that as of February the 5th, you 3 would have been -- or Mr. Crow, at least, would 4 have been aware that USAT had failed its capital 5 requirement as of December 31st, 1987, correct? 6 A. I'm not sure that the -- the auditor's 7 report date is the date that they finished their 8 examination. 9 Q. So, you're telling me that the 10 auditors, when they are doing their audit 11 examinations, don't give you any kind of 12 indication as to where you stand on your 13 financials and that all of a sudden at some date 14 down the road they hand you an auditor's report 15 that gives you the bad news? 16 A. No, I'm not saying that at all. 17 Q. Yeah. And, in fact, Mr. Crow was in 18 daily contact with the auditors, wasn't he, in 19 connection with their audit of USAT? 20 A. I don't know if he was in daily 21 contact. He certainly was in contact with them. 22 Q. Right. And they kept him apprised of 18713 1 what their audit findings were? 2 A. Probably. I'm sure they did. 3 Q. And if they had any problems, they 4 certainly would have brought them to Mr. Crow's 5 attention, correct? 6 A. I'm sure that that's true. Either Crow 7 or somebody that worked for him. 8 Q. So, is it reasonable to assume that by 9 February the 11th, 1988, the board of USAT was 10 aware that USAT was failing its minimum capital 11 requirement? 12 A. Again, I'm not sure because, as I 13 mentioned before, I know that there was -- around 14 this time, there was a reversal based on not 15 getting something from the Federal Home Loan Bank 16 Board; so -- 17 THE COURT: We'll take a short recess. 18 19 (Whereupon, a short break was taken 20 from 3:03 p.m. to 3:24 p.m.) 21 22 THE COURT: Be seated, please. We'll 18714 1 be back on the record. 2 Mr. Berner, I may have cut you off in 3 your last answer in declaring a recess. 4 Were you about to say something? 5 THE WITNESS: Nothing that won't be 6 said lots of times again. 7 THE COURT: All right. Mr. Rinaldi, 8 you may continue. 9 Q. (BY MR. RINALDI) Mr. Berner, we were 10 talking about the financial condition of USAT on 11 February 11th, 1988. And I believe that was the 12 date on which the board approved the USAT 13 contracts. And I believe before the break, you 14 had indicated you weren't quite sure whether the 15 board or you, as a member of the board, were aware 16 of whether USAT had failed its net worth 17 requirement as of December 31st, 1987. 18 Do you recall that? 19 A. Right. At that point in time, I wasn't 20 sure if we were or we weren't. We either were 21 barely above it or below it. 22 Q. Okay. Now, take a look at Page 26. 18715 1 MR. EISENHART: Of? 2 MR. RINALDI: I'm sorry. 3 Q. (BY MR. RINALDI) The document we've 4 been looking at, which is Tab 412. It's the 5 minutes of February 11th -- 6 THE COURT: What's the exhibit number? 7 MR. RINALDI: It's Exhibit T8039. I 8 believe it's the exhibit we were looking at when 9 we broke. 10 THE COURT: Okay. 11 Q. (BY MR. RINALDI) And I would direct 12 your attention to Page 26 of that document and the 13 fourth full paragraph. Take a moment to read 14 that, Mr. Berner. 15 A. Is this the forbearance application 16 paragraph? 17 Q. Yes. 18 A. (Witness reviews the document.) Okay. 19 Q. Now, it indicates there that you 20 presented a draft of a forbearance application to 21 the board for consideration. 22 Do you see that? 18716 1 A. Yes, sir. 2 Q. Do you understand that a forbearance 3 application is normally not presented to the 4 Federal Home Loan Bank Board unless you are, in 5 fact, failing your minimum capital requirements? 6 A. I'm not sure that -- if I knew that at 7 the time. As I said, if we weren't failing it, we 8 were going to be failing it very shortly. 9 Q. Does that refresh your recollection 10 that, in fact, USAT was failing its net worth 11 requirement as of February 11th and that the board 12 was aware of that fact? 13 A. It doesn't, but it's very possible that 14 they were. 15 Q. Well, it's unlikely that you would have 16 presented a forbearance application if you hadn't 17 been failing your net worth requirement. 18 Is that fair? 19 A. If we weren't, in fact, at that time, 20 we knew that -- in a very short period of time, we 21 knew that we would be. 22 Q. Now, on the next page -- that's Page 27 18717 1 of Exhibit T8034 -- in the second paragraph, it 2 says that Mr. Berner discussed in detail the views 3 of the compensation committee concerning 4 employment contracts. 5 Do you see that? 6 A. Yes, sir. 7 Q. Were you a member of the compensation 8 committee at this time? 9 A. No, I was not. 10 Q. Why is it that you were reporting to 11 the board on the views of the compensation 12 committee? 13 A. I believe Jim Whatley asked me to do 14 it. 15 Q. Okay. And it goes on. And you 16 indicate there that it was noted that the 17 contracts were identical to the contracts entered 18 into by UFGI and would only be effective if UFGI 19 could not perform under such contracts. 20 Do you see that? 21 A. Yes, sir. 22 Q. And that's what you were saying before, 18718 1 that it was never the intention of USAT that they 2 would have any obligation to perform under these 3 contracts unless UFGI was unable to perform, 4 correct? 5 A. Yes, sir. 6 Q. Okay. Now, after you entered into 7 these contracts, who paid your salary? 8 A. I believe it was paid by USAT. 9 Q. So, in fact, USAT was performing under 10 the February 11th, 1988 contract, weren't they? 11 A. Again, USAT was always paying our 12 salary except for the first few months when UFGI 13 was. 14 Q. Well, your statement, though, that you 15 recorded and attributed to yourself at the board 16 of directors meeting on February 11th said that -- 17 it's referring to the USAT contracts -- that they 18 were only to become effective if UFGI could not 19 perform under such contracts, correct? 20 A. Yes, sir. 21 Q. Okay. And maybe what we should do is 22 take a look at one of those contracts and see what 18719 1 it provides. In fact, if you take a look at 2 Exhibit T8043, which is about four exhibits on -- 3 and I believe it's tab number -- 4 MR. VILLA: 413, sir. 5 Q. (BY MR. RINALDI) -- 413, does this 6 appear to be the contract that you prepared, 7 drafted, and executed with USAT? 8 A. Yes. 9 Q. Okay. And it makes reference to the 10 September 7th contract with UFG in the second full 11 paragraph, doesn't it? 12 A. September 9th, yes. 13 Q. Okay. And then it goes on, and it says 14 that the term of this agreement is going to be 15 through December 31st, '88, same as the UFG 16 contract in Paragraph 2 on Page 2, correct? 17 A. Yes. 18 Q. And the salary, on the next page in 19 Paragraph 5, is still $170,736. 20 Do you see that? 21 A. Yes, sir. 22 Q. So, the salary, the term, and even the 18720 1 bonus in the paragraph below at 70,000 is the same 2 as we saw in the September 9th, 1987 UFGI 3 contract, correct? 4 A. Yes, sir. 5 Q. And am I correct that if you look at 6 the provisions that relate to the severance, that 7 it would have a similar kind of severance 8 provision? 9 A. Yes, it would. 10 Q. Okay. And the only real difference 11 would appear on the last page of this document, 12 correct, and that's at Page 17, Paragraph 18E? 13 A. That's not true. 14 Q. Next-to-the-last page. I'm sorry. 15 A. No. There are other provisions 16 beginning on Page 16. 17 Q. I take that back. There are some other 18 differences, and those were incorporated in order 19 to -- because it was an insured depository 20 institution and there are certain regulations that 21 apply, correct? 22 A. That's correct. 18721 1 Q. Okay. But what I'm referring to is the 2 provision under Paragraph 18E where it states that 3 "The terms and conditions of this agreement shall 4 become effective if, but only if, UFG shall be 5 unable to comply with all the obligations and make 6 all of its payments as set forth in the UFGI 7 agreement," correct? 8 A. That's correct. 9 Q. Okay. Now, one of the obligations in 10 the UFGI agreement we talked about was the 11 obligation to pay you a 170,000-dollar salary, 12 correct? 13 A. Well, we've talked about it enough 14 times. As I said, USAT always paid our salary and 15 bonuses. 16 Q. So, in other words, when it says here 17 that this only becomes effective if UFG can't 18 perform, in fact, it became effective immediately 19 with respect to the payment of your salary, didn't 20 it? 21 A. Not the contract, no. 22 Q. Well, you were being paid $170,000 a 18722 1 year as a base salary in February of 1988? 2 A. I think that's right. I'm not sure. 3 Q. Okay. Now, pursuant to which contract 4 were you being paid the 170,000-dollar base 5 salary? 6 A. I think I was being paid pursuant to 7 the UFG contract but being paid by USAT. 8 Q. Okay. So, UFG was paying the 170,000 9 but USAT was actually assuming responsibility for 10 the payment of that 170,000? 