18799 1 2 UNITED STATES OF AMERICA BEFORE THE 3 OFFICE OF THRIFT SUPERVISION DEPARTMENT OF THE TREASURY 4 In the Matter of: ) 5 ) UNITED SAVINGS ASSOCIATION OF ) 6 TEXAS, Houston, Texas, and ) ) 7 UNITED FINANCIAL GROUP, INC., ) Houston, Texas, a Savings ) 8 and Loan Holding Company ) ) OTS Order 9 MAXXAM, INC., Houston, Texas, ) No. AP 95-40 a Diversified Savings and ) Date: 10 Loan Holding Company ) Dec. 26, 1995 ) 11 FEDERATED DEVELOPMENT CO., ) a New York Business Trust, ) 12 ) CHARLES E. HURWITZ, ) 13 Institution-Affiliated Party ) and Present and Former Director ) 14 of United Savings Association ) of Texas, United Financial Group,) 15 and/or MAXXAM, Inc.; and ) ) 16 BARRY A. MUNITZ, JENARD M. GROSS,) ARTHUR S. BERNER, RONALD HUEBSCH,) 17 and MICHAEL CROW, Present and ) Former Directors and/or Officers ) 18 of United Savings Association of ) Texas, United Financial Group, ) 19 and/or MAXXAM, Inc., ) ) 20 Respondents. ) 21 22 TRIAL PROCEEDINGS FOR AUGUST 7, 1998 18800 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 18801 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 18802 1 2 INDEX OF PROCEEDINGS 3 Page 4 ARTHUR BERNER 5 Continued Examination by Mr. Rinaldi....18803 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 18803 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. Rinaldi, you may resume your 6 examination. 7 MR. RINALDI: Thank you, Your Honor. 8 9 CONTINUED EXAMINATION 10 11 Q. (BY MR. RINALDI) Mr. Berner, towards 12 the end of yesterday we were discussing the 13 condition of USAT at or about the point in time 14 when the February 11th, 1988 employment contracts 15 were approved by the USAT board. 16 Do you recall that? 17 A. Yes, I do. 18 Q. That would have been the first board 19 meeting you had attended as a director of USAT, 20 correct? 21 A. Correct. 22 Q. Now, you indicated at that time that 18804 1 you weren't sure whether you actually knew that 2 USAT was failing its net worth requirement at the 3 time that the board approved those contracts. 4 Do you recall that? 5 A. Yes, I do. 6 Q. In fact, didn't you know to a certainty 7 at that point in time that USAT was failing its 8 net worth requirements? 9 A. I'm not sure if I knew at that point in 10 time we were failing for a certainty. 11 Q. Let me show you a copy of what's been 12 previously admitted as Exhibit B1996, and I 13 believe that this is Tab 1409. It will not be in 14 the books. This is a new document. This is a 15 document that your counsel showed to Mr. Crow 16 several days ago. And would you take a look at 17 the -- do you see the little box at the bottom 18 that says "in brief"? 19 A. Yes. 20 Q. Okay. And as you read through that, it 21 says at the bottom, "For 1987, United Financial 22 had a loss of 118 million or $14.53 per share." 18805 1 Do you see that? 2 A. Yes. 3 Q. And those were the numbers that we 4 looked at when I showed you the 1987 annual 5 report, weren't they, of UFG? 6 A. Yes, sir. 7 Q. Okay. And that same annual report 8 contained a financial statement that showed that 9 USAT had failed its minimum net worth requirement 10 as of December 31st, 1987? 11 A. Yes, sir. 12 Q. Okay. Now, it shows here that this 13 information was publicly available on 14 February the 6th, 1988. 15 A. On United Financial Group? 16 Q. Yes. 17 A. Yes, sir. 18 Q. And United Financial Group's financial 19 statement -- that is, the audited statement that 20 was dated February the 5th, 1988 -- stated that 21 UFG -- USAT had failed its net worth requirement 22 as of December 31st, 1987. 18806 1 Do you recall that? 2 A. That's correct. 3 Q. So, as a director, wouldn't you have 4 been aware that on February the 4th, 1988, UFG had 5 announced the results of its year end financial 6 statement? 7 A. Well, I'm looking at what you just gave 8 me; and it says in the second paragraph of that 9 article -- it says, "The capital ratios of United 10 Savings remains above regulatory minimum because 11 of 196 million in preferred stock on its books." 12 Q. Did you write that? 13 A. No, I did not. 14 Q. Is it fair to say that on 15 February the 6th, 1988, the financial statement -- 16 the year-end financial statement for UFG was 17 available? 18 A. For UFG? 19 Q. Yes. 20 A. Yes. 21 Q. And that's the financial statement that 22 appears in the proxy that I showed you yesterday, 18807 1 isn't it? 2 A. In the proxy? 3 Q. In the auditor's report. 4 A. In the 10K. 5 Q. Well, I believe it's the -- I'm sorry. 6 In the annual report. You're absolutely correct. 7 A. Yes, sir. 8 Q. Okay. And that's what is marked as 9 Exhibit T8033, and it's at Tab 402. You may want 10 to turn to that. 8033. 11 12 (Discussion held off the record.) 13 14 Q. (BY MR. RINALDI) Now, I believe if 15 you turn to Page -- well, Page 39, which is the 16 auditor's report -- you see the auditor's report 17 is dated February the 5th, 1988? 18 A. That's correct. 19 Q. "And the following date is reported in 20 the news, the results of that year-end -- those 21 year-end financial statements." 22 Do you see that? 18808 1 A. Yes, sir. 2 Q. So, you would have been aware by 3 February the 6th, 1988, of the existence of the 4 results for year-end 1987, correct? 5 A. For UFG? 6 Q. Yes. 7 A. Yes. 8 Q. And in the auditor's report, it says in 9 the third paragraph down, "USAT's ability to 10 continue as a going concern" -- I'm sorry -- "As 11 more fully discussed in Note 14, the company's 12 principal subsidiary, United Savings Association 13 of Texas, is subject to certain minimum regulatory 14 capital requirements which were not met at 15 December 31st, 1987." 16 Do you see that? 17 A. Could we look -- yes, I do. I see 18 that. I was just wondering if we could look at 19 what Note 14 says. 20 Q. Sure. Do you think that will help? 21 A. I don't know. 22 Q. Does it appear from what I've just 18809 1 shown you that you were aware of the financial 2 results for the fourth quarter of 1987 for UFG and 3 that those fourth quarter results reflected that 4 USAT had failed its minimum net worth requirement? 5 A. I'm looking at Note 14. I think that 6 may be helpful. 7 Q. Okay. 8 THE COURT: What page is that on? 9 THE WITNESS: 858. 10 THE COURT: Thank you. 11 Q. (BY MR. RINALDI) And do you find it 12 helpful, sir? 13 A. I do. 14 Q. And if you look at the fourth full 15 paragraph down, it says, "Since USAT failed to 16 meet its minimum requirement, the FSLIC has the 17 authority, the statutory right, to manage the 18 affairs of USAT as it deems appropriate," and then 19 it goes on. 20 And above that in the second paragraph, 21 it says, "At December 31st, 1987, USAT reported to 22 the Federal Home Loan Bank of Dallas that it had 18810 1 regulatory capital of 196.9 million or 2 5.3 million, more than the minimum capital 3 requirement. Subsequently, USAT was notified by 4 the Federal Home Loan Bank of Dallas that its 5 requirement for the exemption..." 6 And it goes on. Then it says -- 7 A. I think that explains the discrepancy. 8 Q. Right. And then in the third 9 paragraph, it says, "Accordingly," the last 10 sentence, "due to events subsequent to USAT's 11 filing of its December 31st, 1987 Federal Home 12 Loan Bank quarterly report, USAT has determined 13 that it failed to meet its minimum requirement by 14 at least $45.6 million." 15 Do you see that? 16 A. Right. I think that's why, on 17 February 5th, there was a different answer. I 18 think that's why the article says that. 19 Q. We were looking at an auditor's report 20 that says February 5th, 1988? 21 A. That's the date of their report. 22 Q. That's the date that it was made public 18811 1 to the press, wasn't it? 2 A. For UFG? 3 Q. That's correct. 4 A. Yes, sir. 5 Q. So that on February the 5th, you knew 6 what the financial results of UFG had been; and 7 you knew that, as indicated in paragraph -- I mean 8 Footnote 14, that there had been a net worth 9 failure by USAT? 10 A. Again, I think that's not correct. I 11 think on February 5th there was a belief that it 12 was above the minimum regulatory net worth and 13 subsequent to that, the numbers had to be changed. 14 I think that's what Footnote 14 is saying. 15 Q. Let's take a look at another document, 16 sir. Before we go to that, let me ask you a 17 couple of questions. 18 At USAT, was there a practice of 19 holding a pre-meeting board meeting before the 20 actual board meeting? 21 A. A pre-meeting board meeting? 22 Q. Yeah, before the actual board meeting. 18812 1 I mean, did the directors sometimes get together 2 and have a meeting before the actual board 3 meeting, what they would refer to as a working 4 meeting? 5 A. At times, they would, yes. 6 Q. And what would typically take place at 7 a working meeting? 8 A. Sometimes it would be discussing issues 9 that were going to come up at the board meeting, 10 maybe some strategic issues. I'm not sure there 11 was a typical -- 12 Q. Who would participate in the working 13 meetings that preceded the board meetings, sir? 14 A. I'm trying to remember. They didn't 15 happen that often. I think it would probably be 16 the board and maybe the executive officers. 17 Q. Well, what would -- if the board 18 participated in the working meeting that preceded 19 the actual meeting, what would be the purpose for 20 the working meeting? 21 A. There might be things that wanted to be 22 discussed at the board -- at the pre-meeting that 18813 1 you might not want to discuss that were still in a 2 state of flux or issues that you didn't want to 3 raise at the board meeting. 4 Q. I'm trying to understand why there 5 would be something that you could discuss at a 6 pre-meeting but that you wouldn't want to discuss 7 at a board meeting. 8 A. There might be people at the board 9 meeting that were not members of the board that 10 you wouldn't necessarily want to bring out things 11 that were in a partial state of being worked on. 12 Q. I see. And so, you would have taken 13 those things up at the pre-board meeting and 14 reached some preliminary conclusion with respect 15 to those matters? 16 A. It's possible, yeah. 17 Q. Okay. Now, would you take a look at -- 18 do you know if there was a pre-board meeting on 19 the evening prior to the February 11, 1988 board 20 meeting in which you approved your contract? 21 A. February 11? No, I don't. 22 Q. Would you take a look at what's been 18814 1 previously marked as Exhibit T4476? And this is 2 Tab 404. And this is a memo from Jenard Gross or 3 Jenard Gross -- I mean from Mike Crow to Jenard 4 Gross. 5 Have you ever seen this memo before? 6 A. Yes, I have. 7 Q. And when would you have seen this? At 8 or about the time it was prepared? 9 A. I don't believe I saw it at that time. 10 Q. But since then, it's been shown to you 11 by your counsel in preparation for your testimony 12 here today? 13 A. I looked through a whole lot of 14 documents, and I think I saw this document. 15 Q. And it says there, "Since the examiners 16 are going to be at our board meeting on Thursday, 17 February 11th, I suggest we present the 1988 18 profit plan the night before at the working 19 meeting at the Remmington Hotel." 20 Do you see that? 21 A. Yes. 22 Q. Does that refresh your recollection 18815 1 that there was a pre-meeting working meeting at 2 the Remmington Hotel on the evening prior to the 3 February 11th, 1988 board meeting? 4 A. It doesn't, but I have no reason for 5 thinking it didn't take place. 6 Q. Then he says, "I'm afraid if we show 7 the 100 million plus, the loss of 100 million plus 8 for the year, it may not be productive." 9 Do you see that? 10 A. Yes. 11 Q. So, in other words, what Mr. Crow is 12 indicating there is that at the pre-meeting the 13 night before with members of the board, they were 14 going to discuss the projected losses of 15 $100 million for the coming year. 16 Is that a fair reading? 17 A. I think that's what it says, yes. 18 Q. Do you know why they didn't want to 19 discuss those 100-million-dollar losses at the 20 meeting on February the 11th, when the examiners 21 were going to be present? 22 A. The only thing I could think of by 18816 1 reading this is he's presenting it for the first 2 time. When you present a budget or a projection 3 that would be discussed, things might change 4 significantly. 5 Q. But you, as a member of the board, 6 would have been aware that UFG and USAT were 7 projecting $100 million in losses in the year 8 1988, wouldn't you? 9 A. At about that time, yes, sir. 10 Q. And that clearly would have put USAT 11 far below its minimum regulatory capital, wouldn't 12 it? 13 A. Yes, it would. 14 Q. So, would you conclude from that that 15 by February the 11th, 1988, you knew to a 16 certainty that USAT was failing its minimum net 17 worth capital requirement? 18 A. You know, I think I said that. 19 Q. Now, when we stopped yesterday, 20 Mr. Berner, we were discussing the March 30th, 21 1988 meeting of the compensation committee several 22 months after the February 11th one. 18817 1 Do you recall that? 2 A. Yes, sir. 3 Q. And as I recall -- correct me if I'm 4 wrong -- you had proposed along with Mr. Munitz 5 and Mr. Gross -- you had made a proposal to 6 Mr. Whatley at that meeting, and Mr. Whatley was 7 the sole member of the compensation committee at 8 that time; is that correct? 9 A. Yes, sir. 10 Q. And your proposal was to, one, give a 11 salary increase to members of -- to certain 12 employees in executive management, and number two, 13 to give a new one-time special bonus, and number 14 three, to enter into new employment contracts that 15 would have longer terms and severance benefits, 16 and number four, you were going to give new 17 employment contracts to Mr. Gross and Mr. Munitz 18 who had not previously had employment contracts. 19 Is that a fair summary of what took 20 place on March the 30th? 21 A. I think it is. Do you have the number 22 so that I can take a look at that memo? 18818 1 Q. Do you want to look at the memo, or do 2 you want to look at the minutes? 3 A. The -- either one. 4 Q. Well -- 5 A. Just whatever you're referring to. 6 Q. Let me see what -- 7 MR. VILLA: I think it's T8053. 8 MR. RINALDI: Yeah. 9 MR. VILLA: Tab 421. 10 A. Okay. I have it. 11 Q. (BY MR. RINALDI) Okay. And what you 12 had proposed to Mr. Whatley is that first USAT 13 give a salary increase; is that correct? 14 A. (Witness nods head affirmatively.) 15 Q. And where is that reflected in the 16 March 31st memo? 17 A. Well, the salary increase is actually 18 No. 2. 19 Q. And do you recall how you were going to 20 achieve that? 21 A. We would change the salaries by adding 22 in the bonus to reflect the true market value of 18819 1 certain employees. 2 Q. Now, that's a memo that you drafted for 3 Mr. Munitz, Mr. Gross, and Mr. Whatley. 4 How do you determine what the true 5 market value of the employees that were going to 6 receive the higher salary levels was? 7 A. Well, again, what we were doing was we 8 were taking their previous year's bonus, rolling 9 it in, and then we were going to hire Hewitt or -- 10 well, it turned out to be Hewitt -- an independent 11 consultant to determine that. 12 Q. So, at the time you undertook to do 13 this, you had no idea whether those increases 14 reflected the true market value for those 15 employees who were receiving the salary increases, 16 did you? 17 A. Well, we did. 18 Q. And how did you make that 19 determination, sir? 20 A. Because I guess at the previous 21 meeting, there was a -- I guess it was the 22 November meeting. There was a suggestion by the 18820 1 compensation committee that the bonuses would be 2 paid because that would reflect the true market 3 value. 4 Q. But those were the 1987 bonuses that 5 were paid in 1988. My question to you is: How 6 did you know that an increase in salary by the 7 amount of the 1987 bonuses that were paid in 1988 8 would elevate the salaries of those individuals to 9 the true market value of those individuals? 10 A. Well, as I said, we assumed it would 11 based on the previous discussion; and then we were 12 going to hire a consultant. 13 Q. And at the previous discussion, had 14 anybody conducted a study, hired a consultant, or 15 done any kind of a report to ascertain what was 16 the true market value of the persons who were 17 receiving salary increases pursuant to the 18 March 30th, 1988 actions of the compensation 19 committee? 20 A. Not that I know of. 21 Q. Okay. Now, how were they going to 22 effectuate those? You said they were going to 18821 1 roll the bonus in. 2 Do you recall whether they were going 3 to be implemented immediately or whether they 4 would be implemented at some time in the future? 5 A. I believe they were going to be 6 implemented immediately. 7 Q. It indicates here that they were going 8 to be effective January 1st, 1988. 9 Do you see that? 10 A. Yes. 11 Q. Do you recall, then, that they were 12 going to -- that the employees who received salary 13 increases were going to receive a retroactive 14 payment? 15 A. Yes. 16 Q. Now, how did Mr. Whatley, when he 17 approved this, know how much each person's salary 18 was going to be after the increase which he 19 granted was given? 20 A. Well, he knew it was going to be equal 21 to what they received last year with their bonus. 22 Q. I understand that. But how did he, for 18822 1 example, know how much Jenard Gross was going to 2 receive under this new salary structure? Did he 3 have in front of him a -- did you provide to him a 4 list of the bonuses which had been paid the 5 previous year? 6 A. I don't believe I provided that to him. 7 Q. So, in other words, he just passed on a 8 formula without knowing the actual amounts that 9 people's salaries -- by which those salaries were 10 going to be increased? 11 A. I don't know. I don't know what he 12 had, whether he passed on a formula or not. 13 Q. Let's try to clarify something. 14 Mr. Whatley was acting pursuant to a proposal that 15 you made to him, correct? 16 A. Yes, sir. 17 Q. Okay. And you provided him with a 18 packet of materials, did you not, for his 19 consideration? 20 A. I think I did, uh-huh. 21 Q. And those materials included this memo. 22 Right? And I think it shows at the bottom, there 18823 1 was even a draft agreement attached to -- if you 2 look at Paragraph 6, do you see that? It makes 3 reference to a draft agreement. 4 A. Yes, sir. 5 Q. So, you had provided him with a packet 6 of materials. And my question to you is: In your 7 packet of materials -- I don't want to put words 8 in your mouth. 9 Is that a fair statement, that you and 10 Mr. Gross and Mr. Munitz provided materials to 11 Mr. Whatley and Mr. Whatley then acted on the 12 basis of those materials for the recommendation? 13 A. I can say it's fair to say that I 14 presented him with a packet of materials. I don't 15 know what else he had at this time. 16 Q. So, you don't even know if he knew how 17 much he was going to be increasing the salaries of 18 a particular individual? 19 A. I don't know if he knew. 20 Q. All he knew is there was a formula that 21 was going to be applied? 22 A. I don't know if that's what he knew. I 18824 1 don't know what he knew. 2 Q. You know that he knew the formula was 3 going to be applied because that's what you had 4 proposed? 5 A. Yes, I do. 6 Q. Now, in the past when USAT had granted 7 salary increases, was it typical for them to first 8 do a performance review of the individual before 9 they granted the salary increases? 10 A. I think that's right. 11 Q. And in this case, were any performance 12 reviews done prior to granting the salary 13 increases? 14 A. I don't know. 15 Q. Did you receive a salary increase? 16 A. Yes, I did. 17 Q. Did you receive a performance review 18 from your supervisor or your superior prior to 19 receiving your salary increase? 20 A. No, I didn't. 21 Q. Did any members of your staff receive a 22 salary increase? 18825 1 A. Yes, they did. 2 Q. And when they received those increases, 3 did you give them performance reviews? 4 A. I think I gave them performance reviews 5 at the end of the previous year. 6 Q. But you didn't give them a performance 7 review in connection with the salary increase that 8 occurred at or after March 30th pursuant to the 9 March 30th compensation committee meeting? 10 A. That's correct. 11 Q. Do you know if anybody did a salary 12 review for the persons who received salary 13 increases? 14 A. I don't know. 15 Q. Okay. Now, if we go on down to 16 Paragraphs 4 and 5 of your -- of T8053, the memo 17 we've been looking at, it talks about a special 18 bonus; and I believe that's in Paragraph 5. 19 Can you describe what that special 20 bonus consisted of? 21 A. Yes. It was a bonus equal to the 22 amount of bonus that they had received the 18826 1 previous year. 2 Q. So, in other words, the bonus from the 3 previous year got wrapped into the salary for the 4 present year and was being paid immediately as 5 part of their salary, correct? 6 A. For certain people, that's correct. 7 Q. Yes. And in addition to that, you were 8 then going to give another bonus over and above 9 that? 10 A. For a lot more people, but that's 11 correct. 12 Q. So, in effect, those people who 13 received the salary increase and the new bonus 14 would, in effect, be receiving two bonuses in 15 1988? 16 A. Well, again, our view was that the 17 bonus that was received really was a reflection of 18 what their salary should have been. So, they were 19 only getting one bonus. 20 Q. But the reason you put the bonus into 21 the salary was you were concerned that they might 22 not get their bonus at the end of the year; isn't 18827 1 that correct? 2 A. That was one of the reasons, yes. 3 Q. So, instead of waiting until the end of 4 the year to pay the bonus, you rolled the bonus 5 into the salary, correct? 6 A. That's correct. 7 Q. So, the salary included the first 8 bonus; is that correct? 9 A. That's correct. 10 Q. And then after rolling the bonus into 11 the salary, a second bonus was given; is that 12 correct? 13 A. Well, again, as I say, we thought that 14 the bonus was what their fair market value was. 15 So, there really was only one bonus. 16 Q. So, you're telling me that -- let's say 17 in the case of yourself -- that your fair market 18 value -- I believe you received a bonus of 19 $114,000 or thereabouts at the end of 1987 that 20 was paid in 1988. 21 Do you recall that? 22 A. Yes, I do. 18828 1 Q. And your base salary at that point was 2 $170,000. 3 Do you recall that? 4 A. Yes. 5 Q. And you believe that your fair market 6 value as an employee had increased since the end 7 of the year to March the 30th to $284,000? 8 A. Well, I'm sure I believed that my fair 9 market value was a lot more than that; but no one 10 else did. 11 Q. And the reason that the original bonus 12 had been rolled in -- wait a second. I'm sorry. 13 But this new bonus wasn't going to be 14 paid all at once, was it? 15 A. That's correct. 16 Q. 25 percent down, and the other 17 75 percent was going to be placed in a trust? 18 A. Right. 19 Q. What was the reason for placing the 20 bonus in trust? 21 A. Well, the reason was that we had -- we 22 had a bunch of people that we thought were 18829 1 extremely important for the running of the 2 institution. These were 60 or 70 people that were 3 key. And we were in a position where, you know, 4 they read the newspapers also; and it looked like 5 the institution was going to potentially fold. 6 They were seeing that Texas thrifts were in bad 7 shape. They were faced with work where they were 8 constantly having bad things happen to them, and 9 we wanted to keep them because we were told we 10 were going to be a survivor. And we thought the 11 way to do that, the way to give them an incentive 12 to stay, was to say, "Here's a little bonus now; 13 and if you stick it out to the end of the year, 14 there's money at the end of the year for you." We 15 were trying to keep these people. 16 Q. Mr. Leahey had informed you 17 approximately five days earlier that in the event 18 of a receivership of USAT, that any employment 19 contracts or contracts for bonuses could be voided 20 by the FSLIC, hadn't he? 21 A. Yes, he had. 22 Q. And by putting the money into a trust, 18830 1 it had the effect of circumventing the provisions 2 of the regulatory scheme which permitted the 3 Federal Home -- I mean the FSLIC to void 4 contractual arrangements with employees when an 5 institution went into receivership? 6 A. It wasn't done in an attempt to 7 circumvent at all. It was an attempt to tell 8 people that this money is going to be there for 9 you if you stick it out to the end of the year. 10 Q. But it had the effect, did it not, of 11 impeding the ability of the FSLIC to terminate the 12 contract and recover promised moneys that may have 13 been promised under employment contracts? 14 A. Not under the employment contracts, not 15 at all. In fact, they received all that money 16 back. It had the effect of keeping quality people 17 at the institution at a time when it was in dire 18 need until the end of the year. 19 Q. Now, you said 70 people got these 20 bonuses. 21 Do you recall that? 22 A. I think it was that range. 18831 1 Q. In fact, wasn't that the number of 2 people that got bonuses at the end of the year? 3 A. Right. It was those same people. 4 Q. Well, we won't go into which people got 5 bonuses. 6 As a result of putting this into a 7 trust when USAT failed, the FSLIC could not 8 recover those moneys which had been promised under 9 the executive bonus; isn't that correct? 10 A. They tried to. They could not, that's 11 correct. 12 Q. And that was the very purpose you 13 sought to achieve? 14 A. The purpose we sought to achieve was to 15 keep people there. And the fact that they stayed 16 there, which was a help to the institution, they 17 got the money they were entitled to. 18 Q. Mr. Berner, I want you to listen to my 19 questions and answer the questions I ask. 20 You told me that that was one of your 21 purposes. I asked you if another of those 22 purposes wasn't to insulate that money from the 18832 1 FSLIC so that the FSLIC could not recover it in 2 the event that the institution failed? 