19048 1 UNITED STATES OF AMERICA BEFORE THE 2 OFFICE OF THRIFT SUPERVISION DEPARTMENT OF THE TREASURY 3 In the Matter of: ) 4 ) UNITED SAVINGS ASSOCIATION OF ) 5 TEXAS, Houston, Texas, and ) ) 6 UNITED FINANCIAL GROUP, INC., ) Houston, Texas, a Savings ) 7 and Loan Holding Company ) ) OTS Order 8 MAXXAM, INC., Houston, Texas, ) No. AP 95-40 a Diversified Savings and ) Date: 9 Loan Holding Company ) Dec. 26, 1995 ) 10 FEDERATED DEVELOPMENT CO., ) a New York Business Trust, ) 11 ) CHARLES E. HURWITZ, ) 12 Institution-Affiliated Party ) and Present and Former Director ) 13 of United Savings Association ) of Texas, United Financial Group,) 14 and/or MAXXAM, Inc.; and ) ) 15 BARRY A. MUNITZ, JENARD M. GROSS,) ARTHUR S. BERNER, RONALD HUEBSCH,) 16 and MICHAEL CROW, Present and ) Former Directors and/or Officers ) 17 of United Savings Association of ) Texas, United Financial Group, ) 18 and/or MAXXAM, Inc., ) ) 19 Respondents. ) 20 21 TRIAL PROCEEDINGS FOR AUGUST 17, 1998 22 19049 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 19050 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 . 19051 1 2 INDEX OF PROCEEDINGS 3 4 ARTHUR BERNER 5 Continued Examination by Mr. Rinaldi....19058 6 Examination by Mr. Guido................19273 7 . 8 . 9 . 10 . 11 . 12 . 13 . 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 19052 1 P-R-O-C-E-E-D-I-N-G-S 2 (10:09 a.m.) 3 THE COURT: Be seated, please. The 4 hearing will come to order. 5 Mr. Guido -- or Mr. Rinaldi, you still 6 have some more? 7 MR. RINALDI: Yes, we do, Your Honor. 8 Before we get started, I have a group 9 of exhibits that I have in separate binders for 10 the Court. These I discussed with counsel for the 11 other side. They are a series of letters between 12 the regulators and MCO and Federated extending the 13 holding company's application that was filed by 14 MCO and Federated in 1984, and they cover the 15 period from the end of 1984 when the application 16 was approved through the end of 1987 at about 17 which time the application was withdrawn by MCO 18 and Federated. 19 So, if it is appropriate with the 20 Court, I would simply like to read the numbers of 21 the exhibits into the record; and we can then 22 admit them as a group. 19053 1 The first exhibit is T1065, and it is a 2 letter from Barry Munitz to Roy Green dated 3 2/28/85. 4 MR. VILLA: No objection. 5 THE COURT: Received. 6 MR. RINALDI: The second document is 7 a -- is Exhibit T1068. It's a letter to Roy Green 8 from Barry Munitz dated June 6th, 1985. 9 MR. VILLA: No objection. 10 THE COURT: Received. 11 MR. RINALDI: The third document is 12 T1079. It is a letter from Barry Munitz to 13 Mr. Louis V. Roy dated August the 30th, 1985. 14 MR. VILLA: No objection. 15 THE COURT: Received. 16 MR. RINALDI: The fourth document is 17 B683. It is a letter to Mr. Barry Munitz from 18 Jack Anderson. It's dated December the 6th, 1985. 19 MR. VILLA: No objection. 20 THE COURT: Received. 21 MR. RINALDI: The next document, which 22 is T1117 in your book, Your Honor, has previously 19054 1 been admitted; and it appears at Tab 105. 2 THE COURT: It's admitted under T1117? 3 MR. RINALDI: It is, Your Honor. 4 THE COURT: Thank you. 5 MR. RINALDI: So, we don't need to 6 admit that at this time. 7 The next document is B904. It's a 8 letter to Mr. Barry Munitz from James E. 9 Halverson. It's dated March the 28th, 1986. 10 MR. VILLA: No objection. 11 THE COURT: Received. 12 MR. RINALDI: The next document is 13 B1046. It is a letter to Mr. Neil Twomey from 14 Barry Munitz dated June the 17th, 1986. 15 MR. VILLA: No objection. 16 THE COURT: Received. 17 MR. RINALDI: B1055, this is a letter 18 to Barry Munitz from Neil Twomey dated June 24th, 19 1986. 20 MR. VILLA: No objection. 21 THE COURT: Received. 22 MR. RINALDI: B1240 -- I'm sorry -- 19055 1 B1221. This is a letter dated September 17th, 2 1986, to Neil Twomey from Barry Munitz. 3 MR. VILLA: No objection. 4 THE COURT: Received. 5 MR. RINALDI: B1246. This is a letter 6 to Barry Munitz from Neil Twomey dated 7 November 30th, 1986. 8 MR. VILLA: Excuse me, sir. What was 9 the date on the document you just read? 10 MR. RINALDI: September 30th, 1986. 11 MR. VILLA: No objection. 12 THE COURT: Received. 13 MR. RINALDI: B1354. This is a letter 14 from Barry Munitz to Neil Twomey dated 15 December 12th, 1986. 16 MR. VILLA: No objection. 17 THE COURT: Received. 18 MR. RINALDI: B1361, a letter from 19 Neil Twomey to Barry Munitz dated December 19th, 20 1986. 21 MR. VILLA: No objection. 22 THE COURT: Received. 19056 1 MR. RINALDI: B1523. This is a letter 2 to Neil Twomey from Barry Munitz dated March 16th, 3 1987. 4 MR. VILLA: No objection. 5 THE COURT: Received. 6 MR. RINALDI: B1538. This is a letter 7 dated March the 27th, 1987. It's from Neil Twomey 8 to Barry Munitz. 9 MR. VILLA: No objection. 10 THE COURT: Received. 11 MR. RINALDI: B1668. This is a letter 12 to Neil Twomey from Barry Munitz dated June 19th, 13 1987. 14 MR. VILLA: No objection. 15 THE COURT: Received. 16 MR. RINALDI: B1696. This is a letter 17 dated July the 6th, 1987. It's to Mr. Barry 18 Munitz from Neil Twomey. 19 MR. VILLA: No objection. 20 THE COURT: Received. 21 MR. RINALDI: B1754. This is a letter 22 from Barry Munitz to Neil Twomey dated 19057 1 September 17th, 1987. 2 MR. VILLA: No objection. 3 THE COURT: Received. 4 MR. RINALDI: B1782. This is a letter 5 dated December the 1st, 1987; and it's to 6 Mr. Barry Munitz from Neil Twomey. 7 MR. VILLA: What's the date on that 8 one, sir? 9 MR. RINALDI: I'm sorry. Did I say 10 December? October 1st, '87. 11 MR. VILLA: No objection. 12 THE COURT: Received. 13 MR. RINALDI: And the last exhibit -- 14 I'm sorry. T1139, which is a letter dated 15 November 17th, 1987, to Mr. Darrell Dulchow from 16 Barry Munitz. The final exhibit is T1140 but it 17 has previously been admitted at Tab 102 and it was 18 admitted as T1140. So, it's already in the 19 record, Your Honor. 20 MR. VILLA: No objection to T1139. 21 THE COURT: Received. 22 19058 1 CONTINUED EXAMINATION 2 3 Q. (BY MR. RINALDI) Good morning, 4 Mr. Berner. 5 A. Good morning. 6 Q. When we stopped the last time, we were 7 talking about the subject of the employment 8 contracts that were entered into between USAT and 9 certain executives of USAT and UFG that were 10 executed on or about July the 1st, 1988. So, the 11 questions I'm about to ask you now will relate to 12 that time frame, sir. 13 Would you take a look at what's -- you 14 should have before you Exhibit B2402. 15 MR. RINALDI: We had the stacks of 16 documents mixed up. Here are two copies for the 17 Court. We, I think, offered it last time. 18 Your Honor, there was a question with 19 respect to this document that was raised last 20 time. And at this juncture, I don't expect to 21 admit the document through this individual; 22 however, I do have a couple of questions I would 19059 1 like to ask him about it. 2 Q. (BY MR. RINALDI) Sir, who was Jim 3 Wolfe? 4 A. Jim Wolfe was the controller -- I think 5 he was senior vice president of United Savings. 6 Q. Okay. And do you recall the name 7 Brenda Bese? 8 A. Yes, I do. 9 Q. Who was Ms. Bese? 10 A. She was an examiner that -- for the 11 Federal Home Loan Bank Board. 12 Q. And did she participate in the 13 examination which occurred in the latter part of 14 1988, if you recall? 15 A. Yes, she did. 16 Q. Do you recall whether Ms. Bese from 17 time to time would make requests for documentation 18 from the -- from USAT? 19 A. I have no specific recollection of 20 that. 21 Q. Well, take a look at what's been marked 22 as B2402. And if you look down to the fourth 19060 1 paragraph, it indicates that Ms. Bese has 2 requested from Mr. Wolfe a list of all employees 3 (holding company association and service 4 corporation) that have employment consulting or 5 other types of agreements. 6 Do you see that? 7 A. Yes, I do, sir. 8 Q. The list says it should state 9 employees' names, dates of contracts, dates of 10 amendments, if applicable, and which entity the 11 agreement is with. 12 Do you recall Mr. Wolfe advising you 13 that Ms. Bese had requested that USAT provide a 14 list of those employees who had employment 15 contracts with USAT? 16 A. No, I don't. 17 Q. Now, I believe when you testified 18 before we broke last week, you thought that at 19 about September of 1988, USAT had provided 20 contracts or copies of the contracts it had 21 entered into on July 1st, 1988, with its 22 executives. Those copies, in about September, had 19061 1 been provided to the Federal Home Loan Bank Board. 2 Do you recall that discussion? 3 A. Yes, I do. 4 Q. Does it appear that it would have been 5 about this time frame, 9/13/88, that the contracts 6 with USAT and its executives that were entered 7 into on July 1st, 1988, were provided to the Bank 8 Board? 9 A. You're asking if this is the first 10 time? They certainly seem to have been provided 11 here. 12 Q. Do you have some reason to believe they 13 were provided at an earlier date? 14 A. I don't have any reason to believe that 15 one way or the other. 16 Q. As you sit here today, you have no 17 basis to believe that one way or the other as to 18 whether they were provided prior to the date of 19 this request from Ms. Bese? 20 A. Again, I don't have a specific 21 recollection if they were. 22 Q. In the normal course of events, would 19062 1 Mr. Wolfe have complied with this kind of request 2 from the examiners? 3 A. I'm sure he would have. 4 Q. So, is it reasonable to assume that 5 after September 13th, 1988 -- that sometime after 6 that date, the Federal Home Loan Bank Board did 7 obtain copies of the United Savings Association of 8 Texas employment agreements that were entered into 9 on July 1st, 1988? 10 A. I would think so, yes. 11 Q. So, after the Federal Home Loan Bank 12 Board learned of the contracts, what reaction did 13 you receive from the supervisory agent that was 14 supervising the affairs of USAT? 15 A. Sometime later -- the supervisory agent 16 being Mr. Twomey? 17 Q. That is correct. 18 A. Sometime later, he had -- I remember he 19 sent us a letter relating to those contracts. 20 Q. Okay. And what was the tenor of the 21 letter, sir, if you recall? 22 A. My recollection is that he had some 19063 1 objections to the contracts. 2 Q. And do you recall any of the detail of 3 the nature of the objections that he raised? 4 A. Could I see the letter? I'm sure it's 5 in here. 6 Q. You certainly may. I'm just trying to 7 see if you have any recollection of what he 8 indicated to you. 9 Well, rather than delay the matter, why 10 don't you take a look at T8111, which should be 11 about the fourth document in in Book No. 3. 12 Now, do you recognize that document, 13 sir? 14 A. Yes, I do. 15 Q. Is this the document that Mr. Twomey 16 sent to you regarding the employment contracts 17 that USAT had entered into on July the 1st, 1988? 18 A. I believe so, yes. 19 Q. So that Mr. Twomey would have responded 20 within a little over a month after Ms. Bese had 21 requested a list of the contracts that were 22 provided to -- that were entered into by USAT. 19064 1 Is that a fair statement? 2 A. Well, certainly, this letter is dated 3 October 27th; and the other memo was, I think you 4 said, September 13th. 5 Q. In his letter, he advised you that he 6 felt that the contracts that USAT had entered into 7 that you drafted had violated 563.39 of the 8 federal regulations. 9 Do you see that? 10 A. Yes, I do. 11 Q. And he also goes on and says that they 12 were unsafe and unsound practices because they 13 were entered into at a time when USAT was actually 14 reporting insolvency or approaching insolvency. 15 Do you see that? 16 A. Yes. 17 Q. After learning from Mr. Twomey that in 18 the eyes of the Federal Home Loan Bank Board, 19 these were not only unsafe and unsound contracts 20 but had violated applicable regulatory provisions, 21 what action, if anything, did you take? 22 A. First, I remember we had a meeting 19065 1 relating to this letter with Mr. Twomey. And then 2 I believe there was a meeting with -- there were a 3 number of meetings that took place subsequent to 4 this letter relating to the contracts. 5 Q. Now, I notice that the letter itself 6 was sent to the board of directors. 7 Would this have originally gone to 8 Mr. Gross? 9 A. I don't know. That would be my 10 assumption, but I'm not positive that's where it 11 originally went. 12 Q. Is this the kind of matter that you 13 would have brought to Mr. Gross' attention? 14 A. Sure. 15 Q. So, Mr. Gross was aware of the fact 16 that Mr. Twomey believed that the employment 17 contracts entered into on July 1 by USAT were not 18 only unsafe and unsound but had violated 19 Section 563.39 of the savings and loan 20 regulations? 21 A. That's certainly what is said here. 22 Q. Now, the letter then conveyed a number 19066 1 of directions to the board of directors regarding 2 the application or the activities of the board in 3 the future. 4 In the first paragraph, it says that 5 they immediately provide 60-day notices to Arthur 6 Berner, Michael Crow, J. Gray, Jr., James M. 7 Jackson, and James L. Wolfe and Bruce F. Williams 8 and these notices were to advise them that the 9 term of the employment contracts would not be 10 extended beyond December 31st, 1988. 11 Do you see that? 12 A. Yes, I see that here, sure. 13 Q. Did you prepare such a notice and send 14 it to the individuals who are listed in Paragraph 15 No. 1? 16 A. Well, this -- this was referring to the 17 earlier contract; and I think after our meeting, 18 it was clear that the July 1, 1988 contracts 19 didn't have a termination on December 31st, 1988. 20 Q. So, what did you do with respect to the 21 first paragraph of this letter? 22 A. As I said, there was a conversation -- 19067 1 a meeting that I had with Mr. Twomey and one of 2 the attorneys, Ms. Guthrie, where we discussed 3 that this provision, number one, wasn't applicable 4 to the July 1, 1988 contracts. 5 Q. That's because when you entered into 6 the July 1 contracts in 1988, you had extended the 7 term of the contract from December 31st, 1988, to 8 December 31st, 1991? 9 A. Well, hadn't extended. The July 1 10 contracts provided for a three-year -- it was a 11 three-year term. 12 Q. Then they were an extension of the 13 original contract, weren't they? 14 A. No. The original contract was -- this 15 was a new contract. This was a new series of 16 agreements. 17 Q. So, the term of the new contract was 18 extended for three years beyond that of the term 19 under the old February 11th, 1988 contracts? 20 A. It went through December 31, 1991, is 21 my recollection. 22 Q. Why did you believe that it was 19068 1 necessary to extend the term of the contracts? 2 MR. VILLA: Objection. He's trying to 3 point out that the first contracts were 4 superseded, and he keeps getting these questions 5 that try to suggest to him he was extending the 6 term of the contract. It's a new contract. 7 Q. (BY MR. RINALDI) Why did the new 8 contract have an additional three-year term? 9 A. Talking about the July 1 agreements, 10 why did they extend -- 11 Q. Yes. 12 A. It was part of the negotiated 13 agreements so that the people that had their 14 September UFG contracts wouldn't trigger those 15 contracts. 16 Q. So, this was as a result of the 17 original -- one of the changes that was made in 18 order to resolve the change of control problem 19 that had arisen with respect to the September 9th, 20 1987 UFG contracts? 21 A. Yes. This was a provision that was 22 negotiated to extend the term of the contracts. 19069 1 Q. So, then, I take it you didn't provide 2 such a notice; is that correct? 3 A. No. It didn't apply to the contracts 4 that were in force. 5 Q. Then it indicates there in Paragraph 2 6 that you were to make no payments directly or 7 indirectly pursuant to the employment contract 8 bonus or agreement, retainer, retirement, pension 9 or profit sharing plan or severance agreement. 10 Do you see that in the second 11 paragraph? 12 A. Yes. 13 Q. What did you understand was meant by 14 Paragraph 2? 15 A. I think it speaks for itself, that we 16 weren't to make any payments pursuant to these 17 employment contracts. 18 Q. So, in order to make any payment under 19 the employment contract, did you have to seek the 20 prior written approval of the prior supervisory 21 agent? 22 A. It didn't ask for that. It just said 19070 1 don't make any except for salaries. 2 Q. Then the last phrase says without the 3 prior written approval of the supervisory agent, 4 correct? 5 A. Correct. 6 Q. So that -- was it your understanding at 7 this point in time that the only thing USAT could 8 do is to pay the existing salaries under the 9 July 1, 1988 contracts? 10 A. That's certainly what this letter was 11 saying. 12 Q. Was that conveyed to you by Mr. Twomey? 13 A. Yes, it was. 14 Q. Was that then conveyed to Mr. Gross and 15 the other members of the board of directors of 16 USAT? 17 A. This letter was given to the other 18 members of the board of USAT. 19 Q. And after you had conducted your 20 meeting with the regulators, did you convey to the 21 board the concerns of the regulators? 22 A. Yes, I did. 19071 1 Q. And among those was the fact that no 2 additional payments could be made without the 3 prior written approval of the supervisory agent 4 except base salaries? 5 A. Again, that's what this letter 6 requested; and there were a lot of subsequent 7 meetings and discussions after that, yes, sir. 8 Q. Did you understand that this -- the 9 limitations placed by this letter also applied as 10 to the severance agreements? 11 A. In this letter? 12 Q. Yes. 13 A. Yes. 14 Q. Okay. So that USAT could not enter 15 into any severance agreement with any of its 16 employees without the prior written approval of 17 the supervisory agent? 18 A. Under this letter, that's what they had 19 said. 20 Q. Okay. Now, you indicated you had a 21 meeting and then following the -- with the 22 regulators. 19072 1 Who attended that meeting, if you 2 recall? 3 A. I did, Mr. Twomey, and Ms. Guthrie. I 4 believe that was her name. 5 Q. And you were the only person that 6 attended from the -- from USAT? 7 A. Yes. 8 Q. Would you turn to Page -- to 9 Document 8117? These are the minutes of the board 10 of directors meeting of USAT dated November 11 the 7th, 1988. And directing your attention to 12 the second full -- the second page, at the bottom 13 of Page 2 of that document, sir, it makes 14 reference to a discussion that you had with the 15 board. 16 Do you see that? 17 A. The bottom of Page 2? 18 Q. 2, or the second page, which is 19 OW035339. Do you see the reference there at the 20 bottom of the page? 21 A. Yes, I do. 22 Q. And it makes reference to a recent 19073 1 meeting of the representatives of the association 2 and representatives of the Federal Home Loan Bank 3 Board where a concern had arisen relating to 4 employment contracts. 5 Do you see that? 6 A. Yes. 7 Q. So, this would have been the meeting 8 that we were just discussing a moment ago? 9 A. I believe so. 10 Q. So, it would have occurred sometime 11 after Mr. Twomey sent his letter on October 27 and 12 sometime prior to the board meeting; is that fair? 13 A. There might have been other meetings, 14 but I know there was a meeting that I attended. 15 Q. And you said you recalled more than one 16 meeting? 17 A. I'm saying there might have been. I 18 don't recall. 19 Q. Now, at the board meeting, did you then 20 report to the members of the board what the 21 Federal Home Loan Bank Board's concerns had been 22 or the concerns they had raised? 19074 1 A. Well, I did; but I also think they were 2 there. The Bank Board people were there. 3 Q. And do you recall, did the Bank Board 4 people who were at the meeting -- by the way, do 5 you recall what the purpose of this meeting was 6 and why the Bank Board people were there? 7 A. I would have to read the minutes and go 8 through it. If you would like me to do that, I 9 will. 10 Q. I'll keep going, and I'll probably 11 point you to some things that will refresh your 12 recollection. 13 A. Okay. 14 Q. Now, it indicates on the next page -- 15 that is, Page 3 -- in the third full paragraph 16 that the Federal Home Loan Bank Board were 17 concerned with money being placed in escrow. 18 Do you recall what that was referring 19 to, sir? 20 A. Yeah. That was the -- the severance 21 benefits that were to be placed in escrow. 22 Q. And that's the $6.6 million that had 19075 1 been set aside by USAT in an escrow account in 2 order to fund the severance payments under the 3 July 1st, 1988 employment contracts? 4 A. Well, it was under the -- actually, it 5 was relating to the UFG employment contract; but 6 there was that -- that severance amount, that's 7 correct. 8 Q. And it indicates here that there was 9 also a concern about bonus payments. 10 Do you know what that was in reference 11 to, sir? 12 A. I believe that was in reference to 13 the -- the March executive bonus plan. 14 Q. And this is the 75 percent that had 15 been placed in a trust for the -- for the benefit 16 of recipients of the executive bonus? 17 A. Yes. 18 Q. And what was the Bank Board's reaction 19 at the board meeting regarding both the escrow to 20 fund the $6.6 million in severance benefits and 21 the moneys that had been set aside to fund the 22 executive bonus? 19076 1 A. Well, it says that they were -- I'm 2 just reading the minutes. It says they were 3 concerned about it. 4 Q. Do you have any independent 5 recollection of that meeting and what their 6 concerns were? 7 A. Yes. I recall they were concerned 8 about the money being placed in escrow and that -- 9 I believe at this time, we had told them that the 10 people who had received those contracts were 11 agreeable to taking that money out of the escrow 12 account. 13 Q. And was there concern that these 14 contracts had been executed at a point in time 15 when USAT was insolvent or approaching insolvency? 16 A. I don't recall that being stated, but 17 it might have been. 18 Q. But that's what Mr. Twomey stated in 19 his letter which he sent to you on October 27th; 20 is that correct? 21 A. Right. 22 Q. But you don't recall that he reiterated 19077 1 that concern at the board meeting for the benefit 2 of the board members? 3 A. I don't specifically recall that. 4 Q. As a result of the Bank Board 5 expressing its concerns over both the escrow and 6 the bonus plan, what occurred; or what actions did 7 the board take? 8 A. Over the course of the next -- there 9 were a lot of actions that were taken. First, I 10 believe -- 11 Q. Well, take a look at the "resolved" 12 paragraph just below there. It passes a 13 resolution which appears to be some form of formal 14 board action. 15 Do you see that? 16 A. Yes. 17 Q. And what was contemplated by that 18 resolution, sir? 19 A. That the money that was placed in trust 20 for the -- under the executive bonus plan for 21 certain named executive officers would be removed 22 and that the moneys that were placed in escrow 19078 1 would be released from escrow. 2 Q. And the moneys in escrow, again, are 3 the $6.6 million? 4 A. I believe that was the amount, yes, 5 sir. 6 Q. Now, there's also a reference here to 7 deleting Section 9I from each of such agreements. 8 Do you see that? 9 A. Yes, I do. 10 Q. And what is the -- do you recall what 11 that was making reference to, sir? 12 A. No, I don't. 13 Q. Why don't we take a look at Section 9I. 14 If we look at Exhibit T8085, that's in the -- I 15 believe the second book, about ten documents in, 16 sir. It should be your employment contract with 17 United Savings Association of Texas. 18 A. Right. That's what this is, yes. 19 Q. I wanted to make sure we were on the 20 same page here. 21 If you turn to Pages 18 through 22, 22 does that refresh your recollection that 9I is the 19079 1 provision which provides for severance -- securing 2 severance benefits with a trust or an escrow? 3 A. Yes, it does. 4 Q. So, what they wanted you to do is 5 delete the provision that would provide for USAT 6 posting a security to fund the severance benefits? 7 A. That's what this is saying. They want 8 us to delete that section from the UFG contract 9 and also from the USAT stuff. 10 Q. And you -- and the board resolved to do 11 so? 12 A. Yes. 13 Q. As a consequence of the board's 14 resolution, were those provisions, in fact, 15 removed from the contract? 16 A. I don't recall one way or the other. I 17 think it was, but I'm not positive. 18 Q. And then I notice, as we turn to the 19 next page, that the board also resolved to remove 20 from trust all moneys that had been placed in 21 trust on behalf and for the benefit of executive 22 officers under the executive bonus plan. 19080 1 Do you see that? That's the second 2 paragraph. 3 THE COURT: Now you're back on T8117? 4 MR. RINALDI: I'm sorry, Your Honor. I 5 jumped back to T8117. 6 Q. (BY MR. RINALDI) Do you see that? This 7 is Page 4, and this is the second full paragraph. 8 There's a "resolved" clause. 9 A. Right. The moneys that were placed at 10 Texas Commerce Bank were to be removed on behalf 11 of these people. 12 Q. So, when the Bank Board pointed out to 13 the board of directors that they may have violated 14 applicable regulations or acted in an unsafe and 15 unsound manner, the board determined to remove the 16 moneys that were placed in escrow and remove the 17 moneys that had been placed into trust; is that 18 right? 19 A. I think when the Bank Board said 20 whatever their concerns were, the board took 21 whatever action they could to try to alleviate 22 those concerns. 19081 1 Q. If you go back to Page 2, one of the 2 things that is referenced in your -- in the last 3 paragraph on Page 2 is that concerns had arisen -- 4 and you make reference to participation in the 5 Southwest Plan. 6 What are you referring to there, sir? 7 A. What I'm referring to is United 8 Savings' participation in the Southwest Plan. 9 Q. And were you advised by the Bank Board 10 that their concern with respect to these 11 employment contracts was such a high level that if 12 it were not resolved in a satisfactory fashion, it 13 would jeopardize your potential -- USAT's 14 potential participation in the Southwest Plan? 15 A. I'm not sure they used those words. My 16 recollection is that they said there was a concern 17 and if these moneys weren't taken out, that it 18 might jeopardize the participation. 