20182 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 21, 1998 22 20183 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 20184 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 . 20185 1 2 INDEX OF PROCEEDINGS 3 4 ARTHUR BERNER 5 Further Examination by Mr. Rinaldi......20187 6 Further Examination by Mr. Guido........20342 7 Further Examination by Mr. Villa........20429 8 Further Examination by Mr. Guido........20437 9 . 10 . 11 . 12 . 13 . 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 20186 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:10 a.m.) 3 THE COURT: Be seated, please. 4 MR. RINALDI: Your Honor, before we 5 start the examination, I had promised that -- 6 THE COURT: We'll be on the record. 7 MR. RINALDI: Before we start, I had 8 promised something to you several days ago. You 9 may recall a proffer was made regarding a 10 particular document, and it's document T8105. We 11 put it in an envelope, and we would proffer it 12 under the rules so that it's in the evidence at 13 least that we have proffered it. 14 THE COURT: Well, it should be put with 15 the exhibits that are in the record. 16 MR. RINALDI: Okay. 17 THE COURT: All right. Mr. Rinaldi, 18 you're going to redirect? 19 MR. RINALDI: That is correct. 20 THE COURT: All right. Proceed. 21 22 20187 1 FURTHER EXAMINATION 2 3 Q. (BY MR. RINALDI) Good morning, 4 Mr. Berner. 5 A. Good morning. 6 Q. I think that we will shortly have 7 concluded your examination; so, just bear with us 8 for a short while longer. 9 Mr. Berner, when the employment 10 contracts that were drafted at the end of 1987 and 11 the contracts drafted in '88 were created, who was 12 the person responsible at USAT and UFG to assure 13 that there would be regulatory compliance with 14 applicable thrift regulations? 15 A. Well, that would have been me. I would 16 be relying on outside counsel generally, but that 17 would be me. 18 Q. And in that connection, before you 19 drafted the first contract which you entered into 20 with UFG on September the 9th, 1987, did you 21 undertake to do any legal research to ascertain 22 what applicable regulations there might be with 20188 1 respect to contracts associated with the holding 2 company? 3 A. I don't remember if I did or I didn't 4 at that time. 5 Q. Now, there came a time about three 6 months after that on February 11th when a whole 7 new set of contracts were entered into with USAT. 8 Do you recall that? 9 A. Yes, I do. 10 Q. Okay. And prior to executing those 11 documents, did you conduct any legal research to 12 determine what the applicable regulations might be 13 with respect to savings and loan contracts? 14 A. I don't remember, but I think there was 15 something in the contracts. So, I might have done 16 some research at that time. 17 Q. Had you contacted outside counsel, 18 Mr. Leahey, to obtain any kind of information 19 regarding what you had to do in order to comply 20 with the applicable regulations? 21 A. Again, I don't remember. I might have. 22 I just don't remember. 20189 1 Q. And I believe you testified on 2 direct-examination you are basically a securities 3 lawyer, aren't you? 4 A. That's correct. 5 Q. So, you were basically unfamiliar with 6 the savings and loan regulations that would have 7 applied to employment contracts for thrifts, 8 weren't you? 9 A. It certainly wasn't my area of 10 expertise. 11 Q. Now, Mr. Villa, when he examined you on 12 cross the other day, showed you a copy of 13 12 CFR 563.39; and that document is Trial 14 Exhibit 1668. Let me hand you a copy of it. 15 For your further edification, if you 16 would prefer to read the large chart, there's a 17 copy of that document blown up here. 18 Now, 563.39 reads as follows -- and I'm 19 just reading the A portion. It says, "An insured 20 institution may enter into an employment contract 21 with its officers and other employees only in 22 accordance with the requirements of this section." 20190 1 Do you see that? 2 A. Yes, I do. 3 THE COURT: Could you state the number 4 of that exhibit again, please? 5 MR. RINALDI: I'm sorry, Your Honor. 6 It's B4245. 7 THE COURT: You may continue. 8 MR. RINALDI: Thank you, Your Honor. 9 Q. (BY MR. RINALDI) The first sentence of 10 the reg makes it very clear, does it not, that any 11 employment contract that's entered into may only 12 be entered into if it complies with 563.39, does 13 it not? 14 A. Yes, it does. 15 Q. The second sentence of the regulation 16 says, "All employment contracts shall be in 17 writing and shall be approved specifically by an 18 institution's board of directors." 19 Do you see that? 20 A. Yes, I do. 21 Q. So that the only persons that can 22 approve an employment contract or employment 20191 1 agreement are the board; and it has to be in 2 writing, correct? 3 A. That's what it says, yes. 4 Q. Okay. And then it goes on and says, 5 "All employment contracts shall be in writing" -- 6 I'm sorry. Strike that. 7 The next sentence reads, "An 8 institution shall not enter into an employment 9 contract with any of its officers or other 10 employees if such contract would constitute an 11 unsafe and unsound practice." 12 Do you see that? 13 A. Yes, I do. 14 Q. So, the touchstone for an employment 15 contract is safety and soundness, correct? 16 A. I'm not sure I understand what you mean 17 by "touchstone," but that's certainly what it 18 says. It couldn't constitute an unsafe or unsound 19 practice. 20 Q. In the immediate next sentence, it 21 defines what safety and soundness is for the 22 purpose of this provision. It says, "The making 20192 1 of such an employment contract would be an unsafe 2 and unsound practice if such contract could lead 3 to material financial loss or damage to the 4 institution." 5 Do you see that? 6 A. Yes, I do. 7 Q. Were you aware of the provisions of 8 563.39 at the time that USAT entered into the 9 February 11th, 1988 contracts with its executives? 10 A. I believe I was, yes. 11 Q. Okay. And I take it, therefore, that 12 you would have been equally aware with respect to 13 all subsequent actions that you took with respect 14 to USAT's employment contracts, correct? 15 A. That I was aware of 563.39? 16 Q. Yes. 17 A. Yes. 18 Q. Did you believe that obligating USAT to 19 possibly pay $6.6 million in severances was a safe 20 and sound practice on July 1 of 1988 when USAT was 21 failing its net worth by some $160 million? 22 A. Yes. As I mentioned to you before, I 20193 1 mean, the placing -- the severance payments, which 2 of course came from UFGI first, was designed to 3 keep the senior people at the institution. And I 4 thought and the board thought that that was 5 critical for the survival of that institution. 6 Q. And did you also believe that the 7 possible payment of $6.6 million could not lead to 8 a material loss or damage to the institution which 9 was already rapidly approaching negative capital, 10 sir? 11 A. That's correct. I think that that 12 could not be material, given the fact that the 13 reason for that was to keep the senior management 14 at the institution. I think that would have been 15 a material loss. 16 Q. Sir, did you believe that paying 17 $2.5 million in bonuses and salary increases in 18 April 1988 could not lead to a material loss or 19 damage to the institution -- 20 A. That's correct. 21 Q. -- when it was also failing its net 22 worth capital requirements, sir? 20194 1 A. That's absolutely correct. 2 Q. So, you concluded that the salary 3 increases and the bonuses that were entered into 4 in April of 1988 when USAT was some $150 million 5 or -- strike that -- over $100 million below its 6 minimum capital requirement was not an unsafe and 7 unsound practice; is that correct, sir? 8 A. I believe that the payment of a 9 2-million-dollar bonus to keep all of the 10 management at United at that time was not an 11 unsafe and unsound practice. 12 Q. Now, I think Mr. Villa also showed you 13 12 CFR 17(b). Do you remember that section? 14 A. I believe so. 15 Q. That's the provision that states that 16 compensation must be reasonable. 17 Do you recall that section? 18 A. I think I do, yes. 19 Q. Do you think it was reasonable to place 20 $6.6 million in escrow to fund the severances in 21 October of 1988 at a time when USAT was 22 $400 million below -- had $400 million in negative 20195 1 capital? 2 A. Yes, I do. Again, the same reason. At 3 that point in time, USAT was looking to be placed 4 in the Southwest Plan. We had to keep the senior 5 people there, and I think it was reasonable. 6 Q. Now, sir -- sir, in response to one of 7 Mr. Villa's questions, you testified that you felt 8 that 563.39 -- strike that. That's probably a 9 misrepresentation. 10 Mr. Villa asked you whether 563.39 had 11 any objective standards in it. Do you recall that 12 question? And you responded that, no, you didn't 13 think it did? 14 A. I recall that question and response. 15 Q. Okay. And you didn't -- 16 A. I'm not sure of those exact words, but 17 the substance of it. 18 Q. In your mind, you didn't believe it was 19 an objective standard to say that making of such 20 an employment contract would be an unsafe and 21 unsound practice if such contract would lead to 22 material financial loss or damage? 20196 1 A. Do I believe that that's an objective 2 standard? 3 Q. Yes. 4 A. No, I do not believe that that's an 5 objective standard. 6 Q. But you went ahead and applied it 7 anyway, right, even though you didn't believe that 8 it was an objective one that you could easily 9 apply? 10 A. Well, we applied the facts to the 11 regulation to see if we thought it could be 12 materially -- what's the language -- could -- 13 could lead to material financial loss. 14 Q. Actually, what I think you testified to 15 was because it wasn't an objective standard, you 16 went and looked at prior contractual standards 17 that had been entered into, correct? 18 A. That was one of the things I did, yes. 19 Q. One of the things you did was you 20 looked at a contract of James A. Coles. 21 Do you remember that? 22 A. Yes, I remember that. 20197 1 Q. Did you know Mr. Coles? 2 A. No, I didn't. 3 Q. Why was that? Why didn't you know 4 Mr. Coles? 5 A. Because he left before I got there. 6 Q. So, this was a contract that was 7 entered into prior to 1985? 8 A. Prior to the time I got there, for 9 sure. 10 Q. Right. In fact, I think, if we look at 11 it, the contract was entered into on January 28, 12 1982; is that correct? Let's take a look. 13 A. I'll take your word for it. 14 Q. Let's take a look. It's Exhibit B4240. 15 This has previously been admitted as Tab 666 -- 16 too many "6s." 667. I'm sorry. 1677. Boy, I'm 17 having trouble with numbers. 18 Now, take a look at the front page of 19 that document. When did Mr. Coles enter into that 20 contract, sir? 21 A. As of the -- looks like the 28th day of 22 January 1982. 20198 1 Q. And if you take a look at 563.39, did 2 it even exist in its present form in 1982? 3 A. I don't know. 4 Q. Okay. Now, what was the condition of 5 USAT in January of 1982, sir? 6 A. I don't know. 7 Q. Was it failing its net worth capital 8 requirement? 9 A. I don't know. 10 Q. And after this contract was entered 11 into, there was an examination in 1983, wasn't 12 there? 13 A. I don't know. 14 Q. Well, if you don't know if there was an 15 examination, do you know whether the examiners 16 ever looked at this contract? 17 A. I don't know one way or the other. 18 Q. But you testified that you relied upon 19 this contract because you believed that the 20 examiners had looked at it and approved it, didn't 21 you? 22 A. I think I said that I looked at this, 20199 1 among other things, as one of the forms to see 2 what had been acceptable before. 3 Q. Yeah. Acceptable to the examiners. 4 Right? 5 A. Just acceptable. To examiners or -- I 6 didn't know if there had been an examination. I 7 have no idea. 8 Q. So, you had no way of knowing when you 9 looked at this document whether an examiner had 10 looked at it previously or whether anybody had 11 approved the provisions that related to change of 12 control, did you? 13 A. That's correct. 14 Q. And then I believe Mr. Villa also read 15 to you from a proxy statement, a 1986 proxy 16 statement -- do you remember that -- about a 17 contract that pertained to an individual named 18 Gerald Williams? 19 A. Yes. 20 Q. And you did know Mr. Williams? 21 A. I did. 22 Q. When did Mr. Williams come to USAT? 20200 1 A. I don't know. 2 Q. It would have preceded you? 3 A. Before my time, for sure. 4 Q. Right. In fact, I believe if you look 5 at the proxy statement, it indicates that it was 6 sometime in September of 1983 that that contract 7 was entered into. 8 A. I'll take your word for it. 9 Q. Again, you don't know if the examiners 10 ever looked at that contract during the '86 exam, 11 do you? 12 A. I'm pretty sure in the '86 exam. 13 Q. What do you base that on? 14 A. I think those contracts were provided 15 to the regulators. 16 Q. Are you aware, sir, that when 17 examinations are conducted, reviews of executive 18 contracts are not necessarily included in all 19 exams? 20 A. Am I aware of that? 21 Q. Yes. 22 A. No. 20201 1 Q. So, you don't know as you sit here 2 whether that contract was ever provided to the 3 regulators and whether they approved its contents, 4 do you? 5 A. I don't know. 6 Q. Did you know at the time? 7 A. No. 8 Q. So, in other words, you just presumed, 9 because these contracts were in the file, that the 10 provisions were ones that would be acceptable to 11 the regulators. 12 Is that a fair statement? 13 A. Well, they were also disclosed in 14 public documents which had been given to the 15 regulators. So, I assumed if there was an 16 objection, they would have said something. 17 Q. Now, you also indicated that there were 18 a number of contracts that had been given to 19 Ms. Carlton during the 1987 exam. 20 Do you remember that? 21 A. I believe that's right, yeah. 22 Q. Well, let me do this. Let me show you 20202 1 what's been previously marked as Exhibit A11032, 2 and this is Tab 483. It's probably a document 3 you'll recognize, sir. 4 A. Okay. 5 Q. And I think if you turn to OW128423, 6 there is a copy of Ms. Laurenson's contract. 7 A. 8423? 8 Q. Yes. 9 A. Okay. 10 Q. Now, when did Ms. Laurenson leave USAT? 11 Do you recall? 12 A. Sometime in the early part of 1988, I 13 believe, or latter part of 1987. 14 Q. Okay. So, Ms. Laurenson was at USAT 15 for slightly over a year. Right? 16 A. Yeah, I believe that's right. 17 Q. Okay. And the contract we have before 18 us shows that it was entered into on September 19 the 19th, 1986. 20 When did Ms. Carlton receive a copy of 21 Sandra Laurenson's contract? 22 A. Sometime during the exam. I don't know 20203 1 when. 2 Q. Well, were you the one that provided 3 the contracts to Ms. Carlton? 4 A. I'm not sure if I did or not. It's 5 possible I did. I don't know. 6 Q. What was the process by which that was 7 done? I mean, there's a whole group of them here; 8 and I'm just sort of curious. 9 Did you just provide them all at once? 10 A. My recollection is that Jim Wolfe was 11 her primary contact. Jim Wolfe or it might have 12 been Ron Carlson was her primary contact. If she 13 wanted something, she would ask them and get it 14 from them. 15 Q. Now, by the time Ms. Carlton got around 16 to drafting her final examination report which is 17 in July 1988, Ms. Laurenson was long gone, wasn't 18 she? 19 A. Yes. In July of '88, she was gone. 20 Q. Does it surprise you that Ms. Carlton 21 wouldn't comment in the exam on the contract of an 22 employee that had departed some six months prior 20204 1 to the drafting of the final exam? 2 A. Does it surprise me that she wouldn't? 3 Q. Yeah. 4 A. I don't know what she would or she 5 wouldn't -- I would have thought if there was a 6 problem, she would have commented on it. 7 Q. But if there was a problem, it would 8 have pertained to a contract that had already been 9 terminated and that no longer existed; is that 10 correct? 11 A. Yes. Well, it had been terminated, 12 that's correct. 13 Q. So, it's not surprising that she didn't 14 comment on a contract that had been terminated 15 some months before, is it? 16 A. Again, I don't know whether she should 17 or shouldn't have commented on that contract. 18 Q. Let me ask you this: Did Ms. Laurenson 19 have some special expertise that USAT needed? 20 A. Yes, she did. 21 Q. What was that? 22 A. She was a mortgage-backed securities 20205 1 expert. 2 Q. But there were plenty of 3 mortgage-backed securities experts at USAT, 4 weren't there? 5 A. I wasn't one. There were people who 6 knew something about mortgage-backs, but she was 7 an expert at it. 8 Q. But Jim Crow wasn't an -- Jim Crow. I 9 mean, Mike Crow wasn't an expert? 10 MR. RINALDI: Could we strike that, 11 Your Honor? 12 Q. (BY MR. RINALDI) Mike Crow wasn't an 13 expert on mortgage-backed securities? 14 A. Mike Crow knew more than I did, but we 15 felt we needed someone who was more of an expert. 16 Q. Mr. Huebsch wasn't an expert, was he? 17 A. He knew more than I did. Again, we 18 needed someone who had more expertise. 19 Q. You knew Ms. Laurenson was on the 20 investment committee, didn't you? 21 A. Yes, I was. 22 Q. How large was the portfolio then? 20206 1 A. When she was hired? 2 Q. Yes. 3 A. I don't know. 4 Q. It was in the billions of dollars, 5 wasn't it? 6 A. I don't remember. 7 Q. Was it surprising that Ms. Carlton 8 didn't criticize a contract that was required to 9 attract someone to USAT that USAT needed badly to 10 manage a large MBS portfolio? 11 A. Well, I'm not sure what you're asking. 12 It's not surprising she didn't comment on it 13 because I think she thought it was safe and sound. 14 I'm not sure where you're going. 15 Q. Let me ask you this: USAT had enormous 16 portfolios that needed to be managed, correct? 17 A. Yes, it did. 18 Q. They didn't have much choice, did they? 19 They had to hire someone that had -- to manage the 20 portfolios, didn't they? 21 A. There were other alternatives; but this 22 was, I think, the best alternative. 20207 1 Q. And so, if that individual were coming 2 out from New York and relocating in Houston, it's 3 not unreasonable that you would have to pay them a 4 substantial amount in order to secure their 5 employment; isn't that correct? 6 A. You would have to pay them the market 7 price. That's for sure. Yes. 8 Q. It's not unusual that a person coming 9 into the situation you described yesterday that 10 existed at USAT where the thrift was having 11 substantial problems with its net worth would 12 require that there be some security to assure that 13 she would be paid under the contract; is that 14 correct? 15 A. It's not surprising that she would have 16 asked for that, yes, that's correct. 17 Q. Now, let's take a look at the other 18 contract that was entered into with Eugene 19 Stodart. That's OW12845. 20 A. 12845? 21 Q. I'm sorry. 48. Excuse me. OW128458. 22 Excuse me. 20208 1 A. Okay. 2 Q. Why was Mr. Stodart hired? 3 A. He was hired to manage the high-yield 4 bond portfolio. 5 Q. How large was that portfolio? 6 A. I don't know what it was at that time. 7 Q. Do you recall in the latter part of 8 1986 that Joe Phillips left USAT? 9 A. I know he left. I don't recall it was 10 the end of '86, but I'm sure it was around that 11 time. 12 Q. Had Joe Phillips been managing the junk 13 bond portfolio before that? 14 A. Yes, he had. 15 Q. Do you recall being approached by 16 Neil Twomey at that point in time and specifically 17 asked by Mr. Twomey, "What is USAT going to do to 18 replace Joe Phillips?" 19 A. I remember that got raised as an issue, 20 yes. 21 Q. In fact, Mr. Twomey was very, very 22 concerned about the safety and soundness of that 20209 1 high-yield bond portfolio; isn't that correct? 2 A. I'm not sure I could put that -- those 3 words to it. I mean, he wanted to know who was 4 going to manage the high-yield bonds after Joe 5 Phillips left. 6 Q. Right. Because he thought that 7 portfolio presented some degree of risk if it 8 wasn't probably managed, didn't he? 9 A. I don't remember him saying that. You 10 would have to ask him what he thought. 11 Q. And so, he urged you to get someone on 12 as soon as possible to manage that portfolio, 13 didn't he? 14 A. I don't remember him urging us to get 15 somebody. I think he just wanted to know how it 16 was going to be managed. 17 Q. Do you remember at that point in time 18 that a question had arisen regarding Ivan Boeske 19 and Drexel Burnham Lambert and he was concerned, 20 in light of Mr. Boeske's indictment, whether 21 Drexel Burnham might be drawn into that and it 22 might affect the high-yield bond market? 20210 1 A. I remember there was some discussion 2 about that. I think that preceded this, preceded 3 April of '87. 4 Q. And in connection with those 5 discussions, he indicated to you that he wanted to 6 be sure that someone competent was managing the 7 portfolio. Right? 8 A. Yes. I think he wanted to know who was 9 going to be managing the portfolio when Joe 10 Phillips left, yes. 11 Q. Is it surprising that Ms. Carlton 12 didn't criticize Mr. Stodart's contract when the 13 supervisory agent she worked for had urged USAT to 14 hire someone well-qualified to manage the junk 15 bond portfolio? 16 A. Is it surprising that she didn't 17 criticize this contract? 18 Q. Yes. It had been requested that you 19 enter into an agreement where you hire someone to 20 manage the portfolio. Right? 21 A. Well, no. I don't think we were 22 requested. Mr. Twomey had wanted to know who was 20211 1 going to run the portfolio. It's not surprising 2 to me that she didn't criticize this contract, no. 3 Q. Given the state of the Texas thrift 4 industry, was it surprising that a qualified 5 person like Mr. Stodart would require some 6 security before relocating to Texas? 7 A. It wasn't surprising. 8 Q. Okay. Now, the third contract that you 9 pointed out here was a contract that was entered 10 into by Mr. Dominic Bruno; and I believe it's the 11 first one in the package. 12 Do you see that? 13 A. Yes. Okay. 14 Q. Now, Mr. Bruno isn't actually hired 15 until sometime in February of 1988, is he? 16 A. Well, this is dated January 12th; so, I 17 don't know when he came. 18 Q. Okay. And if you look on the next 19 page, there's a press release that says he's 20 coming on on February the 10th. 21 Do you see that? 22 A. Yeah. 20212 1 Q. Okay. So, in other words, Mr. Bruno 2 wasn't hired until about three months after the 3 examination had actually commenced. Right? 4 A. I believe that's right. 5 Q. And, again, Mr. Bruno had a special 6 expertise that USAT desperately needed. Right? 7 A. He had an expertise we certainly 8 wanted, yes. 9 Q. He was coming from an institution 10 significantly larger than USAT, wasn't he? 11 A. I don't know. 12 Q. Well, take a look at the -- take a look 13 at the press release. It says he's coming from 14 someplace out in Pennsylvania I think is the way 15 Mr. Villa put it. Do you see there Meritor 16 Financial Group, a 19-billion-dollar savings and 17 loan company? 18 Do you see that? 19 A. Yes, I do. 20 Q. About three times as large as USAT, 21 wasn't it? 22 A. Two and a half, yeah. 20213 1 Q. At this point in time as you described 2 yesterday, USAT was on the verge of collapse, 3 wasn't it? 4 A. I don't think I said that. 5 Q. Well, you said it was failing its net 6 worth capital, didn't you? 7 A. I think I said that -- 8 Q. And you said it had been failing it for 9 some period of time. You had sold off all the 10 above-water assets is what you said. 11 MR. VILLA: Your Honor, I don't object 12 to the questions. The manner in which they are 13 being delivered seems a little overly dramatic. 14 The witness is trying to respond. I think if he 15 could just ask them one at a time it might be 16 easier for him. I think Mr. Rinaldi is actually 17 taller and a little louder than the witness. 18 MR. RINALDI: Is there an objection 19 there? 20 THE COURT: Let's have the testimony. 21 Q. (BY MR. RINALDI) Under those 22 circumstances, it isn't surprising that Vivian 20214 1 Carlton didn't criticize the fact that Mr. Bruno 2 sought a contract that secured his compensation 3 with a letter of credit, is it? 4 A. I don't think it's surprising that she 5 wouldn't criticize this contract. 6 Q. Now, I asked you when these contracts 7 were given to Vivian Carlton. 8 Do you remember that? 9 A. Yes, you did. 10 Q. Okay. Do you recall whether they were 11 given to her seriatim or whether they were given 12 to her all as one group? 13 A. I don't recall. 14 Q. Now, there's nine groups in here. Six 15 of them are UFG, and those are the six contracts, 16 perhaps five. But all the rest are the 17 September 9th, 1987 UFG contracts. Take a look -- 18 A. I'll take your word for it. 19 Q. I don't want you to have to rely on -- 20 THE COURT: Well, let's move on. 21 Q. (BY MR. RINALDI) All right. Now, if 22 you'll look at Page -- at the press release, it's 20215 1 dated February the 10th -- 2 THE COURT: Which press release? 3 MR. RINALDI: It's the press release 4 that appears at OW128383. 5 Q. (BY MR. RINALDI) Do you see that? 6 A. The one we were just looking at? 7 Q. Yeah. 8 A. Right. 9 Q. It's dated February 10, 1986. 10 A. '88. 11 Q. I'm sorry. My glasses need to be 12 checked. 13 Is it fair to assume, sir, that 14 Ms. Carlton received the Bruno contract on or 15 sometime after February the 10th, 1988? 16 A. I don't know one way or the other. 17 Q. Well, if she has a copy of the press 18 release and it's dated February the 10th, she 19 couldn't have gotten a press release that was 20 issued on February the 10th prior to February the 21 10th, could she? 22 A. She couldn't have gotten the press 20216 1 release, that's correct. 2 Q. And the press release is included in 3 this packet, isn't it? 4 A. Yes, it is. 5 Q. So, would you assume that with respect 6 to the materials regarding Mr. Bruno, that those 7 were given to her on or after February the 10th, 8 1988? 9 A. I couldn't make that assumption. I 10 mean, the agreement is dated January 12th. I 11 don't know when she received it. 12 Q. It may be dated January 12th, but it's 13 not signed until January the 16th. So, she 14 couldn't have got it before that date, could she? 15 A. I don't know. Probably not. 16 Q. It's unlikely she would have received a 17 press release dated February 10th, 1988, prior to 18 February 10, is it? 19 A. The press release? 20 Q. Yeah. 21 A. It's very unlikely she would have 22 received the press release. 20217 1 Q. Now, what happened the day after 2 February the 10th, 1988, with respect to 3 employment contracts for UFG? 4 A. With respect to employment contracts 5 with UFG? 6 Q. I'm sorry. USAT. 7 A. That was the date of the compensation 8 committee and the board meeting. 