19307 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 18, 1998 22 19308 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 19309 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 19310 1 2 INDEX OF PROCEEDINGS 3 Page 4 ARTHUR BERNER 5 Continued Examination by Mr. Guido......19311 6 Examination by Mr. Villa................19487 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 19311 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:10 a.m.) 3 THE COURT: Be seated, please. We'll 4 be back on the record. 5 Mr. Guido, you may continue with your 6 examination of the witness. 7 MR. GUIDO: Thank you, Your Honor. 8 9 CONTINUED EXAMINATION 10 11 Q. (BY MR. GUIDO) Mr. Berner, when we 12 finished yesterday, we were just finishing a 13 discussion of the investment committee. I'd like 14 to move on now to the executive committee. 15 Do you recall the executive committee 16 at USAT? 17 A. The executive committee of the board, 18 sure, yes. 19 Q. And who were the members of the 20 executive committee? 21 A. At which point in time? 22 Q. Let's say in 1986. 19312 1 A. Of USAT? 2 Q. Yes. 3 A. I believe it was Gerry Williams, 4 Jenard Gross. I'd have to look at that to 5 remember who the board members were. 6 Q. Was Mr. Whatley a member of the USAT 7 executive committee? 8 A. I believe so, yes. 9 Q. And was Mr. Munitz the chairman of the 10 USAT executive committee? 11 A. I think that's right. 12 Q. Now, was there an executive committee 13 of United Financial Group? 14 A. Yes, there was. 15 Q. And who were the members of that 16 committee? 17 A. Again, I'm trying to remember. I think 18 it was Charles Hurwitz in this 1986, Jenard Gross, 19 I believe. Mr. Whatley. I think Dr. Munitz, but 20 I'm not sure. Again, I know it was in the books. 21 If you could show me the book, I could try to 22 remember. 19313 1 Q. I'd like to show you Exhibits A1109 and 2 A1110. They are Tabs 132 and 133. 3 Looking at A1110, which is the minutes 4 of the board of directors of United Savings 5 Association of Texas for February 13th, 1986, do 6 you see at the top of Page 2 the list of the 7 executive committee? 8 A. Yes, I do. 9 Q. Is that your understanding of the 10 membership of that committee? 11 A. Yeah, sure. 12 Q. Now, let's take a look at A1109, the 13 minutes of the board of directors of 14 United Financial Group of February 13th, 1986. 15 And I direct your attention to Page 6. 16 Does that refresh your recollection of 17 who the members of the executive committee were? 18 A. Yes, it does. 19 Q. Now, did the executive committees of 20 UFG and USAT hold joint meetings similar to the 21 board of -- boards of UFG and USAT? 22 A. I don't recall if they did or did not. 19314 1 Q. How frequently did the executive 2 committee of USAT meet? 3 A. I think it usually met around the same 4 time as the board meetings, and it might have met 5 sometime in between the official -- the 6 regularly-scheduled board meetings. I don't think 7 it met very frequently. 8 THE COURT: Mr. Guido, excuse me. I 9 think we'd better read into the record the names 10 of these people for each executive committee -- 11 MR. GUIDO: Yes, Your Honor. 12 THE COURT: -- so that the transcript 13 reflects it. 14 Q. (BY MR. GUIDO) The UFG minutes are 15 A1109. On Page 6, it lists the executive 16 committee of five directors, and that includes 17 Barry Munitz as the chairman, Jenard Gross, 18 Charles Hurwitz, James Whatley, and Gerald 19 Williams as the members. 20 Is that your recollection, Mr. Berner, 21 of the executive committee of UFG? 22 A. At that time, yes. 19315 1 Q. And then let's take a look at A1110 on 2 Page 2. These are the minutes of the board of 3 directors meeting of February 13th of USAT. And 4 it has as the executive committee Barry Munitz as 5 the chairman, Jenard Gross, Gerald Williams, and 6 James Whatley as members of that committee. 7 Is that your recollection? 8 A. Yes, it is, sir. 9 Q. Now, you said that the executive 10 committee of USAT met how often? 11 A. Again, I don't have a specific 12 recollection. I believe it met around the same 13 times as directors meetings and in between, but 14 I'd just have to look at the minutes to see when 15 they met. 16 Q. Take a look at the transcript that's to 17 your right of your deposition testimony. I'd like 18 to direct your attention to Page 134. 19 MR. NICKENS: Which date? 20 MR. GUIDO: It's June 28th, 1995. 21 Q. (BY MR. GUIDO) And do you see on Line 22 10 you're asked a question? 19316 1 A. Sure. 2 Q. "The third committee I've seen 3 reference to was an executive committee of UFG. 4 Do you recall that committee?" 5 Do you see that reference here? 6 A. Yes, I do. 7 Q. Now, you testified that you didn't 8 recall that the UFG and USAT executive -- whether 9 the USAT and UFG executive committees met jointly? 10 A. That's correct. 11 Q. Have you gone back to review any of the 12 minutes of the executive committees of USAT or 13 UFG? 14 A. I think I've looked at a couple of 15 them. 16 Q. Now, I think you testified that the 17 USAT executive committee met around the time of 18 board meetings. 19 Do you recall that? 20 A. Again, that's my recollection, yeah. 21 There would be minutes of the executive committee, 22 and it would be able to show me when they met. 19317 1 Q. Now, here, this is making reference to 2 the UFG executive committee. 3 Do you see that? 4 A. Yes. 5 Q. And it says in your answer when you 6 were asked, "Do you recall that committee," 7 referring to the UFG executive committee, you say, 8 "Yes, we talked about that a little bit yesterday. 9 There was an executive committee of the board, and 10 I don't remember who the board members were but 11 that met very, very infrequently." 12 Do you see that? 13 A. Yes, I do. 14 Q. Is that your recollection of the UFG 15 executive committee meetings? 16 A. Yes. 17 Q. Is that the same recollection that you 18 have for the USAT board meetings? 19 A. I believe so, yes. 20 Q. Now, in addition to the investment 21 committee and the executive committee, was there 22 an informal policy committee that met more 19318 1 frequently at USAT? 2 A. Well, I think I know what you're 3 talking about. I don't think there was a policy 4 committee. There was an informal group that used 5 to meet every week or tried to meet every week. 6 Q. And who were the members of that 7 committee? 8 A. Well, it wasn't a formal committee. 9 The people that met, generally, were 10 Gerry Williams when he was there, Jenard Gross, 11 Charles Hurwitz, Barry Munitz, Mike Crow, myself 12 were the people that tried to meet every week, 13 Monday mornings about 7:30 or so. 14 Q. What was the purpose of that group? 15 A. It was just kind of to talk about what 16 was going on at United and what was going on 17 outside of United, just kind of bring everyone up 18 to speed at the beginning of the week. 19 Q. Did it have a name? 20 A. I think some people called it the 21 management committee, but it didn't really have an 22 official name. It wasn't an official committee. 19319 1 Q. Did some people refer to it as the 2 strategic committee? 3 A. I've never heard of it as that. 4 Q. Did anybody ever refer to it as the 5 strategic planning committee? 6 A. Well, there was a strategic planning 7 committee; but it wasn't this group. 8 Q. Well, who were the members of the 9 strategic planning committee? 10 A. Again, that wasn't -- I'm not sure that 11 was an official committee; but generally, they 12 were the senior managers at United. Only they 13 would meet once or twice a year, I would think. 14 Q. What do you mean they met once or twice 15 a year? 16 A. Again, that's my recollection. There 17 was a -- it was to try to get a strategy meeting, 18 just kind of think big picture. 19 Q. Were any documents prepared that 20 summarized what had transpired at the -- either 21 the informal weekly meetings or the strategic 22 planning committee meetings? 19320 1 A. I've seen a couple of minutes that were 2 prepared of the strategic planning committee. I'm 3 not sure there were any minutes of the management 4 committee. There may have been. Infrequently, if 5 there was. Normally no on the management 6 committee. 7 Q. I'd like to show you a document that's 8 been marked as Exhibit T4246, and it's at Tab 335. 9 And it's a memo from Doug Hansen to Charles 10 Hurwitz, Jenard Gross, Barry Munitz, 11 Gerry Williams, Mike Crow, Art Berner, Bruce 12 Williams, and Jim Wolfe dated September 8, 1986. 13 Have you seen that document before? 14 A. I'm sure I have because my name is on 15 here, but I don't have a recollection of it right 16 now. 17 Q. The -- does that refresh your 18 recollection of who the members were of the 19 strategic planning committee? 20 A. No. As I say, I think these people all 21 would have been on the committee; but there also 22 were a number of other senior managers that would 19321 1 be a part of the strategic planning committee. 2 Q. Were they heads of departments? 3 A. Generally. 4 Q. I'd like to show you an Exhibit T4250, 5 which is at Tab 871, which is another similar 6 memorandum. This one is dated September 22nd, 7 1986. 8 Have you seen this memorandum before? 9 A. Again, I don't have a recollection; but 10 my name is on it, so I'm sure I received it at the 11 time. 12 Q. Now, this has the -- a similar group of 13 names of recipients. It has Charles Hurwitz, 14 Jenard Gross, Barry Munitz, Gerry Williams, 15 Mike Crow, Art Berner, Bruce Williams, and Jim 16 Wolfe. 17 A. It's got Jim Jackson, not Jim Wolfe. 18 Q. I'm sorry. Jim Jackson. I was reading 19 the earlier memorandum. 20 There is an overlap between these two. 21 Do you see that? Do you recognize that? 22 A. Between the two recipients? 19322 1 Q. Yeah. 2 A. Sure. 3 Q. Was there a same core group of people 4 who were the core group of the strategic planning 5 committee? 6 A. Well, as I said, it was generally the 7 managers, the heads of each of the departments. 8 Yeah, the same core group, plus other people. 9 Q. Now, was Charles Hurwitz an officer or 10 a director of United Savings Association of Texas? 11 A. I don't believe so. 12 Q. Why was he sitting on this group? 13 A. He was chairman of the board of United 14 Financial Group. United Savings was their sole 15 asset or major asset. He also was chairman, I 16 think, of the largest stockholder of 17 United Financial Group, and he was an important 18 person. 19 Q. All right. I'd like to direct your 20 attention to another document, T4320, which is at 21 Tab 569. This is a similar memorandum dated 22 December 17th, 1986. This is directed to Charles 19323 1 Hurwitz, Jenard Gross, Barry Munitz, 2 Gerry Williams, Mike Crow, Art Berner, and Bruce 3 Williams. 4 That's the same core group that we saw 5 in the earlier two memoranda, is it not? 6 A. Same people almost, that's correct. 7 Q. Now I'd like to show you a document 8 that has not been admitted into evidence yet. 9 It's A1601. And with it, I would like to show you 10 A1602. 11 Now, is that your signature on 1601? 12 A. Yes, it is. 13 Q. Did you prepare those minutes? 14 A. I believe so. 15 MR. GUIDO: Now, I'd like to move the 16 admission of A1601, Your Honor. 17 MR. VILLA: No objection. 18 THE COURT: Received. 19 Q. (BY MR. GUIDO) And before I ask you 20 questions about that, I'd like to direct your 21 attention to A1602. 22 Have you seen that document before? 19324 1 A. I've seen this in the last day or so. 2 Q. Do you know what that document is? 3 A. No, other than it says "strategic 4 planning committee, November 6th, 1987." 5 Q. And does it cover the same subjects 6 that are in the memorandum that you wrote or the 7 minutes that you wrote, A1601? 8 A. It seems to cover more. It seems to 9 cover more things than what are reflected in the 10 minutes. 11 Q. Now, do you recognize the handwriting? 12 A. No, I don't. 13 Q. The -- do you know whether or not 14 agendas were prepared for the strategic planning 15 committee meetings? 16 A. For the strategic planning committee 17 meetings? I'm not sure. There might have been. 18 MR. GUIDO: Your Honor, I move the 19 admission of 1602. It's at Bates stamp US39876 20 through US39881, which comes out of the joint 21 exhibits that were prepared by the respondents and 22 the OTS. 19325 1 MR. VILLA: Your Honor, there is no 2 witness who can tell us what this document is or 3 what the handwriting is. But it appears to be a 4 document from United's files; so, we have no 5 objection. But ordinarily, I would object on that 6 basis. No objection. 7 THE COURT: Received. 8 Q. (BY MR. GUIDO) Now, Mr. Berner, A1601 9 are minutes of the strategic planning and 10 management committee meeting. And I showed you 11 the other documents that are also denominated as 12 strategic planning committee minutes. 13 Why on November 6th were there minutes 14 prepared and not minutes prepared for the earlier 15 meetings, September 8th, September 22nd, and then 16 the later meeting, December 17th? 17 A. I have no idea. 18 MR. NICKENS: Your Honor, I will point 19 out this is a year later. I mean, the suggestion 20 is that it's September to December, but it's 21 September of '86 to November of '87. 22 MR. GUIDO: I'm sorry. 19326 1 Q. (BY MR. GUIDO) Why during the earlier 2 period were minutes not prepared and the minutes 3 prepared on November 6th, 1987? 4 A. I have no recollection why minutes were 5 prepared for this particular meeting. 6 Q. Who established the strategic planning 7 committee? 8 A. It was an informal committee. I don't 9 believe it was officially established by the 10 board. 11 Q. Well, what was its purpose? 12 A. It was to -- not to be facetious, but 13 to plan strategically, to look at strategic goals 14 and -- for the association. 15 Q. Well, let's just take a look at this 16 November 6th, 1987 set of minutes. Look at Entry 17 No. 1, mortgage-backed securities. It says, "As 18 rates decline to reach a break-even point, the 19 association will eliminate certain mortgage-backed 20 securities positions." 21 Do you see that? 22 A. Yes, I do. 19327 1 Q. Is that an operational decision? 2 A. I would have thought that that's a 3 strategic decision. 4 Q. You would? 5 A. Yes. It's not dealing with any 6 specific pools or anything. It's just saying that 7 this is the strategy to be used. 8 Q. Well, look at the second sentence. "As 9 break-even is achieved on an MBS pool, the 10 association will attempt to get out of that pool." 11 Isn't that an operational decision? 12 A. Again, I would have thought that that's 13 a strategic decision; but it is what it is. I 14 would have thought that's strategy. 15 Q. Did the -- take a look at the second 16 one, high-yield bonds. "Will attempt to increase 17 and upgrade quality even if we have to sacrifice 18 yield." 19 Do you see that? 20 A. Yes, I do. 21 Q. Is that a strategic and not an 22 operational decision? 19328 1 A. I would think so. 2 Q. What is the significance of something 3 being classified as a strategic decision as 4 opposed to an operational decision for regulatory 5 purposes? 6 A. I don't know. 7 Q. So, you're not using that term as a 8 reflection of any regulatory assumptions that you 9 had? 10 A. I wasn't, no. 11 Q. Now, the equity arbitrage, that entry, 12 "Will only do the best deals, will attempt to get 13 out of margin and only do announced deals for 14 which there is a high degree of confidence that 15 the deal will be completed." 16 Do you see that? 17 A. Yes, I do. 18 Q. Prior to November 6th, 1987, was it 19 USAT's policy to enter into equity arbitrage 20 transactions prior to the so-called deal being 21 announced? 22 A. I don't believe so. 19329 1 Q. Why in the minutes of November 6th was 2 that then set as a requirement? 3 A. Again, I don't recall why it was 4 specifically put in here. It was just something 5 that came out of this meeting. 6 Q. And you don't know why you wrote the 7 minutes of this meeting and there were no minutes 8 of any of the other meetings? 9 A. No, I don't. 10 Q. Now, I'd like to direct your attention 11 to -- 12 MR. GUIDO: Your Honor, I'd like to 13 offer A1601 if I have not moved its admission. 14 MR. VILLA: No objection. 15 THE COURT: I received it. 16 Q. (BY MR. GUIDO) I'd like to now direct 17 your attention to A12111, which is at Tab 1595. 18 This is a document, I believe, that was introduced 19 during cross-examination of Vivian Carlton, 20 Mr. Berner. And it is a February 18th, '88 memo, 21 the subject being "operating committees." And it 22 has come from the work papers of the examiners of 19330 1 the 1987 exam. 2 As part of that, in the listing of -- 3 in response to the letter is identification for 4 requesting the letter, it has attached to it a 5 memorandum from R.C. Henson to you dated 6 January 5th, 1988. 7 Do you see that? 8 A. Yes, I do. 9 Q. And it says, "Principal operating 10 committees of UFG, Inc., and USAT." 11 Do you see that? 12 A. Yes. 13 Q. And it lists a number of committees, 14 but nowhere does it mention the strategic planning 15 committee or the management committee, does it? 16 A. No, it doesn't. 17 Q. Why not? 18 A. Well, obviously, I didn't prepare the 19 memo. But I would have assumed that it's because 20 they weren't official committees and they 21 certainly weren't operating committees. 22 Q. What's your definition of an operating 19331 1 committee? 2 A. It's a committee that makes particular 3 decisions relating to specific operations. 4 Q. Well, how do you distinguish the 5 strategic planning committee from the investment 6 committee? 7 A. I think the strategic planning 8 committee is a committee that is looking to 9 overall strategy. I mean, it's just making 10 recommendations and trying to plot a course or to 11 help people think out a course for where the 12 institution is going. The investment committee 13 would be making specific decisions on specific 14 matters. 15 Q. Does an operating committee make 16 decisions that determine the actions that the 17 entity can take going forward? 18 A. I think it does, yeah. 19 Q. I'd like to show you Exhibit B1702, 20 which has not been admitted into evidence. This 21 is a memorandum of July 13th, 1987, from 22 Jenard Gross to Art Berner, Marge Caldwell, Gary 19332 1 Jacobson, Walter Sanders, Jr. 2 Have you seen this memorandum before? 3 A. Again, I've seen it recently; and I'm 4 sure I received it at the time. 5 Q. Now, who is Marge Caldwell? 6 A. She was a lawyer that worked for me. 7 Q. Who was Gary Jacobson? 8 A. Gary Jacobson -- I'm trying to think of 9 what his position was. He worked in the 10 investment group. I think he kind of did 11 operational work for the investment group is my 12 recollection of what he did. 13 Q. And what about Walter Sanders? 14 A. He was an accountant, and I believe he 15 was doing internal audit work. I believe that's 16 what he was doing for us. 17 Q. Now, look at the third paragraph and 18 particularly the last sentence in that. It says, 19 "We need to allude to the strategic planning 20 committee setting limits on each group." It's 21 referring to high-yield bonds in particular in 22 that paragraph. 19333 1 Do you see that? 2 A. Yes. 3 Q. Did the strategic planning committee 4 have the authority to direct the actions of 5 operating committees of USAT? 6 A. I don't believe so. 7 Q. Did it do so? 8 A. I don't believe so. 9 Q. Did the investment committee report, 10 under the operations manual at USAT, to the 11 strategic planning committee? 12 A. I don't think so, but that's not my 13 recollection. 14 Q. I want to move to another subject. 15 We'll come back to the strategic planning 16 committee, and I'd like to discuss some 17 substantive matters with you. 18 THE COURT: Are you going to move 19 B1702? 20 MR. GUIDO: Yes, Your Honor. I move 21 B1702. 22 MR. VILLA: No objection. 19334 1 THE COURT: Received. 2 Q. (BY MR. GUIDO) I'd like to move now 3 to the entity called USAT Mortgage Finance. 4 Do you recall the creation of USAT 5 Mortgage Finance and its collapse in 6 November/December of 1985? 7 A. I have a vague recollection of it, yes, 8 I do. 9 Q. Let me show you -- I'd like to show you 10 Tab 571, which is A10594. It's a January 10th, 11 1986 memo to the files by Joe Phillips regarding 12 MBS sales. I'd like you to read the first two 13 paragraphs of that to refresh your recollection 14 about the USAT Mortgage Finance creation and 15 collapse. 16 A. (Witness reviews the document.) Okay. 17 Q. Do you recall that USAT Mortgage 18 Finance was created and, through the use of 19 reverse repurchase financing, purchased 20 $500 million worth of mortgage-backed securities? 21 A. I really don't. 22 Q. Pardon? 19335 1 A. I really don't. 2 Q. You don't recall? 3 Now, this was shortly after you arrived 4 at USAT, isn't it? 5 A. That's correct. 6 Q. And it's prior to you -- it's prior to 7 Mr. Pledger leaving USAT? 8 A. Right. He was -- Jim Pledger was still 9 here. 10 Q. And -- but you were the secretary to 11 the board of UFG and its executive committee? 12 A. I believe so. I think that's right. 13 Q. I'd like to direct your attention to 14 Tab 1389, which is A1218, and also A1220, which is 15 at Tab 1390. 16 A. (Witness reviews the document.) 17 Q. I'd like to direct -- you see on the 18 second page, it has your signature? 19 A. Of 1218, yes. 20 Q. Yes. I'd like to direct your attention 21 to the second paragraph. It says, "The 22 committee" -- it says, "disussed." I presume that 19336 1 means discuss -- "the new financing subsidiary 2 regulations and possible alternatives. After full 3 discussion, it was decided that Mr. Berner should 4 keep in daily contact with Washington 5 representatives to determine the status of the 6 effective date of such regulations and a decision 7 on the next course of action would be made by the 8 executive committee as soon as possible." 9 Do you see that? 10 A. Yes, I do. 11 Q. What does that refer to? 12 A. I believe it had to do with the -- the 13 regulations that related to the United -- what do 14 you call it -- MBS. 15 Q. United Mortgage Finance? 16 A. United Mortgage Finance, I'm sorry. 17 Q. I confuse the two, and I'm corrected 18 over and over again. We'll try and avoid that 19 problem. 20 A. And you know a lot more about it than I 21 do, I'll assure you. 22 Q. Now, I'd like to -- who were the 19337 1 Washington representatives that's referred to 2 there? 3 A. Washington counsel. 4 Q. Washington counsel? 5 A. (Witness nods head affirmatively.) 6 Q. At that time, was that Caplan & 7 Drysdale? 8 A. Right. 9 Q. Now, who -- at that time -- excuse 10 me -- prior to you becoming general counsel of 11 UFG, had Caplan & Drysdale been the regulatory 12 counsel at -- for USAT and UFG? 13 A. I believe so, yeah. 14 Q. Okay. And had Mr. Pledger had 15 regulatory experience? 16 A. Yes, he did. 17 Q. I'd like to direct your attention to a 18 document that's in the record as B690, which is at 19 Tab 585, which is a memorandum from Mr. Pledger to 20 distribution list which is at the last page and 21 includes you and a number of other individuals 22 including Mr. Gross, Mr. Gerald Williams, 19338 1 Mr. Munitz, and Mr. Crow. 2 What was Mr. Pledger's involvement in 3 providing legal advice regarding the finance 4 subsidiary regulations as they affected USAT 5 Mortgage Finance? 6 A. I believe he would have been, certainly 7 in-house, the primary person regarding relaying 8 advice on that, legal advice. 9 Q. Now, did you discuss with him what 10 actions would be needed by USAT if United Mortgage 11 Finance did not qualify as a financing subsidiary 12 under the new regulations? 13 A. I don't have any recollection of 14 discussing that with him. 15 Q. Did you have any discussions regarding 16 what actions should be taken with anyone at USAT 17 if USAT Mortgage Finance did not qualify as a 18 financing subsidiary under the new regulations? 19 THE COURT: Would you keep your voice 20 up, Mr. Guido? 21 MR. GUIDO: I'm sorry. 22 Q. (BY MR. GUIDO) If USAT Mortgage 19339 1 Finance did not qualify under the regulations as a 2 financing subsidiary. 3 A. I don't recall ever having any 4 discussions with people about that. 5 Q. Did you have any discussions with 6 anyone about the financial benefits to USAT if 7 some of the assets of USAT Mortgage Finance were 8 sold as opposed to being absorbed into USAT 9 itself? 10 A. I don't believe so. 11 Q. Now, your experience at this time was 12 not experience as a regulatory counsel; is that 13 correct? 14 A. That is correct. 15 Q. And -- but it was -- was your 16 experience experience as a securities lawyer? 17 A. Securities lawyer and as a general 18 counsel for a public company, yes. 19 Q. Now, are you familiar with the term 20 "marketable securities"? 21 A. Marketable securities? 22 Q. Uh-huh. 19340 1 A. Yes. 2 Q. What does that term mean? 3 A. It means it's capable of being sold. 4 Q. Well, does common stock traded on a 5 national exchange qualify as a marketable 6 security? 7 A. It should. 8 Q. Pardon? 9 A. Yes. 10 Q. Does a United States government bond or 11 bill qualify as a marketable security? 12 A. I'm not sure. It might. It might. 13 Q. What do you mean you're not sure? Why 14 are you not sure? 15 A. Well, I'm just not sure how they are 16 traded. It probably does. 17 Q. Well, let's take a 10-year bond. 18 A. That's a marketable security. 19 Q. 30-year bond? 20 A. That would be -- 21 Q. Treasury notes, 1- to 5-year notes? 22 A. That would be marketable. 19341 1 Q. Do you know what, under the 2 regulations, qualifies as assets for liquidity 3 purposes? 4 A. No. 5 Q. Do you know why there is a 6 classification called liquidity under the Federal 7 Home Loan Bank Board and OTS regulations? 8 A. I certainly don't know now. I might 9 have known at the time, but I certainly don't know 10 now. 11 Q. What would it -- what actions would an 12 entity have to take that was holding stock traded 13 on a national exchange to dispose of that stock? 14 A. Just in general? 15 Q. Uh-huh. 16 A. Probably call their broker and sell it. 17 Q. And what about 30-year bonds? 18 A. Again, they might be able to sell it to 19 whoever sells treasury bonds, makes a market in 20 treasury bonds. 21 Q. Could they also call a broker that 22 trades in those instruments? 19342 1 A. They could. 2 Q. Do they trade on a daily basis? 3 A. I'm not sure. 4 Q. Do stocks on national exchanges trade 5 on a daily basis? 6 A. Yes, they do. 7 Q. Did anyone ask you whether investments 8 that were held by USAT could readily be disposed 9 of at the end of 1985 from its holdings in 10 government securities or common stock in order to 11 accommodate the absorption of USAT Mortgage 12 Finance's mortgage-backed securities? 13 A. I don't believe so. I certainly have 14 no recollection of that, but I don't believe so. 15 Q. And you don't believe so? 16 A. I don't believe so, but I have no 17 recollection of it if they did. 18 Q. I'd like to move on to another subject. 19 I'd like to direct your attention to a document 20 that's in the record. It's Exhibit T4219. It's 21 at Tab 868, and it's a memorandum from Mike Crow 22 to Charles Hurwitz, Jenard Gross, Barry Munitz, 19343 1 Gerry Williams, and Art Berner dated June 26th, 2 1986. 3 MR. GUIDO: Your Honor, I think I'll do 4 this as a group of exhibits to see if I can speed 5 things up a little. 6 The next document is T4226, which is at 7 Tab 869. That's a memo from Mike Crow to 8 Jenard Gross, Barry Munitz, Gerald Williams dated 9 July 14th. And it has Art Berner copied on that 10 document. 11 The third is T4246 at Tab 335, which I 12 have previously shown the witness. It's the 13 strategic planning committee notes of September 8, 14 1986. 15 The next is at Tab 870. It's 16 Exhibit A10666. It is United Savings Association 17 strategy meeting of September 15th, 1986. 18 The next is T4250, which I have 19 previously shown the witness today, which are the 20 minutes of the strategic planning committee of 21 September 22nd, 1986. 22 And the next is a document that's been 19344 1 marked T4302, Tab 566. It's dated November 13, 2 1986. 