19 Q. When you say "concern," were they very 20 agitated by this; or was this a fairly mundane 21 matter so far as you were concerned? 22 A. I don't think they were either. I 19082 1 don't think they were very agitated, but I don't 2 think it was a mundane matter. It was a concern, 3 and we responded. 4 Q. Now, on Page 4 of Exhibit T8117, 5 Mr. Twomey is reported as having discussed the 6 question of whether all of the executive bonus 7 payments needed to be removed from trust. 8 Do you see that? It's about the -- 9 it's the second paragraph after the "resolved" 10 clauses. It says, "Mr. Twomey, on behalf of the 11 Federal Home Loan Bank Gordon, stated that he was 12 pre-disposed to keeping such bonus moneys for the 13 mid-level people but that he would have to review 14 this matter further." 15 Do you see that? 16 A. Yes, I do. 17 Q. So, he wasn't adverse to some modest 18 level of bonuses to encourage people to stay, was 19 he? 20 A. Again, I don't know what he was. This 21 was a discussion that we had raised as to what he 22 thought or the Federal Home Loan Bank Board 19083 1 thought we should do with all the rest of the 2 bonus moneys, and he said what's reflected here. 3 Q. So, it would appear at this point in 4 time he had an open mind as to mid-level members 5 of management, correct? 6 A. He's saying he would have to review it 7 further. 8 Q. Did he, however, indicate that he felt 9 that the -- the executive officers' bonuses should 10 be removed from trust? 11 A. Yeah, I think that's what he had said. 12 Q. Okay. Now, if you turn, then, to 13 Page 5, I believe, or actually the end of 4, the 14 last full paragraph, it talks about "Mr. Berner 15 discussed at length the terms of the consent 16 agreement, and the board questioned the 17 representatives of the Federal Home Loan Bank of 18 Dallas." 19 Do you see that? 20 A. Yes, I do. 21 Q. Earlier, I had asked you what was the 22 purpose of this meeting. 19084 1 Had this meeting been called for the 2 purpose of considering USAT entering into a 3 consent agreement? 4 A. I believe that's right. 5 Q. And in connection with entering into 6 that consent agreement, was that requested by the 7 regulators? 8 A. Yes. Yes, it was. 9 Q. And at this point in time, USAT was 10 insolvent, was it not? 11 A. I believe so. 12 Q. And on the next page, it says -- it 13 talks about "The association would be unable to 14 participate in the Southwest Plan absent the 15 execution of the consent agreement." 16 Do you see that? 17 A. Yes. 18 Q. What do you recall of that discussion? 19 A. I really don't recall it, other than 20 what's reflected here. 21 Q. And then it goes on to say that the 22 FSLIC would seek to impose a cease and desist 19085 1 order upon the association in the event the 2 association refused to enter into a consent 3 agreement. 4 Do you see that? 5 A. Yes, I do. 6 Q. Thereafter, did the board then enter 7 into a consent agreement? 8 A. I think it signed it actually that same 9 day. 10 Q. And that's the resolution that appears 11 further down on the paper; is that correct? 12 A. I haven't read -- I assume it's there. 13 If you tell me it's there, I assume that's what it 14 is, unless you want me to read it. 15 Q. I believe it says, "Now, therefore" -- 16 if you look down, the "now, therefore" clause 17 below appears to be a resolution on behalf of the 18 board to enter into the consent agreement, does it 19 not? 20 A. Right. I just haven't read it. 21 Q. It's your recollection that they 22 thereafter on that date executed the consent 19086 1 agreement? 2 A. I believe so. 3 Q. Now, did the consent agreement have any 4 provisions in it regarding the future payment of 5 executive bonuses or salaries that you recall? 6 A. I don't recall one way or the other. 7 Q. Do you recall that it limited expressly 8 what USAT and its subsidiaries and affiliates 9 could do with respect to the payment of salaries, 10 bonuses, and severances? 11 A. I don't have a specific recollection. 12 Again, it would be in there. I would just have to 13 look at it. 14 Q. All right. Well, if you turn to -- to 15 Page 6 of the document -- 16 A. Of? 17 Q. Before we get to that, let me just ask 18 you this: On Page -- I'm sorry. Yeah, turning to 19 Page 6 -- 20 A. Of the minutes? 21 Q. This would be Exhibit T8119. I'm 22 sorry. That would be the consent agreement which 19087 1 is the next document on. 2 And if you turn to the last page, does 3 this appear to be the consent agreement that was 4 executed pursuant to the request of the regulators 5 on November 7th, 1988? 6 A. Yes, it does. 7 Q. Is that your signature that appears at 8 the top of the last page? 9 A. Yes, it is. 10 Q. So, it was executed, then, by Jenard 11 Gross as a director, Mr. Whatley, Mr. Schwartz, 12 Mr. Munitz, and Larry Connell; is that correct? 13 A. Yes. 14 Q. And on behalf of the Bank Board, it was 15 executed by Neil Twomey; is that right? 16 A. Yes. 17 Q. So that all of the signatories to this 18 document were aware of the limitations that it 19 placed upon USAT and its affiliates and 20 subsidiaries, correct? 21 A. I think so. 22 Q. Now, if you turn to Page 6 of the 19088 1 document, it makes reference to operating 2 restrictions. 3 Do you see that? 4 A. Yes. 5 Q. And it says, "On and after the 6 effective date of this agreement" -- this is 7 Paragraph 22 -- "without prior written approval of 8 the agent, the institution shall not and, to the 9 extent possible, shall not allow any subsidiary or 10 affiliate of the institution to" and then it lists 11 a number of things that the institution, its 12 affiliates, and subsidiaries should not do. 13 Do you see that? 14 A. Yes. 15 Q. If you turn then two pages further on, 16 we see that on Page 8, it lists a number of 17 limitations with respect to the employment 18 activities of USAT and its subsidiaries and 19 affiliates. 20 By the way, did you understand that UFG 21 was an affiliate of USAT? 22 A. I'm not sure if I did or didn't at that 19089 1 time. 2 Q. And it says that -- directing your 3 attention to -- to Item Q, it says, "They shall 4 not" and then it says "enter into, renew, or 5 revise any contractual arrangement with any 6 officer acting in the capacity of senior 7 vice president or above, director, advisory 8 director, controlling person, affiliate, 9 subsidiary, or shareholder." 10 Do you see that? 11 A. Yes, I do. 12 Q. Did you understand by that that USAT 13 and its subsidiaries and affiliates were not to 14 enter into contractual arrangement or revise 15 existing contractual arrangements pursuant to this 16 consent order? 17 A. Yes. 18 Q. Then as we go down further under 19 Subparagraph S, it talks about -- "that USAT," 20 under sub II, which starts about halfway through 21 the paragraph "shall not enter into, amend, or 22 renew any collective bargaining agreement, pension 19090 1 or proxy sharing plan, pension or" -- 2 THE COURT: Mr. Rinaldi, I think you 3 read "proxy" for "profit." 4 MR. RINALDI: I'm sorry. 5 Q. (BY MR. RINALDI) "Pension or profit 6 sharing plan, bonus plan, or severance pay plan." 7 Do you understand that? 8 A. Yes. 9 Q. You understood that USAT and its 10 affiliates could not enter into or renew any bonus 11 plans or severance pay plans? 12 A. Yes. 13 Q. Then finally it talks about not making 14 any commitment to increase salaries. 15 Do you see that? 16 A. Yes. 17 Q. And all of these provisions were known 18 by the members of the board at the time they 19 executed this document, correct? 20 A. Yes, sir. 21 Q. Okay. Now, did Mr. Twomey also have 22 occasion to send you a letter regarding the 19091 1 executive bonus plan similar to the one that he 2 had communicated to you on October 27th, 1988, 3 relating to the employment plans? 4 A. The executive bonus plan being the one 5 that was entered into in March for the 25/75? Is 6 that what you're talking about? 7 Q. Yes, that's right. Do you recall 8 whether he -- 9 A. Whether we received any letters 10 subsequent to October 27? 11 Q. Yes. 12 A. I think we did. 13 Q. Let me ask you a question before I get 14 to that. Take a look at Exhibit 8120. This is a 15 letter which appears to have been -- it's T8120, 16 and it's previously been admitted as Tab 449. 17 This appears to be, again, one of those documents 18 that's signed by someone other than yourself over 19 your signature; but is this a document that you 20 authorized to be sent to the Federal Home Loan 21 Bank? 22 A. Yes. 19092 1 Q. Now, in the first sentence, it makes 2 reference to a meeting held at the offices of the 3 Federal Home Loan Bank of Dallas. 4 Do you see that? 5 A. Yes, I do. 6 Q. Is that the meeting you were referring 7 to where the Federal Home Loan Bank supervisory 8 agent raised concerns over the employment 9 contracts? 10 A. No, it was a later meeting. 11 Q. And at this later meeting, did they 12 also then raise concerns about employment 13 contracts? 14 A. I'm not sure if they raised concerns or 15 they were asking for information. 16 Q. And you then responded, and you set 17 some points out in the paragraphs below. And in 18 Paragraph 1, you're assuring them here that all 19 moneys that had been put in escrow for security 20 for such executive severance benefits were in the 21 process of being and would be removed from the 22 escrow; is that correct? 19093 1 A. That was our understanding at the time. 2 Q. And this letter was sent the same day 3 that the board approved the -- the consent 4 agreement, correct? 5 A. Yes. 6 Q. Okay. Now, I'm curious about the next 7 paragraph. Had Mr. Twomey raised a question 8 regarding -- well, it starts out and says, "All 9 salaries and other executive bonus agreements for 10 senior executives who expend a portion of their 11 time on behalf of United Financial Group, Inc. 12 (independent and exclusive of work done for USAT) 13 are being allocated to and paid by United 14 Financial Group, Inc." 15 Do you see that? 16 A. Yes, I do. 17 Q. Had Mr. Twomey raised a question of how 18 salaries were allocated between USAT and UFG? 19 A. I believe he did, yes. 20 Q. Now, prior to Mr. Twomey raising that 21 issue, had salaries been allocated -- had your 22 salary been allocated between USAT and UFG? 19094 1 A. I don't believe so. It might have 2 been. I don't know what they would have done 3 internally. I don't believe it was allocated, 4 though. 5 Q. This was the first time the issue had 6 come up that you were aware of? 7 A. Yes. 8 Q. Do you know whether Mr. Gross' salary 9 had been allocated between USAT and UFG? 10 A. Again, I don't believe so. It may have 11 been internally, but I don't think so. 12 Q. Would your answer have been the same 13 for all the individuals listed at the bottom of 14 Page 1 of this document? 15 A. Yes. 16 Q. Okay. Now, in the document, it 17 indicates the percentage of time that each of 18 these individuals devoted to USAT and UFG. 19 How do you come to an understanding of 20 what percentage of Jenard Gross' time was spent 21 working for USAT as opposed to UFGI? 22 A. My recollection is that for certain of 19095 1 these people, I asked them to try to allocate how 2 much of their time was for UFG and how much of 3 their time was for USAT. 4 Q. So, this was your best guess based upon 5 your discussions with them? 6 A. Well, I think this is what they told 7 me. 8 Q. Now, would you take a look -- I 9 mentioned a moment ago or asked a question a 10 moment ago about whether Mr. Twomey had ever 11 raised any question regarding the safety and 12 soundness of the executive bonus plan as opposed 13 to the employment contracts. 14 Would you take a look at what's been 15 previously marked as T81338? It's Tab 454. 16 Have you had a moment to look at that, 17 sir? 18 A. Yes. 19 Q. Now, does that refresh your 20 recollection that Mr. Twomey ultimately did send a 21 letter raising questions of safety and soundness 22 with respect to the executive bonus plan? 19096 1 A. Yes. 2 Q. And he raises, again, the same concern 3 in the second paragraph that he had previously 4 raised with respect to the severance benefits, 5 does he not, in that he refers to the fact that 6 United was materially insolvent and that it was, 7 in his mind, an unsafe and unsound practice to 8 have entered into such arrangements. 9 Do you see that? 10 A. Yes, I do. I'm not sure he says unsafe 11 and unsound here, but he certainly is taking 12 objection to it. 13 Q. Well, if you look at the first full 14 paragraph, he presumably says -- 15 A. Are you okay? 16 Q. Yes. I'm fine. He says that -- he 17 specifically talks about it being an unsafe and 18 unsound practice, does he not? 19 A. Yes. 20 Q. In this letter, he did not object to 21 all of the executive bonus payments that were 22 contemplated, does he? 19097 1 A. No, he does not. 2 Q. He only objects to those -- to 3 highly-compensated senior executives. Right? 4 A. Yes. 5 Q. Is it fair to say that Mr. Twomey did 6 not object to paying modest salaries to mid-level 7 executives in order to encourage their retention? 8 A. No, it doesn't. 9 Q. Okay. 10 A. I think he did object to it, and it 11 didn't get paid at that time. 12 Q. Well, whatever objection he raised, 13 it's certainly not apparent in this letter, is it? 14 A. It's not in this letter, that's 15 correct. 16 Q. And then he asks that the moneys be 17 taken from trust or that you provide written 18 confirmation by return mail that funds held in 19 trust at Texas Commerce Bank have been returned to 20 United. 21 Do you see that? 22 A. Yes, I do. 19098 1 Q. He did not express any similar concern 2 regarding the remainder of the funds for the other 3 30 plus people that were members of the executive 4 bonus plan, did he? 5 A. In this letter, he did not. 6 Q. Do you recall receiving another letter 7 where he objected to -- 8 A. I recall a number of letters where we 9 kept trying to get clearance from him as to 10 whether or not we could pay the other people, and 11 he wouldn't give us that clearance. And, 12 therefore, that money stayed in trust and 13 ultimately was the subject of a lawsuit. 14 Q. Okay. Now, after you had entered into 15 the -- I'm sorry. After Mr. Twomey had sent you 16 his letter on October 27th, 1988, advising you 17 that the employment contracts were unsafe and 18 unsound and that they had violated 563.39 -- 19 THE COURT: Which document are you 20 referring to now? 21 MR. RINALDI: I haven't turned to a 22 document yet. 19099 1 THE COURT: Okay. 2 Q. (BY MR. RINALDI) But the -- did 3 Mr. Gross have occasion to resign from the board 4 of UFG? 5 A. Yes, he did. 6 Q. And do you recall the date that 7 Mr. Gross tendered his resignation -- 8 A. No, I don't. 9 Q. -- to the board? 10 A. No, I don't. 11 Q. Take a look at what's been previously 12 marked as T8114. This appears at Tab 446. And it 13 should be, oh, about five or six documents back. 14 8114. 15 Does this appear to be the letter that 16 Mr. Gross sent to you tendering his resignation? 17 A. Yes, it does. 18 Q. Okay. And in this document, in the 19 second full paragraph, Mr. Gross makes a proposal 20 regarding his severance from United Financial 21 Group. 22 Do you see that? 19100 1 A. The third paragraph? 2 Q. Yes. 3 A. Yeah. 4 Q. And he makes reference there to -- it 5 says in the third sentence, "In addition to this, 6 I have a note outstanding with United Financial 7 Group, Inc. for $761,250 in conjunction with the 8 purchase of 105,000 shares of stock in the 9 institution." 10 Do you see that? 11 A. Yes. 12 Q. How did Mr. Gross come to purchase the 13 105,000 shares? 14 A. I don't know. I think it was before my 15 time. 16 Q. Okay. But under the terms of the 17 arrangement that he had, he was personally liable 18 for a note in the amount of the purchase price? 19 A. That's my recollection, yes. 20 Q. And had he also pledged the stock at 21 this point in time in order to secure that note? 22 A. I think so. 19101 1 Q. And at this point, do you know what the 2 value of the stock was that secured the note? 3 A. The UFG stock? Not specifically, no. 4 Q. Had it, towards the end of 1988, 5 declined substantially in value? 6 A. It certainly -- from what period? It 7 wasn't worth a tremendous amount of money would be 8 my recollection. 9 Q. So that even if the stock that was 10 pledged were sold off or returned to UFG, is it 11 fair to assume that Mr. Gross would have a 12 substantial personal liability under the note? 13 A. Again, I think there were some other 14 arrangements that we had with him. I don't 15 believe he could have received $761,000 had he 16 sold the stock. 17 Q. Do you recall that the stock was worth 18 about fifty-six cents a share at that point in 19 time? 20 A. I don't, but it couldn't have been 21 worth a lot more. I'm sure that's about right. 22 Q. Now, what was the proposal that 19102 1 Mr. Gross was making at this point in time, if you 2 recall? 3 A. Do you want me to read this or -- 4 Q. I'm asking if you have any independent 5 recollection of the proposal that he made. 6 A. Not at this point in time. 7 Q. In the first sentence, it says, "As you 8 know, I have a contract with United Financial 9 Group, Inc., and United Savings Association of 10 Texas which runs through 1991." 11 So, he must be referring there, then, 12 to the contracts that you entered into on 13 July 30 -- I mean June 30th and July 1 14 respectively with UFG and USAT of 1988, correct? 15 A. That's what he's saying. 16 Q. Okay. And he goes on to say that the 17 contracts have a two-year payment at termination. 18 Do you see that? 19 A. Yes, I do. 20 Q. Then he calculates the termination 21 value of the contracts at 1,028,000 and 1,071,000. 22 Do you see that? 19103 1 A. Yes, I do. 2 Q. Do you know what the difference between 3 the 1,028,000 and the 1,071,000 is? 4 A. No, I don't. 5 Q. In either event, he believed that the 6 severance benefits pursuant to the employment 7 agreements that were entered into by USAT when it 8 was approaching insolvency on July 1st, 1988, had 9 a value of in excess of $1 million? 10 A. You're saying USAT. 11 Q. That's what he says, does he not? 12 A. I don't think he's saying that. He's 13 saying under his contract, he's entitled to 14 $1,028,000. 15 Q. And he's saying under his contract with 16 USAT and UFGI, isn't he? 17 A. I think he's saying UFGI. 18 Q. Doesn't he say he has a contract with 19 United Financial Group and USAT? 20 A. That's what he says in his letter. 21 Q. So, isn't he talking about both? 22 A. Again, I think if he was aware of the 19104 1 terms of the contract, he would know the UFGI was 2 the one he would be paid under. 3 Q. Mr. Gross was a fairly astute man, 4 wasn't he? 5 A. Was and is. 6 Q. Mr. Gross was the chief executive 7 officer of USAT, wasn't he, at least through the 8 arrival of Larry Connell? 9 A. I believe so. 10 Q. And he was still an officer and 11 chairman of the board of UFGI? 12 A. I believe so. 13 Q. Wouldn't you have expected Mr. Gross to 14 have understood the employment arrangements that 15 he had introduced into with both UFGI and USAT? 16 A. I don't know. I assume he would have. 17 Q. Now, it appears here, then, he is 18 offering to -- to exchange the million dollars in 19 severance benefits which he calculates he's 20 entitled to under the USAT and UFG contract in 21 exchange for forgiveness of the note that he owed 22 to UFGI which had a face amount of $761,250; is 19105 1 that fair? 2 A. He also makes reference to a bonus 3 arrangement which would have liquidated that debt. 4 Yes, that's what he's asking for. 5 Q. All right. Now, was this severance 6 proposal then presented to the board of -- of -- 7 of UFG? 8 A. I believe so. 9 Q. And take a look at Exhibit 8113, which 10 is the document immediately preceding the one 11 you're looking at now; and it's Tab 445. 12 A. (Witness reviews the document.) 13 Q. And you'll see that in the fourth 14 paragraph down, this is a meeting -- a special 15 meeting of the board of United Financial Group at 16 which it indicates Mr. Gross read a letter of 17 resignation. 18 Is the letter of resignation that's 19 referred to in T8113 in Paragraph 4 the letter 20 that's identified as T -- I'm sorry -- strike 21 that. 22 Is the letter that's referenced in 19106 1 T8113 in Paragraph 4 the same letter that appears 2 as Exhibit T8114 on the following page? 3 A. I believe so. 4 Q. Okay. And in the following paragraph, 5 it says, "Mr. Crow began by reviewing some of the 6 factual statements made in the letter. He 7 reviewed the excess loss account tax problem." 8 Do you see that? 9 A. Yes, I do. 10 Q. Do you recall what that was referring 11 to, sir? 12 A. Oh, I have a vague recollection of the 13 excess loss account problem. 14 Q. And what is your recollection, sir? 15 A. Oh, goodness. This may not be 16 accurate. My recollection is that if UFG -- if 17 USAT was placed into receivership at that time, 18 UFG might have had to pay a tax. And that's a 19 very -- very broad, superficial statement of what 20 the excess loss account problem was. 21 Q. And you say "might have had to pay a 22 tax." Was this a fairly substantial amount of 19107 1 money that UFG might have been obligated to pay? 2 A. If they had had to pay. They never had 3 to pay it. 4 Q. Now, what was the condition of USAT and 5 UFG at or about this time in time when Mr. Gross 6 tendered his resignation and was proposing that 7 his severance benefits be -- that his note with 8 UFGI be forgiven in return for his not receiving 9 his severance benefits under the USAT and UFG 10 contracts? 11 A. Again, this is just to the best of my 12 recollection. USAT, I'm sure, was significantly 13 insolvent. UFG had probably 20 or $30 million in 14 cash at that time. 15 Q. Okay. If you take a look at two 16 documents earlier on -- I believe it's T8108 -- 17 these are the minutes of October 4th, 1988, that 18 we've looked at, I think, previously. And if you 19 turn to Page 3, Mr. Gross toward the bottom of the 20 page elaborates upon the condition of the 21 association. 22 Do you see that? 19108 1 A. Yes. 2 Q. And at the beginning of October, nearly 3 four weeks before Mr. Gross made his proposal, 4 USAT, according to Mr. Gross in the minutes, had a 5 negative net worth position that would exceed 6 $400 million. 7 Do you see that? 8 A. Yes, I do. 9 Q. To your knowledge, did USAT's condition 10 improve between October the 4th and October 11 the 31st when Mr. Gross presented his proposal? 12 A. I don't think it did. 13 Q. Then if you look at the next paragraph, 14 "Mr. Crow in the presence of Mr. Gross reviews the 15 current standalone financial position of the 16 company." 17 Would that be UFGI he's referring to? 18 A. I believe so. 19 Q. We're on Page 3 of Document T8108, the 20 minutes -- special minutes of the board of UFG and 21 USAT dated October 4, 1988. 22 A. UFG is defined as the company; so, that 19109 1 would be UFG. 2 Q. So, even on a standalone basis, it 3 indicates that after the third quarter results 4 were determined, liabilities would approximate 5 58 million with assets equalling approximately 6 28 million. 7 Do you see that? 8 A. Yes, I do. 9 Q. So that now, as a result of Mr. Gross 10 proposing the severance or its -- strike that. 11 As a result of the letter dated 12 October 31st, 1988, which is Exhibit T8114, did 13 the board of USAT and the board of UFGI ultimately 14 enter into a severance agreement with Mr. Gross? 15 A. I think UFGI did, yes. 16 Q. Ultimately, there was a severance 17 agreement with them? 18 THE COURT: We'll take a short recess. 19 20 (Whereupon, a short break was taken 21 from 11:13 a.m. to 11:34 a.m.) 22 19110 1 THE COURT: Be seated, please. We'll 2 be back on the record. 3 Mr. Rinaldi, you may continue with your 4 examination. 5 MR. RINALDI: Thank you. 6 Q. (BY MR. RINALDI) Mr. Berner, when we 7 broke, we were talking about the resignation of 8 Mr. Gross and the proposal that he had made in his 9 October 31st letter to the board. 10 Ultimately, was that proposal adopted? 11 A. I don't think that exact proposal was 12 adopted. I would have to go back and look. A 13 proposal was adopted. 14 Q. Would you take a look at what's been 15 previously marked as T8128? These are the minutes 16 of the special joint meeting of the boards of 17 directors of USAT and UFGI of 11/21/88. 18 And in the fourth paragraph down, it 19 says, "Dr. Munitz then discussed the severance 20 arrangements concerning Mr. Gross. Mr. Berner 21 reviewed in detail the current settlement 22 negotiations and the latest draft of the Gross 19111 1 separation agreement." 2 Do you see that? 3 A. Yes, I do. 4 Q. And then below that, it indicates that 5 you were authorized to finalize the separation 6 agreement and, if necessary, review any possible 7 alternatives. 8 Do you see that? 9 A. Yes. 10 Q. Then you're instructed in the 11 resolution that appears at the bottom of the page 12 to -- you're authorized and directed to prepare or 13 cause to have prepared a separation agreement with 14 Mr. Gross. 15 And then on the following page, it 16 indicates that the minutes were approved by both 17 United Financial Group and United Savings 18 Association of Texas. 19 Was the separation agreement approved 20 by both UFGI and USAT? 21 A. I think it was just a UFGI transaction, 22 but I don't have a recollection. 19112 1 Q. Now, I notice that under UFGI, this 2 Larry Connell is a director. 3 Was Mr. Connell a director of UFGI, or 4 was he just a director of USAT? 5 A. At this point, he was a director of 6 UFGI. 7 Q. When did he become a director of UFGI? 8 Do you recall? 9 A. No, I don't recall. 10 Q. Now, as a consequence of the directives 11 of the board, did you then prepare the separation 12 agreement? 13 A. Yeah. I think I had outside counsel 14 prepare it, but it was prepared. 15 Q. Would you take a look now at 16 Exhibit T8129, which has been previously admitted 17 as Tab 453? Does that appear to be the separation 18 agreement that you caused to be prepared? 19 A. Yes. 20 Q. Okay. And did you execute this 21 document on behalf of -- of UFGI? 22 A. Yes, I did. 19113 1 Q. And did you also execute it on behalf 2 of United Savings Association of Texas? 3 A. Yes, I did. 4 Q. So, this was -- and then is that 5 Mr. Gross' signature that appears above yours on 6 Page 6? 