11 A. Well, USAT always paid the salaries and 12 bonuses. And the UFG contracts, really, as I said 13 before, it was a drafting mistake to say that UFG 14 would be paying the salary and bonuses at that 15 time. 16 Q. So, then this Paragraph 18E where it 17 says "The terms and conditions of this agreement 18 shall become effective if, but only if, UFG shall 19 be unable to comply with all the obligations and 20 make all of its payments as set forth in the UFGI 21 agreement," that had to be qualified because it 22 didn't apply as to the base salary which USAT was 18723 1 paying or to the bonus that USAT was paying; isn't 2 that correct? 3 A. No. As I said, I think the salaries -- 4 this contract didn't become effective. USAT was 5 paying the salaries based on the other contract. 6 Q. So, USAT was paying the salaries for 7 UFGI that UFGI had contracted under its employment 8 contracts? 9 A. The employment contract, as I mentioned 10 before, USAT was always paying the bonuses and the 11 salaries. That was what they had paid before, and 12 the contract was not intended to change that. 13 Q. So, in Paragraph 18E when it says that 14 "The agreement shall become effective if, but only 15 if, UFG shall be unable to comply with all of its 16 obligations," the only obligation that it's 17 referring to is the obligation to pay the 18 severance payments; is that correct? 19 A. That's correct. There are other 20 obligations in this agreement, I think, other than 21 the severance; but that's correct. 22 Q. And this was just a drafting error? 18724 1 A. This wasn't a drafting error. 2 Q. Well, it says that USAT has no 3 obligations unless UFG is unable to perform. And 4 as we've seen, UFG wasn't performing in terms of 5 paying the base salary; isn't that correct? 6 A. UFG was certainly able to perform. UFG 7 was never going to be paying the base salary and 8 the bonus. That was always paid by USAT. 9 Q. So, then USAT was paying, then, under 10 this contract? 11 A. No. USAT was paying, but they weren't 12 paying under this contract. 13 Q. Now, so that I understand perfectly, 14 the UFG contract remained in effect on 15 September 9th, 1987, and UFGI was complying with 16 its obligation to pay you the 170,000-dollar 17 salary and a bonus of $70,000? 18 A. Yes. 19 Q. And the mechanism for that compliance 20 was to have the salary and the bonus paid by USAT? 21 A. Yes, sir. 22 Q. Okay. Now, when -- the minutes 18725 1 indicate that this contract was unanimously 2 approved by the board. That's Exhibit T8034. And 3 that's Tab 4 -- I mean 8039, and it's Tab 412. 4 It's the minutes of the February 11th, 1988 board 5 meeting of USAT. And you'll see in the third full 6 paragraph on Page 27, it says, "After a full 7 discussion, the resolutions were unanimously 8 adopted." 9 Do you see that? 10 A. Yes, sir. 11 Q. And you were a member of the board of 12 USAT at this point in time? 13 A. Yes, sir, I was. 14 Q. And among the people who received 15 contracts that are listed below was yourself? 16 A. Yes, sir. 17 Q. So, was it fair to say that as a 18 director of USAT, you voted to approve your own 19 employment contract with USAT on February 11th, 20 1988? 21 A. Yes, sir, it is. 22 Q. And at that point in time, USAT was 18726 1 failing its minimum net worth requirement? 2 A. As I say, if it wasn't, it was very 3 close to failing it, that is correct. 4 Q. And I don't want to go back over this 5 again. We've shown you the ethics and conflicts 6 of interest policy that was adopted by USAT and 7 UFG. 8 Did you believe that by entering 9 into -- I mean by approving your own employment 10 contract, you were engaging in any violation of 11 those provisions of that ethics policy that I've 12 read you? 13 A. I'm not sure that I would -- those were 14 foremost in my mind at all, but I don't think I 15 was violating anything. The situation was 16 well-known to the board, and it was unanimously 17 approved. And it would have been approved whether 18 I voted or not. 19 Q. Well, let me just ask you this: By 20 voting to approve your own contract, did you 21 participate in a decision affecting a financial 22 interest of yourself? 18727 1 A. Possibly, since these contracts 2 obviously don't become effective unless the other 3 ones are not effective. But certainly, it's 4 possible, yes. 5 Q. And that would have been contrary to 6 Paragraph 3.4B that we previously looked at of the 7 ethics policies of USAT? 8 A. Again, that possibly would have 9 violated that policy. 10 Q. Now, you say "possibly." And that's 11 because, in your view, the USAT contract did not 12 become effective unless UFG was unable to perform, 13 correct? 14 A. Well, that and also the fact that these 15 contracts were -- it was -- the compensation 16 committee was recommending the contracts. They 17 had the authority to approve the contracts 18 themselves. My vote was irrelevant. I just don't 19 think it's important. 20 Q. Wait a second. You just said something 21 that troubles me. 22 Are you telling me that the 18728 1 compensation committee had the authority to 2 approve the contracts without the approval of the 3 board? 4 A. Yes. 5 Q. Are you certain of that? 6 A. Yes. 7 Q. And was that part of the bylaws or 8 what? 9 A. It actually was part of resolutions 10 passed at this meeting. 11 Q. Let's take a look. 12 Were you a senior vice president? 13 A. Was I a senior vice president? 14 Q. Of USAT. 15 A. I think I was the executive 16 vice president. 17 Q. Is that higher than senior 18 vice president? 19 A. Yes. 20 Q. Okay. Take a look at Exhibit T8012, 21 which is the conflicts of interest and ethics -- 22 business ethics policy, and I would direct your 18729 1 attention -- 2 A. Hold on. 8012? 3 Q. Yes. T8012. 4 A. I have to find it. 5 Q. Tab 393. Do you have it, sir? 6 A. Yes, I do. 7 Q. Now, let's look at Page 5 and, in 8 particular, Paragraph 3.3C. It says, "All 9 employment contracts of persons assuming the title 10 of senior vice president or higher of the 11 association shall be approved by the association's 12 board of directors." 13 Do you see that? 14 A. Yes, I do. 15 Q. Does that refresh your recollection 16 that the compensation committee did not have the 17 authority to approve the contracts of senior 18 executives? 19 A. No, it doesn't. 20 Q. Had that provision been modified at 21 some time subsequent to January 13th, 1987, when 22 it was originally promulgated and approved? 18730 1 A. At this board meeting. 2 Q. Okay. And can you direct the Court to 3 where that appears? 4 A. It's on Page 3. 5 Q. Okay. And where on Page 3 does it say 6 that, sir? 7 A. There is a section that's entitled 8 "compensation committee." 9 Q. Uh-huh. 10 A. In the first "whereas". 11 Q. Yes. 12 A. It says -- do you want me to read this? 13 Q. Yes. 14 A. "It's the intention of the board of 15 directors of the association to have certain 16 matters relating to the compensation of the 17 association's executive employees and the 18 employees of its subsidiaries which would come 19 before the entire board of directors a lesser 20 number of directors constituting a committee with 21 the same effect as if acted on by the entire 22 board. Resolved, that a compensation committee of 18731 1 three directors is appointed to serve until their 2 successors are named and that the committee 3 appointed is James R. Whatley, chairman, Stephen 4 Silverman, Edgar H. Keltner, Jr." 5 Q. And it's your view that that general 6 provision overrides the specific provision of the 7 ethics and conflicts of interest policy which 8 requires that all employment contracts of persons 9 assuming the title of senior vice president or 10 higher of the association shall be approved by the 11 association's board of directors? 12 A. Absolutely. 13 Q. And do you see anywhere where it states 14 that the ethics committee requirement has been 15 altered or changed as a result of that general 16 provision? 17 A. It says that the committee acts as the 18 same as if acted on by the entire board. 19 Q. Does it say that with respect to all 20 compensation matters? 21 A. Certain matters relating to the 22 compensation. 18732 1 Q. Okay. And what were the certain 2 matters, sir? 3 A. Everything that would come before the 4 compensation committee. 5 Q. But it doesn't include employment 6 contracts, does it, because they were specifically 7 provided for under the ethics and conflicts of 8 interest provision, weren't they? 9 A. I don't agree with that. I think 10 you're wrong. 11 Q. And was it your understanding that the 12 compensation committee consisted of three 13 individuals? 14 A. At this time? 15 Q. Yes. 16 A. Yes. 17 Q. And to be validly constituent -- to be 18 a validly constituated -- if that's a word -- 19 compensation committee, did there have to be all 20 three people present? 21 A. I don't know. I'd have to look at the 22 committee, whatever the committee requirements 18733 1 are, whatever the bylaw requirements are. I don't 2 know. 3 Q. Well, let me ask you this: There came 4 a time, did there not, when Mr. Keltner and 5 Mr. Silverman resigned, didn't they? 6 A. Yes. 7 Q. So, there was only one member of the 8 compensation committee left, correct? 9 A. Yes. 10 Q. And as you read this provision, did 11 that permit a sole member of the compensation 12 committee to act on behalf of the entire board? 