20690 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 25, 1998 22 20691 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 20692 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 . 20693 1 2 INDEX OF PROCEEDINGS 3 4 JENARD GROSS 5 Continued Examination by Mr. Leiman.....20694 6 Examination by Mr. Rinaldi..............20833 7 . 8 . 9 . 10 . 11 . 12 . 13 . 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 20694 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:00 a.m.) 3 THE COURT: Be seated, please. The 4 hearing will come to order. 5 Mr. Leiman, you may continue with your 6 examination of the witness. 7 8 CONTINUED EXAMINATION 9 10 Q. (BY MR. LEIMAN) Good morning, 11 Mr. Gross. 12 A. Good morning, Mr. Leiman. 13 Q. We left off yesterday with Tab 709, 14 which is Exhibit T7084. If you would pull that 15 out of the stack of materials to your left. 16 A. Tab 709. What's the -- T what? 17 Q. I'll give it to you. It's T7084. This 18 particular appraisal was done by Ed Schulz. 19 Right? 20 A. Yes, sir. 21 Q. Are you familiar with the appraisal? 22 A. I've seen it in the recent weeks. 20695 1 Q. Okay. Had you seen it prior to recent 2 weeks? 3 A. Not that I recall. 4 Q. Okay. If you notice, the date on the 5 appraisal is March 19th, 1986? 6 A. Yes, sir. 7 Q. That would be two days after the SLC 8 met and approved the Park 410 loan. Right? 9 A. Yes, sir. 10 Q. You didn't read this appraisal, 11 obviously, prior to -- to it being issued in this 12 condition as a March 19th appraisal, did you? You 13 had no written copy of an appraisal from Ed 14 Schulz? 15 A. Not that I know of. 16 Q. Let's put that aside. I would like you 17 to look at Tab 775, which is Exhibit A10298. I'm 18 going to give you that right now. 19 A. Okay. 20 Q. There you are, sir. 21 Mr. Gross, do you recognize this 22 document? 20696 1 MR. BLANKENSTEIN: Mr. Leiman, could 2 you give us just one second? And give me that tab 3 number again. 4 MR. LEIMAN: It's Tab 775, 5 Exhibit A10298. 6 MR. BLANKENSTEIN: Thank you, 7 Mr. Leiman. 8 Q. (BY MR. LEIMAN) Mr. Gross, do you know 9 what this is? 10 A. I've seen it in the last few days. 11 Q. Okay. What is this? 12 A. This is a closing statement. 13 Q. Okay. In connection with what? 14 A. With the Park 410 West Joint Venture. 15 Q. Yes, sir. And the date of this would 16 be what? Can you read that? 17 A. It's April 17th, 1986. 18 Q. Yes, sir, that is correct. Would you 19 please turn -- well, let's look first at the first 20 page. Do you see where it says near the -- about 21 two-thirds of the way down the page, "Reimburse to 22 Park 410 West Joint Venture $4,454,300..." 20697 1 Do you see that? 2 A. I can see part of it. I can't see 3 something under here. I can't -- the next line, 4 whatever that is, I can't really make that out. 5 Q. Can you see the 4-million-dollar 6 figure? 7 A. Yes, I can. 8 Q. It says, "Reimburse to Park 410 West 9 Joint Venture." Right? 10 A. Yes. 11 Q. Okay. Park 410 West Joint Venture was 12 being reimbursed for its expenses in connection 13 with -- by USAT in connection with expenses it had 14 incurred in the partnership prior to the loan 15 being made by USAT. Right? 16 A. I'm sorry. Would you restate the 17 question? 18 Q. Yes, I will. USAT was reimbursing 19 Park 410 West Joint Venture for expenses that it 20 had incurred as a joint venture. Right? 21 A. Well, I -- let me look at the rest of 22 the backup, if you don't mind. (Witness reviews 20698 1 the document.) I can't tell whether the 2 expenses -- whether the expenses had already been 3 disbursed or were being paid in conjunction 4 simultaneously with the closing. Here's another 5 page. 6 Q. Take a look at Page 3 which, I think, 7 explains exactly what's going on here and the 8 disbursements. And look, if you will, about 9 halfway down the page. There's an entry that 10 says -- see where it says "Stanley Rosenberg"? 11 He's getting $400,000? 12 A. Yes. 13 Q. Look below that. 14 A. $2,915,975. 15 Q. Right. And the Park 410 West Joint 16 Venture was getting reimbursed for its expenses 17 minus a payoff to the Bank of Dallas. Right? 18 A. I guess the bank is getting 2,915,000. 19 Q. USAT, correct? 20 A. The Bank of Dallas -- 21 Q. No. If you look down three entries 22 from there, you'll see the Bank of Dallas received 20699 1 a million and a half dollars? 2 A. Right. 3 Q. If you add a million and a half and 4 2.9, you come up with the 4.4 that you see on the 5 first page. 6 A. I see that. 7 Q. Yes. Now, the net that's going for 8 reimbursement to the Park 410 West Joint Venture 9 is 2.9 million. Right? 10 A. Yes. 11 Q. All right. USAT and Mr. Rosenberg were 12 50 percent partners in that joint venture, were 13 they not? 14 A. Yes, they were. 15 Q. And they would have been entitled to 16 reimbursement of that expense of some 17 $1.45 million. Right? 18 A. If they, in fact, had put the money 19 out. 20 Q. Well, USAT wouldn't have reimbursed 21 itself for money it hadn't put out, would it? 22 A. I thought you were saying -- do I 20700 1 understand the question you're saying that we were 2 entitled to -- Rosenberg one-half of the 3 2.91 million. 4 Q. I'm assuming that's all that USAT took 5 and that the balance of that money would have been 6 due to the rest of the joint venture: GMR and 7 IPIC, the other 50 percent owners? 8 A. If, in fact, United had contributed 9 that money to the partnership, they would have 10 been entitled to it back. If Park 410 had 11 advanced all the 2 million 9 and had not called on 12 the partners for money, I guess they wouldn't have 13 been entitled to it back. 14 Q. No, but USAT would have been 15 responsible for half of that amount, wouldn't it? 16 A. One-fourth of that. 17 Q. One-fourth or one-half, according to 18 the joint venture agreement we saw yesterday? 19 A. They would have had to have advanced 20 Stanley Rosenberg's share, but they would have 21 had -- he would have had an obligation to them to 22 pay that back. 20701 1 Q. They would have had to have advanced 2 his share, the $1.45 million, correct? 3 A. That is correct. 4 Q. In addition to that, there would have 5 been a 2-million-dollar outstanding letter of 6 credit. Right? 7 A. That is correct. 8 Q. Which would total up to $3.45 million, 9 wouldn't it? 2 and 1.45? 10 A. That's correct. 11 Q. All right, sir. Thank you. 12 Now, let's have a look at Tab 710, 13 T7127, please. 14 Mr. Gross, Tab 710 is a Tremar Real 15 Estate Research Company report on market potential 16 for the Park 410 West development that was written 17 on or about -- well, it's dated October 1985. 18 Do you see that? 19 A. Yes, sir. 20 Q. Have you ever seen this document? 21 A. I've seen it in the last few days. 22 Q. Okay. Had you seen it prior to that? 20702 1 A. I don't recall. 2 Q. You don't remember seeing it? 3 A. No, sir. 4 Q. Would it have been important to you, 5 Mr. Gross, to know that -- that this report stated 6 that there were some 13,000 -- 13,000 plus acres 7 of vacant land in the surrounding area of 8 Park 410? Would that be important for you to know 9 prior to signing the proposal of the -- of loan 10 approval? 11 A. I think that probably all information 12 you get concerning the tract is valuable and 13 whether -- it would have been helpful, of course, 14 to have this; and I don't know that our people did 15 or didn't have it. 16 Q. I'm sorry, Mr. Gross. You don't know 17 if whom? 18 A. If David Graham or our real estate 19 department did or did not have it. 20 Q. I think you were mentioning 21 yesterday -- and I'm not certain if I got this 22 right; so, correct me if I'm wrong. 20703 1 You said that Mr. Graham did his own 2 internal valuation with regard to the value of the 3 Park 410 property? 4 A. Yes, sir. 5 Q. Okay. What factors did Mr. Graham rely 6 upon in doing his valuation? 7 A. He would typically rely upon the 8 information provided by the prospective borrower. 9 He would rely upon the information that we would 10 have gotten from the Metro studies. He would rely 11 on information he had from the general market in 12 the area, and he would have relied on whatever 13 other information that might have been available 14 through feasibility studies. And he may have seen 15 this. 16 Q. You don't know if he saw this? 17 A. No, sir. 18 Q. All right. Anything else? You 19 mentioned four items. 20 A. Well, he would look at credit reports. 21 He would look at financial statements. He would 22 look at the location, which is the most important 20704 1 thing of all. He would be looking at what's going 2 on in the location, and those are generally some 3 of the key items that he would be looking at. 4 Q. You mentioned eight items. Do you want 5 me to go over them with you? 6 A. There could be some others, but I don't 7 recall them offhand at the moment. 8 Q. All right. What kind of general market 9 information was available to Mr. Graham? 10 A. Well, you would certainly have all of 11 the Chamber of Commerce market information 12 available. You would have the general information 13 that -- as I said, United had been active in this 14 market before; so, I'm sure that he would have 15 general market information that had been gathered 16 over the last several years. 17 Q. You mentioned that location would be 18 the most important factor for his evaluation. How 19 did he go about making a determination using -- 20 what did he use? 21 A. He would use the information provided 22 by the person getting ready to go -- you know, 20705 1 applying for the loan. He would use Chamber of 2 Commerce information. He would use other 3 information he could gather from the other sources 4 in the area. And very often, we had feasibility 5 studies. Whether we had this one or not, I just 6 don't know. 7 Q. I noticed in your list what you didn't 8 include was the appraisal. Is the appraisal 9 important? 10 A. The appraisal is important as a 11 corroborative item. It merely supports the work 12 that you do internally. 13 Q. All right. In terms of a savings and 14 loan, Mr. Gross, making a loan on a piece of 15 property, what is the single most important piece 16 of collateral that the savings and loan relies 17 upon? 18 A. The land. 19 Q. Would that relate to the value of the 20 land? 21 A. Yes, it would. 22 Q. And why is that? 20706 1 A. I'm sorry. Why is what? 2 Q. Why is that the single most important? 3 A. Because that's the first thing you look 4 to as far as your value goes. 5 Q. And yet, if I understand what you're 6 saying, the appraisal was merely looked to as 7 corroborative evidence or corroborative 8 information about what Mr. Graham thought the 9 property was worth based upon the factors you 10 mentioned? 11 A. That's -- that practice is typical 12 industrywide. If -- you know, loan commitments 13 are issued. They are prepared. They are 14 approved. They are issued to the prospective 15 borrowers. And in there is a clause that says 16 "subject to an R-41B appraisal." That's the way 17 it's done in the industry. 18 Q. By "the industry," you mean other Texas 19 savings and loans? 20 A. No. Other insurance companies, other 21 banks, other financial institutions. 22 Q. That's the way it was done in 1985 and 20707 1 '86 in Texas. Right? 2 A. That's correct. 3 Q. And it was done that way by Gibraltar 4 Savings and Loan, wasn't it? 5 A. Yes, I assume it was. I never did any 6 business directly with them. I can't speak to 7 that. 8 Q. Do you know any other savings and loans 9 that did business the way you're saying it was 10 done? 11 A. As far as I know, it was industrywide 12 practice. 13 Q. Can you give me one besides Gibraltar? 14 A. I can name a bunch of them as of today 15 or as of -- 16 Q. I think I would rather you name them as 17 of 1985, '86. 18 A. I can name a lot of banks that did it 19 at that time. 20 Q. What about savings and loans, 21 Mr. Gross? I would like for you to tell me about 22 that. That's the industry we're dealing with. 20708 1 A. All right. As far as I know, it was 2 the general practice in the industry to do it that 3 way. I can't sit here and tell you that I had 4 seen everybody's loan commitments, but I know what 5 was common practice in the industry. 6 Q. Let me ask one follow-up question. How 7 do you know it was common practice? 8 A. Because the reason for it was the 9 appraisal had to be made to the lending 10 institution. So, if you are Borrower X, you don't 11 want to go out and spend the money on a commitment 12 only to find out the institution turned you down 13 on the loan. Then you've got an appraisal that's 14 worthless because the next institution will not 15 accept it. So, then you have to go get a second 16 appraisal. So, that's why, as a rule, everybody 17 gets the appraisal after the fact rather than 18 before the fact. 19 Q. You know, I wonder if you know whether 20 or not the Federal Home Loan Bank Board 21 regulations at the time required that prior to 22 approving the loan, an appraisal be obtained. 20709 1 Do you know? 2 A. I've -- I don't recall, but I've seen 3 information recently that leads me to believe that 4 they did. 5 Q. All right. 6 A. That they did accept this practice is 7 what I'm saying. 8 Q. That they what? 9 A. They accepted this practice. 10 Q. Who accepted this practice? 11 A. The Federal Home Loan Board. 12 Q. They accepted the practice of 13 appraisals coming in after loans were approved? 14 A. Yes. 15 Q. What gives you that idea? 16 A. As I say, I've seen some documents 17 recently to that effect. 18 Q. Why don't you tell me about those 19 documents. What documents have you seen? 20 A. I've seen some Federal Home Loan Bank 21 documents that stated that it was practice at the 22 time to get the appraisal after the commitment. 20710 1 Q. Can you identify those documents for 2 me? 3 A. I can't offhand, no. 4 Q. Would you know what those are if I 5 showed them to you? 6 A. Yes, I would. 7 Q. Maybe we'll have to come back to that 8 in a little while. Let's talk about the Tremar 9 feasibility study just for a minute. Well, about 10 the issue that it raises. 11 Let me ask you this: Would it be fair 12 to say, since apparently you don't remember the 13 study itself, that Mister -- that yourself and the 14 other SLC committee members relied upon Mr. Graham 15 for details? 16 A. Yes. 17 Q. And in addition to details, appraisal 18 value information, economic feasibility 19 information? Yes? You relied upon him for that? 20 A. Yes. 21 Q. Commercial location vacancy rates? 22 A. Yes. 20711 1 Q. All right. The need for hotels, you 2 relied on him for that? Information about that? 3 A. Well, yeah. Whether we relied on him 4 for that specific thing in general is, you know -- 5 I don't know. We relied on him to gather the 6 relevant data for the project. 7 Q. Including hotel information. Right? 8 A. Yes. 9 Q. All right. Also location of potential 10 roads and planned roads. Right? You relied on 11 David Graham? 12 A. Yes. 13 Q. All right. Let's put this Tremar study 14 aside for now. Let's move on to the other -- 15 THE COURT: Could I ask a question? 16 MR. LEIMAN: Yes. 17 THE COURT: Who ordinarily pays for the 18 appraisal? Is that the borrower? 19 THE WITNESS: Yes, sir. That's the 20 reason you don't want to put the money out until 21 after you have a commitment because, for instance, 22 if you don't give him terms that suit him, he may 20712 1 want to go to another lender. And if he's already 2 sent the appraisal to you, he can't take that 3 appraisal to another lender because it's been made 4 out to your institution. 5 Q. (BY MR. LEIMAN) Mr. Gross, is a loan 6 commitment made ordinarily prior to the senior 7 loan committee approving the loan? Is there any 8 kind of process for making a loan commitment, an 9 informal process? 10 A. You would typically give somebody a 11 term sheet, but that would not constitute a 12 commitment. Usually, an institution will tell the 13 borrower, "I think I can do X, Y, and Z"; and the 14 real estate would do that. But then what would 15 happen is you would then go to the senior loan 16 committee with that proposal and they may approve 17 it. They may alter it. They may reject it. 18 Q. But you would give the borrower a term 19 sheet; is that right? 20 A. Yes. 21 Q. Now, in connection with the actual 22 ultimate cost of the appraisal, in the case of 20713 1 Park 410, the loan that was made there for 2 $80 million and the ultimate loan in Norwood, who 3 paid for the appraisal ultimately in those cases? 4 A. Well, the borrower pays for it. 5 Q. Where did the money come from? 6 A. It came from the proceeds of the loan. 7 Q. Now, let's take a look at Tab 663, 8 T7008. 9 Mr. Gross, have you seen this prior to 10 today? 11 MR. LEIMAN: Did I announce this for 12 your benefit? 13 MR. BLANKENSTEIN: I have the document. 14 Thank you. 15 A. I've seen a copy recently. 16 Q. (BY MR. LEIMAN) Okay. Are you familiar 17 with this transaction of December 21, 1984? 18 A. I wasn't at United at the time it 19 occurred; so, I was not familiar with it at the 20 time. 21 Q. I'm sorry? 22 A. I was not an employee of United at the 20714 1 time. I was a consultant. 2 Q. You were a consultant at United at the 3 time this was done. Right? 4 A. That's correct. 5 Q. Yesterday, do you remember seeing 6 another document in which you provided some advice 7 to Mr. Childress while you were a consultant? 8 A. Yes, I do. 9 Q. You didn't provide any advice in 10 connection with this particular transaction? 11 A. I don't recall any. 12 Q. Do you know who Mr. Tom Gordon is? 13 A. Yes, I do. 14 Q. Who was he? 15 A. He was a major shopping center 16 developer here in Houston. 