19886 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 20, 1998 22 19887 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 19888 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 . 19889 1 2 INDEX OF PROCEEDINGS 3 ARTHUR BERNER 4 Continued Examination by Mr. Villa......19890 5 Examination by Mr. Eisenhart............20168 6 . 7 . 8 . 9 . 10 . 11 . 12 . 13 . 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 19890 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. 6 MR. VILLA: Thank you, Your Honor. 7 8 CONTINUED EXAMINATION 9 10 Q. (BY MR. VILLA) Good morning, 11 Mr. Berner. 12 A. Good morning. 13 Q. I had pulled out an exhibit at the 14 close of the testimony yesterday, but you can 15 disregard that exhibit. We won't spend any time 16 on it. 17 Instead, I would like to direct your 18 attention to your November 7, 1988 letter to 19 Neil Twomey, which is Exhibit T8120 at Tab 449. 20 We've already talked about that at some length. 21 And I would now like to direct your attention, 22 sir, to Paragraph 4. And I'll read that for you 19891 1 and ask you a question. It's only one sentence. 2 It says, quote, "We are in discussions with 3 Mr. Jenard Gross for an acceptable resolution to 4 the issues you have raised." This is the letter 5 you sent to Mr. Twomey. 6 Can you tell us, sir: What does that 7 refer to? 8 A. Sometime prior to this -- I think it 9 was in October, sometime in October -- Mr. Twomey 10 had raised the issue of the fact that essentially 11 United Savings had two people that were heading 12 it, Larry Connell and Jenard Gross, both of whom 13 were fairly well paid. And the Federal Home Loan 14 Bank Board perhaps thought that was inappropriate 15 and perhaps we should just have one person heading 16 it and that since Mr. Connell was the savings and 17 loan person, an expert, that that was the person 18 that they thought should be the one that is the 19 ultimate head of USAT. 20 I had discussed that briefly with 21 Mr. Gross; and it had been clear to him since 22 Mr. Connell had gotten there that Mr. Connell was, 19892 1 in effect, running United Savings. And this was 2 a -- Mr. Twomey had raised the issue in the 3 November 3rd meeting as to what was happening on 4 that front, and I was telling him we were getting 5 close to resolving that issue. Mr. Gross had sent 6 in a letter of resignation, and it was being 7 discussed at the board level. 8 Q. Just for a moment's digression about 9 Mr. Connell, how would you describe Mr. Connell in 10 terms of the force of his personality and his 11 executive style? 12 A. Well, Larry Connell was a bulldog. He 13 was a very energetic, very bright, well-qualified 14 person who certainly knew what he wanted and knew 15 how to get what he wanted. He was just a good 16 manager, good leader. 17 Q. Was Mr. Twomey's statement to you, at 18 least what you heard of it, about having two 19 people running United, was it a criticism of 20 Jenard Gross or his management style? 21 A. No, not at all. It was just a question 22 of -- there were two leaders, and it's hard for 19893 1 any organization to have two leaders. And 2 certainly, the Federal Home Loan Bank Board was 3 looking for someone who had the S&L experience; 4 and Mr. Connell was that leader. 5 Q. Now, over the next month or so, we are 6 going to see the ultimate resignation or departure 7 of Jenard Gross, right -- 8 A. Yes. 9 Q. -- from that time period to the end of 10 November. 11 And what relationship did his departure 12 have, in your experience, to the suggestions that 13 were being raised by Mr. Twomey? 14 A. Well, again, I mean, it was just a 15 confirmation that they had suggested that there 16 was more -- we shouldn't have more than one 17 leader, and Mr. Connell effectively became that 18 leader. 19 Q. I'm now going to turn to the fourth and 20 final notebook of compensation exhibits. I'm 21 going to hand one to you and to the Court. 22 A. Thank you. 19894 1 Q. Just a moment, sir. 2 3 (Discussion held off the record.) 4 5 Q. (BY MR. VILLA) You know, I have made a 6 mistake. I do it occasionally, and Mr. Farley 7 always brings it to my attention. 8 The last document in the third book is 9 what I would like to direct your attention to. 10 And the document is T8114, and it's in evidence at 11 Tab 446. 12 Do you have that before you, sir? 13 A. Yes, I do. 14 Q. Would you look at that document and 15 then tell me what it is -- tell the Court what it 16 is. 17 A. This was Jenard Gross' letter of 18 resignation of October 31st from United Savings 19 Association. 20 Q. And this -- does Mister -- does 21 Mr. Gross make a proposal in this letter, T8114? 22 A. Yes, he does. He proposes that he's 19895 1 entitled to certain benefits under his contract. 2 United Financial Group is entitled to certain 3 payments under a note. In effect, what he's 4 saying is why don't we cancel each of these out. 5 I'll give up my rights to the contract and you 6 give up your rights to the payment of the note. 7 United Financial Group gives up its rights to the 8 payment of the note. 9 Q. Okay. And now we can go to Book 4. If 10 you'll look at Exhibit T8113, which is Tab 445. 11 Can you tell me what that document is, 12 sir? 13 A. These are minutes of a special meeting 14 of the board of United Financial Group of 15 October 31st, 1988. 16 Q. And directing your attention to the 17 sixth full paragraph, what does that address? It 18 starts with "the assistance of Mr. Ott." 19 A. It was a discussion of Jenard Gross' 20 proposal that was made in the letter we just 21 looked at. 22 Q. And what did the -- first of all, 19896 1 did -- what role did Mr. Ott play in the 2 consideration of Mr. Gross' proposal? 3 A. Well, he was outside counsel advising 4 the board. 5 Q. And Mr. Ott is from Arnold & Porter. 6 Right? 7 A. From Washington, that's correct. 8 Q. And he was enlisted in connection with 9 the response to Mr. Gross' letter; is that right? 10 A. Yes, that's right. 11 Q. And what -- can you tell by looking at 12 this, sir, whether the board made any decision on 13 Mr. Gross' proposal at this meeting? 14 A. The board didn't make a decision. It 15 decided to postpone making a decision until the 16 next meeting which was scheduled for November 7th. 17 Q. Let me show you what's been marked as 18 Exhibit B4189 and ask you if you can identify 19 this? 20 A. These are minutes of a special board of 21 directors meeting of United Financial Group dated 22 November 15th, 1988. 19897 1 Q. And do they have attachments to them in 2 connection with the issues raised at the meeting? 3 Do you see that? 4 A. Yes, they do. 5 MR. VILLA: Your Honor, I move 6 Exhibit B4189 into evidence. 7 MR. RINALDI: No objection, Your Honor. 8 THE COURT: Received. 9 MR. VILLA: Your Honor, there is 10 another copy of these minutes in evidence without 11 the attachments. It's in evidence as T8124, 12 Tab 450. But this copy has two memoranda attached 13 to it. 14 THE COURT: All right. 15 MR. RINALDI: The two memoranda are in 16 evidence as 8125 and 812 -- 8125, I believe. 17 T8125. 18 Q. (BY MR. VILLA) Mr. Berner, let me 19 direct your attention to the list of Mr. Gross' 20 requests on the first page of B4189. 21 Do you see those? 22 A. Yes, I do. 19898 1 Q. Do you know whether all of these 2 requests were accepted by the board of directors 3 of United Financial Group? 4 A. They were not accepted. 5 Q. And let me ask you to direct your 6 attention to the top of Page 2 of the minutes. 7 Do you see that? The first sentence in 8 particular, I'll read it and then ask you to 9 explain it. It says, quote, "The board further 10 noted that pursuant to discussions with 11 representatives of the Federal Home Loan Bank of 12 Dallas, until the compensation and authority 13 issues at USAT were satisfactorily resolved, 14 further participation in a Southwest Plan 15 transaction would be delayed." Then it goes on. 16 Do you see that? 17 A. Yes, I do. 18 Q. Can you explain to us the effect -- 19 first of all, what's the reference to the 20 authority issues in those minutes? 21 A. That's what I was mentioning before. 22 That was the question of who was going to be 19899 1 leading USAT, Mr. Connell or Mr. Gross. And, 2 again, this is -- this is making reference to 3 that. They wanted to get that resolved. 4 Q. And what link did the resolution of 5 that issue have to United's participation in the 6 Southwest Plan? 7 A. We were being told that until that was 8 resolved, we would not be able to participate in 9 the Southwest Plan. 10 Q. And that was, then, one of the reasons 11 that the board was considering in connection with 12 the severance with Mr. Gross. Right? 13 A. Yes, it was. Yes. 14 Q. Let me direct your attention to the 15 third full paragraph on Page 2, and it discusses 16 certain litigation claims. 17 Do you see that, sir? 18 A. Yes, I do. 19 Q. Would you read that to yourself 20 quickly? And then I'm going to ask you a few 21 questions about it. 22 A. (Witness reviews the document.) 19900 1 Q. Now, sir, did you evaluate Mr. Gross' 2 litigation claims? 3 A. Yes, I did. 4 Q. And let me direct your attention to the 5 memorandum that's attached at Bates stamp 6 No. DM010936. 7 Do you see that evaluation? 8 A. Yes, I do. 9 Q. Is that part of the evaluation of 10 Mr. Gross' litigation claims? 11 A. I believe it is, yes. 12 Q. I'm interested in the sentence in the 13 first paragraph that -- the second full -- the 14 second sentence in the first paragraph. It says, 15 "In each case, it was assumed that Gross would 16 claim that his employment contracts with United 17 Financial Group, Inc. were triggered inasmuch as 18 he was effectively terminated, de facto or 19 de jure." 20 Do you see that? 21 A. Yes, I do. 22 Q. Can you explain what you meant by that? 19901 1 A. In the agreement, there's a provision 2 that if there's a significant change of position, 3 that would be a termination. And I think in 4 Mr. Gross' case, he was saying that -- well, in 5 fact, that bringing in Mr. Connell and putting him 6 as the head of the association, that was, in fact, 7 a termination of his employment; so, he was being 8 terminated. 9 Q. Would you explain to me again why 10 changing the nature of his responsibilities would 11 be deemed a termination? 12 A. Again, my recollection is that under 13 the agreement, if you change somebody's position, 14 somebody's, you know, position, that would be 15 considered a termination. 16 Q. And so, prior to Mr. Connell coming and 17 prior to the directions from or suggestions from 18 Mr. Twomey, Mr. Gross had had more responsibility 19 than afterwards? 20 A. Oh, yeah. He was -- Mr. Gross was the 21 CEO of United Savings. And effectively, once 22 Mr. Connell came, Mr. Connell took over that 19902 1 position as CEO of United Savings. 2 Q. I would like to direct your attention, 3 then, back to the second paragraph of the 4 minutes -- second page of the minutes. Go back to 5 the page that we were on in the minutes which 6 reads, quote, "Mr. Crow stated that he had 7 prepared an analysis of the economic obligations 8 potentially owed by the company to Mr. Gross which 9 he was circulating." 10 Do you see that? 11 A. Yes, I do. 12 Q. I don't have it attached to this 13 particular document, but do you recall whether 14 Mr. Crow did do an economic evaluation of various 15 scenarios? 16 A. I believe he did. 17 Q. Was that taken into consideration by 18 the board? 19 A. Yes, it was. 20 Q. Let me now ask you to turn to the final 21 four pages of this exhibit, the financial position 22 of UFG only. It's a memorandum prepared by 19903 1 Mr. Crow dated November 15th, 1988. 2 Do you see that, sir? 3 A. Yes, I do. 4 Q. Can you tell us what that addresses? 5 You've seen this before, haven't you? 6 A. Yes, I have. This addresses where 7 United Financial Group would be as a standalone 8 company if -- if it wasn't the parent of United 9 Savings. 10 Q. And what conclusions does it reach with 11 respect to whether or not, if an employment 12 agreement were triggered, UFG would be able to 13 make good on the severance claims under that 14 employment agreement? 15 A. It says it's likely that if it was 16 triggered, UFG would be able to make good on it. 17 Q. And that's the paragraph at the bottom 18 of the first page of the memo. Right? 19 A. That's correct. 20 Q. And the remainder of the memo was -- do 21 you know who prepared the remainder of this memo? 22 A. Mike Crow. 19904 1 Q. Do you recall that you and I had a 2 discussion yesterday morning about the 3 consequences over a long period of time of the 4 debt that United Financial Group had and how it 5 would erode its financial position. 6 Do you recall that, sir? 7 A. Yeah. Over a long period of time, 8 that's correct. 9 Q. Let me ask you: Does the document that 10 we see here address issues like that? 11 A. Yes, it does. 12 Q. And particularly the first document, 13 which is the -- I'm sorry -- the 14 second-to-the-last page Bates stamped in the upper 15 right-hand corner DM010939. 16 Do you see that? 17 A. Yes, I do. 18 Q. And what does that reflect? Don't try 19 to interpret it for me. But in general, can you 20 explain to me what that reflects in terms of cash 21 payments over time and cash balances? 22 A. It shows under various scenarios that 19905 1 United Financial Group would be cash positive for 2 a number of years until it turns cash negative. 3 Q. And would the board of directors have 4 taken that into consideration in determining -- in 5 negotiating with Mr. Gross? 6 A. Yes, they would have. 7 Q. Now, you said that it -- it did not -- 8 it looked at UFG on a standalone basis. Right? 9 A. That's correct. 10 Q. And by "standalone," that means to 11 exclude USAT's assets and contingent liabilities? 12 A. That's right. 13 Q. And we're looking at a time period in 14 November of 1988. Right? 15 A. Yes, sir. 16 Q. As of this time, had the Federal Home 17 Loan Bank Board or the Federal Home Loan Bank of 18 Dallas or FSLIC directed UFG to make any 19 payments -- to make any payments in furtherance of 20 its net worth maintenance obligations? 21 A. No, it had not. 22 Q. After the consideration of the issues 19906 1 that we've just talked about here, did the board 2 make a decision on how it would respond to 3 Mr. Gross' proposal? 4 A. I believe it did, yes. 5 Q. And let me direct your attention to the 6 second-to-the-last paragraph on Page 3 of the 7 minutes and ask you if -- to read that and tell us 8 what conclusion the board reached and the factors 9 that you recall that it took into consideration. 10 A. You're talking about the "further 11 resolved" paragraph. 12 Q. The "further resolved" paragraph. 13 A. (Witness reviews the document.) Well, 14 what was decided was that I and, ultimately, with 15 outside counsel, would prepare a document and 16 negotiate with Mr. Gross to resolve his -- his 17 severance based on the things that had been 18 discussed at the board. And it's referred to in 19 this on Page 3. 20 Q. And do you recall, sir, who was the 21 outside counsel that you were employing to assist 22 you in this? 19907 1 A. Bob Ott. 2 Q. And do you recall, sir, that you 3 carried out the directions of the board in this 4 regard? 5 A. Yes, I did. 6 Q. And did you participate in the drafting 7 or the causing to be drafted documents 8 effectuating the board's decision? 9 A. Yes, I did. 10 Q. Did Mr. Gross represent himself? 11 A. No. He had outside counsel. 12 Q. Let me show you what's been previously 13 admitted at T8128, Tab 452, and ask you if you can 14 recognize this. 15 A. These are special -- it's minutes of 16 boards of directors of a special joint meeting of 17 United Financial Group and United Savings of 18 November 21st, 1988. 19 Q. So, the prior meeting minutes were 20 November 15. Right? 21 A. Yes, sir. 22 Q. And these are six days later? 19908 1 A. Right. 2 Q. Between November 15 and November 21, do 3 you recall whether or not you had met with 4 Mr. Gross and his counsel to negotiate? 5 A. Yes, we had. 6 Q. Let me direct your attention now to the 7 fourth full paragraph and ask you to review that, 8 and then I'm going to ask you a question about it. 9 A. (Witness reviews the document.) Okay. 10 Q. Now, sir, what is being reported to the 11 board in this paragraph about the negotiations 12 with Mr. Gross? 13 A. What was being reported was that 14 everything had been agreed to between counsel and 15 Mr. Gross except that Mr. Gross wanted to get 16 released from all potential litigation and that 17 counsel -- that we felt that that was 18 inappropriate; so, the board wouldn't approve 19 that. 20 Q. And was -- was there any statement made 21 at that meeting from counsel on that issue, as 22 well? 19909 1 A. Yes, there was. 2 Q. And what was that? 3 A. That he believed that this would be 4 inappropriate to release Mr. Gross from that. 5 Q. And was a separation agreement 6 ultimately executed as a result of these 7 discussions and negotiations we've been talking 8 about? 9 A. Yes, it was. 10 Q. Let me direct your attention to T8129, 11 Tab 453. Can you tell us what that is, sir? 12 A. This is the separation agreement. 13 Q. Now, let me ask you, Mr. Berner: Did 14 Mr. Gross receive anything of value from United 15 Savings Association of Texas, from USAT, anything 16 significant other than items in his office and 17 related matters in the separation agreement? 18 A. Nothing. 19 Q. What did he receive? What was the 20 principal economic benefit to him coming out of 21 the separation agreement? 22 A. He was released from his note that he 19910 1 owed to United Financial Group which, I think, was 2 the principal financial benefit to him. And 3 United Financial Group was released from making 4 any payments to him under that contract. 5 Q. Was United Savings Association of Texas 6 also released from liability under this document? 7 A. Yes, it was. 8 Q. So, the -- we talked a little about 9 consideration earlier in your testimony. So, 10 which of the two companies provided consideration 11 to Mr. Gross? 12 A. United Financial Group. 13 Q. And to whom did he give the releases? 14 A. United Financial Group and United 15 Savings. 16 Q. Let me ask you now to look at 17 Exhibit B2552, which is in evidence at Tab 486. 18 Do you have that, sir? 19 A. Yes. 20 Q. Can you tell me what that is? 21 A. This is a letter from me to Neil Twomey 22 relating -- dated November 23rd, 1988. 19911 1 Q. And what does it enclose? 2 A. It encloses, I believe, the separation 3 agreement; and it's certainly reflecting that 4 Jenard Gross has resigned as chairman of United 5 Savings and United Financial. 6 Q. The first three -- the first four words 7 of the letter say "as we have discussed." 8 Do you see that, sir? 9 A. Yes. 10 Q. And did you have discussions with 11 Mr. Twomey about the separation agreement as it 12 was being negotiated? 13 A. Yes, I did. 14 Q. And did he express any objections to 15 you over the terms of the separation agreement? 16 A. No, he did not. 17 Q. And when you sent him the separation 18 agreement on November 23rd, 1988, did Mr. Twomey 19 ever express any criticism of the separation 20 agreement? 21 A. No, he did not. 22 Q. Did you believe that Mr. Twomey wanted 19912 1 Mr. Gross to be separated from USAT? 2 A. I definitely did. 3 Q. Let me ask you, sir, to turn to the 4 next document, B2542, which has been admitted at 5 Tab 472. 6 Can you tell me what that document is, 7 sir? 8 A. It's a letter from me to Texas Commerce 9 Bank dated November 18th, 1988. 10 Q. And what is United offering to do? 11 A. We're telling Texas Commerce Bank that 12 if they will release the money that's held in 13 trust, we will agree to hold them harmless. 14 Q. And why are you doing that, sir? 15 A. Well, this was a concern -- one of the 16 concerns that Texas Commerce Bank had. And we 17 were insistent in desperately trying to get the 18 money out of that trust because this was one of 19 the things we had told the Federal Home Loan Bank 20 of Dallas we were going to do. TCB said, "Okay. 21 We need to get an indemnification that we are 22 going to be held harmless before we release the 19913 1 money from the trust." 2 And we said, "We agree." 3 Q. As you see, in the last paragraph, it 4 says, "As we discussed, you will wire the funds on 5 November 28." And then you give your wire 6 instruction number. Right? 7 A. Right. 8 Q. But did that happen? 9 A. No, it did not. 10 Q. Let me now direct your attention to the 11 next exhibit, Exhibit B2554, and ask if you can 12 identify that for me, sir. 13 A. Yeah. This is a memo from me to files 14 relating to a meeting with the Federal Home Loan 15 Bank of Dallas on November 22nd. 16 MR. VILLA: Your Honor, I move 17 Exhibit B2554 into evidence. 18 MR. RINALDI: No objection, Your Honor. 19 THE COURT: Received. 20 Q. (BY MR. VILLA) And how long after the 21 meeting was this memo prepared? 22 A. The next day. 19914 1 Q. Who was at this meeting? 2 A. For everybody? On behalf of United was 3 myself, Dr. Barry Munitz, Larry Connell. There 4 was Alfred Lopez and Ron Woods representing the 5 Wyatt Company, Neil Twomey, Mark Dunn, Donna 6 Guthrie, and Brenda Bese representing the Federal 7 Home Loan Bank of Dallas. 8 Q. And the Wyatt Company is the second 9 compensation consultant that we've talked about? 10 A. Yes, that's correct. 11 Q. I would like to direct your attention 12 to the third and fourth paragraphs of this 13 document and ask you to review them and then tell 14 us what the current status of the matters was at 15 this point -- 16 A. (Witness reviews the document.) 17 Q. -- and what you recall Mr. Twomey's 18 position was as to whether United was complying 19 with the requests that he was making of them. 20 A. Well, the status was -- and Dr. Munitz 21 reported -- that the escrow moneys had been 22 removed. The trust moneys were attempting to be 19915 1 removed, that Jenard Gross had resigned and 2 another senior executive consultant had resigned, 3 and that Mr. Twomey made reference to the fact 4 that the Wyatt Company -- he was impressed by the 5 fact that the Wyatt Company had responded so 6 rapidly to the request that the company do an 7 audit of the Hewitt compensation study. 8 Q. Did Mr. Twomey indicate that there were 9 any additional recommendations that he was going 10 to make? 11 A. He said he was going to review it to 12 see if there were any additional recommendations. 13 Q. And let me now ask you to look at 14 Page 2 of the memo and the second full paragraph, 15 your discussion that starts with "Mr. Twomey." 16 Do you see that? 17 A. Yes, I do. 18 Q. Why don't you read that and then tell 19 me what conclusions you drew about Mr. Twomey's 20 position with respect to whether or not United was 21 attempting to respond to his criticisms 22 A. Well, Mr. Twomey said that the 19916 1 management had taken important steps to deal with 2 his criticisms. And he also makes reference to 3 the fact that even if compensation were too high, 4 he thought the damage to the institution would be 5 greater if additional action was being taken; but 6 he was going to review that. 7 Q. Now, at this point, had you addressed 8 every criticism that Mr. Twomey had asserted in 9 his prior letters? 10 A. Yes, we had. 11 Q. And that included the severance moneys 12 and the bonus moneys, and the issues respecting 13 the compensation levels were being looked at. 14 Right? 15 A. Right. 16 Q. The allocations between the various -- 17 between the two companies, correct? 18 A. Correct. 19 Q. And the questions of authority? 20 A. Right. 21 Q. Now, in this meeting, he raised another 22 series of questions. Let me direct your attention 19917 1 to the fifth paragraph on Page 5, for example -- 2 Page 1 where he asks for job descriptions. 3 Do you see that? 4 A. Right. 5 Q. And were job descriptions ultimately 6 provided to him? 7 A. Yes, they were. 8 Q. Let me direct your attention to the 9 paragraph that begins at the very bottom of 1 and 10 runs over to Page 2. 11 Do you see that, sir? It refers to a 12 compensation list. 13 A. Yes, I do. 14 Q. I would like you to now look at 15 Exhibit A11045, which is your November 25 letter 16 to Neil Twomey. 17 Do you see that? 18 A. Yes, I do. 19 Q. Mine says Krauser 25 on it, Krauser 20 Exhibit 25. 21 What is that, sir? 22 A. It's a letter and an attachment to 19918 1 Neil Twomey about the executive compensation. 2 Q. So, this is a response to the request 3 that he made at the meeting three days earlier. 4 Right? 5 A. Yes. 6 MR. VILLA: Your Honor, I move A11045 7 into evidence. 8 MR. RINALDI: No objection, Your Honor. 9 THE COURT: Received. 10 Q. (BY MR. VILLA) Let's go back to your 11 November 23rd memo again. Let me direct your 12 attention to the second sentence in the second 13 paragraph, your November 23rd, 1988 memo, B2554. 14 The second sentence in the second paragraph reads, 15 "Mr. Twomey began the meeting by stating that he 16 was presenting a letter to show us the technical 17 violations of Section 563.39 of the insurance 18 regulations of the various employment contracts." 19 Do you see that, sir? 20 A. Yes, I do. 21 Q. And I would like you to now look at 22 T8127, which has been admitted at Tab 451. And 19919 1 just tell us for the record what that document is, 2 sir. 3 A. That's the letter from the Federal Home 4 Loan Bank Board that's referred to in the -- in 5 the memo. 6 Q. It's a letter from Mr. Twomey to you. 7 Right? 8 A. That's correct. 9 Q. And does it make certain criticisms of 10 563 -- I'm sorry. Does it make certain criticisms 11 of the employment contracts citing 563.39? 12 A. Yes, it does. 13 Q. And was that the one that was delivered 14 to you at the meeting with Mr. Twomey on the 22nd? 15 A. Right. This is the letter that he gave 16 me at that meeting, yes. 17 Q. Let me now ask you to turn to B4248. 18 Can you identify that for us, sir? 19 A. That's a letter from me to Neil Twomey 20 dated November 29th, 1988, responding to that 21 previous letter we just looked at. 22 MR. VILLA: Your Honor, I move B4248 19920 1 into evidence. 2 MR. RINALDI: No objection, Your Honor. 3 THE COURT: Received. 4 Q. (BY MR. VILLA) And does this letter 5 address some of the issues that were raised in the 6 November 21 letter and the November 22 meeting? 7 A. Yes, it does. 8 Q. And the first one is level of 9 compensation. 10 Do you see that, sir? 11 A. Yes, I do. 12 Q. And what does it refer to as the 13 response of the board of level of compensation? 14 A. Well, it just goes through what the 15 board -- you know, the board's position on the 16 level of compensation and spells out in some 17 detail what the board considered in determining 18 levels of compensation. 19 Q. Now, I would like to direct your 20 attention to the paragraph on Page 4 of your 21 letter that deals with 563.39(b) requirements. 22 Do you see that? 19921 1 A. Yes, I do. 2 Q. And what did United do in response to 3 the criticisms in Mr. Twomey's letter about the 4 text of the employment agreements? 5 A. We changed the employment agreements to 6 respond to all of his concerns. 7 Q. And let me ask you to turn to 8 Exhibit B2609, which is in evidence at Tab 473. 9 Do you have that before you, sir? 10 A. Yes, I do. 11 Q. And what is that? 12 A. That's a memo from me to the people 13 that had employment contracts setting forth an 14 amendment which amended their contracts to reflect 15 what's set forth in that letter and the concerns 16 about 563.39, whatever. 17 Q. I'm not going to go into all of them; 18 but it addresses such issues such as the 19 definition of cause, specific performance, 20 termination of prior contracts. Right? 21 A. Right. Whatever they had raised was 22 handled in that amendment. 19922 1 Q. Let me ask you, sir, to now turn to 2 Exhibit -- let's stop for a moment. 3 Look at B2635 first, which is in 4 evidence at Tab 474. Do you have that before you, 5 sir? 6 A. Yes, I do. 7 Q. What is that? 8 A. That's a letter from me to Neil Twomey 9 enclosing a form of the amendments of the 10 employment contracts that were being entered into. 11 Q. And do you recall, sir, whether any of 12 the officers, the senior officers, declined to 13 execute the amendments to the employment contracts 14 that you had requested? 15 A. Nobody declined to execute it. 16 Q. Sir, we've gone through in 17 unfortunately tedious detail, I'm afraid, every 18 one of the criticisms that Mr. Twomey has asserted 19 in several letters and several meetings. And we 20 have also gone through USAT's response to those 21 criticisms. 22 Let me ask you, sir: Why is it that 19923 1 USAT attempted to respond to all of the criticisms 2 that Mr. Twomey made? 3 A. Well, for a number of reasons. 4 Obviously, we always wanted to be in compliance 5 with whatever regulations applied. More 6 importantly or most importantly, we wanted to be a 7 participant in the Southwest Plan; and it was 8 important from the Federal Home Loan Bank Board's 9 point of view to have all of these contracts 10 changed in order to be a participant in the 11 Southwest Plan. And that was our primary 12 motivation to do that. 13 Q. When you entered into these contracts, 14 sir, did you believe that they were violations of 15 regulations, unsafe and unsound practices, or 16 would otherwise jeopardize United's relationship 17 with its supervisory agents? 18 A. No, we certainly did not. 19 Q. If you had known that, sir, would you 20 have entered into the contracts in the form that 21 they were? 22 A. No. Had there been any criticism, any 19924 1 suggestion, we would have changed the contract, as 2 we did. 3 Q. Do you recall any requests that 4 Mr. Twomey made to you in the course of this -- 5 these discussions with respect to the compensation 6 issues and the authority issues, up to and 7 including the separation of Mr. Gross, that you 8 did not attempt to respond to fully? 9 A. To the best of my recollection, there 10 was nothing that we didn't attempt to respond 11 fully to. 12 Q. Now, on some issues, you were unable to 13 obtain that? 14 A. Some, specifically getting the money 15 out of Texas Commerce Bank. We couldn't do it, 16 but we certainly attempted. 17 Q. Of all of the senior managers, 18 including the people who are respondents in this 19 case, did any of them refuse to cooperate 20 100 percent with the requests that were being made 21 to you and funneled from you to them to change 22 their compensation arrangements so that United 19925 1 might survive? 2 A. Not one. Everybody voluntarily agreed 3 to all of those. 4 Q. Let me show you, sir, what's been 5 marked as Exhibit B2564. Can you tell me what 6 that is? 7 A. That's a letter from Gary Winston who 8 was a lawyer at Mayor, Day & Caldwell to me, dated 9 November 28th. 10 Q. What does it address? 11 A. It addresses a letter -- it's relating 12 to a draft letter to the trustee requesting that 13 the trustee pay to USAT certain bonus moneys taken 14 out of trust. 