13 A. I think it did. 14 Q. You think it did? You're the chief 15 counsel of the institution. 16 Are you telling me that a single member 17 of the board could approve contracts, employment 18 contracts, with respect to USAT? 19 A. Yeah, I think so. 20 Q. But it says, "The compensation 21 committee has the authority," and then it says, 22 "the compensation committee of three directors is 18734 1 appointed to serve until their successors are 2 named." 3 Didn't it require that there be a 4 fully-constituted compensation committee in order 5 for the committee to act on behalf of the board? 6 A. I don't think so. 7 Q. Okay. So, what you're saying is that 8 it didn't matter whether you voted on your own 9 employment contract because the compensation 10 committee had already approved it and they had the 11 authority to act on behalf of the board? 12 A. I think that's correct. 13 Q. Well, if that's the case, why, on 14 February 11th, was the matter even presented to 15 the board? I mean, the compensation committee had 16 clearly already recommended it. 17 So, why did they even have to present 18 it to the board for the board to consider? 19 A. Well, part of the issue here was that 20 the compensation committee, at least granting the 21 authority here, takes place at this meeting. So, 22 since the compensation committee met before this 18735 1 meeting, I'm not sure that they had the authority 2 before this meeting. 3 Q. So then, the compensation committee 4 didn't have the authority to approve your 5 contract? 6 A. Well, I don't -- I don't know what the 7 prior -- I don't know if there was a prior 8 resolution on the compensation committee from 9 other years. 10 Q. Well, is it likely that there would 11 have been -- what you're saying is that the 12 resolution that appears on Page 2 -- is it Page 2? 13 No -- Page 3 regarding the compensation committee 14 you think may have been picked up in earlier 15 years? 16 A. I don't know. 17 Q. But is it fair to say that at the 18 meeting on February 11th, the board did consider 19 the employment contracts and that you, along with 20 the other members of the board, voted to approve 21 them? 22 A. Absolutely. 18736 1 Q. And one of the contracts that you voted 2 to approve was your own? 3 A. That's correct. 4 Q. Okay. Now, following the approval of 5 the contracts on February the 11th, did there come 6 a time when members of the USAT and/or UFG boards 7 resigned and triggered a change of control 8 provision in the UFG contracts? 9 A. Well, there came a time when directors 10 resigned. And there was an argument made by some 11 of the contracted people that triggered the 12 contract, the UFG contract. 13 Q. Okay. And when did this -- did these 14 resignations occur? Do you recall? 15 A. Well, they occurred all during 1987 and 16 through the beginning of March of 1988. 17 Q. And I think we've looked at the -- that 18 the change of control provision, you would go back 19 as far as 24 months to look at the resignations, 20 correct? 21 A. I think that's right, yeah. 22 Q. And so, following the February 11th 18737 1 board of directors meeting, were there additional 2 resignations from the board of UFG? 3 A. Yes. 4 Q. And who resigned? 5 A. From UFG? 6 Q. Uh-huh. 7 A. Oh, goodness. I don't have a list of 8 people here; but I know that subsequent to 9 February 11th, Silverman resigned, Keltner 10 resigned, and if Sterling was on, he resigned. 11 Q. And did Mr. Hurwitz also resign? 12 A. I think he resigned before. 13 Q. Okay. Now, you reduced -- discussed 14 this issue in the memorandum which we had 15 previously looked at, which is T8054 and it's 16 Tab 403. And that's the memorandum dated March 17 the 31st, 1988. I'd like you to take a look at 18 that again. 19 Okay. Now, the first full paragraph in 20 your memorandum, in fact, talks about an apparent 21 change of control in 1988. 22 Do you see that? 18738 1 A. Yes, sir. 2 Q. And this memorandum -- you indicate 3 it's privileged and confidential as attorney work 4 product. 5 What caused you to denominate this as 6 privileged and confidential attorney work product? 7 A. Well, these were my thoughts on what 8 was happening. And at this point in time, there 9 was a possibility that there would be a lawsuit 10 over these contracts. 11 Q. I see. 12 A. And I didn't want whoever might be 13 suing to get ahold of this. 14 Q. And when you denominated this as work 15 product, would this have been placed in any 16 special file? 17 A. I don't believe it was placed in a 18 special file. 19 Q. Is this the kind of thing you would 20 have made available to, say, the examination staff 21 of the Federal Home Loan Bank Board when they came 22 to examine USAT? 18739 1 A. It's possible. I don't recall one way 2 or the other. 3 Q. Okay. Now -- and this memorandum is -- 4 was drafted by you on March the 31st, 1988, for 5 the express purpose of discussing the apparent 6 change of control in 1988 and the revisions of 7 United's salary and bonus structure and related 8 matters; is that right? 9 A. Yes, sir. 10 Q. Now, directing your attention to the 11 second full page of this document, I believe it 12 starts to discuss at that point the change in 13 control or the apparent change in control that's 14 referenced in the first paragraph of Page 1. And 15 it talks about resignations of board members. 16 Do you see that? 17 A. Yes, sir. 18 Q. And does that identify which board 19 members had resigned that caused the triggering? 20 A. Yes, it does. 21 Q. And who were they? 22 A. Keltner, Borman, Silverman, Hurwitz, 18740 1 and Kozmetsky. 2 Q. Okay. Now, Mr. Hurwitz sat only on the 3 UFG board, correct? 4 A. Yes. 5 Q. Okay. So, this change of control had 6 occurred with respect to the UFG contracts, 7 correct? 8 A. Yes. 9 Q. Okay. And at that time, it indicates 10 that three new members were put on the board. 11 They were yourself, Mr. Crow, and Mr. Schwartz. 12 And we talked about that earlier, correct? 13 A. Yes, sir. 14 Q. Now, it says here that -- in the third 15 full paragraph -- "With the resignations and the 16 elections of the board, the change of control 17 provisions of the employment contracts appear to 18 trigger." 19 Do you see that? 20 A. Yes. 21 Q. Did you have some doubt in your mind as 22 to whether the change of control provision had 18741 1 actually been triggered under the UFGI contracts? 2 A. I didn't have any doubt that that's 3 what the language said. I certainly did not 4 believe that that was what the intent of the 5 agreement was. 6 Q. Okay. And in that regard, you discuss 7 below in that same paragraph what you believe the 8 intent of the agreement was. 9 Why didn't you think that that was the 10 intent of the agreement, sir? 11 A. Because in the agreements that I've 12 seen that deal with change of control -- and it's 13 not an unusual -- in fact, it's a very usual 14 paragraph -- it really is designed to deal with 15 situations where there are a new group of people 16 different from the old group of people that 17 actually are taking control of an organization or 18 corporation, and that's not what was happening 19 here. 20 Q. Okay. And you mean by that that the 21 people who were replacing the resigned directors 22 were the same people that had exercised control 18742 1 over UFGI prior to the resignation? 2 A. The people who were replacing them were 3 officers of the company. At least, two out of the 4 three of them were officers of the company who had 5 contracts and, in effect, because they were being 6 put on the board, they were triggering their own 7 contract. And I don't believe that that was the 8 intent of these agreements, to have this situation 9 trigger the contracts. 10 Q. And so, you didn't believe that the 11 change of control provision had been triggered 12 with respect to your contract, did you? 13 A. I didn't believe that was the intent of 14 the agreement. I think that the language of the 15 agreement, it was a trigger; but I did not believe 16 that that was the intent of the agreement or what 17 UFGI intended by this agreement. 18 Q. Was this just a drafting glitch or -- 19 A. I think it was an unforeseen 20 circumstance. 21 Q. Now, I notice that you indicate further 22 on that there had been no change of control with 18743 1 respect to the USAT contract. 2 A. That's what I believed, yes. 3 Q. Now, why was it that -- USAT had the 4 same change of control provision as the UFG 5 contracts, and they had nearly identical boards. 6 Why was it that USAT didn't have a 7 change of control, as well? 8 A. I think at the time, I was viewing it 9 that you looked at the board when the USAT 10 contracts actually got signed. 11 Q. Okay. 12 A. I think that's what I was looking at. 13 Q. And it subsequently turned out that one 14 of the executive officers came to you and 15 indicated that he was going to resign and invoke 16 the change of control provision as a basis for his 17 termination for cause; is that correct? 18 A. For good reason, yes. 19 Q. For good reason. 