7 A. Yes, it is. 8 Q. So, this was a three-party agreement, 9 was it not? 10 A. Yes, it was. 11 Q. And it indicates on the second full 12 page that the employee was going to be released or 13 separation of employee. Do you see that? And 14 that the employee agrees to terminate his 15 employment by USAT and UFG. 16 Do you see that? 17 A. Yes. Are you talking about 18 Paragraph 1? 19 Q. Yes. 20 A. Yeah. 21 Q. And it releases USAT and UFG from any 22 further duty, obligations, or liabilities under 19114 1 any employment agreements, correct? 2 A. Under any agreements, yes. 3 Q. And in return for that, UFGI agrees to 4 release the employee from indebtedness, including 5 both principal and accrued interest, obligation, 6 or liability. 7 What indebtedness is that referring to? 8 A. I believe that's referring to the note 9 with UFGI that he had. 10 Q. That's the one that's described in the 11 fourth full "whereas" clause on the first page of 12 the document? 13 A. Yes. 14 Q. So, in essence, Mr. Gross was released 15 from three quarters of a million dollars worth of 16 liability which he owed under the note to UFGI in 17 return for his renouncing any benefits he might be 18 entitled to under the USAT and UFGI employment 19 agreements and other bonus plans? 20 A. Yes, that's correct. 21 Q. When it makes reference to the USAT 22 employment contracts, that's the July 1st, 1988 19115 1 employment contract that was entered into at or 2 about the time USAT was approaching or actually 3 insolvent; isn't that correct? 4 A. It refers to the July 1st agreement, 5 yes. 6 Q. And at that point in time, USAT was 7 approaching or actually had reached the point of 8 insolvency, did it not? 9 A. I believe so, yes. 10 Q. It also refers in the second "whereas" 11 clause to the June 30, 1988 UFG employment 12 contract; is that correct? 13 A. Among others, yes. 14 Q. And that was the one that UFGI entered 15 into at a point when it had negative equity; is 16 that correct? 17 A. Yeah. I believe it had negative 18 equity. 19 Q. Its assets exceeded its liability by in 20 excess of $20 million at that point. 21 Do you recall that? 22 A. Assets exceeded liabilities, yeah, 19116 1 that's correct. 2 Q. And -- 3 MR. VILLA: You mean liabilities 4 exceeded assets, don't you, sir? 5 MR. RINALDI: Yes. 6 MR. VILLA: The witness is a little too 7 cooperative. 8 MR. RINALDI: Thank you for correcting 9 me, Counsel. 10 Q. (BY MR. RINALDI) Now, shortly after 11 Mr. Gross resigned and entered into this 12 separation agreement, the association was placed 13 into receivership, correct? 14 A. On December 30th, yes. 15 Q. So, approximately a little over five 16 weeks after Mr. Gross resigned, correct? 17 A. Right. 18 Q. At that point in time, did you receive 19 a letter from the Federal Home Loan Bank Board 20 that they were terminating your employment 21 arrangement with USAT? 22 A. I think so, yes. 19117 1 Q. Take a look at what's been previously 2 marked as T8151 which appears at Tab 546. Is this 3 the letter that you received from the Federal Home 4 Loan Bank Board? 5 A. Yes, it is. 6 Q. And pursuant to this letter, any rights 7 which you had under the USAT contract were 8 terminated; is that correct? 9 A. Yes. 10 Q. Now, following your termination at 11 USAT, did you continue to be employed by United 12 Financial Group? 13 A. Yes. 14 Q. For what period of time, sir? 15 A. I believe I left there in September of 16 1991. 17 Q. So, you stayed on for almost another 18 three years; is that correct? 19 A. Yes. 20 Q. Now, in addition to terminating 21 yourself, were a number of other members of the 22 senior executive staff also terminated at or about 19118 1 December 30th, 1988? 2 A. I believe two others. 3 Q. Who were those two others? 4 A. Bruce Williams and Mike Crow. 5 Q. And did they then thereafter make an 6 application to United -- and were their employment 7 contracts with USAT also declared void by the 8 Federal Home Loan Bank? 9 A. Well, whatever this letter says, yeah, 10 that's correct. 11 Q. And did Mr. Crow and the one other 12 individual whom you said was Mr. Gray -- 13 A. No. Bruce Williams. 14 Q. I'm sorry. Mr. Williams. 15 Did they both then apply to United 16 Financial Group for severance benefits? 17 A. Yes, they did. 18 Q. Okay. And as a consequence of their 19 applying for severance benefits, did an issue 20 arise with the federal -- with the FSLIC as to 21 whether UFGI should pay those severance benefits 22 to -- to the individuals who had been terminated? 19119 1 A. Well, initially, yes. They told us not 2 to make those payments. 3 Q. Well, do you recall that the FSLIC -- 4 who represented the FSLIC? Do you recall? 5 A. Yeah. It was -- Hutcheson & Grundy was 6 the law firm. It was -- Currie Bechtol was the 7 senior partner involved, and there was a -- Ron 8 Restrepo was the associate at the time. 9 Q. Do you recall that Mr. Bechtol advised 10 you that -- that he believed that the assets of 11 United Financial Group should be preserved for the 12 benefit of the FSLIC? 13 A. I'm not sure I recollect that. We had 14 a lot of discussions about not paying those 15 severance benefits early on in 1989. 16 Q. Why was the FSLIC concerned about UFGI 17 paying the severance benefits? Did the FSLIC have 18 some sort of claim that they had filed against 19 UFGI? 20 A. I don't believe they filed a claim. 21 Q. Did they assert to you that they 22 believed they had a claim? 19120 1 A. Yeah, they did. 2 Q. What was the nature of the claim that 3 the FSLIC was asserting, sir? 4 A. I think they said they thought they had 5 been damaged by United Financial Group not 6 maintaining USAT's net worth. I believe that's 7 what they said. 8 Q. So that they believed that the net 9 worth obligation which UFG had entered into that 10 we've talked about previously was an obligation 11 that UFGI had to the FSLIC? 12 A. I think they believed that, yes. 13 Q. As a consequence, did they instruct you 14 that you should not dissipate the assets of UFGI 15 by paying severance benefits to individuals who 16 had claimed them? 17 A. They did. They told us not to do it. 18 Q. Did you memorialize the discussions 19 that you had with the FSLIC on some of these 20 issues in various memoranda? 21 A. I believe so, yeah. 22 Q. Would you take a look at what's been 19121 1 marked as Exhibit T8155? This appears at Tab -- 2 I'm sorry. 3 MR. RINALDI: This is a new document, 4 Your Honor; and I will provide the Court with a 5 copy of T8155. 6 Q. (BY MR. RINALDI) Have you had a chance 7 to take a look at that, sir? 8 A. T8155? 9 Q. It's T8155, yes. 10 A. Do you want me to read the whole thing. 11 Q. No. I'll direct your attention to some 12 things. 13 Does that appear to be a document that 14 you prepared? 15 A. Yes, it does. 16 MR. RINALDI: Your Honor, I would move 17 the admission of T8155. 18 MR. VILLA: No objection. 19 THE COURT: Received. 20 Q. (BY MR. VILLA) It indicates in the 21 first full paragraph that you had meetings with 22 the attorneys for the FSLIC whom you previously 19122 1 identified as Currie Bechtol and Hutcheson & 2 Grundy. 3 Directing your attention down to the 4 fifth paragraph, it talks about "Bechtol responded 5 that it was not a question of UFGI benefiting from 6 the contracts legality but, rather, the assets of 7 UFGI belonged to the creditors and FSLIC was the 8 largest UFGI claimant." 9 Do you see that? 10 A. Yes. 11 Q. What was Mr. Bechtol there referring 12 to? 13 A. I'm trying to remember. This was a 14 meeting with not Mr. Crow or -- or Mr. Williams, 15 but it was Buck Dyess who was a lawyer 16 representing three other people or four other 17 people. And there was a question as to whether or 18 not the agreements were illegal, the employment 19 contracts were illegal, was the question Mr. Dyess 20 asked. 21 Q. Mr. Bechtol took the position that he 22 believed the assets of UFGI belonged to the 19123 1 creditors, and FSLIC was the largest creditor? 2 A. Yes. 3 Q. Does he make reference to the fact that 4 FSLIC was taking the position that the net worth 5 maintenance commitment with UFGI was enforceable 6 and that he felt, under that commitment, FSLIC was 7 the largest claimant? 8 A. That's what I assume he was saying. 9 Q. You were present at the meeting, were 10 you not? And this is your memo? 11 A. Right. 12 Q. Is that your best recollection of what 13 was being discussed at the time? 14 A. Yeah. I don't know whether he believed 15 it was enforceable or not. His view was UFGI had 16 an obligation to maintain the net worth. 17 Q. And he indicates that UFGI's largest 18 claimant was the FSLIC? 19 A. Right. 20 Q. And then he goes on and talks about the 21 USAT employment contracts specifically. And he 22 said he believed that they violated 563.39 as 19124 1 being unsafe and unsound. 2 Do you see that? 3 A. Yes. 4 Q. Did Mr. Bechtol also take the position 5 that in addition to the USAT contracts being 6 unsafe and unsound, that the UFGI contracts were 7 also illegal? 8 A. I don't believe so. Again, I'm just 9 trying to read this to try to refresh my 10 recollection. 11 Q. Take a take a moment to read it. 12 A. According to this memo, it says that 13 FSLIC's position was that the compensation was 14 unsafe and unsound. 15 Q. And you're making reference to which 16 paragraph on which page? 17 A. The last sentence on Page 1 to the 18 continuation of Page 2. 19 Q. Okay. Then he goes on, as we look at 20 the bottom of the -- 21 A. I'm not sure if he's talking about UFG 22 or USAT here. It's not clear to me now. 19125 1 Q. As you go down, there is a discussion 2 in about the fourth paragraph down regarding the 3 UFGI contracts. 4 Do you see that? And do you recall 5 that he also took the position that the UFGI 6 contracts were illegal? 7 A. That's what it's saying, yes, sure. 8 Q. Again, he takes the position that, 9 first, they needed to comply with 563.39(b)(4). 10 Do you see that? 11 A. Yes, I do. 12 Q. And in addition, he also states that 13 the UFG contracts did not comply with 563.39. 14 This violated 12 USC Section 1730a(c)(i)(A) of the 15 Savings and Loan Holding Company Act. 16 Do you know what he was referring to 17 there, sir? 18 A. I might have at the time. I don't now. 19 Q. Well, it states that this was a 20 provision that prohibits acts by holding companies 21 which have the purpose or effect of evading the 22 laws and regulations applicable to S&Ls. 19126 1 Do you see that? 2 A. Yes. 3 Q. And by entering into the UFGI 4 employment contracts, the effect was to provide 5 severance benefits to employees of USAT after 6 their severance, correct? 7 A. Would you repeat that again? 8 Q. By entering into the UFGI contracts, 9 their purpose was to provide severance benefits to 10 employees of USAT in the event that USAT was 11 placed into receivership? 12 A. No. I think the entering into the 13 contracts was to make sure the employees stayed 14 with USAT during this period when it was important 15 to keep them there. 16 Q. And their effect was to provide 17 severance benefits to those employees after USAT 18 was placed into receivership, was it not? 19 A. One of the provisions in the agreement 20 was that if somebody got severed, they would be 21 entitled to severance benefits, yes. 22 Q. Under the existing regulations 19127 1 governing USAT when USAT was placed into 2 receivership as we've seen with your contractual 3 arrangements with USAT, those provisions were 4 subject to being voided by the FSLIC, weren't 5 they? 6 A. I think that's what they said. 7 Q. So, the effect of the UFG contract was 8 to evade that provision governing USAT which 9 provided for the termination of severance 10 benefits? 11 A. I don't believe that that's accurate. 12 There was no attempt to evade the regulations. 13 Q. But it had the effect of providing 14 severance benefits when USAT's own contracts were 15 declared void, correct? 16 A. It had the effect of -- one of the 17 effects it had was to provide severance benefits 18 if, yeah, USAT had some contract that was declared 19 void, that's correct. 20 Q. And those contracts that were declared 21 void by USAT were declared void pursuant to 22 applicable S&L regulations, weren't they? 19128 1 A. Without getting into this whole 2 discussion we had last week, the USAT contracts 3 never were effective. The UFGI contracts were 4 effective, and it wasn't an attempt to evade 5 anything. 6 Q. Now, you indicated initially that only 7 two people had made claims against USAT as a 8 result of USAT being placed into receivership. 9 Ultimately, did the number of people 10 who made claims against USAT increase? 11 A. Against USAT? 12 Q. UFGI. 13 A. Yes, they did. 14 Q. Okay. And in addition to Mr. Crow and 15 Mr. Williams, did Mr. Wolfe and Mr. Gray and 16 Mr. Jackson and Mr. Stodart all apply for 17 severance benefits from UFGI? 18 A. Yes, they did. 19 Q. And as a consequence of those 20 applications, did UFGI ultimately negotiate 21 settlement arrangements with all of those 22 individuals I've just identified? 19129 1 A. Yes. There was a lot of things in 2 between then and the settlement; but yes, that is 3 correct. 4 Q. If you'll take a look at Exhibit T8156. 5 This has been previously admitted as Tab 457. 6 Now, this appears to be a memorandum 7 dated August the 3rd, 1989; and it's from you to 8 the board of directors. 9 Which board are you writing to at this 10 point? 11 A. UFGI. 12 Q. And it indicates that as a result of a 13 telephone board meeting on Monday, we're now 14 settling with the employees who had employment 15 contracts with the exception of Dr. Munitz and 16 myself which still remain open. 17 Do you see that? 18 A. Yes. 19 Q. And on the next page, there is a list 20 of the individuals that were settled with. And 21 then after that, there's a -- a draft release 22 agreement between Michael Crow and UFGI. 19130 1 Do you see that? 2 A. Yes, I do. I'm not sure this is a 3 draft. 4 Q. I'm sorry. A release agreement. 5 Are these the individuals that settled 6 with UFGI and the amounts for which they settled? 7 A. Yes, they are. 8 Q. So, Mr. Crow, as a result of his 9 severance, made a claim against UFGI for $655,926; 10 is that correct? 11 A. Yes, it is. 12 Q. And he ultimately settled for $142,528, 13 correct? 14 A. Right. 15 Q. And the assertion of the claim arose 16 out of the July 30th, 1988 UFGI employment 17 agreement? 18 A. The June 30, yes, that's correct. 19 Q. And does this claim also pertain to the 20 USAT July 1st, 1988 employment agreement? 21 A. No. 22 Q. Those had been terminated? 19131 1 A. Yes. 2 Q. Okay. And at the time that all of the 3 employment agreements were entered into -- strike 4 that. 5 What is the -- the next page, it 6 indicates there's an agreement and release. 7 What was the purpose of the agreement 8 and release? 9 A. It was to memorialize all of these 10 payments and to get a release from whoever was 11 getting the payment. 12 Q. And did Mr. Crow have an outstanding 13 obligation to UFGI or a note that he owed to UFGI 14 in approximately the amount of $70,000? 15 A. I think, at this time, that note had 16 already been cancelled. That's my recollection. 17 Q. So that Mr. Crow, in addition to 18 receiving $142,528, also received -- had his note 19 to UFGI cancelled? 20 A. I believe the note had been cancelled. 21 Q. Okay. Now, it indicates here in the 22 cover memo that this did not resolve issues with 19132 1 respect to you and Mr. Munitz. 2 You and Mr. Munitz, you indicated, had 3 remained on for a period of time through -- well, 4 you indicated you had through 1991. 5 Did Mr. Munitz remain on as an employee 6 of UFGI for a similar period of time? 7 A. I don't know when Dr. Munitz left UFGI. 8 Q. Okay. And do you recall how much you 9 were paid in 1989 for your services at UFGI? 10 A. No, I don't. 11 Q. Take a look at T8171. This is a new 12 document. And I'll give you, actually, a group of 13 documents. 14 MR. RINALDI: Let's just put these all 15 in front of him together. 8172 and 8173. I seem 16 to be missing a document. 17 Q. (BY MR. RINALDI) Which one did I give 18 you there? 19 A. You gave me T8171. 20 MR. RINALDI: Let me hand two copies up 21 to the Court. I don't believe that this has been 22 entered. This is the United Financial Group proxy 19133 1 statement for 1990. And then -- 2 THE COURT: All right. We'll be off 3 the record. 4 5 (Discussion held off the record.) 6 7 THE COURT: Back on the record. 8 Q. (BY MR. RINALDI) Take a look at T8171. 9 This is the UFG 1990 proxy statement. 10 Is that a document you supervised the 11 preparation of? 12 A. Yes. 13 MR. RINALDI: Your Honor, we move the 14 admission of T8171. 15 MR. VILLA: No objection. 16 THE COURT: Received. 17 Q. (BY MR. RINALDI) It indicates here on 18 about Page 7 that you continued to be employed by 19 USAT -- I'm sorry -- UFGI as did Mr. Munitz. 20 Do you see that? 21 A. Yes. 22 Q. What was the amount of your 19134 1 compensation for the year 1989? 2 A. Just reading this, it says 381,148. 3 Q. And how about Mr. Munitz'? 4 A. 337,937. 5 Q. Now, did -- were you ultimately 6 successful in reaching a settlement with respect 7 to your severance claims with UFGI? 8 A. Yes. 9 Q. And do you recall what the nature of 10 that settlement was? 11 A. It was along the lines of the 12 settlements we just looked at. 13 Q. How much did you receive as a result of 14 your severance from UFGI? 15 A. 143,500. 16 Q. What page are you reading from there, 17 sir? 18 A. Page 8. 19 Q. And even though you continued to serve 20 as the -- as an employee of UFGI and earned 21 $381,148 in 1989, you received a severance payment 22 from UFGI? 19135 1 A. Yes. 2 Q. Okay. What was the purpose of the 3 severance payment if you continued to be employed 4 by UFGI? 5 A. Well, under the UFGI employment 6 agreement, I was entitled to a severance payment. 7 We had outside counsel look at it, and that was 8 their review. 9 Q. And your severance payment was based 10 upon claims arising out of the employment 11 agreement that was entered into on June the 30th, 12 1988 with UFGI; is that correct? 13 A. Yes. 14 Q. And your original claim was 15 approximately $907,000? Is that what it says on 16 Page -- Exhibit 8171? 17 A. No. That's 907,000 -- 18 Q. I missread. You're absolutely correct. 19 Your original claim was 658,493; is that correct? 20 A. Right. 21 Q. And you settled your claim for 143,500? 22 A. Right. 19136 1 Q. Was that in addition to the 331,148 2 that's referenced on Page 7? 3 A. I believe so. 4 Q. So, in other words, in 1989, you 5 received severance benefits and salary payments 6 that exceeded half a million dollars from UFGI? 7 A. Yes. 8 Q. And this was at a point in time when 9 UFGI had negative equity and had -- is that 10 correct? 11 A. I'm not sure if it had negative equity 12 at that time or not. I don't know. 13 Q. At this point in time, was the FSLIC 14 still attempting to enforce or making claims 15 against UFGI under the net worth maintenance 16 obligation? 17 A. At this time, we had reached an 18 agreement with FSLIC at the end of '89 as to how 19 things were going to be handled. It never 20 happened, but that's where we were. 21 Q. At this time, FSLIC was still asserting 22 a claim against UFGI for the maintenance of the 19137 1 net worth of USAT? 2 A. Again, at this point in time, we had 3 reached what we thought was a settlement agreement 4 with FSLIC as to how things would be handled and 5 we were waiting to implement that settlement 6 agreement. 7 Q. And under that settlement agreement, 8 FSLIC was asserting a claim against UFGI for its 9 obligation under the net worth maintenance 10 obligation? 11 A. It was a settlement of that claim and 12 other claims. 13 Q. And it never came to pass? 14 A. It ultimately -- it did come to pass 15 many years later, but it didn't come to pass in 16 1990. 17 Q. When it came to pass many years later, 18 were you still employed by UFGI? 19 A. No. 20 Q. Are you familiar with the terms of that 21 settlement, sir? 22 A. I was. You would have to show it to 19138 1 me. 2 Q. Do you recall that substantially all of 3 the assets of UFGI were used to satisfy the net 4 worth obligation? 5 A. I believe all of the -- substantially 6 all of the assets of UFGI were used to settle all 7 of the claims. 8 Q. And do you recall that the largest 9 single claim which represented over 80 percent of 10 the settlement amount was to the FDIC? 11 A. Again, I think -- the FSLIC made 12 claims, and UFGI disputed those claims. And 13 ultimately, in 1996 or 1997, it was settled. 14 Q. And while those claims and that 15 settlement was pending, you and Mr. Munitz settled 16 your previous employment agreement with UFGI; and 17 in your case, you received $143,500. Is that 18 correct? 19 A. While those were pending, that is 20 correct. 21 Q. And in Mr. Munitz' case, how much did 22 he assert as a claim against UFGI? 885,000? 19139 1 A. That's what it says. 2 Q. And ultimately, he received a payment 3 of $98,000? 4 A. That is correct. 5 Q. Now, after you settled with UFGI in 6 1989, did you continue to be employed by UFGI? 7 A. Yes. 8 Q. This is Exhibit T8173. It's a new 9 exhibit. 10 MR. RINALDI: It has not been 11 previously admitted, nor has the previous exhibit, 12 Your Honor, which was T8171. I would move the 13 admission of T8171, Your Honor. 14 THE COURT: I believe I already 15 received that. 16 Q. (BY MR. RINALDI) Have you had a moment 17 to look at this, Mr. Berner? 18 A. Yes. 19 Q. Does this appear to be the proxy 20 statement for 1992 of -- 21 A. Well, it's a draft; but I assume it's 22 substantially what the final was. 19140 1 Q. Okay. And if we turn to Page 6, it 2 indicates that in 1991, you were still employed by 3 USAT -- UFGI. 4 Do you see that? 5 A. Yes. 6 Q. In the year 1991, you received 7 $250,376? 8 A. Yes. 9 Q. In the prior year, did your salary 10 continue at the same level as it had been in 1989? 11 A. In 1989? 12 Q. Yes. 13 A. Again, if you give me the proxy, I'll 14 be able to tell you what -- 15 Q. I don't have the proxy now. Perhaps 16 after the break I can show it to you. 17 A. Perhaps somewhere in the same range. 18 Q. I notice this number decreased. Is 19 that because you didn't work the full year 1991? 20 A. I didn't work the full year for UFGI, 21 that's correct. 22 Q. That's why it reflects a lower payment 19141 1 than you had received in the year 1989? 2 A. I assume that's right. 3 Q. Okay. And after you terminated your 4 employment with UFGI, did you continue to be 5 associated with them in any way? 6 A. I acted as outside counsel. 7 Q. And as outside counsel, were you then 8 on a retainer? 9 A. I received a retainer, but we billed by 10 the hour. 11 Q. What was the nature of the retainer? 12 A. I believe it was $150,000 per year for 13 a two-year period. 14 Q. Do you have any continuing relationship 15 with UFGI at this point in time? 16 A. I don't believe so. With UFGI? No. 17 UFGI is gone. 18 Q. Well, it hasn't quite gone. 19 After the two-year retainer was up, did 20 you continue to provide legal services to UFGI on 21 an hourly basis? 22 A. Yes, I did. 19142 1 Q. At this point in time, do you have any 2 ongoing relationship with MCO or Federated? 3 A. Legal relationship? 4 Q. Yes. 5 A. I don't do any legal work for them. 6 Q. Did you ever do any legal work for 7 either MCO or Federated? 8 A. The firm did for two or three years. 9 Q. At this point in time, do you have any 10 agreement between you and MCO or Federated 11 regarding this particular proceeding? 12 A. Yes. 13 Q. And what is the nature of that 14 agreement, sir? 15 A. They are at this point in time paying 16 my legal fees. 17 Q. And in the event that -- do you have 18 any sort of indemnification agreement or 19 understanding in the event you are found to have 20 engaged in unsafe or unsound conduct or you are 21 found to be liable in any way by this tribunal? 22 A. I have no indemnification by them. 19143 1 Q. Have they continued throughout this 2 proceeding to pay the legal fees? 3 A. They didn't for a long period of time. 4 They have over the last couple of years. 5 Q. Do you have any obligation to indemnify 6 them for the legal fees in the event -- 7 A. I believe so. 8 Q. Now, I have a couple of final questions 9 on the issue of compensation that are somewhat 10 unrelated to what we've talked about -- 11 THE COURT: Excuse me, Mr. Rinaldi. 12 Did you offer T8173? 13 MR. RINALDI: If I did not, I would 14 offer it at this time. I would also like to offer 15 T8172. We seem not to have the requisite number 16 of copies. So, I will obtain those and, after the 17 lunch break, provide them to the Court. 18 MR. VILLA: No objection to T8173. No 19 objection to T8172. 20 THE COURT: Received. 21 MR. RINALDI: 8172 -- I don't have a 22 copy of that. Apparently, we left the copies 19144 1 downstairs. 2 THE COURT: When you get a copy, I'll 3 receive it. 4 MR. RINALDI: That's the intervening 5 copy. 6 Q. (BY MR. RINALDI) Could you take a look 7 at Volume I that we have in this set? About 8 halfway through there's an Exhibit T8038. And if 9 you would, just take a look at that for a moment. 10 A. I'm sorry. T80 -- 11 Q. -- 38. It should be the minutes of the 12 compensation committee of United Financial Group 13 and United Savings Association of Texas dated 14 February 11th, 1988. 15 Do you see that? 16 A. Yes, I do. 17 Q. And on the second page, the first full 18 paragraph makes reference to a discussion that you 19 had with the compensation committee. It says, 20 "Mr. Berner discussed the need for United Savings 21 Association of Texas to adopt certain health, 22 medical insurance, and other plans which were 19145 1 currently in the name of UFGI." 2 Do you see that? 3 A. Yes, I do. 4 Q. Do you recall what that refers to, sir? 5 A. No, I don't. 6 Q. Okay. Do you recall whether, as a 7 consequence of the activities of the compensation 8 committee, the board of USAT ultimately adopted 9 those plans? 10 A. I don't recall one way or the other. 11 Q. Take a look at the next document in 12 your book which is T8039. 13 And I take it from your answer that you 14 don't recall what the need was for USAT to adopt 15 the plans from UFGI? 16 A. No, I don't. 17 Q. Were the employee benefits plans that 18 covered the individuals that worked for UFG and 19 USAT sponsored by UFGI at this point in time? 20 A. I don't know. 21 Q. If you would turn to Page 24 and the 22 top of 25 of Exhibit T8039, you'll see it makes 19146 1 reference to the fact that the USAT board has 2 affirmed and ratified the action -- it talks about 3 all resolutions and any and all exhibits thereto, 4 a copy of which has been presented and received by 5 the board of directors at this meeting adopted by 6 the compensation committee. 