9 Q. Right. And they approved six 10 contracts, didn't they, on February the 11th, 11 1988? 12 A. Right. 13 Q. For senior executives. 14 Did anybody give Ms. Carlton a copy of 15 the February 11th, 1988 contracts? 16 A. At that time? 17 Q. Yes. 18 A. I don't know. 19 Q. Why would you have given Mr. Bruno's 20 contract to her and the press release that's dated 21 February the 10th and not given her the executive 22 contracts that were approved the following day on 20218 1 February the 11th, 1988? 2 A. Well, first of all, as we discussed, 3 I'm not sure I gave her the contracts or any of 4 these contracts. But the February 11th meeting, 5 if my recollection is correct, that's the meeting 6 she was at where we discussed those contracts at 7 length. 8 Q. So, you made a conscious decision that 9 because she was at the meeting, you didn't need to 10 give her the contracts? 11 A. I don't remember making a decision one 12 way or the other. 13 Q. Are you telling the Court that the 14 reason the contracts weren't given to her is 15 because she was at the meeting? 16 MR. VILLA: Your Honor, he's already 17 said three times that he doesn't know whether she 18 was given the contracts. Now he's asking him: 19 What was the reason you made a conscious decision 20 not to give her the contracts? 21 Really, I object to the form of the 22 question. 20219 1 THE COURT: All right. Sustained. 2 Q. (BY MR. RINALDI) So, Ms. Carlton was 3 given six contracts with senior executives that 4 were entered into by UFG on September 9th, 1988; 5 is that correct? 6 A. '87. 7 Q. '87. I'm sorry. Thank you. 8 A. That's correct. 9 Q. Those were yours, Mr. Crow, 10 Mr. Williams, Mr. Gray, Mr. Wolfe, and 11 Mr. Jackson. Right? 12 A. Right. 13 Q. And those were contracts that didn't 14 even pertain to USAT, did they? 15 A. Well, it pertained to USAT. They were 16 UFG contracts, but it certainly pertained to USAT. 17 Q. Well, they weren't executed by USAT, 18 were they? 19 A. No. But the people who got the 20 contracts were the senior executives of USAT. 21 Q. But they were contracts between those 22 individuals and UFG, not USAT. Correct? 20220 1 A. Correct. 2 Q. But USAT never produced during the 1988 3 exam, to your knowledge, the February 11 contracts 4 to Ms. Carlton? 5 A. I don't know one way or the other. I 6 don't know. 7 Q. So, in other words -- strike that. 8 Mr. Villa discussed with you the 9 compensation philosophy of USAT and some of the 10 reasons why you decided that you wanted to go 11 there. 12 Do you remember that? 13 A. Yes, I do. 14 Q. And I think that you testified that at 15 the point in time that you went to USAT, it was 16 offering a number of incentive programs by which 17 you could receive substantial future financial 18 remuneration in the event that the enterprise was 19 a successful one. 20 Is that fair? 21 A. I think that's fair. 22 Q. One of those things was something 20221 1 called a performance unit plan, wasn't it? 2 A. Right. 3 Q. How did that work, sir? 4 A. There were a small group of people that 5 were given the possibility of earning a large 6 amount of money if the institution earned or -- I 7 forgot what the number was -- some return on 8 investments or return on assets over a four-year 9 period. 10 Q. But you also understood that if, for 11 any reason, the institution was not successful and 12 didn't obtain the profit levels contemplated in 13 the performance unit plan, that you might not 14 receive any compensation; is that correct? 15 A. That's correct. 16 Q. So, you were a risk taker. Right? 17 A. I'm not sure I consider myself a risk 18 taker. There was a risk in that plan, that's for 19 sure. 20 Q. Well, I mean by that that you were 21 willing to opt for potentially receiving a 22 substantial return if the institution were 20222 1 successful, correct? 2 A. As one portion of my compensation, yes. 3 Q. And you also knew that if the 4 institution was not successful, that that 5 performance unit plan would not pay you anything, 6 didn't you? 7 A. That was certainly a chance, yes. 8 Q. And you made a conscious decision to 9 accept that sort of philosophy when you went to 10 USAT, didn't you? 11 A. Yes, I did. 12 Q. And when you went to USAT, another one 13 of the factors that caused you to go there was 14 that it offered a substantial amount of stock 15 options to senior executives, correct? 16 A. Yes. 17 Q. Those stock options had the potential 18 for being quite valuable in the event that USAT 19 performed well, didn't they? 20 A. Well, UFG, that's correct. 21 Q. But USAT was a 100 percent subsidiary 22 of UFG; so, if USAT does well, UFG does well. 20223 1 Right? 2 A. Correct. 3 Q. But you also know that -- knew that 4 those stock options -- I mean, you've been in the 5 securities industry for some time. 6 You knew that those stock options could 7 be worthless if the shares of UFG went down in 8 value. Right? 9 A. Yes, sir. 10 Q. That's the risk you took when you went 11 to USAT? 12 A. It was certainly a risk, yes. 13 Q. I think you testified that that was one 14 of the reasons that you were attracted to the 15 place, right, because it had these kinds of 16 programs? 17 A. That's correct. 18 Q. So, if USAT had done well, Arthur 19 Berner would have done well, correct? 20 A. Yes, that's probably correct. 21 Q. But there was a change of philosophy at 22 USAT, wasn't there? 20224 1 A. I'm not sure I know what you mean by 2 "change of philosophy." In what way? 3 Q. Well, with respect to compensation. 4 There came a point in time when it was apparent 5 that USAT was not doing well, correct? 6 A. That's correct. 7 Q. And it became apparent that that PUP 8 and the stock options were probably going to be of 9 no value to the executives, correct? 10 A. Correct. 11 Q. And so, in lieu of the PUP and the 12 stock options, you and the other directors of USAT 13 opted to implement a program of guaranteed 14 bonuses. Right? 15 A. I think that's a different -- I mean, 16 it's a different area that you're looking at. But 17 at some point, we did decide to go to guaranteed 18 bonuses, that's correct. 19 Q. Right. And in April of 1988, one of 20 the reasons that the bonus was rolled into the -- 21 I'm sorry. 22 One of the reasons that the executive 20225 1 bonus plan was implemented was because of the lack 2 of value in the PUP and the stock options. Right? 3 A. The executive bonus plan meaning the 4 25 percent bonus and the 75 percent bonus? 5 Q. Yes. 6 A. That wasn't the reason why that was 7 adopted, no. 8 Q. Wasn't that one of the reasons why the 9 bonus for 1987 was rolled into the 1988 salary? 10 A. No. There's a different -- those are 11 different issues. That's not correct. 12 Q. Okay. Let's take a look at -- I don't 13 know if I've marked this as an exhibit -- T8053, 14 which I believe appears at Tab 421. 15 Take a look at Paragraph 4. What we're 16 looking at here is the memo that you drafted that 17 was later converted to a -- I guess you could call 18 it a resolution or something by James Whatley. 19 There is where Mr. Whatley approved the April 1988 20 salary increases and the executive bonus plan. 21 If you look at Paragraph 4, it talks 22 about a one-time 1988 bonus. And then the second 20226 1 sentence reads, "This bonus is a desire to retain 2 capable people to reflect the company's view on 3 the employment contracts to reflect for certain 4 individuals a recognition that the performance 5 unit plan and stock options have little or no 6 value." 7 Do you see that? 8 A. Yes, I do. 9 Q. Does that refresh your recollection 10 that one of the reasons for entering into the 11 executive bonus plan was that you wanted to 12 compensate people whose stock options and PUP or 13 participation unit plan were worthless? 14 MR. VILLA: Performance. 15 Q. (BY MR. RINALDI) Performance unit plan 16 were worthless? 17 A. That's one of the reasons. The reason 18 was to keep the people there. 19 Q. And so, under the old performance 20 scheme, if USAT did well, you would have done 21 well? 22 A. Under the -- 20227 1 Q. Older one, the original one. If USAT 2 had done well, you would have done well? 3 A. Right. 4 Q. And under the new philosophy, if USAT 5 did poorly, you still would have done well. 6 Right? 7 A. I don't think I did very well. I mean, 8 I would have received what I received. 9 Q. Right. Which was a 60 percent salary 10 increase and a 60 percent bonus in the form of an 11 executive bonus in April of 1988? 12 A. Again, as we talked about, the salary 13 increase was to bring the salaries up to what was 14 considered the market value. 15 Q. How did you make that determination, 16 sir? 17 A. I didn't make that determination. 18 Q. And in fact, nobody at USAT had 19 commissioned any kind of study as to what the 20 market value was until months after that increase 21 had been granted, had they? 22 A. This increase? 20228 1 Q. Yes. 2 A. Well, no. Hewitt was hired right away. 3 Q. It was hired right away. When did you 4 get the report? There was a draft in June. The 5 final report is dated September 1988. 6 A. The final report is dated September but 7 Hewitt was working all along and the drafts were, 8 I believe, even earlier than June. 9 Q. But the program was implemented even 10 prior to hiring Hewitt, wasn't it? 11 A. That's correct. 12 Q. Now, there has been a lot of discussion 13 back and forth about the authority of the 14 compensation committee. 15 Do you recall that? 16 A. Yes, I do. 17 Q. And you indicated that Mr. Whatley, 18 even though he may have thought at the time of his 19 testimony here, only had authority to recommend 20 employment actions; and, in fact, it was your 21 belief that Mr. Whatley had the authority to 22 approve employment contracts, correct? 20229 1 A. Employment contracts? 2 Q. Yes. 3 A. The compensation committee had the 4 authority to act as the board of directors for 5 USAT, that's correct. 6 Q. Did Mr. Whatley also sit on the 7 compensation committee of UFG? 8 A. I believe he did, yes. 9 Q. Did the boards usually meet as joint 10 committees of the compensation committee? 11 A. I don't know. Most of those meetings I 12 was not at. 13 Q. And do you recall that the compensation 14 committee of UFG could not act on behalf of the 15 board? 16 A. I believe that's right. It could not. 17 Q. And if you take a look at A3014. It's 18 Tab 92. Take a look at Page 8 of that document 19 and look at -- under "the compensation committee," 20 do you see what it says? "The compensation 21 reviews, reports to, and recommends actions to the 22 board of directors regarding salaries and other 20230 1 compensation of the officers of the company and 2 its subsidiaries." 3 Do you see that? 4 A. Yes, I do. 5 Q. So, under this document, the 1987 6 proxy, the compensation committee only made 7 recommendations regarding the salaries and 8 compensation of the company and its subsidiary, 9 USAT? 10 A. This is UFGI's compensation committee, 11 which is different than USAT's compensation 12 committee. 13 Q. Right. It's the compensation committee 14 that met jointly, correct? 15 A. Sometimes they did. I don't know if 16 they did all the time. 17 Q. And in 1988, there was only one 18 compensation committee member, wasn't there? 19 A. Well, after a certain part of 1988, 20 that's correct. 21 Q. Yeah. And that was Mr. Whatley? 22 A. That's correct. 20231 1 Q. So, it didn't make much sense for 2 Mr. Whatley to meet as the USAT compensation 3 committee and then meet as the UFG compensation 4 committee, did it? 5 A. I don't know. He could have. I don't 6 know whether he did or didn't. 7 Q. So, when Mr. Whatley said that he 8 thought he did not have any authority other than 9 to recommend decisions, that was accurate, wasn't 10 it, with respect to UFGI? 11 A. With respect to UFGI, that was 12 accurate. 13 Q. So, if that's what he was doing was 14 recommending decisions and if that's what he 15 believed he was doing, that would be totally 16 consistent with what appears in the proxy, 17 wouldn't it? 18 A. No, because he was dealing on behalf of 19 USAT. 20 Q. Okay. But on behalf of USAT, if he 21 testified that he was only making recommendations, 22 that wouldn't be inconsistent with anything in the 20232 1 USAT bylaws, would it? 2 A. Well -- bylaws? 3 Q. Well, not the bylaws. In the board 4 minutes. 5 A. Yes, it would. 6 Q. Why? He didn't have to approve a 7 contract or an employment practice. He could 8 simply recommend it and put the onus on the board 9 to make the determination? 10 A. He perhaps could have done that. 11 Q. That's what he said he did, didn't he? 12 A. That's what he said he did at this 13 testimony. I believe that's what he said he did 14 here. 15 Q. Right. So, why is it that you think 16 that he was mistaken? He knew what he was doing, 17 didn't he? 18 A. I think in 1988, he believed 19 differently. 20 Q. And what do you base that on, sir? 21 A. Discussions with him and the fact that 22 he's writing in that memo that you just showed us 20233 1 that it should be done immediately. So, he is 2 clearly acknowledging that something is going to 3 happen, that he's authorized to do something 4 before the board ratified his action. 5 Q. Well, if he could act on behalf of the 6 board, why did it require any action on behalf of 7 the board? 8 A. It may not have. 9 Q. We testified earlier that on May the 10 10th, there was a meeting of the board in which 11 this was approved by the board? 12 A. It was ratified. 13 Q. Your affidavit says it was approved. 14 A. Well, I think the minutes said ratified 15 and approved. 16 Q. So, where it says "ratified and 17 approved," you interpret that to mean ratified, 18 not approved? 19 A. I don't interpret anything. I'm 20 telling you what the minutes said. 21 Q. All right. Mr. Silverman came up in a 22 discussion yesterday with Mr. Villa. 20234 1 Do you recall that? Let me show you a 2 document. It's Exhibit B4188, and I believe it 3 appears at Tab 1678. Take a look at that. 4 A. (Witness reviews the document.) 5 Q. Now, you said Mr. Silverman was an 6 experienced attorney. 7 Do you remember that? 8 A. Yes. 9 Q. What was his area of practice? 10 A. Oh, at this point in time, I don't 11 remember. I think it was corporate and insurance 12 and securities, but I might be wrong on that. 13 Q. He had no particular expertise in the 14 subject of employment contracts? 15 A. I don't know. I'm just not sure. 16 Q. Okay. Now, he writes you a letter; and 17 he said, "I've reviewed the employment agreement; 18 and although I have some minor drafting questions, 19 my only substantive concerns are" -- do you see 20 that? 21 A. Right. 22 Q. And he's referring to the draft of the 20235 1 September 9th, 1987 UFG contract; is that correct? 2 A. That's right. 3 Q. And then he says, "I don't understand 4 Paragraph 5B as it reads. It makes the prior 5 year's bonus part of the base compensation. If it 6 is, then why does it purport to be a bonus? What 7 motivation does this bonus provide to the 8 executive? It has only up side and no down side." 9 Do you see that? 10 A. Yes, I do. 11 Q. Would you agree with that 12 characterization of the guaranteed bonus that was 13 in the September 9th, 1988 contracts? 14 A. Well, he's certainly accurate that 15 there was a guaranteed bonus. 16 Q. Right. And do you agree with the 17 suggestion that it only has an up side and no down 18 side? 19 A. I'm not sure if I agree or not. 20 Q. Well, if a person knows they are going 21 to get their bonus irrespective of how they 22 perform, is there any incentive for a person to 20236 1 enhance his performance in order to obtain that 2 bonus? 3 A. Probably not. But to get a bigger 4 bonus, there certainly is. 5 Q. Now, ultimately, the UFG contracts that 6 were entered into in September of 1987 7 incorporated a guaranteed bonus, didn't they? 8 A. That's correct. 9 Q. And subsequently, a clone or, I think, 10 a corollary contract was the term that was used at 11 the February 11th, 1988 meeting of the board of 12 USAT -- a corollary contract was entered into with 13 USAT; is that correct? 14 A. That's right. 15 Q. And the USAT contract also had 16 guaranteed bonuses, correct? 17 A. I think they were substantially 18 similar. 19 Q. Do you know why Mr. Silverman changed 20 his views with respect to the guaranteed bonus 21 provision? 22 A. Why he changed his view? 20237 1 Q. Uh-huh. 2 A. I'm not sure he changed his view. In 3 this previous letter, he was asking a question; 4 and that got resolved. 5 Q. How did it get resolved? 6 A. Well, you see the final contract, the 7 September 9th contract. That was the way it got 8 resolved. 9 Q. Did Mr. Silverman represent a 10 particular interest on the board? 11 A. He was placed on the board as a 12 representative -- PennCorp had the right to name 13 three people to the board. He was one of the 14 PennCorp representatives. 15 Q. And he sat on the compensation 16 committee of USAT? 17 A. Well, sometime in 1987, I think, he was 18 put on the board, on the compensation committee. 19 Q. Okay. And he also sat on the 20 compensation committee of USAT? 21 A. I believe so. I mean I know at some 22 point, he did. I'm not sure if they were 20238 1 co-existent. 2 Q. Now, between September of 1987 and 3 February of 1988 when the first UFG and USAT 4 contracts were entered into, was PennCorp 5 negotiating with UFGI to compromise certain claims 6 that PennCorp had made against UFGI? 7 A. Certain claims? 8 Q. Yeah. 9 A. I don't have a recollection of that. 10 Q. You don't recall that PennCorp was owed 11 substantial amounts of money by UFGI? 12 A. You're talking about something else. 13 When you said "claims," that wasn't what I was -- 14 Q. Well, why don't you take a look at the 15 memo that Mike Crow drafted dated December 11th, 16 1987. It's Tab 1366. It's T2011. And the first 17 sentence says, "I discussed with Jack Hughes our 18 proposal that PennCorp accept approximately 19 4 million for satisfaction of their claims against 20 UFGI." 21 Do you see that? 22 A. Yeah. 20239 1 MR. VILLA: Your Honor, might as well 2 finish the sentence. "In the form of debt and a 3 small amount of redeemable preferred stock." 4 Q. (BY MR. RINALDI) Right. And when I 5 referred to claims, I was making reference to the 6 term "claims" as used by Mr. Crow. 7 Does that clarify things? 8 A. You were talking about the PennCorp 9 debt. That's their debt. I would not call that a 10 claim. 11 Q. I simply used the terminology that 12 Mr. Crow used. 13 THE COURT: Well, let's proceed. 14 Q. (BY MR. RINALDI) So, about December of 15 1987, negotiations had begun between PennCorp and 16 UFGI to compromise a debt. Right? 17 A. Yes, that's correct. 18 Q. And ultimately, PennCorp was able to 19 compromise that debt at a substantially larger 20 figure than $4 million, wasn't it? 21 A. They got more than $4 million. I think 22 it was a 50- or 60-million-dollar debt. 20240 1 Q. Right. But we were talking about a 2 4-million-dollar settlement here; and ultimately, 3 the settlement was in excess of 10 million, wasn't 4 it? 5 A. I believe that's right. 6 Q. So, Mr. Silverman and PennCorp had a 7 strong incentive to keep Mr. Gross and Mr. Munitz 8 and Mr. Berner and Mr. Crow happy because they 9 were the ones that were going to approve the 10 PennCorp settlement. Right? 11 A. First of all, I don't believe they had 12 a strong desire to keep us happy other than the 13 fact that they owned -- you know, they had a debt 14 in PennCorp. And no, we weren't the ones to 15 approve it. I think it was approved by the 16 regulators. 17 Q. You were the ones who came up with the 18 original agreement, and then you presented it to 19 the regulators; is that right? 20 A. Yes, I did. 21 Q. So, you were in agreement with them? 22 A. Absolutely. I thought it was a great 20241 1 deal. 2 Q. Now, let's go back to what's marked as 3 Exhibit T8022. That's Tab 396. You're probably 4 sick of looking at this document because everyone 5 that's examined you has probably showed it to you. 6 But take a look at it at least hopefully one last 7 time. 8 Now, yesterday, you painted a pretty 9 grim picture of USAT's financial condition 10 throughout 1987. 11 Do you recall that? 12 A. A grim picture? I mean, I think I -- 13 to the extent I was asked about it, I think I 14 tried to explain it the way I understood it. 15 Q. Well, is "grim" too strong a term? 16 A. Yeah. I think "grim" is too strong a 17 term. 18 Q. But by May of 1987, USAT had sold off 19 all of its above-water assets. That's what you 20 told -- I believe in one of the applications you 21 had, I believe that's what it stated? 22 A. Virtually all, yeah. 20242 1 Q. In that memo, you also were projecting 2 operating losses of $18 million a quarter in May 3 of 1987. 4 Do you recall that? 5 A. Yes, that's correct. 6 Q. That's a substantial loss for an 7 institution the size of USAT? 8 A. It is certainly a loss. 9 Q. And by the end of 1987, your 10 projections were actually a little on the low 11 side, weren't they, because USAT's 1987 10K 12 reflects $118 million in loss in 1987. 13 Do you recall that? 14 A. I don't, but I'll take your word for 15 it. 16 Q. Okay. Now, yesterday, you said there 17 was a stock market crash; and all of a sudden, 18 there was a question of whether USAT had failed 19 its net worth requirement. 20 Do you remember that? 21 A. Yes, I do. 22 Q. Now, you didn't mean to suggest to the 20243 1 Court that USAT would have been fine but for the 2 market crash, did you? 3 A. No. I didn't -- I don't think I said 4 that. There was a question as to whether, at the 5 end of October, it had failed its regulatory net 6 worth; and that was the issue. 7 Q. Yeah. But whether it had failed it at 8 October or whether it had failed it in November or 9 December wasn't the question. You knew that 10 within a very short period of time, USAT either 11 had or was going to fail its minimum net worth 12 requirement, didn't you? 13 A. I think that's correct. Yes, I think 14 so. 15 Q. And you knew that when you wrote this 16 memo on October 29, 1987? 17 A. I certainly -- yeah, I certainly knew 18 then. 19 Q. Okay. Now, Mr. Villa asked you whether 20 the regulations that are cited in this memorandum 21 prohibited USAT from increasing salaries. 22 Do you remember him asking a question 20244 1 to that effect? 2 A. I believe he did. 3 Q. Okay. And you said, no, there was 4 nothing in the regs that prohibited increasing 5 salaries. 6 Do you recall that? 7 A. I think so. 8 Q. Okay. 9 MR. VILLA: I'm sorry. Nothing in the 10 regs or the memo? 11 MR. RINALDI: Yeah, in the regulations. 12 Q. (BY MR. RINALDI) Now, would you take a 13 look at the second page under 8? It's (8). And 14 it talks about that if you're failing your net 15 worth requirements, the Federal Home Loan Bank has 16 the powers and they can require you to limit your 17 operational expenditures to specified limits. 18 Do you see that? 19 A. They could. 20 Q. So that one of the limitations that can 21 be placed on an institution when it's failing its 22 net worth requirement is to reduce or limit their 20245 1 operational expenditures. Right? 2 A. I believe that's right. 3 Q. And, in fact, on May 13th, 1988, you 4 got a letter from Mr. Twomey that made reference 5 to the fact that you should be watching your 6 operational expenditures. 7 Do you remember that? 8 A. Actually, I don't; but I'm sure it was 9 in one of the letters that he sent. 10 Q. And USAT's largest operational 11 expenditure by far was salaries and compensation, 12 wasn't it? 13 A. I don't know. 14 Q. I'm handing you a copy of what is the 15 1987 10K, another one of those documents we've 16 seen a lot of. If you would, turn to Page 41, 17 sir. 18 THE COURT: Can I have an exhibit 19 number on that? 20 MR. RINALDI: I'm sorry. It's 21 Exhibit -- I'm sorry. I'm looking at the wrong 22 exhibit. It's Exhibit A3023. At Page 41, there's 20246 1 a Bates stamped number of CN158937. 2 Q. (BY MR. RINALDI) Are you there, sir? 3 A. Yes, I am. 4 Q. And if you run your finger down the 5 column that says "1987," about two-thirds down the 6 page, it indicates what the non-interest expenses 7 of the institution are. 8 Do you see that? 9 A. The non-interest expenses, yes. 10 Q. That's correct. 11 And the non-interest expenses total are 12 $48 million. 13 Do you see that? 14 A. Right. 15 Q. Of which amount compensation represents 16 $26 million. 17 Do you see that? 18 A. Yes, I do. 19 Q. So that of the total operating 20 expenses -- do you see those -- of 48 million, 21 over half was compensation. Right? 22 A. That's correct. 20247 1 Q. So that when it indicates that an 2 entity may have limits placed upon its operating 3 expenses if it's failing its net worth, the 4 principal component of that, in USAT's case, would 5 have been limits on salary and compensation, 6 correct? 7 A. It could have happened, yes. 8 Q. In fact, if you go down the page a 9 little further of T8022(2), it indicates that in 10 addition, while an institution is in 11 non-compliance, it won't even be able to amend a 12 pension plan to provide a cost of living increase. 13 Do you see that? 14 A. Yes, I do. 15 Q. So, when institutions are failing their 16 net worth requirements, the regulations indicate 17 that increases in compensation and increases in 18 operational expenditures should be looked at very 19 carefully? 20 A. Again, one part is the regulator has 21 the right to do things; and then the second part 22 seems to be saying they have the right -- I mean, 20248 1 it's just mandatory. I'm not sure I understand 2 what you're saying. 3 Q. Okay. But the regulations, as you 4 explained to Mr. Villa, don't expressly state that 5 you can't have a salary increase; isn't that 6 correct? 7 A. Yes, that's correct. 8 Q. Now, given these regulations, that 9 didn't raise any safety and soundness issues for 10 you when you read them? 11 A. I'm sorry. What didn't raise any 12 safety and soundness -- 13 Q. The fact that the regulations said that 14 if an institution is failing its net worth, 15 limitations could be placed upon their increases 16 in operating expenses. 17 A. Okay. 18 Q. And that didn't raise any safety and 19 soundness concerns -- I'm sorry. 20 You felt that in this particular 21 environment that we're talking about in October of 22 1988, that it was appropriate for USAT to approve 20249 1 $2 million in bonuses in 1988; is that correct? 2 A. I think that the board of directors 3 felt that. I believe that's correct. 4 Q. And then subsequent to that, it was 5 determined that salary increases and bonuses which 6 amounted to $2 and a half million would be granted 7 in April of 1988. 8 Do you recall that? 9 A. Yes, I do. 10 Q. Okay. And then subsequent to that, in 11 July of 1988, USAT approved new employment 12 contracts with severance benefits that were 13 guaranteed. 