3 The next is T4304, which is at Tab 873. 4 It's the strategic planning committee notes of 5 November 17th, 1986, which I don't think I've 6 previously shown the witness today. 7 And then the next is T4320, which is at 8 Tab 569. That's the December 17th notes of the 9 strategic planning committee that I showed the 10 witness earlier. 11 And then the last is T -- excuse me. 12 The next-to-the-last is T8022, which is at 13 Tab 396. 14 A. Do you want me to go through these? 15 Q. (BY MR. GUIDO) Pardon? 16 A. Do you want me to look through them? 17 Q. Yes. Would you look through those? 18 A. Okay. (Witness reviews the documents.) 19 Mr. Guido, do you want me to read all 20 of these or just glance through them? 21 Q. Just glance through them and become 22 familiar with them. I'll direct your attention to 19345 1 specific parts. 2 A. Okay. (Witness reviews the documents.) 3 Q. Now, let's start with T4219, the 4 Mike Crow memorandum dated June 26th, 1986. 5 Have you seen that document before? 6 A. I don't have a specific recollection. 7 But I'm shown as getting it; so, I have no doubt 8 that I received it. 9 Q. Now, I want to direct your attention to 10 the first paragraph. I think it's the third 11 sentence. It says, "That is, with the company's 12 present structure, operating earnings are 13 significantly negative without an extraordinary 14 earnings boost on a monthly basis." 15 Do you see that? 16 A. Yes, I do. 17 Q. Was your recollection in 1986 that USAT 18 would not show a profit without non-operating 19 income to assist it in achieving a profit? 20 A. I believe I remember that, that's 21 right. 22 Q. Now, let me direct your attention to 19346 1 the next document, which is July 14th, 1986. It's 2 a Mike Crow memorandum. I'll direct your 3 attention to Page 2 of that memorandum. 4 Do you see the second paragraph says, 5 "The need to attack these two problems becomes 6 more intense when one considers the following 7 factors." And I want to direct your attention to 8 Item No. 1 there. It says, "United does not 9 have" -- 10 THE COURT: Mr. Guido, could you ask 11 the question without reading it? 12 MR. GUIDO: Yes, Your Honor. 13 Q. (BY MR. GUIDO) Do you see the Item 14 No. 1 there that says "United does not have"? 15 A. Yes, I do. 16 Q. Is it your recollection that without 17 special gain opportunities in 1986, USAT could not 18 have shown a profit? 19 A. I think that's right. I think that's 20 my recollection. 21 Q. Pardon? 22 A. I think -- believe that's my 19347 1 recollection. 2 Q. Now, I'd like to direct your attention 3 to the next document, which is T4246. It's 4 Tab 335 which I showed you earlier. I think it's 5 to your left over here. 6 A. Which one is it? 7 Q. Tab 335. It's the September 8th, 1986 8 memorandum. 9 A. Okay. Sorry. (Witness reviews the 10 document.) 11 Q. Do you have that in front of you? 12 A. Yes, I do. 13 Q. Now, look at the items at the top of 14 the page, the A through H items. 15 Do you see that on the first page? 16 A. Yes. 17 Q. It says, "Do we have enough capital to 18 avoid a supervisory letter?" 19 Do you see that? 20 A. Yes, I do. 21 Q. What was the significance of the 22 supervisory letter? 19348 1 A. I believe that would put some 2 operational controls on you, but I'm not sure I 3 know at this time. I'm not sure I know at this 4 time what the supervisory letter would have done. 5 Q. Well, does the supervisory letter 6 impose certain restrictions on the operation of 7 the thrift without regulatory approval? 8 A. Again, I'm not sure. I probably knew 9 at the time, but I don't think I know right now. 10 Q. Well, why was there a concern about a 11 supervisory letter in 1986? 12 A. Well, again, I don't want to speculate 13 because at this point in time, I really don't 14 remember what the supervisory letters would do or 15 wouldn't do. 16 Q. So, you don't -- at this point in time, 17 you don't remember specifically what they would 18 do? 19 A. That's correct. 20 Q. Is it your understanding that they 21 imposed some restrictions on the operations of the 22 thrift? 19349 1 A. Again, I just don't -- at this point in 2 time, I really don't know what the supervisory 3 letters would have done. I don't know. 4 Q. Well, would the supervisory letter, if 5 there had been a capital deficiency, allowed a 6 thrift to do things it was not allowed to do if it 7 had met its net worth requirements? 8 A. I'm not sure I understand that 9 question. 10 Could you repeat that? 11 Q. Well, would a supervisory letter, based 12 on your recollection, have allowed a thrift to do 13 something it couldn't do if it had met its net 14 worth requirements? 15 A. Again, all I can tell you is that right 16 now, I haven't looked at the regulations in 17 probably ten years or more. I just don't remember 18 what supervisory letters could or couldn't do. 19 I'm sure I knew it at the time, but I don't know 20 it now. 21 Q. Well, do you know what the significance 22 of capital levels were for supervisory letters? 19350 1 A. Well, I knew what the significance of 2 capital -- what the significance of capital for 3 supervisory letters? 4 Q. Yeah. 5 A. No, I don't know. 6 Q. So, you don't know what the relevance 7 of capital levels were for the issuance of the 8 supervisory letter? 9 A. Again, I'm sure I knew it at the time. 10 I don't know it now. 11 Q. Well, this question says "Do we have 12 enough capital to avoid a supervisory letter?" 13 Is it fair to conclude from that that 14 the capital level would trigger a supervisory 15 letter? 16 A. That's what that seems to be saying. 17 Q. Now, my question -- we looked at a 18 couple of documents and you indicated that 19 earnings levels were of concern to USAT in the 20 1986 time frame. Right? 21 A. Right. 22 Q. Now, was that earnings consideration a 19351 1 concern to USAT because of the impact negative 2 earnings would have on capital levels? 3 A. Among other things, I think that's 4 right. 5 Q. And was one of the concerns of USAT at 6 the time was that if it didn't meet minimum 7 capital levels, it would be subject to a 8 supervisory letter? 9 A. I believe that was a concern. But 10 again, I don't recollect that. 11 Q. Now, this goes on under Item No. B. It 12 says, "Will we meet the thrift test?" 13 Do you see that? 14 A. Yes, I do. 15 Q. Do you know what the thrift test was? 16 A. Again, my recollection is you had to 17 have a certain number of assets in what were 18 called thrift assets. 19 Q. Residential mortgages being one of 20 them? 21 A. I believe so. 22 Q. Mortgage-backed securities being 19352 1 another? 2 A. I think they were thrift. 3 Q. What about high-yield bonds? 4 A. I don't believe they were, but I'm not 5 sure. 6 Q. What about investments in subsidiaries? 7 A. I don't have -- I don't know one way or 8 another. 9 Q. What about real estate, commercial real 10 estate investments? 11 A. I don't know. 12 Q. Then this goes on and says -- Item C 13 says, "Can we get the maturity matching credit for 14 1987?" 15 Do you see that? 16 A. Yes, I do. 17 Q. What's the maturity matching credit? 18 Do you know? 19 A. Again, my recollection is -- and it's 20 very sparse -- is that you were entitled to some 21 credit if your -- I think if your loans and -- the 22 interest rate spread was somehow matched. But 19353 1 it's -- I probably knew it at the time, but I 2 certainly don't know it now. 3 Q. Then do you see where it makes mention 4 of "should United shrink or grow"? 5 A. Yes. 6 Q. And do you recall what that issue was 7 about? 8 A. I sure don't. 9 Q. I'd like to direct your attention to 10 page Bates stamped US465. 11 A. Is that this document? 12 Q. Yeah. 13 THE COURT: My exhibit doesn't have 14 that, Mr. Guido. 15 MR. GUIDO: I'm sorry. I may have a 16 different copy of the document. Let me take a 17 look at your copy and point out the page. 18 Q. (BY MR. GUIDO) It's Item No. D at 19 OW08178. 20 A. 8178? 21 Q. Yes. Item No. D. I may have the wrong 22 page number. 19354 1 Do you have Item No. D which says "It 2 will be difficult for United to shrink"? 3 A. Yes, I do. 4 Q. Okay. And look at Item No. 2. It 5 says, "United's limitation in shrinking" -- do you 6 see that paragraph? 7 A. Yes, I do. 8 Q. "As non-thrift assets." What is it 9 about the size or what was it about the size of 10 USAT and its investment portfolio that made 11 shrinkage not an option? 12 A. I don't know. 13 Q. I'd like to direct your attention to 14 Item No. G. And it's, I think, the 15 next-to-the-last page of the exhibit. 16 Do you see where it talks about the 17 Smith Breeden group? 18 A. Yes, right. 19 Q. And it makes mention of a meeting of 20 September 15th. 21 Do you see that? 22 A. Yes, I do. 19355 1 Q. And it says under the attendees that 2 you were one of the attendees. 3 Do you see that? 4 A. Yes, I do. 5 Q. I would like to turn your attention to 6 the next document, which is A10666, which is a 7 document pertaining to that September 15th Smith 8 Breeden presentation. 9 A. What is it? A10666? 10 Q. A10666, Tab 870. 11 A. Okay. (Witness reviews the document.) 12 Q. I'd like to direct your attention to 13 the third page of the document, which is CN53081, 14 which is the -- it says "Condensed balance sheet 15 and liquidation value." 16 Do you see that? 17 A. Yes, I do. 18 Q. And look under "mortgage-backed 19 securities." 20 Do you see that? 21 A. On top, yes. 22 Q. And it says "The gain from book value 19356 1 of 6.5 million." 2 Do you see that? 3 A. Yes. 4 Q. And then take a look down at the 5 bottom, the next-to-the-last line. See where it 6 says "swaps"? 7 A. Yes. 8 Q. Do you see where it says gain from book 9 value is a negative $122 million? 10 A. Yes. 11 Q. Do you recall that in late -- or the 12 fall of 1986, USAT was informed that its spread on 13 its mortgage-backed securities portfolio between 14 its earnings off of its assets and the cost of its 15 funds, its liabilities including swaps, was a 16 negative spread of approximately 100 basis points? 17 A. No, I don't. 18 Q. The next document -- the next document 19 is a strategic management committee meeting of 20 September 22nd, 1986. 21 A. Which number is that? 22 Q. And that is T4250. 19357 1 A. Is that one of the ones you gave me 2 earlier? 3 Q. It's one of the ones I gave you 4 earlier. I'm sorry. Tab 871. 5 Do you see that? 6 A. Yes, I do. 7 Q. Now, I'd like to direct your attention 8 to Bates stamp 2072. Do you see under "earnings 9 and growth strategy," Bullet Point No. 2? It 10 says, "Our actual net worth will be the same as or 11 below required net worth at the end of the third 12 and fourth quarters without -- unless action is 13 taken." 14 Do you see that? 15 A. Yes, I do. 16 Q. And see the third bullet -- the fourth 17 bullet point? It says, "There is a strong case 18 for taking portfolio gains in the third quarter in 19 order to shore up reserves in the capital 20 position." 21 A. Yes, I do. 22 Q. Pardon? 19358 1 A. Yes, I do. 2 Q. Do you recall that being discussed at 3 the strategic planning committee? 4 A. I don't have a recollection of -- I 5 mean, I don't have a recollection of specific 6 discussions at any of these meetings. I remember 7 in general there was some discussion about that. 8 Q. Let's take a look at the next document, 9 which is Tab 566. It's T4302. This is a document 10 that was in the most recent packet that I've given 11 you. 12 Have you seen this document before? 13 A. Well, I have and I just always find it 14 amusing because when it talks about Ron Huebsch 15 giving an impassioned plea, I've never seen Ron 16 Huebsch be impassioned about anything but that's 17 okay. 18 Q. I didn't write the memorandum. 19 A. No, you didn't. 20 Q. It was written by Mike Crow, wasn't it? 21 A. It appears to be, yeah. 22 Q. Okay. It says, "We had a discussion at 19359 1 the investment committee on selling junk bonds for 2 profits for purposes of quarterly earnings." 3 Do you see that? 4 A. Yes, I do. 5 Q. Were discussions held at the investment 6 committee meetings on the selling of junk bonds 7 for profits for purposes of quarterly earnings? 8 A. I believe so, yeah. 9 Q. Were discussions held at investment 10 committees on selling mortgage-backed securities 11 for profits for purposes of quarterly earnings 12 (sic)? 13 A. I think -- I think there was some 14 discussions, yes. 15 Q. Were sales made out of the junk bond 16 portfolios in 1986 for profits for purposes of 17 bolstering quarterly earnings? 18 A. Again, my recollection is that there 19 were some sales made, yes, sir. 20 Q. Were sales made out of mortgage-backed 21 securities portfolios for profits for purposes of 22 bolstering quarterly earnings? 19360 1 A. I think there may have been some sales. 2 Q. Do you have any idea of the magnitude? 3 A. No. 4 Q. Now, was the magnitude great enough to 5 leave the portfolio without any unrealized gains 6 in the high-yield bond portfolio in 1986? 7 A. I don't know. 8 Q. Were the sales of the magnitude 9 sufficient to leave the mortgage-backed securities 10 portfolios without any unrealized gains in 1986? 11 A. Again, I don't know. 12 Q. What was the impact on the spread 13 income of the mortgage-backed securities portfolio 14 from the sales out of that portfolio to generate 15 profits to bolster quarterly earnings? 16 A. I don't know. 17 Q. Did you ever know? 18 A. It's possible I would have known, but I 19 sure don't know now. 20 Q. Let's take a look at T4320, which is at 21 Tab 569. It's one of the strategic planning 22 meeting notes that Mr. Hansen wrote. 19361 1 A. Tab 569? 2 Q. Yes. Tab 569. 3 MR. BLANKENSTEIN: Excuse me, 4 Mr. Guido. Did you say 569? 5 MR. GUIDO: Yes. Tab 569. 6 MR. BLANKENSTEIN: Thank you. 7 MR. GUIDO: It's the December 17th, 8 1986 strategic planning committee notes. 9 Q. (BY MR. GUIDO) Look at the Items 8 10 and 9. One deals with high-yield bonds, and the 11 other one deals with mortgage-backed securities. 12 Do those paragraphs refresh your 13 recollection that the sales out of the high-yield 14 bond portfolios and mortgage-backed securities 15 portfolios had the effect of reducing the net 16 interest spread on those portfolios? 17 A. No. It doesn't refresh it one way or 18 the other. 19 Q. Did you ever advocate the sales of 20 mortgage-backed securities in order to generate 21 gains to bolster profits? 22 A. Did I ever advocate it? 19362 1 Q. Did you? 2 A. I don't believe so. 3 Q. I'd like to show you T8022, which is at 4 Tab 396. 5 Do you have that in front of you? 6 A. Yes. 7 Q. It's a memorandum dated October 29th, 8 1987, from you to Charles Hurwitz, Barry Munitz, 9 Jenard Gross, Mike Crow, Jim Wolfe, and Bruce 10 Williams. And I'd like to direct your attention 11 to Page 3 which, if you look at the bottom of 12 Page 2, there is a preface that says "In order for 13 United to meet its minimum regulatory requirement 14 as of October 31, '87, we might want to consider 15 some of the following." And 2 is "Selling an 16 asset, there may be some profitable assets on the 17 mortgage-backed securities portfolio or some other 18 portfolios." 19 Is that advocating the sale out of the 20 mortgage-backed securities portfolio to generate 21 gains? 22 A. I don't think so. 19363 1 Q. Pardon? 2 A. I don't believe so. 3 Q. Is it recommending that it be 4 considered as an option? 5 A. It's suggesting that it be considered. 6 Q. Pardon? 7 A. It is suggesting that it be considered 8 as a possible option. 9 MR. NICKENS: Your Honor, I think it 10 should be pointed out for the record that we have 11 now moved one year later. Mr. Guido was asking 12 him about 1986. He's now put a document in front 13 of him that's October of 1987. 14 Q. (BY MR. GUIDO) Now I'd like to direct 15 your attention to another set of documents 16 starting with T4333, which is at Tab 329. 17 The second is B1580, which is not in 18 the record. 19 A. Mr. Guido, these are new documents? 20 Q. These are going to be new documents. 21 The third is T4366, which is not in the 22 record as yet. 19364 1 The next is 4364, which is at Tab 877. 2 And then the next is A1426 at Tab 357 3 and A1447, which is at Tab 1319. 4 A. (Witness reviews the documents.) 5 Q. I'd like to direct your attention to 6 the first document in that packet. It's at 7 Tab 329, and it's T4333. It's a memorandum from 8 Jenard Gross dated January 22nd, 1987, to 9 Mike Crow, Charles Hurwitz, and Dr. Barry Munitz. 10 Have you ever seen that memorandum 11 before? 12 A. I don't believe so. 13 Q. Take a look at the last paragraph on 14 the first page which ends with "that's how we got 15 killed in the mortgage-backed security area." 16 A. (Witness reviews the document.) 17 Q. Have you had an opportunity to review 18 that paragraph? 19 A. Yes. 20 Q. Do you see where it says that the swaps 21 for the mortgage-backed securities were not 22 designed properly and didn't give any thought to 19365 1 the possibility of prepayments? 2 A. Yes, sure. 3 Q. Do you remember those discussions back 4 in 1986? 5 A. There may have been discussions. I 6 don't remember them. 7 Q. So, you don't recall? 8 A. As you know, mortgage-backed securities 9 and swaps is not my area. I'm not -- 10 Q. What do you mean they are not your 11 area? 12 A. I'm not expert in these areas. 13 Q. Did you sit on the investment committee 14 of USAT? 15 A. I sure did. 16 Q. And did you participate in decisions 17 that affected USAT's investments in 18 mortgage-backed securities? 19 A. Did I participate in it? 20 Q. Uh-huh. 21 A. I was there, sure. 22 Q. Did you vote on it? 19366 1 A. To the extent there were votes, yes. 2 Q. And did you sit on the strategic 3 planning committee of which I've shown you notes 4 that were written by Doug Hansen memorializing 5 those meetings? 6 A. Yes. 7 Q. Did you participate in those decisions? 8 A. Yes, I did. 9 Q. Why did you participate in those 10 decisions if you weren't experienced in 11 mortgage-backed securities? 12 A. We had people who were experienced in 13 mortgage-backed securities who would make 14 recommendations. 15 Q. Well, let's take the strategic planning 16 committee. Who on the strategic planning 17 committee had experience with mortgage-backed 18 securities? 19 A. Well, for sure Mike Crow, Bruce 20 Williams. I believe Sandy Laurenson would sit in 21 when we had strategic planning committee meetings. 22 Q. Her name doesn't appear in any of those 19367 1 minutes, does it, that I've shown you? 2 A. Her name doesn't appear on Doug 3 Hansen's memo. 4 Q. Her name doesn't appear, does it? 5 A. Not that I've seen. 6 Q. Did she attend those meetings? 7 A. I don't have a recollection that she 8 did. 9 Q. Now, I'd like to direct your attention 10 to the next document, which is B1580, which is a 11 memorandum from you to Charles Hurwitz, Barry 12 Munitz, Jenard Gross, and Mike Crow dated 13 April 22nd, 1987. 14 A. Which one is it? 15 Q. April 22nd. It's one of the loose 16 documents. It's not in a folder. 17 A. I don't think I have that. 18 Q. I'll give you another copy. 19 This is a memorandum from you dated 20 April 22nd, 1987. And it has CN -- Bates stamp 21 CN031786 through CN031787. 22 Do you recall writing that memorandum? 19368 1 A. Yes, I do. 2 MR. GUIDO: I'd move the admission of 3 Exhibit B1580, Your Honor. 4 MR. VILLA: No objection. 5 THE COURT: Received. 6 Q. (BY MR. GUIDO) Why did you write that 7 memorandum? 8 A. Well, I wrote it -- my recollection is 9 I wrote it because I was -- I was concerned that 10 there wasn't an overall strategy. I was kind of 11 venting. 12 Q. What prompted that concern? 13 A. I don't remember. At this time, I 14 don't remember. 15 Q. Had USAT positioned itself through 16 actions of the investment committee at that time 17 for a rate decline if interest rates ended up 18 jumping up? 19 A. I have no recollection of that. 20 Q. Take a look at the first sentence. It 21 says, "Over the past few days, we have watched the 22 volatile mortgage-backed securities market." 19369 1 Do you see that? 2 A. Yes, I do. 3 Q. What was it about that market? Do you 4 recall? 5 A. No, I don't. 6 Q. Now, what was it about USAT's 7 strategies that you were concerned about that 8 prompted you to write that memorandum? 9 A. Well, I'm not sure I was concerned 10 about the strategy. It was my understanding that 11 it was a -- we were looking at a yield, kind of an 12 interest income spread. I was talking about 13 mark-to-market, and I thought that mark-to-market 14 was indicative of something. And, therefore, I 15 was kind of talking about the fact that on a 16 mark-to-market basis, things were going up and 17 down. 18 Q. And what was it about the yield spread 19 that didn't reflect what you saw being reflected 20 in the mark-to-market? 21 A. Again, I think mark-to-market would go 22 up and down; but I was told by everyone that 19370 1 that's not the way we were doing -- we positioned 2 the portfolio. But again, I'm just reading in 3 here. 4 Q. Well, were you nervous about that? Is 5 that why you wrote this memorandum? 6 A. There was a concern that I had on 7 looking at it as a mark-to-market. You know, I 8 was not -- and as I say here, I didn't understand 9 fully the mortgage-backed securities portfolio, 10 how it worked. 11 Q. Well, did you feel that you were 12 getting adequate explanations, or were you 13 questioning the explanations in this memorandum? 14 A. I thought the explanations were 15 adequate. This was an area that I didn't know 16 anything about and certainly since this time I 17 haven't done anything about it, but I knew very 18 little about mortgage-backed securities. 19 Q. Take a look at T4366, which is an 20 April 27th, 1987 memo from Jenard Gross to members 21 of the strategic planning committee. 22 Do you see that memo? 19371 1 A. Yes, I do. 2 Q. Have you seen that before? 3 A. I believe I have, yes. 4 MR. GUIDO: I'd like to move the 5 admission of T4366, Your Honor. 6 MR. VILLA: No objection. 7 THE COURT: Received. 8 Q. (BY MR. GUIDO) Now, this is five days 9 after your memorandum, and it's written by 10 Jenard Gross. It says, "It seems to me that what 11 keeps evolving at our investment committee 12 meetings is the obvious point that we do not have 13 any unified strategic plan or policy with regard 14 to interest rates." 15 Do you see that? 16 A. Yes. 17 Q. Do you recall discussions with 18 Jenard Gross about the lack of a unified strategic 19 plan or policy with regard to interest rates at 20 USAT? 21 A. No, I don't. 22 Q. Do you recall having a discussion with 19372 1 Jenard Gross about the two memoranda that you 2 wrote? 3 A. No, I don't. 4 Q. I'd like to direct your attention to 5 T4364, which is at Tab 877. This is a memorandum 6 to you, Charles Hurwitz, Jenard Gross, Barry 7 Munitz by Mike Crow. And it attaches some 8 overview comments dated May 1st, 1987. 9 Do you see that? 10 A. Yes. 11 Q. And take a look at the last page -- I'm 12 sorry -- the last page of the exhibit. 13 Do you see that? 14 A. Yes. 15 Q. And it's talking about expansion of 16 United mortgage-backed securities. 17 Do you see that? 18 A. Yes. 19 Q. And it talks about various concerns, 20 does it not? 21 A. Yes. 22 Q. And one of them -- 19373 1 MR. NICKENS: Your Honor, I don't know 2 where Mr. Guido and the witness are reading. If 3 we could be directed to the page. 4 THE WITNESS: The last page. 5 MR. GUIDO: It's the very last page. 6 It says "The second alternative, adding assets." 7 MR. NICKENS: My last page does not 8 follow that. 9 MR. GUIDO: 11375. 10 MR. NICKENS: I apologize. I have two 11 documents that were clipped together. 12 THE COURT: We'll take a short recess. 13 14 (Whereupon, a short break was taken 15 from 10:32 a.m. to 10:53 a.m.) 16 17 THE COURT: Be seated, please. We'll 18 be back on the record. 19 Mr. Guido, you may continue. 20 MR. GUIDO: Thank you. 21 Q. (BY MR. GUIDO) Mr. Berner, I asked 22 you a question about the spread on the 19374 1 mortgage-backed security portfolio. 2 Do you recall that question? The net 3 interest spread on the mortgage-backed security 4 portfolio. 5 A. Yes. 6 Q. Let me show you Exhibit A1419, which is 7 at Tab 150. And I'll direct your attention to the 8 last two pages of the document. Tab 1350. 9 Tab 350. Excuse me. 10 These are the investment committee 11 minutes of November 25th, 1986. They have 12 previously been admitted and testified to. 13 See the memo dated November 24th, 1986, 14 at the back of that packet of investment committee 15 minutes? 16 A. Yes, I do. 17 Q. And it's a review of the MBS swap 18 arbitrage activities, is it not? 19 A. Yes. 20 Q. And look at the second page of the 21 document. 22 Do you see where it does a calculation 19375 1 of the spread and it shows a net spread of 2 negative .99 percent? 3 A. Yes, I do. 4 Q. Did you attend that November 25th, 1986 5 investment committee meeting? 6 A. I believe I did. 7 Q. Pardon? 8 A. I believe I did. I mean, the minutes 9 are written by me, so I assume I was there. 10 Q. So, as of November 25th, 1986, you were 11 aware that the spread on the mortgage-backed 12 security arbitrage portfolio was a negative 13 .99 percent? 14 A. Yes. 15 Q. Now, let's go back to the document that 16 we just -- we were just on when we broke, and that 17 is T4364, which is at Tab 871. That's the 18 Mike Crow memo that's dated May 1st, 1987. 19 Do you see Item No. 2 on the last page 20 with regard to issues that need to be addressed 21 before expansion of the mortgage-backed security 22 portfolio can take place? It says, "The area is 19376 1 very complex." 2 Do you see that? 3 A. Yes. 4 Q. And then it ends -- it says, "It's 5 naive to think that UFG is on a parody level of 6 understanding with Wall Street." 7 Do you see that? 8 A. Yes, I do. 9 Q. Is that a view that you shared with 10 Mr. Crow? 11 A. Well, certainly I was on that level. I 12 think -- when was this written? 13 Q. May 1st, 1987. 14 A. I think Sandy Laurenson was -- I know 15 Sandy Laurenson was with us then. 16 Q. Pardon? 17 A. I said I know Sandy Laurenson was with 18 us then. So, she probably had mastered it; but I 19 certainly hadn't. 20 Q. Well, I mean, did the investment 21 committee just turn over entire discretion to 22 Sandy Laurenson to manage a 3 billion-dollar 19377 1 mortgage-backed security portfolio for USAT? 2 A. I don't believe it did that. 3 Q. Did it supervise her activities? 4 A. I believe it did. 5 Q. Okay. Did it approve her transactions 6 before they were entered into? 7 A. I don't recall if it approved all of 8 the transactions or not. I don't recall that. 9 Q. You mean you don't recall one way or 10 the other? 11 A. I don't recall one way or the other. I 12 don't believe it approved every transaction. I 13 don't have a specific recollection. 14 Q. Well, what were the policies of the 15 board of directors of USAT and UFG with regard to 16 who had the authority to initiate transactions on 17 its behalf? 18 A. I don't recall. 19 Q. Did Ron Huebsch have the authority to 20 enter into equity arbitrage transactions prior to 21 the investment committee approving the 22 transaction? 19378 1 A. I believe so. 2 Q. Did Joe Phillips and Gene Stodart have 3 the authority to enter into transactions in the 4 high-yield bond portfolio prior to approval of the 5 investment committee? 6 A. I'm not sure if they did or not. I 7 don't recall. 8 Q. And you don't recall whether or not 9 Sandy Laurenson had the authority to purchase 10 mortgage-backed securities before approval of the 11 investment committee? 12 A. I don't recall whether she did or not, 13 no. 14 Q. Now, I'd like to direct your attention 15 to A1426 at Tab 357 and A1447 at Tab 1319. 16 THE COURT: Do you have a question, 17 Mr. Guido? 18 MR. GUIDO: Yes, sir. 19 Q. (BY MR. GUIDO) I'd like to direct 20 your attention to the first page of 1426, which is 21 the January 21st, 1987 minutes. 22 Do you see the second paragraph there 19379 1 where it says "A full discussion of the 2 portfolio's interest rate sensitivity took place 3 showing the effect of the mortgage-backed 4 securities portfolio of increases and decreases in 5 interest rates"? 