15 Q. At the risk of beating a dead horse, 16 this is the money in Texas Commerce Bank. Right? 17 A. That's right, for the executive bonus 18 plan. 19 Q. And United had been able to get the 20 $6.6 million back from First City. Right? 21 A. That's correct. 22 Q. Okay. 19926 1 MR. VILLA: Your Honor, I move B2564 2 into evidence. 3 MR. RINALDI: No objection. 4 THE COURT: Received. 5 Q. (BY MR. VILLA) So, I gather that your 6 initial efforts to get the money back from Texas 7 Commerce Bank on your own were unsuccessful. 8 Right? 9 A. That's correct. 10 Q. Now you hired counsel to try to get it 11 back? 12 A. Right. Mayor, Day & Caldwell was our 13 general corporate counsel. Yes, we hired them. 14 Q. Let me -- or employed counsel, I should 15 say. 16 Let me direct your attention to 17 Exhibit B2571 and ask you if you can identify that 18 document. 19 A. Looks like a series of documents. It's 20 a letter from me to Jim Wolfe, the first one, 21 requesting that he agreed to do certain things to 22 get his money out of trust. 19927 1 Q. And is it countersigned -- you say it's 2 a series of documents? 3 A. Yes, it is. 4 Q. And are these the people who had 5 contracts and -- I'm sorry. 6 Are these the contract people who had 7 money in the executive bonus plan? 8 A. Yes, that's correct. 9 Q. And these are -- what was the purpose 10 of having these documents executed by all these 11 individuals? 12 A. So that we had something in writing 13 that they had agreed to the proposal to get their 14 money out of the -- that trust. 15 Q. What were you going to do with this? 16 A. Give it to the trustee. 17 Q. Of Texas Commerce -- 18 A. Of Texas Commerce Bank. 19 Q. Of Texas Commerce Bank? 20 A. Right. 21 MR. VILLA: Your Honor, I move B2571 22 into evidence. 19928 1 MR. RINALDI: No objection, Your Honor. 2 THE COURT: Received. 3 Q. (BY MR. VILLA) How many different 4 efforts do you think you made to get the money 5 back from Texas Commerce Bank? 6 A. A lot. I don't know. Many. It was a 7 series of letters and telephone calls to try to 8 get the money out of trust at Texas Commerce Bank. 9 Q. Let me direct your attention to 10 Exhibit B2591. Can you tell me what that is? 11 A. That's a letter from Ken McLaughlin who 12 was a lawyer at Mayor, Day & Caldwell to John 13 Hopwood who was an outside counsel representing 14 Texas Commerce Bank. And it's dated 15 December 12th, 1988. 16 Q. What's the purpose of this letter? 17 A. Apparently, counsel for TCB had 18 required additional documents, a disclaimer and a 19 consent letter, in order to release the money from 20 trust. This is a transmittal of the draft of 21 those letters, those documents. 22 Q. And Mr. Hopwood is counsel for Texas 19929 1 Commerce? 2 A. That's correct. 3 MR. VILLA: Your Honor, I move B2591 4 into evidence. 5 MR. RINALDI: No objection, Your Honor. 6 THE COURT: Received. 7 Q. (BY MR. VILLA) Let me ask you to direct 8 your attention to B2595 and tell us what it is. 9 A. This is another letter from Ken 10 McLaughlin dated December 14th to Gail Goodman who 11 was a lawyer at Liddell Sapp, counsel for TCB. 12 Q. What was the purpose of this letter? 13 A. To send a copy of the previous letter 14 sent to Hopwood and, also, a memo discussing the 15 disclaimer and drafting a consent letter. 16 MR. VILLA: I move B2595 into evidence. 17 MR. RINALDI: No objection. 18 THE COURT: Received. 19 Q. (BY MR. VILLA) Let me show you a series 20 of documents. I probably should have put them 21 under the same tab. They are B2599, B2600, B2603, 22 B2601, B2602, and B4190. 19930 1 Can you look at those six documents and 2 tell me what they are? 3 A. They are executed as a memorandum of 4 disclaimer of renunciation and a letter to Texas 5 Commerce Bank by each of the people with contracts 6 requesting that the money be taken out of the 7 trust and returned to United. 8 MR. VILLA: Your Honor, I move into 9 evidence B2599, B2600, B2603, B2601, B2602 and 10 B4190. 11 MR. RINALDI: No objection, Your Honor. 12 THE COURT: Received. 13 Q. (BY MR. VILLA) Let me ask you now to 14 turn to Exhibit B260 -- give me a moment, sir. 15 Look at B2608, the next document in your book. 16 Tell me if you can identify that. 17 A. This is a check from Texas Commerce 18 Bank trust department to United Savings, and it's 19 returning the money that was in escrow for -- in 20 trust, rather, for Jenard Gross. 21 MR. VILLA: Your Honor, I move B2608 22 into evidence. 19931 1 MR. RINALDI: No objection, Your Honor. 2 THE COURT: Received. 3 Q. (BY MR. VILLA) Why were the funds 4 returned for Mr. Gross and not returned for any of 5 the other contracting parties? 6 A. Well, Mr. Gross had terminated his 7 employment with United Savings and United 8 Financial Group prior to the end of the year. And 9 the terms of the -- that trust were you had to be 10 there at the end of the year in order to get the 11 additional 75 percent. He was no longer there. 12 It came out of trust. 13 Q. And was that the only money you were 14 able to secure from the Texas Commerce Bank trust, 15 secure the return of from the Texas Commerce Bank 16 trust? 17 A. I believe so, yes. 18 Q. Prior to the litigation? 19 A. Prior to the litigation, yes. 20 Q. Let me now direct your attention to 21 B2604, which is in evidence at Tab 487. 22 Do you recognize this document, sir? 19932 1 A. Yes, I do. 2 Q. Now, just tell us what it is for the 3 record. 4 A. It's a letter from Neil Twomey to the 5 board of United Savings dated December 15th, 1988. 6 Q. Now, we talked quite a bit about the 7 issue of whether or not the Federal Home Loan Bank 8 of Dallas objected to the payment of money from 9 trusts. 10 Did the Federal Home Loan Bank of 11 Dallas, prior to this time, express any objection 12 to the actual bonuses being paid if they were paid 13 from a trust? 14 A. They had not. 15 Q. And what does this letter do? 16 A. This letter is where they object to the 17 actual payment of those bonus amounts. 18 Q. And do you recall any prior document 19 that permits the payment of -- or that probihits 20 the payment of the bonuses other than from a 21 trust? 22 A. I don't believe so. 19933 1 Q. Let me ask you to turn to B2623. Can 2 you tell us what that is, sir? 3 A. That's a letter from me to Neil Twomey 4 dated December 21st responding to, I believe, his 5 letter -- yeah -- his letter of December 15th. 6 MR. VILLA: Your Honor, I move B2623 7 into evidence. 8 MR. RINALDI: No objection, Your Honor. 9 THE COURT: Received. 10 Q. (BY MR. VILLA) I would like to direct 11 your attention to the issue -- and I think we've 12 talked about this issue before -- which is whether 13 or not Mr. Twomey was willing to allow the 14 bonuses -- bonus money that was at Texas Commerce 15 Bank to be released for those individuals other 16 than the contracting parties -- the employees who 17 had contracts. 18 Do you remember that, sir? 19 A. Yes, I do. 20 Q. Would you look at number -- the number 21 two paragraph and the -- and the paragraph which 22 is -- begins at the bottom of the page and read 19934 1 those to yourself? And then tell me what you were 2 asking for in this letter. 3 A. Well, what I was asking for was a clear 4 understanding from Mr. Twomey that for everybody 5 other than the seven people or six people that 6 were mentioned in his letter, that the money could 7 come out of the trust. As you can tell by the 8 date, it was getting close to Christmas; and the 9 people, the employees of United Savings, wanted to 10 know were they going to get their money. And I 11 didn't know, and I wanted a clear directive if 12 they would be able to get their money at the end 13 of the year. 14 Q. This didn't have anything to do with 15 your money. Right? 16 A. No. 17 Q. He had already told you that you 18 couldn't have any money from the trust. Right? 19 A. He certainly did. 20 Q. This was just for the lower level 21 officers. Right? 22 A. Right. Everybody below the six or 19935 1 seven people. I think we said before 40 or 50 2 people that were entitled to bonuses. 3 Q. Now, sir, without any direction from 4 Mr. Twomey, would the USAT management and board 5 have taken the money out of trust and given it to 6 the lower level officers? 7 A. Well, it would have been paid out of 8 trust, yes, sure. 9 Q. Maybe I misstated my question. 10 Unless you had an expression from 11 Mr. Twomey that he was -- that he was happy to 12 have them be paid their bonuses, would the USAT 13 management have paid bonuses to these individuals? 14 A. No, not at this time. We needed to get 15 something from him. 16 Q. And did he ever give it to you? 17 A. No. 18 Q. Let's look at B2630. 19 A. 2630? 20 Q. It's probably -- skip one and go to 21 B2630. It should be a letter dated December 21, 22 1988, from John Hopwood to Neil Twomey with a copy 19936 1 to you. 2 Do you see that? 3 A. Yes, I do. 4 Q. And what is this? 5 A. This is a letter -- as you said, it's 6 from counsel for Texas Commerce Bank to 7 Neil Twomey. And he's asking -- among other 8 things, he's saying that everything seems to be in 9 order. This is Texas Commerce Bank. But he wants 10 to verify that it would be okay to pay the money 11 to the lower level people. 12 MR. VILLA: Your Honor, I move B2630 13 into evidence. 14 MR. RINALDI: No objection, Your Honor. 15 THE COURT: Received. 16 Q. (BY MR. VILLA) Now, let me direct your 17 attention to the last four lines of this letter, 18 last four lines of the first page. 19 Do you see that? 20 A. Yes, I do. 21 Q. It reads, "Further, we would request 22 that you verify for us that to your knowledge, the 19937 1 affected employees have not been placed under any 2 duress or coercion to execute the referenced 3 disclaimer and renunciation documents." 4 Do you see that, sir? 5 A. Yes. 6 Q. Now, tell me why, as you recall it, 7 Texas Commerce Bank was not releasing the money 8 from trust -- let's put aside the other 40 lower 9 level people for whom you were trying to get the 10 money out for their bonuses. 11 Let's focus, instead, on just the six 12 people who kept sending in these disclaimers and 13 release letters. Why was it that Texas Commerce 14 Bank was declining to release that money? 15 A. At this time, they were declining 16 because there was some concern on their part in 17 the renunciation that the releases and disclaimers 18 might have been executed under duress. I think 19 they were feeling if it was executed under duress, 20 then they might be liable if they released the 21 money. I think the tenor of those conversation 22 they had with people suggested there might have 19938 1 been some duress or coercion by the Federal Home 2 Loan Bank to have people sign those renunciations 3 and disclaimers. 4 Q. And is that the reason that you believe 5 they were going directly to Mr. Twomey? 6 A. Absolutely. 7 Q. And they were requesting from him 8 certain verifications. Right? 9 A. Verification to his knowledge that this 10 wasn't true, there was no duress. 11 Q. And let me direct you now to the final 12 document, I believe, on this issue, which is 2641, 13 B2641. 14 Do you have that before you, sir? 15 A. Yes, I do. 16 Q. And what is that? 17 A. It's a letter from Neil Twomey to John 18 Hopwood. 19 Q. A response to the prior letter. Right? 20 A. Right. 21 Q. And a copy was sent to you? 22 A. Yes. 19939 1 MR. VILLA: Your Honor, I move B2641 2 into evidence. 3 MR. RINALDI: No objection, Your Honor. 4 THE COURT: Received. 5 Q. (BY MR. VILLA) Let's go to the last 6 paragraph of B2641 where it says, quote, "In light 7 of the circumstances, we believe that $600,750 8 should be returned to USAT in accordance with 9 instructions contained in Arthur S. Berner's 10 letter dated November 9, 1988. If, however, you 11 are reluctant to advise your client to take this 12 action, we request that those funds remain in 13 trust until the matter is finally resolved." 14 Do you see that? 15 A. Yes, I do. 16 Q. Did that $600,000, pursuant to this 17 letter, remain in trust? 18 A. It did. 19 Q. Until the matter was finally resolved. 20 Right? 21 A. Correct. 22 Q. Let me direct your attention to B3808, 19940 1 which is in evidence at Tab 1430. 2 Do you see that, sir? 3 A. Yes, I do. 4 Q. And is this the Texas Commerce Bank 5 litigation -- a result of the Texas Commerce Bank 6 litigation that finally resolved the issues that 7 we've been talking about with respect to the 8 executive bonus plan? 9 A. Yes, it is. 10 Q. And the case was litigated in this 11 courthouse. Right? 12 A. Yes, it was. 13 Q. In the case, FSLIC claimed that it was 14 an unsafe and unsound practice and that the 15 executive bonus plan was approved without the 16 knowledge of the regulators. 17 Do you recall what the Court held in 18 that case? 19 A. The Court held that the executive bonus 20 plan was not an unsafe and unsound practice and 21 that the regulators had full knowledge of the 22 plan. 19941 1 Q. Do you know, sir -- we've talked about 2 whether the plan had been properly authorized by 3 the board of directors. 4 Do you know whether that issue was 5 litigated, as well? 6 A. Yes, it was. 7 Q. How was that resolved? 8 A. The Court ordered that the plan had 9 been properly authorized by the board of 10 directors. 11 Q. So, did the lower level employees 12 receive their bonus moneys from this -- from this 13 trust ultimately? 14 A. In 1992, they finally got their money 15 from trust, that's correct. 16 Q. Did you receive your money from trust? 17 A. No, I didn't. 18 Q. And why not? 19 A. The Court said that the disclaimers and 20 renunciations were effective. 21 Q. And so, you had waived your right to 22 receive any money from that trust, correct? 19942 1 A. That is correct. 2 Q. USAT went into receivership at the end 3 of 1988, didn't it, sir? 4 A. December 30th, yes, sir. 5 Q. And what happened, to your 6 recollection? 7 A. I was terminated. 8 Q. How did you receive notice of the 9 termination? 10 A. About 10:00 or 11:00 at night -- I was 11 actually out of town that day. Representatives of 12 FSLIC came to my house and delivered a letter to 13 my wife at about 10:00 or 11:00. 14 Q. To notify you that you had been 15 terminated? 16 A. That's correct. 17 Q. As a result of the termination, other 18 employees and officers were terminated as well, 19 weren't they? 20 A. Yes. 21 Q. Mr. Crow? 22 A. Mr. Crow and Bruce Williams. 19943 1 Q. And there were other officers who had 2 contracts that made -- ultimately made claims over 3 the following year, the year 1989, correct? 4 A. Right. Everyone made claims then. 5 Q. We're going to go through those claims 6 and how UFG resolved those claims, but let's try 7 to get an overview of it first. 8 Did you stay at UFG for the year 1989 9 and for a period after that? 10 A. Yes, I did. 11 Q. And were you involved in the 12 negotiation and settlement of those claims with 13 former employees? 14 A. Yes, I was. 15 Q. Can you tell the Court -- let's get an 16 overview of what happened during that one-year 17 period in which the severance claims of the six or 18 seven individuals with remaining contracts were 19 resolved. And then we're going to go back and go 20 through in detail the documents which -- which 21 outline that resolution. 22 A. Okay. Well, in early January, we 19944 1 received letters from -- demands from Mr. Crow and 2 Mr. Williams to resolve their contract. At the 3 same time, we were negotiating with the FSLIC for 4 a total resolution of the United transaction. And 5 while I negotiated with Crow and Williams in 6 connection with the FSLIC negotiation, we entered 7 into what was called a standstill agreement where 8 we told them that before any moneys would go out 9 of United Financial Group, we would give them 10 notice as to what was happening; and they would 11 have the right within three days to object to 12 that. We told them about the settlements we had 13 reached with Crow and Williams, and FSLIC came 14 back through their counsel and said they didn't 15 want any of that money paid out. This was 16 January, February, or March or so of '89. They 17 did say that both my compensation and Barry 18 Munitz' compensation could be continued. 19 At around that same time, all the other 20 people who had contracts who still were employed 21 at the new United made demands through their 22 counsel to get paid under their contract and 19945 1 demanded arbitration. Right after that happened, 2 we had negotiations going on where FSLIC, through 3 their outside counsel, Hutcheson & Grundy, the 4 counsel representing all of the employees, and 5 United Financial Group were negotiating to try to 6 figure out how to settle this matter. 7 In fact, a lot of the negotiations were 8 actually just FSLIC and the counsel for the people 9 that had contracts with directly; and we were out 10 of those things. 11 The arbitration, I think, was set for 12 sometime at the end of July, beginning of August. 13 As we got close to that arbitration, negotiations 14 heated up; and, ultimately, we reached an 15 agreement to pay everyone six months' -- 16 essentially six months' salary. And that was the 17 formula, to pay everyone six months' salary. We 18 gave that information to FSLIC and to their 19 counsel and received no objection. 20 During August, September, October, all 21 of those moneys were paid out, including to myself 22 and Dr. Munitz, although he received much less. 19946 1 And that's effectively what happened. 2 Q. Okay. Now, let's go through and look 3 at the documents that reflect this piece by piece. 4 Let me direct your attention to A1170. 5 Tell me what that is, sir. 6 A. These are minutes of United Financial 7 Group's board of directors of January 6, 1989. 8 MR. VILLA: I move A1170 into evidence. 9 MR. RINALDI: No objection. 10 THE COURT: Received. 11 Q. (BY MR. VILLA) I would like to direct 12 your attention to the bottom of Page 1 and the top 13 of Page 2, and there's reflected some discussion 14 by Mr. Ott about the obligations of the board of 15 directors vis-a-vis the employment agreements. 16 Do you see that? 17 A. Yes, I do. 18 Q. There are a number of issues, but one 19 of them is about Mr. Ott. Do you see that? 20 A. Yes. 21 Q. Was Mr. Ott employed by UFG and the UFG 22 board to advise it on the resolution of the 19947 1 employment agreements? 2 A. Yes, he was. 3 Q. He and members of his firm, which was 4 Arnold & Porter -- 5 A. Right. 6 Q. We're going to see some other Arnold & 7 Porter attorneys appear later in this. Right? 8 A. Yes, we do. 9 Q. And do you recall the statements that 10 Mr. Ott made with respect to -- now, let's look at 11 the last sentence of that paragraph. "Mr. Ott 12 also reviewed the obligations of the board of 13 directors vis-a-vis employment agreements entered 14 into with the three terminated employees. He 15 stated that since it was apparently a valid debt, 16 the officers of the company should attempt to 17 settle and that any settlement reached in good 18 faith negotiations should be consistent with their 19 fiduciary duties." 20 And is this part of the advice that 21 Mr. Ott was providing to the board of directors? 22 A. Yes, it was. 19948 1 Q. Let me ask you now to turn to Tab -- 2 I'm sorry -- Exhibit B2687. Can you tell us what 3 that is, sir? 4 A. This is a letter from Bruce Williams 5 dated January 4th to the United Financial Group 6 board demanding his settlement under his contract. 7 MR. VILLA: Your Honor, I move B2687 8 into evidence. 9 MR. RINALDI: No objection. 10 THE COURT: Received. 11 Q. (BY MR. VILLA) Let's turn to B2688 12 which is already in evidence at Tab 1423. 13 Can you tell us what that document is? 14 A. This is a memo from Mike Crow to Barry 15 Munitz dated January 4th, 1989, again relating to 16 his employment agreement and his bonus plan. 17 Q. I believe that the -- the minutes we 18 looked at referred to certain claims being made, 19 and are these two of the claims that are being 20 referred to at that time? 21 A. Yes. 22 Q. Let me direct your attention to what 19949 1 has been marked as B2689, and it's in evidence at 2 Tab 1420. 3 Do you have that before you, sir? 4 A. Yes, I do. 5 Q. What is it? 6 A. It's another memo from Mike Crow to 7 Barry Munitz dated January 4th, 1989, relating to 8 his bonus agreement and his stock loan. 9 Q. Now, we saw that there was a bonus 10 agreement that had been referred to in the 10 -- 11 in the proxy statement and had been sent to 12 Mr. Twomey in, I think, late May or early June 13 1988. 14 Is this the same bonus agreement that 15 we were talking about? 16 A. Yes, it is. 17 Q. And what does this bonus agreement 18 relate to? 19 A. Well, it relates to a note that 20 Mr. Crow had with United Financial Group which he 21 had used to acquire some United Financial Group 22 stock; and the bonus agreement was to pay down 19950 1 that note. 2 Q. What was the size of that note? Do you 3 recall roughly? 4 A. I think it was somewhere between about 5 70, $75,000. 6 Q. So, Mr. Crow is making a demand under 7 his bonus agreement to have the stock loan 8 released or extinguished by UFG? 9 A. Right. 10 Q. And if this -- if this release of 11 indebtedness occurs, what company is giving 12 consideration to Mr. Crow? 13 A. United Financial Group. 14 Q. Is United Savings Association giving 15 any consideration to Mr. Crow for the release of 16 this debt? 17 A. No. 18 Q. Let me direct your attention to 19 Exhibit B2700 which is in evidence at Tab 1421. 20 Do you have that before you, sir? 21 A. Yes, I do. 22 Q. What is that? 19951 1 A. It's a letter from me to Mike Crow 2 dated January 19, 1989. 3 Q. Does he countersign it? 4 A. Yes, he does. 5 Q. What effect does this letter have? 6 A. It releases the note, and United 7 Financial gets his stock back. 8 Q. So, does this resolve the issue that 9 Mr. Crow raised in the prior exhibit we saw where 10 he made the claim under his stock bonus? 11 A. Under the stock bonus, that's -- yes. 12 Q. Now, let's look at B2695; and tell us 13 what that is, sir. 14 A. This is a letter from Marta Berkley to 15 Bob Ott dated January 9th, 1989. 16 Q. And was Mr. Ott acting as your lawyer 17 at that point? 18 A. United Financial Group's lawyer. 19 Q. United Financial's lawyer. 20 MR. VILLA: Your Honor, I move B2695 21 into evidence. 22 MR. RINALDI: No objection, Your Honor. 19952 1 THE COURT: Received. 2 Q. (BY MR. VILLA) And Ms. Berkley is a 3 lawyer for the Federal Home Loan Bank Board; is 4 that right? 5 A. Yes, that's correct. 6 Q. And have you ever met with Ms. Berkley? 7 A. Oh, yeah. Had I before this? 8 Q. No. After this point. 9 A. Yes, I have. 10 Q. Around -- in what context? 11 A. In trying to work out a settlement of 12 the United Financial Group situation with the 13 Federal Home Loan Bank Board, FSLIC. 14 Q. Do you know whether or not the Federal 15 Home Loan Bank Board and the FSLIC were notified 16 of the severance claims of the individuals that 17 had been terminated? 18 A. Yes, I do. 19 Q. Were they notified? 20 A. Yes, they were. 21 Q. I'll direct your attention to the last 22 sentence of Ms. Berkley's letter which is asking 19953 1 that you schedule a meeting with her. 2 We're going to start taking a look at 3 these meetings, but are these the meetings that 4 lead up ultimately to the standstill agreement and 5 to the resolution that you've told the Court about 6 initially? 7 A. Yes, that's correct. 8 Q. Okay. Let me direct your attention to 9 A1171. Can you tell me what that is? 10 A. These are minutes of the board of 11 directors of United Financial Group dated 12 January 13th, 1989. 13 MR. VILLA: Your Honor, I move A1171 14 into evidence. 15 MR. RINALDI: No objection, Your Honor. 16 THE COURT: Received. 17 Q. (BY MR. VILLA) Was there anybody 18 present at this meeting who was not a member of 19 the board? 20 A. Yes. Mr. Ott was there by voice -- by 21 telephone communication. 22 Q. And Mr. Ott was your outside counsel. 19954 1 Right? 2 A. Yes, that's correct. 3 Q. Let me direct your attention to the 4 last paragraph -- I'm sorry -- the last sentence 5 of the second full paragraph referring to Mr. Ott. 6 It says, quote, "He also stated that the severance 7 agreements were an obligation of the company, and 8 the board believed it was necessary to compromise 9 and settle the claims." 10 Do you see that, sir? 11 A. Yes. 12 Q. Did there come a time when the 13 negotiations began over the terms of the severance 14 claims -- first, we talked about the bonus. 15 Right? 16 A. Right. 17 Q. Now, now there's a separate set of 18 claims which are the severance claims which 19 Mr. Williams and Mr. Crow and, ultimately, others 20 made under their UFG contracts, correct? 21 A. That's correct. 22 Q. Is that what he's addressing here? 19955 1 A. Yes, that's what he's talking about. 2 Q. And pursuant to this action, did you 3 and Mr. Ott make attempts to compromise and settle 4 the severance claims of the former employees? 5 A. Yes, we did. 6 Q. I would like to direct your attention 7 to the second page of the minutes and the first 8 full paragraph. I would like you to read that and 9 then tell us in your own words what you recall 10 occurring here. It's the paragraph that begins 11 with "Dr. Munitz then discussed." 12 A. Well, this was a proposed settlement -- 13 proposed settlements between UFG and Mr. Crow and 14 Mr. Williams whereby there would be a certain 15 amount of money paid to them which they would 16 receive. And if they got employment over some 17 period of time, it would be offset against the 18 amount of money that was being suggested to settle 19 this case. 20 Q. Who was making those proposals? 21 A. United Financial Group. 22 Q. Do you recall whether the proposed 19956 1 settlements with Mr. Crow and Mr. Williams were 2 signed during this time period? 3 A. At some time relatively close to this 4 time, those settlements were signed. 5 Q. In January of 1989, the settlements of 6 severance claims were signed with Mr. Crow and 7 Mr. Williams. 8 Is that your testimony? 9 A. Yes. 10 Q. By both sides? 11 A. By -- well, I'm not sure UFG signed it. 12 I know we had negotiated it, and then we gave the 13 information to the FSLIC and to their counsel. 14 And they told us not to -- you know, not to 15 proceed with those. 16 Q. Well, let's take a look at the 17 document. The next document in evidence is B2701, 18 which is in evidence at Tab 1424. 19 Is this one of the separation 20 agreements? 21 A. Right. 22 Q. If you would just check the back and 19957 1 see who signed it. 2 A. Mike Crow. 3 Q. Why didn't UFG sign it? 4 A. Again, we had entered into the 5 standstill agreement with FSLIC and the Federal 6 Home Loan Bank Board. And we notified them about 7 these agreements, and they told us not to sign 8 them. 9 Q. Let me show you what's been marked as 10 Exhibit B2712. Can you tell me what that is, sir? 11 A. This is the standstill agreement. 12 Q. Let's just start off with the date of 13 it and who it's to and from. 14 A. It's a letter from Marta Berkley dated 15 January 25th, 1989, to Bob Ott of Arnold & Porter. 16 MR. VILLA: Your Honor, I move B2701 17 into evidence. 18 MR. RINALDI: No objection. 19 THE COURT: Received. 20 Q. (BY MR. VILLA) The first paragraph 21 refers to settlement discussions. 22 Do you see that? 19958 1 A. Yes. 2 Q. And what were those settlement 3 discussions? I don't want to hear about the 4 substance of the settlement discussions. But, 5 generally, what was being discussed? 6 A. Generally, all issues related to United 7 Financial Group and net worth maintenance and 8 every other issue was being discussed. 9 Q. And this letter is in furtherance of 10 those discussions? 11 A. Yes, that's correct. 12 Q. I would like to direct your attention 13 to Page 2 and the first full paragraph. You've 14 told us several times about a standstill agreement 15 and three days' notice. 16 Can you take a look at that and tell me 17 what that paragraph reflects? 18 A. That reflects the standstill. We were 19 agreeing that we wouldn't make any payments, 20 disburse any funds, without giving the Federal 21 Home Loan Bank three days' notice. 22 Q. And was -- who countersigns this 19959 1 document? 2 A. Bob Ott, who was the attorney for 3 United Financial Group. 4 Q. You've told us about a standstill 5 agreement. Is this the agreement that you were 6 referring to? 7 A. Right. This is that standstill 8 agreement. 9 Q. What's the logic behind giving FSLIC 10 three days' notice? Why don't you just ask them, 11 "Hey, would you guys just approve these things, 12 put a big stamp of approval on our agreements?" 13 A. I think, as we talked however number of 14 days ago here, generally the regulators don't like 15 to approve anything. They like to say, "Hey, if 16 you haven't heard from us, we don't disapprove 17 it." So, we would give them notice; and they 18 would have the right to say, "No, we don't like 19 this thing." But they will never say, "We approve 20 it." 21 Q. So, under this agreement, you would 22 send them notice of a proposed settlement or a 19960 1 formula for proposed settlements; and then they 2 would have a period of time in which to express an 3 objection. Right? 4 A. That's correct. 5 Q. And if they didn't express objection, 6 what did you believe you were authorized to do? 7 A. I believed we were authorized to 8 proceed ahead with the settlements or whatever 9 action we were talking about. 10 Q. And if FSLIC objected to the 11 settlements, what did UFG did? 12 A. It wouldn't enter into the settlements. 13 Q. Do you recall whether three days' 14 notice was given with respect to the Crow and 15 Bruce Williams settlement? 16 A. Yes, I do. 17 Q. And what happened? 18 A. We gave notice; and it followed a 19 meeting between FSLIC's counsel, myself, and -- 20 actually, I think it was Kenny Friedman of Mayor, 21 Day & Caldwell to discuss those severance benefits 22 and other things. 19961 1 Q. And I would like to direct your 2 attention to Exhibit B2723 and ask you if you can 3 identify that. 4 A. Yeah. This is a memo from me to the 5 board of UFG dated February 6th, 1989; and it 6 relates to activities with FSLIC from January 1 7 through February 1. 8 MR. VILLA: Your Honor, I move B2723 9 into evidence. 10 MR. RINALDI: No objection, Your Honor. 11 THE COURT: Received. 12 Q. (BY MR. VILLA) Let me direct your 13 attention to Page 3 of the exhibit which 14 reflects -- and the paragraph that begins with 15 "meeting with Hutcheson & Grundy January 27, 16 1989." 17 Do you see that, sir? 18 A. Yes, I do. 19 Q. And it runs over to Page 4 and then to 20 the top of Page 5. 21 Now, you have reviewed this in 22 preparation for your testimony, I assume? 19962 1 A. I've looked at this, yes. 2 Q. And what does this reflect in general? 3 Just tell us who was present at the meeting and 4 what issues were placed before them and how they 5 were resolved. 