20 And in that instance, if he had done 21 that, it would have placed UFGI in the position of 22 having to pay him two years' severance benefits, 18744 1 correct? 2 A. Yes, sir. 3 Q. Okay. And who was that individual that 4 suggested that that might be the action he would 5 take? 6 A. Jeff Gray. 7 Q. Okay. Now, did Mr. Gray submit a 8 letter to you? 9 A. Yes, he did. 10 Q. And would you take a look at what's 11 been marked as Tab 436. It's Exhibit B2082. And 12 I will hand you a copy. 13 A. It's not in the book? 14 Q. No, it's not in the book. This is one 15 of those non-bookers. 16 MR. RINALDI: Now, I have extra copies 17 if any of you people can't look -- 18 MR. BLANKENSTEIN: Mr. Rinaldi, I think 19 you misspoke. I think it's Tab 463. Is that 20 right? 21 MR. RINALDI: Yes. That's what I have 22 written down here, but I may have transposed the 18745 1 numbers. 2 MR. BLANKENSTEIN: March 16th, 1988 3 letter from Jeff Gray. 4 Q. (BY MR. RINALDI) Now, do you 5 recognize that letter, sir? 6 A. Yes, I do. 7 Q. And is that the letter that was 8 tendered to you by Mr. Gray indicating his 9 decision to invoke the provisions of the 10 September 9th, 1987 UFG employment contract? 11 A. Well, it was actually tendered to the 12 president; but I received it very quickly after 13 that. 14 Q. Okay. Well, I think that's a useful 15 point to make. I frequently see letters that come 16 to the board of USAT or the board of UFGI. 17 When a letter was sent to the chairman 18 or to the board of USAT, was it routed initially 19 to Mr. Gross or any particular person at USAT? 20 A. I think it probably would have gone to 21 Mr. Gross. I don't know for a fact, but that's 22 what -- I would have sent it there. 18746 1 Q. I'm sorry. I didn't mean to cut you 2 off. 3 A. I think that's where they would have 4 sent it. 5 Q. And if, for example, the Federal Home 6 Loan Bank Board were to send a letter to the board 7 of UFG, would it be the practice to make copies 8 and distribute that letter to all members of the 9 board? 10 A. At some point, yes. 11 Q. And if the board was required to file a 12 response, would Mr. Gross then pass the letter on 13 to you if it pertained to issues about which you 14 were knowledgeable? 15 A. He would. Yes, he would. 16 Q. Okay. And then you would draft a 17 response if he requested it? 18 A. If it was stuff that I was 19 knowledgeable of, yes. 20 Q. And then would you typically review the 21 response with him and, after that, send it out? 22 A. I would review the response with him 18747 1 and, if it was to the board, probably with the 2 board at some point. 3 Q. Okay. And if the letter was in a form 4 satisfactory to the board, you would then send it 5 out? 6 A. Yes. 7 Q. Okay. Now, Mr. Gray says, "I am 8 entitled to receive and hereby call upon you to 9 pay to me the various amounts and benefits 10 referred to" in his employment agreement. 11 Do you see that? 12 A. Yes. 13 Q. And do you recall what amount of 14 compensation this individual was receiving at this 15 point in time? 16 A. No. 17 Q. Was he a fairly highly compensated 18 member of the board or of the executive staff? 19 A. Yes, he was. 20 Q. Okay. Now, I'm looking at T8026, which 21 is at Tab 410. And it indicates, I believe, on 22 here that Mr. Gray -- 18748 1 A. 8026? 2 Q. Yes. And if you look at the second 3 page, it indicates that Mr. Gray was making 4 $161,700 a year. 5 Do you see that in the far left-hand -- 6 I mean right-hand column? 7 A. Yes. Yes. It's marked base salary, 8 and then it says 161.7K. 9 Q. Okay. Is that pretty much consistent 10 with your recollection of his salary level? 11 A. I don't have any recollection of his 12 salary level, but that's probably right. 13 Q. Yeah. Okay. So, in other words, as of 14 March 16th, 1988, UFGI was obligated to pay 15 Mr. Gray $322,000 within five days, huh? 16 A. Yes. 17 Q. Now, did it come to your attention that 18 there was anyone else that had expressed an 19 interest in terminating this arrangement -- I mean 20 their employment and invoking the severance 21 provisions under the UFGI contracts? 22 A. I don't recall anyone else saying that. 18749 1 Q. When Mr. Gray tendered this letter to 2 you, what action was taken at USAT and/or UFG to 3 deal with this problem? 4 A. Well, I know we told them we weren't 5 going to honor that. At some point in the future, 6 we told them that we were not going to honor his 7 letter, that we didn't believe there was a change 8 in control. 9 Q. Okay. And if you look at Page 5, the 10 first full paragraph of your memorandum at the end 11 of Page 4, it says after you received -- or this 12 issue came up, "There were meetings held between 13 the executive officers as well as meetings among 14 Gross, Munitz, and myself as to the effect on the 15 employment agreement of the board changes." 16 Do you see that? 17 A. Yes, I do. 18 Q. Okay. And so, you and Mr. Munitz and 19 Mr. Gross got together and discussed what the 20 strategy was going to be of UFG regarding this 21 change of control? 22 A. Yes, we did. 18750 1 Q. And then on the next page, it talks 2 about your recommendation. The first sentence 3 indicates that, as you previously stated, you took 4 the position -- that is, Mr. Gross and yourself 5 and Mr. Munitz -- that you were going to recommend 6 that employment contracts would not be deemed to 7 have been triggered. 8 Do you see that? 9 A. Yes, sir. 10 Q. Do you recall that it was your opinion 11 at that time that it would constitute corporate 12 waste for UFGI to pay the severance provisions 13 under the circumstances where it was an unintended 14 change of control? 15 A. I don't recall saying that, but if you 16 have something to show me -- I don't recall that. 17 Q. And then it says in the second 18 paragraph, "We discussed a number of possible 19 solutions." 20 Do you see that? 21 A. Yes. 22 Q. Okay. Now, it then says, "At the time 18751 1 the solutions were being discussed, it was also 2 clear that United Savings Association of Texas 3 would have to be receiving some form of 4 supervisory agreement, FSLIC assistance, or 5 capital infusion." 6 Do you see that? 7 A. Yes. 8 Q. So, when this change of control issue 9 arose, USAT was clearly failing its capital 10 requirement and, by March 16th, the date of 11 Mr. Gray's letter, it was apparent to you as a 12 director of USAT that it wasn't going to survive 13 unless there was some form of assistance, correct? 14 A. That it wasn't going to survive? Yes. 15 Without some form of assistance, that's correct. 16 Q. And then it goes on and says it was 17 also evident to you and Mr. Gross and Mr. Munitz 18 that UFGI, without assistance, might not be a 19 viable entity. 20 Do you see that? 21 A. Yes. 22 Q. And then you drop down to the next 18752 1 paragraph, and it says that you decided to propose 2 that salaries be increased to reflect the true 3 market value of the employee. 4 Do you see that? 5 A. Yes. 6 Q. So, once you determined that there was 7 a possible change of control and once Mr. Gray 8 raised the issue of the change of control and UFGI 9 became potentially responsible for paying the 10 severance benefits, you and Mr. Gross and 11 Mr. Munitz looked for a solution to this alleged 12 change of control that had been raised by 13 Mr. Gray? 14 A. Well, it wasn't only because of this. 15 We were looking for a solution for keeping the 16 management team at United Savings because we 17 wanted to keep United Savings a viable entity, 18 which would require some sort of assistance. 19 So, it was a -- there was a continuum, 20 if you will. There was a whole bunch of things we 21 were looking at, and this was one of them. This 22 letter triggered some recommendations. 18753 1 Q. Okay. Now, the people that had 2 employment agreements at USAT were yourself and 3 Michael Crow, Mr. Gray, Mr. Jackson, Mr. Williams, 4 and Mr. Wolfe; is that correct? 5 A. Well, there were other employment 6 agreements. 7 Q. Okay. Well, those are the ones that 8 were listed at the February 11th, 1988 board 9 meeting? 10 A. Those are the people that had these 11 contracts, but there were other contracts that -- 12 Q. I'm talking about these contracts for 13 the moment. Okay? 14 Now, did either you or Mr. Crow tell 15 Mr. Munitz or Mr. Gross that you were going to 16 leave unless you got a salary increase at that 17 point in time? 18 A. I did not tell them. 19 Q. Do you know if Mr. Crow told them that? 20 A. I don't believe he did. I don't know. 21 Q. Did Mr. Gray tell you that? 22 A. Did Mr. Gray -- 18754 1 Q. That he was going to leave unless he 2 got a salary increase. 3 A. Mr. Gray told me he was leaving and 4 wanted the payments under his contract. 5 Q. Right. How about Mr. Jackson? Did he 6 tell you that he was going to leave unless he got 7 a salary increase? 8 A. No one told me. 9 Q. So, Mr. Williams didn't tell you that 10 and Mr. Wolfe didn't tell you that either? 11 A. At that point in time, that's correct. 