6 Do you see that? 7 A. Yes, I do. 8 Q. And the -- what does that refer to? 9 That sentence, what does it refer to? 10 A. I can just read the sentence. It seems 11 to refer to what would happen if interest rates 12 moved up or down and how it would affect the 13 portfolio. 14 Q. All right. Take a look at Bates stamp 15 5225, which is in that packet. 16 Do you see that? 17 A. Yes, I do. 18 Q. Is that what you were referring to when 19 you referred to the interest rate sensitivity 20 being discussed? 21 A. Again, I don't have a recollection. 22 That talks about liquidation value. That might 19380 1 have been part of the discussion. I don't 2 specifically remember that discussion. 3 Q. Now, there is a report -- it says that 4 there is a report. This paragraph says Sandy 5 Laurenson attaches a report to the committee. 6 A. Right. 7 Q. And discusses the mortgage-backed 8 security portfolio and its sensitivity. Right? 9 A. Right. 10 Q. Does it say anything else that occurred 11 at that meeting, that Sandy Laurenson reported to 12 the board that she had done or she had asked her 13 permission to do? 14 A. Does it say anything? 15 Q. Yeah. Anything else? 16 A. No, it does not. 17 Q. Well, look at the third paragraph. It 18 says, "Ms. Laurenson also discussed the results of 19 her put program." 20 Do you see that? 21 A. Yes, I do. 22 Q. That was something else. Right? 19381 1 A. That's correct. 2 Q. And then it says, "It was determined 3 that the program would be reduced in size to a 4 maximum of $100 million." 5 Do you see that? 6 A. Yes, I do. 7 Q. Does it say anything else in those 8 minutes about action that the board would take 9 where Sandy Laurenson reported to the board in 10 these minutes? 11 A. No. This just says what -- the minutes 12 say what they say. 13 Q. Now, take a look at Bates stamp 5224 14 under "sensitivity analysis." 15 Do you see where it says, "The MBS 16 portfolio, when combined with the swaps, was 17 favorably positioned for further rate decline"? 18 A. Yes, I do. 19 Q. Why isn't that in the minutes? 20 A. Well, the minutes -- it's the report. 21 The report is attached to the minutes. It's part 22 of the minutes. 19382 1 Q. And she presented a report which is 2 ordered attached to the minutes of the meeting? 3 A. Right. 4 Q. So, that -- your view is that the 5 actions that are taken by Sandy Laurenson are 6 reported in her report and incorporated by 7 reference into the minutes? Is that what you're 8 saying? 9 A. I'm saying her report is attached, and 10 whatever is reported there is part of the minutes. 11 Q. Let's take a look at Bates stamp 5223. 12 And look -- see under "portfolio investment"? 13 A. Yes. 14 Q. Can you tell us what happened? 15 A. Can I tell you? 16 Q. Yeah. 17 A. It looks like there was a -- no, I 18 can't tell you what happened from looking at this. 19 Q. Can you tell why it happened? 20 A. I can't tell. 21 Q. These minutes don't tell you what those 22 transactions were or why they occurred, do they? 19383 1 A. They don't tell me. They don't tell 2 me. They might tell someone who knows it. They 3 don't tell me. 4 Q. You were the secretary of this 5 investment committee. Right? 6 A. That's correct. 7 Q. And was one of your responsibilities to 8 make sure the investment committee minutes 9 accurately reflected what transpired? 10 A. Which is why I would attach a report, 11 because I wouldn't understand everything she was 12 talking about. That's why her report is attached. 13 Q. Taking a look at this now, do you 14 understand what it is now? 15 A. At this point, I don't. 16 Q. Did you ever know? 17 A. I might have. I'm not sure. 18 Q. But if you don't understand that, how 19 do you expect someone reading this report to 20 understand what those transactions were and why 21 they occurred? 22 A. Well, I would think that people who are 19384 1 expert or knowledgeable of mortgage-backed 2 securities would understand what's going on. I 3 was not. 4 Q. Well, just forget knowledgeable about 5 mortgage-backed securities. You are a securities 6 lawyer, aren't you? 7 A. I'm a securities lawyer. I'm not a 8 mortgage-backed securities lawyer. 9 Q. So, you understand transactions? 10 A. I -- 11 Q. Can you just tell us what the 12 transactions were? 13 A. I can't. Again, I'm not a 14 mortgage-backed securities expert. I don't know 15 if someone who's expert in mortgage-backed 16 securities is capable or not. There were people 17 on that committee who were. 18 Q. But you don't know even what the 19 transactions are that are being described there? 20 A. I don't. 21 Q. And you sat on the committee? 22 A. Yes, I did. 19385 1 Q. You were the secretary of the 2 committee? 3 A. Yes, I was. 4 MR. VILLA: Objection, Your Honor. I 5 mean, how many times do we have to go through the 6 fact that he was the secretary of the committee? 7 THE COURT: Sustained. 8 MR. GUIDO: Your Honor, I'd like to 9 move to the next document, which is A1447, 10 Tab 1319. 11 Q. (BY MR. GUIDO) This is the June 11th, 12 1987 minutes. 13 Are these minutes that you prepared? 14 A. Yes, they are. 15 Q. Look at the second paragraph where it 16 says "Ms. Sandy Laurenson reported on the 17 mortgage-backed security portfolio." 18 Do you see that? 19 A. Yes, I do. 20 Q. It says, "Her report was ordered 21 attached." 22 Do you see that? 19386 1 A. Yes, I do. 2 THE COURT: What's your question, 3 Mr. Guido? 4 Q. (BY MR. GUIDO) Does this reflect -- 5 your minutes reflect what the interest rate 6 sensitivity was in the mortgage-backed security 7 portfolio? 8 A. Without looking through her report, is 9 it described in her report; or do you want me to 10 look through it to see if it's described? 11 Q. In her report or in the text. 12 A. (Witness reviews the document.) There 13 is -- looks like on Page 5864, it says 14 "sensitivity summary." 15 Is that what you're talking about? 16 Q. Now, take a look at that sensitivity 17 summary and compare it to the sensitivity summary 18 at A1426. 19 A. Do you know what page that's on? 20 Q. It's 5225. 21 A. It's the one that's labeled 22 "liquidation value"? 19387 1 Q. Yeah. 2 A. Yes. 3 Q. Do you see that one? 4 A. Yes. 5 Q. Now, when you compare -- see under 6 "yields unchanged, 1/21/87," it shows a negative 7 100 million? Do you see that? 8 A. You're talking about the liquidation 9 value? 10 Q. Yeah. 11 A. Yes, I do. 12 Q. And then when you look at A1447, you 13 see under "unchanged" the liquidation value of 14 negative 245 million? Do you see that? 15 A. That says "total all." I'm not sure 16 what that means. 17 Q. Pardon? 18 A. It says "total all." 19 Q. Okay. 20 A. I don't know what that means. 21 Q. Assume that that means net liquidation 22 value for purposes of this question. Okay? 19388 1 A. Okay. 2 Q. Now, that shows an increase of about 3 245 percent in terms of a loss in the 4 mortgage-backed security portfolio between January 5 and June of 1987, does it not? 6 A. If it was being liquidated? Is that 7 what you're saying? 8 Q. Right. 9 A. If that's what it means, yes, I think 10 that's what it shows if it was liquidated at that 11 time. 12 Q. And it shows an increase in the 13 negative impact of an interest rate swing, does it 14 not, of 100 basis points? 15 A. I don't understand the question. When 16 you say "shows an increase" -- 17 Q. Well, take a look -- if rates go up 100 18 basis points on January 21, 1987, it shows a 19 negative of 147. 20 Do you see that? 21 A. Yes, I do. 22 Q. Then for June 11th, it shows 329. 19389 1 Do you see that? 2 A. Yes, I do. 3 Q. And then if rates go down 100 basis 4 points, the negative figure goes from a minus 89 5 to a minus 179. 6 Do you see that? 7 A. Yes, I do. 8 Q. Look at the last sentence of 9 Paragraph 2 on Page 1 of Exhibit A1447. 10 Do you see that reference? 11 A. This is the discussion? 12 Q. Yes. "A discussion was had concerning 13 the effect of interest rates staying at 8 to 14 9 percent level for '87 and then reducing to 15 6 percent in 1988." 16 Is this making reference to this change 17 in the sensitivity or the liquidation value? 18 A. I don't know. 19 Q. What's it discussing? 20 A. I don't know. 21 Q. Does it reflect anywhere the effect of 22 interest rate changes that had previously occurred 19390 1 prior to June 11th and subsequent to January 21st? 2 A. I'm not -- I don't understand the 3 question. 4 Does that sentence reflect -- 5 Q. Yeah. 6 A. I don't know. 7 Q. What was your objective in preparing 8 the investment committee minutes as its secretary? 9 A. To report on what took place at the 10 meeting. 11 Q. Anything else? 12 A. I think that's what I was trying to do. 13 Q. Well, if you look at these two reports, 14 the sensitivity analysis and -- doesn't it look 15 like something rather significant occurred between 16 those two dates? 17 A. I don't know. I can't tell. 18 Q. Well, remember your memorandum of 19 April 22nd that we discussed, which is B1580? 20 A. Uh-huh. (Witness nods head 21 affirmatively.) 22 Q. The volatility in the mortgage-backed 19391 1 securities market provided you with what you 2 referred to as, quote, insights. 3 Do you see that? 4 A. Yeah. I see what I said. 5 Q. So, what happened in this time period, 6 Mr. Berner? 7 A. Between -- 8 Q. January 21st, 1987, and June 11th, 9 1987. 10 A. All I can tell you is that on the 11 April 22nd memo, I obviously said that the 12 mortgage-backed securities market was volatile. 13 Q. Well, you also indicated that -- in 14 your April 22nd memo -- that looking at the market 15 value or the sensitivity analysis or the 16 liquidation value you believed was telling you 17 something anyway when you looked at the reports. 18 Right? 19 A. Well, I thought it might be telling me 20 something; and that's why I made it clear that I 21 was a mortgage-backed securities illiterate. 22 Q. And what did you think it was telling 19392 1 you? 2 A. I didn't know. That was my question. 3 I didn't know what it was telling me. 4 Q. Well, as of the date you wrote the 5 memorandum, you observed something in terms of 6 liquidation value that you thought was telling you 7 something. Right? 8 A. I'm trying to think -- I think that's 9 right. 10 Q. Okay. And that -- you said that you 11 were concerned there was too much emphasis on 12 yield or net spread. 13 Do you recall that testimony? 14 A. Yes, I do. 15 Q. And I've just shown you a document 16 dated November 24th in which Bruce Williams showed 17 that the net spread had turned negative in the 18 mortgage-backed securities portfolio by almost 100 19 basis points. 20 Do you recall that? 21 A. I recall the document, yes. 22 Q. Let me show you another document. It's 19393 1 Exhibit B1662. 2 A. (Witness reviews the document.) 3 Q. Have you had an opportunity to review 4 that document? 5 A. Yes. 6 Q. Is that your signature? 7 A. Yes, it is. 8 Q. Why did you tell Mr. Twomey that 9 "United Savings Association of Texas has been able 10 to implement a program of successful investments 11 in mortgage-backed securities" in light of what 12 you knew as of June 16th? 13 A. I'm not sure I know what you think I 14 knew as of June 16th, but I think that that's an 15 accurate statement. 16 Q. Do you think that's an accurate 17 statement? 18 A. Yes, I do. 19 Q. And we've looked at documents that show 20 that you knew that the spread on mortgage-backed 21 securities was negative by almost 100 basis 22 points? 19394 1 A. Assuming I knew that, yes. 2 Q. And that you had documents that you 3 attached to minutes that showed that the 4 liquidation value of the mortgage-backed security 5 portfolio had gone from a negative $100 million to 6 a negative $245 million prior to the time that you 7 wrote Exhibit B1662? 8 A. Yes. 9 Q. And you're telling us that the 10 statement in the first paragraph that "United 11 Savings Association of Texas has been able to 12 implement a program of successful investments of 13 mortgage-backed securities" was a true statement? 14 A. I thought it was. 15 Q. I'd like to move on to another set of 16 documents. 17 MR. GUIDO: Oh, I offer 16 -- B1662, 18 Your Honor. 19 MR. VILLA: No objection. 20 THE COURT: We have that in as A14065, 21 which is another copy of the same document. 22 MR. GUIDO: Oh, Your Honor. I'm sorry. 19395 1 Q. (BY MR. GUIDO) I'd like to direct 2 your attention now to the -- UFG's 10K for 3 December 31, 1985. It is A3021, and it is at 4 Tab 1161. 5 Before we go into A3021, Mr. Berner, 6 can you tell us what you meant by the term 7 "successful" when you made reference to the 8 mortgage-backed securities portfolio at USAT in 9 June of 1987? 10 A. I can't tell you now what I meant then, 11 no. 12 Q. Did you mean that you were able to 13 generate accounting gains? 14 A. I can't tell you. This letter is just 15 making a suggestion to them; so, I don't know what 16 that word meant at that time. 17 Q. Let's go to A3021. Now, you were 18 general counsel of UFG at the time this was 19 prepared; is that right? 20 A. Yes, that's correct. 21 Q. And did you participate in its 22 preparation? 19396 1 A. Yes, I did. 2 Q. Did you sign the document? 3 A. I don't believe so. 4 Q. Pardon? 5 A. I don't believe I did. 6 Q. Who worked with you in the preparation 7 of the document? 8 A. It would have been the accounting 9 people. Well, there are various parts in here. 10 Probably the accounting people. I'm sure the real 11 estate people worked with me. I mean, 12 essentially, the heads of all the departments 13 would have worked -- helped work on this. Jim 14 Pledger would have worked on this. Outside 15 counsel would have worked on it. Just a whole 16 group of people would have worked on it. 17 Q. Well, how did the text filter up to the 18 final draft? What were the steps? 19 A. Oh, I'm sure it would -- if we look at 20 the last year, the previous year's, that would 21 have been the start. And then either I or at this 22 time Marge Caldwell would have distributed the 19397 1 text, the previous year's text to the various 2 department heads and have them look at it and 3 review it and make changes. And it would come 4 back and, you know, I would put it in shape, 5 assemble it, try to get it to say the right things 6 in SEC legalese. Accountants would look at it. 7 Outside counsel would look at it. And then it 8 would be filed. 9 Q. But the drafting was coordinated 10 through you or Marge Caldwell? 11 A. It was coordinated -- it was 12 assembled -- yeah, we coordinated it. 13 Q. And you would get back comments on the 14 previous year's 10K or additions and you would 15 incorporate that into a draft? 16 A. Additions, deletions, yes. 17 Q. Were you what you would refer to as the 18 principal draftsperson? 19 A. No. I mean, again, I think each 20 section, there would be a principal draftsperson 21 on that particular section and I would just take 22 it and try to make it -- coordinate it throughout 19398 1 the entire document. 2 Q. Was one of your functions to ensure the 3 accuracy as much as possible of the 10K? 4 A. Yes. 5 Q. Did anyone else have responsibility for 6 that? 7 A. I mean, obviously, the board of 8 directors has responsibility, if that's what you 9 mean. They read it and sign it. But it was my 10 function to -- to make sure it was accurate. 11 Q. Now, let's go to Page 3 of the 12 document. Let's start with Page 2. Look at the 13 heading on Page -- the bottom of Page 2. It says 14 "Interest on earning assets and cost of funds." 15 Do you see that sentence? It says, 16 "The principal element of the company's operating 17 results is the net interest margin." 18 A. Yes. 19 Q. What does that refer to? 20 A. Again, I'm not sure I know right now, 21 but I think it referred to having a margin on your 22 interest between your -- 19399 1 Q. Pardon? 2 A. The interest you paid out versus the 3 interest you collected. 4 Q. So, is it the same thing as what we've 5 been discussing as the net interest spread on 6 mortgage-backed securities, for example? 7 A. I'm not sure I know what the net 8 interest spread is on mortgage-backed securities. 9 So, I'm not sure I can tell you that. 10 Q. Pardon? 11 A. I'm not sure I can tell you that 12 because I'm not sure I know what the net income 13 spread is on mortgage-backed securities. 14 Q. Well, what does net interest margin 15 mean to you? 16 A. I think I just said it. What I think 17 it means is the difference between the interest 18 you pay out and the interest you get paid in. 19 Q. Now where did you get the information 20 for this section? 21 A. I don't know where it came from right 22 now. 19400 1 Q. Well, who was in charge, for example, 2 of the mortgage-backed security portfolio at that 3 time? 4 A. In this time, it probably was Joe 5 Phillips. Is that right? I believe it was Joe 6 Phillips. 7 Q. And who did he report to at the time? 8 A. I think he reported to Ron Huebsch. 9 Q. And what was Mr. Crow's role at that 10 time? 11 A. He was chief financial officer. 12 Q. Did he have any input on this net 13 interest and earning cost of funds? 14 A. I'm sure he would have looked at it and 15 made whatever comments he wanted on it. 16 Q. Now, take a look at the bottom of 17 Page 3. See the paragraph, the first sentence, it 18 says, "The company has significantly improved the 19 interest rate sensitivity." 20 Do you see that? 21 A. Yes. 22 Q. And then you drop down. See the -- I 19401 1 think it's the second sentence that starts "The 2 company has also invested approximately 3 1.2 billion in fixed rate mortgage-back 4 certificates primarily funded with short-term 5 liabilities and hedged arbitrage programs"? 6 A. Yes. 7 Q. Then it talks about the effect of that. 8 Do you have any reason today to believe 9 that that statement is not accurate? 10 A. No, I don't. 11 Q. Has anyone ever told you that the 12 statement was not accurate? 13 A. No, they haven't. 14 Q. Now, I'd like to turn your attention to 15 Page 29. Do you have that? See where it says 16 "investment securities" at the top? 17 A. Yes. 18 Q. That doesn't say anything about 19 mortgage-backed securities, does it? 20 A. I don't believe so. 21 Q. Why wasn't the term "mortgage-backed 22 securities" included within the definition of 19402 1 investment securities for purposes of Schedule 1? 2 A. I don't have any idea. 3 Q. Now, look at those securities there. 4 Do you remember I asked you some questions about 5 liquidity and marketability? 6 Do you remember those questions? 7 A. Yes, I do. 8 Q. It shows that there is $311 million 9 approximately in treasury bills and notes. 10 Do you see that? 11 A. Yes. 12 Q. Are those marketable securities? 13 A. Are they marketable? 14 Q. Uh-huh. 15 A. I believe so. 16 Q. And then take a look -- see the trading 17 account, American Broadcasting Company, Beatrice 18 Foods, and then "other"? 19 Do you see those? 20 A. Yes, I do. 21 Q. Are those marketable securities? 22 A. I believe they are. 19403 1 Q. Okay. Now, take a look under 2 "corporate bonds and other." It says, "Corporate 3 bonds - zero coupon, corporate bonds - stated 4 rate." 5 Are those marketable securities? 6 A. I'd have to know what they are. I 7 can't tell from reading this whether they are or 8 aren't. 9 Q. What is it about corporate bonds that 10 raises a question in your mind? 11 A. Well, for some, there is a market and 12 for some, there might be a private placement. 13 There might not be a market. I just couldn't tell 14 from this. 15 Q. So, you'd have to know whether or not 16 these are private placements or not to know the 17 answer to that question? 18 A. Yes, that's correct. 19 Q. Now, where did you get the information 20 for that statement? 21 A. This was prepared by the accounting 22 department. 19404 1 Q. And the accounting department reported 2 to Michael Crow? 3 A. Yeah, uh-huh. 4 Q. Now, I'd like to direct your attention 5 to another document. That is B954, which is at 6 Tab 89. This is the application for approval to 7 issue subordinated debt securities. 8 Did you participate in the preparation 9 of this document? 10 A. Yes, I did. 11 Q. And was the drafting done the same way 12 you described the drafting for the 10K? 13 A. You're talking about the application or 14 the -- there was a bigger document that's attached 15 to it, and that would have had even more input 16 because there are investment bankers involved and 17 their counsel involved in the drafting of that 18 document. 19 Q. What do you mean by "the larger 20 document"? 21 A. Well, it's all paginated incorrectly, 22 but the attachment -- the offering circular -- 19405 1 there is an offering circular that is attached to 2 it. 3 Q. What is the Bates stamp number you're 4 referring to? 5 A. CN -- is that a Bates stamp number? 6 Q. Yes. 7 A. 152312. 8 Q. Now, who was it that was involved in 9 the preparation of the offering circular besides 10 the people that you've described being involved in 11 the preparation of the 10K which was A3021? 12 A. In addition to those -- all of those 13 people would be investment bankers were involved 14 in this, people from Drexel Burnham, their 15 counsel. United's outside counsel would have been 16 involved in this -- in the drafting of this 17 document. 18 Q. Who was United's outside counsel? 19 A. Mayor, Day, Caldwell & Keeton. 20 Q. Now, did the information all funnel to 21 you for review before it was finalized? 22 A. Well, there was a group -- it was a 19406 1 group process of people meeting and drafting the 2 document together. 3 Q. Okay. Who was it from Drexel Burnham 4 that was involved? 5 A. In the drafting, I think it was Roger 6 Stark. David Kenny might have been involved a 7 little bit, but I specifically remember Roger 8 Stark. And I think he had a younger person with 9 him, but I don't remember. 10 Q. Who was David Kenny? 11 A. He worked for Drexel. 12 Q. And what was his role in this project? 13 A. He was the primary investment banker on 14 the project. This is the more senior person. 15 Q. He was the senior person on -- from the 16 Drexel side working on this? 17 A. Yes. 18 Q. And is he the -- who got you in touch 19 with Mr. Kenny? 20 A. I think it was -- I believe it was 21 Barry Munitz or Charles Hurwitz. 22 MR. EISENHART: Your Honor, I don't 19407 1 believe Mr. Guido was present in the courtroom 2 when this was gone into at some length with 3 Mr. Rinaldi. We really are getting into a 4 repetitive area here. 5 MR. GUIDO: Your Honor, I'm not going 6 very far into this. I need to know who the 7 draftsmen were. I'm trying to identify who it was 8 involved in particular points, and I was just 9 trying to identify the individuals for the record 10 who were outside of USAT in terms of preparing the 11 draft of this document, Your Honor. I don't -- I 12 mean, I don't think I'm being overly repetitive in 13 my questioning. I have read the transcript, and I 14 am trying to just lay the foundation to move on, 15 Your Honor. 16 THE COURT: All right. Let's proceed. 17 Q. (BY MR. GUIDO) With regard to the 18 people from the outside, you said Mayor, Day was 19 one of the participants in of the drafting of the 20 document? 21 A. Yes. They represented United, that's 22 correct. 19408 1 Q. Now, let's take a look at portions of 2 the document. I'd like to identify, if we can -- 3 A. Of the offering circular? 4 Q. Of the offering circular. And 5 particularly, I'll direct your attention to 6 CN152324. 7 A. I know you weren't here yesterday, but 8 this thing is in terrible order. The pages go all 9 over the place. So, if you can -- 10 Q. Okay. Just Page 12. 11 A. Let's see if we can find Page 12. 12 Okay. 13 Q. All right. 14 A. This is the risk factors? Got it. 15 Q. There is a section that starts "risk 16 factors." And then on Page 13, it makes reference 17 to structured arbitrage activities. 18 Do you see that? 19 A. Yes, I do. 20 Q. Who participated in the preparation of 21 the section on structured arbitrage activities? 22 A. Again, it would have started off 19409 1 probably with -- at this time, probably Joe 2 Phillips and the accounting people. And then it 3 would have gone up through counsel and investment 4 bankers to prepare this. 5 Q. Okay. But the information -- the 6 substantive information for this came from the 7 accountants and from Mr. Phillips? 8 A. That's my belief. 9 Q. Okay. Now, let's take a look at 10 Page 14. Basically, on Page 13, it describes a 11 risk-controlled arbitrage and it describes the 12 income being an interest rate spread. 13 Do you see that? 14 A. (Witness reviews the document.) I 15 think so, yes, sir. 16 Q. Pardon? 17 A. I'm trying to find it on Page 14. 18 Q. Look under "structured arbitrage 19 activities" on Page 13 is where it starts, and 20 then it carries over to the top of Page 14. 21 A. Okay. 22 Q. And then look at the top of 14. The 19410 1 first full sentence says, "During periods of 2 rapidly changing interest rates, however, the 3 interest rate spread can be reduced to become 4 negative." 5 Do you see that? 6 A. Yes, I do. 7 Q. Then it says, "As interest rates have 8 fallen since the latter part of 1985, prepayments 9 of mortgage-backed securities purchased in the 10 program have accelerated, requiring the 11 association to reinvest the proceeds at lower 12 yields and resulting in a significant 13 deterioration of the interest rate spread." 14 Do you see that? 15 A. Yes, I do. 16 Q. So, is it your understanding that the 17 mortgage-backed securities that were sold prior to 18 the preparation of this document in 1985 were done 19 because prepayments had accelerated? 20 MR. NICKENS: Is he asking about all 21 sales, Your Honor? 22 MR. GUIDO: All sales prior to that 19411 1 date. 2 A. I couldn't say whether all sales were 3 made. This is setting forth a risk factor. I'm 4 not sure this is all sales. I don't know whether 5 all sales were done for this reason. 6 Q. (BY MR. GUIDO) Let's go to Page 19. 7 See the structured arbitrage program mentioned 8 there? 9 A. Yes, I do. 10 Q. Is that also information that came from 11 the investment people at USAT and the accounting 12 people at USAT? 13 A. I believe so, yes. 14 Q. Pardon? 15 A. I believe that's correct. 16 Q. Now, take a look at Page 20. Do you 17 see where it starts, "to closely manage this 18 process"? 19 A. No. Is that -- 20 Q. Top -- 21 A. Top of the first paragraph? 22 Q. Yes. 19412 1 A. Okay. I see it. 2 Q. Just read to yourself that paragraph 3 down through the sixth line from the bottom of 4 that paragraph that ends with "interest spread." 5 A. (Witness reviews the document.) Okay. 6 Q. Anywhere does that disclose that 7 mortgage-backed securities were sold to generate 8 gains to bolster profits? 9 A. That doesn't say that. 10 Q. Now, I'd like to move to another 11 document which is dated August 29th, 1986. It is 12 Tab 184, and it is A10663. It's the business plan 13 of United Savings Association of Texas. 14 Was this document drafted from the 15 offering circular that was part of Exhibit B954? 16 A. I don't know. 17 Q. Did Kirkpatrick & Lockhart participate 18 in the preparation of this document? 19 A. Of this document? 20 Q. Uh-huh. 21 A. I don't think they were on board at 22 that time. I think this would have been Caplan & 19413 1 Drysdale. 2 Q. It was Caplan & Drysdale at the time? 3 A. Right. 4 Q. Now, I'd like to direct your attention 5 to the Page 4 of the document. And see where it 6 says "structured arbitrage program"? 7 A. Yes. 8 Q. Okay. Now, look at the second 9 paragraph. And I'd like you to read the second 10 paragraph to yourself. It starts, "While the 11 structured arbitrage program is an attempt to 12 provide earnings with a reasonable level of 13 risk" -- and then it goes on. And particularly, 14 the sentence says "first during periods of rapidly 15 changing interest rates." 16 A. Okay. (Witness reviews the document.) 17 Okay. 18 Q. Anywhere does that say mortgage-backed 19 securities were sold to generate gains to bolster 20 profits? 