19581 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 19, 1998 22 19582 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 19583 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 19584 1 2 INDEX OF PROCEEDINGS 3 Page 4 ARTHUR BERNER 5 Continued Examination by Mr. Villa......19585 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 19585 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:00 a.m.) 3 THE COURT: Be seated, please. The 4 hearing will come to order. 5 Mr. Villa, you may continue with your 6 cross-examination. 7 MR. VILLA: Thank you, Your Honor. 8 9 CONTINUED EXAMINATION 10 11 Q. (BY MR. VILLA) Good morning, 12 Mr. Berner. 13 A. Good morning. 14 Q. When we left off yesterday, we were at 15 the point where the UFG compensation committee was 16 considering and approving the draft contracts that 17 you had worked through with Mr. Silverman and 18 others. 19 Do you recall that? 20 A. Yes, I do. 21 Q. I would like you to turn now to 22 Exhibit A1552, which is in evidence as Tab 1401. 19586 1 Do you have that before you, sir? 2 A. Yes, I do. 3 Q. Can you tell us what that is? 4 A. These are the minutes of the UFG 5 compensation committee of September 9th, 1987. 6 Q. And you were present at that meeting? 7 A. Yeah, uh-huh. I sure was. 8 Q. And the UFG -- this is an important 9 compensation committee meeting because this is the 10 meeting where the first either UFG or USAT 11 contract was actually considered and approved. 12 Right? 13 A. That's correct, yeah, at this meeting. 14 Q. Let me direct your attention to the 15 fourth paragraph and -- fourth, fifth, and sixth 16 paragraphs. Those reflect statements by the 17 outside directors of United Financial Group who 18 were sitting on the compensation committee; is 19 that correct, sir? 20 A. Yes, it is. 21 Q. Let me -- I don't want you to review 22 all these minutes, but there are certain portions 19587 1 of them that I want to direct your attention to 2 and then ask you to explain to the Court what you 3 recall about the meeting. Particularly, 4 Mr. Silverman's comments on Paragraph 4 -- well, 5 let me read the sentences. "He noted that as a 6 director, it was important to maintain the quality 7 of key executives that were currently with the 8 association. He also noted that it would be less 9 expensive to maintain these people than to have 10 them leave for other opportunities and for the 11 company to have to spend a lot of downtime as well 12 as fees for finding capable people. It was also 13 noted that any person who came to work at United 14 at this time would probably require at least some 15 if not more extensive employment contracts." 16 Do you see that, sir? 17 A. Yes, I do. 18 Q. Would you tell the Court what you 19 recall about Mr. Silverman's comments at that 20 compensation committee meeting? 21 A. Sure. Actually, I remember them very 22 well because Mr. Silverman who was -- we had 19588 1 talked about before was a PennCorp representative 2 was on the compensation committee and really had 3 never expressed one way or another, you know, 4 where he came out on employment contracts. And at 5 this meeting, he was extremely vocal as to the 6 importance and the necessity for having employment 7 contracts. I was surprised at his views on this. 8 They were so extensive. 9 Q. And as we pointed out before, PennCorp 10 was a principal creditor of United Financial 11 Group. Right? 12 A. Yes, it was. 13 Q. Now, the second of the two that I'm 14 going to direct your attention to is Mr. Whatley's 15 comments in the fifth paragraph. And we won't 16 look at them all, but his statement that the 17 compensation for the association's key executive 18 personnel was competitive and that the guaranteed 19 minimum bonus was -- "and with the guaranteed 20 minimum bonus, this was merely establishing a fair 21 base compensation for these people." 22 Do you see that? 19589 1 A. Yes, I do. 2 Q. That's in the fifth paragraph. 3 Can you explain the notion that a 4 minimum bonus was necessary together with salary 5 to establish a fair base compensation? What was 6 he saying? You were there. You heard it, and you 7 were -- you're familiar with United's compensation 8 practices. 9 A. Right. I think, again, if you 10 remember -- I think we talked about it a little 11 bit yesterday -- United's philosophy was to have a 12 base salary that was generally below what people 13 would normally get for that job and then to 14 provide for significant bonuses. The significant 15 bonuses would be what they would expect to bring 16 you up to what your normal salary would have been 17 at any other place, and then perhaps a small bonus 18 on top of that. 19 So, what Mr. Whatley was talking about 20 here was that by adding the minimum bonus, all he 21 was really doing was reflecting what people's 22 salaries -- real salaries would have been in any 19590 1 other institution. 2 Q. Okay. And at this meeting, it was 3 recommended that the UFG contracts be approved; is 4 that right? This is the meeting. 5 A. It's -- yeah, that's right. 6 Q. Let me ask you to turn to the next 7 exhibit in your book, which is A1133 at Tab 1402. 8 Can you tell us what that is? 9 A. That's the -- the board of directors 10 meeting that same day of United Financial Group. 11 Q. And if you look at the bottom of 12 Page 1, the paragraph that begins at the bottom of 13 Page 1, it carries over to the top of Page 2. And 14 the paragraph on Page -- and the first full 15 paragraph on Page 2, if you would read that to 16 yourself, sir. 17 A. (Witness reviews the document.) Right. 18 Q. Have you seen it now? 19 A. Yes, sir. 20 Q. Can you tell us what this is? 21 A. Well, this is Mr. Whatley, as chairman 22 of the compensation committee, was reporting on 19591 1 what the compensation committee had recommended to 2 the board. And he's repeating essentially the 3 same statements that had been made at the 4 compensation committee. 5 Q. And this is kind of a distillation of 6 the comments that we've seen in the compensation 7 committee? 8 A. Right. 9 Q. As the basis for the UFG contracts. 10 Right? 11 A. That's correct. 12 Q. Now, we've seen the fact that there 13 have been a number of resignations. In fact, we 14 went through it, I think, with Mr. Rinaldi from 15 the board. 16 At this point in September of 1987, the 17 board was considerably larger than it was in 1988 18 after a number of the outside directors had 19 resigned; isn't that right, sir? 20 A. Yes, it was. 21 Q. And at this meeting with a much larger 22 board, although I can't recall from memory how 19592 1 many people were on it at this point, the UFG 2 contracts were approved with the rationale that 3 we've just reviewed; is that right? 4 A. That's right. That's absolutely right. 5 Q. Now, let's go back to near the 6 beginning of your book to the large exhibit which 7 is probably the seventh one in which is the 8 employment contracts exhibit. Its number is 9 A11032, and it's in evidence at Tab 483. 10 Do you see that, sir? 11 A. Yes. 12 Q. And I'd like you to turn to Bates stamp 13 No. OW128391. 14 Do you have that before you? 15 A. Yes, I do. 16 Q. And this is your UFG contract dated 17 September 9, 1987. Right? 18 A. Right. 19 Q. And this is the contract that would 20 have been approved pursuant to the discussions 21 that we've just seen at the compensation committee 22 at the board. Right? 19593 1 A. Yes. This is the one that -- the UFG 2 contract that was approved then, yeah. 3 Q. And it was -- we find it here in the 4 work papers of Ms. Carlton in connection with the 5 examination. Right? 6 A. If that's what this exhibit is, yes, 7 that's right. 8 Q. Okay. Do you recall what the exact 9 amount of your salary was under that -- under your 10 contract, sir? 11 A. I don't, but I can -- I'm sure I can 12 find it. 13 Q. Let's look at Page 3, Paragraph 5A, 14 which is -- it's the Bates stamp that ends in 393. 15 Do you see that? 16 A. Yes, I do. 17 Q. And what's your salary under this 18 agreement? 19 A. $170,736. 20 Q. Is that a raise or cut in your salary 21 from what you were getting immediately prior to 22 this? 19594 1 A. It was the same. 2 Q. Same salary? 3 And if you look at Paragraph 5B, can 4 you tell me what your minimum bonus is under this 5 agreement? 6 A. It was $70,000. 7 Q. And was that -- how did that compare to 8 the bonus that you received in early 1987 for 9 services performed in 1986? 10 A. It was the same. 11 Q. So, your salary and bonus -- as far as 12 your salary and bonus were concerned, the contract 13 didn't have any effect on it; is that right? 14 A. That's correct. 15 Q. Now, this contract does give you 16 severance benefits, however, doesn't it? 17 A. Yes, it does. 18 Q. And if you look at Paragraph 9, and I 19 think it starts on Page 8. 20 A. Right. 21 Q. And I know you've looked at this in 22 preparation for your testimony, sir. 19595 1 About how many years of salary do you 2 receive if you're terminated not for cause or 3 through a change of control? 4 A. Two years' salary. 5 Q. Now, we've been looking at your 6 contract. But did the other -- did a number of 7 other officers receive similar contracts with the 8 exception, of course, that they would have 9 different salary levels than you? 10 A. Yes, they did. 11 Q. Now, Mr. Berner, I think you responded 12 to Mister -- I think it was Mr. Rinaldi's 13 questions with respect to the stock market crash; 14 but do you remember the day of the stock market 15 crash in 1987? 16 A. I think it was October 19th. 17 Q. Okay. Either October 19th or 18 October 21st. I always forget myself. 19 A. It was around that time. 20 Q. And did you consider at that time what 21 effect the stock market crash might have on 22 United's minimum -- United's regulatory net worth? 19596 1 A. At the time, yes, I sure did. 2 Q. And what did it depend on? 3 A. Well, it depended on what the market 4 value was, I think, of the equity arbitrage 5 portfolio generally is what it would have depended 6 upon. 7 Q. Do you remember whether the -- 8 A. Depends on what the fluctuation would 9 have been. 10 Q. The market was fluctuating in the weeks 11 and months after the crash. Right? 12 A. Right. 13 Q. And the portfolio of United's equity 14 arbitrage could move up or down either 15 consistently with the market or inconsistently, 16 but it was also volatile. Right? 17 A. Right. 18 Q. So, at that point, there was a risk 19 that United would, even by your own calculation, 20 fall below its minimum regulatory net worth? 21 A. That's true. That was a concern. 22 Q. And at this time, sir, did you consult 19597 1 regulatory counsel about the potential impact on 2 United's operations if it -- if USAT fell below 3 its regulatory net worth? 4 A. Yeah. I think -- I'm pretty sure I 5 contacted Tom Leahey to find out what would happen 6 if we fell below regulatory net worth. 7 Q. And Mr. Leahey is with Kirkpatrick & 8 Lockhart, a law firm in Washington, D.C. 9 A. Yeah. 10 Q. Let me show you what has been marked as 11 B1807, which would be the next document in your 12 packet. 13 A. I have to find it. B1807? 14 Q. B1807. I'm sorry. You're going to 15 have to go halfway back in the book. 16 A. I have it. 17 Q. Do you have it before you, sir? 18 A. Yes, I do. 19 Q. Can you tell us what this is? 20 A. Well, it's a letter and an attached 21 memorandum, a letter from Tom Leahey of 22 Kirkpatrick & Lockhart dated October 23rd -- 19598 1 Q. 1987. To you? 2 A. -- 1987. 3 Q. And is this -- what does the attachment 4 address? 5 A. It was a memo that was prepared in his 6 office regarding the legal ramifications of the 7 FSLIC insured institutions non-compliance with 8 regulatory net worth. 9 MR. VILLA: Your Honor, I'd move B1807 10 into evidence. 11 MR. RINALDI: No objection, Your Honor. 12 THE COURT: Received. 13 Q. (BY MR. VILLA) Now, let's -- let me 14 ask you to turn to the next document, which is 15 T8022. It's already been admitted at Tab 396. 16 Do you see that, sir? 17 A. Yes. 18 Q. And is that a memorandum that you 19 prepared about interim non-compliance with 20 regulatory capital requirements? 21 A. Right. This is -- yeah, this is my 22 memo. 19599 1 Q. What relationship does it bear to 2 Mr. Leahey's memo? 3 A. Well, it's essentially the same. I 4 mean, I took -- in their memo, they describe 5 certain things. And what I did was take their 6 memo and they made reference to one of the 7 regulations and I went -- actually went back to 8 that regulation and put in what that regulation 9 said in this memo so that the people getting it 10 would have it in front of them. The second part 11 was just a copy of their memo. 12 Q. Yes, so I see. Their memo has 13 numbered -- I think their memo -- the Kirkpatrick 14 & Lockhart memo references 563.13(d) and then 15 lists seven restrictions? 16 A. Right. 17 Q. Has seven numbered restrictions after 18 that. 19 Do you see that? 20 A. Right. 21 Q. And your memo, T8022, actually goes to 22 563.13(d) and then has the ten restrictions in 19600 1 there and then also recites the seven that 2 Mr. Leahey had put out expressly in his memo. 3 Right? 4 A. Correct, that's right. 5 Q. So, you basically used his memo as a 6 form for your memorandum to management to inform 7 them of the potential ramifications if USAT fell 8 below its minimum regulatory net worth. Right? 9 A. That's correct. 10 Q. In reviewing either document, sir, do 11 you recall whether you expected the possible 12 failure of USAT to fall below its minimum 13 regulatory net worth to affect its ability to 14 enter into employment agreements? 15 A. No, I didn't think it would affect the 16 ability to enter into employment agreements. 17 Q. In reviewing it, you don't see anything 18 either in Mr. Leahey's memo or in yours that 19 suggested that it would affect USAT's ability to 20 enter into employment agreements or how about give 21 bonuses? 22 A. No. There is nothing that I saw that 19601 1 would have affected that. 2 Q. Or to increase salaries? 3 A. Right. There's not -- again, nothing 4 that I remember or saw or Mr. Leahey pointed out 5 that would have prevented that. 6 Q. Let me ask you then to turn to the next 7 document, which is T80 -- I'm sorry -- which is 8 T8023, which is in evidence at Tab 408. I 9 believe -- do you have that before you, sir? 10 A. Yes, I do. 11 MR. RINALDI: I'm sorry. What was the 12 number of the document? 13 MR. VILLA: It's T8023. It's in 14 evidence at 408, the October 1987 memo from 15 Mr. Berner to Mr. Crow. 16 MR. RINALDI: I'm sorry. Thank you. 17 It's in front of me. 18 Q. (BY MR. VILLA) Now, sir, I believe 19 you were asked some questions about this memo by 20 Mr. Rinaldi. 21 Do you remember that? 22 A. Yes, I was. 19602 1 Q. Can you tell from looking at this memo 2 whether you believed there was a prohibition in 3 effect in October of 1987 on raising salaries of 4 the officers of United Savings Association of 5 Texas? 6 A. Well, I think I can because this is a 7 recommendation that I'm making or a suggestion I'm 8 going to be making to the board. And if there was 9 a prohibition, I would have to make that 10 recommendation. 11 MR. RINALDI: Excuse me. Let me just 12 object, Your Honor. I'm not sure what you mean by 13 the term "prohibition." I mean, was there a 14 regulatory prohibition or had the board issued 15 some proclamation? I just don't understand the 16 question. 17 MR. VILLA: Okay. 18 Q. (BY MR. VILLA) First of all, why 19 don't you just tell us quickly what this exchange 20 was between you and Mr. Crow, and then I'll 21 clarify that question that I asked before. 22 A. It's a memo from me to Mike Crow 19603 1 attaching another memo that I was going -- that I 2 was suggesting that we jointly send to -- I 3 believe it was Barry Munitz and Jenard Gross 4 suggesting that salary increases be deferred until 5 the middle of 1988. 6 Q. Now, sir, can you tell from the nature 7 of that discussion whether you believed there was 8 a regulatory prohibition on USAT at the time to 9 implement salary increases that would have 10 prevented the implementation of salary increases? 11 A. Just from looking at this, I certainly 12 didn't believe it because if I believed there was 13 a regulatory prohibition, there wouldn't have been 14 a need to defer this or prepare this sort of memo 15 or make, you know, a recommendation to the board. 16 Q. Now, sir, let me ask you to look at a 17 document that's previously been admitted at 18 Tab 409, which is Exhibit T8027. 19 Can you tell us what that is? 20 A. That's minutes of the compensation 21 committee of November 10th, 1987. 22 Q. We've talked about the discussion that 19604 1 you and Mr. Crow had about deferring salary 2 increases. 3 Do you recall that right now? 4 A. Yes. 5 Q. And I think you talked to Mr. Rinaldi 6 about that. 7 A. Sure. 8 Q. Let me direct your attention to the 9 fourth paragraph and ask you whether this is the 10 proposal that you talked about which was then 11 taken up with the compensation committee. 12 A. Yes, it is. 13 Q. Let me read the language because I 14 think it's important. "Mr. Berner then reviewed 15 the proposal to defer salary increases for all 16 persons earning $35,000 and above until July 1, 17 1988. It was noted that this would allow for the 18 same day to be used for reviewing all 19 highly-compensated persons. And the committee 20 unanimously adopted the proposal." 21 Do you see that, sir? 22 A. Yes, I do. 19605 1 Q. Now, sir, you were present at the 2 meeting and you made the proposal at the meeting. 3 Right? 4 A. Right. 5 Q. Can you explain to us, was this a 6 decision -- was this decision that was discussed 7 and made at this meeting a question of timing or 8 was it a question that the board of directors -- 9 I'm sorry -- the compensation committee felt that 10 it was inappropriate to make salary increases? 11 Do you understand my question? 12 A. I think I do. I mean, this was a 13 question of timing. Again, if you look at this 14 previous memo, there wasn't a question of whether 15 people would get increases. It was a question of 16 when they would be paid the increases. And here, 17 we are also -- in addition to what was set forth 18 in the memo, we were also trying to put everybody 19 on the same date when the salary increases would 20 be the same for everybody. 21 Q. And what happens in your experience in 22 an organization if some of the people get salary 19606 1 increases and others don't? 2 A. The people that don't get them get 3 extremely upset about that and concerned about 4 that. 5 Q. And what effect does it have on morale 6 and the ability to retain employees? 7 A. Well, it's obvious morale is -- for 8 those people, certainly morale goes down and 9 people start looking around if they are not 10 getting salary increases while others are. 11 Q. And what effect -- was that the 12 motivation for the recommendation that you-all had 13 made? 14 A. That was one of them, yeah, sure. 15 Q. Now, if you look at the next two or 16 three paragraphs -- next two paragraphs below the 17 one we just read in the compensation committee 18 minutes, I'll ask you to read it to yourself. 19 There is a discussion of bonuses for key 20 employees. 21 Would you look at that quickly for me, 22 sir? 19607 1 A. (Witness reviews the document.) Okay. 2 Q. Now, sir, did the committee approve 3 bonuses for some of the key employees of United at 4 this time? 5 A. Yes, it did. 6 Q. And I'm particularly interested in the 7 line in the middle of the sixth paragraph. 8 MR. RINALDI: Just a second, Your 9 Honor. I just have one objection. I'm still 10 having a problem with the fact that Mr. Villa 11 keeps referring to United. And I'm never sure who 12 he's talking about, whether it's UFG or USAT. 13 It's particularly problematic with respect to this 14 document because this is a compensation committee 15 meeting, and I don't know whether it's a UFG 16 committee meeting or USAT meeting. 17 So, if he's going to ask about United, 18 could we just clarify that so we know whether this 19 is UFG acting or USAT or both or -- otherwise, I 20 think it leaves the record very muddled. 21 THE COURT: Well, I believe Mr. Villa 22 set his nomenclature out yesterday, but if you 19608 1 want to repeat it -- 2 MR. VILLA: I'll repeat it for 3 Mr. Rinaldi's benefit. In my questioning, when I 4 refer to the word "United," it refers to United 5 Savings Association of Texas unless I say 6 otherwise. And when I mean to refer to the 7 holding company, I'm referring to United Financial 8 Group. I'll usually say United Financial Group or 9 UFGI. I set that out yesterday just to make sure 10 there would be no misunderstanding. 11 MR. RINALDI: I apologize. Obviously, 12 I wasn't present in the courtroom when that 13 occurred. 14 MR. VILLA: And we missed you, sir. 15 MR. RINALDI: And I missed you, as 16 well, John. 17 Q. (BY MR. VILLA) Now, sir, there was a 18 discussion at this compensation committee meeting 19 of bonuses, wasn't there? 20 A. Yes, there was. 21 Q. And bonuses were authorized by the 22 compensation committee? 19609 1 A. Yes. They certainly were. 2 Q. I'm particularly interested in the line 3 in the middle of the sixth paragraph. The third 4 sentence in the sixth paragraph. It says, quote, 5 "However, it was decided that in view of the fact 6 that many of the key employees were now doing 7 extra work since other executives had been 8 terminated within a year and that the so-called 9 bonuses were really an attempt to achieve 10 market-based compensation to allow these persons 11 to receive their market value and further in the 12 event of the fact they would not only be costly 13 but time-consuming to deal with replacements, the 14 compensation committee unanimously approved the 15 bonus schedule." 16 Do you see that? 17 A. Yes, I do, sure. 18 Q. Could you explain to us what the 19 concept of bonuses -- perhaps it's getting 20 repetitive, but you've told us before the 21 significance of bonuses to market-based 22 compensation. 19610 1 Is this discussion from the 2 compensation committee minutes another reflection 3 of the point that you were making about the 4 significance of bonuses in United's compensation 5 system? 6 A. Yes, it was. The compensation 7 committee was certainly well aware that the 8 philosophy was to keep the base salaries low and 9 the bonus to bring you up to market. And this was 10 again just a reflection of that. 11 Q. And this also reflects the point that 12 you made earlier about -- with people leaving, the 13 current managers were having to take on an 14 increasing amount of responsibility. Right? 15 A. That's correct. 16 Q. Let me direct your attention -- now, 17 let me ask you one other question. The issue of 18 whether or not United increased salaries seems not 19 to be linked, at least for the compensation 20 committee here, as to whether or not bonuses are 21 granted. 22 Would you agree with that? 19611 1 A. Yes, absolutely. 2 Q. Did you believe that there was any 3 prohibition on granting bonuses under these 4 circumstances? 5 A. Do you mean regulatory prohibition? 6 Q. That's right. Thank you, sir. 7 Regulatory prohibition. 8 A. No. Absolutely no regulatory 9 prohibition on granting bonuses. 10 Q. And, in fact, the compensation 11 committee made both decisions at the same time, 12 one to defer salary increases and, second, to 13 grant bonuses. Right? 14 A. That's right. 15 Q. Now, Mr. Berner, I'm going to ask you 16 to turn to the next document. Before you do that, 17 let's just focus on one point and that is the size 18 of the bonus and who determines the bonus. 19 I think we ultimately determined 20 that -- I may be wrong here because it's getting 21 late in the case and my memory seems to be fading 22 sometimes. But I think your bonus was around 19612 1 $110,000? 2 A. For 1987? 3 Q. For 1987 which you received in 1988? 4 A. I believe that's what someone showed 5 me. 6 Q. Okay. Well, let's assume it was 7 over -- slightly over $100,000. 8 MR. RINALDI: I think the number was 9 $114,000. 10 MR. VILLA: 114,000. Thank you, sir. 11 Q. (BY MR. VILLA) Did you decide on the 12 amount of that bonus? 13 A. Absolutely not. 14 Q. What input did you have other than the 15 efforts that you put in during the year in 16 determining how much the compensation committee 17 decided to give you as a bonus? 18 A. Absolutely none. 19 Q. Do you even know how they determined 20 your bonus? 21 A. I certainly do not. 22 Q. You don't know whether Mr. Gross or 19613 1 Dr. Munitz recommended it or whether the committee 2 came up with it. Right? 3 A. I have no idea how they came up with 4 the number. 5 Q. And as every employee in the world, 6 you'd rather have a larger bonus than a smaller 7 one. 8 Would you agree with that? 9 A. I think that's correct. 10 Q. Okay. Let me show you, sir, the next 11 document which is Exhibit T8028, which is in 12 evidence at Tab 397. 13 Do you have that before you? 14 A. Yes, I do. 15 Q. And this is the USAT board minutes of 16 November 10, 1987; is that right? 17 A. That's correct. 18 Q. I'd like to direct your attention to 19 the third, fourth, and fifth paragraphs on Page 2 20 of the minutes. 21 A. On Page 2? 22 Q. Do you see that? 19614 1 A. (Witness reviews the document.) Yes. 2 Q. Do you remember Mr. Rinaldi's objection 3 that he wanted to determine which company was 4 granting the -- was deferring the actions, 5 deferring the increases in salaries and the 6 bonuses? Do you recall that, sir? 7 A. The one he made just a little while 8 ago? 9 Q. Just a minute ago. 10 A. Yeah, sure. 11 Q. Can you determine from this which 12 company is granting the bonuses and deferring the 13 salaries? 14 A. Yes, I can. 15 Q. And what is it? What company is it? 16 A. United Savings. 17 Q. And the three paragraphs that I've 18 directed your attention to in -- on Page 2 reflect 19 that United Savings Association has adopted the 20 recommendations of the compensation committee on 21 both the deferral of the salaries and the granting 22 of the bonuses; is that right? 19615 1 A. That's correct. That's what they did. 2 Q. Now, there's been some issue in this 3 case as to whether the examiners would have known 4 that after the UFG contracts had been executed, 5 who was paying the salaries and bonuses of these 6 individuals. That's an issue in this case, I'll 7 tell you. 8 By looking at this, could you determine 9 which company was granting the bonuses and paying 10 the salaries of the individuals involved? 11 A. Sure. 12 Q. And what's the company? 13 A. United Savings. 14 Q. And it's set out in the United Savings 15 Association of Texas minutes? 16 A. Sure. 17 Q. Board of directors minutes? 18 A. Right. 19 Q. And do you recall what the examiners 20 looked at -- do you recall whether the examiners 21 looked at the USAT board minutes when they came in 22 to start an examination? 19616 1 A. Yeah. They definitely looked at all 2 the minutes. 3 Q. Was there -- why don't you explain to 4 us -- I know you went back and forth with 5 Mr. Rinaldi, but why don't you explain to us the 6 reason for the UFG September 1987 contracts if 7 USAT was going to continue paying the salaries and 8 the bonuses. 9 A. Well, there are a lot of reasons for 10 the UFG contracts. I mean, the major reason for 11 the UFG contract was to keep the key employees, 12 key senior management employees, at the 13 association, you know, for the next year or two. 14 These were quality people that the board and 15 everyone else felt were the people that were going 16 to run, you know, this association going forward. 17 Q. How did the contracts do that? How did 18 the UFG contracts achieve that goal? 19 A. Well, it set forth what they would be 20 receiving as a minimum salary and bonus and also a 21 severance benefit that UFGI would be paying 22 which -- and the severance benefit would be based 19617 1 on two times salary and bonus, is my recollection. 2 THE COURT: Can I impose a question? 3 MR. VILLA: Yes, Your Honor. 4 THE COURT: Why were the contracts not 5 entered into with USAT? 6 THE WITNESS: Originally? 7 THE COURT: Yes, in September. 8 THE WITNESS: Well, originally, it 9 wasn't entered into with USAT because the thought 10 was that we wanted to make sure that these people 11 would stay and there was a concern as to what 12 would happen with USAT. And the thought was at 13 that time that UFGI would be -- would certainly be 14 around and, therefore, the money would come from 15 them. Also, the thought was since UFGI had the 16 money, there would be no reason to take any money 17 if somebody left from the institution. If 18 somebody left and were entitled to severance 19 benefits, it would come out of the holding company 20 and not come out of the institution. So, you 21 would keep them working for the institution; but 22 their severance benefits would come out of the 19618 1 holding company. 2 THE COURT: Thank you. Mr. Villa, 3 continue. 4 Q. (BY MR. VILLA) Do you recall, sir, 5 what time of year United paid bonuses? 6 A. What time of year? 7 Q. Yes. 8 A. The first week in January. I think it 9 was the first business day of the year. It was 10 pretty close to that. 11 Q. So, if we were to take your W-2s, if I 12 could find them, and determine how much money you 13 received during the year -- for example, 1988 -- 14 would that include a bonus that you would have 15 received in 1988 for income that you had earned in 16 1987? 17 A. Correct, that's right. 18 Q. And so, in order to try to determine, 19 on an annualized basis, what your income was, you 20 would basically shift every bonus one year 21 earlier. Right? 22 A. That's right. Yeah. By paying it in 19619 1 January the next year, you avoided paying taxes 2 for 15 months on that money. 3 Q. All right. And that's kind of typical 4 for corporations. Wouldn't you agree? 5 A. It is. 6 Q. Let me direct your attention, sir, now 7 to Exhibit B1855. It's a memo dated November 18, 8 1987. 9 Do you see that? 10 A. Sure. 11 Q. Did you prepare this memorandum? 12 A. Yes, I did. 13 MR. VILLA: Your Honor, I move 14 Exhibit B1855 into evidence. 15 MR. RINALDI: No objection, Your Honor. 16 THE COURT: Received. 17 Q. (BY MR. VILLA) Now, I think we talked 18 about the fact that Mr. Twomey was your primary 19 contact at the United -- at the Federal Home Loan 20 Bank of Dallas. Right? 21 A. Correct. 22 Q. And you had had a number of 19620 1 conversations with Mr. Twomey about United and 2 whether United's management, operational issues at 3 United, as well as whether United was going to be 4 a survivor. 5 Do you remember that? 6 A. Yes. We had many, many conversations 7 about that. Many. 8 Q. Let me direct your attention to the 9 first paragraph of this memorandum, and this 10 reflects a conversation that you had with Neil 11 Twomey on November 18, 1987; is that right? 12 A. Right. 13 Q. Let me ask you to read the first 14 paragraph to yourself, and then I'm going to ask 15 you a couple of questions about it. 16 A. (Witness reviews the document.) Okay. 17 Q. Now, he's talking here about a matching 18 program that the Federal Home Loan Bank of Dallas 19 was implementing during this time period. 20 Do you remember that matching program? 21 A. I have a vague recollection of it. 22 Q. And it says here that "Twomey told me 19621 1 that united would be -- will be a major factor in 2 the process. United will be the survivor; but we 3 can expect that during the first quarter of 1988, 4 we will be either requested or told to take on one 5 or more additional institutions." 6 And then it goes on and says, "These 7 will probably not" -- these will -- no -- "These 8 probably will not be voluntary acquisitions. And 9 then it talks about a matrix that they are working 10 on. 11 A. Right. 12 Q. Do you recall, sir, conversations with 13 Mr. Twomey in late 1987 about the fact that United 14 was going to have to take on other associations 15 that would be involuntarily thrust on United from 16 Dallas, San Antonio, Austin, or elsewhere? 17 A. Yes, I do. 18 Q. And we talked about whether United was 19 going to survive during this time period. 20 Did it appear to you, based upon -- 21 what did it appear you to, based on the 22 conversations you were having with Mr. Twomey, 19622 1 about the likelihood that United was going to 2 survive? 3 A. Well, Neil told -- Mr. Twomey told me 4 at this conversation and in many other 5 conversations that United was going to be a 6 survivor and that we would be a major factor in 7 some sort of program, that we would be taking on 8 other institutions. 