17 Q. Did you introduce Mr. Gordon to 18 Mr. Graham, Mr. David Graham? 19 A. Not that I recall. 20 Q. Now, this particular document purports 21 to have been signed on December 21st, 1984. 22 Do you see that on the first page? 20715 1 A. Yes, sir. 2 Q. Okay. Did you ever go back when you 3 had later involvement with the Norwood transaction 4 and look at this document? 5 A. I don't know that I looked at this 6 specific document or not. I don't recall. 7 Q. Would this document have played a role 8 in your thinking as to whether or not to approve 9 the Norwood loan later on? 10 A. I don't think I understand the 11 question. 12 Q. Ultimately, you signed a loan approval 13 for some 30-million-dollar loan to Norwood. 14 Right? 15 A. Yes, I did. 16 Q. Did you determine whether or not this 17 document existed? 18 A. I was -- you know, I saw -- I attended 19 subsequent loan committee meetings, and I'm sure 20 the papers in there alluded to it. I probably 21 didn't go back and look at this specific document. 22 Q. You wouldn't have gone back to the real 20716 1 estate records, would you have? 2 A. No, I would not have. 3 Q. Let's look at Tab 666, and that would 4 be T7011. 5 Mr. Gross, have you seen this document 6 recently? 7 A. Yes, I have. 8 Q. And this is the approval as of 9 June 17th, 1985, of an extension and additional 10 loan amount to Mr. Gordon and Mr. Block; is that 11 right? 12 A. Yes, it is. 13 Q. All right. And it also adds to the 14 loan two additional borrowers. Right? Krasovec 15 and Minch? 16 A. Yes, it does. 17 Q. All right. And it adds all of them as 18 being guarantors on 100 percent of the loan, 19 doesn't it? Do you see that at the first page 20 there under "now amended"? 21 A. Yes, I do. 22 Q. And this particular approval added 20717 1 $2.8 million of funding of which $28,000 was a 2 loan fee and interest included was included in the 3 amount of $397,000. Right? Do you see that on 4 the -- 5 A. Which page are you on? 6 Q. That would be on the second page. 7 A. Yes. I see it here. 8 Q. This had an interest reserve, didn't 9 it? This loan? 10 A. Where is that? 11 Q. Well, do you know if this loan had an 12 interest reserve; or did Mr. Gordon, Krasovec, 13 Minch, or Block put up any money in connection 14 with this? 15 A. It did have an interest reserve. 16 Q. You remember it having an interest 17 reserve? 18 A. Yes, but I don't remember it. I don't 19 dispute it. 20 Q. Okay. You didn't sign this, did you? 21 A. No, sir. 22 Q. Okay. However, at the time this 20718 1 particular loan was approved and the extension was 2 made and the $2.8 million was added, you were the 3 chairman and CEO of USAT. Right? 4 A. Yes, I was. 5 Q. Let's have Tab 670, T7010. 6 Mr. Gross, have you seen this document 7 recently? 8 A. Yes, I have. 9 Q. Okay. That was in connection with 10 preparing to testify? 11 A. Yes, sir. 12 Q. Okay. You approved this loan, didn't 13 you, Mr. Gross? 14 A. Yes, I did. 15 Q. Is that your handwriting on the last 16 page of this document? 17 A. Yes, it is. 18 Q. Why did you, first of all, make the 19 comment "one point fee"? 20 A. I think I was saying that we should 21 charge them a one point fee on the loan. 22 Q. In spite of the fact it was a renewal? 20719 1 A. Well, I believe that they had paid the 2 fee for a period of time and that the period of 3 time had expired. So, I felt that we were 4 entitled to an additional fee. 5 Q. Now, who actually paid the fee? 6 A. Who actually paid the fee? 7 Q. Who actually paid the fee? 8 A. United advanced the money, but the 9 borrowers paid the fee. 10 Q. The borrowers were responsible for the 11 fee, but United paid it on their behalf. Right? 12 A. As far as I'm concerned, the borrowers 13 paid the fee from the funds United advanced to 14 them. 15 Q. Did the borrowers take any money out of 16 pocket to pay that fee? 17 A. They either had a charge against the 18 money they were given at the closing or else they 19 wrote a check for it. 20 Q. And the money would have been given to 21 them by whom? 22 A. By United. 20720 1 Q. What do you mean by the second item, 2 "right of first refusal"? 3 A. In here, it says this was giving them 4 six months to enable them to obtain financing for 5 their development right. I was saying I wanted 6 United to have the right of first refusal of 7 making a development loan on the project. 8 Q. All right. What about the third item? 9 A. That's a question -- Tom Gordon at this 10 time had decided to develop four major centers in 11 Houston simultaneously, and I was saying we should 12 check on the loan status of those and the leasing 13 and vacancy status of those. 14 Q. Why would you want to do that? 15 A. I was interested in his financial 16 condition. 17 Q. Did you find out what his financial 18 condition was? 19 A. I don't recall, but I'm sure we did. 20 Q. Who would you have asked to have 21 checked on Mr. Gordon's financial condition? 22 A. It would have gone to David or Gem. I 20721 1 guess this is David. 2 Q. What about leasing and vacancy status? 3 Is that what you were mentioning a moment ago 4 regarding Mr. Gordon's projects in Houston? 5 A. Yes. 6 Q. Okay. Had the loan been paid down at 7 all? 8 A. No. 9 Q. This was still the same amount that we 10 saw six months earlier, is that right, in terms of 11 principal, in terms of the first and second lien? 12 A. I guess I'm confused here. Oh, I see. 13 I thought this was increasing the loan. They 14 increased the loan in June. This didn't increase 15 it apparently. I'm not sure -- I guess this was 16 just in for a time extension. That's what it was. 17 I misunderstood -- the actual 2.8 million was 18 approved in June, and this was just an extension 19 of time. 20 Q. Okay. Had the principal been paid down 21 on either the first or second lien? 22 A. No, it had not. 20722 1 Q. So, this particular loan was 2 100 percent financed by United. Right? 3 A. Yes, it was. 4 Q. Okay. Tab 672, T7582. 5 Mr. Gross, have you seen this document 6 recently? 7 A. I'm sorry. I'm trying to -- just a 8 second. Yes, I have. 9 Q. All right. What is T7582? 10 A. This is a letter from Norwood 11 Properties to me signed by Frank Krasovec and Jeff 12 Minch. 13 Q. What are they asking you to do in this 14 letter? 15 A. May I read it? 16 Q. Yes, sir. 17 A. (Witness reviews the document.) Would 18 you repeat the question now? 19 Q. What was he asking you to do? 20 A. He was asking us to look at two 21 different approaches for proceeding with a joint 22 venture or a loan to them, I believe. 20723 1 Q. Now, in the first two sentences of this 2 letter, Mr. Gross, Mr. Minch and Mr. Krasovec 3 mention replacing Gordon in the land part of the 4 deal. 5 Do you see that? 6 A. Yes, sir. 7 Q. Why did they propose replacing Gordon? 8 A. I believe by then, Gordon was having 9 some financial problems on the four malls which I 10 had mentioned previously. 11 Q. By what date, sir? By February 13th, 12 1986? 13 A. Yes, sir. 14 Q. Didn't you inquire some two months 15 earlier and ask as to what the status was of 16 Mr. Gordon? 17 A. We did. 18 Q. Okay. And when did you actually find 19 out, if you remember? 20 A. I don't remember. 21 Q. But it would have been sometime between 22 the time you approved the third loan in December 20724 1 of 1985 and February 13th of 1986. Right? 2 MR. BLANKENSTEIN: Your Honor, I'm 3 going to object. Mr. Leiman keeps referring to 4 the January item as an approval. It's an 5 extension of an existing loan. 6 MR. LEIMAN: If I said January, I meant 7 December of 1985. 8 MR. BLANKENSTEIN: December of 1985 is 9 an extension of a loan. 10 Q. (BY MR. LEIMAN) Your approval of that 11 extension in December of 1985 and February of 12 1986? 13 A. I don't remember the precise time we 14 found out about it. 15 Q. It was sometime in that period of time, 16 wasn't it? 17 A. I would assume, but I don't know. 18 Q. Well, it certainly was no later than 19 February 13th, was it? 20 A. That's correct. 21 Q. All right. So, you found out that 22 Mr. Gordon had some financial difficulty no later 20725 1 than February 13th, 1986. 2 Was there a meeting that you attended 3 with Mr. Hurwitz? 4 A. I don't recall a meeting with 5 Mr. Hurwitz and Mr. Krasovec and Minch. 6 Q. You don't remember Mr. Hurwitz going? 7 Do you remember Mr. Williams going and meeting 8 with you and Krasovec and Minch? 9 A. During the course of the loan, I had a 10 couple of meetings with them. I can't remember 11 when they were. I know there was one in my 12 office. I can't recall who else was there, but I 13 know they were. 14 Q. And you don't remember Mr. Hurwitz 15 being there? 16 A. No, I don't. 17 Q. Tab 677, T7014. 18 A. Do you want me to read it? 19 Q. Have you seen this recently? 20 A. I believe so. 21 Q. Mr. Minch, in this letter, is asking 22 for additional money to be fronted -- provided by 20726 1 United to acquire the north National Western Life 2 Insurance tract in Austin which was adjacent to 3 the acreage already owned in connection with 4 Deauville. Right? 5 A. Yes. 6 Q. Do you recollect how much money, 7 additional money, United was required to come up 8 with in order to fund the National Western Life 9 Insurance tract? 10 A. Let me read the rest of the letter and 11 see if I can find it. (Witness reviews the 12 document.) It doesn't indicate; so, I don't know. 13 Q. Mr. Minch says that this -- at the 14 bottom of Page 1, "This tract is a key part of the 15 project." Right? 16 A. Yes. 17 Q. He says that "all of the approvals - 18 zoning, site plan, subdivision - were predicated 19 upon acquiring this tract. Without this tract the 20 final plat (the last approval required) cannot be 21 approved." 22 Do you see that? 20727 1 A. Yes. 2 Q. Did you consider this to be something 3 in the nature of a "must fund" in light of that 4 comment by Mr. Minch? 5 A. I don't recall what I thought at the 6 time; but just reading his letter, I would say 7 certainly he thought that. 8 Q. Do you know if USAT ever funded that 9 purchase? 10 A. I believe we did, but I'm not sure. 11 Q. Tab 679, T7015. 12 Mr. Gross, by April 24th of 1986, 13 Mr. Gordon's financial condition had deteriorated. 14 Right? 15 A. Yes. 16 Q. Are you familiar with this letter, 17 Tab 679, T7015? 18 A. I've seen it in the last few days, 19 also. 20 Q. Do you have any reason to think you 21 didn't receive a CC of this letter? 22 A. No. 20728 1 Q. All right. Your name is mentioned on 2 the second page as is Mr. Hurwitz'. Right? 3 A. Right. 4 Q. Do you have any reason to think he 5 didn't receive it? 6 A. I have no idea if he did. 7 Q. Did Mr. Graham consult you prior to 8 sending this letter out? 9 A. I do not recall. 10 Q. Let's look at the second page of the 11 letter, and let's look at the third from the 12 bottom paragraph. The letter says, "If you agree 13 with the proposal set forth above, United will put 14 this matter behind it and will proceed to work out 15 an arrangement with Norwood Properties to attempt 16 to successfully complete development of this 17 tract." 18 Do you see that? 19 A. Yes. 20 Q. By virtue of this -- of this letter, 21 was an arrangement made with Mr. Gordon to remove 22 him and Mr. Block from any liability under their 20729 1 guarantee on the Norwood loan? 2 A. By virtue of this letter? I know they 3 were removed. And I think the prime reason we 4 removed them is because, by then, we were afraid 5 he was going to take Chapter and we were going to 6 have the property not usable for several years 7 until his bankruptcy proceedings got wound up. 8 Q. Why would -- if he took Chapter what? 9 In bankruptcy? 10 A. Yes. 11 Q. Chapter 7? 11? 12 A. 11. 13 Q. Why would that tie up the property? 14 A. Because it would become one of the 15 items in the bankrupt estate, and we couldn't do 16 anything with it. 17 Q. Do you believe that Mr. Gordon and 18 Mr. Block had an equity interest in this property? 19 A. I'm not an attorney, but I know that we 20 went through a lot of people taking bankruptcy. 21 And I know it was a very painful process, trying 22 to get the property out of bankruptcy, no matter 20730 1 what the circumstances. 2 Q. Did you ask Mr. Gordon and Mr. Block if 3 they were willing to simply waive that bankruptcy 4 proceeding, waive any kind of claim in bankruptcy 5 if they would be released from the guarantee? Is 6 that what you did? 7 A. I'm sorry. 8 Q. How did you deal with this? 9 A. I don't recall. 10 Q. Tab 681, T7016. Have you seen Tab 681, 11 T7016 recently? 12 A. Yes, I have. 13 Q. Was that in preparation for your 14 testimony? 15 A. Yes. 16 Q. Mr. Gross, in this memo, David Graham 17 is asking for your approval to over -- to fund the 18 Norwood loan which was in default at the time; 19 isn't that right? 20 MR. BLANKENSTEIN: Can I have that 21 question again? I'm not sure I fully understood 22 what Mr. Leiman's choice of words were. 20731 1 THE COURT: Would you restate your 2 question, please, Mr. Leiman? 3 MR. LEIMAN: Actually, I would like the 4 question reread, if I could. 5 THE COURT: Why don't you restate it. 6 Q. (BY MR. LEIMAN) Mr. Gross, you were 7 being asked by Mr. Graham for permission for 8 United to fund the Norwood loan which was in 9 default -- to fund additional moneys for the 10 Norwood loan. Right? 11 A. Could I read just a minute? 12 Q. Sure. 13 A. (Witness reviews the document.) Is the 14 one behind different from the one in front, or is 15 it just a smaller version? Do I read it, as well? 16 It looks like it's the same. 17 Q. It's the same, but I believe that 18 constitutes your approval to fund this loan which 19 was at the time delinquent. 20 A. I'm not sure why it would be 21 delinquent. 22 MR. BLANKENSTEIN: There's no evidence 20732 1 yet that Mr. Leiman has introduced that the loan 2 was delinquent at this time other than his 3 statement to that effect. If he wants to ask 4 Mr. Gross if he knows it was delinquent at that 5 time, that's fine. We should have evidence rather 6 than Mr. Leiman's statements to that effect. 7 Q. (BY MR. LEIMAN) I'm going to show you 8 Tab 692, which is T7023, Mr. Gross. You may look 9 at that in conjunction with my previous question. 10 A. (Witness reviews the document.) I'm 11 sorry. What was the question? This says the loan 12 doesn't mature until June 28. So, it wouldn't 13 have been delinquent. 14 Q. Just look with me, please, at the 15 middle of the page on T7023 where it states 16 "Interest past due for April: $187,946. Interest 17 past due for May: $184,866. Loan matures 18 June 28. Principal balance due: 21.1 million. 19 Total interest due: $557,000." 20 Do you believe that the loan was 21 delinquent, sir? 22 A. Can we go back and read the original 20733 1 question that you asked me? 2 Q. I'm asking you this question. 3 A. Do I believe the loan was delinquent? 4 Q. Yes, sir. 5 A. When? At the time he wrote this 6 letter? 7 Q. Do you believe it was delinquent as of 8 June 20th, 1986? 9 A. I do. 10 Q. All right. Now, let's look at 11 Mr. Graham's memo to you which is dated May of 12 1986 in which Mr. Graham states in the second 13 sentence, "Presently, all our present loans have 14 been fully funded. So, if we advance any 15 additional funds, it will be an overadvance on 16 these loans." 17 Do you see that? 18 A. I see that. 19 Q. And you approved the overadvance on 20 Page 3 of this document, which is T7016, didn't 21 you? 22 A. Yes. He says here we have the legal 20734 1 right within our trust to advance the additional 2 funds beyond the originally allocated loan amount. 3 Q. Mr. Gross -- 4 A. I did okay it. 5 Q. You did? 6 A. It would appear that I did. I don't 7 dispute that. 8 Q. And in okaying it, do you understand 9 that the loan was delinquent and interest was due 10 and owing? 11 MR. BLANKENSTEIN: Are you asking did 12 he understand that at the time he approved 13 Mr. Graham's request? Is that the question? 14 MR. LEIMAN: That's the question. 15 A. I don't know that I was aware at that 16 time. I was obviously aware on June 28th. 17 Q. (BY MR. LEIMAN) Did you consult with 18 Mr. Berner or any other attorney as to whether or 19 not there was a legal right to fund this 20 additional money in spite of the fact that the 21 loan had been fully funded? 22 A. Excuse me. Let me look at something 20735 1 else in here. It sounds -- okay. I'm sorry. Go 2 ahead. 3 MR. LEIMAN: What's the pending 4 question? I'm sorry. 5 6 (The record was read by the court 7 reporter as requested.) 8 9 A. I don't recall. 10 Q. (BY MR. LEIMAN) Did you ask Mr. Graham 11 the condition of the loan, its delinquency status, 12 when he asked you for this advance? 13 A. I do not recall. 14 Q. Would that have been your practice, to 15 find out before providing that kind of additional 16 funding? 17 A. It probably would have; but as I say, I 18 don't recall whether I did or not. 19 Q. Do you know whether or not it would 20 have been legal for USAT and yourself, as the CEO 21 and chairman, to have approved this advance for 22 interest payments that are past due in spite of 20736 1 the fact that the loan had been fully funded? 2 MR. BLANKENSTEIN: I'm not sure what 3 "legal" means in this context. Is he suggesting 4 it was a violation of some regulation of the 5 Federal Home Loan Bank Board at the time, some 6 criminal law? It's a rather vague and ambiguous 7 question. I don't know how the witness can 8 possibly answer it. 9 Q. (BY MR. LEIMAN) In the context of what 10 you understood the word "legal right" to be as 11 written by Mr. Graham. 