21 A. Does it say those words, no, it 22 doesn't. 19414 1 Q. Pardon? 2 A. No, it doesn't say those words. 3 Q. I'd like to move to another document, 4 which is A3022, which is at Tab 719. 5 Was the December 31, 1986 10K, which is 6 at A3022, prepared in the same manner as A3021, 7 the 1985 10K? 8 A. Yes. 9 Q. Now, I'd like to direct your attention 10 to Page 13 of the document. See where it says 11 "mortgage-backed securities," that paragraph? 12 A. Not yet. Yes. 13 Q. It says "During the period from 14 December 31, '84, through December 31, '86, the 15 association's investment in mortgage-backed 16 securities guaranteed as to payment of principal 17 and interest by Fannie Mae -- Ginnie Mae, Fannie 18 Mae, or Freddie Mac increased from 419 million to 19 2.7 billion." 20 Do you see that paragraph? 21 A. Yes, I do. 22 Q. Is that paragraph information that you 19415 1 obtained from the investment people at USAT and 2 the accounting people? 3 A. I believe so. 4 Q. And is this a document that was 5 reviewed and approved by the board of UFG? 6 A. I believe so, yes. 7 Q. Now, I'd like to direct your attention 8 to Page 10 of the document which discusses hedging 9 activities. 10 Do you see that paragraph? 11 A. Yes, I do. 12 Q. And is that information that was 13 obtained from the accounting people and reviewed 14 by the board of directors prior to its inclusion 15 in the 10K? 16 A. Well, accounting, and I think the 17 investment people would have been the people to 18 start the process. 19 Q. Now, I'd like to direct your attention 20 to Page 32. 21 Do you see the section that says 22 "mortgage-backed securities"? 19416 1 A. Yes, I do. I'm just trying to figure 2 out what section this is in. 3 Q. I have CN071175 on the page. 4 A. Right. I have it. Thanks. 5 Q. See under "mortgage-backed securities"? 6 A. Yes. 7 Q. Do you see where the second paragraph 8 under this section says "In 1986, purchases and 9 sales of mortgage-backed securities totaled 6.5 10 billion and 4.8 billion respectively"? 11 A. Right. I see that. 12 Q. See where it goes on and says, "This 13 increased activity during a period of falling 14 interest rates reflects in part the company 15 shifting from higher coupon rate to lower coupon 16 rate mortgage-backed securities in order to 17 curtail the prepayment rates"? 18 Do you see that? 19 A. Yes, sir. 20 Q. Anywhere in that paragraph does it say 21 mortgage-backed securities were sold in 1986 in 22 order to generate gains to bolster profits? 19417 1 A. It certainly doesn't say those words. 2 Q. Now I'd like to show you a document 3 A10658 which is at Tab 182. 4 Do you have Tab 182 before you? 5 A. Yes. 6 Q. I'd like you to look at the 7 August 27th, '86 letter which is at the top of the 8 packet. 9 Do you have that? 10 A. Yes. 11 Q. Is that a document that is signed by 12 you? 13 A. Yes, it is. 14 Q. And then I want to direct your 15 attention to another document which is at CN053210 16 dated September 4th, 1986. 17 Is that a letter also signed by you? 18 A. Yes, it is. 19 Q. Now, I want to direct your attention to 20 the last paragraph of the first page of that 21 document. 22 Do you see where it says "United MBS 19418 1 Corporation will acquire mortgage-backed 2 securities by engaging in reverse repurchase 3 transactions"? 4 A. Yes, I do. 5 Q. It says, "The association might further 6 hedge these acquisitions either directly or 7 through general hedges held by the association on 8 a consolidated basis." 9 Do you see that? 10 A. Yes, I do. 11 Q. Was it your understanding that United 12 MBS was intended to be an arbitrage similar to the 13 ones that were described in the two 10Ks that we 14 just looked at? 15 A. I'm not sure. I don't recall what my 16 understanding was at the time. 17 Q. Then it goes on. "It is not expected 18 that such activities will create any direct, 19 indirect, or contingent liabilities of the 20 association. However, under repurchase 21 transactions, broker/dealers may call for 22 increases in collateral which the subsidiary may 19419 1 not have the ability to satisfy." 2 Do you see that? 3 A. Yes, I do. 4 Q. What does that refer to? 5 A. Again, I'm sure I got this information 6 from other people. But I believe what it refers 7 to is that on a repurchase transaction, there is 8 collateral. And at various times, they -- the 9 broker/dealers may call for an increase in that 10 collateral. 11 Q. But why would that -- I mean, this is 12 United MBS we're talking about. 13 Why would that create any contingent 14 liabilities for USAT? 15 A. I'm not sure it would have. It might 16 have. I'm not sure. 17 Q. I'd like to direct your attention now 18 to a May 9th, 1986 letter to James Halverson from 19 you. It's at A10634, Tab 180. 20 MR. NICKENS: Your Honor, I would like 21 to say for the record, as you know, we've had a 22 system of designating documents that counsel could 19420 1 expect to use on the following day. A large, 2 substantial percentage of the documents that we 3 have currently gone through were not on the pull 4 list. And, therefore, Mr. Berner has not had an 5 opportunity to have his attention directed toward 6 those documents because they were not indicated 7 that they would be documents that he might be 8 asked about. 9 Mr. Guido has complained bitterly at 10 times about not receiving notice from us. And at 11 least the last half dozen of these documents were 12 not on the pull list that we were given. 13 MR. GUIDO: Your Honor, I can explain 14 that. I think there is some misunderstanding. 15 The documents -- the last half dozen 16 documents that I have gone through were on the 17 Rinaldi pull list. And I thought we made it clear 18 that with regard to the representations that dealt 19 with the mortgage-backed securities, that I was 20 going to do that portion of that list. I'm sorry 21 that there is some misunderstanding and I didn't 22 make that clear. But I thought that with regard 19421 1 to the documents that I have just been going 2 through, and I think it is the last half dozen or 3 so, that those were on Mr. Rinaldi's list. And I 4 thought it was the understanding that I was going 5 to do the mortgage-backed security portions of 6 that. 7 I will refrain and I will make sure in 8 the future that this doesn't happen again, Your 9 Honor. I apologize to counsel for the 10 misunderstanding. 11 MR. NICKENS: Well, my principal point, 12 Your Honor, is in fairness to the witness, there 13 are thousands of exhibits. And to be shown one 14 that he may or may not have seen within the last 15 10 or 12 years obviously would reflect on his 16 ability to comment on that document. 17 THE COURT: All right. Let's proceed. 18 MR. GUIDO: Thank you, Your Honor. 19 Q. (BY MR. GUIDO) A10634, do you have 20 that in front of you? 21 A. Yes, I do, sir. 22 Q. Is that a document that you wrote, 19422 1 Mr. Berner? 2 A. I certainly signed it. I'm sure I 3 wrote it. 4 Q. Is this a document that you have seen 5 before? 6 A. I believe so. Yeah, I've seen this. 7 Q. Is this something that you've reviewed 8 recently? 9 A. I think I've looked at it recently. 10 Q. In fact -- 11 A. I went through a lot of documents. 12 Q. -- you were asked questions about this 13 during your deposition in the investigative phase, 14 were you not? 15 A. That was how many years ago? 16 Q. You haven't had an opportunity to 17 review your deposition? 18 A. I have not reviewed my deposition. 19 Q. Now, I'd like to direct your attention 20 to the first paragraph. It says, "On behalf of 21 Mr. Munitz, Gross, Williams, and myself, I would 22 like to thank you and Ginger Baugh for taking the 19423 1 time to meet us to discuss the United Savings 2 Association of Texas senior subordinated note 3 application." 4 Do you see that? 5 A. Yes, I do. 6 Q. And this, I gather, is a follow-up 7 letter from a meeting in which you were asked to 8 amplify or to expand on some of the information 9 that was provided? 10 A. That's what it appears to be, yes. 11 Q. Now, I'd like to direct your attention 12 to Page 2 of the document. 13 Do you see where it says "corporate 14 bond strategy"? 15 A. Yes, I do. 16 Q. It says, "The association has 17 implemented its program of investing in corporate 18 bonds in order to maintain an interest rate spread 19 between the high-yield corporate bonds and 20 duration matched long-term certificates of 21 deposit." 22 Do you see that? 19424 1 A. Yes, I do. 2 Q. And then it goes on, on Page 3, and 3 sets out the objectives that were set by the 4 investment committee of USAT for those 5 transactions. 6 Do you see that? 7 A. Is that at the top of Page 3? 8 Q. At the top of Page 3, those three 9 points. Do you see that? 10 A. Yes, I do. 11 Q. One of them says "security of the 12 association's principal." The second says 13 "maintenance of interest rate spread." And the 14 third says "possible capital appreciation." 15 Do you see that? 16 A. Yes, I do. 17 Q. Did USAT buy mortgage-backed securities 18 that had warrants attached to them? 19 A. Mortgage-backed securities had 20 warrants? 21 Q. I'm sorry. High-yield bonds had 22 warrants attached to them. 19425 1 A. I think there may have been some 2 occasions where there were. 3 Q. Did USAT buy high-yield bonds that had 4 means for USAT to participate in equity 5 appreciation of the issuers of the high-yield 6 bonds? 7 A. I don't have any recollection of that. 8 I just don't recall that. 9 Q. Now, I'd like to direct your attention 10 to the next part which deals with the 11 mortgage-backed securities portfolio which is on 12 Page 4. 13 A. Is this the gap management? 14 Q. Yeah. The gap management. Do you see 15 that? 16 A. Yes. 17 Q. In the first paragraph, it talks about 18 USAT's mortgage-backed security program. 19 Do you see that? 20 A. Yes. 21 Q. Then it goes on. See the last 22 paragraph on that page? 19426 1 A. The one beginning "working in concert"? 2 Q. No. The very last paragraph. It says, 3 "While utilization of these techniques..." 4 A. Yes. 5 Q. Now, what are the techniques that are 6 referred to there in that sentence? 7 A. Again, I haven't read the whole 8 document; but it looks like it talks about the 9 matching techniques in the second paragraph and 10 maybe the -- utilizing Fannie Maes, Ginnie Maes, 11 and Freddie Mac securities. I think that's what 12 it's talking about. 13 Q. Well, what does "gap management" refer 14 to? 15 A. Again, that's -- I believe that's the 16 difference between the interest and your assets 17 your liabilities. 18 Q. You mean between the duration of the 19 assets liabilities? Is that what you mean? 20 A. You're correct, I think. 21 Q. So -- and when it talks about matching 22 techniques, it's matching the durations between 19427 1 the assets and liabilities, is it not? 2 A. I think that's what it's talking about, 3 but I'm not sure. I'd have to read the whole 4 thing and see if I could recollect what was being 5 said at that time. 6 Q. Well, you wrote the letter, did you 7 not? 8 A. Well, it was over my name; but this 9 would have been prepared by other sections in the 10 institution. 11 Q. But you reviewed it, did you not? 12 A. Yes, I did. 13 Q. And you believed it to be accurate when 14 you sent it; is that right? 15 A. Absolutely. 16 Q. Now, it says, "While utilization of 17 these techniques has resulted in the association 18 not taking full advantage of the recent dramatic 19 decline in interest rates, USAT's management 20 believes that USAT should not be in the interest 21 rate speculation business." 22 Do you see that? 19428 1 A. Yes, I do. 2 Q. What does that refer to? 3 A. I don't recall. 4 Q. What does "interest rate speculation 5 business" mean to you? 6 A. What it means to me? 7 Q. Uh-huh. 8 A. It would be speculating on which way 9 interest rates would go. 10 Q. Now, would positioning a 11 mortgage-backed security portfolio to benefit from 12 a decline in interest rates be engaging in 13 interest rate speculation business? 14 A. I'm not sure. I just don't know enough 15 about mortgage-backed securities to say that. 16 Q. Now, I'd like to direct your attention 17 to another document, which is B1042 at Tab 232. 18 This is a memo to Neil Twomey from Jonathan Scott 19 dated June 12th, 1986. 20 Have you seen this document before? 21 A. I think I've seen this. 22 Q. Do you know who Jonathan Scott was? 19429 1 A. I believe he worked for the Federal 2 Home Loan Bank of Dallas. 3 Q. Do you know what his position was? 4 A. No, I don't. 5 Q. Why did you attend this meeting? 6 A. I don't know. I was asked. 7 Q. Pardon? 8 A. I was asked to attend. 9 Q. Did you regularly attend meetings that 10 USAT staff had with the regulatory people? 11 A. Sometimes I would, and many times I 12 wouldn't. 13 Q. Now, do you know what the purpose of 14 this particular meeting was? 15 A. Not without reading this. I might be 16 able to tell if I read this. 17 Q. Well, why don't you read the first two 18 paragraphs and maybe that will refresh your 19 recollection. 20 THE COURT: We'll adjourn until 1:30. 21 MR. GUIDO: Thank you, Your Honor. 22 19430 1 (Whereupon, a lunch break was taken 2 from 12:03 p.m. to 1:36 p.m.) 3 4 THE COURT: Be seated, please. We'll 5 be back on the record. 6 Mr. Guido, how much longer do you have 7 with the witness? 8 MR. GUIDO: I have about 45 minutes, an 9 hour at maximum, Your Honor. 10 THE COURT: Very good. 11 MR. GUIDO: Could be as early as half 12 an hour. 45 minutes to an hour seems about right. 13 THE COURT: All right. Proceed. 14 Q. (BY MR. GUIDO) I want to show you two 15 documents. One is A10690 at Tab 568, and the 16 other is T4302 at Tab 566. I think you already 17 have the Tab 566. It was the one where you made a 18 comment about Ron Heubsch's demeanor. That much, 19 I remember. 20 A. The impassioned plea. 21 Q. Here it is. 22 A. (Witness reviews the document.) 19431 1 Q. T4302 is dated November 13th, 1986; and 2 A10690 is dated November 7th. 3 Do you have those two documents in 4 front of you? 5 A. Yes, I do, sir. 6 Q. 10690 is a memo from Michael Crow to 7 you. 8 Do you see that? 9 A. Yes. 10 Q. Have you seen that document before? 11 A. I don't remember seeing it, but I'm 12 sure I received it. 13 Q. Did you review that document at any 14 time before your testimony in this hearing? 15 A. No, I have not. 16 Q. Look at -- and then T4302 is from 17 Mike Crow to Bruce Williams. That one talks about 18 what transpired at an investment committee 19 meeting. 20 Do you see that? 21 A. Yes, I do. 22 Q. Now, one of them talks about selling 19432 1 junk bonds for profits for purposes of quarterly 2 earnings. And the other one says, in the last 3 sentence, "The portfolio will not be marked to 4 market on a periodic basis since it is not a 5 trading account." 6 Are those two statements consistent? 7 A. I think they are. I think they were, 8 yes. 9 Q. Why do you think that they are 10 consistent with each other? 11 A. Well, again, I know the accountants 12 were looking at -- the accountants being 13 Peat Marwick -- were looking at the question of 14 whether it was a trading or an investment account. 15 And I don't believe it was inconsistent to sell 16 some junk bonds in an investment account. 17 Q. You don't think it's inconsistent to 18 sell high-yield bonds for profits to bolster 19 quarterly earnings with a portfolio that is not a 20 trading account? 21 A. Again, this -- these are accounting 22 issues, and I know the accountants were all over 19433 1 this. And I believe they didn't feel that it was 2 inconsistent. 3 Q. Well, look at -- I mean, I gather you 4 haven't looked at the policy that's A10690. Look 5 at what it says about the reasons for sales of the 6 securities. 7 A. Okay. 8 Q. Do you see that? 9 A. Yes. 10 Q. It gives some reasons. Right? 11 A. Yes, it does. 12 Q. Were any of those reasons the sale of 13 high-yield bonds for profits for purposes of 14 bolstering quarterly earnings? 15 A. Well, it says "and other appropriate 16 reasons as may be approved by the investment 17 committee." So, I assume that those in addition 18 to the specifics that are spelled out in that. 19 Q. So, you think that's what makes them 20 consistent? 21 A. No. I think that the question of 22 whether or not it's a trading account is something 19434 1 that the accountants would look at and make a 2 determination as to whether it was an investment 3 account or trading account. But I don't believe 4 it's inconsistent to say you could trade for 5 profit with that policy. 6 Q. Let's go on to the next document, and 7 I'll have you take a look at three documents at 8 the same time. 9 The first one is B1664, which is a 10 memorandum from Peggy Powers to the file regarding 11 a board of directors meeting at USAT on June 9th, 12 1987. 13 The second is B1742, which is at 14 Tab 282. It's a letter dated September 9th, 1987, 15 from Neil Twomey to you. 16 And then the third is B1864, which is a 17 letter from Mr. Lemanski dated November 24th, 18 1987, to the Federal Home Loan Bank Board. 19 A. (Witness reviews the documents.) 20 MR. GUIDO: Your Honor, apparently 21 B1664 -- I thought it was on Mr. Rinaldi's -- in 22 Mr. Rinaldi's second binder. It basically is just 19435 1 a recordation of the meeting of the board of 2 directors where the supervisory agent gives them 3 instructions, Your Honor. I can do my questions 4 without that document. 5 MR. EISENHART: Your Honor, we have the 6 exhibits. 7 THE COURT: Is B1664 in the record? 8 MR. GUIDO: No, it is not, Your Honor. 9 THE WITNESS: Mr. Guido, this is B1864. 10 I think it's the wrong document. 11 MR. GUIDO: No. I've given you two in 12 addition to that one document. 13 THE WITNESS: Okay. I only have two 14 documents. 15 MR. GUIDO: You have two documents. 16 Q. (BY MR. GUIDO) Let's start with B1742 17 at Tab 283. That's the letter from Neil Twomey to 18 you dated September 9th, 1987. 19 Do you recall the issue came up with 20 Neil Twomey about the safety and soundness of 21 USAT's investments in junk bonds? 22 A. I'm not sure it was safety and 19436 1 soundness. I remember there was an issue in 2 connection with the exam related to the high-yield 3 bonds. 4 Q. Do you recall that he was concerned 5 that they may be too risky for USAT's investments? 6 A. I think that's right. I know he wanted 7 them to be reviewed. 8 Q. Now, this is a letter to you regarding 9 discussions that he's had with you about the 10 review of the high-yield bond portfolio. Right? 11 A. Let me look at it. (Witness reviews 12 the document.) 13 Yeah. This is before the review, 14 that's correct. 15 Q. Right. This is before the review. And 16 he is -- this makes mention of Merrill-Lynch 17 Capital Markets. 18 Do you see that? 19 A. Right. I do. 20 Q. Had he told you that he wanted 21 Merrill-Lynch Capital Markets to do the review? 22 A. That's my recollection. 19437 1 Q. And that -- what was your reaction? 2 A. Our reaction was "that's fine," but 3 then we discussed it with them and it was -- I 4 think their fee was too high is my recollection. 5 Q. What was the fee? Do you recall? 6 A. No, I don't. 7 Q. Was it about $100,000? 8 A. That sounds like it could be right, but 9 I really don't have a specific recollection of 10 that. 11 Q. And what was the fee that was charged 12 by the firm that eventually did the analysis? 13 A. Well, I know Pru-Bache did the 14 analysis, and I'm not sure -- I don't remember 15 what the fee was. 16 Q. Was it about $30,000? 17 A. I don't know. 18 Q. Now, this sets out that you had 19 indicated to him that the fee was too great with 20 Merrill-Lynch Capital Markets. Right? 21 A. That's correct. 22 Q. And it sets out what he wanted you to 19438 1 do going forward. Right? 2 A. Yes. 3 Q. Now, he sets out in this letter the 4 scope of the review, does he not? 5 A. Yes, he did. 6 Q. And look at Item No. 4. Do you see 7 that? 8 A. Yes. 9 Q. And that deals with a review of the 10 specific activities, right, the trading 11 activities? 12 A. Yes. 13 Q. Now, take a look at B1864 at Tab 283. 14 Anywhere do you see a review of the actual trading 15 activities that occurred at USAT in its high-yield 16 bond portfolio? 17 A. Are you asking me -- I'm not sure -- 18 are you asking me if there is something in this 19 letter or -- 20 Q. Yeah. 21 A. Do you want me to read this letter? 22 Q. You haven't reviewed this letter 19439 1 either? 2 A. Not in a long time. It's a 3 50,000-dollar fee. 4 Q. Take a look at the second page. It 5 sets out what the association asks to be reviewed. 6 Do you see anywhere in there the 7 association requesting Pru-Bache to review the 8 actual trading activities that took place? 9 A. This is a letter from Pru-Bache to the 10 Federal Home Loan Bank Board. 11 Q. To the Federal Home Loan Bank Board? 12 A. Right. 13 Q. Regarding its review of United Savings 14 Association of Texas' high-yield bond portfolio? 15 A. Right. 16 Q. Anywhere does it indicate that it 17 reviewed the trading activities -- the actual 18 trading activities in the portfolio? 19 A. Again, No. 4 seems to say -- and I 20 haven't read this letter in a long time -- but the 21 diversification of the association's trading. 22 Q. Among different broker/dealers. It's 19440 1 not talking about the trading activity and the 2 decision-making process, is it? 3 A. Again, I can't tell just from reading 4 this. I haven't read the whole letter. But I 5 know this letter was sent to the Bank Board and 6 their review was acceptable. 7 Q. Did you participate in defining what 8 Pru-Bache's -- the scope of Pru-Bache's work would 9 be? 10 A. No, I didn't. 11 Q. Who did? 12 A. I think most of it came from Neil 13 Twomey, and then he would have been dealing with 14 our investment group. 15 Q. Well, Neil Twomey sent you a letter and 16 told you what the minimums were. 17 Neil Twomey didn't negotiate the 18 contract with Pru-Bache, did he? 19 A. I don't believe he did. 20 Q. Who did? 21 A. It would have been someone in our 22 investment group. 19441 1 Q. Do you recall who it was? 2 A. No, I don't. 3 Q. When you make a reference to 4 "investment group," what are you talking about? 5 A. It could be, you know, Ron Huebsch 6 or -- I don't know who was in charge of the 7 high-yield bonds at this time. Or it might have 8 been Mike Crow, someone in that group. 9 Q. Did you review the contract? 10 A. I don't recall reviewing it. I may 11 have. 12 Q. Now, I'd like to show you 13 Exhibit B2459, which is a letter from you dated 14 October 12th, 1988. And it is -- it has attached 15 to it a memorandum from Mike Crow to Larry Connell 16 dated August 5th, 1988. 17 Do you have that document in front of 18 you? 19 A. Yes, sir. 20 Q. Have you seen this document before? 21 A. Yes, I have. 22 Q. When? 19442 1 A. I'm sure when I drafted it, but I think 2 I've seen it recently in preparing for this. 3 Q. Now, see the second page, the fourth 4 paragraph from the bottom? It says, "For your 5 information, I am attaching a memorandum detailing 6 the results of these activities," and then it has 7 this attachment to it. 8 A. Yes. 9 MR. GUIDO: I move the admission of 10 Exhibit B2459, Your Honor. 11 MR. VILLA: No objection. 12 THE COURT: Received. 13 Q. (BY MR. GUIDO) Look at Page 1 of the 14 attachment, CN140651. 15 Do you see that? 16 A. Yes, I do. 17 Q. See at the bottom under "high-yield 18 bonds," it says, "Management's intent is to hold 19 this portfolio until maturity or call. Therefore, 20 mark-to-market is not our primary objective." 21 Do you see that? 22 A. Yes, I do. 19443 1 Q. What does that refer to? 2 A. What is it referring to? 3 Q. Yeah. What is that -- 4 A. The high-yield bond portfolio. 5 Q. What is the significance of 6 management's intent in that context? 7 A. It's just setting forth what the intent 8 of management was. 9 Q. If USAT had actively traded its 10 portfolio so as to generate gains to bolster 11 quarterly profits, would that have been consistent 12 with this intent in your view? 13 A. Yeah, I believe so. I mean, again, I 14 think that's an accounting issue as to whether or 15 not it's a mark-to-market or not a mark-to-market. 16 It's not inconsistent. 17 Q. Was it a regulatory issue, as well? 18 A. I'm not sure if it was a regulatory 19 issue. 20 Q. Do you recall having discussions with 21 anyone that you got advice from whether or not 22 actively trading a portfolio to generate gains to 19444 1 bolster profits was permissible under the Federal 2 Home Loan Bank Board's policies? 3 A. I don't recall having any conversations 4 about that. 5 Q. Did you ever represent to the Federal 6 Home Loan Bank Board or its representatives that 7 USAT had actively traded its high-yield bond 8 portfolio to generate gains to bolster profits? 9 A. Well, I know we would send them monthly 10 reports as to what the trading -- what the 11 activity was in the high-yield bonds. So, I'm not 12 sure when you say did we represent that actively 13 traded, they would see the trading. 14 Q. I asked you whether or not you 15 represented, not whether or not you provided them 16 information that showed there were transactions. 17 Did you represent to representatives of 18 the Federal Home Loan Bank Board that USAT 19 actively traded its high-yield bond portfolio to 20 generate gains to bolster quarterly profits? 21 A. I didn't. I don't know if it was by 22 anybody else. 19445 1 Q. Pardon? 2 A. I don't know if anybody else 3 represented -- 4 Q. But you didn't? 5 A. Not that I can recall. 6 Q. Okay. Did you represent to the Federal 7 Home Loan Bank Board that USAT actively traded its 8 mortgage-backed security portfolio to generate 9 gains to bolster quarterly profits? 10 A. I didn't. 11 Q. Now I'd like to turn to another subject 12 matter, and that is the maturity matching credit 13 issue. And I'd like to show you, to start with, 14 Exhibit T9006, which is a memorandum from Robert 15 Pozen to Art Berner dated August 12th, 1986. 16 17 (Discussion held off the record.) 18 19 Q. (BY MR. GUIDO) Have you had an 20 opportunity to review this document? 21 A. I saw it briefly this morning. 22 Q. Do you know what it refers to? 19446 1 A. Again, just from reading the first 2 paragraph or so, it seems to be referring to 3 whether it could shrink its liabilities and 4 eliminate regulatory violations by moving assets 5 and liabilities into subsidiaries. 6 Q. What is the -- what is the significance 7 of moving assets and liabilities between an 8 association and its subsidiaries? 9 A. Again, I might have known at the time. 10 I don't know right now. 11 Q. Why was it a question that you were 12 seeking guidance from Mr. Pozen on? 13 A. Again, I don't know. 14 Q. I'd like to direct your attention to a 15 document that's at Tab 335. You have it in the 16 stack of materials. It's T4246. 17 A. 4246? 18 Q. Yeah. 4246. It's 335. Here it is. 19 T4246 is a September 8th, 1986 20 memorandum from Doug Hansen regarding "Growth and 21 capital strategy - the next six months." I know 22 the document is a little difficult to read, but 19447 1 I'd like to direct your attention to the fourth 2 page of the document. I think it's Bates stamped 3 466. 4 A. I don't have that Bates stamp. 5 Q. Pardon? 6 A. I have an "OW" number. 7 Q. Oh, I'm sorry. This is the category 8 "D" again. And look -- 9 A. (Witness reviews the document.) 10 Q. Do you see where that's talking about 11 readjusting the portfolio by shrinking USAT's 12 assets? 13 A. That's on Page -- 14 Q. Pardon? 15 A. Is it -- which number are you referring 16 to in D? 17 Q. I'm looking at D -- is D -- let me see 18 if I can speed this up a little bit, Mr. Berner. 19 Is D essentially referring to the 20 proposals that are in T9006? 21 A. It looks like D3 seems to be talking 22 about it. 19448 1 MR. GUIDO: Your Honor, I move the 2 admission of T9006. 3 MR. VILLA: No objection. 4 THE COURT: Received. 5 Q. (BY MR. GUIDO) Now, T9006 says that 6 if you're going to transfer assets and liabilities 7 between a parent and a sub that you need to get 8 regulatory approval, does it not? 9 A. You'd have to refer me to -- 10 Q. Look at Page 2 of T9006. See "bulk 11 transfers"? 