7 Do you see that? 8 A. Yes, I do. 9 MR. VILLA: Was it the one at the 10 bottom of 24 or top of 25? 11 MR. RINALDI: The bottom of 24 is where 12 I was reading from. 13 MR. VILLA: Thank you. 14 Q. (BY MR. RINALDI) Do you recall that the 15 board of USAT affirmed and ratified the actions of 16 the compensation committee and adopted the health, 17 medical, insurance, and other plans that were 18 previously in the name of UFGI? 19 A. Well, I didn't. But I'm seeing this, 20 and it certainly says that. 21 Q. What impact did that have on USAT from 22 a financial standpoint? Did they then become 19147 1 responsible for the maintenance of those health 2 benefit plans? 3 A. I don't know. 4 Q. And then if you look at the top of 5 Page 25, it does indicate that a resolution is 6 passed and they adopt certain programs described 7 in Exhibit C. 8 Do you see that? 9 A. Yes, I do. 10 Q. We don't have an Exhibit C attached to 11 this document, but if you would take a look at 12 Exhibit A1140 -- and here. I have an extra copy. 13 It will save you the trouble of fishing around. 14 MR. RINALDI: This has previously been 15 admitted, Your Honor, as Tab 1407. 16 Q. (BY MR. RINALDI) These are the minutes 17 of the UFG board of directors meetings dated 18 February 11th, 1988. And on Page 8 of that 19 document -- 20 A. Page 8? 21 Q. Yes -- there's a resolution that says 22 that, "Effective February the 11th, 1988 (the 19148 1 effective date), the company hereby approves, 2 adopts, ratifies, consents to and agrees to the 3 adoption, assumption, and continuation by USAT 4 without a gap or lapse in time, effect or 5 coverage, each and every plan, fund, or program 6 described in Exhibit A." 7 Do you see that? 8 A. Yes, I do. 9 Q. And then attached is an exhibit -- 10 Exhibit A, and it lists a number of health benefit 11 plans. 12 Does that refresh your recollection 13 that USAT assumed responsibility for a number of 14 health plans that are listed in Exhibit A that had 15 previously been the responsibility of UFGI? 16 A. It doesn't. I assume if it says what's 17 it's doing, that's the exhibit. It does not 18 refresh my recollection. 19 Q. And at this point in time, February 20 the 11th, 1988, USAT was then failing to meet its 21 minimum capital requirements, was it not? 22 A. I believe that's right. 19149 1 Q. Now, the last set of documents I want 2 you to look at on this subject begins with 3 Exhibit T8105. And I will hand you up a copy. 4 This has not previously been admitted. I'm not 5 sure if it's in your book. 6 MR. RINALDI: Your Honor, I would move 7 the admission of T8105. This appears to be a memo 8 to Barry Munitz, Jenard Gross, Larry Connell from 9 Arthur Berner dated September 30th, 1988. If you 10 would just give me a moment to catch up. 11 Q. (BY MR. RINALDI) Have you had a chance 12 to look at that document, sir? 13 A. I've looked at the memo. Do you want 14 me to read the -- 15 Q. Well, do you recognize the attachment? 16 A. Yes, I do. 17 Q. Okay. Now, in the -- this is in 18 reference to the 1988 arbitrage reward bonus plan. 19 Do you see that? 20 A. Yes. 21 Q. And it indicates here that a draft of 22 the consent agreement prevents us from instituting 19150 1 new bonus plans without the PSA approval. 2 When you talk about the draft of the 3 consent agreement, what are you referring to, sir? 4 A. I believe there was a draft consent 5 agreement that ultimately got signed in November. 6 The one we were referring to earlier today -- 7 Q. Is that the consent agreement that was 8 entered into on November the 7th, 1988? 9 A. Right. I think there was a draft that 10 was being discussed prior to that time. 11 Q. As we discussed, under that draft, 12 bonus plans or any new bonus plans were prohibited 13 by the express terms of the consent agreement 14 unless they were approved by the supervisory 15 agent; is that correct? 16 A. I think that's what it said. I'm not 17 positive, but I think that's what it said. 18 Q. And here you say that "The consent 19 agreement prevents us from instituting a new bonus 20 plan without PSA approval." 21 What's the PSA? 22 A. Principal supervisory agent. 19151 1 Q. That would have been Mr. Neil Twomey, 2 correct? 3 A. Correct. 4 MR. VILLA: I believe it was 5 Mr. Barclay. 6 Q. (BY MR. RINALDI) "However" -- it goes 7 on and says, "I believe that the board of 8 directors' approval of the referenced plan was 9 made prior to receiving the consent agreement and, 10 therefore, should be permissible." 11 Do you see that? 12 A. Yes. 13 Q. What did you mean by that sentence, 14 sir? 15 A. Just that. The arbitrage reward bonus 16 plan had been agreed to by the board certainly 17 prior to -- certainly prior to November 7th. This 18 is looking at the draft and saying it was approved 19 prior to getting the draft. So, it shouldn't be a 20 problem. 21 Q. Now, had the arbitrage reward bonus 22 plan actually been executed by the board of 19152 1 directors at this time? 2 A. I don't know. 3 MR. VILLA: Your Honor, I'm going to 4 object. I don't believe there's an issue here 5 that's been raised by the Notice of Charges or 6 addressed by a prior witness on the question of 7 the application of the consent agreement and 8 whether there's been a violation of a proposed 9 consent agreement or an executed consent 10 agreement. 11 I certainly didn't depose Mr. Twomey 12 about that issue when I had the opportunity to 13 depose him. Secondly, I don't believe that the 14 arbitrage bonus plan is an issue in this case. 15 The issues involved wholly different questions of 16 compensation. 17 So, I believe that this goes beyond the 18 scope of the Notice of Charges and really 19 unfavorably impacts upon us because when we take 20 depositions of their supervisory agents and 21 others, we don't focus on what appears to be some 22 discussion that a bonus plan -- if the Court wants 19153 1 to hear it, I understand. I think it opens up new 2 areas. I object to it. 3 MR. RINALDI: Your Honor, I have two 4 documents to show the witness on this subject. I 5 think it goes to the state of mind of Mr. Berner 6 with respect to all compensation plans in general, 7 and I simply want to ask him about whether he was 8 aware that the regulators had proposed a consent 9 agreement that would have prohibited entering into 10 new bonuses at the time the board entered into the 11 equity arbitrage bonus. 12 THE COURT: Are you saying this 13 arbitrage reward bonus plan was a new agreement to 14 be entered into? 15 MR. RINALDI: I certainly am, 16 Your Honor. It was not executed until after 17 they -- the board of directors of USAT had notice 18 that because of the materially insolvent condition 19 of USAT, that it was the intention of the 20 regulators to impose a consent agreement which 21 would limit any future bonus programs. And having 22 been placed on notice of that, Mr. Berner then 19154 1 writes to the board, "Well, we haven't yet entered 2 into the consent agreement. We think we can go 3 along and enter into this bonus program." 4 I just want to ask him: Did they enter 5 into the program? And if so, did that then result 6 in a dissipation of assets from USAT? It takes 7 two documents, and then we're finished. 8 MR. VILLA: That's exactly what I 9 object to. We're not talking about violation of 10 any consent agreement in the arbitrage bonus plan. 11 The arbitrage bonus plan is nowhere in this case. 12 The violation of the consent agreement is nowhere 13 in this case. Nobody's been deposed on the issue, 14 and I think that it goes beyond the Notice of 15 Charges. It's -- however many questions it 16 involves and however many documents it involves, 17 it's not an issue in this case. 18 THE COURT: I'll sustain the objection. 19 MR. RINALDI: Your Honor, I think it 20 goes to Mr. Berner's state of mind. He's a man 21 who's willing to recommend to the board to enter 22 into a bonus plan at the same time he's aware that 19155 1 the supervisory agents have advised him that 2 the -- that a supervisory agreement is pending 3 under which they wouldn't be able to make these 4 payments. And I simply wanted to point out to the 5 Court and establish that notwithstanding the fact 6 that he was aware of the supervisory concerns as 7 reflected in the consent agreement that the board, 8 rather cavalierly, I might add, go ahead and 9 implement a new bonus program that results in a 10 further dissipation of assets from USAT. 11 It has nothing to do with any 12 additional liabilities in this case. Rather, it 13 goes to the question of what was the state of mind 14 of the USAT board, what was the state of mind of 15 Mr. Berner, what was their willingness to go ahead 16 in the face of supervisory advice, that these 17 kinds of programs were going to be terminated 18 under the consent agreement. 19 THE COURT: I think if you want to go 20 into it, it should have been part of the Notice. 21 I sustain the objection. 22 MR. RINALDI: Your Honor, I'm going to 19156 1 start into a new area with Mr. Berner; and I would 2 suggest that since it's a totally different set of 3 documents, that this might be an appropriate time 4 to take the lunch break. And then we can come 5 back and start with some new material. 6 THE COURT: How much more do you have? 7 MR. RINALDI: I will start into some 8 areas that relate to his activities as the 9 chief -- or as the general counsel of USAT and 10 UFGI. I think the examination may take an hour, 11 hour and a half; and then Mr. Guido has a number 12 of questions that he has regarding a different 13 subject matter. 14 THE COURT: All right. We'll adjourn 15 until 1:30. 16 17 (Whereupon, a lunch break was taken 18 from 12:26 p.m. to 1:37 p.m.) 19 20 THE COURT: Be seated, please. We'll 21 be back on the record. 22 Mr. Rinaldi, you may continue. 19157 1 MR. RINALDI: Yes, Your Honor. There 2 were two things that I wanted to clarify for the 3 record. 4 First of all, at the conclusion of the 5 testimony this morning, the Court indicated that 6 it would not allow me to go into the equity 7 arbitrage bonus plan. I advised the Court at that 8 time I had two documents that I needed to put in. 9 What I would like to do at this point is, pursuant 10 to 12 CFR 509.36(b)(3) and (2), make a proffer to 11 the Court about what I expect to put in in terms 12 of the two documents and what I would expect the 13 evidence to show. 14 THE COURT: All right. Proceed. 15 MR. RINALDI: T8105 which was the memo 16 from Arthur Berner to Mr. Munitz, Mr. Gross, and 17 Mr. Connell indicated that as of October the 4th, 18 1988, the equity arbitrage bonus plan had not been 19 adopted. And as of that date, Mr. Berner and the 20 members of the board were aware that the 21 supervisory agent had presented a consent 22 agreement that would have prohibited them from 19158 1 entering into any future bonuses. 2 The evidence would further show that, 3 notwithstanding that knowledge, they went ahead 4 and, on October the 4th, 1988, at the minutes of 5 the joint meeting of the board of directors of UFG 6 and USAT, approved the equity arbitrage bonus 7 plan. And I would proffer in connection with that 8 Exhibit T8108, which is already admitted at 9 Tab 443. 10 The evidence would further show that at 11 the point in time when the bonus plan was created, 12 Mr. Gross, by his own admission in the minutes of 13 T8108, acknowledged that USAT had a negative net 14 worth of $400 million and, notwithstanding that, 15 they went ahead and approved a bonus plan that 16 was -- would have dissipated assets from USAT. 17 USAT was not responsible for the full $300,000 18 under the bonus plan. 19 The evidence would further show through 20 Exhibit A3106 which is the UFG 1989 proxy 21 statement which has previously been admitted at 22 Tab 93 that, in fact, USAT paid about $149,000 19159 1 toward the equity arbitrage bonus plan. 2 THE COURT: Well, the figure you used 3 before, 300 million, did you -- 4 MR. RINALDI: 300,000. I'm sorry. 5 THE COURT: Okay. 6 MR. RINALDI: I believe the evidence 7 would show that MCO, Federated, and USAT all 8 participated in the equity arbitrage program and, 9 therefore, they contributed shares to the bonus 10 arrangement. The distributive share of USAT, 11 based upon the proxy statement in 1989, was 12 $149,000. 13 In essence, at a point in time when 14 USAT was clearly under water, they approved a 15 bonus program that cost USAT $149,000. 16 The purpose of submitting this evidence 17 was to show the state of mind of both the board of 18 directors and Mr. Berner and their willingness to 19 approve bonus programs and programs that would 20 enhance their own financial -- or financial 21 benefit of the executive officers of USAT at a 22 point in time when USAT clearly did not have 19160 1 assets that they could afford to use for those 2 purposes. 3 With that, I would then proffer T8105, 4 which was the one document that has not been 5 previously admitted, Your Honor. 6 THE COURT: Well, I sustained the 7 objection. 8 MR. RINALDI: During the morning 9 session, I also asked Mr. Berner about the 1991 10 proxy statement. We did not have a copy of that 11 at the time. This has been marked as T8172 and 12 has not been previously admitted. I advised the 13 Court at that time that I would arrange to have 14 copies provided to the Court after the break. I 15 had only one question I wanted to ask the witness 16 regarding this particular document. 17 Q. (BY MR. RINALDI) If you turn to Page 6 18 of the document, it indicates that -- 19 MR. RINALDI: Your Honor, with respect 20 to the proffer that I made, I believe that the 21 Rules of Civil Procedure governing this procedure 22 require that I submit to you a copy of the 19161 1 proffered document, which is T8105. So, I will 2 arrange at the end of the day to submit that in an 3 envelope or something so that it's available for 4 the Court and then will be available for 5 subsequent review should this be a matter we 6 choose to pursue if that's appropriate with the 7 Court. 8 THE COURT: All right. 9 Q. (BY MR. RINALDI) Mr. Berner, on Page 6, 10 it indicates that in 1990, you continued to be 11 employed by USAT -- UFGI; and during that year, 12 you received $328,352 in compensation. Is that 13 correct? 14 A. Yes. 15 Q. And Mr. Munitz continued to be employed 16 by UFGI at this point in time and received 17 $116,866 in compensation? 18 A. Yes. 19 Q. Let me just ask you: At this point in 20 time, since USAT had gone into receivership, what 21 was the remaining nature of UFGI's business? 22 A. UFGI, of course, was a public company. 19162 1 And during 1989, 1990, and subsequent years, part 2 of the business was to deal with the regulatory 3 agencies and try to resolve all of the outstanding 4 issues that existed. 5 Q. Did it have any other business than 6 dealing with the regulatory agencies to resolve 7 the outstanding issues left over from the 8 receivership? 9 A. At that point, no. 10 Q. And with respect to Mr. Munitz, what -- 11 was he also employed as the president of MCO at 12 this point in time? 13 A. I don't know. 14 Q. Do you recall, was he affiliated in 15 some way with MCO? 16 A. I think he was, but I'm not positive. 17 Q. Okay. I believe that it indicates in 18 here -- if you look at Page 5, it indicates 19 that -- that Mr. Munitz has also been 20 vice chairman of the board of MAXXAM and president 21 and trustee of Federated since September of 1982. 22 Do you see that? 19163 1 A. Right. 2 Q. Do you know whether Mr. Munitz was also 3 being compensated by either Federated or MAXXAM at 4 this point in time? 5 A. I don't know. 6 Q. But during the entire period of time 7 from 1982 until 1990, he was an employee, it would 8 appear, of Federated or the president of 9 Federated? 10 A. Again, just reading, yeah, he was 11 president and trustee of Federated. 12 Q. And once again, 8172 was a proxy 13 statement that was prepared under your 14 supervision? 15 A. Yes. 16 MR. RINALDI: It's already been 17 admitted, has it not, Your Honor? 18 THE COURT: I didn't receive it. I 19 didn't have a copy. I believe Mr. Villa indicated 20 he had no objections. 21 MR. VILLA: No objections. 22 THE COURT: Received. 19164 1 Q. (BY MR. RINALDI) Mr. Berner, I would 2 like to now turn to some slightly different 3 material. You have before you a new volume. And 4 the first two documents I would like to show you 5 are the United Financial Group, Inc. proxy 6 statement for 1986 which is Tab 88 and it's 7 Exhibit A3013. In addition, I would also like to 8 show you the 1987 proxy statement for UFGI, which 9 is A3014 and Tab 92. 10 A. (Witness reviews the documents.) 11 Q. Have you had a chance to look briefly 12 at those documents? 13 A. Yes. 14 Q. Now, as the general counsel for UFGI, 15 one of your responsibilities would have been to 16 supervise the preparation of UFGI's annual proxy 17 statements; is that correct? 18 A. That's correct. 19 Q. And what actually is a proxy statement, 20 sir? 21 A. A proxy statement is information that's 22 supplied to shareholders of the company for their 19165 1 annual meeting where things will be voted on. It 2 could also be a special meeting. This one happens 3 to be for the annual meeting. 4 Q. What is the nature of the information 5 that proxies contain? 6 A. It contains -- it's all spelled out in 7 the Securities Act. It contains information about 8 the management, contains information about 9 compensation. It will contain information about 10 committees, things that are going to be voted on. 11 Q. Does it also generally list the 12 principal shareholders of the corporation? 13 A. Yes, it does. 14 Q. Okay. Now, directing your attention to 15 A3013, I notice that this is a document that was 16 actually signed by James L. Pledger; and it's 17 dated March the 31st, 1986. However, I believe 18 you previously testified that you would have been 19 employed for some five months -- by UFG for some 20 five months prior to the submission of this 21 document; is that correct? 22 A. I think that's right. 19166 1 Q. Okay. Now, would you have played any 2 role in the preparation or the supervision of the 3 preparation of this particular document? 4 A. Yes, I would have. 5 Q. Okay. And what would your role have 6 been? 7 A. I would have reviewed it, reviewed the 8 drafts of the document. 9 Q. And you were Mr. Pledger's supervisor 10 at this point in time? 11 A. Yes. For UFGI, yes. 12 Q. Now, directing your attention to the 13 second page, it indicates an array of information 14 relating to ownership of UFGI. 15 A. The second page of -- 16 Q. Well, Page 2, which is Table 1. 17 A. Okay. 18 Q. And in particular, directing your 19 attention to Table 1. It identifies there the 20 ownership of common shares of Federated 21 Development Company and any ownership of common 22 shares of MCO Holdings and it also identifies some 19167 1 Series C stock. 2 How did you determine what the 3 Federated ownership level was with respect to 4 UFGI's shares? 5 A. Well, there were a couple of ways. I'm 6 not sure exactly for this document. But you would 7 send out officers and directors and 5 percent 8 stockholders questionnaires to people; and also, 9 they would be filing at various times what's 10 called a 13D or 13G filing with the SEC. 11 Q. When you sent out those questionnaires, 12 would they typically go to people like Mr. Hurwitz 13 or Federated or MCO, or would they only go to the 14 officers of MCO? 15 A. They would go to Mr. Hurwitz, 16 Federated, people in MCO. 17 Q. Would that have been done under your 18 supervision, sir? 19 A. Yes. 20 Q. Now, what was the UFGI or MAXXAM 21 ownership of common shares at or about March of 22 1986? 19168 1 A. MAXXAM? 2 Q. Yes. 3 A. I think MAXXAM was MCO Holdings. So, 4 it shows it as 1,104,098. 5 Q. And I notice that the numbers for 6 MAXXAM and Federated get aggregated. 7 What was the reason for that, if you 8 look in the footnote further down? Do you see 9 that? In footnote 3, it says, "Federated and MCO 10 owned an aggregate of 1,906,039 shares." 11 Why was it that the shares of MCO and 12 Federated were aggregated? 13 A. They had filed a 13D schedule with the 14 SEC showing that they were a group. 15 Q. And then further down, it talks about 16 the Kozmetsky shares for an additional 17 1.4 percent. 18 Do you see that? 19 A. Right. 20 Q. So, would all three of their shares be 21 aggregated together? 22 A. I'm not sure. I'm not sure if 19169 1 Dr. Kozmetsky's shares were included there or not. 2 I'm not positive. 3 Q. But if Dr. Kozmetsky's shares were 4 included as part of the group, then it would have 5 increased the number of shares under the common 6 ownership of UFGI and -- I'm sorry -- under the 7 common ownership of MCO Holdings, Federated, and 8 Mr. Kozmetsky to something over 24 percent, 9 correct? 10 A. I'm not sure I understand your 11 question. 12 Q. Well, MCI -- I'm sorry. MCO Holdings 13 and Federated, it indicates, owned approximately 14 23.3 percent of the outstanding shares of UFGI. 15 Do you see that? 16 A. Right. 17 Q. Then it indicates that Mr. Kozmetsky 18 also owned 1.4 percent. So, if -- 19 A. Right. 20 Q. If they were all part of the same 21 group, then in total, they would have held over 22 24 percent of the outstanding shares, correct? 19170 1 A. If you're asking me if those three 2 numbers added together get above 24 percent, the 3 answer is yes. 4 Q. We'll look later at perhaps some other 5 documents that will help you out. 6 Now, there was a second class of stock, 7 which was the C preferred stock. 8 Do you see that? 9 A. Yes. 10 Q. Okay. And do you recall how MCO and 11 Federated came to acquire those shares? 12 A. This is before my time, but I believe 13 there had been an offering made at some previous 14 time before I got there and they had bought some 15 additional stock, the Series C stock. 16 Q. Okay. Was the Series C stock 17 ultimately convertible to common stock? 18 A. Yes. 19 Q. And that's what is described in 20 Paragraph 10, is it not? 21 A. Yes. 22 Q. So, if I owned one share of Series C, 19171 1 it would be convertible into two shares of common 2 stock on or after June 14, 1987, correct? 3 A. Right. 4 Q. Now -- and then in Paragraph 9, it 5 indicates that Federated and MCO owned 736,526 6 shares of the C preferred stock. 7 Do you see that? 8 A. Yes, I do. 9 Q. So that upon conversion, they would 10 acquire an additional -- in excess of an 11 additional 1.4 million shares; is that correct? 12 A. If it had been converted, yes, that's 13 right. 14 Q. And if that had occurred, that 15 1.4 million shares would have put them well above 16 25 percent ownership of UFGI, correct? 17 A. Yes, yes. 18 Q. Okay. Now, at this point in time, do 19 you recall that MCO and Federated had pending an 20 application to -- that had been granted by the 21 Federal Home Loan Bank Board to become a holding 22 company? 19172 1 A. I believe so, yeah. 2 Q. And if you take a look at the third 3 page, the last full paragraph, is that what's 4 described in the last full paragraph of that page? 5 A. Yes. 6 Q. And they had sought permission to go 7 above the 25 percent ownership level. 8 Do you see that? 9 A. Yes. 10 Q. Was it your understanding that if they 11 exceeded the 25 percent ownership level, they 12 would then be considered a holding company under 13 the savings and loan regulations? 14 A. I believe that's what I understood at 15 that time. 16 Q. And it makes reference there to the 17 fact that -- that the approval by the Bank Board 18 on December the 6th, 1984, had been subject to 19 compliance with several conditions. 20 Do you recall what the conditions were 21 that were placed upon the approval of the holding 22 company application that had been approved by the 19173 1 Bank Board? 2 A. No, I don't. 3 Q. Did you have occasion to deal with that 4 as the general counsel of UFGI or of USAT? 5 A. I don't believe so. 6 Q. Now, the final sentence there says that 7 MCO and Federated are currently discussing with 8 the Bank Board the possible modification of such 9 conditions. 10 Do you recall what that made reference 11 to? 12 A. Again, I believe there was discussions 13 relating to net worth maintenance; and there might 14 have been other discussions that I'm not aware of. 15 Q. When you say "net worth maintenance," 16 was one of the conditions that had been imposed 17 upon UFG as a condition of it exceeding the 18 25 percent ownership level a condition requiring 19 MCO and Federated to maintain the net worth of 20 USAT? 21 A. One of the conditions on UFG? 22 Q. I'm sorry. Imposed upon MCO and 19174 1 Federated. 2 A. Okay. Could you repeat that? I didn't 3 get the question. 4 Q. Was one of the conditions that was 5 imposed upon Federated and MCO as a condition of 6 their exceeding 25 percent ownership of USAT that 7 they maintain the net worth of USAT at some level? 8 A. I think that's right. Again, I don't 9 remember looking at those conditions; but I know 10 there was some discussion about net worth 11 maintenance. 12 Q. Okay. And did you -- were you involved 13 in any way with negotiating with the regulators 14 regarding that net worth condition? 15 A. No. 16 Q. And you don't recall having any 17 discussions with the regulators regarding the 18 modification of that condition? 19 A. There might have been some discussions 20 in connection with the subordinated debt deal, but 21 I wasn't negotiating with them about the 22 modifications. 19175 1 Q. Now, would you take a look at Page 3, 2 Paragraph 5? It makes reference there to the 3 ownership by Drexel Burnham Lambert of 488,931 4 shares. And that also appears on Page 2. 5 Do you see that? 6 A. Yes, I do. 7 Q. On Page 2, it indicates that Drexel 8 Burnham Lambert owned approximately 6 percent of 9 the outstanding common shares of UFGI? 10 A. Right. 11 Q. Do you know or did you ever have any 12 discussions with anyone at UFGI or USAT as to why 13 Drexel Burnham Lambert had acquired a 6 percent 14 ownership interest in UFGI? 15 A. I don't believe so. 16 Q. Did you ever discuss that with 17 Dr. Munitz or Mr. Hurwitz? 