12 MR. BLANKENSTEIN: It's clear the legal 13 right is in the deed of trust. If he would ask 14 him a fair question based on the document, I 15 wouldn't have to object. 16 Q. (BY MR. LEIMAN) Do you believe it would 17 have been a violation of Federal Home Loan Bank 18 Board regulations to overadvance money for 19 interest payments that were past due on a fully 20 funded loan? 21 A. Based on the information Mr. Graham 22 provided me, I assume it would not have been. 20737 1 Q. I don't understand what your answer 2 means. 3 A. He starts with the premise that we have 4 the legal right to. So, I figure if we have the 5 legal right to, it must be within the framework of 6 the Federal Home Loan Bank requirements. 7 Therefore, I had to assume it was all right. 8 Q. My question was: Do you believe you 9 had the legal right, under Federal Home Loan Bank 10 Board regulations prevailing at the time you did 11 this in May of 1986, that you had the legal right 12 to advance additional funds to cover delinquent 13 interest? 14 A. I have no idea. 15 Q. Okay. 16 A. I just don't -- I just don't know. 17 Q. Would you have wanted to find out? 18 A. From the memo, I assumed that David had 19 found out and thought that we could. I'm sorry. 20 Are you referring to the interest or the payment 21 he's talking about? 22 Q. Would you have wanted to find out 20738 1 whether it was a violation of the Federal Home 2 Loan Bank Board regulations to have funded the 3 additional interest payments on a fully funded 4 loan? 5 A. I don't think we funded additional 6 interest. 7 Q. You don't think you did? 8 A. As I read that, he was funding 9 expenses, wasn't he? 10 Q. I don't know what he was funding. The 11 interest was -- 12 A. I'm reading this memo here. And what 13 it says, that to advance additional funds beyond 14 the original allocated loan amount to protect our 15 security. If we advanced only those funds 16 applicable to the third party expenses, we should 17 not have a problem with increasing our lien 18 position. He doesn't say anything about paying 19 interest in here. 20 Q. And if it were advanced for interest 21 payments, would that have been a violation of 22 Federal Home Loan Bank Board regulations? 20739 1 MR. BLANKENSTEIN: Your Honor, I'm 2 going to object. This is a totally hypothetical 3 question not supported by any of the facts. This 4 witness is not an expert at this stage as to what 5 the Federal Home Loan Bank Board regulations back 6 in 1986 required. It's a totally unnecessary 7 question. It's not designed to elicit any 8 information that's relevant to this case. 9 THE COURT: I'll deny the objection. 10 If you know, you may answer. 11 THE WITNESS: I do not know. 12 THE COURT: We'll take a short recess. 13 14 (Whereupon, a short break was taken 15 from 10:04 a.m. to 10:24 a.m.) 16 17 THE COURT: We'll be back on the 18 record. 19 Mr. Eisenhart? 20 MR. EISENHART: Yes, Your Honor. 21 Shortly before the break, Mr. Leiman asked 22 Mr. Gross a question as to whether there was a 20740 1 regulation that prohibited the payment that was 2 being talked about in Exhibit T7016. I think in 3 fairness to the witness, if there is such a 4 regulation, Mr. Leiman ought to give him the cite 5 and ought to show him the regulation so he can 6 comment on it intelligently. 7 Quite frankly, I have a real concern. 8 I mean, we're 85 days into this trial now. For 9 him to be asking those kind of questions, if there 10 is such a regulation, I think it's highly tricky 11 and improper. I think he ought to show him the 12 regulation or stop those questions. 13 THE COURT: Seems to me that might be 14 covered on cross or redirect. Do you want to 15 comment, Mr. Leiman? 16 MR. LEIMAN: What I was referring to 17 was the legal representation made by Mr. Graham in 18 his memo to Mr. Gross. Now, I think the Court is 19 absolutely correct. If Mr. Eisenhart wants to go 20 into it on cross, he can do that. I see no reason 21 why I don't have the right to make that inquiry in 22 connection with a document that Mr. Gross had seen 20741 1 and which he later signed. 2 MR. BLANKENSTEIN: If that's the basis, 3 if Mr. Graham's representation is the basis of 4 that question, that question is plainly improper 5 because Mr. Graham makes it very clear that he's 6 dealing entirely with the legal right under the 7 deed of trust. If Mr. Leiman's question was 8 plainly improper, if that's the sole basis, if he 9 has no regulation he was making reference to -- 10 THE COURT: That was your reference 11 when you asked the question? 12 MR. LEIMAN: That was one reference, 13 Your Honor. There were additional concerns raised 14 throughout the documents as to whether or not it's 15 appropriate for them -- if I might ask my next 16 question which relates to the interest advanced by 17 USAT in the amount of some $751,000 by the time of 18 closing, I think that -- I'm entitled to ask 19 whether or not that was an appropriate advance of 20 funds. 21 THE COURT: Well, do you have a 22 regulation in mind? 20742 1 MR. LEIMAN: I have no regulation in 2 mind at this time. 3 THE COURT: So, you want to ask him a 4 question on general safety and soundness? 5 MR. LEIMAN: That was part of the 6 question, whether or not it was prohibited by 7 regulation. I guess the follow-up question is: 8 Is there one regarding safety and soundness? 9 MR. BLANKENSTEIN: Mr. Leiman stated 10 that the basis for his question to Mr. Gross as to 11 whether there was a regulation was Mr. Graham's 12 memorandum. Mr. Graham's memorandum makes no 13 reference to any legal right existing under any 14 regulation speaking entirely under the deed of 15 trust. Mr. Leiman asked a very trick question. 16 He's been caught now. 17 MR. LEIMAN: Your Honor, I'm not sure 18 what this reference by Mr. Eisenhart and 19 Mr. Blankenstein is about with regard to a trick 20 question. My question stands as to whether or not 21 Mr. Gross was aware of any regulation in the 22 Federal Home Loan Bank that would have prohibited 20743 1 the advance of funds for a delinquent loan. 2 THE COURT: Let's stick to that point. 3 Are you aware of any such regulation? 4 MR. LEIMAN: I don't know of any such 5 regulation. I'm asking Mr. Gross if he knows of 6 one. 7 MR. EISENHART: I think it's highly 8 improper to suggest to a witness that there is a 9 regulation that he ought to be aware of. 10 MR. BLANKENSTEIN: Counsel is supposed 11 to have some basis for a question. He has now 12 admitted he has no basis for that question. 13 THE COURT: All right. Next question. 14 Q. (BY MR. LEIMAN) Tab 700, Exhibit T7538. 15 Would you please look at the exhibit, Mr. Gross? 16 A. (Witness reviews the document.) 17 Q. I would like to focus your attention on 18 the first page of the document where it says 19 "interest from" and then "to." It's about 20 three-quarters of the way down to 7/29/86. 21 Do you see that? 22 A. Yes, I do. 20744 1 Q. Do you see it talks about an amount of 2 $751,110? 3 Do you see that? 4 A. Yes, I do. 5 Q. All right. That amount is for past due 6 interest on the Norwood loan, is it not? 7 A. Nothing on here indicates that. 8 Q. All right. What do you understand this 9 document to be, Mr. Gross? 10 A. This is a closing statement on the 11 Norwood/United Park Joint Venture. 12 Q. Okay. What would the 751,000-dollar 13 figure represent in connection with this closing 14 statement? 15 A. It's interest from some point to 16 7/29/86. 17 Q. Can you think of any interest that 18 would have accrued in connection with this loan 19 from a point to the settlement date? 20 A. From the last date it was paid. 21 Q. As of the last date interest had been 22 paid? 20745 1 A. Yes. 2 Q. Let's look -- if you look in front of 3 you at Exhibit T7023 which is Tab 692 -- 4 A. I'm sorry. At -- 5 Q. Tab 692. 6 A. Here we are. 7 Q. Do you see where it says "Interest past 8 due for April. Interest past due for May"? 9 Do you see that? 10 A. I do see that. 11 Q. All right. Would you agree with me 12 that the interest that was past due and listed on 13 Exhibit 7023 is the interest that's being paid as 14 past due interest on Exhibit 7538? 15 MR. BLANKENSTEIN: Your Honor, that 16 misstates 7538. It doesn't say that it's past due 17 interest. 18 Q. (BY MR. LEIMAN) Do you understand the 19 question? 20 A. Yes. It doesn't state that it's past 21 due interest. 22 Q. But it says "interest." My question to 20746 1 you, sir, is: Do you believe that the interest 2 that is listed on 7538 includes the interest that 3 is past due and listed as such on 7023? 4 A. I wanted to -- could I see a copy of 5 the note? 6 Q. Mr. Gross, I'm sure counsel spent a 7 good deal of time with you preparing you for your 8 testimony today. I know that we gave counsel -- 9 MR. BLANKENSTEIN: Your Honor, there's 10 no occasion for that. If he has a question, let 11 him ask a question. 12 THE COURT: Mr. Gross, if you need 13 another document to answer the question, you can 14 say so. 15 A. It seems to me it would be appropriate 16 for me to take a look and see what the terms of 17 the note were so I could determine, in fact, that 18 everything was past due at the time it was 19 supposed to be past due. 20 Q. (BY MR. LEIMAN) Mr. Gross, I can't 21 imagine -- personally, I can't imagine why you 22 would need that. My question still stands. 20747 1 Do you believe that the interest that 2 is shown as past due on 7023 is, in fact, included 3 in the interest that is being paid on 4 Exhibit 7538? I can't imagine why you would need 5 that -- 6 THE COURT: All right. Let's have the 7 answer. 8 A. I would assume it is, but I don't -- I 9 would have to see some documents to determine the 10 characterization of "past due." 11 Q. (BY MR. LEIMAN) Well, that's half a 12 loaf. 13 MR. BLANKENSTEIN: Your Honor, perhaps 14 Mr. Leiman could just ask questions. The side 15 comments are truly unnecessary. 16 Q. (BY MR. LEIMAN) Mr. Gross, could that 17 number represent other than past due interest? 18 A. I really can't -- I don't know. 19 Q. You don't know what else it could be? 20 A. As I said, all I want to see is just a 21 characterization of the fact that it's past due. 22 I mean -- it seems to me that the money is right, 20748 1 you know, and I would have to run out the 2 extension to the 751,000. Looks like that's an 3 extra month beyond these numbers. So -- but I 4 would just want to look at the characterization to 5 verify that it was past due interest. 6 Q. Would the promissory note help? 7 A. Yes, it would. 8 Q. I'm handing you now what's been 9 previously admitted as T7460, Tab 740. This is 10 the promissory note for $30 million dated 11 July 29th, 1986. 12 A. I'm looking for the one -- I would be 13 looking for the note in conjunction with the 14 21-million-dollar loan. Not this note. This 15 interest that we're saying is past due is in 16 conjunction with a different loan. 17 MR. LEIMAN: Your Honor, I'll move on. 18 THE COURT: All right. 19 Q. (BY MR. LEIMAN) Let's look at A1654, 20 which is Tab 688. 21 MR. BLANKENSTEIN: Your Honor, I think 22 the witness didn't hear Mr. Leiman saying that he 20749 1 was going to move on and he didn't need to review 2 the note. 3 THE WITNESS: I'm sorry. 4 MR. BLANKENSTEIN: I missed the exhibit 5 number. 6 THE COURT: Would you repeat the 7 exhibit number, Mr. Leiman? 8 MR. LEIMAN: Yes, sir. It's A1654, 9 Tab 688. 10 THE COURT: We're not able to find it. 11 MR. EISENHART: Your Honor, I have 12 Exhibit T7021 at Tab 688. 13 THE WITNESS: That's what I have. 14 THE COURT: Is that the proposal dated 15 June 2nd, 1986? 16 MR. LEIMAN: Yes, sir. It should be a 17 signed version. 18 THE COURT: All right. That's T7021. 19 Q. (BY MR. LEIMAN) Have you seen this 20 exhibit recently, Mr. Gross? 21 A. Yes, I have. 22 Q. All right. What is it? 20750 1 A. It is the -- could I stop just a second 2 and look at it? 3 Q. Yes. 4 A. (Witness reviews the document.) It's 5 the proposal to enter into -- for United Financial 6 Corp. to enter into a partnership with Frank 7 Krasovec and Jeffrey Minch who were the principals 8 of Norwood Properties, a real estate development 9 firm in Austin, Texas. They will acquire a 10 100-acre tract and develop it as a mixed-use 11 development tentatively named Norwood Park. 12 Q. Mr. Gross, at Page 2, you were one of 13 the co-sponsors of this particular investment 14 proposal, weren't you? 15 A. I see my name on here. I don't recall, 16 but I have no -- I have no recollection of it one 17 way or the other. 18 Q. Do you have any reason to think that 19 you were not one of the persons that recommended 20 this loan, this investment? 21 A. It was -- you know, it was not my 22 customary practice; but I do see my name on here. 20751 1 Q. Do you remember why you recommended 2 this loan? 3 A. No, I do not. 4 Q. This investment, rather? 5 A. No, sir. 6 Q. Look at Item No. 3 on Page 2. "If, at 7 the end of 18 months, Krasovec/Minch has not 8 closed $10 million in gross sales at the 9 agreed-upon pro forma prices, United Financial 10 shall have the option to remove Krasovec/Minch 11 from the venture at no cost to United Financial. 12 If Krasovec/Minch are removed from the venture, 13 they shall also be released of liability on the 14 development loan." 15 Do you see that? 16 A. Yes, I do. 17 Q. Do you understand that to mean, 18 Mr. Gross, that Krasovec and Minch would have had 19 no responsibility under their guarantee in 20 connection with this loan if they were let go by 21 United. Right? 22 A. Yes. 20752 1 Q. Okay. Earlier, I had misspoken about 2 bankruptcy; and we were talking about the 3 rationale for why United had agreed to let 4 Mr. Gordon and Mr. Block off the hook in 5 connection with their guarantee on the earlier 6 Norwood loan. 7 Do you remember we talked about that? 8 A. Yes. 9 Q. Did you try and work out an 10 arrangement, or did any of your staff at USAT try 11 and work out an arrangement with Mr. Gordon and/or 12 Mr. Block in connection with their release on 13 their guarantee under the Norwood loan? 14 A. I believe the staff did. I did not. 15 Q. Do you know what the tenor or substance 16 of those negotiations or discussions were? 17 A. I think it -- you know, it's basically 18 what I said before. It was the idea that Gordon 19 was having economic problems and had gotten over 20 extended on some shopping centers here, and we 21 were afraid he was going into bankruptcy. We felt 22 that this was a good project and we wanted to move 20753 1 forward on it. We were afraid that if he went 2 into Chapter, that we would be tied up for two or 3 three years and it would impair the project. 4 Q. Mr. Gross, do you remember ever having 5 seen any documentation that would substantiate 6 those concerns about bankruptcy of Block and 7 Gordon? 8 A. I do not recall. 9 Q. What consideration did USAT get for 10 releasing Block and Gordon from their guarantee? 11 A. I just don't know at this time. 12 Q. Have you ever seen any indication that 13 there was any consideration given by Block and 14 Gordon? 15 A. I don't recall. 16 Q. Look at the third page -- I'm sorry -- 17 Page 5 of this proposal, T7021, which is Tab 688. 18 A. Page 5? I have it. 19 Q. Item No. 1 states, "A detailed 20 feasibility study has been ordered and will be 21 reviewed when received." 22 Was this consistent with the practice 20754 1 at USAT to wait until after the real estate 2 investment committee had already approved a 3 loan -- an investment, rather, to get a 4 feasibility study as to whether or not that was an 5 appropriate investment to make? 6 A. You know, I do not know whether we 7 already had a previous one or not and this was 8 merely an additional one or not. 9 Q. Had USAT been involved with this 10 property for about some two years prior to this? 11 A. I believe it had. Well, let's see. 12 Q. Okay. 13 A. At least 18 months. 14 Q. Had anything been built on it? 15 A. It had not. I believe it was just in 16 the zoning -- I think along about this time, it 17 was just about getting through zoning in the city 18 of Austin. 19 Q. Are you aware of any other feasibility 20 studies that were done in connection with the 21 project? 22 A. I do not. I just don't recall. 20755 1 Q. You recommended this project in spite 2 of the fact that there was no feasibility study? 3 A. I didn't say there was no feasibility 4 study. I said I didn't recall one. 5 Q. It says here that one hadn't been 6 received. 7 A. That doesn't mean one hadn't been done 8 prior to this. 9 Q. You believe there might have been? You 10 just don't know? 11 A. I just don't know. 12 Q. Looking at the next page, 6, that's 13 your signature under Mr. Graham's signature, isn't 14 it? 15 A. Yes, it is. 16 Q. And Mr. Crow signed and Mr. Williams? 17 A. Yes. 18 Q. Who else signed under your signature? 19 Do you recognize that? 20 A. That may be Jeff Gray, but I'm not 21 sure. 22 Q. Was it customary to date this final 20756 1 page? 2 A. I would usually put -- usually put the 3 date on it, although they obviously did not at 4 this time. 5 Q. Would I be right in thinking that the 6 date on which this approval would have been 7 effective would be June 2nd as shown on the front? 8 A. I don't know, but -- I just don't know. 9 Q. Well, absent there being a date on the 10 signature page, what should I look to to determine 11 whether or not the approval was on June 2nd other 12 than the front page? 13 A. Maybe there would be some minutes of 14 the real estate committee that would deal with 15 that. 16 Q. Well, let's take a look at Tab 1032A 17 which I believe bears the number A1655 or T7589? 