3 A. I don't think that that was the reason. 4 Q. Okay. Now, then, in Paragraph 6, it 5 talks about -- that they would provide for amended 6 employment contracts along the lines of the draft 7 attached. 8 Did you then prepare a draft and submit 9 that to Mr. Whatley? 10 A. I believe so. 11 Q. Okay. And the contracts were going to 12 clarify the circumstances under which a change of 13 control might be triggered. 14 Do you see that? 15 A. Yes, sir. 16 Q. Okay. Now, one of the reasons for your 17 making this proposal was to deal with the problem 18 caused by the triggering of the change of control 19 under the UFG contract; isn't that correct? 20 A. Yes, sir. 21 Q. And that change of control could have 22 been very costly to UFG if it -- if people like 18833 1 Mr. Gray had tendered their resignations and UFG 2 had to pay two years' severance to those 3 individuals; is that correct? 4 A. Yes. 5 Q. And by approving the new USAT salary 6 and bonus and contract arrangements on 7 March the 30th, 1988, it resolved the problem that 8 UFG had that had been created by the change of 9 control issue, didn't it? 10 A. Yes. 11 Q. So, you used the assets of USAT, the 12 subsidiary, to resolve the financial problem of 13 the parent, UFG, didn't you? 14 A. Yes. 15 Q. Thank you. 16 Now, do you recall that prior to 17 preparing your memo, which is 8053, you had had 18 several meetings with Mr. Gross and Mr. Munitz on 19 this same subject? 20 A. I believe that's right. 21 Q. Okay. And maybe this will help us 22 figure out what, in fact, you gave to Mr. Whatley. 18834 1 Let's take a look at T8052. This is the 2 immediately-preceding exhibit. It appears at 3 Tab 420. 4 Have you had a chance, sir, to take a 5 look at what's been marked as T8052? 6 A. Yes, I have. 7 Q. And I notice that in the first -- is 8 this a document that you would have drafted? 9 A. Yes. 10 Q. One other question about 8053. It 11 indicates that it was privileged and confidential 12 attorney work product. 13 Do you see that? 14 A. Yes. 15 Q. Okay. What did you do with this memo 16 when you -- after you had finished drafting it? 17 Did you attach it to the minutes? 18 A. It might have been. I don't know. 19 Q. If it was privileged and confidential, 20 would it have been attached to the minutes? 21 A. I don't have a recollection one way or 22 the other, whether it was or wasn't. 18835 1 Q. But is it fair to say, sir, that if it 2 had not been attached to the minutes, there's no 3 way anyone looking at the minutes could have 4 determined what occurred on March the 30th, 1988? 5 A. By looking at the minutes? 6 Q. Yes. 7 A. I think that's right. 8 Q. Okay. Now, going back to T8052, which 9 is a memo that looks strikingly similar to 8053, 10 was this an earlier draft of 8053? 11 A. It looks like it. 12 Q. It indicates in the first paragraph 13 that you had meetings on March the 28th and 29th 14 among Gross, Munitz, and Berner. 15 Do you see that? 16 A. Yes, I do. 17 Q. So, is it fair to say that you and 18 Mr. Gross and Mr. Munitz were the architects of 19 the salary increase and bonus and new employment 20 contracts that was presented to Mr. Whatley on the 21 30th? 22 A. I think that's right for the most part. 18836 1 Q. And do you remember we talked about the 2 change of control provision? 3 A. Yes. 4 Q. And you told me, I believe, that you 5 thought that there probably had been a technical 6 change of control? 7 A. I think that's right. 8 Q. Did you tell that to Mr. Gross and 9 Mr. Munitz? 10 A. I think I did. 11 Q. Let's take a look at your memo, 12 Paragraph 1. It says, "The board of directors of 13 UFG and USAT will take the position that there has 14 been no change of control which triggered certain 15 executives' employment contracts." And you go on 16 and you state, "We will state that an attempt to 17 enforce the employment contracts at this time 18 would be resisted." Then it says, "In my view, 19 this is a correct interpretation." 20 Was that your view at the time on 21 March the 30th, that the change of control had not 22 been triggered? 18837 1 A. It was not within the intent of the 2 agreement, that's correct. 3 Q. And that's what you advised Munitz, and 4 that's what you advised Gross? 5 A. That was not the intent of the 6 agreement, that's correct. I think I said that 7 we'll take that position. My position was that -- 8 that was not within the intent of what the change 9 of control provision was supposed to deal with. 10 Q. I don't see anything about intent 11 there. It simply says, "The board will take the 12 position that there was no change of control." 13 And then it goes on and says, "In my view, that's 14 a correct interpretation." 15 A. Correct, because it wasn't within the 16 intent of the parties. 17 Q. So, you felt there had been no change 18 of control; is that correct? 19 A. I felt that we could make the argument 20 that that was not within the intent of the parties 21 and we could resist the intent to say there had 22 been a change of control. 18838 1 Q. And then you go on and it states, "And 2 payments at this time could subject the board to 3 charges of corporate waste." 4 Do you see that? 5 A. Yes, I do. 6 Q. And was that also your opinion, that if 7 they had paid severance benefits pursuant to the 8 change of control provision, they could be subject 9 to claims of corporate waste? 10 A. In this case, that's correct. 11 Q. But you didn't think that as directors 12 of USAT, that you could be subject to corporate 13 waste claims if you granted substantial salary 14 increases and granted another bonus in order to 15 resolve the problem created by the change of 16 control? 17 A. That's absolutely correct. 18 Q. Okay. Now, if you take a look at the 19 minutes, does it appear that, essentially, the 20 proposal that was made to Mr. Whatley later was 21 all worked out in advance by you and Mr. Gross and 22 Mr. Munitz? 18839 1 THE COURT: What document are you 2 looking at? 3 MR. RINALDI: I'm looking at T8052. 4 THE COURT: Are those minutes? 5 MR. RINALDI: No. This is a draft of 6 8053, and the only minutes that he's testified 7 existed are 8050. 8 THE COURT: I thought you made 9 reference to minutes. That's why I asked. 10 MR. RINALDI: I'm sorry. I apologize. 11 Q. (BY MR. RINALDI) So -- 12 A. I'm sorry. What was your question? 13 Q. Well, you and Mr. Gross and Mr. Munitz 14 sat down and came up with a solution to the 15 problem, correct, for the change of control; and 16 you, over the course of several meetings, refined 17 that. There's a meeting on the 28th and the 29th. 18 Then on the 30th, it was presented to 19 Mr. Whatley, correct? 20 A. That's correct. 21 Q. And Mr. Whatley adopted the thing in 22 its entirety? 18840 1 A. He adopted the one that's 8053. 2 Q. Right. 3 A. Right. 4 Q. Now, take a look at the -- we had 5 talked about a draft document, and I see that a 6 draft and some other materials are attached to the 7 March 30th, 1988 memo, which is T8052. 8 Do you see that? 9 A. Yes. 10 Q. Would that have been the same draft 11 that was attached to -- to the -- that was 12 submitted to Mr. Whatley? 13 A. I don't know. It might have been. 14 Q. Well, I only ask because in T8053, it 15 indicates that a draft was given to Mr. Whatley. 16 A. Right. 17 Q. Yeah. So, would you surmise that the 18 draft that appears on the March 30th, 1988 memo is 19 the one that was given to Mr. Whatley? 20 A. I would surmise that. I don't know it, 21 but I would surmise it. 22 Q. And take a look at the draft. At that 18841 1 point in time, it talks about giving a contract 2 between the executive and UFG. 3 Do you see that in the first line of 4 the draft which is US 301-4453 which is the 5 attachment to T8052? 6 Do you see that? 7 A. Yes. 8 Q. Okay. Now, it says in the first line 9 that this is an agreement with UFG. But then 10 there's a note, "We would provide same contract 11 with USAT with required FSLIC provisions." 12 Do you see that? 13 A. Yes, I do. 14 Q. So, when you voted -- when Mr. Whatley 15 voted to approve the contracts, the contracts that 16 he was -- that were going to be entered into in 17 the future were going to be two sets of contracts; 18 is that correct? 19 A. I think that was the contemplation. 20 Q. This is kind of like a belts and 21 suspenders thing? If the UFG -- if UFG is unable 22 to pay, then USAT can pay? 18842 1 A. Same purpose as the other two 2 contracts, that's correct. 3 Q. Under the new contracts, who was going 4 to be responsible for the base salary? 5 A. USAT would pay the base salary. That 6 was the intent. 7 Q. So, the drafting glitch that had 8 occurred in the September 9th, 1987 contracts 9 persisted? 10 A. That's right. Nobody pointed it out. 11 Q. Now, what was the term that you were 12 proposing to Mr. Whatley at this point in time? 13 Take a look at the second page where it talks 14 about the term. 15 A. Looks like a -- December 31, 1994. 16 Q. And this was March 30th, 1988. So, it 17 would have been well over six years. Right? 18 A. Right. 19 Q. Almost a seven-year contract. Right? 20 A. Six and a half years, right. 21 Q. And you didn't think that was a bit 22 excessive? 18843 1 A. I think it was beneficial to USAT, but 2 this is just a draft agreement. 3 Q. Well, I understand that. But on 4 March 30th, USAT is an institution that is 5 unlikely to proceeded without receiving some sort 6 of assistance. We already know that. And you're 7 proposing entering into a seven-year contract with 8 these people? 9 A. That's what the draft says, yes. 10 Q. And did you contact regulatory counsel 11 to determine whether that was an unreasonable term 12 for such an agreement before you proposed it to 13 Mr. Whatley? 14 A. I don't believe so. 15 Q. Okay. Now, did the contract then have 16 a -- a change of control or termination severance 17 benefit provision? In fact, I'll help you. If 18 you go to Pages 10 and 13, on Page 10, you'll see 19 it talks about the severance amount. 20 A. Page 10? 21 Q. In Paragraph D2. 22 A. (Witness reviews the document.) Right. 18844 1 Okay. Yeah, I see that. 2 Q. So that if a person was terminated 3 for -- and it wasn't for cause, he would be 4 entitled to, again, two years' of annual salary, 5 correct? 6 A. That's correct. 7 Q. Okay. And then I see that on 8 Page 23 -- or 13, there's something different. 9 It's sort of a new wrinkle that we haven't seen 10 before. It's Paragraph 9I. 11 Do you see that? 12 A. Yes. 13 Q. It says, "During the term of this 14 agreement, the company shall obtain and maintain a 15 letter of credit with a national bank selected by 16 the executive." 17 What was the purpose of this proposed 18 letter of credit as you understood it, sir? 19 A. It was to try to give the employee 20 comfort that if there was a severance payment, it 21 would be there for them. 22 Q. And in the event that the institution 18845 1 were to go into receivership and FSLIC were to 2 declare the contracts void, the employee could, 3 nonetheless, attempt to recover the severance 4 benefit by drawing down on the letter of credit? 5 A. They could attempt to. 6 Q. All right. And isn't that a very 7 similar kind of mechanism that Mr. Leahey 8 described to you in his letter which is 8048 that 9 was considered to be an unsafe and unsound 10 practice in FSLIC versus Bass? 11 A. Yes. 12 Q. Did it trouble you that you were 13 proposing an arrangement that, in another case, 14 had been found to be an unsafe and unsound banking 15 practice? 16 A. Well, as we talked yesterday, there 17 were a lot of distinctions here. If the risk -- 18 it was declared to be an unsafe and unsound 19 practice, the risk was going to be on the employee 20 who would have thought that he had the right to 21 get his money and would have found out, having 22 perform under the contract, that he didn't. So, 18846 1 it was less of a concern to me looking at it from 2 the USAT side. 3 Q. Now, following the meeting on the 30th 4 of March, were the salary increases implemented 5 immediately? 6 A. I believe so. 7 Q. And would you take a look at T8055? 8 And this is Tab 422. 9 Now, turning to the second page of the 10 document, do you recognize the signature that 11 appears at the bottom of the page? 12 A. I think it's Jenard Gross' signature. 13 Q. Okay. And does this appear to be the 14 salary adjustments that were discussed at the 15 March 30th meeting of the compensation committee? 16 A. I think so. 17 Q. And the second column over talks about 18 the original base. Do you see that? 19 A. Yes. 20 Q. And then the next column over talks 21 about the '87 bonus. And then the third column on 22 the far right indicates the new base. 18847 1 Do you see that? 2 A. Yes. 3 Q. So, in other words, if I want to find 4 out what a person's salary was increased to, I 5 simply had to add the first two columns; and the 6 sum of that is the third column over called the 7 new base. Is that right? 8 A. Looks like it, yes. 9 Q. Under this scheme, who were to be the 10 four most highly compensated individuals under the 11 new base salary? 12 A. You're talking about just these people 13 that are listed on the schedule? 14 Q. That's correct. Well, did anyone else 15 receive a salary increase besides these people? 16 A. Well, I think there are other people 17 that might have been more highly compensated. I'm 18 not sure. 19 Q. I'm asking you who the four most highly 20 compensated people that received a new base salary 21 under the scheme that is listed here. 22 A. It was Jenard Gross. 18848 1 Q. And he was an architect of the plan, 2 wasn't he? 3 A. Yes. 4 Q. Okay. Who else? 5 A. Barry Munitz. 6 Q. And he was one of the other architects 7 of the plan, wasn't he? 8 A. Yes. 9 Q. And who else? 10 A. Myself. 11 Q. And you were a third architect of the 12 plan? 13 A. Yes. 14 Q. And then the fourth person would have 15 been Mr. Crow? 16 A. Correct. 17 Q. And did Mr. Crow participate in your 18 discussions, and was he aware of this new salary 19 arrangement that was being proposed? 20 A. I'm not sure if he was or wasn't. 21 Q. Now, let me turn to the next page over 22 in the same document to the fourth page in. 18849 1 Does that also appear to be Mr. Gross' 2 signature? 3 A. Yes, it does. 4 Q. And does that indicate that at or about 5 the 5th of April 1988, the pro rata bonuses of 6 25 percent of the '87 bonus were paid to persons 7 who were to receive them? 8 A. Yes. 9 Q. Okay. Now, you had indicated that you 10 thought there were 70 people who had received 11 these special or executive bonuses. 12 Do you recall that? 13 A. I remember that number from one of the 14 minutes you showed me. Yes, I said that. 15 Q. If I told you that there were only 43 16 people here, would that surprise you? 17 A. No. 18 Q. So, everybody who received a bonus at 19 the end of 1987 that was paid in '88 didn't 20 necessarily receive an executive bonus or a 21 special bonus under your new scheme? 22 A. I think they did. I think it probably 18850 1 means that those people had left. 2 Q. Well, if they had left, why would you 3 give them the executive bonus if the purpose of it 4 was to keep them there? 5 A. That's what I'm saying. At the end of 6 1987, somewhere in between when they got the bonus 7 and this time, they had apparently left. 8 Q. So, you're telling me 27 people had 9 left of the 70 people? 10 A. Just looking at what you're telling me, 11 yes, I think that's right. 12 Q. That's your surmise? 13 A. That's my surmise. 14 Q. Okay. Now -- and the -- if you take a 15 look at the bottom of the page -- that's the 16 fourth page of T8055 -- it indicates what the 17 total cost of the bonus was going to be, does it 18 not? 19 A. Yes. 20 Q. This is UFG-D1983. 21 Do you see that? 22 A. Yes. Yes, I do. 18851 1 Q. What was that cost going to be? 2 A. The total cost was 1,165,460. 3 Q. And the immediate payment was going to 4 be 291,365; is that correct? 5 A. Right. 6 Q. And USAT entered into this new bonus 7 arrangement at a point in time after it had been 8 advised by the examiners on March the 30th, 1988, 9 that it was failing its net worth capital by at 10 least $50 million by USAT's reckoning and by over 11 $100 million by the examiners' reckoning; is that 12 correct? 13 A. Yes, it is. 14 Q. And you agreed with what was done 15 there? 16 A. Absolutely. 17 Q. And you were one of the principal 18 beneficiaries? 19 A. I was a beneficiary, yes. 20 Q. You wouldn't call yourself a principal 21 beneficiary? 22 A. Possibly. 18852 1 Q. Now, take a look at the next document, 2 which is T8056. This is a letter to Mr. George 3 Smith from Michael Crow; and it indicates that by 4 April the 5th, the money -- I mean, an escrow 5 agent was contacted and the -- that the moneys 6 were put into an escrow account. 7 Do you see that? 8 A. Yes. 9 Q. And the escrow agent was going to be 10 Texas Commerce Bank, correct? 11 A. Yes, sir. 12 Q. Then if we move on about four 13 documents, we come to a document entitled -- this 14 is T8062, and it's Tab 427. It's United Savings 15 Association of Texas' 1988 executive bonus plan. 16 Do you see that? 17 A. Yes. 18 Q. And then attached to that is a trust 19 document. 20 Did you participate in the drafting of 21 this, United Savings Association of Texas' 22 executive bonus plan? 18853 1 A. I believe I did. 2 Q. And the trust document that's attached, 3 as well? 4 A. Yeah. I wasn't the primary drafter, 5 but I participated. 6 Q. Would you have overseen the drafting by 7 outside counsel? 8 A. Yes. 9 Q. So, this isn't the kind of document 10 that you would have drafted in-house? 11 A. I don't believe I drafted it, no. 12 Q. And when you -- do you recall which 13 counsel drafted this? 14 A. Yes. 15 Q. Who? 16 A. It was Jesse Gelsomini. I'm surmising 17 that. There were initials at the last page of 18 JJG. 19 Q. Do you know which firm he was with? 20 A. Mayor, Day & Caldwell. 21 Q. And did Mayor, Day & Caldwell at this 22 point in time have any expertise in thrift and 18854 1 savings and loan regulations? 2 A. I believe they did. 3 Q. And did you ask Mayor, Day & Caldwell 4 to express an opinion as to whether this would be 5 an unsafe or unsound banking practice to enter 6 into such a bonus arrangement? 7 A. I don't believe so. 8 Q. You never sought such an opinion? 9 A. I don't believe so. 10 Q. To your knowledge, did anyone at USAT 11 or UFG seek such an opinion from Mayor, Day 12 & Caldwell? 13 A. I don't think so. 14 Q. And as a consequence of this trust 15 agreement, 879 -- if you look at the last page -- 16 do you see that? 17 A. The last page of the trust? 18 Q. It's the last page of the document. 19 By the way, who executed this document 20 on behalf of USAT? 21 A. Looks like it's Mike Crow. 22 Q. Okay. And on the last page, it 18855 1 indicates the 75 percent portion due to the 2 employee on 1/3/89. 3 Do you see that? 4 A. Yes. 5 Q. So, 879,345 -- I'm sorry. 879,345 was 6 thereafter placed in an irrevocable trust to fund 7 the executive bonus; is that correct? 8 A. That's correct. 9 Q. Okay. And following the actions of 10 Mr. Gross that we've just looked at, did you then 11 receive a bonus as well as a retroactive salary 12 increase? 13 A. Yes, I did. 14 Q. Now, the trust agreement we looked at a 15 moment ago is dated, I believe on the execution 16 page, April the 25th, 1988. 17 Do you see that? 18 A. Yes. 19 Q. So, by the point in time that that 20 trust -- by April 25th, 1988, the executive bonus 21 plan was a fait accompli? 22 A. Yes. 18856 1 Q. That's French for a done deal. Right? 2 A. Thank you. Yes, it was. 3 Q. And the money had been placed 4 irrevocably in a trust for the benefit of the 5 employees, correct? 6 A. I'm not sure it was an irrevocable 7 trust, but I'll take your word for it. 8 Q. We'll find out later that you had some 9 trouble getting it out of the trust, didn't you? 10 A. We sure did. 11 Q. Now, did there come a time when the 12 actions of the compensation committee approving 13 the bonuses or the actions of the compensation 14 committee with respect to the bonuses were 15 approved by the board of USAT? 16 A. Yeah, I believe so. 17 Q. And do you recall whether that was 18 before or after Mr. Gross had granted -- had paid 19 out the first 25 percent and put the last 20 75 percent in an irrevocable trust? 21 A. I believe it was after, after this 22 date. 18857 1 Q. So, USAT entered into this employment 2 bonus plan and paid out the moneys prior to ever 3 having the approval of the board; is that correct? 4 A. Well, I don't think that's correct. 5 Q. Well, had the board met and approved it 6 prior to that? 7 A. Well, if you remember, the compensation 8 committee had the authority of the board; and they 9 had approved it. 10 Q. And you're saying that because 11 Mr. Whatley was the sole member of the 12 compensation committee and could have approved 13 this, that, in fact, that's what he did? 14 A. Yes, that's correct. 15 Q. Now, when you presented this to 16 Mr. Whatley, did Mr. Whatley understand that he 17 was approving the executive bonus; or was it his 18 understanding that he was simply going to 19 recommend the executive bonus to the board for the 20 board's approval? 21 A. I don't know what his understanding 22 was. 18858 1 Q. You couldn't read Mr. Whatley's mind, 2 could you? 3 A. No. I certainly couldn't do that. 4 Q. And if Mr. Whatley has testified under 5 oath that, in fact, he only recommended the 6 executive bonus plan and then it was subject 7 always to the board's final approval, you would 8 have no reason to dispute that characterization by 9 Mr. Whatley, would you? 10 A. If that's his current recollection, I'm 11 sure that's his current recollection. I don't 12 know that that was his recollection or what his 13 understanding was ten years ago because I think he 14 knew what the compensation committee's authority 15 was for USAT. 16 Q. Did there come a point in time when you 17 submitted an affidavit in a legal proceeding in 18 which you swore under oath that the board of 19 directors of USAT had approved the executive bonus 20 on May the 10th, 1988? 21 A. I think they ratified it on that date, 22 sure. 18859 1 Q. And why, sir, did you submit such an 2 affidavit if board approval of the executive bonus 3 was not necessary and it could have been approved 4 by Mr. Whatley? 5 MR. VILLA: Excuse me. Do you mean why 6 did he submit the affidavit, or why did he make 7 the statement? 8 MR. RINALDI: I'm asking him why was it 9 necessary to submit the affidavit stating that the 10 board had, in fact, approved the executive bonus 11 plan if, in fact, no such board approval was 12 necessary. 13 A. Again, I'm not sure in what connection 14 that affidavit was -- why it was asked for. 15 Q. (BY MR. RINALDI) Why don't you take a 16 look at what's been marked as Exhibit T8068. And 17 I first must apologize because this is a document 18 that somehow has been -- I think the pages have 19 been transposed a little bit, but maybe you can 20 help us out on this. 21 And the first three pages appear to be 22 a set of minutes dated May the 10th, 1988. It's 18860 1 the minutes of United Savings Association of 2 Texas. 3 Do you see that? 4 MR. BLANKENSTEIN: If you can tell us 5 the tab number, please. 6 MR. RINALDI: Certainly. I apologize. 7 That would have been 461. 8 MR. BLANKENSTEIN: Thank you. 9 MR. RINALDI: Thank you for reminding 10 me. 11 A. Okay. 12 Q. (BY MR. RINALDI) And then the -- the 13 fourth page in, there's an affidavit of Arthur 14 Berner. 15 Do you see that? It's -- and it goes 16 on for about five pages. 17 MR. EISENHART: Your Honor, I want to 18 make sure we're on the same exhibit here. We have 19 T8068 at Tab 460. 20 MR. RINALDI: I've got Tab 461; so, 21 it's a different tab. 22 MR. EISENHART: Tab 461 appears to be 18861 1 the affidavit, but that's been marked T8068A. 2 MR. RINALDI: Okay. Whatever. The 3 exhibit I have is -- perhaps when Mr. Villa and I 4 put these in, we changed the marking. The exhibit 5 I have appears to be T8068 and is the minutes plus 6 the affidavit plus a letter to Peat Marwick from 7 Arthur Berner. 8 What does your copy say, Your Honor? 9 THE COURT: My copy of T8068 is three 10 pages, and it is the minutes of the board of 11 directors for May 10th, 1988, of the association. 12 MR. RINALDI: Then there should be an 13 affidavit. 14 THE COURT: There's no affidavit on my 15 exhibit. 16 MR. EISENHART: I think there is some 17 confusion, then, Your Honor, because I'm looking 18 at T8068 which starts out with a letter on United 19 Financial Group stationery to Peat Marwick dated 20 April 22; and then I have minutes. There's no 21 affidavit. 22 MR. RINALDI: Well, let's take a look 18862 1 at the tabs here. 2 THE COURT: Let's be off the record for 3 a moment. 4 5 (Discussion held off the record.) 6 7 THE COURT: All right. We'll be back 8 on the record. And I now have T8068A, and the 9 first document on that is an affidavit of Arthur 10 Berner. 11 MR. RINALDI: Okay. I'm handing 12 Mr. Berner a copy of T8068A. And then in addition 13 to that, Document T8068 is an exhibit which is two 14 attachments that were previously attached as 15 Exhibits 3 and 4 to T8068A. And it is a letter to 16 Peat Marwick dated April 22nd, 1988, which is 17 Exhibit 3; and then there is an Exhibit 4 which 18 are the minutes of the board of directors meeting 19 of United Savings Association of Texas of 20 May 10th, 1988. 21 THE COURT: All right. I have both of 22 those documents attached to T8068A. 18863 1 MR. RINALDI: Okay. 2 Q. (BY MR. RINALDI) Okay. Now, 3 Mr. Berner, would you take a look at your 4 affidavit? 5 A. Okay. 6 Q. Do you recall that during the course of 7 the litigation that's reflected at the first page 8 of this affidavit, Texas Commerce Bank versus 9 USAT, that a question arose as to whether the 10 executive bonus plan was valid under existing 11 regulations pertaining to savings and loans? 12 A. I don't remember that specifically. I 13 know there was a question that arose on that bonus 14 plan. 15 Q. And do you recall that in order for the 16 executive bonus plan to be an enforceable 17 contractual arrangement, it had to have been 18 approved by the board? 