18 A. As to what? I don't think so. 19 Q. And during the time you served as the 20 general counsel, did that number fluctuate at all? 21 A. I believe it did. 22 Q. And what is your recollection at this 19176 1 point in time? 2 A. Again, I don't have a specific 3 recollection; but I would -- they would file a 13D 4 every year. And my recollection is that the 5 number changed from year to year. 6 Q. Can you tell what the value of Drexel's 7 investment was at this point in time in UFGI? 8 A. No, not from this. 9 Q. Well, take a look at Page 12. And it 10 indicates there under the stock option plans that 11 on March 14th, 1986, the NASDAQ, national market 12 quotation system, showed that UFGI shares were 13 then trading at $6 a share. 14 Do you see that? 15 A. No, I don't. I'm sure -- where is it? 16 Q. On Page 12 -- 17 A. Right. 18 Q. -- of Exhibit T1121. 19 A. Just point me to it. 20 Q. It's right under "stock option plans." 21 Do you see that? 22 A. I do now, yes. 19177 1 Q. So, if the shares were then trading at 2 $6 a share, Drexel's investment in UFGI at this 3 point would have been about $3 million or just 4 under that, correct? 5 A. When you say "Drexel's investment," you 6 mean what they acquired? 7 Q. The value of it. The value of their 8 shares at this point in time would have been 9 around $3 million? 10 A. Right. Also, you don't know how much 11 of these shares were owned beneficially and how 12 much were owned for whatever accounts. 13 $6 times whatever that number was, the 14 answer is yes. 15 Q. Can you look at the footnote on the 16 next page? It indicates that all of those shares 17 were beneficially owned; is that correct? 18 MR. EISENHART: May we know what page 19 we're talking about? 20 MR. RINALDI: We're looking at T1121, 21 the 1986 proxy statement. And if we look at 22 Page 3, which is the page following Table 1, at 19178 1 Footnote 5, it indicates that Drexel Burnham 2 Lambert beneficially owned 488,931 shares. 3 Do you see that? 4 A. Yes, I do. 5 THE COURT: Mr. Rinaldi, I don't have 6 that exhibit. 7 MR. RINALDI: I'm sorry. It's Tab 88. 8 It's alternatively marked as 3013. 9 THE COURT: Okay. I have that. You 10 said you were on Page 12? 11 MR. RINALDI: Well, Page 12 was the per 12 share price at $6. 13 THE COURT: Where is it on there? 14 MR. RINALDI: I'm sorry? 15 THE COURT: I see a statement that 16 says, "March 14th, '86. The enclosing common 17 stock was reported as" -- okay -- "$6." Okay. 18 Got you. 19 MR. RINALDI: Mr. Berner had indicated 20 he didn't know what the value of Drexel's 21 investment was because he wasn't certain if they 22 beneficially owned all the shares; and then I 19179 1 pointed him to Page 3, Paragraph 5. 2 Q. (BY MR. RINALDI) In the third line, it 3 indicates that they beneficially owned the shares. 4 Do you see that, sir? 5 A. Yes, sir. 6 Q. In the next full sentence, it talks 7 about Drexel Burnham Lambert granted to MCO a call 8 option on 300,000 shares of the company's common 9 stock. 10 Do you see that? 11 A. Yes. 12 Q. Okay. How did you learn that Drexel 13 had granted 300,000 shares as a call option to 14 MCO? 15 A. My recollection is it was either a 16 conversation with Dr. Munitz or with Howard 17 Bressler who told me about this option. 18 Q. And who was Howard Bressler? 19 A. He was general counsel at MCO. 20 Q. And did he office in the same building 21 that you were officed in? 22 A. No. 19180 1 Q. Where was Mr. Bressler? 2 A. He was in Los Angeles, I believe, 3 somewhere. 4 Q. How did the subject of the 300,000 5 shares come up? 6 A. Again, in connection with the 7 preparation of it, he would have sent out a 8 questionnaire, an officers and directors 9 questionnaire. I think that's the way it came up. 10 Q. And at this point in time, did 11 Mr. Bressler then send you a copy of any 12 documentation associated with the option that's 13 referenced in Paragraph 5? 14 A. I'm not sure if he did or he didn't. I 15 don't know. 16 Q. Did you have any discussion as to why 17 Drexel had optioned the shares to MCO? 18 A. Not really. I mean, he just told me 19 about the option. 20 Q. It also indicates that there is a put 21 behind the option. What did you understand was 22 the purpose of the put? 19181 1 A. All I understood was that at some point 2 in time, MCO had the right to exercise the call or 3 the option. If they didn't do it, at some point 4 in time, Drexel had the right to -- 5 Q. And the date that the put was to arise 6 was August the 1st, 1988? 7 A. Yes. 8 Q. So, until August the 1st, 1988, Drexel 9 could not put the shares back to MCO? 10 A. That's right. 11 Q. Okay. Now, take a look at the proxy 12 statement which is A3014. This is -- has been 13 previously admitted as Tab 92. It's the next one. 14 It would appear that Federated's -- if we turn 15 again to Table 1, which is the second full page, 16 it would appear that Federated's ownership and 17 MCO's ownership of common stock has not changed. 18 But I notice now that Drexel's ownership has gone 19 to 789,853 shares. 20 Do you see that? 21 A. Yes, I do. 22 Q. Did you discuss with anyone why Drexel 19182 1 had increased its ownership of United Financial 2 Group shares in the period between 1986 when the 3 '86 proxy statement was filed and the date upon 4 which this 1987 proxy statement was filed, which 5 is March 31st, 1987? 6 A. I don't believe so. 7 Q. So, you had no discussions with 8 Mr. Munitz or Mr. Hurwitz about why this had been 9 done? 10 A. I don't believe so. 11 Q. How was it that you learned of the fact 12 that Drexel Burnham Lambert had increased its 13 ownership in these shares? 14 A. They would send a 13D every year or 13G 15 form every year, and it would show the amount of 16 stock that they owned. 17 Q. Now, I notice that on this particular 18 document, you did sign as a -- on behalf of UFGI 19 as secretary and vice president? 20 A. Yes. 21 Q. And did you participate, then, in the 22 preparation in the same fashion that you had the 19183 1 1986 proxy statement? 2 A. Yes, I did. My signature is actually 3 on the letter. The notice is what I'm signing. 4 Q. Okay. 5 A. But yes, I did. 6 Q. Now, you indicated that you probably 7 obtained the information upon which Drexel's 8 ownership is based from the Form 13Gs that were 9 filed. Would you take a look at Exhibit T116, 10 which is Tab 51? 11 Before I get to that, I have another 12 question. Why is it that you determined to put in 13 information that's reflected in A3014 in 14 Paragraph No. 6? That's the information regarding 15 the put/call option. 16 Why is it that that was put into the 17 proxy statement at all? 18 A. Because it was in the last one. 19 Because, I think, it's probably thought of as a 20 relevant disclosure. 21 Q. Well, you said it was put in the last 22 one. Why was it that you determined that it was 19184 1 necessary to put it into the 1986 proxy statement, 2 as well? 3 A. I think it's a relevant disclosure. 4 Q. Relevant to what subject? 5 A. Well, you're showing shares that are 6 owned by people; and you're showing that 300,000 7 of these shares are subject to a put and call 8 option. 9 Q. So, you felt that this was relevant to 10 the ownership of shares by which entity? 11 A. By all three of these entities or two: 12 MCO and Drexel. 13 Q. So, in your mind, did you feel that 14 that was a material fact that should be disclosed 15 in the proxy? 16 A. I thought it was relevant; so, I 17 thought it should be in there. 18 Q. Is there a rule of materiality that 19 applies to proxy statements that requires that all 20 material facts relating to matters relevant to the 21 proxy statement be included in that statement? 22 A. I'm not sure what you mean by "rule of 19185 1 materiality." What do you mean by "rule of 2 materiality"? 3 Q. Well, you recall that when we talked on 4 the first day of your examination about filings 5 with the Securities and Exchange Commission, I 6 asked you whether you were required to include all 7 material facts in filings. And you indicated 8 that, yes, that there was some requirement of 9 materiality. And I asked you then, I think, what 10 you understood "materiality" to mean; and you made 11 some reference to the fact that if the fact is 12 important -- and I don't want to recharacterize 13 your testimony here, but do you recall that we had 14 that discussion? 15 A. I recall we had that discussion. 16 Q. Did you feel, then, that this was a 17 material fact that should be included regarding 18 MCO and Federated's ownership of UFGI stock? 19 A. Again, I thought it was a relevant fact 20 under the rules as I understood it to show this. 21 I'm not sure what you're trying to get at between 22 material and -- it's just relevant. 19186 1 Q. Now, let's go on then. I just wanted 2 to go through very quickly the three documents -- 3 the next three documents. They are Tab 42, T1063. 4 This is the 13G of Drexel that's dated 5 February 13th, 1985, and then the 13G dated 6 February 13th, '86, and then the 13G dated 7 February 13th, 1987. The latter two are T51 -- 8 Tab 51, T1116, and Tab -- I'm sorry. Is there a 9 problem? 10 MR. VILLA: We're having a little 11 trouble following you. 12 THE COURT: We're not able to follow 13 whether you're talking tabs or exhibit numbers. 14 Let's start over. 15 MR. RINALDI: The first exhibit is 16 T1063. It's Tab 42. The second exhibit is T1116. 17 It's Tab 51. The third exhibit is T1128. It has 18 not been admitted, and I am handing to the -- 19 well, the witness should have a copy in his book, 20 but I will hand up to the Court two copies of 21 T1128. 22 Q. (BY MR. RINALDI) Now, do you recognize 19187 1 all three of these documents as something you 2 would have received from Drexel? 3 A. I'm not sure I saw the T1063 because it 4 preceded me. 5 MR. EISENHART: Your Honor, may I have 6 some identification of the third document? I 7 don't see it in my book. 8 MR. RINALDI: I have an extra copy. 9 MR. EISENHART: Thank you. 10 Q. (BY MR. RINALDI) You say T1063? 11 A. Yeah. It's not something that I might 12 necessarily have seen because it preceded my 13 employment there. 14 Q. But the next two -- that is, T1116 and 15 the new document, T1128 -- are documents that you 16 would have taken into consideration in preparing 17 the 1986 and '87 proxy statements? 18 A. Yes, sir. 19 Q. Okay. 20 MR. RINALDI: Your Honor, I would move 21 the admission of T1128. 22 MR. EISENHART: I believe it's already 19188 1 in as T1129. It's the February 13th, 1987 letter 2 from Drexel enclosing a 13D. And I'm looking at 3 the same document with the same handwriting on it 4 and different exhibit numbers. 5 MR. SCHWARTZ: Tab number? 6 MR. EISENHART: Tab 48. 7 MR. RINALDI: If that's the case, then, 8 Your Honor -- that's the 1987 -- 9 MR. EISENHART: Yes. February 13th, 10 1988. It's exactly the same document. 11 THE COURT: Yeah, they look like the 12 same to me. 13 MR. RINALDI: Okay. I apologize, 14 Your Honor. I did not know it was previously 15 admitted. 16 THE WITNESS: Do you want me to change 17 that designation in this book? 18 MR. RINALDI: I wouldn't worry about 19 it. The record will reflect that T1128 has 20 actually been admitted as T1129. 21 MR. EISENHART: Correct. 22 MR. RINALDI: Tab what? 19189 1 MR. EISENHART: Tab 48. 2 MR. RINALDI: Okay. I'll just make a 3 note. Thank you. 4 Q. (BY MR. RINALDI) Now, would you take a 5 look at what's been marked as A2074? This will be 6 the next document in your book, and it's Tab 36. 7 A. Okay. 8 Q. Now, do you recognize this document, 9 sir? 10 A. I believe I received this. Yes, I sure 11 do. 12 Q. Okay. And this is a 13D that was 13 provided to you by Federated and MCO? 14 A. Yes, that's correct. 15 Q. Okay. Now, we spoke a moment ago about 16 Mr. Kozmetsky being -- I mean MCO and Federated 17 being part of a group, and then we also talked 18 about shares owned by Mr. Kozmetsky. 19 Do you recall that? 20 A. Yes, I do. 21 Q. Now, I notice that in this 13D which 22 is -- appears to have been filed on April 19190 1 the 30th, 1986, if you take a look at Page 18 of 2 the document, I think you'll see that it's filed 3 by a James Paulin. 4 Do you see that? 5 A. Right. Yes, I do. 6 Q. Who was Mr. Paulin? 7 A. He was an employee for, I think, 8 MAXXAM. 9 Q. Does he have a nickname? 10 A. Buzz. 11 Q. Okay. So, he is Buzz Paulin where I've 12 seen references to Buzz? 13 A. That's his name. 14 Q. And he works for MAXXAM? 15 A. I believe that's who he worked for. 16 Q. I take it by this time it is still MCO 17 Holdings, Inc.? 18 MR. EISENHART: Your Honor, I'm not 19 sure what Mr. Rinaldi is referring to. I'm 20 looking at the page with Mr. Paulin's signature on 21 it, and it appears he works for Federated. 22 THE COURT: Which is contrary to what 19191 1 the witness says. 2 MR. EISENHART: Maybe I'm looking at a 3 different page. I'm looking at Page 18 of 67; and 4 it says "Federated Development Company, signed 5 James H. Paulin, Jr." 6 MR. RINALDI: I asked the witness who 7 Mr. Paulin was, and he responded. 8 MR. KEETON: We've had testimony from 9 people that know in this trial that Mr. Paulin 10 works for Federated. For Mr. Rinaldi to even try 11 to lead the witness into the answer is 12 irresponsible. 13 MR. EISENHART: I don't know what point 14 he's trying to make. There's two signature pages. 15 It's easy enough to see who signed on behalf of 16 who. It's not a very complex point. 17 MR. RINALDI: The suggestion by 18 Mr. Keeton that I was doing something nefarious, I 19 think, is absurd, Your Honor. I apologize if I 20 asked the question and elicited an answer that was 21 inconsistent with the document. 22 MR. KEETON: Not only the document, 19192 1 Your Honor, but the whole record in this case. 2 And Mr. Rinaldi knows better. 3 MR. RINALDI: Mr. Rinaldi does not know 4 better, Mr. Keeton. 5 THE COURT: All right. Let's move on. 6 Q. (BY MR. RINALDI) Does this then -- just 7 to set the record straight, is it your 8 recollection, then, that Mr. Paulin, in fact, 9 worked for Federated? 10 A. Yes, sir. 11 Q. And it was Mr. Bressler, then, who 12 worked for MCO? 13 A. Yes, sir. 14 Q. Okay. Now, the document goes on. And 15 on Page 11, it talks about an application approved 16 by the Federal Home Loan Bank on December 6, 1984. 17 This is on Page 11 of 67. 18 A. Yes. 19 Q. Do you see that? 20 A. Yeah. 21 Q. Does this refresh your recollection the 22 description of the application and the conditions 19193 1 that were imposed upon MCO and Federated? 2 A. I would have to read it really. I 3 mean, it doesn't -- if you want me to read it -- 4 Q. Well, it's just the one paragraph there 5 that is a description. 6 A. This talks about one of the conditions. 7 Q. Well, it talks about the fact that 8 there was an application that was subject to some 9 conditions. 10 Would this have been the source of the 11 information that you put into the proxy statement 12 that relates to the holding company application? 13 A. I'm not sure if this actual document 14 was or if there were previous years that might 15 have been -- 16 Q. And -- 17 A. Also, it could have been in the 18 questionnaire. I just don't know where -- where I 19 received the information from. 20 Q. Okay. Now, directing your attention to 21 Page 16, I believe this is the portion of the 13D 22 that discusses the put/call option. 19194 1 Do you see that? 2 A. Yes. 3 Q. Now, you said that you had a discussion 4 with -- and I believe it was with Mister -- for 5 fear of misstating something, I believe you said 6 it was with Mr. Bressler who worked for MCO 7 Holdings regarding the put/call option. 8 Do you recall that? 9 A. I think I said I wasn't sure if it was 10 Dr. Munitz or Mr. Bressler or both. 11 Q. Did they give you anything in writing 12 so that the information regarding the put/call 13 option could be put into UFG's proxy statement? 14 A. Again, I would have to look at the 15 officers and directors questionnaire that I sent 16 to them to see how they responded at that time. 17 Q. But you do recall that the information 18 that's contained in this document, which is A2074, 19 was also available to you in preparing the proxy 20 statement for 1987? 21 A. I think, actually, this is later. I 22 think the proxy statement -- I mean -- let me go 19195 1 back and look. I thought the proxy statement was 2 dated March something. 3 Q. It is, for 1986. But then the 4 identical wording appears in the 1987 proxy 5 statement. 6 A. Okay. Maybe I misunderstood your 7 question. 8 Q. Is this one of the sources of 9 information that you would have used in preparing 10 the 1987 proxy statement insofar as that statement 11 refers in Paragraph C to the put/call option? 12 A. Yeah. I might have used this, or I 13 might have just relied on the questionnaire. I 14 don't specifically remember if I used this or the 15 questionnaire that they filled out. 16 Q. Now, in the proxy statement, at 17 Paragraph 6, it talks about a put/call option. 18 And if you look at -- at the second full sentence 19 of -- well, let's take a look. I'm now looking at 20 A3014, which is Tab 92; and it's at Page 3, 21 Paragraph 6. 22 A. A30? 19196 1 Q. It's the document we looked at just a 2 moment ago, sir. 3 A. The proxy statement? 4 Q. Yes, the proxy statement. And if you 5 look at Paragraph -- is this the -- yes. And if 6 you look at, I believe, Paragraph 6, it talks 7 about the put/call option there, does it not? 8 A. Yes. 9 Q. And in the -- in the second sentence, 10 it makes reference to, "In December, 1995, DBL 11 granted to MCO a call option on 300,000 shares." 12 Do you see that? 13 A. Yes, I do. 14 Q. And that's substantially the same 15 information that appears on Page 16 of 16 Exhibit A2074, is it not? 17 A. Substantially? 18 Q. Well, it says, "On December 24th, MCO 19 entered into a stock option agreement with Drexel 20 Burnham Lambert pursuant to which Drexel was 21 provided with a call option." 22 Do you see that? 19197 1 A. Yes. 2 Q. So, that's the information on that 3 page? 4 A. That's what I said, that's right. 5 Q. Now, further down on Page 16 of 6 Exhibit A2074, it talks about -- after the 7 escrowing of shares, there's a sentence that 8 begins "in the event that." 9 Do you see that? 10 A. Yes. 11 Q. It says, "In the event that MCO 12 exercises the call but does not make full payment 13 to DBL for the shares or that DBL exercises the 14 put but does not receive full payment for the 15 shares, DBL may draw upon a letter of credit 16 obtained by MCO in the amount of the shares 17 purchase price." 18 Do you see that? 19 A. Yes. 20 Q. Okay. Now, what was the purpose as you 21 understood from the 13D of the letter of credit? 22 A. Just reading it, I believe it was to 19198 1 make sure that Drexel received full payment. 2 Q. Okay. So, it was much like the letter 3 of credit that was suggested with respect to the 4 compensation agreements. It would assure people's 5 payment? 6 A. I don't know if it's similar or not. 7 It looks like it was to assure that Drexel would 8 receive full payment for the shares. 9 Q. Do you see anywhere in the proxy 10 statement where the letter of credit is mentioned 11 in either the '86 or the '87 proxy statement? 12 A. No. 13 Q. So, that was information that was not 14 included? 15 A. I don't think it was relevant. 16 Q. Was that the reason you decided not to 17 include it? 18 A. I'm not sure if I knew it in '86. By 19 '87, I just don't think it was relevant. 20 Q. My question is: Did you then determine 21 it was relevant and, therefore, not include it? 22 A. Yes. 19199 1 Q. So, that was your decision? 2 A. I believe so. 3 Q. And then if we go on, attached to the 4 13D that -- which is A2074, is a copy of the 5 actual put/call option. 6 Do you see that? 7 A. The Exhibit 4? 8 Q. Yes. 9 A. Yes. 10 Q. I believe it starts at OFD2633. 11 Do you see that? 12 A. Yes, I do. 13 Q. And if you turn to Page 12 of the stock 14 option itself, which is OFD2644, it makes 15 reference to an indemnification agreement. 16 Do you see that? 17 A. Yes. 18 Q. Were you aware at the time that you 19 prepared the proxy statement that MCO had, as part 20 of the stock option agreement, agreed to indemnify 21 Drexel Burnham Lambert in the fashion that's set 22 forth on this page? 19200 1 A. Again, I'm not sure if I was aware in 2 the 1986 proxy. I probably was aware in the 1987 3 proxy. 4 Q. And did you again determine not to 5 include the information regarding the in 6 indemnification because you felt it wasn't 7 relevant? 8 A. Yes. 9 Q. Now, I had asked you on several 10 occasions whether you recalled that MCO and 11 Federated, after having their application to 12 become a holding company conditionally approved by 13 the Federal Home Loan Bank Board, had made efforts 14 to modify those conditions. 15 Do you recall? 16 A. Do I recall your question? Sure. 17 Q. Okay. Do you recall what the nature of 18 the modifications were that MCO and Federated were 19 seeking? 20 A. Not really. 21 Q. Do you recall whether it related to the 22 net worth maintenance condition that had been 19201 1 imposed by the Federal Home Loan Bank Board as a 2 condition of becoming a holding company? 3 A. Yes, I do. 4 Q. And did it? 5 A. Yes, it did. 6 Q. Okay. Turn to Page T11 -- I'm sorry -- 7 to Exhibit T1113. It should be the next one in 8 your book after the 13D. This has previously been 9 admitted as Tab 68. 10 11 (Discussion held off the record.) 12 13 MR. RINALDI: My understanding is that 14 this was previously admitted as T1113 at Tab 68. 15 This is a letter to Julie Williams, and it's 16 signed by William S. Eckland. And it's dated 17 January 31st, 1986. 18 Q. (BY MR. RINALDI) Do you recall 19 having -- do you recall whether you have ever seen 20 this letter before, sir? 21 A. No, I don't. 22 Q. Okay. Now, if you turn to Page 219 -- 19202 1 well, it's Bates stamped -- let's see -- OW009486. 2 A. OW009486? 3 Q. And 487. 4 A. Okay. 5 Q. Now, this appears to be a copy of the 6 December 6th, 1987 resolution of the Federal Home 7 Loan Bank Board as it applied to the application 8 of MCO and Federated to become a holding company. 9 A. Did you say 1987? 10 Q. I'm sorry. '84. December 6th, 1984. 11 It's No. 84712. Do you see that in the upper 12 right-hand corner? 13 A. Yes. 14 Q. Do you recall whether in preparing 15 the -- the proxy statement you had occasion to 16 review this document? 17 A. I don't believe so. 18 Q. As the general counsel of UFGI, did you 19 ever see this document? 20 A. I may have. I don't have a specific 21 recollection of seeing it, but I may have seen it. 22 Q. Okay. Now, in Paragraph 4 on the 19203 1 second page of the document, it indicates that 2 there is a condition set forth there. 3 Do you recognize that condition, or did 4 you read it in the context of preparing the proxy 5 statement? 6 A. I recognize that condition. 7 Q. And did you have occasion, then, to 8 negotiate at all with the Federal Home Loan Bank 9 of Dallas or the Federal Home Loan Bank of -- in 10 Washington, D.C., regarding the modification of 11 this particular provision? 12 A. The only recollection I have of talking 13 about the MAXXAM net worth was in connection with 14 the subordinated debt application. 15 Q. And what is your recollection with 16 respect to that, sir? 17 A. We were attempting -- we at United 18 Savings were attempting to get in 50 to 19 $100 million of additional equity. And Drexel, 20 who was the underwriter, proposed underwriter, 21 thought they could sell that but only if MAXXAM 22 put in some additional equity. And MAXXAM, I 19204 1 think, had agreed that they could do that if they 2 could get their net worth maintenance obligation 3 or this issue resolved. 4 Q. Now, do you recall what period of time 5 this would have occurred, sir? 6 A. It would have been in the early part 7 of -- would have started in the early part of 8 1986, I believe. 9 Q. Is it your recollection that at that 10 point, that the holding company application was -- 11 strike that. 12 Was it your recollection that the 13 question of the condition that had been imposed 14 upon MAXXAM or MCO and Federated as a condition of 15 their acquiring over 25 percent interest in UFGI, 16 whether that was still a matter that was under 17 negotiation with the Federal Home Loan Bank of 18 Dallas? 19 A. I believe it was. 20 Q. Okay. And do you recall that 21 periodically from time to time, that the period of 22 time in which MCO and Federated had to act was 19205 1 extended by the Federal Home Loan Bank of Dallas 2 or -- 3 A. Yes. 4 Q. And if you take a look at the next 5 document, which is B1046, this appears to be a 6 letter to Neil Twomey -- 7 MR. RINALDI: And I'm handing up a copy 8 of this to the Court. This has not been 9 previously admitted, but we did admit it as part 10 of a group of exhibits earlier today. So, it is 11 already in the record. 12 Q. (BY MR. RINALDI) Do you recall that, 13 periodically, letters were sent to the Bank Board 14 requesting extensions of the period of time in 15 which MCO and Federated could comply with the 16 holding company application condition? 17 A. Yeah. I remember them getting 18 extensions to resolve that issue, yes. 19 Q. And on the second page, it indicates 20 that you were copied. 21 Do you see that? 22 A. Yes. 19206 1 Q. What was the reason for copying you 2 with this kind of correspondence? 3 A. I'm just assuming that Dr. Munitz 4 believed it was something that I would want to 5 know since it related to USAT. 6 Q. And do you recall that these kinds of 7 letters were sent approximately every 90 to 120 8 days? 9 A. I think that's right. 10 Q. Did there come a time when MCO decided 11 to no longer pursue its application to become a 12 holding company and withdrew the application? 13 A. I believe that's correct. 14 Q. Do you recall discussing that with 15 anyone? 16 A. No. 17 Q. Do you know why it is they withdrew 18 their application? 19 A. No, I don't. 20 Q. Now, you had discussed the fact that 21 you believed that in connection with the issuance 22 of some -- of subordinated debt application, a 19207 1 question of the conditions imposed by the Federal 2 Home Loan Bank Board with respect to MCO and 3 Federated's maintenance of USAT's net worth had 4 come up. 5 Do you remember that? 6 A. Yes. 7 Q. Okay. Would you take a look at what's 8 been previously marked as -- I'm sorry. It's a 9 new exhibit, T1118. This is a memo that you 10 drafted to Charles Hurwitz, Barry Munitz, Jenard 11 Gross, and Gerry Williams dated March the 20th, 12 1986. 