18 A. Is that one I already have? 19 Q. No, sir. I'm giving it to you now. 20 MR. DUEFFERT: Mr. Leiman, one more 21 time. 22 MR. LEIMAN: That would be Tab 1032A or 20757 1 A1655 or T7589. 2 Q. (BY MR. LEIMAN) Mr. Gross, this sheet 3 lists the senior loan committee meeting as of 4 June 2, 1986, as a 75-minute meeting at which 5 among other things that were being considered was 6 approval of a 30-million-dollar development loan 7 to joint venture to be formed between United 8 Financial Corporation and Frank P. Krasovec, 9 Jeffrey Minch, terms and conditions shown on the 10 attached loan committee approval sheet. 11 Do you see that? 12 A. Yes, I do. 13 Q. Does that help refresh your memory as 14 to when the real estate investment committee would 15 have met? 16 A. As I say, I don't know; but I have no 17 reason to disagree. I can't say that that's when 18 it happened, but based -- this is when the senior 19 loan committee met. There's no question about it. 20 Q. Did the senior loan committee and the 21 real estate investment committee meet 22 simultaneously? 20758 1 A. Not that I recall. 2 Q. They had separate meetings? 3 A. I believe so. 4 Q. This is your -- you initialed this on 5 the bottom, is that right, of this exhibit? 6 A. Yes, I did. 7 Q. Okay. Tab 687, T7020. 8 Mr. Gross, have you seen this recently? 9 A. Yes, I have. 10 Q. What is it? 11 A. It is the United Savings Association 12 loan committee approval of the 100 acres US 183 13 I-35 tract loan application. 14 Q. Does this constitute a senior loan 15 committee approval? 16 A. Yes, it does. 17 Q. Okay. And what is the senior loan 18 committee approving in this document? 19 A. A joint venture tentatively styled 20 Norwood/United Park to be formed between United 21 Financial Corp. and Frank P. Krasovec and Jeffrey 22 Minch, the principals of Norwood property. 20759 1 Q. It's a 30-million-dollar loan, isn't 2 it? 3 A. Yes. 4 Q. Mr. Krasovec and Mr. Minch didn't put 5 any money up in connection with this purchasing 6 the property, did they, in this regard? 7 A. Well, they -- we advanced the money for 8 them. 9 Q. For what? 10 A. For the -- for this loan. 11 Q. So, they took no money out of pocket? 12 They had no equity in this loan, did they? 13 A. They have responsibility. 14 Q. I understand that. Did they have any 15 equity in the loan? 16 A. Well, you know, I've had a similar type 17 loan. As far as I was concerned, I had equity in 18 it because I paid it back. 19 Q. What do you mean by "equity," 20 Mr. Gross? 21 A. When I put my name on a piece of paper 22 guaranteeing a note and I have a note obligation 20760 1 to pay, as far as I'm concerned, I show it as a 2 liability on my financial statement; and I have an 3 obligation to pay it back. 4 Q. Mr. Gross, the total amount of this 5 loan was for $30 million. Right? 6 A. That's correct. 7 Q. The total amount of the purchase price 8 that was paid in connection with this was -- how 9 much was that? 30 million? 10 A. Purchase price of what? 11 Q. For the property. 12 A. No. It was less than that. This would 13 include the development of the property. 14 Q. Did Mr. Krasovec and Mr. Minch sign a 15 30-million-dollar promissory note, to the best of 16 your knowledge? 17 A. I believe they did. 18 Q. Okay. Mr. Gross, what you said a few 19 minutes ago, in connection with equity, when you 20 had an obligation to repay a loan -- 21 A. Yes. 22 Q. -- do you believe that's what equity 20761 1 is? 2 A. Well, it -- I believe that when you 3 sign an obligation, that's a commitment of equity 4 because you have to pay it back from somewhere. 5 Q. That's what you mean by "equity"? 6 A. Equity is what you put into a loan, and 7 I'm eventually going to put the money in to pay it 8 off. 9 Q. Okay. What about in connection with 10 the purchase of collateral real estate? 11 A. If I sign it personally, I've got an 12 obligation to pay it back. 13 Q. So, it's the obligation to pay it back 14 that creates the equity; is that right? 15 A. Well, as I keep paying it back, my 16 equity builds up. 17 Q. Pay back what? The interest or the 18 principal? 19 A. Pay back the loan. As I pay back the 20 loan. 21 Q. The loan meaning the interest and the 22 principal? 20762 1 A. They are both in the loan; so, it would 2 be the whole thing. 3 Q. Was that your philosophy in 1986? 4 A. It was my personal philosophy in that 5 I -- I had this type of loan and I paid it off and 6 they provided the -- the money for the interest 7 and for the land and it got repaid. So, as far as 8 I was concerned, it was an obligation going in; 9 and I paid it off. And, therefore, I had -- even 10 though they advanced the money, I had purchased 11 the land. 12 Q. In addition to the $30 million that was 13 lent to Mr. Krasovec and Mr. Minch, there was a 14 9.2-million-dollar equity contribution made by 15 United Financial Corporation. Right? 16 A. Nine something. I assume -- 17 approximately -- 18 Q. You will find that at Page 2 of the 19 previous exhibit. Two exhibits back, T7021 at 20 Tab 688. 21 A. I know it's 9.4 million. 22 Q. Was it $9.4 million? 20763 1 A. I thought that was right. 2 Q. Is that how much the contribution of 3 United Financial Corporation was? 4 A. Yes, it was. 5 Q. United Financial Corporation was a 6 subsidiary of United Savings? 7 A. Yes. 8 Q. Who was the president of that, if you 9 know? 10 A. I don't recall. 11 Q. Mr. Gross, looking here at the middle 12 of Page 1 on Exhibit T7020 -- 13 A. Middle of Page 1. All right. 14 Q. The loan that's approved in connection 15 with this particular property, the Norwood 16 project, had the borrowers Krasovec and Minch on 17 it; is that right? 18 A. Yes, it did. 19 Q. And at this point in time, Mr. Block 20 and Mr. Gordon had been released of their 21 guarantee obligations in connection with the 22 previous loan; is that right? 20764 1 A. Probably shortly hereafter, but 2 somewhere in this general area. 3 Q. If you would look with me at Tab 670 4 which is Exhibit T7010? 5 A. 7021? 6 Q. No, sir. 7010. 7 A. 7010? 7023, 7021. Would this be 8 from -- oh, these are from today, too. 7010? 9 Q. 7010 is what you're looking for. 10 MR. BLANKENSTEIN: Perhaps if I give 11 the witness my copy. Would that be all right? 12 THE COURT: All right. 13 THE WITNESS: Here we go. I just found 14 it down here. 15 Q. (BY MR. LEIMAN) Mr. Graham -- I'm 16 terribly sorry. I apologize. 17 Mr. Gross, at the time that you signed 18 the loan committee approval, 7010, in December of 19 1985, USAT was relying upon financial information 20 regarding Gordon and Block showing that the net 21 worth of Gordon and Block as well as Krasovec and 22 Minch totaled up to some $59.7 million. Right? 20765 1 A. I see that. 2 Q. Is that what you were relying on? 3 A. Yes. 4 Q. And Mr. Gordon had net worth of 5 $45 million shown and Block had $1 and a half 6 million. Right? 7 A. That's correct. 8 Q. That's around $46.6 million? 9 A. That's correct. 10 Q. All right. At the time that the loan 11 committee approved on June 2, 1986, in 12 Exhibit T7020 the loan for $30 million for 13 Mr. Krasovec and Mr. Minch, the guarantee -- the 14 net worth of the guarantors had gone from the 15 $59.7 million that was previously approved in 16 December of '85 down to $14.6 million; is that 17 right? 18 A. Yes. 19 Q. What was the economic justification for 20 accepting the lesser guarantee in connection with 21 this loan? 22 A. The first one was a loan. The second 20766 1 one was a joint venture. And in a joint 2 venture -- in the first loan, we had no 3 participation. It was a straight loan. 4 When you get to a joint venture, you 5 negotiate with the person that you're doing the 6 joint venture with on the most favorable terms. 7 In looking back through some of the 8 documents the other day, I saw that originally 9 they wanted 75 percent of the equity; and they 10 were offering us 25 percent. It ended up we got 11 62 and a half percent and they got 37 and a half 12 percent of the profit. 13 And so, all of these items are 14 negotiated items; and we felt that the 25 percent 15 liability was -- was just a part of the overall 16 trade that you made. 17 Q. I don't understand how trading 18 25 percent liability on the part of UFC, which is 19 an additional 9.4-million-dollar investment, 20 justifies a reduction in the guarantors' net 21 worth. 22 MR. BLANKENSTEIN: Whether Mr. Leiman 20767 1 does or doesn't understand, does he have a 2 question for the witness? I'm not sure what the 3 question is. 4 Q. (BY MR. LEIMAN) Can you explain to me, 5 Mr. Gross, how extending additional moneys in 6 connection with this transaction, some additional 7 $9.4 million, justifies the reduction of -- by 8 some $46 million in net worth of the guarantors? 9 MR. BLANKENSTEIN: I don't think 10 there's a relationship between those two facts 11 that Mr. Leiman has established. I don't quite 12 understand the question. 13 Q. (BY MR. LEIMAN) Do you understand the 14 question, Mr. Gross? 15 A. I don't see the relevance of it. In 16 other words, at this point in time, it's not 17 advantageous to keep Gordon in there. And so, 18 that's not a negotiating item. It's to our 19 benefit not to have him in there. And his 20 financial ability to pay anything is evaporated, 21 and it just doesn't make any -- Gordon doesn't 22 have any bearing on this is what I'm -- in other 20768 1 words, Gordon's net worth doesn't have any bearing 2 on this joint venture. 3 Q. Were the most current financial 4 statements that you had in connection with 5 Mr. Gordon as of May of 1985 with regard to 6 approving the 22-million-dollar loan extension to 7 him in December of '85? 8 MR. BLANKENSTEIN: I believe you 9 misspoke. I think it was 21. 10 Q. (BY MR. LEIMAN) I'm sorry. 11 21-million-dollar loan extension. 12 A. Well, that would have only been, what, 13 seven months old? 14 Q. Well, were they the most current that 15 you had? 16 A. I really don't know. I had -- yeah. I 17 assume we would indicate the most current 18 statement, but I don't know one way or the other. 19 Q. Well, did you have a more recent 20 financial statement on Mr. Gordon at the time that 21 you agreed to release Mr. Gordon from any 22 liability in connection with his obligation of the 20769 1 guarantee for the Norwood loan? 2 A. I do not know. 3 Q. You said that among the matters that 4 you had considered were matters related to and 5 concerns about Mr. Gordon going into bankruptcy 6 with his projects. Right? 7 A. That's correct. 8 Q. Did you have any financial information 9 on Mr. Gordon as of the time that you were 10 considering those concerns that would have in some 11 way justified your concern? 12 A. I'm sure we had them. I do not recall 13 what they were. 14 Q. Do you remember ever seeing anything in 15 that regard? 16 A. I don't recall. 17 Q. Let's look at Tab 685, T7018. 18 A. Do you want me to read it? 19 Q. Yeah. It's a short letter. I think it 20 would help if you read it. 21 A. (Witness reviews the document.) I've 22 read it. 20770 1 Q. Did you review this letter recently? 2 A. Yes, I did. 3 Q. Do you agree with the assertion made in 4 here by Mr. Graham to Mr. Minch that the change in 5 the approval that we've been looking at in 6 connection with the Norwood loan to Krasovec and 7 Minch was a provision that if, at the end of 8 18 months, $10 million in sales had not closed, 9 your group, meaning Krasovec and Minch's group, 10 could be removed from the project at United's 11 option? 12 Do you agree with that? 13 A. Yes. 14 Q. Do you also agree with the assertion 15 that obviously all your liability, meaning 16 Krasovec and Minch's, would be waived at that 17 time, also? 18 A. Yes, I do. 19 Q. And do you remember if Mr. Graham is 20 accurately reporting that the committee, the 21 senior loan committee, had a strong feeling that 22 "it was all our money and that if you could not 20771 1 successfully perform, we should have a right to 2 consider other alternatives to protect our 3 investment"? 4 A. I think that was Mr. Graham's view. As 5 I said, I don't feel the way he feels about it. 6 Q. You don't think it was all of USAT's 7 money? 8 A. I think at that point in time, they 9 have an obligation to pay that money back. So, we 10 had made the loan and we put our joint venture 11 money in and they have their obligation to 12 perform. 13 Q. Mr. Gross, did you ever tell Mr. Graham 14 about your philosophy about what equity is? 15 A. I don't recall if I did or I didn't. 16 Q. Take a look at Tab 702, which is T7033. 17 MR. BLANKENSTEIN: I'm sorry, 18 Mr. Leiman. Just the exhibit number. 19 MR. LEIMAN: 7033. 20 Q. (BY MR. LEIMAN) Mr. Gross, this is the 21 joint venture agreement dated July 29th, 1986, 22 between Krasovec and Minch and United Financial 20772 1 Corporation, the subsidiary of USAT. 2 Have you seen this recently? 3 A. I believe I have. 4 Q. Look at Page No. 6. Starting under 5 header B, the second full sentence beginning with 6 "Notwithstanding any other provision of this 7 agreement to the contrary," do you see where it 8 says that "in the event that sales aggregating 9 $10 million at prices approved by the venturers 10 are not accomplished by the date stated herein, 11 then UFC shall have the option to remove Norwood 12 as a venturer"? 13 A. I see that. 14 Q. Under that, several lines down, "UFC 15 shall cause Norwood, Krasovec, and Minch to be 16 released of liability on the debt." It goes on 17 and on. 18 Do you see that? 19 A. I see that. 20 Q. This is the legal document that sets 21 out that Krasovec and Minch will have no liability 22 if they are removed for failure to sell 20773 1 $10 million worth of real estate. Right? 2 A. Yes. 3 Q. T7468. You don't have this up there, 4 Mr. Gross. 5 This memorandum from Arthur S. Berner 6 to you is dated December 18th, 1987, with regard 7 to Norwood Park. 8 Do you see that? 9 A. I do. 10 Q. Do you have any reason to think that 11 you didn't get this memo? 12 A. No, I don't. 13 Q. Have you had a chance to see this memo 14 recently? 15 A. Yes, I have. 16 Q. All right. 17 MR. LEIMAN: Your Honor, I would offer 18 T7468 at this time. 19 MR. BLANKENSTEIN: No objection. 20 THE COURT: Received. 21 Q. (BY MR. LEIMAN) Mr. Gross, looking at 22 the second full paragraph in this memo, Mr. Berner 20774 1 states there should be consideration of the full 2 and absolute release from Norwood. 3 Do you see that? 4 A. Yes, I do. 5 Q. What was the purpose of -- do you know 6 what Mr. Berner was alluding to here? 7 A. I'm sorry. You're talking about the 8 second paragraph, if we should elect to consider 9 this? 10 Q. Yes. 11 A. I believe that they had -- they had not 12 sold the $10 million worth of land that they 13 thought they had sold earlier, and I think that we 14 were talking about removing them from the venture. 15 And, of course, they were -- it's -- apparently 16 they were threatening to file a lender liability 17 lawsuit against us. 18 Q. Had they been removed from the venture, 19 do you believe they would have had any liability? 20 A. I think that -- no. I think they are 21 saying that it's lender liability, not their 22 liability. 20775 1 Q. And what would their liability, 2 Krasovec and Minch's, have been had they been 3 removed by the joint venture? 4 A. They would have given up all interest 5 in the venture, and they would have had their 6 liability released. 7 Q. Okay. T7581, which is Tab 1051, 8 please. Have you seen this January 21, 1988 9 document previously? 10 A. I'm not sure I've seen this within the 11 last week or not, to tell you the truth. I see my 12 signature on the second page, but I don't -- I 13 don't recall it specifically. 14 Q. Do you see in the middle of the page 15 the note indicating that the current rate of 16 interest -- "at the current rate, interest reserve 17 depleted in 13 months"? 18 A. Yes. 19 Q. What's that a reference to, the 20 interest reserve? 21 A. That's the unfunded interest that shows 22 above, I would imagine. 20776 1 Q. And what is the committee considering 2 in connection with this proposal? 3 A. This provides for the extension of the 4 agreement until July 29th, 1989. 5 Q. Is it your understanding that Krasovec 6 and Minch were being paid $22,000 a month for 7 their management services in connection with the 8 Norwood property? 9 A. That's what it says. 10 Q. And had they been paid $22,000 a month 11 from the time that the loan had been entered into, 12 the joint venture had been entered into in 1986? 13 A. I don't really know, but I assume they 14 had been. 15 Q. Tab 758, T7462. This is the settlement 16 and loan modification agreement dated April 5th of 17 1988. 18 Have you seen this recently? 19 A. Yes, I have. 20 Q. In addition, at Page OW192925, there is 21 attached hereto a settlement and modification of 22 the joint venture agreement. 20777 1 Do you see that? 192925. It's on the 2 left-hand lower part of the page. 3 A. OW192925? 4 Q. Yes. 5 A. Yes, I have that. 6 Q. If you would, look at the next page. 7 Reading under -- read to yourself, please, No. 3 8 and No. 4 on the next page over. 9 A. (Witness reviews the document.) I see 10 that. 11 Q. This is an absolute release of 12 liability by USAT and UFC of Krasovec and Minch. 13 Right? 14 A. Yes. 15 MR. BLANKENSTEIN: Is he asking what 16 his understanding of this document is? Is that 17 it? Has he established that Mr. Gross has seen 18 this document -- saw this document at the time? 19 THE COURT: Well, he asked him what it 20 is; and he answered. Let's have the next 21 question. Next question. 22 Q. (BY MR. LEIMAN) Mr. Gross, have you 20778 1 seen this before? 