12 Q. Well, was there some subsequent point 13 in time when they told you that? 14 A. No. 15 Q. Did Mr. Gross ever tell you that he had 16 had a conversation with any of those gentlemen and 17 that, apart from Mr. Gray, any of them had 18 indicated they were going to leave if they didn't 19 receive a salary increase? 20 A. No. 21 Q. Did Mr. Munitz ever tell you he had had 22 a conversation with them where they had indicated 18755 1 they were going to leave unless they received a 2 salary increase? 3 A. I don't think so. 4 Q. And would your answer be the same with 5 respect to Mr. Crow? 6 A. I'm sorry? 7 Q. Did you ever have a conversation with 8 Mr. Crow where he told you he had been advised by 9 anyone who had these employment contracts that 10 they were going to leave unless they received a 11 salary increase? 12 A. I didn't have a conversation with 13 Mr. Crow about that. 14 Q. Okay. In any event, once this change 15 of control issue was brought up by Mr. Gray, a 16 solution was proposed by you and Mr. Gross and 17 Mr. Munitz. 18 Is that fair? 19 A. Yes, sir. 20 Q. Can you describe for me what that 21 solution was? 22 A. Well, again, there was a whole -- a 18756 1 bunch of things in that -- in the solution. One 2 was to take -- to create whole new contracts, and 3 instead of having a salary and a minimum bonus, it 4 would be to roll those in because the view was 5 that the salary and the minimum bonus was, in 6 fact, what the market compensation was. That's 7 what we talked about at that February meeting. 8 Then there were additional provisions 9 which dealt with not only this group of people but 10 with the 60 or 70 other people that had received 11 bonuses who were core people for the association, 12 which would be to give them a one-time bonus equal 13 to their previous year's bonus, 25 percent of 14 which they would get paid immediately, and the 15 other 75 percent they would get paid if they were 16 with the association at the end of the year. And. 17 I think that's -- I know I wrote a memo 18 about that. There may have been other things 19 involved in it. 20 Q. And were you then going to redraft the 21 contracts to eliminate the change of control 22 provision -- 18757 1 A. Not to eliminate it. To change it. 2 Q. To change it, yeah, so that it would no 3 longer be triggered inadvertently by a resignation 4 of the board members which had occurred 5 previously? 6 A. That's correct. 7 Q. And was there also some consideration 8 given to securing the severance benefits under the 9 new employment contracts? 10 A. I'm not sure if that happened at this 11 time. It happened at some subsequent time. It 12 might have happened around this time. 13 Q. Do you recall that the subject of 14 obtaining letters of credit to secure the 15 severance benefits was raised by you with 16 Mr. Berner -- I mean Mr. Munitz at or about this 17 point in time? 18 A. I think that's right. 19 Q. And ultimately, you did enter into new 20 contracts with provisions for securing the 21 severance benefits? 22 A. That's right. 18758 1 Q. And do you also recall that the term of 2 the contract was going to be extended? 3 A. Yes, I do. 4 Q. Okay. And what was the rationale for 5 extending the term of the contract? 6 A. I think there were a couple of 7 rationales. One was to, again, make sure that 8 this group of people, the core people, would 9 hopefully stay with the association for a longer 10 period of time. 11 Q. And the reason you wanted to keep these 12 people there is because, by this point in time, 13 you knew that the savings association would have 14 to be receiving some form of supervisory agreement 15 or FSLIC assistance or capital infusion in order 16 to survive, correct? 17 A. Something like that, yes. 18 Q. And it was also evident to you at this 19 point in time that, without assistance, UFGI might 20 not be a viable entity? 21 A. UFGI? 22 Q. Yes. 18759 1 A. Well, it would -- it wouldn't be 2 getting any assistance. 3 Q. Well, if USAT didn't get any 4 assistance, UFGI would not be viable? 5 A. That's probably right. Yeah, that's 6 probably correct. 7 Q. Okay. And that's what you said in the 8 second paragraph on Page -- on the -- on 9 Page OW035559 of your memo? 10 Do you see that? 11 A. Yes. 12 Q. Now, when you came to this -- so, it 13 was you, Mr. Gross, and Mr. Munitz that arrived at 14 a decision as to a possible proposal to resolve 15 this change of control issue? 16 A. That's right. I think there were other 17 discussions with Mr. Crow; but, yes. 18 Q. Now, was there also a proposal at this 19 point in time to expand the group of people that 20 had the employment contracts with the guaranteed 21 severance benefits? 22 A. Again, I'm not sure if it was at this 18760 1 point in time or shortly thereafter; but it was 2 around this point in time. 3 Q. And so, I take it from your answer, the 4 answer is "yes"? 5 A. I think the answer is "yes." 6 Q. Okay. And what was the nature of -- 7 who was going to be given a contract in the future 8 that had not previously had an employment contract 9 with USAT and UFG? 10 A. Dr. Munitz and Mr. Gross. 11 Q. Okay. And what was the thinking there? 12 Why was it necessary to give Mr. Munitz and 13 Mr. Gross a contract when they had not had one in 14 the past and the change of control which Mr. Gray 15 had raised did not apply to them? 16 A. Well, the thinking was that they, just 17 like this other group of six that did have 18 contracts, were key people for the continued 19 viability of USAT and UFGI and that there is no 20 reason why they wouldn't get contracts. 21 Q. Did Mr. Gross ever tell you that he 22 felt that he was going to leave his position as 18761 1 chairman of the board unless he got an increase in 2 salary? 3 Did he ever tell you that? 4 A. No. 5 Q. Did Mr. Munitz ever tell you that 6 unless his salary was increased above the $240,000 7 that he was presently receiving that he was going 8 to leave UFGI? 9 A. No. 10 Q. But it was decided by you and 11 Mr. Munitz and Mr. Gross that Mr. Gross and 12 Mr. Munitz should receive employment contracts for 13 the purpose of assuring that they would stay at 14 USAT and see it through whatever took place in the 15 future? 16 A. It was decided to make that 17 recommendation to the compensation committee. 18 Q. Now, the next -- at the end of your 19 memo, it says that the employees with contracts 20 would be told that if FSLIC granted assistance, 21 FSLIC might negate the entire contract. 22 Do you see that? 18762 1 A. Yes. 2 Q. Okay. What were you referring to 3 there? 4 A. I think I was referring to a case that 5 had been brought to my attention by our outside 6 counsel. 7 Q. Would that have been Mr. Leahey? 8 A. Yes. 9 Q. And what was the nature of the case 10 that he brought to your attention? 11 A. There was a case -- which at the time I 12 read, and I've recently read. There was a case 13 where there was an institution that had some 14 employment contracts where, I believe, they had 15 secured the contracts -- the payments under the 16 contracts and FSLIC came in and negated those 17 contracts. 18 Q. Do you recall whether that was FSLIC 19 versus Bass? 20 A. Yes, it was. 21 Q. And in that case, the contracts as in 22 the case of USAT had been entered into at a point 18763 1 in time when the institution was losing money and 2 failing or approaching a failure of its net worth. 3 Do you recall that? 4 A. Well, no. I think that case is 5 slightly different in that my recollection of the 6 case was that they said that institution was 7 clearly going to fail and United at this time -- 8 United was being told that it was clearly going to 9 survive. 10 Q. Well, now, wait a second. If we go 11 back to Page OW035559, in the second paragraph, 12 you write there in the second sentence, "At the 13 time these solutions were being discussed, it was 14 clear that United Savings Association would have 15 to be receiving some form of supervisory 16 agreement, FSLIC assistance, or capital infusion"? 17 A. That's correct. 18 Q. So, United wasn't going to survive in 19 its present format, was it? 20 A. Well, United was being told by its 21 supervisory agent and others that it was going to 22 be a survivor. 18764 1 Q. And because the supervisory agent told 2 you it was going to be a survivor, did you 3 believe, then, that it was appropriate for USAT to 4 award employment contracts at a point in time when 5 USAT was failing its net capital requirement? 6 A. I'm not sure I'm making the connection. 7 USAT, we were being told, was going to survive. 8 There had been some question before about the 9 management leaving -- and had been raised by the 10 regulators -- and this was a way to make sure that 11 the management didn't leave and that the core 12 group of key employees stayed. 13 Q. Okay. And then Mr. Leahey gives you a 14 memorandum, does he not, at your request? 15 A. Yes. 16 Q. Okay. And why don't we take a look at 17 that memorandum. It's Exhibit T8048, and it's at 18 Tab 417. 19 Does T8048 appear to be the memorandum 20 that you gave to Mr. Leahey? 21 A. That I received from Mr. Leahey? 22 Q. I'm sorry. That you received from 18765 1 Mr. Leahey? 