9 Q. And once again, did the prospect that 10 United was going to be a survivor and be taking on 11 other institutions, did that have an effect on 12 management's willingness to take steps to try to 13 keep the management team intact? 14 A. Sure. I mean, the board is looking at 15 how do you -- how do you be a survivor? What do 16 you need to do? We're being told we're going to 17 be a survivor. We're being told we have a quality 18 management team. Everybody understands that if, 19 all of a sudden, top management starts to leave 20 during this process, who knows where we would be? 21 We may not be a survivor. 22 So, it was incumbent upon the board to 19623 1 keep the top management people and also the middle 2 management people at the institution. It's the 3 only way we could survive. 4 Q. Let me direct your attention -- 5 Mr. Twomey doesn't say in that paragraph that 6 we've just looked at -- make any comments about 7 management. But if you look at Paragraph 5 of the 8 memo -- it's numbered 5 on Page 2 -- you'll see a 9 discussion of management. 10 Do you want to take a look at that? 11 And I'm going to ask you about the first three or 12 four sentences of Paragraph 5, and then later I'll 13 ask you about the last bit of Paragraph 5. 14 Have you seen that now, sir? 15 A. Yes. 16 Q. And again here, this is a reflection of 17 Mr. Twomey repeating that United would be a 18 surviving institution. This is your recounting 19 another statement that he made to you. 20 A. Right. 21 Q. But his statements about management 22 says, quote, "Neil told me that he thought our 19624 1 middle management was excellent and our accounting 2 and financial staff is extremely solid. Perhaps 3 we should tell Jim Wolfe this. And although top 4 management lacks some S&L experience, Dallas was 5 basically pleased." 6 Do you see that? 7 A. Yes, I do. 8 Q. Now, let me ask you: Was that -- can 9 you tell me whether there was a theme that came to 10 you from Mr. Twomey about his view of United's 11 management and where, if at all, there was a 12 shortcoming in United's management that had to be 13 filled? 14 A. Well, again, I think we talked about 15 this before; but there was a consistent -- to use 16 your term -- consistent theme that United's 17 management was solid quality, good people. The 18 only concern that the Dallas bank had was at the 19 top where they thought that we needed some solid 20 S&L type experience. 21 Q. And as we'll later see, was that the 22 issue that was addressed with the hiring of 19625 1 Mr. Connell? 2 A. Yes, it was. 3 Q. Now, look at the last sentence of that 4 paragraph. 5 A. (Witness reviews the document.) 6 Q. There is a reference to Charles Hurwitz 7 and redwood trees. 8 Do you see that? 9 A. Yes, I do. 10 Q. Do you recall that discussion with 11 Mr. Twomey? 12 A. Yes, I do. 13 Q. Why don't you tell us about that. 14 A. Well, again, Charles Hurwitz was, as 15 everyone knows, was the chairman of United 16 Financial. He was the chairman of MAXXAM, which 17 was the largest stockholder of United Financial, 18 and he was having a lot of trouble -- having 19 picked up I guess it was Pacific Lumber, he was 20 having a lot of trouble with environmentalists and 21 redwoods and I think Congress people who are out 22 there kind of sniping at him. 19626 1 And what Neil was telling me here was 2 that he understood what was going on. He said it 3 probably would have made his life easier -- and I 4 wasn't exactly sure what he meant at that time if 5 Hurwitz had never heard of the redwood trees 6 because that would have gotten all the 7 environmentalists off his back, but that in any 8 event, he certainly understood that Hurwitz was a 9 smart business guy who, you know, at this point in 10 time Texas S&Ls needed smart business people. 11 Q. And later, we're going to see other 12 memos about Mr. Twomey's discussions with you 13 about Mr. Hurwitz and Congressional pressure, 14 won't we? 15 Do you remember those? 16 A. Yes, I do. 17 Q. Let me direct your attention to the 18 last paragraph of this memorandum. And it says, 19 quote, "As a result of all these, I believe that 20 we should begin to gear up for taking on 21 additional operating burdens during 1988." 22 Do you see that, sir? 19627 1 A. Right, yes. 2 Q. And is that consistent with the 3 strategy that you felt was appropriate given what 4 Mr. Twomey was telling you about the future of 5 United? 6 A. Surely, yeah. I mean, we were looking 7 at -- we're being told we're going to be taking on 8 additional institutions, that management is solid. 9 So, what I was telling the people here was that we 10 have to expect that in the beginning of 1988, 11 we're going to probably be taking on some 12 additional institutions. 13 Q. I mean, there has -- we have been 14 hearing during the course of your 15 direct-examination a number of questions 16 reflecting the fact that United's poor financial 17 condition and how could anybody be increasing 18 salaries to try to keep people with the 19 institution in poor financial condition, but was 20 that the message you were getting from the Federal 21 Home Loan Bank of Dallas at the time that your 22 poor financial condition meant that United was 19628 1 about to fail? 2 A. Just the opposite. I mean, the message 3 we were getting -- you know, all Texas S&Ls were 4 in poor financial shape, but the message we were 5 getting was that this was a quality institution 6 with quality management and we're going to be 7 taking on other failed S&Ls and that's what we 8 were expecting. 9 Q. And gearing up for additional operating 10 burdens meant not only maintaining current 11 management but possibly hiring new management. 12 Right? 13 A. Right. And taking on, as I say, 14 additional S&Ls in various parts of the state. 15 That's what we were being told. 16 Q. Let me direct your attention to the 17 next exhibit, B1853, and ask you if you can 18 identify that for me, sir. 19 A. Yeah. It's a memo from Tom Leahey of 20 Kirkpatrick & Lockhart relating to a meeting that 21 was held with Stuart Root of FSLIC, F-S-L-I-C. 22 Q. It's a memo to you. Right? 19629 1 A. To me. 2 MR. VILLA: Your Honor, I move B1853 3 into evidence. 4 MR. RINALDI: No objection, Your Honor. 5 THE COURT: Received. 6 Q. (BY MR. VILLA) Do you know what the 7 purpose of this meeting was, Mr. Berner? 8 A. Yeah. United was proposing -- I was 9 proposing a different sort of proposal for getting 10 additional capital into the association whereby we 11 would take on some failed -- some real estate that 12 was opened by FSLIC from failed institutions and 13 that would count as capital. We made this 14 proposal to a number of people at the FSLIC. And 15 George Christopher, who was the senior partner of 16 Kirkpatrick & Lockhart, was having a meeting at 17 this time with Stuart Root who had been brought 18 in, and I guess he was acting executive director 19 to discuss this proposal. 20 Q. And do you know how senior Mister -- 21 where Mr. Root fell in the matrix of the 22 professional core at FSLIC? 19630 1 A. He was either No. 1 or No. 2 or he was, 2 I think, right below the board. 3 Q. So, at the Federal Home Loan Bank and 4 FSLIC as they worked together in the years before 5 1989, there were the members of the Federal Home 6 Loan Bank Board which at that point were Danny 7 Wall. Right? 8 A. Right. Larry White. 9 Q. Larry White? 10 A. And Roger Martin. 11 Q. Roger Martin. And just below them were 12 the professional core of career people, and 13 Mr. Root was the most senior of the career people? 14 A. Actually, he wasn't a career person. 15 He had been a partner at Cadwalader, Wickersham & 16 Taft, but he had been brought in -- he had been 17 brought in to work on all of these problems. He 18 was a regulatory attorney. 19 Q. He was a regulatory attorney. Okay. 20 So, there were meetings at this point 21 with Mr. Root in connection with the real estate 22 proposal that United was making to take on real 19631 1 estate from failing savings and loans. Right? 2 A. That's correct. 3 Q. And I think we'll probably see at some 4 point during your testimony something called a 5 FSLIC proposal. 6 Is that the same proposal? 7 A. That's right. 8 Q. Do you remember what FADA was? 9 A. I did at the time. Now I don't. 10 Q. Something like Federal Asset 11 Disposition Agency. Right? 12 A. That's right. 13 Q. And it was taking a lot of the bad real 14 estate -- troubled real estate from thrifts and 15 trying to work it out. Right? 16 A. Right. And -- that's correct. 17 Q. So, this was one of the proposals that 18 United was pursuing in the fall of 1987. And at 19 this point, it had reached the level of Mr. Root 20 at FSLIC and there were active discussions; is 21 that right? 22 A. That's correct. 19632 1 Q. Let me ask you now to look at B1873. 2 Can you tell me what that is, sir? 3 A. This is a letter from George 4 Christopher of Kirkpatrick & Lockhart to Stuart 5 Root. Again, he's forwarding the proposed -- a 6 draft of the proposal that we were making on this 7 matter. 8 Q. And the draft is actually attached. 9 Right? 10 A. Yes, it is. 11 MR. VILLA: Your Honor, I move B1873 12 into evidence. 13 MR. RINALDI: No objection, Your Honor. 14 THE COURT: Received. 15 Q. (BY MR. VILLA) The date of this 16 letter is December 1, 1987. Right? 17 A. Right. 18 Q. Now, let me show you now or ask you to 19 turn to what has been marked as Exhibit B1998. 20 It should be the next document in your book. 21 Can you identify this document for me, 22 sir? 19633 1 A. Again, it's a letter from George 2 Christopher to Richard Trotter, who was a deputy 3 executive director of FSLIC dated February 8th, 4 1988 enclosing a redraft of that proposal, the 5 early proposal. 6 Q. And a copy of it was sent to you? 7 A. Yes. 8 Q. Down at the bottom, you see? 9 A. Yes. 10 MR. VILLA: Your Honor, I move B1998 11 into evidence. 12 MR. RINALDI: No objection, Your Honor. 13 THE COURT: Received. 14 Q. (BY MR. VILLA) Let me direct your 15 attention to the second paragraph. It says, 16 quote, "The consensus at our meeting appeared to 17 be that the proposal is now within a workable 18 format from the view point of both parties." 19 Then it talks about working out the 20 details, including identifying troubled thrift 21 candidates. 22 Do you see that? 19634 1 A. Yes, I do. 2 Q. Do you recall, sir, how close you 3 believed that this proposal came to finally being 4 approved in February of 1998? 5 A. Oh, between, I think that earlier 6 letter and this letter, there must have been -- I 7 don't know how many -- four, five, six meetings in 8 Washington with United's staff and the FSLIC 9 staff. Mr. Trotter, I think, was the -- he might 10 have been the highest career officer at FSLIC, but 11 they would bring in a number of people, tax people 12 and regulatory people and our people, and we 13 worked on drafts for many, many days. And at this 14 point in time, that draft, we were getting very 15 close to doing a deal, it looked like. 16 Q. And, in fact, at this point, it 17 appeared that you had had a mutually acceptable 18 framework. Right? 19 A. Right. 20 Q. So, as of February 8th, 1988, which 21 would have been roughly three days before the USAT 22 contracts we've heard so much about were approved 19635 1 by the board of USAT, what did you believe that 2 USAT's prospects for survival were? 3 A. They were outstanding. I mean, we were 4 working on this program to get additional capital. 5 We were going to be a survivor. Everything was 6 fine. We knew we had financial problems, but 7 everything was fine from the institution's point 8 of view. 9 Q. And you were actually in the process of 10 negotiating at that point with the highest career 11 officer at FSLIC to identify troubled thrift 12 candidates that would be managed by USAT. Right? 13 A. The candidates and also their real 14 estate, that's correct. 15 Q. And their real estate. 16 A. That's right. 17 Q. Let me ask you to turn to B2024, which 18 is a packet of letters. And I've put them in as a 19 group because they are quite similar. 20 Have you had an opportunity to look at 21 those letters, sir? 22 A. Yes. 19636 1 Q. And who are they addressed to? I think 2 there are three or four of them all dated 3 February 18, 1988. 4 A. Right. It was Stuart Root, Lawrence 5 white, Danny Wall, and Roger Martin. 6 Q. So, it's to Stuart Root, the highest 7 person in the FSLIC below the board, and the three 8 members of the board of the Federal Home Loan Bank 9 Board including the chairman, Danny Wall. Right? 10 A. That's correct. 11 Q. And is this further discussions along 12 the way of negotiating the real estate deal that 13 you had referred to in the prior correspondence 14 and memorandum? 15 A. Correct, that's right. 16 Q. And at this point, you're dealing with 17 the highest levels of the Bank Board. Right? 18 A. With the Bank Board and most senior 19 executive, that's correct. 20 Q. I'd like to direct your attention to 21 the next document, which is Exhibit B2039. 22 MR. VILLA: Your Honor, I'd like to 19637 1 move into evidence, I believe, Exhibit B2024. 2 Rib. 3 MR. RINALDI: No objection, Your Honor. 4 THE COURT: Received. 5 Q. (BY MR. VILLA) Let me direct your 6 attention, sir, to Exhibit B2039. 7 Do you have that before you? 8 A. Yes, I do. 9 Q. This is a memorandum from one of the 10 lawyers who was working with you to the other, 11 Mr. Christopher and Mr. Leahey? 12 A. Right. 13 Q. I'd like you to read the second and 14 third paragraphs of this and then ask you a 15 question about the meeting that's described in 16 there. Mine's not very legible. Perhaps you 17 could tell us a little more about it, about the 18 meeting that you and Jenard Gross had with Danny 19 Wall, the chairman of the Federal Home Loan Bank 20 Board. 21 A. I'm just reading it. (Witness reviews 22 the document.) 19638 1 Okay. Well, the -- do you want me to 2 talk about the meeting? 3 Q. Yes. Tell us about the meeting. 4 A. Well, we had -- 5 Q. First of all, the date of this memo is 6 February 26, 1988, just to put it in context. 7 This is a couple of weeks -- ten days after the 8 letters we've just looked at. Right? 9 A. Right. 10 Q. Okay. 11 A. I believe that's right. 12 Q. Tell us about the meeting. 13 A. Again, my recollection is that we had a 14 meeting with Danny Wall -- Jenard Gross and myself 15 had a meeting with Danny Wall and I believe also 16 at one point with Richard Trotter and, again, I 17 think the other members of the board to talk about 18 our proposal. And it was a very positive meeting, 19 and I think they -- there was a decision made to 20 bring the proposal to the board. 21 Q. Let me ask you, sir, on February 26th, 22 1988, did it seem to you that United Savings 19639 1 Association was destined to fail? 2 A. Absolutely not. 3 Q. Now, I'd like you to turn to the 4 beginning of the book, which is the packet of 5 contracts, A11032. We're going to switch gears 6 for a minute and try to keep us in chronological 7 order. 8 And I'd ask you to take a look at Bates 9 stamp Nos. 128381 through 382. 10 A. Okay. 11 Q. Do you have that before you, sir? 12 A. Is that the Dominic Bruno contract -- 13 letter? 14 Q. It is the Dominic Bruno contract. 15 A. I have it. 16 Q. And do you recall that Dominic Bruno 17 was hired by United Savings Association of Texas? 18 A. I certainly do. 19 Q. If I neglected to say the exhibit 20 number, I'll say it again. It's A11032. 21 Now, this is -- strike that. 22 Mr. Bruno was hired to work on 19640 1 mortgage-backed securities, right, after 2 Ms. Laurenson left? 3 A. That's right. 4 Q. And he came from a savings and loan in 5 Philadelphia? 6 A. That is my recollection, yes. 7 Q. It says Meritor Savings Bank and, in 8 fact, on the letter that's directed there. Right? 9 A. That's correct. 10 Q. And can you tell from this agreement 11 what the term of Mr. Bruno's contract is? 12 A. I think it's a two-year contract. 13 Q. And can you see whether or not he has a 14 minimum guaranteed bonus? I'll direct your 15 attention to the bottom of Paragraph 3. 16 A. Minimum bonus of -- guaranteed bonus of 17 50 percent of base salary. 18 Q. And then in Paragraph 4, it says -- it 19 talks about a bonus in future years of at least 20 50 percent of your salary. Right? 21 A. I believe 50 percent of base salary, 22 that's right. 19641 1 Q. And did United have had to provide 2 security to -- at his request or, I guess, at his 3 option to assure the payments of salary and bonus? 4 A. Yes, it did. 5 Q. And what was the form of the security 6 that he could select? 7 A. A letter of credit. 8 Q. And do you recall, Mr. Berner, whether 9 or not this contract was supplied to the 10 examiners, in particular, Ms. Carlton during her 11 1987 examination of United Savings? 12 A. Yes, it was. 13 Q. Let me direct your attention, sir, 14 to -- your book may have one exhibit in it that 15 I'm not going to use; so, don't get confused. 16 Let me direct your attention, sir, to 17 Exhibit A1141 which is in evidence at Tab 99. 18 A. Okay. 19 Q. And you should be looking at the USAT 20 board of directors minutes for February 11, 1988. 21 A. Right. I have those. 22 Q. And did you prepare these minutes, sir? 19642 1 A. Yes, I did. 2 Q. Can you explain to me, sir, what your 3 practice was with respect to the preparation of 4 board minutes showing the people who are in 5 attendance at board meetings? 6 A. My practice would be to list all of the 7 people -- to list the board members or say that 8 the board was there and then anybody who was not 9 on the board would be listed as being present at 10 that meeting. 11 Q. And what if they left during the course 12 of the meeting? Would you reflect that in your 13 minutes? 14 A. Yes, I would. 15 Q. So, based upon -- let's start off 16 with -- can you tell me whether anybody was at 17 this board meeting who was not a member of the 18 board? 19 A. Yes, I can. 20 Q. And who are they? 21 A. Mr. Crow, Jack Hughes who was, I 22 believe, with PennCorp. And then people from the 19643 1 Federal Home Loan Bank of Dallas, Ms. Carlton and 2 Mr. Cottingham. 3 Q. And have you reviewed these minutes to 4 see whether there is any indication that 5 Ms. Cottingham -- I'm sorry -- Mr. Carlton and 6 Ms. Cottingham -- 7 A. The other way around. 8 Q. Ms. Carlton and Mr. Cottingham left the 9 meeting at any point during the meeting? 10 A. I had reviewed it, and they did not 11 leave the meeting. 12 Q. There is no indication there that they 13 left the meeting? 14 A. Certainly no indication that they left 15 the meeting. 16 Q. So, could you tell me what you believe 17 as to whether or not they were present throughout 18 the meeting? 19 A. Based on my practice, I believe they 20 were present throughout the entire meeting. 21 Q. Let me direct your attention to 22 Paragraph -- I'm sorry -- to Page 3 of the minutes 19644 1 under "compensation committee." 2 Do you see that? 3 A. Yes, I do. 4 Q. I think you had discussions with 5 Mr. Rinaldi and earlier yesterday with me about 6 the authority of the compensation committee of 7 United Savings Association of Texas to act for the 8 board. 9 Do you remember those discussions? 10 A. Yes, I certainly do. 11 Q. Okay. And was it USAT's practice to 12 reauthorize its committees on an annual basis, 13 typically in February? 14 A. Generally, that's correct. That's what 15 we would do. 16 Q. And this is the reauthorization of the 17 compensation committee. Right? 18 A. Correct. 19 Q. And can you tell me by looking at this 20 discussion, the "whereas" and the "resolves," 21 Mr. Berner, whether the compensation committee of 22 United Savings Association of Texas had the 19645 1 authority to act with the same effect as if acted 2 on by the entire board? 3 A. Yes, I can, and they did. 4 Q. Now, let me direct your attention to 5 Page 27 of the minutes. And I'd like you to take 6 a look at the discussion that begins on the second 7 full paragraph, second paragraph, and then runs 8 through the "whereas" clauses. 9 A. (Witness reviews the document.) 10 Q. Okay? 11 A. Sure. 12 Q. We're not going to read it all into the 13 record, but I'd like you to tell the Court what is 14 described in the minutes and then tell us what you 15 recall occurring at the meeting and whether you 16 have a recollection of it. 17 A. Sure. Well, what's described in the 18 minutes is a report on what the compensation 19 committee had done. The compensation committee 20 had met earlier before the board meeting, and they 21 were adopting the USAT contracts. And what was 22 described here was a spelling out of the reasons 19646 1 why these contracts were being adopted. And 2 actually, I remembered after the compensation 3 committee, Mr. Whatley, who normally would have 4 done this, asking me to do this. And I believe 5 part of the reason was because there were other 6 people like regulators at this meeting and he 7 wanted me to describe it as opposed to he doing 8 it. So, I -- I remembered very well. 9 Q. Now, sir, so -- I'd like to direct your 10 attention to the second sentence of the second 11 paragraph. It says, "It was noted that these 12 contracts were identical to contracts entered into 13 by UFGI and would only be effective if UFGI could 14 not perform under such contracts." 15 Do you see that? 16 A. Yes, I do. 17 Q. Now, sir, do you -- we've already gone 18 back to Ms. Carlton's packet of employment 19 contracts. But do you recall, sir, that you had, 20 in fact, given the UFGI September 9, 1987 21 contracts to Ms. Carlton? 22 A. I'm not sure that I gave -- I know she 19647 1 had them, that's correct. I think I gave them or 2 someone gave them to her. 3 Q. In fact, when we went back and looked 4 at your September 9, 1987 UFGI employment 5 contract, we went back and looked at one that was 6 in her set the of employment contracts with her 7 initials on it, didn't we? 8 A. That's correct. 9 Q. So, if she -- if she were sitting 10 there -- and I understand that she doesn't have 11 the recollection of being there or denies being 12 there -- but if she were sitting there and she 13 heard a discussion of the fact that the USAT 14 contracts were identical to the contracts entered 15 into by UFGI and she had a copy of the UFGI 16 contracts, she would know exactly what the USAT 17 contracts were, wouldn't she? 18 A. She absolutely would. 19 Q. Now, the Court has heard testimony from 20 a number of people with respect to that meeting. 21 First of all, Mr. Whatley was on the board at that 22 time. Right? 19648 1 A. Yes, he was. 2 Q. And Mr. Paul Schwartz was on the board. 3 It's been a long time since we've heard from 4 Mr. Schwartz, but Mr. Schwartz was on the board of 5 USAT at that time, wasn't he, sir? 6 A. Yes, he was. 7 Q. Mr. Whatley and Mr. Schwartz have 8 already testified about this board meeting and the 9 fact that the contracts were discussed. And 10 you've seen their testimony, haven't you? 11 A. On that point, yes, I did. 12 Q. For the Court's reference, Mr. Schwartz 13 testified at Pages 1543 and 1547 that Vivian 14 Carlton was present at the February 11, 1988 USAT 15 meeting. And Mr. Whatley testified at Pages 4448 16 and 4449 that Ms. Carlton was present at that 17 meeting. 18 Now, Ms. Carlton has denied -- 19 MR. RINALDI: I'm sorry. 4448 and 20 4449, those would be the wrong page numbers for 21 Mr. Whatley. He testified much further into the 22 proceeding, I think. 19649 1 MR. VILLA: I have his testimony with 2 me, and I'll correct those for the record. 3 MR. RINALDI: Okay. 4 MR. VILLA: Okay. 5 MR. RINALDI: Did you say 448 or 4448? 6 MR. VILLA: 4,448 as opposed to -- and 7 4,449. That's the reason I wanted to put it in 8 the record, so there would be no doubt. 9 Q. (BY MR. VILLA) So, we've heard from 10 Mr. Whatley and Mr. Schwartz that they remembered 11 this discussion when Ms. Carlton was present and 12 we've heard from Ms. Carlton that it didn't occur. 13 I'm going to go ask you, sir, because 14 it happens to be an important question in this 15 case, do you -- are you testifying that the 16 conversation occurred? 17 A. Absolutely. 18 Q. Are meeting minutes circulated after 19 these meetings? 20 A. Sure, yes. 21 Q. And they go out to all the board 22 members. Right? 19650 1 A. That's correct. 2 Q. And they are placed in the files of the 3 Federal Home Loan -- I'm sorry -- placed in the 4 files of USAT. Right? 5 A. Yes, they were, yeah. 6 Q. And as we'll see, Ms. Carlton was -- 7 had her exit interview at the end of March 1988. 8 So, there were examiners in the institution for 9 another six weeks after the date of this meeting, 10 maybe seven weeks. Right? 11 A. Yes, that's right. 12 Q. Did anybody ever contact you, any 13 member of the board or any examiner, and tell you 14 that these notes -- these minutes were inaccurate? 15 A. Nobody. 16 Q. And, in fact, the first thing examiners 17 look at are board -- well, you probably don't 18 know. 19 Do you know whether examiners look at 20 board meeting minutes? 21 A. I certainly know they look at board 22 meetings (sic). 19651 1 Q. Now, you made the presentation about 2 the USAT contracts at this board meeting, correct? 3 A. Correct. 4 Q. Do you recall, sir, whether Ms. Carlton 5 or Mr. Cottingham, either, said to you at the 6 meeting or after the meeting anything which you 7 would construe as a criticism of the contracts 8 that had just been adopted in their presence? 9 A. No, I certainly don't. 10 Q. I'd like to jump forward in time -- 11 we're going to look at something which is the next 12 exhibit in your book, and that's Ms. Carlton's -- 13 I call it Ms. Carlton's. It's the examination 14 report that resulted from Ms. Carlton's 15 examination of November 16, 1987. And that should 16 be before you as A6022, which is Tab 468. 17 A. I have that. 18 Q. Do you see that, sir? 19 A. Yes, I do. 20 Q. And the UFG contracts were signed on 21 September 9, 1987. Right? 22 A. Correct. 19652 1 Q. UFG contracts. 2 There has been an issue in this case as 3 to whether or not USAT or -- whether or not the 4 examiners were confused as to whether USAT or UFG 5 was paying salaries and bonuses after the UFG 6 contracts were signed in September 1987, correct? 7 That's an issue in this case. I'll tell you that. 8 You haven't had the opportunity and pleasure of 9 being in the Court for the last six months. So, 10 it's hard for you always to keep up with the 11 testimony. But that, I will tell you, is an 12 issue. 13 Let me ask you, sir: If the UFG 14 contracts were signed on September 9, 1987, is 15 that before or after the effective date of this 16 examination, the "as of" date? 17 A. Before. 18 Q. It's before the "as of" date of the 19 examination? 20 A. Correct. 21 Q. And let's take a look at 22 Page US3-010998, which is about halfway back in 19653 1 the examination report. 2 A. I have it. 3 Q. Do you see that, sir? 4 A. Yes, I do. 5 Q. Now, can you tell me, sir: Does that 6 indicate salaries being paid by USAT for the 7 individuals involved here? 8 A. Yes, it does. 9 Q. It doesn't say UFG is paying their 10 salaries, does it? 11 A. No, it doesn't. 12 Q. And there is no distinction drawn here 13 between individuals who have contracts and 14 individuals who don't. For example, we know that 15 Mr. Huebsch does not have a similar employment 16 contract to the UFG contract that you executed on 17 September 9, 1987. Right? 18 A. That's right. 19 Q. And yet, he and you and Mr. Gray and 20 Mr. Crow are all dealt with on this page as being 21 paid by USAT. Right? 22 A. That's correct. 19654 1 Q. So, the senior officers, six senior 2 officers of UFG and USAT, have two contracts now. 3 One of them is the UFG contract that was signed in 4 September of 1987, and one of them is the USAT 5 contract that's signed in February of 1988. 6 Right? 7 A. Yes. 8 Q. What's the substantive difference 9 between those two contracts? 10 A. Oh, well, I mean, obviously, the most 11 substantive difference is that the USAT contract 12 does not become effective until the -- until and 13 unless UFGI is not capable of performing under its 14 contract. And there also were some provisions in 15 the USAT contract that dealt with the federal 16 regulations, had some specific things you had to 17 put in it. So, I think those were put in. 18 Other than, that I believe they were 19 identical. 20 Q. What was the necessity -- and I think 21 you addressed it to some extent with the Court why 22 there was no USAT contract in September of 1988, 19655 1 September of 1987. 2 But let me ask you, sir: What was the 3 necessity of having a USAT contract in February of 4 1988? 5 A. Well, again, the purpose of the 6 contracts were to keep the people there, to make 7 sure that they -- the top management people didn't 8 bail out. And in the beginning of 1988, there was 9 a concern that perhaps -- you had these UFG 10 contracts -- that maybe UFG wouldn't be there. 11 And again, if the purpose was to keep the people 12 there, if they are starting to worry that "I have 13 got this contract and the person I have this 14 contract with may not be there, it doesn't do what 15 it's supposed to do." 16 So, we created the USAT backup contract 17 to say, "Look, if UFG isn't here and they can't 18 perform, don't worry. USAT will be there to 19 perform. So, you don't have to worry about 20 your -- you know, the provisions that are in your 21 contract, the things we've adopted to keep you 22 here." 19656 1 Q. In fact, Mr. Berner, you prepared a 2 contemporaneous -- roughly contemporaneous 3 memorandum explaining the new contract and other 4 matters, didn't you? 5 A. I think that's right. 6 Q. Let me give you another volume. Let me 7 direct your attention, sir, to Exhibit T8054, 8 which is in evidence at Tab 403. 9 Do you have that before you? 10 A. Yes, I do. 11 Q. And is that a memorandum that you 12 prepared in March of 1988? 13 A. Yes, it was. 14 Q. Let me direct your attention to Page -- 15 I'm sorry -- to Page 3 of the memorandum and the 16 second full paragraph. 17 Would you read that, sir? 18 A. (Witness reviews the document.) 19 Q. To yourself. 20 A. (Witness reviews the document.) Okay. 21 Q. Now, this is -- you know, we're trying 22 in this case to reconstruct events that happened a 19657 1 decade or more ago. But this is a memorandum that 2 you prepared at the time outlining your thinking 3 and the facts as they transpired. Right? 4 A. That's right. 5 Q. And as we're going to go through your 6 examination over the next day on 7 compensation-related issues, we're going see about 8 five different documents that you had prepared, 9 contemporaneous narratives of the events involved 10 here. 11 And your testimony today that you're 12 giving the Court is consistent with your 13 contemporaneous documents, isn't it, sir? 14 A. Yes, it is. 15 Q. Except, well, people forget a few 16 details. I may forget a detail here or there, but 17 the essence of them is consistent and the 18 explanation you've just given the Court is 19 consistent with your contemporaneous explanation, 20 isn't it? 21 A. I think so. Hope so. 22 Q. Now, let's talk about the question 19658 1 about -- of UFG's viability. 2 You say here that in January 1988, the 3 senior executive officers became concerned about 4 UFGI's viability. And then you go on to discuss 5 two issues. First of all, their debts were in 6 excess of their assets; is that right? 7 A. That's correct. 8 Q. We're going to talk about this in some 9 detail with respect to the PennCorp debt, but let 10 me ask you, sir: Were the debts that UFGI had, 11 were they immediately due and owing -- we're going 12 to put to one side the question of whether or not 13 it had a liability to infuse capital into USAT. 14 Putting that to one side, the other 15 debts of UFGI, were they immediately due and 16 owing? 17 A. No, they were not. 18 Q. What kind of debts were they? 19 A. They were long-term debts. There was 20 a -- there were public debentures. There was the 21 PennCorp debt. There were some someone used to 22 call the 22 sellers, that they at one point had 19659 1 owned one of the predecessors to United Savings. 2 They were debts that would have to be paid out 3 over a number of years. 4 Q. So, even though the current assets -- I 5 don't want to use "current." That may be an 6 accounting term. The assets of United Financial 7 Group might be less than its liabilities, the 8 assets were -- putting to one side the whole 9 question of United Savings Association of Texas, 10 the assets were essentially what? Do you 11 remember? 