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 incor