6 A. As I say, present at the meeting were 7 myself and Ken Friedman of Mayor, Day & Caldwell; 8 and representing FSLIC was Currie Bechtol and Ron 9 Restrepo of Hutcheson & Grundy. And Currie 10 Bechtol said that we had -- first, Bob Ott had 11 given notice of the severance agreements that had 12 been negotiated with Mr. Crow and Mr. Williams. 13 And he had given the three-day notice, and Currie 14 Bechtol was saying that FSLIC was having a problem 15 with those severance agreements. And during the 16 course of this meeting, he instructed us not to 17 make any payments under those severance 18 agreements. 19 And this was also the meeting where he 20 said that he was well aware of the continued 21 employment of myself and Dr. Munitz and that they 22 had no objection to continuing paying us. 19963 1 Q. Let me direct your attention to the 2 fourth paragraph on Page 4, the one that begins, 3 "I stated." 4 Do you see that? 5 A. Right. 6 Q. Now, it says, "I stated that they were, 7 therefore, not to make any payments on the Crow 8 and Williams severance or the Berner and Munitz 9 bonuses. I specifically asked whether or not 10 there were any problems with the Berner and Munitz 11 salaries. Both Restrepo and Bechtol stated that 12 FSLIC had agreed to those salary payments and they 13 saw no problems making them." 14 Do you see that? 15 A. Yes, I do. 16 Q. Is that what you were referring to? 17 A. Yes. 18 Q. And over the course of the year, in 19 fact, who was it that was the representative of 20 UFG who dealt with the FSLIC in trying to settle 21 the net worth maintenance and the compensation 22 claims? 19964 1 A. Me. 2 Q. So, Mr. Bechtol had very little doubt 3 that you continued to be employed, did he, sir? 4 A. He and I had many, many, many, many 5 meetings and telephone conversations over the 6 course of that year. 7 Q. By the way, Mr. Rinaldi showed you a 8 number of proxy statements for UFG for the years 9 1989, 1990, 1991, perhaps 1992, but at least the 10 first three years after the failure of USAT. 11 And you were involved in the 12 preparation of those statements? 13 A. Yes, I was. 14 Q. Who, if anyone, at -- representing the 15 FSLIC did you send those statements to, proxy 16 statements? 17 A. Well, I certainly would have sent it 18 definitely to Currie Bechtol all the time; and I 19 also believe I sent it to other people at the 20 Federal Home Loan Bank Board. 21 Q. Why would you send UFG securities 22 filings to Mr. Bechtol? 19965 1 A. One was they had asked for it. Over 2 the course of the settlement discussions, they 3 wanted to get all of our filings; and we thought 4 it was important that they get them. 5 Q. Did anybody ever raise any objection to 6 the salary that you and Mr. Munitz were receiving 7 from UFG? 8 A. No, never. 9 Q. Let me direct your attention to 10 Exhibit B2724 which has been put in evidence at 11 Tab 1425. 12 Do you see that, sir? 13 A. Yes, I do. 14 Q. Now, after UFG declined to consummate 15 the settlement with Mr. Crow and Mr. Williams, 16 what did Mr. Crow and Mr. Williams do? 17 A. Well, they hired lawyers or a lawyer. 18 This is Clarence Meyer. And then they -- he 19 notified us that they were withdrawing from the 20 separation agreement that we had looked at 21 earlier. 22 Q. I would ask you to turn to B2727. This 19966 1 is a little hard to read; so, you're going to have 2 to kind of look halfway down the page to see who 3 the claimants are. If you'll take a look at these 4 documents, perhaps you can tell us what they are. 5 A. Yeah. This is a notice of arbitration 6 from Jim Wolfe, Gene Stodart, and Jim Jackson. 7 And they were represented by Arthur Buck Dyess, 8 who was their lawyer. 9 MR. VILLA: Your Honor, I move B2727 10 into evidence. 11 MR. RINALDI: No objection, Your Honor. 12 THE COURT: Received. 13 Q. (BY MR. VILLA) What does this do? What 14 does the demand for arbitration do? 15 A. This was a demand under their contracts 16 to have an arbitration of their rights under 17 their -- their severance payments under their 18 employment agreements. This is putting us on 19 notice that there was going to be an arbitration 20 proceeding. 21 Q. Do you recall whether, under their 22 contracts, they had the right to file a lawsuit? 19967 1 A. I don't believe so. I think the 2 requirement was they had to go to arbitration. 3 Q. So, if they wanted to assert a claim, 4 how would they do it? 5 A. By going to the American Arbitration 6 Association and asserting a claim. 7 Q. Let me ask you to turn to B2729. What 8 is this? 9 A. This is a letter from me to Ron 10 Restrepo of Hutcheson & Grundy; and it's enclosing 11 the demand letters from Jackson, Stodart, and 12 Wolfe and the demand for arbitration. 13 MR. VILLA: I move B2729 into evidence. 14 MR. RINALDI: No objection, Your Honor. 15 THE COURT: Received. 16 Q. (BY MR. VILLA) Why is it that you were 17 sending Mr. Restrepo from Hutcheson & Grundy the 18 arbitration claims and other claims that are being 19 made by former employees of USAT and UFG? 20 A. Well, ultimately, as you go to 21 arbitration, they would probably require a payment 22 to be made from United Financial Group; and we 19968 1 wanted to get FSLIC and Hutcheson & Grundy on 2 board early to know what we should do. We were 3 looking to them for guidance as to how we should 4 proceed. 5 Q. Let me ask you to turn to 6 Exhibit B2730. 7 THE COURT: We'll take a short recess. 8 9 (Whereupon, a short break was taken 10 from 10:33 a.m. to 10:55 a.m.) 11 12 THE COURT: Be seated please. We'll be 13 back on the record. 14 Mr. Villa, you may continue. 15 MR. VILLA: Thank you, Your Honor. 16 Q. (BY MR. VILLA) Mr. Berner, the next 17 document in your book should be 2730; but I'm not 18 going to examine you about it. 19 So, if you'll go to A1679, which would 20 be the UFG board minutes. 21 Do you have A1679 before you, sir? 22 A. Yes, I do. 19969 1 Q. Can you tell me what that is? 2 A. These are minutes for the board of 3 directors meeting of United Financial Group dated 4 February 14, 1989. 5 MR. VILLA: I move A1679 into evidence. 6 MR. RINALDI: No objection. 7 THE COURT: Received. 8 Q. (BY MR. VILLA) Let me direct your 9 attention to the sixth full paragraph on the first 10 page. 11 Do you see that, sir? 12 A. I see that. 13 Q. Would you read that paragraph to 14 yourself and then tell us what the phrase that the 15 Crow and Williams settlements were temporarily 16 sidetracked in review of FSLIC's demand that no 17 payments be made at the time? 18 A. Well, what I was telling the board was 19 the separation agreements -- the settlements we 20 thought we had reached earlier were not going to 21 be effective because the FSLIC told us not to make 22 any payments. So, as a result, those agreements 19970 1 had been sidetracked. 2 Q. And you were following the directions 3 of the FSLIC in your settlement negotiations; is 4 that right? 5 A. Right. The memo we had seen where 6 Mr. Bechtol had told us that we shouldn't make 7 those payments. 8 Q. B2732, can you tell us what that is? 9 A. Yeah. This is a letter from me to 10 Currie Bechtol dated February 22nd, 1989. 11 MR. VILLA: Your Honor, I move B2732 12 into evidence. 13 MR. RINALDI: No objection, Your Honor. 14 THE COURT: Received. 15 Q. (BY MR. VILLA) Let me direct your 16 attention to the second full paragraph and the 17 first sentence -- first of all, there's a list of 18 open items in this document, is there not? 19 A. Right. Seven or eight items that are 20 open. 21 Q. If you look at the second full 22 paragraph, the first sentence says, quote, "and 19971 1 awaiting some response from the FSLIC." 2 Do you see that, sir? 3 A. Correct. 4 Q. Why are you awaiting a response from 5 the FSLIC as to a resolution of the issues such as 6 whether you can have space on the 22nd floor? 7 A. It was our intention at that time to 8 essentially do almost nothing without informing 9 the FSLIC through their counsel and hopefully 10 hearing back from them as to what they would allow 11 or wouldn't allow. 12 Q. If you look at Paragraphs 3 and 4, what 13 do those describe? 14 A. Those describe the employment 15 agreements. 16 Q. And is that one of the issues that 17 you're waiting for the FSLIC to get back to you 18 on? 19 A. Right. We had notified them before 20 about those claims and were waiting for them to 21 get back to us. 22 Q. Let me direct your attention to the 19972 1 next exhibit, Exhibit B2734. 2 Can you tell me what that is? 3 A. It's a letter from Bob Ott to Marta 4 Berkley. 5 Q. Were you copied on that letter, sir? 6 A. Yes, I was. 7 MR. VILLA: I move B2734 into evidence. 8 MR. RINALDI: No objection. 9 THE COURT: Received. 10 Q. (BY MR. VILLA) Would you look at the 11 last sentence of that letter: "We should 12 appreciate receiving guidance from the Federal 13 Savings and Loan Insurance Corporation on how we 14 should proceed with respect to these claims." 15 It's in reference to the claims of former 16 employees. 17 Do you see that, sir? 18 A. Yes, sir. 19 Q. Why was this being sent? 20 A. Again, it was part of the standstill 21 agreement. The understanding is we would notify 22 them as to what was going on. We were looking for 19973 1 guidance from the regulators, from the FSLIC, as 2 to how we should respond to those arbitration 3 demands and the other employment claims. 4 Q. Now, sir, I think I'm going to skip the 5 next one that's probably in your book, which is 6 2735. And I'll go to the next one, which is B2739 7 which has been put in evidence at Tab 1426. And 8 I'm also going to ask you to look at B2740. 9 Do you have those two documents before 10 you? 11 A. Sure, yeah. 12 Q. Let's start off with -- just tell me 13 what B2739 is. 14 A. It's a letter from Martha Jacob, who 15 was an attorney, to Theresa Tilley of the American 16 Arbitration Association. 17 Q. What does it relate to? 18 A. The demand for arbitration that's being 19 filed by Mike Crow. 20 Q. So, when the FSLIC advised you that 21 they objected to the Crow settlement, FSLIC -- I'm 22 sorry -- UFG did not enter into that settlement. 19974 1 Right? 2 A. That's right. We didn't sign that 3 document. It never happened. 4 Q. What did it prompt? 5 A. A demand for arbitration. 6 Q. And let's look at 2740. Can you tell 7 me what that is? 8 A. It's the same. It's a letter from 9 Martha Jacob to Theresa Tilley regarding Bruce 10 Williams' demand for arbitration. 11 MR. VILLA: Your Honor, I move B2740 12 into evidence. 13 MR. RINALDI: No objection, Your Honor. 14 THE COURT: Received. 15 Q. (BY MR. VILLA) I would like to direct 16 your attention to B2741, a letter from you to 17 Currie Bechtol. Can you tell us what this is, 18 sir, what this involves? 19 A. It's my letter to Currie telling him 20 that I had been informed by Crow and Williams' 21 attorney that they were going to be filing a 22 demand for arbitration. 19975 1 MR. VILLA: Your Honor, I move B2741 2 into evidence. 3 MR. RINALDI: No objection, Your Honor. 4 THE COURT: Received. 5 Q. (BY MR. VILLA) Would you look at B2750, 6 the next document. What is that, sir? 7 A. It's my letter forwarding the demand 8 for arbitration from Mike Crow and Bruce Williams 9 to Hutcheson & Grundy. 10 MR. RINALDI: No objection, Your Honor. 11 THE COURT: Received. 12 Q. (BY MR. VILLA) Skip the next one. 13 We'll go to B2751. 14 Can you tell me what this is, sir? 15 A. This is a memo from me to Barry Munitz, 16 Paul Schwartz, and Jim Whatley relating to a 17 meeting with FSLIC on March 14, '89. 18 MR. VILLA: Your Honor, I move B2751 19 into evidence. 20 MR. RINALDI: No objection, Your Honor. 21 THE COURT: Received. 22 Q. (BY MR. VILLA) Let me direct your 19976 1 attention to the first full paragraph on Page 2. 2 Would you read that to yourself, please? It 3 starts "for the Crow/Williams arbitrations." 4 A. (Witness reviews the document.) Okay. 5 Q. What does that describe, sir? 6 A. This describes a meeting that was had 7 with some of the FSLIC representatives where we 8 had been talking about the merits of the 9 employment demands. And this particular paragraph 10 is setting forth that the -- as far as the Crow 11 and Williams arbitration, we thought we had a 12 weaker case since they had, in fact, been 13 terminated; and it looked -- at this point in 14 time, it looked unlikely that we would be able to 15 settle. 16 Q. Sir, did you understand the term "arm's 17 length"? Do you know what "arm's length" means? 18 A. Sure. 19 Q. How would you describe "arm's length"? 20 A. Two people that aren't related to each 21 other trying to get the best deal they can 22 possibly get. 19977 1 Q. Sir, at this point, was Mr. Crow 2 associated with United Financial Group in any way? 3 A. No, he was not. 4 Q. How would you describe the negotiations 5 between United Financial Group and Mr. Crow, for 6 example, over the amount that he received in the 7 severance? 8 A. Arm's length sounds like a good way to 9 describe it to me. He and his lawyers were 10 certainly negotiating as hard as they could. 11 Q. Had they initiated litigation? 12 A. They had initiated arbitration. 13 Q. Now, you also had a claim under your 14 agreement, didn't you, sir? 15 A. Yes, I did. 16 Q. And if you look at the last paragraph 17 on Page 2, was your situation discussed at that 18 meeting; and is it reflected there? 19 A. Yes, it was. 20 Q. Can you -- can you tell us what 21 occurred? 22 A. Sure. My discussion -- 19978 1 Q. Well, let me stop you for a second. 2 Who is John Beatty? 3 A. He was a senior attorney. I'm not sure 4 what his title exactly was. He was fairly high up 5 with the FSLIC Washington staff. 6 Q. Was he somebody that you met with from 7 time to time in connection with this case? 8 A. Yes. Starting in January of 1989, 9 throughout 1989, we had a number of meetings, 10 mostly in Washington. 11 Q. So, just to put it in context with the 12 discussions we're talking about here, it's a FSLIC 13 meeting; and Mr. Beatty -- his role and his 14 conduct is being described. Right? 15 A. Right. We had a series of meetings 16 over the course of the year related to United 17 Financial Group, and this was one of those 18 meetings. 19 Q. Why don't you go back to the last 20 paragraph on Page 2. Let me read it. It's two 21 sentences. And then tell us about your 22 discussions with Mr. Beatty involving both your 19979 1 claim and your salary. "At this point in the 2 meeting, Mr. Beatty stated that he recognized that 3 I had not waived my claim. He also noted that the 4 FSLIC did not have any problems with my continuing 5 employment at UFG at the current salary." 6 Now, sir, what was your claim in 7 connection with -- what did that refer to? 8 A. My claim under my UFG contract having 9 been terminated and the fact -- if you remember, 10 there was a discussion with Mr. Ott earlier that I 11 had a claim similar to Mr. Williams and Mr. Crow. 12 And Mr. Beatty was well aware of that; and he 13 realized that I had not waived my claim, that I 14 still had a claim under those employment 15 contracts. 16 Q. As I recall, Mr. Ott's discussion 17 referred to three employees that had been 18 terminated. 19 Do you remember that? 20 A. I certainly do. 21 Q. The three were Mr. Crow, Mr. Williams, 22 and -- 19980 1 A. Myself. 2 Q. And you? 3 A. Right. 4 Q. And the second sentence relates to the 5 salary. 6 Do you recall discussions with 7 Mr. Beatty about whether or not it would be 8 appropriate for you to receive a salary? And, if 9 so, tell us about the discussion. 10 A. Again, over the course of -- starting 11 as early as January and continuing on through 12 here, the FSLIC was well aware and had no problem 13 with my continuing on as an employee and receiving 14 my salary. 15 Q. And did you -- and one of the people 16 you discussed this with was Mr. Beatty? 17 A. Mr. Beatty, that's correct. 18 Q. Let me direct your attention to A1671. 19 Can you tell me what that is? 20 A. These are minutes of the United 21 Financial Group board dated March 31st, 1989. 22 MR. VILLA: Your Honor, I move A1671 19981 1 into evidence. 2 MR. RINALDI: No objection, Your Honor. 3 THE COURT: Received. 4 Q. (BY MR. VILLA) Now, let me direct your 5 attention to the seventh full paragraph, the one 6 that begins "Mr. Berner and Mr. Ott." 7 Do you see that? 8 A. Yeah, sure. 9 Q. Would you just read that to yourself? 10 And then tell us what's happening at this point in 11 the arbitration and negotiation saga that we've 12 gone through. 13 A. Well, at this point, they had -- the 14 former employees and some of the people still at 15 United, the people with contracts, had demanded 16 arbitration. We were proceeding along towards 17 arbitration. We had brought into the negotiation 18 process the FSLIC and their counsel. There was a 19 series of discussions that were going on. And 20 here the board is directing us to see if we can 21 work out a settlement to those -- to those claims. 22 Q. Now, that's interesting. You pointed 19982 1 out something that I hadn't focused on. There are 2 actually two groups of plaintiffs, aren't there, 3 sir? 4 A. Yes, that's correct. 5 Q. One is involving Mr. Bruce Williams and 6 Mike Crow, correct? 7 A. Right. 8 Q. And they had been terminated? 9 A. Along with myself, they had been 10 terminated at the end of -- December 30th of '88. 11 Q. Who are the other plaintiffs? I refer 12 to arbitration generally as litigation and 13 arbitration -- people making arbitration demands 14 are plaintiffs. 15 Who is the other group of plaintiffs? 16 A. It was Jim Wolfe, Jim Jackson, Gene 17 Stodart, Jeff Gray. I think that might have been 18 it. There might have been another one. 19 Q. Were those individuals terminated when 20 USAT went into receivership? 21 A. No, they weren't. They stayed on as 22 employees of the new United. 19983 1 Q. So, they had a job at the new United. 2 Right? 3 A. That's correct, yes. 4 Q. And yet, they made severance claims? 5 A. They made claims under their contracts. 6 Q. Do you remember at the end of this 7 whether the -- probably the FDIC by that point, in 8 August or September of 1989 -- whether the FSLIC 9 or the FDIC distinguished between the percentages 10 that these two groups of people received on their 11 severance claims on the grounds that, "Hey, some 12 of you still had your jobs and some of you were 13 actually let go"? 14 A. There was no division. The settlements 15 basically were the same with everybody. 16 Q. So, as a result of 1671, what action 17 did you take, the directions from the board, as 18 reflected in 1617? 19 A. We continued to see if we could work 20 out a settlement with the people that were making 21 the demands. 22 Q. Let me direct your attention to B2765. 19984 1 Tell me what that is. 2 A. That's a letter from me to Marta 3 Berkley of the FSLIC dated April 12th, 1989. 4 MR. VILLA: Your Honor, I move B2765 5 into evidence. 6 MR. RINALDI: No objection. 7 THE COURT: Received. 8 Q. (BY MR. VILLA) Now, on March 31st, the 9 board of directors directed you to work out 10 possible settlement. We just saw that. Right? 11 A. That's correct, sir. 12 Q. And on April 12, you sent a letter to 13 Ms. Berkley; and I would like to direct your 14 attention to Page 2 of the letter, the 15 second-to-the-last paragraph saying "pursuant to 16 the standstill agreement." 17 Do you see that, sir? 18 A. Yes, I do. 19 Q. I would like you to read that paragraph 20 to yourself and particularly the entry No. 4 under 21 that and then tell us what you are doing here. 22 Who are you contacting and why? 19985 1 A. Well, I'm contacting Marta Berkley of 2 the FSLIC and telling her that pursuant to the 3 standstill agreement where we had to give three 4 days' notice, that we were going to attempt to 5 negotiate a settlement with the people that 6 formerly held employment contracts. 7 Q. So, at this point, you hadn't even 8 negotiated a settlement. You were just notifying 9 her that you were going to attempt to negotiate a 10 settlement? 11 A. That's correct. We were putting them 12 on notice that that's what we were trying to do. 13 Q. Okay. Now, let me direct your 14 attention to A1672 and ask you if you can tell me 15 what that is. 16 A. These are minutes of the United 17 Financial Group board of directors of May 15th, 18 1989. 19 MR. VILLA: Your Honor, I move A1672 20 into evidence. 21 MR. RINALDI: No objection. 22 THE COURT: Received. 19986 1 Q. (BY MR. VILLA) I would like to direct 2 your attention to the last paragraph on the first 3 page, beginning with the section that says, 4 "Mr. Berner also reviewed the current status of 5 contractual claims relating to employment 6 contracts." 7 Do you see that? 8 A. Right. 9 Q. Read to that yourself, and then I'm 10 going to ask you a question about the following 11 sentence. Actually, the second following 12 sentence. 13 A. (Witness reviews the document.) 14 Q. It says, quote, "He stated that the 15 FSLIC had made certain allegations concerning the 16 validity of the employment contracts but had 17 proposed a settlement offer which FSLIC would deem 18 acceptable. Mr. Berner noted that these employees 19 were reviewing the settlement offer." 20 Do you see that? And then it goes on. 21 A. Right. 22 Q. Sir, can you tell me who the principal 19987 1 parties were involved in the negotiations over the 2 amount of severance at this point in time? 3 A. At this point, it was Currie Bechtol on 4 behalf of FSLIC and the lawyers for the various 5 plaintiffs, as you say, that were demanding 6 arbitration. 7 Q. And FSLIC was itself initiating 8 proposals; is that right? 9 A. That's right, and that's what's spoken 10 about in this Paragraph . 11 Q. Now, sir, do you recall what time of 12 year the arbitrations were scheduled to begin? 13 A. I believe it was the end of July or 14 August, sometime in August. 15 Q. And like all litigation, negotiation 16 itself seems to get focused on the time when the 17 actual trial begins, doesn't it, sir? 18 A. Not all; but, yeah, that's true. 19 Q. Let me direct your attention to A1673. 20 Tell me what that is. 21 A. These are UFG board minutes of 22 June 28th, 1989. 19988 1 MR. RINALDI: No objection, Your Honor. 2 THE COURT: Are you going to offer 3 that, Mr. Villa? 4 MR. VILLA: Yes, Your Honor. I move 5 A1673 into evidence. 6 THE COURT: Received. 7 Q. (BY MR. VILLA) Mr. Berner, I would like 8 to direct your attention to Page 2, Paragraph 3, 9 where it says, "Mr. Berner then discussed the 10 current status." 11 Do you see that, sir? 12 A. Yes, I do. 13 Q. Now, we had previously seen some 14 documentation indicating that the FSLIC and the 15 claimants or plaintiffs were having one-on-one 16 negotiations. Right? That is to say, essentially 17 excluding UFG. Right? 18 A. That's correct. 19 Q. And did they reach a settlement based 20 upon those negotiations? 21 A. No. They hadn't reached any sort of 22 settlement, but they had those discussions. 19989 1 Q. Now, did there come a time as the -- as 2 the arbitrations were about to commence that the 3 board of directors requested that you take some 4 action? 5 A. Well, that's what these minutes are 6 reflecting, the fact that the board said, "The 7 arbitration is coming up in August. Let's see if 8 we can figure out a way to settle these claims." 9 Q. With whom did you negotiate with about 10 this, sir? 11 A. With the attorneys for the various 12 claimants and with FSLIC. 13 Q. Did you exchange draft proposals? 14 A. At various times, yes, we did. 15 Q. Did the lawyers for the claimants make 16 any changes to those proposals? 17 A. Sure. 18 Q. Let me ask you to take a look at 19 Exhibits B2787, B2788, and B2789. 20 Would you please state for the record 21 what those are? 22 A. These are letters from me to the 19990 1 various attorneys representing the claimants or 2 the plaintiffs, enclosing a draft agreement and 3 release, proposed release/settlement. 4 MR. VILLA: Your Honor, I move B2787, 5 B2788, and B2789 into evidence. 6 MR. RINALDI: No objection, Your Honor. 7 THE COURT: Received. 8 Q. (BY MR. VILLA) And if you look at 9 B2788, I think we've identified everybody else but 10 Mr. Mazzoni. Who is Mr. Mazzoni? 11 A. Mr. Mazzoni is an attorney with Dow 12 Cogburn who was representing Jeff Gray. 13 Q. I would like to direct your attention 14 now to B2790. 15 Do you see that, sir? 16 A. Yes, I do. 17 Q. I would like you to look at the first 18 full paragraph and the beginning of the second 19 paragraph and read that to yourself. 20 A. (Witness reviews the document.) 21 Q. What does that describe, sir? 22 A. It describes my discussions, first, 19991 1 with Currie Bechtol stating that we were looking 2 at six months' salary as a settlement payment and 3 then his discussion with Marta Berkley saying 4 that -- informing her and then making a statement 5 that he assumes that they have no problem with it 6 and United would be going forward with those 7 settlements. 8 Q. Do you recall the meeting in July of 9 1989 in Washington, D.C to discuss the settlement 10 and advise them of the formula of six months' 11 severance? 12 A. Yes, I do. 13 Q. And was Mr. Bechtol and Ms. Berkley at 14 that meeting? 15 A. Yes, they were. 16 Q. And after you gave them notice of that, 17 did they take any action to object to the terms of 18 the settlement? 19 A. No, they didn't. 20 MR. VILLA: Your Honor, I move B2790 21 into evidence. 22 MR. RINALDI: No objection, Your Honor. 19992 1 THE COURT: Received. 2 Q. (BY MR. VILLA) By the way, the terms of 3 the settlement as reflected are six months' 4 compensation. Right? 5 A. Approximately six months in 6 compensation, yeah. 7 Q. So, as I understand it, the claimants 8 had claims for compensation for how many years? 9 A. For two years. 10 Q. And they received what portion of their 11 claim? 12 A. Well, six months would have been 13 25 percent; but they actually got less than 14 25 percent. 15 Q. And why was that? 16 A. We negotiated a better deal. 17 Q. So, you had told the FSLIC that -- that 18 you wanted authority to settle for up to six 19 months; is that right? 20 A. That's right. 21 Q. And, in fact, you were able to get it 22 for a lesser amount. Right? 19993 1 A. That's correct. 2 Q. I mean, six months is 25 percent; and 3 we're going to see the percentage of numbers in 4 there. 5 Do you remember what they are? 6 A. I believe they were 20, 21, 22 percent, 7 in that range. 8 Q. So, you were able to get it for less 9 than the six months that you were essentially 10 authorized by the FSLIC to settle for. Right? 11 A. Yes, sir, that's correct. 12 Q. And let me ask you to look at A1674 13 which is in evidence at Tab 475. Why don't you 14 just tell us what that document is, and I'll ask 15 you a question about it. 16 A. These are minutes of a UFG board of 17 directors meeting dated July 31 which was held by 18 conference telephone. 19 Q. And directing your attention to the 20 fourth paragraph that starts with "the board then 21 discussed" and then the first "resolved," tell us 22 what was decided at that meeting, sir. 19994 1 A. We were discussing the employment 2 agreements, and what was decided was the 3 settlement of these employment agreements. 4 Q. Now, I think we saw in one of the 5 letters that the arbitrations were about to begin 6 in the beginning of August? 7 A. I think it was August 2nd that one of 8 the letters referred to. 9 Q. And so, this approval for the entry 10 into the settlements was within days of the 11 beginning of the arbitration; is that right? 12 A. That's correct, a couple of days. 13 Q. I'll direct your attention to T8156, 14 which is in evidence as Tab 457. Tell us for the 15 record what that document is, sir. 16 A. It's a memo from me to the board of 17 directors dated August 3rd, 1989, relating to 18 settlements. 19 Q. And if you'll turn to the second page 20 of the document, does that reflect the first set 21 of settlements that was entered into? 22 A. Yes, it does. 19995 1 Q. And what percentages were you able to 2 negotiate to settle the cases? 3 A. Well, in total, it was 21.9 percent. 4 It went anywhere from 21.1 to 23.2 seemed to be 5 the highest. 6 Q. Do you recall, sir, what percentage -- 7 did you ultimately resolve your own claims against 8 UFG? 9 A. Yes, I did. 10 Q. Let's go back to these five. Some of 11 these five individuals set forth or six 12 individuals set forth on this page, the second 13 page of Exhibit T8156, had been terminated from 14 UFG -- I'm sorry -- had been terminated from USAT. 15 Right? 16 A. Yes, that's correct, two of them. 17 Q. And others continued working there, 18 correct? 19 A. Four continued working there. 20 Q. Did the FSLIC make any distinction -- 21 did they make any argument that you should be 22 paying less to the people who had a continuing 19996 1 employment at the new USAT than you were to the 2 people like Mr. Crow who were basically terminated 3 from his job? 4 A. They most definitely did not. 5 Q. Now, following this -- and we're going 6 to see a couple of documents which reflect it -- 7 did you and Dr. Munitz resolve your claims against 8 UFG for severance? 9 A. Yes, we did. 10 Q. And what percentage did you receive? 11 A. It was around 21 percent. I don't 12 remember exactly. I'm sure it's in one of the 13 documents here. 14 Q. Do you recall what percentage 15 Dr. Munitz received? 16 A. His was a lot less, much less than 17 20 percent. 18 Q. At the time you entered into these 19 settlements that we're talking about -- and let's 20 start off with these first six settlements that 21 are referred to -- did you believe that you were 22 acting consistently or inconsistently with the 19997 1 wishes of the FSLIC? 2 A. Consistently. 3 Q. And why? 4 A. We had been keeping them informed of 5 what was going on. We had a number of meetings. 6 We were explaining -- we were talking about the 7 settlements, letting them know what the 8 settlements were. And they certainly didn't 9 disapprove them. They never told us there was any 10 problem with any of these settlements. 11 Q. Let me direct your attention to A1675. 12 Can you tell me what that is, sir? 13 A. These are minutes of UFG dated 14 August 24th, 1989, board of directors of UFG. 15 MR. VILLA: Your Honor, I move A1675 16 into evidence. 17 MR. RINALDI: No objection, Your Honor. 18 THE COURT: Received. 19 Q. (BY MR. VILLA) Let me direct your 20 attention to the paragraph at the bottom of 21 Page 2. Would you read that and tell us what's 22 happening? 19998 1 A. (Witness reviews the document.) The 2 bottom of Page 2? 3 Q. Yes, sir. 4 A. There's a discussion going on about the 5 employment agreements -- my employment agreement 6 and Dr. Munitz' agreement. 7 Q. There's a statement in here that says, 8 quote, "Mr. Ott stated that in his view, 9 Mr. Berner had grounds for terminating his prior 10 contract and that if he did so, the board should 11 consider a settlement along the lines of one at 12 least as favorable as those made with the other 13 employees." 