12 A. At that time, I believe they were in 13 the 30- to 40-million-dollar range. 14 Q. What kind of assets were they? 15 A. Other than, obviously, it owned United 16 Savings Association. 17 Q. I'm trying to put to one side the 18 question of United Savings Association's value as 19 an asset and any contingent liability that may 20 arise out of United Savings Association. 21 A. On a standalone basis, if you will, it 22 was cash. 19660 1 Q. It was essentially cash and marketable 2 securities. Right? 3 A. Right. That's right. 4 Q. So, it was sitting on some amount of 5 cash and marketable securities and its 6 liabilities, while exceeding those assets, had to 7 be paid out over a number of years. Right? 8 A. That's correct. 9 Q. And that's why, on a book basis, it 10 might be insolvent but it had current cash 11 available to meet immediate requirements. Right? 12 A. Absolutely correct. 13 Q. And we're going to be talking from time 14 to time about whether or not UFG could have made 15 good on various severance obligations that it had. 16 And I'm going to ask you, sir: Do you 17 believe -- and we're going to look at actually 18 some careful examinations of this issue. 19 Did you believe at this time in 20 February, March of 1988 whether UFG could, if 21 required to have funded $6 million or $2 million 22 or $3 million, depending on who was severed, to 19661 1 pay the severance of departing employees? 2 A. It certainly had the assets to pay the 3 severance payments. 4 Q. Notwithstanding the fact that the 5 liabilities of UFG exceeded its assets. Right? 6 A. Right. That's what we were talking 7 about. The liabilities are long-term liabilities 8 that had to be paid out over time. The assets are 9 current assets. And if there was a severance 10 benefit, that would have been a current liability 11 that would have had to have been paid immediately. 12 Q. Now, I told you to put to one side the 13 question of the contingent liability of United 14 Savings Association's net worth obligation. 15 Right? 16 A. Right. 17 Q. And if UFG were directed by the 18 regulators to infuse its net -- its capital into 19 USAT, that would also have an effect. 20 What effect do you believe that would 21 have on -- that's an unfair question because you 22 don't know how far the capital shortfall is at any 19662 1 given time. 2 Would that have an effect on USAT's -- 3 strike that. 4 If United Financial Group were directed 5 by the regulators to infuse capital into USAT, 6 would that change the analysis as to whether or 7 not UFG might be able to meet its severance 8 obligations to the employees? 9 A. Sure. In a number of ways. First of 10 all, obviously, we don't know the size; but it 11 could be that all the current assets, all that 12 cash goes down into USAT. So, then there would be 13 no ability to pay the severance. 14 Also, if all of the cash goes down, 15 then probably, under all the long-term debt, you 16 wouldn't be able to pay the interest which would 17 mean those would default and they would become 18 current liabilities. And then everyone would have 19 a mad scramble for the assets, but there would be 20 nothing left of United Financial Group. 21 Q. So, the situation that the executives 22 saw -- the senior executives saw in February, 19663 1 March 1988 was a situation in which UFG had 2 current assets or had assets to meet its 3 liabilities over a period of time but there was a 4 risk of a direction to either use its assets to 5 infuse capital into USAT or, if that didn't 6 happen, over a longer period of time these 7 long-term liabilities would essentially erode 8 UFG's financial position; is that right? 9 A. That was the concern, and that's 10 essentially why you had the backup contract which 11 was the USAT contract. But it only became 12 effective if UFG couldn't pay. If UFG was there 13 to pay, it would pay. If something happened and 14 all the money wasn't there and you couldn't 15 protect them, then the USAT contract would become 16 effective and they would be entitled to their 17 severance there if they were entitled to 18 severance. 19 Q. And that's why in the last sentence of 20 this memo -- of this paragraph, you say "Since 21 USAT could not dividend additional cash to UFG, it 22 appeared as if, over a long period of time, unless 19664 1 there was a significant change in circumstances, 2 UFG would not be viable." Right? 3 A. That's correct. 4 Q. But at this point -- and we're going to 5 spend some time talking about the net worth 6 maintenance obligations of UFG. 7 But at this point in time in March of 8 1988, there had been no requests by the regulators 9 for UFG to infuse its capital into USAT, was 10 there? 11 A. That is right. There had been nothing. 12 Q. So, at this point in time, what was 13 your judgment as to whether UFG could perform on 14 the September 9, 1987 contract with respect to the 15 severance of the six individuals involved? 16 A. It absolutely could perform. 17 Q. But the officers feared that that might 18 not be always the case, and that's why they wanted 19 the USAT contracts as a backup. Right? 20 A. That's right. In early '88, that's 21 exactly what they were looking at. 22 Q. Now, if -- and I go back to this 19665 1 question as to whether or not the UFG contracts, 2 whether that -- there is some problem and somebody 3 might be misled by the UFG contracts on the 4 question of whether UFG was taking over the salary 5 and bonus obligations of USAT. 6 Let me ask you, sir: Is there a reason 7 why, if UFG was -- the UFG September 9, 1987 8 contracts were intended primarily, as you've told 9 us, to provide a severance backup to these 10 employees, why would it have to recite the amount 11 of salary and bonus in the contract? Why didn't 12 it just say "There is a severance. You have a 13 severance arrangement"? 14 A. Well, you have to measure it by 15 something, and the severance was two times salary 16 and I think bonus, also. So, you have to back -- 17 to see the number, to see what you were getting, 18 two times in order to figure out your severance 19 payment. 20 Q. Let me direct your attention, sir, to 21 Exhibit T8040 and T8041. 22 THE COURT: We'll take a short recess. 19666 1 (Whereupon, a short break was taken 2 from 10:31 a.m. to 10:54 a.m.) 3 4 THE COURT: Be seated, please. We'll 5 be back on the record. 6 Mr. Villa, you may continue. 7 MR. VILLA: Thank you. 8 Q. (BY MR. VILLA) Mr. Berner, when we 9 broke, I was just directing your attention to two 10 exhibits. One of them is T8041, which is at 11 Tab 415. And the other one is T8040, which is at 12 Tab 414. 13 Do you have those before you, sir? 14 A. Yes, I do. 15 Q. Can you tell us what they are? I 16 said -- let's start with 8040 because it's the 17 earlier one in your book. 18 A. It's a bonus agreement between 19 Jenard Gross and United Financial Group dated 20 February 11th, 1988. 21 Q. And if you look at T8041, what is that, 22 sir? 19667 1 A. It's a bonus agreement between Michael 2 Crow and United Financial Group dated 3 February 11th, 1988. 4 Q. And can you tell us generally what 5 these two bonus agreements do? 6 A. Yeah. Generally, what they do is they 7 provide for payment of -- I guess, over time, the 8 repayment of a note that each of Mr. Gross and 9 Mr. Crow had with United Financial Group. 10 Q. As long as they stay employed with the 11 association? 12 A. As long as they stay employed, yeah. 13 If they leave, they don't get anything. 14 Q. And let me direct your attention to the 15 next exhibit, which is T8038 at Tab 411 in your 16 binder. 17 Do you have that before you? 18 A. Yes, I do. 19 Q. And that's the minutes of the UFG and 20 USAT compensation committee dated February 11, 21 1988. Right? 22 A. Yes, that's correct. 19668 1 Q. And the earlier part of this it talks, 2 I think, about the corollary contracts that we had 3 spent some time on before the break, but I'd like 4 to direct your attention to the fourth full 5 paragraph on the first page. 6 Do you see that, sir? 7 A. Yes, I do. 8 Q. And would you read that and tell us 9 whether the bonus agreements we've just looked at 10 were approved by the United Financial Group/USAT 11 compensation committee on that date. 12 A. Right. This is the committee's 13 recommendation to adopt those bonus agreements. 14 Q. Now, you did join the board of United 15 Savings Association of Texas; is that right? 16 A. Yes, I did. 17 Q. And United Financial Group, as well? 18 A. Yes. 19 Q. When did you join those boards? 20 A. It was in February, I believe. 21 February -- right around -- say, February 4. I 22 think it was actually this date. February 11th, 19669 1 1988. 2 Q. Why did you join the boards? 3 A. In my contract with United Financial 4 Group, there was a requirement that said if I was 5 asked to join the board for either United 6 Financial Group or any of its subsidiaries, I was 7 required to do that. 8 Q. Mr. Berner, we have gone through the 9 change of control scenario with the departure of a 10 number of directors several times. So, I'm not 11 going to take you through it. 12 But is it fair to say that one of the 13 reasons you believe you were asked to join the 14 board was because of the departure of a number of 15 directors? 16 A. That's correct. 17 Q. And more directors departed after you 18 joined the board, as well? 19 A. That's right. 20 Q. Now, the change of control scenario or 21 issue that, I think, you discussed with 22 Mr. Rinaldi at some length we found was triggered 19670 1 by the departure of Mr. Edward Keltner from the 2 board of United Financial Group. Right? 3 A. Well -- 4 MR. RINALDI: Your Honor, let me just 5 impose at this point an objection. I've sat here 6 all morning and listen to Mr. Villa testify. And 7 frankly, Mr. Guido has on numerous occasions 8 raised this point. This man is a respondent. 9 This man is being taken on cross-examination, so 10 to speak, because we called him on direct. But in 11 reality, as a respondent, I believe that he should 12 be subject to being treated as a witness on direct 13 and that we should not be in a position where 14 Mr. Villa can continue to ask leading questions, 15 formulating the questions in a manner that at 16 times suits his purpose. What he ought to do is 17 show the witness a document and ask him what his 18 recollection of it is. 19 But to sit here and, you know, question 20 after question, a leading question, I think is 21 inappropriate with respect to a respondent. And 22 I'm simply following on the objection that 19671 1 Mr. Guido has made on a number of occasions 2 before. 3 And with that, I would simply implore 4 the Court at this point to direct Mr. Villa to 5 limit his examination to direct-examination rather 6 than leading questions. 7 MR. VILLA: Your Honor, I do try not to 8 have leading questions on important points because 9 I'd rather have you hear the witness. Oftentimes, 10 what I was doing -- and as Mr. Rinaldi objected -- 11 I was trying to focus Mr. Berner on a portion of 12 Mr. Rinaldi's examination and that, I think, is an 13 appropriate way of trying to bring the witness in 14 so that we can understand where in the chronology 15 we are. If I step over the line and lead the 16 witness too much, I hope that somebody will 17 correct me. And I'll try to avoid it. 18 THE COURT: All right. I think that 19 it's a legitimate concern that Mr. Rinaldi has 20 raised. I would caution you to, on substantive 21 points, not to lead the witness. 22 MR. VILLA: I'll do my best, Your 19672 1 Honor. 2 THE COURT: All right. 3 Q. (BY MR. VILLA) Mr. Berner, we were 4 focusing on the question of which director 5 triggered the departure -- which director's 6 departure triggered the change of control. 7 And do you recall who it was? 8 A. It was Mr. Keltner. 9 Q. Now, we've heard that Mr. Gray asserted 10 a -- or sent a letter asserting a severance claim. 11 Right? You saw that in Mister -- saw that in our 12 testimony. Right? 13 A. Yes. Yes, I have. 14 Q. Do you know if there were others who 15 were raising the issue, other officers who were 16 raising the question of whether or not they would 17 assert a severance claim as Mr. Gray had done? 18 A. It's my recollection that every officer 19 who had a contract was aware of the issue and 20 raising the issue and discussing that issue at 21 that time. 22 Q. What did you believe in March of 1988 19673 1 that the other executives would do if Mr. Gray was 2 paid his severance benefits? 3 A. I believed there was a very good 4 likelihood that they would demand severance 5 benefits, also, and leave. 6 Q. Despite the fact that they hadn't at 7 this point -- hadn't at that point actually made a 8 claim. Right? 9 A. That's correct. If they had seen 10 Mr. Gray getting paid the severance benefits, I 11 believe they would have demanded the same and 12 leave. 13 Q. Now, Mr. Rinaldi asked you whether the 14 change of control problem was a UFG problem and 15 whether USAT used its assets to solve that -- a 16 problem of UFG. 17 Do you recall those questions? 18 A. I certainly do. 19 Q. Now, if Jeff Gray, Jim Jackson, Bruce 20 Williams, and Jim Wolfe left and demanded their 21 severance, would you regard that as strictly a UFG 22 problem? 19674 1 A. Bruce Williams also and others. Would 2 that be strictly a UFG problem? Absolutely not. 3 I mean, these were the senior executive officers 4 of United Savings Association. And if the senior 5 executive officers picked up and left, the 6 likelihood of United Savings surviving as an 7 entity would have -- in my opinion, would have 8 been close to nil. 9 Q. And why was that? 10 A. Well, first of all, probably -- number 11 one, as we've looked at before, the Federal Home 12 Loan Bank Board kept talking about the quality of 13 the management of United Savings. If that 14 management walks out, there is no quality. 15 Secondly, when the generals leave the 16 battle, the lieutenants and the privates leave the 17 battle, also. And if people start seeing the 18 senior people walking away from the association, 19 they are going to be very concerned and walk away 20 at the same time. I mean, it would -- in my 21 opinion, it would have been the end of United 22 Savings. 19675 1 Q. What effect, if any, do you believe it 2 would have had on United's ability to fund itself 3 through repo lines and collecting certificates of 4 deposit from the public? 5 A. Well, again, I think people would have 6 looked at this as, you know, people leaving a ship 7 that was sinking. And Wall Street would have, I'm 8 sure, cancelled the repo lines and nobody else 9 would be depositing money, so you'd get CDs. I 10 think it would have been a clear example, evidence 11 that this was an association that was going out of 12 business. 13 Q. So, do you believe it's fair to say 14 that this was solely a UFG problem? 15 A. No, I don't. I think this was a USAT 16 problem. 17 Q. Now, what was your position, the 18 position that you advocated, on whether or not a 19 change of control had occurred when Mr. Keltner 20 departed? 21 A. My position was that we would not pay 22 somebody on the basis of the facts that took 19676 1 place, that this was not the change of control 2 that was intended in the employment agreements. 3 The employment agreements were intended to keep 4 people there. And what happened wasn't what was 5 designed to trigger a severance payment, and my 6 position was that we should not pay anyone and, if 7 necessary, we should litigate and keep them from 8 leaving. 9 Q. And what was the -- if you could 10 characterize it -- the position that Mr. Gray 11 took? 12 A. Mr. Gray's position was that he had a 13 contract. It was in writing. It was in English. 14 And it was clear what was covered, and there was a 15 change of control. And, therefore, he was 16 entitled to a severance. 17 Q. Through the mechanical operation of the 18 number of directors leaving. Right? 19 A. Right. That's what was covered in 20 change of control. 21 Q. Did -- your position was based upon the 22 intent -- what you construed as the intent of the 19677 1 contract? 2 A. Absolutely right. 3 Q. And his was based upon a mechanical 4 application of the contract? 5 A. His was on the letter of the contract, 6 and mine was on the intent as to what the -- what 7 we intended by drafting that contract and the fact 8 situations that took place was not what was 9 intended. 10 Q. Sir, do you have any view as to whether 11 or not USAT would have -- sorry -- UFG would have 12 prevailed on their -- on their position, the 13 position that you were advocating, that it didn't 14 fall within the intent of the contract? 15 A. If it went to court? 16 Q. Yes. 17 A. And litigated? 18 Q. Yes, sir. 19 A. We probably would not have won. But 20 even if we did win, it would have taken a long 21 period of time to litigate that issue and while 22 that issue was being litigated, again, senior 19678 1 people would be leaving the association. But I 2 think -- I think as a matter of law, we would have 3 had a tough case. 4 Q. Okay. Let's start off on the first 5 question, which is your likelihood of prevailing 6 in court. You say that you evaluate that as being 7 less than 50/50? Is that what you said? 8 A. I think he would have had the better 9 case in court. 10 Q. The second issue was if you had 11 litigated -- if you had litigated this issue and 12 eventually won, say, a year or two years down the 13 line, what impact do you think that would have had 14 on United Savings? 15 A. Well, again, I think if Mr. Gray leaves 16 and he's litigating the issue and everybody else 17 sees that the issue is being litigated, there is a 18 strong likelihood that they would be leaving and 19 litigated, too, and in the same position of the 20 senior management leaving the institution. And 21 whether or not you win a year or two down the road 22 is irrelevant. You had to keep the people there 19679 1 in 1988 to do what they needed to do, to run this 2 institution. 3 Q. So, what position did UFG ultimately 4 take on whether or not the severance provisions 5 were triggered by the change of control? 6 A. Well, the position we were taking -- 7 the position we were telling Mr. Gray we would 8 take was that we would litigate that issue and we 9 were not going to deem that a change in control. 10 Q. Now, I think you were asked a number of 11 questions as to whether anybody -- by Mr. Rinaldi 12 as to whether anybody came to you and said if they 13 didn't receive an increase in salary, they were 14 going to leave. 15 Do you remember those questions? 16 A. Yes, I do. 17 Q. And your answer to those questions was 18 no one said that to you. Right? 19 A. That's right. 20 Q. But what was your concern? Whether or 21 not anybody came in and said that to you, sir. 22 A. Well, my concern and the concern of the 19680 1 rest of management isn't that people walk in -- 2 people don't usually walk in -- certainly senior 3 executive officers don't walk in and say, "If you 4 don't give me a raise, I'm out of here." 5 What -- at least in my experience, what 6 generally happens is that people get uncomfortable 7 with what's going on, they look around for other 8 jobs and, if they get another job, they walk in 9 and say, "I'm leaving." 10 And as management, as senior management 11 and the board, we had to avoid that situation from 12 happening. We had to keep the people there. We 13 had to let them know that to the extent that these 14 contracts were serving a purpose, it would 15 continue to serve that purpose. So, we couldn't 16 wait for somebody to walk in and say, "I'm gone." 17 Q. Now, you had a contract that was 18 substantially identical to the other contracts; is 19 that right? The UFG September 9, 1987 contract. 20 A. It was identical other than the salary. 21 Q. Now, if you had agreed to the 22 mechanical operation of the change of control 19681 1 provision that was being espoused by Mr. Gray, 2 what would you have been able to recover under 3 your contract? 4 A. Two times salary and bonus. 5 Q. And about how much would that have 6 been? 7 A. I think the salary was 170 and the 8 bonus, I think, was 110 or 114, somebody said. 9 So, 284 times two. 300 and whatever it is, 68. 10 Q. I think it's probably -- 11 A. 568,000. Yeah, that's right. It's a 12 lot of money. 13 Q. You're talking about -- your time on 14 the investment committee served you well, sir. 15 MR. RINALDI: Just a minute, sir. I'm 16 a bit confused. I believe the bonus provision 17 under the September UFG contract was only for 18 $70,000. You just showed that to him. 19 MR. VILLA: Your Honor, at the risk 20 of -- I've seen it degenerate when counsel engage 21 in colloquies like this. I've pledged that I 22 won't do it again except to be nice to 19682 1 Mr. Rinaldi. I don't think it's probably fruitful 2 for us to do this. If I make a misstatement, I 3 hope he'll correct me; but arguing about the terms 4 of the contract is not something I'm going to 5 respond to him about. If he objects, I'll be 6 happy to listen to the Court's ruling. But apart 7 from that, I think I have to relegate his 8 questions to his redirect or whatever he calls it. 9 MR. RINALDI: I would object then. I 10 believe that counsel has infused into the record a 11 false statement of fact. He showed the witness a 12 document. The witness testified he had a 13 guaranteed contract with UFGI that was entered 14 into on September 9, 1987, and that the bonus 15 provision of that was for only $70,000. He then 16 asked him, "Well, wasn't it 114,000 or 110,000?" 17 And I was simply indicating that I thought he had 18 misstated the record. 19 THE COURT: All right. Do you think 20 the figures are the salary was 170 and the bonus 21 was 70, which makes for 240? Then his severance 22 would have been 480? Is that -- 19683 1 MR. RINALDI: Well, I was only pointing 2 out to him that -- yes, Your Honor. Yes. 3 Q. (BY MR. VILLA) So, you would have -- 4 let's assume Mr. Rinaldi is right. You could have 5 made your change of control claim, agreed with the 6 interpretation of Mr. Gray, and walked away with 7 $480,000. Right? 8 A. I think more than that; but yeah, at 9 least that, that's correct. 10 Q. You didn't do that, did you, 11 Mr. Berner? 12 A. No, I didn't do that. 13 Q. And why not? 14 A. Because I was -- I believed that the 15 institution was supposed to survive. I was senior 16 management. I was on the board. I didn't think 17 that this was the intent of that contract. And I 18 think as a member of the management and the board 19 of this association, you make sure that it 20 survives. I think that's what we were there for. 21 It's what the contracts were entered into for, and 22 I think this was a technical breach or a technical 19684 1 correction or whatever in that contract that just 2 wasn't what it was intended to deal with. 3 Q. Now, you were having meetings from time 4 to time in the spring of 1988 with Mr. Twomey and 5 Ms. Baugh. Right? 6 A. Yes. 7 Q. Let me ask you to turn to the next 8 exhibit, which is B2091. 9 Can you identify that for me, sir? 10 A. It's a memo that I wrote of March 23rd 11 relating to a meeting with Neil Twomey of 12 March 22nd. 13 MR. VILLA: Your Honor, I move B2091 14 into evidence. 15 MR. RINALDI: No objection, Your Honor. 16 THE COURT: Received. 17 Q. (BY MR. VILLA) Let me direct your 18 attention, sir, to the third page and ask you to 19 review the first two paragraphs discussing 20 Mr. Twomey's view about the quality of management. 21 Would you read that for me? Read it to 22 yourself first. Actually, read the first three 19685 1 paragraphs. 2 A. (Witness reviews the document.) Okay. 3 Q. Have you had an opportunity to read it? 4 A. Yes, I have. 5 Q. Now, do you remember that United 6 Savings Association of Texas had filed a capital 7 forbearance application? 8 A. Yes, I do. 9 Q. And do you recall whether the capital 10 forbearance application had projected a loss for 11 the upcoming year? 12 A. Yes, I do. 13 Q. And do you remember what the amount of 14 loss was? 15 A. Oh, I think it was -- my recollection 16 was it was in the hundred-million-dollar range or 17 so. 18 Q. So, for the year 1988, USAT was 19 projecting a 100-million-dollar loss. Right? 20 A. Right. 21 Q. And I believe Mr. Rinaldi showed you a 22 number of documents in his examination reflecting 19686 1 that United was below its regulatory capital 2 limits by substantial margins by March of 1988. 3 Right? 4 A. Right, that's correct. 5 Q. Now, all this information -- would all 6 this information have been available to 7 Mr. Twomey, the capital forbearance application 8 and United's financial condition, on or about 9 March 23, 1988? 10 A. I'm pretty sure it would have been by 11 then, sure. 12 Q. Now, notwithstanding that, let's see 13 what Mr. Twomey says about United's management. 14 Start with the second paragraph -- or the first 15 paragraph. I want to read a sentence and ask you 16 whether you can recall these discussions. The 17 second sentence says, "He said that Jenard Gross 18 was considered in the highest esteem." Well, let 19 me read the first sentence. "Twomey also said 20 that the Dallas bank was concerned about the 21 operating management at United. He said that 22 Jenard Gross was considered in the highest esteem 19687 1 and that the other members of United's management 2 team were also thought of highly. However, he 3 said that the senior management at the Dallas bank 4 was concerned that there was no strong S&L type 5 between Gross and this other management. He 6 suggested we consider looking for an EVP level 7 chief operating officer." 8 Do you see that, sir? 9 A. Yes, I do. 10 Q. Now, why don't you tell us what you 11 recall of the discussions that you had with 12 Mr. Twomey after the information came out about 13 United's financial situation and after the 14 information came out with respect to its projected 15 hundred-million-dollar loss in 1988. 16 A. Well, again, this and other -- there 17 was a series of discussions where Mr. Twomey 18 repeated that, you know, his view on the quality 19 of United's management. They insisted and kept 20 saying that they thought that we needed a senior 21 executive S&L type person. But again, United 22 Savings was going to be a survivor. That's 19688 1 basically it. I mean, it was a constant theme. 2 Q. And did he say anything to you to the 3 effect that in light of United's financial 4 condition that he looked on management adversely? 5 A. No, no. Just the opposite. I mean, as 6 I say, he kept saying that United's management was 7 considered outstanding management. 8 Q. How did this affect your view as to 9 whether action should be taken to retain United's 10 existing management? 11 A. Well, again, it was my view -- and this 12 just, you know, reinforced it -- that we had to 13 keep this management intact because this was the 14 management that the regulators thought was an 15 outstanding group of people that could run S&Ls. 16 So, we had to keep them there. 17 Q. Let me direct your attention to the 18 third paragraph on that page. It's a reference to 19 Mr. Hurwitz and requests. 20 Do you see that, sir? 21 A. Yes, I do. 22 Q. Why don't you tell us what you recall 19689 1 about that. 2 A. Again, my recollection is that 3 Mr. Twomey said that he had been approached by 4 Washington about Charles Hurwitz and about the 5 fact that they were concerned that Hurwitz was 6 using influence to dump Drexel bonds into United 7 Savings. 8 Q. And did he tell you all of the 9 government agencies that were contacting him or 10 requesting information from him? 11 A. He didn't mention them, but he said 12 there was -- I think he said the General 13 Accounting Office and another agency. 14 Q. Let me show you what's been -- ask you 15 to look at the next page -- I'm sorry -- the next 16 exhibit, which would be T8050, Tab 418. 17 Do you have that before you, sir? 18 A. Yes, I do. 19 Q. And is this the compensation committee 20 minutes of March 30, 1988, of UFG and USAT? 21 A. Yes, it is. 22 Q. Look at the third full paragraph and 19690 1 the discussion of employment contracts. 2 Do you see that? 3 A. Yes, I do. 4 Q. Now, let me ask you now to flip over 5 and look at the next exhibit -- I'm going to ask 6 you about the two of them together -- which is 7 T8053, which is in evidence at Tab 421. 8 Do you have that before you? 9 A. Yes, I have that here. 10 Q. Can I ask you, sir: Looking at these 11 two exhibits, the compensation committee minutes 12 of March 30, 1988, and your memorandum which has a 13 date on it of March 31, 1988, and is signed by 14 James Whatley, can you tell us what occurred at 15 the compensation committee of UFG and USAT on 16 March 30, 1988? 17 A. I think I can. Do you want me to read 18 all of these? 19 Q. No. I don't want you to read it. I 20 want you to, if you can, describe for the Court 21 the issues that were raised and how they were 22 resolved by the compensation committee and why 19691 1 they were resolved like that. 2 You were present. Right? 3 A. Yes, I was. 4 Q. Okay. 5 A. Again, one of the issues -- the first 6 issue was this whole question of the change of 7 control, and it was decided that we were not going 8 to accept the fact that there was a change of 9 control and that if anyone wanted to enforce that, 10 we intended as, a board, to resist that. 11 We then decided that we would look at 12 salaries and, in effect, put what was the bonus 13 that was granted at the beginning of 1988 that was 14 for 1987 work which was designed to bring salaries 15 to the market level, to put that actually into 16 salary and to have that paid out over the course 17 of the year and then to tell everybody that they 18 wouldn't be getting any bonuses in the future. 19 And then we would create kind of an executive 20 bonus plan where, in order to keep people there, 21 we would give them a bonus -- we would take what 22 was the same number as the 1987 bonus that was 19692 1 paid in '88, pay 25 percent of that at that point 2 in time, and tell everybody that if they wanted to 3 get the additional 75 percent, they had to stay 4 for the full year. If they were there for the 5 full year, then they would get that other 6 75 percent; but that they shouldn't expect and, in 7 fact, wouldn't be getting probably any additional 8 bonuses going forward. I think we might have done 9 something on options. I'm not sure. 10 But essentially, that was what we were 11 doing. 12 Q. Now, let's deal with the issue of 13 rolling the last year's bonus into the salary. 14 Okay? Why did you roll -- or why did the 15 compensation committee roll the 1987 bonus which 16 had been paid in January of 1988, why did they add 17 it to the existing base salary and then break it 18 up? Why was that done? 19 A. Well, again -- and I think we've talked 20 about it a couple of times. The whole concept of 21 the United philosophy, compensation philosophy, 22 was keep your salary low and, in effect, your 19693 1 bonus would get you to your market rate. 2 So, the 1987 bonus that was paid at the 3 beginning of 1988 was designed to get you to what 4 your market rate should have been. 5 Q. For 1987? 6 A. For 1987. So, now we were doing that 7 for 1988 and we were just saying, "Okay. That's 8 your market rate." We'll just make it a salary 9 instead of a salary and bonus to be paid at the 10 end of the year, and it would then be paid out 11 over the course of the year instead of waiting 12 till the end of the year on that part. 13 Q. So, was this a change in compensation 14 philosophy or was this a response to the current 15 problems at UFG and USAT with respect to 16 management turnover? What prompted this? 17 A. Well, I think it was a combination of a 18 lot of things. It was a change in the philosophy 19 in that we were not going to wait until the end of 20 the year and add a bonus. We were going to pay 21 people market price during the course of the year. 22 And yeah, it was -- it was designed to deal with 19694 1 the fact that there might be people leaving. We 2 didn't know what was going to happen. And this 3 way, they would know that they would be getting 4 paid during the course of the year. 5 Q. Now, we've talked about the elimination 6 of various long-term incentive plans such as the 7 performance unit plan and the stock option plan. 8 Do you remember that? 9 A. Yes. 10 Q. And those -- the value of those two had 11 effectively gone to zero. I think you've already 12 testified to that. Right? 13 A. That's correct. 