14 Do you remember that? 15 A. Well, the agreements provided for a 16 letter of credit, that's correct. 17 Q. And even further down the line in 18 October, USAT actually set up a 6.6-million-dollar 19 escrow. 20 Do you remember that? 21 A. Yes, I do. 22 Q. And that didn't raise any safety and 20250 1 soundness concerns for you, doing all of those 2 things? 3 A. Those were issues that were looked at, 4 that's correct. 5 Q. And you didn't think that any of those 6 practices could lead to material loss or damage to 7 USAT? 8 A. I did not. 9 Q. Now, Mr. Villa talked to you about 10 Option 1 on T8022. That's the one that appears on 11 the last page. And he went into how -- all of the 12 discussions about infusing capital from UFGI to 13 USAT. 14 Do you see that? 15 A. Yes, I do. 16 Q. And we talked about that and went into 17 it at some length yesterday. 18 What about Option 2: "Selling asset 19 (There may be some profitable assets in the 20 mortgage-backed securities portfolio or some other 21 portfolio)." 22 Do you see that? 20251 1 A. Yes, I do. 2 Q. Was it USAT's practice to sell 3 mortgage-backed securities to generate gains to 4 bolster capital? 5 A. It did it, yes. 6 Q. Was that its common practice? 7 MR. VILLA: Your Honor, at the risk of 8 treading too heavily on the multiple questioner 9 issue, I think Mr. Guido asked questions about 10 that exact line in his examination the day that 11 Mr. Rinaldi was not with us. If Mr. Guido is 12 going to come back and ask about mortgage-backed 13 securities, I'm going to object to having the 14 issue raised three times by different questioners. 15 MR. RINALDI: I don't have any more 16 questions on that, Your Honor. 17 Q. (BY MR. RINALDI) Now, after you wrote 18 the October 29th memo and you realized there was a 19 problem with USAT's net worth, you had a meeting 20 with Mr. Twomey and brought this subject up. 21 Do you recall that? 22 A. Yes, I do. 20252 1 Q. And you memorialized, as you did on 2 many occasions, your meeting with Mr. Twomey on 3 November 18th, 1988. This is Exhibit B1855. Let 4 me just ask you a couple of questions before we 5 actually get into the memo. 6 On cross-examination from Mr. Villa, he 7 asked you whether you spoke frequently with 8 Mr. Twomey or words to that effect. And your 9 response -- I wrote it down -- was that you had 10 many, many conversations with Mr. Twomey. 11 Do you recall that? 12 A. I believe that's right. 13 Q. As USAT's problems regarding its net 14 worth continued to grow worse, did you have more 15 and more conversations with Mr. Twomey? 16 A. We would have a series -- we would have 17 conversations, you know, very frequently. I don't 18 know if they were more or less, but we would have 19 very frequent conversations. 20 Q. When an issue arose regarding the 21 application of a regulation that might impact upon 22 USAT, was it your practice to contact Mr. Twomey 20253 1 if you had a question about how the Bank Board 2 might view that regulation? 3 A. I don't believe so. Not in general. 4 Q. Well, when you were looking to enter 5 into a forbearance application because of the 6 contemplated net worth failure in November of 7 1988, you contacted Mr. Twomey, didn't you? 8 A. Again, I don't have a specific 9 recollection. If that's what is dealt with here, 10 the answer is yes. I certainly talked to him 11 about it, yes. 12 Q. Well, look at Paragraph 3. It says, "I 13 discussed with Neil the possibility United would 14 be going below its minimum regulatory net worth 15 either during 1987 or early 1988." 16 Do you see that? 17 A. Right. 18 Q. "I told him as a public company, we 19 would be obligated to make a press announcement 20 and, therefore, we would like to have worked out 21 with the Dallas bank a forbearance program so that 22 we can announce that at the same time." 20254 1 Do you see that? 2 A. Yes. 3 Q. So, you went to Mr. Twomey on November 4 the 18th to advise him about this imminent net 5 worth failure that you were contemplating would 6 occur? 7 A. That was one of the things we certainly 8 talked about, that's correct. 9 Q. And after you talked about that, in 10 Paragraph 6 it says -- on the next page -- it 11 says, "Neil and I promised to keep the lines of 12 communication open and going both ways and that as 13 he heard of any additional problems or concerns, 14 he would let me know so long as I let him know of 15 any problems at United." 16 Do you see that? 17 A. Yes, I do. 18 Q. Okay. Now, in view of this open 19 communication policy, did you tell Mr. Twomey at 20 that time that United had recently approved 21 $2 million in bonuses for payment in 1988, even 22 though at that point you believed United was about 20255 1 to fail its net worth capital requirement? 2 A. I don't believe I told him. I might 3 have. 4 Q. Do you think that's something that he, 5 as a supervisory agent of United, might have been 6 concerned about or interested in learning? 7 A. Not really. 8 Q. So that at least with respect to 9 compensation matters, the lines of communication 10 weren't as open as they were with respect to 11 matters of forbearance and net worth failure; is 12 that fair? 13 A. I don't think that's an accurate 14 statement. The lines of communication were 15 attempted to be kept open on all matters. 16 Q. Okay. Now, let's move on to the 17 October -- to the February 11th, 1988 meeting of 18 the board of USAT. 19 Now, this is the one where we've gone 20 around and around about whether Ms. Carlton was or 21 wasn't there. 22 Do you remember that? 20256 1 A. Yes, I do. 2 Q. Let's take -- this is Exhibit A1141, 3 and I believe it's in evidence as Tab 99. It's 4 Exhibit A1141. 5 Now, turn to Page 27. That's the 6 portion of the minutes where you discuss the 7 employment contracts. And in the second full 8 paragraph, you are speaking. And in the second 9 sentence, it says, "It was noted that these 10 contracts were identical to contracts entered into 11 by UFGI and would only be effective if UFGI could 12 not perform under such contracts." 13 Do you see that? 14 A. Yes, I do. 15 Q. So, based on what was said at the 16 board, it doesn't appear as if USAT has any 17 liability under the contracts they were entering 18 into; is that fair? 19 A. Unless UFGI couldn't perform, that's 20 correct. 21 Q. So, anybody reading this or even being 22 at the minutes or at the board (sic) would have 20257 1 thought that USAT didn't have to pay salary, USAT 2 didn't have to pay bonus, USAT didn't have to pay 3 severance benefits, USAT didn't have to put up 4 letters of credit. Right? 5 A. I don't believe that's an accurate 6 statement. 7 Q. Well -- but the contracts say -- and -- 8 that they aren't effective unless UFG can't 9 perform. And all of those things -- the salary, 10 the bonus, the severance, the letters of credit -- 11 were supposed to be done by UFG in the first 12 instance, correct? 13 A. No, that's not correct. The salaries 14 were supposed to be paid by USAT. 15 Q. And you explained that to Ms. Carlton 16 at the meeting? 17 A. I don't believe we spoke about the fact 18 that they were paying the salaries at this 19 meeting. 20 Q. Okay. And I guess we've already talked 21 about the fact that you don't know whether, 22 following the meeting, a copy of these contracts 20258 1 were ever given to Ms. Carlton, correct? 2 A. I don't know one way or the other. 3 Q. Now, at the meeting, the forbearance 4 application was also discussed. Do you see that? 5 It's on the prior page. 6 Did you think that the contracts were 7 unsafe and unsound -- sorry. 8 Did you think that the contracts were 9 safe and sound even though they could have led to 10 material financial loss -- strike that. 11 Under these contracts, USAT could have 12 been obligated to pay two times annual salary as a 13 severance payment, correct? 14 A. It could have if UFGI -- if there was a 15 severance and if UFGI couldn't pay it, then the 16 USAT contract became effective. USAT could have 17 been obligated to pay it. 18 Q. Correct. And you testified yesterday 19 that the reason these contracts were entered into 20 was because people expressed concern over the 21 viability of UFG; isn't that correct? 22 A. That's correct. 20259 1 Q. Okay. So, there was some substantial 2 concern at this point in time as to whether UFGI 3 would be able to perform, and that's the very 4 reason that the USAT contracts were entered into; 5 isn't that correct? 6 A. That's correct. 7 Q. So, in your mind, did you believe that 8 these contracts could lead to a material financial 9 loss or damage to USAT if UFG couldn't pay? 10 A. Absolutely not. As I said, the reason 11 for these contracts was to keep the senior people 12 there. And in my opinion and I think the opinion 13 of the board, that was the critical thing and that 14 the payment of two times severance at some time 15 was not a material loss. 16 Q. Even though that severance amounted to 17 some $6.6 million for the eight contracts? 18 A. It could have, that's correct. 19 Q. Now, yesterday, Mr. Villa, in the 20 context of discussing these employment contracts, 21 discussed with you the financial condition of UFG 22 at this point in time. 20260 1 Do you remember? 2 A. I believe so, yes. 3 Q. I believe in your testimony, you said 4 that UFG at this point in time was insolvent on a 5 book basis. 6 Do you remember saying that? 7 A. Actually, I don't. 8 Q. Well, is that consistent with your 9 understanding? 10 A. That they were insolvent on a book 11 basis? 12 Q. Yes. Maybe Mr. Villa said that. 13 A. If, by that, you mean -- tell me 14 what -- 15 Q. Liabilities exceed assets. 16 A. If that's what you mean by being 17 insolvent, that's correct. 18 Q. On a book basis? 19 A. Their liabilities exceeded their 20 assets. 21 Q. But I believe you testified that 22 notwithstanding the fact that they were insolvent 20261 1 on a book basis, they nevertheless had some 2 $20 million in cash or thereabouts at the UFG 3 level, correct? 4 A. I think it was more than that; but yes, 5 that's correct. 6 Q. And UFG at that point in time in that 7 same February 11th meeting of the UFG board 8 entered into bonus agreements with Mr. Crow and 9 Mr. Gross. 10 Do you remember that? 11 A. Yes, I do. 12 Q. And those were also dated February the 13 11th, 1988, correct? 14 A. I believe that's right, yes. 15 Q. And the purpose of the bonus agreement 16 with Mr. Gross was to pay off three quarters of 17 the million-dollar liability that he had incurred 18 under a note at the time that he purchased 105,000 19 shares of UFG stock in 1985. 20 Do you remember that? 21 A. Well, actually, I think the purpose was 22 to keep him there. And it provided if he stayed 20262 1 there for a long period of time, he would then 2 have that note paid off, that's correct. 3 Q. So, in other words, on February 11th, 4 1988, UFG had substantial amounts of cash that was 5 available to them; and they were in a position to 6 give Mr. Gross a bonus that had a value of, 7 ultimately, over three quarters of a million 8 dollars, correct? 9 A. Well, they weren't giving him a bonus. 10 What was happening was he owed interest on that 11 note, and he had to pay principal on that note. 12 And this bonus was to offset that; so, it would be 13 a wash. 14 Q. Right. But the value of the bonus to 15 Mr. Gross would have been in excess of three 16 quarters of a million dollars, wouldn't it? 17 A. Over a long period of time, that's 18 correct. 19 Q. Okay. And the same was true with 20 Mr. Crow. He had a note for $76,000. And UFGI 21 agreed to give him a bonus to pay off that note as 22 well, correct? 20263 1 A. Over a long period of time if he stayed 2 with the association, that's correct. 3 Q. Now, shortly after the February meeting 4 at which you indicated that UFGI had substantial 5 cash and was in a position to pay these bonuses, 6 there was a change in control, wasn't there, of 7 UFG? 8 THE COURT: Mr. Rinaldi, we'll take a 9 short recess. 10 MR. RINALDI: Okay. 11 12 (Whereupon, a short break was taken 13 from 10:32 a.m. to 10:56 a.m.) 14 15 THE COURT: Be seated. We'll be back 16 on the record. 17 Mr. Rinaldi, you may continue. 18 MR. RINALDI: Thank you, Your Honor. 19 Q. (BY MR. RINALDI) Before we broke, I was 20 talking to you about the change of control issue 21 that arose in the beginning of 1988 in United 22 Financial Group. 20264 1 Do you recall yesterday Mr. Villa asked 2 you a series of questions about the change of 3 control that occurred when members of the UFG 4 board of directors resigned and, at that point in 5 time, Mr. Gray threatened to leave? 6 Do you recall that? 7 A. After the change of control? 8 Q. Yes. 9 A. That's correct. 10 Q. And as a result of that potential 11 threat of a change of control, UFG had the 12 potential for substantial liability under its 13 September 9, 1987 contracts, didn't it? 14 A. Yeah. Two times the salary. 15 Q. Right. And at that point in time, in 16 March and April of 1988, why didn't UFG use some 17 of its cash assets to effectuate a solution to the 18 change of control? 19 A. You mean like paying Mr. Gray? I'm not 20 sure what you mean by that. 21 Q. Well, you increased the salaries of the 22 executives and you also gave them a special bonus, 20265 1 a portion of which was placed in a trust account, 2 correct? 3 A. Correct. 4 Q. And that was a mechanism to -- to 5 resolve the problem that had arisen when Mr. Gray 6 raised the change of control issue, correct? 7 A. No. That was a means to try to keep 8 the senior people and a lot of other people at 9 United Savings while it was going through the 10 Southwest Plan discussions and other survival 11 discussions. 12 Q. Right. But all of that had been 13 triggered by Mr. Gray threatening to enforce the 14 change of control provision, correct? 15 A. No. A portion of it was triggered by 16 that. 17 Q. Well, if a portion of it was triggered 18 by that, why didn't UFG at least pay a portion of 19 the salary increases and the bonuses that were 20 used to resolve that problem? 21 A. Well, first of all, USAT always paid 22 salaries and bonuses. The way to resolve that 20266 1 problem was not to give him his two times 2 severance and let him leave. 3 Q. I'm not suggesting that. I'm 4 suggesting this: If the resolution to the problem 5 was to increase the salary, why not let UFG pay 6 the increase in salary? You just testified they 7 had $20 million in cash or more. They could have 8 paid that increase, couldn't they? 9 A. They could have paid an increase. 10 USAT -- the resolution was to give -- to roll the 11 bonuses into salaries; so, it wasn't a -- to bring 12 people to their market level and then to give them 13 a one-time bonus, 25 percent of which would be 14 paid then and 75 percent at the end of the year, 15 the purpose of which was to keep the senior people 16 and other people at the institution. 17 The purpose was not to give Mr. Gray 18 money as a severance. 19 Q. I'm not talking about giving Mr. Gray 20 money as a severance. I'm asking you: Couldn't 21 the increase in salaries have been paid for by UFG 22 rather than USAT? 20267 1 A. Couldn't it have? 2 Q. Yes. 3 A. They could have paid for it. 4 Q. And couldn't the executive bonus have 5 been paid by UFG rather than USAT? 6 A. To the senior executives? 7 Q. Yes. 8 A. Could have. It could have. 9 Q. Instead, you used the assets of USAT to 10 effectuate a resolution of the change of control 11 problem that was created by Mr. Gray's threat of 12 invoking the September 9th, 1988 contracts, 13 correct? 14 A. We used -- we increased their 15 salaries -- people's salaries by rolling in the 16 bonus, and then we created that other bonus. 17 Q. And you used the assets of USAT? 18 A. Yes, we did. 19 Q. And that resolved UFG's change of 20 control problem, didn't it? 21 A. No. It resolved the change of control 22 problem which would have affected USAT. If all of 20268 1 the senior people had left the institution, that 2 was a USAT problem. 3 Q. But you made a conscious decision not 4 to use the assets of UFG and to use the assets of 5 USAT, didn't you? 6 A. I'm not sure there was a conscious 7 decision. Salaries and bonuses were always paid 8 by USAT. 9 Q. Now, would you take a look at what's 10 been previously marked as Exhibit B2091? This is 11 Tab 1688. This is another one of the memos that 12 you wrote and that Mr. Villa showed you yesterday 13 that relate to your conversations with Mr. Twomey. 14 And if you would take a moment to look at that. 15 A. (Witness reviews the document.) 16 Do you want me to read the whole thing? 17 Q. No, no. I'll point you to a couple of 18 things I'm interested in. 19 Under Roman Numeral I, it talks about 20 the forbearance; and you told Mr. Twomey that you 21 were distressed that the Dallas bank hadn't 22 granted the forbearance. 20269 1 Do you see that? 2 A. Yes, I do. 3 Q. And you were concerned at this time 4 about repo lines being pulled and the impact it 5 could have on USAT in the event that the 6 forbearance wasn't granted. 7 Do you see that? 8 A. Yes, I do. 9 Q. So, you were keeping Mr. Twomey at this 10 point apprised of the concerns you had regarding 11 the continued problems of USAT, weren't you? 12 A. Yes, we were. 13 Q. And then I notice on the next page, you 14 talk about the Southwest Plan; and Mr. Twomey is 15 fairly informative here, isn't he? He tells you 16 that you need to contact a man named Mr. Grevette 17 in Washington and he tells you that it's being 18 handled out of Washington and he identifies the 19 people that are doing the Southwest Plan. 20 Do you see that? 21 A. Yes, I do. 22 Q. So, Mr. Twomey tried very hard to keep 20270 1 you well informed about what was going on at the 2 Bank Board, didn't he? 3 A. Yes, he did. 4 Q. He was maintaining those lines of 5 communication with you, wasn't he? 6 A. He was trying. 7 Q. In the second sentence, it says, "He 8 noted that since we were below the minimum 9 regulatory capital and the forbearance hadn't been 10 granted, he would expect that we would be asked to 11 sign a supervisory agreement." 12 So, he's giving you a heads up, isn't 13 he? 14 A. Yes, he was. 15 Q. And as the general counsel for USAT, 16 you found it helpful to have Mr. Twomey keeping 17 you apprised regularly about the process and what 18 was going on, didn't you? 19 A. I thought it was helpful, yes, I did. 20 Q. This meeting is held on March the 23rd, 21 1988. Right? This is after you entered into the 22 new employment contracts on February the 11th. 20271 1 Did you reciprocate and advise 2 Mr. Twomey about what USAT was doing with its 3 compensation practices? 4 A. I didn't talk to -- apparently, I 5 didn't talk to him about the contracts, if that's 6 what you're asking. 7 Q. Did you think that that was a material 8 event that he would be interested in knowing as a 9 supervisory agent? 10 A. Probably not. 11 Q. Now, we talked a little bit about the 12 memo you got from Mr. Leahey on March the 25th, 13 1988. 14 Do you remember that? 15 A. Yes, I do. 16 Q. Okay. And in that, Mr. Leahey raised 17 the point that entering into contracts that were 18 secured -- that had secured severance provisions 19 could be construed as an unsafe and unsound 20 practice. 21 Do you remember that? 22 A. I believe I do. 20272 1 Q. And I believe you testified that you 2 went out and read the Bass case and did your own 3 sort of legal analysis as to whether, under the 4 circumstances USAT faced, the Bass case might be 5 applicable. 6 Do you remember that? 7 A. I certainly read the Bass case at that 8 time. 9 Q. But you weren't an expert, I think you 10 testified, with respect to the aspect of 11 regulations? 12 A. That's correct. 13 Q. You weren't an expert on safety and 14 soundness issues, were you? 15 A. No. 16 Q. You knew from the Leahey memorandum 17 that there was a potential that the course of 18 action that the board of USAT was about to pursue 19 could be construed as an unsafe and unsound 20 practice, correct? 21 A. It could be, that's correct. 22 Q. And in your mind, the regulations 20273 1 didn't provide an objective standard that gave you 2 any guidance, did they? 3 A. That's correct. 4 Q. And Leahey, when you went to him, said 5 he couldn't give you a legal opinion as to safety 6 and soundness, didn't he? 7 A. That's correct. 8 Q. And he suggested that you might want to 9 talk to Hewitt & Associates, didn't he? 10 A. That's much later. 11 Q. Well, ultimately, you did talk to 12 Hewitt & Associates, didn't you? 13 A. If you're saying in the March memo -- 14 Q. No, no, no. I'm talking about -- I 15 think you testified that when Mr. Leahey declined 16 to give you a safety and soundness opinion, he 17 suggested that perhaps you ought to talk to 18 Hewitt. 19 Do you recall that? 20 A. During the course of the Hewitt -- 21 Q. Yes. 22 A. Yes, there was some of that discussion, 20274 1 that's correct. 2 Q. When you asked Hewitt, they advised you 3 that you should go get an outside opinion from 4 regulatory counsel, didn't they? 5 A. Correct. 6 Q. During this period of time, you never 7 asked Mr. Twomey, with whom you had these open 8 lines of communications, as to whether the course 9 of conduct that you were contemplating or embarked 10 upon with respect to increased salaries and 11 bonuses would be considered an unsafe and unsound 12 practice? 13 A. If you're talking about the contracts, 14 as you know, we sent him Larry Connell's contract 15 and asked him to let us know if there was any 16 problem with it. 17 Q. I'm asking you about the April 1988 18 time frame when you're granting salary increases 19 for executive personnel that approximate nearly 20 60 percent of their base salary and you're 21 granting a new executive bonus. 22 At that point in time you're talking to 20275 1 Mr. Leahey, you had hired Hewitt & Associates. At 2 that point in time, Hewitt tells you that they 3 can't give you a safety and soundness opinion, 4 that they -- 5 MR. VILLA: I just wanted to object 6 to -- I assume that the term "you" here refers 7 to -- 8 MR. RINALDI: USAT. 9 MR. VILLA: -- USAT and not Mr. Berner 10 because we know he was not a member of the 11 compensation committee that made these decisions. 12 Q. (BY MR. RINALDI) You were the one that 13 communicated with Hewitt, weren't you? 14 A. On occasion, as did others. 15 Q. And you were the one that communicated 16 with Mr. Leahey, didn't you? 17 A. Yes. 18 Q. You related those communications back 19 to Mr. Whatley and the other members of the board, 20 didn't you? 21 A. Yes, I did. 22 Q. Okay. And during this period of time 20276 1 on March the 30th, Vivian Carlton had informed the 2 board that they were failing their net worth 3 capital as of December 31st, 1988, by at least 4 50 million and, by her calculation, by over 5 $100 million. 6 Do you recall that? 7 A. Yes, I do. I don't recall the numbers, 8 but those sound like the right numbers. 9 Q. And the same day, March the 30th, 1988, 10 that Vivian Carlton told you about the 11 100-million-dollar net worth deficiency, USAT went 12 ahead and approved salary increases, executive 13 bonuses, authorized entering into new contracts 14 that would have severance agreements and that 15 would have a longer term, didn't they? 16 A. Yes, we did. 17 Q. Wasn't that a reckless course of 18 action, knowing that such a practice might be an 19 unsafe and unsound practice, sir? 20 A. Absolutely not. If the institution was 21 doing poorly, that's expressly when you want to 22 make sure that the people that are there that are 20277 1 running the institution, the senior management and 2 the junior management, have an incentive to stay. 3 It's just the oppose of being reckless. It's what 4 management has to do. 5 Q. And so, after you paid the salaries and 6 the bonuses, you contacted Hewitt and asked for 7 their views about whether what you had done was 8 reasonable; is that correct? 9 A. That's correct. 10 Q. And do you recall that you told 11 Mr. Villa that Hewitt helped draft the new 12 contract? 13 A. That's correct. 14 Q. And do you recall that you testified 15 that Hewitt felt the contract was, quote, 16 "reasonable"? 17 A. I believe that's what they said in 18 their report. 19 Q. Would you take a look at B2181? This 20 has been previously admitted, I believe, at 21 Exhibit 1690. This is a letter to Mr. Berner, 22 Arthur S. Berner; and it's from Mr. Mark K. Gordon 20278 1 at Hewitt & Associates. And take a look at what 2 it says in the first -- second sentence of the 3 first -- third sentence of the first paragraph. 4 It says, "Our work is not intended to constitute 5 legal advice or supersede the need for such 6 advice." 7 Do you see that? 8 A. Yes, I do. 9 Q. And if you turn to the next page under 10 Section 8D, do you remember what Paragraph 8D 11 pertained to? 12 A. No, I don't. 13 Q. Well, it talks about good cause and the 14 change of control. That was the provision that 15 provided for change of control, and it defined 16 what it was under the contract. 17 A. Okay. 18 Q. If you go down that third bullet point, 19 about two-thirds down in the paragraph, it reads 20 as follows: "We believe that attorneys familiar 21 with both the situation of United Financial Group 22 and the regulatory environment and special laws 20279 1 applicable to such financial institutions should 2 provide input in drafting such a provision." 3 Do you see that? 4 A. Yes, I do. 5 Q. Did you ever go to attorneys that were 6 familiar with the situation of UFG and the 7 regulatory environment and special laws applicable 8 to financial institutions in order to obtain their 9 assistance in drafting that contract? 10 A. Yeah. I talked to Tom Leahey about it. 11 Q. Mr. Leahey redrafted the contract? 12 A. He gave me whatever input he wanted to 13 on the contract. 14 Q. Did you send him a contract? 15 A. Yes, I did. 16 Q. Did Mr. Leahey tell you the contract 17 was a safe and sound contract? 18 A. He wouldn't give an opinion on safety 19 and soundness. 20 Q. As a securities attorney, when an 21 attorney won't give an opinion on safety and 22 soundness, doesn't that raise red flags for you? 20280 1 A. No, because that's a factual matter. 2 It's not necessarily a legal matter. Generally, 3 lawyers won't give you -- I won't give a legal 4 opinion on a factual matter. 5 Q. Now, we talked about the Southwest Plan 6 and how you had hoped that you would be a 7 participant in the Southwest Plan. And you had 8 numerous conversations with Mr. Twomey on that 9 subject, didn't you? 10 A. Yes, I did. 11 Q. And if you look at B2176, there's 12 another memo of Mr. Twomey -- of yours of 13 conversations with Mr. Twomey, and that appears at 14 6 -- I mean 1692. That's Trial Exhibit 1692. 15 Take a look at that just for a second. 