19 A. Again, I don't recall all the issues 20 that arose in that case. 21 Q. Do you recall, however, that you 22 submitted the affidavit which is reflected in 18864 1 T8068A? 2 A. Yes, I do recall that. 3 Q. And on Page 8 of the -- Paragraph 8 of 4 the affidavit, it states that "At the meeting, the 5 compensation committee approved the terms of the 6 1988 executive bonus plan and trust." And it 7 indicates that the meeting was held on 8 March the 30th, 1988. 9 Do you see that? 10 A. Yes, I do. 11 Q. And then if you turn over to the next 12 page, Paragraph 12, it says, "I attended a USAT 13 board meeting on May the 10th, 1988. A true and 14 correct copy of the minutes of the meeting is 15 attached as Exhibit 4." 16 And that's the May 10th meeting that 17 appears as Exhibit 4, is it not? 18 A. Exhibit -- 19 THE COURT: I have a blank sheet for 20 Exhibit 4 in my book. 21 Q. (BY MR. RINALDI) Well, I believe 22 it's -- T8068 is Exhibit 4, is it not, Mr. Berner? 18865 1 A. Yes. That says Exhibit 4. 2 Q. Okay. And so, going back to your 3 affidavit, your affidavit states that you attended 4 the May 10th meeting and that a true and correct 5 copy of the minutes of that meeting was attached 6 as Exhibit 4 to Berner and Munitz' memorandum. 7 It goes on and says, "At the meeting, 8 the board approved the actions of the USAT 9 compensation committee which, on May 30, had 10 approved the creation of the plan and trust." 11 Do you see that? 12 MR. VILLA: March 30, sir. 13 MR. RINALDI: I'm sorry. 14 Q. (BY MR. RINALDI) "March 30, had 15 approved the creation of the plan and trust." 16 Do you see that? 17 A. Yes. 18 Q. Now, does that refresh your 19 recollection that the special bonus or executive 20 bonus plan was not approved by the board until 21 May the 10th, 1988? 22 A. The board ratified the compensation 18866 1 committee's action, yes, sir. 2 Q. And do you recall why -- now, would you 3 take a look at the minutes of the May 10th 4 meeting? And can you direct me to where it is the 5 board takes up the question of the executive bonus 6 and trust? 7 A. (Witness reviews the document.) I 8 believe it's the next-to-last paragraph on Page 1. 9 Q. Is that the paragraph that reads, 10 "Mr. Gross stated that the next item of business 11 was approval of committee actions since the last 12 board meeting"? 13 A. Yes. 14 Q. "And after reviewing, such actions were 15 unanimously approved, adopted, and ratified." 16 Do you see that? 17 A. Yes. 18 Q. So, is it fair to say that the board, 19 in fact, approved, adopted, and ratified the 20 actions of the compensation committee? 21 A. The full board, that's correct. 22 Q. And they didn't do that until well 18867 1 after the executive committee -- I mean the 2 executive compensation plan had been approved -- 3 had been implemented? 4 A. They ratified it after, that's correct. 5 Q. You keep saying "ratified it." Would 6 you take a look at your affidavit? 7 A. Uh-huh. 8 Q. Does it say "ratified"? 9 A. I'm looking at the -- it says 10 "approved." 11 Q. It says "approved." 12 A. No, no. Hold on a second. "Approved 13 the actions of the compensation committee," that's 14 correct. 15 Q. Then it goes on and says, "The USAT 16 board approved this plan to retain capable 17 employees," and then it goes on. 18 A. Correct. 19 Q. So, the board had to approve the plan, 20 didn't they? 21 A. Again, I think we're saying the same 22 thing; but maybe we're not. The compensation 18868 1 committee had authority to approve it, and they 2 did. The board approved and ratified the 3 compensation committee's action. This affidavit 4 is dealing with a different question because an 5 issue came up as to the compensation committee's 6 approval in this litigation. 7 Q. And what was the issue that came up, 8 sir? 9 A. The Government raised the issue as to 10 whether or not the compensation -- whether or not 11 the bonus plan had been approved. 12 Q. And that's because the applicable 13 regulations required that employment contracts, 14 such as the executive bonus program, had to be 15 approved by the board of directors? 16 A. I don't know why the Government raised 17 the issue. But that was one of the issues in this 18 case, and that's what this is dealing with. 19 Q. Let's take a look then at -- 20 MR. RINALDI: I won't mark this as an 21 exhibit, Your Honor, because it is simply a 22 statutory provision. It's 569.39, "Employment 18869 1 Contracts." I'll make copies of this for counsel, 2 and I'll hand a copy up to the Court. This is 3 Regulatory Provision Section 563.39. 4 Q. (BY MR. RINALDI) Would you take a 5 look at 563.39, Mr. Berner? It starts out 6 "general." 7 Do you see that? 8 A. Yes. 9 Q. "An insured institution may enter into 10 an employment contract with its officers and other 11 employees only in accordance with the requirements 12 of this section." 13 Do you see that? 14 A. Yes. 15 Q. It goes on and says, "All employment 16 contracts shall be in writing and shall be 17 approved specifically by an institution's board of 18 directors." 19 Do you see that? 20 A. Yes. 21 Q. So, does that refresh your recollection 22 that the compensation committee, as reflected in 18870 1 the ethics manual of USAT, could not approve an 2 employment contract without the express approval 3 of the board? 4 A. No, it does not. 5 Q. And do you note that under -- take a 6 look at T8012. 7 A. Where is that? 8 Q. That's the minutes I showed you, 8012, 9 in Volume I. And these are the -- we looked at 10 these yesterday. This is your business and ethics 11 and conflict of interest policy. 12 Do you see that? 13 A. Yes. 14 MR. RINALDI: Your Honor, I don't know 15 if -- I believe this was admitted but -- has 8012 16 been admitted? 17 MR. EISENHART: Yes. It's at Tab 393. 18 MR. RINALDI: Okay. 19 Q. (BY MR. RINALDI) And yesterday, I 20 pointed you to the section that says under 3.3(c), 21 Page 5, that "All employment contracts of persons 22 assuming the title of senior vice president or 18871 1 higher of the association shall be approved by the 2 association's board of directors." 3 Do you see that? 4 A. Yes, I do. 5 Q. And then if you turn to the back of 6 this document -- if you look at Appendix A4, there 7 is attached a copy of 563.39. And it states -- do 8 you see that? 9 A. Yes. 10 Q. -- that "All employment contracts shall 11 be in writing and shall be approved specifically 12 by the institution's board of directors." 13 Now, isn't it true, sir, that during 14 the litigation with respect to Texas Commerce Bank 15 versus United Savings Association of Texas, the 16 FSLIC raised the question of whether the executive 17 bonus plan had been properly implemented and 18 whether it had been approved by the board as 19 required under 563.39? 20 A. I believe that was one of the issues 21 that FSLIC raised. 22 Q. And you swore under oath in your 18872 1 affidavit that, in fact, this employment contract 2 for an executive bonus had been approved by the 3 board on May the 10th, 1988; isn't that correct? 4 A. That's one of the things I swore to, 5 yes, uh-huh. 6 Q. Let's move on to a new subject, sir. 7 Following the March 30th, 1988 meeting, 8 did you undertake to redraft the employment 9 contracts as discussed or as -- remember you had 10 indicated that Mr. Whatley had agreed that the 11 employment contracts should be redrafted along the 12 lines of your draft and that the change of control 13 provision that had created a problem for UFG 14 should be refined? 15 A. Right. 16 Q. Okay. And did you then undertake to 17 redraft the contract? 18 A. I did. 19 Q. Okay. And can you describe for us what 20 steps you took? 21 A. As best I can remember, we hired Hewitt 22 to act as a consultant. I know I drafted the -- 18873 1 redrafted the agreement, gave them the agreement 2 at some point in time, and they had a bunch of 3 comments. I don't remember one way or the other 4 if I sent -- I think I sent copies to Leahey. 5 There were a bunch of meetings, mostly with the 6 Hewitt people. 7 And as a result, we ended up with the 8 final agreements in June, I think it was. 9 Q. And in about June of 1988, did UFG then 10 enter into new employment contracts with -- with 11 the same executives that they had previously enter 12 into contracts with on September the 9th, 1987? 13 A. Yeah. I think it was the end of June. 14 Q. Now, who was on the board of UFG at 15 that point in time? Do you recall? 16 A. I think Jenard Gross, Barry Munitz, Jim 17 Whatley, Paul Schwartz, myself, and I think Mike 18 Crow was on UFG. 19 Q. So, there would have been six members 20 of the board? 21 A. I believe that's right. 22 Q. And would you take a look at what's 18874 1 been previously marked as T8079? This is Tab 435. 2 Do you have that document in front of 3 you, sir? 4 A. Yes, I do. 5 Q. Okay. And it indicates in the first 6 paragraph that all of the members of the board of 7 directors were present with the exception of Paul 8 Schwartz. 9 Do you see that? 10 A. Yes. 11 Q. So -- strike that. Can we go back just 12 a moment to -- 13 THE COURT: We'll take a short recess. 14 MR. RINALDI: Thank you. 15 16 (Whereupon, a short break was taken 17 from 10:31 a.m. to 10:56 a.m.) 18 19 THE COURT: Be seated, please. We'll 20 be back on the record. 21 Mr. Rinaldi, you may continue. 22 Q. (BY MR. RINALDI) Mr. Berner, I 18875 1 apologize. I started on -- I promised you we 2 would start on a new subject; and then I realized 3 there were two questions I had failed to ask 4 regarding the May 10th, 1988 meeting of the board 5 at which you previously testified that the 6 executive bonus was approved by the board of USAT. 7 Sir, were the salary increases that 8 were implemented after the compensation committee 9 meeting on March the 30th, 1988, also approved by 10 the board on May the 10th, 1988? 11 A. I don't have them all in front of me, 12 but I think they approved all of the actions of 13 the compensation committee. 14 Q. Okay. That would be T8068A, I believe; 15 and it's in this -- I'm sorry. 8068. 16 Does that indicate that they approved 17 all of the actions that had been previously taken 18 by the compensation committee? 19 A. Of all the committees, yes. 20 Q. And was that unanimously undertaken? 21 A. Yes, yes. 22 Q. Who was on the board of USAT on 18876 1 May the 10th, 1988, when the board unanimously 2 approved the bonuses and the salary increases? 3 Would it have been the same group that you just 4 mentioned that were on the board of USAT in June 5 when the employment contracts were approved? Or 6 you were speaking about UFG. 7 A. Yeah. 8 Q. Who would have been on the board of 9 USAT? 10 A. In May? My recollection is it would 11 have been Jenard Gross, Barry Munitz, Jim Whatley, 12 Paul Schwartz, and myself. I don't think Mike 13 Crow was on USAT's board. 14 Q. So, there would have only been five 15 members? 16 A. That's my recollection, yes. 17 Q. Do the minutes indicate whether 18 everybody was present at the May 10th, 1988 19 meeting? 20 A. Yes. 21 Q. So, of the members of the board who 22 approved the salary increases and the executive 18877 1 bonuses on May the 10th, 1988, three of those five 2 members were individuals who would receive a 3 personal financial benefit from the approval of 4 the bonuses and the salary increases; isn't that 5 correct? 6 A. Well, they approved the committee's 7 action; but the answer is three of those people 8 were getting increases, yes. 9 Q. And those three would have been 10 Mr. Berner, Mr. Munitz, and Mr. Gross? 11 A. Right. 12 Q. And do you know what percentage of the 13 salary -- total salary adjustments were 14 represented by the salary adjustments for 15 Mr. Berner, Mr. Munitz, and Mr. Gross that were 16 approved at the May 10th, 1988 meeting? 17 A. I certainly don't. 18 Q. Would it surprise you if I told you 19 that they alone received over 37 percent of the 20 total salary adjustments that were approved? 21 A. I'm sure you've calculated it; so, it 22 wouldn't surprise me if you told me that. 18878 1 Q. Would it surprise you that the amounts, 2 including Mr. Crow's -- that that percentage would 3 rise to 47 percent of the total salary increases 4 approved on May the 10th, 1988? 5 A. I'm sure you've calculated it; so, it 6 doesn't surprise me. 7 Q. Would it surprise you if those same 8 four people received 47 percent of the executive 9 bonus amounts that were approved by the board on 10 May the 10th, 1988? 11 A. I assume it would be the same number. 12 Q. In your opinion, did it violate the 13 ethics policies that I've shown you earlier for a 14 majority of the board to vote to approve salary 15 increases and executives bonuses from which they 16 stood to receive substantial financial benefits? 17 A. I don't believe it did. 18 Q. And in your opinion, did that 19 constitute a fiduciary breach on the part of those 20 individuals? 21 A. No. 22 Q. Do you believe that it constituted a 18879 1 conflict of interest for a majority of the board 2 members to approve the salary increases and the 3 executive bonuses from which they were going to 4 receive personally 47 percent -- or 37 percent of 5 the bonus amount and 37 percent of the salary 6 increase? 7 A. Again, it was the compensation 8 committee that had approved it; and they were 9 ratifying and approving the actions of the 10 compensation committee. 11 Q. Would your opinion change if, in fact, 12 Mr. Whatley told you that he never approved either 13 the salary increase or the executive bonus but he 14 simply recommended that the board approve those? 15 A. Would my opinion change? No. 16 Q. So, are you suggesting that when 17 Mr. Whatley swore under oath that he recommended 18 and did not approve the executive bonus or the 19 salary increase, that that gentleman was lying to 20 this Court? 21 MR. VILLA: Your Honor, I think that's 22 an unfortunate question. It doesn't follow from 18880 1 the last question, and the last thing this witness 2 has done is impugn the integrity of any of the 3 other witnesses. I object to the question. 4 THE COURT: Denied. I think you can 5 answer. 6 A. Jim Whatley is the salt of the earth. 7 Jim Whatley is one of the most honest honorable 8 men I've ever known. If he said what you said he 9 said at this point in time, I think he probably 10 has forgotten what took place 10 or 12 years ago. 11 You will never hear me say that I think Jim 12 Whatley is a liar. 13 Q. (BY MR. RINALDI) But if Mr. Whatley 14 testified that it was his intention to recommend 15 the salary increases and executive bonuses subject 16 to approval by the board, would you dispute that 17 characterization? 18 A. I would dispute that that's what he 19 thought he was doing ten years ago, yes. 20 Q. All right. Let's move on, then, to the 21 1988 salary -- the June 1988 UFG board meeting. 22 This is Tab 435. It's T8079. 18881 1 Does this appear to be the meeting of 2 the board of UFG at which the board of UFG 3 approved new employment contracts for its senior 4 executive management staff? 5 A. Yes, it does. 6 Q. And by looking at the minutes, can you 7 identify the individuals who received 8 employment -- new employment contracts from UFG? 9 A. Yes. 10 Q. And who were they, sir? 11 A. Jenard Gross, Barry Munitz, myself, 12 Mike Crow, James Jackson, Jeff Gray, Bruce 13 Williams, James Wolfe, and Eugene Stodart. 14 Q. And of that group of people, which had 15 previously had contracts with UFG? 16 A. With UFG? 17 Q. Uh-huh. 18 A. All except Jenard Gross, Barry Munitz; 19 and I'm not sure if Gene Stodart had a contract 20 with UFG or not. 21 Q. Now, you identified, before we broke, 22 the individuals who would have been on the board 18882 1 of UFG at that time. You indicated that they 2 would have been Mr. Gross, Mr. Whatley, 3 Mr. Schwartz, Mr. Crow, Mr. Munitz, and 4 Mr. Berner; is that correct? 5 A. Yes. 6 Q. And was Mr. Schwartz present at the 7 meeting? 8 A. No, he was not. 9 Q. So that there would have only been five 10 officers -- I'm sorry -- directors of UFG that 11 were present at the meeting on June the 28th, 12 1988, when the UFG contracts were approved; is 13 that correct? 14 A. Yes, sir. 15 Q. And they would have been Mr. Gross, 16 Mr. Whatley, Mr. Munitz, and Mr. Berner, correct? 17 A. And Mr. Crow. 18 Q. I'm sorry. And Mr. Crow. 19 So that of the -- of the directors who 20 were present at the UFG board meeting when the 21 employment contracts were approved on June 28th, 22 1988, four of those people were individuals who 18883 1 were going to receive contracts from UFG, correct? 2 A. Yes. 3 Q. And only one, Mr. Whatley, was not 4 going to receive a contract? 5 A. Yes. 6 Q. Now, did that create a dilemma for you 7 in terms of the board approval of the contract if 8 the majority of the board members were actually 9 going to receive contracts from UFG pursuant to 10 board action? 11 A. Did it create a dilemma? 12 Q. Yes. 13 A. No. 14 Q. You didn't think there would be a 15 conflict of interest if a director voted to 16 approve his own contract? 17 A. There might be a conflict of interest, 18 yes, possibly. 19 Q. And a conflict of interest is not a 20 dilemma from your perspective? 21 A. I wouldn't have said that was a 22 dilemma, no. 18884 1 Q. How did the board deal with the 2 potential conflict or appearance of a conflict of 3 interest that might arise from the fact that four 4 of the five directors who were present at the 5 meeting at which the UFG executive contracts were 6 going to be approved were individuals who were 7 going to receive such contracts? 8 A. The way it was dealt with here was that 9 as an individual's contract was discussed, that 10 individual didn't participate. 11 Q. Did he stay in the room? 12 A. My recollection is yes. 13 Q. And so, all the others discussed 14 whether they were interested in or thought it was 15 appropriate to give the one who was abstaining a 16 new contract? 17 A. Yes. 18 Q. And you discussed the merits and so 19 forth of whether that person was deserving of such 20 a contract? 21 A. There wasn't that discussion. I think 22 everyone believed that everyone was entitled to 18885 1 contracts. 2 Q. So, to avoid the appearance of conflict 3 of interest, each person abstained? 4 A. That's correct. 5 Q. Let's take you, for example. When your 6 contract came up, Mr. Crow, Mr. Gross, and 7 Mr. Munitz all voted to approve your contract? 8 A. And Mr. Whatley. 9 Q. And Mr. Whatley? 10 A. Yes. 11 Q. And when Mr. Gross' contract came up, 12 you reciprocated and voted for his contract? 13 A. Yes, I did. 14 Q. And all of the four contracts were 15 unanimously approved? 16 A. Yes, sir. 17 Q. Did you think that that process raised 18 an appearance of a conflict for impropriety? 19 A. There was a conflict, but it was a 20 conflict that was described. It was known. 21 Everybody knew what the conflicts were. It was 22 dealt with in accordance with Delaware laws. The 18886 1 fact that there are conflicts doesn't mean you 2 can't approve things. 3 Q. Did you think it was consistent with 4 the conflicts of interest policies that had been 5 promulgated on January 13, 1987, and adopted by 6 the UFG board? 7 A. I'm not sure I thought about it at that 8 time. 9 Q. Now, as a consequence of your being 10 awarded a new contract by UFG, let me ask you to 11 take a look at what's been previously marked as 12 Exhibit B2263. 13 MR. RINALDI: I'm sorry. I don't have 14 the tab number. 15 Q. (BY MR. RINALDI) Do you have that? 16 A. 2263? 17 Q. Yes. It's not in the book. 18 THE COURT: I don't believe it's in the 19 record. 20 MR. RINALDI: Okay. Then let me hand 21 up a copy to the witness. I believe that I put 22 that on the pull list, did I not? 18887 1 MR. VILLA: You did not. 2 MR. RINALDI: I did not? 3 MR. VILLA: Correct. 4 MR. RINALDI: Oh, goodness. I 5 apologize, Your Honor. I thought we had put this 6 on the pull list. That means these gentlemen are 7 without a copy. 8 As you know, all of the contracts were 9 identical; and I'm just going to ask him a couple 10 of questions about the contracts generally and 11 elucidate that with his contract. 12 If the parties wish to follow along, 13 they can certainly look at either Jenard Gross' 14 UFG contract which appears at Tab 437 in 15 Exhibit T8083; or, alternatively, they can look at 16 the Mike Crow contract which is Exhibit B2264. 17 But these are pretty generic questions 18 I'm going to ask just about the contract in 19 general. 20 Q. (BY MR. RINALDI) Let's -- do you have 21 B2263 in front of you, sir? It's the document I 22 just handed you. 18888 1 A. Yes, I do. 2 Q. Does this appear to be a copy of the 3 contract that you executed with United Savings 4 Association of Texas following the June 28th, 1988 5 meeting? 6 A. No. 7 MR. VILLA: Your Honor, I believe this 8 is the UFG contract. 9 MR. RINALDI: I apologize. Did I say 10 USAT? I'm sorry. 11 Q. (BY MR. RINALDI) We have been talking 12 about the minutes of the UFG meeting which are 13 T8079, correct, sir? 14 A. Yes. 15 Q. And is this the contract that you 16 entered into following the approval of contracts 17 that we've discussed at the board meeting of UFG? 18 A. Yes. 19 Q. Okay. Now, what I would like for you 20 to do is to take a copy of what has been 21 previously marked as Tab 483. It's A11032. 22 THE COURT: Mr. Rinaldi, I think B2263 18889 1 is in at T8082. I don't know the tab number. 2 MR. RINALDI: You may very well be 3 right, Your Honor. I just inadvertently left it 4 out of our book. If it's in, then we'll just 5 treat this as -- what number is it? 6 THE COURT: T8082. 7 MR. RINALDI: Okay. 8 Q. (BY MR. RINALDI) Here. Let's just 9 take your copy. T8082 is what this has been 10 admitted as so there's no confusion. And that's 11 Tab 436. 12 A. What is it you wanted me to compare 13 this with? 14 Q. I would like for you to take a copy of 15 that contract and compare it with Tab 483, which 16 is A11032. And that should be -- I think that's a 17 new -- one of the documents that we handed up to 18 you that's loose. It must have been put away last 19 night. 20 Now, directing your attention to the 21 first -- 22 A. Excuse me. I don't have the thing I'm 18890 1 supposed to compare it to. 2 Q. I'll start with this, and he'll be 3 getting it for you. I wanted to ask you a couple 4 of questions about this document. 5 Now you have A11032 in front of you. 6 Would you turn to the page Bates stamped 0128391? 7 A. Okay. 8 Q. Now, that should be the employment 9 contract which you entered into with UFG on 10 September the 9th, 1987. 11 Do you see that? 12 A. Yes. 13 Q. And I wanted to compare that to the new 14 contract which you entered into with United 15 Financial Group on June the 30th, 1988. 16 Now I notice that on the first page in 17 the fifth "whereas" clause, it makes reference to 18 the fact of a prior contract? 19 A. The fifth "whereas" of the new one? 20 Q. Of T8082. 21 A. Yes. 22 Q. And it refers to the fact that you had 18891 1 previously entered into an employment agreement 2 dated April 9, 1987? 3 MR. SCHWARTZ: September 9, 1987. 4 Q. (BY MR. RINALDI) September 9, 1987. 5 Do you see that? 6 A. Yes. 7 Q. Let's turn to the second page of T8082, 8 and it indicates the term. Now, you may recall 9 that previously in the draft that you presented to 10 Mr. Whatley, you had proposed a term of over six 11 years through December 31st, 1993. And it now 12 appears that a shorter term was selected. 13 Do you see that? 14 A. Yes. 15 Q. So that the new term is now through 16 December 31st, 1991? 17 A. Yes. 18 Q. So, that would have meant that this was 19 a contract of about three and a half years 20 duration? 21 A. Right. 22 Q. Okay. Now, what was the term of the 18892 1 prior contract that you had entered into with UFG? 2 A. Let me look. It was through 3 December 31, 1988. 4 Q. So, it had been slightly over a year, 5 correct? 6 A. Correct. 7 Q. So, this increased the duration of the 8 contract by an additional three years, does it 9 not, or four years, I guess? Three years. I'm 10 sorry. Is that correct? 11 A. Yes. 12 Q. And how did your salary change from the 13 old contract to the new? I believe that appears 14 at Paragraph 5A in both of the contracts. 15 A. (Witness reviews the documents.) How 16 did it change? 17 Q. Yeah. Under the new agreement, did you 18 have a higher salary than you had been previously 19 receiving? 20 A. Yes. 21 Q. And what was it -- the salary under the 22 new agreement? 18893 1 A. $284,736. 2 Q. Under the old agreement, how much had 3 it been? 4 A. The salary or salary and bonus? 5 Q. Just the salary. 6 A. 170,736. 7 Q. So, your base salary had increased by 8 something over $110,000, correct? 9 A. Correct. 10 Q. Now, I notice under the old 11 arrangement, there was a guaranteed bonus; but 12 under the new one, there no longer was a bonus; is 13 that correct? 14 A. Yes. 15 Q. Or at least not a guaranteed one? 16 A. Right. 17 Q. And under the new contract, do you 18 recall, did this have a severance provision which 19 provided for severance benefits in the event that 20 you were terminated? 21 A. Yes, it did. 22 Q. And do you recall whether those 18894 1 severance benefits were secured in any way? 2 A. Under the new agreement? 3 Q. Yes. 4 A. I recall that they were -- the 5 agreement said it was supposed to be secured, yes. 6 Q. And would you take a look at Page 18? 7 It's Paragraph 9I. Is that the provision that 8 deals with the securing of the benefits? 9 A. (Witness reviews the document.) Yes, 10 it is. 11 Q. And it indicates there on Page 18, "As 12 security for the company's obligation to make 13 payments to the executive" -- and what payments 14 are they referring to there, sir? 15 A. The severance payments, I believe. 16 Q. That's the two years' annual severance 17 payments? 18 A. Yes. 19 Q. So that under this contract, you would 20 then be entitled to two times your annual salary 21 as a severance benefit. And if your annual salary 22 had now been increased, I think, to $284,000, you 18895 1 would have been entitled to severance benefits of 2 something in excess of a half a million dollars; 3 is that correct? 