14 Q. What role was the executive bonus -- 15 giving them 25 percent of their bonus for the year 16 in whatever it is, March or April 1988, and 17 putting the other 75 percent if they stayed for 18 the entire year 1988, what function did that 19 particular executive bonus plan serve in the 20 overall compensation philosophy of USAT and UFG? 21 A. Well, I'm not sure it was -- well, a 22 couple of things. First of all, it wasn't only 19695 1 for the senior executives. That executive bonus 2 plan was for everyone who had received a bonus in 3 1987 which was -- my recollection in looking at 4 the minutes was about 70 people had received 5 bonuses in the beginning of 1988 for 1987 work. 6 And this was to keep that level of people. The 7 theory being that if you got a bonus in 1987, you 8 were somebody we wanted to keep. 9 So, everyone who got a bonus in 1987 10 would get a bonus, one-time bonus, in 1988, pay 11 25 percent now; but in order to make sure that you 12 stayed, you didn't just take a bonus and leave, 13 you had to stay till the end of the year. And 14 again, the theory was you have to keep everyone 15 intact. You've got to keep this institution 16 intact, and we don't want people leaving. 17 I think Mr. Rinaldi pointed out that 18 there were only 42 or 43 people that got bonuses. 19 That meant that 27 people had left from the 20 beginning of the year. We didn't want to have 21 that happening. So, you had to get -- you had to 22 do something to keep them here. It was the only 19696 1 thing we could do. 2 Q. Now, you made a good point which I 3 hadn't picked up on. The idea of taking the last 4 year's bonus, laying it on top of the base salary, 5 and then paying it out every month, was that a 6 decision that was implemented only for the top six 7 or seven or eight people at United? 8 A. No. Anyone who had received a bonus, 9 that happened to. 10 Q. So, the increase of the salary to 11 include the last year's bonus and breaking it up 12 on a monthly basis, and the executive bonus plan, 13 the 25/75, was not limited to the top six or eight 14 people? 15 A. No. It was -- it went throughout the 16 organization for the people that we felt were the 17 key, vital people for this institution. 18 Q. Now, Paragraph 3, if you take a look at 19 T8053, Paragraph 3 -- and this is the memo -- 20 talks about the fact that people will be told that 21 they should assume -- why don't you just take a 22 look at Paragraph 3 and tell me what decision is 19697 1 reflected in there. 2 A. Again, the decision is to tell 3 everybody that they -- as opposed to previous 4 years where they could expect a big bonus at the 5 end of the year, they shouldn't expect any bonus 6 or very little bonus at the end of this year 7 because the philosophy -- compensation philosophy 8 were changing and they were rolling the bonus into 9 the salary because that will now reflect your 10 market value. 11 Q. Let me direct your attention to the 12 handwritten entry at the bottom of T8053, which I 13 think says "compensation study will be conducted 14 by outside independent consultants to determine 15 that United is in line with peer group." 16 Do you see that? 17 A. Yes, I do. 18 Q. Do you know who added that requirement? 19 A. Jim Whatley. 20 Q. Now, there has been some question in 21 this case as to whether the compensation 22 consultant was hired to satisfy concerns of 19698 1 Ms. Carlton and claims that she may have or 2 concerns that she may have raised in connection 3 with the examination of USAT. 4 Tell me, sir, who prompted the hiring 5 of the compensation consultant in your 6 recollection? 7 A. Jim Whatley. We had talked to him 8 about the possibility of doing it, and Jim Whatley 9 wanted to have an outside consultant come in and 10 look at this. 11 Q. And it says at the bottom of T8053, 12 which is the memo, "Agreed to by the compensation 13 committee by James R. Whatley." And then he signs 14 it. Right? 15 A. Yes, that's correct. 16 Q. What position did Mr. Whatley hold on 17 the compensation committee as of that time? 18 A. He was the compensation committee. 19 Q. And why was that? 20 A. The other members of the compensation 21 committee had resigned. They had resigned from 22 the board. 19699 1 Q. Had resigned from the board. And is 2 there any practice among public corporations and 3 other corporations about whether you have inside 4 directors or outside directors on compensation 5 committees? 6 A. Generally, you try to have all or at 7 least substantially all; but you try to have all 8 outside directors on the compensation committee. 9 Q. And Mr. Whatley was one of the few 10 existing outside directors apart from Paul 11 Schwartz. Right? 12 A. At that time, yeah, I believe that's 13 right, yes. 14 Q. Now, let me go back to the March 30, 15 1988 USAT/UFG compensation committee minutes. And 16 the last sentence of Paragraph 3 says, 17 "Mr. Whatley noted" -- and that's Exhibit T8050. 18 "Mr. Whatley noted, however, that the company 19 should proceed as quickly as possible on the 20 proposal without waiting for the report of the 21 compensation specialist." 22 Do you see that? 19700 1 A. Yes, I do. 2 Q. Now, sir, why was it necessary for the 3 association to act as quickly as possible on the 4 issues that were being raised on March 30, 1988? 5 A. Well, again, as we talked about, the 6 whole purpose was to avoid people leaving. And if 7 we waited to hire the compensation expert until 8 they came in with their report, it could be a 9 month or two months or longer. In fact, I think 10 it ended up being a couple of months. We couldn't 11 afford to wait two months while people were 12 leaving or people were thinking about leaving. We 13 still had executives that were saying their 14 contract had been triggered. We had to do 15 something. 16 Q. Was any attention paid at this time to 17 the effect that FSLIC assistance or receivership 18 would have had on the proposed contracts? 19 A. Yeah, sure was. 20 Q. Let me direct your attention to the 21 next exhibit, I believe, in your binder which 22 should be T8048 which is in evidence as Tab 417. 19701 1 Do you have that before you? 2 A. Yes, I do. 3 Q. And remind us again, who is Thomas 4 Leahey and what role did he serve for United? 5 A. He was a partner at Kirkpatrick & 6 Lockhart, and he was our outside regulatory 7 counsel at this time. 8 Q. And do you recall receiving this 9 memorandum from Mr. Leahey? 10 A. Yes, I do. 11 Q. And do you recall whether you discussed 12 this memorandum and the issues raised in it with 13 Mr. Whatley? 14 A. With Mr. Whatley? 15 Q. Mr. Whatley. 16 A. Yes, I did. 17 Q. Let's go back to T8053, which is the 18 prior memo, that memo that Mr. Whatley signed. 19 And if you look at Page 2 of T8053, the last 20 sentence of the carryover paragraph, do you see 21 that? 22 A. Yes. 19702 1 Q. "We will also tell those people with 2 contracts that there is a possibility that the 3 contracts will be cancelled if there is FSLIC 4 assistance." 5 Do you see that? 6 A. Yes, I do. 7 Q. Now, tell us what you recall about 8 discussing the issue with Mr. Whatley and advising 9 the other officers of this potential that the 10 contracts would be set aside if there were FSLIC 11 assistance. 12 A. Well, in the memo from Kirkpatrick & 13 Lockhart from Tom Leahey, he had raised the Bass 14 case as a possible issue. And at that time, I had 15 read the Bass case and, as I had mentioned before, 16 I since reread the Bass case. 17 But in the Bass case, money that had 18 been put into, I believe it was an escrow or trust 19 account for certain executives, the FSLIC came in 20 and said that that was an unsafe and unsound 21 practice. So, that was an issue. 22 In reading the Bass case, I don't think 19703 1 the Bass case was totally on point; but it 2 certainly was a relevant case that the people who 3 were signing contracts needed to know about 4 because I think we needed to disclose that to them 5 since they were taking a risk that their money 6 might end up -- they might not get their money if 7 they thought they were entitled to it. 8 Q. Well, let's do this one step at a time. 9 You discussed this issue with Mr. Whatley. Is 10 that what you're saying? 11 A. Yes, I did. 12 Q. And that's what's reflected in the 13 sentence that I read out of your memo? 14 A. Yes, sir. 15 Q. And it was also discussed with the 16 people who were getting contracts. Right? 17 A. Yes, it was. 18 Q. Now, you had some discussion with 19 Mr. Rinaldi about the application of the Bass case 20 to this case. And while we're not in the Court of 21 Appeals trying to apply the Bass case and 22 determine whether or not it was on all fours or on 19704 1 no fours with this case, let me ask you: What 2 distinctions did you see -- I remember Mr. Rinaldi 3 asked you the distinctions. You gave him No. 1. 4 You talked about that, and he never asked for any 5 others after No. 1. So, let's ask you now. 6 What distinctions did you see between 7 the Bass case and the situation that was facing 8 United in March of 1988? 9 A. Again, obviously I reread this case in 10 the last few months. No. 1 in the Bass case, they 11 had -- the government had originally brought the 12 action against not only the owners of the 13 institution but also the senior executives of the 14 institution and then the case was dropped against 15 the senior executives. So, that was an 16 interesting fact. 17 In the Bass case, one of the points 18 that the Court was making was that the people who 19 were getting those contracts owned the institution 20 and, therefore, there was no reason to give them 21 contracts. They weren't going to be leaving. All 22 of their net worth was tied up into that 19705 1 institution. Again, that was clearly different 2 than in our case where the people were getting 3 contracts owned nothing or very little of the 4 institution. 5 No. 3 in the Bass case, the case was -- 6 I think that institution was failing and the Court 7 makes reference to the fact that that institution 8 was going to go out of business. In our case, 9 we're sitting where we're being told by the 10 regulators, "You're not failing. You're going to 11 be around. You're going to survive. You're going 12 to be taking on other S&Ls." I think I mentioned 13 that in the Bass case, the people that were sued, 14 all their net worth was tied up in the 15 institution. And I believe there was even a 16 provision in the Bass case that they would get 17 their money no matter what happened. If the 18 institution failed or didn't fail, they would be 19 entitled to a severance benefit, which was 20 different than these agreements. 21 So -- and then as a lawyer, the fact 22 that it was a district court case in Illinois, it 19706 1 wasn't in appellate court, and it was not Texas, 2 it clearly was a relevant case that people had to 3 know about; but it was different than the case we 4 had here. 5 Q. Now, sir, would you recognize that 6 there was a risk that you -- that the regulators 7 or FSLIC would step in and intervene and try to 8 prevent the payment of severance or executive 9 bonus payments to the executives of UFG and USAT? 10 A. Clearly. I mean, the Bass case said 11 there was a risk that that could happen. But the 12 risk was on the executives. 13 Q. What do you mean the risk was on the 14 executives? 15 A. Well, if you sign a contract and you 16 put the money in, let's say, a letter of credit or 17 a trust or an escrow agreement and the executives 18 are there believing that if something happens, 19 that money is there for them and they continue 20 working, believing that that money is there for 21 them, and then when they go to get their 22 severance, if something happens and FSLIC comes in 19707 1 and says, "Sorry, you can't get it," the person 2 that's been at risk isn't the institution. The 3 person that's at risk is the executive that's 4 worked there believing he's going to get his money 5 and he doesn't get it. 6 Q. But if that happened, what benefit 7 would it be to USAT? 8 A. They would have had all those people 9 working there all that time and then they would 10 have had their money. 11 Q. Now, by the time you had received the 12 memo from Mr. Leahey on March 25, you had attended 13 the February 11 board meeting. Right? 14 A. Yes, that's correct. 15 Q. Where the USAT contracts had been 16 discussed and adopted, correct? 17 A. That's correct. I had been there, yes. 18 Q. And at that point, had the Laurenson, 19 Stodart, and Bruno contracts been given to 20 Ms. Carlton, do you believe? 21 A. I believe so, yes. 22 Q. And how about the first set of the UFG 19708 1 contracts? 2 A. Again, I believe she had all of those, 3 yes. 4 Q. Let me direct your attention to the 5 next exhibit. Before I leave this, it wouldn't be 6 fair -- would it be fair, sir, to say that you 7 ignored the issues raised by Mr. Leahey in his 8 memo, T8048? 9 A. That would not be fair at all. 10 Q. Did you take them into consideration? 11 A. Absolutely, which is why I talked about 12 it with Mr. Whatley and I would talk about it with 13 all of the executives. 14 Q. Now, let's flip over and take a look at 15 T8049, which is in evidence at Tab 405. And just 16 tell us what that document is for the record, sir. 17 A. It's minutes of the March 30, 1988 18 special board of directors meeting of United 19 Savings. 20 Q. There are a number of attachments to 21 these minutes. Can you explain to me what they 22 are? 19709 1 A. Well, this was a meeting where we were 2 having -- the Federal Home Loan Bank Board was 3 doing their report of examinations. So, the first 4 attachment looks like the agenda that was, I 5 believe, prepared by Ms. Carlton. 6 Q. Well, the agenda was all that I was 7 actually directing your attention to. I'm going 8 to ask you a question about that. 9 Now, who -- was anybody present from 10 the Federal Home Loan Bank Board at this meeting? 11 A. Yes, there were. 12 Q. And who was that? Can you see? 13 A. Danny Thomas, Neil Twomey, 14 Ginger Baugh, Vivian Carlton. 15 Q. That looks like it's it. Right? 16 A. That looks like that's it for the 17 Federal Home Loan Bank Board. 18 Q. Now, I notice on Page 2, at the top of 19 Page 2, there is a paragraph that reads, "After 20 full discussion and further questioning, the 21 representatives of the Federal Home Loan Bank of 22 Dallas were thanked for their cooperation in 19710 1 connection with the examination and they departed 2 from the meeting." 3 Do you see that? 4 A. Yes, I do. 5 Q. And is that consistent with the 6 practice that you had in the minutes reflecting 7 the departing participants? 8 A. Yes, it is. 9 Q. Looking at the minutes of this meeting 10 or the agenda which I believe was provided by the 11 Federal Home Loan Bank of Dallas, and I think it 12 says Mr. Gross had it appended to the meeting 13 minutes. And based upon your own recollection, 14 sir, do you recall Ms. Carlton or Mr. Twomey or 15 anybody else raising any question about the 16 employment contracts at UFG or USAT? 17 A. They didn't raise any questions about 18 the employment agreements. 19 Q. Now, let me ask you to look at A3015, 20 which is the next exhibit. 21 Can you tell me what that document is? 22 It's in evidence at Tab 94. 19711 1 A. This is the proxy statement for the 2 United Financial Group annual meeting of 1988. 3 Q. Would this have been filed with the 4 Securities and Exchange Commission? 5 A. Yes, it would have. 6 Q. And would you have been involved in the 7 preparation of this document? 8 A. Yes, I certainly would have. 9 Q. Would you have sent it to the Federal 10 Home Loan Bank of Dallas? 11 A. Yes, I would have. 12 Q. Now, you're trained as a securities 13 lawyer, aren't you, sir? 14 A. Yes, I am. 15 Q. As a matter of fact, I'm sure you 16 regret your foray into the regulated institution 17 area, don't you? 18 A. Every single day. 19 Q. Let me ask you, sir, to explain to us 20 the significance to a securities lawyer of putting 21 a fact in a filing, public filing with the 22 Securities and Exchange Commission. 19712 1 A. Well, the whole philosophy of the 2 Securities Act is disclosure. And if you put 3 something in in a Securities Act filing, it's 4 disclosed so people are put on notice. And it 5 is -- it is the highest form of notice. I mean, 6 once it's there, nobody can claim that they didn't 7 know about something. It's disclosed to them. 8 Q. Now, you testified in response to 9 Mr. Rinaldi's questions that you believed that the 10 USAT contracts were attached to the 1987 Form 10K. 11 Do you remember that? 12 A. I remember saying that I thought they 13 were, yes, that's correct. 14 Q. And Mr. Rinaldi pulled out the Form 10K 15 and showed you that it was the UFG contract that 16 was attached. 17 Do you remember that, as well? 18 A. That's right. I certainly do. 19 Q. Now, let's look at the proxy statement 20 and see -- and the Form 10K and see if we can 21 unravel the source of your confusion. 22 Let me direct your attention to Page 9 19713 1 of the proxy statement. And I've taken the 2 liberty of blowing it up so we can look at the 3 document in its entirety. 4 Is that Page 9 of the proxy statement 5 that you have before you, sir? 6 A. Yes, it is. 7 Q. What does that -- the top paragraph, 8 what does it describe? 9 A. It describes the September 9th, 1987 10 employment agreement that had been entered into 11 with United Financial Group. 12 Q. And that's the portion of it right here 13 (indicating); is that correct? 14 A. That's right. 15 Q. Now, I'd like you to read the last 16 sentence of the first paragraph. 17 A. Read it out loud? 18 Q. Read it out loud. 19 A. "In 1988, each of the employees entered 20 into a substantially similar agreement with USAT 21 which becomes effective only in the event the 22 company is unable to satisfy its obligations under 19714 1 the agreements." 2 Q. Now, sir, when you answered the 3 question to Mr. Rinaldi the first time that you 4 thought that the USAT employment agreement was 5 attached to the 10K -- and I believe described in 6 the proxy statement -- can you tell me now why you 7 did that, why you got confused between the USAT 8 and the UFG contract? 9 A. Well, they were substantially the same 10 agreement. And I thought that I had attached the 11 USAT, but it was the UFG contract. They were 12 substantially the same. 13 Q. And, in fact, it's stated as such in 14 the proxy statement itself, isn't it, sir? 15 A. Right. 16 Q. Let me ask you to look at Page 16 of 17 the proxy statement, which I haven't blown up, and 18 the last full paragraph of the proxy statement, 19 being A3015. Just read that to yourself, and I'll 20 ask you a question about it. 21 A. (Witness reviews the document.) Okay. 22 Q. What does that describe, sir? 19715 1 A. The bonus agreements that we had looked 2 at before for Mr. Gross and Mr. Crow. 3 Q. Okay. Now, let's see how the proxy 4 statement and the 10K worked together. The next 5 document you have in front of you is A3023, 6 Tab 79. 7 Do you see that? 8 A. Yes. 9 Q. Okay. And that's the 1987 proxy 10 which -- I'm sorry -- 1987 Form 10K which would be 11 filed in March of 1988. Right? 12 A. That's correct. 13 Q. I'd like you to turn to Page 64, which 14 has a Bates stamp No. CN158960. And under Part 3, 15 Item 10, this is -- and Item 11, Item 12, Item 13. 16 Do you see that, all of Part 3? 17 A. Yes, I do. 18 MR. RINALDI: I'm sorry. Where, 19 Counsel, are you? 20 MR. VILLA: Page 64. 21 MR. RINALDI: Yes. But where is the 22 part -- 19716 1 MR. VILLA: Part 3, Items 10, 11, and 2 12 and 13. 3 MR. RINALDI: I'm sorry. Okay. 4 Q. (BY MR. VILLA) Do you have that 5 before you now, sir? 6 A. Yes, I do. 7 Q. And this is generically a description 8 of executive compensation issues. Right? 9 A. That's correct. 10 Q. And what does it incorporate by 11 reference? 12 A. The proxy statement. 13 Q. And, indeed, were these two documents 14 sent around at the same time and cross-referenced 15 in between that? 16 A. Yes, they were. 17 Q. So, if you sent somebody the 10K, would 18 you also send them the proxy statement? 19 A. Generally, yes. 20 Q. Now, let me direct your attention now 21 deeper into the document to Exhibit UFG -- I'm 22 sorry. It's Exhibit 10.16. You'll never find it 19717 1 by that; so, I'll give you the Bates range. It's 2 UFG 2028814. 3 A. 2028814? 4 Q. 8814. 5 A. Okay. 6 Q. Do you see that? Flip to the next 7 page, and you'll see -- what is that, sir? 8 A. This is the form of the employment 9 agreement between UFG and unnamed executive dated 10 September 9th, 1987. 11 MR. RINALDI: Are we looking at A3023, 12 sir? 13 MR. VILLA: A3023 at Bates range UFG 14 2028815. 15 MR. RINALDI: That -- I'm sorry. Is 16 this the complete 10K that he's looking at? 17 MR. VILLA: Yes. 18 MR. RINALDI: Okay. So that what we 19 were given is only the 10K without the 20 attachments? 21 MR. VILLA: I don't know what you were 22 given, sir. 19718 1 MR. RINALDI: Okay. All right. 2 MR. VILLA: You showed him the 3 employment contract yesterday, I believe. So, I 4 assume you have it. 5 MR. RINALDI: Yes. Let me look and see 6 so that I understand what we're looking at. 7 Okay. So, this is the complete 10K as 8 opposed to just the 10K without its attachments. 9 Okay. Thank you. 10 Q. (BY MR. VILLA) So, that's the UFG 11 employment contract which is described as 12 substantially similar to the USAT contract. 13 Right? 14 A. That's correct. 15 Q. And now let me ask you to go deeper in 16 the Bates range to UFG 2028965. 17 A. 8965. 18 Q. And you'll find that this is in -- the 19 two documents that are here are now in reverse 20 order. But by paginating through them, can you 21 tell me what these two documents are? 22 A. (Witness reviews the documents.) This 19719 1 is the Crow and the Gross bonus agreements. 2 Q. Okay. Would the supervisory personnel 3 at the Federal Home Loan Bank of Dallas have been 4 provided a copy of this 10K with its exhibits and 5 the proxy statement? 6 A. Yes, they would have. 7 Q. And the proxy statement described the 8 USAT and UFG contracts as substantially similar; 9 is that right? 10 A. Yes, it does, that's correct. 11 Q. And the UFG contract is attached? 12 A. That is correct. 13 THE COURT: Mr. Villa, the 14 Exhibit A3023 as in evidence does not include the 15 attachments. So, your document in the folder 16 referring to Tab 79 is substantially more than the 17 exhibit that's in evidence. 18 MR. VILLA: Your Honor, I think -- 19 well, may I move Exhibit A3023 into evidence? 20 THE COURT: Well, there is an A3023 in 21 evidence. It's just different from or less 22 complete than your 3023. 19720 1 MR. VILLA: May I consult with 2 Mr. Farley here? 3 I'm advised that A3023.1 is the Form 4 10K with the exhibits that is in evidence. I 5 believe this is -- this document is in evidence 6 because I recall asking Mr. Schwartz about it 7 including, I believe, the exhibits. So, I think 8 it's in evidence. 9 MR. RINALDI: No. Actually, I think 10 you asked Mr. Whatley about it, did you not? I 11 thought you went through the same line of 12 questioning with Mr. Whatley. 13 MR. VILLA: I believe it was 14 Mr. Schwartz. In any event, A3023.1, if we could 15 check. If it isn't, I could renumber this 16 document and ask that it be admitted in as a 17 different number. 18 May I inquire, is there an A3023.1? 19 THE COURT: Okay. The -- you're 20 correct. The Form 10K with attachments is 21 A3023.1. 22 MR. VILLA: Thank you, Your Honor. I'd 19721 1 ask the record to reflect that my questions that 2 referred to A3023 should be more properly applied 3 to A3023.1. 4 THE COURT: Well, the question arises, 5 your folder shows Tab 79. And the question is, 6 which exhibit is that Tab 79? 7 MR. VILLA: Your Honor, I'm advised 8 that both of them are under Tab 79. Since one is 9 included within the other, perhaps I could consult 10 with Mr. Rinaldi and reach an agreement as to 11 whether or not we could eliminate the 10K without 12 attachments. 13 MR. RINALDI: Your Honor, I think that 14 his representation is correct, that the entire 15 document with the attachments was admitted. I 16 think it's probably -- 17 THE COURT: It was admitted as A3023.1. 18 My only inquiry now is under what tab it is. 19 MR. RINALDI: Okay. We'll try to sort 20 that out. But his suggestion, I believe, at this 21 point is A3023 at Tab 79 is simply the short form 22 of the 10K without its attachments. Since this is 19722 1 a critical document in this proceeding and since 2 the attachments are so voluminous -- I think there 3 are probably 5 or 6 inches of paper -- I would 4 urge the Court that we have two documents, even if 5 they are duplicative because we are going to use 6 the -- 7 THE COURT: Well, do we have a tab 8 number for A3023.1? 9 MR. RINALDI: We would have to defer, I 10 think, to the paralegals that are responsible for 11 trying to keep track of this stuff and maybe they 12 could help us. Perhaps we should go off the 13 record. 14 MR. VILLA: Your Honor, why don't we 15 just label it as Tab 79.1? May we do that? 16 MR. RINALDI: Or to keep with our -- 17 THE COURT: Just so we keep the record 18 straight -- let's be off the record. 19 MR. VILLA: Thank you, Your Honor. 20 21 (Discussion held off the record.) 22 19723 1 THE COURT: All right. We'll be back 2 on the record. 3 Pursuant to our discussion, we're going 4 to have Exhibit A3023.1 under Tab 79A; is that 5 correct? 6 MR. VILLA: That's correct, Your Honor. 7 THE COURT: All right. We'll adjourn 8 until 1:30. 9 10 (Whereupon, a lunch break was taken 11 from 11:56 a.m. to 1:36 p.m.) 12 13 THE COURT: Be seated, please. We'll 14 be back on the record. 15 Mr. Villa, you may continue. 16 MR. VILLA: Thank you, Your Honor. 17 Q. (BY MR. VILLA) Mr. Berner, before we 18 turn to the documents -- 19 MR. VILLA: Actually, Your Honor, 20 before I question Mr. Berner, I would just like to 21 note that I think that the page citation that I 22 gave for the Whatley testimony that Mr. Rinaldi 19724 1 and I discussed was probably correct and that the 2 numbers were 4448 through 4449. I think he 3 probably misheard me and thought I dropped a 4 digit. 5 THE COURT: Thank you. 6 Q. (BY MR. VILLA) Mr. Berner, before we 7 broke, we talked briefly about the composition of 8 the compensation committee and how Mr. Whatley was 9 the only remaining independent outside director at 10 USAT and UFG and he was the one on the 11 compensation committee. 12 Do you remember that discussion? 13 A. Yes, sir, I do. 14 Q. My question to you is: Do you know 15 why, in March or April of 1988, USAT and UFG did 16 not secure other outside directors to join their 17 board and go on to these various committees? 18 A. Yes, I do. At that time, obviously, 19 USAT was in financial trouble, as was most of the 20 Texas S&Ls, and UFG was a public company. And it 21 would be very hard to get independent people to 22 join a board of a company, of a public company 19725 1 with a troubled S&L as a subsidiary. Generally, 2 corporations will indemnify their directors for 3 any liability and if you fear that the company is 4 not going to be there, you just won't come on the 5 board. It's very hard -- would have been very 6 hard to get any outside director to join. 7 Q. And that's the reason that Mr. Whatley 8 was the only remaining one at that point? 9 A. That's correct. 10 Q. And nobody was added, at least to your 11 knowledge? Nobody was added? 12 A. Subsequently at some later date, 13 somebody was added many years -- a couple years 14 later. 15 Q. Mr. Berner, we had -- we were looking 16 at Exhibit T8062. And not to confuse you but to 17 perhaps pick up speed, I'm going to skip over that 18 exhibit. 19 And the next one in your -- the next 20 one I'm going to direct your attention to is 21 Exhibit B2136, which has been admitted in evidence 22 at Tab 464. 19726 1 Is that before you, sir? 2 A. Yes, it is. 3 Q. Can you describe for the Court what 4 this document is? 5 A. This is a memo from me to Jim Whatley 6 dated April 7th, and it's transmitting the revised 7 employment contracts. 8 Q. And what -- why were you revising the 9 employment contracts after March 30, 1988? 10 A. Well, this was in connection with 11 the -- with what the compensation had directed we 12 do, that we revise -- prepare new employment 13 agreements. 14 Q. And this is the process that resulted 15 in the contracts that we saw that Mr. Rinaldi 16 showed you for June 30 and July 1, 1988? 17 A. Yes. This was the beginning of that 18 process, that's correct. 19 Q. Was the -- do you recall whether the 20 change of control provision which had been an 21 issue in the UFG contract was modified at all in 22 the later contracts? 19727 1 A. Yes. It was -- it was changed. 2 Q. Did you regard -- the original change 3 of control provision that Mr. Gray alleged had 4 been triggered, did you regard that as a drafting 5 mistake? 6 A. No. I didn't take that as a drafting 7 mistake. There had just been an unforeseen 8 factual change of circumstance that triggered it, 9 but it wasn't a drafting change. The change of 10 control provision you'll find in almost all -- if 11 not all employment agreements. 12 Q. I'm sorry. The change of control 13 provision -- I couldn't hear you, sir. 14 A. You'll find in almost all the formal 15 employment agreements. 16 Q. Let's look then at B2136 which is 17 before you. There is a reference to Mark Gordon 18 of Hewitt & Associates. 19 Do you see that? 20 A. Yes, I do. 21 Q. And was he the principal at Hewitt with 22 which USAT and UFG dealt? 19728 1 A. Yeah. In connection with these 2 contracts, that's correct. 3 Q. Now, did Hewitt -- by the way, do you 4 know anything about Hewitt & Associates? 5 A. Hewitt is one of the largest and most 6 well-respected compensation consultants in the 7 country. 8 Q. So, let me ask you, sir: Do you know 9 whether Hewitt was only looking at the form of the 10 contracts which was being discussed in your memo, 11 or were they looking at a broader range of 12 compensation arrangements? 13 A. No. They were looking at the full 14 spectrum of senior compensation as well as the 15 contracts. 16 Q. And that would include both the levels 17 of compensation as well as the form of the 18 contract? 19 A. That's correct, sir, yes. 20 Q. Do you know whether Hewitt was made 21 aware of the fact that USAT and UFG had parallel 22 contracts of the sort that we have been talking 19729 1 about for the last day or so? 2 A. Yes, I do. I know that they knew that 3 there were going to be parallel contracts. 4 Q. Let me direct your attention to the 5 contract that's before you and attached to the 6 memorandum in the fourth line of the contract. 7 Do you see where it says "note"? 8 A. Yes, I do. 9 Q. It says, "Note. We would provide same 10 contract with USAT with required FSLIC 11 provisions." Right? 12 A. Right. 13 Q. So, when they were working with you, 14 did they work on both contracts or just one? 15 A. They just worked on one contract. 16 MR. RINALDI: I'm sorry. Where did you 17 just read from? 18 MR. VILLA: Bates stamp number Page -- 19 it's the second page of the exhibit. 20 MR. RINALDI: This is B2136? 21 MR. VILLA: Yes. 22 Q. (BY MR. VILLA) And this memo and the 19730 1 draft contract was sent to Mr. Whatley; is that 2 right? 3 A. Yes, it was. 4 Q. Let me ask you to look at B2150, which 5 is the next exhibit, and ask you if you can 6 identify this for us. 7 A. This is, again, a memo from me dated 8 April 22nd transmitting additional drafts of -- 9 the final draft of the employment contract in 10 parts. 11 Q. And it's to Dr. Munitz, Mr. Gross, and 12 Mr. Whatley. Right? 13 A. Right. 14 MR. VILLA: Your Honor, I move B2150 15 into evidence. 16 MR. RINALDI: No objection. 17 THE COURT: Received. 18 Q. (BY MR. VILLA) So, could you explain 19 to the Court the process here of drafting these 20 contracts? 21 A. I would do the first draft and send it 22 to the compensation committee and, in this case, 19731 1 to Hewitt, get comments back, redraft it. At some 2 point in time, I know I sent it also to the 3 proposed recipients to get their comments on it. 4 Q. And then you would develop a final 5 draft? 6 A. A final draft of the contract, that's 7 correct. 8 Q. And I notice you have the word "final" 9 in quotes in this memo. 10 Do you see that? 11 A. Yeah, because I didn't think this was 12 actually going to be the final draft. This was -- 13 it was my final first draft that was going to 14 Hewitt and everybody else, and I expected 15 additional comments. 