16 And do you see as you go down to about 17 the seventh paragraph or the last two paragraphs 18 down there, he goes through the process by which 19 it's necessary for you to qualify for the 20 Southwest Plan, doesn't he? 21 A. On the first page? 22 Q. Yes. 20281 1 A. Hold on. 2 Q. It's the last two paragraphs on the 3 page? 4 A. Are you talking about the forbearance 5 application. 6 Q. Well, it says, "We then discussed the 7 forbearance application." It says, "Thomas stated 8 that as soon as the examination was complete, 9 which was expected to be within the next seven to 10 ten days, a draft examination report would be 11 forwarded to Dallas." 12 A. Right. 13 Q. So, they were waiting on that exam from 14 Vivian Carlton. Then he says, "It's likely that 15 United would have to redo its application as a 16 result of the exam." So that even if you got back 17 a clean -- even when the exam came back, they knew 18 at this point in time you were going to have to 19 submit a new forbearance application. Right? 20 A. That's what he was saying. 21 Q. They were keeping you posted on the 22 steps you had to go through. Then after the exam 20282 1 was deemed complete, the bank of Dallas would have 2 60 days to make a determination as to whether they 3 were going to grant the forbearance. Right? 4 A. Yes, that's right. 5 Q. Then he says that he hoped a ruling 6 wouldn't take that long. Then it goes on and 7 says, "In addition, he notes that on any 8 forbearance application with the Southwest Plan 9 participant, there was a requirement that it go to 10 the FSLIC for approval." 11 Do you see that? 12 A. Yes, I do. 13 Q. And then you say at the bottom that 14 that's the first time you had ever heard of this 15 provision. Is it fair to say that the regulators, 16 Mr. Twomey and his supervisory agents, were trying 17 to guide you through this process and get you to 18 at least the point where you would be eligible to 19 enter the Southwest Plan? 20 A. I think he's giving us what the 21 procedure is. He was certainly informing us of 22 what was necessary on this forbearance 20283 1 application. 2 Q. Okay. And then if we look -- let's 3 take a look at Exhibit 2224, which I'll hand you 4 right now, which is Tab 1695. And if you look at 5 the last full page, it talks about the 6 Southwest Plan. 7 A. The last page? 8 Q. I'm sorry. It's the second page. It 9 talks about the Southwest Plan. They were telling 10 you that the people in Washington and Dallas were 11 starting to talk about United's role in the 12 Southwest Plan, and they thought that was 13 positive. Right? 14 A. Right. 15 Q. So, they were trying to help you work 16 your way into the Southwest Plan, weren't they? 17 A. Well, he was telling us what was going 18 on. He was informing us of where we were. 19 Q. You found these communications to be 20 helpful? 21 A. I did. 22 Q. Take a look at B2274, which was 20284 1 previously admitted as 8081 at Tab 1377. This, 2 again, is another one of your memos. 3 On June the 30th, 1988 -- do you see 4 that date? 5 A. Yes, I do. 6 Q. He says, "I then requested further 7 reaffirmation of the Bank Board's position once 8 Connell was hired." This is the point in time 9 that you talked about with Mr. Villa that you were 10 trying to hire a person with expertise in the 11 savings and loan industry so that you could 12 qualify to be a participant in the Southwest Plan. 13 Right? 14 A. Right. 15 Q. And then it says, "Neil flatly stated 16 that after we had hired Connell, we would have 17 satisfied all the requirements that the Federal 18 Home Loan Bank of Dallas had concerning United and 19 that United would have no impediments to 20 participating in the Southwest Plan." 21 Do you see that? 22 A. Yes, I do. 20285 1 Q. So, on June the 30th, you had gone 2 through all of the hoops. And at that point, you 3 had reached the starting line. Right? 4 A. I don't want to say we had reached the 5 starting line. This is what we had been told. 6 Q. Nobody had made any guarantees to you 7 or said, "You're going to be in this plan." All 8 along, they were telling you, "You have to do 9 this, you have to do that. If you do all of these 10 things, you will be eligible"? 11 A. For the Southwest Plan. 12 Q. They didn't say you would necessarily 13 be guaranteed in the Southwest Plan; is that 14 correct? 15 A. In the Southwest Plan. 16 Q. Now, the way you responded to that, did 17 they tell you you were going to participate in 18 some other plan? 19 A. They told us we were going to be a 20 survivor. 21 Q. Were they saying that they hoped you 22 would be a survivor, that they didn't want you to 20286 1 fail; or were they saying, "We guarantee that 2 you're not going to fail"? 3 A. More the latter than the former. 4 That's true. 5 Q. Okay. Let me ask you this. I've just 6 shown you three memos that go back and cover a 7 period of less than, oh -- I guess they start in 8 May, June. One is May 18, the second one is June 9 the 3rd, and the next one is June the 30th. 10 Here you're having these constant 11 communications with Mr. Twomey about the 12 Southwest Plan. And in the final one on June the 13 30th, 1988, you're talking about having overcome 14 all impediments to participate in the 15 Southwest Plan. 16 Now, on this same day, the boards -- 17 two days earlier, the boards of USAT and UFG had 18 met, hadn't they, and they had approved new 19 employment contracts, had they not? 20 A. I believe that's correct. 21 Q. And on June the 30th when you had this 22 discussion with Mr. Twomey, did you ever think 20287 1 about telling Mr. Twomey, "Oh, by the way, we just 2 entered into an all new set of employment 3 contracts"? 4 A. I don't believe I thought about it on 5 June 30th, no. 6 Q. What about three weeks earlier when you 7 responded to Mr. Twomey's request about whether 8 there were any contracts entered into between USAT 9 and the executives? You had said you were working 10 on contracts, hadn't you? 11 A. Right. That's my recollection, yes. 12 Q. Then after you finished working on 13 them, you executed them; and you just forgot to 14 tell Mr. Twomey that you had entered into the 15 contracts? 16 A. Well, I sent him the Connell contract 17 and asked him to let me know if there were any 18 problems with it. 19 Q. Let's talk about the Connell contract. 20 When you sent the Connell contract to the Federal 21 Home Loan Bank Board, did you consider it to be a 22 model -- I mean, that term has been used by 20288 1 several witnesses -- but a model for all the other 2 people that were receiving contracts? 3 A. I believe it was substantially a model, 4 yes. 5 Q. And, in fact, the other six executives 6 or eight executives at USAT that got executive 7 contracts, those contracts were in substantially 8 the same form as the Connell contract, weren't 9 they? 10 A. To a great extent, yes, that's correct. 11 Q. And the reason you were submitting the 12 Connell contract was to see whether the Bank Board 13 would have any objection to it. Right? 14 A. The reason I submitted it was because I 15 asked Mr. Twomey if he wanted to see it; and he 16 said he didn't need to see it, but he did want to 17 see it. So, I sent it to him. 18 Q. And you were anxious to do that because 19 you wanted to know if they had any objections. 20 Right? 21 A. That's correct. 22 Q. And that's because you considered it to 20289 1 be a model and you were going to enter into a 2 contract with eight other people along the same 3 lines. Right? 4 A. Certainly if he had had objections to 5 the Connell contract, we would have changed those 6 other contracts. That's right. 7 Q. Did you ever tell Mr. Twomey when he 8 was looking at this Connell contract or at or 9 about the time you submitted the Connell contract, 10 that if he didn't have any objection regarding the 11 Connell contract, that you anticipated entering 12 into executive contracts with nine other members 13 of senior management? 14 A. Did I tell him at the time I sent the 15 Connell contract? 16 Q. Yes. 17 A. I don't believe I did at that time. 18 Q. You didn't tell him that it was a model 19 contract; is that right? 20 A. I don't believe I did. I think I said 21 that -- something similar to that earlier; but I 22 don't think on June 30 I said that, no. 20290 1 Q. And you didn't tell him if that 2 contract in this form was acceptable to him that 3 you were going to enter into nine other contracts 4 with senior executives of USAT? 5 A. I did not say that to him. 6 Q. Okay. You knew that if you told 7 Mr. Twomey about the other nine USAT contracts, he 8 would be very upset, didn't you? 9 A. No. 10 Q. In fact, isn't that exactly what 11 happened in October of 1988 when he learned about 12 the other contracts? 13 A. He learned about the other contracts 14 before that. In October, he sent us a letter 15 saying there were problems with those contracts. 16 Q. And he was upset, wasn't he? 17 A. He thought there were problems with the 18 contracts, that's correct. 19 Q. Wasn't that the reason why you withheld 20 the information about the other nine contracts 21 when you submitted the Connell contract, sir? 22 A. No. 20291 1 Q. Now, going back to what led up to the 2 Connell contract, do you recall that we talked -- 3 Mr. Villa showed you a document about Mr. Twomey's 4 May 13th, 1988 request for USAT contracts. It's 5 T869, and it's previously been admitted as 6 Tab 430. 7 THE COURT: Would you state that 8 exhibit number again, please? 9 MR. RINALDI: I'm sorry. It's 8069, 10 T8069. It's previously been admitted as Tab 429. 11 And I'm also handing the witness at the same time 12 T8071, which is Trial Exhibit 43. And I will also 13 hand him a copy of -- I'm sorry. That's Tab 430. 14 That's T8071, Tab 430. And then Exhibit A3015, 15 which is Tab 94. 16 Q. (BY MR. RINALDI) Sir, would you take a 17 look at the first two documents that I have put 18 before you? The first one should be the May 13, 19 1988 letter to Mr. Twomey regarding the contracts. 20 Do you see that? 21 A. From Mr. Twomey. 22 Q. Mr. Villa asked you some questions 20292 1 yesterday, and I wasn't quite clear as to what 2 your response was. 3 Mr. Twomey requests that you -- let's 4 see what his term is. He says in the second full 5 sentence, "We will be reviewing these contracts 6 for compliance with 563.39 of the insurance 7 regulations" -- this is after he has requested 8 employment contracts of the association. Then he 9 says, "If the association or any of its 10 subsidiaries have entered into any employment 11 contracts which provisions violate aforementioned 12 insurance regulations, please detail the 13 corrective actions." 14 In this, he's requesting any employment 15 contracts of the association, correct? 16 A. Correct. 17 Q. Then on the next page, you write back 18 to him the next document, which is 8071, and you 19 advise him in the first sentence of the first 20 paragraph, "Please be advised the association has 21 not entered into such employment agreements with 22 such officers or employees." 20293 1 Yesterday, Mr. Villa had asked you 2 whether you had signed the document. Your 3 recollection was that you were leaving town, and 4 then I remember you said something about going on 5 a honeymoon. 6 My question to you is: What did you 7 mean when you said that the association had not 8 entered into employment agreements when it had 9 just executed, on February 11, eight or seven 10 employment agreements with executives? 11 A. Obviously, I don't remember 12 specifically what I was thinking at that time, 13 whether the UFGI contracts had been triggered or 14 hadn't been triggered. Certainly the people 15 thought they had been triggered so that the USAT 16 contracts never became effective. We had also 17 entered into these negotiations and were 18 drafting -- in fact, by this time, it was almost a 19 final draft of the new contracts. So, I just 20 didn't think of it. It was a mistake. 21 Q. Well, let me ask you this. You keep on 22 telling us that you always disclosed the contracts 20294 1 in the proxy statements. 2 So, take a look at Tab 94. That's 3 A3015, the third document I've given you. 4 A. What page? 5 Q. Turn to Page 9. It's the last sentence 6 in the first paragraph of Page 9. There it says, 7 "In 1988, each of the employees entered into a 8 substantially similar agreement with USAT which 9 becomes effective only in the event the company is 10 unable to satisfy its obligations under the 11 agreements." 12 Do you see that? 13 A. Yes, I do. 14 Q. So, when you sent out the proxy 15 statement, you believed that USAT had entered into 16 contracts, didn't you? 17 A. Which would be effective if the UFGI 18 contract -- 19 Q. Right. But when Mr. Twomey asked you 20 if they had entered into contracts, you didn't 21 tell him, did you? 22 A. I did not tell him in my letter. 20295 1 Q. That was because you didn't think they 2 became effective? 3 A. That was one of the reasons. We were 4 also entering into new agreements with all these 5 people based on the Hewitt and the newly-drafted 6 contract, that's correct. That was a mistake. 7 Q. Mr. Berner, you took a contracts course 8 in law school, didn't you? 9 A. A long time ago. 10 Q. And in that contracts course, you 11 studied executory contracts, didn't you? 12 A. I'm sure I did. 13 Q. I think we all did. 14 Now, you said it sort of slipped your 15 mind. But then Mr. Twomey sends back to you a 16 document which has previously been admitted as 17 Tab 1376, and it's B2211. He sends this back to 18 the board of directors -- 19 MR. VILLA: Objection, Your Honor. I 20 don't think the word "slipped his mind" is a fair 21 characterization of the witness' answer. 22 Q. (BY MR. RINALDI) Okay. You said you 20296 1 had made a mistake or however you characterized 2 it. You said you had forgotten it because you 3 were drafting new contracts? 4 MR. VILLA: Objection, Your Honor. He 5 just heard it about a minute or 30 seconds ago. 6 Why doesn't he just ask the question rather than 7 characterize the answer? 8 Q. (BY MR. RINALDI) When the board of 9 directors received this letter back on May the 10 23rd, it states that "We were subsequently advised 11 by Mr. Berner that no such contracts existed." 12 Now, when you learned that Mr. Twomey 13 understood that no contracts existed, didn't that 14 trigger anything in your mind, I mean, to say, 15 "Wait a second. What about those February 16 contracts? I forgot to mention them"? 17 A. We've been through this. I think what 18 I said is in my mind at that time, the February 19 contracts were not effective because the UFGI 20 contracts had been triggered; and now we were 21 entering into a whole new series of agreements. 22 Q. Now, Mr. Villa showed you the minutes 20297 1 of the June 7th meeting of the UFG compensation 2 committee; and that's the minutes at which the 3 compensation committee considered the Hewitt 4 report. 5 Do you remember that? 6 A. If he showed it to me, I'm sure I 7 remember it. 8 Q. Well, he asked you whether Hewitt had 9 concluded that the new employment agreement was 10 fair and nationally competitive; and you indicated 11 yeah, that's what is reflected in the minutes. 12 Do you recall that? 13 A. Yes, I do. 14 Q. Let's take a look at what the Hewitt 15 report actually contains. It's previously been 16 admitted as Tab 466 at A11030. 17 Do you recognize that as the final 18 report that Hewitt prepared? 19 A. Yes, it is. 20 Q. Okay. Now, if you turn to Page 2 of 21 the report which is actually about, oh, I guess -- 22 it's got a -- I don't see a Bates stamp on this. 20298 1 MR. VILLA: Is it "ii" or No. 2? 2 MR. RINALDI: No. 2, the actual body of 3 the report. 4 Q. (BY MR. RINALDI) Do you see that, where 5 it talks about reasonableness considerations? 6 A. Yes, I do. 7 Q. Basically, Hewitt concluded that the 8 compensation arrangements were reasonable. Right? 9 A. That's my recollection, yes. 10 Q. And in considering whether they were 11 reasonable or not, it took into account the 12 factors that are listed on Pages 2 and 3 here at 13 the bullet points. 14 Do you see that? 15 A. Yes. 16 Q. It says, "In evaluating the 17 reasonableness of individual compensation 18 agreements, several factors should be considered, 19 including"? 20 A. Including, right, sure. 21 Q. It says, "Competitive industry pay 22 practices and estimated value of the sum of all 20299 1 compensation, organization size and growth 2 expectation, incumbent level of responsibility, 3 historical pay levels, competitive business 4 environment." 5 Do you see that? 6 A. Yes, I do. 7 Q. Did Hewitt take into consideration the 8 financial condition of USAT as one of its 9 reasonableness considerations? 10 A. I don't know. You would have to ask 11 them because this is just listing some of the 12 things they took into consideration. 13 Q. Well, it certainly doesn't list it 14 there as a reasonableness consideration, does it, 15 sir? 16 A. Probably not. Wait a minute. Hold on. 17 Organization size and growth expectation, it might 18 fit in there. 19 Q. In fact, there's nothing in here about 20 failing its net worth requirement, is there? 21 A. In these things? 22 Q. Yes. 20300 1 A. I don't know. I don't know. I don't 2 see it here. 3 MR. VILLA: Your Honor, it's on Page 7. 4 MR. RINALDI: As a reasonableness 5 consideration? 6 MR. VILLA: Overview of the current 7 situation. Its capital base has eroded below 8 regulatory net requirements. 9 Q. (BY MR. RINALDI) Does it say it took 10 that into consideration? 11 A. Sure. They reached a conclusion based 12 on all of the things they have looked at. 13 Q. Okay. Now, let's take a look at the 14 Hewitt peer group, sir. That appears on Page 12, 15 ten pages further on in the document. 16 Do you see that? 17 A. The peer group? 18 Q. Uh-huh. It's -- the proxy comparator 19 group is the level above it? 20 A. Proxy review? 21 Q. No. Below that, in the middle of the 22 page, it says "proxy comparator group"? 20301 1 A. Right. 2 Q. So, basically, what they did is looked 3 at the salaries that were being paid at other 4 institutions by evaluating their proxy statements, 5 correct? 6 A. I'm sure that's one of the things they 7 did. You know, they did a complete study to reach 8 their conclusions. 9 Q. And they had a peer group that they 10 looked at, and this is the list of the proxy 11 comparator group? 12 A. This is the list of the 12 corporations 13 that they said they looked at, their proxy, as 14 best I can tell. 15 Q. And of the 12 comparators in that 16 group, how many were losing money like USAT? 17 A. I have no idea. 18 Q. Well, look at the second column from 19 the left. It says, "Net income in millions of 20 dollars." 21 Do you see that? 22 A. Yes, I do. 20302 1 Q. Only two of the 12 were losing money, 2 correct? All the rest were profitable savings and 3 loans, weren't they? 4 A. Again, you're asking me -- I don't know 5 if they were profitable or not. I have no idea. 6 Q. All the rest had net income that was 7 positive, correct? 8 A. Of these 12, it looks that way, yes. 9 Q. Two had negative income. And then 10 there's USAT down at the bottom with a negative of 11 118 million. 12 Do you see that? 13 A. Yes. 14 Q. Among the comparator groups, USAT 15 ranked as one of the worst performers? 16 A. I guess. 17 Q. Then if you look over here, it says, 18 "Return on assets." 19 Do you know what that is, sir? 20 A. I think so. 21 Q. And what is it? 22 A. It's your income return on your asset 20303 1 size. 2 Q. It shows that USAT has a negative 3 1.65 percent return on assets? 4 A. I can't read it. I see the .65. It's 5 probably just my copy. 6 Q. Even so, apart from Gibraltar Finance 7 Corporation, if it's 1.65, United Financial Group 8 has the worst performance record of any of the 9 comparator group, correct? 10 A. I guess so. 11 Q. Then if you look at the asset size of 12 these institutions, UFG is substantially smaller 13 than all the others, isn't it? I mean, the only 14 one that even comes close is Anchor. It's 7.4. 15 And USAT is down there with 7.2? 16 A. Correct. 17 Q. So, they had $7.2 billion in assets. 18 The average of the group looks to be about 19 14.4 billion? 20 A. I can't read the number, but it seems 21 to be larger. Looks like a double-digit number. 22 Q. So, the salaries at USAT were being 20304 1 compared to other thrifts all over the country, 2 most of which were profitable? 3 A. I don't believe that's all they 4 compared it to. I don't believe that's what this 5 report says. 6 Q. Well, it's one of the comparisons they 7 drew, correct? 8 A. That's correct. 9 Q. And the institutions they used for 10 purposes of that proxy review as it pertained to 11 their reasonableness calculation was to look at 12 12 other institutions, 10 of which were profitable? 13 A. Well, these were public institutions, 14 that's right. 15 Q. Now, did they reach any conclusions 16 specifically regarding your compensation? 17 A. Yes, they did. 18 Q. Take a look at Page 4, and let's see 19 what they said about your compensation. It says 20 that EVP -- and we're about in the third paragraph 21 down. It's indented. "EVP general counsel is 22 approximately 40 percent above the target market 20305 1 range." 2 Do you see that? 3 A. Yes, I do. 4 Q. Then there's a footnote that they are 5 going to have further discussions with Dr. Whatley 6 and Munitz to suggest the incumbent general 7 counsel assume broader responsibilities than the 8 industry peer positions and his performance and 9 value to UFG warrant premium over market rates? 10 Do you see that? 11 A. Yeah. I think you said they were going 12 to have it. This says they had had it. 13 Q. But in their final report, they 14 indicated that they thought that your salary was 15 above what they thought was the target market 16 range, correct? 17 A. I think they said it was above the 18 target market range, that's correct. 19 Q. Okay. Now, when USAT approved the 20 compensation -- or the new executive contracts, it 21 didn't have that Hewitt report in front of it. It 22 just had a -- an earlier draft, didn't it? 20306 1 A. I think the draft was substantially 2 finished, that's correct. 3 Q. Now, Mr. Villa asked you why there -- 4 at the June 28th, 1988 USAT meeting where the 5 employment contracts were approved, he asked you 6 why there weren't any other directors to approve 7 the contracts. 8 Do you recall that? 9 A. I believe so, yeah. 10 Q. And you said, well, there was only 11 Mr. Whatley because he was the only independent 12 director, correct? 13 A. Right, non-employee who was there. 14 Mr. Schwartz also but he wasn't there, I believe. 15 Q. You said it was very difficult to get 16 anyone to serve because of liability concerns and 17 that you understood, as did all the members of the 18 board, including Mr. Whatley, that entering into a 19 contract at that point in time could be 20 potentially construed as an unsafe and unsound 21 practice. 22 Do you remember that? 20307 1 A. That's correct. 2 Q. And you also said that your counsel, 3 again, wouldn't give you an opinion and that the 4 consultants said you ought to check with an 5 attorney. 6 Under those circumstances, did you 7 consider telling Mr. Twomey about what was 8 contemplated by the board and asking him whether 9 he would view that as being an unreasonable or 10 unsafe and unsound compensation practice? 11 A. Again, I believe I had told him earlier 12 that we were going to enter into contracts. 13 Q. I understand that you said that you 14 were looking at. 15 A. Right. 16 Q. But did you consider -- under this 17 scenario where there was only one independent 18 director and you couldn't get anybody else to sign 19 off on it and the consultants wouldn't give you a 20 safety and soundness opinion and you couldn't get 21 a safety and soundness opinion from Mr. Leahey and 22 you knew it raised potential problems of safety 20308 1 and soundness, under those circumstances, did you 2 ever consider going to Mr. Twomey and telling him 3 what you were contemplating and asking him his 4 views as to whether that would be an appropriate 5 course of action for USAT? 6 A. Well, I asked if he wanted us to send 7 him the Connell contract. 8 Q. You didn't tell him about the other 9 eight contracts, correct? 10 A. I don't believe I did, that's correct. 11 Q. And when you entered into the 12 contracts -- strike that. 13 Now, in going through some of the 14 documents that I saw yesterday, I noticed that in 15 some of your correspondence back and forth between 16 UFG and the FSLIC, there was a reference made to 17 golden parachute. 18 Do you remember that term being used? 19 A. Actually, I don't; but it's a common 20 term. 21 Q. As a securities lawyer or corporate 22 lawyer, what did you understand the term "golden 20309 1 parachute" to mean? 2 A. It's something that will keep somebody 3 there at a job with a provision that if something 4 happens later on and they leave, they get a 5 severance payment. 6 Q. So that these change of controls which 7 provided for the severance payment in the UFG and 8 USAT contracts were a kind of a golden parachute; 9 is that fair? 10 A. Again, I don't know the definition of 11 it; but it probably would be considered a golden 12 parachute. 13 Q. Now, you testified previously that UFG 14 didn't pay salaries and they didn't pay bonuses. 15 So, the only purpose for the June 30th, 16 1988 UFG contract was to provide severance 17 benefits in the event that USAT failed, correct? 18 A. I think there were a lot of purposes in 19 the agreement, but that's -- I mean, the purpose 20 of the agreement was to keep these people there. 21 It provided for severance benefits, yes. 22 Q. And the way you kept them there was to 20310 1 provide for severance benefits in the event that 2 USAT failed? 3 A. That was one of the things, yes. 4 Q. Okay. And you had been informed by 5 Mr. Leahey that employment agreements at the USAT 6 level could be voided by the FSLIC in a 7 receivership, hadn't you? 8 A. I believe that's correct. 9 Q. And you knew that if you put that kind 10 of provision in the USAT contracts and they were 11 voided, it would be of no value, correct? 12 A. To who? It would certainly be of value 13 to USAT. 14 Q. It would be of no value to the 15 employees in the event that USAT failed? 16 A. Right. The employees were at risk with 17 these contracts. 18 Q. So that if USAT failed, then UFG would 19 end up paying a severance benefit under the UFG 20 contracts, correct? 21 A. Probably. That's correct, yes. 22 Q. Okay. So that the UFG contracts were a 20311 1 mechanism for guaranteeing that the senior 2 executives would receive a severance benefit if 3 FSLIC voided the USAT contracts and -- when it 4 placed USAT into receivership? 5 A. Well, it didn't guarantee anything. It 6 was a provision, that's correct. The thing we 7 were trying to do that would hopefully guarantee 8 it was the letter of credit. That never happened. 