13 Do you recognize that document, sir? 14 A. Yes, I do. 15 Q. Okay. And did you prepare it? 16 A. Yes. 17 MR. RINALDI: Your Honor, I would move 18 the admission of T1118. 19 MR. VILLA: No objection. 20 THE COURT: Received. 21 Q. (BY MR. RINALDI) Now, in the first 22 paragraph, it talks about you and Mr. Pozen having 19208 1 a lunch with Jim Halverson, Neil Twomey, and 2 Ginger Baugh. 3 Do you see that? 4 A. Yes. 5 Q. Who is Mr. Pozen? 6 A. He was outside counsel of Caplan & 7 Drysdale for United Savings at that time. 8 Q. And it goes on and indicates that you 9 had discussed the interaction of the MCO/Federated 10 net worth guarantee question with the proposed 11 capital note transaction. 12 Does that make reference to what you 13 referred to earlier about discussions you had had 14 relating to a subdebt application? 15 A. Yes. 16 Q. Can you explain to the Court what the 17 subdebt application referred to? 18 A. It was an application to -- we were 19 attempting to get an additional 50 to $100 million 20 of capital into United Savings, and utilization of 21 subordinated debt would be considered capital. If 22 money was brought in as subordinated debt, it 19209 1 would be considered capital. 2 Q. Whose idea was it for USAT to issue the 3 subordinated debt? 4 A. Whose idea? 5 Q. Yes. 6 A. I don't remember whose idea it was. 7 Q. Well, was it proposed as a means of 8 resolving the net worth requirement that the 9 Federal Home Loan Bank Board had imposed upon MCO 10 and Federated? 11 A. It was a means of getting additional 12 capital into United Savings. This goes back to 13 early '86 when everyone believed that United 14 Savings could use an additional 50 to $100 million 15 of capital. 16 Q. Now, the second paragraph of this 17 document says, "We told them that we believed 18 MCO/Federated was willing to contribute up to 19 10 million to the equity of USAT but only upon the 20 condition that they could acquire in excess of 21 25 percent of the stock of UFG without a net worth 22 guarantee." 19210 1 Do you see that? 2 A. Yes, I do. 3 Q. How did you learn that MCO and 4 Federated were willing to put in an additional 5 $12 million but only upon -- I'm sorry -- were 6 willing to put in an additional $10 million but 7 only on the condition that they could acquire in 8 excess of 25 percent of the stock of UFG without a 9 net worth guarantee? 10 A. I believe I spoke with Dr. Munitz about 11 that. 12 Q. What did he say to you at the time? 13 A. That they could sell the capital note 14 deal but they could only sell it if MAXXAM or MCO 15 was willing to put in additional capital. 16 Q. And MAXXAM then told you that they 17 wouldn't put in additional capital unless they 18 could get a waiver of the net worth condition? 19 A. They would to get the net worth issue 20 resolved. 21 Q. Well, it says here that they would only 22 do it if they could exceed the 25 percent 19211 1 ownership level without a net worth condition. 2 A. Yeah. I don't think -- my recollection 3 is they were not saying it had to be waived 4 entirely. The issue had to be resolved. 5 Q. Now, why did you send this to Gerry 6 Williams? 7 A. He was president of United Savings and 8 executive vice president of United Financial 9 Group. 10 Q. Had you been discussing with him, as 11 well, MCO and Federated's views regarding their 12 holding company application and the requirement 13 that they adhere to a net worth condition? 14 A. Well, we had discussed it; and we 15 also -- this was in connection with raising an 16 additional 50 to $100 million of capital for 17 United Savings. 18 Q. Did you have any occasion to discuss 19 this with Mr. Hurwitz? 20 A. The MCO net worth guarantee? 21 Q. Yes. 22 A. I'm not sure if we did or not. It's 19212 1 possible he was in the meeting where this was 2 discussed. 3 Q. When you say "the meeting where it was 4 discussed," you mean the meeting where it was 5 discussed with Mr. Munitz? 6 A. Yeah. 7 Q. Who else would have attended that 8 meeting? 9 A. I don't know. I don't know. 10 Q. Then it goes on in the next paragraph 11 and says, "We told them" -- I take it by that you 12 mean that you and Mr. Pozen told the regulators; 13 is that correct? 14 A. Right. 15 Q. "That in the event MCO and Federated 16 exceeds 50 percent ownership, it was our 17 understanding (although we were not representing 18 MCO and Federated) that MCO and Federated was 19 proposing the Belzburg formulation of a snapshot 20 net worth guarantee." 21 Do you see that? 22 A. Yes, I do. 19213 1 Q. Now, how did you learn that MCO and 2 Federated was proposing a Belzburg formulation if 3 MCO and Federated exceeded 50 percent ownership? 4 A. That would have been in discussion with 5 Barry Munitz. 6 Q. And what did you mean by "the Belzburg 7 formulation"? 8 A. Today, I don't know what that was; but 9 I'm sure I knew at the time. 10 Q. Then the next paragraph makes reference 11 to the fact that Drexel had informed us that in 12 view of the poor reception of Texas S&Ls, they 13 didn't believe that they could do a capital note 14 offering unless MCO or Federated were involved. 15 Is that what you testified to earlier? 16 A. Yes. 17 Q. Now, how did you determine what 18 Drexel's views were regarding the potential 19 ability of Drexel to issue a capital note public 20 offering? 21 A. Talk to them. 22 Q. Who did you speak to at Drexel? 19214 1 A. Oh, David Kenny and Roger Stark. 2 Q. Who was Mr. Kenny? 3 A. He was an officer -- he was in the 4 investment group at Drexel, an officer of Drexel. 5 Q. And how did you come to meet Mr. Kenny? 6 A. Goodness. My recollection is we were 7 trying to get somebody to underwrite this capital 8 note offering; and I believe my recollection is 9 that Mr. Hurwitz or Dr. Munitz contacted Drexel to 10 see if they could do that, if they could sell this 11 deal. 12 Q. And was it Dr. Munitz or Mr. Hurwitz 13 who then contacted Mr. Kenny? 14 A. I don't know if they contacted 15 Mr. Kenny, but that's who ended up working on the 16 transaction. 17 Q. Did Mr. Kenny get back to you and 18 advise you that he had been contacted by 19 Mr. Munitz and Mr. Hurwitz and that they indicated 20 that USAT wanted to issue some capital notes? 21 A. We had a number of discussions and 22 meetings talking about the capital note and how 19215 1 they thought they could possibly sell the capital 2 note. 3 Q. I understand that. I understand that 4 with a transaction this large and this complex, it 5 would, of necessity, require a lot of meetings. 6 My question is: How was it that USAT first came 7 in contact with Drexel as a potential offeree of 8 these notes? 9 A. Again, my recollection is that either 10 Mr. Hurwitz or Dr. Munitz contacted a number of 11 people to see if anyone could sell this and Drexel 12 was the only one who said they might be able to 13 sell this. 14 Q. Okay. Now, did Mr. Kenny tell you that 15 they thought it would be easier to place the note 16 if Drexel -- I'm sorry -- if MCO and Federated had 17 actual control over United Savings Association of 18 Texas? 19 A. Again, my recollection is that he said 20 that without the MAXXAM-Federated putting in 21 additional money, they couldn't sell the capital 22 note. 19216 1 Q. Okay. I'm making reference now to the 2 fourth full paragraph. At the end of that 3 sentence, it talks about they did not believe they 4 could do a capital note offering unless MCO and 5 Federated had a more direct control relationship. 6 Did you understand by that that Drexel 7 wasn't going to be in a position to make the 8 public note offering unless MCO and Federated had 9 a greater degree of control over USAT? 10 A. I think that's what it's saying. 11 Q. Okay. Now, all of the regulators 12 seemed to be favorably disposed. Was it your 13 recollection that at this point, the Federal Home 14 Loan Bank of Dallas was in favor of the issuance 15 of these notes? 16 A. I think I'm talking about -- favor of 17 the issuance of the notes? 18 Q. Yes. 19 A. Yes. 20 Q. Now, it also talks about waiving the 21 net worth guarantee. Does that refresh your 22 recollection that MAXXAM and Federated were 19217 1 talking about acquiring over 25 percent ownership 2 on the condition that the net worth guarantee that 3 had been conditionally imposed on the MCO 4 Federated application be waived? 5 A. Again, it doesn't refresh it; but that 6 may be what they were talking about. 7 Q. Now, at this point in time, the amount 8 of the capital note offering was going to be 9 around $50 million; is that correct? 10 A. Right. 11 Q. Of which amount MCO and Federated were 12 only going to put up 10 million; is that correct? 13 A. Correct. 14 Q. Where did you expect that the remaining 15 $40 million in capital notes would be sold? Would 16 it be just offered to the public? 17 A. That's correct. 18 Q. And did Drexel at that point indicate 19 they thought they could be successful in 20 underwriting an issuance of subordinated debt? 21 A. Yes, they did. 22 Q. At this point, was Drexel the 19218 1 preeminent company in the area of underwriting and 2 offering subordinated debt? 3 A. I'm not sure there was anyone. I don't 4 know who was preeminent in offering subordinated 5 debt of S&Ls. I'm not sure there was anybody. 6 Q. I'm not talking about S&Ls. Just 7 subordinated debt in general. 8 Did you understand that Drexel had a 9 special expertise in that area? 10 A. In subordinated debt? 11 Q. Yeah. 12 A. I'm not sure that they had a special 13 expertise. You're talking about junk bonds? 14 Q. Yes. 15 A. Yes, Drexel had an expertise in 16 offering junk bonds. 17 Q. But you didn't understand that they had 18 any special expertise in the area of subordinated 19 debt in the nature of -- 20 A. They said they could sell it. 21 Q. What was the coupon rate on these 22 subordinated notes? 19219 1 A. I'm not sure it was even discussed at 2 this point. 3 Q. Were they going to be an unsecured 4 debt? 5 A. Unsecured debt. 6 Q. So they would have been, in effect, a 7 junk bond, correct? 8 A. Yes. 9 Q. I wanted to make sure when we were 10 talking about subordinated debt and junk bonds 11 that we were on the same wavelength. 12 Now, it would indicate here that 13 initially the regulators were in favor of the 14 capital note transaction. That's what is 15 indicated at the top of Page 2, correct? 16 A. Yes. 17 Q. And then you say in the next paragraph 18 that you would have an application on their desks 19 by April the 15th, 1986. 20 Do you see that? 21 A. Yes. 22 Q. Thereafter, did you then, in fact, 19220 1 submit an application to the Federal Home Loan 2 Bank of Dallas for the issuance of subordinated 3 debt? 4 A. Yes, we did. 5 Q. Okay. Now, further down the page, it 6 talks about a direct investment application. 7 Do you see that? 8 A. Yes, I do. 9 Q. What was the direct investment 10 application that's being referred to there? 11 A. I'm not sure I remember at this time. 12 That would have been something that Jim Pledger 13 would have been working on. 14 Q. Do you recall that USAT, in the latter 15 part of 1985 or beginning of 1986, had filed an 16 application with the Federal Home Loan Bank of 17 Dallas to increase the percentage of its assets 18 that could be invested in direct investments? 19 A. Yeah, I think that's right. 20 Q. And is that what this is making 21 reference to here? 22 A. I believe so. 19221 1 Q. As you sit here today, do you recall 2 what a direct investment is? 3 A. No. 4 Q. Do you recall that one of the purposes 5 for their seeking to increase the direct 6 investment limit was so that they could invest in 7 high-yield bonds and equity arbitrage securities? 8 A. I don't recall. 9 Q. Now, as a consequence of this meeting, 10 you indicated that you, in fact, did file an 11 application to issue subordinated debt. Right? 12 A. Right. 13 Q. And if you turn to the next page, does 14 this appear to be the cover letter to the -- 15 A. You're saying the next page? 16 Q. I mean to the next document in your 17 book. 18 MR. EISENHART: Your Honor, may those 19 of us who don't have a book know what document 20 he's referring to? 21 MR. RINALDI: If you'll just wait, I'll 22 get to it. 19222 1 Q. (BY MR. RINALDI) Exhibit B953. It's 2 previously admitted as Tab 90. This is a letter 3 to Neil Twomey from Arthur Berner dated 4 April 29th, 1986. 5 Do you see that? 6 A. Yes. 7 Q. Okay. And is this a document that you 8 prepared? 9 A. I believe I prepared this. 10 Q. And then at the end, it talks about an 11 enclosure; and it refers to an application form 12 and application. Is this the cover letter by 13 which you transmitted the subdebt application? 14 A. I believe so. 15 Q. Now, directing your attention to the 16 third paragraph of that document, it says, "As 17 explained in the enclosed application, United will 18 proceed with the issuance of these subordinated 19 debt securities only if one of United Financial 20 Group, Inc.'s principal shareholders, MCO 21 Holdings, Inc. (MCO) acquires at least 10 million 22 of the issues." 19223 1 Do you see that? 2 A. Yes, I do. 3 Q. So that it was contemplated at the time 4 that the subdebt application was filed that MCO 5 would acquire 10 million of the subdebt? 6 A. Yes. 7 Q. Then it goes on and says, "MCO has 8 advised United that it will not make this 9 acquisition unless the Bank Board approves MCO's 10 pending request for modification of the net worth 11 maintenance agreement dated December 6, 1984." 12 Do you see that? 13 A. Yes, I do. 14 Q. So, does that refresh your recollection 15 that MCO refused to participate in the purchase of 16 $10 million of the subdebt application unless the 17 Bank Board would waive the net worth requirement 18 that had been previously imposed pursuant to the 19 December 6, 1984 net worth maintenance -- 20 A. Yeah, I'm not sure -- 21 MR. EISENHART: Object to the form of 22 the question. He previously used the term "waived 19224 1 the requirement," and the witness has corrected 2 him once already. And he's trying to sneak it 3 back in again. The letter is talking about 4 resolving the differences. 5 MR. RINALDI: Well, you know -- 6 Q. (BY MR. RINALDI) Why don't we go back 7 to Exhibit T1118. Maybe we can clarify this. 8 It's the immediately-preceding exhibit. 9 A. T1118? 10 Q. Yeah. 11 A. Okay. 12 Q. If you look at the last paragraph on 13 the first page -- now, you did write this 14 document, did you not? 15 A. T1118? 16 Q. Yes. 17 A. Yes, I did. 18 Q. And you intended to communicate to 19 Mr. Hurwitz and Mr. Gross and Mr. Williams an 20 accurate reflection of what had occurred at the 21 meeting, correct? 22 A. Yes. 19225 1 Q. And in the last paragraph, you said, 2 "All of the regulators seem favorably disposed to 3 recommend to Washington that the net worth 4 guarantee be waived if MCO and Federated, in fact, 5 puts in 10 million in equity." 6 Do you see that? 7 A. Yes, I do. 8 Q. So, in fact, MCO and Federated were 9 seeking a waiver of the net worth commitment, were 10 they not? 11 A. Again, I don't know what their request 12 was -- at this point in time as we're sitting here 13 today, I don't know what their request was, that 14 they were asking for the modification of the net 15 worth maintenance. I don't know if it was a 16 waiver or some other modification. 17 Q. We can tell from the next document, 18 which is Exhibit B953, that MCO did advise you 19 that it would not make an investment of 20 $10 million in USAT's subordinated debt unless the 21 Bank Board approves the pending request for 22 modification of the net worth maintenance 19226 1 agreement? 2 A. Right. 3 Q. Were you involved in the pending 4 negotiations between the Bank Board and MCO at 5 all? 6 A. No. 7 Q. So that your sole involvement would 8 have been the discussion that you had with the 9 Bank Board on March the 20th, 1986? 10 A. Well, that and the submission of the 11 application where we were saying that unless the 12 MCO net worth maintenance was modified, we weren't 13 going to put in any more money. 14 Q. You didn't know the nature of the 15 modification that was being sought? 16 A. I don't know now. I'm not sure. 17 Q. Did you direct the preparation of the 18 subdebt application? 19 A. Did I direct the -- 20 Q. Did you supervise it? 21 A. I'm not sure if I supervised it. I was 22 certainly one of a group of people that worked on 19227 1 it. 2 Q. Well, you were submitting the 3 application on behalf of USAT? 4 A. Right. 5 Q. Okay. Now, had MCO and Federated 6 requested that USAT submit a subdebt application 7 as a means of resolving the issue with respect to 8 the net worth maintenance condition? 9 A. No. Just the opposite. USAT was 10 trying to get some additional capital. 11 Q. And MCO and Federated said, "Okay. If 12 you submit that application, we would agree to 13 sign up for $10 million of the subdebt on the 14 condition that we can achieve a modification of 15 the net worth condition"? 16 A. Again, I think there's a step in 17 between in that Drexel was saying, "We can sell 18 it, but we can only sell it if MCO steps up and 19 puts in $10 million." 20 And they said, "We'll put in 21 $10 million if we can get this thing modified." 22 Q. Now, take a look at the next document 19228 1 in your book, which is Exhibit B954 that has 2 previously been admitted as Tab 89. 3 Do you recognize that document, sir? 4 A. Yes, I do. 5 Q. And what is this document? 6 A. This is the application for approval to 7 issue subordinated debt securities. 8 Q. And I asked you a moment ago: Did you 9 supervise its preparation? 10 Perhaps I should ask you a slightly 11 different question. 12 What role did you play in the 13 preparation of this subdebt application, sir? 14 A. I would have certainly assembled all of 15 the information that's here. It would have come 16 in from various sources in the institution, and 17 then I would have worked to assemble this thing 18 and send it on. 19 Q. Now, I notice that if you turn to 20 Page 85, 86, and 87, there is a -- 21 A. 85 of what? 22 Q. The Bates number on this -- and we're 19229 1 looking now at the subdebt application itself, 2 which is B954. And the Bates stamps are CN152395? 3 A. CN152395? 4 Q. Yes, and 94 and 93. I believe they are 5 in reverse order in the original. For some 6 reason, the -- 7 A. Wait a minute. I go from 152357 to -- 8 if you point it out, I'm sure I'll find it. 9 THE COURT: We'll take a short recess. 10 11 (Whereupon, a short break was taken 12 from 2:59 p.m. to 3:28 p.m.) 13 14 THE COURT: Be seated, please. We'll 15 be back on the record. 16 Mr. Rinaldi, you may continue. 17 18 (Discussion held off the record.) 19 20 MR. RINALDI: Back on the record? 21 THE COURT: We've been on the record. 22 Proceed. 19230 1 Q. (BY MR. RINALDI) We're looking at 2 Exhibit B954, which is the subdebt application 3 and, in particular, looking at Pages 85, 86, and 4 87. Apparently, these pages were in reverse order 5 and -- did you change the page? 6 A. I haven't touched it. 7 Q. You should be on Page 85, which has the 8 Bates numbers CN152392; is that right? 9 A. No. 2395. 10 Q. I'm sorry. I apologize. 2395. And 11 then Page 86 is CN152394. And 87 is CN152393; is 12 that correct? 13 A. Yes. 14 Q. Okay. And those three pages encompass 15 a section that relates to stock ownership of UFG. 16 Do you see that? 17 A. Yes. 18 Q. Okay. Now, turning to Page 87, which 19 is CN152393, I thought maybe we could clarify an 20 objection that Mr. Eisenhart had raised a moment 21 ago. If you take a look at the first full 22 paragraph there and you go down -- about halfway 19231 1 down the paragraph beginning with the sentence 2 "Federated," do you see that? 3 A. (Witness reviews the document.) 4 Q. It's the fourth sentence in the first 5 full paragraph. It begins with the words 6 "Federated and MCO are currently." 7 Do you see that? 8 A. Yes. 9 Q. That indicates that Federated was 10 discussing with the Bank Board the possible 11 modification of the -- certain conditions. Then 12 it says, "Including a waiver of a condition 13 requiring Federated and MCO to guarantee that they 14 would cause the association to satisfy the 15 regulatory net worth requirements." 16 Do you see that? 17 A. Yes. 18 Q. Then it goes on and says, "In the event 19 that such waiver is not obtained and Federated and 20 MCO's application is not approved prior to or 21 contemporaneously with the Federal Home Loan Bank 22 Board approval of the association's application to 19232 1 issue the notes, MCO has indicated that it will 2 not acquire any of the notes offered hereby. In 3 such event, it is anticipated that this offering 4 would be terminated." 5 Does that reflect your understanding of 6 the conditions under which MCO had agreed -- MCO 7 and Federated had agreed to acquire the notes 8 under the subdebt offering? 9 A. It doesn't refresh it, but I assume 10 it's correct. 11 Q. Well, were you the one that was 12 responsible for the overall preparation of this 13 document? 14 A. I was one of the people that was 15 responsible for the preparation of this document. 16 Q. And one of your jobs would be to 17 ascertain whether the representations made in this 18 document were accurate to the best of your 19 ability? 20 A. Right. 21 Q. So, you have no reason to dispute the 22 accuracy of that representation I just read to 19233 1 you? 2 A. Right. I thought that's what I said. 3 Right. 4 Q. Now, on Page 85, it talks about stock 5 ownership of UFG. And once again, on the 6 following page, there is a Footnote 6 that makes 7 reference to the put/call option that we talked 8 about earlier. 9 Do you see that? 10 A. Yes. 11 Q. Okay. And did you include this 12 paragraph in the subdebt application because you 13 felt that the option agreement between UFG and MCO 14 was relevant to MCO's ownership of UFGI stock? 15 A. Yes. 16 Q. Now, after you filed the application, 17 do you recall whether it was approved by the 18 Federal Home Loan Bank Board? 19 A. The Federal Home Loan Bank Board, no, 20 it was not approved. 21 Q. Okay. Turn to the next page in the 22 book which is B1000. This has not been previously 19234 1 admitted. I'm handing up to the Court two copies 2 of the document. This is a letter to Neil Twomey 3 from Arthur Berner. 4 Do you recognize this document, sir? 5 A. Yes, I do. 6 Q. Did you draft it? 7 A. Yes, I did. 8 Q. And it indicates in here that an 9 examination was commencing with respect to USAT, 10 correct? 11 A. Yes. 12 Q. Okay. And at this point in time, did 13 you receive a request from Mr. Twomey that no 14 action be taken by USAT with respect to the 15 subdebt offering? 16 A. Yes. 17 Q. And in your letter, you indicate to 18 Mr. Twomey you have also requested that USAT not 19 commence the offering of the notes until such time 20 as you have reviewed these preliminary 21 indications. 22 Do you see that? 19235 1 A. Yes. 2 Q. Was it your understanding, then, that 3 you were going to hold up or USAT was going to 4 hold up with issuing the subdebt notes until there 5 had been a preliminary determination with respect 6 to the 1986 examination? 7 A. I believe that's what it was saying, 8 yeah. I think that was my understanding. 9 Q. And did USAT then hold up? 10 A. Yes. 11 Q. Okay. Did there come a time when USAT 12 later learned that the Bank Board would not 13 approve the subdebt application? 14 A. Yes, there was. 15 Q. Okay. And what was the reason that the 16 Bank Board gave as to why it did not feel it was 17 appropriate to approve the application at that 18 point in time? 19 A. I believe it had to do with the Couch 20 Mortgage situation, to my recollection. 21 Q. Okay. And what was the problem with 22 respect to the Couch Mortgage situation at this 19236 1 point in time? 2 A. At this point being in May or -- 3 Q. Pardon? 4 A. When you say "at this point in time," 5 I'm not sure what you mean. 6 Q. Let's do this rather than guess what 7 occurred. Take a look at Exhibit B1084. 8 THE COURT: Did you say Exhibit B1000 9 is not in evidence? 10 MR. RINALDI: It has not been admitted. 11 I would move the admission of B1000. 12 MR. VILLA: No objection. 13 THE COURT: Received. 14 MR. RINALDI: I'm handing up to the 15 Court Exhibit B1084. This is a letter from 16 Mr. Twomey. 17 Q. (BY MR. RINALDI) Do you recall having 18 received this letter, sir, from Mr. Twomey? 19 A. Yes, I do. 20 MR. RINALDI: I would move the 21 admission of Exhibit B1084, Your Honor. 22 MR. VILLA: No objection. 19237 1 THE COURT: Received. 2 Q. (BY MR. RINALDI) In the letter, it 3 indicates that the note offering was going to be 4 increased from 50,000 to 75 -- I'm sorry -- 5 50 million to 75 million. 6 Do you see that? 7 A. Yes, I do. 8 Q. How is it that it was determined to 9 increase the amount of the subdebt offering, sir? 10 A. I believe Drexel Burnham had said that 11 they thought they could sell up to 75 million. 12 Q. Was it still conditioned on the 13 understanding that MCO would purchase up to 14 10 million of the subdebt? 15 A. Yes, it was. 16 Q. And there's a reference there, also, to 17 a second 50 million offering to be issued through 18 United's money desk operations to be reduced to 19 25 million. 20 Do you know what that makes reference 21 to? 22 A. No, I really don't. 19238 1 Q. Now, at this point in time, it appears 2 that Mr. Twomey requested that you provide him 3 with a copy of the business plan. 4 Do you see that in the second 5 paragraph? 6 A. Yes. 7 Q. And as a consequence of Mr. Twomey's 8 letter, did you, in fact, prepare and submit to 9 the Federal Home Loan Bank Board a business plan 10 for consideration in conjunction with the subdebt 11 application? 12 A. Yes, we did. 13 Q. Will you turn to what's previously been 14 marked as Exhibit A10663 which has previously been 15 entered as Tab 184? Do you have that document in 16 front of you, sir? 17 A. Yes, I do. 18 Q. Let's just give the judge a moment to 19 get his copy, and then we'll proceed. 20 And is this a document that you 21 assisted in the preparation of, sir? 22 A. The business plan? 19239 1 Q. Yes. 2 A. Yes, I did. 3 Q. What role would you have played with 4 respect to the preparation of the business plan? 5 A. I would have assembled most of it from 6 the various sources, sort of reviewed the 7 document. 8 Q. And is this something that would have 9 been done at the direction of the board of 10 directors of USAT? 11 A. The business plan? 12 Q. Yes. 13 A. Well, it was done at the request of the 14 regulators. 