12 A. Okay. "Of savings account 13 liabilities"? Okay. 14 Q. Yeah. 15 A. That's what he says in his letter. 16 Q. Okay. So, that was the advice on 17 August 12th, 1986. Right? 18 A. Well, he says while the question isn't 19 free from doubt, the staff of FHLBB takes the 20 position, yes, that 700 million would be a bulk 21 transfer. 22 Q. So, did you ask for the memorandum -- 19449 1 the memorandum dated August 12th, 1986? 2 A. I must have. 3 Q. Did Mr. Pozen ever come up with 4 questions on his own and answer them for you? 5 A. I don't think so, not if he wanted to 6 be paid. 7 Q. So that any of the advice he gave to 8 you was in response to a request that -- 9 A. Generally, that's true. 10 Q. Now, I'd like to direct your attention 11 to T5125, which is at Tab 302. This is a memo 12 from Bruce Williams to Jenard Gross and Mike Crow 13 regarding United MBS. 14 Have you seen this document before? 15 A. I've seen it recently, yes. 16 Q. And had you seen it during the time 17 that you were deposed in the investigation in this 18 proceeding? 19 A. I think so. Did you show it to me? I 20 don't remember. 21 Q. You don't remember? 22 A. I really don't. 19450 1 Q. Now, this says -- if you'll look at the 2 underlined portion of the first paragraph -- "By 3 management approval, 320 million of variable rate 4 mortgage-backed securities and 710 million of 5 interest rate caps were transferred from United 6 MBS to USAT for maturity credit purposes." 7 Do you see that? 8 A. Yes, I do. 9 Q. Do you recall anyone ever coming to you 10 in the middle of 1987 or the spring of '87 and 11 asking you whether or not they could make such a 12 transfer without the approval of the Federal Home 13 Loan Bank Board? 14 A. No, I don't. 15 Q. Do you recall ever advising them 16 whether or not they needed regulatory approval for 17 such a transfer? 18 A. No, I don't. 19 Q. Do you recall whether or not they ever 20 asked you whether such a transfer could be 21 utilized for maximizing the maturity matching 22 credit? 19451 1 A. No, I don't. 2 Q. Do you recall ever participating in any 3 discussions about readjusting USAT's portfolio to 4 maximize the maturity matching credit? 5 A. I don't have a recollection of that, 6 no. 7 Q. Now, we just looked at a document that 8 was from the strategic planning committee. Do you 9 have that in front of you, Tab 335? 10 Isn't the maturity matching credit one 11 of the topics at the top of that memorandum? 12 A. Yes, it is. 13 Q. Would you turn to the page that 14 addresses that topic? What does it say about the 15 maturity matching credit there? 16 A. This is C, "United should be able to 17 receive most of the maturity matching credit in 18 1987." 19 Q. Does it talk about readjusting the 20 portfolios to maximize the maturity matching 21 credit? 22 A. Can you refer me to where it talks 19452 1 about adjustments? 2 Q. I'm going to have to look on your copy. 3 A. Okay. 4 Q. Here it is. Take a look at the section 5 on the maturity matching credit C. 6 A. Right. 7 Q. Look at Item No. 5. See where it says 8 "A proposed change in the method United uses to 9 account for swaps and caps and the Federal Home 10 Loan Bank report should reduce the gap into the 15 11 to 20 percent range." 12 Do you see that? 13 A. I see that, yes. 14 Q. It says, "Movement of either the 15 high-yield bonds or the mortgage-backed securities 16 to a sub by the end of September would complete 17 the transition to a 15 percent gap." 18 Do you see that? 19 A. Yes, I do. 20 Q. So, does that refresh your recollection 21 that transferring assets and liabilities between 22 USAT and the sub was discussed in a meeting in 19453 1 which you attended? 2 A. Well, I don't remember it; but these 3 are minutes of that meeting. 4 Q. Do you recall the transaction that's 5 referred to in T5125? 6 A. No, I don't. 7 Q. When -- when the answer was filed by 8 you in this proceeding to the complaint, did you 9 review the answer before it was filed on your 10 behalf? 11 A. I believe I reviewed it. 12 Q. And do you recall that in it, the 13 transfer of the caps and the mortgages referred to 14 in T5125 was addressed in that answer? 15 A. I don't recall it; but I've been told 16 that's true, yes. 17 Q. And what is your understanding of what 18 was said in the answer? 19 A. It's my understanding that there might 20 have been an admission, and I think that that 21 admission was incorrect. 22 Q. So, what do you mean there was an 19454 1 admission? 2 A. It's my understanding from talking to 3 counsel that there was an admission in the answer 4 and, upon further review, that that was probably 5 incorrect. 6 Q. And what was it that it's your 7 understanding was incorrect about the admission 8 that was in the answer? 9 A. Again, my understanding is that the 10 caps were always -- belonged at the USAT level. 11 Q. However, the answer you filed in this 12 proceeding admitted that the caps were transferred 13 as set out in T5125? 14 A. That's correct. 15 Q. I'd like to move to another subject. 16 And I'd like to direct your attention back to 17 A10658, which is at Tab 182. 18 A. Tab 182? 19 Q. And I think you also have Tab 183, 20 which is A10664. 21 A. I have 182. 183, you said? 22 Q. Uh-huh. 19455 1 MR. NICKENS: Did you mean A10634? 2 MR. GUIDO: 10664. I'm sorry. 3 Tab 183. It's the September 4th letter. 4 THE WITNESS: I don't believe I have 5 it. Do you have another copy? 6 Q. (BY MR. GUIDO) Mr. Berner, we'll just 7 use 183 which has both the August 7th and the 8 September 4th letter. 9 A. Okay. Now I have both of them. 10 Q. The -- remember, I asked you questions 11 earlier today about the letters that you wrote to 12 the Texas Savings and Loan Commission about United 13 MBS. And one of the questions I asked you about 14 dealt with the creation of contingent liabilities 15 at the USAT level for the activities of United 16 MBS. 17 Do you recall that question? 18 A. I believe I do. 19 Q. And look at -- do you have Tab 183 in 20 front of you now? 21 A. Yes, I do. 22 Q. And do you see the last paragraph 19456 1 there? It talks about -- 2 A. Last paragraph on -- 3 Q. -- margin calls. Last paragraph on 4 the first page. 5 A. Oh, sorry. (Witness reviews the 6 document.) Calling for increase in collateral? 7 Q. Uh-huh. 8 A. Yes, I see that. 9 Q. Is that what's typically known as a 10 margin call? 11 A. Yes, I think so. 12 Q. So, this is essentially directing -- or 13 addressing the question of what would happen if 14 there was a margin call that was made to United 15 MBS by the counter-party to a reverse repurchase 16 agreement. Right? 17 A. Yes. It's saying that, yes. 18 Q. What does it say would happen as far as 19 USAT was concerned? 20 A. The last sentence says, "In such event, 21 the association would have to supply such 22 collateral, thus creating a direct liability of 19457 1 the association to fulfill the requirements of the 2 subsidiary." 3 Q. Now let's take a look at A13016, which 4 is at Tab 1144. 5 A. Do I have that? Do I have that here? 6 Q. Do you have that letter before you? 7 A. Yes, I do. 8 Q. Now, this is a letter from Mike Crow to 9 Bill Coster dated February 12th, 1987. And look 10 at the second sentence there where it talks about 11 USAT's commitment to maintain a 10 percent total 12 capital-to-asset ratio within the sub. 13 Do you see that? 14 A. Right, I see that. 15 Q. What would have been the consequence 16 understand that letter if a margin call had been 17 made on United MBS under its repurchase 18 agreements? 19 A. Under this letter? 20 Q. Yeah. 21 A. I don't think anything. 22 Q. You don't think anything? Why not? 19458 1 A. I don't think it's legally binding on 2 anybody. 3 Q. What do you mean it's not legally 4 binding? 5 A. This is -- this is just a statement as 6 to an intent. I don't think it's a 7 legally-binding obligation. 8 Q. Well, it's a commitment. Right? 9 A. As I said, I think it's a statement. I 10 don't believe it's a legally-binding obligation. 11 Q. And what is it about it that's not 12 legally binding? 13 A. I don't believe there is any 14 consideration. It's certainly not signed by the 15 other side. I think this is just a statement of 16 an intent. 17 Q. Well, Salomon Brothers was being asked 18 to extend credit to USAT, was it not, at the time? 19 A. If that's what this is doing, yes. 20 Q. I mean, that's what this deals with, 21 doesn't it? 22 A. Yes, it does. 19459 1 Q. And this commitment is being given to 2 Salomon Brothers as an inducement to them to enter 3 into repurchase agreements with USAT, is it not? 4 A. Again, I don't believe that this is a 5 legally-binding document. 6 Q. We'll get to your conclusions in a 7 minute. I'm just asking you: What does the 8 document do in terms of what it says or purports 9 to do? 10 A. It says we will -- we're telling you 11 we're going to commit to maintain the capital. 12 Q. Okay. In order to induce you to enter 13 into reverse repurchase agreements with us? 14 A. Again, I don't think this -- it doesn't 15 say "in order to induce you." It says, "We hope 16 that you'll extend the credit." 17 Q. And then we commit to do certain 18 things. Right? 19 A. Well, again, I don't believe this is a 20 commitment. I don't believe it's a 21 legally-binding commitment. 22 Q. Pardon? 19460 1 A. I do not believe that this is a 2 legally-binding commitment? 3 Q. Well, why was it given to Salomon 4 Brothers? 5 A. To tell them what we were planning on 6 doing. 7 Q. And it wasn't because Salomon Brothers 8 wanted some assurance from USAT? 9 A. I don't know. I wasn't involved in 10 that. I don't know. 11 Q. You weren't involved at all in the 12 drafting of this letter? 13 A. No. 14 Q. I'd like to direct your attention to a 15 couple of other documents, and that is -- I'd like 16 to direct your attention to B1565, which is at 17 Tab 1394, and T4362, which is at Tab 1395. 18 Have you had an opportunity to review 19 those two documents? 20 A. Yes, I have. 21 Q. Do you recall the conversation that's 22 referred to in both of those exhibits on 19461 1 April 14th? 2 A. I don't recall the conversation, no. 3 Q. These letters indicate that you were 4 involved in discussions regarding requests by 5 persons issuing reverse repurchase agreements and 6 settling securities requests that the parent 7 corporation -- in this case, USAT -- guarantee the 8 obligations of the sub. 9 A. Yeah. This is saying there are 10 occasions where they might require a guarantee. 11 Q. And were you involved in any way in the 12 drafting of any documents that held out a 13 commitment by USAT to ensure the performance of 14 the activities of United MBS? 15 A. It's possible I was, but I don't recall 16 it. 17 Q. Let me show you some documents starting 18 with A -- excuse me -- with T9001, which is a 19 packet of documents that came from -- I think it's 20 Kirkpatrick & Lockhart's files -- dated -- it's 21 drafted 2/12/87. 22 Have you seen this packet of materials 19462 1 before? 2 A. I've seen this in the last day or so. 3 Q. Pardon? 4 A. I think I've seen this in the last day 5 or so, and I probably saw it before. 6 MR. NICKENS: Can we identify for the 7 record, Your Honor, what packet of materials we 8 are discussing? 9 MR. GUIDO: The packet of materials 10 is -- I'll use the imaging numbers -- OW089411 11 through OW089440. 12 MR. NICKENS: And it's been labeled 13 T9001? 14 MR. GUIDO: T9001. 15 Q. (BY MR. GUIDO) Now, these documents 16 have some handwriting on them. It appears to be 17 the same person's handwriting. 18 Do you recognize the handwriting? 19 A. No, I don't. 20 Q. The packet of materials -- take the 21 first document that says "agreement dated as of, 22 blank, 1987." 19463 1 Do you see that? 2 A. Yes, I do. 3 Q. And then it goes through -- the first 4 document in the packet goes through Page 12. 5 Do you see that? 6 A. Yes. 7 Q. Okay. And that ends at OW089422. 8 Do you see that? 9 A. Right. 10 Q. And then there is another document that 11 picks up after that. 12 Do you see that? 13 A. This is the letter? 14 Q. The letter. 15 A. Right. 16 Q. And that is a five-page document that 17 goes from OW089423. Right? 18 A. Right. 19 Q. And that's a letter from United MBS 20 Corporation to Drexel Burnham, or a draft? 21 A. Looks like it's from United Savings 22 Association. 19464 1 Q. You're right. I'm sorry. 2 And then the third is a letter or a 3 draft of a letter dated 2/13/87 which has Imaging 4 Nos. OW089429 through OW089431. 5 Do you see that? 6 A. Yes, I do. 7 Q. Okay. And that's a letter from 8 counsel. Right? A draft letter from counsel? 9 A. From me. A draft letter from me. 10 Q. Right. And then the fourth is a 11 three-page letter dated -- it's drafted the same 12 date, 2/13/87, OW089432 through 89434. 13 Do you see that? 14 A. Yes. 15 Q. And that's a letter from Kirkpatrick & 16 Lockhart? 17 A. Right. It's a draft, that's correct. 18 Q. Do you recall participating in the 19 drafting of these documents? 20 A. No, I don't. 21 Q. Do you recall requesting these 22 documents to be drafted? 19465 1 A. No, I don't. 2 Q. Do you recall signing any of the finals 3 of these documents? 4 A. Well, I only recall it because I saw it 5 this morning. 6 MR. GUIDO: Your Honor, I'd like to 7 move T9001 into the record. 8 MR. VILLA: No objection. 9 THE COURT: Received. 10 Q. (BY MR. GUIDO) Now I'd like to show 11 you a document that's been marked as 9002. This 12 is a letter dated February 17th, 1987. And it's 13 to Drexel Burnham Lambert from United Savings 14 Association of Texas. 15 Do you see that? 16 A. Yes, I do. 17 Q. And is that your signature on Page 5 of 18 that document? 19 A. Yes, it is. 20 MR. GUIDO: I move the admission of 21 Exhibit T9002, Your Honor. 22 MR. NICKENS: Your Honor, we don't have 19466 1 an objection to the document; but we do have a 2 concern that I want to express for the record. 3 This document has no Bates numbers, and 4 it was first delivered to us last night. And we 5 were given another document to try to establish 6 the provenance of this document since it didn't 7 have any Bates numbers which indicated that it 8 might have been a part of a production conducted 9 by counsel then for the FDIC, Hutcheson & Grundy. 10 We have never been completely satisfied that we 11 got access to Hutcheson & Grundy's documents. 12 The reason we have no objection to this 13 document is we were able to find, overnight, this 14 document in another form with a Bates number. But 15 it does raise a concern about documents that come 16 without any indicated source the night before the 17 testimony. But because we were able to find it, 18 we have no objection. 19 THE COURT: All right. Received. 20 MR. GUIDO: Your Honor, I'd like for 21 the record to show how the document came to 22 counsel's attention, if I may, for the record. 19467 1 And that is that counsel discovered over the break 2 the drafts of T9001 and sought to ascertain 3 whether or not there were any of the signed 4 originals that were available. And the documents 5 that we were able to find through inquiry with the 6 FDIC were these documents. 7 When counsel for the OTS learned or 8 ascertained the drafts, counsel for the OTS 9 notified counsel for the respondents that it had 10 found these drafts in the Kirkpatrick & Lockhart 11 files that were being reviewed because of the 12 expectation that this witness would testify about 13 certain letters not being legally enforceable. 14 At that point in time, we immediately 15 notified counsel for the respondents of this 16 document. I only received the originals right 17 before I gave them to counsel, and I believe that 18 the documents that I have are essentially 19 authenticated by the draft, which is essentially 20 identical to the signed copy which does -- the 21 draft does have a Bates stamp, Your Honor. 22 But that's the history of how the OTS 19468 1 found the document and, in preparing for this 2 witness, came across these drafts in Kirkpatrick & 3 Lockhart's files and felt that the documents may 4 help explore with this witness his views about why 5 certain letters that are denominated commitments 6 are not legally enforceable, Your Honor. And 7 that's how the documents came to my attention. 8 THE COURT: All right. Thank you. The 9 document is received. 10 Q. (BY MR. GUIDO) Now, I'd like to 11 direct your attention to 9002 and ask you: Is 12 this document a legally-enforceable agreement? 13 A. I haven't read it, but I assume it is. 14 Q. Pardon? 15 A. Again, I haven't read this; but I 16 assume it's -- well, let's see. I think this is 17 probably a legally-enforceable document. 18 Q. Pardon? 19 A. I think it is probably a 20 legally-enforceable document. 21 Q. And what is it that makes this legally 22 enforceable as opposed to the letter that I showed 19469 1 you from Salomon Brothers or to Salomon Brothers? 2 A. Well, again, I haven't gone through 3 this; but it looks like there is consideration on 4 both sides and we're setting forth that this is an 5 agreement. 6 Q. Well, for a document to be legally 7 enforceable, does the consideration have to be 8 recited in the text of the document? 9 A. It does not have to be. 10 Q. And does the document have to exchange 11 promises to be legally enforceable? 12 A. Does it have to exchange promises? 13 Q. Uh-huh. 14 A. I'm not sure. 15 Q. What do you mean you're not sure? 16 A. I'm not sure. You mean can you have a 17 contract without an exchange of a promise? 18 Q. Yeah. 19 A. Well, sure. I mean, if I sell you my 20 car, there is no promise. 21 Q. What do you mean if you sell me your 22 car, it's not a promise? 19470 1 A. Well, if I say I want to buy your car 2 and you say, "Here's your car" and I give you 3 $100, there is no promise. 4 Q. Okay. So that that's a contract? 5 A. Well, it's enforceable. 6 Q. Or is that a sale? 7 A. Well, it could be either one. 8 Q. Pardon? 9 A. It could be either one. 10 Q. But there is no need for recitation in 11 your view of mutual promises to make something 12 enforceable as a contract? 13 A. I haven't seriously thought about what 14 would make things legally enforceable, but I think 15 you have to have some sort of consideration 16 floating back and forth. You have to have 17 authorization for it to be a legally-enforceable 18 document. I don't believe that that previous 19 document would be legally enforceable. 20 Q. And what is it about the previous 21 document that makes it not legally enforceable is 22 my question? 19471 1 A. There are a number of things. There is 2 no consideration showing. There is nothing -- 3 there is no agreement on the parties' side. You 4 don't know what the other side is giving, what 5 you're giving. It's just a statement of an 6 intent. 7 Q. What if the other side is entering into 8 reverse repurchase agreements? 9 A. They might be able to argue something, 10 but I don't believe that that document is a 11 legally-enforceable document. 12 Q. So, what is it that you would have to 13 know in addition to that document to know whether 14 it was legally enforceable? 15 A. I think you would have to look at -- to 16 see whether that document is legally enforceable? 17 Q. Uh-huh. 18 A. I don't think that document is legally 19 enforceable. 20 Q. No matter what? 21 A. No matter what. 22 Q. Is that what you're saying? 19472 1 A. I believe that's right. 2 Q. I'd like to show you T9003 and 9004. 3 9003 says "Agreement dated February 15th, 1987, 4 between United MBS Corporation, a Texas 5 corporation, and Drexel Burnham Lambert 6 Incorporated, a Delaware corporation." 7 Do you see that? 8 A. Yes, I do. 9 Q. Is that your signature on Page 12 of 10 the document on behalf of United MBS Corporation? 11 A. Yes, it is. 12 MR. GUIDO: I move the admission of 13 T9003, Your Honor. 14 MR. NICKENS: Your Honor, on the same 15 basis that we had no objection to 9002, we don't 16 have any objection to this document. 17 THE COURT: All right. Received. 18 MR. GUIDO: And my comments, Your 19 Honor, are the same with regard to this document, 20 as well. 21 Q. (BY MR. GUIDO) And then look at 22 T9004. 19473 1 Is that document also signed by you? 2 A. (Witness reviews the document.) Yes, 3 it is. 4 Q. Pardon? 5 A. Yes, it is. 6 MR. GUIDO: I move the admission of 7 T9004, Your Honor. 8 MR. NICKENS: Same non-objection, Your 9 Honor. 10 THE COURT: All right. Received. 11 Q. (BY MR. GUIDO) Now, look at T9002. 12 Okay? 9002 in the first paragraph, the last 13 sentence, says, "In order to induce Drexel and its 14 affiliates to enter into the agreement, the master 15 repo agreement, such hedging transaction 16 agreements, and such purchase agreements, and to 17 consummate the transactions contemplated 18 thereunder, the parent company hereby agrees for 19 the benefit of Drexel and such affiliates as may 20 conduct business with the company as follows," and 21 it has a series of agreements. 22 Do you see that? 19474 1 A. Yes, I do. 2 Q. And it makes reference to the 3 agreement. Right? And is that essentially T9003? 4 A. Yes, I believe it is. 5 Q. And then it makes reference to the 6 master repo agreement. 7 Is that essentially T9004? 8 A. I believe so. 9 Q. Now, what does T9002 obligate USAT to 10 do with regard to United MBS's performance of its 11 obligations under the master repo agreement and 12 the agreements, T9003 and T9004? 13 A. I haven't gone through this to look at 14 it; so, if you have a specific -- if you want to 15 refer me somewhere or -- 16 Q. Do you recall -- do you recall the 17 document at all? 18 A. Well, as I said, I saw it briefly this 19 morning. I did not read it. 20 Q. So, you don't know. 21 Let's take a look at one of the 22 paragraphs. Under Paragraph -- on Page 3D, it has 19475 1 one of the covenants, the parent company 2 covenants. Right? 3 A. Yes. 4 Q. And what does that obligate the parent 5 company to do? 6 A. I can just read it. "Cause the company 7 to be" -- "company" being, I guess, United MBS -- 8 "to be in compliance with all representations and 9 warranties and to fulfill the covenants of the 10 company contained in Article VI of the agreement 11 provided that the parent company" -- which I 12 assume is United Savings Association -- "shall not 13 be directly liable or indirectly liable for the 14 performance by the company, United MBS, of any of 15 the company's obligations." 16 So, it's just to cause them to comply 17 with the representations and warranties and to 18 fulfill their covenants. 19 Q. In the master agreement. Right? 20 A. Right. 21 Q. Now, take a look at -- and then it has 22 some limitation on liability. Right? 19476 1 A. Well, it says they won't be directly or 2 indirectly liable. 3 Q. For the performance. 4 Do you see that? 5 A. Right. 6 Q. Okay. Now take a look at Page 4 under 7 "liability limited." That repeats the limitation 8 on liability, doesn't it? "The parent company 9 shall not be directly or indirectly liable for the 10 performance by the company of any of the company's 11 obligations under any master agreement." 12 Do you see that? 13 A. Yes, I do. 14 Q. Now, that turns out to have a proviso, 15 doesn't it? 16 A. Yes, it does. 17 Q. Okay. And what does that proviso say? 18 A. It says, "The parent company shall be 19 liable to Drexel and its affiliates for any 20 damages caused to Drexel and its affiliates by 21 virtue of a material breach of any covenant of the 22 parent company herein or the material inaccuracy 19477 1 or incompleteness of any representations or 2 warranties made or deemed made by the parent 3 company." 4 Q. Now, was one of the covenants that the 5 parent company shall cause United MBS to be in 6 compliance with its representations and 7 warranties? 8 A. I believe that's right, yes. Yes. 9 Q. So, if those -- it has not caused the 10 sub to be liable, United -- I mean, to comply with 11 its representations and warranties, then USAT 12 would be liable on damages? 13 A. If there were any damages, that's 14 correct. 15 Q. Now, I'd like to move back to some 16 minutes that we've talked about earlier in your 17 testimony, and it's A1601, A1602. 18 A. Do you know what the "T" number is? 19 Q. There are no T numbers. These are 20 documents that I introduced in the course of your 21 testimony. It's back when we were talking about 22 the strategic planning committee at the outset 19478 1 today. 2 THE COURT: Are those documents in 3 evidence, Mr. Guido? 4 MR. GUIDO: Your Honor, we moved them 5 into evidence today. 6 A. A1601? 7 Q. (BY MR. GUIDO) Yeah. 1601 and 1602. 8 They wouldn't be in a folder. 9 MR. GUIDO: These are the minutes of 10 November 6th, 1987, of the strategic planning 11 committee, Your Honor, and then the agenda that 12 goes with that. 13 MR. NICKENS: Your Honor, I object to 14 the characterization of A1602 as the agenda that 15 goes with it. I don't think there is any evidence 16 to that, and the only reference that I see is in 17 A1601 which refers to a memorandum prepared by 18 Bruce Williams and Mike Crow concerning long-range 19 strategy and tactics. 20 MR. GUIDO: Well, with that amendment 21 to my question, Your Honor, may I proceed with my 22 question? 19479 1 THE COURT: Yes. Proceed. 2 Q. (BY MR. GUIDO) This memorandum, which 3 is A1602, Mr. Berner, resulted in decisions by the 4 strategic planning and management committees of 5 United Savings Association of Texas. 6 My question for you is: Taking a look 7 at Item No. 1, in the minutes, it essentially has 8 what is in 1A of the memorandum, does it not? 9 MR. VILLA: Your Honor, I'll object to 10 the question. As you'll recall, I didn't object 11 to the introduction of A1602 at the time, although 12 I said there was no basis for it, nobody can 13 testify who prepared it or what their notes were, 14 what it related to. And now he's characterized 15 the memorandum as the basis for decisions. 16 I object to the question. I think 17 perhaps I was not -- should have been objecting to 18 the introduction of the document, but I don't 19 think there is any factual basis for the link that 20 is the presupposition in Mr. Guido's question. 21 If he wants to get the witness to 22 testify to that, he may do so. But that question 19480 1 is objectionable. 2 THE COURT: All right. Well, that was 3 the question, was it not? 4 Can the witness answer that? 5 Q. (BY MR. GUIDO) Is A1602 essentially 6 the memorandum that's being described in A1601? 7 A. I don't know. I mean, is this the memo 8 that you're talking about prepared by Bruce 9 Williams and Mike Crow? 10 Q. Uh-huh. 11 A. I don't know. 12 Q. Does it address essentially the same 13 topics? 14 A. Some of them are the same. 15 Q. Let's take 1A and 1602. It's the same 16 as 1 in the minutes, is it not? 17 A. No. 18 Q. No? 19 A. I don't believe so. 20 Q. Why not? 21 A. Well, in the minutes, it says -- 22 dealing with mortgage-backed securities, it says 19481 1 "As rates decline, the association will eliminate 2 certain mortgage-backed securities positions." 3 And it says break-even is achieved on a pool and 4 the association will attempt to get out of that 5 pool. 6 And the other 1A in the memo, it talks 7 about keeping minimum levels needed to meet 8 regulatory requirements, abandon the concept of 9 mortgage-backed securities as a profitable 10 business. 11 They both talk about mortgage-backed 12 securities, but I don't -- they are not 13 necessarily the same. They don't seem the same to 14 me. 15 Q. 1A and 1 do not seem to be addressing 16 the same thing to you? 17 A. 1A and 1, no, they don't. 18 Q. And what are the differences? 19 A. 1A talks about abandoning the concept 20 of mortgage-backed securities and retaining them 21 to a minimum level needed to meet regulatory 22 requirements. And 1 in the minutes talks about 19482 1 eliminating certain mortgage-backed securities 2 positions as they break even. 3 Q. Okay. Now, let's take a look at the 4 high-yield bonds. 5 Do you see the high-yield bonds, 6 Item No. 2, in the minutes? 