2 A. Probably. Except for seeing it in the 3 last week, I probably did not. 4 Q. Do you understand that this document -- 5 do you understand Krasovec and Minch were released 6 of any and all liability by USAT and UFC? 7 A. That's what this would appear to 8 indicate. 9 Q. Does that view conform to your 10 understanding of what happened in 1988 with regard 11 to Krasovec and Minch and the Norwood loan? 12 A. Well, I'm confused. I thought 13 somewhere along the line, I saw something that 14 said it went until 1989. So, I don't -- does this 15 become effective immediately? Is that what it's 16 saying? Or does it become effective sometime in 17 the -- wasn't there a previous document that had a 18 date in it of 1989? 19 Q. I think that was one of the options, to 20 extend the agreement until 1989. 21 A. Then I guess what I'm saying is that's 22 the reason I'm confused between that one and this 20779 1 one. 2 Q. Mr. Gross, let me change the question 3 slightly. 4 Do you have any reason to think that 5 Krasovec and Minch were not released of any 6 liability in connection with their loan guarantee 7 under the Norwood loan? 8 A. I don't know whether -- without having 9 to sit here and read -- I guess, are these the 10 same document. I have two documents here. The 11 front one and the second one, are they the same 12 document? 13 Q. They are different documents? 14 A. What are we saying? That as of this 15 date, it's effective and they are out? 16 MR. BLANKENSTEIN: I'm not sure what 17 the pending question is. 18 Q. (BY MR. LEIMAN) As of the date that 19 this document was signed, do you believe that 20 there was any liability whatsoever on the part of 21 Krasovec and Minch in connection with the Norwood 22 joint venture? 20780 1 MR. BLANKENSTEIN: Your Honor, I'm 2 going to object to that. It's a blatant 3 mischaracterization of what the document says. 4 It's conditioned upon them not satisfying the 5 deadline in the -- set forth in these agreements. 6 Only if that happens would there be some trigger 7 with regard to the liability, and that didn't 8 occur on the date these documents were signed. 9 And Mr. Leiman knows that. He's asking another 10 one of those questions. 11 Q. (BY MR. LEIMAN) What is your 12 understanding of this document, Mr. Gross, in 13 connection with Krasovec and Minch's liability? 14 A. I haven't read the document in its 15 entirety to say -- the thing I don't understand, 16 that I'm not following here, this is dated in 17 April of '88; and I thought they had agreed that 18 it would be extended to sometime in '89. And I 19 don't know if this is a settlement that applies to 20 '89 or if it applies to here. I thought they were 21 still in it later in '88, but I just don't know. 22 Q. Do you know who Jeff Seidman is? 20781 1 A. He was one of the people in our real 2 estate department. 3 Q. Look at Page 26. 4 A. Page 26? 5 MR. BLANKENSTEIN: Of which document? 6 MR. LEIMAN: The second document that 7 we've been looking at of Tab 758, T67462. Page 26 8 of the second agreement contained in here. 9 Q. (BY MR. LEIMAN) Do you see 10 Mr. Seidman's signature? 11 A. I do. 12 Q. All right. Did Mr. Seidman work for 13 you? 14 A. Yes, he did. 15 Q. What was his job? 16 A. He was in the real estate department. 17 Q. Do you believe that Mr. Seidman signed 18 this document? Do you have any reason to think it 19 wasn't his signature? 20 A. I'm just trying to find out when this 21 was effective. I see when it was signed. I'm 22 trying to find out: Is it effective now -- I 20782 1 don't see something -- somewhere in here, it will 2 say it's effective April 5th; or somewhere, it 3 will say sometime in 1989. I thought we approved 4 somewhere here in the extension to 1989. 5 Q. Mr. Gross, look back at T7581 which is 6 a recommendation and a proposal. 7 A. I'm sorry. Which one? 8 Q. T7581. 9 A. I've got it. This is dated 10 January 21st of '88? 11 Q. Yes. 12 A. And it was approved to extend to 13 July 29th, 1989. 14 Q. Right. There were three options there, 15 Mr. Gross. I fell down on the job completely 16 because I didn't ask you which of these three 17 options you selected. 18 Was it No. 1, 2, or 3? 19 A. I do not know because what it sounds 20 like -- when you say "options," are you talking 21 about the three recommendations down at the 22 bottom? 20783 1 Q. Yes, sir. Those are different options 2 under "recommendation." 3 A. One of them says extended July 29th, 4 1989. 5 MR. DUEFFERT: Mr. Leiman, for the 6 record, could you just restate the exhibit number 7 again that we're looking at? 8 MR. LEIMAN: 7581. 9 MR. BLANKENSTEIN: 7581? 10 MR. LEIMAN: Yes. 11 A. As I say, No. 3 -- it seems to me that 12 2 and 3 are just part of No. 1. But it seems to 13 me what we approved was to extend it to July 29th, 14 1989. That's why I sort of don't understand 15 that -- is this settlement agreement saying that 16 it's signed on April 5th, 1988, and the 17 termination date of it is July 29th, 1989? 18 Q. (BY MR. LEIMAN) That's my question to 19 you. What do you think it means, Mr. Gross? You 20 were the chairman of the institution. You were 21 the CEO. You were the head of the real estate 22 department. Mr. Seidman worked for you. 20784 1 What did this agreement mean? 2 MR. BLANKENSTEIN: Mr. Leiman needs to 3 establish, I think, that it was his practice to 4 read this document or that he had seen these 5 documents or that he had come to form some opinion 6 with regard to these documents at the time. He's 7 just asking questions now some ten years later as 8 to what Mr. Gross thinks the effect of these legal 9 documents are. He's not a lawyer, and I think 10 these are improper questions unless he wants to 11 establish as a foundation of what Mr. Gross knew 12 or didn't know at the time. 13 MR. LEIMAN: Your Honor, I find the 14 argument to be just a tad disingenuous in that we 15 provided a list of these documents directly to 16 counsel with starred documents indicating which 17 ones Mr. Gross would be questioned about. The 18 very purpose that we're here today is to try and 19 speed this along. 20 Now, the expectation was that Mr. Gross 21 would have read these ahead of time. I don't -- I 22 can't be precluded, Your Honor, from asking what 20785 1 the significance of the document is on the one 2 hand or then summarizing what I'm asking him as to 3 what the net effect of the document would be. I 4 have to ask the question one way or the other. 5 MR. BLANKENSTEIN: I don't think the 6 purpose of providing the documents was to make 7 Mr. Gross an expert. If he wants to ask him a 8 question in connection with what Mr. Gross knew or 9 didn't know at the time, that's a legitimate 10 question. He doesn't want to establish a proper 11 foundation for the question. 12 MR. LEIMAN: Your Honor, I asked the 13 question. The question is whether he believes 14 Mr. Krasovec and Mr. Minch were ultimately 15 released of any liability whatsoever in connection 16 with their guaranteeing this loan. 17 MR. BLANKENSTEIN: That's a different 18 question than the question he asked. 19 THE COURT: All right. Let's have the 20 answer to that one. 21 A. I just don't know. 22 Q. (BY MR. LEIMAN) You don't know the 20786 1 answer to as to whether they were released from 2 liability? 3 A. If this occurred in July of 1989, I 4 would not have been there; and I would not know. 5 So, I don't know whether it -- I don't know when 6 this occurred. If it occurred April 5th, I was 7 there if it occurred April 5th, 1988. 8 Q. Do you know whether Mr. Krasovec and 9 Mr. Minch were released of liability as of the 10 time you were there in April of '88? 11 A. I don't recall. Having looked at the 12 document, I just do not know. 13 Well, may I take some more time to try 14 to read some more of it? Because, you know, it's 15 many pages long; and all I'm trying to find in 16 here is -- and I really can't tell from glancing 17 at it. I've looked at one paragraph. I can't 18 tell if they are terminating the agreement as of 19 this date or if it's as of July 29, 1989. 20 I can't get the connection -- you know, 21 I'm trying to answer these things as intelligently 22 as I can; but I just can't get the connection 20787 1 between what we agreed to and what's in here. I 2 don't know how we got from here to here. 3 Q. From where to where? 4 A. I don't know how we got from agreeing 5 to extend the venture until July 29th, 1989, to 6 something terminating it on April 5th, 1988. 7 That's where I'm at a loss. 8 MR. EISENHART: Your Honor, I think 9 we're just wasting time here. The document is in 10 evidence. He's asking him what the legal effect 11 of the document in evidence has. There's no 12 evidence that the witness ever saw this document 13 before. His present opinion doesn't add anything 14 to these proceedings. We're just getting nowhere 15 and spinning our wheels. 16 THE COURT: I'm not sure what value we 17 would gain from this witness giving an 18 off-the-cuff-on-the-witness-stand interpretation 19 of these documents. These are pretty detailed 20 documents, and he's indicated he's not sure what 21 they mean. He wants to read them some more. I 22 don't know what purpose would be served by that. 20788 1 MR. LEIMAN: Your Honor, if the witness 2 does not know whether or not Krasovec and Minch 3 were released of their guarantee, then so be it. 4 If that's the answer to the question, I'll be 5 satisfied with that. 6 MR. BLANKENSTEIN: He's said that about 7 four or five times now. He said he doesn't 8 recall. 9 THE COURT: All right. We'll take a 10 short recess. 11 12 (Whereupon, a short break was taken 13 from 11:26 a.m. to 11:48 a.m.) 14 15 THE COURT: Be seated, please. We'll 16 be back on the record. 17 Mr. Leiman, you may continue. 18 MR. LEIMAN: Thank you, Judge. 19 Q. (BY MR. LEIMAN) Tab 676, Exhibit T7711, 20 please. 21 Would you please look at the exhibit, 22 Mr. Gross? 20789 1 A. (Witness reviews the document.) 2 Q. Mr. Gross, if you would, please turn to 3 the last page of this Exhibit No. 7711. Do you 4 see your name as the CC along with Mr. Gerald 5 Williams? 6 A. Yes, sir. 7 Q. You would have received this, wouldn't 8 you? 9 A. I have no reason to doubt it, but I 10 don't recall it. 11 Q. Take a look at the penultimate or 12 next-to-last full paragraph on this Page No. 3, 13 sir. And specifically, I would like you to look 14 at the last sentence of the second-to-last 15 paragraph. This letter by David Graham states as 16 follows to Frank Krasovec, quote, "A savings and 17 loan cannot legally extend, renew or restructure a 18 delinquent loan. So, unless the loan is brought 19 current, our alternatives are limited." 20 Do you see that? 21 A. I see that. 22 Q. Do you believe that that was an 20790 1 accurate portrayal by Mr. Graham? 2 A. I don't know. 3 Q. Tab 690, please. T7138. 4 MR. BLANKENSTEIN: I didn't hear the 5 exhibit number. 6 MR. LEIMAN: 7138, Tab 690. 7 Q. (BY MR. LEIMAN) Mr. Gross, Tab 690, 8 T7138, is a Burke O'Hara June 4th, 1986 market 9 analysis or feasibility study. Right? 10 A. Yes. 11 Q. Did you ever read this? 12 A. I looked at it recently. 13 Q. Prior to recently, do you remember ever 14 having seen it or read it? 15 A. I do not. 16 Q. You don't remember having read it? 17 A. No. 18 Q. Tab 800, T7523, please. 19 Mr. Gross, this is a supplement to the 20 Burke O'Hara feasibility study. This is dated 21 June 17th, some days afterward. 22 Have you seen a copy of this document? 20791 1 A. (Witness reviews the document.) This 2 one doesn't look familiar. It's possible, but I 3 don't recall even recently seeing it. 4 Q. Do you know if you ever saw it at the 5 time the Norwood loan was made in 1986? 6 A. I don't -- no. 7 Q. Tab 734, T7701. 8 This is an appraisal done by the 9 Appraisal Associates of Austin. It's T No. 7701. 10 Do you see that? 11 A. Yes. 12 Q. It's dated June 11th, 1986. 13 A. I see that. 14 Q. Norwood Properties became your joint 15 venture partner -- USAT's joint venture partner. 16 Right? 17 A. Yes. 18 Q. Did you ever see a copy of this 19 particular appraisal? 20 A. I don't recall seeing one. Maybe, you 21 know, in the last few days, yes. 22 Q. All right. Do you remember ever having 20792 1 seen it prior to the last few days? 2 A. I do not. 3 Q. Would it have been significant to you, 4 sir, to have an appraisal in hand that showed the 5 property -- the Norwood property in Austin valued 6 at $32 and a half million? 7 MR. BLANKENSTEIN: Is Mr. Leiman 8 representing that this appraisal is 32 million? I 9 read it as 37,500,000. 10 MR. LEIMAN: It's $32 million. 11 MR. DUEFFERT: Which page are you 12 referring to? 13 MR. LEIMAN: Page KM67. 14 A. Mine says 37, 5. 15 Q. (BY MR. LEIMAN) If you read on, you'll 16 see that some additional property is included 17 there. 18 MR. BLANKENSTEIN: I'm -- excuse me, 19 Your Honor. I'm lost. It says 37,500,000. I 20 don't know where Mr. Leiman has come up with his 21 32-million-dollar figure. 22 THE COURT: What's the reference for 20793 1 that figure, Mr. Leiman? 2 MR. LEIMAN: The 124-acre tract, sir. 3 THE COURT: What page of this document? 4 MR. LEIMAN: Well, it's Bates Page 067. 5 THE COURT: Where is the 32 million? 6 MR. LEIMAN: It's the third figure down 7 representing 124 acres, Your Honor. 8 THE COURT: All right. 9 Q. (BY MR. LEIMAN) Let me simply ask this 10 question, Mr. Gross. Did you ever see this 11 appraisal? 12 A. As I said, I did not. 13 Q. Okay. Tab 698, T7029. 14 Mr. Gross, this is the Bolin appraisal 15 dated July 22nd, 1986. 16 Do you see that? 17 A. Yes. It says "as of June 5th, 1986"? 18 Q. Right. And the appraisal is dated on 19 the next page July 22, 1986, for the transmittal. 20 Right? 21 A. Yes. 22 Q. You wouldn't have seen this prior to 20794 1 approving the loan to Krasovec and Minch on 2 Norwood, would you? 3 A. That's correct. 4 Q. Okay. So, since this information came 5 subsequent to your approval of the loan, you have 6 no reason to believe that you would have been 7 aware of it or any of the information in these 8 documents at the time you approved the loan; is 9 that right? 10 MR. BLANKENSTEIN: I'm going to object 11 to that question. He may well have been aware of 12 the information in the documents. Not having seen 13 the appraisal, it contains a lot of publicly 14 available information, Your Honor. It's a truly 15 leading question. 16 THE COURT: I think the witness might 17 answer it. 18 THE WITNESS: Would you repeat the 19 question? 20 MR. LEIMAN: Read it back, please. 21 22 . 20795 1 (The record was read by the court 2 reporter as requested.) 3 4 A. Since it was addressed to David Graham, 5 I would imagine that he had conveyed the 6 information verbally to him prior to the loan 7 approval. 8 Q. (BY MR. LEIMAN) When would he have 9 conveyed that information, Mr. Gross? 10 A. Typically, they would give you what the 11 numbers were going to be and then give a written 12 report, a verbal and then give a written. 13 Q. So, they would give a single number; 14 and then that would be the basis of -- that would 15 be the appraisal basis? 16 A. That's typically what was done. As I 17 said before, we used the appraisal for 18 corroboration purposes, not for loan purposes. 19 Q. Okay. Let's go back to a document you 20 should have there in front of you, Mr. Gross, 21 which should be Tab 1035, T7571. 22 A. T7571? 20796 1 Q. Yes, sir. 2 3 (Discussion held off the record.) 4 5 Q. (BY MR. LEIMAN) Yesterday you 6 testified, Mr. Gross, that you wrote this document 7 entitled "Notes regarding United Savings." Right? 8 A. Yes, I did. 9 Q. You were a consultant at the time you 10 wrote it to USAT. Right? 11 A. Yes, I was. 12 Q. Okay. Item No. 2 states as follows: 13 "United is making 100 percent loans and funding 14 the interest payments on risky deals; that is, 15 real estate deals where the developer has no 16 equity in it at all." 17 You wrote that, didn't you? 18 A. I did. 19 Q. All right. As I read it, there are 20 three factors in there, Mr. Gross. United making 21 100 percent loans, number one. The second factor, 22 funding the interest payments. The third factor, 20797 1 in which the developer has no equity. 2 Is that how it breaks down for you? 3 A. That's what it says. Up at the top, it 4 says, "To put this in better perspective, suppose 5 examiners came in to look at United Savings. 6 These are typically what their observations would 7 be." 8 Q. Was this the observation that you made? 9 A. I made it looking at this real estate 10 department through the eyes of an examiner, and 11 that's what I said in the first sentence. 12 Q. Okay. And acting as if you were an 13 examiner, this was your idea of what an examiner 14 would be looking for as being a risky deal. 15 Right? 16 A. That -- well, that's what I'm saying. 17 But by the same token, if you look through the 18 rest of the -- of the memo, I'm pointing out other 19 items in there. And my purpose in writing this is 20 to point out to them because the ADC loans are 21 large loans as compared to a home loan, that an 22 examiner walking into the institution is going to 20798 1 look at them far more frequently than he's going 2 to look at a single-family residential loan. As a 3 result of that, I'm saying it is imperative that 4 they get all these properly documented, that they 5 have the -- everything in the file, financial 6 statements, that they be sure they have good 7 credit risk. I'm trying to point out to them that 8 these are going to be the first things looked at. 9 So, they want to know it backwards to make sure 10 they make good ADC loans. 11 Q. Are you finished with your answer? 