9 Q. So, you were trying to secure the 10 contractual payments which FSLIC might prohibit in 11 the event that USAT went into receivership and the 12 USAT contracts were voided? 13 A. I'm not sure I understand that. You 14 said we were trying to do what? 15 Q. To secure the contractual payment or 16 severance payment which FSLIC might prohibit if 17 USAT went into receivership. 18 A. Trying to provide an incentive for 19 these employees to stay at United Savings is what 20 we were trying to do. 21 Q. I understand that. And the way you 22 were doing it was to create a severance benefit 20312 1 that couldn't be paid by USAT if it went into 2 receivership, correct? 3 A. Well, that's not necessarily true. We 4 didn't know if it could or couldn't be paid by 5 USAT. First of all, it would have to be paid by 6 UFGI first before it ever got to the USAT level. 7 So, if UFGI had a problem and if FSLIC 8 had the authority to do something, they would have 9 the authority to do something, which was what the 10 employees were told. They were at risk if there 11 was a problem. 12 Q. So, what you were attempting to do is, 13 through UFG, create severance benefits that UFG 14 couldn't go do directly through its own employment 15 contracts? 16 A. No, that's not correct. We didn't 17 believe and I don't believe that USAT couldn't do 18 it. We were trying to create a benefit so that 19 these employees would stay at USAT. That's what 20 we were trying to do. 21 Q. Now, let me just ask you a couple 22 questions about the rationale for these new 20313 1 contracts. Four people were the principal 2 beneficiaries of the new contracts: Mr. Munitz, 3 Mr. Gross, Mr. Berner, and Mr. Crow. 4 I want to ask you: Why was it 5 necessary in nineteen -- in June of 1988 to give 6 Jenard Gross an employment contract? He was 7 already making $291,656 annually, and he had no 8 prior contractual relationship with either USAT or 9 UFG. 10 What was the purpose for giving 11 Mr. Gross a new contract at that point in time? 12 MR. VILLA: Your Honor, I object. You 13 know, I think he asked these questions in his 14 direct. I didn't open these up again, and he's 15 going back again to it in his redirect for nothing 16 that was raised in my response. If he had some 17 questions he forgot, I think the Rules of Trial 18 Procedure is he should have asked him the first 19 time. These are a second set of questions on a 20 topic that I didn't touch. 21 MR. RINALDI: He went through a whole 22 series of questions yesterday about how Mr. Gross 20314 1 was being replaced by Mr. Connell and that after 2 he came on, there were two CEOs. 3 THE COURT: All right. Let's have the 4 question. 5 Q. (BY MR. RINALDI) What was the purpose 6 for giving Mr. Gross a contract in June of 1988 if 7 Mr. Connell was about to come in and take over the 8 position of CEO? 9 A. First of all, at the time that the 10 contract was being given to Mr. Gross, he was -- 11 Mr. Connell was coming in as the COO, chief 12 operating officer, not as the CEO, chief executive 13 officer. The purpose of giving Mr. Gross the 14 contract was the same as everybody else, to keep 15 him at the institution. In fact, at that time I 16 think he was on the Federal Reserve Board. He was 17 somebody that was important for the survival of 18 United Savings. 19 Q. But Mr. Gross couldn't leave USAT, 20 could he? 21 A. Why not? 22 Q. He had a 750,000-dollar outstanding 20315 1 note with UFG. And in the event that he 2 voluntarily withdrew, that note would have become 3 immediately due and payable, wouldn't it? 4 A. Yes, it would have. 5 Q. So, that was a real strong incentive 6 for Mr. Gross, to stay on without a contract, 7 wasn't it? 8 A. Well, I don't know all of Mr. Gross' 9 financial net worth; but I think that Mr. Gross' 10 financial net worth was so significant that that 11 wasn't a major problem for him. 12 Q. Well, if it was so significant and it 13 wasn't a major problem, why did you need to pay 14 him additional money in order to stay on? Sounds 15 like he didn't need the money. 16 A. He didn't need the money. We needed to 17 keep him. United Savings needed to keep him at 18 the institution. 19 Q. Did Mr. Gross ever tell you that if he 20 didn't get a 167,000-dollar salary increase in 21 April of 1988 which he himself approved, that he 22 was going to leave the institution? 20316 1 A. First of all, I don't know if he 2 approved it. 3 Did he ever say that he was going to 4 leave the institution? 5 Q. Yes. 6 A. He never told me that he was going to 7 leave the institution. As we talked about before, 8 when people leave -- Mr. Gross, when he left in 9 November, didn't tell me ahead of time he was 10 going to leave. He just said, "I'm leaving." 11 Q. And Mr. Crow also had a similar 12 contractual arrangement, didn't he, that provided 13 that if he left, he was going to have to pay 14 $76,000 to UFG? 15 A. Correct. That's right. 16 Q. And you didn't think that that was a 17 significant enough incentive for Mr. Crow to stay? 18 A. No, I didn't. 19 Q. You felt you had to pay him an 20 additional $109,000 in bonus and salary? 21 A. Correct. 22 Q. You didn't think the $171,000 that he 20317 1 was then earning was adequate? 2 A. I think he needed to get -- whatever he 3 was entitled to under the contract was what I 4 think was necessary to keep him there. 5 Q. How was it determined what was 6 necessary to keep an individual there when 7 Mr. Whatley approved these salary increases on 8 March the 30, 1988? 9 A. I believe he tried to look at what was 10 the market rate, and then he hired Hewitt to see 11 if that was an accurate assessment. 12 Q. He had already made the approvals 13 before Hewitt did a report, didn't he? 14 A. That's correct. 15 Q. That was at the suggestion of 16 Mr. Munitz, wasn't it? 17 A. To hire Hewitt? We talked about it, 18 but I believe it was Mr. Whatley's desire to hire 19 an independent expert. 20 Q. Now, after the executive bonuses were 21 entered into, Mr. Villa asked you a couple of 22 questions that I found kind of piqued my 20318 1 curiosity. 2 Let me show you a copy of what's been 3 previously marked as A1156, sir. This is the 4 minutes of the board of United Savings Association 5 dated September the 8th, 1988. And it's Tab 1413, 6 I believe. 7 And directing your attention to the 8 second page, which is the third paragraph down -- 9 that's the second page, the third paragraph down. 10 Do you see it? 11 A. Beginning "Mr. Gross"? 12 Q. Starting with "Mr. Gross." 13 A. Yes, I do. 14 Q. And it states that "Mr. Gross stated 15 that the next item of business was discussion of 16 the payment of the 1988 executive bonus." And 17 then it goes on, "And Mr. Whatley reviewed the 18 need for immediate payment of such bonus, and he 19 stated that the compensation committee had 20 determined to recommend immediate payment." 21 Do you see that? 22 A. Yes, I do. 20319 1 Q. What was the reason that Mr. Gross and 2 Mr. Whatley thought that the executive bonus -- 3 first of all, the executive bonus wasn't supposed 4 to be paid, the last 75 percent, until 5 January the 1st, 1989. Right? 6 A. That's right. 7 Q. They were going to accelerate the 8 payments, correct? 9 A. Correct. 10 Q. What was the thinking here as to why it 11 was appropriate to accelerate those payments? 12 A. Well, the original purpose of the 13 executive bonus plan was to keep all of the -- the 14 key employees, which were the senior executives 15 all the way through the mid-level executives at 16 United Savings, until it got through the 17 Southwest Plan or became a survivor. At this 18 point in time, we're sitting where we believe and 19 they believe that we were now going to be -- 20 through the Southwest Plan, we were going to be a 21 survivor. We were negotiating final terms on the 22 agreement to be in the Southwest Plan. 20320 1 Mr. Whatley believed that it was appropriate -- 2 since the bonus plan had achieved what it was 3 supposed to achieve, keeping those people there -- 4 it would be appropriate to pay that money now. 5 Q. So, it's at this point in time that 6 shortly thereafter, MAXXAM withdraws its offer to 7 take over USAT and that, then, the plan got 8 reinstated? 9 A. Yeah. MAXXAM didn't close on its deal, 10 and the money got put back into trust, that's 11 correct. 12 Q. Wasn't one of the purposes for making 13 an immediate payment, in addition to the fact that 14 you felt that perhaps there was no longer a need, 15 the fact that you were concerned about the 16 regulators taking an action against that bonus 17 plan? 18 A. I don't believe -- first of all, the 19 regulators were at this meeting sitting there 20 while we were doing this. No, that wasn't the 21 purpose. The purpose was because all of these 22 people had done what they were supposed to do so 20321 1 that United Savings would be a survivor, the 2 purpose was to give them their money ahead of 3 time. 4 Q. Let's take a look at the board meeting 5 of United Financial Group which occurred the day 6 before. That's Tab 8096. This is a new document, 7 I guess. 8 MR. RINALDI: I have passed out a copy 9 to other people, and I'll give Mr. Berner an 10 opportunity to take a look at this. 11 Q. (BY MR. RINALDI) Now, these are the 12 minutes of the board of directors of United 13 Financial Group; and that's, I notice, one day 14 before the meeting that we've just been looking 15 at. 16 Do you see that? 17 A. Yes, I do. 18 Q. Why don't you put them both in front of 19 you because I would like you to make a comparison. 20 Now, turn, if you will, to Page 6 of 21 Exhibit T8096. 22 MR. RINALDI: Your Honor, I would move 20322 1 the admission of T8096 at this point. 2 MR. VILLA: No objection. 3 THE COURT: Received. 4 Q. (BY MR. RINALDI) Do you have that, 5 Page 6? 6 A. Yes. 7 Q. Okay. I would like you to compare it 8 to Page 2 of Exhibit A1156. Now, directing your 9 attention to -- on Page 6 of Exhibit T8096, the 10 first full paragraph there below the "further 11 resolved" clause, "Dr. Munitz," it says, "then 12 discussed the possible amendment of the escrow 13 arrangement relating to the 1988 bonuses for 14 certain key employees which are to be paid in 15 January of 1989." 16 Do you see that? 17 A. Yes, I do. 18 Q. He's referring there to the executive 19 bonus plan, correct? 20 A. Yes. 21 Q. That's the same executive bonus plan 22 that's being referred to the following day at the 20323 1 USAT meeting on September the 8th, correct? 2 A. Right. 3 Q. Then he goes on and says, 4 "Mr. Munitz" -- it goes on and says, "He reviewed 5 the current situation of the company and USAT 6 subsidiary and the possible effect that further 7 regulatory action may have on such escrowed 8 amounts." 9 Do you see that? 10 A. Yes, I do. 11 Q. What was Mr. Munitz referring to there 12 when he said "the possible effect that further 13 regulatory action may have on the escrowed amounts 14 in the executive bonus plan"? 15 A. I believe he was talking about going 16 through the Southwest Plan. 17 Q. What does that mean? 18 A. Well, when you went through the 19 Southwest Plan, sometimes, as they did here, you 20 go into receivership; and he just wasn't sure what 21 would be the mechanics of how you would be a 22 survivor. 20324 1 Q. The concern was people might not get 2 paid their bonuses; so, they wanted to accelerate 3 their payment? 4 A. He had a concern about that, that's 5 correct. 6 Q. Then it goes on and says, "He noted," 7 at the bottom, "that the amounts which were put 8 into escrow had already been earned and that the 9 company was in danger of losing key employees due 10 to USAT's non-participation in the 11 Southwest Plan." 12 A. This is Mr. Whatley now that's making 13 that observation. 14 Q. Yes. What did he mean by that? 15 A. That there was a danger that people 16 would leave the association. 17 Q. So, they are proposing here that they 18 are going to pay out the bonus plan immediately? 19 A. Yes. 20 Q. Now, why would UFG -- so, in other 21 words -- let me see if I have this straight. 22 Mr. Munitz says that he's concerned 20325 1 about regulatory action being taken on the 2 escrowed moneys. And then Mr. Whatley says, 3 "Well, let's pay it out immediately because we're 4 in danger of losing key employees due to USAT's 5 non-participation in the Southwest Plan"? 6 A. Well, he says -- first of all, he says 7 they have been earned by the employees; and the 8 purpose -- you're leaving out something, but 9 that's what he's saying. That's right. 10 Q. So, there was a concern that if they 11 didn't participate and the place went into 12 receivership, people might not get their money; is 13 that right? 14 A. If they didn't participate and the 15 association went into receivership, there was a 16 possibility that they would not get their money. 17 Q. So, they decided "Let's just terminate 18 the thing early"? 19 A. They decided to terminate it because 20 they thought it had done what it was supposed to 21 do. 22 Q. Then it says, "Resolved in accordance 20326 1 with Article 8 of United Savings Association of 2 Texas' 1988 executive bonus plan (The Plan), the 3 board of directors of United Savings Association 4 of Texas (The Company) hereby approves the full 5 and complete termination of the plan effective as 6 of September 15, 1988." 7 How would UFG's board approve the 8 termination of a USAT bonus plan? 9 A. They probably couldn't. 10 Q. Well, you wrote these minutes, didn't 11 you? 12 A. Yes, I did. 13 Q. So, this is just a drafting error 14 again? 15 A. Probably. 16 Q. You've got the two entities confused. 17 Is that it? 18 A. I'm not sure what happened here. This 19 is the first time I'm seeing this. I really 20 haven't thought about it. That's probably why it 21 was related again in the United Savings 22 Association meeting. 20327 1 Q. Then the next day, when Mr. Twomey is 2 present, we see that at the board meeting of 3 USAT -- I'm now looking at Exhibit No. T1156. 4 This is the September 8 meeting of USAT. There's 5 no mention about the concern of a possible effect 6 that further regulatory action may have on such 7 escrowed amounts. 8 Do you see that? 9 A. Well, it says that Mr. Whatley reviewed 10 the need for immediate payment, that's correct. 11 Q. It leaves out that sentence about the 12 concern that was being raised by Mr. Munitz about 13 the possible effect that further regulatory action 14 might have on the escrowed funds. Right? 15 A. It does. 16 Q. So, they didn't talk about that in the 17 presence of Mr. Twomey, did they? 18 A. I don't know if they did or they 19 didn't. It's certainly not reflected here. 20 Q. And you made every effort to make the 21 minutes accurate, didn't you? 22 A. I certainly did. 20328 1 Q. Okay. 2 THE COURT: Mr. Rinaldi, how much more 3 do you have? 4 MR. RINALDI: You know, I think if 5 Your Honor would go to, say, 12:20 or 12:30, I 6 don't think I have much more. 7 THE COURT: All right. Proceed. 8 MR. RINALDI: What I would like to do 9 ideally is finish this this morning. 10 Q. (BY MR. RINALDI) Now, I want to clarify 11 one point, sir. Remember when I pointed out to 12 you that there were 70 people that received 13 bonuses in 1987, yet only 43 people participated 14 in the executive bonus plan? 15 A. Yes. 16 Q. I asked you if you knew why, the reason 17 for the discrepancy of 23 people. 18 A. Right. 19 Q. You didn't mean to suggest to the judge 20 that, in fact, 23 people had left USAT between 21 November of 1987 and April of 1988 when the 22 executive bonus plan was entered into, did you? 20329 1 A. My recollection is that the people who 2 received bonuses the previous year got bonuses 3 that year. If that was the case, that there was a 4 discrepancy of 27 people, I don't know what 5 happened to those people. I was just using your 6 numbers. 7 Q. You don't know if 27 or 5 or 54 people 8 left in that period of time, do you? 9 A. I don't know. I'm making an 10 assumption. 11 Q. Let me ask you this: Do you recall 12 that the 1987 bonuses also included several groups 13 who didn't participate in the executive bonus 14 plan? 15 A. No, I didn't. 16 Q. Do you recall that they included the 17 reinsurance group, the money desk, the real estate 18 work-out desk, the arbitrage group, all of which 19 were treated slightly differently for purposes of 20 bonuses? 21 A. Do I recall that they were not in the 22 executive bonus plan? 20330 1 Q. Yes, or that they received slightly 2 different treatment depending on -- 3 A. No, I don't recall. 4 Q. The arbitrage bonus program had a 5 different bonus, didn't they? 6 A. I believe that's correct. 7 Q. And there were other groups that had a 8 bonus based on different performance criteria. 9 Right? 10 A. I don't have any recollection. 11 Q. So, you don't know why there was a 12 differential of 23, do you? 13 A. I was just using your numbers. 14 Q. I want to make it clear on the record 15 that you weren't testifying that you, in fact, to 16 your knowledge, knew that 27 people or 23 people 17 had left in that interim period? 18 A. That's correct. 19 Q. In terms of funding the escrow, 20 Mr. Villa pointed out that Mr. Ott and Mr. Leahey 21 were present at the board meeting where the 22 6.6 million escrow was approved. 20331 1 Do you remember that? 2 A. Right. 3 Q. You said, boy, if there was anything 4 wrong, you would expect Mr. Ott and Mr. Leahey to 5 tell you not to do it. Right? 6 A. Yes. 7 Q. Okay. Did you ever ask Mr. Ott or 8 Mr. Leahey whether it was an unsafe or unsound 9 practice to put $6.6 million in an escrow when 10 USAT had negative worth of $400 million? 11 A. You asked me that before. I don't 12 remember specifically asking those -- that 13 question that way. But they were there when this 14 was being discussed as to what was happening. The 15 financial situation was certainly well-known and 16 discussed, and what we were doing was well-known 17 and discussed. I don't know if I specifically 18 said to them, "Is this an unsafe and unsound 19 practice?" I assume that if they thought there 20 was any problem with it, they would have said 21 something. 22 Q. Do you believe that the diversion of 20332 1 6.6 million of assets in October of 1988 into an 2 escrow when USAT had negative capital would not 3 create a risk of material or damage to USAT? 4 MR. VILLA: Your Honor, I object to the 5 word "diversion." 6 THE COURT: All right. Use some other 7 word. 8 MR. RINALDI: Fine. 9 Q. (BY MR. RINALDI) Do you believe that 10 the application of $6.6 million in USAT assets, 11 when it had negative capital, in October of 1988 12 would not create a risk of material loss or damage 13 to USAT? 14 A. I believe the putting of that 15 6.6 million into escrow was the appropriate thing 16 to do. 17 Q. Now, Mr. Villa showed you a number of 18 documents that showed the senior executives waived 19 their rights under both the executive bonus and 20 the severance escrow. 21 Do you remember that? 22 A. Yes. 20333 1 Q. And ultimately, you were successful in 2 getting the money back out of the escrow; and 3 ultimately, there was some money recovered from 4 the executive bonus, at least as to those 5 individuals who had waived their rights under the 6 executive bonus plan, correct? 7 A. That's correct. 8 Q. Now, the escrow which held the 9 $6.6 million was unwound because the Federal Home 10 Loan Bank of Dallas demanded that you do it, 11 wasn't it? 12 A. They told us to do it, and we did it. 13 Q. You knew that if you didn't give the 14 waivers to USAT, that USAT would never be 15 considered for the Southwest Plan, didn't you? 16 A. I believe that was certainly a concern. 17 Q. And you also knew that if USAT wasn't 18 considered for the Southwest Plan, it would go 19 into receivership; and all of the executives who 20 were being requested to give waivers would, in all 21 likelihood, lose their jobs? 22 A. That's probably right. 20334 1 Q. And so, the only possible way to 2 preserve your job and those of the other senior 3 executives was to do what the Federal Home Loan 4 Bank Board had asked you to, correct? 5 A. No. The only possible way of getting 6 USAT into the Southwest Plan and making it a 7 survivor was to do what we did. 8 Q. Right. Because you wouldn't have been 9 in the Southwest Plan if you hadn't given the 10 waivers? 11 A. I wasn't in the Southwest Plan anyway. 12 Q. I understand that. 13 You wouldn't have been eligible to be 14 in it, correct? 15 A. United Savings would not have been 16 eligible to be in the Southwest Plan, that's 17 correct. 18 Q. Now, Mr. Villa asked you about -- he 19 showed you a lot of documents relating to attempts 20 by the FSLIC and UFG to settle claims arising out 21 of the termination of various former senior 22 executives of USAT. 20335 1 Do you remember that? 2 A. You're talking about the 1989 -- 3 Q. Yeah. That whole series of documents 4 that we walked through about the negotiations with 5 respect to the arbitration that arose on Crow's 6 contract and several of the other executives. 7 Why was FSLIC trying to negotiate 8 settlements with the claimants, just so the Court 9 understands? 10 A. They were a participant in this 11 process. And, you know, we at United Financial 12 were trying to work out a settlement with FSLIC; 13 and I assume they wanted to negotiate the 14 transaction to keep -- I don't know why. They 15 were just a party to it. 16 Q. Well, in fact, wasn't the -- do you 17 remember I showed you a memo that had been written 18 by you? FSLIC, in May of 1989 -- where FSLIC 19 talked about how they were the principal creditor 20 of UFGI because they were the successor to the net 21 worth maintenance claim and, also, the tax claim? 22 A. I remember that memo. I remember you 20336 1 showing me that memo. 2 Q. And FSLIC was making substantial claims 3 against UFGI, were they not? 4 A. Absolutely. 5 Q. And as a claimant, they were trying to 6 protect their interest and prevent any improper 7 dissipation of UFG's assets under the contracts, 8 correct? 9 A. That's fair, I think. 10 Q. And ultimately, the FSLIC acquiesced to 11 a settlement that resulted in preserving 12 80 percent of the amounts that were being claimed 13 under the severance? 14 A. Roughly 80 percent. 15 Q. They settled for twenty cents on the 16 dollar. 17 A. Okay. 18 Q. So, this was -- like any other 19 litigant, FSLIC simply made a litigation decision 20 to compromise the claim in the form that you had 21 negotiated? 22 A. We all had negotiated. 20337 1 Q. There never would have been any claims 2 or any need to pay the negotiated settlement 3 amounts if UFG hadn't entered into the employment 4 contracts which Mr. Twomey concluded were unsafe 5 and unsound; isn't that correct? 6 A. Well, again, if UFGI hadn't entered 7 into the agreement, it may not have been USAT. 8 Q. Right. My question was a slightly 9 different one. If they hadn't entered into the 10 employment contracts in the first instance, that 11 whole negotiation with the FSLIC would never have 12 occurred? 13 A. If there were no contracts, then people 14 would just have to go under whatever common law 15 rights they thought they had for terminations. 16 Q. There would have been no dissipation or 17 payment of over $600,000 in settlement expenses by 18 UFGI? 19 A. That's right. If there were no 20 contracts, there would not have been a payment 21 probably. 22 Q. And that additional money would have 20338 1 been ultimately available to contribute to the 2 settlement of the claims that were asserted under 3 the net worth maintenance claims of the FSLIC. 4 Right? 5 A. If all of those things had happened, 6 there would have been $600,000 more, I assume, at 7 United Financial Group. 8 Q. And ultimately, all of the assets or 9 substantially all of the assets were turned over 10 to the FDIC as the successor in connection with 11 the settlement that we talked about yesterday, 12 correct? 13 A. Ultimately, that's right. 14 Q. Okay. Now, you have repeatedly 15 indicated to me that the reason for the salary 16 increases and the bonuses that were paid in April 17 of 1988 was they were necessary to retain people 18 at USAT, correct? 19 A. Right. 20 Q. And that was your view. 21 The salary increases and bonuses were 22 given to 42 people, correct? 20339 1 A. About that number, yes, that's right. 2 Q. And of those 42 people, the great 3 majority of the money went to eight senior 4 executives, didn't it? 5 A. I don't know, but I think that's 6 probably right. 7 Q. And the only -- and the -- it was only 8 the compensation of those eight senior executives 9 that was criticized by Neil Twomey in his 10 October 27th, 1988 letter, wasn't it? 11 A. I think that's right. 12 Q. He never criticized the modest salary 13 increases that were given to lower level people at 14 USAT, did he? 15 A. As far as I know, he didn't. 16 Q. And only the executive bonuses of those 17 same highly-compensated senior executives were 18 objected to by Mr. Twomey in his December 15, 1988 19 letter; isn't that correct? 20 A. I believe that's right. 21 Q. No one ever said it was an unsafe or 22 unsound practice to give moderate incentives to 20340 1 encourage people to stay at USAT, did they? 2 A. I don't believe so. 3 Q. The only issue in this litigation is 4 whether the eight employment contracts entered 5 into by Mr. Gross, Mr. Berner, Mr. Munitz, 6 Mr. Crow, and four other highly-compensated 7 executives that were given at a point in time when 8 USAT was badly failing its capital requirement, 9 the only issue is whether that or those employment 10 agreements were an unsafe and unsound practice; 11 isn't that correct? 12 MR. VILLA: I'll object to saying 13 that's the only issue in this litigation by a long 14 shot. That isn't even the only issue in the 15 compensation case. 16 Q. (BY MR. RINALDI) Let me rephrase the 17 question. 18 The only contracts or employment 19 activity that's been challenged in this proceeding 20 are the employment contracts that were given to 21 those eight highly-compensated individuals who 22 received employment contracts from UFG and USAT at 20341 1 or about the time USAT and UFG -- USAT was 2 experiencing negative capital or approaching 3 negative capital and USAT -- UFG had a -- was 4 insolvent on a book basis, correct? 5 A. I don't know if that's the only claim 6 in this case. 7 Q. Okay. 8 MR. RINALDI: I have no other questions 9 for the witness, Your Honor. 10 THE COURT: Thank you. Are you going 11 to have some re -- 12 MR. RINALDI: Mr. Guido has some 13 questions. He's told me that he does not think it 14 will be long. I don't know that you can rely on 15 my representations regarding Mr. Guido's 16 practices, but I can certainly try to get him. I 17 would think this would be an appropriate time to 18 take the lunch break. 19 THE COURT: All right. We'll adjourn 20 until 1:45. 