4 A. Yes. 5 Q. And as security for that, how was UFG 6 going to secure your right to receive those 7 severance benefits in the event that, say, USAT 8 went into receivership and there was a change of 9 control at UFG? 10 A. Well, the agreement called for a letter 11 of credit. 12 Q. Okay. And let me make sure I've got 13 this right. If USAT had gone into receivership, 14 that would have constituted -- would that have 15 constituted a change of control under the UFG 16 contract? 17 A. I believe so. 18 Q. And so, if USAT were placed in 19 receivership, you would have been in a position to 20 declare that there had been good cause to 21 terminate your agreement with UFG? 22 A. I believe that's right. 18896 1 Q. And in that event, you would have then 2 been able to demand from UFG something in excess 3 of a half a million dollars in severance benefits? 4 A. Yes. 5 Q. Okay. And those benefits were to be 6 secured by a letter of credit? 7 A. Right. 8 Q. Okay. How does that letter of credit 9 thing work? 10 A. How does it work? 11 Q. Yes. 12 A. Well, it never happened; so, I don't 13 know how it would have worked. 14 Q. How do letters of credit generally 15 work? 16 A. They generally work lots of different 17 ways. You'll go to a bank and someone will take 18 out a letter of credit and they will secure it 19 normally with something. 20 Q. You mean collateral? 21 A. Possibly collateral, yes. And then 22 whoever the -- whatever rights the person has 18897 1 under that letter of credit, if his rights are 2 protected, he is entitled to collect under that 3 letter of credit. 4 Q. Now, did you have an alternative 5 provision in that new contract that provided for 6 an alternative means of funding your 7 half-a-million-dollar severance benefits in the 8 event of a change of control? 9 A. I thought it did. I would have to look 10 for it. (Reviewing) Yes, it did. 11 Q. And what was that alternative 12 mechanism? 13 A. A trust account. 14 Q. And is that what appears on the first 15 full paragraph of Page 20? 16 A. Yes. 17 Q. So that if UFG decided it did not want 18 to secure your severance benefits with a letter of 19 credit, it could alternatively set up an 20 irrevocable trust? 21 A. I don't remember if it was an 22 irrevocable trust, but there's a provision here to 18898 1 set up a trust. 2 Q. Well, was the purpose of creating a 3 trust to set aside or earmark moneys that would be 4 available to secure the payments that you might 5 become entitled to under the UFG contract in the 6 event of a change of control? 7 A. It was to create another way of 8 securing that amount, yes. 9 Q. And the letter of credit was an idea 10 that had been originally proposed by you to 11 Mr. Munitz, hadn't it? 12 A. No. Actually, I think the letter of 13 credit arose out of previous contracts that the 14 company -- USAT had signed with other people. 15 Q. Right. So, people like Sandra 16 Laurenson when they were thinking about coming 17 from New York down to Houston to take on a 18 position at USAT which was having some severe 19 financial problems, in order to protect herself, 20 she wanted a letter of credit, didn't she? 21 A. I don't know what all of her reasons 22 were, but she certainly wanted a letter of credit. 18899 1 Q. So, that's where you got the original 2 idea? 3 A. I think so. 4 Q. Wasn't it your idea or your proposal to 5 Mr. Munitz to secure the benefits under the USAT 6 and UFG severance provisions of the June 28th or 7 June 30th contract with UFG with a letter of 8 credit? 9 A. Again, my recollection is that there 10 was a lot of discussion about securing the 11 payments and -- 12 Q. Would you take a look at Exhibit 8045? 13 A. 8045? 14 Q. T8045. It's going to be in Volume I, 15 and it's fairly early on. Maybe I can help you 16 here. Let's see. 17 A. There it is. 18 Q. There you go. Thank you. 19 And does that appear to be a -- 20 THE COURT: Is that document in the 21 record? 22 MR. RINALDI: Let me check my notes and 18900 1 see. This may be a new document, Your Honor. I 2 have an indication of a blank here, and the 3 paralegal who maintains the computer on this 4 advises me that -- I don't think it's in. It 5 wasn't on the pull list. 6 MR. BLANKENSTEIN: Can you give us the 7 T number again? 8 MR. RINALDI: It's T8045. 9 THE COURT: All right. We'll be off 10 the record for a minute. 11 12 (Discussion held off the record.) 13 14 THE COURT: We'll be back on the 15 record. 16 Q. (BY MR. RINALDI) Sir, do you have a 17 copy of 8045 in front of you? 18 A. Yes, I do. 19 Q. Have you had a chance to review it? 20 A. No. Actually, I was taking a break. 21 Q. Okay. Well, that's fine. 22 Take a look at it. Does that appear to 18901 1 be a document that you prepared for submission to 2 Mr. Munitz? 3 A. Dr. Munitz. Yes, it does. 4 Q. It doesn't have your signature on it, 5 but do you have any reason to doubt that you 6 prepared this? 7 A. No. 8 Q. Now, it says, "Following are some 9 random thoughts we discussed on the way to and 10 from Washington." 11 Do you recall going to Washington in 12 the beginning of 1988 with Mr. Munitz and 13 discussing the question of new contracts? 14 A. Discussing, yes, a whole bunch of 15 things, yes, I do. 16 Q. Was this at or about the point in time 17 when Mr. Gray had raised the question of the 18 change of control? 19 A. Yeah, it was. It was somewhere around 20 this time. 21 Q. Okay. Now, let me show you a copy of 22 what's been previously marked as Exhibit B2082. 18902 1 This is Mr. Gray's letter in which he indicates 2 that he felt there was a change of control; and 3 it's dated March 16, 1988. 4 Is it your recollection that Mr. Gray, 5 prior to actually sending to United Financial 6 Group a copy of Exhibit B2082, had raised the 7 question orally of the potential change of 8 control? 9 A. Yes. 10 Q. And it had been some time prior to the 11 actual submission of his letter on March 16th? 12 A. Yes, sir. 13 Q. So, would you assume from that that in 14 your flight to and from Washington with 15 Mr. Munitz, that you were discussing the subject 16 of that change of control issue that is addressed 17 in your memo dated March the 10th, 1988? 18 A. Yes. 19 Q. Okay. And as I go down to the first 20 full paragraph, he does, in fact, refer to a 21 change in control. "As we discussed, I don't 22 believe that we should agree to the fact that a 18903 1 change of the board's membership as it currently 2 stands is a change of control." 3 That's consistent with what you told us 4 yesterday, that you thought that was contrary to 5 the intent of the original employment contract, 6 correct? 7 A. Correct. 8 Q. Then it says, "If any person insists, 9 obviously, we can deal with it by removing one of 10 the new directors and adding back one of the old 11 (e.g., Charles)." 12 What were you referring to there about 13 adding back Charles? 14 A. What I was referring to was perhaps 15 putting Mr. Hurwitz back on the board. 16 Q. Is that something that you had 17 discussed with Mr. Hurwitz? 18 A. No. 19 Q. Did there come a time when that subject 20 was approached with Mr. Hurwitz about whether he 21 wanted to get back on the record? 22 A. Not by me. 18904 1 Q. Do you know if anybody did? 2 A. I don't know. 3 Q. As we go down, in the next paragraph, 4 you propose a salary increase. And then as we go 5 to numbered Paragraph No. 2, it says, "We could 6 perhaps have the employment contract amounts 7 secured by letters of credit as we did with the 8 Sandy Laurenson contract." 9 Do you see that? 10 A. Yes. 11 Q. Does that refresh your recollection 12 that the original idea to secure the severance 13 benefits under the USAT -- I mean the UFG contract 14 was your idea? 15 A. Again, I think there were discussions 16 before this about that. 17 Q. Then the next sentence says, "This 18 might provide some insulation should there be a 19 real change of control." 20 What were you referring to there about 21 providing insulation? 22 A. Again, if -- if UFG would have a real 18905 1 change of control, not the change of control that 2 took place, this would be a way of having the 3 people who wanted to stay on know they would be 4 able to get their severance payment. 5 Q. And would potentially insulate them 6 from the FSLIC voiding their contract and 7 depriving them of severance benefits; is that 8 correct? 9 A. That's not necessarily what this was 10 dealing with. This was talking about a real 11 change of control, not the change of control that 12 took place in our particular case. 13 Q. Wouldn't a receivership be a real 14 change of control? 15 A. It's one of the ways I think there 16 would be a real change of control. 17 Q. And in the event of receivership, the 18 FSLIC could void the contracts? 19 A. Yes. 20 Q. And this was a mechanism for insulating 21 the employees against that possibility, correct? 22 A. It would be an attempt to insulate them 18906 1 from any type of real change of control. 2 Q. Now, following the approval of the 3 employment contracts -- 4 MR. RINALDI: Let me offer into 5 evidence Exhibit T8045, Your Honor. 6 MR. VILLA: No objection. 7 THE COURT: Received. 8 Q. (BY MR. RINALDI) Now, following the 9 approval of the UFG employment contracts, was the 10 same subject considered by the board of United 11 Savings Association of Texas? 12 A. Yes. 13 Q. And take a look at Exhibit T8078. I 14 think you just need to -- 15 A. 8078? 16 Q. Yes. I think it's the page prior to -- 17 it's not there? 18 A. I have it here. I have it in the book. 19 Q. Fine. It's supposed to be in the book. 20 This is T8078, and it's previously been admitted 21 at Tab 434. 22 Now, this is a -- the meeting of the 18907 1 board of directors of USAT. Did the board of 2 directors of USAT also consider granting 3 employment contracts on the same day that the 4 board of UFG had considered that subject? 5 A. Yes. 6 Q. Did the boards meet simultaneously or 7 jointly, or was this one after the other? 8 A. I can't tell from this. 9 Q. When the boards met jointly, was it the 10 practice of having a joint set of minutes that was 11 in -- 12 A. No. 13 Q. -- that was one single set of minutes 14 for both institutions? 15 A. I don't believe so. When you say "met 16 jointly," if it was a joint meeting, there would 17 be one set of minutes. 18 Q. Okay. When you had a joint meeting, if 19 there was an issue that pertained to UFG, would 20 that be voted on, then, by only the UFG directors 21 and then if a USAT issue arose, that would only be 22 voted on by USAT directors? 18908 1 A. Maybe I don't understand what you mean 2 by "a joint meeting." 3 Q. Maybe I'm perhaps confused. I 4 frequently see minutes of the board or of 5 subcommittees of the board which indicate that 6 these are joint meetings. 7 A. Right. 8 Q. And I presume that many of these 9 minutes, since you were the secretary of most 10 committees, were prepared by yourself. 11 And I'm wondering, what does it mean 12 when it refers to a joint meeting of the boards? 13 A. When it refers to a joint meeting of 14 the boards, it would be one meeting where both 15 boards were there. 16 Q. And at those meetings, if one of the 17 boards is asked to take an action and reaches a 18 resolution, is that recorded in the joint set of 19 minutes? 20 A. I believe so, yeah. 21 Q. And if the other board then takes 22 another action separate and distinct from the 18909 1 first action, would that be, then, recorded as the 2 action of the other board in the same set of 3 minutes? 4 A. I think so. 5 Q. You don't break them out into two 6 separate sets of minutes? 7 A. If it's a joint meeting. 8 Q. Does that mean, then, that on 9 June the 28th, 1988, when the special meeting of 10 the board of UFG occurred and the meeting of the 11 board of directors of USAT occurred, that these 12 were separate meetings and they were held one 13 after the other? 14 A. I can't tell, but I think that's 15 probably right. 16 Q. Okay. Now, I notice the USAT board 17 minutes are a special board meeting; and the ones 18 of -- I'm sorry. I think I got it backwards. 19 The UFG meeting was a special meeting, 20 and the USAT meeting was just a meeting? 21 A. No. It says "special meeting." 22 Q. It does? Okay. 18910 1 So, these were both special meetings? 2 A. Right. 3 Q. What did that mean? 4 A. Generally, at the beginning of the 5 year, you would set out regular meeting dates, 6 usually one a quarter. If you would then have 7 meetings at other times other than those, they 8 would then be called special meetings. 9 Q. So, if you had something special that 10 needed to be dealt with, you would call a meeting; 11 and that would mean it was a special meeting? 12 A. "Special" meant that it was not the 13 regularly-scheduled meeting that you had set up at 14 the beginning of the year. 15 Q. Was this meeting then called for the 16 purpose of considering employment contracts? 17 A. I think that was one of the reasons. 18 Q. Were there any other reasons? 19 A. Well, I'm just reading the minutes. 20 There's a discussion of the Southwest Plan, open 21 bank assistance. There's a CD bonus plan. The 22 employment of Larry Connell, that was very 18911 1 important. That was discussed here and approved. 2 Q. All right. Now, you described the 3 mechanism by which UFG contracts were approved. I 4 notice that the language which appears in the USAT 5 minutes is very similar to that which appears in 6 the UFG minutes. And, in fact, I believe the last 7 two paragraphs -- strike that. 8 I believe the -- yeah -- the last two 9 paragraphs on the first page of T8078, the USAT 10 minutes, are identical to the third and fourth 11 paragraphs that appear on the last page of the UFG 12 minutes. 13 Do you see that? 14 A. I'm not looking at that, but I'll take 15 your word for it that they are both identical. 16 Q. And they both have the paragraph that 17 talks about -- that when the contracts were voted 18 upon, members of the board who had an interest 19 abstained and the remaining members then voted for 20 the contract. 21 Do you see that provision? 22 A. Right. 18912 1 Q. Were the USAT contracts approved in the 2 same fashion as the UFG contracts? 3 A. To the best of my recollection. 4 Q. And at this point in time, the only 5 difference in the constituency of the boards of 6 USAT and UFG would have been Michael Crow; is that 7 correct? 8 A. Yes. 9 Q. And it indicates here that Mr. Schwartz 10 was not present, correct? 11 A. Right. 12 Q. So, at the -- at the USAT board, the 13 members who were present would have been 14 Mr. Gross, Mr. Whatley, Mr. Munitz, and 15 Mr. Berner, correct? 16 A. Right. 17 Q. Okay. 18 A. That's right. 19 Q. So, three of the four directors of USAT 20 that participated in the board meeting would have 21 been persons who were going to receive contracts 22 from USAT? 18913 1 A. Right. 2 Q. And those contracts then were, in each 3 instance, unanimously approved with the interested 4 party abstaining when his own contract was being 5 voted on? 6 A. Yes. 7 Q. Okay. Now, would you take a look at 8 T8085? 9 A. 8085? 10 Q. Yes. Does this appear to be an 11 executed copy of the employment agreement that you 12 entered into with United Savings Association of 13 Texas? 14 A. Yes, it does. 15 Q. Now, this was entered on July the 1st, 16 1988, correct? 17 A. Yes. 18 Q. Now, I'm curious. If you take a look 19 at the UFG contract -- that's T8082. Okay? I 20 think that's probably going to be this one right 21 here. 22 Now, these are identical contracts. 18914 1 Right? 2 A. No. 3 Q. Well, let's strike that. 4 These were virtually identical 5 contracts except the USAT contract had several 6 provisions that were required to satisfy Bank 7 Board regulations, and it also had a final 8 provision that talked about their only becoming 9 effective if and only if UFG could not make the 10 payments it was obligated to under its contracts. 11 Is that a fair description of the 12 differences? 13 A. I think they are substantial 14 differences, but that's correct. 15 Q. For the most part, the text of these is 16 strikingly similar? 17 A. That's correct. 18 Q. On T8082, which is the UFG contract, 19 there's a -- count down to -- the fifth "whereas" 20 clause mentions that there had been a previous 21 employment agreement dated September the 9th, 22 1987, between UFG and yourself. 18915 1 Do you see that? 2 A. Yes, I do. 3 Q. But I count down five paragraphs on the 4 USAT contract, and I flip over to the second page. 5 And I notice that there is no paragraph on this 6 page that indicates that there has been any prior 7 contract entered into between you and USAT. 8 Do you see that? 9 A. Do I see it? Yes. 10 Q. Now, in fact, on February the 11th, 11 1988, you previously testified -- or at or about 12 February the 11th, following the February 11, 1988 13 meeting of the board of USAT, you testified that 14 you executed a contract between yourself and USAT. 15 Do you recall that? 16 A. Yes. 17 Q. Is there a reason why the new 18 employment contract didn't make reference to the 19 old employment contract? 20 A. Yes. 21 Q. Why was that? 22 A. Because it was my position that that 18916 1 USAT contract was never effective. It only became 2 effective if the UFGI contract couldn't be 3 performed. 4 Q. I understand that. But if you look at 5 the "whereas" clause in T8082, it doesn't talk 6 about an effective contract, does it? It just 7 says -- the recital says, "The executive has 8 previously entered into an employment agreement." 9 A. You asked the question as to why the 10 "whereas" wasn't here, and it isn't here -- that 11 my position was that that USAT contract was never 12 effective, and it didn't have to be referred to. 13 Q. And so, you left it off the front of 14 the contract? 15 A. Yes. 16 Q. Did you do that because you didn't want 17 the regulators to learn that you had previously 18 entered into an employment contract on February 19 the 11th, 1988, and had failed to tell them about 20 that contract? 21 A. No, absolutely not. In fact, the 22 regulators were at the board meeting when those 18917 1 contracts were discussed and approved. 2 Q. Did you ever send a copy of those 3 contracts to the regulators after they were 4 entered into on February the 11th, 1988? 5 A. I'm not sure. I think they were part 6 of the 10K. I may be wrong on that, but I thought 7 they were attached to the 10K. 8 Q. The 10K of UFG? 9 A. I believe so. 10 Q. And you submitted the 10K to them and 11 advised them that enclosed in the 10K were 12 employment contracts that had been entered into 13 with USAT? 14 A. No. I just sent them the 10K. 15 Q. Oh, and left them to figure it out 16 themselves? 17 A. It was a major disclosure document for 18 one of the largest, if not the largest, 19 institution. 20 Q. How large is a 10K? 21 A. Depends on how much attachments there 22 are. 18918 1 Q. We're talking about 7, 8 inches of 2 paper? 3 A. No. The 10K we've looked at before was 4 part of that annual report; so, that was about 60 5 pages. 6 Q. But that didn't include the 7 attachments, did it? 8 A. Right. 9 Q. When you put on the attachments, it's a 10 substantial packet of paper? 11 A. It would depend on the year. 12 Q. And you presumed that by submitting the 13 10K, that that was sufficient disclosure to put 14 the regulators on notice that you had entered into 15 the February 11, 1988 contract? 16 A. Absolutely. I presumed, you know, 17 truthfully as a securities lawyer, when you 18 disclose something in a public document, people 19 are put on notice that what's in there is in 20 there. And I would have presumed and did presume 21 that the person that's regulating USAT would look 22 at the documents that were sent to him. 18919 1 Q. Let me ask you this: Do you remember 2 submitting a forbearance application in the middle 3 of February 1988 after the employment contracts 4 had been approved by the board? 5 A. I remember the forbearance application. 6 I don't remember the date of it. 7 Q. If I told you that it wasn't submitted 8 until a number of days after the February 11th, 9 1988 meeting, would that surprise you? 10 A. No. It wouldn't surprise me at all. 11 Q. Is there a reason why you wouldn't have 12 then disclosed to the regulators in the 13 forbearance application the fact that you had 14 entered into employment agreements with USAT? 15 A. Well, it's consistent with -- what I'm 16 saying is that my view on the USAT employment 17 agreements is that they were not effective until 18 UFGI couldn't perform under its agreement. 19 Q. If they weren't effective, then would 20 you have attached them to the 10K? 21 A. Just as an exhibit. 22 Q. I understand that. If this wasn't an 18920 1 effective contract, then what would have been the 2 purpose of putting it on the 10K? 3 A. I thought it was something that needed 4 to be disclosed pursuant to the securities laws. 5 Q. So, it had to be disclosed pursuant to 6 the securities laws; but you didn't think it had 7 to be disclosed pursuant to your obligation to the 8 federal regulators to advise them of what was 9 going on in connection with the filing of a 10 forbearance application? 11 A. Again, the regulators were present at 12 the board meeting when those contracts were 13 approved. The contracts were not effective unless 14 UFGI couldn't perform under those contracts. 15 Q. And who was going to be paying for all 16 of the moneys under these employment contracts? 17 It was going to be USAT, wasn't it? 18 A. For which? The severance would be UFG. 19 The salaries would continue to be USAT, that's 20 correct. 21 Q. And you didn't think that you needed to 22 disclose the existence of the new contracts to the 18921 1 regulators when you filed your forbearance 2 application? 3 A. Again, it had been disclosed to the 4 regulators earlier. If you're telling me that the 5 forbearance application came after that 6 February 11 meeting but it wasn't an effective 7 contract, that's correct. 8 Q. But you never submitted a copy of the 9 contracts after they were executed to the 10 regulators? 11 A. Well, at some point, I know the 12 regulators received signed copies of them. 13 Q. Right. It was some point well into the 14 future, correct? 15 A. It was sometime after February 11. I 16 don't know when they received them. 17 Q. We'll get to that. Okay? 18 Now, was UFG able to pay the base 19 salary of Mr. Gross and Mr. Munitz at this point 20 in time, in June of 1988? 21 A. Yes. 22 Q. Is there a reason, then, why when they 18922 1 entered into new employment agreements, that UFG 2 didn't pay the base salaries of Mr. Munitz and 3 Mr. Gross who had just entered into new contracts 4 with UFG? 5 A. I believe it did pay the salary of 6 Dr. Munitz. I believe he was always paid by UFG. 7 It didn't pay Mr. Gross because that's -- 8 consistent with everything else, the salaries and 9 bonuses were paid by USAT for everyone except 10 Dr. Munitz. 11 Q. So, Mr. Gross' nearly half 12 a-million-dollar salary -- I think it was $450,000 13 or thereabouts -- which was being approved as part 14 of the UFG compensation employment agreement that 15 was entered into or approved on June 28th, 1988, 16 by the UFG board, that salary obligation was not 17 paid by UFG; is that correct? 18 A. It continued to be paid by USAT, that's 19 correct. 20 Q. Okay. Now, what was the financial 21 condition of USAT and UFG at or about June 30th, 22 1988, on the day that those contracts were 18923 1 approved? 2 A. I don't know specifically, but I'm 3 sure -- I know USAT was significantly below its 4 regulatory net worth. 5 Q. Can you take a look at T8095? Now, 6 T8095 which has previously been admitted as 7 Tab 439 is a memo from Mr. Crow to the board of 8 directors of UFG. 9 So, this is something you would have 10 received, correct? 11 A. Yes. 12 Q. And this is the second quarter 1988 13 performance of UFG. And -- 14 A. Right. 15 Q. And if you turn to the third page of 16 this document, it has something called "regulatory 17 compliance." 18 Do you see that? 19 A. Yes. 20 Q. And it indicates there that on 21 June 30th, 1988, USAT had regulatory capital of 22 only $86 million. 18924 1 Do you see that? 2 A. Yes, I do. 3 Q. And that it was $163 million below the 4 minimum regulatory capital requirement? 5 A. Yes, sir. 6 Q. As a director, did you feel it was 7 appropriate for USAT to be taking on the 8 obligation of new contracts with increased 9 salaries and severance benefits at a point in time 10 when it was failing its regulatory capital by 11 $163 million? 12 A. Of course, it wasn't taking on 13 anything -- USAT wasn't taking on anything unless 14 UFGI couldn't perform under its contract. Yes, I 15 thought that was appropriate. 16 Q. Well -- and what was the condition of 17 UFGI which you indicated was the entity that had 18 to perform first? 19 A. On June 30th? 20 Q. Yes. 21 A. I would have to look. This is after 22 the Penn Corp debt was paid down. 18925 1 Q. On the first page, it says the company 2 lost 31.7 million in the second quarter. Right? 3 A. Right. 4 Q. And it shows that it had negative 5 shareholder equity, correct? 6 A. Yes. 7 Q. How much was that? Can you tell? 8 A. If I can find it here. (Witness 9 reviews the document.) Can you show me the page? 10 Q. But it's your recollection that at this 11 point in time, there was negative equity in UFG, 12 as well? 13 A. Shareholder's equity, yes. 14 Q. Now, at this point in time, did you -- 15 had you become -- had you been advised prior to 16 entering into the contracts that UFGI had an 17 obligation to maintain the net worth of USAT? 18 A. I believe we had gotten a letter from 19 the Federal Home Loan Bank of Dallas at that time. 20 Q. And take a look at 8071. 21 A. 8071? 22 MR. VILLA: 8070, I think. 18926 1 MR. RINALDI: You're absolutely 2 correct. There are two May 13th letters, and I've 3 transposed them. 4 Q. (BY MR. RINALDI) It's T2013 is 8071. 5 This is a letter -- 8070. This is a letter from 6 Neil Twomey to the board of directors of United 7 Financial Group. And if you look down about one 8 sentence in the first paragraph, it says, "In 9 order to obtain final approval for the acquisition 10 and merger of First American Financial of Texas, 11 Inc. into United Financial Group, Inc. (UFGI) and 12 Houston First American Savings Association into 13 United, UFGI agreed to comply with certain 14 conditions set forth in Federal Home Loan Bank 15 Board Resolution No. 83-252 dated April 29, 1983." 