2 A. Yes. 3 Q. And at the beginning, it says -- it 4 makes reference to the fact that the -- he is 5 reviewing the contract situation. But you didn't 6 supply him with a copy of UFGI or USAT's 7 contracts, did you? 8 A. That's what he says. I actually 9 thought he had received it in connection with our 10 10K reports. We sent him the 10Ks to review and 11 go over. And so, I thought he had received them. 12 Q. Okay. But it's clear -- 13 A. Apparently, he's saying -- he said in 14 this memo that at that point in time, he wasn't 15 familiar with it. 16 Q. But a 10K is a fairly large document 17 and he may not have realized that he had it in his 18 file. Is that fair? 19 A. It's possible. 20 Q. But in any event, Mr. Leahey said he 21 didn't have it? 22 A. He said he didn't have it at the time, 18766 1 that's right. 2 Q. Now, you posed to him a number of 3 questions and you wanted him to summarize his 4 experience on, first, "whether and when FSLIC 5 does, in fact, exercise its authority to forego 6 termination of such contracts, especially in the 7 context of open bank assistance." 8 What were you seeking there? 9 A. I was trying to get -- one of the 10 possibilities was to have some assistance, open 11 bank assistance. I just wanted to know -- 12 Q. What is open bank assistance? 13 A. My recollection of what I remember then 14 is that the bank would stay open and it wouldn't 15 be put into receivership and FSLIC would put in 16 something, that the bank would just continue on. 17 Q. Okay. And then the second thing you 18 requested was "whether such termination would be 19 required or likely in the context of a grant of 20 capital forbearance." 21 What were you talking about there? 22 Whether they would have to terminate the 18767 1 contracts? 2 A. Right. If we were getting capital 3 forbearance, would that terminate the contract? 4 Would FSLIC terminate the contract? 5 Q. Okay. And then the third question you 6 asked is "whether FSLIC would seek to recover 7 benefits paid under such a contract in connection 8 with termination of employment shortly prior to a 9 grant of FSLIC assistance." 10 Do you see that? 11 A. Yes. 12 Q. And what were you seeking there? 13 A. Again, just to find out if, for 14 example, in Mr. Gray's case, if, in fact, we paid 15 people and then at some point in the near future 16 there would be assistance, would they try to get 17 the money back? 18 Q. And then there -- the fifth item there 19 says "whether FSLIC takes a particular position 20 with regard to bonus provisions in such 21 contracts." 22 Do you see that? 18768 1 A. Yes. 2 Q. And what were you seeking there? 3 A. Again, I'm just trying to find out what 4 the FSLIC's position would be if there were 5 bonuses provided for in the agreement. 6 Q. And in response to your request, 7 Mr. Leahey advised you that there existed a case 8 called FSLIC versus Bass, and he discusses that 9 case at Page 4. 10 Do you see that? 11 A. Yes. 12 Q. And he says there that the only 13 reported decision we've been able to locate 14 directly addressing a challenge to the validity of 15 contract payments under 12 CFR, Section 563.39, is 16 FSLIC versus Bass." 17 And then he goes on and says in that 18 case that the Court had held the contracts in 19 question invalid because they were considered an 20 unsafe -- to be an unsafe and unsound practice. 21 Do you see that? 22 A. Yes. 18769 1 Q. And then he goes on and he describes 2 the contracts. And he says, "The contracts there 3 had been adopted less than four months before 4 FSLIC was appointed receiver for Unity Savings of 5 Chicago at a time when Unity's net worth was 6 10 million and it was losing $2 million a month." 7 Do you see that? 8 A. Yes. 9 Q. So that you understood that if you 10 entered into employment contracts at this point in 11 time, when the institution was failing its net 12 worth, that that could be considered an unsafe and 13 unsound banking practice, didn't you? 14 A. I understood that it could be 15 considered something -- yes. It could be an 16 unsafe and unsound practice. 17 Q. And you determined to go ahead and 18 enter into new contracts, knowing that, because 19 you felt that USAT's situation was distinct from 20 the Unity situation? 21 A. Yes. 22 Q. And the difference was that in Unity -- 18770 1 I'm sorry -- in the USAT situation, you felt the 2 regulators had indicated to you that it was likely 3 that USAT would be a survivor? 4 A. That wasn't the only difference between 5 our situation and the Bass situation. That was 6 one of the differences. 7 Q. What were the other differences? 8 A. Oh, goodness. One of the differences 9 was that in the Bass situation, actually 10 interestingly enough, they had brought an action 11 against the officers and then they dropped the 12 action against the officers. And the only people 13 that were defendants here were the people who were 14 the majority stockholders of Unity. And the Court 15 makes the distinction of saying that you didn't 16 have to give those people contracts because they 17 weren't going to leave anyway because they were 18 the majority stockowners and they had most of the 19 equity. All of their equity was tied up in the 20 institution. I say it also made -- 21 Q. Can we just deal with that? 22 A. Sure. 18771 1 Q. You mean because the stockholders had 2 an equity interest in the institution, there was 3 no need to give them contracts as an incentive to 4 stay? 5 A. In that case, they said since the 6 Basses owned -- all of their equity, all of their 7 net worth was tied up in the institution, there 8 was no reason to give them severance bonus 9 benefits because they weren't going to be leaving. 10 Q. So, after you got this memo from 11 Mr. Leahey and after you read the Bass case, did 12 you determine then that the holding in the Bass 13 case would have no application to USAT if USAT 14 entered into new employment contracts? 15 A. No, I didn't determine it would have no 16 application. It was a case that was -- you know, 17 it was a case that was related and it was 18 something that everyone certainly had to be aware 19 of. The facts of the Bass case were significantly 20 different than the facts of USAT, but certainly 21 anyone getting a contract would have to be aware 22 that FSLIC could come in and negate the contract. 18772 1 Q. And so, at the time you understood that 2 if the board approved new employment agreements, 3 they could very well be engaging in an unsafe and 4 unsound banking practice, given the fact that USAT 5 was then failing its net worth requirement? 6 A. It appears that there is a possibility 7 that someone could come in and say that those 8 contracts were unsafe and unsound, that is 9 correct. 10 Q. Now, prior to implementing your 11 solution, did you contact the Federal Home Loan 12 Bank of Dallas and inquire of them as to whether 13 USAT's entry into new contracts would constitute 14 an unsafe and unsound banking practice? 15 A. Prior to proposing the solution? 16 Q. Yes. 17 A. I don't believe so. 18 Q. So, you went ahead with the solution. 19 And in the next paragraph, it says -- 20 THE COURT: Which document are you 21 reading from? 22 MR. RINALDI: I'm sorry, Your Honor. 18773 1 The next paragraph of his memo, which is T8054. 2 And that's Tab 403. 3 Q. (BY MR. RINALDI) And we're talking 4 about the last page of the document, Page 19. 5 And so, you had come up with this 6 solution or proposal, and it included increasing 7 the salaries -- and I believe you said the 8 salaries were going to be increased by the 1987 9 bonuses, correct? 10 A. I think that's right. 11 Q. And then you were going to issue a new 12 special bonus that would be equal to the bonus 13 that had been paid in 1988 for 1987? 14 A. For all the people that had received 15 bonuses, that's correct. Not only the contracted 16 people. 17 Q. Right. And that in addition to that, 18 you were going to enter into new contracts with 19 the contracted people, as well as Mr. Munitz and 20 as well as Mr. Gross, and those new agreements 21 were going to have guaranteed severance benefits 22 or were going to have two years' severance 18774 1 benefits. 2 Is that fair? 3 A. That's my recollection, yes. 4 Q. And the term of those contracts for 5 people who had pre-existing contracts with UFG and 6 USAT was going to be extended from 1988 through 7 what year? 8 Do you recall? 9 A. I think it was 1991 or 1990. I'm not 10 sure. 11 Q. And after you came up with this 12 proposal, what did you do next? 13 A. We went to Mr. Whatley to discuss it 14 with him as he was -- 15 Q. And who was Mr. Whatley? 16 A. Jim Whatley is the -- was a member of 17 the board, was the sole -- at that point, the sole 18 member of the compensation committee. He was a 19 fairly well-known executive. 20 Q. So, by this time, because of the 21 resignations on the board, there was not a full 22 complement of independent directors on the 18775 1 compensation committee? 2 A. Well, he was the only member of the 3 compensation committee that was left, that's 4 correct. 