16 Q. And did you get feedback on these 17 various drafts from time to time? 18 A. Yeah. Sure I did. 19 Q. And did you incorporate the feedback or 20 comments you received? 21 A. We discussed them, and I think most of 22 them were incorporated. Certainly they all were 19732 1 discussed. 2 Q. Who was the final arbiter as to what 3 went into the contract that was going to be 4 offered to the employees? 5 A. Well, ultimately, it was Jim Whatley 6 and upon the advice of Hewitt were the final 7 people. 8 Q. So, as of April 22nd, 1988, you were 9 dealing with a revised final draft; but it was 10 possible there would be further modifications -- 11 A. Yes. 12 Q. -- is that right? 13 A. That's correct. 14 Q. Let's look at the next document, which 15 is Exhibit B2181. 16 Can you identify this document for me, 17 sir? 18 A. This is a letter from Hewitt to me 19 dated May 5th, 1988. 20 Q. And what does it address -- 21 A. The employment -- 22 Q. -- and what does it enclose? 19733 1 A. I'm sorry. It addresses the employment 2 agreements, and enclosed is a revised draft which 3 had been marked with changes by their counsel, 4 Phil Billard. 5 MR. VILLA: Your Honor, I move the 6 admission of Exhibit B2181. 7 MR. RINALDI: No objection, although I 8 believe the memo of the letter itself is 9 previously admitted, is it not? 10 MR. VILLA: I think I've seen it 11 before, but I couldn't find it as being admitted. 12 MR. RINALDI: I believe it was 13 admitted. I don't know if it had the attachment. 14 THE COURT: Received. 15 MR. VILLA: May I proceed, Your Honor? 16 THE COURT: Yes. 17 Q. (BY MR. VILLA) In the first sentence 18 of this letter is a reference to Mr. Phil Billard. 19 Do you see that? 20 A. Yes, sir. 21 Q. And who is Mr. Billard? 22 A. He was a lawyer for -- that worked at 19734 1 Hewitt. 2 Q. Do you recall, sir, what Hewitt's final 3 position was as to whether the form of the 4 contract that USAT and UFG worked up in this 5 process was reasonable? 6 A. Yes. I believe they felt it was 7 reasonable. 8 Q. Now I'm going to change direction for a 9 moment, Mr. Berner, and come back to the question 10 of whether USAT was going to survive this time 11 period. So, I want you to not get too wrapped up 12 in the draft context here. We talked previously 13 about a real estate proposal. 14 Do you remember that? 15 A. Sure, I do. 16 Q. And I think I used the word FADA and 17 FSLIC. 18 Do you recall that? 19 A. Right. 20 Q. What ultimately happened to the real 21 estate proposal that USAT had made and was 22 discussing with the Federal Home Loan Bank Board? 19735 1 A. After -- I don't remember when the last 2 meeting was we looked at it; but some period of 3 time after that, we withdrew that proposal and it 4 just never happened. 5 Q. USAT withdrew the proposal? 6 A. Right. 7 Q. Can you tell me what other plans were 8 then being proposed by the FSLIC that may have had 9 an effect on your decision to withdraw the real 10 estate proposal? 11 A. Yeah. They were working -- the FSLIC 12 was working on -- and I think at this time -- I'm 13 not sure exactly when they did the first deal, but 14 it was well-known that they were working on what 15 was called the Southwest Plan, which was a means 16 of aiding Texas thrifts. 17 Q. And what effect did the opportunity to 18 participate in the Southwest Plan have on USAT's 19 appetite for pursuing the real estate proposal? 20 A. Well, the Southwest Plan was 21 significantly better for the savings institution 22 than anyone coming in and putting in additional 19736 1 capital. There were a lot of tax benefits and 2 other things that were -- that made it a 3 significantly better deal than the FADA/FSLIC real 4 estate transaction. 5 Q. So, why is it that USAT chose not to 6 pursue the FADA/FSLIC real estate transaction? 7 A. Because we wanted to be part of the 8 Southwest Plan. We wanted to take advantage of 9 what was being offered by the FSLIC under the 10 Southwest Plan. 11 Q. Now, I'm not sure that I understand 12 perfectly what the Southwest Plan was. But can 13 you tell us in maybe three or four sentences 14 perhaps a little more what you understood the 15 Southwest Plan to be and the distinction between 16 acquirers and non-acquirers under the Southwest 17 Plan? 18 A. It's been a long time, but Southwest 19 Plan was a means by which acquiring institutions 20 would be given tax benefits, would be given FSLIC 21 assistance. At various times, I think FSLIC notes 22 were put in to bring the net worth -- if it was a 19737 1 negative net worth, to bring it to zero or to 2 bring it to minimum regulatory requirements. 3 Again, it was a way to protect you. For certain 4 assets, if asset values went down after you were 5 in the Southwest Plan, you would be protected 6 under the various Southwest Plan deals as it 7 evolved. 8 So, it was a very extensive means for 9 helping failed or failing or troubled S&Ls 10 specifically in Texas, mostly in Texas. 11 Q. And when you say "assistance" for these 12 S&Ls, you mean financial assistance. Right? 13 A. Financial assistance, right. 14 Q. And you spoke about some -- something 15 with respect to the assets, the value of the 16 assets. 17 What did you mean by that? 18 A. Well, I mean, whatever the value of the 19 assets were, if they decreased after you -- as 20 part of the Southwest Plan, they would protect 21 you -- the FSLIC would protect you from having 22 further losses of assets, asset valuation. 19738 1 Q. So, the assets that were covered by 2 these protections, if they went down in value, 3 FSLIC would -- 4 A. Protect you. 5 Q. -- would make a financial contribution 6 to the survivor of the association? 7 A. That's correct. 8 MR. RINALDI: Once again, I have to 9 object. If he has an understanding of what the 10 Southwest Plan is, he should give that 11 understanding. But we have Mr. Villa, who 12 obviously is quite conversant on the subject, 13 testifying for the witness. 14 THE COURT: All right. Sustained. 15 Q. (BY MR. VILLA) Did you believe at 16 this point in May of 1988 that United was going to 17 be a participant in the Southwest Plan? 18 A. In May of 1988? 19 Q. Yes, sir. 20 A. No, I didn't think we were going to be 21 a participant in the Southwest Plan at this time. 22 Q. Had the regulators raised a problem 19739 1 with respect to United's participation? 2 A. Yeah. The regulators said to us that 3 we needed to get a senior S&L person in to United 4 Savings before we could be considered a 5 participant -- potentially a participant in the 6 Southwest Plan. 7 Q. Let me direct your attention, sir, to 8 Exhibit B2165, which would be the next one in your 9 book. 10 Do you have that before you? 11 A. 2165, yes, I do. 12 Q. And is that a Houston Chronicle article 13 of April 30, 1988? 14 A. Mine says April 29th. 15 Q. You're correct. 16 And this is one that has been released 17 with respect to United Financial Group. Right? 18 A. Yes, that's correct. 19 Q. Would you have seen this at or about 20 the time that it was -- 21 MR. VILLA: Your Honor, I note that my 22 copy seems to have additional matters attached to 19740 1 it. The exhibit that I'm offering is a one-page 2 exhibit. And it has -- at least what I see is a 3 number of additional pages attached. I did not 4 intend to offer those. So, I move to admit the 5 Houston Chronicle article of April 29, 1988. 6 MR. RINALDI: Your Honor, this is a 7 document that was produced by Hewitt & Associates. 8 This is how it came from Hewitt's & Associates' 9 files. You'll see that it has a Bates stamp at 10 the bottom. I think if you're going to offer the 11 document, you ought to offer the entire document 12 for -- since that's the way it came out of the 13 Hewitt files. 14 MR. VILLA: Your Honor, I'm offering 15 the document not because it came from the Hewitt 16 files but because it happens to be where we 17 apparently found the copy of the article 18 discussing United's future in the Southwest Plan. 19 The remainder of the material is not relevant to 20 my discussion, and I really don't know what it is. 21 So, I offer -- 22 THE COURT: All right. I'll receive 19741 1 the one-page exhibit, B2165. 2 MR. VILLA: Thank you. 3 Q. (BY MR. VILLA) Now, sir, I'd like to 4 direct your attention to the fourth paragraph in 5 the fourth column which begins "United 6 headquartered in Houston." 7 Do you see that? 8 A. Yes, I do. 9 Q. And just read that to yourself. It 10 starts, "United headquartered in Houston" and goes 11 over to the fifth column. 12 A. (Witness reviews the document.) Right. 13 Q. And did this -- sir, is this one of the 14 newspapers that covers this area, the Houston 15 Chronicle? 16 A. Now it's the only one, yes. 17 Q. The only one. 18 Do you recall what the financial 19 community's perception was of United's likelihood 20 of getting into the Southwest Plan in April of 21 1988? 22 A. Yes. I believe they felt confident 19742 1 that United was going to get into the Southwest 2 Plan. 3 Q. And, in fact, that's what's discussed 4 in this article. Right? 5 A. Yes, it is. 6 Q. Now, I'd like you to turn to the next 7 two documents together. Actually, let me -- 8 before I do that, I think it uses the terms in 9 here "lead institution into which smaller 10 institutions/thrifts may be put." 11 Do you see that? 12 A. Yes, I do. 13 Q. And what does that mean to you? 14 A. Well, again, that we would be a 15 survivor and would be acquiring other smaller S&Ls 16 in this area. 17 Q. Let me direct your attention to the 18 next two exhibits together, which are A11098 and 19 B2176. 20 Do you see those two? 21 A. Yes, I do. 22 Q. And have you had an opportunity to 19743 1 review those prior to your testimony today? 2 A. Yes, I have. 3 Q. And are these -- can you tell me, sir, 4 whether these two documents describe the same 5 meeting that you attended? 6 A. Yes, they do. 7 Q. And what is B2176? 8 A. B2176 is my memo to files dated May 4th 9 relating to a meeting with the Federal Home Loan 10 Bank of Dallas. 11 Q. And do you know what B -- I'm sorry -- 12 A11098 is? 13 A. I believe it's Ginger Baugh's memo of 14 the same meeting. 15 Q. Okay. 16 MR. VILLA: Your Honor, I move B2176 17 and A11098 into evidence. 18 MR. RINALDI: Your Honor, I have no 19 objection to B2176. On the other hand, I don't 20 have a clue as to the authenticity of this 21 document or how Mr. Berner would know that it was 22 actually authored by Ginger Baugh. 19744 1 THE COURT: Well, you referred to -- 2 which one are you referring to? 3 MR. RINALDI: I'm talking about A11098. 4 Mr. Berner just testified that the handwritten 5 notes are the notes of Ginger Baugh taken of a 6 meeting on May the 3rd, 1988. That may well be 7 true, but I don't know that to be the case. 8 THE COURT: But you have no objection 9 to the document? 10 MR. RINALDI: Well, I'd object to the 11 document, having never read it before -- or not 12 recognizing this, having read it before, but I 13 have no objection to B2176. This apparently is 14 Mr. Berner's own memo which, it appears, recites 15 what went on at a meeting on May the 3rd. Since 16 he drafted the memo, I have no objection to him 17 testifying regarding the contents of the memo. 18 THE COURT: Received. Can you lay some 19 foundation for the -- 20 MR. VILLA: Your Honor, it was 21 identified in Ms. Baugh's deposition where I 22 believe Mr. Rinaldi was present as Exhibit 80 and 19745 1 she identified it at Page 473 through 479 of her 2 deposition and identified it as handwritten 3 minutes of a meeting that she attended on May 3rd, 4 1988, where Mr. Berner and others were present. 5 So, the two -- we have essentially -- 6 it was produced by the Federal Home Loan Bank 7 Board, as well. 8 MR. RINALDI: If the representation of 9 Mr. Villa is accurate, I have no objection then to 10 the document. Unfortunately, I don't have a 11 perfect recall of all depositions I have attended. 12 THE COURT: All right. Received. 13 MR. VILLA: Thank you, Your Honor. 14 I'll provide you with a copy. It was marked 15 Twomey 53, and the same document was marked 16 Ginger Baugh or, I'm sorry, Baugh 80 and it was 17 identified in her deposition at those pages that 18 I've just provided the Court. 19 Q. (BY MR. VILLA) Now, sir, both of 20 these documents refer to George Barclay as a 21 participant. 22 Do you see that? 19746 1 A. Yes, I do. 2 Q. Who is George Barclay? 3 A. Mr. Barclay was, I believe, the 4 president of the Federal Home Loan Bank of Dallas. 5 He was the highest officer of the Federal Home 6 Loan Bank of Dallas at that time. 7 Q. And do you recall, sir, having a 8 meeting with Mr. Barclay in early May of 1988? 9 A. Well, I recall it by looking at this, 10 yes. 11 Q. Do you -- let's forget the date for a 12 moment. 13 Do you remember meeting with 14 Mr. Barclay in the spring of 1988 involving United 15 Savings Association and a number of issues that 16 arose out of United Savings? 17 A. Yes, I do. 18 Q. Without these two documents, you 19 wouldn't be able to tell me the date of the 20 meeting; is that right? 21 A. That's correct. 22 Q. And let me direct your attention to the 19747 1 first set of minutes, the handwritten ones, at 2 A11098. 3 Do you see those, sir? 4 A. Yes, I do. 5 Q. And under the first -- under the -- 6 after the names, there is some handwriting. And 7 I'll read it. It says, "FSLIC proposal in D.C. 8 George B., quote, 'FSLIC is intrigued,' close 9 quote. We believe United has good management team 10 but needs solid, hard-driving experienced 11 financial CEO." 12 Do you see that? 13 A. Yes, I do. 14 Q. Now, tell me what you remember about 15 this issue and the discussions with Mr. Barclay 16 who was the president of the Federal Home Loan 17 Bank of Dallas. 18 A. Well, I remember specifically that, 19 that Mr. Barclay was telling us that we had a 20 good -- United had a good management team, a solid 21 management team but needed to get an experienced, 22 hard-driving CEO with S&L experience, strong S&L 19748 1 experience. 2 Q. Now, if you look at your document, your 3 memo, which is B2176, in the second full 4 paragraph, third line, you see, quote, 5 "Mr. Barclay stated that it was his understanding 6 that FSLIC was intrigued with the idea of the real 7 estate deal and that the report was generally good 8 on United's management." 9 Do you see that, sir? 10 A. Yes, I do. 11 Q. And in the fourth paragraph, it says 12 that -- a discussion about Dallas would prefer a 13 hard-driving, financially-oriented CEO. 14 Do you see that? 15 A. I think it's the third paragraph, but 16 yes. 17 Q. I think you're correct. 18 Now, sir, this was the bank board's 19 minutes and your minutes of the same meeting, in 20 fact, showing the same words coming out of 21 Mr. Barclay's mouth. Right? 22 A. Yes, that's correct. 19749 1 Q. What was the bottom line of this 2 discussion, as far as you were concerned, with 3 respect to the position of the Federal Home Loan 4 Bank of Dallas regarding the quality of USAT's 5 management? 6 A. The quality of management? Again, that 7 they thought that management was very good, and 8 the only thing we lacked was a senior S&L type 9 person. 10 Q. In your understanding, was there 11 anybody in the Federal Home Loan Bank of Dallas 12 that had a higher position than George Barclay? 13 A. There was nobody that I knew that had a 14 higher position. 15 Q. Now, if you take a look at the second 16 page of the handwritten notes which is 17 Exhibit A11098, there is -- about five lines 18 down -- something about Heidrick or Hydryn and 19 Struggles and CEO Job Search. 20 Can I ask you, sir: What is Heidrick & 21 Struggles? 22 A. They are a well-respected, fairly large 19750 1 or very large executive search firm. 2 Q. And did USAT hire Heidrick & Struggles 3 at some point? 4 A. Yes, we did. 5 Q. For what -- for what role? 6 A. To find a CEO, somebody with a strong 7 S&L background to be CEO. 8 Q. And who did Heidrick & Struggles 9 ultimately identify and assist USAT in hiring? 10 A. Larry Connell. 11 Q. Are you familiar with Mr. Connell's 12 reputation in the financial services industry? 13 A. Yeah. He both then and now has an 14 outstanding reputation in financial services. In 15 fact, I may be mistaken, but I thought he was the 16 Treasury's nominee to be chairman of the FDIC 17 recently, within the last couple of years or so. 18 He's well-respected. 19 Q. Do you recall what the reaction was 20 from the regulators at the Federal Home Loan Bank 21 of Dallas when they learned that United's 22 selection for its CEO was Larry Connell? 19751 1 A. They were very pleased. 2 Q. Let me show you what's been marked as 3 Exhibit B2199 and ask you if you can identify it. 4 A. Yeah. This is a memo from me dated 5 May 18th about a conversation with Neil Twomey. 6 MR. VILLA: Your Honor, I move B2199 7 into evidence. 8 THE COURT: Received. 9 Q. (BY MR. VILLA) Now, Mr. Berner, I'd 10 like to direct your attention to the last sentence 11 of B2199. 12 Do you see that? 13 A. Yes, sir, I do. 14 Q. And you've told us that the Federal 15 Home Loan Bank of Dallas was favorably disposed 16 toward Mr. Connell. Remember that just a moment 17 ago? 18 A. Right, yes, sir. 19 Q. Can you tell me what is referred to in 20 the last sentence of B2199? 21 A. Again, that -- Mr. Twomey is telling me 22 that the Federal Home Loan Bank is aware of the 19752 1 people we were talking to for being CEO and that 2 they thought they were all strong candidates, good 3 candidates. 4 Q. Now, let me direct your attention to 5 the next document in your book, which is 6 Exhibit B2191 which has already been introduced 7 into evidence as Tab 465. 8 Do you see that, sir? 9 A. Yes, I do. 10 Q. Can you just tell us for the record 11 what it is? 12 A. It's a letter from the Federal Home 13 Loan Bank of Dallas to the United Savings board 14 dated May 13th, 1988. 15 Q. And you were on the United Savings 16 board at this point in time. Right? 17 A. Yes, I was. 18 Q. According to this letter, according to 19 what you can determine from this letter from 20 Mr. Twomey, would United Savings' failure to meet 21 its minimum regulatory net worth have affected 22 USAT's ability to enter into employment 19753 1 arrangements with its employees? 2 A. No. There is no reference to that. 3 Q. Do you see anything in the letter that 4 would suggest that? 5 A. I don't. No, I don't. 6 Q. I'd like for you to turn to the last 7 paragraph of the letter. There is a reference to 8 a capital forbearance application. 9 Do you see that? 10 A. Right, yes. 11 Q. And had United filed a capital 12 forbearance application by this time? 13 A. Yes, we had. 14 Q. And the last sentence of the letter 15 says, "Therefore no, action will be taken at this 16 time in regards to the noted violation." 17 Do you see that? 18 A. Yes, I do. 19 Q. Did you have an understanding as to 20 whether the Federal Home Loan Bank Board intended 21 to take any action whatsoever against USAT because 22 USAT had fallen below its minimum regulatory 19754 1 capital limits? 2 A. It was my understanding at this time 3 that they were not going to take any action 4 against United. 5 Q. I'll direct your attention to T8069, 6 which has been introduced in evidence as Tab 429. 7 Do you see that, sir? 8 A. Yes, I do. 9 Q. And that's a letter dated May 13, 1988, 10 from Mr. Twomey to Mr. Gross. Right? 11 A. Right. 12 Q. And it asks for copies of certain 13 agreements. I think you had a discussion with 14 Mr. Rinaldi about this. 15 Do you recall that? 16 A. Yes, I did. Yeah, I sure did. 17 Q. And let's look at the next letter, 18 which is the response, which is T8071 which is 19 Tab 420. Perhaps you can shed some light on the 20 circumstances under which Tab 420 was prepared. 21 A. I guess the record should show that 22 that's a joke. Right? 19755 1 Q. Let me ask you: Can you tell us again 2 the circumstances under which Tab 420, 3 Exhibit T8071, was prepared? 4 A. Yeah. As I explained with 5 Mr. Rinaldi's question, I was leaving that day to 6 go on my honeymoon when this letter was written. 7 Q. Do you actually recall dictating it and 8 leaving it for your secretary to type and sign for 9 you? 10 A. I don't, but I have no reason to think 11 I didn't. 12 Q. Now, let me ask you, sir: Do you have 13 a present recollection of the thought process that 14 you went through when you responded to 15 Mr. Twomey's letter? 16 A. No. The thought process? No. I don't 17 have a recollection. 18 Q. I'm sorry? 19 A. I don't have a present recollection of 20 that. 21 Q. Why do you believe that you responded 22 in the fashion that you did as set out in T8071? 19756 1 A. Well, I think at that time, if you 2 remember, the UFG -- the September 9th UFGI 3 contract had been triggered. UFGI had sufficient 4 wherewithal to -- you know, to pay if they had to 5 pay under those severance arrangements. And we 6 were in the process of negotiating with the 7 employees and drafting new contracts for UFGI and 8 USAT. So, I think I just dismissed the fact that 9 there was a USAT contract. 10 Q. Now, by this point in time -- and we're 11 talking about May 18 -- the USAT February 11th 12 board meeting had occurred at which these 13 contracts had been discussed. Right? 14 A. Sure, yeah. They -- yes. 15 Q. And we've seen the March 1988 10K and 16 proxy statement? 17 A. Right. 18 Q. Were they discussed in there? 19 A. Yes, they were. 20 Q. Sir, were you making an attempt to hide 21 from Mr. Twomey the existence of the February 11, 22 1988 USAT contracts? 19757 1 A. Absolutely not. 2 Q. Would you agree with me, sir, that the 3 letter could have been drafted more precisely? 4 A. If I knew then what I know now, 5 absolutely, it could have been drafted more 6 precisely. 7 Q. Let me show you what's been marked as 8 Exhibit B2211, which is a letter -- I'm sorry. 9 Can you take a look at it? 10 A. Yes. 11 Q. What is that, sir? 12 A. It's a letter from Neil Twomey to the 13 board of directors of United Financial Group dated 14 May 23, 1988. 15 Q. And is this the response that Mister -- 16 excuse me. This is in evidence as Tab 1376. 17 Is this Mr. Twomey's response to your 18 letter of May 18th? 19 A. Yes, it is. 20 Q. And then let's look at the next 21 exhibit, which is Exhibit B2218 which is admitted 22 at Tab 484. 19758 1 Can you tell us what that is? 2 A. It's a letter from me to Mr. Twomey 3 dated June 1, 1988 responding to that May 23 4 letter. 5 Q. Okay. And what did you send along with 6 Exhibit B2218, your June 1st letter? 7 A. I sent along the United Financial Group 8 contracts for Mike Crow, Jeff Gray, Jim Jackson, 9 Jim Wolfe, Bruce Williams, and myself. And I sent 10 along the bonus arrangement agreements between 11 Mr. Gross and Mr. Crow and United Financial Group. 12 Q. Did you advise Mr. Twomey in this 13 letter of a compensation consultant that had been 14 retained by United Savings and the work that that 15 compensation consultant was going to do? 16 A. Yes, I did. 17 Q. And why don't you tell us about that. 18 A. Well, I told him that United Savings 19 had retained a compensation consultant and, as a 20 result, they were reviewing the agreements and 21 were going to make improvements -- recommendations 22 for improving the agreements and, as a result, we 19759 1 expected to enter into new contracts within the 2 near future. 3 Q. Now, was there any discussion at this 4 point, both verbally with Mr. Twomey and in this 5 letter, about the potential for hiring a new 6 senior executive officer? 7 A. I believe there's something in this 8 letter -- yes. We had a conversation about hiring 9 a new CEO. 10 Q. And was there -- did United discuss the 11 possibility of giving the new executive officer an 12 employment agreement, as well? 13 A. Yes. Yes, we did. 14 Q. Let me show you -- let me direct your 15 attention, sir, to the next exhibit which is 16 Exhibit B2224 and ask if you can identify that 17 document. 18 A. Yes. This is a memo from me dated 19 June 3rd relating to a conversation I had with 20 Neil Twomey on that same date. 21 MR. VILLA: Your Honor, I move 22 Exhibit B2224 into evidence. 19760 1 MR. RINALDI: No objection, Your Honor. 2 THE COURT: Received. 3 Q. (BY MR. VILLA) Sir, let me direct 4 your attention to the bottom of Page 1 and the top 5 of Page 2, the last paragraph on Page 1 and the 6 top of Page 2, and ask you to read that to 7 yourself and I'll ask you a few questions about 8 it. 9 A. (Witness reviews the document.) 10 Q. Have you read it, sir? 11 A. Yes. 12 Q. Now, can you -- can you tell us about 13 this discussion you had with Mr. Twomey, both by 14 whatever this refreshes your recollection and your 15 own memory, about the impact of the hiring or 16 imminent hiring of Mr. Connell as having United's 17 prospects as a Southwest Plan acquirer? 18 A. I was being told at that time and 19 subsequent to -- subsequent to that that if, you 20 know, Larry Connell or somebody of his caliber was 21 hired as a CEO, we would be considered a 22 participant for the Southwest Plan, that that was 19761 1 the last hurdle they were looking for. 2 Q. So, what was your expectation at this 3 point as to whether United was going to survive 4 and, in this case, as a Southwest Plan acquirer? 5 A. Again, at this point, it was extremely 6 positive because we knew we were about ready to 7 hire somebody. And once we hired that person, 8 we'd be a participant. 9 Q. Let me direct your attention to the 10 next exhibit, which is A1558 which has been 11 admitted as Tab 465A. 12 Why don't you just tell us what that 13 is. 14 A. This is the minutes of the compensation 15 committee of United Financial Group of June 7th, 16 1988. 17 Q. And who was present at this meeting of 18 the compensation committee besides the members and 19 you and Mr. Munitz? 20 A. Mark Gordon of Hewitt. 21 Q. And did he present a report at that 22 meeting? 19762 1 A. Yes, he did. 2 Q. And do you recall, sir, what his -- 3 what the conclusions were of Hewitt & Associates 4 about the compensation at United of its senior 5 executive officers as compared to competitive 6 institutions by peer group across the country? 7 A. Yeah. His report said that the 8 compensation was competitive and was fair. 9 Q. And that the summary of that report is 10 set forth in Paragraph 3 or the third paragraph of 11 the June 7, 1988 minutes that we're looking at, 12 Exhibits A1558. Right? 13 A. That's right. 14 Q. Now, let me ask you to turn to 15 Exhibit T8074, which is the next document in your 16 book which is admitted at Tab 432. 17 Do you see that, sir? 18 A. Yes, I do. 19 Q. Can you recognize that document and 20 tell us what it is? 21 A. This was a report or it might have been 22 part of that report, but it was a memo prepared by 19763 1 Hewitt relating to different methods for funding 2 and securing benefits. 3 Q. Was this the report that Mr. Gordon 4 presented at the June 7th compensation committee 5 meeting? 6 A. I think it was part of it. It was part 7 of the report. 8 Q. What did Hewitt examine in connection 9 with the funding and securing of non-qualified 10 benefits? 11 A. I don't recall right now. I'd have to 12 look at this. 13 Q. Do you know whether they looked at the 14 means by which these benefits could be funded? 15 A. Oh, yeah. They looked at all the 16 different possible means, but I wasn't sure if 17 they had looked at other agreements or what they 18 specifically looked at. 19 Q. I see. Let me direct your attention 20 to -- let me ask you: Do you recall what funding 21 arrangement they ultimately included in the new 22 contracts -- was ultimately included in the new 19764 1 contracts? 2 A. Letters of credit and, if they failed, 3 I think it provided for a trust arrangement. 4 Q. Let me direct your attention to the 5 second page of this exhibit and the second 6 paragraph. 7 Do you see that? 8 A. When you say the second page, is that 9 the one that begins "about the material"? 10 Q. Yes, correct. "About the material." 11 A. Yes. 12 Q. Do you see that? 13 A. Yes. 14 Q. And the second paragraph says, quote, 15 "Before acting on any of these approaches, 16 Hewitt & Associates suggests that UFGI check with 17 outside counsel to make sure any funded 18 arrangements do not violate federal or state 19 banking laws regarding unsafe and unsound 20 practices." 21 Did you receive any opinion from 22 outside counsel as to whether or not the letter of 19765 1 credit funding arrangements would be considered 2 unsafe and unsound practices? 3 A. We didn't get a legal opinion, no. 4 Q. Why not? 5 A. Law firms generally -- as we talked 6 about I think this morning or yesterday -- will 7 not give you a legal opinion on things that are 8 factual in nature. And whether something is 9 unsafe or unsound is not something that a lawyer 10 could point to and make a legal judgment on. 11 Q. But did you -- did you discuss this 12 issue with your outside legal counsel? 13 A. Yes, I did. 14 Q. And I think you've told us about your 15 review of the memo that Mr. Leahey sent to you in 16 late March of 1988. Right? 17 A. You mean -- yes. Yes, I do. 18 Q. Did you discuss it with him after he 19 sent you the memo? 20 A. Yes, I did. 21 Q. And after receiving this memorandum 22 from Hewitt, did you also discuss it with 19766 1 Mr. Leahey? 2 A. Yes, I did. 3 Q. Did you reach any different conclusion 4 than you had reached in March of 1988 with respect 5 to whether or not the funding arrangements were 6 unsafe or unsound practices? 7 A. No. It was the same conclusion. It 8 was certainly -- there was a chance that somebody 9 might come in and say that they were unsafe or 10 unsound practices, but the same conclusion. 11 Q. And did you reach the same conclusion 12 as to which party was at risk if they were deemed 13 to be unsafe and unsound practices? 14 A. Yeah. It was the employee getting the 15 contract and hoping that he would have severance 16 payments was the one that was at risk. 17 Q. And in these circumstances, since you 18 were one of those employees, would you have been 19 at risk personally? 20 A. Sure. 21 Q. Now, I think you told us that the final 22 agreements that -- and we're going to look at them 19767 1 in a moment -- used as their funding and securing 2 source initially letters of credit and then later, 3 when that didn't work, a trust agreement. Right? 4 A. Yeah, I think that was what was 5 provided in the agreement. 6 Q. And do you know whether Hewitt took 7 into consideration the fact that USAT had used 8 letters of credit to secure the employment 9 contracts of Sandy Laurenson, Eugene Stodart, and 10 Dominic Bruno? 11 A. Yes. I believe they did. They looked 12 at that, yes. 13 Q. Do you know whether the new letter of 14 credit provisions were materially different than 15 the ones that had been used for the 16 Stodart/Bruno/Laurenson contracts? 17 A. I don't believe they were. 18 Q. Let me show you what's been marked as 19 the next exhibit in order, which is Tab 435, 20 Exhibit T8079. 21 Do you have that before you, sir? 22 A. Yes, I do. 19768 1 Q. Just tell us for the record what it is. 2 A. It's the minutes of the special board 3 of directors meeting of United Financial Group of 4 June 28th, 1988. 5 Q. And at this point, were you a director 6 of United Financial Group? 7 A. Yes, I was. 8 Q. I'd like to direct your attention to 9 Page 3 of these minutes, the second and third 10 paragraphs, and ask you to look at those two 11 paragraphs and tell us what occurred. 12 A. (Witness reviews the document.) Jim 13 Whatley reported to the board about the Hewitt 14 report and the need for the -- these new contracts 15 and recommended, based on the Hewitt report, that 16 these contracts be entered into. 17 Q. And did the board vote on the 18 contracts? 19 A. Yes, they did. 20 Q. Were there any abstentions? Can you 21 tell whether abstained from the vote? 22 A. Well, as each contract came up, the 19769 1 person who was specifically -- whose contract was 2 coming up abstained from the vote on his contract. 3 Q. Let me ask you to turn -- look at the 4 next exhibit, which is T8078, and it's been 5 introduced into evidence as Tab 434. 6 Do you see that? 7 A. Yes, I do. 8 Q. And -- by the way, were any directors 9 not present at the meeting of the United Financial 10 Group on June 28? 11 A. I believe that Paul Schwartz was not 12 present at that time. 13 Q. And let's look at the USAT minutes that 14 I have just directed you to, T8078. 15 Can you tell whether Mr. Schwartz was 16 present at this meeting? 17 A. He was not present at this meeting. 18 Q. Not present at either meeting? 19 A. Right. 