16 Then it goes on to state the terms of 17 that provision. And under Paragraph 6, it 18 indicates that UFGI, the applicant, would 19 stipulate to the corporation that as long as it 20 controlled the association -- that would be 21 USAT -- that it would cause the net worth of the 22 association to be maintained at a level consistent 18927 1 with that required by the applicable regulations. 2 Do you see that? 3 A. Yes, uh-huh. 4 Q. Do you recall -- now, this letter was 5 addressed to the board of directors of UFG. 6 Did you ultimately receive a copy of 7 the letter? 8 A. Yes, I did. 9 Q. And how would that have worked? It 10 would have gone initially to Mr. Gross and then 11 would have been passed on to you? 12 A. I believe so. 13 Q. At the end of the letter, Mr. Twomey 14 says, "Inasmuch as United is below its minimum net 15 worth requirement, UFG is hereby directed to 16 advise the supervisory agent of the steps which 17 will be taken to infuse capital into United. Your 18 response should be received by this office no 19 later than May 30, 1988." 20 Do you see that? 21 A. Yes, I do. 22 Q. Following that letter, did United 18928 1 infuse any capital into USAT? 2 A. It did not infuse capital into USAT. 3 Q. Now, he indicates there that United was 4 obligated to stipulate to the corporation. 5 To your knowledge, did United stipulate 6 to the corporation? 7 A. To my knowledge today? 8 Q. Yes. 9 A. Yes, we did. 10 Q. Was there some question in your mind at 11 that time? 12 A. Actually, at that time, probably not; 13 but we never could find the stipulation until you 14 gave it to us a couple years ago. 15 Q. But there's no doubt today as you sit 16 here that, in fact, United entered into such a 17 stipulation? 18 A. That's correct. 19 Q. And following the receipt of the 20 May 13th letter, no actions were taken to infuse 21 capital; or no capital was infused. Is that 22 correct? 18929 1 A. No capital was infused by United. 2 Q. By UFG? 3 A. By UFG, that is correct. 4 Q. Now, did there come a time when 5 Mr. Twomey sent you another letter, again 6 requesting that you infuse capital? 7 A. Well, this letter didn't request that 8 we infuse capital. 9 Q. Okay. Did there come a time when he 10 sent you another letter addressing the issue of 11 infusing capital? 12 A. I believe he sent a letter later in the 13 year, December. 14 Q. So, it's your position as you read this 15 letter that you were under no obligation to infuse 16 capital at this point in time? 17 A. That's correct. 18 Q. And if you had infused capital as 19 Mr. Twomey or -- had come up with a plan to take 20 capital from UFG and infuse it into USAT, what 21 impact would that have had on UFG's ability to 22 continue as a going concern? 18930 1 A. Would you repeat that question? 2 There's a lot of hypotheticals in there. 3 Q. If you had taken capital out of UFGI 4 and infused it into USAT, could UFGI have 5 continued as a going concern? 6 A. If we had done that -- I'm not sure 7 that was the proposal; but if we had taken from 8 UFGI and put it into USAT, I don't know what would 9 have happened. My guess is there would be a lots 10 of people filing bankruptcy petitions and trying 11 to get assets. I don't know what would have 12 happened. 13 Q. UFGI would have been insolvent, 14 wouldn't it? 15 A. If UFGI had taken its own capital, it 16 probably would have been insolvent. 17 Q. And so, at this point in time, USAT was 18 a principal creditor of UFGI, wasn't it? 19 A. I don't know if they would be 20 considered a creditor or not. 21 Q. Well, pursuant to the terms of the 22 stipulation, USAT -- or UFGI had an obligation to 18931 1 infuse a substantial amount of capital into USAT? 2 A. Again, even under the stipulation, that 3 wasn't required. 4 Q. That's your interpretation, correct? 5 A. Well, it says, "It will cause the net 6 worth." Yeah, that would be my interpretation. 7 Q. Cause the net worth to be maintained. 8 Right? What did you understand that to mean? 9 A. You could bring in capital from lots of 10 different places. 11 Q. I understand that. But you had to 12 bring in capital. And one way to bring in capital 13 was to take your own money and put it into the 14 institution, correct? 15 A. That was a way. 16 Q. And you tried other ways; but it was 17 unsuccessful, wasn't it? 18 A. I'm not sure that that's true. No, I 19 don't think so. 20 Q. I see. Well, when you say it wasn't -- 21 it wasn't successful, you're not suggesting that 22 you -- strike that. 18932 1 Ultimately, USAT was placed into 2 receivership, was it not? 3 A. Ultimately, USAT was placed into 4 receivership. 5 Q. And following that receivership, USAT 6 was transformed into another entity; and it was 7 taken over by an individual named Lewis Ranieri, 8 correct? 9 A. As part of the Southwest Plan, that's 10 correct. 11 Q. But UFG never infused capital into 12 USAT? 13 A. That's correct. 14 Q. Okay. Now, take a look at Exhibit T -- 15 THE COURT: Mr. Rinaldi, we'll adjourn 16 until 1:30. 17 18 (Whereupon, a lunch break was taken 19 from 12:04 p.m. to 1:35 p.m.) 20 21 THE COURT: Be seated, please. We will 22 be back on the record. 18933 1 Mr. Rinaldi, you may continue. 2 MR. VILLA: Your Honor, one short 3 matter. We haven't yet gotten a reply, and I 4 suppose it's possible that it will be filed and we 5 won't receive it before the close of business 6 today. 7 I was wondering whether we may 8 communicate with your clerk early next week as to 9 whether there is any matter in there that we need 10 to respond to. 11 THE COURT: Well, you may communicate 12 with him. I don't think he's going to tell you 13 whether you need to respond. 14 MR. VILLA: No, sir. I'm not as 15 articulate on a Friday afternoon as I wish I was, 16 Your Honor. 17 Thank you, Your Honor. 18 Q. (BY MR. RINALDI) Mr. Berner, before 19 we broke, I had asked you if copies of the USAT 20 contracts that were entered into in February of 21 1988 had been submitted to the Bank Board. And I 22 believe in connection with that, you had responded 18934 1 that you thought copies of those contracts was 2 attached to a 10K that had been filed by UFG. 3 Do you recall that? 4 A. Yeah. I recall saying that, yes, sir. 5 Q. Okay. Would you take a look at what's 6 been previously admitted in this proceeding, which 7 is Exhibit T8033? This is the annual -- 1987 8 annual report that we've been looking at on a 9 number of occasions. 10 Is that the 10K you were referring to, 11 sir? 12 A. A portion of this annual report is the 13 10K. 14 Q. Okay. And would you turn for me, if 15 you will, to Page 67 because I believe there is, 16 on that page, a list of the attached exhibits. 17 And I believe you had indicated you thought that 18 it might be an attached exhibit. 19 Do you see that? Now, take a look at 20 10.16. Does that appear to be the employment 21 contract you were referring to that was attached 22 to United Financial Group -- I mean to the -- to 18935 1 the United Financial Group, Inc. Form 10K? 2 A. 10.1 -- which one? 3 Q. 10.16. 4 A. Yes. 5 Q. And does it appear that the contract 6 that was attached was, in fact, the contract that 7 had been entered into between United Financial 8 Group, Inc. and its executive employees and not 9 the contract that was entered into between USAT 10 and its executive employees? 11 A. Yes, it does. 12 Q. Okay. So, does that refresh your 13 recollection that, in fact, you did not submit the 14 February 11th, 1988 contracts to the Federal Home 15 Loan Bank Board regulators at or about the time 16 that they were executed? 17 A. Again, it wasn't attached to the 10K; 18 so, I don't have a specific recollection of giving 19 it to them at that time, no. 20 Q. Do you have any recollection of giving 21 it to them at any subsequent point in time? 22 A. Yes, I do. 18936 1 Q. And when would that have been? 2 A. Well, I know they had it in September; 3 and they might have had it before then. 4 Q. Okay. Now, when we broke last, you 5 indicated that -- we were talking about the net 6 worth failure and that UFG, pursuant to a letter 7 dated May 13th, 1988 from Mr. Twomey, had not 8 undertaken to infuse any capital into USAT. 9 Do you recall that? 10 A. I'm sorry. I didn't hear the question. 11 I'm sorry. 12 Q. When we broke, we were talking about a 13 request that was made by Mr. Twomey for USAT -- 14 UFG to advise us of the steps it was going to take 15 with respect to any actions to infuse capital into 16 USAT. 17 Do you recall that? 18 A. Yes, I do. 19 Q. Okay. And you testified, I believe, 20 that no steps were taken at that time by UFG to 21 infuse its capital into USAT. 22 Do you recall that? 18937 1 A. To infuse its own capital? 2 Q. Yes. 3 A. Steps were taken by UFGI to do a lot of 4 things. It -- 5 Q. My question is: Did UFGI infuse its 6 own capital into USAT at that point in time? 7 A. At that point in time, it did not, no. 8 Q. And UFGI, at that point in time, did 9 have capital that it could have infused into USAT; 10 is that correct? 11 A. It did. It wasn't asked to do that, 12 but it did. 13 Q. Now, did there come a time when they 14 were specifically asked to infuse capital into 15 UFGI? I mean into USAT. 16 A. I believe there was a time in December 17 where they were asked to do that. 18 Q. Could you take a look at Exhibit T1152? 19 I don't know that this has been -- it was 20 previously admitted as Tab 73. This would be in 21 the third volume, and it's T1152. Perhaps I can 22 help you find it. 18938 1 Do you recognize that document, sir? 2 A. Yes, I do. 3 Q. This is Tab 73, Exhibit T1152. 4 Is that the letter that you received 5 that the board of directors of United Financial 6 Group received from Neil Twomey on or about 7 December 8th, 1988? 8 A. Yes. 9 Q. And in that letter, does he direct the 10 board of UFG to infuse capital into USAT? 11 MR. EISENHART: Your Honor, I think 12 there is a mix-up on exhibit numbers here. Our 13 Tab 73 is Exhibit T2021. It is the same document, 14 I believe. 15 THE COURT: That's what we have. 16 T2021, I think, was the exhibit number for that 17 letter. I don't know if it's in somewhere else or 18 not. 19 MR. RINALDI: Okay. 20 Q. (BY MR. RINALDI) And is this the 21 letter that you received, that UFG received from 22 Mr. Twomey? 18939 1 A. Yes, it is. 2 Q. And pursuant to that letter, did UFG 3 undertake to infuse capital into USAT? 4 A. No, it did not. 5 Q. And did it then receive a subsequent 6 letter later in December, that you recall? 7 A. I believe it did. 8 Q. And at that time, were any steps taken 9 to infuse capital into USAT? 10 A. Well, after this letter, we had our 11 board meeting where we talked about this request 12 and what our response would be to this request. 13 Q. And did they infuse capital at that 14 time? 15 A. At December 8? 16 Q. Yes. 17 A. No, it did not. 18 Q. And at any time prior to the 19 foreclosure, prior to or after the receivership of 20 USAT, did UFG infuse any of its own capital into 21 USAT pursuant to its net worth obligation? 22 A. At any time prior to the receivership? 18940 1 Q. Yes. 2 A. It did not infuse its own capital into 3 USAT. 4 Q. Now, after the contracts with UFG and 5 USAT had been entered into, did you undertake to 6 obtain letters of credit to secure the obligation 7 by UFG and USAT to pay severance benefits to the 8 executive employees of USAT and UFG? 9 A. Did I personally -- 10 Q. Yes. 11 A. -- try to do that? I did not try to do 12 that. 13 Q. Did you assign anybody to do that? 14 A. I didn't assign. I think I asked 15 somebody to do that. 16 Q. And do you recall having had any 17 conversations with either Mark Gordon or 18 Phil Ballard with Hewitt & Associates regarding 19 that subject? 20 A. I had a number of conversations with 21 both of them. I'm not sure if -- regarding 22 getting a letter of credit? 18941 1 Q. Yes. 2 A. No, I don't recall that. 3 Q. Okay. Would you turn to Exhibit T8076? 4 It would be in the second volume. And it's at -- 5 it's an E-mail dated 6/27/88, which would have 6 been the day before the contracts were entered 7 into or were approved by the boards of UFG and 8 USAT. 9 Do you recognize this document, sir? 10 A. I've seen this, yes. 11 Q. You have? Okay. 12 And in the second full paragraph, it 13 talks about -- this is from Mr. Gordon. And just 14 for the Court's benefit, Mr. Gordon was an 15 individual that worked for Hewitt that had helped 16 you with the compensation study that Hewitt was 17 doing; is that correct? 18 A. Well, he did the study. 19 Q. Okay. Mark Gordon was his name? 20 A. I think that's right. 21 Q. Okay. And this is an E-mail, it 22 appears, from Mr. Gordon. And in it, it states 18942 1 that "Art is sure they can obtain L of Cs at Texas 2 Commerce Bancshares, TCB, for a reasonable 3 one-quarter percent price. The only catch is UFG 4 has to collateralize this payment. Art is writing 5 a vanilla trust agreement based on one TCB has 6 written." 7 Do you see that? 8 A. Yes, I do. 9 Q. Do you recall contacting Texas Commerce 10 Bank and inquiring of them whether they could 11 provide letters of credit to UFG to secure the 12 severance benefits? 13 A. No, I do not. 14 THE COURT: Mr. Rinaldi, what exhibit 15 number was that? 16 MR. RINALDI: It's T8076, Your Honor. 17 MR. BLANKENSTEIN: Your Honor, I don't 18 believe it's in evidence. 19 MR. RINALDI: I'm sorry. I thought 20 that it -- but I put it on my pull list. 21 MR. EISENHART: It's on your pull list. 22 MR. RINALDI: I would move its 18943 1 admission at this time, and we will arrange to 2 bring up additional copies at the earliest 3 possible convenience. This is a copy of the 4 document, and I would move its admission at this 5 time. 6 MR. VILLA: Well, Your Honor, this is a 7 statement from Gordon -- I'm sorry -- from Hewitt. 8 I'm not sure what the sponsoring witness is for 9 this document. I mean, this is a statement from 10 the Hewitt files, and I think if they want to 11 bring -- ordinarily, if they want to put in a 12 document from the Hewitt files, you would think 13 they would have somebody from Hewitt to do it. 14 MR. RINALDI: Your Honor, I believe it 15 purports to relay a conversation Mr. Berner had 16 had with Mr. Gordon, and Mr. Berner has indicated 17 that the document -- that he has seen it before, 18 and he did indicate that he had conversations with 19 Mr. Gordon regarding the subject. 20 MR. VILLA: He's seen it because you 21 put it on your pull list; so, I showed it to him. 22 It's kind of a circular way of getting things into 18944 1 evidence, Your Honor. I think ordinarily if you 2 want something from Hewitt into evidence, you 3 ought to bring the people from Hewitt in to do so. 4 So, I don't think there is a basis for 5 this sponsoring witness, Your Honor. I object. 6 He can use it to refresh his recollection, but I 7 don't think it should be introduced into evidence. 8 THE COURT: All right. I'll sustain 9 the objection. 10 Q. (BY MR. RINALDI) Sir, does that 11 refresh your recollection that you contacted Texas 12 Commerce Bank and attempted to secure letters of 13 credit for UFG to secure the severance benefits? 14 A. No. 15 Q. Now, it indicates there that you would 16 have to post collateral for the letters of credit. 17 Was it -- do you recall having had any 18 discussions with persons at UFG or USAT of the 19 problem of UFG posting collateral at that point in 20 time to secure letters of credit? 21 A. I'm not even sure -- when is this? 22 What date is it? 18945 1 Q. I believe it says June the 27th, 1988. 2 A. Okay. 3 Q. In that time frame, do you recall 4 having any discussions with anyone regarding the 5 question of UFG posting collateral to secure a 6 letter of credit? 7 A. No, I don't. 8 Q. Now, if the letters of credit that were 9 going to have to be secured by UFG would total 10 $6.6 million, did UFG have collateral that was 11 available, unencumbered, that it would post to 12 secure letters of credit for $6.6 million? 13 A. Yes. 14 Q. Now, did you, after entering into the 15 contracts, then request Mr. Crow to attempt to 16 obtain letters of credit? 17 A. I believe I asked -- or Mr. Crow and I 18 talked about it, and he was going to try to do so. 19 Q. Okay. And do you recall -- could you 20 take a look at Exhibit T8091? And this has 21 previously been admitted as Tab 1374. 22 Do you see that document? 18946 1 A. Yes. 2 Q. Have you seen it before, sir? 3 A. Yes, I have. 4 Q. And was that a document that you sent 5 to Mr. Crow? 6 A. Yes, it is. 7 Q. And it states in the document that 8 Mr. Crow should -- that UFG is required to set up 9 an irrevocable letter of credit equal to two times 10 the executive's annual salary. 11 Do you see that? 12 A. Well, it doesn't say UFG. 13 Q. Well, who is going to -- let's get this 14 straight. 15 Wasn't UFG the entity that was 16 responsible for securing the letters of credit in 17 the first instance? 18 A. Again, I'd have to go back and look at 19 the agreement. I'm not sure the agreement says 20 UFGI either. 21 Q. Now, we've been through this. And 22 every time I've asked you if UFG had an obligation 18947 1 under those agreements, you have told me that, 2 first, UFG had no obligation to pay salary. Then 3 you've told me that UFG had no obligation to pay 4 any bonus or -- under any of the agreements; is 5 that correct? 6 A. UFG had no obligation to pay any bonus 7 under the agreements. 8 Q. And none of the salaries? 9 A. That's correct. 10 Q. And the only obligation of UFG was to 11 pay the severance benefit in the event of a change 12 of control that triggered entitlement to that 13 severance benefit, correct? 14 A. That's correct. 15 Q. And in connection with that, wasn't it 16 UFG's responsibility then to obtain letters of 17 credit to secure the severance benefit for which 18 they were obligated? 19 A. It's not clear to me that UFG had to 20 actually get the letter of credit. It had to -- 21 there had to be letters of credit put up, that's 22 correct. 18948 1 Q. Well, wait a second. Didn't you write 2 this contract? 3 A. Yeah, I sure did. 4 Q. But you're telling me it's not clear to 5 you as the drafter of the contract whether UFG was 6 the entity that had to obtain the letters of 7 credit to fulfill its obligation to secure the 8 severance benefits? 9 A. Could we look at the contract? 10 Q. Sure. We can look at any of them. 11 Which one would you like? Let's take a look at 12 T808 -- let's take a look at yours. Why don't we 13 look at -- let me just look through the book and 14 pick out one. 15 Why don't you turn to Exhibit 8082. 16 I'm sorry. 8083. That appears to be Jenard 17 Gross' contract with United Financial Group. 18 A. Uh-huh. (Witness nods head 19 affirmatively.) 20 Q. And if you turn to -- I think it's 21 Page 18, 9I. I believe it says, "As security for 22 the company's obligation" -- and in this case, the 18949 1 company is UFGI -- "to make payments to the 2 executive pursuant to this Paragraph 9, upon the 3 execution by the company, the company shall 4 deliver or cause to be delivered to the executive 5 an unconditional, irrevocable letter of credit." 6 Do you see that? 7 A. That's what it says, "or cause to be 8 delivered," that's correct. 9 Q. Right. So, doesn't that mean that the 10 company was UFG that would have to deliver the 11 letter of credit? 12 A. No. It means that it will deliver it 13 or it will cause it to be delivered. 14 Q. And so, you read that to mean that it 15 would cause it to be delivered through USAT? 16 A. Yes. 17 Q. And let me just ask you -- if you look 18 at the USAT contracts, is it not correct that they 19 state in the last -- let's see. Let's take a look 20 at the USAT contract that you entered into, which 21 is T8085. 22 And if you turn to the last page of 18950 1 8085, Page 29, do you see the last paragraph 2 there? It says, "The terms and conditions of this 3 agreement shall become effective if, but only if, 4 UFGI shall be unable to comply with all of its 5 obligations and make all of its payments as set 6 forth under the UFGI agreement." 7 A. Yes, sir. 8 Q. So, under the USAT contract, isn't it 9 true that USAT had no obligation to pay 10 benefits -- or to pay salaries or to provide 11 letters of credit unless UFG was unable to comply 12 with all of its obligations? 13 A. Right. But its obligations, UFGI's 14 obligations, was to deliver or to cause to be 15 delivered a letter of credit. 16 Q. And so, what you're saying is that one 17 of the ways it could cause for the letter of 18 credit to be delivered is to then go to USAT and 19 have USAT post the letter of credit? 20 A. That's correct. 21 Q. And isn't that inconsistent with the 22 Paragraph 18E of the USAT contract which says -- 18951 1 MR. SCHWARTZ: Exhibit number? 2 MR. RINALDI: This is Exhibit 8085. 3 Q. (BY MR. RINALDI) -- which says that 4 "The terms and conditions of this agreement shall 5 become effective if, but only if, UFGI shall be 6 unable to comply with all of its obligations"? 7 A. That's not inconsistent at all. The 8 UFGI obligation, under its agreement, was to cause 9 a letter of credit to be posted. That's what its 10 obligation under the UFGI agreement was. This 11 agreement, which is the USAT agreement, only 12 becomes effective if UFGI doesn't satisfy all of 13 its obligations. 14 Q. Okay. And if you look at 9I on Page 18 15 of this agreement, it states that "as security for 16 the company" -- and in this case, we're talking 17 about USAT -- we're now looking at Exhibit T8085. 18 It says, "As security for USAT's obligation to 19 make payments to the executive pursuant to this 20 paragraph, upon the effective date of the 21 agreement as determined in accordance with this 22 Paragraph 18E, the initial establishment date, the 18952 1 company shall deliver or cause to be delivered to 2 the executive an unconditional, irrevocable letter 3 of credit." 4 Do you see that? 5 A. Yes, sir. 6 Q. So, USAT was obligated under its 7 agreement to deliver a letter of credit but only 8 if UFG didn't first comply. Right? 9 A. No, that's not correct. 10 Q. Why was it that UFG didn't obtain 11 letters of credit, sir? 12 A. Okay. The purpose of the letter of 13 credit was to secure -- 14 Q. No, sir. Listen to my question. 15 Why didn't UFG obtain a letter of 16 credit? 17 A. I was trying to answer your question. 18 Q. Okay. Fine. 19 A. The purpose of the letter of credit was 20 to secure -- ultimately to secure a severance 21 benefit. So, if UFGI didn't pay its severance 22 benefit, then the UFGI contract -- the USAT 18953 1 contract would have become effective. If USAT 2 didn't pay under its contract, then someone could 3 look to the letter of credit as security. But it 4 didn't mean that someone could go directly to that 5 letter of credit if it existed. UFGI's obligation 6 was to deliver or cause to be delivered a letter 7 of credit which would secure the payment of the 8 severance benefit. 9 Q. But wasn't the purpose for having two 10 contracts with USAT being the backup -- and I 11 think that was the term you had used -- to make 12 UFG the primary obligor for the severance benefits 13 and to make USAT only obligated to pay severance 14 benefits in the event that UFGI couldn't? 15 A. Absolutely right. 16 Q. Okay. And so -- 17 THE COURT: Excuse me. I didn't hear 18 the answer. 19 THE WITNESS: Absolutely right. That's 20 correct. 21 Q. (BY MR. RINALDI) And so, the 22 mechanism for securing the severance benefit was 18954 1 going to be to have UFGI put up a letter of credit 2 or secure a letter of credit or cause some 3 institution to put up a letter of credit on its 4 behalf; is that correct? 5 A. To have -- UFGI's obligation under its 6 agreement was to deliver or cause to be delivered 7 a letter of credit which would secure the payment. 8 It wasn't there to make the payment. It was to 9 secure the payment. 10 Q. Okay. And when UFGI caused its 11 obligation to be fulfilled by putting up a letter 12 of credit of USAT, it was, in effect, using the 13 assets of the subsidiary for the benefit of the 14 parent, wasn't it? 15 A. Well, first of all, it wasn't using any 16 assets. First of all, there was no letter of 17 credit -- as you know, there was no letter of 18 credit that was ever put up. 19 Secondly, I think it's unfair to say 20 that this was the -- you know, for the benefit of 21 the parent. I mean, obviously, all of these 22 people were employees of USAT. All of their work 18955 1 or 90 percent or 85 percent of their work was 2 being done for USAT. 3 So, I don't think that's a fair 4 characterization. But in any event, what was 5 being -- what was provided for in this agreement 6 was if you could have gotten a letter of credit 7 which, as you know, was never gotten, that would 8 have just secured -- ultimately secured the 9 severance benefit. 10 Q. Okay. And why didn't UFG get a letter 11 of credit? 12 A. I'm not sure I know why it didn't. I 13 don't think they could. 14 Q. And why couldn't UFG get a letter of 15 credit? Didn't it have the collateral to put up? 16 A. Yeah. I don't know why it couldn't. 17 Q. Don't you normally have to 18 collateralize a letter of credit? 19 A. Sometimes. 20 Q. Isn't that your experience? 21 A. Sometimes. 22 Q. If you had an institution like UFG that 18956 1 was -- had negative equity, would any lender put 2 up a letter of credit without receiving collateral 3 for that letter of credit in your experience, sir? 4 A. Well, sometimes you put up collateral 5 for a letter of credit; and sometimes you don't. 6 But in this case, they probably would have needed 7 to put up collateral. 8 Q. And is the reason that UFG didn't get 9 letters of credit is because they didn't have 10 collateral to put up at that point in time? 11 A. No. 12 Q. So, UFG just decided it didn't want to 13 get letters of credit; is that right? 14 A. That's -- no. First of all, UFGI's 15 obligation was to deliver a letter of credit or 16 cause to be delivered. 