21 MR. RINALDI: Thank you. 22 20342 1 (Whereupon, a lunch break was taken 2 from 12:17 p.m. to 1:51 p.m.) 3 4 THE COURT: Be seated, please. We'll 5 be back on the record. 6 I believe Mr. Guido has some questions 7 for the witness. 8 MR. GUIDO: Yes, Your Honor. 9 THE COURT: Proceed. 10 11 FURTHER EXAMINATION 12 13 Q. (BY MR. GUIDO) I would like you to look 14 at three documents which are B1499, B52, and 15 B1529, Mr. Berner, which are the drafts of the 16 letter to Julie Williams with regard to the 17 conversion of the C to D preferred stock. I would 18 like to ask you a few questions about -- 19 THE COURT: Would you state those 20 numbers again, please? 21 MR. GUIDO: Yes, Your Honor. B1499, 22 B52, B1529, Your Honor. 20343 1 THE COURT: Thank you. 2 A. Do I need them all -- 3 Q. (BY MR. GUIDO) I'm going to ask you 4 some questions about the drafting of the 5 documents. 6 A. Okay. 7 Q. Starting with B1499, did you prepare 8 B1499? 9 A. Yes, I did. 10 Q. Where did you get the information for 11 B1499? 12 A. Which information are you talking 13 about? 14 Q. The information that's in the text of 15 the letter. 16 A. About the Series C preferred? 17 Q. Yeah. It's a three-page draft letter, 18 right, dated February 23rd, 1987? 19 A. Right. 20 Q. Where did you get that information? 21 A. Well, the information about the 22 Series C preferred, I had the preferred stock 20344 1 designation. 2 Q. Where did you get the information on 3 Page 2 with regard to the Federated and MCO's 4 holdings of outstanding shares of common stock of 5 UFG? 6 A. I think I probably looked at the -- I 7 don't remember specifically where I got that 8 information as to what they held. 9 Q. You don't know where you got that 10 information? 11 A. Not right now, no. 12 Q. Now, why did you send that draft letter 13 to Mr. Leahey? 14 A. He was our regulatory counsel. 15 Q. What did you ask him to do? 16 A. To review it and to, you know, give me 17 his comments on it. 18 Q. It doesn't -- in the fourth paragraph 19 on Page 3 of the exhibit, Page 2 of the letter, do 20 you see the sentence that talks about the common 21 stock holdings? 22 A. The -- yes. I think I do, yes. 20345 1 Q. Is there any reason that doesn't 2 mention the put/call option? 3 A. It wasn't a stock holding. That's the 4 only thing I can think of. 5 Q. Now I would like you to take a look at 6 Exhibit B52, which is the letter -- the draft 7 letter that, I think you testified, was prepared 8 by Mr. Leahey. 9 A. Yes. 10 Q. Now, that letter has -- do you see on 11 the first page of the letter at UFGO5134, it says 12 "facts and background"? Do you see that section? 13 A. Yes. 14 Q. Where did Mr. Leahey get that 15 information? 16 A. I don't know where he got it from. 17 Q. Did you have discussions with 18 Mr. Leahey about this letter? 19 A. About the letter? 20 Q. Uh-huh. 21 A. Yes. At certain points, yes. 22 Q. Did you provide him information to 20346 1 include in the letter? 2 A. No. He had -- I mean, he had 3 information on United Financial Group, if that's 4 what you're asking. 5 Q. What do you mean "he had information"? 6 A. He would have had all of our regulatory 7 filings, 10Ks and 10Qs, proxy statements. 8 Q. Well, when you sent him this draft 9 letter, what specifically did you ask him to do? 10 A. Well, I don't remember specifically. 11 You know, he knew -- I told him that we were 12 trying to get this "no action" letter. I said, 13 this is a draft of a request for a "no action" 14 letter. Review it and give me your comments. 15 Q. Now, you asked him for his comments on 16 your letter? 17 A. I mean, I don't have a specific 18 recollection of that; but that's what I think I 19 would have asked him for. 20 Q. Take a look at the time sheets which 21 are Exhibit B1529. Do you see the March 23rd, 22 1987 statement? 20347 1 A. Yes, I do. 2 Q. Do you see the entry under "matters 3 related to exchange of preferred stock"? 4 A. Yes. 5 Q. Do you see the last item on the second 6 page of that bill under the text? It says, 7 "Telephone conferences with Mr. Berner with regard 8 to the same"? 9 A. Right. 10 Q. Do you see the reference "review and 11 revision of request prepared by Mr. Berner for 12 Federal Home Loan Bank Board staff confirmation of 13 non-voting status of Series D stock"? 14 A. Yes, I do. 15 Q. You testified on cross-examination that 16 you didn't draft that letter. 17 What was your role in preparing the 18 submission of the letter to Julie Williams for a 19 "no action" request for the conversion of Series C 20 and Series D? 21 A. I think I mentioned I drafted my 22 letter, and then I reviewed Mr. Leahey's letter. 20348 1 And I'm sure we discussed it. 2 Q. And yet you also had a series of phone 3 calls with him about the drafts, didn't you? 4 A. I don't remember. I'm sure we had some 5 phone calls, sure. 6 Q. It does indicate that there was a 7 series of phone calls with you in that statement, 8 does it not? 9 A. It doesn't say "series." It says 10 telephone calls, yes. 11 Q. It uses the term, plural, 12 "conferences," does it not? 13 A. Yes, it does. 14 Q. Look at the statement, B1586. 15 A. I don't have that one. 16 Q. I'm sorry. B1586. I don't have the 17 tab number on it. That's the second bill. Look 18 at the entry there under "matters related to 19 change of preferred stock." 20 Do you see the reference to the 21 telephone conferences there? 22 A. Yes, I do. 20349 1 Q. Did you participate in the drafting of 2 that letter? 3 A. No, I didn't. I reviewed it and then 4 discussed it. 5 Q. You did provide the first draft to 6 Mr. Leahey. Right? 7 A. Yes, I did. 8 Q. Okay. And is it your testimony you did 9 not provide him with any information other than 10 the draft of the letter? Is that your testimony? 11 A. No, that wasn't my testimony. My 12 testimony was that I drafted the first draft. He 13 had information on United. And he drafted this 14 letter, and we discussed it. 15 Q. And you reviewed the letter with him in 16 draft form, did you not? 17 A. Yes, I did. 18 Q. Did you ever tell him that there was a 19 put/call option that needed to be included in that 20 letter? 21 A. Did I tell him that it needed to be 22 included? 20350 1 Q. Uh-huh? 2 A. No, I didn't. 3 Q. Did you ask him whether disclosure of 4 the put/call option needed to be included in that 5 letter? 6 A. I don't think I did. I don't recall 7 asking him that. 8 Q. Did you discuss with him the put/call 9 option? 10 A. In connection with that letter? 11 Q. Yeah. 12 A. I don't recall it, no. 13 Q. You signed the letter. Right? 14 A. Yes, I did. 15 Q. And were you aware of the regulations 16 of the Federal Home Loan Bank with regard to 17 accuracy of representations that were made to the 18 Federal Home Loan Bank when you were at USAT? 19 A. I believe I was. 20 Q. What were those? 21 A. I don't know them right now. 22 Q. Were they built on SEC disclosure 20351 1 requirements? 2 A. I believe that's right, but I'm not 3 positive. Again, I don't have a recollection 4 right now what they are; but that's sound like 5 it's probably right. 6 Q. You are a securities lawyers. Right? 7 A. Yes, I am. 8 Q. What are those disclosure requirements 9 under the SEC regulations? 10 A. You have to disclose all material 11 information. 12 Q. And you are not allowed to omit 13 material facts? 14 A. That's correct. 15 Q. Otherwise, that's a fraudulent 16 misrepresentation. Right? 17 A. It depends what the facts are. 18 "Fraudulent misrepresentation" is a very big term. 19 Q. If there's an omission of a material 20 fact, is that a 10(b)5 violation of the securities 21 law? 22 A. Possibly, it could be. 20352 1 Q. I would like to move on to another 2 subject, and it deals with your testimony about 3 the net worth condition. 4 I would like to direct your attention 5 to Document T8033, which is at Tab 402. This is 6 the 1987 annual report and 10K of UFG. 7 You testified that -- in response to 8 questions by your counsel that you didn't know 9 about the existence of the actual stipulation 10 until sometime in 1991 or 92; is that -- 11 A. Yeah, sometime when Mr. Rinaldi brought 12 it to -- showed it to me and counsel. 13 Q. Prior to that time, had you made any 14 effort to ascertain whether or not there was such 15 a signed stipulation? 16 A. After 1988, I know we made an effort to 17 see if there was a signed stipulation. 18 Q. And did you make an effort to locate 19 the board minutes authorizing the signature of 20 that stipulation? 21 A. The board minutes authorizing it? 22 Q. Uh-huh. 20353 1 A. Yes, I did. 2 Q. When did you do that? 3 A. I don't remember when. Sometime in 4 1989, '88 or '89. 5 Q. Why did you do that? 6 A. One of the issues in 1989 was whether 7 or not there actually was a stipulation, a signed 8 stipulation. 9 Q. Did you go look for that information in 10 response to the letters that Mr. Twomey had 11 written to you raising the question of what UFG 12 was going to do to satisfy its net worth 13 maintenance obligation? 14 A. No. At that time, I didn't look for 15 it. 16 Q. You didn't look? 17 A. For the signed stipulation, no. 18 Q. Did you look for the resolutions? 19 A. The resolutions we had seen, yeah. 20 Q. After you had the letters from 21 Mr. Twomey? 22 A. It might have been before. 20354 1 Q. Now, I would like to direct your 2 attention to the -- Page 2 of the 10K for 1987 3 which, as indicated on Page 68, was signed 4 March 28th, 1988. Look at the last full paragraph 5 on Page 2 of the 10K. 6 Read the first sentence into the 7 record, please. 8 A. The last paragraph? 9 Q. Uh-huh. 10 A. "UFGI, in connection with its becoming 11 a holding company, agreed to maintain USAT's 12 capital above the minimum requirement level 13 established by the FSLIC." 14 Q. Okay. Now, when you testified that you 15 didn't know about the stipulation until 16 Mr. Rinaldi brought it to your attention, were you 17 trying to tell this Court that there was no 18 enforceable net worth obligation in your view 19 until Mr. Rinaldi or someone on his staff found 20 the signed stipulation? 21 A. The issue that came up in 1989 was 22 whether or not there was a stipulation and, 20355 1 therefore, whether or not that was enforceable in 2 1989. 3 Q. Did you prepare this 10K? 4 A. This is 1988 or earlier. Yes, that's 5 correct. 6 Q. You prepared it? 7 A. Yes, I did. 8 Q. It said that UFG agreed to maintain the 9 capital, does it not? 10 A. Yes, it did. 11 Q. Now, I would like to direct your 12 attention to your testimony that you gave with 13 regard to the sources of income from -- at USAT. 14 And I would like you to take a look at A12235, 15 which was the -- at Tab 888 and also look at A3022 16 which is at Tab 719. 17 A. (Witness reviews the document.) 18 Q. It's the 1986 10K. Now, you were asked 19 questions by your counsel regarding whether the 20 Federal Home Loan Bank Board personnel had 21 knowledge about what USAT was relying on to 22 generate income. 20356 1 Do you recall those questions? 2 A. I believe so, yes. 3 Q. Okay. And you testified at 20036 that 4 "there's no secret that USAT was relying upon 5 income from the sale of assets and from investment 6 securities." 7 Do you recall that testimony? 8 A. I believe so. 9 Q. Okay. Are common stocks investment 10 securities? 11 A. Common stocks? 12 Q. Uh-huh. 13 A. Yes, they are. 14 Q. Did USAT have an equity arbitrage 15 portfolio of common stocks? 16 A. Yes, it did. 17 Q. Was it a portfolio that it actively 18 traded? 19 A. Yes, it did. 20 Q. Okay. And was it a portfolio that it 21 marked to market for accounting purposes because 22 it actively traded that portfolio? 20357 1 A. I believe so, yes, it did. 2 Q. And did USAT rely on those profits to 3 generate income to maintain its net worth? 4 A. They expected to make profits from it, 5 yes. 6 Q. And did they utilize those profits to 7 maintain USAT's net worth? 8 A. I believe so. 9 Q. Now, look at 12235. Do you see the 10 first page -- 11 A. Yes. 12 Q. -- of that document where it says 13 "throughout 1986?" 14 Do you see that paragraph? 15 A. Yes, I do. 16 Q. And your counsel asked you some 17 questions about that paragraph, did he not? 18 A. I believe so. 19 Q. Does that say anything about what the 20 purposes of the sales were that generated the 21 gains that are referred to there? 22 A. Does it say anything about what the 20358 1 purposes were? 2 Q. Yeah. The purposes for the sales. 3 A. This paragraph doesn't say what the 4 purposes were. 5 Q. I would like to direct your attention 6 now to Tab 719, which is A3022. That's the 1986 7 10K which was filed on March 17th, 1987; and I 8 would like to direct your attention to Page 32 of 9 that document. 10 A. (Witness reviews the document.) 11 Q. I would like to direct your attention 12 to the third paragraph down in that document. Do 13 you see where it says, "In 1986, purchases and 14 sales"? 15 A. Yes, I do. 16 Q. I would like you to read the first two 17 sentences of that paragraph into the record. 18 A. Read it into the record? 19 Q. Yes. 20 A. "In 1986, purchases and sales of 21 mortgage-backed securities totaled $6.5 billion 22 and $4.8 billion respectively. This increased 20359 1 activity during a period of falling interest 2 reflects, in part, the company's shifting from 3 higher coupon rate to lower coupon rate 4 mortgage-backed securities in order to curtail the 5 prepayment risk." 6 Q. Did you in any filing that you prepared 7 or in any conversations that you had with the 8 Federal Home Loan Bank Board ever inform the 9 Federal Home Loan Bank Board that USAT actively 10 traded its mortgage-backed security portfolio to 11 generate gains to bolster profits? 12 A. I think -- whatever we disclosed here 13 as far as the trading, that's what we disclosed as 14 far as the trading. 15 Q. Nothing more than that? 16 A. I'm sure there's other disclosures in 17 these documents about trading mortgage-backed 18 securities. 19 Q. Did you ever personally tell Mr. Twomey 20 that USAT was actively trading its mortgage-backed 21 securities portfolio to generate gains for the 22 purpose of bolstering profits? 20360 1 A. I'm not sure I ever used those words. 2 I mean, we would tell him what USAT was doing; and 3 we certainly were describing what was going on and 4 the fact that there was some trading of 5 mortgage-backed securities that generated gains. 6 Q. But did you ever tell him what the 7 purpose of the sales were other than the purpose 8 that's reflected on Page 32, that paragraph you 9 just read? 10 A. I'm saying I think there's a lot of 11 disclosure about mortgage-backed securities and 12 gains in these documents. It's not just in this 13 paragraph that there were descriptions of 14 mortgage-backed securities. 15 Q. What do you mean, "in the 10Ks"? Is 16 that what you're referring to? 17 A. I believe so. 18 Q. You're saying that in those 10Ks -- I 19 want to get your testimony clear. In that 20 particular 10K, using that as an example, there 21 are disclosures of sales that are made out of 22 mortgage-backed securities portfolios for purposes 20361 1 other than to stem prepayments? 2 A. I don't know -- I haven't gone through 3 and read all of this 10K to see what all of the 4 disclosures are in the 10K and other documents. 5 So, I can't tell you today what the disclosure is. 6 This is the -- 7 Q. Whatever disclosures are there are 8 there? 9 A. Whatever the disclosures are is what 10 the disclosures are. 11 Q. You're not testifying that there are 12 other purposes that are disclosed in that 10K? 13 A. Whatever is disclosed in the 10K is 14 disclosing what we thought was appropriate 15 disclosure. 16 Q. You're not saying that it contains 17 anything in particular? 18 A. I don't know what it contains. 19 Q. Okay. You asked what importance did it 20 appear to you that the regulators were placing on 21 regulatory counsel by your counsel. 22 Do you recall that? 20362 1 A. Yes, I do. 2 Q. And it -- in the transcript at 3 Page 20073, you responded, "The impression I had 4 at this time was that they were placing very, very 5 little on regulatory capital." 6 Do you recall that testimony? 7 A. Yes, I do. 8 Q. Now, I would like to show you some 9 documents, if I may, starting with B1161, which is 10 a document that is not in the record. This is a 11 letter dated August 5th, 1986. And I want to 12 direct your attention -- it's from Mr. Joe Selby, 13 the supervisory agent, to Mr. Passarelli, who was 14 the acting director of regional operations in the 15 Office of Examinations and Supervision. 16 Do you see the paragraph that says, 17 "The association has challenged both the legal and 18 accounting basis for classifying the Couch 19 Mortgage Company credits and loans modified while 20 delinquent"? 21 Do you see that? 22 A. Yes, I do. 20363 1 Q. Do you recall challenging those 2 classifications? 3 A. At various times, I remember -- I know 4 with Couch Mortgage, we were questioning it. I 5 don't have a specific recollection on loans 6 modified or loans delinquent. 7 Q. Do you recall that in light of the 8 challenge that USAT had made in light of the 9 examiners' findings, that the decision with regard 10 to what to do with write-downs was deferred by the 11 agency? 12 A. Actually, I don't recall that. 13 Q. Do you have any reason to dispute the 14 accuracy of this letter? 15 A. I don't have any reason to dispute it. 16 I don't know one way or the other. 17 MR. GUIDO: I move Exhibit B1161 into 18 the record, Your Honor. 19 MR. VILLA: No objection. 20 THE COURT: Received. 21 Q. (BY MR. GUIDO) I would like to then 22 have you take a look at a document that has been 20364 1 marked as A11079. It's at Tab 1680. And also 2 A11078 -- excuse me -- at Tab 1760. These are two 3 memoranda to the file on a meeting that occurred 4 on August 7, 1987. 5 Have you had an opportunity to review 6 both of those documents? 7 A. I've just skimmed them now. I've seen 8 them before. 9 Q. Take a look at A11079. Take a look at 10 Paragraph 2. It says, "The first item was the net 11 worth of the association." 12 Do you see that? 13 A. Yes. 14 Q. And then look at A11078, the third 15 paragraph, which also addresses the net worth 16 requirement. 17 Do you see that? 18 A. The paragraph numbered 2? 19 Q. Uh-huh. 20 A. Yes, I do. 21 Q. Okay. Now, do you recall what the 22 disagreement was that USAT had with the examiners 20365 1 reflected in that memo? 2 A. Again, from reading my memo, I recall 3 there was a disagreement between general and 4 specific reserves. 5 Q. What was the consequence of that 6 distinction? 7 A. I don't recall right now. 8 Q. Did it have a consequence for net 9 worth? 10 A. I think it did, but I -- I don't recall 11 right now. 12 Q. Well, I mean, reading the memorandum, 13 does it indicate to you that the examiners were 14 arguing for a classification that would have taken 15 USAT below its regulatory net worth? 16 A. I think they always thought we were 17 below our regulatory net worth, but -- it seems as 18 if there's a disagreement. I remember the 19 disagreement between the general and specific 20 reserves. 21 Q. Okay. And do you recall that there 22 wasn't a resolution in August -- at the August 7th 20366 1 meeting of 1987 of whether or not they would be 2 classified as general or specific? 3 A. You said was not? 4 Q. Right. 5 A. There was not a resolution, right. 6 Q. So, as a consequence, there wasn't a 7 resolution of whether USAT was above or below its 8 minimum regulatory capital requirements as of 9 August 7th, 1987? 10 A. I believe that's right. I believe that 11 USAT thought it was above it, and the regulators 12 thought it wasn't. 13 Q. Okay. And there had been no resolution 14 of that matter at that time? 15 A. Not on that issue, that's correct. 16 Q. Now I would like to direct your 17 attention to Exhibit B1983, which is at Tab 1786. 18 Excuse me. It's Tab 1768. 19 I would like to direct your attention 20 to the fourth paragraph of that and ask you to 21 read that paragraph, and I want to ask you some 22 questions about that. 20367 1 A. (Witness reviews the document.) Okay. 2 Q. Now, here Mr. Twomey says he was 3 concerned about your net worth report. 4 Do you see that? 5 A. Yes, I do. 6 Q. Do you recall that conversation with 7 Mr. Twomey? 8 A. I recall it came up here, but I don't 9 really recall the substance of it. 10 Q. And do you recall that he told you that 11 Ginger Baugh was concerned since the form showed 12 your net worth at approximately $60 million? 13 A. Right. 14 Q. And then you told him about a letter. 15 Do you see the reference to the letter? 16 A. Yes, I do. 17 Q. What did the letter say? Do you 18 recall? 19 A. I have no recollection. 20 Q. The letter advocated that the way 21 Ginger Baugh was looking at it because of 22 inadequacies of the form, that the form didn't 20368 1 accurately reflect what you believed to be the net 2 worth of USAT. Right? 3 A. Apparently. I'm just reading the 4 paragraph. I don't have any specific recollection 5 of this. I don't recall this. 6 Q. Well, do you remember anything about 7 the letter? 8 A. No, I don't. 9 Q. What's in the letter is in the letter? 10 A. Apparently. 11 Q. You don't have any independent 12 recollection other than what's in this letter? 13 A. I have no recollection at all. 14 Q. Now, that seems to indicate that net 15 worth mattered to Mr. Twomey, does it not? 16 A. I don't know if it did or not. He 17 seems to be talking about the report form. 18 Q. Well, it said he was concerned about 19 your net worth report. He was concerned that it 20 showed there was only $60 million of net worth. 21 Right? 22 A. That's correct. 20369 1 Q. Does that reflect someone who placed 2 very, very little importance on regulatory 3 capital? 4 A. Well, I think in the context of all of 5 our other conversations -- I don't know if this 6 reflects it or not, but that was my understanding. 7 Q. Now I would like to move on to another 8 topic. 9 You indicated when your counsel asked 10 you questions about the emphasis that the 11 regulators placed on regulatory net worth, you 12 said, well, you thought they were emphasizing 13 other matters, I think, was the term. 14 Do you recall that testimony? 15 A. Actually, I don't. 16 Q. Huh? 17 A. Actually, I don't; but that's okay. 18 Q. What were they looking to if they 19 weren't looking to regulatory net worth to 20 ascertain whether or not the thrift -- a 21 particular thrift was operating proper? 22 A. You're talking about the context of 20370 1 operations. I think I said they were looking at 2 management. 3 Q. What sort of things were they looking 4 to in terms of management? 5 A. The quality of the management. 6 Q. And the competence of the management? 7 A. Yes. 8 Q. The integrity of the management? 9 A. I believe they probably would have 10 looked at that. 11 Q. I would like to show you a document 12 which is at B2020 which is the forbearance 13 application dated February 16th, 1988, shortly 14 after the meeting that's reflected in the exhibit 15 that I've just shown you which is at Tab 1406. 16 Your counsel asked you some questions about that 17 forbearance application, and the document still 18 has the Post-It note on the page. I'm going to 19 ask you about some other statements in there. 20 I would like to direct your attention 21 to Page 4 of the document, which is at Bates stamp 22 OW091221. 20371 1 A. 221? 2 Q. Yes. Now, this is -- this document is 3 dated February 16th, 1988. It says in the second 4 paragraph -- do you see that where it says, "The 5 erosion of United's capital position has resulted 6 from adverse economic conditions"? 7 A. Yeah, I see it. 8 Q. Read that paragraph to yourself, 9 please. 10 A. (Witness reviews the document.) Okay. 11 Q. Do you see the last sentence in 12 particular where it says what the losses are 13 attributable to and it says "they do not result 14 from underwriting deficiencies or as the result of 15 imprudent operating practices." 16 Do you see that? 17 A. Yes, I do. 18 Q. Now I would like to turn your attention 19 to Page 8 of the document. Do you have the next 20 page, 8, which is OW0912277? 21 A. Okay. 22 Q. Do you see the first paragraph at the 20372 1 top? I would like you to read that to yourself -- 2 A. (Witness reviews the document.) Okay. 3 Q. -- where it says, "United's management 4 successfully developed and implemented strategies 5 to improve the long-term viability of the 6 association." 7 Do you see that? 8 A. Yes, I do. 9 Q. It says, "A discussion of management's 10 accomplishments is presented in this section." 11 Do you see that? 12 A. Yes. 13 Q. I would like you to drop down now to 14 the last paragraph on that page. Do you see where 15 it says "investment portfolio"? 16 A. Yes, I do. 17 Q. It says, "United's management 18 successfully developed investment strategies to 19 minimize losses associated with economic 20 hardship." 21 Do you see that? 22 A. Yeah. Sure, yes. 20373 1 Q. Take a look at the next page now at the 2 paragraph at the top. 3 A. It's very difficult to read this. 4 Q. Pardon? 5 A. Some of this is kind of whited out. 6 It's hard to see. 7 Q. The paragraph on my copy says, "United 8 currently manages portfolios of high-yield bonds, 9 mortgage-backed securities, and equity securities. 10 Since 1985, United's high-yield bond portfolio has 11 generated net income equal to 24.5 million and 12 profit from the sale of bonds of 62.7 million. 13 United's equity arbitrage portfolio provided 14 dividend income of 8.3 million and, despite the 15 disastrous stock market decline in October 1987, 16 provided net gains of 42.4 million." 17 Do you see that? 18 A. Yes, I do. 19 Q. Does that anywhere make mention of 20 mortgage-backed securities, Mr. Berner? 21 A. In that paragraph? 22 Q. Yeah. 20374 1 A. Well, it talks about it in the first 2 sentence. 3 Q. Does it say anything about the 4 performance of the mortgage-backed securities 5 portfolio? 6 A. In that sentence? 7 Q. In that paragraph. 8 A. No, it doesn't. 9 Q. Do you know why not? 10 A. No, I don't. 11 Q. Now, these were representations that 12 you made as part of the forbearance application. 13 Right? 14 A. Correct. That's right. 15 Q. You helped draft the forbearance 16 application. Right? 17 A. Yes, I did. 18 Q. Now, I would like to turn your 19 attention to three other documents. One is T4403, 20 which is at Tab 885. The second is T4422, which 21 is at Tab 886. And the third is A1489, which is 22 at Tab 1214. 20375 1 I think I asked you whether you were a 2 member of the strategic planning committee, and I 3 think you testified that you were; is that 4 correct? 5 A. Yes, I was. 6 Q. And as a member of the strategic 7 planning committee, you would have received the 8 memoranda that were distributed to that committee. 9 Right? 10 A. Probably, yes. 11 Q. Do you recall receiving T4403? 