15 Q. I understand that, but would you have 16 submitted the business plan without obtaining the 17 prior approval of the board of directors of USAT? 18 A. I think we probably submitted it to the 19 board of directors. 20 Q. In that regard, would Mr. Gross have 21 played any role in providing input into the 22 business plan? 19240 1 A. I'm sure he had some role. 2 Q. And what would have been the nature of 3 his role? 4 A. Again, I would have to go look through 5 the whole thing, but various sections. 6 Q. So, Mr. Gross would have been aware 7 generally of the nature of the business plan that 8 was being submitted to the Federal Home Loan Bank 9 Board? 10 A. I think that's right. 11 Q. Would the same be true of Mr. Munitz? 12 A. I'm not sure if Mr. Munitz would have 13 been involved with this. 14 Q. And how about Mr. Crow? Is that 15 something that he would have been involved in the 16 preparation of? 17 A. Yes, he would have. 18 Q. Now, directing your attention to 19 Pages 16, 17, and 18 of the -- of the business 20 plan, once again under Item 5, it talks about the 21 continuity of management and directors. 22 Do you see that? 19241 1 A. Yes, I do. 2 Q. Once again, it lists a Table 1 similar 3 to what we've seen in the proxy statements; and it 4 identifies Drexel Burnham Lambert's ownership. 5 Do you see that? 6 A. Yes. 7 Q. Under Footnote 6, we see the same one 8 or one very similar to the one we saw in the 9 subdebt application, correct? 10 A. Yes. 11 Q. And this indicates that there is a 12 put/call option that's been entered into between 13 Drexel Burnham Lambert and MCO, correct? 14 A. Yes. 15 Q. And did you believe that the 16 information contained in this paragraph was 17 relevant to MCO's ownership of UFG stock? 18 A. I think it was required here; and yes, 19 I thought it was relevant. 20 Q. Okay. Now, you had indicated a moment 21 ago that a problem arose with respect to the Couch 22 Mortgage. 19242 1 Do you recall that? 2 A. Yes. 3 Q. Would you take a look at what's been 4 previously marked as Exhibit B14 -- I'm sorry. It 5 has not been previously marked. 6 B1451. This is a letter to Joe Selby 7 from Arthur Berner; and it's dated January 28th, 8 1987. Then let me also hand you a copy of 1439, 9 which is a letter -- you have it in front of you, 10 but let me hand it up to the Court -- dated 11 January 15th, 1987, from Arthur Berner to 12 Neil Twomey. 13 Now, first, with respect to 14 Exhibit B1439, is that a document that you sent to 15 Mr. Twomey? Do you recognize that? 16 A. Yes, it is. 17 MR. RINALDI: We move the admission of 18 Exhibit B1439, Your Honor. 19 MR. VILLA: No objection. 20 THE COURT: Received. 21 Q. (BY MR. RINALDI) And in the first full 22 paragraph, it indicates that "Over the next few 19243 1 months, United was unable to receive permission 2 from the Federal Home Loan Bank Board to proceed 3 with this offering. In late November or early 4 December, I was informally informed by the staff 5 of the Federal Home Loan Bank in Washington that 6 the capital note application would be sent back to 7 Dallas because Washington was concerned about 8 disclosure relating to the Couch situation." 9 Do you see that? 10 A. Yes. 11 Q. Yes. What was the problem with respect 12 to the Couch situation that you're referring to 13 here in this letter in January of 1987? 14 A. You mean what was the Couch situation? 15 Q. Well, what were you referring to here 16 that was the problem? 17 A. In I guess it was September of 1986, we 18 were informed that Couch had essentially sold the 19 same mortgages to more than one savings and loan 20 institution. So, they double and triple hocked a 21 bunch of mortgages. 22 Q. Was that the first time that you had 19244 1 become aware that there was a problem with respect 2 to the Couch Mortgage situation in September of 3 1986? 4 A. You mean was it the first time we knew 5 they had been double hocking? 6 Q. Yes. 7 A. Absolutely. 8 Q. Had the Couch Mortgage situation been a 9 problem with respect to USAT prior to that for any 10 other reason? 11 A. It had been somewhat of a problem 12 earlier, yes. 13 Q. When you say it had been somewhat of a 14 problem, what was the nature of the problem 15 earlier? 16 A. My recollection was that in late '85, 17 early '86, Couch was becoming delinquent in 18 servicing loans and in providing payments to 19 United. 20 Q. Was that of concern to United? 21 A. Yes, it was. 22 Q. And as a result of the Couch Mortgage 19245 1 situation, did you then withdraw your application 2 for the issuance of the subordinated debt 3 application? 4 A. Well, I believe there's a letter 5 from -- that makes reference here -- a letter from 6 Joe Selby, but we withdrew our application. 7 Q. Take a look at B1451. This is a letter 8 from you to Mr. Selby -- I mean a letter from you 9 to Mr. Selby dated January 28th, 1987. And it 10 talks about having received a letter from 11 Mr. Selby. And then in the last -- I mean in the 12 second sentence of the first paragraph, it says, 13 "In connection therewith and pursuant to your 14 advice, USAT hereby requests the withdrawal of our 15 application and the return to us under separate 16 cover of the application." 17 Do you see that? 18 A. Yes, I do. 19 Q. And that was the subdebt application 20 that you were withdrawing? 21 A. Yes, sir. 22 Q. And that was pursuant to the suggestion 19246 1 of Mr. Selby? 2 A. Right. 3 Q. Now, do you recall a moment ago or 4 earlier today, we talked about the C preferred 5 shares? 6 A. Yes. 7 Q. And I showed you a copy of the 1986 8 proxy statement. And in that, there was a 9 footnote that indicated that in June of 1987, 10 those shares would be convertible to common shares 11 of UFGI. 12 Do you recall that? 13 A. Yes, I do. 14 Q. And I think you agreed that were that 15 conversion to have occurred, that MCO, by virtue 16 of its ownership of in excess of 700,000 shares of 17 C preferred common, would acquire an additional 18 1.4 million plus shares of UFG common. 19 Do you remember that? 20 A. Did you say MCO or -- 21 Q. MCO and Federated. 22 A. Right. I believe that's right. 19247 1 Q. You remember that conversation? 2 A. Yes. 3 Q. Did there come a time in the early part 4 of 1987 when MCO became concerned about the 5 conversion of the C preferred shares and the 6 potential that if they were converted, that it 7 would cause them to exceed a 25 percent ownership 8 of UFG common stock? 9 A. I'm not sure they were concerned about 10 if it was converted. I think they were concerned 11 about if it could be converted. 12 Q. What do you mean by that distinction? 13 A. Well, they were the only ones who could 14 convert it; so, they weren't worried about that. 15 My recollection is if it was capable of being 16 converted, there was a new rule that said you 17 would be considered ownership of that common 18 stock. 19 Q. And how did that subject first come to 20 your attention, if you recall? 21 A. I don't remember if it was Dr. Munitz 22 or Howard Bressler or their outside counsel that 19248 1 raised it first. 2 Q. But it was someone at MCO or Federated 3 that raised the subject of the potential 4 convertibility of the C preferred shares? 5 A. Yes. 6 Q. It wasn't something that you came up 7 with independent of MCO or Federated? 8 A. No. 9 Q. Now, after MCO or Federated advised you 10 that they were -- well, did they advise you that 11 they had a concern about the C preferred shares? 12 A. That's my recollection. 13 Q. What was the nature of the concern that 14 they indicated they had? 15 A. As I said, I think their concern was if 16 it could be converted, it was capable of being 17 converted, that that would be considered ownership 18 of the common stock. 19 Q. And after this concern was raised, what 20 action did you take? 21 A. Again, my recollection is that they 22 asked me to contact the Federal Home Loan Bank 19249 1 Board informally to see if we extended out the 2 conversion date a year, if that would be -- if 3 that would be okay and, therefore, they wouldn't 4 be considered to own the common stock. And I 5 remember I contacted somebody at the Bank Board; 6 and informally, I was told that -- without any 7 names -- if we extended out the conversion a year, 8 that it wouldn't be considered the ownership of 9 the common stock. 10 Q. Was there a reason why Mr. Bressler or 11 Mr. Buzz Paulin didn't contact the Bank Board 12 since it was MCO and Federated that owned the C 13 preferred shares? 14 A. They asked me to do it. Buzz wasn't a 15 lawyer. 16 Q. Okay. How about Mr. Paulin? 17 A. That is Buzz. 18 Q. I'm sorry. 19 So, what was the reason that you were 20 asked to do it? 21 A. I don't know. I was just asked. 22 Q. And to the best of your recollection, 19250 1 who was it that asked you to make the inquiry? 2 A. Again, I don't remember if it was 3 Dr. Munitz or Mr. Bressler or their outside 4 counsel. 5 Q. Did you discuss the subject with 6 Mr. Hurwitz at all? 7 A. No. 8 Q. After you contacted the Bank Board, did 9 you write a memo back to Mr. Munitz with respect 10 to what you had ascertained from your informal 11 contact? 12 A. I believe I did. 13 Q. Would you take a look at what's been -- 14 well -- and what did you learn? Do you recall? 15 A. My recollection is that they said if 16 you extend out the convertibility so it wouldn't 17 be converted until a year later, that they 18 wouldn't consider it ownership of the underlying 19 common stock. 20 Q. Now, turn to what's been previously 21 marked as B1493. 22 MR. RINALDI: Your Honor, I believe I 19251 1 had not yet offered B1451. We would move 1451 2 into evidence. 3 Any objection, Counsel? 4 MR. VILLA: If you would give me a 5 second. 6 MR. RINALDI: I'm handing up to the 7 Court a memo from Mr. Berner to Charles Hurwitz 8 and Barry Munitz dated February the 18th, 1987. 9 It's in reference to exchange of preferred stock. 10 And it's Exhibit B1493. 11 THE COURT: Mr. Villa, do you have any 12 objection to B1451? 13 MR. VILLA: No, Your Honor. 14 THE COURT: Received. 15 Q. (BY MR. RINALDI) Is this the memo that 16 you mentioned a moment ago that you prepared 17 following your phone call to the Federal Home Loan 18 Bank? 19 A. Yes, I believe so. 20 MR. RINALDI: Your Honor, we would move 21 the admission of Exhibit B1493. 22 MR. VILLA: No objection. 19252 1 THE COURT: Received. 2 Q. (BY MR. RINALDI) Now, why did you send 3 your memo to Mr. Munitz and Mr. Hurwitz? 4 A. They were the chief officers at 5 Federated and MAXXAM. At least I thought they 6 were. 7 Q. Does this refresh your recollection 8 that it was either Mr. Munitz or Mr. Hurwitz that 9 requested you to undertake the inquiry? 10 A. Well, I know it wasn't Mr. Hurwitz. It 11 doesn't because Bill Eckland is also getting a 12 copy of this. He was their outside counsel. It 13 was either Munitz or Eckland or Howard Bressler. 14 Q. Now, Mr. Eckland was a savings and loan 15 specialist, was he not? 16 A. I believe so. 17 Q. Is there a reason why Mr. Eckland 18 didn't make the inquiry? 19 A. Again, I don't remember why they asked 20 me to do it; but I was asked to do it. 21 Q. And in -- your memo indicates in the 22 first full paragraph that you learned that 19253 1 preferred stock which is not immediately 2 convertible to the underlying common is not 3 considered to be a holding of the underlying 4 common; is that correct? 5 A. That's what I was told. 6 Q. But this stuff or this C preferred 7 stock was going to be convertible within a matter 8 of months, was it not? 9 A. That's right. That's why I was asked 10 to find out the answer to this question. 11 Q. So, after you learned that, once it 12 became convertible, at that point it would be 13 considered the same as holding common stock, would 14 it not? 15 A. Right. That's my understanding. 16 Q. And so, what action did you decide -- 17 did MCO and Federated decide to take? 18 A. Well, I'm not sure MCO and Federated -- 19 they requested that the preferred stock be 20 exchanged for a new series of preferred stock that 21 would not be convertible for an additional year. 22 Q. In the last full paragraph of that 19254 1 memo, it says, "Based on this information, I 2 believe we can enter into an agreement whereby the 3 MCO/Federated convertible preferred stock could be 4 exchanged for a new class of convertible preferred 5 stock having exactly the same characteristics 6 except that the earliest exchange date would be 7 1988." 8 Do you see that? 9 A. Yes, I do. 10 Q. Was that your idea, or did someone else 11 make that proposal? 12 A. That was somebody else's idea. 13 Q. Okay. Whose idea was it to exchange 14 the C preferred stock for -- 15 A. It was either Dr. Munitz or Bill 16 Eckland or perhaps Howard Bressler. 17 Q. Now, as a consequence of your having 18 received this information from the Federal Home 19 Loan Bank, did you make an -- a formal submission 20 to the bank regarding the exchange from C to D 21 preferred? 22 A. Yes. There was a formal submission 19255 1 made. 2 Q. Do you recall who that was submitted 3 to? 4 A. I believe it was Julie Williams. I 5 believe it was Julie Williams. 6 Q. Would you turn the page to the next 7 document which would be T1131? This is a document 8 that was previously admitted as Tab 75. And take 9 a moment to -- to look at that. 10 A. (Witness reviews the document.) Do you 11 want me to read the whole thing or -- 12 Q. No. I just wanted to make sure 13 everybody had their copies. 14 A. Okay. 15 Q. And what was the purpose of sending 16 this letter to Julie Williams if you had already 17 received a verbal communication that, in fact, you 18 could change from C to D preferred? 19 A. This was to get a formal receipt of an 20 opinion or a ruling that that was, in fact, true. 21 Q. Okay. And in connection with that, you 22 provided Ms. Williams with certain information 19256 1 relating to MCO and Federated's ownership of UFGI, 2 did you not? 3 A. Well, I mean, I didn't prepare this 4 document. Yeah, I provided it. 5 Q. Well -- but the document is signed by 6 you, is it not? 7 A. Yes, it is. 8 Q. And you reviewed its contents before 9 you sent it to Ms. Williams? 10 A. Yes, I did. 11 Q. Now, if you turn to the second page, it 12 indicates here that MCO and Federated Development 13 Company and MCO -- 14 A. Excuse me. Do you have a staple 15 remover? 16 Q. I think you can just turn the page and 17 read it like that; or if you like, you can take it 18 out of the book. 19 It indicates there that MCO and 20 Federated hold 9.8 and 13.5 percent respectively 21 of the issue and outstanding shares of voting 22 common stock of UFGI. I think that's consistent 19257 1 with what we saw in the 1986 proxy statement, is 2 it not? 3 A. I believe so. 4 Q. It adds up to 23 percent which was what 5 was in the proxy statement? 6 A. Yes. 7 Q. And it goes on below and talks about 8 the C preferred shares. Do you see it at the last 9 full paragraph on the page? It says, "The Series 10 C stock held by Federated and MCO in the aggregate 11 will be convertible into 1,473,051 shares." 12 That's what we talked about, that it would be 13 slightly over 1.4 million shares of common stock 14 if converted, correct? 15 A. Correct. 16 Q. It indicates that if Federated and MCO 17 both converted their series stock into voting 18 common stock, they would hold in the aggregate 19 34.9 percent of the voting common stock of UFGI. 20 Do you see that? 21 A. Yes, I do. 22 Q. And then as we go over to the next 19258 1 page, there is an analysis; and it indicates 2 that -- it talks about an acquirer acquiring 3 control of the savings and loan if it directly 4 acquires over 25 percent of any class of voting 5 stock. 6 Do you see that? 7 A. No. 8 Q. It's in the first full paragraph of the 9 analysis. 10 A. Yes. 11 Q. So, in other words, if UFGI -- I'm 12 sorry. If MCO and Federated had the shares 13 converted and they owned 34.9 percent of the 14 common voting stock of UFGI, they would have 15 obtained over 25 percent of the voting stock and 16 acquired control of USAT and UFGI, correct? 17 A. I believe that's right. 18 Q. Okay. Now, in the footnote below, it 19 talks about, again, Federated's ownership; and it 20 indicates that Federated already has 23.3 percent 21 of the common stock and approximately 95.7 percent 22 of the Series C stock? 19259 1 A. 97.5 percent? 2 Q. Yes. I'm sorry. 3 A. Yes. 4 Q. Does it mention anywhere in this 5 footnote or, indeed, in this letter that you sent 6 to Julie Williams that MCO and Federated had 7 entered into a put/call option arrangement with 8 Drexel Burnham Lambert for the acquisition of 9 300,000 shares of United Financial Group stock? 10 A. In this letter? 11 Q. Yes. 12 A. I don't believe it says it in this 13 letter. Of course, we had sent her the 14 application before. 15 Q. I'm sorry. You sent her what? 16 A. She had received the application for 17 our subordinated debt, and it obviously was in our 18 proxy statement and in our business plan. And I 19 believe in her response, she makes reference to 20 their 13D where it was all spelled out. 21 Q. Now, you indicated a moment ago that 22 you had sent her a copy of the subdebt 19260 1 application. You sent Ms. Williams a copy of the 2 subdebt application as part of this letter for 3 requesting an opinion with respect to the 4 conversion from C preferred to D preferred? 5 A. No, not as part of this. Earlier. 6 Q. So, what you're saying is you had sent 7 to the Federal Home Loan Bank Board the subdebt 8 application? 9 A. Right. 10 Q. So, you assumed that they knew from the 11 subdebt application about the put/call option? 12 A. I don't know why the put/call option 13 wasn't described in this letter, but they 14 certainly knew about the put/call option. 15 Q. But you do agree and you've testified 16 previously that the put/call option was relevant 17 to MCO and Federated's ownership of UFGI; is that 18 correct? 19 A. It was relevant to the stockholders of 20 UFGI to know what MCO and Federated had the rights 21 to acquire. 22 Q. You also said that you thought that 19261 1 Ms. Williams had access to the 13D. 2 Do you recall that? 3 A. Yes, I do. 4 Q. Now, how many 13Ds did UFGI file? I'm 5 sorry -- did MCO and Federated file? 6 A. How many 13Ds? 7 Q. Yes. 8 A. They would file one every year. 9 Q. And in fact, if you take a look at 10 A2074 -- 11 A. I'm sorry. Where is that? 12 Q. This isn't really the original 13D. 13 Rather, it's Amendment No. 13, isn't it? 14 A. I don't have what you just made 15 reference to. 16 Q. I'm sorry. This is A2074. This is the 17 13D that we looked at some time ago. Let me see 18 if I can find it for you. 19 20 (Discussion held off the record.) 21 22 Q. (BY MR. RINALDI) And I think if you 19262 1 turn to the first page of the text which is on 2 Page 7 of 67 pages, it indicates, does it not, 3 that this was the 13th amendment; is that correct? 4 A. Yes, it does. 5 Q. Do you know whether Julie Williams, in 6 fact, had this 13D available to her? 7 A. I believe so. 8 Q. Now -- and did you provide it to her? 9 A. No, but she made reference to it in her 10 response. 11 Q. All right. We'll take a look at that. 12 Now, as a consequence of your sending 13 this request to her, did Ms. Williams then come 14 back to you and request further information? 15 A. I believe so, yes. 16 Q. Okay. Let me show you what's been 17 marked as B1561. This is a letter to Julie 18 Williams -- I'm sorry -- to Arthur Berner from 19 Julie Williams dated April the 8th, 1987. And it 20 should be the next document in your book, sir. 21 Is this a copy of the response that you 22 initially received from Julie Williams on or about 19263 1 April 8th, 1987? 2 A. Yes, it is. 3 MR. RINALDI: Your Honor, we would move 4 the admission of B1561. 5 MR. VILLA: No objection. 6 THE COURT: Received. 7 Q. (BY MR. RINALDI) And in the first full 8 paragraph there, Ms. Williams asks you for 9 additional information with respect to UFGI's 10 voting common stock. 11 Do you see that? 12 A. Yes. 13 Q. And the acquisition of the voting 14 common stock. 15 As a result of her request for further 16 information regarding the voting common stock of 17 UFGI owned by MCO and Federated, did you submit a 18 response to Ms. Williams? 19 A. Yes, I did. 20 Q. Okay. Would you take a look at what's 21 been marked as Exhibit B1566? 22 Do you recognize this document, sir? 19264 1 A. Yes, I do. 2 Q. Is that your signature that appears on 3 the last page? 4 A. Yes, it is. 5 MR. RINALDI: We would move the 6 admission, Your Honor, of B1566. This is the 7 letter dated April the 14th, 1987, to Julie 8 Williams from Arthur Berner. 9 MR. VILLA: No objection. 10 THE COURT: Received. 11 Q. (BY MR. RINALDI) And in here, do you 12 provide her with additional information regarding 13 UFG -- I mean Federated and MCO's acquisition of 14 common stock of UFGI? 15 A. Yes, I do. 16 Q. And in this document, do you advise her 17 of the existence of the put/call option between 18 Drexel and MCO under which Drexel agreed to option 19 300,000 shares to MCO? 20 A. In this letter, no, I don't. 21 Q. Now, subsequent to the submission of 22 this additional information regarding MCO's and 19265 1 Federated's ownership of UFGI, did Ms. Williams 2 issue some form of letter regarding the conversion 3 of C preferred to D preferred? 4 A. Yes, she did. 5 Q. Would you take a look at what's been 6 marked as Exhibit T1131? 7 A. T1131? 8 Q. I'm sorry. 34. I can't read my own 9 writing. 10 This is a cover memo dated March 11 the 12th, 1987. It's to Barry Munitz, Howard 12 Bressler, Bill Eckland; and it's from you. 13 A. I think it's May 12th. 14 MR. RINALDI: And I'll hand a copy up 15 to the Court. 16 A. I believe it's May 12th. 17 Q. (BY MR. RINALDI) I'm sorry. Did I 18 say -- May 12th. And attached to it is a letter 19 dated May 6, 1987, to Mr. Berner from Julie 20 Williams. 21 Do you see that? 22 A. Right. 19266 1 Q. Okay. Is the attachment the letter 2 that you received from Ms. Williams in response to 3 your earlier written request on March 4th, 1987? 4 A. I believe so, yes. 5 Q. And is this cover memo a memo that you 6 drafted to Barry Munitz advising him that Julie 7 Williams had responded to your request? 8 A. Yes. 9 MR. RINALDI: Your Honor, we move the 10 admission of T1134. 11 MR. VILLA: Your Honor, our 12 Exhibit T1134 only has the cover memo. It doesn't 13 have the attached document. May I have one 14 moment, Your Honor? 15 THE COURT: Yes, you may. 16 MR. VILLA: No objection, Your Honor. 17 THE COURT: Received. 18 Q. (BY MR. RINALDI) And turning to the 19 last page of the Williams memoranda, did 20 ultimately Ms. Williams determine that they would 21 recommend that no enforcement action be taken 22 against UFGI or MCO or Federated if the 19267 1 transaction to convert C preferred to D preferred 2 were consummated? 3 A. That's correct. 4 Q. Okay. Now, as a consequence of the 5 approval or at least the "no action" letter that's 6 sent by Julie Williams, was the D preferred stock 7 then -- I mean the C preferred stock then 8 converted to a new issue? 9 A. Yes, it was. 10 Q. And what was the new issue denominated? 11 A. D. Series D preferred. 12 Q. Did the D preferred then have a new 13 conversion date? 14 A. Yes, it did. 15 Q. And what was that conversion date? 16 A. It was a year after the C. Sometime in 17 1988. 18 Q. Okay. Now, in Paragraph -- the second 19 full -- the paragraph that begins on the first 20 page of the document, Ms. Williams recites the 21 facts that had been given to her by you. And it 22 indicates that UFGI currently has issued an 19268 1 outstanding 8,183,844 shares of common stock. 2 Do you see that? 3 A. In the first paragraph? 4 Q. No. The second paragraph on the first 5 page. 6 A. Oh, okay. Yes. 7 Q. Then it goes on and says that MCO and 8 Federated -- "MCO Holdings, Inc., an affiliate of 9 Federated, holds an aggregate of 23.3 percent of 10 the outstanding common shares of stock." 11 Do you see that? 12 A. Yes. 13 Q. And below that is a footnote. Is that 14 what you were referring to when you indicated that 15 Ms. Williams had received a copy of the 13D filing 16 by MCO? 17 A. I didn't say she received it by MCO. I 18 said she had access to it. 19 Q. Does this indicate which of the 13 20 amendments are being referred to here? 21 A. This does not indicate that. 22 Q. So, you don't know if it's the 19269 1 amendment that is referred to previously as 2 Exhibit T106 -- I'm sorry. Is that it? Strike 3 that. 4 As Exhibit A2074 which -- 5 A. I would assume that she would have 6 looked at the most recent filing. 7 Q. But you don't know if that's the one 8 that's being referred to here, do you? 9 A. I don't know that. I'm saying I would 10 assume that's what she would do. 11 Q. But by reading this, I can't tell, can 12 I? 13 A. No. 14 Q. And in your submissions, you did not 15 disclose to her the existence of the put/call 16 arrangement; is that correct? 17 A. In the description of the conversion, 18 that's correct. 19 Q. And in Ms. Williams' letter back, she 20 does not indicate that she is aware of the 21 put/call arrangement, does she? 22 A. Other than making reference to the 13D, 19270 1 that is correct. 2 Q. Now, following the receipt of this 3 letter, you went ahead with the conversion, 4 correct? 5 A. Yes, it was converted. 6 Q. And did there come a time approximately 7 a year later when the same problem arose with 8 respect to the D shares? 9 A. That's correct. 10 Q. And at that point in time, did they 11 then -- did MCO request conversion from D to an E 12 preferred? 13 A. Yes, they did. 14 Q. Take a look at what's been marked as 15 B2146. And when you -- is this the letter 16 submitted by Ms. Williams? 17 A. Yes, it is. 18 Q. Okay. And would you take a look at 19 T1141? 20 MR. RINALDI: Your Honor, we would move 21 the admission of B2146. 22 MR. VILLA: No objection. 19271 1 THE COURT: Received. 2 Q. (BY MR. RINALDI) And directing your 3 attention to T1141, is this the application that 4 you -- or the request that you filed with Julie 5 Williams to convert the C preferred to D 6 preferred? 7 A. Yes, it is. 8 Q. And it's in response to T1141 that you 9 received the letter which is Exhibit B2146 from 10 Julie Williams? 11 A. I believe so, yes. 12 Q. Okay. 13 MR. RINALDI: Your Honor, we would move 14 the admission of T1141. 