14 Do you see that, sir? 15 A. Yes. 16 Q. Do you remember Mr. Ott giving advice 17 like that to the board? 18 A. I most certainly do. 19 Q. And then it finally says, "Mr. Ott was 20 requested to prepare appropriate documents to 21 submit to the board for review and approval." 22 Do you see that, as well? 19999 1 A. Yeah. 2 Q. Let me direct your attention to 3 Exhibit B2807. Would you tell us for the record 4 what that is? 5 A. These are minutes of the UFG board of 6 directors meeting of September 22nd, 1989. 7 MR. VILLA: Your Honor, I move 8 Exhibit B2807 into evidence. 9 MR. RINALDI: No objection, Your Honor. 10 THE COURT: Received. 11 Q. (BY MR. VILLA) And let's look at Page 2 12 of the minutes, third-to-the-last paragraph where 13 it says, "In connection with the settlement of 14 contract claims, Mr. Whatley stated that he and 15 Mr. Schwartz should contact each other by 16 telephone on Monday, September 25, to determine a 17 possible resolution." 18 Do you see that, sir? 19 A. Yes, I do. 20 Q. Now, why are -- why are Mr. Whatley and 21 Mr. Schwartz having discussions by telephone to 22 consider the contract claims of you and 20000 1 Dr. Munitz? 2 A. Well, the board was made up of four 3 people. They were the two independent board 4 members who would make that decision. I think 5 they might have also been the compensation 6 committee at that time, but they were -- they were 7 independent of the two of us that had these 8 potential claims. 9 Q. So, they were talking outside your 10 presence on the telephone, either a conference 11 call with Mr. Ott or -- I don't know whether 12 Mr. Ott was on this call or not -- but out of your 13 presence; is that right? 14 A. That's correct. 15 Q. And if you'll look at the next 16 document, A1677, do you have that before you? 17 A. Yes, I do. 18 Q. What is that? 19 A. These are minutes of the board of 20 directors of United Financial Group dated 21 October 13, 1989. 22 MR. VILLA: Your Honor, I move A1677 20001 1 into evidence. 2 MR. RINALDI: No objection. 3 THE COURT: Received. 4 Q. (BY MR. VILLA) Look at the 5 second-to-the-last paragraph where it starts 6 "Dr. Munitz." 7 Do you see that, sir? 8 A. Yes, I do. 9 Q. There's a line that says, "Mr. Whatley 10 suggested that he, Mr. Schwartz, and Mr. Ott 11 confer immediately following the board meeting to 12 discuss these matters." The reference is, I 13 believe, to the outstanding contract matters. 14 Now, what were the purposes of these 15 discussions? 16 A. For them to decide on what an 17 appropriate settlement, if any, would be proposed 18 to myself and Dr. Munitz. 19 MR. VILLA: Your Honor -- 20 Q. (BY MR. VILLA) I direct your attention 21 to Exhibit T8157 which is in evidence at Tab 458. 22 For the record, Mr. Berner, would you 20002 1 tell us what that document is? 2 A. These are minutes of a compensation 3 committee meeting of United Financial Group dated 4 October 13, 1989. 5 Q. You were not present at this meeting, 6 were you? 7 A. I was not. 8 Q. And the last -- therefore, you didn't 9 prepare the minutes either, did you, I presume? 10 A. I did not. 11 Q. Do you know who prepared these minutes? 12 A. No, I have no idea. 13 Q. But they are signed by Mr. Whatley as 14 chairman of the compensation committee. Right? 15 A. Right. 16 Q. Let me read the last sentence in the 17 second paragraph. It says, quote, "Mr. Ott noted 18 that Mr. Berner had indicated his agreement to 19 accept a settlement along the same lines as the 20 other employees," close quote and then the 21 committee approves your settlement. 22 Do you see that, sir? 20003 1 A. Yes. 2 Q. Did Mr. Ott accurately reflect your 3 views that you were willing to accept a settlement 4 along the same lines as the other employees? 5 A. Yes, he did. 6 Q. Let me direct your attention to 7 Exhibit B2809. I don't believe this is in 8 evidence. 9 Can you tell us what this is, sir? 10 A. This is my settlement agreement and 11 release where I'm releasing my employment -- 12 whatever claims I have under my employment 13 agreement. 14 Q. And I -- 15 MR. VILLA: Your Honor, I move B2809 16 into evidence. 17 MR. RINALDI: No objection, Your Honor. 18 THE COURT: Received. 19 Q. (BY MR. VILLA) Let me show you what's 20 been marked as Exhibit B2812. 21 Do you have that before you, sir? 22 A. Yes, I do. 20004 1 Q. And what is it? 2 A. It's a letter from me to Currie Bechtol 3 dated November 1st, 1989. 4 MR. VILLA: Your Honor, I move B2812 5 into evidence. 6 MR. RINALDI: No objection, Your Honor. 7 THE COURT: Received. 8 Q. (BY MR. VILLA) And in Paragraph No. 5, 9 what are you informing Mr. Bechtol of? 10 A. What I'm telling him is that all of the 11 employment related matters had been settled with 12 the exception of Dr. Munitz' claim. 13 Q. Directing your attention to A1678, can 14 you tell me what that is, sir? 15 A. These are minutes of the United 16 Financial Group board dated November 14th, 1989. 17 MR. VILLA: Your Honor, I move A1678 18 into evidence. 19 MR. RINALDI: No objection, Your Honor. 20 THE COURT: Received. 21 Q. (BY MR. VILLA) Let me direct your 22 attention to the third-to-the-last paragraph on 20005 1 the second page. 2 What does that address? 3 A. This addresses Dr. Munitz' employment 4 contract and directs Mr. Whatley, Mr. Schwartz, 5 and Mr. Ott to review it and hopefully finalize 6 it. 7 Q. Now, sir, I would like to direct your 8 attention to Exhibit T8158 which I believe is in 9 evidence at Tab 459. 10 Can you tell us what that is for the 11 record? 12 A. Yeah. These are the minutes of the UFG 13 compensation committee dated November 27th, 1989. 14 Q. And directing your attention to the 15 fourth paragraph -- fourth, fifth, and sixth 16 paragraphs in these minutes, can you tell me, sir, 17 what is being decided there? 18 A. What's being decided here was to give 19 to Dr. Munitz $98,000 in consideration for his 20 release of any claims that he had under his 21 employment agreement subject, obviously, to 22 counsel -- outside counsel saying that that 20006 1 payment was not inappropriate. 2 Q. And do you recall, sir, whether outside 3 counsel made any objection to that claim and 4 settlement? 5 A. They made no objection to it. 6 Q. Let me ask you now to turn to 7 Exhibit B2814. Can you tell me what that document 8 is, sir? 9 A. Yeah. This is the agreement and 10 release that's signed by Dr. Munitz as settlement 11 for his employment claims. 12 MR. VILLA: Your Honor, I move 13 Exhibit B2814 into evidence. 14 MR. RINALDI: No objection, Your Honor. 15 THE COURT: Received. 16 Q. (BY MR. VILLA) And do you recall 17 that -- what portion of his claim Dr. Munitz 18 received in settlement as a percentage matter? 19 A. I believe it was somewhere in the range 20 of 10 to 15 percent of his claim. 21 Q. So, did he receive more or less on a 22 proportionate basis than the other former 20007 1 employees and officers who had settled their 2 claims? 3 A. He received significantly less on a 4 percentage basis than the other employees. 5 Q. Mr. Berner, when you resolved these 6 severance claims of the individuals that we've 7 just talked about for the last hour in the year 8 1989, did you believe that you were acting in any 9 way inconsistently with the intentions of the 10 FSLIC? 11 A. Absolutely not. 12 Q. When you received your salary for the 13 years 1989, 1990, and perhaps a portion of 1991 14 before you went to the Winstead firm, did you have 15 any notion that you were acting in a way that was 16 inconsistent with the wishes of the FSLIC or its 17 successor, the FDIC? 18 A. Absolutely not, no. 19 Q. Did you attempt to keep them apprised 20 during that year of the negotiations -- the year 21 1989 -- of the negotiations you were having with 22 the individuals that were making the contract 20008 1 claims? 2 A. They were kept apprised. They were a 3 participant. They were a party to the 4 negotiations from the beginning to the end. 5 Q. Now, you don't have any document in 6 your hand that says, "We approve of these 7 settlements," do you, sir? 8 A. No, I don't. 9 Q. Just like you don't have Mr. Twomey's 10 letter in July of 1988 saying he approves of 11 Mr. Connell's contract. Right? 12 A. That's correct. 13 Q. But you informed them of the 14 settlements, didn't you? 15 A. I certainly did. 16 Q. And did you ever receive an objection? 17 A. I never received an objection -- 18 Q. Until -- 19 A. -- until this lawsuit. 20 Q. Until the initiation of hostile 21 activity, shall we say? 22 MR. VILLA: Thank you. I have 20009 1 completed my examination on the employment, 2 Your Honor. I'm going to move to another subject. 3 Q. (BY MR. VILLA) Mr. Berner, you were 4 asked some questions by Mr. Rinaldi about the 5 letter that you sent to Julie Williams, who was 6 the deputy general counsel of the Federal Home 7 Loan Bank Board, involving the Series -- I think 8 Series C to Series D convertible stock. 9 Do you remember those questions, sir? 10 A. Yes, I do. 11 Q. And Mr. Rinaldi asked you whether you 12 had disclosed in the letter the existence of the 13 so-called Drexel option, the put and call option 14 between Drexel and MCO with respect to some 15 portion of the UFG stock. 16 Do you also remember that? 17 A. Yeah. We spent a long time going over 18 that question, whether it was disclosed in those 19 letters. 20 Q. And I think you said something to him 21 in response to one of his questions that said that 22 you didn't draft that letter. 20010 1 Do you remember that? 2 A. Yes, I do. Sure. 3 Q. Let's first look at the letter that's 4 in question. It should be before you as 5 Exhibit T1131. It's in evidence at Tab 75. 6 Do you see that? 7 A. Yes. I have that letter, yes. 8 Q. And this is the final letter that was 9 sent to Ms. Williams on March 4, 1987; is that 10 right? 11 A. Right. 12 Q. It's over your signature? 13 A. Yeah. I signed this letter. 14 Q. Who drafted that letter, Mr. Berner? 15 A. Tom Leahey, or at least somebody from 16 Kirkpatrick & Lockhart. I believe Tom Leahey. 17 Q. Let's see if we can reconstruct the 18 events leading up to that letter. The next 19 document in your stack should be Exhibit B1499. 20 Do you have that before you? 21 A. Yes, I do. 22 Q. Can you tell me what B1499 is? 20011 1 A. It's a draft letter dated 2 February 23rd, 1987, to the Federal Home Loan Bank 3 Board that I am faxing to Tom Leahey on 4 February 23rd. 5 Q. It looks like it's about two and a half 6 single-spaced pages or double-spaced pages. 7 Right? 8 A. Right. 9 Q. Why would you be faxing to this 10 Mr. Leahey? 11 A. I wanted to get his thoughts on this 12 letter and see if he had any comments on the 13 letter, any changes that he thought might be 14 appropriate to put in. This was a letter that was 15 going to the Federal Home Loan Bank Board, the 16 FSLIC; and that's what I would use him for. 17 Q. Had you previously spent much time 18 corresponding with the corporate and securities 19 division of the Federal Home Loan Bank Board? 20 A. I think the only correspondence I might 21 have had was when we submitted the subdebt 22 application, just a transmittal letter. 20012 1 Q. So, you were not familiar with the 2 practices of the Federal Home Loan Bank Board's 3 corporate and securities division; is that 4 correct? 5 A. I was not. 6 Q. In fact, had you had any experience 7 with them prior to this time? 8 A. None whatsoever. 9 Q. Had you ever prepared an application 10 like this, a "request for no action" letter to the 11 Federal Home Loan Bank Board, any portion of the 12 Federal Home Loan Bank Board? 13 A. No. 14 Q. Did you know what had to go into this? 15 A. I certainly didn't. 16 MR. VILLA: Your Honor, I move 17 Exhibit B1499 into evidence. 18 MR. RINALDI: No objection, Your Honor. 19 THE COURT: Received. 20 Q. (BY MR. VILLA) Let me ask you to turn 21 to the next exhibit, which is B52, and ask you if 22 you can tell me what that is. 20013 1 A. Yeah. This is a -- a draft letter that 2 I received back from Tom Leahey in response to my 3 draft that I had sent to him. 4 MR. VILLA: Your Honor, I move B52 into 5 evidence. 6 MR. RINALDI: No objection. 7 THE COURT: Received. 8 Q. (BY MR. VILLA) It says up at the top, 9 "United Financial Group, Inc." letterhead in 10 brackets. Right? 11 A. Right. 12 Q. And that was because he was drafting a 13 document for you. Right? 14 A. Yeah. This document was for me to put 15 on UFG letterhead and to send to Julie Williams. 16 Q. Now, I would like you to compare 17 B1499 -- just eyeball compare them as we'll say, 18 not word for word, because that would not be a 19 productive task -- with B52. 20 Can you tell me, sir, whether he made 21 what we would call minor revisions in your 22 document; or did he do what we might call 20014 1 euphemistically extensive editing? 2 A. I think he took my document and threw 3 it away and started from scratch. 4 Q. In fact, you sent him a two-page 5 double-spaced document; and he sent you back a 6 four-and-a-half single-spaced document. Right? 7 A. That's correct. 8 Q. With considerable different information 9 and citations to regulations and the like. Right? 10 A. That's correct. 11 Q. Now, sir, I would also like to ask you 12 to compare the draft that Mr. Leahey sent you 13 back, Exhibit B52, with the final letter that was 14 sent to Ms. Williams. 15 A. I think I've done that before, yes. 16 Q. Do you see any differences? 17 A. Well, other than the final one has it 18 being hand delivered and the draft has it going 19 Federal Express, I think they are word for word 20 the same. 21 Q. And you recited in -- strike that. 22 So, the document that was delivered to 20015 1 Ms. Williams over your signature was prepared -- 2 every letter of that document was prepared by 3 whom? 4 A. By Kirkpatrick & Lockhart, by Tom 5 Leahey. 6 Q. Now, sir, if -- let me direct your 7 attention to the next exhibit, which is B1529 8 which you should have before you. 9 Can you tell me what B1529 is? 10 A. This is a bill from Kirkpatrick & 11 Lockhart, and the bill is dated March 23rd. And 12 it's relating to services rendered through 13 February 28th of 1987. 14 Q. And the date of this letter is -- the 15 final letter is March 4, 1987. Right? 16 A. Yes. 17 Q. So, this would have been the period 18 immediately prior to the letter to Ms. Williams, 19 Julie Williams. Right? 20 A. That's correct. This would have been 21 the month just before that. 22 MR. VILLA: Your Honor, I move B1529 20016 1 into evidence. 2 MR. RINALDI: No objection, Your Honor. 3 THE COURT: Received. What did you say 4 the date of that was? 5 THE WITNESS: The bill's date is 6 March 23rd, and it relates to services through 7 February 28th of 1987. 8 THE COURT: All right. Thank you. 9 Q. (BY MR. VILLA) Let me direct your 10 attention to the second page of this letter -- I'm 11 sorry -- the second page of the bill. 12 Do you have that before you, sir? 13 A. Yes, I do. 14 Q. Actually, I guess the bottom of the 15 first page and the top of the second page. 16 Do you see that? 17 A. Yes. 18 Q. The entry entitled "matters relating to 19 exchange of preferred stock"? 20 A. Yeah, I sure see that. 21 Q. And is the application or "no action" 22 letter that you sent to Ms. Williams involving the 20017 1 exchange of preferred stock? 2 A. Yes. 3 Q. And does this describe services 4 rendered by Kirkpatrick & Lockhart for the period 5 up to February 28, 1987, in connection with that 6 letter, including, quote, "review and revision of 7 requests prepared by Mr. Berner for FHLBB staff," 8 and then it goes on? 9 A. Right. That's what this entry in this 10 bill is dealing with, is that letter. 11 Q. Let me direct your attention now to 12 Exhibit B1586. 13 Can you tell the Court what B1586 is? 14 A. It's a transmittal letter and a bill 15 from Kirkpatrick & Lockhart for services rendered 16 from March 1st through March 28th of 1987. 17 Q. So, this would be the period 18 immediately after the bill we've just looked at; 19 is that right? 20 A. Right, for the next month. This is for 21 March. 22 Q. And this would cover the time period in 20018 1 which the letter was actually dated that was sent 2 to Ms. Williams. Right? 3 A. Right. That's correct. 4 MR. VILLA: Your Honor, I move B1586 5 into evidence. 6 MR. RINALDI: No objection, Your Honor. 7 THE COURT: Received. 8 Q. (BY MR. VILLA) Let me direct your 9 attention to the bottom of the second page of this 10 exhibit entitled "matters related to exchange of 11 preferred stock." 12 Do you see that, sir? 13 A. Yes, I do. 14 Q. And does that describe services 15 performed in connection with the application to 16 Ms. Williams that we've just looked at? 17 A. Yes. Some additional services were 18 performed. 19 Q. And is this consistent with your 20 recollection as to who prepared the letter to 21 Ms. Williams that is the basis for an accusation 22 against you that you failed to disclose the 20019 1 existence of the put and call option on the UFG 2 stock? 3 A. Sure. I mean, the letter was prepared 4 by -- by outside counsel. 5 Q. Word for word. Right? 6 A. Word for word, yes. 7 Q. Now, sir, if Mr. Leahey had included in 8 the draft that he sent you any discussion of the 9 Drexel option, so-called, would you have left it 10 in? 11 A. Sure. 12 Q. At this point, sir, did you believe 13 that the Federal Home Loan Bank Board was aware of 14 the existence of the Drexel option? 15 A. Yes, I did believe that. 16 Q. And what was that based on? 17 A. It was in the proxy statement for 1986. 18 And I'm not sure if the 1987 proxy had come out, 19 but it was in the 1986 proxy. It had been 20 disclosed in the capital note offer, and it had 21 been in the 13Ds, I believe, of MAXXAM. But it 22 had been in our proxy statement and our capital 20020 1 note offer, subordinated debt offer. 2 Q. Thank you. 3 Now, sir, we're going to move to an 4 entirely new area which is called, generically, 5 net worth. 6 Before we begin, sir, you're aware that 7 the Notice of Charges accuses you of violating 8 the -- or causing a violation of United Financial 9 Group's obligation to maintain the net worth of 10 USAT, aren't you? 11 A. I'm aware of that, yes, sir. 12 Q. And Mr. Rinaldi asked you a number of 13 questions about the UFG net worth maintenance 14 obligations toward USAT. Right? 15 A. That's correct, yes. He certainly did. 16 Q. And in addition, you have read the 17 Notice of Charges where it says, particularly in 18 Paragraph 28, that alleges that you and others 19 took certain steps to, quote, "maintain the 20 appearance of substantial net worth when, in fact, 21 USAT's net worth failed to meet minimum regulatory 22 capital requirements, avoid contributing capital 20021 1 to maintain its net worth pursuant to FHLBB 2 condition, and to stave off regulatory 3 intervention and to maintain USAT as a purchaser 4 and trader of Drexel-underwritten junk bonds." 5 You've seen that allegation? 6 A. I certainly have. 7 Q. Let's start off with the 8 Drexel-underwritten junk bonds. 9 What interest do you have or have ever 10 had in how much USAT owns of Drexel-underwritten 11 junk bonds? 12 A. I have absolutely no interest or 13 concern of how much Drexel -- or how much junk 14 bonds of Drexel United owns or ever owned. 15 Q. Do you know whether Drexel's portion 16 of -- whether USAT's portfolio of junk bonds had 17 Drexel overrepresented or underrepresented 18 relevant to their market? 19 A. It's my recollection that Drexel was 20 underrepresented. 21 Q. Did you ever take any action which in 22 any way would increase Drexel's portion of the 20022 1 junk bonds? 2 A. None whatsoever. We had a person that 3 was in charge of the junk bonds. They made 4 recommendations and acquired and sold junk bonds. 5 Q. Let's talk about, in general, the 6 question of staving off -- of misleading the 7 regulators in order to stave off regulatory 8 intervention. 9 Sir, did you try to stave off 10 regulatory intervention at United Savings 11 Association of Texas? 12 A. No. In fact, we were trying to get 13 regulatory intervention throughout most of '88 and 14 a lot of '87. 15 Q. And, sir, just at the outset -- and 16 we're going to get to it by the end in some 17 detail -- did you take any -- did you fail to take 18 any action -- strike that. 19 When was the first time under the net 20 worth maintenance agreement that you got any 21 request from the Federal Home Loan Bank Board or 22 FSLIC to actually infuse capital into USAT? 20023 1 A. It was in -- 2 Q. And by "you," I mean UFG. 3 A. It was in December of 1988. 4 Q. And at that point, what was your view 5 of UFG's ability to infuse capital into USAT? 6 A. Well, it certainly couldn't infuse 7 capital to maintain its regulatory net worth. 8 Q. Now, sir, you joined USAT in 1985. 9 Right? 10 A. That's right. October 1st, 11 September 30th. 12 Q. At that point, did you learn of the 13 fact that United Financial Group had merged with 14 First American Financial which was the holding 15 company of Houston First America? 16 A. I learned it somewhere along that time. 17 Q. Did you learn as part of that that UFG 18 had filed an application with the Federal Home 19 Loan Bank Board? 20 A. Yes, I did. 21 Q. And did you learn that pursuant to this 22 application, a resolution had been entered by the 20024 1 Bank Board that approved the application? 2 A. Again, I learned about it. I'm not 3 sure exactly when I learned about it, but I 4 certainly learned about it. 5 Q. Let me show you what's been marked as 6 Tab -- Exhibit T2002 at Tab 17. Is that a copy of 7 the resolution? 8 A. Yes, it is. 9 Q. Let me direct your attention to 10 Paragraph 6 which is kind of hard to read. It's 11 on Page 3. 12 What is that, sir? Paragraph 6. 13 A. Well, this is a statement that the 14 applicant is going to stipulate that for as long 15 as it controls the association, it will 16 maintain -- it will cause the net worth to be 17 maintained. 18 Q. Now, let me ask you to turn to the next 19 exhibit, T2005, which has been entered in evidence 20 as an exhibit at Tab 116. That's Tab 116. 21 Particularly, the last page. 22 Can you tell me what that is, sir? 20025 1 A. This -- it's hard to read; but it's the 2 stipulation to maintain the net worth, cause the 3 net worth to be maintained. 4 Q. To cause the net worth to be 5 maintained. Right? 6 A. Right. 7 Q. That's signed by Mr. Bentley? 8 A. Right. C.E. Bentley. 9 Q. Can you tell us what you recall about 10 whether you knew of the existence of this actual 11 signed stipulation prior to the time USAT went 12 into receivership? 13 A. I did not know of the existence of this 14 stipulation until sometime in 1991 or 92, sometime 15 significantly after United was put into 16 receivership. 17 Q. You knew about the resolution, but you 18 did not know about the existence of the 19 stipulation; is that right? 20 A. That's correct, sir. 21 Q. And how was the stipulation ultimately 22 brought to your attention? 20026 1 A. I believe it was Mr. Rinaldi who 2 brought it to my and a bunch of other people's 3 attention because no one had seen it for as long 4 as I was at United. 5 Q. And you had discussions, in fact, with 6 the Federal Home Loan Bank of Dallas? 7 A. For -- beginning 1988 and 1989, we had 8 had discussions of that stipulation and its -- the 9 fact that nobody had it. 10 Q. Or nobody could find it? 11 A. Nobody could find it. Nobody knew if 12 it existed. 13 Q. Did the -- let's talk about the time 14 period prior to when USAT failed. 15 Did the -- did your belief that the 16 stipulation hadn't been executed, did that affect 17 the approach that UFG took toward whether or not 18 it would cause USAT's net worth to be maintained? 19 A. No, it didn't. I mean, that was our -- 20 that's what we were attempting to do for as long 21 as I was there and continued to do. 22 Q. Why was it important for UFG to try to 20027 1 preserve the value of USAT by causing its net 2 worth to be maintained or otherwise? 3 A. Well, USAT was, essentially, the sole 4 asset or certainly almost substantially all of the 5 assets of UFG. So, it was important for UFG, as a 6 public company, to keep USAT alive and viable, to 7 keep its capital up. 8 Q. And, indeed, after USAT failed, it was 9 just a matter of time as we saw until UFG's assets 10 and liabilities would be dwindling. Right? 11 A. That's right. 12 Q. Now, the provisions we've looked at, 13 the resolution and the stipulation, I believe -- 14 at least the stipulation -- caused the net worth 15 of United Savings to be maintained. 16 Do you see that? 17 A. Yes, I do. 18 Q. What were the different ways that UFG 19 could cause the net worth of USAT to be 20 maintained? 21 A. I'm sure there are a bunch of ways. 22 One would be, obviously, to put money into -- 20028 1 physically, for UFG to infuse money into USAT. 2 Another way would be to have a third 3 party infuse money into USAT as we'll see as we 4 talked about before through a subordinated debt or 5 sale of securities or other ways. 6 A third way would be to perhaps do some 7 other plan, some other -- some other activity that 8 would, in effect, put capital into USAT. 9 Q. What do you mean by "some other plan"? 10 A. Well, things like the FADA/FSLIC plan 11 that we looked at before. There was a real estate 12 transaction -- real estate plan that we attempted 13 to use -- I think we may be talking about later. 14 Different sorts of ideas which would -- the effect 15 of which would be to put capital into USAT. 16 Q. Now, sir, the Notice of Charges alleges 17 that the respondents took action to mislead the 18 regulators regarding USAT's regulatory net worth 19 to stave off regulatory intervention. We just 20 talked about that. Right? 21 A. Yes, we sure did. 22 Q. From the time that you, I gather, 20029 1 became more directly involved with the regulators 2 around the time of Mr. Pledger's departure in 3 mid-1986 or thereabouts, do you recall the 4 position that the regulators were taking as to 5 whether or not USAT was meeting its regulatory 6 minimum net worth? 7 A. I do. From, I mean, June 30th of 1986 8 onward, the regulators' position was that USAT was 9 not meeting its minimum regulatory net worth. 10 Q. Did they ever change their position, to 11 your recollection, from the time you assumed 12 primary responsibility from Mr. Pledger until the 13 time that USAT failed? 14 A. Never. I mean, it was always their 15 position that USAT was below its minimum 16 regulatory net worth requirement. 17 Q. When was the first time that you recall 18 that the regulators actually imposed, quote, 19 regulatory intervention on USAT in the form of 20 sending USAT a supervisory agreement or consent 21 order that would have the effect of restricting 22 USAT's activities? 20030 1 A. That would have been the consent to 2 merge which was in November of '88, 1988. 3 Q. That's the one we already talked about 4 that was executed in November 1988? 5 A. Right. Yes, that one. 6 Q. And the regulators -- I think you told 7 us the regulators' position as to whether or not 8 USAT met its minimum regulatory net worth, at 9 least from the time that you became directly 10 involved in mid-1986 until the time that USAT 11 failed, was that USAT was always below its minimum 12 regulatory net worth? 13 A. That's correct. Their position was 14 from June 30, 1986 onward, it was below its 15 minimum regulatory net worth. 16 Q. What was the date of the first letter 17 that was sent to UFG asking UFG to infuse capital 18 into USAT? 19 A. It was December something. It was in 20 December of 1988 was the first time that UFG 21 was -- was told or asked to infuse capital. 22 Q. Now, we're going to start the process 20031 1 of going through the different steps that USAT and 2 UFG pursued to try to maintain the capital levels. 3 We're going to start in the period 1986. 4 Let me ask you, sir: Do you recall the 5 subordinated debt application? 6 A. Yes, I do. 7 Q. And what is subordinated debt? 8 A. Well, it's debt -- in this case, debt 9 of United Savings that is subordinate to other 10 debt. 11 Q. And what would have been the effect if 12 the regulators had authorized USAT to issue 13 subordinated debt on USAT's capital position? 14 A. Subordinated debt was considered 15 capital under the regulations. So, had that been 16 authorized, there would have been additional 17 capital infused into USAT. 18 Q. Now, I'm not going to take you through 19 the subordinated debt application and the 20 prospectus that was with it. But do you recall 21 that that was shown to you by both Mr. Rinaldi and 22 Mr. Guido and it was submitted to the Federal Home 20032 1 Loan Bank of Dallas in late April 1986? 2 A. Yes, I do. 3 Q. Let me show you what's been marked as 4 B978. 5 THE COURT: Mr. Villa, we'll adjourn 6 until 1:30. 7 MR. VILLA: Thank you, Your Honor. 8 9 (Whereupon, a lunch break was taken 10 from 12:05 p.m. to 1:36 p.m.) 11 12 THE COURT: Be seated, please. We'll 13 be back on the record. 14 Mr. Villa, you may continue. 15 MR. VILLA: Thank you, Your Honor. For 16 your planning purposes, I expect to conclude my 17 examination either just before the break or just 18 after the break today on all matters. 19 THE COURT: All right. Are the other 20 respondents going to have questions? 21 MR. VILLA: I think very limited. 22 MR. EISENHART: I would expect like 20033 1 five minutes or less, Your Honor. 2 THE COURT: I assume OTS has some 3 redirect? 4 MR. GUIDO: Yes, Your Honor. 5 THE COURT: All right. Let's proceed. 6 MR. VILLA: Thank you. 7 Q. (BY MR. VILLA) Mr. Berner, when we 8 broke, we were looking at Exhibit B978, I believe. 9 It's a letter dated May 12, 1986, from Mr. Twomey 10 to you. 11 Do you see that? 12 A. Yes, I have that letter. 13 Q. And do you recall receiving this letter 14 from Mr. Twomey in connection with the 15 subordinated debt application that we've just 16 spoken about? 17 A. Right, that's correct. 18 MR. VILLA: Your Honor, I move B978 19 into evidence. 20 MR. RINALDI: No objection, Your Honor. 21 THE COURT: Received. 22 Q. (BY MR. VILLA) Now, do you recall, 20034 1 Mr. Berner, that Mr. Twomey directed a number of 2 questions to USAT in connection with the 3 subordinated debt application? 4 A. Yes. That's what this letter was 5 about, those questions. 6 Q. Would you explain to the Court the 7 process that USAT and the regulators were going 8 through? 9 A. Well, we had -- we had prepared the 10 subordinated debt application, had forwarded it to 11 the Dallas bank; and they were looking through it 12 at this point in time to see whether or not it was 13 okay to then forward it on to Washington. 14 Q. Do you recall what issue that they were 15 assessing -- at least one of the issues -- I know 16 we talked about your -- your background in 17 regulatory; so, I'm not going to ask you all of 18 issues that they were looking at in the 19 subordinated debt. But one of the issues was in 20 connection with whether or not they would approve 21 USAT's subordinated debt application? 