12 A. I don't, but -- I don't specifically 13 recall this, no; but I'm sure I -- if it went to 14 the committee, I probably received it. 15 Q. And T4422, do you recall receiving that 16 document? 17 A. Again, I don't; but I have no reason to 18 think that I didn't. 19 Q. Well, have you seen either of these 20 documents recently? 21 A. No, I haven't. 22 Q. No one showed you these documents 20376 1 recently? 2 A. No. 3 Q. Well, take a look at the T4422 document 4 and read the beginning of the paragraph that says 5 "results." 6 Do you see that? 7 A. (Witness reviews the document.) Yes. 8 Q. The bottom of the page on to Page 2 of 9 the document, Page 2 of the strategic profile. 10 A. Actually, I think I have seen this 11 document recently. 12 Q. Pardon? 13 A. Looking at this, I think I have seen 14 this recently. 15 Q. This is Mike Crow's assessment of the 16 wholesale strategy, is it not? 17 A. Yes. 18 Q. Okay. And this is a document that I 19 think you saw in your deposition, is it not? 20 A. I don't remember that. 21 Q. But it's something you did see 22 recently? 20377 1 A. Just reading the bottom, it looks like 2 something I've seen. 3 Q. Now, what does it say about the results 4 of the wholesale strategy? 5 A. He says the results over the past three 6 years have not been good. 7 Q. What else does it say about the results 8 in that paragraph? 9 A. Do you want me to read the whole 10 paragraph? 11 Q. Well, read the sentence that says, 12 "However, one cannot escape the fact that..." 13 Do you see that? 14 A. Yes. "However, one cannot escape the 15 fact that irrespective of the market-created asset 16 quality problems, many of the major activities as 17 part of the wholesale activity have been 18 disappointing." 19 Q. Now, take a look at T4403. 20 A. Okay. 21 Q. Do you see on Page 2 the reference to 22 the Smith Breeden review at the top of the page in 20378 1 September 1986? 2 A. Yes, I do. 3 Q. And do you see what that shows in terms 4 of the mark-to-market change occurring versus 5 Smith Breeden? 6 A. I see that table. I'm not sure what 7 you're pointing to. 8 Q. Well, the table shows that the 9 mark-to-market adjustment of the portfolio is 10 $604 million, doesn't it? 11 A. Right. 12 Q. And what was the goodwill that USAT -- 13 what was the size of the goodwill at USAT? 14 A. The size of it? 15 Q. Uh-huh. 16 A. I don't remember. 17 Q. Was it somewhere between two and 18 300 million? 19 A. I don't remember at all. 20 Q. Now, both of these documents, do they 21 reflect that the performance of various portfolios 22 at USAT that were initiated as part of the 20379 1 wholesale strategy were not successful? 2 A. I don't think so. 3 Q. You don't think they do? 4 A. No. 5 Q. Why not? 6 A. I mean, obviously, I haven't gone 7 through this; but I think Mr. Crow is saying it 8 was, in his view, disappointing. And Mr. Williams 9 is talking -- I don't know what he's talking 10 about. Actually, I'm not sure what we're -- 11 Mr. Williams' memo, I'm not sure if he's pointing 12 out anything at all about long-term results. 13 Q. Well, let's just take a look at the 14 Crow memoranda. Let's just stick to the Crow 15 memoranda. Look at the last two bullet points on 16 Page 2 which deal with mortgage-backed securities. 17 One of them says, does it not -- the second bullet 18 point from the bottom where it makes reference to 19 the original mortgage-backed securities portfolio 20 which is characterized here as Joe's portfolio. 21 It says, "Over the period, the portfolios lost 22 $57 million producing an annualized return on 20380 1 assets of negative 2.67 percent." Right? 2 A. That's what it says. 3 Q. That's a loss isn't it? 4 A. That's what it says. 5 Q. Take a look at the next one, "United 6 MBS Corporation." That was the Sandy Laurenson 7 sub. Do you remember talking about that in your 8 direct testimony? 9 A. Yes, I do. 10 Q. What's this show, that that lost 11 96 million for a negative return of negative 12 5.99 percent. Right? 13 A. Yeah. It says counting mark-to-market 14 loss. I'm not sure I know what that means. 15 Q. But that's a negative return of 16 $96 million, is it not? 17 A. Again, I don't know what -- I don't 18 know what it means by counting mark-to-market 19 losses; but that's what it says, that it lost 20 $96 million. 21 Q. Now, I would like to direct your 22 attention to A1489; and that is the minutes of the 20381 1 investment committee of February 3rd, 1988. 2 Do you see that? 3 A. Right. 4 Q. And take a look at the very last page 5 of that document. 6 A. The last page? 7 Q. Uh-huh. That has what's referred to as 8 a sensitivity summary there. 9 Do you see that? 10 A. Yes, I do. 11 Q. And it's also been referred to as a 12 liquidation analysis or a mark-to-market analysis 13 in testimony in this proceeding. 14 A. Okay. 15 Q. Do you recall your memorandum of April, 16 I think, of 1987 -- I think it was April 22nd, 17 1987, where you were concerned about interest rate 18 projections and the ability of USAT to adjust for 19 interest rate changes? 20 Do you recall that? 21 A. I recall that memo. I'm not sure 22 that's what it said. I recall you showing me that 20382 1 memo. 2 Q. That's the memo where you referred to 3 yourself as a mortgage-backed securities 4 illiterate, I think, was the term? 5 A. I do. 6 Q. You said it would be helpful to have 7 mark-to-market analysis? 8 A. Again, I remember you showing me that 9 memo. I don't specifically recall that. I know 10 that's what I was talking about. 11 Q. This liquidation analysis shows a 12 mark-to-market negative value of all 13 mortgage-backed securities as of February 3rd, 14 1988, of $245 million, does it not? 15 A. That's what it shows, yes, sir. 16 Q. Now, going back to Exhibit B2020, the 17 forbearance application -- 18 A. 2020? 19 Q. 2020, the forbearance application. 20 Look at Page 9 of the forbearance application 21 again. 22 A. (Witness reviews the document.) 20383 1 Q. Are those results the reason why in 2 Paragraph -- the full paragraph at the top that I 3 read to you that you said was illegible, "United 4 currently manages portfolios," that paragraph. 5 A. Right. 6 Q. Are those results that I've just shown 7 you in the investment committee minutes the reason 8 why the results of mortgage-backed securities are 9 not included in that paragraph on Page 9 of the 10 forbearance application? 11 A. I don't know. 12 Q. Now, I would like to direct your 13 attention to some other documents. One is B3744, 14 which is at Tab 1759; B2297, which is at Tab 1700; 15 B2317, which is at Tab 1701; B2377, which is at 16 Tab 1775. 17 A. (Witness reviews the documents.) 18 MR. EISENHART: Your Honor, I'm 19 informed that there may be some question as to 20 whether the first of the four documents Mr. Guido 21 has referenced, which is B3744, has actually been 22 admitted. We have that tab number, but I gather 20384 1 there's some question about whether it was 2 admitted or not. 3 MR. VILLA: Your Honor, I didn't offer 4 it because I used it to determine whether the 5 positions reflected in the 3744 were what the 6 supervisory personnel were stating to Mr. Berner. 7 Since I didn't think he was a proper sponsoring 8 witness for the document, I didn't use it. 9 THE COURT: We are showing it as not 10 offered. 11 MR. GUIDO: Your Honor, it is from the 12 supervisory files; and I believe that under the 13 Rules, it could be admitted. 14 Am I right that this is from the 15 supervisory files, Mr. Villa? 16 MR. VILLA: That's correct. 17 MR. GUIDO: We move its admission, 18 Your Honor. 19 MR. VILLA: No objection. 20 THE COURT: Received. 21 Q. (BY MR. GUIDO) B3744 is a significant 22 supervisory case report as of August 1, 1987. 20385 1 Do you have that in front of you, 2 Mr. Berner? 3 A. Yes, I do. 4 Q. Okay. See where it says "latest 5 composite exam rating"? 6 A. Yes, I do. 7 Q. Do you see where it says a 4? 8 A. Right. 9 Q. Do you know what a 4 means in regards 10 to a composite rating? 11 A. No, I don't. 12 Q. Do you know that's below average? 13 A. I have no idea. 14 Q. I would like to turn next to the two 15 letters that you wrote. One is B2317, and the 16 other is B2297. 17 Do you have them before you? 18 A. Yes, I do. 19 Q. One of them, 2297, is dated July 11th, 20 1988; and the second, 2317, is dated July 19th, 21 1988. 22 Do you see that? 20386 1 A. Yes. 2 Q. Those are your -- USAT's offer to 3 participate in the Southwest Plan. Right? 4 A. Yeah, I believe that's -- it's relating 5 to the Southwest Plan, that's correct. 6 Q. Okay. They are both related. And 7 you're basically urging prompt action on USAT's 8 request. Right? 9 A. In one, we're saying we're ready to 10 commence negotiation and -- we're not saying 11 prompt action. We're just saying we would like to 12 participate, and we were discussing various 13 packages of the Southwest Plan. 14 Q. One of them says as soon as possible, 15 no later than July 14, which is three days after 16 the letter was sent, correct? 17 A. That we were ready to commence 18 negotiations. 19 Q. I would like to direct your attention 20 to B2377, which is at Tab 1775. It's your memo to 21 Jenard Gross, Barry Munitz, Larry Connell, Mike 22 Crow dated August 23rd, 1988. It says on Tuesday, 20387 1 August 23rd, you had a conversation with 2 Neil Twomey. 3 Do you see that? 4 A. Yes. 5 Q. "And he told me a number of things." 6 Right? 7 A. Right. 8 Q. And what was the first thing he told 9 you? 10 A. He had signed a pre-examination request 11 and we would be getting a team of examiners 12 beginning about September 6th and this would be in 13 connection with our participation in the 14 Southwest Plan. 15 Q. Okay. Was this the Federal Home Loan 16 Bank's response to your letters which were dated 17 July 11th and July 19th requesting participation 18 in the Southwest Plan? 19 A. I don't remember if this was that 20 response -- in response to those letters. I don't 21 know. 22 Q. If Mr. Twomey was satisfied with the 20388 1 management of USAT at that time, why did he sign a 2 pre-examination request for the Southwest exam? 3 Do you know? 4 A. I have no idea. 5 Q. Now, I would like to direct your 6 attention to a document which is B2624, which is 7 the -- your letter of 12/21/88 at Tab 1778. I 8 think your counsel showed you this letter and 9 asked you some questions about it, and you 10 indicated that the letter reflected concerns that 11 the board of directors of USAT had regarding the 12 plan for liquidation of the assets of USAT. 13 Do you recall those questions? 14 A. Yes, I do. 15 Q. Okay. And the first question I have 16 for you: Who were the members of the board of 17 directors of USAT, December 21, 1988? 18 A. I'm not sure. I don't know. I was. 19 Jim Whatley, I think, was. Barry Munitz, I'm not 20 sure if he was. I'm pretty sure Larry Connell 21 was. And I don't know who else was. 22 Q. Paul Schwartz was? 20389 1 A. Yes, Paul Schwartz was. 2 Q. There were five of you. Right? 3 A. I don't have a specific recollection. 4 You would have to show me. There were people 5 coming on and off. 6 Q. Who appointed those people to the board 7 of USAT? 8 A. Who appointed them? 9 Q. Uh-huh. 10 A. I was asked to join as part of my 11 contract in February. 12 Q. You were asked by whom? 13 A. I believe it was Jenard Gross. 14 Q. Jenard Gross asked you? 15 A. It might have been Barry Munitz. 16 Somebody asked me to join the board -- told me to 17 join the board. Mr. Schwartz I have no idea who 18 asked him to join the board. 19 Q. Where did Mr. Schwartz work? 20 A. He worked at MAXXAM. Mr. Whatley had 21 been on the board forever, for many, many years. 22 Mr. Connell joined the board when he came to work 20390 1 for United; and Dr. Munitz had been on the board 2 for a number of years, also. 3 Q. Was Dr. Munitz an officer of Federated? 4 A. He may have been. I don't know. I'm 5 not sure. 6 Q. Was this letter written before or after 7 the Hyperion group had been selected as the 8 successful bidder over MAXXAM? 9 A. They were in doing their due diligence, 10 and I believe they had been selected at this time. 11 Q. Now, let's take a look at the concerns 12 that are reflected in the letter. This says, "The 13 concern is about the liquidation prior to 14 December 31 of a significant portion of the 15 mortgage-backed securities portfolio." 16 Do you see that? 17 A. "And high-yield bond portfolio." 18 Q. "And high-yield bond portfolio." It 19 says, "The elimination of certain swap and other 20 hedge positions of United Savings Association of 21 Texas." 22 Do you see that? 20391 1 A. Yes, I do. 2 Q. So, those are the concerns that are 3 reflected in this letter. Right? 4 A. That's what's referred to. 5 Q. Pardon? 6 A. That is what's referred to. 7 Q. Then it says, "Please be advised that 8 after consultation with those persons at USAT who 9 are responsible for supervision of such 10 portfolios." 11 Do you see that phrase? 12 A. Yes, I do. 13 Q. Who were the persons at United 14 responsible for the supervision of the portfolios 15 that's referred to there? 16 A. Mortgage-backed securities at this time 17 would have been Dominic Bruno. High-yield bond 18 was Gene Stodart. 19 Q. And what about swaps? 20 A. I think that probably would have been 21 Dominic Bruno, also. 22 Q. Okay. Then why does it say there's a 20392 1 concern with regard to rapid sale prior to year 2 end? 3 A. There would be a significantly great 4 loss that would be incurred if there was -- this 5 is what we were told. There would be a 6 significantly greater loss if these sales were 7 made before year end. 8 Q. That's high-yield bonds, 9 mortgage-backed securities, and swaps, correct? 10 A. That's what we were talking about, 11 that's correct. 12 Q. I would like to show you another 13 exhibit which is dated the same date, December 21, 14 1988; and that is at B2629 which your counsel did 15 not show you. 16 17 (Discussion held off the record.) 18 19 Q. (BY MR. GUIDO) Is this a letter you 20 also sent setting forth a strategic plan to deal 21 with the liquidation of the portfolios that are 22 addressed on the letter dated the same date, 20393 1 12/21/88, Exhibit B2624? 2 A. Yes. That's what it says. 3 Q. Now, I would like to direct your 4 attention to the various sections. The -- the 5 first page deals with -- the first of the plans 6 deals with equity arbitrage securities. That's at 7 OW160337. 8 Do you see that? 9 A. Yes, I do. 10 Q. Okay. Now, that's not addressed in the 11 letter. Right? It's only high-yield bonds, 12 mortgage-backed securities, and swaps. Right? 13 A. That's correct. 14 Q. Okay. Now, I'm going to move to now 15 the page that deals with the -- where it says 16 "strategic plan - reduction of dollar roll and 17 repurchase agreement obligations" dated 18 December 12th, 1988. 19 Do you see that? 20 A. Yes, I do. 21 Q. That's OW160339. 22 Do you see that? 20394 1 A. Yes. 2 Q. Okay. Now, that -- do you see the 3 paragraph that says, "A reduction in the level of 4 these activities referring to dollar rolls and 5 repurchase agreement obligations"? 6 Do you see that paragraph? 7 A. Yes. 8 Q. It says that that would presume a 9 reduction in the level of mortgage-backed 10 securities. 11 Do you see that? 12 A. Yes. 13 Q. Then it says, "The attached document 14 from Dominic Bruno provides a plan for the 15 potential liquidation of these securities which 16 would result in a reduction of the financing 17 vehicles." 18 Do you see that? 19 A. Yes, I do. 20 Q. Now, did you ask Dominic Bruno to 21 develop a liquidation plan? 22 A. I'm not sure if I asked him or somebody 20395 1 else asked him. 2 Q. Now, the next sentence says, "Unless 3 management is instructed by the supervisory agent 4 to execute the potential plan described by 5 Mr. Bruno, we will not proceed in this matter." 6 Do you see that? 7 A. Right. 8 Q. Now, let's take a look at Mr. Bruno's 9 plan, which is two pages further on into the 10 document, OW160341. 11 Do you see the first paragraph there 12 that describes the plan that he has put together 13 and what he believes that plan will do? 14 A. (Witness reviews the document.) When 15 you say what he believes the plan will do -- 16 Q. Well, it says, "More generally, this 17 plan provides for an orderly liquidation of USAT's 18 assets and liabilities. Efficiency of execution 19 (or minimizing an adverse market impact of 20 transactions) is assumed to be the objective of 21 this liquidation." 22 Do you see that? 20396 1 A. I see that. 2 Q. So, he's recommending that as an 3 orderly liquidation plan, is he not? 4 A. I haven't looked at this, and I don't 5 know what's in here. 6 Q. Did you look at this document before 7 you testified on cross-examination, Mr. Berner? 8 A. Did I look at this document? 9 Q. Yes. 10 A. No, I did not. 11 Q. Now, why was it if Mr. Bruno, who was 12 the person you're referring to in your November 21 13 letter, and Mr. Barclay as one of the people you 14 consulted with -- why are you saying you won't 15 follow the plan that he developed, although he 16 clarified it as an orderly plan, unless you were 17 specifically instructed to do so by the 18 regulators? 19 A. Again, it's my recollection that the 20 plan was developed because the regulators required 21 a plan to be developed; but I don't think 22 management thought that that was in the best 20397 1 interest of the association. 2 Q. Why was that. Was there something 3 disorderly about the plan? 4 A. I don't remember at this time. 5 Q. Well, why do you cite somebody as a 6 person that you believe to provide you with advice 7 on how to liquidate the plan on the one hand and, 8 on the other, say you're not going to follow his 9 plan unless you're directed to do so by the 10 regulators? 11 A. The plan was directed by the regulators 12 to be prepared. I know he didn't want to dispose 13 of all the mortgage-backed portfolios. That's 14 what the plan is providing. So, unless we were 15 directed by the regulators to liquidate the 16 portfolio, we were not going to do it. 17 Q. Do you recall that he wanted -- well 18 before the date of these memoranda and letters, 19 that he wanted to totally restructure that 20 portfolio? 21 A. I don't have any recollection. 22 Q. You don't have any recollection of 20398 1 that? 2 A. No. 3 Q. But you do recall that he wanted to 4 keep the portfolio? 5 A. That's my recollection. 6 Q. But you don't recall that he wanted to 7 restructure the portfolio substantially? 8 A. No, I don't. 9 Q. Now, that deals with the 10 mortgage-backed securities portfolio. Look at the 11 next paragraph. It says, "An exception to this is 12 our intent to unwind the interest rate swaps 13 mentioned on Page 2 of Mr. Bruno's memo with 14 Salomon Brothers." 15 Do you see that? 16 A. No, I don't. Where are you looking at? 17 Q. I'm looking at the third paragraph on 18 OW160339. 19 A. Okay. 20 Q. Do you see that? 21 A. I see that paragraph. 22 Q. Now, there it says you're going to go 20399 1 ahead and unwind them without anybody directing 2 you to do so. Right? 3 A. Right. 4 Q. But on the first paragraph on Page 1 of 5 Exhibit B2624, you object to the sale of the swaps 6 which you specifically say you're going to do 7 despite Mr. Bruno's views and his recommendations. 8 A. Mr. Bruno objected to the way -- what's 9 reflected in this December 21st letter to Barclay 10 was based on Mr. Bruno's statement that he felt 11 that what was being ordered at this time was 12 inappropriate and would create additional losses. 13 Q. Or was he just objecting to the terms 14 that Salomon wanted because Salomon was trying to 15 recoup funds from a different contract dispute 16 with USAT? 17 A. I have no idea. 18 Q. Why is it that you cite him and you 19 don't follow his two recommendations and both of 20 these documents are the same date? 21 A. When you say we don't follow his two 22 recommendations, I'm not sure what you're talking 20400 1 about. 2 Q. Well, he says that he has an orderly 3 liquidation plan; and you say you're not going to 4 comply with that, although your complaint in your 5 letter is you want to have an orderly liquidation 6 plan? 7 A. Again, we were told to create a 8 liquidation plan; so, he created that. It wasn't 9 his intent, and it wasn't management's intent to 10 liquidate the mortgage-backed securities 11 portfolio. That was done at the direction of the 12 Federal Home Loan Bank of Dallas. 13 Q. Well, was your objection to December 21 14 in Exhibit B2624 to liquidation or liquidation 15 prior to December 31, '88? 16 A. Liquidation -- at this point in the 17 December 21st letter to George Barclay was the 18 liquidation in the manner that they were telling 19 us to get rid of those mortgage-backed securities. 20 Q. Prior to December 31 of '88? 21 A. Prior to this letter. 22 Q. So, that's the objection in that 20401 1 letter? 2 A. The objection is that we were being 3 told to do something that we believed was creating 4 significant additional losses. 5 Q. And then you cite Mr. Bruno as the 6 person you're relying upon for that conclusion? 7 A. That's correct. 8 Q. And then on the same date, you have a 9 memorandum that you prepared that says you're not 10 going to follow his recommendations? 11 A. No. His recommendations under this 12 plan, which is not the same thing as under the 13 letter. His recommendations were prepared at the 14 request of the regulators. What we're saying is 15 we don't believe the liquidation of that portfolio 16 is correct, but we'll do it if you tell us to do 17 it. 18 Q. So, in the second document -- let me 19 see if I can get this straight and hopefully 20 straight for the record. 21 In 2629, you're basically saying -- in 22 Exhibit 2629 -- that we just don't agree with any 20402 1 liquidation of the mortgage-backed securities 2 portfolio unless instructed to do so? 3 A. That's correct. 4 Q. But in your letter of December 21 to 5 Mr. Barclay who is -- is he the chairman of the 6 Federal Home Loan Bank? 7 A. He was president or something. He was 8 the head man. 9 Q. You're saying that your only objection 10 is to the timing? 11 A. That -- the only objection at that 12 point was to the manner in which we were being 13 directed to liquidate that portfolio. 14 Q. Now I would like to go to another 15 point. You testified at 2015 (sic) about a 16 6-million-dollar payment that Mr. Connell directed 17 to be made out of the interest reserve for the 18 Park 410 to make the interest payments on that 19 loan. 20 Do you recall that? 21 A. Yes, I do. 22 Q. And do you recall that you also -- that 20403 1 Mr. Connell was not fired when you and Mr. Crow 2 were fired by Mr. Twomey and he stayed on at Bank 3 United? 4 A. That's correct. 5 Q. Were you trying to say that somehow 6 there was a connection between those two things? 7 A. I didn't say that. 8 Q. Okay. You weren't implying that there 9 was a connection? 10 A. No. 11 Q. Now, you did testify that you thought 12 it was inappropriate. 13 Do you recall that testimony, the 14 6-million-dollar payment was inappropriate? 15 A. Yeah, I do. 16 Q. Why did you think it was inappropriate? 17 A. It was creating an additional loss. 18 Q. Why was it creating an additional loss? 19 A. Because the loan value would be going 20 up, and this was a loan that was in trouble. 21 Q. Now, USAT was underwater at the time. 22 Right? It was being taken over? 20404 1 A. Yes, it was. 2 Q. It was being resolved, I think, is the 3 term, or placed into receivership and then resold. 4 Right? 5 A. Right. 6 Q. So, no matter who bought the place, 7 that loan was going to be worth whatever it was 8 going to be worth? 9 A. If, in fact, those deals went through, 10 that's correct. 11 Q. If that loan were performing and sold 12 in the open market, was it more favorable or less 13 favorable than if it had been non-performing? 14 A. If it was performing and if it were 15 sold, would it be more valuable? 16 Q. Or less valuable than if it had been 17 non-performing. 18 A. I'm sure it would be more valuable if 19 it were performing. 20 Q. Do you know what the effect would have 21 been if USAT had kept the loan and just sold the 22 loan without making the payment and not 20405 1 transferring it to Bank United? 2 A. No, I don't. 3 Q. So, you don't know what the loss would 4 have been? 5 A. No, I don't. 6 Q. So, how do you know it was 7 inappropriate? 8 A. It was taking a non-performing loan and 9 moving $6 million as an additional loan. 10 Q. Well, if it was more valuable if you 11 had done that, if somebody was willing to pay 12 more, how do you know that there was something 13 inappropriate about it? 14 A. I felt it was inappropriate. 15 Q. Now, did you feel it was inappropriate 16 because you felt very bitter at that time? 17 A. No. 18 Q. Had you attempted to be one of the 19 people to acquire USAT after it was resolved? 20 A. Me? 21 Q. Yeah. 22 A. No. 20406 1 Q. Okay. Did you have any discussions 2 with the board of directors about them being 3 participants in the Southwest Plan as an acquirer 4 of USAT? 5 A. UFG? 6 Q. Yeah. UFG. Excuse me. 7 A. That UFG would help in the acquisition? 8 Q. Yes. 9 A. That was the hope at one point, yes. 10 Q. And you were one of the participants in 11 those discussions, weren't you? 12 A. Yes, I was. 13 Q. And, in fact, you were one of the key 14 draftsmen of the various proposals, were you not? 15 A. There were lots of proposals which I 16 helped draft. I'm not sure what you mean when you 17 say "the key one." 18 Q. Did you participate in discussions with 19 the board of UFG or the board members of USAT 20 about being participants in the bidding process 21 for the acquisition of USAT? 22 A. That UFG would be a participant? 20407 1 Q. That the board members of USAT being 2 participants in the bidding process for the 3 acquisition of USAT as part of the Southwest Plan. 4 A. The board members individually, you're 5 talking about? 6 Q. On behalf of the board of USAT or on 7 behalf of the board of UFG. They were the same 8 people, weren't they? 9 A. No, they weren't. I'm really confused 10 on the question. 11 MR. VILLA: Are you talking about 12 individuals so Mr. Berner would have a stock 13 interest or that the board is acting on behalf of 14 UFG to preserve some shareholder interest? 15 Q. (BY MR. GUIDO) Let's say: Did you 16 participate in discussions individually with other 17 members of the board of USAT or UFG in order that 18 the -- the group of you would be participants in 19 the bidding process? 20 A. As individuals? 21 Q. Yes, as individuals representing your 22 interests. 20408 1 A. My own personal interest? 2 Q. Uh-huh. 3 A. No. 4 Q. Did you participate in any process in 5 an attempt to maintain control over the bidding 6 process? 7 A. To maintain control? We tried to be a 8 part of that. The board of UFG tried to be a part 9 of that process, yes. 10 Q. I asked you: Did you attempt to 11 maintain control over the bidding process? 