17 Q. Okay. And my question to you is: Why 18 didn't it do that? 19 A. It tried. It couldn't get a letter of 20 credit. 21 Q. And why couldn't it get a letter of 22 credit? 18957 1 A. I don't know. 2 Q. And who would know that? 3 A. Mr. Crow, I assume. 4 Q. Okay. So, in lieu of that, when you 5 couldn't obtain the letter of credit, you decided 6 to create an escrow; is that correct? 7 A. I think the agreement called for a 8 trust. 9 Q. And did you attempt to set up a trust? 10 A. Again, my recollection is I think we 11 tried to do that or there was some discussion 12 about doing it. And for some reason, it wasn't 13 set up. I don't remember what the reason was. 14 Q. And is it fair to say that under the 15 agreements, it was the obligation of UFG to set up 16 the trust or cause the trust to be set up in the 17 first instance? 18 A. To cause it to be set up. 19 Q. Okay. What does 'cause it to be set 20 up" mean? 21 A. It means you get someone to do 22 something. 18958 1 Q. Okay. And so, they were going to go 2 set up a trust and then UFGI would have to fund 3 that trust, wouldn't it? 4 A. Not necessarily. 5 Q. You mean, they could get someone else 6 to fund the trust? 7 A. That's what I think to "cause to have 8 it set up" means. 9 Q. So, in other words, it could have been 10 USAT that funded the trust? 11 A. It could have been. 12 Q. I see. And that wouldn't have been 13 prescribed by the express terms of the agreement 14 that said USAT had no obligation to set up a trust 15 or obtain a letter of credit unless and until UFGI 16 had failed to comply? 17 A. Again, the UFGI agreement, which was 18 the only one that was effective, said it would 19 cause -- said it would cause it to be done. The 20 purpose of the letters of credit and the purpose 21 of the trust would be to secure the payment. The 22 payments would be coming from UFG. 18959 1 Q. And so, UFGI couldn't get letters of 2 credit and were unable to set up a trust 3 arrangement; is that correct? 4 A. Again, I don't know why they didn't get 5 the letter of credit and I'm not -- I don't have a 6 recollection as to why we -- why the trust wasn't 7 set up; but ultimately, it was an escrow account 8 that was set up. 9 Q. Okay. And if you turn to Exhibit 8016 10 which, I believe, is the second document or the 11 first document in the third volume. 12 A. I'm sorry. In the third volume? 13 Q. Yeah. And this is Tab 441. 14 A. 8016? 15 Q. 8106. And it's 441. It should be a 16 letter to Mr. Munitz from Mr. Gross. And it says 17 here that "Pursuant to your employment contract 18 (the employment contract), with United Savings 19 Association of Texas, USAT's obligation with 20 respect to severance benefits payable under the 21 employment contract are to be secured by an 22 unconditional, irrevocable letter of credit (the 18960 1 letter of credit) or with cash deposited with a 2 trustee by USAT in a trust account maintained for 3 your benefit (the trust account). USAT has 4 determined that it will not be feasible to obtain 5 a letter of credit or to establish a trust 6 account. In lieu thereof, USAT has deposited an 7 aggregate amount of $6,612,980 with First City 8 National Bank (First City) with respect to USAT's 9 obligation to pay severance benefits under all 10 executive employment agreements to which it is a 11 party." 12 Do you see that? 13 A. Yes. 14 Q. Now, it says here that USAT is setting 15 up an escrow for the purposes of -- for the 16 purposes of fulfilling its obligations, the 17 obligations of USAT, with respect to severance 18 benefits paid under the employment contract. 19 Do you see that? 20 A. Yes. 21 Q. Does it say anything there that USAT is 22 being caused to do that by UFGI? 18961 1 A. No. 2 Q. So, in other words, in this letter from 3 Mr. Munitz to Mister -- I mean from Mr. Gross to 4 Mr. Munitz, Mr. Gross is saying that USAT is 5 setting aside the $6.6 million in an escrow 6 account, not to fulfill UFGI's obligation, but 7 USAT's obligation, correct? 8 A. That's what that says, yes. 9 Q. Okay. And UFG -- USAT didn't have an 10 obligation unless and until UFGI couldn't fulfill 11 its obligation, correct? 12 A. That's correct. 13 Q. So, is it fair to assume that on this 14 date, October the 3rd, 1988, UFGI was unable to 15 fulfill its obligation under the employment 16 contracts to provide a letter of credit or a trust 17 to secure the severance benefits under the UFGI 18 contracts? 19 A. No, it's not fair to say that. 20 Q. Why isn't it fair to say that, sir? 21 A. Because UFGI -- you know, UFGI could 22 have set something up. But the way it went about 18962 1 setting it up was to require USAT to put the money 2 in escrow so that in the event that UFGI couldn't 3 make its payment and USAT couldn't make its 4 payment, there was some security for the severance 5 payments. 6 Q. Now, you just said something. You said 7 UFGI made USAT put the money into escrow. 8 Is that what you said? 9 A. Caused them to do that. 10 Q. I see. But that's not what this 11 document says, does it? 12 A. It's not what this letter says, that's 13 correct. 14 Q. This letter says USAT was doing it to 15 fund USAT's obligation under the USAT contract, 16 correct? 17 A. Well, it talks about under the 18 employment contract. I don't know which one -- 19 okay. 20 Q. It talks about its contract. 21 A. That is correct. 22 Q. So, is it fair to say, sir, that UFGI 18963 1 did not fulfill its obligation to fund the 2 severance benefits under the UFGI contracts? 3 A. No, it's not fair to say that. 4 Q. Okay. But it is fair to say that USAT 5 fulfilled its obligation to fund its obligation to 6 secure the benefits under USAT's contracts, 7 correct? 8 A. USAT set up the escrow -- put the money 9 into escrow for the escrow -- for an escrow 10 account. USAT did that. 11 Q. And are you testifying, sir, that they 12 did that for the benefit of UFGI? 13 A. They did that to secure the contracts. 14 Q. And was that done for the purpose of 15 securing the benefits that UFGI had promised to 16 pay under its contracts? 17 A. For the employees that were working at 18 USAT. 19 Q. So, in other words, USAT, the 20 subsidiary, was using its assets to secure the 21 severance obligations that had been undertaken by 22 UFGI, the parent; is that correct? 18964 1 A. It was using its assets -- well, it was 2 using its assets to put up the escrow account, 3 that's correct, to pay for the severance. 4 Q. Which was the obligation of UFGI, the 5 parent, correct? 6 A. No. UFGI's obligation was to cause it 7 to be set up. UFGI's obligation was to pay the 8 severance benefit. 9 Q. That's correct. 10 A. Okay. 11 Q. And USAT was then putting up the money 12 in escrow in order to fulfill the obligation of 13 UFGI, the parent, correct? 14 A. That's correct. They were putting 15 up -- they were putting the money in escrow to 16 secure the severance benefits, that is correct. 17 Q. And those were the severance benefits 18 that in the first instance were the obligation of 19 UFGI, the parent? 20 A. To pay. 21 Q. That's correct. 22 A. That's correct. 18965 1 Q. So, the subsidiary insured depository 2 institution was using its assets to secure the 3 obligation of the parent, UFGI? 4 A. Right. That is correct. 5 Q. Thank you. 6 A. For the benefit of the employees that 7 were working at USAT, that's exactly correct. 8 Q. Now, when the board of USAT approved 9 these escrow arrangements, what was the condition 10 of USAT when it took the $6.6 million and put it 11 into the escrow account? 12 A. In October? 13 Q. Yeah. I mean, this was set up, was it 14 not, at or about October the 3rd, 1988? 15 A. The escrow agreement? 16 Q. Yes. 17 A. Yes. 18 Q. And what do you recall the condition of 19 USAT at that point in time was? 20 A. It was negotiating for infusions of 21 capital as part of the Southwest Plan. 22 Q. Would you take a look at the minutes of 18966 1 the USAT board meeting dated October 4th, 1988? 2 This is Exhibit T8108, and it's Tab 443. Okay? 3 And if you'll look at the last full paragraph on 4 that page, it indicates that on October the 4th -- 5 just a second. 6 Actually, turn to the last page, 7 Page 6. And if you'll look at the 8 next-to-the-last paragraph, it talks about "The 9 board discussed the desire of placing money 10 pursuant to the previously-executed employment 11 contracts into escrow." 12 Do you see that? 13 A. Yes. 14 Q. Okay. And is this the board meeting of 15 USAT where the directors of USAT unanimously 16 agreed to put the $6.6 million into an escrow to 17 fund the employment contracts? 18 A. It actually was a joint board meeting. 19 I was looking at it. It says a joint board 20 meeting of both the UFGI and the USAT -- 21 Q. Okay. And is this the board meeting at 22 which it was approved by USAT and UFG, if that's 18967 1 who approved it? Is that what happened? 2 Which board approved it? Can you tell? 3 A. No, I can't tell. 4 Q. But UFGI couldn't force USAT's board to 5 put $6.6 million into escrow, could it? 6 A. It was the same board. I mean, the 7 same people except for one person. In fact, at 8 this time, I'm not even sure who was on the board 9 of UFGI and USAT. 10 Q. Well, is it reasonable to assume that 11 when it refers to "the board" having approved an 12 escrow, that that would have been the members in 13 their capacity as the members of the USAT board 14 since it's USAT that put up the money? 15 A. I don't know if that's reasonable to 16 assume or not reasonable to assume. It was a 17 joint meeting, and UFGI was doing its thing. 18 Q. So, in other words, it could well have 19 been the UFGI board that approved the creation of 20 the escrow? 21 A. I can't tell from this which board 22 approved the creation of the escrow. 18968 1 Q. Well, if the UFGI board had approved 2 USAT putting the money into escrow, wouldn't that 3 have fulfilled their obligation to cause money to 4 be put up to fulfill -- to secure the severance 5 benefits? 6 A. Yes, it would have. 7 Q. Okay. Now, what was the condition of 8 USAT as reflected in these minutes when it took 9 $6.6 million of its assets and set it aside for 10 severance benefits? 11 A. In October, it was negotiating for 12 participation in the Southwest Plan and for 13 infusion of significant capital. 14 Q. And take a look at the next-to-last 15 paragraph. Mr. Connell reports -- 16 A. The next-to-the-last paragraph on -- 17 Q. On the first page of 8108. It says, 18 "Mr. Connell reviewed in detail the status of the 19 Southwest Plan negotiations concerning the 20 association. He stated the association had 21 presented a bid to the Federal Savings and Loan 22 Insurance Corporation." 18969 1 And then if you drop down a little 2 further, it says, "He noted that the team of 3 negotiators including Mr. Patriarch and Mr. Raul 4 Herrera had stated that any restructure or 5 recapitalization of United Savings Association of 6 Texas, which included FSLIC assistance, would 7 require placing the association into receivership 8 and forming a new association with the current 9 shareholders' interest being eliminated." 10 Do you see that? 11 A. Yes. 12 Q. Okay. So, at that point, you knew to a 13 certainty that USAT was going to go into a 14 receivership of some sort, didn't you? 15 A. No, we didn't know to a certainty. 16 Q. Well, you knew that it was highly 17 likely then that in the context of the Southwest 18 Plan, they were going to be placed into a 19 receivership. Right? 20 A. At that point in time, we were 21 negotiating the whole situation, that's correct. 22 Q. Right. But there was a high degree of 18970 1 probability that they were going to go into 2 receivership. 3 Isn't that what Mr. Herrera reports to 4 the board or was reporting Mr. Herrera had said? 5 A. It said that any restructuring and 6 recapitalization would require that, and then it 7 goes on to say that "on negotiating, was trying to 8 resist this conclusion." We didn't know -- we 9 were negotiating the Southwest Plan transaction at 10 that time. 11 Q. Okay. But Mr. Herrera had told them if 12 we're going to restructure, it's going to be 13 through the mechanism of a receivership and, 14 unless something changed, USAT was going into a 15 receivership, correct? 16 A. If it was part of the Southwest Plan, 17 that's correct. 18 Q. Okay. And in a receivership, all of 19 the employment contracts would have been 20 terminated, correct, or could potentially be 21 voided by the FSLIC? That's what Mr. Leahey had 22 told you back in his March 25th, 1988 memorandum, 18971 1 correct? 2 A. Well, I think that may be right. I'm 3 not sure that that's correct. I just don't know. 4 Q. And one of the reasons -- and then if 5 you turn to the next page, it reports the 6 condition of USAT at this time. And by this time, 7 it says, the company had negative $120 million net 8 worth and that the association's negative net 9 worth approximated 115 million. 10 Do you see that at the top of the 11 second page of the minutes? 12 A. Yes, I do. 13 Q. So, both USAT and UFG had negative net 14 worth at this point in time, correct? 15 A. Yes. 16 Q. And I think it goes on to state that 17 "The September losses would be significant in as 18 much as the association would be providing a 19 significant amount for additional real estate 20 losses and that the company would be required to 21 make a provision for taxes as a result of the 22 excess loss account situation. He noted that the 18972 1 company would report a loss of approximately 2 $120 million for the quarter and that, as a 3 result, the negative net worth of the company at 4 September 30th, '88, would exceed $200 million." 5 Do you see that? 6 A. Yes, I do. 7 Q. And then if you turn over to the next 8 page, you go down three -- the third paragraph 9 from the bottom, "Mr. Gross noted that the 10 association's negative net worth position would 11 exceed $400 million without dealing with the 12 current goodwill on the association's books in 13 excess of 150 million." 14 Do you see that? 15 A. Yes, I do. 16 Q. Did you think it was appropriate for 17 USAT, in about October of 1988 when it had 18 negative net worth that exceeded $200 million, to 19 take $6.6 million of its assets and deposit those 20 assets in an escrow for the benefit of its 21 executive officers to secure employment contract 22 benefits? 18973 1 A. Well, I think first of all -- 2 Q. Well, what is your answer, sir? 3 A. I was going to give you -- first of 4 all, you'll notice at this meeting, Mr. Leahey as 5 well as Mr. Ott are here. Now, they are -- 6 Mr. Leahey was the regulatory counsel but had 7 given this memo and he was certainly aware of what 8 was going on here and he had no objection. And 9 since he had no objection, I assumed it was 10 perfectly reasonable in the regulations to do it. 11 And I think from a business point of view, it was 12 certainly reasonable to secure these contracts 13 because we wanted to make sure that USAT was part 14 of the Southwest Plan. And if these senior 15 employees started to leave at this time in 16 October, that would have meant the doom of United 17 Savings and that was not what we were trying to 18 do. 19 Q. Sir, does that mean that your answer to 20 my question is "yes"? 21 A. My answer is what I just gave you. 22 Q. Did you think it was appropriate for 18974 1 USAT, when it had over $200 million in negative 2 net worth, to use $6 million of its assets to 3 secure employee benefit contracts on October -- or 4 on or about October 1988? Yes or no? 5 A. I think given the circumstances as to 6 where United Savings was in the negotiation of the 7 Southwest Plan -- 8 MR. RINALDI: Your Honor, could you ask 9 the witness to simply answer my question of 10 whether he thought it was appropriate to take 11 $6.6 million of USAT's assets and place that in an 12 escrow fund in order to secure employment benefits 13 at a point in time when the institution had in 14 excess of $200 million in negative net worth? 15 THE COURT: Answer the question. Then 16 you may explain your answer. 17 A. The answer is yes, given the fact that 18 United Savings was in the process of negotiating 19 the Southwest Plan transaction, that there were 20 contracts with senior people who, if they left at 21 that point in time, probably would have meant that 22 there would not be a successful participation in 18975 1 the Southwest Plan. And we had regulatory counsel 2 who was available at this meeting who thought it 3 was appropriate, also, under the regulations. 4 Q. (BY MR. RINALDI) Okay. And who would 5 have been on the board that would have approved 6 that at that point in time, sir? 7 A. I don't know. You'll have to -- I 8 don't know who was on the board on October 4th. 9 Q. Well, Jenard Gross was still there, 10 wasn't he, because he pipes up at some point and 11 says, "We're looking at $400 million plus in 12 negative net worth." 13 Do you recall me reading that to you on 14 Page 3, the third paragraph from the bottom? 15 A. Yes, I do. 16 Q. Okay. And Mr. Gross at that point had 17 a base salary of $458,000. So, how much did he 18 stand to benefit from the escrow arrangement? 19 A. How much did he stand -- if he were 20 terminated? 21 Q. No. How much of that $6.6 million was 22 being placed into the escrow for his benefit if 18976 1 his base salary was $458,000? 2 A. I'm not sure I -- it would only be to 3 his benefit if he were terminated. 4 Q. I understand that. But it was being 5 placed into the escrow, and it was to secure the 6 severance benefits that he might receive if he 7 were terminated. 8 And so, what portion of that 9 $6.6 million that was going into escrow would 10 relate to the security for the severance benefits 11 that might be available to Mr. Gross? 12 A. If I understand your question, it would 13 have been twice his base salary. 14 Q. So, it would have been over $900,000, 15 correct? 16 A. That's correct. 17 Q. And with respect to Mr. Berner, whose 18 salary was $284,000, it would have been over half 19 a million dollars, correct? 20 A. That's correct. 21 Q. And with respect to Mr. Munitz, whose 22 salary was $396,000, it would have been just under 18977 1 $800,000? 2 A. That's correct. 3 Q. And with respect to Mr. Crow, the 4 benefit would have been -- if his salary was 5 280,000 -- something over a half a million 6 dollars? 7 A. Yes, that's correct. 8 Q. And so, the joint boards of UFG and 9 USAT went ahead and approved the placing of 10 $6.6 million in the escrow; is that correct? 11 A. Yes, it did. 12 Q. Now, you indicated that Mr. Leahey and 13 Mr. Ott were there. 14 Do you recall? 15 A. Yes. 16 Q. Did you ask Mr. Leahey whether it was a 17 breach of your fiduciary duties or a violation of 18 the regulations applicable to savings and loans 19 for USAT to put $6.6 million into escrow accounts 20 for the purpose of securing severance benefits for 21 executives of USAT on or about October 4th, 1988? 22 A. Well, he was present at this meeting 18978 1 where that's what's discussed and that's what 2 takes place. 3 Q. Okay. And my question to you is: Did 4 you ask him whether it was a safe and sound 5 conduct, practice, or did you ask him whether it 6 would violate your fiduciary duties to do so? 7 A. I don't have a recollection of 8 specifically asking him, but he was sitting there 9 at this meeting where this was what's happening. 10 And I think if he felt it was inappropriate, he 11 would have said something. He might have been 12 specifically asked. 13 Q. Do you know if he was still at the 14 meeting? Because this was the last agenda item 15 that came up. 16 A. Unless it's noted that he left, he 17 would still be at the meeting. 18 Q. Okay. And so, you never asked him 19 specifically whether he thought that it was 20 appropriate for you to enter into this escrow 21 arrangement and put money into the escrow account? 22 A. Well, again -- 18979 1 Q. My question is: Did you ask him? 2 A. This is what's discussed at the 3 meeting. This is what's being talked about at the 4 meeting. I -- 5 Q. You're not listening to me, Mr. Berner. 6 I asked: Did you seek his opinion? 7 A. He was there. Of course we sought his 8 opinion. 9 Q. And what did he say to you? 10 A. He certainly didn't object. 11 Q. Okay. 12 A. You know, there is nothing here to 13 suggest that he would have -- that he objected to 14 this or thought this was inappropriate or 15 wasn't -- violated any of the regulations. 16 Q. Did he give you an opinion in writing, 17 sir? 18 A. I don't believe so. 19 Q. Okay. Did he give you a verbal opinion 20 saying, "Mr. Berner, I see no problem regarding 21 safety and soundness with placing $6.6 million in 22 an escrow account to secure severance benefits for 18980 1 USAT's executive management"? Yes or no? 2 A. There is nothing here that says he gave 3 a verbal opinion. He was sitting at this meeting 4 where that's what was being discussed, and it was 5 certainly known that he was there to give 6 regulatory advice. And I assume if he thought it 7 was inappropriate, he would have said something. 8 Q. And so, the answer to my question is, 9 no, you never asked him for his opinion? 10 A. Well, that's why he was at the board 11 meeting. 12 Q. Mr. Berner, if you would simply answer 13 the question I ask -- you have told me now five 14 times that he was at the board meeting. I can see 15 that he was at the board meeting. 16 My question to you is: Did you ask 17 him -- 18 A. I don't -- 19 Q. -- "Is it an unsafe and unsound 20 practice for us to do what we're doing"? 21 A. I don't have a specific recollection of 22 anyone saying those specific words. But he is 18981 1 there on behalf of the association to give us 2 regulatory advice; and if he felt it was an unsafe 3 and unsound practice, he would have said 4 something. 5 Q. So, the answer is no, you didn't ask 6 him? 7 A. The answer is I don't have a specific 8 recollection of anyone asking that question. But 9 if he was there to give regulatory advice and he 10 thought it was unsafe and unsound, he would have 11 said, "I think this is unsafe and unsound." 12 Q. Okay. Let's try it one more time. 13 Did you ask him for his opinion whether 14 it was unsafe and unsound, a fiduciary breach, 15 appropriate, inappropriate to put $6.6 million 16 into an escrow? Yes or no? 17 A. It says we discussed that issue. I 18 don't have a specific recollection one way or the 19 other as to whether those words and those specific 20 questions were asked. But I know he was sitting 21 there; and if he felt it was an unsafe and unsound 22 practice or a breach of fiduciary duty as our 18982 1 lawyer, he would have said something. 2 Q. Now, he had previously sent you a 3 memorandum in March of 1988 in which he pointed 4 out the existence of a decision called FSLIC 5 versus Bass. 6 Do you remember that? We talked about 7 it yesterday. 8 A. Yes, I do. 9 Q. Okay. And do you recall after you 10 received Mr. Leahey's opinion whether you 11 personally did any further research into the FSLIC 12 versus Bass opinion to find out whether it was 13 potentially applicable to your circumstance? 14 A. I read the case at the time. 15 Q. Okay. 16 MR. RINALDI: Your Honor, I'd like to 17 offer as an exhibit what's been previously marked 18 as 8 -- T8063 and hand a copy to the witness. 19 This is a compilation of documents. He may never 20 have seen it before, but I would at least like to 21 show it to him and get his reaction. I'm just 22 going to ask him if he's seen it. 18983 1 Q. (BY MR. RINALDI) Now, would you turn 2 to the third page in? Turn to the third page in, 3 sir. 4 A. Okay. 5 Q. Do you see that page? 6 A. Yes. 7 Q. And is there a discussion at the top of 8 the page of Federal Savings and Loan Insurance 9 Corporation versus Bass? 10 A. Yes. 11 Q. Okay. Now, I notice at the bottom, 12 there is what appears to be a distribution list. 13 Do you see that? 14 A. Yes. 15 Q. And there appears to be on there "Jim, 16 Barry, Art, Jenard," et cetera. 17 Do you see? 18 A. Right. 19 Q. Have you ever seen this document or 20 this page of Document T8063 before? 21 A. I don't have a recollection of it. 22 Q. Do you recognize the handwriting either 18984 1 in the upper left-hand corner or in the bottom 2 right-hand corner? 3 A. The upper left, I can't read at all. 4 The bottom right, no, I don't. 5 Q. Is that Mr. Munitz' handwriting? 6 A. I don't know. No, it wouldn't be. 7 Q. It's not your handwriting? 8 A. Doesn't this say "Barry"? It would not 9 be -- 10 Q. Okay. Does it appear that this was 11 circulated to Barry, Art, and Jenard or at least 12 their names appear on what would be a list of 13 circulation on the bottom corner? 14 A. Well, there are names on the bottom 15 right-hand corner. It doesn't say it's being 16 circulated. 17 Q. Did you ever receive a copy of this 18 from -- 19 A. I don't have any recollection of 20 receiving it. 21 Q. Okay. Thank you. 22 Now, when you contacted Mr. Leahey in 18985 1 March of 1985, I asked you the other day 2 whether -- 3 MR. VILLA: March of 1988, sir? 4 MR. RINALDI: I'm sorry. March of 5 1988. 6 Q. (BY MR. RINALDI) I asked you whether 7 you had requested a safety and soundness opinion 8 of Mr. Leahey regarding the entry into the new 9 contractual relationship that was entered into on 10 about March 30th, 1988. 11 Do you recall that? 12 A. I'm not sure that was your question, 13 but whatever your question was -- I remember we 14 talked about it. 15 Q. Okay. And you contacted Mr. Leahey, 16 correct, and he sent you an opinion that -- 17 A. He sent me a memo. 18 Q. Pardon? 19 A. He sent me a memo. 20 Q. Right. And in the memo, he indicated 21 he had not seen any employment contracts? 22 A. At that time, he said he wasn't 18986 1 familiar with them. 2 Q. Now, did you subsequently request a 3 written opinion from Mr. Leahey as to whether what 4 you were proposing to do and what had been 5 undertaken at the March 30th, 1988 compensation 6 committee meeting, an opinion as to whether that 7 would be consistent with safe and sound banking 8 practices? 9 A. A written opinion or an opinion? 10 Q. An opinion. 11 A. We certainly talked about it. 12 Q. Okay. You talked about it. And did 13 you request that he put his views in writing? 