12 A. Yeah. 13 Q. Are you saying it's a good thing or a 14 bad thing to make 100 percent loans funding the 15 interest payments in which the developer has no 16 equity? 17 A. I'm saying those are typical of the 18 characteristics of an ADC loan. 19 Q. Is it a good thing or a bad thing, 20 Mr. Gross? 21 A. It's a good thing, I guess, because the 22 Federal Home Loan Bank set out that type of loan 20799 1 and said it was a satisfactory practice. 2 Q. No. 3, you write, "United is going into 3 risky real estate ventures both as a partner and 4 as a sole developer. Therefore, they are getting 5 into areas that increase their chances for large 6 losses." 7 Do you see that? 8 A. I do. 9 Q. What did you mean there? 10 A. The same thing that I meant in the one 11 before, that these are going to be looked at by 12 the examiner and, therefore, they better have good 13 backup for what they are doing and it's -- they 14 need to be well-documented. They need to have 15 good partners. They need to have good locations, 16 and they need to have well-documented loans. 17 Q. Now, the real estate information in 18 this particular document that you wrote was 19 obtained from David Graham and Gem Childress. 20 Right? 21 A. As I testified the other day, some of 22 it was. Some came from other people in the 20800 1 institution. 2 Q. Charlie Patterson in the real estate 3 department? 4 A. That was another one. 5 Q. You say in No. 1, "As of the past 6 month, 27 percent of all construction loans were 7 all delinquent." You say in 6, "Almost 4 percent 8 of all single-family mortgages were delinquent." 9 In 8 -- I'm sorry. In 7, you say, "Over 10 10 percent of all the installment loans were 11 delinquent." 9, "A large number of single-family 12 residential and construction loans are in 13 bankruptcy." Right? 14 A. Yes. 15 Q. All right. Would those have been 16 observations that -- did you make those 17 observations? 18 A. Those were the things that I would have 19 picked up had I been the examiner coming through 20 there. Those are the observations that I made. 21 Q. Those would have been provided to you 22 by staff in the real estate department, correct? 20801 1 A. That is correct. 2 Q. You also say in No. 11 on this document 3 that "no interest has been billed or collected on 4 any of the construction loans in the San Antonio 5 market for the last three months." Right? 6 A. I see that. 7 Q. That would also have been based upon 8 information provided by the USAT real estate 9 staff. Right? 10 A. Yes. These are residential 11 construction loans in 11. 12 Q. Right. What did that signify to you, 13 that there were no payments collected on 14 construction loans in San Antonio? 15 A. They were failing to bill the builders 16 for the interest in a timely manner, which was a 17 problem of the blending of these two institutions. 18 Q. And that's why, in No. 13, you start 19 talking about the recordkeeping at USAT. Right? 20 No. 13, you say, "With a portfolio of 21 approximately 900 commercial loans from United, 22 fully one-third of the files have original 20802 1 documents missing"? 2 A. That's correct. 3 Q. And No. 14, "Many of the single-family 4 residential files are missing from the file room, 5 and a number of these can't be found"? 6 A. That's correct. 7 Q. 15, "Files are scattered both 8 throughout the districts as well as in the home 9 office"? 10 A. Yes. 11 Q. And there's a great deal of question in 12 16 as to whether some of the files even exist. 13 Right? 14 A. Right. 15 Q. This is information that you gathered 16 from the real estate department that was being 17 headed by Mr. Graham and Mr. Childress. Right? 18 A. Most of this information here relates 19 to the residential department which is being 20 headed by Mr. Patterson. 21 Q. By the way, after you became CEO and 22 chairman, did you let Mr. Patterson go? Did you 20803 1 ask him to resign? 2 A. I can't remember whether we asked him 3 to resign or not, but I do know that we had 4 someone else to take over the department. 5 Q. When was that? 6 A. I just don't recall. 7 Q. Look at No. 22. It talks about their 8 potential loan losses in the magnitude of 9 $10 million on two recently foreclosed projects in 10 the institution. "These write-offs have not been 11 taken (Allison/Walker)." 12 Do you see that? 13 A. Yes. 14 Q. What's Allison/Walker? 15 A. They were condominium developers in 16 Houston, and these were projects that they were 17 building to sell off. They went into Chapter 18 while they were under construction. 19 Q. Should they have been written off? 20 A. At that point in time, no. I'm writing 21 this and looking at -- this is just something 22 that's recently occurred, and there's things in 20804 1 process to try to get the loans finished out. And 2 these are my observations. At that point in time, 3 they probably should not have been written off. 4 But eventually if they weren't worked out, they 5 would have to be. 6 Q. As of this time, they weren't, correct? 7 A. That's correct. 8 Q. Look at No. 23, beginning with the last 9 sentence on the bottom of the page in which you 10 state, "I still haven't been furnished with any 11 grouping of the unimproved real estate in the 12 valley and in Houston that I requested some months 13 ago." 14 Who was responsible for unimproved real 15 estate, Mr. Gross? 16 A. I know that the valley real estate was 17 residential. I don't know what the Houston real 18 estate was. 19 Q. Was any of this run by Gem Childress or 20 David Graham? 21 A. This is 14 years ago. I just don't not 22 recall. 20805 1 Q. Mr. Gross, would you classify joint 2 venture deals as risky deals even though all 3 institutions were doing them? 4 A. I think if the loan -- I think if the 5 deal is properly structured, if the location is 6 good, and I think if the people in the deal are 7 credit worthy, I don't think they are any more 8 risky than a loan that isn't a 100 percent loan. 9 I think you have to look to the specific loan or 10 the specific joint venture to determine that. 11 Q. Just because other institutions are 12 doing it doesn't make it less risky, does it? 13 A. Well, it doesn't make it less risky. 14 But by the same token, it doesn't mean that it is 15 risky. 16 Q. I don't think that that was the -- that 17 wasn't the question I was asking. 18 MR. LEIMAN: If Mr. Leiman has a 19 question, he should ask it. 20 THE COURT: Do you have a follow-up 21 question? 22 Q. (BY MR. LEIMAN) Does the fact that 20806 1 other institutions are doing risky deals make it 2 less risky for United? 3 A. As I said, the fact that other 4 institutions may or may not be doing risky deals 5 if United were doing risky deals wouldn't make it 6 more or less. That's not what I said. What I 7 said is if a loan is properly structured and 8 documented, it is not necessarily a risky loan. 9 Q. An example of a risky deal would be 10 where a developer finds a site and the savings and 11 loan lends 100 percent of the money and interest 12 carry and splits the profit 50/50. Right? 13 A. What. 14 Q. An example of a risky deal would be 15 where a developer finds a site and the savings and 16 loans lends 100 percent of the money and interest 17 carry and splits the profits 50/50 with the 18 developer? 19 A. I'm sorry. Where are you reading from? 20 Q. I'm reading from my notes. 21 A. I beg your pardon. 22 Q. All right. Let me give it to you one 20807 1 more time. 2 A. I thought I was... 3 Q. A risky deal would be where a developer 4 finds a site and contributes his expertise and the 5 S&L lends 100 percent of the money and interest 6 carry and splits the profits 50/50 with the 7 developer. Right? 8 A. Not necessarily. We had hundreds, 9 maybe a thousand homes that we had foreclosed on 10 that there was no joint venture with anybody and 11 no 100 percent loan; and that's what was filling 12 up the REO portfolio at the time. 13 Q. Look at your deposition transcript at 14 Page 106, please. In your deposition, I asked you 15 about this memo that you wrote on notes regarding 16 USAT, correct? 17 A. That's correct. 18 Q. In Line No. 11, you gave an answer 19 which states, "I would say that if I came into an 20 institution and they are doing joint venture 21 deals, I would classify those as risky deals even 22 though they are all doing them." Right? 20808 1 A. Yes. Again, I preface that, if I were 2 an examiner walking in. 3 Q. Right. I think I read that part. 4 MR. NICKENS: I don't believe it was 5 read, Your Honor. If we could go back to Line 3, 6 the question and answer that preceded this, to 7 give the context that was indicated. 8 THE COURT: Why don't you read it, 9 Mr. Nickens. 10 MR. LEIMAN: Who should read it? 11 THE COURT: Mr. Nickens. 12 MR. NICKENS: Beginning at Line 3, 13 "Going back a moment. When you talk about risky 14 real estate ventures, No. 3 again" -- referring to 15 the document -- "describe for me the kind of 16 ventures, the kinds of real estate deals that are 17 involved with No. 3." 18 ANSWER: "If you go back up to the 19 beginning, I'm taking this from the perspective if 20 I were an examiner walking in. Do you see my 21 initial comments at the top?" 22 QUESTION: "Yes." 20809 1 And then the portion Mr. Leiman wanted 2 to read. 3 Q. (BY MR. LEIMAN) Going on, it says, 4 "What kind of transaction is involved in a joint 5 venture deal like that?" 6 ANSWER: "As an example, let's take an 7 apartment project. Typically, a developer will 8 find a site or location; and at that time, the S&L 9 would then go into a joint venture with him. He 10 would contribute his expertise, the S&L would 11 usually lend 100 percent of the money and the 12 interest carry for the deal to go build the 13 apartments. Then they would split the profits 14 50/50. So, that would be a type of joint 15 venture." 16 MR. NICKENS: You skipped a portion in 17 there. "They would then do that, build the 18 apartments, and after some period of time, usually 19 sell the apartments." 20 MR. LEIMAN: I apologize. That's my 21 mistake. I did not see that. 22 Q. (BY MR. LEIMAN) "Some of the others 20810 1 were land joint ventures where they would find a 2 piece of land and, again, the financial 3 institution, be it United or Gibraltar, whoever it 4 might be, University Savings, would make the 5 investment to acquire the land but make it in the 6 form of a loan to the venture. The venture would 7 then pay interest to the institution and then, 8 when it was wound up, they would split the profits 9 50/50." 10 QUESTION: "What would that be for? 11 Would that be for solely as an investment in land, 12 or would it be to develop the land?" 13 ANSWER: "Usually, it was developing 14 the land and then subdividing, making some sort of 15 a subdivision type thing, either residential or 16 commercial, and selling off the lots." 17 THE COURT: Now, what's your question, 18 Mr. Leiman? 19 Q. (BY MR. LEIMAN) Would this be a risky 20 deal where a developer finds a site and 21 contributes his expertise and the S&L lends 22 100 percent of the money and interest carry and 20811 1 splits the profits 50/50? 2 MR. BLANKENSTEIN: Your Honor, I'm not 3 sure what he's trying to do here. He asked him 4 that question before. Mr. Gross testified that he 5 didn't think so and explained. Then he went back 6 and read the deposition testimony where Mr. Gross 7 says "I'm now speaking as an examiner." He wasn't 8 offering his opinion in that regard. I don't know 9 what this same question is designed to do. I 10 don't think that he's effectively trying to 11 impeach him with this deposition testimony where 12 Mr. Gross says, as he said on the stand, "I'm 13 speaking as an examiner" there. Now he's asking 14 for his opinion not speaking as an examiner. 15 Q. (BY MR. LEIMAN) Why wouldn't an 16 examiner be interested in commenting on 17 100 percent funded risky deals? What would be the 18 point of that in connection with this memo? 19 A. What I'm saying there, as I said 20 before, is because these are larger loans than 21 your typical single-family residential loan, these 22 are the first things an examiner is going to look 20812 1 at because they are larger loans. That doesn't 2 mean they are risky because they are larger. All 3 it means is that if they are properly documented 4 and location is good and design is good, the 5 developer is good and you have a good track record 6 and it has a good financial situation, it can be a 7 conservative situation and be a profitable 8 situation. 9 Q. Let's look at T7081, which is Tab 708. 10 Mr. Gross, Tab 708 at T7081 is a 11 construction loan checklist prepared by Karen 12 Wynans. 13 Who is that? 14 A. She was the secretary in the commercial 15 real estate department. 16 Q. Was this a record kept in the ordinary 17 course of business at United Savings? 18 A. Yes, it was. 19 Q. Was Ms. Wynans responsible for keeping 20 the record, as best you know? 21 A. That's what this indicates. I assume 22 she was. 20813 1 Q. Do you see what the loan ratio was on 2 the Park 410 loan listed at $88 million? 3 A. I see that. 4 Q. What does it say that the loan ratio 5 was? 6 A. It says 90.9 percent. 7 Q. And on the second page, it says that 8 the loan was closed on April 17th, 1986, and 9 funded on April 17th, 1986, in the amount of 10 $46.6 million. Right? 11 A. I think it's 45.6. 12 Q. I'm sorry. I apologize, Mr. Gross. It 13 is 45.6. 14 What would an appropriate loan-to-value 15 ratio be? 16 A. It would be 80 percent. 17 Q. Tab 1036, T7573. 18 A. You know, I guess what she failed to do 19 here is she didn't pick up the collateral that 20 they had. That's the reason for the difference 21 between the 90.9 and the 80. 22 Q. Are you counting collateral in 20814 1 connection with loan-to-value ratio? 2 A. Yeah. They have $10 million deposited 3 with us for performance. So, I would certainly 4 count it. I would say that -- I would either add 5 it to -- what I would have done is taken the 6 80 million since they have 10 million of extra 7 collateral up. I would have said that the basic 8 exposure is $70 million, and I would have taken 9 80 percent of $80 million, which works out to 64 10 to make it a conforming loan. 11 Q. To make it a conforming loan? 12 A. Yes. 13 Q. You would have added in the collateral 14 to make it a conforming loan? 15 MR. BLANKENSTEIN: I don't think that's 16 what he said. I think he said that would make it 17 a conforming loan. 18 MR. LEIMAN: I'm sorry. I was 19 distracted, Your Honor. 20 THE COURT: Well, what's your question? 21 Q. (BY MR. LEIMAN) In terms of creating 22 the loan-to-value ratio, you're adding in the 20815 1 collateral; is that right? 2 A. I'm adding in -- in addition to the 3 land that you've got up, you have additional 4 collateral put up. Whether somebody puts up stock 5 or a letter of credit, CDs, whatever they put up, 6 that's an additional asset that you look to. And 7 as I say, my attitude is if I looked at this loan, 8 I would say there's an 80-million-dollar loan with 9 the collateral of the loan plus an additional 10 $10 million over here. I would subtract the 11 10 million from the 80 and say there's $70 million 12 exposure and take the 80 percent of the 80 million 13 and conclude that the exposure on the loan was 14 less than 80 percent of the appraisal. 15 Q. In doing that, you would not increase 16 the value of the land, would you, Mr. Gross? 17 A. You just got additional collateral. 18 Q. You wouldn't increase the value of the 19 land, would you? 20 A. I don't understand the question. 21 Q. By adding in the collateral that you're 22 talking about, would that increase the value of 20816 1 the land? 2 A. No, but it would increase the security 3 for the loan. 4 Q. It wouldn't change the value of the 5 land, would it? 6 A. No. 7 Q. Now, let's look at the origination fees 8 that are listed here in the middle of 7081. 9 A. 7081. This one right here. 10 Q. You see it's referring to $2.4 million 11 in fees? 12 A. I see -- 13 Q. 1.6 and 800,000. 14 A. Yeah, I see that. Origination -- a 15 million 6 origination and 800 deferred. 16 Q. Yeah. On those two lines, it talks 17 about the amount of origination fees? 18 A. Yes. 19 MR. BLANKENSTEIN: Those two lines 20 don't talk about the amount of the origination 21 fees. State what the record says. 22 Q. (BY MR. LEIMAN) How do you understand 20817 1 these two lines to read? 2 A. The first line reads "origination, a 3 million 6," and the second line says "deferred, 4 $800,000." 5 Q. All right. Now look to the left of 6 that where it says "fees." Okay? 7 A. I see that. 8 Q. And what does it say for the total 9 amount of these fees? 10 MR. BLANKENSTEIN: I'm sorry. I don't 11 know where Mr. Leiman is looking. 12 Q. (BY MR. LEIMAN) Look to the left of the 13 word "description," and it says "fees." Under the 14 word "amount," it says 1.6 million and 800,000 15 which totals $2.4 million. Right? 16 A. May I approach you? 17 Q. Certainly. Right here. See the word 18 "fees"? 19 A. I see that. 20 Q. What is the total amount of fees? 21 MR. BLANKENSTEIN: You want him to add 22 the two numbers together? 20818 1 MR. LEIMAN: Yes. 2 A. $2,400,000. 3 Q. (BY MR. LEIMAN) What was the percent of 4 origination fees in connection with this loan? 5 A. I need to refer back to the -- 6 Q. It was 3 percent, wasn't it? Is that 7 what Mr. Hurwitz and you approved? 8 MR. BLANKENSTEIN: Objection. He said 9 he didn't know. Now he said you and Mr. Hurwitz 10 approved them. That's an extraordinarily improper 11 question, and Mr. Leiman knows that. 12 THE COURT: Sustained. What's your 13 question? 