7 A. Yes. 8 Q. Do you see high-yield bonds addressed 9 in the memorandum A1602? 10 A. 1C, right. 11 Q. Pardon? 12 A. It looks like it's in 1C. 13 Q. Okay. Now, do those seem to be 14 addressing the same issue? 15 A. A portion of them seem to be the same. 16 Q. Pardon? 17 A. A portion seems to be the same. 18 Q. What portion doesn't seem to be the 19 same? 20 A. Well, this talks about continuing a 21 strategy to expand the portfolio to $700 million, 22 and the minutes don't refer to that at all. 19483 1 Q. Okay. Now, does it mention equity 2 arbitrage? 3 A. Yeah. 1 -- I guess it's D. 4 Q. Pardon? 5 A. It looks like 1D in this. 6 Q. Do they address the same subject 7 matter? 8 A. Again, there is more in the minutes 9 than seem to be in this memo. But they are both 10 talking about equity arbitrage. 11 Q. Both of them what? 12 A. They both are talking about equity 13 arbitrage. 14 Q. Now, I'd like to direct your attention 15 to Item No. 4 in the minutes. 16 Is that covered in any of the subject 17 matters in the A1602? 18 A. It looks like it's covered in 2A. 19 Q. Does this -- going through this refresh 20 your recollection that A1602 is the memorandum 21 prepared by Bruce Williams and Mike Crow referred 22 to in the minutes A1601? 19484 1 A. It doesn't, no. 2 Q. Now, was the idea of abandoning the 3 concept of mortgage-backed securities as a 4 profitable business ever addressed prior to 5 November 6th, 1987? 6 A. I don't recall it. 7 Q. I'd like to direct your attention to 8 B1580, which is one of the earlier exhibits. It's 9 a memorandum dated April 22nd, 1987, from you to 10 Charles Hurwitz, Barry Munitz, Jenard Gross, and 11 Mike Crow. 12 A. What is the number? B15 what? 13 Q. It's -- it wouldn't be in a folder. 14 A. Is this it? 15 Q. That's it. Look at Paragraph 8 on 16 Page 2 of that document. That document, 17 Paragraph 8, says, "We have been told on numerous 18 occasions that we can totally hedge the 19 mortgage-backed securities portfolio but, of 20 course, we will lose all of the spread. One thing 21 to consider perhaps is hedging it and losing the 22 spread while maintaining the assets in order to 19485 1 meet our thriftness test. If we ultimately 2 believe that dealing in mortgage-backed securities 3 is too volatile an exercise, we may want to 4 consider totally hedging so that we can meet the 5 thriftness test without any risk or, of course, 6 reward." 7 Do you see that? 8 A. Yes, I do. 9 Q. Are you suggesting that the 10 mortgage-backed securities be abandoned as a 11 profitable business in that paragraph? 12 A. Was I suggesting it? That was a 13 consideration. It was never seriously considered. 14 Q. So, then, your testimony that 15 abandoning mortgage-backed securities as a 16 profitable business didn't occur prior to 17 November 6th, 1987, was not true, was it? 18 A. That's incorrect. I think you asked 19 whether there had been some discussions about it. 20 There was no serious discussion about that. 21 Q. Did I ask you whether or not there were 22 serious discussions or had it been discussed? 19486 1 A. Well, it was never discussed. 2 MR. GUIDO: No further questions, 3 Mr. Berner. 4 THE COURT: Mr. Schwartz, are you going 5 to have questions? 6 MR. SCHWARTZ: No, I do not, Your 7 Honor. 8 THE COURT: So, that concludes the -- 9 MR. GUIDO: That concludes the direct, 10 Your Honor. 11 THE COURT: All right. We'll take a 12 short recess. 13 14 (Whereupon, a short break was taken 15 from 2:53 p.m. to 3:18 p.m.) 16 17 THE COURT: Be seated, please. We'll 18 be back on the record. 19 The direct-examination of Mr. Berner is 20 complete. Mr. Villa, are you going to cross? 21 MR. VILLA: Yes, I am, Your Honor. 22 THE COURT: All right. Proceed. 19487 1 2 EXAMINATION 3 4 Q. (BY MR. VILLA) Good afternoon, 5 Mr. Berner. 6 A. Good afternoon. 7 Q. It's been seven long years, hasn't it, 8 sir? 9 A. It certainly has. Seven lean years. 10 Q. Mr. Berner, a little about your 11 background. 12 Are you married, sir? 13 A. Yes, I am. 14 Q. How many children do you have? 15 A. I've got four. 16 Q. Now, you've told us a little bit about 17 the nature of your practice. 18 You're currently employed at Winstead, 19 Sechrest & Minick? 20 A. Yes, I am. 21 Q. And how long have you been at Winstead? 22 A. Since 1991. About seven years. 19488 1 Q. How many lawyers are there at the 2 Winstead firm? 3 A. About 225, 230 lawyers. 4 Q. You've been there for the last six or 5 seven years; is that right? 6 A. It will be seven years in September. 7 Q. Do you hold any position at Winstead? 8 A. I'm on the advisory committee, which is 9 the executive committee of the firm. And I'm head 10 of the corporate securities group in the firm. 11 Q. How many people, lawyers, and other 12 professionals are in the corporate securities 13 group? 14 A. There are about 50 or 60 -- oh, 15 including professionals? About 60 lawyers and 16 other professionals. 17 Q. And how long have you been the head of 18 the corporate securities group? 19 A. About two years. 20 Q. In response to some questions from 21 Mr. Rinaldi, you talked about the fact that after 22 you left United Financial Group in 1991, I 19489 1 believe, that UFG paid a retainer of $150,000 for 2 several years. 3 Do you recall that, sir? 4 A. For two years, yes, I do. 5 Q. For two years. 6 And did they pay that retainer to you 7 or to the law firm to which you were going to 8 become employed? 9 A. They paid it to the law firm, and it 10 was offset by billings. 11 Q. So, they paid it to the Winstead firm. 12 You didn't get $150,000 personally, did you, sir? 13 A. I certainly did not. 14 Q. And it's the type of retainer that 15 is -- that the client pays and then you bill 16 against it on your hourly rate; isn't that right, 17 sir? 18 A. That's right. 19 Q. Where were you born and raised, sir? 20 A. I was born in the Bronx, New York, and 21 raised there, lived there till I was about 26 or 22 so. 19490 1 Q. And you went to public schools in 2 New York? 3 A. Yes. I'm a product of the public 4 school education. 5 Q. And where did you attend college? 6 A. City College of New York. 7 Q. And your major there? 8 A. Political science. 9 Q. Are you licensed to practice law in any 10 jurisdictions besides Texas? 11 A. New York. 12 Q. Just so it's clear in the courtroom 13 today, do you have any training in mortgage-backed 14 securities, sir? 15 A. No, sir. 16 Q. No training. 17 Do you have any training in any 18 financial instruments like high-yield bonds, 19 equity arbitrage, or the like? 20 A. No. I was not trained in any of the -- 21 any equity securities or bond securities. 22 Q. And from the time you -- I guess prior 19491 1 to the time you went on the investment committee 2 of United in 1986, you hadn't had any involvement 3 in any of those types of securities? No training 4 at any point in your career; isn't that right, 5 sir? 6 A. That's right. I had not worked with 7 any of those types of securities. 8 Q. And since the day you left United 9 Savings Association of Texas, apart from your 10 periodic depositions and questions by Mr. Guido at 11 those depositions, have you done any work in 12 mortgage-backed securities, junk bonds, equity 13 arbitrage, or the like? 14 A. No, I have not. 15 Q. Have you ever been suspended or 16 disbarred by any bar association, sir? 17 A. No. 18 Q. Ever been charged with any type of 19 violation of any ethical rules? 20 A. No. Certainly have not. 21 Q. Are you involved in religious, civic, 22 or charitable activities? 19492 1 A. Yeah. Sure am. 2 Q. Can you tell us a little bit about 3 that? 4 A. Oh, goodness. I was a founder of my 5 synagogue and president. I've served as president 6 of the American Jewish Committee in Houston and 7 also in the -- on the national board. I was on 8 the board of the Anti-defamation League, Jewish 9 Family Service, the Houston Area Women's Center, 10 the Houston Symphony, the Houston Ballet, Houston 11 Opera, Society for the Performing Arts, a bunch of 12 other smaller organizations. 13 Q. Now, I think that Mr. Rinaldi asked you 14 a little bit about your career; but I want to 15 focus a little bit on your work at Inexco. 16 You joined Inexco Oil after having 17 worked at Cahill Gordon as an associate for 18 several years; is that right? 19 A. That's right. About three and a half 20 years at Cahill Gordon. 21 Q. At your position at Inexco Oil, you did 22 not have occasion to become familiar with the 19493 1 regulation of federally-insured financial 2 institutions; is that right? 3 A. No. Certainly did not. 4 Q. Was there a regulatory scheme with 5 which you were familiar? 6 A. Well, obviously, the Securities and 7 Exchange -- SEC regulatory work. And then at one 8 point I was involved with the FERC, FERC work, 9 Federal Energy Regulatory Commission. 10 Q. Can you describe for the Court the 11 process of being approached and hired by 12 United Financial Group? Who approached you? 13 A. I was first approached by Kenney 14 Friedman, who was a partner at Mayor, Day, who 15 called me to tell me that he had -- they were 16 looking -- that United Financial Group was looking 17 for general counsel and wanted to know if I knew 18 of anybody. And I told him I would think about 19 it. And a couple days later, I called him back 20 and said that I might be interested. 21 Q. Now, at that point, sir, had you been 22 approached by anyone else to take other jobs? 19494 1 That is to say, other jobs in either private law 2 firms or in other companies. 3 A. At that point, I was approached 4 probably -- certainly every three months, if not 5 every month, by oil companies and law firms. 6 Q. And you declined those other offers, is 7 that correct, or those other approaches? 8 A. Yes, I did. 9 Q. You've told us, I think, a little bit 10 about the interview process; so, I won't go 11 through that. But tell us approximately when you 12 were hired by United Financial Group. 13 A. I started working there -- I believe it 14 was September 30th or October 1st. 15 Q. And what did you understand your job 16 was going to be? 17 A. I was going to be general counsel of 18 United Financial Group. 19 Q. Do you recall what your first salary 20 was? 21 A. The base salary? 22 Q. Base salary. 19495 1 A. I believe it was somewhere about 180, 2 $190,000, but I'm not positive. 3 Q. Okay. I'll show you some of your 4 financial information. Maybe that will help you. 5 Let me ask you, sir: Prior to being 6 hired by United Financial Group, had you ever met 7 Charles Hurwitz? 8 A. I had met him, sure. 9 Q. And on what occasions? 10 A. Oh, over the course of a number of 11 years, I would meet him at every -- maybe once or 12 twice a year at a party, a big party. We would 13 just talk for a couple of minutes. And when he 14 acquired MCO Resources, he wanted to meet the 15 chairman of Inexco, which is where I worked. And 16 I set up a meeting with him and somebody else from 17 MCO, and I sat in on that meeting. That was the 18 only business relationship I ever had with him, 19 business meeting. 20 Q. In 1985, did you regard yourself as a 21 friend of Mr. Hurwitz? 22 A. Not really. 19496 1 Q. Apart from meetings or events relating 2 to this litigation, how many times since 1989 have 3 you seen or spoken to Mr. Hurwitz? 4 A. Other than in connection with this 5 litigation? 6 Q. Yes, sir, or the investigation prior to 7 this litigation. 8 A. Well, essentially since 1991, I think 9 I've seen him once. And since 1989 -- for a 10 couple of years, we officed in the same office. 11 I'd probably see him once a month or once at the 12 coffee bar or something like that. 13 Q. And are you currently engaged in any 14 business with Mr. Hurwitz? 15 A. No, I certainly am not. 16 Q. And neither you nor your law firm 17 currently represents Mr. Hurwitz or any of his 18 companies; isn't that right, sir? 19 A. That's correct. 20 Q. At the point you joined 21 United Financial Group, you knew essentially 22 nothing about the regulation of federally-insured 19497 1 financial institutions; isn't that right? 2 A. I knew nothing about it. 3 Q. What did you do to inform yourself 4 about the regulation of federally-insured 5 financial institutions? 6 A. I did a number of things. I read some 7 of the regulations. I spoke a lot with Jim 8 Pledger, who was a regulatory lawyer who was on 9 staff. I talked with Bob Pozen, who was outside 10 counsel, and asked him to prepare a number of 11 memos just basically giving me an understanding of 12 the regulatory framework. And I think I might 13 have gone to -- I think I went to one CLE course, 14 continuing legal education course. 15 Q. When you joined United in the fall of 16 1985, did you understand that Mr. Pledger would be 17 leaving within the next year? 18 A. No, not at all. 19 Q. So, when you joined, the expectation 20 was that he would be handling regulatory issues 21 and you would be handling, as you told us, 22 securities issues primarily? 19498 1 A. Yeah. 2 Q. Is that right? 3 A. That's right. Jim was certainly -- was 4 going to stay there, as far as I knew. In fact, 5 we had had a conversation before I came there; and 6 it was clear that he was going to stay. 7 Q. You had had a conversation before you 8 came just to make sure that you and Mr. Pledger 9 got along; is that right? 10 A. That's right. 11 Q. And also so you had a clear 12 understanding of the scope of your 13 responsibilities and the scope of his? 14 A. That's basically right, yeah. 15 Q. Now, I'm going to in the next day, day 16 and a half, talk about various of the issues that 17 Mr. Rinaldi and, to a limited extent, Mr. Guido 18 have examined you about. I'm going to begin with 19 the issues of compensation. 20 You are aware that Claim No. 13 in the 21 Notice of Charges makes certain allegations 22 against you in connection with compensation 19499 1 practices at United Savings Association of Texas. 2 Right, sir? 3 A. Yes. I'm aware of that. 4 Q. When you joined UFG in 1985, you were 5 not an expert in the federal regulations governing 6 compensation of thrift employees, were you, sir? 7 A. No, I certainly wasn't. 8 Q. Did you ever become an expert in that 9 in your judgment? 10 A. An expert? No, I did not. 11 Q. When you joined in 1985, who at United 12 was primarily responsible for reviewing the 13 compensation practices of United to determine 14 whether or not they were -- and when I use 15 "United," by the way, I am referring to United 16 Savings Association of Texas. I will say "UFG" if 17 I mean otherwise. 18 But when you joined in 1985, what 19 person was primarily responsible for determining 20 whether or not the compensation practices at 21 United were in conformity with the regulations? 22 A. Well, that would have been Jim Pledger 19500 1 because Jim was in charge of all of the regulatory 2 stuff. 3 Q. And I think we've heard that 4 Mr. Pledger had expertise and has ultimately gone 5 on to a distinguished career as a Texas state 6 regulator; isn't that right? 7 A. That's absolutely right. 8 Q. After Mr. Pledger's departure sometime 9 in the second half of 1986, you inherited much of 10 his responsibility for the oversight of employment 11 contracts and employment practices; isn't that 12 right, sir? 13 A. Yes. Yeah. After he left, I had to do 14 that. 15 Q. And from that point forward, you 16 attempted to determine whether various 17 compensation practices were permitted by the 18 regulations. Right? 19 A. Yes. 20 Q. Now, the Notice of Charges here has 21 cited three regulations; and I'm going to ask 22 Mr. Farley if he'll get them out for us. 19501 1 MR. VILLA: You might pass out our 2 book, Mr. Farley, to the Court. 3 Your Honor, I have assembled in order, 4 I think, the exhibits that I intend to use. One 5 for the witness. And I have provided the OTS with 6 notice of the exhibits, and we have copies for 7 them in court, right, in the order in which I 8 intend to review them. 9 Q. (BY MR. VILLA) Now, the Notice of 10 Charges in this case sites three regulations or R 11 memoranda, and they are 12 CFR 563.17, 12 CFR 12 563.39, and Memorandum R 42. 13 While you were at United, Mr. Berner, 14 would you have examined these regulations -- would 15 you have been looking at these regulations? 16 A. I certainly looked at them, yes. 17 Q. Let me start with R -- I'm sorry. Let 18 me start with 12 CFR 563.17 which we've marked as 19 Exhibit B4246. And I believe everybody has a copy 20 of it. I had not anticipated where this -- where 21 our new shelving unit was going to be, Your Honor. 22 I thought I might be able to put it up a little 19502 1 higher. But let me direct your attention to 2 563.17, which is Exhibit 4246. 3 This is one of the three regulations 4 cited in the charges against you, sir. You've had 5 an opportunity to review this regulation in 6 preparation for your testimony, haven't you? 7 A. Yeah. I certainly looked at it. 8 Q. And in this regulation, I'm going to 9 ask you: In 563.17, do you see any objective 10 standards by which you as an officer of United 11 Savings Association of Texas could determine 12 whether or not a compensation practice or a salary 13 was excessive? 14 A. An objective standard? 15 Q. Yes, sir. 16 A. No. There is none that I could find. 17 Q. In fact, in 563.17(b), the beginning of 18 it is "Compensation to officers, directors, and 19 employees of each insured institution and its 20 service corporations shall not be in excess of 21 that which is reasonable and commensurate with 22 their duties and responsibilities." 19503 1 Do you see that, sir? 2 A. Right. That's what I looked at. 3 MR. VILLA: Your Honor, I am not sure 4 whether it's necessary to move into evidence 5 B4246, but I'd move it into evidence. 6 MR. GUIDO: No objection, Your Honor. 7 THE COURT: Received. 8 Q. (BY MR. VILLA) Let's go to B4245, 9 which is 563.39 which is the second of the three 10 regulations cited in the Notice of Charges. 11 You've had an opportunity to review 12 563.39 prior to your testimony, too, haven't you, 13 sir? 14 A. I certainly have looked at it, yes. 15 Q. And have you -- can you determine, sir, 16 whether 563.39 then -- that is to say in 1986 when 17 you inherited responsibility for that -- or today 18 provides you with an objective standard for 19 whether or not a compensation practice or contract 20 is excessive? 21 A. It does not. It doesn't deal -- 22 nothing objective in there. 19504 1 Q. And indeed, 563.39(a), as you take a 2 look at it right here, talks about contracts shall 3 be in writing, "Shall not enter into any 4 employment contract with any of its officers or 5 employees or such contract would constitute an 6 unsafe or unsound practice." And it says "An 7 unsafe or unsound practice is a contract which 8 could lead to material financial loss or damage to 9 the association." And then it goes on. 10 Do you see that, sir? 11 A. Yes, I do. 12 Q. So, again, the second regulation that's 13 cited doesn't provide -- didn't provide an 14 objective standard for you in 1986 and doesn't 15 provide an objective standard today; is that 16 right? 17 A. That's right. It does not. 18 MR. VILLA: Your Honor, I move 4245 19 into evidence. 20 MR. GUIDO: No objection, Your Honor. 21 THE COURT: Received. 22 Q. (BY MR. VILLA) Let me now turn to the 19505 1 third of the three, which is R 42. R 42 is what's 2 known as an R memorandum, and it's cited in the 3 Notice of Charges as a basis for the claims and 4 compensation. 5 You've also had an opportunity to 6 review R 42 prior to your testimony, haven't you, 7 sir? 8 A. Yeah. I've looked at that. 9 Q. Let me direct your attention to R 42, 10 and particularly the first portion of it. Well, 11 in any part of it, is there any objective standard 12 by which you could determine whether an employment 13 practice or a level of compensation is excessive 14 or is in violation of any regulations or R 15 memoranda? 16 A. Well, no objective standards. 17 Obviously, there was some things you are supposed 18 to look at; but no objective standard. 19 Q. Right. There's a series of factors and 20 basically, it says that the compensation must be 21 reasonable and commensurate with duties and 22 responsibilities. And then it lists a number of 19506 1 factors, doesn't it? 2 A. Yes. 3 MR. VILLA: Your Honor, I move B4247 4 into evidence. 5 MR. GUIDO: No objection, Your Honor. 6 THE COURT: Received. 7 Q. (BY MR. VILLA) So, how is it that you 8 as general counsel of USAT would determine whether 9 certain compensation practices were unsafe or 10 unsound or would be deemed as unreasonable or 11 reasonable? 12 A. Well, generally, what I did and what I 13 would do would be to look at agreements that had 14 been in existence at the institution, agreements 15 that had been provided to the regulators, 16 provisions that they had seen to see if they 17 had -- there had been any objections to any of 18 those regulations or any of those provisions in 19 the agreement to get a basic understanding of what 20 I would consider to be unsafe or unsound. 21 Q. Because there is no objective standard, 22 you build on the historical relationship between 19507 1 the institution and its regulators, don't you, 2 sir? 3 A. Right. If -- I mean, generally, I 4 guess it was my thinking that if something had 5 been provided to the regulators and they hadn't 6 objected to it or approved it, it would probably 7 be considered okay. 8 Q. Now, let me ask you, sir -- I know you 9 only have three years of experience with 10 regulators for the years you were at United 11 Savings. 12 But in your experience, did the 13 regulators typically approve practices or 14 contracts? Did they come in with a stamp and say, 15 "I like this one. Approved"? 16 A. Based on my experience at United and 17 what I saw the regulators do generally was they 18 would ask you to send something. And if they 19 didn't approve it -- I mean, if they disapproved 20 of it, they let you know that they had something 21 that they disapproved of, but you would never -- I 22 never had them come back and say that "this is 19508 1 okay." It was more of a negative of "Send it to 2 us and if we have anything that we don't like 3 about it, we'll let you know." 4 Q. So, there are occasions when you have 5 an application that actually needs approval. For 6 example, we're going to talk about the PennCorp 7 debt payoff which needed approval. Right? 8 A. Right. 9 Q. But other than those where there is an 10 application that actually needs approval, the 11 typical practice of regulators and the regulators 12 in the thrift industry was essentially 13 non-objections; isn't that right? 14 A. If what they did with me and with 15 United is typical, that was certainly the way it 16 was handled with United. 17 Q. Now, besides the fact that you had 18 supplied information to the regulators or that 19 they would become aware of it or you believed that 20 they became aware of it in public filings, there 21 are other factors you would take into 22 consideration as to whether or not an employment 19509 1 contract or practice was reasonable; isn't that 2 right, sir? 3 A. I'm sure there were lots of things, 4 yeah. 5 Q. Well, for example, what -- would you 6 consider the opinions of independent consultants? 7 A. Sure. 8 Q. Would you consider the opinions of a 9 compensation committee comprised of outside 10 directors? 11 A. Yeah. If they were, as was true in 12 United, if they were experienced business people 13 and lawyers and were aware of things, yeah, that's 14 certainly something you would take into 15 consideration. 16 Q. We talked a little bit about 17 Mr. Whatley in this case, and Mr. Whatley's 18 testified. For example, was Mr. Whatley a man in 19 your judgment who had experience in the financial 20 services sector? 21 A. Absolutely. Jim Whatley -- well, 22 Kaneb, which he was chairman and president of, had 19510 1 owned United Savings. He also, I believe -- I 2 know he's been an executive officer and director 3 of other financial institutions. 4 Q. We've heard testimony that he was on 5 the board of, I think, First City Bank. 6 A. Right. 7 Q. Would you ordinarily ask -- and you're 8 in a law firm now; so, you've seen this from both 9 sides. 10 Would you ordinarily ask a law firm to 11 opine for you on the question of whether or not an 12 employment practice was an unsafe or an unsound 13 practice? 14 A. I wouldn't normally ask, and I will 15 tell you that as -- if somebody asks me now to 16 give an opinion of that sort, I wouldn't give it. 17 We wouldn't give a legal opinion on that. 18 Q. And why not? 19 A. It's factually based. It's not legally 20 based. It's just not something that a law firm 21 will give a legal opinion on. 22 Q. Now, do you recall what your salary was 19511 1 at Inexco when you left? 2 A. Approximately. 3 Q. Well, let me show you what's been 4 marked as Exhibit B422. 5 Can you identify that for us, sir? 6 A. It looks like a portion of my 1985 tax 7 return. 8 MR. VILLA: Your Honor, I move 9 Exhibit B422 into evidence. 10 MR. GUIDO: No objection. 11 THE COURT: Received. 12 Q. (BY MR. VILLA) Now, as I recall, you 13 told us that you joined United at the end of 14 September 1985; is that right? 15 A. Right. That's right. 16 Q. So, this portion of your income from 17 Inexco would have covered nine months; is that 18 right? 19 A. That's correct. 20 Q. And as I see it, it's roughly $190,000. 21 Does that also comport with your 22 recollection? 19512 1 A. That's certainly what I remembered. 2 Q. And on an annualized basis, that comes 3 out to about $250,000 a year? 4 A. Again, that's my recollection of what I 5 was being paid. 6 Q. Now, was your starting salary at United 7 higher or lower than $250,000 a year? 8 A. My base salary? 9 Q. Yes, sir. 10 A. It would have been lower. 11 Q. Why did you accept a salary cut to join 12 United Financial Group, particularly in a 13 situation where you had been approached by other 14 potential employers? 15 A. I could facetiously say because of all 16 the fun I knew I was going to have. 17 Well, when I went to work for United, 18 Barry Munitz had told me that the way they did 19 their compensation was to give people a lower base 20 salary and significantly higher bonuses than one 21 would get, you know, generally in the industry and 22 that, as a general rule, I would be able -- I 19513 1 could expect to get a minimum of 25 percent of my 2 base salary as a minimum and upwards of 3 100 percent or more base salary as a bonus. 4 Q. So, in determining what you expected to 5 receive as your cash compensation -- and let's put 6 off to one side other programs that United then 7 had in effect. 8 As your cash compensation, did you 9 negotiate not only your salary but a minimum and 10 hopefully unlimited maximum bonus? 11 A. Yeah. It wasn't firmly fixed, but I 12 had -- that was my understanding, that I would 13 have, as I say, the base salary and a minimum of 14 25 percent bonus. 15 Q. Now, sir, were there other components 16 of your compensation that were offered to you when 17 you joined United Financial Group that induced you 18 to take the job? 19 A. There certainly were. 20 Q. Can you tell us about some of them? 21 A. Well, they had some stock options which 22 at the time seemed to me to be fairly attractive 19514 1 because the price of the stock was relatively low. 2 And the thought was that United Financial Group's 3 business would do a lot better going forward. And 4 probably one of the more important things was 5 there was a performance unit plan which was based 6 on -- if I remember correctly, it was based on 7 earnings. But over a four-year period or at the 8 end of a four-year period, depending on how United 9 Financial Group did, there would be a significant 10 cash payment. I believe my payment was somewhere 11 in the neighborhood of six or $700,000. 12 Q. So, if the -- 13 A. Might have been more. 14 Q. I'm sorry? 15 A. It might have even been more, but it 16 was a big cash payment. 