22 A. I believe one of the issues was 20035 1 operating earnings and income that we had. 2 Q. Do you know what that was relevant to? 3 A. Well, it was relevant to see, first of 4 all, if you could pay off all the debt and pay the 5 interest on the debt and, also, to see just where 6 you were going to get earnings and income going 7 forward. 8 Q. Now, subordinated debt, unlike stock, 9 are you required to make payments on debt 10 instruments? 11 A. The differences between preferred 12 stock, for example, is you have to pay the 13 interest. Preferred stock, you don't have to pay 14 a dividend. 15 Q. That's the reason that the Federal Home 16 Loan Bank of Dallas was examining what your 17 operating earnings were? 18 A. Right. 19 Q. Let me direct your attention to 20 Paragraph 4 of Mr. Twomey's letter of May 12. 21 Would you read that? And then let's talk about 22 it. 20036 1 A. Okay. 2 Q. Now, let me direct your attention to 3 the third sentence which reads, "While we're aware 4 of the substantial income from sales of branches 5 and sales of investment securities during the past 6 two years, it was never intended that the 7 association rely on these outside sources to meet 8 operating expenses." 9 Do you see that, sir? 10 A. Yes, I do. 11 Q. Was it, in your discussions with 12 Mr. Twomey, any secret that United Savings 13 Association of Texas was relying upon income from 14 the sales of assets and from investment 15 securities? 16 A. Was it a secret? 17 Q. Yes, sir. 18 A. No, it certainly wasn't a secret. We 19 would tell them. They certainly knew about it. 20 Q. Was this one of the issues that was in 21 the correspondence of the analysis of the 22 subordinated debt application? 20037 1 A. Yeah. That's what this is relating to. 2 Q. Let me direct your attention, sir, to 3 Exhibit B1000, which is Tab 1644. It's already in 4 evidence. 5 Do you see that in front of you? 6 A. Yes, I do. 7 Q. What is this? 8 A. This is my letter of May 27th, 1986, to 9 Neil Twomey relating to the subordinated debt 10 application. 11 Q. Explain to me why you wrote this 12 letter, sir. 13 A. Apparently, I had received some 14 information that there was going to be an 15 examination and that they were going to hold back 16 on the approval of the subordinated debt 17 application until the examination was finished or 18 at least they had received a preliminary 19 indication of the results of the examination. And 20 I was saying that while I understood that, it was 21 very important for us to increase USAT's capital 22 position; so, I would like them to act as quickly 20038 1 as possible. 2 Q. And that's the third paragraph where 3 you're asking them to act rapidly so that the 4 subordinated debt could be considered and 5 approved. Right? 6 A. Right. 7 Q. And if it were issued, it would have 8 the effect of increasing USAT's capital position? 9 A. Yeah. It was -- at that point, it was 10 a 50-million-dollar subordinated debt application. 11 Q. Let me direct your attention to the 12 next exhibit, which is marked as A12 -- A12159. 13 Can you tell us what that is? 14 A. This is my letter of June 23rd, 1986, 15 to Roy Green who was principal supervisory agent 16 of the Federal Home Loan Bank of Dallas. 17 Q. Was Mr. Green the predecessor to 18 Mr. Barclay? 19 A. Yes, he was. 20 Q. And the principal supervisory agent is 21 the same as the president of the Federal Home Loan 22 Bank? 20039 1 A. He's the highest officer there, yes. 2 MR. VILLA: Your Honor, I move A12159 3 into evidence. 4 MR. RINALDI: No objection, Your Honor. 5 THE COURT: Received. 6 Q. (BY MR. VILLA) Can you explain to me 7 the significance of this letter, sir? 8 A. Well, one of the significances, if 9 that's a word, is we were informing them that we 10 were going to increasing the subordinated debt 11 application from 50 million to $75 million. 12 Q. Now -- 13 A. Then I'm also asking Mr. Green to act 14 as promptly as possible. 15 Q. In the summer of 1986, what position 16 was the Federal Home Loan Bank Board -- Federal 17 Home Loan Bank of Dallas taking with respect to 18 whether or not USAT was meeting its regulatory 19 capital? 20 A. From June 30 on and maybe even before, 21 their position was United Savings was below its 22 minimum regulatory net worth capital. 20040 1 Q. Do you recall, Mr. Berner, any concern 2 at USAT over the federal regulators' failure to 3 act on the subordinated debt application? 4 A. Sure. We were very concerned about 5 that because we were looking to put some 6 additional capital into United Savings. 7 Q. Do you remember how long the 8 subordinated debt application was pending without 9 any action being taken? 10 A. I believe we filed it in April, and it 11 was April of 1986. And it was January of 1987 12 when they finally told us to withdraw it. 13 Q. Let me show you what's been marked as 14 B1084. No, strike that. 15 Look at B1439 -- sorry -- which is in 16 evidence at Tab 1646. 17 Do you see that, sir? 18 A. Yes, I do. 19 Q. Can you tell us, why did you write that 20 letter? 21 A. I had been told by the Federal Home 22 Loan Bank in Washington informally that the 20041 1 application was being sent back to Dallas and that 2 it was going to be, in effect, rejected because 3 they were worried about some disclosures. 4 Q. And this -- what's the purpose of this 5 letter then? 6 A. It's to find out what was going on; and 7 if they had some problems, to raise them so that 8 we could address them as quickly as possible. 9 Q. Now, I think you told me that there 10 were a number of different ways in which USAT 11 could maintain its regulatory capital. Right? 12 A. Yeah, sure. 13 Q. At this point, which avenue appeared to 14 be the one that USAT was pursuing to maintain its 15 regulatory capital? 16 A. Well, this was to get third-party money 17 to come into the association through the sale of 18 the subordinated debt. 19 Q. Let me show you, sir, what's been 20 marked as B1446. 21 Can you tell me what that is? 22 A. This was a letter from Joe Selby to 20042 1 Gerry Williams dated January 23rd, 1987, of the 2 Federal Home Loan Bank of Dallas. 3 Q. Gerry Williams at that point had left 4 United Savings Association of Texas. Right? 5 A. Yes. He left at the end of December, 6 beginning of January. 7 MR. VILLA: Your Honor, I move that 8 exhibit into evidence. 9 MR. RINALDI: No objection, Your Honor. 10 THE COURT: Received. 11 Q. (BY MR. VILLA) What issue does this 12 letter address? 13 A. This is the issue dealing with the 14 subordinated debt application; and Mr. Selby is 15 telling us that in view of the Couch Mortgage 16 situation, that it should be withdrawn. 17 Q. And do you have a recollection that the 18 regulators, after eight months or nine months, 19 asked USAT to withdraw its subordinated debt 20 application? 21 A. I certainly do, yes. 22 Q. I would like you to take a look at the 20043 1 next exhibit, B1451, which is in evidence at 2 Tab 1451? 3 A. That's my letter to Mr. Selby 4 responding to his letter to Gerry Williams 5 withdrawing the application. 6 Q. And the date is January 28, 1987. 7 Right? 8 A. Right. 9 Q. Nine months after the application was 10 initially submitted. Right? 11 A. Yeah. It was submitted in April of 12 '86; so, this was nine months or so. 13 Q. Until the Couch Mortgage issue arose in 14 late 1986 or early 1987, did USAT expect that it 15 would have $100 million in subordinated debt to 16 add to capital? 17 A. 75 million. Yeah, we certainly did. 18 The application had moved to Washington. We had 19 no reason for thinking that it wasn't going to be 20 approved. It seemed like a good way to get some 21 additional capital into the association at that 22 time. 20044 1 Q. What happened to the market for 2 subordinated debt in 1987 for Texas thrifts? 3 A. It went away. It was gone. You 4 couldn't sell subordinated debt in Texas thrifts 5 in '87. 6 Q. What do you mean you couldn't sell it? 7 A. Given the nature of the Texas thrifts 8 where, essentially, they all had little earnings 9 and no capital, you just couldn't sell 10 subordinated debt to the market in 1987. 11 Q. So, after you missed the window in 1986 12 to sell the subordinated debt, did USAT make any 13 further attempts to issue subordinated debt? 14 A. Subordinated debt, no, we didn't. 15 Q. I would like you to take a look, sir, 16 at Exhibit A14 -- Exhibit A14020, Tab 1461. 17 Can you tell me what that is? 18 A. This is the -- looks like the 19 supervisory letter from Danny Thomas of the 20 Federal Home Loan Bank of Dallas to the board of 21 directors of United Savings; and I think attached 22 to it is the examination, the 1986 examination. 20045 1 Q. Now, we've used the word "supervisory 2 letter" in various different -- in various 3 different ways. So, I want to make sure that we 4 are using it in a consistent way, at least in your 5 examination. 6 As you used the word "supervisory 7 letter" here, what do you mean? 8 A. It's a letter from the senior 9 supervisory agent just transmitting the exam and 10 summarizing the results of the exam. 11 Q. So, is this different in your mind from 12 what we call a supervisory agreement? 13 A. Yeah, sure. 14 Q. What is a supervisory agreement? 15 A. A supervisory agreement would be where 16 they are instructing you or trying to control your 17 operations or telling you things that you can or 18 can't do. 19 Q. And they are both different from a 20 consent order that United was finally asked to 21 sign in October or November of 1988. Right? 22 A. That's right. 20046 1 Q. Turning to the letter from Mr. Danny 2 Thomas, which is before you, let's take a look at 3 the fourth full paragraph. 4 Would you read that to yourself? 5 MR. GUIDO: What's the exhibit number 6 on that, please? 7 MR. VILLA: Exhibit number? A14020. 8 MR. GUIDO: Thank you. 9 A. (Witness reviews the document.) 10 Q. (BY MR. VILLA) Would you read the 11 fourth full paragraph, sir? 12 A. Read it out loud? 13 Q. No. To yourself. 14 A. Okay. (Witness reviews the document.) 15 Q. Sir, does that -- what is being -- what 16 is United being told in that paragraph? 17 A. That according to the Federal Home Loan 18 Bank of Dallas and the examination report, United 19 was below its minimum regulatory net worth. 20 Q. And by how much? 21 A. 14.4 million or 6.3 percent of net 22 worth. 20047 1 Q. Is this in any way different from the 2 position that the regulators were expressing 3 toward United from the time you became involved in 4 the summer of 1986? 5 A. No. As I said before, the regulators 6 from the time I got involved were saying that 7 United was below its minimum regulatory net worth. 8 Q. Let me direct your attention, sir, to 9 the last paragraph of Mr. Thomas's letter. Would 10 you read that to yourself? And then I'll ask you 11 a question about it. 12 A. (Witness reviews the document.) Okay. 13 Q. Now, what do you understand that 14 Mr. Thomas is referring to when he says that the 15 board of directors is going to be required to meet 16 with the Federal Home Loan Bank of Dallas to 17 execute a supervisory document? 18 A. This was the second thing that we were 19 talking about before, that we were being asked to 20 come to this meeting and they would present a 21 document to us which would somehow restrict 22 operations in some way, I guess. He was expecting 20048 1 to propose that at this meeting in May. 2 Q. Now, Mr. Berner, I'm going to show you 3 the next document, which is Exhibit A12235; and 4 it's in evidence at Tab 888. 5 Do you see that, sir? 6 A. Yes, I do. 7 Q. Do you recognize this document? 8 A. I do. 9 Q. What is it? 10 A. This was a plan or a proposal that we 11 came up with as a way for raising capital. 12 Essentially, what we were going to try to do is 13 take some bad real estate, put it into a separate 14 entity, spin that entity off to shareholders or 15 other people, and raise capital that way. 16 Q. And do you know, sir, whether this 17 document was submitted to the Federal Home Loan 18 Bank of Dallas? 19 A. Yes, I do. It was. 20 Q. Now, I see the name "Ginger" up in the 21 right-hand corner. 22 Do you know who that would be referring 20049 1 to, sir? 2 A. I would assume it's Ginger Baugh. 3 Q. And Ginger Baugh held what position in 4 connection with the supervision of United? 5 A. She was an analyst. She worked for 6 Neil Twomey. She was a person that I dealt with a 7 lot. 8 Q. Now, we've walked through this document 9 at some length with Mr. Crow. And we have a 10 blow-up of it behind you, but I'm going to spare 11 you that. 12 I would like you to review the 13 document, particularly Page 2 of the document, and 14 ask you whether it's consistent with the views 15 that USAT was expressing to the regulators at 16 least as of mid-1987 about USAT's financial 17 condition. 18 A. (Witness reviews the document.) Yes, 19 it is. 20 Q. And what were the views, sir? 21 A. That USAT's financial position was 22 deteriorating; that we were, in effect, getting 20050 1 earnings through the sale of above-water assets 2 and we had a particularly good quarter in equity 3 arbitrage; that we couldn't expect that to happen; 4 and that, basically, all of our above-water assets 5 had been liquidated and there was essentially 6 nothing left. It was deteriorating rapidly. 7 Q. And was USAT making various proposals 8 to the Federal Home Loan Bank Board in order to 9 address that situation? 10 A. Sure, yeah. 11 Q. And -- 12 A. This is one of them. 13 Q. This is one of the proposals? 14 A. Right. 15 Q. Was it any secret, to your knowledge, 16 that USAT was maintaining its net worth by selling 17 appreciated assets including investment 18 securities? 19 A. No, none whatsoever. 20 Q. Did anybody call you up after having 21 received this document and tell you they were 22 surprised by the disclosures in it? 20051 1 A. No. They were fully aware of it. 2 Q. Mr. Berner, we saw in the letter from 3 Danny Thomas a reference to the fact that there 4 was going to be a meeting with the Federal Home 5 Loan Bank of Dallas and the directors of USAT in 6 which a supervisory agreement would be proposed. 7 Do you remember that? 8 A. Sure. I remember that. 9 Q. Was a supervisory agreement entered 10 into between the Federal Home Loan Bank of Dallas 11 and USAT in the spring of 1987, spring or summer 12 of 1987? 13 A. No, it was not. 14 Q. And why not? 15 A. The Federal Home Loan Bank of Dallas 16 proposed that instead of a supervisory letter 17 agreement, if we would bring in outside 18 consultants to review our books and records and to 19 review our investment securities, that would take 20 the place of any sort of supervisory letter. 21 Q. Let me direct your attention, sir, to 22 what's been marked as A11076 and ask you if you 20052 1 can identify that document. 2 A. Yes. That's a memo from me to the 3 board of directors dated May 7th, 1987. 4 MR. VILLA: Your Honor, I move A11076 5 into evidence. 6 MR. RINALDI: No objection. 7 THE COURT: Received. 8 Q. (BY MR. VILLA) Sir, I would like you to 9 take a look at the second paragraph of that 10 document and tell us what that describes and what 11 you recall of your discussion with Mr. Twomey. 12 A. Well, this describes what I just said. 13 Mr. Twomey is telling me that we're not going to 14 be getting a supervisory letter; that, instead, if 15 we would be bringing in -- and we had agreed to 16 bring in consultants to review our books and 17 records and our investment portfolio, and that 18 would be satisfactory. 19 Q. Where did the idea come from to have -- 20 to have -- strike that. 21 Where did the idea come from for USAT 22 to be subject to independent third-party reviews 20053 1 in lieu of a supervisory agreement? 2 A. That came from the Federal Home Loan 3 Bank of Dallas. I think Mr. Twomey. But from the 4 Dallas bank. 5 Q. And were there meetings that occurred 6 after this date -- May 7, 1987 -- to implement the 7 proposal that Mr. Twomey had made? 8 A. Sure. There were a few meetings on 9 that. 10 Q. Now, do you remember in the early part 11 of your testimony you described for us a meeting 12 where everybody flew to the opposite city. You 13 flew from Houston to Dallas, and all the 14 regulators flew from Dallas to Houston. Right? 15 A. I sure do. 16 Q. And we looked at a memo, and we looked 17 at one portion of the memo of that meeting. And 18 now I'm going to direct your attention to another 19 portion of the memo. 20 Let me show you what's been marked as 21 B1706 which is in evidence at Tab 16799. I think 22 you've identified this document, and it's in 20054 1 evidence. Why don't you just tell us for the 2 record what it is. 3 A. This is my memo of July 20th relating 4 the events of a July 16th, 1987 meeting with the 5 FHLB of Dallas. 6 Q. Now, sir, I would like you to look at 7 the next document in your book which is 8 Exhibit B1709. 9 Can you tell me what that is? 10 A. This is a memo from Peggy Powers, who I 11 believe was with the Federal Home Loan Bank of 12 Dallas, to files. 13 Q. What does Ms. Powers relate to? 14 A. The same meeting, the July 16th 15 meeting. 16 Q. So, this is another occasion on which 17 we have complementary memos, yours on one side and 18 the Federal Home Loan Bank Board's on the other 19 side? 20 A. That's right. 21 MR. VILLA: I move 1709 into evidence. 22 MR. RINALDI: No objection. 20055 1 THE COURT: Received. 2 Q. (BY MR. VILLA) Let's start with 3 Ms. Powers' memo, which is B1709. I would like 4 you to look at Paragraph 7 of Ms. Powers' memo. 5 Do you see that under "books and 6 records review"? 7 A. Yes, I do. 8 Q. It says, quote, "Twomey gave Berner the 9 name of Randy Germane at Grant Thornton." And it 10 goes on, quote, "Mike Crow is to contact Mike 11 Germane for a meeting." 12 Do you see that, sir? 13 A. Yes, I do. 14 Q. Do you recall the -- first of all, 15 before I do that, let me ask you: Do you remember 16 the two areas of United's operations that were 17 going to be subject to independent third-party 18 analysis in lieu of a supervisory agreement? 19 A. Yeah. It was the books and records and 20 then my recollection was the high-yield bond 21 portfolio. 22 Q. Okay. And this -- the paragraph that I 20056 1 just read from is entitled "books and records 2 review"? 3 A. Right. 4 Q. Do you recall, sir, the name of the 5 firm that did the books and records review? 6 A. Grant Thornton. 7 Q. And do you recall who selected that 8 firm? 9 A. Neil Twomey. 10 Q. Now, let's turn to No. 8, which is the 11 junk bond review. It says, "Twomey stated that 12 Merrill Lynch had been contacted to complete this 13 review. The only remaining issue is the scope of 14 the review, and it should be completed within two 15 weeks." 16 Do you see that, sir? 17 A. Yes, I do. 18 Q. Do you recall what role Mr. Twomey 19 played in determining the scope of the third-party 20 reviews and either selecting or personally 21 approving the parties involved in the reviews? 22 A. He did it all. He was the one who set 20057 1 out the scope and then he originally contacted 2 Merrill Lynch and then ultimately he approved 3 somebody else. 4 Q. Let me turn back to your memo, which is 5 B1706. I would like you to look at Page 3, the 6 second full paragraph. 7 Do you have that before you? 8 A. Yes, I do. 9 Q. And is that a discussion of the 10 independent third-party consultants to conduct the 11 reviews? 12 A. Yes, it is. 13 Q. I'm not going to ask you to go through 14 it, but do you discern any significant differences 15 between your memorandum of the meeting and 16 Ms. Powers' memorandum of the meeting? 17 A. They are saying the same thing. 18 Q. They are remarkably similar, aren't 19 they? 20 A. We were both at the same meeting. 21 Q. Let me show you, sir, what has been 22 marked as Exhibit B3744. 20058 1 Do you have that before you, sir? 2 A. Yes, I do. 3 Q. I would not expect you to have seen 4 this document before; but I'm going to ask you, 5 sir, whether the position that the Federal Home 6 Loan Bank of Dallas was expressing toward United 7 Savings Association of Texas in 1987 is consistent 8 with the position that's set forth in this 9 document, particularly on Page 2. 10 Let's take a look first at the entry on 11 April 1, 1987. It says, quote, "RRC agreed with 12 SA recommendation to initiate an audit inspection 13 of United's junk bonds activities, recordkeeping, 14 and other areas to determine true condition of the 15 institution." 16 Do you see that, sir? 17 A. Yes, I do. 18 Q. And do you recall that the 19 recommendation came from the supervisory agent? 20 A. Oh, yeah. I mean, Neil Twomey, he was 21 the guy that recommended that this is what we do. 22 Q. Then let's look at the entry for 20059 1 July 30, 1987. It says, "It was finally 2 determined after receiving numerous financial 3 reports and attending several meetings with 4 United's accountants that United did, in fact, 5 fail its net worth requirement as of June 30, 6 1987. In lieu of a supervisory agreement, United 7 has agreed to a third-party review of its 8 accounting system and to its investment area, 9 particularly in junk bonds. Prospective reviewers 10 are being interviewed and considered for these 11 reviews." 12 Do you see that issue, sir? 13 A. Yes, I do. 14 Q. Is that an accurate statement of the 15 state of play with respect to the supervision of 16 United in July of 1987? 17 A. Absolutely. This is exactly where we 18 were. 19 Q. So, at this point, the regulators' 20 position was that you were below your minimum 21 regulatory net worth; but instead of a supervisory 22 agreement, what had they proposed? 20060 1 A. That we bring in someone to review the 2 junk bonds and we bring in somebody to review the 3 books and records. 4 Q. Now, we've already identified the party 5 who is reviewing the books and records. That's 6 Grant Thornton. Right? 7 A. Right. 8 Q. Do you recall -- I think you identified 9 already for us some of the companies that were 10 being considered to do the junk bond review. And 11 one of them was Merrill Lynch? 12 A. Right. 13 Q. Let's talk about the scope of the 14 review. Would you look at Exhibit B1742, which is 15 in evidence at Tab 282? 16 Do you recall that document, sir? I 17 believe Mr. Guido may have shown it to you. 18 A. Yeah. Somebody showed it to me, that's 19 right. 20 Q. What is it? 21 A. This is a letter from Neil Twomey of 22 the Federal Home Loan Bank of Dallas to me dated 20061 1 September 9th, 1987, relating to getting someone 2 to look at the junk bond portfolio -- 3 Q. And what -- 4 A. -- and then setting out the scope of 5 the review. 6 Q. And setting out the scope of the 7 review? 8 A. Right. 9 Q. Now, Mr. Berner, as -- going back to 10 the Notice of Charges from time to time to focus 11 us on what the issues are in this case, do you 12 recall that the allegation by the OTS that I began 13 the segment with was the allegation that USAT had 14 taken actions to stave off regulatory intervention 15 so it could continue its investment activities. 16 Do you recall that? 17 A. Yes. 18 Q. Do you recall there were occasions on 19 which the federal regulators expressed views to 20 USAT and offered to express views to others, 21 including Wall Street investment houses, that they 22 had no intention of taking regulatory action even 20062 1 if USAT was below its regulatory net worth limits? 2 A. I absolutely recall Neil Twomey saying 3 that to me, that he would make contact with Wall 4 Street people or tell them if they contacted him. 5 Q. Do you recall the dates of those 6 discussions you had with Mr. Twomey? 7 A. I believe it was 1987. I think it was 8 maybe in 1988 also. 9 Q. Okay. Let's take a look at some 10 documents now to see if we can focus on the issue. 11 Let's turn to the next document, which is A11078. 12 Tell me what that document is, sir. 13 A. It's a memo from Ginger Baugh to files 14 relating -- talking about a meeting of August 7th, 15 1987, relating to United. 16 Q. And does it say in the first paragraph 17 of her memo that you were present? 18 A. Yes, it does. 19 Q. I would like you to look at A11079, the 20 next document in your book, which is in evidence 21 at Tab 1680. 22 What is A11079? 20063 1 A. It's a memo from me to files 2 relating -- dealing with the same meeting. 3 Q. So, again, we have complementary memos 4 of the same meeting. Right? 5 A. Right. 6 MR. VILLA: Your Honor, I move A11078 7 into evidence. 8 MR. RINALDI: No objection, Your Honor. 9 Q. (BY MR. VILLA) First, let's look at 10 Ms. Baugh's memo, A11078. 11 THE COURT: Let me receive that. 12 That's received. 13 MR. VILLA: I'm sorry, Your Honor. Too 14 much coffee at lunch. 15 Q. (BY MR. VILLA) Let's look at A11078. 16 First of all, Paragraph No. 2 under the net worth 17 requirement, A11078, do you see that? 18 A. It's hard to read; but I see it, yes. 19 Q. And just read the paragraph and I'm 20 going to ask you one question about the paragraph. 21 A. Okay. 22 Q. Sir, is this consistent with your 20064 1 recollection of what the discourse was between 2 United and its regulators about its net worth 3 condition as of August of 1987? 4 A. Yes, it is. 5 Q. And what was that? 6 A. They believed that we were below our 7 regulatory net worth and we believed that if we 8 weren't, we were getting pretty close; and there 9 was certainly a concern on Wall Street about it. 10 Q. Let me direct your attention, sir, to 11 the next paragraph, the one that begins "United 12 stated the reason for its emphasis on the 13 subject." 14 Do you see that? 15 A. Yes, I do. 16 Q. Particularly, the last paragraph of 17 that -- the last sentence of that paragraph which 18 reads, "Neil offered to meet personally with any 19 brokers and give regulatory feedback, verbal 20 comfort on United's part. Neil stated that he 21 would have to discuss with legal possibilities of 22 a written comfort letter." 20065 1 Do you see that? 2 A. Yes, I do. 3 Q. What does that refer to? 4 A. Again, we had a concern of what would 5 happen on Wall Street if, you know, we fell below 6 our regulatory net worth. And Mr. Twomey is 7 telling us, if anybody has a concern, to call him, 8 that he will tell them verbally that everything is 9 okay with United. And he's also going to check 10 with legal to see if he might be willing to put 11 something in writing. 12 Q. If you turn to the last page of the 13 memo that Ms. Baugh prepared, under "future 14 actions," do you see what No. 3 is? 15 A. Yes, I do. 16 Q. And does it say "discuss with legal 17 possibilities of a written comfort letter for 18 United re: FHLB comfort with United's position"? 19 Do you see that? 20 A. Yes, I do. 21 Q. Did you ever get a written comfort 22 letter from the Federal Home Loan Bank of Dallas? 20066 1 A. No, we never got a written comfort 2 letter. 3 Q. Let's go to your memo of August 17, 4 1987, which is A11079; and let's go down to the 5 fourth full paragraph. 6 Do you see that, sir? 7 A. Yes. 8 Q. Let me see. It says, quote, 9 "Mr. Twomey stated that it was possible that even 10 if United was not in compliance with its minimum 11 net worth requirements as of March 31, 1986, he 12 could give a, quote, 'comfort letter' saying that 13 the Home Loan Bank Board was not going to be 14 taking any action," and it says he preferred to do 15 it orally. Right? 16 A. Right. 17 Q. Is this the same discussion that is 18 reflected in Ms. Baugh's memo, do you think? 19 A. Sure. Same -- same thing. 20 Q. Did you know that Ms. Baugh was 21 preparing a memo of this meeting? 22 A. No. 20067 1 Q. Let's turn to the question of who is 2 doing third-party reviews. Let's look back at 3 Ms. Baugh's memorandum, A11078, under 4 Paragraphs 12 and 13, which is in the last page of 5 her memo. 6 Do you see that, sir? 7 A. Yes, I do. 8 Q. And, particularly, the statement about 9 Grant Thornton update. 10 Do you see that? 11 A. Right. 12 Q. Grant Thornton engagement. It says, 13 quote, "Art requested an update." 14 Do you see that, sir? 15 A. Yes, I do. 16 Q. Why are you requesting an update from 17 the Federal Home Loan Bank of Dallas about a -- 18 about a review of your books and records? 19 A. Well, they were -- the Federal Home 20 Loan Bank of Dallas was the one that was setting 21 the scope and hiring the reviewer. So, I wanted 22 to know what was happening since we hadn't heard 20068 1 from them. 2 Q. And in Paragraph No. 13 under 3 "high-yield bond review," do you see that, sir? 4 A. Right. 5 Q. Does that reflect the discussions you 6 told us about earlier where Mr. Twomey was 7 considering various Wall Street firms to conduct 8 the review? 9 A. Right. 10 Q. Okay. 11 A. And the scope of the review, yes. 12 Q. And let's go back to your memo -- it's 13 like a tennis match, isn't it -- A11079 and look 14 at Paragraphs 9 and 10 of your memo. 15 Do you see that on the second page? 16 A. Yes, I do. 17 Q. And are the same subjects addressed 18 there? 19 A. Yes, they are. 20 Q. Now, Mr. Berner, in October of 1987, as 21 we've heard several times, there was a substantial 22 stock market crash. Right? 20069 1 A. Yes. 2 Q. In the days or weeks after the crash, 3 were you able to determine precisely what the 4 financial effect would be on United? 5 A. No, we weren't because the market 6 went -- I think it fell 500 or so points one day, 7 and then it would go up a couple hundred points. 8 It was fluctuating very, very wildly in October, 9 November of 1987. 10 Q. And that would affect particularly the 11 arbitrage portfolio? 12 A. Right. It was a mark-to-market 13 portfolio. 14 Q. Were you concerned in the days after 15 United -- strike that. 16 Were you concerned in the days after 17 the stock market crash that United might fall 18 below its minimum regulatory net worth? 19 A. I certainly was. 20 Q. And did you initiate any contact with 21 the Federal Home Loan Bank of Dallas? 22 A. Yes, I did. 20070 1 Q. Why? 2 A. Well, I wanted to -- to kind of tell 3 them that there was a problem, that we might be 4 falling below our regulatory net worth, and just 5 to see -- keep them informed. Just keeping them 6 informed. 7 Q. Let me direct your attention to 8 Exhibit B1810. Could you review that document and 9 identify it for us? 10 A. This is a memo from me relating to a 11 meeting with Neil Twomey. The meeting took place 12 on October 22nd, and the memo was dated 13 October 23rd. 14 MR. VILLA: Your Honor, I move 15 Exhibit B1810 into evidence. 16 MR. RINALDI: No objection, Your Honor. 17 THE COURT: Received. 18 Q. (BY MR. VILLA) As you look at No. 1 19 there, the FADA real estate preferred stock plan, 20 do you see that? 21 A. Yes, I do. 22 Q. We talked a little bit about that. We 20071 1 may talk about it again. That isn't what I'm 2 focusing on. 3 Look at the second full paragraph and 4 Mr. Twomey's comments and his expression of the 5 view of the Federal Home Loan Bank of Dallas 6 toward net worth. 