12 A. I don't believe we tried to maintain 13 control. We tried to be a part of the process, 14 yes. 15 THE COURT: We'll take a short recess. 16 17 (Whereupon, a short break was taken 18 from 3:11 p.m. to 3:33 p.m.) 19 20 THE COURT: Be seated, please. We'll 21 be back on the record. 22 Mr. Guido, you may continue. 20409 1 MR. GUIDO: Thank you, Your Honor. 2 Q. (BY MR. GUIDO) In October of '88, did 3 the USAT board discuss making a generic bid for 4 other thrifts? 5 A. I believe so. 6 Q. Okay. And was the purpose of doing so 7 to maintain control over the bidding process for 8 USAT? 9 A. I don't -- I don't believe so. I'm not 10 sure I understand what you mean when you say 11 "maintain control over the bidding process for 12 USAT." I'm just not sure I understand that. 13 Q. Well, did USAT's board submit a generic 14 bid for a savings and loan? 15 A. I don't recall. 16 Q. Did they submit a bid for what was 17 referred to as the charter package? 18 A. At some point, there was a bid for the 19 charter package, I believe. 20 Q. And that was done by the USAT board. 21 Right? 22 A. I don't remember who it was done by. 20410 1 Q. Was the bid a bid that identified the 2 investor group that was to be formed? 3 A. I don't recall it. 4 Q. What was the purpose of making that 5 bid? 6 A. Again, the only thing I recall, it was 7 part of the Southwest Plan. There was a package 8 of S&Ls is what I recall about the charter 9 package. That's about all I recall. 10 Q. At the time that the USAT board was 11 putting together that packet, did you know who the 12 bidders were for USAT? 13 A. I believe there were -- I don't know if 14 they actually formalized bids, but there were the 15 Ranieri group and the MAXXAM Group. 16 Q. And how did you know that? 17 A. I don't know how I knew that. 18 Q. Did you send a draft of the USAT 19 board's bid to each of those groups, the MAXXAM 20 Group and the Ranieri group, prior to it being 21 submitted to the regulators? 22 A. I think we did, yeah. Yeah, I believe 20411 1 we did. 2 Q. And why did you do that? 3 A. I don't recall right now. 4 Q. Did you have any discussions with the 5 MAXXAM or the Ranieri groups about who it was that 6 you preferred as an investor group? 7 A. We had a discussion with -- we had 8 discussions with both of them, I believe. 9 Q. Uh-huh. Can you tell us about those 10 discussions? 11 A. Again, it's just recollection. It was 12 to see who could provide or if anyone would 13 provide benefit for, I believe, the UFG 14 shareholders. 15 Q. Was there any discussion about the 16 benefit for UFG's management? 17 A. I don't recall it. I mean, it's been a 18 lot of years. 19 Q. Now, did you indicate to either of them 20 that you felt that they should not submit a bid 21 for USAT directly? 22 A. I don't recall. 20412 1 Q. Did you subsequently learn that one of 2 them had submitted a bid directly to the Federal 3 Home Loan Bank Board for USAT? 4 A. Again, I believe I remember that, yes. 5 Q. And which group was that? 6 A. I think that was the Ranieri group. 7 Q. Did you tell anyone from the Ranieri 8 group that you found that to be objectionable? 9 A. I don't recall. 10 Q. How -- how did you learn that the 11 Ranieri group had made a bid directly to the 12 Federal Home Loan Bank Board for USAT? 13 A. I don't recall. 14 Q. Did Mr. Connell tell you? 15 A. I don't remember. 16 Q. Did you, after you learned of the bid 17 package that was being considered by the MAXXAM 18 group and the Ranieri group, assist the MAXXAM 19 group in preparing a private placement memorandum 20 for the MAXXAM group to obtain financing for its 21 bid for USAT? 22 A. I believe so. 20413 1 Q. Did you do so at the time that you were 2 telling both groups that you were and other 3 management of USAT were neutral in who would be 4 the successful bidder for USAT? 5 A. I don't recall. 6 Q. Did you ascertain whether or not 7 Mr. Connell had developed a preference from his 8 perspective of who should be the successful bidder 9 for USAT? 10 A. I don't remember, no. 11 Q. What sort of thrift, traditional or 12 nontraditional, was the MAXXAM group contemplating 13 for USAT's successor? 14 A. I have no recollection. 15 MR. GUIDO: Your Honor, I would like to 16 admit B2629, a document that I showed the witness, 17 into evidence. I would also like to show the 18 witness some notes that he wrote with regard to 19 the topics that I've just asked him questions 20 about. 21 MR. VILLA: Your Honor, at the risk of 22 sounding like a broken record, we have assiduously 20414 1 given them notice of all documents. I personally 2 was up at 11:30 one night to make sure I faxed 3 over to Mr. Rinaldi and Mr. Guido all documents 4 that I would use in the order that I would use 5 them. I have had about five documents dropped on 6 me today that I haven't had notice of. Now, I 7 understand that all is fair, apparently, in love 8 and in the courtroom; but I don't want it to be in 9 any way misunderstood as to which side is playing 10 by the rules because we are and they are not. 11 MR. GUIDO: Your Honor, I would like to 12 respond. 13 MR. VILLA: I have no objection to 14 2629. 15 THE COURT: Received. 16 MR. GUIDO: I have a response to that. 17 Mr. Villa is incorrect when he states that he 18 provided me with all documents that were used 19 yesterday in the Court. There were documents that 20 were not on his list that were produced. The 21 documents that I used today were expressly on the 22 list that Mr. Villa used for his cross-examination 20415 1 of his witness, not direct-examination as 2 Mr. Villa has used the documents. I believe I 3 have met the terms of the rules. 4 But going forward, if that is the case, 5 that the Court feels that the rule covers me 6 giving him notice again of documents that he's 7 already indicated he was already aware of, I'm 8 perfectly happy to do so. In the past when I have 9 given Mr. Villa documents and list the documents 10 and turn out not to use them and he does use them, 11 I have never objected to that practice, 12 Your Honor. 13 The purpose of the rule was to give 14 people a fairness notice of the notice before 15 them. I think the fact is that these two 16 documents he's objecting to are documents on his 17 own list and they deal with the subject matter 18 that he asked questions about. I don't think I 19 violated the rule. 20 THE COURT: He told you he might use 21 these documents? 22 MR. GUIDO: Yes, Your Honor. 20416 1 MR. VILLA: That is an absolute 2 untruth. I have my letters. There are two things 3 I will tell you. Number one, every document that 4 I used was identified in my copies. I kept copies 5 of them and faxes, and I'm prepared to show them 6 to anybody who wants to see them. These are not 7 on my list. I have too long sat in this courtroom 8 and had questions about our integrity based upon 9 oral exchanges. So now, I put everything in 10 writing. I don't think that we have to submit it 11 to the Court; but if you want to ever see it, I 12 have it in writing. 13 You can look at this document and the 14 other one, and it will not show up on my list of 15 the documents I intended to use. I'm sure 16 Mr. Guido make a misstatement and didn't intend to 17 mislead the Court, but it is an untrue statement. 18 I have no objection to 2629. 19 THE COURT: How about 2478? 20 MR. GUIDO: Both of these documents I 21 got from Mr. Villa's staff. Both of these 22 documents were documents produced to me by 20417 1 Mr. Villa. I don't know whether they are on his 2 letter or not on his letter. These were two 3 documents given to me. I don't have the letter 4 here. They were segregated out right here in this 5 courtroom last evening, and they were put into a 6 category of documents that were not shown to the 7 witness. But both of these last two documents, 8 Your Honor, were documents that I got from 9 Mr. Villa. I had never seen these documents 10 before he produced these documents. 11 MR. VILLA: What he's saying is on the 12 list of four or 5,000 documents, he's now saying 13 he got them from me. I have in my hand with the 14 faxed hour of 11:00 at night to make sure he would 15 have notice of every document we were going to 16 use. These are not on the list. I'm saying this 17 because there has been some very personal attacks, 18 particularly towards Ms. Clark. And we sit here 19 sometimes with our lips tightly shut, and we find 20 that they use documents time and again without 21 giving us notice. If he can't find the documents 22 with the use of his individuals, he asks us for 20418 1 the documents. Then we give it to him. Then he 2 stands up in Court and says, "I got it from 3 Mr. Villa." That is unbelievable. He didn't get 4 them from me any more than he got them from the 5 library. 6 THE COURT: Mr. Guido, did you ask 7 somebody for these documents? 8 MR. GUIDO: I didn't ask for any 9 documents. My staff segregated them out last 10 night from Mr. Villa's staff into those that were 11 used by Villa and those that were not. I never 12 asked for specific documents, Your Honor, and 13 Mr. Villa knows he's incorrect about that and it's 14 a patently false statement on his part. These 15 last two documents that I have used, Your Honor, 16 and every document I have used today are documents 17 that Mr. Villa produced to me under the 18 representation that they were going to be used for 19 cross-examination, Your Honor. 20 For Mr. Villa to stand up here and say 21 that is just totally untrue, Your Honor. 22 THE COURT: All right. How about 2468? 20419 1 Any objection to that? 2 MR. VILLA: No objection. 3 THE COURT: Received. 4 Q. (BY MR. GUIDO) Have you had an 5 opportunity to review 2478, Mr. Berner? 6 A. No, I haven't. 7 Q. I would like you to take a look at the 8 second paragraph. 9 A. (Witness reviews the document.) 10 Q. Remember I asked you whether or not the 11 board of directors of USAT and UFG had considered 12 taking -- getting involved in the Southwest Plan 13 in order to attempt to provide or maintain control 14 over the bid process and you said "no"? 15 Do you recall that? 16 A. I think I said I understand what you're 17 talking about, but yes. 18 Q. Take a look at the last sentence in 19 Paragraph 2. It says, "The purpose of getting 20 involved in the bid proposal for the 21 recapitalization of USAT was to provide some value 22 to shareholders and to maintain control over the 20420 1 bid process." 2 Do you see that? 3 A. Yes. 4 Q. Do you recall preparing this 5 memorandum? 6 A. I don't recall it, but it's -- it looks 7 like a memorandum from me. So, I'm sure it was 8 mine. 9 Q. And it says the purpose of the 10 memorandum is to document your recollection of 11 meetings and incidents that occurred in the past 12 two weeks prior to October 24th, 1988, the day of 13 that memorandum. Right? 14 A. That's correct. 15 Q. And then it discusses the preparation 16 of a generic bid. 17 Do you see that in the third paragraph? 18 A. Yes, I do. 19 Q. Okay. And that the purpose was to have 20 the potential investors respond to your proposals 21 without going directly to FSLIC. 22 Do you see that? 20421 1 A. Yes, I do. 2 Q. Do you have any reason to dispute the 3 accuracy of that? 4 A. No, I don't. 5 Q. And it indicates that you distributed 6 letters to those people. 7 Do you see that? 8 A. Yes, I do. 9 Q. And that you had discussions between 10 representatives from Ranieri and MAXXAM's groups 11 regarding the proposal. Right? 12 A. Yes. 13 Q. And then it indicates down in the last 14 paragraph during the week of October 10th, you 15 prepared a bid and distributed the drafts to 16 MAXXAM and the Ranieri groups. Right? 17 A. Yes. 18 Q. Okay. And then does it indicate that 19 you learned from Mr. Connell in that paragraph 20 that the Ranieri group had submitted a bid 21 directly to FSLIC? 22 A. (Witness reviews the document.) You're 20422 1 referring to the last paragraph? 2 Q. Uh-huh. 3 A. And the question was? 4 Q. Page 1. Does it indicate that he told 5 you that the Ranieri group was going ahead and 6 submitting its own bid? 7 A. It says he stated that Ranieri would be 8 getting a similar letter. I guess, yes. 9 Q. Doesn't that paragraph indicate that 10 during the week of the 10th, that you helped work 11 on the private placement memorandum for MAXXAM? 12 Right? 13 A. Yes, it does. 14 Q. All right. Take a look at the first 15 full paragraph at the top of the next page. See 16 where it discusses the continuing discussion among 17 management about the need to keep control of the 18 bidding process? 19 A. No. Where is that? Point me to where 20 you're looking. 21 Q. The second full paragraph at the top of 22 Page 2. 20423 1 A. (Witness reviews the document.) Okay. 2 Q. Then look at the next page. It talks 3 about you making a telephone call to Mr. Ranieri 4 asking to get together with him so that you could 5 discuss a number of issues. 6 Do you see that? 7 A. Yes, I do. 8 Q. Okay. What are those issues that you 9 asked to discuss? 10 A. The value to shareholders, 11 indemnification, and management continuity. 12 Q. What is the reference to management 13 continuity? 14 A. I don't remember now. 15 Q. Did you get a response? 16 A. Did we -- meaning did we have a 17 meeting? 18 Q. Uh-huh. 19 A. Again, I'm reading this paragraph. It 20 says we set up a meeting for October 18th; so, I 21 assume we did. 22 Q. Now, did you subsequently get notice 20424 1 that Mr. Ranieri wanted to distance himself from 2 management as he was participating in the bidding 3 process? 4 A. I believe that's true. 5 Q. Did he tell you why he wanted to do 6 that? 7 A. I don't recall if he did or not. 8 Q. You don't recall. 9 After you had drafted your -- or 10 participated in the drafting of the private 11 placement memorandum for MAXXAM, did you tell 12 anyone that the management of USAT was neutral on 13 who the investor group would be in USAT? 14 A. I don't recall. 15 Q. Look at the last page of the 16 memorandum. It's the second full paragraph. Do 17 you see the reference to "Mr. Patriarka asked me 18 whether or not we preferred any one of the 19 bidders"? 20 A. Yes, I do. 21 Q. What's it say there? 22 A. It says, "I told them at this point we 20425 1 didn't and that we were taking a neutral 2 position." 3 Q. How could you take a neutral position 4 between bidders when you're assisting one of them 5 in preparing a private placement memorandum to 6 place funds? 7 A. They are two totally separate things. 8 Q. They are? 9 A. I think so. 10 Q. Now, did you ever tell the people at 11 Ranieri that you thought it was a problem that 12 they had submitted a separate bid for USAT's 13 recapitalization? 14 A. I don't recall. 15 Q. Take a look at the paragraph on Page 3. 16 It's almost two thirds of the way down. It says 17 on Wednesday, October 19th, after a telephone 18 conversation with Scott Shea, you received a copy 19 of the Ranieri bid. 20 Do you see that? 21 A. Right. 22 Q. Then it indicates that you discussed 20426 1 the bid that had been submitted by Ranieri. 2 Right? 3 A. Yes, it does. 4 Q. Look at the next-to-the-last sentence. 5 It says, "I told them that I thought it was a 6 problem inasmuch as USAT management might have 7 lost control as a result of the bid." 8 Do you see that? 9 A. Yes, I do. 10 Q. Do you recall telling him that? 11 A. Again, if it's down here, I assume I 12 told him. I don't recall it, no. 13 Q. Were you agitated? 14 A. I don't think so. 15 Q. Why did you write this memorandum? 16 A. I have no idea. I assume it was to put 17 down the -- to document my recollections of the 18 meetings. 19 Q. Now, remember I asked you whether or 20 not the Hurwitz group had one concept for a thrift 21 and the Ranieri group had another? 22 Do you recall my question about that? 20427 1 A. I do. 2 Q. You said you didn't recall? 3 A. That's right. 4 Q. Would you take a look at Page 2, sixth 5 Paragraph down. Is it your recollection that 6 Mr. Connell was uncomfortable with the Hurwitz 7 group? 8 A. Again, if I put it in here, I assume 9 that's what I felt at the time. I don't have a 10 recollection right now. 11 Q. Now, look down -- the fourth line down 12 where it says "after Pacific first." It says, 13 "Ranieri was intending to create a more 14 traditional S&L as opposed to the Hurwitz merchant 15 banking concept." 16 Do you see that? 17 A. Yes. 18 Q. Does that refresh your recollection as 19 to what they were intending to do? 20 A. It doesn't; but if it's here, I assume 21 that was my recollection at the time. 22 Q. What happened after the Ranieri group's 20428 1 bid was accepted by the Federal Home Loan Bank? 2 A. What happened? 3 Q. Uh-huh. 4 A. USAT was put into receivership. 5 Q. Okay. Had you ever been given notice 6 of what the findings were with regard to your 7 management role at USAT as part of the 8 Southwest Plan examination? 9 A. I don't believe so. 10 Q. Were you terminated? 11 A. Yes, I was. 12 Q. And was Mr. Twomey the person who 13 terminated you? 14 A. I don't know. I got a letter from, I 15 think, the FSLIC or Federal Home Loan Bank Board. 16 Q. Did you have any discussions with 17 anyone where they told you why you were 18 terminated? 19 A. I did not. 20 MR. GUIDO: No further questions, 21 Your Honor. 22 MR. VILLA: I have about two questions, 20429 1 Your Honor. Before we recess today, I've had my 2 assistant, Mr. Farley, make copies of all my 3 letters. I would actually like to submit them to 4 the Court so if there's any questions as to 5 whether or not I put Exhibits B2478 and B2629 into 6 the letters, you'll happen to have them. 7 8 FURTHER EXAMINATION 9 10 Q. (BY MR. VILLA) Mr. Berner, Mr. Guido 11 has asked a number of questions to you about the 12 fact that UFG worked with MAXXAM in connection 13 with making its final bid for USAT. 14 Do you recall that? 15 A. Yes, I do. 16 Q. And there was at least the implication 17 in his questions that UFG did it because there was 18 some sort of benefit that would accrue to you or 19 other members of UFG or USAT's management. 20 I'm sure you heard that implication in 21 his questions, didn't you, sir? 22 A. I did. 20430 1 Q. Now, sir, let me show you what's been 2 marked as B2668 and direct your attention, sir -- 3 it's been marked in this case as B2668 -- direct 4 your attention to the last full paragraph on the 5 first page of 2668. 6 Do you see that before you? 7 A. Yes, I do. 8 Q. And does that show a comparison of the 9 benefit or, that is to say, the value of the bids, 10 competing bids, of MAXXAM and Mr. Ranieri? 11 A. Yes. It seems to, yes. 12 Q. And which bid ended up costing the 13 government more and by how much? 14 A. This says the Ranieri bid cost about 15 $100 million more than the MAXXAM bid. 16 Q. So, the MAXXAM bid was $100 million 17 better than Mr. Ranieri's bid. And this is a 18 memo -- it's to Marta Berkley. 19 Do you remember Marta Berkley? 20 A. Right. 21 Q. We saw some of her letters, didn't we? 22 A. Yes, we did. 20431 1 Q. Now, sir, do you think there's anything 2 wrong with UFG's management assisting in 3 developing a MAXXAM bid that would have saved the 4 government $100 million if it had been accepted? 5 A. No, I don't. 6 Q. In fact, the MAXXAM bid was rejected 7 even though it would have saved the government 8 $100 million; isn't that true, sir? 9 A. Yes, it is. 10 Q. And Mr. Ranieri's bid was accepted. 11 Right? 12 A. Yes, it sure was. 13 MR. VILLA: Your Honor, I move B2668 14 into evidence. 15 MR. GUIDO: No objection, Your Honor. 16 THE COURT: Received. 17 MR. VILLA: Your Honor, I would like to 18 tender to the Court a packet of letters that we've 19 submitted to Mr. Rinaldi over the last couple of 20 days just for the question of whether or not I 21 have misrepresented anything to the Court as to 22 whether or not B2478 and B2629 were documents that 20432 1 I had put on the list. May I do so, Your Honor? 2 THE COURT: Yes, you may. There seems 3 to be still some miscommunication between you and 4 Mr. Guido. It looks like you're submitting a list 5 of documents you intend to use plus other 6 documents. Is that the situation? 7 MR. VILLA: No, Your Honor. What 8 happens is if you have to make a decision the 9 night before, you try to be overinclusive because 10 you don't want to be sandbagged. Maybe I put in 11 274 documents and I use 250. You drop off 24 -- 12 you saw me in the courtroom sometimes saying I was 13 going to skip over a document. I would give him 14 the documents I was going to use in the order I 15 would use them. And if there's an extra 10 or 12 16 documents in there, I drop them out the night 17 before. This is the list I gave him in the order 18 I gave them to him. The two documents are not on 19 the list. We can play by any rules that the Court 20 feels is appropriate. I don't like it suggested 21 that we're not playing by the rules. That's why 22 it's in writing, Your Honor. 20433 1 Now, I think you'll find if you compare 2 the documents I have on that list against the 3 documents I actually used, I hit about probably 4 95 percent; and they are probably pretty darn 5 close to exactly the order I used them to 6 facilitate their utilization of the documents. 7 THE COURT: How did these documents, 8 2629 and 2478, get from your staff to Mr. Guido? 9 MR. VILLA: I have no idea. 10 MR. EISENHART: Your Honor, they are B 11 documents. They are available to all parties in 12 the case. 13 MR. VILLA: These are documents that 14 both sides have. They have had some problems 15 finding some of their documents. They ask us for 16 documents every once in a while. We pull them out 17 and give them to them. That happened yesterday. 18 MR. GUIDO: Your Honor, I never asked 19 for these documents. I got these documents as the 20 stack of Mr. Villa's production; and I am going to 21 take Mr. Villa's principle one step further 22 because I don't believe him, Your Honor. And I am 20434 1 going to make a list of the documents that I 2 received and provide it to him. 3 I don't know how this document was 4 transferred from his office to my office, but the 5 document was given to me as part of Mr. Villa's 6 production. I haven't done any additional 7 research. I don't know how it got transmitted. 8 This may be a ploy. This may be an error, 9 Your Honor, from my perspective; but it's one or 10 the other. It is not me finding a document and 11 using a document, violating a rule that I have 12 been making a great deal of noise about, 13 Your Honor. 14 So, I think it was either an error on 15 the part of his staff producing something he's 16 indicated -- that he ended up pulling documents 17 after the fact. So, I could have gotten a 18 production that was after the documents were 19 pulled. 20 THE COURT: Before, you mean? 21 MR. GUIDO: In other words, Mr. Villa 22 just indicated that he was going through late at 20435 1 night preparing a letter to transmit to me what he 2 was going to use, preparing a binder for the 3 Court. I don't get my documents from Mr. Villa in 4 a binder like the Court does or the witness does. 5 What I get is a stack of documents that purport to 6 be in the same order as the letter after I made a 7 complaint about the procedure to Mr. Villa. I 8 receive these documents in that stack. I did not 9 go back and check every one of the documents on 10 the letter that Mr. Villa did to see whether or 11 not I got additional documents, Your Honor. 12 I'm telling this Court that I got those 13 documents that I used from Mr. Villa's staff as 14 his production of what he was going to use. 15 MR. VILLA: Your Honor -- 16 MR. GUIDO: And they may have produced 17 something to me that Mr. Villa determined later on 18 he wasn't going to use and he didn't put it on his 19 letter and he didn't know that I received a copy 20 of it, Your Honor. That's possible. It's also 21 possible, Your Honor, that there's been a great 22 deal of sensitivity on Mr. Villa's colleague's 20436 1 part about me objecting to the procedure that I 2 believe they were using which was unfair to the 3 OTS, Your Honor. And this could be, you know, an 4 attempt to discredit the OTS, Your Honor. 5 All I'm saying is that I am telling 6 this Court that it's my understanding that this 7 document was in the stack of documents that were 8 produced by Mr. Villa's staff as documents that 9 they purported that they were going to use with 10 this witness on cross-examination, Your Honor. 11 To avoid this in the future, I am going 12 to have my staff prepare a letter, send it back to 13 Mr. Villa indicating what it is that I have 14 received, Your Honor. 15 MR. VILLA: Your Honor, just a point of 16 clarification. I'm sure Mr. Guido has so many 17 people on the staff he doesn't really know where 18 his documents come from. But as I'm sure his 19 paralegals will tell you, we don't provide him 20 documents. We provide a list. If I'm saying 21 anything in error, if he claims I gave him a stack 22 of documents with the wrong documents in it -- we 20437 1 didn't give him the documents. That's why we fax 2 it over the night before. If I've made an error, 3 would one of the paralegals stand up and correct 4 me? 5 MR. GUIDO: Your Honor, Mr. Villa just 6 corrected me. There was a stack of documents that 7 I got from my staff that purported to be -- 8 THE COURT: So, your stack of documents 9 came from your stack? 10 MR. GUIDO: You're right, Your Honor. 11 I misspoke when I said that the documents came 12 from Mr. Villa, and I apologize to Mr. Villa. And 13 apparently, my staff, when it made the selection, 14 made the selection of documents. 15 THE COURT: All right. Are there any 16 more questions? 17 MR. GUIDO: I have one more question 18 for this witness. 19 20 FURTHER EXAMINATION 21 22 Q. (BY MR. GUIDO) Do you know Michael 20438 1 Salomon? 2 A. No, I don't. 3 Q. Do you know whether or not he was an 4 economist? 5 A. I have no idea. 6 Q. Do you know whether or not he was an 7 accountant? 8 A. No. I have no idea. 9 Q. Do you know whether or not he was an 10 attorney? 11 A. I have no idea. 12 Q. Do you know whether or not he had any 13 ability to evaluate the value of any bid packages? 14 A. I have no idea who he is. 15 MR. GUIDO: No further questions, 16 Your Honor. 17 MR. VILLA: Did I move 2668 into 18 evidence? 19 THE COURT: Pardon? 20 MR. VILLA: I was checking with 21 Mr. Langdon. Thank you, Your Honor. No further 22 questions. 20439 1 THE COURT: Thank you, Mr. Berner. 2 We'll adjourn until 9:00 on Monday. 3 4 (Whereupon at 4:07 p.m. 5 the proceedings were recessed.) 6 . 7 . 8 . 9 . 10 . 11 . 12 . 13 . 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 20440 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 21st 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 . 20441 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 21st 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