14 Q. (BY MR. LEIMAN) Were the fees 3 percent 15 on this loan? 16 A. I believe they were; but as I say, this 17 is the way she shows it. 18 Q. That's what she shows. Right? 19 A. She shows 2 percent origination and 20 1 percent deferred. 21 Q. Would I be right that this totals up to 22 3 percent? 20819 1 A. 3 percent, yes. 2 Q. Okay. Let's look at Tab 655, 3 Exhibit A1113. 4 A. Do I have that? 5 Q. This was admitted under T7587 6 Mr. Gross. We talked about the approval yesterday 7 by the board of directors of the Park 410 loan. 8 Do you remember that? 9 A. Yes, I do. 10 Q. And that occurred on May 8th, 1986. 11 Is that what I understand your 12 testimony to be? 13 A. That's when this is dated. It's not 14 signed, but I have no reason to -- you know, I 15 assume that's correct; but I don't -- 16 Q. Look at Page 5 of the document. 17 A. I'm looking at Page 5. Mine is 18 unsigned. 19 Q. Yes. Mine is, too. 20 A. Okay. 21 Q. We were unable to locate any signed 22 version of these minutes. 20820 1 Do you see at the top of the page, it 2 says, "On motion by Dr. Munitz and seconded by 3 Mr. Duckett, the following resolution was adopted 4 with Mr. Winters objecting as to the loan amount 5 and value of the property"? 6 A. I do. 7 Q. Do you recall that meeting? 8 A. I didn't until I saw this this past 9 week. 10 Q. Let me ask you a question. Why was 11 Dr. Munitz making a motion -- was Dr. Munitz on 12 the USAT board of directors? 13 A. Yes, he was. 14 Q. Was he on the board of directors on 15 May 8th, 1986? 16 A. As far as I know. 17 Q. And do you remember the board of 18 directors approving this -- this loan? 19 A. Yes, I do. 20 Q. And did they approve the loan after 21 the -- the initial funding had taken place as we 22 saw in Ms. Wynans' records? 20821 1 A. Yes, they did. 2 Q. Okay. T7565. 3 Mr. Gross, have you seen this exhibit 4 before? 5 A. I have. 6 Q. Do you know who Mr. Pledger is? 7 A. Yes. At that time, I believe he was 8 our -- he was either our general -- I believe he 9 was the general counsel. I'm not sure when Art 10 Berner came in, but I think he was our general 11 counsel. 12 Q. This certification of resolution, in 13 the last full paragraph, states that a loan in the 14 amount of $80 million to Park 410 West Joint 15 Venture is hereby approved on the date of 16 March 17th, 1986. 17 Have you seen this prior to this week? 18 A. No, I have not. 19 Q. Have you seen it this week? 20 A. I have. 21 Q. Do you have any reason to think that 22 this was not part of the documents maintained in 20822 1 the files of USAT? 2 A. I'm sorry. Would you repeat the 3 question now? 4 Q. Do you have any reason to think this 5 was not a document that was maintained in USAT's 6 files? 7 A. I don't know. You know, I have no 8 reason to doubt it. 9 MR. LEIMAN: Your Honor, I move the 10 admission of T7565. 11 MR. BLANKENSTEIN: No objection, 12 Your Honor. 13 THE COURT: Received. 14 MR. LEIMAN: Your Honor, I've got 15 another hour or perhaps less; but it may be a good 16 time to recess for lunch. 17 THE COURT: We'll recess until 2:00. 18 19 (Whereupon, a lunch break was taken 20 from 12:28 p.m. to 2:04 p.m.) 21 22 THE COURT: Be seated, please. We'll 20823 1 be back on the record. 2 Mr. Leiman, you may continue. 3 Q. (BY MR. LEIMAN) Good afternoon, 4 Mr. Gross. 5 A. Good afternoon. 6 Q. Tab 1036, T7573. 7 Mr. Gross, earlier you testified -- 8 actually, yesterday you testified that you had 9 written the "solutions to problems at United 10 Savings" memoranda? 11 A. Yes, sir. 12 Q. Okay. Look with me, please, at No. 5. 13 You state, "We should try to take something that 14 we can take a large profit on to offset some of 15 the losses that we're going to have to take." 16 What did you mean by that? 17 A. United had some land that they were -- 18 had co-ventured in the Fort Worth/Dallas area and 19 indicated they had about $30 million worth of 20 profits. I believe they also had a couple of 21 apartments that they were joint venture partners 22 in. They indicated they had some significant 20824 1 profits in those. My feeling was that they should 2 sell some of those to cover some of the losses 3 they were going to take on some of these 4 single-family homes and residential loans they 5 were taking back. 6 Q. Was your advice followed? 7 A. I don't recall. 8 Q. Let's look at No. 9. You state, "More 9 time needs to be spent with large potential real 10 estate deals to examine them more thoroughly. For 11 instance, the other day we sat around our table 12 and discussed all the bad loans. And the comments 13 were that -- were that one of them" -- I can't 14 read that word. "While it was visible from the 15 freeway in Dallas, you had to go 4 miles to get to 16 it. Then others are bad locations and bad people 17 and all the different excuses in the world. But 18 with a 10- or 15-minute presentation, we're 19 approving 40-million-dollar land deals which may 20 end up being several hundred-million-dollar 21 developments. Certainly there is not enough time 22 in that frame to really determine if these are 20825 1 good ventures or bad ventures. We don't want 2 someone sitting around four years from now making 3 the same comments about these deals." Then you go 4 on in that paragraph. 5 What did you mean by that? 6 A. What I meant by that was I thought that 7 more time should be taken in evaluating loans and 8 joint ventures to make sure that we were satisfied 9 that they were good locations, good people, 10 properly structured, had a high probability of 11 success. 12 Q. What did you mean by "ventures" that 13 you just said? 14 A. Joint ventures. 15 Q. All right. Development loans? 16 Commercial loans? 17 A. Yes. 18 Q. Okay. Tab 1037, T7572. 19 Yesterday you told me that you wrote 20 this memo, "future programs of United Savings." 21 Right? 22 A. Yes. 20826 1 Q. Can you tell me what the game plan was 2 that you had previously discussed with someone 3 named -- is that Barry Munitz? 4 A. Yes. 5 Q. What was the game plan that you had 6 discussed? 7 A. I think I was alluding to my comment 8 back on the prior pages of this. 9 Q. Prior pages of what? 10 A. In other words, this Exhibit T7573. 11 Q. All right. Near the bottom of this 12 Exhibit 7572, you state, "I think primarily we 13 need to hit a couple of home runs to create some 14 large profits to try to take the losses we need to 15 take in the rest of the portfolio and get our 16 house in order so that we can -- so we can get the 17 bad behind us and move on a much more positive 18 note to try to increase earnings and growth." 19 What did you mean by that? 20 A. Same thing I said just before. I was 21 referring particularly to this land that they had 22 in the Dallas/Fort Worth area that they had 20827 1 indicated they had about a 30-million-dollar 2 profit in that. And I was suggesting that that 3 profit should be taken -- I also think they had 4 several amounts they indicated they had profits 5 in. I thought it would be appropriate to take 6 those profits to offset against the losses they 7 were looking at in the residential portfolio. 8 Q. Were you looking at any commercial 9 loans? 10 A. I'm sorry? 11 Q. In terms of home runs, any commercial 12 loans? 13 A. No. I was referring to these two 14 things I just mentioned. 15 Q. All right. T7584. 16 Mr. Gross, can you identify this 17 document for me? 18 A. It looks like a document that I 19 dictated. 20 Q. You wrote the document. Right? 21 A. Yes. 22 Q. This is T7584, and you wrote it to the 20828 1 members of the executive committee of what 2 institution? 3 A. United Savings. 4 Q. Okay. 5 MR. LEIMAN: Your Honor, I move T7584 6 into evidence. 7 MR. BLANKENSTEIN: No objection. 8 THE COURT: Received. 9 Q. (BY MR. LEIMAN) Mr. Gross, near the 10 bottom of the first page, you state, "During 1985, 11 in the real estate market, there was no progress 12 made in office occupancy anywhere in the state, 13 including Houston. There was a nominal amount of 14 gain in industrial occupancy in Houston. There 15 was some reduction in apartment vacancy in 16 Houston, while vacancy was rising throughout the 17 rest of the state. There are fewer unsold 18 finished homes in Houston than a year ago. The 19 reverse is true throughout the rest of the state, 20 but there is an incredible number of foreclosed 21 homes in Houston compared to a year ago. This 22 number is still rising. Utilization of raw land 20829 1 for new projects has come to a virtual halt in 2 Houston, while starting to slow down in other 3 parts of the state. Most areas of the state, 4 modest to strong demand continues for low-price 5 housing, while slowing for high-price housing." 6 You wrote that, did you not? 7 A. Yes, I did. 8 Q. Turn, please, to Page 3. On Page 3, 9 you state as follows: "Along that same line, I 10 guess part of the mentality is the same thing that 11 we faced in Houston ten years ago in real estate 12 in that a lot of the things that are being built 13 today are not worth economically what they cost 14 physically the day they are finished because you 15 can't rent them out at a price that gives you a 16 return on your real costs. Costs are rising at a 17 time when rents are falling. The sensible thing 18 is for an entrepreneur to quit building which, of 19 course, puts him out of business and he doesn't 20 want to do." 21 You wrote that, as well. Right? 22 A. Yes, I did. I wrote this whole 20830 1 article -- 2 Q. I just asked you if you wrote it. You 3 did write it? 4 MR. BLANKENSTEIN: He's trying to 5 answer his question. 6 THE COURT: All right. Finish your 7 question. 8 A. I was going to point out as you can see 9 from the title of it, it was the best of times; it 10 was the worst of times. It was written to create 11 a dramatic impact and was a little bit of 12 hyperbole to get the members of the executive 13 committee to -- a little shocker to make them 14 stand back and think prior to this meeting so they 15 would go into it trying to examine all the 16 possible things that might be beneficial. 17 Q. Did you finish your answer? 18 A. Yes. 19 Q. At the time you wrote this, you 20 believed that during 1985 in the real estate 21 market, no progress had been made in office 22 occupancy in the state of Texas. 20831 1 Did you believe that to be true? 2 A. As I say, that might have been an 3 overgeneralization; but generally, it was true. 4 At the same time, what that's really saying is 5 that just because no progress was made in the 6 office occupancy didn't mean -- what that's saying 7 is that in many instances, while a lot of property 8 was being built, there was an -- there was enough 9 being occupied that it was not causing at that 10 moment a decline in the occupancy. The occupancy 11 wasn't getting any better. 12 Q. Mr. Gross, you wrote this memorandum on 13 or before March 26, 1986, correct? 14 A. Yes. 15 Q. And that was before the Park 410 loan 16 for $80 million closed; isn't that right? 17 A. I can't recall -- before it closed? 18 That would be correct. 19 Q. Okay. And it also was written before 20 the Norwood loan was approved by the senior loan 21 committee of USAT, isn't that right -- 22 A. The Norwood loan -- 20832 1 Q. -- for $30 million? 2 A. That was part of a joint venture; and 3 it was approved, I think, in June. 4 Q. So, this memorandum was written prior 5 to either of those two events occurring. Right? 6 A. Yes, it was. 7 Q. And it was also written before the 8 board of directors approved the Park 410 loan in 9 May of 1986; isn't that right? 10 A. That is correct. 11 Q. All right, sir. 12 MR. LEIMAN: No further questions for 13 the witness at this time. 14 THE COURT: Mr. Leiman, who is going to 15 be the next OTS examiner. 16 MR. LEIMAN: It will be Mr. Rinaldi, 17 Your Honor. 18 MR. RINALDI: Perhaps we should just 19 take five minutes while we clear this. 20 THE COURT: All right. We'll wait for 21 you. We'll be off the record. 22 20833 1 (Discussion held off the record.) 2 3 THE COURT: All right. We'll be back 4 on the record. 5 Mr. Rinaldi, are you going to examine 6 the witness? 7 MR. RINALDI: I mean, Your Honor. 8 THE COURT: All right. Proceed. 9 10 EXAMINATION 11 12 Q. (BY MR. RINALDI) Good afternoon, 13 Mr. Gross. 14 A. Good afternoon. 15 Q. So that we can focus your responses, 16 you should understand that I am limiting all of my 17 questions almost exclusively to the subject of 18 executive compensation. 19 Generally in terms of the time frame 20 I'll be dealing with, we'll be talking about 1987 21 and 1988. At least that will give you some sort 22 of sense of where we are in time. Let me start by 20834 1 handing you a copy of what's been previously 2 marked and admitted as Trial Exhibit B174 -- I 3 can't read the writing -- 1. 4 A. I have some things over here under this 5 book. 6 Q. Maybe we ought to put that over here, 7 and then we won't confuse ourselves. 8 Take a look at what I've placed 9 before -- 10 THE COURT: Could I just caution you: 11 Are those admitted exhibits that we have here? I 12 just want to make sure that they are not pulled 13 from the boxes and then sort of strewn about. 14 MR. RINALDI: Those will be replaced 15 back into the boxes. They are admitted exhibits 16 as I understand. And we've pulled all the other 17 exhibits that I intend to use with him so we won't 18 have to have any delay searching for the 19 documents. 20 MR. SCHWARTZ: At the end of the day, 21 Your Honor, the practice has been throughout that 22 staff from, I believe it's Mr. Nickens' office, 20835 1 comes in and goes through all the folders that 2 have been used during the course of the day and 3 replaces them into these boxes. And then any 4 documents that have been received into evidence 5 are then given folders and assigned to the boxes. 6 That's done at the close of court each day. 7 THE COURT: All right. Proceed. 8 Q. (BY MR. RINALDI) Mr. Gross, I've put 9 before you a document that purports to set forth a 10 directory of United Financial Group, Inc. and its 11 subsidiaries. And it identifies persons who held 12 positions at United Financial Group at or about 13 the time we were talking about, which is the 14 mid-part of 1987 or September 8, to be more 15 precise. 16 At this point in time -- that is, in 17 around September of 1987 -- turn to Page -- Page 1 18 of that document which is US2021522. That's the 19 Bates stamp -- 20 A. 22? I have it. 21 Q. I think you're right at it there. 22 It indicates on this page that you were 20836 1 the director as well as the president and chief 2 executive officer of United Financial Group in 3 about November 8th, 1987. 4 Do you see that? 5 MR. BLANKENSTEIN: September 8th? 6 MR. RINALDI: I'm sorry. I keep saying 7 that. September. 8 A. Yes, sir. 9 Q. (BY MR. RINALDI) And until you 10 ultimately resigned from UFG, did you continue to 11 serve at UFG in the capacity of president and 12 chief executive officer of UFG? 13 A. Yes, I did. 14 Q. Okay. Then on the next page, it 15 indicates that you were at this time also a member 16 of the executive committee? 17 A. Yes. 18 Q. And then if we follow on to the next 19 page, it also indicates -- I'm sorry -- the same 20 page. This is the second page, numbered page; and 21 it's US2021523. It also indicates that you served 22 as chairman of the investment committee. 20837 1 Do you see that? 2 A. Yes. 3 Q. And then below that, it shows the 4 nominating committee. Then as we go on, it shows 5 that you served, on Page 3, at United Financial 6 Group, Inc. subsidiaries - Group Investors Trust 7 Company, again, as a director and president. 8 Now, I don't want to go through this 9 entire document with you, you know, subsidiary by 10 subsidiary. But would it be fair to say that as 11 the president and chief executive officer of UFGI, 12 that you served on most of the operating 13 committees? 14 A. Well, certainly a number of them. 15 Q. In that capacity, if you served on an 16 operating committee, were you generally the 17 president of that -- I'm sorry -- of that 18 subsidiary? I confused you. 19 A. I don't know. I can look through here 20 if you want to take a minute and let me run 21 through all this. 22 Q. Sure. I just confused the record. Let 20838 1 me clarify it. I asked you about committees. You 2 sat, it appears, on most of the committees in your 3 capacity as president and chief executive officer 4 of UFGI; is that correct? 5 A. Yes. 6 Q. And then there are also a number of 7 subsidiaries of UFGI. Did you also sit on the 8 boards and serve as an officer of most of the UFGI 9 subsidiaries? 10 A. We're talking about UFGI. Right? 11 Q. Yes. 12 A. That looks like it's correct. 13 Q. Now, UFGI's principal subsidiary would 14 have been USAT, correct? 15 A. Yes. 16 Q. If we turn to numbered Page 7 in that 17 document, it indicates that you were a director of 18 USAT. 19 Do you see that? 20 A. Yes. 21 Q. As we go down, it indicates that you 22 were also on the executive committee and the 20839 1 investment committee. Do you see that? 2 A. Yes, I do. 3 Q. You're not on the audit committee and 4 the compensation committee. Is that because 5 usually those committees were composed of outside 6 directors? 7 A. Yes. 8 Q. Okay. So, then -- and I'm sure 9 Mr. Leiman has covered this with you; but you were 10 also on real estate and loan committees, as well? 11 A. Yes. 12 Q. Now, if you served on a committee, were 13 you generally the chairman; or was that just -- 14 A. I don't think -- I don't know that I 15 was always a chairman. It looks like on a number 16 of them, I was. 17 Q. At least on the investment committee, 18 you were the chairman? 