20 Q. Now, I'll direct your attention to the 21 third, fourth, fifth, and sixth paragraphs on that 22 page. If you'd just review them quickly and tell 19770 1 us what happened at the USAT board meeting. 2 A. The same thing. There was a report by 3 Mr. Whatley about the Hewitt report and the 4 compensation -- the contracts, and they were 5 adopted. 6 Q. And were there any abstentions on that 7 vote? 8 A. Well, again, as each person's contract 9 came up, that person abstained if he was on the 10 board. 11 Q. Was there any other way that you know 12 of to proceed on voting for these contracts other 13 than having the person whose contract was involved 14 abstain? 15 A. I mean, I conceivably could have had 16 just the outside independent director, 17 Mr. Whatley, vote on all the contracts. 18 Q. Well, because Mr. Schwartz was not 19 present, how many individuals were entitled to 20 vote at that meeting who were not receiving 21 contracts? 22 A. Just Mr. Whatley. 19771 1 Q. Just Mr. Whatley? 2 A. Right. 3 Q. And who was the person who was 4 proposing the contracts for adoption by the board? 5 A. Mr. Whatley. 6 Q. Do you have any reason to believe that 7 the outcome of this vote would have been different 8 had all of the people who had contracts or could 9 have entered into contracts abstained entirely 10 from all voting? 11 A. Mr. Whatley would have voted in favor 12 of them. 13 Q. You regularly practice corporate and 14 securities law, don't you, sir? 15 A. Yes, I do. 16 Q. And you're familiar with the customs 17 and practices provisions of Delaware law? 18 A. Yes, I am. 19 Q. As well as Texas law? 20 A. Yes, I am. 21 Q. Do issues like this come up from time 22 to time in corporate law in which boards of 19772 1 directors are -- take action on items that may 2 affect them personally? 3 A. It comes up all the time, yes. 4 Q. And how -- what's the standard method 5 that you're aware of of resolving this type of an 6 issue? 7 A. Well, as long as it's fully disclosed 8 to the non-interested or disinterested directors, 9 they would note on it. They very often would get 10 outside consultants to pass on the fairness of the 11 particular agreement, and then they would vote. 12 Sometimes with, sometimes without the interested 13 directors voting also. 14 Q. So, one issue would be disclosure. 15 Right? 16 A. The first issue, yes. 17 Q. And the second issue would be possibly 18 getting an outside independent consultant to look 19 at the issue? 20 A. Right, that's correct. 21 Q. And the third question would be whether 22 a majority of the uninterested directors were 19773 1 voting in fair of it. Right? 2 A. Yeah. The disinterested directors, 3 that's correct. 4 Q. Disinterested. 5 Can you tell me, sir, whether that 6 procedure was followed here? 7 A. It was. The only difference was that 8 also the interested directors voted on 9 contracts -- not their particular contract, but 10 they voted on everybody else's contract. 11 Q. Now, in questioning by Mr. Rinaldi, you 12 were asked whether -- about the necessity of 13 certain matters being approved by the board of 14 directors by regulation and otherwise. 15 Do you remember that? 16 A. Yes, I do. 17 Q. And let me pull out this regulation 18 again so we can determine exactly what issues have 19 to come before the board. I know this doesn't 20 help much, but I've placed up here Exhibit B4245 21 which is -- 22 A. I'm going to look at my book because I 19774 1 can't see that. 4245? 2 Q. Yes. It's in the first book of your 3 documents. 4 A. It's been taken out of the book. I'll 5 look at that. 6 Q. Which is Exhibit B4245 and 12 CFR 7 564.39 under "employment contracts." 8 Do you see the line that says "All 9 employment contracts shall be in writing and shall 10 be approved specifically by an institution's board 11 of directors"? 12 A. Yes, I do. 13 Q. You can see that? 14 A. I can. As you point to it, I can see 15 it. 16 Q. Okay. Now, let me ask you, sir: Was 17 there a necessity for these contracts to be 18 considered by the USAT board of directors under 19 the regulation that we've just seen? 20 A. Yes, I think so. 21 Q. Now, do you construe the requirement of 22 having employment contracts in that 563.39 to be 19775 1 considered by the board of directors to apply to 2 other compensation practices such as the executive 3 bonus plan? 4 A. I wouldn't construe it that way. 5 Q. Would you construe it as applying to 6 other practices such as rolling the prior year's 7 bonuses into the salaries and breaking it up over 8 a period of the year so long as it was not done in 9 a written contract? 10 A. I wouldn't consider that an employment 11 contract, no. 12 Q. Now, Mr. Rinaldi asked you whether you 13 reciprocated in the voting on June 28 by voting 14 for the contracts of the other executives that 15 came up. 16 Do you recall him asking you that and 17 using that word? 18 A. I do actually, yes. 19 Q. Did you vote for Mr. Crow's contract, 20 for example, because he voted for yours? 21 A. No. 22 Q. Why did you vote for Mr. Crow's 19776 1 contract? 2 A. Because I thought it was fair, and I 3 thought it was in the best interest of USAT. 4 Q. Did you take into consideration the 5 person who was recommending the contract and the 6 issues and the advice on which he relied? 7 A. I certainly took into account the fact 8 that Mr. Whatley was recommending these contracts, 9 and he relied on the Hewitt report. 10 Q. Now, is that true of your votes for the 11 other contract recipients who were directors at 12 that meeting? 13 A. Yes, it is. 14 Q. Actually, I mean both meetings, UFG and 15 USAT. 16 A. Yes. Yes, it is. 17 Q. Did you vote for the contracts of 18 Mr. Wolfe, Mr. Williams, Mr. Jackson, Mr. Gray, 19 and Mr. Stodart? 20 A. Yes, I did. 21 Q. None of them were directors, were they, 22 sir? 19777 1 A. No, they were not. 2 Q. Let's talk for a moment about conflicts 3 of interest, actual and apparent. 4 Mr. Rinaldi asked you whether you 5 thought the approval -- the voting process on the 6 USAT and UFG employment contracts were an actual 7 or apparent conflict of interest because the 8 directors or some of them voting on them would 9 receive contracts. 10 Do you recall that, sir? Do you recall 11 that colloquy with Mr. Rinaldi? 12 A. I think I do, yes. 13 Q. Now, if USAT had a board of outside 14 directors, would you have used them to review and 15 approve the contracts? 16 A. Absolutely. 17 Q. Was that an option that was open to 18 USAT at that time? 19 A. We had one -- well, we had two outside 20 directors, one of whom was at this meeting and one 21 of whom wasn't. 22 Q. And what role did the outside director 19778 1 have in forming compensation policy for USAT and 2 UFG, speaking of Mr. Whatley? 3 A. Well, he was the compensation 4 committee. 5 Q. And what effect did his decision have 6 with respect to the compensation practices in the 7 form of employment contracts at USAT and UFG 8 during at least the last eight months of the year 9 1988? 10 A. It was -- I mean, he was the committee. 11 So, whatever he formed, his practices were the 12 compensation practices of USAT and UFG. 13 Q. Now, let's return to the June 28 14 meetings and particularly the USAT meeting. 15 Did the USAT board consider hiring 16 Larry Connell for the position of chief executive 17 officer? 18 A. Yes. 19 Q. And do you recall what the board 20 decided? 21 A. To hire him. Well, I was supposed 22 to -- we were going to draft a contract and get 19779 1 him a contract, basically to hire him. 2 Q. Do you recall if Mr. Connell received 3 an employment contract which was any different 4 from the ones that had been drafted for the other 5 officers of United Savings Association of Texas? 6 A. There were a few special little 7 provisions in there; but basically, it was the 8 same. 9 Q. Let me direct your attention to B2274 10 and ask you if you can identify that document for 11 us. 12 A. Yeah. This is a memo from me dated 13 June 30 relating a conversation with Neil Twomey 14 which took place on June 29th. 15 MR. VILLA: Your Honor, I move B2274 16 into evidence. 17 MR. RINALDI: No objection, Your Honor. 18 THE COURT: Received. It looks 19 familiar. Are you sure it's not already in? 20 MR. VILLA: There are very few things 21 I'm sure of. When you ask me that question, I get 22 less sure. 19780 1 THE COURT: Looks like it's in at 2 T8081. 3 Q. (BY MR. VILLA) Mr. Berner, for the 4 remaining questions I'm going to ask you, you can 5 consider the document before you as T8081, 6 Tab 1377. Let me ask you to review the first 7 paragraph of this memorandum and then tell us what 8 you recall of your conversation with Neil Twomey 9 about his review of the contract that was going to 10 be provided to Larry Connell. 11 A. Well, I had told him that we were in 12 the process of hiring Larry Connell and that we 13 were going to be signing a contract with him. And 14 I asked Neil, Mr. Twomey, if he felt he needed to 15 review that contract. And my recollection is that 16 he said no, it wasn't required, but that he 17 strongly suggested that I send the contract to him 18 and if he had any problems with it, he would let 19 me know. And if he didn't, it would be okay. And 20 I think he would talk to Barclay, George Barclay 21 about it. 22 Q. Now, what was your understanding, sir, 19781 1 about whether or not Mr. Twomey was going to get 2 back to you if he had no problems with the 3 contract? 4 A. If he had no problems with it? 5 Q. Correct. 6 A. He was not going to get back to me if 7 he had no problems with the contract. 8 Q. Let me direct your attention now to the 9 second paragraph of this memorandum, T8081, and 10 ask you to review that. 11 A. Okay. 12 Q. Now, since you've got a quote in here, 13 I'll read it. It says, "Neil flatly stated that 14 after we had hired Connell, we would have, quote, 15 'satisfied all of the requirements that the 16 Federal Home Loan Bank of Dallas had concerning 17 United,' close quote, and that United would be -- 18 would have no impediments to participating in the 19 Southwest Plan." 20 Do you see that? 21 A. Yes, I do. 22 Q. Do you recall that discussion, that 19782 1 particular discussion, that occurred on the day 2 that you were sending the Connell contract to 3 Mr. Twomey? 4 A. I absolutely do recall that discussion 5 because that was extremely important to us, to 6 know that we would be participating in the 7 Southwest Plan. And with the hiring of Larry 8 Connell, there were no more problems. We had 9 satisfied all of the Dallas bank's problems. 10 Q. And is that why you put that particular 11 sentence in quotes, because of its significance to 12 you? 13 A. That's exactly right, sir. 14 Q. Let me now direct your attention to 15 A11031 and ask you if you can identify that for 16 me. 17 A. That's my letter to Neil Twomey 18 forwarding Larry Connell's contract. 19 MR. VILLA: That's in evidence, Your 20 Honor, as Tab 467. 21 Q. (BY MR. VILLA) And does the last 22 sentence of that reflect the agreement that you 19783 1 had with Mr. Twomey? 2 A. Absolutely. 3 Q. And what does it say? 4 A. It says, "I'd appreciate you reviewing 5 this agreement and letting me know if you see any 6 major problems." 7 Q. Mr. Berner, why did you send that 8 letter? 9 A. That was part of the arrangement that 10 we had made on the day before when we had -- on 11 this day. When I talked with Mr. Twomey, he said, 12 "Send me the contract and I'll let you know if I 13 have any problems." 14 Q. Did you have any further conversations 15 or correspondence with Neil Twomey prior to 16 October -- late October 1988 as to whether or not 17 he had any major problems with the Connell 18 contract that you sent him on or about June 30, 19 1988? 20 A. Nothing. He never said a word till we 21 received that letter in the end of October about 22 the contracts. 19784 1 Q. So, what conclusion did you draw about 2 whether or not the contract that you sent him on 3 June 30, 1988, had any major problems in it from a 4 regulatory standpoint? 5 A. My conclusion was that it didn't have 6 any major problems. If it had a problem, the 7 arrangement that he and I had was that he would 8 let me know. 9 Q. I'd like you to turn to the next 10 document. It's Exhibit B2281. 11 MR. VILLA: Your Honor, I stand 12 corrected. This document is in evidence as 13 Exhibit B2279, Tab 1446. 14 THE COURT: What's 22 -- do you have it 15 as 2281? 16 MR. VILLA: I have 2281 erroneously on 17 the document, Your Honor. It should be 2279. 18 THE COURT: Thank you. 19 MR. RINALDI: And the tab is? 20 MR. VILLA: Tab 1446. 21 Q. (BY MR. VILLA) Sir, can you identify 22 this document? 19785 1 A. This is the agreement between Larry 2 Connell and United Savings of July 1st, 1988. 3 Q. And is this the agreement that you 4 would have sent Mr. Twomey? 5 A. Yes, it is. 6 Q. Let me direct your attention to 7 Paragraph 9 of the agreement. 8 A. Do you have a page number? 9 Q. I'm trying to get you the page. 10 MR. RINALDI: 2279 is the Connell 11 contract; is that right? 12 MR. VILLA: The Connell contract is 13 what it's supposed to be. 14 Q. (BY MR. VILLA) I'd like to direct 15 your attention to Page 19. 16 Do you see that, sir? Paragraph 9I. 17 A. Yes, I do. 18 Q. And is this the security -- is this the 19 provision that requires USAT to provide security 20 for severance and other payments under the 21 agreement? 22 A. Yeah. This was the provision where we 19786 1 would try to provide a letter of credit to secure 2 his severance. 3 Q. And failing the letter of credit, 4 certain other steps could be taken under this 5 provision; is that right? 6 A. That's correct. 7 Q. So, Mr. Twomey would have had this when 8 he received -- or would have been -- this is the 9 contract -- strike that. 10 This contract with the security 11 provision in it was sent to Mr. Twomey at the 12 beginning of July 1988. Right? 13 A. At the end of June, right, that's 14 correct. 15 Q. Now, let's take a look at Mr. Connell's 16 salary on Page 3 of the contract. He receives a 17 salary of $280,000 a year; is that right? 18 A. Yes, sir. 19 Q. And on Page 4, there is a description 20 of his bonus. 21 Do you see that? 22 A. Right. 19787 1 Q. And he receives 140,000-dollar bonus 2 for the first six months. Right? 3 A. That's right. That's what he received. 4 Q. So, on an annualized basis, that bonus 5 would be 280,000? I'm sure Mr. Rinaldi will 6 correct me if I've got my calculation wrong. 7 Does that sound about right? 8 A. That sounds about right. 9 Q. So, he was earning, under this 10 contract, somewhere between 420,000 and $560,000 a 11 year on an annualized basis. Right? 12 A. Right. And a minimum bonus for '89 of 13 no less than 110,000. 14 Q. Did you ever get any complaints from 15 Mr. Twomey about how much Mr. Connell was being 16 paid? 17 A. Prior to October, the end of October? 18 Q. Prior to the end of October. 19 A. No, not a word. 20 Q. Now, do you recall, sir, having a 21 conversation -- having a meeting with Mr. Twomey 22 and others at the Federal Home Loan Bank of Dallas 19788 1 shortly after the 4th of July, 1988? 2 A. Yes, I do. 3 Q. And I'm going to show you a document 4 which I mislabeled in your book, and it should be 5 Exhibit T8089. It's a memo dated July 6, 1988, 6 and it's in evidence at Tab 1380. So, if you'll 7 do me the favor of just marking that T8089 so you 8 won't get confused. 9 A. I'm confused anyway. 10 Q. Would you review this memo and then 11 tell us -- tell us in particular with respect to 12 paragraphs -- the second and third paragraphs of 13 this memo what you recall about this meeting with 14 the Federal Home Loan Bank of Dallas right after 15 the 4th of July, 1988. And this would have been 16 about five days after you had sent the contract to 17 Mr. Twomey. 18 A. Well, I recall we were -- Jenard Gross 19 and I were up in Dallas, and we were talking with 20 George Barclay and others. Neil Twomey, 21 Ginger Baugh. And we were talking about the fact 22 that we were in the process of hiring Larry 19789 1 Connell and we expected within the next few days 2 to have him sign his contract and send it back to 3 us. And I remember Mr. Barclay asking Mr. Twomey 4 whether or not they had to review the contract, 5 and I believe Neil said that they didn't but he 6 had gotten a copy of it. And I reminded him that 7 he had received a copy of the contract, and I 8 think he said he had been on vacation and hadn't 9 looked at it at that time. 10 Q. Did Mr. Twomey ever tell you at this 11 meeting anything to the effect that he wasn't 12 going to look at the contract and he wasn't going 13 to determine whether or not there were any 14 problems with the contract? 15 A. No, not at all. 16 Q. Now, Mr. Berner, there has been a 17 suggestion made in this case that the regulators 18 might have believed that all the effective 19 employment contracts were with United Financial 20 Group and, therefore, they were somehow applying 21 different standards to the UFG contracts than they 22 would have if the contracts had been only with 19790 1 USAT. 2 I'm going to ask you, sir: Was 3 Mr. Connell's contract with USAT or UFG? 4 A. It was with USAT. 5 Q. Did Mr. Connell have a corollary UFG 6 contract? 7 A. No, he didn't. 8 Q. His only contract was with USAT; is 9 that right? 10 A. Yes, sir, that's correct. 11 Q. Let's go back to the July 6th, 1988 12 meeting. Now, Mr. Barclay was at this meeting 13 again. He's the president of the Federal Home 14 Loan Bank of Dallas? 15 A. Right. 16 Q. I'd like you to look at the first four 17 paragraphs on Page 2 of your memo and then tell us 18 what you recall about the discussions regarding 19 the various different options for United to 20 recapitalize -- be recapitalized or otherwise 21 assisted. 22 A. (Witness reviews the document.) Well, 19791 1 we talked about a lot of various potential 2 concepts for assistance in this meeting; and 3 that's what's reflected here. 4 Q. What was your impression after the 5 hiring of Larry Connell as to USAT's likelihood of 6 being a survivor in one form or another, whether 7 it's the Southwest Plan, good bank, bad bank, open 8 bank assistance, or new capital? 9 A. Again, there was -- in my mind, there 10 was no doubt that United Savings was going to be a 11 survivor. 12 Q. And that was -- you were aware, weren't 13 you, of the difficult financial condition of 14 United during this time period, the fact that its 15 capital was dwindling or entirely gone prior to 16 the end of the second quarter 1988? 17 A. Yes, I was. 18 Q. And did USAT file periodic reports with 19 the Federal Home Loan Bank of Dallas advising them 20 of its capital position? 21 A. Certainly it did, yes. 22 Q. Was a capital forbearance application 19792 1 filed about three months prior to this time? 2 A. It was, and was still pending. 3 Q. Now, sir, notwithstanding those 4 problems that had been brought to the attention of 5 the Federal Home Loan Bank of Dallas, did they say 6 anything in this meeting that suggested that USAT 7 was not going to be a survivor because USAT's 8 capital had dwindled to a low point or was 9 nonexistent? 10 A. No, not at all. They certainly didn't 11 say that at all. 12 Q. Do you recall, sir, what attitude was 13 expressed during this time period regarding 14 whether or not an institution was judged solely by 15 the amount of regulatory capital it had, 16 particularly in Dallas? 17 A. It's my recollection that they weren't 18 looking at capital, that there were almost no S&Ls 19 in Texas that had capital. But what the 20 regulators looked at was management and the 21 quality of management to see if it was going to be 22 a survivor. 19793 1 Q. Let me ask you to turn to T8085 which 2 is in evidence at Tab 438. 3 Can you tell me what that is, sir? 4 A. That's my employment agreement with 5 United Savings dated July 1, 1988. 6 Q. And is this one of the contracts that 7 the USAT board approved on June 28? 8 A. Yes, it is. 9 Q. Now, I see on the first line that it 10 says this agreement is made the first day of 11 July 1988. 12 Do you see that, sir? 13 A. Yes. 14 Q. Do you know whether July 1, 1988, was 15 the exact date that this contract was signed? 16 A. I don't believe so. I'm positive it 17 wasn't signed on that date. 18 Q. Okay. Let me ask -- direct your 19 attention to Exhibit -- 20 MR. VILLA: Your Honor, if I may have a 21 moment, I think I may have an exhibit number 22 wrong. 19794 1 MR. RINALDI: I think it's 8085, isn't 2 it? 3 Q. (BY MR. VILLA) Exhibit B2306, which 4 is Tab 1411. 5 Can you identify this document for me, 6 sir? 7 A. Yeah. It's a letter from me to the 8 people that were receiving employment contracts. 9 Q. What's the -- I'm sorry. I called it a 10 letter, didn't I? It's a memorandum, isn't it, 11 sir? 12 A. Memorandum, that's correct. 13 Q. And what's the date of the memo? 14 A. July 12th, 1988. 15 Q. And the last sentence says, quote, "I 16 need to have your signed agreements received by 17 July 15, 1988." Right? 18 A. Right. 19 Q. Is that in reference to the employment 20 contract that -- to the USAT and UFG employment 21 contracts that we've been talking about? 22 A. Yes, it is. 19795 1 Q. So, when do you believe that these USAT 2 employment contracts were signed? And UFG 3 employment contracts. 4 A. Sometime around the 15th of July, 5 between the 12th and 15th probably. 6 Q. Why did you wait two weeks to have the 7 contracts signed? 8 A. Well, one reason was that, you know, as 9 of July 5th or July 6th, we had this meeting in 10 Dallas and Neil Twomey had not reviewed the 11 Connell contract. And I was still waiting to see 12 if there were any problems with the Connell 13 contract. 14 Q. Now, Mr. Berner, if Mr. Twomey had 15 notified you of any major problems prior to 16 July 12, 1988, would you have sent out the 17 contracts for execution in the form you did? 18 A. No. I would have changed them. 19 Q. In fact, at some later point in time, 20 in late October, Mr. Twomey did inform you of a 21 number of criticisms he had of the contracts and 22 compensation practices, didn't he, sir? 19796 1 A. Yes, he certainly did. 2 Q. And what did you do in response? We're 3 going to go through it in some detail, but -- 4 A. When he notified us -- notified me that 5 there were some criticisms with the contract, we 6 changed all of the contracts to deal with all of 7 his criticisms. 8 Q. And if he had told you in July what he 9 told you in October, would you have changed the 10 contracts at that point? 11 A. Certainly. I would have changed 12 them -- as soon as he told me there were problems, 13 we would have changed the contracts to deal with 14 those problems. 15 Q. Now, if you remember the July 5th or 16 July 6th memo that you had of your conversation 17 with George Barclay and others -- do you remember 18 that memo? 19 A. Yes. 20 Q. We just looked at it. Right? 21 A. Right. 22 Q. There was a reference in that memo to 19797 1 Mr. Gross saying something about Mr. Connell had 2 not yet signed his contract. 3 Do you remember that, sir? 4 A. That's right. 5 Q. Now, do you recall, sir, whether at 6 some point after that Mr. Connell executed and 7 sent you his contract? 8 A. Yeah, he certainly did. 9 Q. And that's the USAT contract? 10 A. That's right. That's the one we've 11 been looking at. 12 Q. And that's also dated July 1, 1988. 13 Right? 14 A. Dated as of July 1, that's right. 15 Q. In your practice, sir, at USAT, the 16 dates on which contracts are effective -- are the 17 dates on which contracts are effective necessarily 18 the dates on which they are actually executed? 19 A. No, not necessarily. 20 Q. Now, Mr. Berner, I'm going to hand 21 you -- I show you what's been marked as 22 Exhibit B2299. 19798 1 Would you take a moment and look at 2 that? 3 A. (Witness reviews the document.) 4 Q. Can you tell us what this is, sir? 5 A. This is an article from Forbes magazine 6 dated July 11th, 1988. 7 Q. I'd like to direct your attention to 8 the line -- if you look at the bottom of -- strike 9 that. 10 Do you recall becoming aware of this 11 article in July of 1988? 12 A. Yes, I do. 13 MR. VILLA: Your Honor, I move this 14 into evidence, B2299. 15 MR. RINALDI: Your Honor, this was just 16 handed to me. I don't know what the significance 17 of the article is, but presumably it's something 18 that appeared in the press. So, subject to any -- 19 THE COURT: All right. If it's in the 20 paper, it's admissible. Received. 21 Q. (BY MR. VILLA) Let me direct your 22 attention, sir, to the fourth full paragraph in 19799 1 the second column. It says, "How can FSLIC" -- do 2 you see that, sir? 3 A. Yes, I do. 4 Q. It says, "How can FSLIC justify laying 5 a 2 billion-dollar package on such a barely 6 solvent S&L? George Barclay, president of the 7 Federal Home Loan Bank of Dallas, explains, quote, 8 'In Texas, everything is relative. You can have 9 well run, well-managed institutions down here with 10 negative net worth. Even if you have zero percent 11 capital on a relative basis, you may be okay,'" 12 close quote. 13 Do you see that? 14 A. Yes, I do. 15 Q. Can you tell me, sir, whether views 16 like that were ever expressed to you by 17 Mr. Barclay and by other members of the 18 supervisory staff of the Federal Home Loan Bank of 19 Dallas? 20 A. It is my recollection that Mr. Barclay 21 and other people at the Federal Home Loan Bank had 22 made that statement, similar statements. 19800 1 Q. Let me direct your attention to the 2 last column on paragraph -- the last paragraph in 3 the first column of the second page. 4 Is United Savings mentioned in there as 5 a possible -- or as a prospective survivor of the 6 Texas S&Ls? 7 A. Yes. 8 Q. Let me show you what's been -- 9 THE COURT: We'll take a short recess. 10 11 (Whereupon, a short break was taken 12 from 3:01 p.m. to 3:23 p.m.) 13 14 THE COURT: Be seated, please. We'll 15 be back on the record. 16 Mr. Villa, you may continue. 17 MR. VILLA: Thank you. 18 Q. (BY MR. VILLA) Mr. Berner, you can 19 skip the next exhibit that's in front of you, 20 which is B2305. And I'd like to direct you to 21 three exhibits: B2307, B2308, and B2328. 22 Now, sir, do you recognize -- and let's 19801 1 start off with B2307. It's a Houston Chronicle 2 article that came out shortly after Mr. Connell's 3 hiring by United. 2307, sir. 4 A. Yes. I'm looking at it. 5 Q. Okay. And B2308 is a Houston Post 6 article also about Mr. Connell's hiring by United. 7 A. Right. 8 Q. And B2309 is a National Thrift News 9 article referencing Mr. Connell's hiring by 10 United. 11 A. Right. 12 Q. I'm sorry. B2328, which is the third 13 one. 14 A. Right. 15 Q. Do you see those, sir? 16 A. Yes, I do. 17 Q. Do you recall, sir -- let's start with 18 B2307. And I'll direct your attention to the 19 second full paragraph. 20 Do you see that? 21 A. Yes, I do. 22 Q. 2307, which is a Houston Chronicle 19802 1 article? 2 A. Yeah, sure. 3 MR. VILLA: And Your Honor, I move 4 B2307 into evidence. 5 MR. RINALDI: Your Honor, since it's a 6 newspaper article, I presume it's 7 self-authenticating. 8 THE COURT: Received. 9 Q. (BY MR. VILLA) Do you see the second 10 column in which it discusses what Mr. Connell's 11 focus will be when he joins United? 12 A. Yes, I do. 13 Q. And what is it? 14 A. "United hopes to acquire sick thrifts 15 under the plan and get an infusion of fresh 16 capital, possibly from private investors." 17 Q. Let me direct your attention to B2308. 18 And that's the Houston Post article. 19 MR. VILLA: Your Honor, I move B2308 20 into evidence. 21 MR. RINALDI: No objection, Your Honor. 22 THE COURT: Received. 19803 1 MR. KEETON: Your Honor, I'd like to 2 make just one point. I don't think newspaper 3 articles automatically come into any trial. And 4 I'm not objecting to this one, but I don't want my 5 silence to say that later on, if there is a flood 6 of newspaper articles coming into this case, I'm 7 not going to object to them and think that my 8 objection is good. 9 THE COURT: Well, I think I may be 10 responsible for a flippant remark that I made. I 11 didn't at all intend -- and I thought it might 12 come back to haunt me. 13 MR. KEETON: I thought it was 14 facetious. I just didn't want to sit here quietly 15 and worry about what might happen two months from 16 now. 17 THE COURT: All right. Well taken. 18 MR. VILLA: I don't know whether -- did 19 the Court rule on my motion? 20 THE COURT: I received 2308. 21 Q. (BY MR. VILLA) Mr. Berner, I'd like 22 to direct your attention to the middle column and 19804 1 a reference to Mr. Connell's primary interest 2 there. 3 Does that also reflect that his primary 4 interest is in getting United into the Southwest 5 Plan? 6 A. Right. He says "recapitalization of 7 United and its involvement in the Southwest Plan 8 as an acquirer." 9 Q. And finally, 2328 -- I believe this is 10 the last newspaper article I will be offering -- 11 is a National Thrift News. 12 Do you know what the National Thrift 13 News is or was? 14 A. I believe it was a trade newspaper for 15 thrift associations. 16 Q. Right. 17 MR. VILLA: Your Honor, I move 2328 18 into evidence. 19 MR. RINALDI: No objection, Your Honor. 20 THE COURT: Received. 21 Q. (BY MR. VILLA) I'd like to direct 22 your attention to the line underneath 19805 1 Mr. Connell's name where it says "United Savings 2 may acquire up to 20 insolvent savings and loans 3 under the FSLIC's Southwest Plan." 4 Do you see that, sir? 5 A. Yes, I do. 6 Q. Now, Mr. Berner, can you tell me -- 7 because the issue here is not only what you knew 8 but what the other members of management knew and 9 what was the perception with respect to United. 10 At the time that Larry Connell was 11 hired and the information was out into the 12 financial industry, what do you recall as to the 13 prospects of United participating in the Southwest 14 Plan as an acquirer? 15 A. Well, again, I think what I said before 16 is that we had been told -- and everyone knew -- 17 that as soon as we hired an S&L executive, that we 18 would have satisfied all the requirements to be a 19 participant in the Southwest Plan as an acquirer. 20 And you know, we talked to the Dallas bank about 21 that and they certainly kept reaffirming that. 22 And, in fact, one of the reasons that Larry 19806 1 Connell came was to be the CEO of a surviving 2 institution. 3 So, it was everyone's understanding and 4 everybody's belief at that time that with Larry 5 Connell on board, United would be a participant in 6 the Southwest Plan. 7 Q. Mr. Berner, the OTS claims in this case 8 that as of June 30 or July 1, USAT was essentially 9 hopeless and that you and other members of 10 management were enriching yourselves, essentially 11 getting ready to take the money and run. 12 I'm going to ask you, sir: Is that 13 true? 14 A. No, it's not true. 15 Q. What did you think USAT's future was 16 when Mr. Connell was hired? 17 A. USAT was a survivor. It was going to 18 be a participant in the Southwest Plan. It was 19 going to be in existence for a long time. 20 Q. And do you recall, sir, whether United 21 submitted any specific plans for participation in 22 the Southwest Plan at this time? 19807 1 A. Yeah. Right around this time, I 2 remember we had submitted applications to acquire 3 other thrifts. 4 Q. I'm going to ask you to take a look at 5 Exhibit B2297 and tell us if you can identify that 6 document. 7 A. It's a letter from me to Tom Lycos of 8 the FSLIC in Washington. 9 MR. VILLA: Your Honor, I move B2297 10 into evidence. 11 MR. RINALDI: No objection, Your Honor. 12 THE COURT: Received. 13 Q. (BY MR. VILLA) Does it involve -- I 14 see it involves the Southwest Plan. 15 Do you see that in the "re" line? 16 A. Yes. I just -- 17 Q. And who was Mr. Lycos? 18 A. He was in charge -- my recollection is 19 he was in charge of the Southwest Plan in 20 Washington. 21 Q. Now, the first paragraph of this letter 22 says, quote, "We have been informed by the Federal 19808 1 Home Loan Bank of Dallas that with the retention 2 of Mr. Larry Connell as president and chief 3 executive officer of United Savings Association of 4 Texas, there are no further impediments to United 5 Savings Association of Texas participating in the 6 Southwest Plan," close quote. 7 Do you see that? 8 A. Yes, I do. 9 Q. And you copied Mr. Barclay, Mr. Twomey, 10 Mr. Bradley, and Roger Martin, didn't you? 11 A. Yes, I did. 12 Q. And Mr. Martin is a member of the board 13 of the Federal Home Loan Bank Board. Right? 14 A. He was a member of the FHLBB, that's 15 correct. 