15 MR. VILLA: No objection. 16 THE COURT: Received. 17 Q. (BY MR. RINALDI) Now, the last full 18 paragraph of B2146 indicates that "Based on the 19 information contained in your March 4th, 1987, and 20 February 29th, 1988 letters, and for the reasons 21 set forth in our May 6th, 1987 response to your 22 initial letter, this office would not recommend 19272 1 that any enforcement action be taken against 2 either UFGI, Federated Development Company, or MCO 3 Holdings, Inc. in the event that the proposed 4 exchange were consummated without prior FSLIC 5 approval." 6 Do you see that? 7 A. Yes. 8 Q. Did either your March 4, 1987, or your 9 February 29, 1988 letter make any reference to the 10 put/call option, sir? 11 A. I don't believe so. 12 MR. RINALDI: Thank you. I have no 13 other questions with respect to these matters. 14 Your Honor, that concludes my portion 15 of the examination of the witness with respect to 16 the compensation and these MCO ownership issues. 17 Mr. Guido will now examine the witness with 18 respect to other matters associated with other 19 allegations. 20 THE COURT: We'll take a short recess. 21 22 . 19273 1 (Whereupon, a short break was taken 2 from 4:16 p.m. to 4:32 p.m.) 3 4 THE COURT: Be seated, please. We'll 5 be back on the record. 6 Mr. Guido. 7 MR. GUIDO: Good afternoon, Your Honor. 8 THE COURT: Good afternoon. 9 10 EXAMINATION 11 12 Q. (BY MR. GUIDO) Good afternoon, 13 Mr. Berner. 14 A. Good afternoon. 15 Q. Have you reviewed any documents prior 16 to your testimony in this proceeding? 17 A. Yes, I have. 18 Q. What have you reviewed? 19 A. I think I've looked at things that you 20 had pulled or told counsel about documents that 21 you were pulling. 22 Q. Over the weekend, did you have an 19274 1 opportunity to review those documents that I 2 pulled and gave the numbers to your counsel? 3 A. I think I glanced at some of them. I 4 don't think I looked at all of them. 5 Q. Have you had an opportunity to review 6 any pre-hearing submissions in this proceeding? 7 A. I don't believe so. 8 Q. Have you had an opportunity to review 9 any submissions that you and your co-respondents 10 made to the FDIC through Williams & Connolly? 11 A. I'm not sure I know what you mean, the 12 submissions. 13 Q. Have you reviewed your deposition prior 14 to your testimony? 15 A. No, I haven't. 16 Q. Do you recall reviewing any submissions 17 made to the FDIC on your behalf prior to the -- 18 your testimony during the investigative phase of 19 this proceeding? 20 A. I don't recall any. 21 Q. You don't recall whether you have or 22 you have not? 19275 1 A. That's correct. 2 Q. Okay. And you don't recall whether or 3 not you reviewed any pre-hearing submissions. Is 4 that your testimony? 5 A. I believe so, that's right. 6 Q. And you say that you received some 7 documents that I identified for your counsel that 8 I was going to ask you questions about today? 9 A. That's correct. 10 Q. And I think your testimony was you 11 glanced at them? 12 A. I looked at them, that's correct. 13 Q. How long did you look at them? 14 A. About two hours' worth. 15 Q. Okay. How thick was the stack? 16 A. I don't know. I don't recall. 17 Q. Was it a thorough review? 18 A. Was it a thorough review? 19 Q. Yes. 20 A. I looked at the documents that you had 21 pulled. 22 Q. Were you doing something else while you 19276 1 looked at those documents? 2 A. I think I was talking to my counsel. 3 Q. Okay. You weren't watching a ball game 4 or anything? 5 A. No. 6 Q. Now, you were the general counsel and 7 the secretary for UFG and USAT; is that correct? 8 A. At various times, that's correct. 9 Q. And during the time that the investment 10 committee was created, did you serve on the 11 investment committee? 12 A. Yes, I did. 13 Q. When was it created? 14 A. Sometime in 1986. I think the first 15 quarter or so of 1986. 16 Q. Why was it created? 17 A. Why was it created? 18 Q. Uh-huh. 19 A. UFG and USAT were dealing in securities 20 and high-yield bonds and mortgage-backed 21 securities, and it was thought that it would be 22 better to formalize -- create a formal committee 19277 1 to look at those issues. 2 Q. Whose idea was it to create the 3 committee? 4 A. I don't know. I think it was just 5 discussed. I'm not sure it was any one particular 6 person's idea. 7 Q. Why was it decided there was a need to 8 formalize the committee? 9 A. There were big dollar transactions; and 10 we thought it was the best thing to do, to have a 11 formal committee. 12 Q. Did you recommend it? 13 A. I certainly thought it was a good idea. 14 Q. Do you know who initiated the idea of 15 creating a formalized committee? 16 A. It's possible I did, but I'm not sure 17 that that's true. I don't really remember who 18 initiated the idea. 19 Q. Do you recall what the size of the 20 investments and securities were at the time it was 21 created? 22 A. No, I sure don't. 19278 1 Q. Do you know whether or not it increased 2 significantly from November of 1985, those 3 investments? 4 A. To when? 5 Q. From November of 1985 until the date 6 that you said it was created, sometime in the 7 first quarter of '86. 8 A. I sure don't. 9 Q. How were investment decisions made 10 prior to the creation of the investment committee? 11 A. There were -- again, my recollection is 12 that there were people that were in charge of the 13 various portfolios; and they would have informal 14 conversations and discussions with certain members 15 of management. 16 Q. Which members of management? 17 A. I think -- again, I was not involved in 18 it; so, I'm just going to give you hearsay. I 19 think it was maybe Jenard Gross and Mike Crow. 20 But you know, I was not part of that; so, I don't 21 specifically know that. 22 Q. What do you mean you weren't part of 19279 1 that? 2 A. I wasn't involved in those discussions. 3 Q. You weren't one of the people that was 4 consulted prior to the creation of the investment 5 committee? 6 A. That's correct. I was not. 7 Q. Did you participate in any decisions 8 with regard to investments in mortgage-backed 9 securities through a sub called USAT Mortgage 10 Finance? 11 A. I knew about it. Did I participate? I 12 certainly was aware of it, and I think I was part 13 of some discussions. 14 Q. Was -- besides Michael Crow and Jenard 15 Gross, the informal group of people that made 16 investment decisions prior to the creation of the 17 investment committee, was Barry Munitz one of 18 those people? 19 A. I don't know. 20 Q. Was Ron Huebsch one of those people? 21 A. Sure. He would have been one. 22 Q. Was Joe Phillips one of those people? 19280 1 A. He would have been one. 2 Q. Was Charles Hurwitz one of those 3 people? 4 A. I don't know. 5 Q. Now, do you recall who the members of 6 the investment committee were? 7 A. When it was first formed? 8 Q. Uh-huh. 9 A. Gerry Williams, Jenard Gross, myself, 10 Mike Crow, Ron Huebsch, Joe Phillips, Bruce 11 Williams, I think Barry Munitz. And I think that 12 may be it. 13 Q. Did anyone else participate in the 14 meetings of the investment committee? 15 A. Yes. 16 Q. Who? 17 A. On occasion, Charles Hurwitz would 18 participate; and then we would also have people 19 that would call into the investment committee 20 meetings from various brokerage houses, investment 21 banking houses. 22 Q. I would like to show you your 19281 1 transcript of your deposition, Pages 128 through 2 197, which includes the portion of your testimony 3 that I questioned you about. I would like to 4 direct your attention to Page 133, Line 14 through 5 24. 6 Do you see the question that starts at 7 14: "Who were the members of the USAT investment 8 committee?" 9 MR. VILLA: Can I ask you, sir, what's 10 the date of the deposition you're referring to? 11 MR. GUIDO: The date of the deposition 12 is June 28th, 1995. 13 MR. VILLA: Thank you, sir. 14 Q. (BY MR. GUIDO) Do you see the question, 15 "Who were the members of the USAT investment 16 committee?" 17 A. Yes. 18 Q. Would you read your answer into the 19 record, please? 20 A. "Jenard Gross, Bruce Williams, Mike 21 Crow, Gerry Williams when he was there, Ron 22 Huebsch, myself, whoever was the head of the 19282 1 high-yield bond group, and whoever was the head of 2 the mortgage-backed securities group. You know, 3 those changed. And then sitting in quite often 4 would be Mr. Munitz and Mr. Hurwitz." 5 Q. You said Mr. Hurwitz was a member of 6 the committee? 7 A. That's my recollection. 8 Q. This says, "And then sitting in quite 9 often was Hurwitz." Is that your recollection? 10 A. At the beginning, that's correct. 11 Q. Now, let me question -- beginning at 12 Line 22. "Was Hurwitz on the investment committee 13 for UFG? The previous question was USAT." What 14 is your answer there? 15 A. I don't remember if he formally was. I 16 think he was, but I don't remember if he formally 17 was. 18 Q. And then the question, "Who do you 19 recall were the members" -- 20 MR. NICKENS: Your Honor, are we just 21 going to read his deposition question and answer 22 into the record? I mean, he's not impeaching the 19283 1 witness and not asking any questions, just reading 2 his prior testimony. 3 MR. GUIDO: Your Honor, the rules allow 4 me to introduce the whole transcript into the 5 record, if I wish. I have some very specific 6 questions to ask this witness about this line of 7 questions; and I wanted to establish the predicate 8 before I did so, Your Honor. 9 MR. NICKENS: Your Honor, I object. 10 The way to go about that would be for him to ask 11 him the question; and then if he gets a different 12 answer, then he could impeach him with his prior 13 testimony. But to just have him read it into the 14 record is not a proper procedure. 15 MR. GUIDO: Your Honor -- 16 THE COURT: Are you saying you can 17 introduce the -- 18 MR. GUIDO: Your Honor, I can introduce 19 the entire transcript or portions of the 20 transcript. 21 THE COURT: What rules -- 22 MR. GUIDO: I think it's 59.10 19284 1 Your Honor. 2 THE COURT: I can't see the point of 3 it. I'm willing to give you a lot of leeway in 4 setting the stage for your questions, but I'm not 5 sure -- you think that these questions and answers 6 in a deposition in some way contradict what he 7 just said? 8 MR. GUIDO: I thought with regard to 9 Mr. Hurwitz that he did alter the testimony from 10 his deposition; and that's what why I went to the 11 deposition, Your Honor. I think that it was 12 rather significant. 13 THE COURT: It seems to me we're having 14 an awful lot of material that may be redundant, 15 but proceed. 16 MR. GUIDO: Your Honor, I'm going to 17 try and avoid the redundancy. I understand the 18 problem in this proceeding because of multiple 19 respondents. 20 THE COURT: All right. 21 MR. GUIDO: I ask this witness these 22 questions because he was the secretary of this 19285 1 committee, Your Honor. 2 Q. (BY MR. GUIDO) Now, with regard to your 3 testimony about the USAT and UFG committees, is it 4 your recollection that, essentially, it was a 5 joint committee composed of the same individuals? 6 A. It was two committees consisting of 7 generally the same individuals, I believe, yeah. 8 Q. How did they sit? Did they sit and 9 discuss UFG investments for a period of time and 10 then shift over and discuss USAT investments for a 11 period of time? 12 A. There weren't that many UFG 13 investments; but I think to the extent there were, 14 they would be discussed separately. 15 Q. Were there separate minutes? 16 A. I don't believe so. 17 Q. We've looked at a lot of minutes in 18 this proceeding, and I think they are mostly 19 denominated as the investment committee of UFG and 20 USAT. 21 Is that your recollection? 22 A. I don't have a recollection one way or 19286 1 the other. If that's what they say, I'm sure 2 that's what it was. 3 Q. Now, why was there a joint committee, 4 joint meetings, and joint minutes? Why weren't 5 they kept separate? 6 A. It was the same people discussing 7 investments that were being made for USAT and, to 8 the extent that UFG made investments, UFG. It was 9 done at the same time. 10 Q. When did you become general counsel? 11 A. Of what? 12 Q. Of UFG. 13 A. It would have been when I first started 14 there: October of 1985. 15 Q. Did you hold any position at USAT at 16 that time? 17 A. I believe I was made a vice president 18 either right at that time or shortly thereafter. 19 Q. Were you also general counsel of USAT 20 when you first joined? 21 A. No, I was not. 22 Q. Okay. Was Mr. Pledger the general 19287 1 counsel? 2 A. Yes, he was. 3 Q. How long was he general counsel at 4 USAT? 5 A. How long? I don't know when he 6 started. He left sometime in 1986. 7 Q. When in '86? 8 A. Middle part of the year, I believe. 9 Q. Did he have a disagreement with you 10 about any regulatory matters before he left? 11 A. Not that I recall. 12 Q. Now, when you served as the secretary 13 for the UFG investment committee, did you also 14 serve as the secretary for the USAT investment 15 committee? 16 A. Yes. 17 Q. Did anyone ever raise with you a 18 question about whether or not the operations of 19 the two entities should be kept more distinct? 20 A. No. 21 Q. Did you ever raise it with anyone? 22 A. Not that I recall. 19288 1 Q. Had you had any background when you 2 joined UFG with banking regulations? 3 A. No. 4 Q. Did you ask anyone for any advice who 5 had such a background? 6 A. Yes, I did. 7 Q. Who? 8 A. Jim Pledger and Bob Pozen mostly. 9 Q. Who was Mr. Pozen? 10 A. He was counsel -- a lawyer with 11 Caplan & Drysdale. 12 Q. Did you seek any advice from him with 13 regard to the need to recognize the separateness 14 of UFG versus USAT? 15 A. I don't recall if I did or if I didn't. 16 I think I would have relied on Mr. Pledger. 17 Q. Now, I would like to show you a 18 document which is Exhibit B1626 which is a letter 19 dated May 19th, 1987, a memorandum from Barry 20 Munitz to you. 21 Do you recall seeing this memorandum 22 before? 19289 1 A. Yes, I do. 2 Q. When? 3 A. Well, I saw it yesterday. 4 Q. Okay. Prior to yesterday? 5 A. I don't recall it, but I'm -- I mean, 6 my handwriting is on the top; so, I'm sure I did. 7 Q. Can you read that at the top? 8 A. It says, "Marge Caldwell, make changes 9 as" -- it's either "request" or "required." 10 Q. Now, see where it says, "I believe that 11 when we originally established the investment 12 committee, I was given formal membership in order 13 to have a critical mass of policy people shaping 14 the framework for our activities"? 15 Do you see that? 16 A. Yes. 17 Q. What is the reference to critical mass 18 of policy people referring to? 19 A. Again, I'm not sure what he was 20 referring to in that -- I could speculate, but I 21 don't know what he was referring to. 22 Q. Did you participate in the creation of 19290 1 the investment committee? 2 A. I think I said that -- I'm not sure it 3 was my idea, but the -- you know, there was a 4 decision made to formalize an investment 5 committee. 6 Q. Well, were there senior management at 7 USAT and UFG at the time the investment committee 8 was created? 9 A. Yes. 10 Q. And who would you consider to be those 11 senior management people? 12 A. Oh, I would have to look at -- if you 13 have a list of the people who were there, I could 14 tell you all of the -- 15 Q. Was Gerald Williams was one of them? 16 A. Sure. 17 Q. Was Jenard Gross one of them? 18 A. Yes. 19 Q. Was Barry Munitz one of them? 20 A. With UFG, yes. 21 Q. Was Charles Hurwitz one of them? 22 A. With UFG. 19291 1 Q. Now, after Mr. Munitz' resignation from 2 the committee in May, did he continue to 3 participate in the decisions of the committee? 4 A. Again, I believe he attended a number 5 of meetings. 6 Q. After that point in time? 7 A. I believe so. 8 Q. Okay. Now, I would like to show you 9 another document which is at Tab 1348. It's 10 T4374. 11 MR. GUIDO: It is a memorandum dated 12 May 27th -- a letter dated May 27th, 1987, 13 Your Honor, to Mr. Jim Paulin, United Financial 14 Corporation from Lawrence O. Connell. 15 MR. VILLA: Do you want to move 16 admission of 1626? 17 MR. GUIDO: I'm sorry. I move 1626, 18 Your Honor. A1626. 19 MR. VILLA: No objection. B1626. 20 THE COURT: Received. 21 MR. GUIDO: B1626. 22 Q. (BY MR. GUIDO) Have you seen 19292 1 Exhibit T4374 before, Mr. Berner? 2 A. Yes, I have. 3 Q. Prior to yesterday? 4 A. Yes. 5 Q. Huh? 6 A. Yes. 7 Q. When did you see it? 8 A. Well, I was shown it a few weeks ago 9 from -- again, in connection with this proceeding. 10 Q. Okay. 11 A. And I might have received it -- I'm 12 sure I received it because it shows me getting a 13 copy of it earlier, but I don't have a specific 14 recollection of this letter. 15 Q. What was UFC? 16 A. I believe it was a subsidiary of United 17 Savings Association of Texas. 18 Q. Do you see the reference in the first 19 sentence that says, "I was informed by Jim Paulin 20 this morning that Charles had committed for UFC to 21 purchase 990,000 more of TSG Holdings"? 22 A. Yes, I do. 19293 1 Q. Do you recall that transaction? 2 A. I've looked at it recently. Yes, I do. 3 Q. Is your memory refreshed, or you just 4 see this piece of paper and don't doubt its 5 accuracy? 6 A. That's what it is. 7 Q. Do you know who the reference to 8 Charles is there? 9 A. I believe Charles Hurwitz. 10 Q. Where did Charles Hurwitz get the 11 authority to commit a sub of USAT to purchase 12 $990,000 worth of stock? 13 A. I don't believe he had that authority. 14 Q. Do you recall ever objecting to this 15 transaction? 16 A. My recollection is it came to the 17 investment committee and was ultimately approved 18 by the investment committee. 19 Q. Before or after the fact? 20 MR. NICKENS: What fact, Your Honor? 21 Q. (BY MR. GUIDO) Before or after the 22 commitment to purchase by UFC the 990,000. 19294 1 A. I believe it was before the purchase. 2 I believe so. 3 Q. Well, this memo says, "I was informed 4 by Jim Paulin this morning that Charles had 5 committed for UFC to purchase 990,000 more of TSG 6 Holdings." 7 Do you see that? 8 A. Yes, I do. 9 Q. Then it says, "Art, please get in the 10 investment committee minutes." Seems to be saying 11 to put it in after the fact, doesn't it? It's 12 reporting a fact, and then it's telling you to put 13 it in the minutes? 14 A. That's what it seems to be saying. I'm 15 not sure that's what it meant, but that's what it 16 says. 17 Q. Now, look at B1626 again, Mr. Munitz' 18 memorandum. 19 Do you see that? 20 A. Yes. 21 Q. Take a look at the reason why he 22 doesn't want to serve on the investment committee 19295 1 anymore. What does that say his reasons are? 2 A. He says, "Now that our high-yield bond 3 person is on board and we have people both in the 4 equity arbitrage and the mortgage-backed security 5 functions, it seems far less vital to have my 6 official participation. In addition, I am 7 concerned that the Wednesday afternoon regular 8 meetings often conflict with other assignments for 9 me. Therefore, I would like you to remove me from 10 formal membership, although as regularly as 11 possible I will continue to attend." 12 Q. Do investment committee meetings occur 13 on Wednesday afternoon? 14 A. I believe so, yeah. 15 Q. I would like to show you A1444, which 16 is Tab 1316. I'm sorry. Tab 1317. Excuse me. 17 A. 1444? 18 Q. A1444. 19 A. Okay. This is 1356. 20 Q. I'm sorry. It's Tab 1316 is what the 21 file says. 22 19296 1 (Discussion held off the record.) 2 3 Q. (BY MR. GUIDO) Now, that's the minutes 4 of the investment committee of May 27th, 1987; is 5 that right? 6 A. Yes, it is. 7 Q. And it's the -- the regular meeting of 8 the investment committee is being reported there, 9 is it not? 10 A. I believe so. 11 Q. Do you see any mention in those minutes 12 to the UFC purchase of 990,000 more shares of TSG? 13 A. Well, it says at the bottom paragraph 14 that the committee discussed the TSG acquisition 15 and it was determined that full particulars of the 16 acquisition would have to be received from 17 Mr. Paulin. 18 Q. I'm sorry. I didn't hear you. 19 A. "The committee then discussed the TSG 20 acquisition, and it was determined that full 21 particulars of the acquisition would have to be 22 received from Mr. Paulin." 19297 1 Q. That was at the regular investment 2 committee meeting on May 27, 1987. Right? 3 A. Yes. 4 Q. Now, I would like to show you Tab 1317, 5 which is A1445. This says May 27, 1987 also. It 6 says, "A special meeting of the investment 7 committee was held on May 27th, 1987. All members 8 of the committee were present. A discussion of 9 the possible acquisition of additional shares of 10 Transcontinental Services Group, N.V., was held 11 among the members of the committee. After full 12 discussion, it was determined to acquire an 13 additional 300,000 shares at a price of $3.30 per 14 share." 15 Do you see that? 16 A. Yes, I do. 17 Q. My first question is: Did this special 18 meeting really occur? 19 A. Yes, it did. 20 Q. Did it occur before or after Charles 21 Hurwitz had made the commitment to purchase the 22 additional $990,000 worth of TSG stock? 19298 1 A. I'm sure it occurred after the first -- 2 T4374. 3 Q. So, it -- Exhibit A1445 was written 4 after; and the meeting that's referred to occurred 5 after Charles Hurwitz had already committed for 6 UFC to purchase the 990,000 shares of TSG 7 holdings? 8 MR. VILLA: $990,000. 9 Q. (BY MR. GUIDO) $990,000. 10 A. Yes. 11 Q. Did anyone raise an objection to that 12 transaction? 13 A. Well, I think that's what the A1444 is, 14 that the committee, before it's going to approve 15 anything, is asking for full particulars. So, it 16 has the meeting and says, "We need to get more 17 information." Then later on that day, there's a 18 special meeting when it gets those particulars. 19 Q. What were the particulars? 20 A. I have no recollection of that. 21 Q. Who is Mr. Paulin? 22 A. He was an employee of Federated. I 19299 1 know that. 2 Q. What was his role at United Financial 3 Corporation? 4 A. He didn't have an official role with 5 United Financial Corporation. 6 Q. What was TSG? 7 A. Again, my recollection is it was an 8 English or London-based company that -- I think it 9 just -- it invested in deals or did deals. That's 10 what I can recall right now. 11 Q. Do you recall a man named Stanley Cohen 12 being affiliated with TSG Holdings? 13 A. No. 14 Q. Do you recall any of the Kramer Levin 15 partners being affiliated with TSG Holdings? 16 A. No. 17 Q. I would like to now show you A11097, 18 which is a memorandum from you to Charles Hurwitz, 19 Barry Munitz, and Jenard Gross dated March 23rd, 20 1988. 21 Have you seen Exhibit A11097 22 previously? 19300 1 A. Yes, I have. 2 Q. Okay. And prior to yesterday, had you 3 seen this document? 4 A. Yes, I have. 5 Q. And when was that? 6 A. Well, I remember the document; and I've 7 seen it in connection with the preparation for 8 this testimony. 9 Q. Is this a document that you wrote? 10 A. Yes, it is. 11 MR. GUIDO: I would like to move the 12 admission of A11097, Your Honor. 13 MR. VILLA: No objection. 14 THE COURT: Received. 15 Q. (BY MR. GUIDO) I would like to direct 16 your attention to the last page of the document. 17 A. (Witness reviews the document.) 18 Q. Now, was it your practice to write 19 memoranda summarizing your meetings with the 20 people at the Federal Home Loan Bank? 21 A. Not all the time, but often -- 22 Q. Okay. 19301 1 A. -- I would. 2 Q. Why was that? 3 A. To memorialize what was said at various 4 meetings and to convey information to whoever I 5 was trying to convey the information to. 6 Q. Had you ever had an experience prior to 7 March 23rd, 1988, in which there was something 8 that you didn't write down in a memorandum and the 9 Federal Home Loan Bank Board people's 10 recollections were different than yours? 11 A. I'm not sure. I mean, I don't 12 remember. 13 Q. Was it to prevent that occurrence that 14 you wrote the memoranda summarizing your meetings 15 with the Federal Home Loan Bank Board people? 16 A. No. I think, in general, it was just 17 to memorialize what was said and convey 18 information. 19 Q. Okay. Now, I would like to direct your 20 attention to the second-to-the-last paragraph 21 there. See where it says, "Twomey asked what 22 Hurwitz' current role in United was"? 19302 1 Do you see that? 2 A. Yes, I do. 3 Q. I would like to direct your attention 4 to the fourth line from the bottom where it says, 5 "While I would not deny to Neil if Charles wanted 6 something done, it would probably be done." 7 Do you see that? 8 MR. NICKENS: Your Honor, I would ask 9 that the entire paragraph be read if we're going 10 to read part of it. 11 MR. GUIDO: Trying to save time, 12 Your Honor, but I'll -- 13 Q. (BY MR. GUIDO) "Twomey asked what 14 Hurwitz' current role in United was. He stated 15 that although he knew that Hurwitz was off the 16 board, he had often seen institutions where 17 control was in non-board members. I told Neil 18 that while Charles certainly had a say in overall 19 policy direction, in fact, the day-to-day 20 operations were totally out of his hand and even 21 on policy decisions, there was a free exchange of 22 ideas between all senior management. While I 19303 1 would not deny to Neil that if Charles wanted 2 something done, it would probably be done, I 3 stressed that, in fact, Charles was out doing 4 other deals and was not imposing his will upon 5 United or United's management." 6 Do you see that? 7 A. Yes, I do. 8 Q. Is it your recollection that if Charles 9 Hurwitz wanted something done at USAT, it would 10 probably be done? 11 A. Again, that's what I said. I'm not 12 sure that I recalled him actually imposing his 13 will, but yes. 14 Q. But that's your recollection? 15 A. That was my belief. 16 Q. Okay. I would like to now ask you some 17 questions about another committee of USAT's. 18 THE COURT: Mr. Guido, would this be a 19 good time to recess? We'll recess until 9:00 20 o'clock. 21 MR. GUIDO: Yes, Your Honor. 22 19304 1 (Whereupon at 5:05 p.m. 2 the proceedings were recessed.) 3 . 4 . 5 . 6 . 7 . 8 . 9 . 10 . 11 . 12 . 13 . 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 19305 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 17th 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 . 19306 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 17th 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