7 Would you read that paragraph to 8 yourself? And then let's discuss it. It's a 9 paragraph that begins "Neil told me that the 10 proposal..." 11 A. (Witness reviews the document.) Okay. 12 Q. Now, the sentence that I'm going to ask 13 you about is the one that starts, "Neil told me 14 that the people at the Dallas bank felt that, in 15 fact, virtually all of the large S&Ls were 16 effectively insolvent. He stated that they 17 were -- they all recognized that it was important 18 to reach a solution since, in fact, the large 19 Texas S&Ls were, in his word, unclosable." 20 Do you see that? 21 A. I do. 22 Q. Tell me what you remember about that 20072 1 discussion. 2 A. What I remember is that his view was -- 3 and I think the view of the Dallas bank -- that 4 all or virtually all of the Texas thrifts were 5 insolvent on a RAP basis and maybe even on a GAAP 6 basis. They were looking to other things. You 7 couldn't close all of the Texas thrift 8 institutions. 9 Q. What did you understand that they were 10 looking to? 11 A. Management. That's my understanding. 12 Q. Was this the only occasion on which 13 Mr. Twomey expressed to you the views that are set 14 forth in here that -- I don't want to characterize 15 the views -- the views that you have described 16 about the supervisors -- importance that the 17 supervisors placed on capital? 18 A. Was this the only time? No. He 19 expressed that view many times. 20 Q. Let's go back again to the Notice of 21 Charges and the claim that USAT mislead the 22 meeting regulators about its compliance with its 20073 1 minimum regulatory capital in order to stave off 2 regulatory intervention. 3 Do you remember that claim, sir? 4 A. I certainly do. 5 Q. What importance did it appear to you 6 that the regulators were placing on regulatory 7 capital? 8 A. The impression I had at this time was 9 that they were placing very, very little on 10 regulatory capital. They knew that the Texas 11 thrifts were, in Neil's words, effectively 12 insolvent. That's not what they were looking at. 13 Q. I think you've told us before who Joe 14 Selby was, but why don't you remind us. 15 A. He was, I guess, the second in command 16 at the Federal Home Loan Bank. I think he was in 17 charge of all the supervisory agents. 18 Q. I would like you to look at what's been 19 marked as Exhibit A12185 and identify that for the 20 record. 21 A. This is a letter from me dated 22 October 27th to Joe Selby. 20074 1 Q. October 27, 1987? 2 A. 1987, right. 3 Q. And does it enclose an agenda? 4 A. An agenda and our proposal relating to 5 the FSLIC/FADA real estate program. 6 MR. VILLA: Your Honor, I move A12185 7 into evidence. 8 MR. RINALDI: No objection. 9 THE COURT: Received. 10 Q. (BY MR. VILLA) Now, this is about eight 11 days after the stock market crash; is that right? 12 A. I think that's right, yes. 13 Q. Would you take a look at the agenda -- 14 strike that. 15 Who was asking -- who asked for this 16 meeting at the end of October 1985? 17 A. I believe we did. I mean, I know we 18 did. 19 Q. You know you did? 20 A. I know we did. 21 Q. What's the first item on the agenda 22 that you wanted to take up with the Federal Home 20075 1 Loan Bank of Dallas, number 1? 2 A. Our investment securities results and 3 the effect on net worth. 4 Q. And can you explain to me what in a -- 5 what you wanted to talk about? I see the topic. 6 Explain to me the significance of it. 7 A. Again, we had a stock market crash. 8 The net worth was fluctuating wildly; and there 9 was a possibility that we would be falling, in our 10 opinion, below our regulatory net worth. And we 11 wanted to discuss that with the Dallas bank. 12 Q. So, you scheduled a meeting with the 13 second highest ranking person in the Dallas bank 14 to raise that issue? 15 A. Yes, sir. 16 Q. And also attached is the FADA/FSLIC 17 proposal or an early version of it that we've 18 talked about; is that right, sir? 19 A. That's right. 20 Q. Now, I see from your letter that the 21 meeting was scheduled for October 30, 1987. 22 Right? 20076 1 A. Right. 2 Q. Let me show you the next document in 3 your book, which is T8022. It's in evidence at 4 Tab 396. 5 Do you have that before you? 6 A. Yes, I do. 7 Q. And we've looked at it once before. Is 8 this a -- does this consider various scenarios -- 9 strike that. 10 Does this consider various restrictions 11 that may be imposed upon USAT if it falls below 12 its minimum regulatory capital? 13 A. Right. This is -- as you remember, I 14 had gotten a memo from Tom Leahey; and this is my 15 reiteration of that memo to the recipients. 16 Q. What I'm interested in in the last page 17 of the memo, the consideration of the different 18 options. It starts at the bottom of Page 2 and 19 reads, "In order for United to meet its minimum 20 regulatory requirement as of October 31, 1987, we 21 might want to consider some of the following." 22 No. 1 is infusing capital from UFG to 20077 1 USAT. Do you see that? 2 A. Sure. 3 Q. That's the first option, isn't it? 4 A. That was one of the things to consider, 5 yes. 6 Q. Was UFG prepared at that time to infuse 7 capital into USAT if the regulators had directed 8 them to do so? 9 A. Yes, it was. 10 Q. I'm going to ask you to take a look at 11 what's been marked as Exhibit B1829 and ask you if 12 you can identify it for me. 13 A. This is a memo from me to the board of 14 directors dated November 2nd, 1987, reporting on 15 the October 30th, 1987 meeting with the Federal 16 Home Loan Bank. 17 MR. VILLA: Your Honor, I move B1829 18 into evidence. 19 MR. RINALDI: No objection, Your Honor. 20 THE COURT: Received. 21 Q. (BY MR. VILLA) Your book may have two 22 copies of 1829. If it does, you can disregard the 20078 1 next document, sir. 2 I would now like you to take a look at 3 what's been marked as A11088. Do you see that, 4 sir? 5 A. Yes, I do. 6 Q. Before I actually get to A11088, 7 looking at your memo of November 2nd, 1987, do you 8 see that the people representing the Federal Home 9 Loan Bank Board include Ginger Baugh? 10 A. Yes, I do. 11 Q. Now, I would like you to take a look 12 now at A11088. Do you have that before you? 13 A. Uh-huh. (Witness nods head 14 affirmatively.) 15 Q. And you've had an opportunity to look 16 at these handwritten notes prior to your testimony 17 today, haven't you? 18 A. Yes, I have. 19 Q. They have been identified in the 20 pretrial proceeding by Ms. Baugh as her 21 handwritten notes of the meeting. 22 Sir, can you tell whether this is the 20079 1 same meeting that's reflected in your memo, 2 Exhibit B1829? 3 A. I believe it is. 4 MR. VILLA: Your Honor, I move A11088 5 into evidence. 6 MR. RINALDI: No objection. 7 THE COURT: Received. 8 Q. (BY MR. VILLA) Now, let's turn first to 9 your notes, B1829. Look at the last paragraph of 10 your notes. 11 Do you see that? 12 A. Yes, sure. 13 Q. It reads, "At the meeting, it was also 14 resolved that United did not have any books and 15 records problem and that Grant Thornton had 16 completed their review with no finding of a 17 material deficiency"? 18 A. Right. 19 Q. Let's look at Ms. Baugh's memo, 11088. 20 The first line of text under where they have the 21 names of the participants says "Grant Thornton 22 reviewed books and records B&R were terrible. 20080 1 Fine now." 2 Do you see that? 3 A. Yes, I do. 4 Q. What do you recall, sir, of the 5 ultimate resolution of the review of the books and 6 records of United by Grant Thornton? 7 A. Grant Thornton concluded after 8 reviewing it that they were in fine shape, that 9 there was no problem with them. 10 Q. After this discussion on October 30, 11 1987, was there any further issue that you recall 12 being on the Grant Thornton independent 13 third-party review of the books and records of 14 United? 15 A. Not that I recall. I don't think there 16 was anything after this meeting. 17 Q. Let me direct your attention to the 18 second page of the handwritten notes of Ms. Baugh, 19 which is A11088. You'll see the first line. It 20 says "stock arbitrage, exception 1985"; and then 21 it's got two numbers for '86, '87. And it says 22 $50 million in red. 20081 1 Do you see that? 2 A. I do. 3 Q. Right below it is the following line: 4 "Management fearful of slipping below minimum NW 5 requirement." 6 Do you see that? 7 A. Sure, yes. 8 Q. Do you recall, sir, whether at the 9 meeting that you and the other senior people at 10 USAT scheduled with Mr. Selby shortly after the 11 stock market crash of 1987, you expressed to the 12 Federal Home Loan Bank Board senior supervisory 13 people any concerns with respect to what was going 14 to occur to USAT's net worth? 15 A. Absolutely. The first purpose of that 16 meeting was to describe to them the fact that we 17 might be falling below, even in our calculation, 18 our minimum regulatory net worth because of the -- 19 the stock market crash. That was the purpose of 20 the meeting, and that's what we told them. 21 Q. Was there any request at this meeting 22 from the regulators to curtail your activities, 20082 1 the activities of USAT? 2 A. No. There certainly weren't. 3 Q. Did the regulators request UFG to 4 infuse capital into USAT? 5 A. No, they did not. 6 Q. As UFG -- strike that. 7 As USAT began getting financial results 8 of the stock market crash of 1987, did you have 9 further discussions with Mr. Twomey about the 10 potential impact on United's financial condition? 11 A. I believe we did. 12 Q. Let me show you what's been marked as 13 B1855, which is in evidence as Exhibit -- I'm 14 sorry -- in evidence as Tab 1682. 15 Do you have that before you? 16 A. Yes, I do. 17 Q. Let me direct your attention to 18 Paragraph 3. 19 A. Do you want me to identify this or not? 20 Q. Yes, sir. Thank you. 21 A. I'm learning. This is a memo from me 22 relating to a meeting that I had with Neil Twomey 20083 1 on November 18th, 1987. 2 Q. Thank you, sir. 3 I would like to direct your attention 4 to Paragraph No. 3. Do you see that at the bottom 5 of the first page? 6 A. Sure. 7 Q. And, particularly, the sentence "I 8 discussed with Neil the possibility that United 9 will be going below its minimum regulatory net 10 worth either during 1987 or early 1988." And then 11 it goes on. 12 Do you see that? 13 A. Sure. 14 Q. Do you recall this meeting that 15 occurred, whether or not you can recall this date? 16 Do you recall meetings that occurred with 17 Mr. Twomey in the weeks and months after the stock 18 market crash addressing these issues? 19 A. Yes, I do. 20 Q. Tell us what you recall about those 21 meetings. 22 A. Well, again, I kept saying to Neil 20084 1 that, you know, if we aren't below our minimum 2 regulatory net worth at this point in time, we 3 probably will be falling below it by the end of 4 the year or the beginning of next year. 5 Q. Why were you telling your supervisory 6 agent the fact that United would be falling below 7 its minimum regulatory net worth? 8 A. I thought he should be informed of what 9 management felt and where United Savings was. 10 Q. Was another proposal for capital 11 enhancement subsequently filed with the Federal 12 Home Loan Bank Board? 13 A. Yes, it was. 14 Q. Let me direct your attention to the 15 next document, which is B1873 in evidence as 16 Tab 1684. Why don't you just tell us what that 17 is, and we'll go on. 18 A. Well, as we talked about before, this 19 is the letter from George Christopher to Stuart 20 Root dated December 1, 1987; and it's dealing with 21 the FSLIC/FADA proposal. 22 Q. And we talked about the fact at the 20085 1 outset that there were many different ways that 2 UFG could cause USAT to meet its minimum 3 regulatory net worth; and at this point, which one 4 of those ways were you pursuing? 5 A. This was to try to come up with some 6 concept other than infusion of cash which would 7 generate capital. 8 Q. At this point, was going to the public 9 market or a debt market a feasible alternative? 10 A. It was not a feasible alternative. You 11 couldn't raise any money. 12 Q. It was not an alternate? 13 A. Not for a Texas thrift. 14 Q. Let me show you what's been marked as 15 B1864 which is in evidence at Tab 283. I believe 16 Mr. Guido may have shown you that. 17 Do you see that, sir? 18 A. Yes, I do. 19 Q. What is that? 20 A. This is the letter from 21 Prudential-Bache to Mr. Twomey; and it has the 22 report on the high-yield bond, junk bond 20086 1 portfolio. 2 Q. Did Mr. Twomey ever complain to you or 3 anybody at USAT that you're aware of that the 4 report did not address all the issues that he was 5 concerned about? 6 A. No. In fact, after he received the 7 report, he said everything was fine. 8 Q. And what do you recall about the basic 9 conclusions in the report? 10 A. That there was no problem with our 11 high-yield bond portfolio or the way it was 12 managed. 13 Q. So, let's review where we are. We're 14 at November of 1987, and you've been working on -- 15 you've been dealing with the regulators for 16 approximately 18 months; is that right? 17 A. That's about right, yeah. 18 Q. From the middle of 1986? 19 A. Yeah. Jim Pledger left somewhere in 20 the middle of 1986. About 18 months later. 21 Q. For the last 18 months or so, what 22 position had the regulators taken about USAT and 20087 1 whether it was below its minimum regulatory net 2 worth? 3 A. Again, they were taking the position 4 all along that United was below its minimum 5 regulatory net worth. 6 Q. And did Mr. Thomas -- what did 7 Mr. Thomas suggest in his letter of April 16, 8 1987, as to what the regulators would demand from 9 United? 10 A. Some sort of a supervisory document or 11 letter. 12 Q. And what did the regulators propose in 13 lieu of a supervisory agreement? 14 A. That we bring in outside consultants to 15 look at our high-yield bond portfolio and our 16 books and records. 17 Q. And what was the result of those 18 third-party reviews of those two aspects of 19 United's operations? 20 A. That there was no problem with either 21 one of those aspects and everything was fine. 22 Q. Now, after the stock market crash, had 20088 1 you -- had USAT made any approaches to the 2 regulators to express concerns about falling below 3 its minimum regulatory net worth? 4 A. Well, as we've just seen, both 5 immediately after the crash when we went up to 6 Dallas and then subsequently at a breakfast 7 meeting I had with Neil and I think also at 8 various other times. But specifically, those are 9 two meetings that I know of. 10 Q. And had United submitted proposals such 11 as the restructuring proposal that we talked about 12 outlining the financial strains that it was under? 13 A. Sure. 14 Q. Now, as of this point in time, had the 15 Federal Home Loan Bank of Dallas demanded that -- 16 or directed United to execute a supervisory 17 agreement? 18 A. No, they had not. 19 Q. You told us a little bit about 20 PennCorp, P-E-N-N-C-O-R-P. Right? Penn Corp? 21 A. Right. 22 Q. And PennCorp was -- I don't want to put 20089 1 words in your mouth. Tell us again. What was the 2 relationship between PennCorp and United Financial 3 Group? 4 A. PennCorp was a large creditor of United 5 Financial Group. 6 Q. When you say "large," what -- in terms 7 of dollars, can you give us an estimate, a range? 8 A. I think it was in the 60-million-dollar 9 or more range. 10 Q. And do you recall a man named Jack 11 Hughes? 12 A. Yes, I do. 13 Q. Who is Jack Hughes? 14 A. He worked for PennCorp. 15 Q. Shortly after the time of the October 16 stock market crash, did PennCorp approach UFG 17 about the outstanding loans that PennCorp had to 18 UFG? 19 A. Yes, they did. 20 Q. Let me direct your attention to what's 21 been marked as Exhibit B1836 and ask you to review 22 that and tell us what it is. 20090 1 A. It's a memo from me dated November 5, 2 1987, relating a telephone conversation with Barry 3 Sterling, who was one of the PennCorp directors. 4 MR. VILLA: Your Honor, I move B1836 5 into evidence. 6 MR. RINALDI: No objection. 7 THE COURT: Received. 8 Q. (BY MR. VILLA) Now, let me ask you to 9 look at B1846 and ask you to identify that. 10 A. This is a memo from me dated 11 November 13, 1987, relating to strategic planning 12 decisions. 13 Q. And I don't believe this is in 14 evidence. 15 MR. VILLA: I move B1846 into evidence. 16 MR. RINALDI: No objection, Your Honor. 17 THE COURT: Received. 18 Q. (BY MR. VILLA) I would like to direct 19 your attention to Paragraph 5 involving PennCorp 20 debt. 21 Do you see that? 22 A. Yes, I do. 20091 1 Q. And would you read that to yourself? 2 And then tell us what you were advocating with 3 respect to the PennCorp debt. 4 A. (Witness reviews the document.) What I 5 was advocating was either -- well, to somehow 6 restructure the debt, either by restructuring its 7 terms or by trying to buy the debt back at a 8 discount. And I make reference to the fact that 9 based on conversations I had with Mr. Hughes and 10 other people had with Mr. Hughes, that he was 11 expecting us to come to them with some sort of a 12 proposal like that. 13 Q. Let me direct your attention to 14 Exhibit T2011, which is in evidence at Tab 1366. 15 This is a memo dated December 11, 1987, from Mike 16 Crow to a number of people including you. Right? 17 A. Yes, that's correct. 18 Q. Do you recall, sir, whether there were 19 negotiations that were conducted with respect to 20 the payoff of the PennCorp debt at a discount? 21 A. Sure. 22 Q. Who was the primary person handling 20092 1 those negotiations from the UFG standpoint? 2 A. I don't remember if it was Mike Crow or 3 Jenard. I think it was probably Mike Crow, but 4 I'm not positive on that. Jenard Gross. 5 Q. Did you recognize in late 1987 that the 6 federal regulators could request UFG to make a 7 capital infusion into USAT? 8 A. Sure. 9 Q. At that point, had they done so? 10 A. No. They had not requested us to do 11 anything. 12 Q. You were not on the UFG board at that 13 point, were you, sir? 14 A. No, I was not. 15 Q. Would you tell me generally about the 16 debt and preferred stock interest in USAT and UFG? 17 A. When you say "preferred stock," you 18 mean what was outstanding at that time? 19 Q. Correct. 20 A. Oh, goodness. 21 Q. Let's deal with the UFG level because I 22 don't think USAT is significant except to the 20093 1 extent that USAT stock may provide security for 2 the UFG debt. 3 A. Right. Well, there was the PennCorp 4 debt which was, as I say, somewhere in the 50-, 5 60-million-dollar range is my recollection. That 6 was a long-term debt. There was what we called 7 public debt. There had been, a number of years 8 ago by a predecessor, debentures that were sold; 9 and I'm not sure. I think that might have been in 10 excess of 20, $30 million. There was what we 11 called a "22 sellers" note. I think that was 12 about 12 or $15 million. That's just a 13 recollection. The 22 sellers were people that had 14 owned an interest in, also, a predecessor of 15 United Savings. Then there was the McReynolds 16 note, which was smaller. And the "22 sellers" 17 note debt was secured by USAT stock. Then on -- 18 preferred stock, also? 19 Q. Yes. Well, you don't have to do it 20 from memory, sir. We have a memo. 21 I would like to know was the debt what 22 we call cross-defaulted? 20094 1 A. A lot of it was. 2 Q. What does it mean to be 3 cross-defaulted? 4 A. It means if you default on any one debt 5 instrument, you would be defaulting on all of the 6 others. 7 Q. Did any of the debt instruments have, 8 as security, stock of United Savings Association 9 of Texas? 10 A. My recollection is the 22 sellers note 11 had either 50 or 51 percent of the USAT stock 12 which was securing the debt. 13 Q. Mr. Berner, I would like you to look at 14 Exhibit B3714 and tell us what that is. 15 A. That would have made it easier. 16 Q. It would have made it longer, I'll tell 17 you that. I wanted the short form. 18 A. This is a memo from me dated 19 December 14th relating to the debt and preferred 20 stock outstanding as of that time. 21 MR. VILLA: Your Honor, I move B3714 22 into evidence. 20095 1 MR. RINALDI: No objection, Your Honor. 2 THE COURT: Received. 3 Q. (BY MR. VILLA) What conclusions, if 4 any, did you reach of the potential impact of a 5 default by UFG on any of its debt? 6 A. My conclusion was that it would be a 7 disaster. 8 Q. How would that disaster be effectuated? 9 A. Well, if you defaulted on any of the 10 notes -- as I say, they all were cross-defaulted. 11 Certain of the notes were secured by USAT stock. 12 So, whoever had that security would be foreclosing 13 on the security. So, they would be attempting to 14 get 50 or 51 percent of the USAT stock. Everybody 15 would be grabbing at the UFGI money to see what 16 was going to happen, and UFGI probably would have 17 to file for bankruptcy at that point. 18 Q. Now, we've had some -- let me ask you: 19 Do you recall anything about a net operating loss? 20 A. Yes. 21 Q. And what -- did either UFG or USAT have 22 a net operating loss? 20096 1 A. UFG had a large net operating loss. 2 Q. Do you recall, sir, what would 3 happen -- I know you're not a tax specialist -- 4 but what would happen or what there was concern 5 would happen if a majority of the stock of one or 6 both of these corporations changed hands? 7 Do you know, sir, what the concern was 8 about whether that net operating loss would be 9 dissipated? 10 A. Yeah. Under the tax laws, if there's a 11 change of control, then what happens is that, in 12 effect, you can't utilize the net operating loss. 13 You can only utilize it a little piece at that 14 time. So, the value of that net operating loss 15 would have been gone. 16 Q. Do net operating losses have value in 17 terms of the ability to shelter income? 18 A. Sure. That's what it does. It 19 shelters your income. 20 Q. Do you recall the size of the net 21 operating loss that USAT or UFG had during this 22 time period? 20097 1 A. I don't. It was very large. I know it 2 was very large. 3 Q. Now, we've had some questions in this 4 case whether the failure to pay dividends on 5 cumulative preferred stock amounts to a default 6 under the applicable agreements here. 7 Can you explain to us what's cumulative 8 preferred stock? 9 A. Cumulative preferred stock is a 10 preferred stock, which means it's -- it's entitled 11 to benefits in front of the common stock; where 12 dividends, if they are declared by the board, 13 would be paid and if they are not declared by the 14 board, they accumulate. Before you can ever pay a 15 dividend on the common stock, you have to pay off 16 all the dividends that have accumulated on the 17 preferred stock. 18 Q. Does the board have to declare a 19 dividend on preferred stock? 20 A. No. In fact, that's one of the reasons 21 why companies issues preferred stock as opposed to 22 debt. On preferred stock you don't have to pay 20098 1 the dividends; whereas in debt, you have to pay 2 the interest or you default. 3 Q. So, let me ask you, sir: If you failed 4 to declare a dividend on preferred stock, is that 5 a default that sets out this chain of events that 6 we've talked about? 7 A. No. It's not a default at all. It 8 just accumulates. Before you can pay dividends on 9 the common stock, you have to pay the dividends on 10 the preferred that have accumulated. 11 Q. We've also had some questions about the 12 failure to make sinking funds payments. 13 What's a sinking fund? 14 A. Well, a sinking fund on any sort of 15 instrument is where you put money aside to buy 16 back that instrument or a portion of that 17 instrument over time. And on the preferred stock, 18 it would be -- you would put money aside to buy 19 back that preferred stock over some period of 20 time. 21 Q. What happens if a company does not make 22 a scheduled sinking fund payment? 20099 1 A. Same thing as not making the preferred 2 stock dividend. Nothing happens except it 3 accumulates. And before you can do anything with 4 the common stock, you have to take care of all the 5 preferred stock. 6 Q. Is it a default to fail to make a 7 sinking fund payment, a scheduled or required 8 sinking fund payment? 9 A. No, it's not. 10 Q. As a result of the 1987 year-end 11 financials, did you believe that USAT was meeting 12 its regulatory capital requirements? 13 A. As a result of its financials, no, it 14 was not. 15 Q. Let me direct your attention to 16 Exhibit B1983 and ask you if you can identify 17 that. 18 A. It's a memo from me relating a 19 conversation with Neil Twomey. It is dated 20 February 2nd, 1988. 21 MR. VILLA: Your Honor, I move B1983 22 into evidence. 20100 1 MR. RINALDI: No objection. 2 THE COURT: Received. 3 Q. (BY MR. VILLA) Let me direct your 4 attention, sir, to the third paragraph. We've 5 talked a little about capital forbearance 6 applications. I'm not going to take you through 7 it again, but let me direct -- let me just ask you 8 about this. It says, "I talked to Neil about our 9 capital forbearance application and type of 10 comfort letter. He said he would have to talk to 11 Selby about it, but he thought that he would be in 12 a position to tell anyone that desired to know 13 that the Dallas bank would not be doing anything 14 to United." 15 Do you see that, sir? 16 A. Sure do. 17 Q. Do you recall the conversations that 18 you were having with Mr. Twomey in the spring of 19 1988 about whether or not the Federal Home Loan 20 Bank of Dallas was in a position to tell anybody 21 that they were not going to do anything to United? 22 A. Yes. Again, we either knew at this 20101 1 point in time or we would soon know that we were 2 going to be below our minimum regulatory net 3 worth; and there was a concern as to what would 4 happen with Wall Street. We filed a capital 5 forbearance application which wasn't being acted 6 upon. So, we needed to know, in case something 7 happened, would the Dallas bank be willing to tell 8 Wall Street that we were okay. Mr. Twomey was 9 saying here that he would tell anyone that they 10 weren't going to do anything to United. 11 Q. Let me direct your attention to the 12 next document, which is Exhibit B2020 in evidence 13 at Tab 1406. 14 Can you tell us what that is, sir? 15 A. That's the capital forbearance 16 application. 17 Q. Filed by United Savings Association of 18 Texas. Right? 19 A. Right. 20 Q. I would like to direct you to 21 Paragraph 25 -- sorry. Let me give you the Bates 22 number. OW091246. 20102 1 A. Okay. 2 Q. Can you look at the fifth line from the 3 bottom down there? And tell me, if you can, what 4 United was telling the Federal Home Loan Bank of 5 Dallas that it was projecting for its losses for 6 the upcoming year? 7 A. This is the line "net operating 8 income"? 9 Q. Yes, sir. On a quarter-by-quarter 10 basis, what was United projecting its losses for 11 for the upcoming year 1988 in this application to 12 the Federal Home Loan Bank of Dallas? 13 A. It's hard to read, but it looks like 14 over 20 million per quarter or 28 million per 15 quarter. 16 Q. So, if my math is right, it's somewhere 17 between 80 and $110 million in projected losses 18 for the year 1988; is that right? 19 A. That's correct. 20 Q. And this was filed with the Federal 21 Home Loan Bank of Dallas? 22 A. Right. This was our capital 20103 1 forbearance application. 2 Q. You can skip the next document in your 3 book, sir. Let me direct your attention, sir, to 4 Exhibit B3722 and ask if you can identify that 5 document. 6 A. Yeah. This is a memo from me dated 7 March 16th, 1988, relating to the preferred stock. 8 MR. VILLA: Your Honor, I move B3722 9 into evidence. 10 MR. RINALDI: No objection, Your Honor. 11 THE COURT: Received. 12 Q. (BY MR. VILLA) Do you recall, sir -- 13 what's being reflected in this memo, both in the 14 text of the memo and in the handwritten notes? 15 A. Well, the text is a statement by me 16 saying we should consider not paying the dividends 17 on the Series A and Series B preferred; and then 18 the handwritten note says, "Don't pay anything on 19 A or B." 20 Q. Did there ever come a time when United 21 Financial Group made a decision as to whether or 22 not to declare preferred stock dividends on their 20104 1 Series A or Series B preferred stock? 2 A. To stop declaring dividends? 3 Q. To stop -- 4 A. Somewhere around this time, that 5 decision was made. 6 Q. Would this prompt a default on all of 7 UFG's debt? 8 A. No. 9 Q. Would this be, in your judgment, an act 10 of insolvency for a corporation not to declare a 11 dividend on a preferred stock? 12 A. No. 13 Q. By failing to declare a dividend, what 14 would it do to the current cash situation of the 15 corporation? 16 A. Obviously, it would improve it because 17 you wouldn't be paying out money on dividends. 18 You would be keeping that money at the UFG level. 19 Q. Was there a concern at this time that 20 UFG might be running out of cash? 21 A. Yes, there was. 22 Q. And had UFG been involved in 20105 1 discussions with respect to the restructure of its 2 debt? I'm talking about the PennCorp debt and 3 some of the other debt. 4 A. Yes. Around this time, there was 5 discussion about the PennCorp debt; and I believe 6 we were also talking to the 22 sellers and 7 McReynolds about their debt. 8 Q. Let me ask you to take a look at what's 9 been marked as Exhibit B2098. 10 Do you see that, sir? 11 A. Yes, I do. 12 Q. And what is that? 13 A. It's a memo from me dated March 29th, 14 1988, relating to the debt restructuring. 15 MR. VILLA: Your Honor, we move B2098 16 into evidence. 17 MR. RINALDI: No objection. 18 THE COURT: Received. 19 Q. (BY MR. VILLA) Can you tell me what 20 thinking you had here about the question of 21 whether it would be beneficial to the stockholders 22 of UFG, whoever those stockholders may be, to pay 20106 1 off the PennCorp debt and avoid defaults? 2 A. Whether I thought it was beneficial? 3 Q. No. What was your thinking about this 4 issue? 5 A. My thinking was if the PennCorp debt or 6 any debt defaulted, all of the other debt would 7 cross-default. Everybody would be grabbing for 8 USAT stock and all the rest of the money; and that 9 would probably require abruptly filing which would 10 have, in effect, wiped out the UFG stockholders 11 probably. 12 Q. Now, sir, did you recognize at this 13 time that the FSLIC may succeed to the ownership 14 of the stock of UFG through, for example, an open 15 bank assistance? 16 A. That was certainly a possibility. We 17 were discussing that at that time. 18 Q. In fact, if you look at Paragraph No. 4 19 and the parenthetical, the third line down says, 20 "Even if FSLIC ultimately takes 50 to 90 percent 21 of UFG stock..." Right? 22 A. Right. Sure. That was certainly in my 20107 1 thinking. 2 Q. And why would FSLIC end up with 50 to 3 90 percent of the stock? 4 A. My understanding of what open bank 5 assistance was, if they did that, they would end 6 up with the majority of the stock. 