14 A. I don't believe so. 15 Q. Okay. Did he give you a verbal 16 opinion, sir? 17 A. Well, I wasn't asking for -- again, as 18 a lawyer, I think when you ask about a legal 19 opinion, it's something different than did we talk 20 about the substance of them. We talked about the 21 contracts. 22 Q. Did you request that he provide you 18987 1 with an opinion? 2 A. No. 3 Q. Now, you indicated yesterday that after 4 discussing this matter with him, he suggested that 5 you discuss it with the compensation experts to 6 see whether they had a view regarding safety and 7 soundness. 8 Do you recall that? 9 A. That's my recollection. 10 Q. And do you recall yesterday when I 11 asked you if you had sought an opinion from him on 12 safety and soundness, you said that he had 13 declined to give such an opinion because he 14 thought the concept of safety and soundness was 15 too nebulous? 16 A. Again, that's, I think, not the 17 characterization. I don't think he declined. I 18 don't think I said to him, "I want a written 19 opinion" and he said, "No, I'm not going to give 20 you a written opinion." 21 Q. Okay. Do you recall that when you 22 responded to my question, you said that Mr. Leahey 18988 1 had indicated that safety and soundness was too -- 2 was a nebulous concept? 3 A. Yes. He certainly said safety and 4 soundness was something -- was not defined in any 5 regulation. He'd have to look at lots of facts. 6 Q. And did you take from that conversation 7 that he did not feel that he would be in a 8 position to opine on the safety and soundness 9 aspects of the employment actions that were -- 10 that had been undertaken following the March 30th, 11 1988 meeting of the compensation committee? 12 A. No. What I took from it was that he 13 wouldn't give a legal opinion that says, "this is 14 unsafe and unsound" as a legal opinion, as I 15 understand a legal opinion. He certainly could 16 have views on it and thoughts about things, but 17 not to the extent of giving a legal opinion. 18 Q. And conversely, did you understand that 19 he wouldn't give a legal opinion to the effect 20 that this was a safe and sound practice? 21 A. He wouldn't give a legal -- a written 22 legal opinion, that's correct. 18989 1 Q. Okay. And when he declined to -- well, 2 after ascertaining that he would not give you an 3 opinion of that nature, did you discuss the matter 4 with Hewitt & Associates? 5 A. There were discussions at various times 6 about that. 7 Q. And did you discuss with them the 8 question of whether this proposed transaction was 9 going to be consistent with safety and soundness 10 principles? 11 A. There were discussions about that, yes. 12 Q. And did you ask Hewitt whether they 13 would provide you with either a written or a 14 verbal opinion that what you were proposing to 15 undertake was consistent with the principles of 16 safety and soundness? 17 A. I don't remember asking them for a 18 written opinion on whether it was or wasn't. 19 Q. But do you remember querying them as to 20 whether it would comply with principles of safety 21 and soundness? 22 A. Again, we talked about it. 18990 1 Q. Okay. And were there any particular 2 concerns that you had with respect to safety and 3 soundness? 4 A. Sure. The question of securing the 5 severance payments was one of the things. They 6 also were going to look at the size of the 7 salaries. 8 Q. Okay. Now, would you take a look at 9 Tab 432, which is T8074? 10 A. Do you know where that is? 11 Q. Yes. It's June 7th, 1988. 12 A. No. What book is it in? 13 Q. I believe it's in the second book, and 14 it's the seventh or eighth document in. 15 A. 8077? 16 Q. 8074. This is the funding and securing 17 of non-qualified benefits. 18 A. Okay. 19 Q. Do you see that document? 20 A. Yes. 21 Q. Okay. And in this document -- do you 22 recognize this document? 18991 1 A. Yes. I've seen this. 2 Q. Okay. And this was sent to you by 3 Hewitt & Associates, correct? 4 A. Yes. 5 Q. And in this document at Page 7, they 6 discuss the question of securing benefits with 7 letters of credit, do they not? 8 A. Yes, they do. 9 Q. And then if you turn page -- to 10 Page 11, they also talk about taxable trusts as a 11 mechanism for securing benefits. 12 Do you see that? 13 A. What page? 14 Q. Page 11. 15 A. Yes. They are talking about taxable 16 trusts, yes. 17 Q. And this was a memorandum where a 18 report that was sent to you regarding funding 19 mechanisms for securing the benefits of USAT and 20 UFG's severance benefits, correct? 21 A. This was a memo sent to me, you know, 22 talking about funding and securing non-qualified 18992 1 benefits. 2 Q. Yeah. 3 A. Just in general, non-qualified 4 benefits, yes. 5 Q. Okay. And he says in the first -- the 6 second full page, "United Financial Group has 7 asked Hewitt & Associates to review alternative 8 approaches to fund and secure executive severance 9 arrangements outlined in individual employment 10 contracts. This material presents several 11 possible vehicles for consideration." 12 A. Right. So, it was United Financial 13 Group that had asked him to do that, that's 14 correct. 15 Q. Right. And they asked him to look at 16 vehicles for securing severance benefits. Right? 17 A. Yes. 18 Q. And then it says, "Before acting on any 19 of these approaches, Hewitt & Associates suggests 20 that UFG check with outside legal counsel to make 21 sure any funded arrangements do not violate 22 federal or state banking laws regarding unsafe and 18993 1 unsound practice." 2 Do you see that? 3 A. Yes, I do. 4 Q. After you received this memo from 5 Hewitt, did you, in fact, utilize letters of 6 credit and trust arrangements to secure the 7 severance benefits that UFGI and USAT agreed to 8 provide under the June 1988 employment contracts? 9 A. No, we didn't. 10 Q. You didn't write into that a letter of 11 credit provision that the letter of credit would 12 be provided to secure the severance benefits? 13 A. I thought you asked if we used it. I 14 thought that was your question, did we use a 15 letter of credit or a trust. 16 Q. No. Did you write a provision in that 17 provided for a letter of credit and a provision 18 that provided for, alternatively, a trust? 19 A. Yes. 20 Q. And prior to executing those contracts 21 which provided for letters of credit and/or a 22 trust to secure the severance benefits, did you 18994 1 comply with the suggestion or the recommendation 2 of Hewitt & Associates and check with outside 3 counsel to make sure that any of the funded 4 arrangements did not violate federal or state 5 banking laws regarding unsafe and unsound 6 practices? 7 A. I talked to outside counsel, yes. 8 Q. Okay. And which outside counsel did 9 you talk to? 10 A. Tom Leahey. 11 Q. Okay. And did you send Mr. Leahey a 12 copy of the contract at that point in time? 13 A. I think I did. 14 Q. And did Mr. Leahey provide you with a 15 written opinion as to whether it was an unsafe or 16 unsound banking practice for USAT to secure the 17 benefits in the manner they were secured? 18 A. I didn't ask him to supply a written 19 opinion on anything, no. 20 Q. So, he gave you a verbal opinion? 21 A. We talked about it. 22 Q. I see. You talked about it. 18995 1 Did he tell you that in his opinion, as 2 a bank regulatory attorney, that it would not 3 violate safety and soundness requirements to set 4 up a letter of credit to secure severance benefits 5 under a USAT or UFG employment agreement? 6 A. My recollection is -- we were talking 7 about UFG employment agreements. My recollection 8 is that what he said was that unsafe and unsound 9 was -- there was no definition in the regulations 10 as to what is unsafe and unsound. So, you have to 11 be very fact specific. 12 Q. So, he didn't give you a specific 13 opinion as to whether what you were proposing or 14 contemplating would have violated safety and 15 soundness? 16 A. He didn't give me a written opinion one 17 way or the other, no. 18 Q. Okay. Now, would you take a look at 19 Tab T8107? This is in the third volume. I'm 20 sorry. The second volume. Second document in the 21 third volume. 22 Now, this is an opinion from 18996 1 Mr. Leahey. 2 Do you recognize it? 3 A. Yes. I've seen this letter, yes. 4 Q. Okay. And he was presenting this to 5 you for what purpose, sir? 6 A. I don't remember why he presented. I 7 think it was informational. 8 Q. Okay. At this point in time, USAT was 9 considering the entry into a consent agreement, 10 was it not? 11 A. Yes. 12 Q. And at that point in time, Mr. Leahey 13 was advising you on the fiduciary obligations of 14 the boards of USAT and UFG concerning their 15 deliberations over the consent agreement? 16 A. I think he was talking about USAT, 17 unless I'm mistaken. I might be mistaken, but I 18 thought he was just USAT's lawyer. 19 Q. Okay. But directing your attention to 20 the first full paragraph there, it talks about the 21 board is first going to have to exercise its 22 judgment in a manner consistent with the business 18997 1 judgment rule, and then it goes on. It says, 2 "This essentially" -- this is 8107, the last full 3 paragraph or the last sentence on the first page. 4 "This essentially requires that the directors act 5 in good faith belief that their decision is in the 6 best interest of United. Exercise due care in 7 determining the facts and law relevant to the 8 decision and, three, act without personal interest 9 in the transaction." 10 Do you see that? 11 A. Yes. 12 Q. And then he goes on and he says, "In 13 determining what is in the best interest of 14 United, the board members act as fiduciaries." 15 And I don't -- and he says, "One 16 immediate question is to whom the board's 17 fiduciary duties run. While it seems clear that 18 they run to United in the first instance, when the 19 decision presented is one which could lead to 20 termination of the existence of United, the real 21 issue is whether the directors should take into 22 account the interest of creditors of United as 18998 1 well as or in lieu of the interest of its 2 stockholders." 3 Do you see that? 4 A. Yes, I do. 5 Q. "And if the board reasonably determines 6 that United is insolvent, we believe that the 7 board members should take into account the 8 interest of the creditors of United and that the 9 failure to do so would be the basis for subsequent 10 action against them by a receiver for United." 11 Do you see that? 12 A. Yes, I do. 13 Q. Did you understand at this point in 14 time that as a director of United, if United was 15 insolvent, that you had to act as a fiduciary and 16 take into account the interest of the creditors of 17 United? 18 A. I think that's my understanding of the 19 law. 20 Q. And did you further understand that you 21 could not take any action that would constitute an 22 action for your own personal interest? 18999 1 A. I'm sorry. Did I understand what? 2 Q. Did you further understand that you had 3 to act without personal interest in any 4 transaction you undertook? 5 A. I think so. 6 Q. Okay. And then at the bottom of the 7 page, it goes on and says, "Under the Texas 8 depositor preference statute, the primary, if not 9 sole creditor, would be the FSLIC in its capacity 10 as potential subreview to the rights of the 11 insured depositors." 12 Is that what you understood at the 13 time? 14 A. That it would be the primary creditor? 15 Q. Yes. 16 A. I believe so. 17 Q. And if USAT was insolvent, your 18 fiduciary obligation was to its sole creditor, 19 which would have been the FSLIC, correct? 20 A. I don't think that's the sole creditor, 21 but I think it's its major creditor. 22 Q. Okay. And you understood that based 19000 1 upon the October 3rd memo from Mr. Leahey of 2 Kirkpatrick & Lockhart, correct? 3 A. I believe that's what we were talking 4 about. That's what he was talking about, yes. 5 Q. And then the following day at the 6 October 4th board meeting of USAT and UFG, you 7 voted to take $6.6 million of the assets of USAT 8 and put them in an escrow account for the benefit 9 of yourself and a number of other members of the 10 senior executives of USAT; is that correct? 11 A. Again, it was put in for the benefit of 12 USAT to keep these people there with our 13 regulatory counsel sitting there and telling us 14 that there was no problem in doing that. 15 Q. So, the answer to my question is "yes"? 16 A. It's what I just said. 17 Q. Okay. Did you believe that it was for 18 the benefit -- well -- and the persons that were 19 going to benefit from those severances or those 20 severance benefits in the event that USAT went 21 into receivership was yourself, Mr. Gross, 22 Mr. Munitz, all of whom were members of the board 19001 1 of USAT who voted to approve the placement of the 2 $6.6 million in the escrow; isn't that correct? 3 A. No. The people that would benefit 4 would be USAT. If USAT was put into receivership 5 and those contracts were triggered and UFGI 6 couldn't pay and USAT couldn't pay and FSLIC 7 hadn't -- if FSLIC probably would have tried to 8 take that escrow away, as they did, these people 9 wouldn't benefit. 10 Q. But if you put the money into a letter 11 of credit or an escrow, that escrow, if it were -- 12 if FSLIC were unable to avoid it, that escrow 13 would have benefited directly Mr. Gross, 14 Mr. Munitz, and Mr. Berner, all of whom voted for 15 the creation of the escrow, correct? 16 A. If UFGI was unable to pay -- if UFGI 17 was unable to pay under its contract and USAT 18 wasn't able to pay under the contract and you were 19 entitled to reach the escrow, then they would have 20 benefited from that escrow. But that required a 21 lot of steps between them and -- 22 Q. And as a director of USAT, did you feel 19002 1 that by placing the money in the escrow, you were 2 placing your own personal pecuniary interest ahead 3 of USAT and its principal creditor, the FSLIC, 4 when you put $6.6 million into the escrow? 5 A. No, I didn't. 6 Q. That was a fiduciary breach, wasn't it? 7 A. No, it was not. 8 Q. USAT was insolvent at that time, wasn't 9 it? 10 A. USAT was probably insolvent at that 11 time, that's correct. 12 Q. I mean, you do recall I read to you 13 that Mr. Gross had said they had negative net 14 worth of in excess of $400 million? 15 A. Well, that doesn't mean you're 16 insolvent, but they were probably insolvent at 17 that time. 18 Q. Did you feel it was a safe and sound 19 practice when USAT was -- had negative net worth 20 of $400 million to utilize $6.6 million of USAT's 21 assets to fund severance benefits for yourself and 22 other executive managers of USAT? 19003 1 A. It wasn't used to fund severance 2 benefits. The money was -- 3 Q. To fund the escrow to secure the 4 severance benefits? 5 A. It was used to fund the escrow to make 6 sure that the senior employees, the senior 7 executives, didn't leave the association at that 8 time. And yes, I believe that it was extremely 9 important to keep those senior executives at 10 United Savings at that time. 11 Q. And you felt that that was a safe and 12 sound practice? 13 A. I did, and I believe regulatory counsel 14 did, also. 15 MR. RINALDI: Your Honor, perhaps this 16 would be an appropriate time to take a short break 17 and then I can finish with the remainder of my 18 questions. 19 Would that be appropriate? 20 THE COURT: How much more do you have? 21 MR. RINALDI: Well, I'm getting very 22 thirsty is the problem. 19004 1 THE COURT: We'll take a short recess. 2 3 (Whereupon, a short break was taken 4 from 2:48 p.m. to 3:12 p.m.) 5 6 THE COURT: Be seated, please. We'll 7 be back on the record. 8 Mr. Rinaldi, you may continue. 9 MR. RINALDI: Yes. Thank you. 10 Q. (BY MR. RINALDI) Mr. Berner, will you 11 turn to Exhibit 8 -- T8069? We've had -- and this 12 would be Tab 429. We've had some discussion as to 13 whether materials were turned over to the 14 regulators at various periods of time regarding 15 the employment contracts, and I wanted to see if 16 we can't clarify this for the record. 17 Now, do you recognize what's been 18 marked as T8069? It's a May 13th, 1988 letter to 19 Jenard Gross from Neil Twomey, sir. 20 A. Yes. 21 Q. And did Mr. Gross give you a copy of 22 this letter and request that you respond to 19005 1 Mr. Twomey's request? 2 A. Yes, he did. 3 Q. Okay. And in the May 13th letter, 4 Mr. Twomey writes to Mr. Gross and says, "In order 5 to complete our records, please submit a copy of 6 all employment contracts between officers or 7 employees and the association or any of its 8 subsidiaries. We will be reviewing these 9 contracts for compliance with Section 5.39A of the 10 insurance regulations." 11 Now, when you received this, did you 12 understand that Mr. Twomey was seeking employment 13 contracts that had been entered into with 14 executives of USAT as well as UFG? 15 A. Well, I saw the letter. I knew what he 16 asked for, yes. 17 Q. And the letter asked for contracts of 18 the association and any of its subsidiaries, 19 correct? 20 A. Right. 21 Q. Okay. So, you understood that 22 Mr. Twomey was asking whether USAT had any 19006 1 employment contracts with its executives. 2 Is that a fair statement? 3 A. Right. 4 Q. Okay. Now, turn to the next page or 5 two documents in to T8107. Now -- 6 A. 8107? 7 Q. Yes. I mean 8071. 8 THE COURT: What's the number? 9 MR. RINALDI: T8071. It's Tab 430. 10 Q. (BY MR. RINALDI) Now, Mr. Twomey -- 11 MR. VILLA: He's Berner. 12 MR. RINALDI: I'm sorry. 13 Q. (BY MR. RINALDI) Mr. Berner, the 14 letter we just looked at was sent to Mr. Gross. 15 Did you have a discussion with 16 Mr. Gross regarding T8069 -- that is, Mr. Twomey's 17 request for employment contracts? 18 A. I don't believe so. 19 Q. Mr. Gross just turned it over to you 20 and said "take care of this"? 21 A. I think so. 22 Q. Okay. And did you then respond to 19007 1 Mr. Twomey's request of May the 13th? 2 A. I did. 3 Q. And T8071 is a letter that appears to 4 be from United Savings Association of Texas, and 5 it has at least your name at the bottom. 6 Did you draft this letter, sir? 7 A. I think I probably did. As you 8 remember, this was the day that I was going on my 9 honeymoon. So, I was on my way to Europe at the 10 time this was drafted. But I think I did. 11 Q. Okay. And you dictated it, and your 12 secretary then sent it out under your name? 13 A. I think that's probably right. 14 Q. Okay. And the letter says, "Dear 15 Mr. Twomey. United Savings Association of Texas 16 has just received your letter dated May 13th, 17 1988, concerning employment contracts between the 18 association or any of its subsidiaries or officers 19 and employees thereof." 20 Do you see that? 21 A. Yes. 22 Q. And then in the next sentence, you 19008 1 write back to Mr. Twomey, "Please be advised that 2 the association has not entered into employment 3 agreements with such officers or employees." 4 Do you see that? 5 A. Yes, I do. 6 Q. Now, on May the 18th, 1988, in fact, 7 USAT had entered into a number of employment 8 contracts with its employees that are dated 9 February the 11th, 1988, hadn't they? 10 A. Well, again, we've talked about this 11 before. 12 Q. Sir, would you answer my question "yes" 13 or "no"? 14 A. I'll try to. 15 Q. And my question is: Had USAT entered 16 into employment contracts on February the 11th or 17 thereabouts, 1988, with a number of its executive 18 officers? 19 A. Well, my view was that these were not 20 effective -- 21 Q. I'm just asking: Had they executed a 22 contract? 19009 1 A. They had signed the agreement that 2 we've seen before, which was not effective. 3 Q. And had you personally executed a 4 contract that's dated as of February 11th, 1988? 5 A. Yes. I executed that agreement which 6 would not be effective until the UFGI agreement -- 7 UFGI couldn't perform. So, I had taken the 8 view -- was taking the view that those agreements 9 weren't effective. 10 Q. Okay. But you did enter into a 11 contract with USAT, did you not, at or about 12 February the 11th, 1988? 13 A. Well, I signed that agreement, yes. 14 Q. Okay. And when you signed that 15 agreement, did you enter into that agreement? 16 A. I don't know what you mean when you say 17 "enter into." The agreement was only effective if 18 UFGI didn't perform. 19 So, it was my view, which we saw before 20 consistent with the June and July agreements, that 21 the USAT agreement was never effective. 22 Q. Okay. I understand. And I'm not 19010 1 asking you whether it was effective or not. You 2 did enter into an agreement, did you not, with 3 USAT on February the 11th, 1988? 4 A. You're saying if it's not effective? 5 Q. Did you sign an agreement? 6 A. Absolutely. 7 Q. And does signing an agreement 8 constitute entering into an agreement within your 9 lexicon? 10 A. Well, that's what I'm saying. Only if 11 it was effective. I don't believe so. I was not 12 taking that view. 13 Q. Okay. Now, if UFGI had been unable to 14 perform, the contract would have been effective? 15 A. Would have become effective. 16 Q. And UFGI would have had an obligation 17 under that contract, correct? 18 A. USAT? 19 Q. USAT would have had an obligation under 20 that contract? 21 A. If UFGI couldn't perform, the USAT 22 contract would become effective, yes. 19011 1 Q. Okay. And therefore, there was an 2 existing contract between you and USAT for the 3 provision of an employment contract between you 4 and USAT and in the event that UFGI could not 5 perform its portion -- its obligations under the 6 agreement, USAT had an obligation to you to 7 perform under that contract. 8 Is that fair? 9 A. No. I don't think it's a fair 10 statement. I think the fair statement is if UFGI 11 couldn't perform, the USAT contract would have 12 become effective and then there would have been 13 obligations. 14 Q. So, when Mr. Twomey wrote you this 15 letter and he asked if you had entered into any 16 employment contracts, you read into the letter 17 that he was asking whether there were any 18 contracts which had become effective? 19 A. I think that's what I was reading into 20 it. 21 Q. I see. 22 And when he said "entered into a 19012 1 contract," did you understand that to mean you had 2 signed a legal document whereby you were entitled 3 to some employment benefits, contingent or 4 otherwise? 5 A. Again, when I got his letter, I was 6 leaving the country. And consistent with 7 everything I've said before, what I thought was 8 that the USAT contract was not effective and, you 9 know, I knew that they knew about it, and I didn't 10 send it to them. 11 Q. Now, the next sentence says, "Please be 12 advised" -- I mean, it says, "As you are aware, 13 United Financial Group, Inc., the holding company, 14 has entered into certain employment agreements 15 which have been provided to Ms. Vivian Carlton in 16 connection with our examination." 17 Do you see that? 18 A. Yes, I do. 19 Q. Okay. And does that refresh your 20 recollection that the contracts that were being 21 entered into -- I mean that the contracts that you 22 provided previously to Vivian Carlton were, in 19013 1 fact, UFGI contracts and that you had never 2 provided the USAT contracts to Ms. Carlton? 3 A. Well, as I say, I know we gave them the 4 UFGI contract. I'm not sure if we gave her, at 5 this point in time, the USAT contract. 6 Q. Why would you have given them the USAT 7 contracts if you didn't think they had been 8 entered into? 9 A. Well, she was at the meeting when we 10 discussed that and approved that. I'm not sure I 11 gave her the USAT contract. 12 Q. Okay. Do you think that your response 13 to Mr. Twomey to the effect that "Please be 14 advised the association has not entered into 15 employment agreements with such officers or 16 employees" was misleading when, in fact, USAT had 17 entered into employment contracts with a number of 18 senior executive officers on February the 11th, 19 1988? 20 A. Obviously, I didn't think it was 21 misleading. I would have no intention or desire 22 to mislead him. 19014 1 Q. Now, would you turn, then, sir, to one 2 document further in? This is B2211. Mr. Twomey 3 follows up -- 4 A. Wait a minute. There is no document in 5 mine. 6 Q. This is B2211, and I think it's 7 Tab 1376. 8 Do you recognize that document, sir? 9 A. Do you want me to put this in the book? 10 Q. Yes, if you'd like. 11 This is a letter dated May the 23rd, 12 1988. And it's from Mr. Twomey to the board of 13 directors of United Financial Group. 14 Do you recognize this document? 15 A. Yes, I do. 16 Q. Okay. And was this received by 17 Mr. Gross and then passed along to you as the last 18 one? 19 A. I believe so. 20 Q. Okay. 21 A. The last one was addressed to 22 Mr. Gross. This was addressed to the board. I 19015 1 assume he got it and gave it to me. 2 Q. Okay. And in this document, it says, 3 "On May 13th, 1988, the supervisory agent of the 4 Federal Home Loan Bank of Dallas requested that 5 United Savings Association of Texas provide us 6 copies of each of the employment contracts between 7 the association or any of its subsidiaries and 8 officers or other employees." 9 And then it says, "We were subsequently 10 advised by Mr. Arthur S. Berner that no such 11 contracts exist." 12 Do you see that? 13 A. Yes. 14 Q. In fact, you knew that a number of 15 contracts existed? 16 A. Well, we've been through this. I 17 didn't believe that the USAT contracts were 18 effective. 19 Q. Okay. I know you didn't believe they 20 were effective, but they did exist, didn't they, 21 and they had been entered into, hadn't they? 22 A. You know, you're asking for what I was 19016 1 telling him. I'm telling you the rationale and 2 the thinking that I was going through, and you're 3 trying to tell me that it's something different. 4 I'm telling you that my view was that 5 they didn't exist. 6 Q. Did the agreements that you signed with 7 USAT exist at this point in time? Exist. Were 8 they in existence? 9 A. There was an agreement that became 10 effective after -- if UFGI could not perform. 11 Q. And it existed, didn't it? 12 A. It was an agreement that became 13 effective, yes, sir. 14 Q. And it existed, and there were copies 15 of it in your files, weren't there? 