5 Q. So that -- were there quorum 6 requirements for the compensation committee? 7 A. I don't believe so. 8 Q. And so, when you made this proposal to 9 Mr. Whatley, what was his reaction? 10 A. We discussed it at a meeting, and I 11 think he was generally in favor of it. We had 12 suggested at some point -- and he was very much in 13 favor of -- getting an outside compensation 14 consultant to review all of these things to make 15 sure that they were fair and appropriate. 16 Q. And you were the ones that proposed 17 that to Mr. Whatley, were you not? 18 A. We suggested that he might want to 19 think about doing it and actually -- my 20 recollection is that he wanted to do it before we 21 suggested it. 22 Q. Well, your memo says that -- that you 18776 1 determined to -- this is the next-to-the-last 2 paragraph on the last page of T8054. It says, 3 "Messrs. Gross, Munitz and Berner determined to 4 express these views to Mr. Whatley as the sole 5 member of the compensation committee but to also 6 suggest that if he desired, he could hire an 7 outside consultant to, in effect, give him a 8 fairness opinion so that he was not taking sole 9 responsibility for these actions." 10 Do you see that? 11 A. Yes, sir. 12 Q. And then in the last paragraph, you 13 suggested that the association should pay 14 Mr. Whatley a fee for conducting a survey and 15 reviewing the compensation; is that correct? 16 A. Yes, sir. 17 Q. How much was the fee that you suggested 18 Mr. Whatley receive? 19 A. I have no recollection of that. 20 Q. Was it $10,000? 21 A. I have absolutely no recollection. 22 Q. So, now, were these then presented to 18777 1 Mr. Whatley at a meeting of the compensation 2 committee? 3 A. Yes, they were. 4 Q. Okay. And did you attend that meeting? 5 A. Yes, I did. 6 Q. Did Mr. Gross and Mr. Berner attend 7 that meeting? 8 A. I'm Mr. Berner. 9 Q. I'm sorry. Gross and Munitz. 10 A. Mr. Gross and Munitz attended that 11 meeting. 12 Q. Would you take a look at Exhibit T8050. 13 It's Tab 418. 14 Does this appear to be the minutes of 15 the compensation committee at which you made your 16 proposal to Mr. Whatley? 17 A. Yes, it does. 18 Q. Okay. And it begins by saying, 19 "Mr. Berner reviewed in detail the current status 20 of the employment contracts and a proposed 21 resolution of the problem." 22 And that's the resolution we just 18778 1 talked about? 2 A. Right. There was a memo that I 3 prepared in which I had it detailed out, that's 4 correct. 5 Q. And then he presented a proposal which 6 was discussed with and approved by the committee. 7 So, Mr. Whatley, acting as the sole 8 member of the compensation committee, approved the 9 proposal that had been made by you and Mr. Munitz 10 and Mr. Gross? 11 A. Yes. 12 Q. Okay. And then it goes on and says, 13 "The committee suggested that Dr. Munitz retain a 14 compensation specialist to pass on the fairness of 15 the proposal." 16 Do you see that? 17 A. Yes, sir. 18 Q. And then it goes on and says, 19 "Mr. Whatley noted, however, that the company 20 should proceed as quickly as possible on the 21 proposal without waiting for the report of the 22 compensation specialist." 18779 1 Do you see that? 2 A. Yes, sir. 3 Q. What was the great need for expedition 4 at this point in time? 5 A. Well, there was a couple of needs. 6 No. 1 one was the fact that you had the letter 7 from Mr. Gray. No. 2 was that the association 8 was -- its financial situation was deteriorating 9 and we wanted to make sure that the people below 10 the top echelon was aware that we were going to be 11 granting bonuses and we would be paying a portion 12 of that bonus at this point in time and deferring 13 the rest until the end of the year. We wanted 14 that information to get out immediately. 15 Q. Now, it says here that the -- well, 16 Mr. Whatley was going to proceed as quickly as 17 possible, but was the compensation specialist 18 going to determine whether your proposal was an 19 appropriate one to enter into at this point in 20 time? 21 A. I think they were going to look mostly 22 at the contracts, the rolling in of the bonuses 18780 1 into the contracts and the extension, the whole 2 terms of the contracts is what they were -- 3 Q. And were they going to inquire into the 4 question of whether it would constitute a safe and 5 sound practice to enter into these executive 6 agreements at a point in time when USAT was 7 failing its net worth requirements? 8 A. They might look at it, but they 9 wouldn't have any expertise as to what is an 10 unsafe and unsound practice, I don't believe. 11 Q. Okay. Who was going to look into that 12 aspect of it? 13 A. We were going to try to see if we could 14 get counsel to look at it, but they wouldn't 15 normally render any sort of opinion on unsafe and 16 unsound. We would probably just go back to the 17 regulators and present them with the contracts. 18 Q. I see. Now, which counsel were you 19 going to have look at it? Mr. Leahey or -- 20 A. I believe Mr. Leahey was going to look 21 at it, yes. 22 Q. Okay. And did you ultimately then 18781 1 present this to Mr. Leahey? 2 A. Yes. 3 Q. You did? 4 A. Yes. 5 Q. Did Mr. Leahey give you a written 6 opinion? 7 A. I don't believe so. 8 Q. And what was the substance of 9 Mr. Leahey's opinion, as you recall? 10 A. It was that the lawyers shouldn't be 11 passing on unsafe and unsound, that it's too 12 nebulous to decide whether these contract terms 13 were unsafe and unsound. I think he tried to buck 14 it back to the consultants or go talk to the 15 regulators. 16 Q. Did Mr. Leahey suggest to you that 17 rather than seeking a -- an opinion from him on 18 safety and soundness that you should contact the 19 regulators and seek their views as to whether the 20 proposed solution met the requirements of safety 21 and soundness? 22 A. I'm not sure if he proposed that or 18782 1 suggested that or not. I don't recall that. 2 Q. Did you ever go to the regulators and 3 describe for them before you entered into the new 4 agreements what it is you had proposed? 5 A. We actually gave them a contract which 6 had all of those provisions in there, all the 7 provisions of the new contracts in there. 8 Q. You didn't listen to my question. 9 A. I'm sorry. 10 Q. Before you granted the salary increase, 11 did you go to the regulators and ask them whether 12 granting a salary increase under the circumstances 13 we've described when USAT was failing its minimum 14 net worth requirement would constitute an unsafe 15 and unsound practice? 16 A. I don't believe we went to the 17 regulators and asked them that question. 18 Q. Did you go to the regulators and ask 19 them whether granting a bonus at the end of March 20 and the beginning of April 1988 when USAT was 21 failing its minimum net worth requirement, in the 22 amount that you have indicated -- that is, the 18783 1 previous year's bonus -- whether that would be an 2 unsafe and unsound practice? 3 A. I don't think we went to the regulators 4 on that. 5 Q. So, you didn't go to the regulators and 6 ask their view as to any aspect of your solution 7 prior to implementing the solution? 8 A. Well, again, I think at some later 9 point, we sent them a contract which had all the 10 provisions of the solution. 11 Q. Well, we'll get to that. Now, the 12 compensation committee then approved this. 13 Now, let me just ask you this. I read 14 these compensation committee minutes, which is 15 8050. 16 Do you see that? 17 A. Yes. 18 Q. Where in the minutes does it describe 19 that the salaries were going to be increased by 20 the 1987 bonus which was paid in 1988? 21 A. It -- these minutes don't describe 22 that. 18784 1 Q. Okay. And where in the minutes does it 2 describe the new bonus? 3 A. Again, these minutes don't describe 4 that. 5 Q. And where does it describe the fact 6 that you were contemplating new contracts with 7 Mr. Gross and Mr. Munitz? 8 A. It's not described in the minutes. 9 Q. In fact, none of the proposed solution 10 is described in the minutes, is it? 11 A. That's correct. 12 Q. Now, if I were an examiner looking at 13 these minutes, how could I ascertain what had 14 occurred at this meeting in terms of the solution 15 that was approved by Mr. Whatley? 16 A. By asking. 17 Q. But all it indicates happened was that 18 you hired a compensation specialist; isn't that 19 correct? 20 A. In the minutes, that's correct. 21 Q. So, if an examiner didn't ask you what 22 happened at the meeting, they would have no way of 18785 1 knowing that you had granted salary increases, a 2 bonus, agreed to enter into new contracts in the 3 future, and agreed to give a contract to Mr. Gross 4 and Mr. Munitz, would they? 5 A. I'm not sure that that's correct. 6 Q. Okay. How would they determine that 7 from looking at these minutes, sir? 8 A. From looking at the minutes? 9 Q. Yes. 10 A. They couldn't determine it from looking 11 at the minutes. 12 Q. Okay. Now, you -- what's the purpose 13 of writing a set of minutes, sir, if one can't 14 determine what's happened at the meeting? 15 A. It's to describe what took place at the 16 meeting. 