7 Q. And was open bank assistance one of the 8 things that the management, board of directors of 9 UFG and USAT, were doing to try to save USAT? 10 A. It was one of the things we were 11 working on. 12 Q. Even though the consequences might be 13 essentially wiping out the current shareholders? 14 A. You have something left, but that's 15 correct. Even though it would substantially wipe 16 them out, that was something we were looking at. 17 Q. Now, if you used -- let me ask you, 18 sir: If you used USAT's current cash -- strike 19 that. 20 If you used UFG's current cash to 21 infuse capital into USAT and exhausted UFG's cash, 22 what was the consequence that you saw for the 20108 1 future of UFG? 2 A. Well, at the next interest payment for 3 whatever note we had, we would have had to 4 default. All the other loans would have been 5 cross defaulted. The people that had their loans 6 secured by the USAT stock would have been 7 foreclosing. Every other creditor would have been 8 going after the cash, including the cash that had 9 been put down into USAT. They probably would have 10 treated that as some sort of an act of bankruptcy, 11 and they would have been going to try to get that 12 cash brought back up. 13 Q. Let me ask you, sir -- I'm sure you 14 don't have on the tip of your tongue the size of 15 the repo lines that United Savings Association had 16 with various houses on Wall Street. But do you 17 have any sense as to what the effect would have 18 been on USAT's repo lines and the way USAT funded 19 itself if there had been the kind of default, 20 cross default and precipitation into bankruptcy 21 that we've talked about here? 22 A. Obviously, I'm not an expert in it; but 20109 1 I believe they would have pulled all those repo 2 lines. 3 Q. So, in your judgment, sir, did it make 4 any difference who the shareholders of UFG were in 5 deciding whether or not it was a good business 6 decision to pay off the PennCorp debt? 7 A. Didn't make any difference whatsoever. 8 It was a good business decision. 9 Q. Even if the shareholders were 10 ultimately the FSLIC? 11 A. Right. 12 Q. You recognized that in the future, the 13 FSLIC may direct UFGI to infuse capital into USAT. 14 Right? 15 A. Absolutely. 16 Q. But it hadn't done so yet? 17 A. They had not. 18 Q. What was your assumption at this point 19 in time as to what UFG would do if such a request 20 were made of them? 21 A. We would have infused it. We would 22 have tried to talk them out of it, but we would 20110 1 have infused it. 2 Q. Why would you have tried to talk them 3 out of it? 4 A. I think it would be a bad business 5 decision; but if they had told us to do it, we 6 were ready to do it. 7 Q. I would like to direct your attention 8 to the 1988 form -- actually, it's the 1987 Form 9 10K which is in evidence at A3023, Tab 79. 10 MR. GUIDO: Is that 23 or 23.1? 11 MR. VILLA: 3023. It's the short one. 12 We don't need all the exhibits for this. 13 Q. (BY MR. VILLA) Do you have that, sir? 14 A. Yes, I do. 15 Q. If you look at Page 2 of the 10K under 16 "current condition," does UFG -- what does UFG say 17 about whether or not USAT meets its minimum 18 regulatory capital requirements as of September 30 19 and December 31, 1987? 20 A. Seeing the preliminary discussions 21 between United Savings and the Federal Home Loan 22 Bank of Dallas, they believed we would have failed 20111 1 it as of September 30 and December 31st. 2 Q. Now, I would like to direct your 3 attention to the last paragraph on Page 2 that 4 deals with the -- the obligation of UFG as a 5 holding company to maintain USAT's capital. 6 Do you see that, sir? 7 A. Yes, I do. 8 Q. What does that describe? 9 A. Well, it describes what would happen 10 if, in fact, we were requested to make a payment 11 into USAT, if UFGI was requested to make a payment 12 into USAT. 13 Q. The series of cross-defaults and 14 bankruptcy and possibly pulling of the repo lines 15 that we've just gone through over the last ten 16 minutes? 17 A. Right. That's correct. 18 Q. Let me direct your attention to 19 Footnote 14 on Page 59 of this document. 20 MR. GUIDO: What footnote was that? 21 MR. VILLA: Footnote 14 on Page 59. 22 Q. (BY MR. VILLA) Do you have that before 20112 1 you, sir? 2 A. Yes, I do. 3 Q. Would you read that footnote? Not 4 allowed. Just read it to yourself. 5 A. Yes. 6 Q. Is UFG stating in this footnote that it 7 would not infuse capital into USAT? 8 A. No. It's not saying that at all. 9 Q. What is it saying? 10 A. It's saying if requested, it would have 11 to do it. If they do it, it then goes on to 12 describe the fact that it might not be able to 13 meet its obligations to other creditors. 14 Q. Now, Mr. Berner, do you recall some 15 occasions on which Mr. Twomey came to the board of 16 United Financial Group -- I'm sorry -- United 17 Savings Association of Texas? 18 A. Yes, I do. 19 Q. Let me ask you to look at 20 Exhibit T8049, which is in evidence at Tab 405. 21 THE COURT: We'll take a short recess. 22 20113 1 (Whereupon, a short break was taken 2 from 3:01 p.m. to 3:25 p.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, Your Honor. 8 Q. (BY MR. VILLA) Mr. Berner, when we 9 broke off, we were looking at T8049, which is 10 Tab 405. 11 Do you have that before you, sir? 12 A. Yes, I do. 13 Q. For the record, could you tell us what 14 that is? 15 A. These are minutes of a special meeting 16 of the board of United Savings dated March 30th, 17 1988. 18 Q. And can you see whether Mr. Twomey was 19 present at the meeting? 20 A. Yes, he was. 21 Q. I would like to direct your attention 22 to the sixth and seventh paragraph, if I counted 20114 1 them right, the one that begins with "Mr. Gross." 2 Would you read those two to yourself? And then 3 I'm going to ask you some questions. 4 A. (Witness reviews the document.) 5 Q. Now, sir, was this the meeting at 6 which -- we've had considerable testimony about 7 this meeting; and, in fact, I think I've asked you 8 some questions about it before. 9 Was this the meeting in which 10 Ms. Carlton presented the results of her 11 examination? 12 A. Yes, it was. 13 Q. And do you recall what the results were 14 as to whether or not USAT was below its minimum 15 regulatory capital? 16 A. Yeah, it was certainly the Federal Home 17 Loan Bank's position that we were below our 18 minimum regulatory net worth capital at this time; 19 and I think it was our position, also, that we 20 were below it. 21 Q. And, in fact, the discussion refers to 22 the capital forbearance application that we've 20115 1 already seen; is that right? 2 A. Yes. Mr. Gross was dealing with that. 3 Q. Why was the capital forbearance 4 application necessary? 5 A. If you fall below your minimum 6 regulatory net worth, you need to get some 7 forbearance. That's what the application was for. 8 Q. Now, Paragraph 7 addresses the issues 9 that I've devoted this last hour and a half to 10 which is whether or not the federal regulators 11 intended to take regulatory action against USAT 12 because it was below its minimum regulatory 13 capital. 14 What did Mr. Twomey -- tell us what 15 happened at the meeting where it says, quote, 16 "Mr. Berner asked Mr. Twomey whether or not there 17 would be any interim action taken in view of the 18 association falling below its required minimum 19 capital. Mr. Twomey stated that the Federal Home 20 Loan Bank of Dallas does not expect to take any 21 action." 22 Do you see that? 20116 1 A. Yes, I do. 2 Q. Do you recall Mr. Twomey appearing at a 3 meeting and addressing those issues? 4 A. Yes, I do. Obviously, we were 5 concerned. We were below our minimum regulatory 6 net worth. We were a public company. United 7 Financial Group was a public company. We were 8 worried about what might happen. We were worried 9 whether or not the Bank Board was going to take 10 any regulatory action because we were below 11 minimum regulatory net worth. Mr. Twomey stated 12 they weren't going to do anything when I asked 13 that question. 14 Q. Did this differ in any way from the 15 position that the regulators had expressed now 16 since June of 1986 as to whether or not they were 17 going to take action against USAT because it fell 18 below its minimum regulatory capital standards? 19 A. This was absolutely consistent with 20 what they had said all along. 21 Q. Now, Mister -- and Mr. Twomey told that 22 to the entire board of directors. Right? 20117 1 A. That's correct. Everybody else was at 2 that meeting. 3 Q. Now, Mr. Berner, we talked about the 4 fact that for a period of time, USAT lost to its 5 then living memory the stipulation. 6 Do you remember that, the net worth 7 maintenance stipulation? 8 A. Yes, I do. 9 Q. Did there come a time when you explored 10 with the lawyers for UFG the question of what 11 steps FSLIC would ordinarily take before directing 12 any capital infusion by a holding company into a 13 subsidiary? 14 A. Yes, I do. That was a concern of mine, 15 and I remember asking the lawyers. 16 Q. Let me direct you to Exhibit B2139 and 17 ask you to identify that document for us. 18 A. This is a letter from Tom Leahey of 19 Kirkpatrick & Lockhart to me dated April 13th, 20 1988. 21 MR. VILLA: Your Honor, I move B2139 22 into evidence. 20118 1 MR. RINALDI: No objection, Your Honor. 2 THE COURT: Received. 3 Q. (BY MR. VILLA) I would like to direct 4 your attention to the second full paragraph. He's 5 sending you some documents and it says, quote, 6 "You will note that both agreements provide for 7 notification by the FSLIC after a default occurs" 8 and then it goes on. 9 Do you see that? 10 A. Yes, I do. 11 Q. Why is it you were exploring what the 12 mechanisms were for FSLIC to exercise whatever 13 rights it might have under a net worth maintenance 14 obligation? 15 A. First of all, I wanted to know just 16 what would happen if they insisted that UFGI 17 infuse capital into USAT; and I wanted to know 18 what we could do if they did that, how we could 19 protect ourselves and what time periods we would 20 have to react to the request to infuse capital. 21 Q. At this point in time, did you believe 22 that UFG was required to infuse capital into USAT 20119 1 unless there was at least some notification from 2 FSLIC? 3 A. No. Unless they notified us, it wasn't 4 my opinion that we had to infuse capital. 5 Q. And that's why you were seeking 6 Mr. Leahey's assistance on what the mechanisms 7 were? 8 A. That's correct. I had asked Tom to get 9 me that opinion, and he sent me this information. 10 Q. Let me direct your attention to what's 11 been -- A11098, Tab 1693, which I believe was 12 received in evidence either yesterday or today. 13 It's Ms. Baugh's notes of May 3, 1988. 14 Do you have that before you, sir? 15 A. Yes, I have that. 16 Q. Let me direct your attention to the 17 second page of those notes and the 18 second-to-the-last line where it says, 19 "Acquisition debt. Get rid of $53 million for 20 $2 million. GB asked for written plan." 21 Do you see that? 22 A. Yes, I do. 20120 1 Q. And George Barclay was at that meeting? 2 A. Right. That's who GB is. 3 Q. Do you recall the meeting where 4 Mr. Barclay asked you for a written plan? 5 A. Sure. 6 Q. What does this refer to, getting rid of 7 the 53-million-dollar acquisition debt? 8 A. This refers to our proposal for 9 acquisition discount. 10 Q. And he asked you to submit something in 11 writing? 12 A. Right. He said before they could act 13 on it, he wanted to see a plan in writing as to 14 what we were proposing. 15 Q. Before they could act on it, were you 16 asking for their approval or concurrence in 17 connection with this? 18 A. Sure. 19 Q. And did he make any commitments that 20 they would, in fact, review it and give you their 21 judgment on what you should do? 22 A. Sure. He did. 20121 1 Q. Let me ask you to look at what's been 2 marked as T2012 at Tab 74. Can you tell us what 3 that is for the record? 4 A. It's a letter to me from Mr. Barclay 5 dated May 5, 1988. 6 Q. And what does it enclose? 7 A. It encloses a plan, a memorandum 8 relating to a plan to buy down the debt at a 9 discount. 10 Q. And the PennCorp debt and related 11 debt -- we call it PennCorp debt; but it's the 12 debt of the holding company, correct? 13 A. Right. It was more than just the 14 PennCorp debt. 15 Q. The first clause in the letter, 16 "pursuant to our discussion of May 3, 1988"? 17 A. Right. 18 Q. And that also refers to the meeting 19 that we've just seen the notes of? 20 A. That's correct. 21 Q. So, let's try to fix in time in May of 22 1988 where USAT and UFG stood. 20122 1 What did you believe USAT's chances 2 were of being a survivor at that point? 3 A. Again, we had been told all along that 4 we were going to be a survivor, that we were a 5 surviving institution; we had quality management 6 and we would be surviving. 7 Q. Did you see any threat to that survival 8 if there were a series of defaults set off by 9 UFG's failure to meet its debt obligations? 10 A. Right. As we talked about before, if 11 the debt had defaulted and everybody 12 cross-defaulted and people started grabbing for 13 the money and UFG might have contemplated filing a 14 bankruptcy petition, that probably would have 15 pulled the repo lines; and the USAT stock was 16 securing some of the notes. It would have been a 17 disaster. 18 Q. UFG had an application pending for a -- 19 strike that. 20 Do you know whether UFG actually needed 21 approval from the Federal Home Loan Bank of Dallas 22 to utilize its assets to pay down its debt at a 20123 1 discount? 2 A. I don't believe that it actually needed 3 approval. 4 Q. Why is it that you went to the Federal 5 Home Loan Bank of Dallas and sought their 6 approval? 7 A. Well, there was a likelihood or a 8 chance that UFG would have to infuse capital into 9 USAT. And we wanted to make sure that before we 10 paid out 20 million or $30 million in cash, that 11 the Dallas bank knew what we were doing and that 12 they approved of what we were doing. 13 Q. What would -- what would happen to 14 UFG's ability to infuse any capital into USAT if 15 it paid out 20 or $30 million in cash to pay off 16 its debt at a discount? 17 A. Well, the cash would have been gone. 18 So, obviously, the ability to put money down into 19 USAT -- we would have had less cash, but you also 20 would have had less people grabbing at the money. 21 Q. Let me ask you to skip over one 22 document, and then we'll come back to it. I would 20124 1 like you to take a look at B2191 at Tab 465. We 2 have two letters dated May 13, 1988; and this is 3 the second of the two in your book. For the 4 record, this is a letter from Neil Twomey to the 5 board of directors of United Savings Association 6 of Texas. 7 Do you see that? 8 A. Yes, I see that. 9 Q. And do you see that -- what does this 10 letter involve? 11 A. This is a letter to the board of United 12 Savings, and Mr. Twomey is stating that United 13 Savings had fallen below its minimum regulatory 14 net worth and that under the regulations, certain 15 corrective actions could be required. 16 Q. Let me direct your attention to the 17 second page of this letter. What does Mr. Twomey 18 say as to whether or not any action will be taken 19 against United Savings Association of Texas in 20 view of its failure to fall below its minimum 21 regulatory capital requirement? 22 A. He says, "No action will be taken at 20125 1 this time in regards to the notice of violation." 2 Q. This is consistent with three to four 3 memos of yours that we've seen as well as 4 statements that Mr. Twomey made at the board 5 meeting. Right? 6 A. That's correct. This is absolutely 7 consistent with that. 8 Q. Let me direct your attention now to the 9 document that's one forward in your book. It's a 10 letter of May 13, 1988, from Neil Twomey, this 11 time to the United Financial -- the board of 12 directors of United Financial Group, Inc. It's 13 been admitted in evidence at T2031 at Tab 71 -- 14 2013 at Tab 71. 15 Do you see that, sir? 16 A. Yes. 17 Q. Did you -- tell us first what -- this 18 is the second of two letters with the same date 19 and this one goes to the board of the holding 20 company. Right? 21 A. That's right. This was going to United 22 Financial Group's board of directors. 20126 1 Q. And this letter, T2013, involves the 2 question of the net worth maintenance, correct? 3 A. That's right. 4 Q. Okay. Did you consider this letter, 5 Mr. Berner, a direction or even a request for UFG 6 to infuse its capital into USAT in order to 7 maintain USAT's regulatory net worth? 8 A. Absolutely not. 9 Q. Did Mr. Twomey ever tell you that he 10 regarded it as a request that you infuse capital 11 into USAT to maintain its net worth, the May 13 12 letter? 13 A. No, he didn't. 14 Q. Let me show you, sir, the next document 15 which is Exhibit B2199 which has been admitted in 16 evidence at Tab 1694. Just for the record, tell 17 us what it is. 18 A. It's a memorandum from me dated 19 May 18th, 1988, relating a conversation with 20 Neil Twomey. 21 Q. I would like you to look at the third, 22 fourth, and fifth paragraphs and tell us what that 20127 1 relates to. 2 A. (Witness reviews the document.) Well, 3 it relates to the fact that Neil Twomey had said 4 to me that he was forwarding a letter stating 5 that -- dealing with the infusion of capital into 6 USAT. And I asked him, "Well, what effect would 7 our PennCorp application have based on the 8 letter?" And he said it would have no effect 9 whatsoever. And I told him we expected to pay off 10 the PennCorp debt by the end of June. And then I 11 subsequently had a conversation with someone else 12 at the Dallas bank who told me that the thought of 13 paying off the PennCorp debt at a discount was a 14 splendid idea, that this was something that should 15 be done. 16 Q. This is Mr. Casavantes? 17 A. Yeah, David Casvantes. 18 Q. Do you know whether he worked in the 19 application section of the Federal Home Loan Bank 20 of Dallas? 21 A. I think that's where he worked. 22 Q. Now, this is two weeks, approximately, 20128 1 after UFG had submitted its voluntary application 2 to the Federal Home Loan Bank of Dallas for 3 approval to pay off the PennCorp and related debt; 4 is that correct? 5 A. Right. 6 Q. Was Mr. Casavantes working on that 7 application? 8 A. Yes, he was. 9 Q. Did you have contact with him from time 10 to time? 11 A. Yes, and Jarlene Miller. 12 Q. Jarlene Miller? 13 A. Jarlene Miller. 14 Q. Now, I think you've already told us 15 that for a period of time of time in May, 1988, 16 you were outside of the United States? 17 A. Yes, I was. 18 Q. And you returned at the end of 1988; is 19 that correct? 20 A. I returned at the end of May. 21 Q. I'm sorry. The end of May. Wishful 22 thinking. Right, sir? 20129 1 Let's take a look at T4471. Can you 2 tell me what T4471 is? 3 A. That's a letter from me to Neil Twomey 4 dated May 18th. 5 Q. And like the other May 18 letter, it is 6 not signed by you but signed by somebody on your 7 behalf; is that right? 8 A. That's correct. 9 MR. VILLA: Your Honor, I move T4471 10 into evidence. 11 MR. RINALDI: No objection, Your Honor. 12 THE COURT: Received. 13 Q. (BY MR. VILLA) And in this letter, you 14 inform Mr. Twomey that you're going to be out of 15 town until the end of May and you'll contact him 16 at that point. Right? 17 A. Right. 18 Q. And when you returned at the end of 19 May, you did contact Mr. Twomey, didn't you, sir? 20 A. I certainly did. 21 Q. Let me show you what's been marked as 22 Exhibit B2221 and ask you if you can identify that 20130 1 for me. 2 A. This is a letter dated -- I can't tell 3 if it's June 3rd or June 8th -- from me to 4 Neil Twomey relating to the minimum regulatory net 5 worth. 6 MR. VILLA: Your Honor, I move B2221 7 into evidence. 8 MR. RINALDI: No objection, Your Honor. 9 THE COURT: Received. 10 Q. (BY MR. VILLA) Let me direct your 11 attention to the second paragraph of B2221. Would 12 you read that? And let me ask you a question 13 about it. 14 A. (Witness reviews the document.) Okay. 15 Q. In essence, what are you telling 16 Mr. Twomey in this letter? 17 A. What I was telling him is that after we 18 had a final decision on the UFGI payment of the 19 PennCorp debt, the payment at a discount, we would 20 be in a better position to talk about the infusion 21 of capital into USAT. 22 Q. Now, the May 13 letter that we looked 20131 1 at from Mr. Twomey with respect to the infusion of 2 capital you testified didn't, in your judgment, 3 direct an infusion of capital. 4 What did it ask for? 5 A. He asked that we advised him as to what 6 we were planning on doing. 7 Q. Why is it necessary for UFG to know 8 what the Federal Home Loan Bank of Dallas is going 9 to do on the PennCorp debt application in order to 10 advise Mr. Twomey as to what UFG is going to do 11 with respect to the net worth maintenance 12 obligation to USAT? 13 A. First of all, obviously, there would be 14 more cash available one way or the other. 15 Secondly, the application didn't only deal with 16 the PennCorp debt. If all of that debt was paid 17 off, we would be in a totally different position 18 than we would be if that debt was still 19 outstanding with the cross-defaults and everything 20 we've talked about for the last hour or so. 21 Q. Did USAT -- did UFG have enough cash to 22 both pay off the PennCorp debt and make any 20132 1 significant contribution toward the net worth 2 maintenance obligations that it had or might have 3 toward USAT? 4 A. Well, if it paid off the PennCorp debt, 5 I think it would have something like $30 million 6 left in cash. 7 Q. And additional liabilities in 8 connection with that 30 million. Right? 9 A. Right. Long-term liabilities, that's 10 correct. 11 Q. Let me direct your attention to B2224, 12 which is in evidence at Exhibit 1695. 13 Could you tell us what that is? 14 A. This is a memo from me dated June 3rd, 15 1988, relating a conversation with Neil Twomey. 16 MR. GUIDO: B2240? 17 MR. VILLA: Your Honor, may I restate 18 that? It's Exhibit B2224 in evidence at Tab 1695. 19 Q. (BY MR. VILLA) I'm sorry I interrupted 20 you, sir. Would you state again what it is that 21 you were -- this document is? 22 A. It's a memo from me dated June 3rd, 20133 1 1988, relating to a conversation with Neil Twomey. 2 Q. I would like to direct your attention 3 to Paragraphs No. 6 and 7 on Page 2 and carrying 4 over to the top of Page 3. 5 Would you read that? And then I'll ask 6 you a few questions. 7 A. (Witness reviews the document.) Okay. 8 Q. Now, Mr. Berner, the two issues that 9 are discussed here are the UFGI debt repayment and 10 the UFG infusion of capital into USAT; is that 11 correct? 12 A. That's right. 13 Q. Let's deal first with the UFGI debt 14 repayment. 15 Did -- were you pressing or asking 16 Mr. Twomey for a response on the debt repayment 17 issue? 18 A. Yes, I was. I was pressing him. 19 Q. Did he express any view to you as to 20 whether he thought it was a good idea for UFG to 21 utilize its assets to pay down the debt at a 22 discount? 20134 1 A. He thought it was a wonderful idea, and 2 I'll quote him. He said the time to strike was 3 now to pay off that debt at a discount. 4 Q. And there was a statement here that "we 5 needed to act quickly since there was a June 30 6 deadline." 7 Do you see that? 8 A. That's correct. 9 Q. What do you recall about the June 30 10 deadline? 11 A. I remember Jack Hughes telling us that 12 if we didn't consummate the transaction by the 13 30th of June, they would walk away from the deal. 14 Q. I think you told us at the outset that 15 one of their reasons had to do with the quarter, 16 that they had to write down the value of the loans 17 on PennCorp's financial statement? 18 A. I believe that was referred to in Mike 19 Crow's memo. 20 Q. In Mike Crow's memo. 21 And typically, you have to write down 22 things at quarterly accounting periods? 20135 1 A. Right. They would be making whatever 2 their quarter financial statement releases were 3 right after that. 4 Q. So, Mr. Twomey's view, as you've just 5 recited it, was favorably disposed towards 6 utilizing the assets toward the PennCorp debt? 7 A. Yes. I think he was very favorably 8 disposed. 9 Q. Look on Page 2 and over to Page 3. 10 Now, did you discuss whether it was even possible 11 for UFG, under any scenario, to put sufficient 12 capital into USAT to have any significant effect 13 on USAT's financial condition? 14 A. We certainly did. Neil Twomey and I 15 talked about that and made it clear that there was 16 no way for UFG, under any scenario, to put 17 insufficient capital into USAT. 18 Q. Did he dissent from that view? Did he 19 say, "You have enough capital. You can pull them 20 out"? 21 A. No, not at all. He didn't believe we 22 had enough capital. 20136 1 Q. I'm very interested in the last 2 paragraph before No. 8 where it says, "Neil said 3 that once he received my response, he would, as a 4 matter of course, respond by making an official 5 demand to UFG to infuse sufficient capital. He 6 said, however, that it would be a pro forma 7 requirement since he knew there was no way that 8 UFG could put sufficient capital down and 'if UFG 9 didn't, what could I do?'" 10 Do you see that, sir? 11 A. Yes, I do. 12 Q. Let me ask you, Mr. Berner: Did you 13 understand that there was a present obligation, a 14 current obligation on UFG to infuse capital into 15 USAT? 16 A. No. I understood just the opposite, 17 that there wasn't a current obligation to do that. 18 Q. And the obligation would arise when 19 this -- when what occurred? 20 A. When the Federal Home Loan Bank of 21 Dallas and Mr. Twomey gave us an official demand 22 that we put money into USAT. 20137 1 Q. As of this point in June of 1988, that 2 had not occurred, had it, sir? 3 A. That's correct. It had not occurred. 4 Q. Let me ask you to turn to B2240. 5 MR. VILLA: Your Honor, I'm running a 6 little longer than I thought. I probably still 7 have another half hour. 8 Q. (BY MR. VILLA) Do you have B2240 in 9 front of you, sir? 10 A. Yes, I do. 11 Q. Can you tell me what it is? 12 A. It's a memo from me dated June 16th, 13 1988, relating to a conversation with Neil Twomey. 14 MR. VILLA: Your Honor, I move B2240 15 into evidence. 16 MR. RINALDI: No objection, Your Honor. 17 THE COURT: Received. 18 Q. (BY MR. VILLA) Let me direct your 19 attention, sir, to Paragraph 1 under PennCorp 20 debt. 21 Do you see that? 22 A. Yes, I do. 20138 1 Q. And the first sentence says, "Neil 2 reiterated that he thought it was a very good idea 3 for us to pay off the PennCorp loan." 4 Do you see that, sir? 5 A. Right. 6 Q. Did Mr. Twomey ever change his view on 7 whether it was a good idea for UFG to pay off the 8 PennCorp debt? 9 A. I don't believe so. He certainly never 10 said anything to me or to anyone else that he had. 11 Q. Then I'm interested in the last 12 sentence of that paragraph and particularly the 13 parenthetical. It says, "In discussion with Tom 14 Leahey, we have decided that if we have not 15 received word by the last week of June, we should 16 contemplate doing the transaction without, quote, 17 'official' sanction," close quote. 18 Do you see that? 19 A. Yes, I do. 20 Q. Why is it that you would do it without 21 official sanction? 22 A. Well, again, this is typical of other 20139 1 things we talked about. There are many times 2 where you send applications in and the regulators 3 never give you an affirmative response. What Tom 4 Leahey and I were worried about was this would sit 5 there and we would never get an affirmative 6 response. And we felt this was too critical a 7 situation for that to happen. 8 Q. Let me turn your attention to Page 3 9 entitled "regulatory capital." 10 Do you see that? 11 A. Yes. 12 Q. "Neil once again stated that he 13 expected to have to send a letter to United 14 Financial Group asking how it intended to comply 15 with the requirement that it infuse adequate 16 capital, and then there's the remainder of it." 17 Do you see that, sir? 18 A. Yes, I do. 19 Q. And is this consistent with your view 20 as to whether or not a subsequent letter was 21 required? 22 A. It's consistent with my view based on 20140 1 what Mr. Twomey was telling me, that there would 2 have to be a subsequent letter. 3 Q. And finally, in the middle of the page, 4 there's a discussion of examination and 5 forbearance, the paragraph which is the -- I guess 6 the fourth paragraph on the page about the 7 examination report. 8 Do you see that? 9 A. Yes, I do. 10 Q. And there's a statement about a 11 supervisory letter? 12 A. Right. 13 Q. And how did he describe the 14 restrictions that might be in the supervisory 15 letter? 16 A. He would describe it as not being very 17 onerous. 18 Q. I would like you to turn to the next 19 document, which is Exhibit B2252 at Tab 80. 20 Can you identify that for the record, 21 sir? 22 A. This is a letter to me from Jarlene 20141 1 Miller dated June 24th, 1988. 2 Q. And what do you understand that the 3 effect of this letter was? 4 A. That we could pay the PennCorp debt 5 down, I believe. 6 Q. And at that -- after receipt of this 7 letter, did UFG begin the process of paying down 8 both the PennCorp debt and other debt that it had 9 at the holding company level? 10 A. It paid down the PennCorp debt. I'm 11 not sure at this time if we paid down any other 12 debt. Mostly, it was the PennCorp debt. 13 Q. Did you engage in negotiations in an 14 attempt to pay down some of the other debt? 15 A. We were trying to pay down the 16 22 sellers debt and the McReynolds debt at a 17 discount. My recollection is they were not going 18 to take a discount. I don't believe at this point 19 we paid any of that down. 20 Q. Now, I'm not going to dwelling on 21 United's prospects; but we're talking about the 22 time period June 30, 1988, and the question of 20142 1 UFG's financial condition. We talked about it 2 yesterday in connection with whether it would be a 3 survivor and whether management could reasonably 4 have expected that USAT would survive for purposes 5 of their employment contracts. Put that to one 6 side. 7 Now I'm focusing on the question of 8 whether, in the middle of 1988, after Mr. Connell 9 was hired, UFG -- strike that -- USAT believed 10 that it was going to get into the Southwest Plan. 11 A. Well, again, I think we talked about 12 that either this morning or yesterday; that once 13 we had hired Larry Connell, there were no more 14 impediments to getting into the Southwest Plan. 15 And we fully expected to be a participant in the 16 Southwest Plan. 17 Q. Did you believe, sir, in utilizing 18 UFG's assets to pay down the PennCorp debt and to 19 reduce the risk of default on the holding company 20 debt, that you were acting consistently or 21 inconsistently with the wishes of the federal 22 regulators? 