16 Q. Did any of them call you and tell you 17 that your understanding or the information you had 18 received that you were going to be a survivor and 19 participate in the Southwest Plan was wrong? 20 A. No. 21 Q. I'll direct your attention to the next 22 document, 2317. 19809 1 Is this a letter that you wrote, sir, 2 dated July 19, 1988, to M. Danny Wall? 3 A. Yes, it is. 4 Q. And who is Mr. Wall? 5 A. He was chairman of the Federal Home 6 Loan Bank Board in Washington. 7 Q. And he's the -- one of the gentlemen 8 you met with during the spring of 1988 talking 9 about the FSLIC real estate deal and other open 10 bank assistance deals. Right? 11 A. Yes, he is, that's correct. 12 MR. VILLA: Your Honor, I move B2317 13 into evidence. 14 MR. RINALDI: No objection, Your Honor. 15 THE COURT: Received. 16 Q. (BY MR. VILLA) The fourth full 17 paragraph of that document, B2317, essentially 18 states the same conclusions as we've just looked 19 at in the prior document. Right? 20 A. That's correct. 21 Q. That there would be no impediments -- 22 you had been told by the Federal Home Loan Bank of 19810 1 Dallas that there are no impediments to United's 2 participation in the Southwest Plan now that 3 Mr. Connell has been hired. Right? 4 A. Right. We had previously notified 5 Roger Martin. Here I was also notifying Chairman 6 Wall. 7 Q. And the cc's on this letter are growing 8 and include a number of senior people at the 9 Federal Home Loan Bank Board and the Federal Home 10 Loan Bank of Dallas, correct? 11 A. Yes, that's correct. 12 Q. Did anybody call you after this letter 13 and tell you that your representations that United 14 was going to be a survivor and participate in the 15 Southwest Plan were wrong? 16 A. No, they certainly did not. 17 Q. Let me direct your attention to the 18 next document which is B2320. 19 Do you recognize this document, sir? 20 A. Yes. This is a memo that I prepared 21 dated July 20th, 1988, relating to a meeting with 22 the Dallas bank, Federal Home Loan Bank of Dallas. 19811 1 Q. And did you discuss at this meeting 2 United's participation in the Southwest Plan? 3 A. Mr. Connell and I did, that's correct. 4 Q. And Mr. Connell attended the meeting 5 with you. Right? 6 A. Yes. He certainly did. 7 MR. VILLA: Your Honor, I move B2320 8 into evidence. 9 MR. RINALDI: No objection, Your Honor. 10 THE COURT: Received. 11 Q. (BY MR. VILLA) Let me -- take a look 12 at the memo, and I'm not going to ask you to go 13 through every issue in the memo. But I'd like to 14 ask you whether this -- whether the -- just 15 describe for us this meeting and leave out for us, 16 because I'm going to ask you about it separately, 17 the question of Congressional pressure on 18 Mr. Twomey. I'll ask you about that separately in 19 the second paragraph. 20 A. Yeah. Larry Connell and I met with 21 Neil Twomey, Robert Brick, and a couple of other 22 people were there to discuss possible -- the 19812 1 Southwest Plan -- Mr. Brick was the guy that was 2 in charge of the Southwest Plan, I believe, in the 3 Dallas area -- to discuss participation in the 4 Southwest Plan and potential open bank assistance 5 and I think one or two other proposals, just to 6 kick them around and talk about them. 7 Q. And what conclusions did you draw at 8 the end of this meeting of July 19 as to whether 9 or not United would be a survivor and participate 10 in the Southwest Plan or another similar 11 assistance plan that was then being offered to 12 well-managed thrifts? 13 A. The conclusion I reached was that we 14 were going to be a survivor. And certainly it was 15 the conclusion that Mr. Connell reached, too, that 16 we were a survivor and that we were going to 17 continue as an ongoing S&L. 18 Q. Now, let me direct your attention to 19 the second paragraph of this memo. 20 Have you had a chance to read this? 21 It's a paragraph that involves the Dingell 22 committee. 19813 1 A. I've read this recently, yes. 2 Q. And do you recall this? Why don't you 3 tell us what you recall of Mr. Twomey's comments 4 about inquiries from the Dingell committee. 5 A. Neil and I talked about -- 6 Q. Let me interrupt you, sir. Why don't 7 you tell us what the Dingell committee is, if you 8 know, because not everybody is -- knows it by that 9 name. 10 A. Well, Dingell was -- Mr. Dingell 11 represented -- Dingell was, I guess, chairman 12 of -- I forgot what committee it was in the U.S. 13 House of Representatives, and he was at that time 14 a very influential, powerful representative. 15 Q. Okay. Now, if you go back to telling 16 us or recounting for us your conversation with 17 Mr. Twomey about inquiries from the Dingell 18 committee. 19 A. Okay. Well, we were talking 20 actually -- we started out talking about the 21 utilization of Westheimer Securities, which was 22 kind of an internal organization that would allow 19814 1 us to sell equity arbitrage at a discounted price. 2 And Mr. Twomey said that he thought we shouldn't 3 use them because we were having a lot of -- he was 4 having a lot of pressure from the Dingell 5 committee concerning Charles Hurwitz. And he also 6 mentioned that the committee was concerned about 7 the forbearance application that we had on file 8 because the view was that by giving forbearance, 9 somehow they were helping Charles Hurwitz. 10 Q. Now, we talked about the fact that USAT 11 had filed a capital forbearance application 12 sometime in February 1988. Right? 13 A. That's right, yes. 14 Q. Is that the forbearance application 15 you're referring to? 16 A. That's correct. That's the one that we 17 had filed earlier and they still hadn't acted 18 upon. 19 Q. So, Mr. Twomey was talking about the 20 effect of the Dingell committee's inquiries on 21 whether or not the Federal Home Loan Bank of 22 Dallas would grant the capital forbearance 19815 1 application that USAT had pending. Right? 2 A. That's correct. He was saying that 3 they were having -- that he was getting pressure 4 from them probably not to do it. 5 Q. And then do you know whether that 6 capital forbearance was ever granted? 7 A. It was never granted. 8 Q. Let me ask you to look at the last 9 sentence in that paragraph. It says, quote, "Neil 10 thought, therefore, that it would possibly provide 11 Dingell some ammunition (although he recommended 12 that it would be a cost savings for United to use 13 Westheimer Securities)." 14 Do you see that? 15 A. Yes, I do. 16 Q. Have you ever in your discussions with 17 any regulator ever heard them say that they were 18 going to deny an application that United had 19 because he thought that it would provide 20 ammunition to a Congressional committee? 21 A. I never heard that before, no. 22 Q. And using Westheimer Securities would 19816 1 have been a cost savings, wouldn't it, sir? 2 A. That's correct. 3 Q. And what did United do after you heard 4 from Mr. Twomey that it would give ammunition to 5 the Congressional inquiries? 6 A. We didn't use them. 7 Q. Let me show you -- this is going to be 8 the last document in Book 1 -- the report of 9 examination. It's not the next document in your 10 book. If you can get out Book 1, I know this is a 11 bit of shuffling. It's the report of examination 12 that's admitted at Tab 468, and it's 13 Exhibit A6022. 14 Do you have that before you, sir? 15 A. Yes, I do. 16 MR. RINALDI: What is the tab on that? 17 MR. VILLA: I'm sorry. I believe it's 18 Tab 468. 19 Q. (BY MR. VILLA) Tab 468. And it's 20 Exhibit A6022. We looked at it briefly before 21 when we were trying to establish some questions 22 about whether -- who was paying the USAT officers. 19817 1 Do you remember that? 2 A. Yes, I do. 3 Q. Okay. Now, this is the report of 4 examination with a cover letter from Mr. Twomey. 5 Right? 6 A. Yes. Actually, there's two Page 1s in 7 my exhibit; but, yes. 8 Q. If it's got an extra page, just 9 disregard one of them. Disregard the second of 10 the two because the first one has an exhibit 11 sticker on it. 12 A. Okay. 13 Q. Do you recall this as being the report 14 of examination that was received by United in late 15 July 1988? 16 A. Yes, I do. 17 Q. Let me ask you: Do you recall whether 18 the supervisory agents typically preceded the 19 report of examination with their own letter? 20 A. I think they did. I believe they did. 21 Q. And -- I'm sorry. Go ahead. 22 A. I believe they did, yes. 19818 1 Q. And if you'll look at the second 2 sentence of Mr. Twomey's letter, it says, quote, 3 "The purpose of this letter is to highlight the 4 significant areas of supervisory concern addressed 5 in said report." Right? 6 A. That's right. 7 Q. Let me ask you, sir, to look at the 8 first sentence of the second full paragraph, which 9 reads, quote, "The examiners have noted in the 10 report the continuing turnover in management and 11 directors since the last federal examination as of 12 May 27, 1986," close quote. 13 Do you see that? 14 A. Yes, I do. 15 Q. Do you recall the Federal Home Loan 16 Bank of Dallas raising with you the questions of 17 management turnover and the need for USAT to stem 18 management turnover? 19 A. Yes. I most certainly do. 20 Q. And what steps did USAT take to address 21 these criticisms from the Federal Home Loan Bank 22 of Dallas? 19819 1 A. Well, again, initially, we entered into 2 employment agreements with the senior people. We 3 then entered into the executive bonus plan which 4 provided for not only the senior people but 5 throughout the mid-level of the association for 6 people to receive bonuses but they would get them 7 at the end of the year. That way, we thought we'd 8 be able to keep people at the association. 9 Q. Let's go to Page 3 of the report 10 itself, which is Bates stamp number -- if you look 11 at the bottom right -- US3010971. 12 Do you see under "management changes"? 13 Are you on the same page that I am? 14 A. Yes, I am. 15 Q. Now, you remember in response to some 16 of Mr. Rinaldi's questions, by subtracting the 17 number of people who had received bonuses at the 18 end of 1987 against the number of people who had 19 received bonuses in March or April of 1988, you 20 had concluded that somewhere in the neighborhood 21 of 20 officers had left. 22 Remember that, sir? 19820 1 A. I believe that's right, yes. 2 MR. RINALDI: Can you tell me what page 3 you're on? 4 MR. VILLA: I'm sorry. 5 6 (Discussion held off the record.) 7 8 Q. (BY MR. VILLA) Now, when you did that 9 calculation, you were talking about all officers 10 who were receiving bonuses. Right? 11 A. That's right. 12 Q. Okay. Let's focus on what the turnover 13 of key personnel was. And do you see that there 14 is an analysis in the first line -- the first two 15 lines of the turnover of key personnel? 16 A. Right. 17 Q. And what does it say, sir? 18 A. It said that 13 key personnel had left 19 despite efforts to maintain a high level of 20 experience and qualified staff. 21 Q. And seven were what? 22 A. Seven of the 13 were terminated and six 19821 1 resigned. 2 Q. And then it goes on to discuss the 3 resignation of directors. Right? 4 A. That's correct. 5 Q. Now, sir, does the report also discuss 6 the quality of management at various places? 7 A. I believe it does. 8 Q. Let me direct your attention a little 9 further down on the page on Page 3 under 10 "experience and background." 11 Do you see that? 12 A. Yes, I do. 13 Q. Let's look at the first line of the 14 discussion of the experience and background of 15 management. Quote, "USAT's current management 16 consists of seven EVPs, 12 SVPs, and 54 VPs. This 17 group appears to be motivated and skillful in 18 their respective areas," close quote. 19 Do you see that? 20 A. Yes, I do. 21 Q. Were you an EVP, executive 22 vice president? 19822 1 A. Yes, I was at this time. 2 Q. And was Mr. Crow? 3 A. Yes, he was. 4 Q. Now, let me direct your attention to 5 Page 20 of the document which bears Bates stamp 6 number US3010988. 7 A. Okay. 8 Q. And the second full paragraph down. 9 And I believe this is in connection with the 10 investment securities activities. 11 Do you see that, sir? 12 A. Yes. 13 Q. The sentence that reads "USAT appears 14 to have established adequate policies and 15 procedures as well as secured a competent staff 16 which can conduct its investment securities 17 activity." 18 Do you see that? 19 A. Yes, I do. 20 Q. Now, let me ask you, sir: Did 21 Mr. Twomey or Ms. Carlton ever express views, up 22 until the time of Mr. Ranieri's appearance on the 19823 1 scene in November of nineteen -- November or 2 December of 1988 that were contrary to those set 3 forth in the examination report? 4 A. No. As I said before, they had always 5 said that the USAT management was highly capable, 6 qualified, good management, good people. 7 Q. And this report was delivered to United 8 Savings Association five months before United 9 Savings was put into receivership. Right? 10 A. That's correct. 11 Q. Let's look at Tab 466, Exhibit A11030. 12 A. Can I put back -- 13 Q. You may take Book 1 and consign it to 14 the deeps. 15 Can you identify what's been marked as 16 Tab 466, Exhibit A11030? 17 A. I believe this is the Hewitt report. 18 This is the Hewitt report. 19 Q. And that's the compensation consultant 20 that you had discussed earlier having presented a 21 report in June. Right? 22 A. That's right. Yeah. This was the 19824 1 actual written report. 2 Q. This was the final product? 3 A. This is the final product. 4 Q. And it's much more extensive than what 5 we saw before. Right? 6 A. Right. 7 Q. Do you recall, sir, whether the 8 conclusions reached in this report were any 9 different than the ones that were communicated to 10 the board orally in June of 1988? 11 A. My recollection is that they were the 12 same. 13 Q. Do you recall, sir, what the focus of 14 the report is, what the areas that they were going 15 to look at were? 16 A. Compensation. I think they also looked 17 at the contract, but compensation specifically, 18 whether the compensation was fair and competitive. 19 Q. Let me direct your attention, sir, to 20 Paragraph -- to Page 4 of the report. And we 21 don't have a very good pagination system on this 22 report so -- it says Page 4 under "total direct 19825 1 compensation." 2 Are you looking at the same one I am? 3 A. Yes, I am. 4 Q. And is the conclusion that's drawn 5 there with respect to the fact that the total 6 direct compensation of the senior executive 7 management consistent with what you recall? 8 A. Yes, it is. 9 Q. Now, there is a line there about the 10 EVP general counsel's approximately 40 percent 11 positive target market range. Right? Do you see 12 that? 13 A. Yes, I do. 14 Q. And a footnote. And the footnote 15 discusses a discussion they had with Mr. Whatley 16 and Dr. Munitz about your role. 17 Do you remember that? 18 A. Yes, I do. 19 Q. Why don't you tell us -- first of all, 20 the reference there is to you, isn't it? 21 A. Yes, it is. 22 Q. Okay. Tell us what you recall about 19826 1 the conclusions that Wyatt drew initially and the 2 subsequent discussions with respect to your role 3 and how it affected your compensation. 4 A. You said Wyatt. Did you mean Hewitt? 5 Q. I meant Hewitt, sir. 6 A. Originally, their conclusion was that 7 my salary was above what they had looked at as the 8 target range. And then they had some discussions 9 or -- with Dr. Munitz and Jim Whatley about what I 10 was doing and then reached the conclusion that it 11 was fair. 12 Q. And do you recall -- I'm sure you spent 13 some time looking at this because it affected you. 14 Do you recall whether the Wyatt report, 15 which we're going to see in a little while, also 16 examined your particular compensation? 17 A. Yes, it did. 18 Q. And what conclusions did Wyatt draw? 19 A. Wyatt thought that Hewitt had looked at 20 the wrong peer group and that my compensation was 21 not only fair but was competitive. 22 Q. Let me ask you to turn to the next page 19827 1 of the Hewitt report, Page 5 under "long-term 2 incentives." 3 Do you see that? 4 A. Yes, I do. 5 Q. I won't ask you to read it out loud; 6 but read the first entry, the first bullet point, 7 to yourself. 8 A. (Witness reviews the document.) 9 Q. Do you see that, sir? 10 A. Yes, I do. 11 Q. And do you recall what Hewitt's 12 reaction was to the lack of long-term incentive 13 plans for UFG and USAT to motivate their employees 14 to continue in employment with the company? 15 A. Yeah. Their view was that since we 16 didn't have any long-term plans that it was not 17 serving as any incentive, that you needed to do 18 something to keep your key employees at the 19 institution. 20 Q. Finally, look at the bottom of the 21 page. I'm not sure it's "finally," but look at 22 the bottom of the page about employment contracts. 19828 1 Do you see that, sir? 2 A. Yes, I do. 3 Q. Would you read that to yourself? 4 A. (Witness reviews the document.) 5 Q. Do you recall what conclusion Hewitt 6 drew as to whether or not a two years' severance 7 which is the severance provision -- strike that. 8 Do you recall what the length of the 9 severance provision was in the contracts? 10 A. I do. It was two years' severance. 11 Q. And do you recall, sir, whether Hewitt 12 expressed a view as to whether or not two 13 years' -- whether you call it a termination 14 payment or a severance payment -- at two times 15 base compensation, do you recall what conclusions 16 Hewitt drew as to that? 17 A. Yes. They concluded that that was 18 conservative to average-moderate relative to 19 average market practices. 20 Q. Let me direct your attention, then, 21 sir, to the next document which is B2380. 22 Can you tell us what this document is? 19829 1 A. Looks like it's a memo from Bob Hacker, 2 Robert Hacker, to -- he was an attorney at 3 Kirkpatrick & Lockhart -- to his accounting 4 department. 5 Q. Well, let's skip over the memo and 6 let's look at the letter that's the second page of 7 the exhibit. 8 What is the letter? 9 A. This is a letter from Bob Hacker to me 10 forwarding their fees, their statement for fees. 11 Q. And the date of the letter, sir? 12 A. Is August 26, 1988. 13 Q. And what time period does it cover for 14 legal services? 15 A. June 26, 1988, through July 30, 1988. 16 MR. VILLA: Your Honor, I move 17 Exhibit B2380 into evidence. 18 MR. RINALDI: No objection, Your Honor. 19 THE COURT: Received. 20 Q. (BY MR. VILLA) And what services did 21 Kirkpatrick & Lockhart generally provide to USAT? 22 A. Generally, they were regulatory 19830 1 services. They were our outside regulatory 2 counsel. 3 Q. Mr. Berner, you told us that you 4 believe that at some time after you received the 5 Hewitt letter in I think it was June 7, 1988, that 6 you believe you consulted with Kirkpatrick & 7 Lockhart about the employment contracts. Right? 8 A. That's correct. I talked to them. 9 Q. Let me direct your attention to the 10 Bates stamp page which is actually the first page 11 of their bill which is OW263178. 12 Do you have that before you? 13 A. Yes, I do. 14 Q. And do you see three lines from the 15 bottom what it reflects, sir? 16 A. Yes. It says it's -- you want me to 17 repeat it or -- 18 Q. Well, just tell us what it says. 19 "Telephone conferences with Mr. Berner regarding 20 employment contracts and proposed security 21 subsidiary." Right? 22 A. That's right. 19831 1 Q. Now, sir, you told us that you believe 2 that you had talked to Mr. Leahey about employment 3 contracts sometime after receiving the June 7 4 report from Hewitt. Right? 5 A. Right. 6 Q. Do you believe, sir, that this is -- 7 let me ask you, sir: What relationship do you 8 believe this has to the conversations that you 9 had? 10 A. I think this is reflecting the fact 11 that we had conversations relating to those 12 employment contracts. 13 Q. Let me direct your attention, sir, 14 to -- and it's under, by the way, "general 15 regulatory matters," isn't it? Under the heading 16 "general regulatory matters"? 17 A. That's right. 18 Q. Let me show you what's been marked as 19 Exhibit A1156, Tab 1413. 20 Do you have that before you, sir? 21 A. Yes, I do. 22 Q. What is it? 19832 1 A. These are minutes of the board of 2 directors of September -- of United Savings of 3 September 8, 1988. 4 Q. Can you tell by looking at the minutes 5 who besides the members of the board of directors 6 were present? 7 A. Yes, I can. 8 Q. And who was present, for example, from 9 the regulatory authorities? 10 A. Neil Twomey, Mark Dunn, and Donna 11 Guthrie. 12 Q. And keep going. 13 A. And then Brenda Bese and Diane 14 Buckshnis who were the examiners -- were 15 examiners. 16 Q. Let me direct your attention to the 17 sixth paragraph on Page 1 where it talks about 18 "Mr. Connell and Mr. Berner then reviewed." 19 Do you see that? 20 A. Yes, I do. 21 Q. And would you read that paragraph and 22 the two following and then tell the Court what is 19833 1 being discussed at this board meeting with the 2 regulators present. 3 A. (Witness reviews the document.) What 4 was being discussed here was that, you know, we 5 were -- United was attempting to get in additional 6 capital into the savings association. 7 So, we were retaining Merrill-Lynch to 8 help us with the -- with the -- with finding 9 people, finding additional capital to be brought 10 into United Savings. And this is discussing the 11 bringing in of that additional capital as part of 12 the Southwest Plan. 13 Q. Let me direct your attention to the 14 second page and the third full paragraph that 15 starts with "Mr. Gross." 16 Do you see that? 17 A. Yes, I do. 18 Q. Why don't you read that and quickly 19 read the resolutions that follow it and then let's 20 talk about what's occurring at this point with 21 respect to the executive bonus plan. 22 A. I've read this recently; so, I think 19834 1 I'm a little bit familiar with this. 2 Q. Now, Mr. Berner, can you -- let me 3 just -- first, focus on the language of the 4 discussion where it says, "Mr. Gross stated that 5 the next item of business was discussion of the 6 payment of the 1988 executive bonuses made 7 pursuant to the 1988 executive bonus plan. 8 Mr. Whatley reviewed the need for immediate 9 payment of such bonus and stated that the 10 compensation committee had determined to recommend 11 the immediate payment." And then it goes on to 12 then adopt the resolution. 13 A. Right. 14 Q. Can you explain to us what was 15 happening at this meeting with respect to the 16 executive bonus plan? And, you know, don't answer 17 that question yet. Let's go back. Explain to us 18 again what is the executive bonus plan and had 19 money been put aside under the executive bonus 20 plan? 21 A. The executive bonus plan was the plan 22 where 25 -- there was a bonus that was being given 19835 1 equal to the previous year's bonus, 25 percent of 2 which was paid back in -- I believe it was March 3 or April. The other 75 percent would be paid at 4 the end of the year for anyone who stayed through 5 the end of the year, and it was designed to keep 6 the employees, the management people, the key 7 people that we thought were necessary for this 8 institution, at the institution so that they 9 didn't leave so that we could participate in the 10 Southwest Plan and be a survivor. That was the 11 purpose of the executive bonus plan. 12 Q. Do you remember which financial 13 institution was holding the money for the 14 executive bonus plan? 15 A. I believe that was Texas Commerce Bank. 16 Q. Texas Commerce Bank? 17 A. Yes. 18 Q. Okay. Now, tell us what's happening at 19 this meeting with the regulators present. 20 A. Well, at this meeting, Mr. Whatley was 21 saying in view of everything that happened and 22 that now we were clearly a survivor, we were going 19836 1 to be participating in the Southwest Plan. We had 2 just hired Merrill-Lynch to help bring in the 3 additional capital that was going to be brought 4 into the institution. We were looking 5 seriously -- it makes reference to the charter 6 package which was a package of three or four 7 failed S&Ls that we thought we were going to be 8 acquiring, that the compensation committee -- in 9 his view, we no longer needed to keep that money 10 in trust. It had served its purpose. It had done 11 everything it was supposed to do. So, he was 12 recommending that the money come out of trust and 13 be paid to the employees, people that had those 14 bonuses. 15 Q. Well, what do you mean the money had 16 served its purpose and done everything it was 17 supposed to do? 18 A. Again, the purpose of the bonus was to 19 keep people there so that United Savings would be 20 a survivor. We didn't want to lose any of the 21 management. And now we had gotten to the point 22 where it had done its job. We were going to be a 19837 1 survivor. We were going to be a participant in 2 the Southwest Plan. We were raising additional 3 capital. 4 So, in his view, it had done what it 5 was supposed to do. It kept those people there 6 and now we were going to pay the -- that bonus, 7 the additional 75 percent of that bonus. 8 Q. Now, we've seen at the outset that 9 there were four or five federal regulators present 10 at that meeting. 11 Do you see that in your minutes? 12 A. Yes. 13 Q. Was there any objection by any of these 14 federal regulators to the payment of the executive 15 bonuses? 16 A. None whatsoever. 17 Q. Did any of them express surprise to you 18 either during or after the meeting that United was 19 utilizing an executive bonus plan to try to keep 20 its management from turning over? 21 A. No, no. Nobody said that. 22 Q. Did any of them say to you anything to 19838 1 the effect of putting money aside in a financial 2 institution under a trust agreement was an unsafe 3 and unsound practice and is prohibited? 4 A. No. They certainly did not say that. 5 Q. Did any of them say to you that taking 6 the money out and immediately paying it to the 7 individuals involved was excessive compensation or 8 some violation of a regulation? 9 A. No, they didn't. 10 Q. Let me show you the next document which 11 has been mark as Exhibit 2406, B2406. 12 Can you identify that for me, sir? 13 A. Yes. This is a letter from 14 Jenard Gross to Lynn Chambers of Texas Commerce 15 Bank dated September 22nd, 1988. 16 Q. And what effect does this document 17 have? 18 A. Mr. Gross is informing Ms. Chambers 19 that the board had decided to take the money out 20 of trust. He was telling her to take the money 21 out of trust and to forward it to Fran Dean who 22 was the human -- I think the head of human 19839 1 resources at United so that she could distribute 2 it to the employees. 3 MR. VILLA: Your Honor, I move B2406 4 into evidence. 5 MR. RINALDI: No objection, Your Honor. 6 THE COURT: Received. 7 Q. (BY MR. VILLA) Let me direct your 8 attention to A1560 and ask you if you can tell us 9 what that document is. 10 A. Yes. This is a -- these are minutes of 11 the compensation committee of United Savings dated 12 September 26th, 1988. 13 Q. This is -- is it four days after 14 Mr. Gross' letter? Is that right? 15 A. Yes. 16 MR. VILLA: Your Honor, I move B1560 17 into evidence. A1560 into evidence. 18 MR. RINALDI: No objection. 19 THE COURT: Received. 20 Q. (BY MR. VILLA) Can you tell me what's 21 happening at this meeting of the compensation 22 committee? And then tell me why. 19840 1 A. Yeah. At this meeting, the 2 compensation committee is rescinding the 3 resolution to take the money out of the trust. 4 And the reason it was done is that in early, 5 mid-September, it was believed that MAXXAM was 6 going to be placing an additional $50 million in 7 capital into United Savings and Merrill-Lynch was 8 going to be raising an additional $200 million. 9 And then somewhere between the 15th of September 10 and here, MAXXAM walked away from that commitment. 11 So, the money wasn't coming in at that time. And, 12 therefore, we felt -- again, in order to make sure 13 that the -- that the trust served its purpose, 14 which was to keep people there, we couldn't pay it 15 out in September because we now weren't sure that 16 the -- that we were going to be surviving in the 17 Southwest Plan. So, we decided to put it back 18 into the trust. 19 Q. And was the money ultimately 20 recommitted to Texas Commerce Bank? 21 A. Yes, it was. 22 Q. Let me direct your attention now to 19841 1 A1158, which has been introduced in evidence in 2 this case as Tab 1414. 3 Do you have that before you, sir? 4 A. Yes, I do. 5 Q. And what is that? 6 A. These are minutes of the special joint 7 meeting of the board of United Financial Group and 8 United Savings dated October 4th, 1988. 9 Q. Is there anybody who is present at this 10 meeting that's not a member of the board? 11 A. Yes, there were. 12 Q. And who are they? 13 A. Robert Ott, who was an attorney with 14 Arnold & Porter, and Tom Leahey who was -- we 15 talked about before, the attorney with Kirkpatrick 16 & Lockhart. 17 Q. And what role were they to be playing 18 at this meeting as you understand it? By the way, 19 you were instrumental in hiring them, were you 20 not? 21 A. Yes. Both of them at different times, 22 yes. 19842 1 Q. And what do you understand their 2 expertise to be? 3 A. Well, Tom Leahey, as we've talked about 4 a lot, was and is a regulatory attorney, S&L 5 regulatory attorney. Robert Ott also had 6 expertise in regulatory matters and in general 7 corporate matters and he was going to be 8 representing the board of directors of 9 United Financial Group. 10 Q. And Mr. Leahey is the person with whom 11 you discussed the application of FSLIC v. Bass. 12 Right? 13 A. Yes, that's correct. 14 Q. And let me direct your attention to the 15 second-to-the-last full paragraph on Page 6? 16 A. (Witness reviews the document.) 17 Q. Would you read that to yourself and 18 then tell us what was occurring there and why? 19 A. Well, what was occurring here -- this 20 goes back to the employment agreements which had a 21 provision that said you place the severance money 22 into -- you try to get a letter of credit for the 19843 1 severance money. If you couldn't do that, you 2 would put it in trust. And what was happening 3 here was at this time, it was apparent that we 4 couldn't receive a letter of credit and we 5 couldn't put it in trust. So, there was a 6 decision made to place it in escrow. And that's 7 what's happening here. That's being approved, to 8 place the money in escrow, as opposed to getting a 9 letter of credit or putting it in a trust. 10 Q. Now, you've been a lawyer who has 11 advised boards of directors, haven't you, sir? 12 A. Yes, I have. 13 Q. Both as inside counsel and outside 14 counsel? 15 A. Yes. 16 Q. Let me ask you, sir: If you have 17 regulatory counsel at a board meeting and 18 regulatory issues are being discussed and decided, 19 would you expect that the regulatory counsel would 20 give you advice if they believed that the board 21 was taking some action that was a violation of 22 regulations? 19844 1 A. Well, sure. That's why they are there. 2 I mean, they are there to give you regulatory 3 advice on regulatory matters. And if they thought 4 there was any problem in doing what you're doing, 5 you would certainly expect them to give you 6 advice. That's why you're paying them. 7 Q. It's not a written opinion of counsel, 8 is it, sir? 9 A. It's not a written opinion of counsel, 10 no. 11 Q. But would you expect them to sit by 12 silently and watch you do something that they 13 believed was illegal or improper? 14 A. Of course not. I mean, that's why you 15 bring in your outside counsel, to tell and you to 16 guide you as to what's permissible and not 17 permissible, give you their advice, and tell you 18 what to do. 19 Q. Do you recall whether Mr. Ott or 20 Mr. Leahey gave you any advice that putting the 21 money into the trust, escrow -- into the escrow at 22 First -- strike that. 19845 1 Do you know where this money went? 2 Which association -- which bank it went into? 3 A. I believe it went into First City. 4 Q. This is the severance money that went 5 into the First City trust account. Right? 6 A. That's correct. 7 Q. Do you recall whether Mr. Leahey or 8 Mr. Ott told you that putting the money into the 9 First City trust account was a violation of 10 regulations or was unsafe or unsound? 11 A. They certainly didn't say that, no. 12 Q. Now, the last sentence of the paragraph 13 says -- let's go back. 14 The terms of the contract allowed the 15 money to be secured either through a letter of 16 credit or -- 17 A. A trust. 18 Q. -- a trust? 19 A. Right. 