17 Q. And the financial goals that were set 18 out were feasible goals at least at the time you 19 joined? 20 A. I certainly thought so. 21 Q. So, you would add the value of the 22 stock options, however you valued those, as well 19515 1 as at least a contingent chance of receiving the 2 performance unit plan to your expected 3 compensation in determining what you thought you 4 were going to receive when you joined 5 United Financial Group? 6 A. Yeah. That's absolutely correct. 7 Q. Now, I believe that in response to 8 Mr. Rinaldi's questions, you said that when you 9 joined United Financial Group in 1985, you thought 10 that UFG was paying your salary and that for 11 several years -- and then you thought that USAT 12 began paying your salary. And you said, "I 13 thought that until you showed me something at my 14 deposition." 15 Do you remember that exchange with 16 Mr. Rinaldi? 17 A. Yeah. I certainly do. 18 Q. Let me ask you to take a look at 19 Exhibit B3993, which is the next exhibit in your 20 book, and which was an exhibit at your deposition. 21 Can you tell us what B3993 is? 22 A. It looks like my 1985 -- a portion of 19516 1 my 1985, 1986, and 1987 tax returns. 2 Q. Can you tell -- 3 MR. VILLA: Your Honor, I move B3993 4 into evidence. 5 MR. GUIDO: No objection, Your Honor. 6 THE COURT: Received. 7 Q. (BY MR. VILLA) Can you tell, sir, by 8 looking at these -- the 1985, 1986, and 1987 tax 9 returns who, in fact, was paying your salary? 10 A. According to the tax returns, it was 11 United Financial Group. 12 Q. And so, you're surprised because you 13 thought United Savings Association was paying your 14 salary. But, in fact, United Financial Group, at 15 least according to the W-2s, was paying your 16 salary; is that right? 17 A. That is right. And yes, I am 18 surprised. 19 Q. Do you know whether there were 20 intercompany transactions between UFG and USAT 21 which shifted the salary expense between the two 22 of them? 19517 1 A. No. I don't have any idea about that. 2 Q. You do know that the W-2 reflects that 3 UFG was paying your salary, even if you happen to 4 have been paid out of the USAT payroll account; 5 isn't that right? 6 A. Again, I'm surprised; but that's what 7 it showed, that United Financial Group was paying 8 my salary. 9 Q. Now, sir, one of the -- 10 MR. GUIDO: Your Honor, I have an 11 objection to Mr. Villa's characterization of the 12 document unless he can clarify that this is a W-2. 13 I mean, I've seen W-2s, and I don't see any 14 reference to a W-2 on this. It's a schedule of 15 wages received and taxes paid. It may be a 1099. 16 I'm not so sure that this is a W-2. And if he 17 wants to make reference to the tax return showing 18 that it came from UFG, I have no objection if he 19 can clarify it for the record. But I don't see 20 any reference to "W-2" on at least my copy of this 21 document. 22 Q. (BY MR. VILLA) Sir, apart from what 19518 1 you see here before you today, do you know of any 2 other document that you have or had that 3 identifies the employer's name for the years 1985, 4 '86, or '87? 5 A. Not that I know of. 6 Q. And is this the document that 7 Mr. Rinaldi showed you in your deposition taken by 8 the OTS? 9 A. Right, yeah. I remember being 10 surprised when he did it, yes. 11 Q. So, one of the first major securities 12 filings that you worked on when you joined United 13 was its proxy statement for the 1986 annual 14 meeting; is that right, Mr. Berner? 15 A. Yeah. That was one of them, yes. 16 Q. And United's annual report and proxy 17 statement both came out in March of nineteen -- 18 March of the various years; isn't that also right? 19 A. Right. 20 Q. So, for the 1985 year, the 1985 10K 21 would come out in March of 1986; and it would 22 ordinarily be accompanied by a proxy statement? 19519 1 A. That's right. 2 Q. Let me ask you to turn to the next 3 document which is in your book which should be 4 Exhibit A3013, which is in evidence at Tab 88. 5 Do you have that, sir? 6 A. Yeah, sure. 7 Q. Can you identify that document for us? 8 A. This is the proxy statement for the 9 1986 annual meeting of United Financial Group. 10 Q. And approximately when would this 11 document have been filed, Mr. Berner, with the 12 Securities and Exchange Commission? 13 A. It would have been filed probably 14 sometime in March. 15 Q. March of 1986? 16 A. March of 1986, right. 17 Q. And would it have been sent to the 18 Federal Home Loan Bank of Dallas? 19 A. Yes. 20 Q. And that was your routine practice? 21 A. That was -- yes, it was. 22 Q. Let me ask you to turn your attention 19520 1 to Page 10, which has UFG 06347. 2 Can you do that for me? 3 A. Okay. 4 Q. You see under the heading "employment 5 contracts"? Do you see "employment contracts" at 6 the top of the page? 7 A. Yes, I do. 8 Q. I'd like for you to read to yourself 9 the first paragraph under "employment contracts." 10 Then I'm going to ask you some questions about 11 Mr. Gerry Williams' employment contract. 12 A. (Witness reviews the document.) Okay. 13 Q. Now, you would have drafted this 14 paragraph or at least overseen part of its 15 drafting; isn't that right, Mr. Berner? 16 A. Yes, that's correct. 17 Q. And this -- this provision describes in 18 United's public filings the terms of the 19 employment contract for Gerald Williams, who was 20 then president of United Savings Association of 21 Texas. Right? 22 A. Right. Yeah, that's what this is 19521 1 describing. 2 Q. So -- and can you tell from this the 3 length of Mr. Williams' contract? 4 A. Three-year contract. 5 Q. And what's his base salary? 6 A. His -- well, his base salary was 7 $242,000 as of September 1st, 1985. 8 Q. And his -- and his contract had a 9 change of control provision in it, am I correct? 10 A. Yes, it did. 11 Q. Now, as you understand it, sir, if you 12 have a multi-year contract, for example, a 13 three-year contract, and your contract is 14 terminated in the -- at some point during the term 15 of the contract by the employer, what is your 16 right to financial recovery under the contract? 17 A. Well, under his contract, generally it 18 would be for the remaining term of the contract. 19 Q. So, for example, under this contract, 20 his maximum -- the maximum he could receive if he 21 were terminated under this contract without cause, 22 for example, or because of a change of control 19522 1 would have been just under $750,000, 242 times 3. 2 Right? 3 A. That's right. 4 Q. Do you believe -- did you participate 5 in the drafting of Gerry Williams' original 6 contract? 7 A. No, I did not. 8 Q. That was drafted before you got there, 9 wasn't it? 10 A. Yes, it was. 11 Q. And who would have been involved in the 12 drafting of the contract? 13 A. Well, I'm sure Jim Pledger was as the 14 general counsel of USAT. I don't know who else 15 might have been involved. 16 Q. And did you believe that Mr. Pledger 17 was knowledgeable about the regulations governing 18 compensation? 19 A. He most definitely was. 20 Q. This description was included in UFG's 21 public filings as a description of the three-year 22 contract. Right? 19523 1 A. It was in the proxy statement, that's 2 correct. 3 Q. Did you ever hear any complaint from 4 the regulators, federal regulators, about the term 5 of Mr. Gerry Williams' contract, either its length 6 or the fact that it had change of control 7 provisions in it, that he would be entitled to up 8 to $750,000 in severance depending on when the 9 contract was terminated, or any other complaint or 10 criticism of the Gerry Williams contract? 11 A. No. I never heard anything from the 12 Federal Home Loan Bank or any other regulator 13 about that. 14 Q. Let me ask you, sir, to turn to the 15 next document in your pack which should be 16 Exhibit A11032, which is in evidence at Tab 483. 17 Do you have that before you, sir? 18 A. Yes, I do. 19 Q. And let me ask you now to go to the 20 Bates stamp range which ends in 423 to 424. 21 A. I don't see the Bates stamp. 22 Q. In the lower right-hand corner, there 19524 1 should be a -- 2 A. There is an "OW" number. 3 Q. An "OW," yes. And the last three 4 numbers are 423 and 424. It's a letter to Sandra 5 Laurenson. 6 Do you see that? 7 A. Yes, I do. Okay. 8 Q. Would you look quickly at it? You've 9 seen the -- and Sandra Laurenson was hired -- I 10 don't want to go through too much old -- replow 11 old ground. 12 Ms. Laurenson was hired to take over 13 part of Joe Phillips' job; is that right? 14 A. That's correct. 15 Q. And would you have been involved in the 16 negotiations with Ms. Laurenson? 17 A. No. I really didn't negotiate with 18 her, but I certainly saw this letter. 19 Q. But you would have been aware of the 20 terms of the contract. Right? 21 A. Oh, absolutely. 22 Q. And can you see from this contract -- 19525 1 and I'll direct your attention to Paragraph 3 -- 2 what the length of the contract was? It's No. 3. 3 A. No. 3? 4 Q. Go through the end of the year 1988. 5 A. I'm sorry. Yeah. 6 Q. All right. So, from September 1986 to 7 the end of 1988, which is two years and four 8 months. And if you look at Paragraph 5, did it 9 provide a guaranteed salary -- I mean a guaranteed 10 bonus? 11 A. Yes, it did. 12 Q. And what was the guaranteed salary plus 13 bonuses? 14 A. It was no less than -- for the period 15 from January 1, 1987, through January 1, 1989, no 16 less than $600,000. 17 Q. Could Ms. Laurenson require USAT to 18 guarantee its obligations under this contract? 19 A. Yes. Yes, she could. 20 Q. And that's under Paragraph 6, isn't it, 21 sir? 22 A. That's correct. 19526 1 Q. Let me tell you, Mr. Berner, that there 2 will be evidence in this case that this particular 3 copy of the contract came from the files of Vivian 4 Carlton, the examiner-in-charge of Federal Home 5 Loan Bank of Dallas' examination of United for the 6 years 1986 and 1987. 7 Do you recall dealing with Ms. Carlton? 8 A. Sure, I do. 9 Q. Did Ms. Carlton ever indicate to you 10 that the terms of Ms. Laurenson's contract were an 11 unsafe or unsound practice? 12 A. No, she did not. 13 Q. Did she ever tell that you there were 14 provisions of the federal regulations -- for 15 example, 563.39 -- that had to be included in here 16 or it was an unsafe or unsound practice? 17 A. No. In our discussions concerning 18 these contracts or anything else, she never 19 suggested that this was unsafe or unsound. 20 Q. So, she didn't criticize it as 21 excessive in length or criticize the guaranteed 22 bonus or anything else; is that right? 19527 1 A. That's right. She -- there was no 2 criticism by her. 3 Q. And apart from any discussions you had 4 with her, did you see in any examination report -- 5 and I guess she was the examiner-in-charge of two 6 examination reports that you would have received 7 while you were at United Savings. In either one 8 of those reports, was there ever any criticism of 9 Ms. Laurenson's contract? 10 A. She criticized a lot of things; but to 11 the best of my recollection, she never criticized 12 the contract. 13 Q. Let me ask you to go deeper into this 14 document to the Bates stamp numbered pages 458 15 through 59. And this is the contract of Mister -- 16 do you have it before you, sir? 17 A. Yes, I do. 18 Q. -- of Mr. Eugene Stodart; is that 19 right? 20 A. Right. 21 Q. Mr. Stodart was hired at United, as 22 well? 19528 1 A. Yeah. He was hired to be head of our 2 high-yield bond program. 3 Q. Now, he didn't come -- Mr. Stodart 4 didn't come from a large New York bank, did he, 5 sir? 6 A. I believe he came from Westinghouse. 7 Q. From Westinghouse. 8 And he was hired to handle the other 9 portion of Mr. Phillips' work when Mr. Phillips 10 left, and that involved high-yield bonds. Right? 11 A. That's right, yeah. He was the head of 12 our high-yield bond department. 13 Q. And would you have been informed of the 14 terms of Mr. Stodart's contract as the general 15 counsel of USAT and United Financial Group? 16 A. Yes. I definitely have seen this. I 17 knew about it. 18 Q. And by looking at this contract -- and 19 let me direct your attention to Page -- 20 Paragraph 4, fourth paragraph -- can you determine 21 the length of this contract? 22 A. I believe it looks like it's two years. 19529 1 Through the end of 1988. 2 Q. And does Mr. Stodart have a guaranteed 3 bonus over the terms of this contract? 4 A. Yeah. He's guaranteed a bonus of at 5 least 50 percent, and it's uncapped. 6 Q. It's uncapped. So, it could be higher 7 than that; is that right? 8 A. That's right. 9 Q. And this bonus isn't tied to the 10 financial performance of United Savings; isn't 11 that right, sir? 12 A. That's right. 13 Q. If you'll turn to the second page of 14 the contract, you'll see some handwriting where it 15 says "Letter of credit will be issued at my 16 request to secure guarantee of salary and bonus." 17 Do you see that, sir? 18 A. Yes, I do. 19 Q. And do you know who insisted upon this 20 term? 21 A. Oh, I believe it was -- well, in fact, 22 I know it was Mr. Stodart that insisted upon that. 19530 1 Q. Now, once again, this document, 2 Mr. Stodart's contract, comes from the records of 3 Ms. Carlton's examination. And I would ask you 4 whether you recall Ms. Carlton ever expressing any 5 criticism of the terms of Mr. Stodart's contract. 6 A. No, she did not. 7 Q. Did she ever tell you that its term, 8 one year and eight months, was excessive, that a 9 guaranteed 50 percent -- at least a 50 percent 10 bonus was inappropriate, or that an agreement to 11 provide a letter of credit for the salary and 12 bonus made it an unsafe or unsound practice? 13 A. No. She never criticized this at all. 14 Q. Now, one of the criticisms -- and we'll 15 jump forward. I won't show you this document, but 16 we'll talk about it in some detail. I think 17 Mr. Rinaldi has talked to you about it. 18 One of the criticisms in Mr. Twomey's 19 letter of October 27, 1988 -- jumping forward two 20 years in time or a year and a half -- was that 21 certain of the employment contracts didn't include 22 explicit reference to 12 CFR 563.39. 19531 1 Do you remember that, sir? 2 A. Yes, I do. 3 Q. And this has no reference to it either, 4 does it, sir? This agreement, Mr. Stodart's 5 agreement. 6 A. No, it doesn't. 7 Q. And likewise, there had been no 8 criticism by Ms. Carlton, either orally or in 9 writing, of the Stodart contract? 10 A. As I said, she never -- Ms. Carlton 11 never criticized this contract or Ms. Laurenson's 12 contract. 13 Q. Mr. Berner, was the fact that 14 Ms. Carlton did not criticize the terms of these 15 contracts that we've looked at important to you in 16 determining what would be appropriate in the 17 compensation practices of United? 18 A. Well, sure. We were talking about it 19 before, that unsafe and unsound and reasonableness 20 is fact specific. And you look to the regulators 21 to tell you whether something is or is not unsafe 22 or unsound or reasonable. And the fact that there 19532 1 was no criticism of any of these contracts 2 certainly would lead me to believe that there was 3 no problem with any of these contracts. 4 Q. You sought to use your own judgment, 5 didn't you, sir? 6 A. Sure. 7 Q. But if you had provided contracts to 8 Ms. Carlton which had, for example, terms in them 9 that allowed them to be guaranteed by letters of 10 credit and there had been no objection that came 11 back to you either orally or in writing, that 12 would be significant to you in determining whether 13 or not such terms could be included in future 14 contracts; isn't that right? 15 A. No question. That's -- you have to 16 look to the regulators to give you guidance. 17 Q. Now, Ms. Carlton's examination -- first 18 examination of United began in May of 1986, and I 19 believe we've independently established that. So, 20 I won't ask you to call upon your recollection to 21 give us that information. 22 But I'm going to ask you, sir: Do you 19533 1 recall what Ms. Carlton's position was as to 2 whether or not United Savings Association of Texas 3 was below its minimum regulatory capital limits? 4 A. My recollection was that she believed 5 that United was below its minimum regulatory 6 capital. 7 Q. And when did she first express that to 8 you? 9 A. It was either the end of -- sometime 10 during the exam. I think it was the end of '86, 11 beginning of '87. 12 Q. And it's reflected in both of her 13 examination reports, isn't it, sir? 14 A. Yes, it is. 15 Q. Did she ever say anything to you that 16 United's financial situation was a factor in 17 determining whether or not these contracts we've 18 looked at were unsafe and unsound practices or 19 violations of federal regulations? 20 A. Again, she never said anything critical 21 about these contracts; so, no, she didn't. 22 Q. So, despite the fact that it was her 19534 1 express provision both orally and in writing that 2 United was below its minimum regulatory capital 3 limits, these contracts were not subjected to any 4 different standard that you're aware of? 5 A. Not that I'm aware of, that's right. 6 Q. Now, let's focus on the contracts of 7 Ms. Laurenson and Mr. Stodart. 8 Do you know why in late 1986 and early 9 1987 USAT was offering employment contracts with 10 these terms to incoming officers? 11 A. Well, obviously, we wanted to get 12 quality people. And the only way you could get 13 quality people to come down to a Texas savings and 14 loan was to offer them contracts. 15 Q. Mr. Rinaldi asked you a question that I 16 alluded to earlier that might have suggested that 17 employment contracts were only necessary to 18 attract people from the big New York banks. 19 Let me ask you, sir: Do you know 20 where, for example, Dominic Bruno came from? 21 A. I think Dominic came from Meritor. I 22 think he came from Meritor. 19535 1 Q. Meritor is a savings and loan in 2 Pennsylvania? 3 A. Yeah. I think -- yeah. 4 Q. And Mr. Stodart came from Westinghouse? 5 A. That's my recollection, that's where he 6 came from. 7 Q. So, it wouldn't be fair to say that 8 USAT was forced to offer contracts only to those 9 employees who came from the largest New York 10 banks, would it, sir? 11 A. No, it would not. 12 Q. Now, did you meet from time to time the 13 people who were coming in and interviewing for 14 jobs? 15 A. From time to time, yes. 16 Q. And what reasons did they give you for 17 demanding employment contracts? 18 A. They wanted to be sure that they had 19 something in writing if they were going to come 20 down or be part of a Texas thrift which certainly 21 at that time Texas thrifts were -- universally 22 were in financial trouble. 19536 1 Q. Now, let me show you, sir, what's been 2 marked as Exhibit No. A1550. It should be the 3 next one in your book. I'd ask you if you can 4 identify that document for me. 5 A. Yeah. It's the -- it's minutes of a 6 compensation committee meeting of United Savings 7 of February 2nd, 1987. 8 MR. VILLA: Your Honor, I move A1550 9 into evidence. 10 MR. GUIDO: No objection, Your Honor. 11 THE COURT: Received. 12 Q. (BY MR. VILLA) Let me direct your 13 attention to the third full paragraph of the 14 document, and I'll ask you to read it to yourself 15 and then tell us about the value of United's stock 16 options and the reasons for any changes in value 17 in this time period in early 1987. 18 A. Well, at this time, apparently -- and I 19 don't have a specific recollection; but at this 20 time, the value of the United Financial Group 21 stock had gone down so that the benefit of the 22 stock option plan had significantly decreased 19537 1 because the purpose of the stock option plan was 2 an incentive to keep people there. And if the 3 stock options aren't worth anything because the 4 price of the stock is below the purchase price, it 5 didn't do what it was supposed to do. 6 So, what was being recommended and 7 adopted here was that the options be repriced. 8 Q. And the line where it says that the 9 stock options are, quote, "not acting as the 10 incentive that the compensation committee and the 11 board desired," close quote, that's a reference to 12 the fact that when stock prices continue to fall, 13 the stock options don't have the effect of keeping 14 employees in their jobs. Right? 15 A. Right. And also, you'll notice that 16 we're creating a new vesting period. So again, 17 it's -- the purpose is to keep people there. So, 18 you're giving them a lower price but you're having 19 them start all over for vesting. 20 Q. But the value of the stock of Texas 21 thrifts continued to fall after February of 1987; 22 is that right? 19538 1 A. Yes, it did. 2 Q. Let's go back to A3103 (sic), which was 3 the proxy statement we looked at. I'm going to 4 ask you to look at Pages 11 and 12 of that. 5 A. 3013? 6 Q. I hope I said A3013. 7 A. Okay. I'm sorry. Page -- 8 Q. 11 and 12. Do you see that, sir, down 9 at the bottom, there is a description of the 10 performance unit plan? 11 A. Yes, I do. 12 Q. You've already told the Court what the 13 performance unit plan was; isn't that right? 14 A. Yes. 15 Q. Let me direct your attention to the 16 last -- the first paragraph on the top of Page 12 17 and the second-to-the-last line in that paragraph. 18 See that? It says, quote, "Upon termination of 19 employment, except for death or disability, prior 20 to the four-year term, units are forfeited." 21 Right? 22 A. Right. 19539 1 Q. So, under the performance unit plan, if 2 you didn't stay for the full four years, you lost 3 your chance to earn this 600,000 in your case, 4 plus dollars; is that right? 5 A. That's right. It's a long-term, 6 extended plan. 7 Q. And it provided an incentive to keep 8 the senior managers. I think there were roughly a 9 dozen people involved; is that right? 10 A. Yeah. There were 12 people at this 11 time. 12 Q. Did there come a time in early 1987 13 when it became clear that UFG was not going to 14 meet its financial goals as set forth in the 15 performance unit plan? 16 A. It sure did. 17 Q. And was that just USAT, or did that 18 include other -- strike that. 19 Did the problems that beset USAT in 20 1987 also affect other thrifts in Texas? 21 A. I think it affected all the thrifts. 22 Q. So, the value of the performance unit 19540 1 plan units went to zero as far as you were 2 concerned. Right? 3 A. It was valueless, that is correct. 4 Q. Now, Mr. Berner, Jim Pledger left in 5 the second half of 1986. Right? 6 A. Yes. Somewhere in that -- that's 7 correct. Second half of '86. 8 Q. And he was general counsel of USAT. 9 Right? 10 A. Right. 11 Q. Did you take over his responsibilities? 12 A. I was in charge of them, yes. 13 Q. You didn't hire anybody to replace him? 14 A. No, I did not. I tried originally but 15 couldn't find anyone. 16 Q. So, would it be fair to say that your 17 responsibilities and, indeed, your workload as 18 general counsel of UFG expanded when you became 19 also general counsel of USAT? 20 A. I think that would be a fair statement. 21 Q. Gerry Williams left at the beginning of 22 nineteen -- at the end of 1986 and the beginning 19541 1 of 1987; isn't that right? 2 A. Right. At year end, that's correct. 3 Q. And what happened to his 4 responsibilities, sir? 5 A. It was essentially divided up among the 6 senior people that were left. Jenard Gross took 7 on a good portion of it. I took on a portion of 8 it. I think Mike Crow took on a portion of it. 9 Q. In fact, you took on considerable more 10 responsibility for dealing with the regulators, 11 for example, when Mr. Pledger and then 12 Mr. Williams left. Right? 13 A. That's correct. 14 Q. So, at the same time, your total 15 exception package -- and that includes the 16 performance unit plan and the stock options -- 17 went down, your workload and responsibilities 18 substantially increased; isn't that right? 19 A. I believe that's a fair statement, yes. 20 Q. Did there come a time, sir, when USAT 21 began to experience unwanted management turnover? 22 A. I think actually beginning with almost 19542 1 Jim Pledger from '86 onward, a lot of senior 2 people were leaving, senior management people were 3 leaving. 4 Q. And was there concern at USAT about the 5 cost of replacing management who left? 6 A. There certainly was. 7 Q. What was the effect that the new hires 8 were having on the morale of the other people when 9 the new hires were getting multi-year contracts, 10 guaranteed bonuses, and security arrangements? 11 A. Well, I think everybody was -- was 12 always a little jealous. I think everybody was 13 concerned about the fact that new hires were 14 getting guaranteed bonuses and guaranteed 15 contracts and the people that were there already 16 didn't have those things, and there was a concern 17 obviously on the part of senior management and we 18 wanted to keep everybody at United. 19 Q. Let me show you what's been previously 20 admitted at Tab 391 as Exhibit T8013. And you'll 21 have to go probably three or four exhibits into 22 your stack. 19543 1 Do you have that before you, sir? 2 A. Is that the minutes of United Savings 3 board of February 19th? 4 Q. Yes. 5 A. Yes. 6 Q. And would you have prepared these 7 minutes, sir? 8 A. I believe so. Let me -- I'm sure I 9 did, yes. 10 Q. Let me direct your attention to the 11 second page under the heading "compensation 12 committee." 13 Do you see that? 14 A. Yes. 15 Q. Okay. Do you remember Mr. Rinaldi 16 asked you a question and you said, I believe -- 17 you were trying to remember whether the 18 compensation committee of United Savings 19 Association always had the authority of the entire 20 board. 21 Do you remember that? 22 A. I certainly remember that discussion we 19544 1 had. 2 Q. Okay. So, by looking at the 1987 USAT 3 board minutes, can you determine whether or not 4 the compensation committee of USAT had the 5 authority to act on things with the same effect as 6 if acted on by the entire board? 7 A. That's absolutely true. 8 Q. And there is a resolution that in fact 9 says that, right? 10 A. Right. There's a resolution on Page 2 11 of the compensation committee. 12 Q. Now, you've read Mr. Whatley's 13 testimony that he did not believe that the USAT 14 compensation committee had the power to act for 15 the board of directors. Right? 16 A. Yes, I have. 17 Q. Was Mr. Whatley correct? 18 A. No, he was not. 19 Q. Let me direct your attention to the -- 20 to April of 1987, which is after the conclusion of 21 the field work of Ms. Carlton on the 1986 22 examination of United. And let me ask you to turn 19545 1 to the next document, which is Exhibit B1589. 2 Do you have that before you, sir? 3 A. Yes, I do. 4 Q. And is this a memorandum you prepared 5 in April of 1987 shortly after the conclusion of 6 the examination by Ms. Carlton? 7 A. Yeah. I remember this memo that I 8 prepared. 9 MR. VILLA: Your Honor, I move B1589 10 into evidence. 11 MR. GUIDO: No objection, Your Honor. 12 THE COURT: Received. 13 Q. (BY MR. VILLA) And this memo reflects 14 a conversation with Neil Twomey. Right? 15 A. Right. 16 Q. Neil Twomey was the supervisory agent 17 for United Savings? 18 A. In Dallas, that's correct. 19 Q. Let me direct your attention to Page 3 20 of the document and the first full paragraph at 21 the top. 22 Would you read that to yourself and 19546 1 then tell us whether this reflects the views that 2 Mr. Twomey expressed to you from time to time with 3 respect to the management of United and tell me 4 what those views are. If you want to quote from 5 part of this, you may do so; but I'd like your 6 recollection. 7 A. Yeah. Well, over the course of a 8 couple of years, Neil Twomey and I had 9 conversations about the management. And Neil's 10 position was always that the integrity of the 11 management at United was considered one of the 12 best in Texas. Their big concern was the fact 13 that at the highest level, there was no strong S&L 14 guy, somebody who knew the S&L business. But 15 other than that, the management was considered, 16 you know, in very high esteem. And we had 17 conversations like that many times. 