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.