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.