17 Q. But you said they granted a salary 18 increase, they granted a bonus, they agreed to 19 write new contracts. I mean, we went through all 20 of that; and none of it's mentioned in these 21 minutes. 22 Isn't that correct? 18786 1 A. That's correct. 2 Q. So, anyone looking at these minutes 3 wouldn't have known what had occurred? 4 A. That's correct. 5 Q. Okay. Now, you indicated that you had 6 drafted a memo that indicated what had occurred at 7 the board -- at the compensation committee 8 meeting? 9 A. Yes. 10 Q. Okay. Among other things, the memo 11 that you're referring to would be T8054, which is 12 the document we've been looking at for some 13 time -- 14 A. No. 15 Q. -- which is Tab 418? 16 A. That's not what I'm talking about. 17 Q. But that, in fact, does describe what 18 occurred, doesn't it? 19 A. Yes. 20 Q. Okay. That's one memo, isn't it? 21 A. That's a memo that describes -- 22 Q. I'm curious. Why did you take the time 18787 1 to sit down on March the 31st, 1988, to draft 2 T8054, which is Tab 418? 3 A. Again, my recollection is I did it 4 because I was worried that there was going to be a 5 lawsuit -- 6 MR. EISENHART: Your Honor, I'm just 7 not sure what Mr. Rinaldi's reference is. Looking 8 at Tab 4018, and that's T1050, which is the 9 minutes. 10 THE COURT: I think we're back on 11 T8054. 12 MR. RINALDI: Yes. It's his memo. 13 MR. BLANKENSTEIN: Your Honor, I 14 believe that's Tab 403 in our system. 15 MR. RINALDI: I'm sorry. It's Tab 403, 16 and I misspoke. Thank you, Mr. Eisenhart. 17 Q. (BY MR. RINALDI) What was the reason 18 for drafting T8054? That's your memorandum, 19 privileged and confidential attorney work product, 20 dated March 31st, 1988. 21 A. My recollection is that the reason was 22 to put on paper what took place because I was 18788 1 afraid there was going to be a lawsuit coming up 2 with Mr. Gray. 3 Q. Well, if you were going to implement a 4 solution that would give Mr. Gray a substantial 5 salary increase, a substantial bonus, and a new 6 contract that provided for two times annual salary 7 as a severance benefit and, in addition, lengthen 8 the term of his contract, why would he be engaging 9 in a lawsuit with you? 10 A. Because under his contract that was 11 triggered, he would have gotten two times 12 severance right then and he could have done 13 whatever he wanted to do. 14 Q. Well -- or he could have stayed on and 15 earned his salary that he previously earned plus 16 the bonus from the previous year? 17 A. That's right. But when I'm sitting 18 there, I don't know whether he's going to decide 19 that what we're proposing is beneficial to him or 20 whether he thinks that getting his severance 21 payment is more beneficial to him. 22 Q. Okay. So, now, you -- there was 18789 1 another memo where you reduced all of the things 2 that happened at the board of -- at the 3 compensation committee meeting to writing, wasn't 4 there, that described in detail what had occurred 5 at the March 30th meeting of the board of 6 directors -- I mean of the compensation committee? 7 A. Right. 8 Q. Okay. And just one question. Did the 9 board of directors have a meeting on March the 10 30th, 1988, the same day that the compensation 11 committee met and adopted your proposal? 12 A. Yes. 13 Q. Okay. And do you recall what the 14 purpose of that meeting was, sir? 15 A. I believe that was the exit interview 16 meeting for one of the exams. 17 Q. I see. So, would this have been a -- 18 what we refer to as a special-purpose meeting? 19 A. It was -- it wasn't a 20 regularly-scheduled meeting; so, it would be a 21 special meeting of the board. 22 Q. And let's take a look at the minutes of 18790 1 that meeting. It's Tab 405, and it's T8049. And 2 it should be about three documents earlier on from 3 the memorandum or four documents earlier on from 4 the memo we've been looking at. 5 A. 8049? 6 Q. 8049. Have you found that yet, sir? 7 A. Not yet. Oh, there it is. 8 Q. And it indicates that a Ms. Carlton 9 from the Federal Home Loan Bank Board appeared and 10 that she presented an agenda that was attached to 11 the minutes. And she presented a -- and the 12 purpose of the meeting was to hear the final field 13 examiner's results of the Federal Home Loan Bank 14 Board of Dallas 1987 exam. 15 Do you see that? 16 A. Yes, sir. 17 Q. Okay. And then attached is her agenda 18 that was directed by Mr. Gross. 19 Did she go over all the items that were 20 on this agenda? 21 A. Let me find the agenda. I don't recall 22 one way or the other if she went over all the 18791 1 items or not. 2 Q. Okay. Well, let me ask you: The first 3 item on the agenda after the introduction is 4 "capital adequacy." 5 Do you see that? We're looking at 6 Page OW054325, and that's about the third page in 7 on document T8049. 8 Are you there? 9 A. Yes. 10 Q. Okay. And under "capital adequacy," it 11 says that "association's regulatory compliance as 12 of September 30th, 1987," and it says "deficit 13 regulatory capital of 14 million." And then it 14 refers to an attachment. And then it says, under 15 No. 2, "Association's regulatory compliance as of 16 December 31st, 1987, deficit regulatory capital 17 requirement of $112,551,000, Attachment 2." 18 Do you see that? 19 A. Yes. 20 Q. And then if you turn two pages on, 21 there is Attachment 2, okay? It's not a very good 22 quality. I apologize. It appears at OW054327. 18792 1 And Attachment 2 says that "The association, by 2 its calculation, had deficit minimum regulatory 3 capital on December 31st, 1987, of $53 million." 4 Do you see that? 5 A. Yes. 6 Q. And then next to that, it indicates the 7 examiners calculated that deficit at $112 million. 8 Do you see that? 9 A. Yes. 10 Q. Now, did the special meeting of the 11 board at which Ms. Carlton advised you of the size 12 of the net worth failure of USAT, did that meeting 13 occur before or after the compensation committee 14 meeting? 15 A. I believe it was after. 16 Q. But in any event, it occurred on the 17 same day that you recommended to Mr. Whatley that 18 Mr. Whatley -- or that USAT agree to salary 19 increases, bonuses, and new employment contracts 20 with severance benefits; is that correct? 21 A. That's correct. 22 Q. Now, let's go back then to 18793 1 Exhibit T8053; and this is Tab 421. 2 Do you recognize this document, sir? 3 A. Yes, I do. 4 Q. All right. And this is a memo to James 5 Whatley, Jenard Gross, Barry Munitz from Arthur S. 6 Berner. It's dated March the 31st, 1988. 7 Do you see that? 8 A. Yes. 9 Q. Okay. And did you prepare this 10 document, sir? 11 A. I'm pretty sure I did, yes. 12 Q. And does this document purport to set 13 forth what occurred at the March 30th, 1988 14 meeting of the board -- I mean of the compensation 15 committee of USAT? 16 A. Well, actually, the memo, as you can 17 tell, it's talking about these are notes and 18 suggestions to be discussed. I think they were 19 discussed, and then they were adopted with 20 Mr. Whatley signing this memo. 21 Q. Right. And it indicates that they were 22 to be discussed -- in the first sentence there, it 18794 1 indicates that "These are notes and suggestions to 2 be discussed with Jim Whatley at the compensation 3 committee meeting on March the 30th, 1988." And 4 then I notice that the date is March the 31st, 5 1988. 6 A. Right. 7 Q. Do you see that? So, this had been an 8 earlier memorandum of notes and suggestions, and 9 you just converted it? 10 A. Yeah. I think that's what it was. It 11 was suggestions, and then it got converted when 12 Mr. Whatley signed it. 13 Q. And so, all you did was type in "agreed 14 to by the compensation committee" and you had Jim 15 Whatley sign it? 16 A. Well, I didn't have him sign it. He 17 signed it. 18 Q. I understand. You gave it to him for 19 his signature, correct? 20 A. Correct. 21 Q. And this sets forth your proposal that 22 was adopted by Mr. Whatley? 18795 1 A. This sets forth the proposal that 2 Dr. Munitz and Jenard Gross and myself had 3 proposed, that's right. 4 Q. Okay. And it was adopted in its 5 entirety by Mr. Whatley, with the exception that I 6 see there's some handwritten notations at the 7 bottom of the page. 8 Do you see that? 9 A. Yes, sir. 10 Q. Okay. And what do those handwritten 11 notations refer to? 12 A. It says, "Compensation study will be 13 conducted by outside independent consultants to 14 determine that United is in line with peer group." 15 Q. Okay. So, that's what we discussed. 16 You were going to hire a compensation specialist 17 to anoint what had been done by the compensation 18 committee? 19 A. To provide a fairness opinion, yes. 20 Q. Okay. Now, Paragraph 2 -- 21 THE COURT: Mr. Rinaldi, we'll adjourn 22 until 9:00 o'clock. 18796 1 (Whereupon at 4:52 p.m. 2 the proceedings were recessed.) 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 18797 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 6th 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 18798 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 6th 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