20 Q. And this was going to be put into what 21 kind of -- what kind of an arrangement? 22 A. Into an escrow. 19846 1 Q. Into an escrow. And did that require a 2 waiver from the contract holders? 3 A. Yeah. This was a change in their 4 contract, and any contract holder would have to 5 approve that. 6 Q. And did -- did you secure such waivers 7 from the contract holders? 8 A. Yes, we did. 9 Q. I'll jump over some of these documents, 10 sir. 11 The money that was used to fund this 12 escrow came from -- do you know which entity the 13 money came from? 14 A. United Savings. 15 Q. This may be a good point to explain 16 your view as to why the money to fund the escrow 17 came from United Savings Association as opposed to 18 United Financial Group. 19 Can you explain that to us? 20 A. I can certainly try. I mean, the -- 21 again, the purpose of the escrow or the letter of 22 credit or the trust -- but the purpose of that 19847 1 escrow was to act as a backstop in case money 2 couldn't be paid under the severance agreement. 3 So, the first -- you had your 4 United Financial Group that -- you had a contract 5 with them. If they could pay, they would pay. If 6 for some reason they were incapable of paying, 7 then you would go to United Savings. That 8 contract would become effective and you would go 9 to United Savings. If they could pay, they would 10 pay. 11 If you couldn't get it through United 12 Savings going through those two levels, you would 13 then go to what was the letter of credit or trust 14 account or escrow now. So, that was the backup to 15 make sure that if both organizations weren't there 16 and couldn't pay, you would have something to be 17 sure you would get your severance benefit. 18 Q. So, in this three-tiered system, which 19 company was first in line to pay? 20 A. United Financial Group. 21 Q. And second was? 22 A. United Savings Association. 19848 1 Q. And the third one was? 2 A. The letter of credit or escrow or 3 trust. 4 Q. Let me ask you -- I'm trying to skip 5 over some documents. 6 Let me ask you to turn two documents 7 deeper into your pile there and look at the 8 document which has been marked as Tab 98, 9 Exhibit B2487. It's an October 27 letter from 10 Mr. Twomey regarding employment contracts. 11 Do you have that, sir? 12 A. Yes, I do. 13 Q. I'll bet you remember this letter, too, 14 don't you, sir? 15 A. Oh, yes, I do. 16 Q. And in this letter, Mr. Twomey is 17 criticizing a number of employment contracts, 18 isn't he? 19 A. Yes, he was. 20 Q. Did he criticize the contract of 21 Mr. Lawrence Connell? 22 A. I believe -- yes, he did. 19849 1 Q. And it's in the third line down. 2 Right? 3 A. Right. 4 Q. Now, there has been an issue in this 5 case from time to time as to whether a different 6 standard would be applied to management that had 7 been at the association for some period of time as 8 opposed to new management that might be coming in, 9 like Mr. Connell. 10 Let me ask you, sir: Did Mr. Twomey 11 ever express to you that there were two standards 12 that he was applying as to whether or not these 13 contracts that USAT had entered into were 14 violations of regulations? 15 A. He never said that there were two 16 standards, no, sir. 17 Q. Is there anything in this letter that 18 you see that says that Mr. Connell's contract is 19 subject to a different standard than the contracts 20 of the other individuals such as you and Mr. Crow, 21 Mr. Gray, Mr. Jackson, Mr. Wolfe, Mr. Williams, 22 Mr. Gross? 19850 1 A. And Mr. Bruno. No, nothing whatsoever. 2 Q. Oh, and I -- and Mr. Bruno. Right. 3 Mr. Bruno is being criticized here, too. Right? 4 A. Yes, he is. 5 Q. And we saw Mr. Bruno's contract in 6 Vivian Carlton's examination work papers. Right? 7 A. Yes, we did. 8 Q. Were you surprised to hear -- see these 9 criticisms in the October 27, 1988 letter? 10 A. I was very surprised to see that. 11 Q. Did Mr. Twomey ever, in writing or 12 orally, give you any reason why he did not respond 13 to the Connell contract, for example, from early 14 July 1988 until October 27, 1988? 15 A. No, he certainly never told me why he 16 didn't respond to the Connell contract. 17 Q. And if he had sent you this letter with 18 the date on it of July 2nd, 1988, would you have 19 entered into all those contracts? 20 A. We would have changed them. We 21 definitely would not have entered into those 22 contracts, absolutely not. 19851 1 Q. Now, as soon as Mr. Twomey expressed 2 concerns about the contract and contract 3 arrangements, what did USAT do? 4 A. Well, we had a couple of meetings; and 5 then we changed the contracts. 6 Q. Let me ask you to turn to the next 7 document, which is Exhibit 81 -- I'm sorry -- 8 T8120 which is in at Tab 449. 9 Do you see that? 10 A. Yes, I do. 11 Q. And what is this document, sir? 12 A. This is a letter from me to Neil Twomey 13 dated November 7th, 1988, responding to certain 14 questions that he had raised earlier. 15 Q. This responds to the issues that are 16 being raised by the Federal Home Loan Bank Board? 17 A. That's right. 18 Q. Or the Federal Home Loan Bank of 19 Dallas, I should say? 20 A. Dallas. 21 Q. And those issues were in the October 27 22 letter we just saw? 19852 1 A. I'm not sure they were there. I think 2 they got actually raised in a meeting that we had 3 between October 27th and this meeting -- and this 4 letter. 5 Q. I see. So, you had a meeting with 6 Mr. Twomey face to face where he raised some 7 issues with you? 8 A. I think we had a couple of meetings 9 between then and this. 10 Q. Now, Mr. Berner, as a part of this 11 November 7 letter, if you'll look two pages back, 12 you'll see a description of the employment 13 agreement with United Savings. 14 Do you see that document, sir? 15 A. Yes, I do. 16 Q. It's a six-and-a-half, maybe 17 five-and-a-half single-spaced document describing 18 the events involving the employment contracts with 19 United Savings during this time period. Right? 20 A. That's correct. 21 Q. And do you recall whether he asked you 22 for that or whether you just offered that? 19853 1 A. I believe he asked for it. 2 Q. And those discussions or -- I'm 3 sorry -- the events were fresher in your mind at 4 the time you drafted this document. Right? 5 A. They certainly were. 6 Q. And once again -- you know, earlier 7 today, I pointed out to you your March 31, 1988 8 memo describing the events. And here's your 9 November 7, 1988 memo also describing the events. 10 Right? 11 A. That's correct. 12 Q. And sir, you've read this memo. Do you 13 recall any major substantive difference between 14 what you're telling us today and the events as 15 described in this memo? 16 A. I don't. I really don't. 17 Q. Let me direct your attention to the 18 second paragraph of the letter, which is the 19 November 7, 1988 letter, T8120. It says, "The 20 following steps have been taken by United Savings 21 Association pursuant to our discussions." 22 Do you see that? 19854 1 A. Yes, I do. 2 Q. And No. 1 is -- just read No. 1 and 3 tell us what was happening as a result of that. 4 A. Well, what was happening was that the 5 money that had been placed in escrow in October 6 was now coming out of escrow and being returned to 7 United Savings Association. 8 Q. Or you were attempting to do that. 9 Right? 10 A. Yeah. What I'm saying is that we 11 thought that would be done within a week. 12 Q. Now, did that also apply to the 13 executive bonus plan? 14 A. Right. It also applied to the money 15 that had been put into the executive bonus plan 16 that was at Texas Commerce Bank, that's correct. 17 Q. Now, let's try to adopt a convention 18 here so we won't get confused because I always get 19 confused. 20 The executive bonus plan goes to Texas 21 Commerce Bank, and that was -- do you recall the 22 amount of money that was set aside in the 19855 1 executive bonus plan? 2 A. I think it was about $2 million; is 3 that right? No, I really don't. At this point, I 4 don't. 5 Q. Okay. Do you recall -- and the other 6 one is the severance -- 7 A. Right. 8 Q. Severance moneys. Right? 9 A. Correct. 10 Q. And do you recall where that went? 11 A. That went to First City. 12 Q. Okay. So, executive bonus plan goes to 13 Texas Commerce Bank; and the severance moneys go 14 to First City. Right? 15 A. That's right. 16 Q. Okay. Now, sir -- so, in this, you're 17 telling Mr. Twomey you're going to make an attempt 18 to get them both back and you hope to do it within 19 a week. Right? 20 A. That's right. 21 Q. Let's look at the next exhibit, B2501. 22 Can you tell me what that is, sir? 19856 1 A. This is a memo from me dated 2 November 7th, 1988, to people who had contracts. 3 Q. And what is it -- what's the purpose of 4 this memo? 5 A. Well, its just -- it's transmitting two 6 agreements relating to the bonus plan and their 7 employment contracts. 8 Q. And what were these agreements going to 9 do? 10 A. I don't have it here, but my 11 recollection is it was going to take the money out 12 of the Texas Commerce Bank and take the money out 13 of First City. 14 Q. The executives who were listed as the 15 recipients of this had moneys in both of those 16 accounts; is that right? 17 A. That's correct. 18 Q. Were there -- strike that. 19 Were they the beneficiaries of the 20 moneys in both of those accounts? 21 A. Yes, they were. 22 Q. And did they have to sign something in 19857 1 order to get the moneys released? 2 A. Yes, they did. 3 Q. And is that what you're sending them in 4 this memo? 5 A. I believe that's what was being sent. 6 MR. VILLA: Your Honor, I move B2501 7 into evidence. 8 MR. RINALDI: No objection, Your Honor. 9 THE COURT: Received. 10 Q. (BY MR. VILLA) Let me ask you to look 11 at the next exhibit, which is B4222. And it's 12 actually, I think, a series of documents and not 13 just one, which is in evidence at Tab 1450. 14 A. Yes, I've seen it. 15 Q. And what are these documents, sir? 16 A. These are the agreements that I think 17 was referred to in that previous memo, and it's an 18 agreement to remove the money from escrow and I 19 think also to remove the money from the trust. 20 Q. Well, let's not go so fast. Let's 21 start off with the first one. If you look down 22 four paragraphs, the "whereas" clause, do you see 19858 1 that? 2 A. Yes, I do. 3 Q. And which association or which bank 4 does that apply to? 5 A. This one applies to First City. 6 Q. First City Bank? 7 A. Correct. 8 Q. And that was the bank that was holding 9 the severance moneys? 10 A. That was the bank that was holding the 11 severance moneys, that's correct. 12 Q. And you see in here a series of these 13 agreements that have been signed by the senior 14 management. Right? 15 A. Yes, sir. That's -- everyone that had 16 the contracts would sign these, that's right. 17 Q. Let's look at the next document in your 18 stack, which is Exhibit B4223. 19 Can you tell me what B4223 is? 20 A. Again, this is the other agreement that 21 was referred to in that memo. This is the 22 agreement to take the money -- the executive bonus 19859 1 plan money out of that trust. 2 Q. At which bank? 3 A. That was at Texas Commerce Bank. 4 Q. Texas Commerce Bank. 5 Would you now turn, sir, to 6 Exhibit B2529 which is at Tab 469? 7 Do you see that, sir? 8 A. Yes, I do. 9 Q. And what is this, sir? 10 A. This is a letter from me to Wanda Faris 11 at First City Bank telling them to take the money 12 out of that escrow. 13 Q. This is the severance moneys you're 14 talking about. Right? 15 A. This is the severance moneys, that's 16 correct. 17 Q. And was the money returned from First 18 City Bank to USAT? 19 A. Yes, it was. 20 Q. Now, let's turn to the moneys that are 21 held in trust at Texas Commerce Bank. That turns 22 out to be a little stickier, doesn't it, sir? 19860 1 A. Yes, it did. 2 Q. Was the money -- did Texas Commerce 3 Bank return the money once already? 4 A. They had returned the money in 5 September -- we looked at that before -- the 6 middle of September. And then we had given it 7 back to them at the end of September. 8 Q. Okay. So, now USAT is asking for the 9 money back a second time. Right? 10 A. That's correct. That's -- yes. 11 Q. Now, this is going to be a long story, 12 and we're going to go through all the various 13 steps unfortunately. But at the end of this 14 story, does Texas Commerce Bank give the money 15 back to USAT? 16 A. No, it does not. 17 Q. Now, did all the employees who were 18 asked to sign the waivers and releases they needed 19 to to get the money back from Texas Commerce Bank? 20 A. Yes. As soon as we sent those releases 21 and waivers, they all signed to get the money 22 back. 19861 1 Q. Did any of them object? 2 A. Nobody objected. 3 Q. Let me ask you, sir, was every 4 beneficiary of the severance plan and the 5 executive bonus plan required to sign these -- 6 strike that. 7 Was every recipient of the executive 8 bonus plan required to sign a release? 9 A. No. Just the senior executives were. 10 Q. And why was that? 11 A. Well, that's what was requested by 12 Mr. Twomey in his letter. 13 Q. So, the junior people were not required 14 to sign these releases; is that right? 15 A. That's correct. They were not. 16 Q. Were there any discussions -- and I 17 believe you discussed this briefly with 18 Mr. Rinaldi. 19 Were there any discussions with 20 Mr. Twomey over the period from November 1988 21 until USAT failed at the end of 1988 as to what 22 should be done with the money that had been set 19862 1 aside for the mid and junior level officers? 2 A. I had a number of discussions with 3 Mr. Twomey about that, yes. 4 Q. And what ultimately came of those 5 discussions? 6 A. Ultimately, we never could get an 7 answer out of him. So, the money stayed in trust 8 for everybody till ultimately, there was, as you 9 know, a lawsuit a couple of years later. And then 10 the judge said the money should come out of trust, 11 and everybody received their money except the 12 senior executives. 13 Q. Let me show you what's been marked as 14 Exhibit 25 -- B2532 and admitted into evidence at 15 Tab 470. 16 Do you see that, sir? It's a letter 17 dated November 9, 1988. 18 A. Yes, I do. 19 Q. And you signed that letter? 20 A. Yes, I did. 21 Q. What was the purpose of this document 22 that you were sending? 19863 1 A. This was a letter to Texas Commerce 2 Bank to tell them that the money that was being 3 held in the trust for the senior executives should 4 be released from that trust and sent back. 5 Q. Now, Mr. Berner, we've been talking 6 about the responses that United made to the 7 criticisms of the Federal Home Loan Bank of Dallas 8 as reflected in your November 7 letter. And we've 9 just been carrying through on Point No. 1 of your 10 November 7, 1988 letter. 11 Let's go back to your November 7, 1988 12 letter, which is Exhibit T8120. It's about five 13 or six entries back. And look at Point 2. 14 A. (Witness reviews the document.) 15 Q. Do you have that in front of you now? 16 A. Yes, I do. 17 Q. Would you read Point 2 and then just 18 tell us what that issue addresses? 19 A. Yes. We've actually talked about it 20 before. This is -- we had been requested to try 21 to allocate how much time of the senior executives 22 was being spent on United Financial Group work as 19864 1 opposed to being spent on United Savings 2 Association work. And this is an attempt to 3 allocate that time. 4 Q. And do you recall how these allocations 5 were arrived at? 6 A. Yes. For the most part, I called each 7 of these people and told them what we were trying 8 to do and they made an estimate as to how much of 9 their time was spent on USAT work versus UFG work. 10 Q. And the letter says that "USAT will 11 receive credit for any expenditures paid by it to 12 such executives during 1988." 13 Do you see that? 14 A. Yes, I do. 15 Q. How was this going to be done, if you 16 know? 17 A. I really don't. I know there would 18 be -- I think a payment between UFG and USAT, I 19 believe. 20 Q. And how would it be accomplished? What 21 would you do? What would your role in the process 22 be of accomplishing this? 19865 1 A. My role would have been to tell 2 probably Mike Crow or perhaps Jim Wolfe -- 3 probably Mike Crow to -- since he was the head 4 of -- the chief financial officer of the 5 accounting department -- to get it done. 6 Q. Would you send him a copy of this? 7 A. Oh, yeah. 8 Q. But is this something that you would 9 have been responsible for doing? That is to say, 10 actually effectuating the intercompany transfer? 11 A. No. That would be done by the 12 accounting department. 13 Q. Okay. Let's go a little deeper into 14 your pile to Exhibit A1163, which is in evidence 15 at Tab 447. 16 Do you recognize this document, sir? 17 A. These are minutes of a board of 18 directors meeting of United Savings Association 19 dated November 7th, 1988. 20 Q. And was anybody at this board meet who 21 was not a member of the board? 22 A. Yes. 19866 1 Q. And who was that? 2 A. Mike Crow, who was chief financial 3 officer of USAT. Then Bob Ott and Tom Seawell, 4 who were lawyers with Arnold & Porter. And then 5 Mr. Twomey, Ms. Dunn, Ms. Guthrie, and Ms. Bese of 6 the Federal Home Loan Bank of Dallas and Ms. Sandy 7 Morehead representing the Texas Savings and Loan 8 Department. 9 Q. Do you remember Ms. Morehead? 10 A. No, I don't. 11 Q. Do you recall whether the Texas Savings 12 and Loan Department ever assigned an examiner to 13 United Savings in its last six months? 14 A. I believe they did. 15 Q. And where did that -- do you remember 16 where that examiner officed? 17 A. I sure don't. 18 Q. Let me direct your attention to the 19 last paragraph on Page 2, and I'd like you to read 20 over to Page 3 and then to the middle of Page 4 21 and I'm going to ask you a couple of questions 22 about these discussions. 19867 1 A. (Witness reviews the document.) Okay. 2 Q. Mr. Berner, do you recall this meeting, 3 this meeting on November 7, 1988, with a number of 4 examiners present? 5 A. Yes, I do. 6 Q. What occurred at this meeting? 7 A. In connection with the employment -- 8 Q. In connection with the compensation 9 issues and the -- and the role of the examiners at 10 the meeting. 11 A. Yeah. We had -- well, there was a 12 lengthy discussion of the employment agreements 13 with the examiners stating that the -- the 14 regulators stating that they thought the 15 employment agreements were unsafe and unsound. 16 And the board responding that we thought that that 17 was incorrect, that these things had been 18 reviewed. We had -- independent experts had come 19 in and said that they were fair, that it was 20 extremely important to have these contracts in 21 order to maintain the management at United. The 22 regulators, I remember, had requested that we get 19868 1 a second opinion from another independent expert 2 to see if these contracts were fair and the 3 compensation reasonable. And we said -- although 4 we didn't really think it was necessary, we agreed 5 to do that. And it was almost heated -- it was 6 certainly well discussed, these employment 7 agreements. 8 Q. And did the board make a decision at 9 that point to make the changes that the regulators 10 had been requesting, apart from the level of 11 compensation which was going to be looked at by 12 another compensation consultant? 13 A. Yes. Yes, we did. 14 Q. Let me direct your attention to Page 9 15 of the minutes and the third paragraph at the 16 bottom of the page. 17 Do you see that? 18 A. Yes, I do. 19 Q. It says, quote, "Before adjourning the 20 meeting, Mr. Twomey on behalf of the Federal Home 21 Loan Bank of Dallas stated that he wished to place 22 on record his belief that the management of the 19869 1 association was cooperating with the Federal Home 2 Loan Bank of Dallas and the FSLIC in resolving all 3 outstanding issues relating to the Southwest Plan 4 including the compensation issue. He also noted 5 that the management of the association had been 6 working diligently over the past year in the best 7 interest of the association in order to reduce 8 losses," close quote. 9 Do you see that? 10 A. Absolutely. 11 Q. Do you remember that comment being made 12 by him? 13 A. I most definitely do. I mean, this 14 was -- this was extremely important for him to say 15 this. We were -- you know, we had gone through 16 this whole discussion of the compensation in the 17 contracts, and he made it a point to go on record 18 to make that statement. And that's why it's 19 reflected there that way. 20 Q. Well, let's go back to Page 3 of the 21 minutes. And about two lines from the bottom, 22 there is -- I'm sorry -- the second-to-the-last 19870 1 paragraph, there is a "further resolved." 2 Do you see that? 3 A. Yes, I do. 4 Q. And it's a reference to the Wyatt 5 Company. 6 Would you tell me what that's all 7 about? 8 A. Again, after I guess it was sometime in 9 the early part of November in connection with the 10 employment agreements and the compensation levels, 11 there were discussions between myself, Larry 12 Connell, Neil Twomey, and others concerning 13 getting a second opinion as to the fairness of the 14 compensation levels and the contracts. Mostly 15 compensation levels is my recollection. 16 Q. Why was Wyatt selected? 17 A. Well, because Wyatt is a 18 nationally-recognized compensation firm; but I 19 believe the reason they were selected was because 20 they had done work for the Federal Home Loan Bank 21 and Mr. Twomey had suggested that we use them. 22 Q. And what was Wyatt ultimately hired to 19871 1 do? 2 A. Again, my recollection is they were 3 hired to look at the -- well, actually, to look at 4 the compensation and to look at the Hewitt report 5 and to pass on Hewitt's methodology and whether 6 their opinion was correct. 7 Q. Was the issue of the propriety and 8 level of compensation in any way linked to the 9 size of the association, the so-called peer group 10 analysis? 11 A. Sure it was. I mean, obviously, if 12 you're a bigger institution, you would expect 13 compensation would be higher than in smaller 14 institutions. That was an issue. 15 Q. Do you recall, sir, what the size of 16 United Savings Association was in -- during the 17 year 1988? Now, I understand it fluctuated during 18 the year; but could you give me a ballpark for the 19 size of the association? 20 A. Oh, I believe it was in, like, seven, 21 $7 and a half billion. Certainly in the mid-part 22 of the year, it was that. I think it might have 19872 1 shrunk a little bit as you got towards the end of 2 the year; but I would say six, $7 billion. 3 Q. Six or $7 billion. Do you recall, sir, 4 whether there was discussion at the board meeting 5 as to the appropriate asset size of the peer group 6 for comparing executive salaries? 7 A. Actually, I do. 8 Q. And what is that? 9 A. It was agreed that we would use the 6- 10 to 12 billion-dollar range as the peer group. 11 Q. And was that an agreement reached 12 between both the board of directors of United and 13 the regulators at that meeting? 14 A. Yes, it was. 15 Q. Do you recall, sir, what Wyatt 16 concluded as a result at the end of their study? 17 A. They concluded that the compensation 18 levels were fair. 19 Q. Let me ask you to turn now to 20 Exhibit B2495, which is in evidence at Tab 471. 21 MR. VILLA: Your Honor, the last 22 document that I have -- the last document that I 19873 1 have been discussing which is the November 7, 1988 2 USAT board minutes, I'm told has been admitted in 3 evidence at -- under the number T8117, not A1163. 4 But it is correctly designated as Tab 447. 5 So, I would like to clarify the record 6 that the November 7, 1988 USAT board minutes are 7 in evidence as T8117. 8 THE COURT: T8117? 9 MR. VILLA: Yes, Your Honor. 10 THE COURT: Thank you. 11 Q. (BY MR. VILLA) Let me ask you, 12 Mr. Berner, to look at what's been marked as B2495 13 and has been introduced into evidence at Tab 471. 14 Do you recognize that document? 15 A. Yes, I do. 16 Q. What is it? 17 A. This is the Wyatt report relating to 18 United Savings' compensation. 19 Q. Let's go to Page 2 of the document 20 under -- not Page 2. The second page of the 21 document. Let's just go to the second page of the 22 exhibit. 19874 1 Do you see that, sir? 2 A. Yes. 3 Q. And it's got "The Wyatt Company, Dallas 4 office, compensation consulting clients"? 5 A. Right. 6 Q. About halfway down the left-hand side, 7 who do you see is their client? 8 A. The Federal Home Loan Bank of Dallas. 9 Q. And is that consistent with your 10 recollection as to why Wyatt was selected? 11 A. Yes, it is. 12 Q. Let me ask you to turn your attention 13 to the executive summary of this document which 14 appears and starts at Bates stamp No. OW154787. 15 Do you see that? 16 A. Yes, I do. 17 Q. Now, let's go down the executive 18 summary of this document with respect to, first, 19 total direct compensation on the first page, 1A. 20 Do you see that where it says, quote, 21 "Hewitt's conclusions regarding the reasonableness 22 of USAT executive salaries are generally sound. 19875 1 However, Wyatt compensation figures are somewhat 2 lower," close quote, period. 3 Do you see that, yes? 4 A. Yes, I do. 5 Q. Now, is that -- you told us what you 6 recalled about Wyatt's conclusions. 7 Is that what you were referring to? 8 A. Yes. Yes, it is. 9 Q. Now, I'd like you to take a look at "B" 10 at the bottom of that page and the carryover to 11 the middle of the following page and then explain 12 to me what is being referred to there and the 13 issue of United salary levels relative to the 14 overall compensation of the association. 15 A. Well, I think that what is being 16 reflected here is that UFG/USAT paid salaries a 17 little bit above comparable competitors but that 18 this -- what Wyatt is saying is that this is a 19 sound practice given the fact that total 20 compensation and total benefits are significantly 21 below other Texas thrifts of comparable size. And 22 they go on to say that this reflects higher 19876 1 productivity levels as a result of fewer 2 employees. 3 Q. Now, did Wyatt conduct an analysis 4 trying to compare the compensation levels on an 5 asset basis as a percentage of assets for United 6 versus other large Texas thrifts? 7 A. Yes, they did. 8 Q. And how much do you see that United 9 saved on its compensation level over the average 10 of the other large Texas thrifts? 11 A. It's either 18 or $16,277,000. I think 12 it's 18 million. 13 Q. And was that consistent with your 14 observation that United had fewer people working 15 at senior levels than other thrifts? 16 A. Absolutely correct. That was the 17 philosophy at United. 18 Q. Let's turn to the next page. This is a 19 discussion particularly relevant to you about 20 whether or not you're overpaid. 21 I bet you read this, didn't you? 22 A. I certainly did. 19877 1 Q. Mr. Berner, what does it conclude about 2 whether or not you are overpaid? 3 A. It says "USAT position EVP general 4 counsel is not overpaid." 5 Q. And does it do an analysis of -- do you 6 recall what the reasons were that they reached for 7 finding that you were not overpaid? 8 A. I know they did an analysis of other -- 9 of larger S&Ls and of law firms and other things. 10 Also, the amount of legal expenses that we were 11 incurring versus other institutions. 12 Q. Now, sir, we have talked about your 13 securities expertise, for example, and your 14 expertise in the issues involving corporate law. 15 Sir, because of that expertise that you 16 had, did United hire outside counsel at the same 17 rate as other comparable associations in your 18 belief? 19 A. No, they didn't. I think we used 20 outside counsel significantly less than other 21 associations. 22 Q. Except in the area of what? 19878 1 A. Regulatory matters, I'm sure. 2 Q. And was the fact that you did this 3 additional work in-house reflected in your overall 4 legal expenses for the association? 5 A. Yes, it did. 6 Q. And how -- did Wyatt actually do an 7 analysis of your legal expenses at United and 8 compare it to other associations based on asset 9 size to determine whether or not you had been able 10 to save money in the long run? 11 A. They did that analysis, that's correct. 12 Q. And is that the analysis that's set out 13 on this page that we're looking at, Bates stamp 14 No. OW154790? 15 A. Yes, it is. 16 Q. And how much did United save? 17 A. Two and a half million dollars. 18 Q. Let me direct your attention to 19 Paragraph -- or to two pages deeper into the 20 document, which is Bates stamp No. OW154792, and 21 the discussion of the chairman of the executive 22 committee. 19879 1 Do you see that? 2 A. Yes, I do. 3 Q. Do you recall that Wyatt looked at the 4 role of the -- first of all, do you remember who 5 the chairman of the executive committee was at 6 United? 7 A. It was Barry Munitz. 8 Q. Do you recall that Wyatt looked at the 9 role that Mr. Munitz played at United and drew 10 some conclusions? 11 A. Yes, I do. 12 Q. And what were the conclusions that you 13 recall they drew? 14 A. Well, that what he was doing was 15 critical to what was happening at United, that his 16 functions were often handled by outside people who 17 were paid on a fee basis or a percentage basis. 18 Q. And -- 19 A. And also that his salary was being paid 20 by UFG. 21 Q. Let me ask you to turn to the final 22 page of this summary under the conclusion. 19880 1 Do you see the conclusion, sir? 2 A. Yes, I do. 3 Q. It says, quote, "Overall, it is our 4 observation that for USAT current executive 5 compensation levels are within competitive ranges 6 and are appropriate and reasonable," close quote. 7 Do you see that? 8 A. Yes, I do, sir. 9 Q. And was that your recollection of their 10 conclusions? 11 A. Yes, it was. 12 Q. Now, let's turn to Page OW154784. And 13 look in the middle of the page. Do you see that, 14 the peer group that USAT looked at -- I'm sorry -- 15 that Wyatt looked at? 16 A. Yes, I think so. You're talking about 17 the thing that says "competitive compensation"? 18 Q. Right. 19 A. Okay. 20 Q. And it's talking about clusters. Can 21 you see what the peer group is right in the middle 22 of the page? 19881 1 A. Yes, sir. 2 Q. The size of the comparable -- 3 MR. RINALDI: I'm sorry. Which page? 4 MR. VILLA: I'm sorry. It's OW154784. 5 It's early in the document, sir. It also says 6 Page 3 at the top. 7 Q. (BY MR. VILLA) Do you see that? 8 A. Yes, I do. 9 MR. VILLA: Mr. Rinaldi, do you have 10 it, sir? 11 MR. RINALDI: Yes, I do. 12 Q. (BY MR. VILLA) And do you see what 13 the peer group was that they compared United to? 14 A. Yes, I do. 15 Q. And what are the numbers? 16 A. There are 14 thrifts with assets 17 between 6 billion and 12 billion averaging 18 8.28 billion and 49 commercial banks with assets 19 between 6 billion and 12 billion averaging 20 8.7 billion. 21 Q. Mr. Berner, so far, we've seen the 22 examiners raise a series of criticisms -- not the 19882 1 examiners -- the Federal Home Loan Bank of Dallas 2 raise a series of criticisms of the compensation 3 practices of United and a series of responses 4 which we're going to look at in more detail 5 tomorrow as we go through the completion of the 6 responses. 7 I'm going to ask you: Why did United 8 respond to the criticisms by the Federal Home Loan 9 Bank of Dallas? 10 A. Why did it respond? 11 Q. Why? 12 A. Well, we wanted to be a participant in 13 the Southwest Plan. We believed that you -- you 14 know, you should try to do and you should do 15 everything that the regulators ask you to do. 16 They had been telling us that -- as we got into 17 this thing, that if we didn't respond, we might 18 not participate in the Southwest Plan and that was 19 extremely important. We needed to keep the 20 institution alive and surviving. 21 Q. Let me ask you to turn to the next 22 document. I've had it blown up a little bit. 19883 1 THE COURT: We'll adjourn until 2 9:00 o'clock tomorrow. 3 4 (Whereupon at 4:49 p.m. 5 the proceedings were recessed.) 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 19884 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 19th day of August, 17 1998. 18 ____________________________ MARCY CLARK, CSR 19 Certified Shorthand Reporter In and for the State of Texas 20 Certification No. 4935 Expiration Date: 12-31-99 21 22 19885 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 19th day of August, 18 1998. 19 _____________________________ SHAUNA FOREMAN, CSR 20 Certified Shorthand Reporter In and for the State of Texas 21 Certification No. 3786 Expiration Date: 12-31-98 22