16 A. Sure. 17 Q. So, when you told him that contracts 18 didn't exist, that was false, wasn't it? 19 A. No. 20 MR. VILLA: Objection. You know, 21 you're reading the letter that goes back and 22 trying to suggest that's what the witness said. 19017 1 Q. (BY MR. RINALDI) Well, when you told 2 him that no contracts had been entered into, that 3 was false, wasn't it? 4 A. No, sir. 5 Q. Now, we go on and he says, "However, 6 he" -- meaning you -- "had indicated that 7 employment agreements do exist between UFG, Inc. 8 and its officers and/or employees. Therefore, 9 please provide us with copies of each such 10 contract between United Financial Group and any of 11 its subsidiaries and the officers and other 12 employees of these entities." 13 Do you see that? 14 A. Yes. 15 Q. And pursuant to that request, did 16 Mr. Gross ask you to send the UFG contracts to 17 USAT -- I mean to Mr. Twomey? 18 A. Well, he gave me this letter. 19 Q. Now, when Mr. Gross gave you the 20 letter, did he ask you why you had told Mr. Twomey 21 that no contracts existed between USAT and the 22 executive officers of USAT when, in fact, a number 19018 1 of such contracts had been entered into at or 2 about February 11th, 1988? 3 A. Did he ask me -- 4 Q. Yes. Did he ask you why you had said 5 no contracts had been entered into when, in fact, 6 contracts had been entered into? 7 A. I don't remember him asking me one way 8 or the other. 9 Q. So, now, after you received this second 10 letter from Mr. Twomey, I take it that you were 11 directed by Mr. Gross then to respond to the -- to 12 the March -- May 23rd, 1988 letter; is that 13 correct? 14 A. Yes. 15 Q. And do you recall that you did, in 16 fact, respond to the letter? 17 A. Yes, I did. 18 Q. Now, if you'd turn to Exhibit T8072, 19 this is a letter dated June the 1st, 1988. And I 20 believe it is Tab 431. It's a letter from 21 Mr. Berner to Neil Twomey regarding employment 22 contracts of UFGI dated 6/1/88. 19019 1 And in the first sentence, you write to 2 Mr. Twomey, "Pursuant to your request on May 23rd, 3 1988, addressed to the board of directors of UFGI, 4 I'm enclosing a copy of the executed employment 5 agreements entered into between United Financial 6 Group and the following persons: Michael Crow -- 7 Michael R. Crow, Jeff Gray, Jim Jackson, Jim 8 Wolfe, Bruce Williams, and myself." 9 Do you see that? 10 A. Yes, I do. 11 Q. So, you did provide him with the UFG 12 contracts? 13 A. Yes. 14 Q. And those would have been the contracts 15 that were entered into on September the 9th, 1987, 16 correct? 17 A. Correct. 18 Q. And then you go on and you indicate to 19 him that United Savings had retained a 20 compensation consultant. And in the final 21 sentence in the second paragraph, you state, "We 22 expect a report within the next three weeks, and 19020 1 it is therefore probable that United Savings 2 Association will enter into employment contracts 3 with these and perhaps other key employees." 4 Do you see that? 5 A. Yes. 6 Q. Now, it says here that you will; and 7 that would suggest that that's an action that 8 would be taken in the future, correct? 9 A. Right. 10 Q. So, when you wrote him this second 11 letter, you still failed to advise him that there 12 had been previous February 11, 1988 contracts that 13 had been entered into between USAT and the 14 executive officers, didn't you? 15 A. You know, my position has never 16 changed. I always believed that those contracts 17 weren't effective and, therefore, consistent 18 throughout all of this, I just didn't believe 19 those were contracts. 20 Q. Okay. And you believed that because 21 they didn't -- they were not effective, they 22 didn't exist? I mean, he's asking you if the 19021 1 contracts exist; and you keep saying that because 2 they weren't effective, they didn't exist. So, in 3 your mind, if a contract isn't effective yet, it 4 doesn't exist? 5 A. In my mind, the United Savings 6 contracts weren't effective. 7 Q. So, now, option agreements that don't 8 become effective until some future date, is it 9 your opinion they don't exist until they become 10 effective? 11 A. I don't believe -- you'd have to 12 explain the agreement, but I don't believe that 13 that's necessarily true. 14 Q. Right. And that's because once you 15 execute them, they at least have been entered 16 into; is that correct? 17 A. No. You'd have to look at the 18 agreement; and the option agreement probably would 19 provide, you know, immediate rights and 20 obligations as opposed to something down the road. 21 Q. Okay. Now, let's take a look at your 22 next correspondence with Mr. Twomey. It's T8081, 19022 1 and this is Tab 1377. And this is -- 2 A. T8081? 3 Q. T8081. 4 A. It's not here. 5 Q. This is a memo to Charles Hurwitz, 6 Jenard Gross, and Barry Munitz from you dated June 7 the 30th, 1988. 8 Would you take a look at that document? 9 That states that "On June 29th, 1988, I had a 10 telephone conversation with Neil Twomey. I told 11 him that we were in the process of finalizing our 12 offer to Larry Connell and wanted to know whether 13 or not he felt it was necessary that we have 14 Connell's employment contracts approved by the 15 Dallas bank. Neil said that approval was not 16 required but that he would strongly suggest that I 17 forward a copy to him so that he could review it." 18 Do you see that? 19 A. Yes. 20 Q. Okay. Now, when did you enter into the 21 contract with Mr. Connell between USAT and 22 Mr. Connell? 19023 1 A. When was it signed? 2 Q. No. I mean, when did the board approve 3 it? It was at or about the same time -- 4 A. Right. 5 Q. -- that the contracts were entered 6 into on June the 28th -- were approved by the 7 board of USAT on June the 28th, 1988, correct? 8 A. You're asking -- I'm not sure I 9 understand the question. 10 Q. Well, when -- do you recall that when 11 we looked at the minutes of the board of USAT for 12 June 28th, 1988, that they had a special meeting 13 at which they approved the employment contracts 14 between USAT and its executive officers? 15 A. I believe that's right, yes. 16 Q. And you pointed out to me that there 17 were other things that were taken into 18 consideration by USAT that day, and one of the 19 things you pointed out was they had looked at 20 Mr. Connell's contract. Remember? 21 A. Right. 22 Q. Okay. So, on the very same day that 19024 1 your contract had been approved by the board of 2 USAT on June 28th, 1988, the board also approved 3 entering into a contract with Mr. Connell; is that 4 correct? 5 A. I think what you're saying is right, 6 yes. 7 Q. Okay. And that was on June the 28th, 8 1988. Two days later, you talked to Mr. Twomey. 9 And you told Mr. Twomey that you were in the 10 process of finalizing the Connell contract; is 11 that correct? 12 A. Right. 13 Q. And you offered to submit the contract 14 to him, didn't you? 15 A. Yes. 16 Q. At that time, did you advise Mr. Twomey 17 that USAT was in the process of finalizing 18 contracts between USAT and its executive officers 19 that had been approved on June the 28th, 1988, by 20 the board of USAT? 21 A. I probably wouldn't because it would 22 have been the same situation, that the USAT 19025 1 contracts would not be effective until the UFGI 2 contracts became effective. 3 Q. And if UFGI had been unable to perform, 4 then the USAT contracts would have become 5 effective? 6 A. If UFGI -- that is correct. 7 Q. And if UFGI had been unable to perform 8 and those contracts had become effective, they 9 would have created a substantial obligation for 10 USAT, wouldn't they? 11 A. Assuming all of your -- making all of 12 your assumptions, yes, that's true. 13 Q. And don't you think that Mr. Twomey, as 14 the supervisory agent for USAT, would have wanted 15 to know about that kind of contingent liability 16 that USAT would have had in the event that UFG 17 could not perform under its contracts? 18 A. I don't know what Mr. Twomey would have 19 wanted to know. 20 Q. Now, following this June 30 memorandum, 21 turn to 8084. You had an opportunity to write to 22 Mr. Twomey, and this is June 30th, 1988. 19026 1 Does that appear to be your signature 2 on T8084? 3 A. Yes. 4 Q. Okay. And on that date, did you 5 transmit a copy of the employment contract you had 6 entered into with Larry Connell or were about to 7 enter into with Larry Connell to Mr. Twomey for 8 Ms. review? 9 A. Right, and asking him to let me know if 10 there were any major problems with it. 11 Q. Okay. And at that point in time, did 12 you consider sending the contracts that you had 13 entered into or were about to enter into with 14 executives of USAT -- that is, the contingent 15 contracts that would become only effective if UFGI 16 couldn't perform -- did you consider sending those 17 to Mr. Twomey for his review? 18 A. I don't believe so. 19 Q. Did you think that Mr. Twomey would 20 have been interested in learning about the -- 21 THE COURT: Mr. Gross? 22 MR. BLANKENSTEIN: Mr. Blankenstein. 19027 1 Just so the record's clear, I think Mr. Rinaldi 2 has made reference to A11031, which is in evidence 3 at 467, when he was speaking about T8084. 4 MR. RINALDI: I'm sorry. You're 5 correct. 6 THE COURT: I apologize, 7 Mr. Blankenstein. 8 MR. BLANKENSTEIN: It's not "Jenard" 9 either. 10 Q. (BY MR. RINALDI) Did you think it was 11 misleading to provide the Connell contract to 12 Mr. Twomey and to not advise Mr. Twomey that there 13 were other contracts between executives of USAT 14 that provided for USAT to provide salaries and 15 severance benefits in the event UFGI could not 16 perform? 17 A. It's hard to answer your question. I 18 did not think it was misleading to not send 19 Mr. Twomey the USAT agreements. 20 Q. Now, you keep saying to me that UFG -- 21 USAT didn't have any obligation to perform; but 22 just so the record is straight, under the new 19028 1 agreements -- that is, the January 28th 1988 2 agreements -- didn't -- 3 A. Did you say January? 4 Q. June 28th, 1988 agreements or the ones 5 that were approved on June 28th, 1988, by the 6 board of USAT. 7 Didn't USAT have the obligation to pay 8 the base salaries of the individuals under those 9 contracts? 10 A. It wasn't under the contracts, no. 11 Q. Okay. I'm sorry. 12 Did USAT pay their base salaries? 13 A. Except for Dr. Munitz, that's correct. 14 Q. Okay. And you're saying that USAT was 15 paying the base salaries but it wasn't pursuant to 16 the contracts? 17 A. That's what I'm saying. 18 Q. What was it pursuant to? 19 A. It was always understood and it was 20 always known that USAT would be paying the 21 salaries and bonuses. 22 Q. I understand that. But then USAT 19029 1 enters into an express contract with the officers 2 and employees of USAT. Let's take a look at 3 T8085. That's your contract with USAT. 4 And under the express terms of that 5 contract, if we turn to Page 3, it says, "Salary: 6 During the period of executive's employment" -- 7 that would be you -- "Hereunder, the company" -- 8 that would be USAT -- "shall pay to the executive 9 a salary of a rate not less than $284,736 per 10 anum." 11 Do you see that? 12 A. Yes, I do. 13 Q. And it was your understanding that USAT 14 had no obligation to pay your salary even though 15 they were paying your salary? 16 A. No obligation under this document, no. 17 Q. From whence did the obligation arise, 18 sir? 19 A. From the fact that they hired me and I 20 was working for them. 21 Q. Well, they hired you; and you didn't 22 have a contract. Then you gave them -- then they 19030 1 entered into a contract with you that provided for 2 a base salary, and you're telling me that this 3 contract was a novelty? It had no -- no 4 significance in terms of their obligation to pay 5 your base salary? 6 A. I keep saying it. This agreement 7 didn't become effective until the UFGI contract -- 8 UFGI couldn't perform under its contract. 9 Q. Well, I understand that. But UFGI 10 wasn't performing with respect to your base 11 salary. USAT was paying it, wasn't it? 12 A. As I think I've said on a number of 13 occasions, it was always the understanding that 14 USAT would be paying the salaries and bonuses. 15 Q. You know, you keep saying "it was 16 always the understanding." 17 Who was the understanding between, and 18 where does that understanding appear? 19 A. Well, I think it was between all the 20 contract holders, the board, the compensation 21 committee. No one ever suggested -- because I 22 don't think ever really focused on it. No one 19031 1 ever suggested that when the first UFGI contract 2 was entered into, that UFGI was now obligated to 3 pay that salary. It was never -- 4 Q. Put aside the first UFGI contract. I'm 5 talking about the June -- the contracts that were 6 approved on June 28th, 1988. 7 You entered into a brand-new contract 8 with USAT pursuant to which you were being paid -- 9 I'm sorry. Strike that. 10 You entered into a contract at a point 11 in time when you were being paid by USAT $284,000, 12 and the express terms of that contract were that 13 USAT would continue to pay you $284,000. And it's 14 your testimony, sir, that USAT had no obligation 15 under that contract to pay your salary? 16 A. That's correct. Under this agreement, 17 they had no obligation to pay my salary. 18 Q. And did you explain all of this to 19 Mr. Twomey so that he would understand about the 20 nature of the contractual relationships that 21 existed with USAT and its senior executives at or 22 about June 30th, 1988? 19032 1 A. Well, he had the old UFGI contracts. I 2 don't know if he had gotten the new UFGI 3 contracts. I'm not sure I sat and explained it to 4 him. 5 Q. Well, if you were an examiner, how 6 would you have understood the manner in which this 7 compensation arrangement worked simply by looking 8 at the UFGI contract? 9 A. How would you -- 10 Q. How would you have known that even 11 though USAT was paying for your salary, that it 12 had no obligation to pay that salary even though 13 there was an employment contract that had been 14 entered into that provided for such a salary? 15 A. Well, you've confused me. Your 16 statement is -- your question has confused me. 17 Could you repeat it? 18 Q. Well, I guess what I'm having trouble 19 with is you entered into an agreement with USAT in 20 about June of 1988, correct, or July 1 of 1988? 21 And that's Exhibit T8083. 22 A. Actually, I think the agreements were 19033 1 signed significantly later than July 1. 2 Q. And I'm sorry. It's T8085. I 3 misspoke. 4 But my point is the agreement provided 5 that USAT had an obligation to pay your base 6 salary. They paid -- you received a base salary 7 of $284,000, the exact amount that was in the 8 agreement, but it's your testimony that that 9 payment was not pursuant to the contractual 10 arrangements you had entered into? 11 A. Correct. 12 Q. Thank you. 13 Now, if you'd move to the next 14 document, it's T8089. Now, this is Tab 1380. 15 A. T8089? 16 Q. Yes. 17 A. It's not in my book. 18 Q. I'm sorry. I guess people have -- I 19 mean, these have been taken out and put in the 20 envelopes, and I didn't realize any absence of 21 them. 22 Do you recognize that document, sir? 19034 1 THE COURT: Am I supposed to have a 2 copy of that? 3 MR. RINALDI: I'm sorry. T8089 has 4 previously been entered as an exhibit at Tab 1380. 5 MR. BLANKENSTEIN: We do have it in as 6 that number, Your Honor. 7 MR. RINALDI: Well, then here. 8 9 (Discussion held off the record.) 10 11 Q. (BY MR. RINALDI) Did you draft this 12 memorandum, sir? 13 A. Yes, I did. 14 Q. And it's a memorandum from you to 15 Charles Hurwitz and Barry Munitz and Jenard Gross 16 and Michael Crow, correct? 17 A. Yes, sir. 18 Q. And it relates a meeting that you had 19 on July the 5th, 1988, with you and Jenard Gross 20 had met with members of the Federal Home Loan Bank 21 of Dallas. And present at the meeting was George 22 Barclay, Jim Satterfield, Danny Thomas, Neil 19035 1 Twomey, and Ginger Baugh. 2 Do you see that? 3 A. Yes. 4 Q. And at the meeting, the subject of the 5 employment contract that was entered into with 6 Larry Connell came up. 7 Do you see that? 8 A. Yes. 9 Q. And Mr. Barclay at that point asked 10 whether or not the Dallas bank needed to approve 11 the contract, as he was told by Mr. Twomey and by 12 Mr. Thomas that they did not have to approve it. 13 Do you see that? 14 A. Yes. 15 Q. And at that meeting, you mentioned that 16 you were going to forward a copy of the contract 17 to Neil Twomey? 18 A. Not that I was going to. That I had. 19 Q. You had. "And Neil stated that since 20 he had been out of the office for the last few 21 days, that he had not gone through his 'in' box 22 and, therefore, had not reviewed the contract." 19036 1 At the time you met with these 2 representatives of the Federal Home Loan Bank 3 Board -- this was less than a week after USAT had 4 entered into new -- had agreed to enter into new 5 employment agreements between its executive 6 officers and USAT -- did you consider disclosing 7 to Mr. Twomey or the Federal Home Loan Bank Board 8 the existence of that contractual arrangement 9 whereby USAT had a contingent obligation to fund 10 the employment contracts of certain executives of 11 USAT? 12 A. Well, again, without getting into 13 characterization, I don't believe I talked about 14 the USAT agreements. 15 Q. Now, you had said that there did come a 16 time when you provided the contracts to the 17 Federal Home Loan Bank Board. 18 Do you recall that? 19 A. Yes. 20 Q. Now, was that during the 1988 21 examination? 22 A. It was -- I know it was provided at 19037 1 that time. There might have been other times, but 2 I'm sure it was provided at that time. 3 Q. Right. And that would have been 4 probably sometime in September, correct, sir? 5 A. Yes. 6 Q. Okay. Now, let me hand you a copy of 7 what's previously been marked as Exhibit B2402, 8 and I will hand two copies to the Court and five 9 copies to counsel. 10 Now, this is a work paper that came 11 from the files of the Federal Home Loan Bank 12 Board, and it's dated 9/13/88. And it indicates 13 that on 9/13/88, present District Attorney Bese -- 14 it's a memo from Brenda Bese to Jim Wolfe. 15 Now, I will tell you that Brenda Bese 16 was one -- the examiner that examined the 17 institution in 1988. And Mr. Wolfe, what was his 18 position at USAT? 19 MR. VILLA: Your Honor, I object. They 20 didn't bring Ms. Bese. This wasn't on their list, 21 as Mr. Rinaldi knows, and as we've been excoriated 22 for. They have chosen -- 19038 1 MR. RINALDI: I gave you copies of 2 this. 3 THE COURT: Let's hear the objection. 4 MR. VILLA: They didn't bring Ms. Bese. 5 This is a memo from Ms. Bese to Mr. Wolfe. 6 There's no indication that it went to this client. 7 It's not on their exhibit list, I don't believe. 8 I may stand corrected, but I believe I reviewed 9 their exhibit list in exhaustive detail. 10 I think it's inappropriate, 11 particularly since they have made the decision not 12 to bring Ms. Bese here. So, I object to the use 13 of this document, particularly without prior 14 notice. 15 MR. RINALDI: Your Honor, could 16 Mr. Guido address this? This is ridiculous. This 17 is one of their own exhibits that they designated 18 in this proceeding. But Mr. Guido -- 19 MR. VILLA: I don't believe that's 20 correct. I don't believe that's correct. 21 THE COURT: Well, one person talking at 22 a time. I'll hear Mr. Guido. 19039 1 MR. GUIDO: Your Honor, the B exhibits 2 are respondents' exhibits, as far as I understand. 3 It came off of their exhibit list. Besides, Your 4 Honor, it has occurred in the past, numerous 5 times, as Mr. Nickens knows, that the respondents 6 have added documents to their exhibit list and 7 they have given us notice the day before that they 8 have been used. 9 I've never objected to that, and I 10 think during the colloquy with Mary Clark I made 11 it clear that that has been happening. And what I 12 found objectionable was that there was a big pile 13 of documents that we didn't get until the day of 14 court. But it's my understanding this is on the 15 respondents' exhibit list. Mr. Rinaldi has 16 indicated that he did provide this document before 17 today. And third is that we have in the past been 18 allowing the respondents to add documents to their 19 exhibit list. 20 So, I don't understand Mr. Villa's 21 objection to the use of this document. This 22 document is from the supervisory files and under 19040 1 the Rules, it is admissible, Your Honor. 2 MR. RINALDI: Your Honor, I have a 3 suggestion at this point. 4 MR. VILLA: Well, let me respond. I 5 think the B exhibit list was a joint list. I 6 think we were the people who typed it up; but I 7 think it was a joint list, number one. 8 Number two, it's not on their exhibit 9 list. And if it had been, I would have been a 10 little more prepared to address the question of 11 having selected -- chosen not to bring Brenda 12 Bese, how they are going to try to get these 13 things into evidence. And that's why we object to 14 not bringing Ms. Bese. She's not subject to 15 cross-examination and I, frankly, am going to have 16 to try to absorb this document during examination 17 of a witness at ten minutes to the break. Not 18 fair. 19 And number three, while people have put 20 in documents at the last minute, I understand 21 that. Both sides have done that. After -- 22 particularly after the rather, I thought, harsh 19041 1 invective directed at us, you would think the last 2 document they put in obviously for some effect 3 just before the break would be one that they would 4 tell us about. 5 So, I think without Ms. Bese here that 6 we ought to defer this document until we resume 7 and give us an opportunity to review it. 8 MR. NICKENS: Your Honor, there are two 9 lists. The exhibit list, Exhibit B list which was 10 prepared before we came here, was a joint product. 11 They were able to designate documents they wanted 12 on it and we wanted. 13 So, I take it that this document was on 14 the exhibit list. What we're talking about is the 15 pull list. You directed both sides to exchange 16 documents that it knew that it intended to use the 17 following day. They gave us a very extensive pull 18 list for Mr. Berner. And I take it that this 19 document was not on the pull list. It's clearly 20 for some surprise purpose. 21 MR. GUIDO: Your Honor, may I address 22 that? 19042 1 MR. NICKENS: In violation of your 2 directive. 3 MR. GUIDO: What I would suggest, Your 4 Honor, is, one, is Mr. Nickens and Mr. Villa, I 5 think, have confirmed that this does appear on an 6 exhibit list. And so, that's the case. If they 7 do have an objection to this document being given 8 to them too late in the proceeding, what I would 9 suggest is since we are at 4:00 o'clock that we 10 break and we deal with this after the break and I 11 make my filing and we'll just move on from there 12 is what I would suggest that we do unless 13 Mister -- 14 THE COURT: Is Ms. Bese on your witness 15 list? 16 MR. RINALDI: No, she isn't, Your 17 Honor. This is a Federal Home Loan Bank Board 18 document that was designated by the respondents to 19 be part of the record. They pulled it from our 20 files. It has a Bates stamp at the bottom. 21 The only reason it's being put into 22 evidence at this point and the only reason that I 19043 1 copied it this afternoon was that Mr. Berner had 2 indicated that he thought that at some subsequent 3 time the contracts were given to the regulators. 4 And I wanted to be able to demonstrate when that 5 time was. And this document is nothing more than 6 a portion of Ms. Bese's log that reflects the date 7 in time when Ms. Bese received the employment 8 contracts that were entered into between USAT and 9 its executive management after June 28th, 1988. 10 It's not -- I mean, none of the other 11 substance do I intend to deal with, but it's just 12 a record of the Bank Board to show when the 13 contract was delivered to the Bank Board. 14 Now, Your Honor knows that it's 15 impossible to fly Ms. Bese out here because she 16 has several small children. I can certainly give 17 this to another Bank Board witness, either 18 Mr. Twomey or I could give it to Mr. Lapidus and 19 they could identify that this is, in fact, a Bank 20 Board document. It is kept by the Bank Board in 21 this format, and this is how -- we heard yesterday 22 from Ms. Vivian Carlton how she conducted 19044 1 examinations. And we know that requests are made 2 and that logs of this nature are kept. I think 3 it's a little bit disingenuous for these people 4 who designated this as their witness -- I mean, 5 their exhibit -- to now complain that somehow it's 6 inappropriate for the OTS to take an exhibit that 7 they designated and to attempt to use it in the 8 proceeding. As I say, I think it's 9 self-authenticating as a Bank Board examination 10 document, which clearly I think they agree comes 11 from the examination work papers. 12 MR. VILLA: Your Honor, the Bates stamp 13 numbers are OW1272885, and it jumps to 128058. 14 Then it jumps to 127277. 15 MR. RINALDI: Your Honor, and I -- 16 MR. VILLA: Need I say more in terms of 17 how self-authenticating this document is as a 18 document? Now, you know, if they had just given 19 it to me at the break -- 20 THE COURT: All right. I'll defer 21 action on this until we come back. 22 Is there anything we need to -- 19045 1 anything else we need to consider before we 2 adjourn? 3 MR. GUIDO: Your Honor, I have the 4 filing. I just got that by fax, and I have copies 5 for you. This has been filed in Washington, and I 6 have had copies made this afternoon for 7 distribution to all parties and to the Court. 8 THE COURT: Very well. Are there other 9 matters? 10 MR. VILLA: No, Your Honor. 11 THE COURT: All right. We'll adjourn 12 until August 17th at 10:00 a.m. 13 14 (Whereupon at 3:56 p.m. 15 the proceedings were recessed.) 16 17 18 19 20 21 22 19046 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 7th 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 19047 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 7th 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