18 Q. And as we go through the next day of 19 testimony, we're going to see perhaps a dozen of 20 your memos that reflect conversations like that 21 from Mr. Twomey. 22 But do you have an independent 19547 1 recollection of those conversations? 2 A. Oh, absolutely. Absolutely. 3 Q. Up until the very end -- and I mean up 4 until the time that Mr. Ranieri's people started 5 appearing at United in, say, the month or so 6 before United Savings Association of Texas 7 failed -- did Mr. Twomey's views as expressed to 8 you of United's management change? 9 A. My recollection is that his views about 10 United's management never changed until the end, 11 the very end. 12 Q. Do you recall, sir, what the occasion 13 was for this discussion that's reflected in B1589? 14 A. I believe it was the letter relating to 15 the 1986 exam. 16 Q. And you were having discussions with 17 Mr. Twomey as the supervisory agent because he had 18 received a copy of the United exam and had 19 forwarded it to United. Right? 20 A. That's right. 21 Q. By the way, when you spoke to 22 Mr. Twomey -- strike that. 19548 1 Was Mr. Twomey the supervisory agent 2 for United Savings Association of Texas throughout 3 the entire time period -- that is to say, from the 4 time you arrived -- at least from the time you 5 first became aware of it after you arrived until 6 the time United Savings closed? 7 A. That's right. I think he -- there's -- 8 it might have been for the first couple of months 9 when I was there when I really wasn't working on 10 the regulatory stuff, there might have been 11 somebody else. But from the time I started to get 12 involved with this, he was the supervisory agent. 13 Q. And he was the person that you dealt 14 with primarily at the Federal Home Loan Bank of 15 Dallas; is that right? 16 A. He most, and Ginger Baugh. 17 Q. And Ms. Ginger Baugh was a supervisory 18 analyst that worked for him. Right? 19 A. Somebody that worked for him, right. 20 Q. Now, sir, let me show you -- ask you to 21 turn to the next document, which is Exhibit A11011 22 which I believe has been accepted into evidence at 19549 1 Tab 256. 2 Do you see that? 3 A. Yes, I do. 4 Q. I'd like to direct your attention to 5 Page 8 of this document which bears Bates stamp 6 No. OW120674. 7 Do you have that? 8 A. Yes, I do. 9 Q. And would you read to yourself the last 10 paragraph? This is an internal Bank Board 11 document; so, I wouldn't expect you to have 12 received it. But I'm going to ask you, sir, 13 whether the statements in this are accurate to 14 your recollection. 15 Let me start off, have you had an 16 opportunity to read it now? 17 A. I've read that paragraph for sure, yes. 18 Q. And the author of this memo, I believe, 19 is Mr. Joe Selby if you'll turn to the front 20 page -- second page. 21 Do you see that? 22 A. Yes. 19550 1 Q. Do you know who Mr. Selby is, don't 2 you? 3 A. Yes, I do. He was the EVP at Federal 4 Home Loan Bank of Dallas. 5 Q. The executive vice president in charge 6 of, I think, regulatory affairs. Right? 7 A. Right. 8 Q. He was, in effect, the No. 2 person in 9 the entire Federal Home Loan Bank of Dallas? 10 A. That's correct. 11 Q. And the entire supervisory side 12 reported to him. Right? 13 A. That is absolutely right. 14 Q. Very highly regarded and respected 15 regulator? 16 A. He was tough, yeah, he was, that's 17 correct. 18 Q. We all know Mr. Selby. 19 Now, Mr. Selby makes comments in here 20 about United being approached from time to time 21 regarding utilization of its present management 22 for management contracts of problem institutions. 19551 1 Do you see that, sir? 2 A. Yes, I do. 3 Q. And do you remember what the management 4 consignment program was? 5 A. No. At this point, I really don't. 6 Q. Do you recall, sir, that United had 7 been approached from time to time to -- 8 A. Yes, I do. 9 Q. -- to take over the management of 10 problem institutions? 11 A. Yes, I do. 12 Q. Smaller institutions. Right? 13 A. That's correct. 14 Q. So, Mr. Selby's assessment of the 15 management of United is consistent with your 16 recollection of how the Federal Home Loan Bank 17 Board was approaching United in 1986. Right? 18 A. Yes. It's absolutely consistent. 19 Q. Let me show you what's been marked as 20 Exhibit B1643 and ask you if you can tell me what 21 that document is, sir. 22 A. It's a memo from me concerning the 19552 1 project compensation plan. 2 Q. And did you prepare -- strike that. 3 And enclosed is a cover letter and the 4 project compensation plan. Right? 5 A. That's correct. 6 MR. VILLA: Your Honor, I move 7 Exhibit B1643 into evidence. 8 MR. GUIDO: No objection, Your Honor. 9 THE COURT: Received. 10 Q. (BY MR. VILLA) I'd like you to direct 11 your attention to the second page of this exhibit, 12 and the third paragraph. 13 Would you read that to yourself, sir? 14 A. (Witness reviews the document.) 15 Q. Now, sir, was the project compensation 16 plan one of the steps that United was taking -- 17 one of the many steps United was taking in the 18 first half of 1987 to try to retain key employees? 19 A. Yeah. My recollection is we were 20 floating out a number of ideas to try to keep the 21 key employees there because the other plans 22 were -- had no value. 19553 1 Q. The other plans were of no value, and 2 United was experiencing management turnover? 3 A. That's correct. 4 Q. Now, sir, let me direct your attention 5 to the next document in your book, which is 6 Exhibit A1130. And it is a special meeting of the 7 UFG board of directors dated June 9, 1987. 8 Do you have that before you, sir? 9 A. Yes, I do. 10 Q. And you prepared these minutes. Right? 11 A. Yeah. These are minutes that I 12 prepared. 13 MR. VILLA: I move A1130 into evidence, 14 Your Honor. 15 MR. GUIDO: No objection, Your Honor. 16 THE COURT: Received. 17 Q. (BY MR. VILLA) Let me ask you first: 18 Who is Stephen Silverman? 19 A. He is a lawyer -- he was on the board 20 of United Financial Group and United Savings. He 21 is a lawyer in California, private practice. 22 Q. He is not an officer or employee of 19554 1 United Financial Group or United Savings, is he? 2 A. No. He never was. 3 Q. So, he would be regarded as an outside 4 director? 5 A. That's correct. He was -- 6 Q. I'm sorry. Or an independent director, 7 as well? 8 A. That's correct. 9 Q. Did he have any relationship with 10 PennCorp? 11 A. Yeah. Under -- PennCorp was entitled 12 to name three directors to the UFG board of 13 directors because of their loans that had been 14 entered into a number of years before, and he was 15 one of the three directors that PennCorp had 16 named. 17 Q. So, PennCorp had outstanding debt to 18 United Financial Group. Right? 19 A. That's correct. 20 Q. And as a creditor, they had certain 21 rights to place members -- their designees on the 22 board of United Financial Group. Right? 19555 1 A. That's right. 2 Q. And Mr. Silverman was one of them? 3 A. He was one of the three, that's right. 4 Q. And, therefore, would it be fair to say 5 that his interest in some ways was of that 6 representing a major creditor of United Financial 7 Group? 8 A. Well, I think he -- I mean, he viewed 9 his position on the board very seriously. So, I'm 10 sure he took that fiduciary duty. But he was 11 certainly representing PennCorp, also. 12 Q. And he was -- was he on the 13 compensation committee of United during this 14 time -- United Financial Group as well as United 15 Savings Association during this time period? 16 A. Well, I think he's elected at this 17 point -- in this meeting. He's elected to the 18 compensation committee. 19 Q. In the middle of 1987 -- we've already 20 seen -- strike that. 21 We've already seen in the year 1987 22 certain steps being taken to attract new officers 19556 1 as well as various other plans that have been 2 taken by United such as changing the stock option 3 plan, the project compensation plan. 4 Do you recall whether, in the middle of 5 the year 1987, United Financial Group also 6 explored the prospect of having new employment 7 contracts or having employment contracts to try to 8 retain some of the key executives? 9 A. Yes, I do. I certainly do. 10 Q. And this is what's described in what's 11 been marked as Exhibit A1130; isn't that right, 12 sir? 13 A. Yeah. 14 Q. Well, why don't you read to yourself 15 paragraphs -- the fifth, sixth, and seventh 16 paragraph of that and then tell us, since you were 17 there, what you can recall about the discussion 18 and the necessity for employment contracts and, 19 more importantly, who was making the decision? 20 Was this management making the decision or the 21 board of directors? 22 A. Well, this was -- again, my 19557 1 recollection is -- and it's pretty clear -- that 2 the board of directors was concerned very much 3 about keeping senior management there. So, they 4 wanted to -- they figured one of the ways to do 5 that was by entering into employment contracts. 6 And what they did here was to form an ad hoc 7 committee to draft the employment agreement -- to 8 look into it and then to draft the employment 9 agreements and present it back to them for 10 approval. 11 Q. Now, I know it's hard to remember back. 12 And tomorrow, we're going to go through a bit more 13 of a regulatory chronology about the position of 14 United Savings Association and its regulators 15 about USAT's net worth, regulatory net worth. 16 But do you recall, sir, whether the 17 disagreements that you, I think, had referred to 18 in your examination with Mr. Rinaldi, whether 19 those disagreements over USAT's net worth were 20 resolved by the middle of June 1987? 21 A. I don't believe they were. I don't 22 think they were. 19558 1 Q. In fact, during that time period, the 2 regulators were still taking the position that 3 United might not be meeting its regulatory net 4 worth. In fact, they were not. They were taking 5 the position that United was below its regulatory 6 net worth; is that right? 7 A. My position is that the regulators took 8 that position from that point on, that United 9 never met its regulatory net worth. 10 Q. Now, sir, let me ask you to turn to the 11 next document, which is Exhibit T8016. It's a 12 memo from you to the compensation committee dated 13 June 24, 1987. 14 Do you see that? 15 A. Yes, I do. 16 Q. And did you prepare that memorandum and 17 the attachment? 18 A. Yes, I did. 19 MR. VILLA: Your Honor, I move T8016 20 into evidence. 21 MR. GUIDO: No objection, Your Honor. 22 THE COURT: Received. 19559 1 Q. (BY MR. VILLA) Now, sir, attached to 2 T8016 is a draft employment contract; is that 3 correct? 4 A. Right. 5 Q. It's not attached to T8016. Actually, 6 a portion of T8016 is a draft of an employment 7 contract; is that right? 8 A. Right. That's correct. 9 Q. And had you been involved in the 10 preparation of that contract? 11 A. Yes, I was. 12 Q. And what sources did you use for 13 drafting that contract? 14 A. Oh, goodness. Well, I looked at a 15 number of forms. I remember looking at some of 16 the form agreements, some of the previous 17 agreements at United. I looked at -- there was a 18 book that I had that had form employment 19 agreements. I had prepared some employment 20 agreements at Inexco. And I think -- I'm not 21 positive -- I might have gotten some form 22 agreements from outside counsel. I'm not positive 19560 1 about that. 2 Q. And when you talk about prior 3 agreements at United, do you know whether you 4 looked at -- can you recall today whether you 5 looked at, for example, Mr. Gerry Williams' 6 agreement or the agreements of any prior 7 management at United? 8 A. Yeah. I think I looked at Gerry 9 Williams' -- I know I looked at Gerry Williams', 10 and I'm pretty sure I looked at Jim Coles' 11 agreement. 12 Q. Let me ask you to turn your attention 13 to Pages 7 and 8 of the contract. It ends on 03 14 and 04. 15 Do you see that UFG 2027203 and 04? 16 A. Yes. 17 Q. This contract has a change of control 18 provision in it. 19 Do you see that, sir? 20 A. Yes, I do. 21 Q. And that change of control allows the 22 executive to terminate his contract and receive 19561 1 severance under certain circumstances. Right? 2 A. That's correct. 3 Q. And one of the ways that the contract 4 defines a change of control is a change in the 5 majority of the board of directors within a 6 24-month period? 7 A. Right. 8 Q. Is that a typical formula to determine 9 whether a change of control has occurred? 10 A. I think you'll find that in many, many, 11 if not most agreements. 12 Q. You didn't come up with this on your 13 own, did you, sir? 14 A. I certainly did not. 15 Q. Let me ask you to turn to 16 Exhibit B4240. It's the next document in your 17 book. 18 A. Okay. 19 Q. I think you mentioned the contract of 20 Jim Coles. Who is -- who is Jim Coles? 21 A. He was -- well, he was an executive at 22 United. He had left before I got there. I think 19562 1 he was -- I think he was CEO. I'm pretty sure he 2 was CEO. 3 Q. And this is the Coles contract that you 4 were referring to, isn't it, sir? 5 A. Yes, it is. 6 MR. VILLA: Your Honor, I move 7 Exhibit B4240 into evidence. 8 MR. GUIDO: No objection. 9 THE COURT: Received. 10 Q. (BY MR. VILLA) I'd like you to turn 11 to a page that ends with DM002919. 12 Do you see that, sir? 13 A. Yes, I do. 14 Q. And down at the bottom of the page, do 15 you see the change of control provision about an 16 inch from the bottom of the page? 17 A. Right. I see that. 18 Q. 2 inches from the bottom of the page. 19 And that is, indeed, a change of control provision 20 that triggers under, I think, Z, "If those 21 individuals who at the beginning of such period 22 constitute the board of directors of the company 19563 1 cease for any reason to constitute at least a 2 majority thereof." Right? 3 A. That's correct. 4 Q. And that's the same kind of provision 5 that we were talking about that was included in 6 your draft contract that was keying off a change 7 in number of directors. Right? 8 A. That's right. 9 Q. I'd like you to take a look at the next 10 document, which is Exhibit A3014. And it's in 11 evidence at Tab 92. 12 Do you have that before you, sir? 13 A. Yes, I do. 14 Q. Can you tell us what it is? 15 A. It's the proxy statement for the 1987 16 annual meeting of United Financial Group. 17 Q. Let me direct your attention -- again, 18 this is one of the proxy statements that was filed 19 with the Securities and Exchange Commission and 20 sent to the Federal Home Loan Bank of Dallas; is 21 that right? 22 A. That's correct. 19564 1 Q. Let me direct your attention to Page 10 2 of that proxy statement and the paragraph entitled 3 "employment contracts." 4 Do you see that? 5 A. Yes, I do. 6 Q. And about four sentences down, there is 7 a sentence which reads, "In January 1987, 8 Mr. Williams resigned as an officer and director 9 of the company and all of its subsidiaries. As a 10 result of his resignation, Mr. Williams received 11 $404,000 pursuant" -- "$404,437 pursuant to the 12 terms of his employment agreement." 13 Do you see that? 14 A. Yes, sure. 15 Q. And then it goes on to say that he paid 16 off part of a note that was still due and owing. 17 Right? 18 A. Right. 19 Q. So, do you recall -- does that refresh 20 your recollection, sir, that at the time that 21 Mr. Williams, Gerry Williams, left United, he 22 received a very substantial severance payment 19565 1 under that contract that we had previously seen? 2 A. Right. He received in excess of 3 $400,000. 4 Q. Did you hear any complaints from any of 5 the regulators regarding the severance payments to 6 Mr. Coles or to Mr. Williams? 7 A. No. Mr. Coles was before my time, but 8 Mr. Williams -- no. 9 Q. You don't recall any with respect to 10 Mr. Williams? 11 A. Absolutely none. 12 Q. Now, you've read Mr. Williams' 13 testimony in this proceeding where he testified 14 that Neil Twomey said that the severance was fine 15 and that he, Neil Twomey, had approved Williams' 16 package. 17 Do you remember that, sir? 18 A. Right. I remember seeing that. 19 MR. VILLA: That's at Page 6211 -- 6210 20 and 6211 for counsel. 21 Q. (BY MR. VILLA) Do you recall, sir, 22 whether or not United would have reviewed the 19566 1 severance package of their departing chief 2 operating officer with Mr. Twomey prior to the 3 person departing? 4 A. That's my recollection, that -- I mean, 5 I didn't do it, but my recollection is it was 6 reviewed with him. 7 Q. So, as we're looking back on these -- 8 on the history of United's employment contracts, 9 you would have known about Mr. Williams and 10 Mr. Coles and their severance agreements and their 11 employment contracts at the time you were drafting 12 these contracts in June of 1987 that we've just 13 seen; is that right? 14 A. That's correct. 15 Q. And how would -- how would those 16 contracts and the history of them and the fact 17 that they had been made public affect your 18 judgment as to whether the contract that you were 19 working out for UFG was a violation of any 20 regulations? 21 A. Well, again, I mean, you would look to 22 the fact that the regulators had approved or at 19567 1 least had not disapproved the previous contracts, 2 that they were long-term contracts, they had 3 change of control provisions in there. They had 4 provided for significant payments upon 5 termination. 6 So, I would have used that and I would 7 have thought that that was -- if there was any 8 problem with any of those contracts, at some point 9 someone would have said something. 10 Q. Let me direct your attention, sir, to 11 Exhibit B4188, which would be the next one in your 12 book. 13 MR. GUIDO: I'm sorry. I missed that 14 number. 15 MR. VILLA: B4188. 16 Q. (BY MR. VILLA) Can you tell me what 17 that is, sir? 18 A. This is a letter from Steve Silverman 19 to me concerning the employment agreements and 20 some comments that he had on the employment 21 agreements. 22 MR. VILLA: Your Honor, I move B4188 19568 1 into evidence. 2 MR. GUIDO: No objection. 3 THE COURT: Received. 4 Q. (BY MR. VILLA) Now, can you tell me 5 what the process was of drafting the UFG 6 employment agreements in 1987 and the role that, 7 for example, this letter from Mr. Silverman played 8 in that process? 9 A. Well, I think we looked at it before. 10 I had drafted the first draft of the employment 11 agreements. I sent it out to the compensation 12 committee, which was Mr. Silverman, Mr. Keltner, I 13 believe, and Mr. Whatley. They reviewed the 14 employment agreements. They had comments. We 15 either discussed the comments or incorporated 16 their comments, revised the draft. I believe I 17 sent it out to them again and got a final draft 18 which was then presented to the comp committee and 19 finally to the board of directors. 20 Q. And what qualifications did you believe 21 Mr. Silverman had to review and comment upon 22 employment agreements? 19569 1 A. Mr. Silverman was a very experienced 2 lawyer, worked for -- I forgot the name of the 3 firm he worked for -- major firm, and had been a 4 lawyer for 20, 25 years at the time. 5 Q. Do you know whether, sir, 6 Mr. Silverman's comments were taken into 7 consideration in the drafting of the contracts? 8 A. Oh, sure. 9 Q. Now, I believe that Mr. Guido showed 10 you some correspondence with respect to United 11 Savings Association of Texas making their -- 12 making some of their senior personnel available to 13 the Federal Home Loan Bank in connection with 14 mortgage-backed securities, high-yield bonds, and 15 equity arbitrage. 16 Do you remember that? 17 A. Yes, I do. 18 Q. And do you recall, sir, whether that -- 19 whether those discussions occurred, whether there 20 were discussions between United and the Federal 21 Home Loan Bank on that issue? 22 A. Yes, I do. There were a bunch of 19570 1 discussions or some discussions. 2 Q. Let me ask you to look, sir, at the 3 next document, which is Exhibit B1706, and ask you 4 whether you can identify that for me. 5 A. Yeah, I sure can. 6 Q. What is it, sir? 7 A. It's a memo concerning a meeting with 8 the Federal Home Loan Bank of Dallas. 9 Q. You smiled when you -- 10 MR. VILLA: Your Honor, I move B1706 11 into evidence. 12 MR. GUIDO: No objection, Your Honor. 13 THE COURT: Received. 14 Q. (BY MR. VILLA) You smiled when you 15 looked at that document. I gather it's the first 16 paragraph of the document that reminds you of the 17 incident, doesn't it, sir? 18 A. Yes, it does. We all flew up to Dallas 19 to have this meeting and, at the same time, the 20 Dallas bank people were flying to Houston to have 21 the meeting. So -- because we didn't want to have 22 the meeting by telephone. I remember we wanted to 19571 1 have a specific meeting in person. So, I remember 2 we flew to Dallas, they flew to Houston, and we 3 ended up having a meeting on the telephone. 4 Typical. 5 Q. Let me direct your attention, sir, to 6 the bottom of Page 2 and the top of Page 3 and ask 7 you to read the paragraph that ends at the bottom 8 of 2 and runs over the top of 3. 9 A. Read it out loud? 10 Q. No, sir. Read it to yourself. 11 A. (Witness reviews the document.) Okay. 12 Q. And is this, sir, one of the 13 discussions in which Mr. Twomey reflected at least 14 a tentative willingness to have United's 15 investment personnel assist smaller institutions 16 in the 9th district? 17 A. Yes, it is. 18 Q. And those discussions went on from time 19 to time, didn't they? 20 A. They certainly did. There were a 21 number of discussions. 22 Q. Now, sir, let me direct your attention 19572 1 to the next document, which is a memorandum dated 2 August 10, 1987, Exhibit A11079, that you prepared 3 about a meeting with the Federal Home Loan Bank of 4 Dallas. 5 Do you see that? 6 A. Yes. This was an August 7th, 1987 7 meeting. 8 Q. Yes, sir. 9 MR. VILLA: Your Honor, I move A11079 10 into evidence. 11 MR. GUIDO: No objection, Your Honor. 12 THE COURT: Received. 13 Q. (BY MR. VILLA) Now, sir, we're in the 14 period August 1987. And this is a year and a 15 half, roughly, after Ms. Carlton's first 16 examination of United Savings when she began her 17 examination of United Savings Association of 18 Texas. And I had asked you from time to time 19 whether you knew what the regulators' position was 20 as to whether United met its regulatory net worth. 21 Do you remember that question, sir? 22 A. Yes, sure. 19573 1 Q. Let me direct your attention to the 2 second full paragraph of your memorandum and ask 3 you whether that refreshes your recollection that 4 as of this point, there was still discussions, 5 August 1987, as to whether or not United met its 6 regulatory net worth. 7 A. Yeah, there were discussions. United 8 was taking the view that we had, and the 9 regulators were taking the view that we had not. 10 Q. So, at the time that the first 11 contracts were drafted -- and we're talking about 12 the fall -- the UFG contracts which ultimately 13 become the UFG contracts signed in the fall of 14 1987. At that time period -- basically, we're 15 talking about the third quarter of 1987 -- it was 16 at least an issue of discussion between United 17 Savings Association of Texas and the regulators as 18 to whether or not United met its regulatory net 19 worth. Right? 20 A. That's absolutely right, sir. 21 Q. But the problems -- the financial 22 problems besetting United were having an effect on 19574 1 its ability to retain its personnel. Right? 2 A. That's correct. During this time 3 period, actually beginning in '86, top management 4 was leaving and people were leaving, that's 5 correct. 6 Q. Was there any person who stated, that 7 you recall, sir, that the reason for entering into 8 these contracts was the fact that United was 9 insolvent or had failed to meet its regulatory 10 minimum net worth? 11 A. No, never. The reason for entering 12 into the contracts? 13 Q. Yes, sir. 14 A. No. 15 Q. Was there anybody who said that the 16 reason for entering into the contracts was to try 17 to avoid the supervisors or the regulators from 18 coming in and stopping United from entering into 19 contracts with the senior management? 20 A. No. 21 Q. In fact, the regulators had been taking 22 the position for well over a year that United was 19575 1 below its regulatory net worth; isn't that right? 2 A. That's absolutely right. 3 Q. I'd like to direct your attention to 4 Paragraphs 6 and 7 of this Exhibit A11079. Could 5 you read those -- it's on Page 2. Just read those 6 to yourself, sir. 7 A. Page 2? 8 Q. Yes. 9 A. I was looking at Page 1. Sorry. 10 Q. They are numbered 6 and 7. 11 A. Okay. Sorry. (Witness reviews the 12 document.) 13 Q. Let's start with No. 6. This was 14 the -- this is further discussion between you and 15 Mr. Twomey of the possibility that United's 16 personnel would be used for other associations for 17 high-yield bonds and other investment-related 18 activities. Right? 19 A. That's right. 20 Q. But what I'm interested in is No. 7. 21 Can you tell me, sir, whether there was an ongoing 22 dialogue between United Savings Association of 19576 1 Texas and the federal regulators about the 2 possibility that United would be taking over other 3 associations either in the 9th district, which is 4 the Dallas district, what we now know as the 5 Dallas district, or elsewhere in the United 6 States? 7 A. Yeah. There were discussions 8 throughout '87 and '88 about United taking over 9 other S&Ls. 10 Q. And did the -- and we're going to start 11 seeing it come up, but did the -- did it appear -- 12 what did it appear to you the likelihood was that 13 United would be called upon to take over either by 14 purchase or through the management consignment 15 program or through one of these other programs 16 that the Federal Home Loan Bank Board and the 17 Federal Home Loan Bank of Dallas were working out 18 that United would be asked to take over 19 responsibilities for other thrifts? 20 A. At this point in time, that was 21 something that we thought was very likely, that we 22 would be asked to take over thrifts either in 19577 1 Texas or we even were looking outside of Texas to 2 take over thrifts. So, I think we felt it was 3 quite likely. 4 Q. In fact, we will see over the next 16 5 months or so after this a number of discussions, 6 various plans, including the Southwest Plan in 7 which United was going to shoulder considerably 8 greater responsibilities by taking over other 9 institutions. Right? 10 A. That's -- yes, sir, that's right. 11 Q. Does the likelihood that United would 12 be called upon to take over other institutions 13 have any effect on the need to retain United's 14 current management? 15 A. Well, of course. I mean, if -- if -- 16 the regulators viewed United's management as we 17 saw before, as being quality management, people 18 who knew how to run S&Ls. They were worried that 19 there was nobody at the top with nuts and bolts; 20 but if you lose the top management, I think it 21 would be unlikely that we would be able to take 22 over S&Ls. They were looking at the United team 19578 1 to be the one running those S&Ls. 2 Q. And in fact, if United started losing 3 its top management, the likelihood that it would 4 be given additional substantial responsibilities 5 would be reasonably expected to decline, wouldn't 6 you agree? 7 A. Absolutely. You'd probably end up also 8 losing your middle management, too. But there is 9 no question that the likelihood of taking over 10 another institution would be significantly 11 decreased. 12 Q. Sir, let me ask you to turn to 13 Exhibit A1552. 14 THE COURT: We'll adjourn until 15 9:00 o'clock. 16 17 (Whereupon at 4:52 p.m. 18 the proceedings were recessed.) 19 20 21 22 19579 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 18th day of July, 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 19580 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 18th day of July, 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