20143 1 A. I believe we were acting consistently 2 with the wishes of the federal regulators. 3 Q. And once UFG began using its assets to 4 pay off the PennCorp debt, did that reduce its 5 ability to make any substantial infusion into 6 USAT? 7 A. Well, it didn't have any ability to 8 make a substantial infusion into USAT. So, no, it 9 certainly didn't harm it. 10 Q. Now, sir, I'm not going to take you 11 through it; but do you remember receiving 12 Ms. Carlton's -- the examination report of the 13 Federal Home Loan Bank of Dallas for the 14 examination that Ms. Carlton conducted as of 15 November 16, 1987? 16 Do you remember receiving that in July 17 of 1988? 18 A. Sure. 19 Q. Do you recall whether there's any 20 mention in there about a failure of UFG to meet 21 its obligations to USAT under the net worth 22 maintenance agreements? 20144 1 A. I don't believe there was any reference 2 to that at all. 3 Q. Now, Mr. Berner, at the end of June 4 1988, United either reported that it was insolvent 5 or that it was close to insolvent. Right? The 6 end of June 1988. 7 A. "United" being? 8 Q. United Savings Association of Texas. 9 A. Yes, sure. 10 Q. I know that the financials take a while 11 to catch up; and while I don't have a memory of 12 exactly what the financial numbers are, United 13 Savings Association of Texas and, as a corollary, 14 United Financial Group's condition was 15 deteriorating? 16 A. That's a fair assessment. 17 Q. Okay. As a result, did you have any 18 discussions with Mr. Twomey about what actions, if 19 any, that the regulators would take vis-a-vis 20 United? 21 A. I believe we did. 22 Q. Let me direct your attention to 20145 1 Exhibit B2377. I would like you to identify that 2 for us. 3 A. This is a memo from me dated 4 August 23rd, 1988, relating to a conversation with 5 Neil Twomey. 6 MR. VILLA: Your Honor, I move B2377 7 into evidence. 8 MR. RINALDI: No objection, Your Honor. 9 THE COURT: Received. 10 Q. (BY MR. VILLA) Let me direct your 11 attention to the second paragraph -- the paragraph 12 numbered 2. It says, "I talked to him about our 13 rapid insolvency." And then he said, "And Neil 14 said we would have to sign some sort of 15 supervisory letter, but he did not expect it to be 16 too onerous. And he goes on to talk about various 17 things. 18 Do you see that? 19 A. Yes, I do. 20 Q. I'm interested in the last paragraph 21 where it says, "He also said that he would be able 22 to deal with high-yield bonds and would do all 20146 1 that he could to make sure that we could maintain 2 those areas which were still profitable." 3 Do you see that, sir? 4 A. Yes, I do. 5 Q. What were the areas that were still 6 profitable? 7 A. The high-yield bond portfolio was still 8 profitable. The equity arbitrage was still 9 profitable at this time. That may have been the 10 only two areas that were profitable. 11 Q. Is this consistent, Mr. Berner, with 12 the allegation in the Notice of Charges that the 13 regulators were mislead about United's financial 14 condition and, therefore, didn't take action 15 against United? 16 A. It's not consistent at all. The 17 regulators knew all along what United's financial 18 position was, and they made decisions not to take 19 action on the basis that they thought United could 20 be a survivor. 21 Q. Now, during the months of August and 22 September, United expected to participate in the 20147 1 Southwest Plan; isn't that right? 2 A. Yes, it did. 3 Q. I think you told us that there was a 4 Southwest Plan transaction that was anticipated to 5 close at the end of September 1988? 6 A. Right. 7 Q. And MAXXAM was unable to close on the 8 transaction. 9 Do you know why? 10 A. Yeah. I believe they were closing on 11 another transaction at that time. I may be wrong, 12 but I think it was the Kaiser Aluminum 13 transaction. So, because of that, they couldn't 14 close on this at the same time, get it done by the 15 end of September. 16 Q. So, they couldn't close on both 17 transactions at the same time? 18 A. Right. 19 Q. And did MAXXAM, to your knowledge, then 20 submit another application and bid for USAT? 21 A. Right. Immediately after September, 22 they filed an application to put capital into 20148 1 United. 2 Q. And was the board of directors of UFG 3 and USAT supportive of that bid? 4 A. Yes, we were. 5 Q. And did they work with MAXXAM in an 6 effort to recapitalize United through the MAXXAM 7 bid? 8 A. Absolutely. 9 Q. Do you know whether the MAXXAM bid was 10 a substantial bid in terms of the number of 11 dollars and the value that was going to be 12 injected into USAT? 13 A. My recollection, it was a very 14 substantial bid that they were willing to put into 15 USAT. 16 Q. Now, there was another bidder who 17 appeared on the scene at this time, wasn't there, 18 sir? 19 A. Yes, there was. 20 Q. Who was that? 21 A. Lou Ranieri and Hyperion. 22 Q. We'll talk about them in a couple of 20149 1 minutes. In the end, the two bidders went; and 2 who won? 3 A. Hyperion got United Savings. 4 Q. Did there come a time about a month or 5 so before USAT was ultimately taken over on 6 December 30, 1988, when Mr. Ranieri and the 7 representatives of Hyperion began appearing at the 8 offices of United Savings Association of Texas? 9 A. Yes, there was. 10 Q. Tell us a little bit about that. 11 A. It was somewhere around the end of the 12 first week of December where -- I forgot who got 13 the call. We were told that Hyperion was going to 14 be coming into the association to start doing due 15 diligence work on the association, and they were 16 going to be bringing a very large team of lawyers 17 and accountants and business people to go through 18 the association. 19 Q. And did they? 20 A. They absolutely did. 21 Q. Did there come a time in early 22 December 1988 when United began executing 20150 1 transactions at the -- either the instructions of 2 the Hyperion personnel or let's say the Ranieri 3 group or through Mr. Twomey that were designed to 4 prepare United for receivership? 5 A. Yes, there was. 6 Q. Tell us a little about that. 7 A. It was towards the middle to the end of 8 December. There were a number of transactions 9 where United was being directed by Mr. Twomey to 10 do things which, in the opinion of management, 11 were improper, were detrimental to the 12 association. And we would not have done it except 13 that we had signed a consent order and Mr. Twomey 14 had the authority to order us to do things; so, we 15 did it. 16 Q. Now, this occurred in December of 1988; 17 is that right? 18 A. Yes, it did. 19 Q. Now, at the same time, I would like -- 20 well, I would like you to take a look at what's 21 been marked has T2021, which is in evidence at 22 Tab 73, and tell me what that is. 20151 1 A. This is a letter from Mr. Twomey to the 2 board of directors of United Financial Group dated 3 December 8th, 1988. 4 Q. And what does this letter do? 5 A. This is a letter directing UFGI to 6 infuse additional equity capital into United. 7 Q. Is this the official demand that 8 Mr. Twomey had referred to in his discussions with 9 you in June of 1988 that he would eventually have 10 to send? 11 A. Yes, it was. 12 Q. Do you know why he waited until 13 December of 1988 to send it, sir? 14 A. I have no idea why he waited. 15 Q. Did it coincide with the appearance of 16 Mr. Ranieri's people at the offices of United 17 Savings? 18 A. I believe it was either the same day or 19 within a day of Mr. Ranieri and his group showing 20 up at United. 21 Q. Do you recall any time prior to 22 December 8, 1988, that Mr. Twomey sent any letter 20152 1 directing an infusion of capital from UFG to USAT? 2 A. I do not recall it because it did not 3 happen. 4 Q. Now, at the time that UFGI received 5 this directive, can you tell us from your own 6 recollection the financial condition of USAT and 7 UFGI and whether UFGI could have made any 8 significant capital contribution to USAT? 9 A. Well, UFGI -- USAT's financial 10 situation was extremely poor. I'm not sure 11 exactly what their net worth deficiency was, but I 12 believe it was in the hundreds of millions of 13 dollars. UFGI, on a standalone basis, had about 14 somewhere between 20 and $30 million in cash. 15 Q. And liabilities? 16 A. And long-term debt liabilities. 17 Q. But it didn't have a net worth of 20 or 18 30 million? 19 A. No. It had a negative net worth. 20 Q. Negative net worth. So, the assets 21 were less than the liabilities of UFGI. Right? 22 A. That's correct. I think they were 20153 1 actually pretty close at that time. But it was -- 2 I think it was negative. 3 Q. According to the Notice of Charges in 4 this case -- it's Paragraph 91 -- USAT was 5 $380 million below its regulatory net worth at the 6 beginning of the fourth quarter of 1988. 7 Does that seem about right to you? 8 A. It seems about right, sure. 9 Q. You wouldn't dispute it? 10 A. I certainly wouldn't dispute it. 11 Q. Now, what would, in your judgment, have 12 occurred if UFGI had taken its remaining assets 13 and responded to this request by Mr. Twomey on 14 December 8th, 1988, and put them into USAT? 15 A. Well, obviously, it would have had very 16 little effect on USAT. You still would have had 17 the situation of other creditors going after the 18 money and trying to block what was going on by 19 putting that money into USAT. 20 Q. Did you take Mr. Twomey's letter 21 seriously when it arrived? 22 A. Absolutely. 20154 1 Q. Let me ask you -- the date of the 2 letter is December 8, 1988; is that right? 3 A. Right. 4 Q. Let me ask you to look at B2585. And 5 would you tell us what that is? 6 A. It's a letter from me to the board of 7 directors of United Financial Group dated 8 December 9th, 1988. 9 Q. And what does it convey? 10 A. Well, it conveys the letter we received 11 on December 8th and calls for a board of directors 12 meeting as soon as possible. 13 MR. VILLA: Your Honor, I move B2585 14 into evidence. 15 MR. RINALDI: No objection. 16 THE COURT: Received. 17 Q. (BY MR. VILLA) Now, you told us there 18 came a time when it became -- well, let me ask 19 you, sir: Did there come a time when it became 20 clear that Mr. Ranieri would be the successful 21 bidder? 22 A. Yes. 20155 1 Q. Tell us again approximately when that 2 was. 3 A. It was approximately that time. When 4 he came down with his group of people to take over 5 the institution, it was clear that they were the 6 successful bidder. 7 Q. Were actions taken to prepare United 8 for Mr. Ranieri to take it over? 9 A. Yes, there were. 10 Q. Let me ask you, sir: We've had some 11 testimony in this case about the payment of 12 interest on a loan, a large loan called the 13 Park 410 loan, on the day or two before USAT went 14 into receivership, a 6-million-dollar payment of 15 interest. 16 Do you know anything about that? 17 A. Actually, I do. The way the 18 Southwest Plan was structured, if that money was 19 taken into income, it would have increased the 20 Park 410 loan. And if it increased the Park 410 21 loan, you then would have had -- under the 22 Southwest Plan, the government was coming in and 20156 1 effectively covering -- making up all of your bad 2 debts and covering all of your bad loans. So, the 3 government would be picking up an additional 4 $6 million that they would give to Mr. Ranieri and 5 Hyperion. 6 Q. And do you recall, sir, whether USAT -- 7 do you recall who at USAT directed that the 8 income -- that the $6 million be taken into 9 income? 10 A. I certainly do. 11 Q. Who was that? 12 A. Larry Connell. 13 Q. Did Mr. Connell then -- was 14 Mr. Connell -- strike that. 15 Mr. Connell had a contract like all the 16 rest of you. Right? 17 A. Yes, he did. 18 Q. Was his contract terminated; or was he 19 kept on at United, the new United, by Mr. Ranieri 20 at least for a period of time? 21 A. He was kept on as president of new 22 United. 20157 1 Q. And, in fact, he resigned from the 2 board of UFG at some point, correct? 3 A. That's correct. 4 Q. Do you recall why he resigned from the 5 board? 6 A. I'm not sure. I know he had -- he had 7 had a long prior relationship with Lou Ranieri. I 8 think he resigned in order to stay on at USAT. 9 Q. Now, at the same time that this -- that 10 this -- strike that. 11 So, the $6 million that was taken into 12 income at USAT in the closing days of USAT before 13 the receivership, did that have any significant 14 effect on USAT's financial condition? 15 A. On USAT's financial condition? 16 Q. Yes, sir. 17 A. Not if they were $300 million in 18 deficit beforehand, no. 19 Q. Who would benefit? 20 A. Lou Ranieri and the people taking over 21 the institution. 22 Q. Now, at the same time that Mr. Twomey 20158 1 was directing UFG to infuse capital into USAT, do 2 you recall whether he was directing USAT to 3 execute any securities transactions? 4 A. I certainly do recall that. 5 Q. Tell us what you recall about those 6 securities transactions and your conversations 7 with Mr. Twomey. 8 A. He was directing that USAT sell a 9 significant amount of mortgage-backed securities 10 through one or two particular brokers at that time 11 when I believe our people -- the people who were 12 in charge of that portfolio thought it was a 13 terrible mistake and they would take a huge bath 14 by doing that. 15 Q. Did you raise objections to the 16 transactions that Mr. Twomey was directing USAT to 17 execute? 18 A. I most certainly did. 19 Q. And why? 20 A. It was wrong. It was inappropriate. 21 It was creating a bigger loss to United, which 22 would have meant that, ultimately, the government 20159 1 was paying a bigger loss. It was just -- it was 2 just wrong. 3 Q. Who did the transactions benefit? 4 A. Lou Ranieri. 5 Q. Do you know whether Mr. Crow resigned 6 at this time? 7 A. He did. 8 Q. Do you remember why? 9 A. I believe he thought that what he was 10 being directed to do was in conflict with what his 11 position was and it was just improper. 12 Q. Did the UFG board meet to consider both 13 the directive to infuse capital into USAT and the 14 directives from Mr. Twomey to execute sales from 15 the mortgage-backed securities and junk bond 16 portfolios? 17 A. It certainly did. 18 Q. Let me direct your attention to A1167. 19 Can you identify that for me? 20 A. It's the minutes of a special meeting 21 of the board of directors of United Financial 22 Group dated December 15th, 1988. 20160 1 MR. VILLA: Your Honor, I move A1167 2 into evidence. 3 MR. RINALDI: No objection, Your Honor. 4 THE COURT: Received. 5 Q. (BY MR. VILLA) I would like to direct 6 your attention to the bottom of Page 1 and the top 7 of Page 2 and ask you to review it. 8 A. (Witness reviews the document.) Okay. 9 Q. Can you tell me what -- it begins with 10 "The board has discussed the possible sale by 11 United Savings of a significant portion of its 12 mortgage-backed securities and high-yield bond 13 portfolios." Then it talks about how there would 14 be a loss if this was executed in this fashion, 15 and it directs you to do certain things. Right? 16 A. That's correct. 17 Q. Tell us in your own words what the 18 board decided at this meeting. 19 A. Well, the board was outraged. And the 20 board decided that before we would do anything, I 21 would write a letter to FSLIC and insist that we 22 get a written directive telling us to do these 20161 1 things and that any future meetings that were 2 being held between Mr. Connell and the Federal 3 Home Loan Bank be attended by myself and other 4 counsel. 5 Q. And pursuant to that, did you write 6 letters to the Federal Home Loan Bank of Dallas? 7 A. I certainly did. 8 Q. I would like you to take a look at 9 Exhibits B2624, B2652, and B2653. Can you tell me 10 what those three documents are? 11 Let's start with B2624. 12 A. That's a letter from me dated 13 December 21, 1988, to George Barclay of the 14 Federal Home Loan Bank Board. And it relates to 15 the sale of high-yield bonds and mortgage-backed 16 securities. 17 MR. VILLA: Your Honor, I move B2624 18 into evidence. 19 MR. GUIDO: What were the three 20 documents again? 21 MR. VILLA: I'll do them one at a time. 22 Let's start with B2624. 20162 1 MR. RINALDI: No objection. 2 THE COURT: Received. 3 Q. (BY MR. VILLA) B2652 is in at Tab 290 4 so I don't have to move that into evidence. 5 The third document is B2653. Is that 6 another letter you sent to Mr. Twomey in 7 connection with the issues that you've discussed 8 today with respect to the objections that the 9 board was expressing about the execution of 10 securities transactions at year end to benefit 11 Mr. Ranieri? 12 A. Yes. 13 MR. VILLA: Your Honor, I move B2653 14 into evidence. 15 MR. RINALDI: No objection. 16 THE COURT: Received. 17 Q. (BY MR. VILLA) Did you also have oral 18 discussions face-to-face or over the telephone 19 with Mr. Twomey about this at the end of 1988? 20 A. Yes. We had discussions at the end of 21 1988 about this. 22 Q. Did he appear pleased that you were 20163 1 placing in writing your belief that the 2 transactions that he was directing be executed 3 were, in USAT's opinion, not in the best interest 4 of the association and requiring him to give USAT 5 written directive? 6 Did that appear to please him? 7 A. He was not pleased. He was not amused. 8 Q. Was he angry at you? 9 A. He was very angry, and he was very 10 upset and very angry that we were asking him to 11 put on record what they were telling us to do. 12 Q. Let's go back to the December 15, 1988 13 UFG board meeting, A1167. 14 By the way, Mr. Berner, we talked about 15 the relationship you had with the Federal Home 16 Loan Bank of Dallas and how the Federal Home Loan 17 Bank of Dallas -- yesterday and today, we went 18 through the various comments that Mr. Twomey made 19 about management and how he was praising 20 management and saying, in fact, that if you have a 21 good S&L person, you plug the only hole in the 22 management. 20164 1 Remember all those quotes? 2 A. Yes, I do. 3 Q. Okay. Was he still saying that in 4 December of 1988 when you were asking him to put 5 in writing all of his directives? 6 A. He wasn't saying it about me. I'm not 7 sure what he was saying about the rest of the 8 management. He was not happy. 9 Q. Did his attitude change towards you? 10 A. It certainly changed. It was 11 threatening. It was uncomfortable. 12 Q. Now, Mr. Berner, let me ask you to look 13 at Page 3 of the notes -- I'm sorry -- of the 14 minutes of the December 15, 1988 UFG board 15 meeting, A1167. 16 Do you see that? 17 A. Yes. 18 Q. Look at Page 3 to the top of Page 4. 19 Take a quick look at it. I know you've looked at 20 it ahead of time. Tell us what the board was 21 considering at this point. 22 A. (Witness reviews the document.) Well, 20165 1 again, what the board was considering was what to 2 do about the net worth maintenance obligation, 3 what to do about the -- you know, who was going to 4 be coming in and acquiring the institution. I'm 5 sure there's more. That's about it. 6 Q. And what direction did the board give 7 you and UFG's outside counsel with respect to 8 meeting with the representatives of the FSLIC, the 9 FDIC, and ultimately the OTS on the net worth 10 maintenance obligations? 11 A. I think the direction was to meet with 12 them and to discuss with them, you know, just the 13 enforceability and other things relating to the 14 net worth maintenance. 15 Q. And did you conduct such meetings over 16 a period of time? 17 A. Oh, beginning in January, we certainly 18 discussed it over a period of time. 19 Q. You began in January of 1989, and when 20 was a settlement ultimately reached? 21 A. It was the end of 1996. 22 Q. 1996. Well, I think the date is 20166 1 probably actually December 13, 1995. Would you 2 look at Exhibit B3660, sir? 3 A. I was thinking the actual bankruptcy, 4 not when the money was actually paid to them. 5 Q. You have before you B3660 which is in 6 evidence at Tab 82. Can you tell us what that is, 7 sir? 8 A. It's a consent cease and desist order 9 for affirmative relief. 10 Q. Is this a part of the wrapping up of 11 the net worth maintenance obligation claims 12 against United Financial Group? 13 A. Yes, it is. 14 Q. And under that, substantial moneys were 15 paid to the FDIC; is that right? 16 A. That's correct. 17 Q. And that was the culmination of the 18 negotiations that began as directed by the 19 December 15th UFG board meeting. Right? 20 A. That is correct. 21 Q. Now, as part of the settlement of those 22 claims, the OTS dropped all of its claims against 20167 1 the other directors of UFG, didn't they? 2 A. Yes, they did. 3 Q. And that included Mr. Whatley, for 4 example. Mr. Whatley was on the board of UFG for 5 the entire -- going back for many, many years and 6 clearly through the entire year 1988, wasn't he, 7 sir? 8 A. Yes, he was. 9 Q. And did they release Mr. Whatley? 10 A. Yes, they did. 11 Q. And Mr. Paul Schwartz was on the board 12 of UFG from February of 1988 through the period 13 when all these letters came in and on until 1995; 14 is that correct? 15 A. And beyond, that's correct. 16 Q. And was Mr. Schwartz released? 17 A. Yes, he was. 18 Q. They didn't sue him for failing to 19 maintain the net worth of USAT, did they? 20 A. No, they did not. 21 Q. And what happened to you? 22 A. I'm here. 20168 1 MR. VILLA: Thank you. I have no 2 further questions. 3 THE COURT: Do the other respondents 4 have questions? 5 MR. EISENHART: I do, Your Honor. 6 THE COURT: Mr. Eisenhart. 7 8 EXAMINATION 9 10 Q. (BY MR. EISENHART) Good afternoon, 11 Mr. Berner. 12 A. Good afternoon. 13 Q. Fresh face, and I won't be very long. 14 I have just a few questions to ask of you on 15 behalf of my client, MAXXAM. 16 A. Okay. 17 Q. I want to follow up just very briefly 18 on one line of questioning Mr. Villa asked you 19 about that has to do with the high-yield or junk 20 bond portfolio and the volume of material or the 21 volume of bonds in that purchased from Drexel. 22 I think you said it was your impression 20169 1 that Drexel was actually somewhat underrepresented 2 in the high-yield bond portfolio relative to their 3 market share. Is that your testimony? 4 A. That's my recollection, yes. 5 Q. You were a member of the investment 6 committee at USAT, were you not? 7 A. Yes, I was. 8 Q. You were the secretary of the committee 9 and attended most, if not all, of the investment 10 committee meetings? 11 A. Most. Certainly not all. 12 Q. As you sat in those meetings month 13 after month, did you ever hear anyone say that a 14 particular security underwritten by Drexel should 15 be purchased because it was underwritten by 16 Drexel? 17 A. Never. 18 Q. Did you ever hear anyone exert any 19 pressure on USAT to favor Drexel in the purchase 20 or to -- of securities or to purchase securities 21 because they were Drexel-underwritten? 22 A. No, I did not. 20170 1 Q. You never heard anything of the sort? 2 A. No, sir. 3 Q. Now, you've described for Mr. Villa a 4 series of conversations that you had with people 5 at the Federal Home Loan Bank of Dallas and I 6 think, indeed, some that you had with people at 7 the Bank Board in Washington in 1988 concerning 8 the recapitalization or restructuring of USAT; is 9 that correct? 10 A. Yes, that's right. 11 Q. And this, as I understand it, was a 12 fairly high priority project for you throughout 13 1988? 14 A. That's for sure, yes. 15 Q. During the course of these discussions 16 that you had with people at the Dallas bank or the 17 people in Washington, did any of them ever say to 18 you or suggest to you that they had a right to 19 call on MAXXAM or Federated to make a capital 20 infusion into USAT? 21 A. They never said that to me, no. 22 Q. To your knowledge, did anybody at the 20171 1 Bank Board ever make a demand on MAXXAM or 2 Federated to infuse capital into USAT? 3 A. Not that I know of. 4 Q. Now, as I understand it, you started at 5 USAT in, what, early '86. Right? 6 A. September 30th, '85. 7 Q. '85. But that for the period of time 8 up until the middle of '86, Mr. Pledger was the 9 one who was primarily responsible for the 10 regulatory filings; is that right? 11 A. Yes, sir. 12 Q. And then you took over after that? 13 A. Yes, sir. 14 Q. How about the UFG filings, things like 15 proxy statements and things of that sort? Were 16 they your responsibility? 17 A. They were primarily my responsibility, 18 yes. 19 Q. Now, as I understand it, there were 20 certain requirements that things like proxy 21 statements of UFG be sent to the Bank Board as 22 well as part of USAT's regulatory filings. 20172 1 Was that the case? 2 A. I believe that's right. 3 Q. How would you and Mr. Pledger handle 4 that? Which of you would take care of that? 5 A. When he was there, he would have sent 6 them to the Bank Board. 7 Q. So, you would -- just take a UFG proxy, 8 for example. You would prepare the proxy 9 statement and see to the filing with the SEC. And 10 then you would send it to Mr. Pledger, and he 11 would take care of filing it with the Bank Board? 12 A. Right. He was right next door to me. 13 Q. Well, it may not have been a long 14 journey. After he left, you took over the 15 responsibility for the regulatory filings, as 16 well? 17 A. Either me or somebody in the accounting 18 department would do most of those filings. 19 Q. Now, let me show you a document which 20 has been marked as Exhibit B3754. 21 MR. GUIDO: Is this document on any 22 exhibit list? 20173 1 MR. EISENHART: Yes. It's on the 2 exhibit list in this case. 3 Q. (BY MR. EISENHART) Do you recognize 4 that document, Mr. Berner? 5 A. Actually, I'm seeing this maybe for the 6 first time. It's a letter from Neil Twomey to 7 Jenard Gross with a copy to Margorie Z. Kulik. 8 Q. It attaches something called an annual 9 report, an H-(b)11 report. 10 Do you see that? 11 A. Yes, I do. 12 Q. Now, that is a report that USAT was 13 required to file with the Federal Home Loan Bank 14 Board; is that correct? 15 A. That's correct. 16 Q. And as I understand it, there are 17 certain documents which must be attached to that 18 report; is that correct? 19 A. I believe that's right. 20 Q. Would you turn to Page 25 of the 21 H-(b)11. 22 A. Page 25? 20174 1 Q. Yes. And do you see there a list of 2 exhibits? 3 A. Yes, I do. 4 Q. And what is -- what is the third item 5 on the list of exhibits? 6 A. It's United Financial Group's proxy 7 statement of March 31, 1986. 8 Q. And as I understand it, proxy 9 statements would be routinely attached to the -- 10 these H-(b)11 reports that would then be filed 11 with the Bank Board? 12 A. I believe that's right, yes. 13 Q. Now, I would ask you to take a look at 14 some Bank Board regulations that I've had marked 15 as Exhibit B4267. 16 MR. EISENHART: Your Honor, I'm 17 reminded that I did not offer Exhibit B3754; and I 18 do offer it. 19 MR. RINALDI: No objection, Your Honor. 20 THE COURT: Received. 21 MR. EISENHART: And Your Honor, I will 22 offer B4267. 20175 1 MR. RINALDI: No objection. 2 THE COURT: Received. 3 Q. (BY MR. EISENHART) Now, Mr. Berner, 4 these regulations, B4267, concern the filing of 5 the type of report we were just looking at, the 6 H-(b)11. And I'll refer you to, on the first 7 page, the numbered paragraph -- that would be 8 Section 584.1(a)(2). It says "filing of annual 9 reports." 10 Do you see that? 11 A. Yes, I sure do. 12 Q. That contains the basic requirement 13 that a savings and loan holding company and the 14 savings and loan -- I'm sorry. Each registered 15 savings and loan holding company, including 16 subsidiary savings and loan holding companies, 17 shall file an annual report H-(b)11; is that 18 correct? 19 A. That's correct. 20 Q. Now, I would like you to drop down a 21 little bit to Subparagraph 4, which is at the 22 bottom of that column; and it begins with the word 20176 1 "general." 2 Do you see where I refer you to? 3 A. Yes, I do. 4 Q. And that says exactly where these 5 reports are to be filed. 6 Do you see that? 7 A. Yes. 8 Q. And where are they filed? 9 A. With the corporation -- they are sent 10 to the District Bank and the Office of Examination 11 and Supervision in Washington and two copies to 12 the supervisory agent. 13 Q. So the H-(b)11 is filed -- in the case 14 of USAT, would be filed both with the Federal Home 15 Loan Bank Board in Washington and with the 16 supervisory agent at the Federal Home Loan Bank of 17 Dallas; is that correct? 18 A. That's correct. That's what it says. 19 Q. Now, I would like to show you another 20 document which has been marked B4266. B4266 is a 21 Federal Home Loan Bank Board form, and it's the 22 form for the annual report H-(b)11. And I would 20177 1 like to refer you to the second page of that. If 2 you look at the bottom of that under numbered 3 Paragraph 3, you'll see number of copies. 4 Do you see what I refer to? 5 A. Yes, I do. 6 Q. And that tells you how many copies you 7 have to file and where you're supposed to file 8 them. And that also says, I think, that two 9 copies are filed with the Office of Examination 10 and Supervision in Washington and two are filed 11 with the District Bank; is that correct? 12 A. Yes. That's what it's saying, yes. 13 Q. And if you turn to the last page of 14 B4266, it's headed "instructions as to exhibits." 15 And if you look at numbered Paragraph 3, that 16 requires you to file proxy material, does it not? 17 A. Yes. 18 Q. And proxy material is routinely filed 19 as exhibits to these forms? 20 A. I believe so. 21 Q. Now, based on your knowledge of the 22 filing procedures for these forms at USAT, 20178 1 Mr. Berner, were these instructions as to the 2 numbers of copies and the places where they were 3 to be filed routinely followed? 4 A. I believe so. 5 Q. And would it be your belief, therefore, 6 that the H-(b)11 forms that were filed were sent 7 to the Bank Board in Washington as well as to the 8 Federal Home Loan Bank of Dallas? 9 A. Yeah. I certainly believe that, that's 10 true. 11 Q. And would it be your belief that at 12 such times as proxy statements were filed, that 13 those would be attached to the copies sent to both 14 places? 15 A. I believe so. 16 MR. EISENHART: Your Honor, I offer 17 B4266. 18 MR. RINALDI: No objection. 19 THE COURT: Received. 20 MR. EISENHART: I have no further 21 questions. Thank you very much, Mr. Berner. 22 THE WITNESS: Thank you. 20179 1 THE COURT: Mr. Blankenstein, do you 2 have questions? 3 MR. KEETON: No questions, Your Honor. 4 THE COURT: All right. We'll adjourn 5 until 9:00 tomorrow. 6 MR. GUIDO: Thank you, Your Honor. 7 8 (Whereupon at 4:35 p.m. 9 the proceedings were recessed.) 10 . 11 . 12 . 13 . 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 20180 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 20th 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 . 20181 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 20th 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