19 A. Yes. 20 Q. Now, were there any committees in the 21 hierarchy of things that were more important than 22 others? 20840 1 A. Yes. If you try to hierarchy it, the 2 executive committee would be the most important. 3 Q. And Barry Munitz served as the chairman 4 of that on Page 7? 5 A. I'm lost here. Let's see. Yes. 6 Q. Okay. And then after the executive 7 committee, what was the most important operating 8 committee of USAT? 9 A. I guess each committee would think it 10 was. 11 Q. Well, which committee was responsible 12 for overseeing the largest number of assets of the 13 institution? 14 A. At this time, probably the real estate 15 workout committee. 16 Q. And were you on the real estate workout 17 committee? 18 A. I think I was. 19 Q. What capacity did you serve? 20 A. I don't know. I would have to look and 21 see. I don't think I was chairman. 22 Q. And after the real estate workout 20841 1 committee, which committee, operating committee, 2 managed most of the assets? 3 A. If I could see a list of them, it would 4 help. 5 Q. This purports to be a list -- 6 A. I'm sorry. I think we went from UFG to 7 USAT, didn't we? 8 Q. Yes. We are now at USAT and the 9 committees of USAT. 10 A. Okay. You're talking about just these 11 committees right here? I guess I got confused. 12 Q. Tell you what. Turn back to the third 13 page -- second page of this document, third page. 14 There's a table of contents there. Maybe you can 15 just run your finger down and see the subsidiaries 16 of USAT. 17 A. Well, I guess what I was looking for 18 was the committees of USAT. 19 Q. Oh, I see. 20 A. I was trying to get a relative 21 weighting of their -- you know, the assets they 22 were managing or something like that. 20842 1 Q. Well, let me ask you this: Other than 2 the real estate workout committee, in your view, 3 would the investment committee have managed or 4 oversaw the management of the next largest amount 5 of assets of the institution? 6 A. Just offhand, I think so. Without 7 seeing the list of all of them -- 8 Q. Well, let's just try to refine that a 9 little. 10 Was the investment committee 11 responsible for overseeing the equity arbitrage 12 portfolio? 13 A. Yes, it was. 14 Q. Do you recall approximately how much or 15 how large that portfolio was? 16 A. No, I don't. 17 Q. Okay. Now, was the investment 18 committee also responsible for overseeing the 19 high-yield bond portfolio? 20 A. Yes, it was. 21 Q. And do you recall that in -- 22 approximately how large that portfolio was? 20843 1 A. Seems to me it was, like, three or 2 $400 million, somewhere in that range. 3 Q. Did the investment committee also 4 oversee the mortgage-backed security portfolios? 5 A. Yes, it did. 6 Q. Do you recall approximately how large 7 those portfolios were at this time? 8 A. I'm not sure. They were in excess of a 9 billion. I just don't know. 10 Q. Together with those three types of 11 investments, there would have been substantial 12 assets oversaw by the investment committee? 13 A. Yes. 14 Q. Now, is it also fair -- as we go into 15 this, we see at numbered Page 14 in the document 16 that you were also the president of United 17 Financial Corporation. 18 Do you see that? 19 A. Yes. 20 Q. What was United Financial Corporation. 21 Do you recall? 22 A. Without looking down and reading it, I 20844 1 don't recall. It says, "A service subsidiary. 2 Primary business purpose: Service subsidiary" and 3 then "(primarily involved in real estate service 4 and investments.)" 5 Q. Is it fair to say, sir, that as the 6 president and CEO of USAT, that you also sat on 7 most of the operating committees of USAT, as well? 8 A. Yes. At least a large number of them. 9 Q. I believe that I may have just assumed 10 something that you had not actually indicated 11 because on Page 7, it indicates you were a 12 director of USAT; and then on Page 8, I believe in 13 the middle of the page, it says you were the 14 chairman of the board and chief executive officer 15 and president. 16 Do you see that? 17 A. Yes, sir. 18 Q. When did you become president of USAT? 19 A. I believe it was January of 1987. 20 Q. And what was the circumstance that gave 21 rise to your being appointed president of USAT? 22 A. It was the resignation of Gerry 20845 1 Williams as president. 2 Q. And he had previously served in that 3 capacity? 4 A. Yes. 5 Q. Did you also become the chief executive 6 officer at that point in time? 7 A. I believe I was the chief executive 8 officer starting in February of 1985. 9 Q. Okay. And as a result of your assuming 10 these new responsibilities as president, did you 11 then take over all of the responsibilities 12 previously performed by Mr. Williams? 13 A. A lot of the them but not all of them. 14 Q. How was that divvied up, then? 15 A. As best I recall, Mike Crow took over 16 some of the responsibilities that Gerry had 17 dealing with operations, administration, some of 18 that area, I believe human resources. Art Berner 19 took over some of the responsibilities in liaison 20 with the Dallas Federal Home Loan Bank and the 21 other regulators. 22 Q. And what about Mr. Munitz? Did he take 20846 1 over any responsibilities with the departure of 2 Mr. Williams? 3 A. I don't recall. 4 Q. Do you recall that at the point in time 5 you became president, that the -- that you were 6 given a 40,000-dollar pay increase in order to 7 reflect the fact that you were taking on the new 8 duties of presidency? 9 A. I don't recall that, no. 10 Q. Take a look at what's been previously 11 marked as T8011, sir. You can close that one up. 12 These are the minutes of the board of 13 the directors meeting of January 8, 1987. I would 14 direct your attention to the last paragraph on the 15 second page of that document. It says, 16 "Mr. Whatley reported that the compensation 17 committee" -- I'm sorry. Strike that. 18 "Mr. Whatley reported for the 19 compensation committee on the compensation 20 committee meeting. He stated that the committee 21 was recommending the adjustment of Jenard Gross' 22 salary by approximately 16 percent. After full 20847 1 discussion, such recommendation was unanimously 2 approved." 3 Was that consistent with your 4 recollection that your salary was increased as a 5 result of taking over the responsibilities 6 previously held by Gerald Williams? 7 A. I don't think that is what it says. 8 Q. I wasn't representing that to you. I 9 was asking if that was your recollection. 10 A. I don't think that was -- I think it 11 was in recognition of performance. 12 Q. Okay. Let's take a look, then, at 13 Exhibit T8034 which has previously been admitted 14 at Tab 479. And specifically, I would direct your 15 attention, sir, to -- to Page C0000004. I may 16 have gotten the zeros wrong. 17 Do you see where -- Page 4? It 18 indicates that Jenard Gross' salary went up from 19 $250,000 to -- well, strike that. 20 It went up from 250 to 290. Are those 21 thousands of dollars we're talking about there? 22 A. Yes. 20848 1 Q. So, as of the -- as of January 1987, 2 your salary was increased by 16 percent to 3 $290,000 a year? 4 A. Yes. 5 Q. And then if you turn two pages further 6 on in the document, sir, it indicates at 7 Paragraph 1 -- it says -- do you see where it 8 starts with "Mr. Whatley"? And it says, 9 "Mr. Whatley should -- (as usual) should inform 10 the board that appropriate adjustment has been 11 made, particularly since Mr. Gross also assumes 12 the presidency"? 13 A. I see that. 14 Q. Does that refresh your recollection 15 that your salary was being increased to reflect 16 the fact that you were going to take on new 17 responsibilities? 18 A. You know, it's -- it says also -- you 19 know, I guess -- I don't recall ever seeing this. 20 So, I really don't know what they were alluding 21 to. 22 Q. These were the notes of the -- for 20849 1 Chairman Gross and Whatley on the compensation 2 committee action that was taken on January 7, 3 1987. These appear to be notes of the 4 compensation committee, correct? 5 A. I just can't tell. I don't know. 6 Q. Fine. 7 Below that, it indicates that "Although 8 Gross' bonus is 80 percent of salary, a large 9 portion prepaid for loan interest requirement." 10 Do you have any idea what that refers 11 to, sir? 12 A. Yes, sir. I believe that refers to the 13 loan which I had on the UFGI stock. 14 Q. Okay. And is it fair to say that as 15 part of your bonus each year, the loan -- and 16 we'll get to this later -- the loan you had for 17 purposes of purchasing UFGI stock was -- the 18 interest on that loan was included as part of the 19 bonus? 20 A. I believe that's correct. 21 Q. Okay. And if you look down at No. 5, 22 it indicates that Crow's bonus already paid 20850 1 50 percent for 1986. And it says, "Salary for 2 promotion increases 20 percent from 140 to 170." 3 Was Mr. Crow also given a salary 4 increase -- 5 A. I'm sorry. I lost my page. 6 Q. It's Page 6. That's C and then seven 7 zeros and a six. Do you see No. 5 there? Was 8 Mr. Crow given a salary increase in January of 9 1987 to reflect his increased duties? 10 A. Yes, he was. 11 Q. Okay. Now, as CEO, which of the 12 individuals at United Savings Association of Texas 13 reported to you directly? 14 A. At what -- 15 MR. BLANKENSTEIN: At what point in 16 time? 17 Q. (BY MR. RINALDI) I premised this all by 18 saying I'm talking about the 1987-1988 time frame. 19 A. I guess I would really have to go back 20 and look at -- I would really have to look at the 21 organizational chart to tell you. I could name 22 some of the people. 20851 1 Q. There's an organizational chart sitting 2 in front of you, if that helps you. 3 A. That would make it easier, then. 4 Q. I think if you look at Page -- Page 7 5 of the organizational chart, which is -- or the 6 directory anyway is Exhibit B1741. If you go 7 down, you will see that there are a number of 8 officers that are listed. 9 A. I'm sorry. Where are we? 10 Q. I guess on Page 7 and 8. 11 A. Of 1741? 12 Q. That is correct, sir. 13 A. Pages 7 and 8? 14 Q. Yeah. Now, why don't we start on 15 Page 7. Was Mr. Berner an officer? 16 A. Yes, he was. 17 Q. And did he report to you as the chief 18 executive officer and president of USAT? 19 A. Yes, he did. 20 Q. And would your answer be the same with 21 respect to Mr. Crow? 22 A. Yes. 20852 1 Q. How about Mr. Huebsch? 2 A. No. 3 Q. Who did Mr. Huebsch report to? 4 A. To Mr. Crow. 5 Q. Okay. And the remaining people 6 there -- Ms. Laurenson, Mr. Stodart, and 7 Mr. Williams -- they all reported to -- 8 A. Mr. Crow. 9 Q. -- Mr. Crow? 10 So, is it fair to say that the only 11 people that reported directly to you were 12 Mr. Berner and Mr. Crow? 13 A. I don't believe so. 14 Q. Well, who else would have reported 15 directly to you, sir? 16 A. I believe Jim Jackson did, if I'm not 17 mistaken. 18 Q. And what -- in what capacity did 19 Mr. Jackson serve? 20 A. He was money desk/branches back here on 21 Page 9. 22 Q. Okay. 20853 1 A. Jeff Gray did. 2 Q. Okay. And he was -- 3 A. Mortgage operations. 4 Q. All right. 5 A. And yes, Raymond Chilton would have. 6 Q. Okay. That would have been in the real 7 estate area? Mr. Chilton? 8 A. Yes, sir. 9 Q. Was there anyone else that you recall? 10 A. I guess probably whoever was in charge 11 of internal audit, Mike -- whoever might have been 12 at that time, I believe. 13 Q. Did the directors of each of the major 14 divisions of USAT report to you? 15 A. The ones I just outlined pretty well 16 did. 17 Q. And USAT had various different 18 divisions or operating sections, did it not? 19 A. Yes. 20 Q. Would the head of each of those 21 operating sections then report to you? 22 MR. BLANKENSTEIN: Are you asking him 20854 1 about individuals other than he's just identified? 2 MR. RINALDI: No. I'm just asking 3 him -- 4 Q. (BY MR. RINALDI) In a general context, 5 if there was a head of a particular division of 6 USAT, would that head then report to you? 7 A. I thought that's just what we went 8 through. 9 Q. That was what I was trying to clarify. 10 These people that you identified were heads of the 11 various working divisions at USAT? 12 A. Yes. 13 Q. Okay. How about Mr. Munitz? Did he 14 report to you? 15 A. I would have to see an -- this is at 16 USAT? 17 Q. Yes. 18 A. He was chairman of the executive 19 committee. I would have to look at an 20 organizational chart to tell you. I just don't 21 know. 22 Q. I'm not talking in terms of 20855 1 organizational charts. I'm talking in terms of 2 practicalities. If Mr. Munitz had a problem, 3 would he bring that to you? If he did have a 4 problem, what would be the nature of the matters 5 he would report to you on, if at all? 6 I don't want to ask a compound question 7 and have your counsel object. 8 What was the nature of your 9 relationship with Mr. Munitz? 10 A. Well, he was chairman of the executive 11 committee; and I was chairman of the institution. 12 And he dealt primarily in the areas of personnel, 13 in the areas of compensation, in the areas of, you 14 know, outside consultants, things of that sort. 15 And what the pecking order was, I really couldn't 16 tell you. 17 Q. Did he report to you? If Mister -- I'm 18 sorry. 19 How would you characterize your 20 relationship with Mr. Munitz? 21 A. I guess I would characterize it as 22 pretty much collegial. 20856 1 Q. And would you say that, together, you 2 were at a similar level in terms of the operation 3 of the institution; or were you above Mr. Munitz? 4 A. I was head of operations as chief 5 executive officer, and he was chief of the 6 executive committee. I don't know how you split 7 hairs as to who was the boss. If we had an 8 organizational chart, it would indicate that. 9 Q. If there was a disagreement between you 10 and Mr. Munitz on some issue, how would that be 11 resolved? Did you consider yourself to be above 12 him or below him in the pecking order? 13 A. I guess I never really -- I never 14 really thought about it. 15 Q. Okay. Now, we've been talking so far 16 about USAT, correct? 17 A. Well, earlier we were talking about 18 UFG. 19 Q. I mean when we were talking about 20 people that served under you, we were talking 21 about USAT? 22 A. Yes. 20857 1 Q. Would your answers be substantially 2 similar with respect to UFGI, or did different 3 people report to you under UFGI? 4 A. Well, let me look at that again and 5 see. Now, that was on -- 6 Q. UFGI starts on about the fourth page of 7 the document, sir? 8 A. Again, Barry is chairman of the 9 executive committee. The investment committee 10 would report to me. 11 Mr. Whatley was chairman of the 12 nominating committee. We really didn't have that 13 many committees. 14 About the only one, Barry would chair 15 the executive committee; so, those involved in 16 investments would report to me. 17 Q. Now, I noticed that you were only the 18 president and chief executive officer of UFGI and 19 that Mr. Hurwitz served as the chairman of the 20 board; is that correct? 21 A. Yes. 22 Q. Now, you also held the position of 20858 1 chairman of the board as well as president and 2 chief executive officer of USAT? 3 A. Yes. 4 Q. Did that mean that you had more 5 expansive authority at USAT by virtue of the fact 6 that you were also chairman of the board? 7 A. I would think so. 8 Q. And as the chairman of the board, were 9 you then in a position to direct Barry Munitz, who 10 was simply a board member? 11 A. You know, as I say, I really can't 12 recall a situation where he directed me or I 13 directed him. 14 Q. Okay. That's fine. Now, with respect 15 to your position as president, CEO, and chairman 16 of the board of USAT, can you just explain for the 17 Court how you perceived your duties at USAT? What 18 is it you did? 19 A. As of this date? 20 Q. Yes. 21 A. Well, my basic duties at USAT were to 22 look at overall policy, strategy, outside contacts 20859 1 both in the industry and in the social and civic 2 area and business areas. 3 My primary focus up until January 1st 4 of this year had been on the commercial real 5 estate and the REO. 6 Q. Now, when you say "of this year," 7 you're referring to 1987? 8 A. Yeah, until the time Gerry left. 9 Q. I wanted to make it clear in the 10 record. 11 A. Then I picked up these other 12 responsibilities at that time. 13 Q. Would it be fair to say that you were 14 responsible for all of the operations at USAT, at 15 least overseeing those operations? 16 A. Yes. 17 Q. And if something went on at USAT, you 18 would have been aware, at least generally, that it 19 was going on? 20 A. Well, hopefully. 21 Q. But you expected the people that served 22 below you to report to you what it was they were 20860 1 doing? 2 A. We had -- they -- they referred to it 3 as bad news to the top, and I wanted to hear it if 4 we had problems. 5 Q. Would it be fair to say that you 6 essentially ran the show? 7 A. I tried to. 8 Q. Now, what were the mechanisms you used 9 in order to monitor or oversee what went on at 10 USAT? 11 A. Well, I guess one of them was the 12 executive committee. And then we got information 13 fed up to the executive committee of what was 14 going on throughout the institution. 15 Q. Did you periodically receive 16 performance reports with respect to the 17 institution? 18 A. Yes, sir. 19 Q. Okay. And can you describe for the 20 Court what a performance report is? 21 A. A performance report is a report that's 22 put out monthly. It was probably, if I remember 20861 1 correctly, 30, 40 pages thick, something like 2 that, and then would go department by department, 3 item by item, really a total in-depth analysis of 4 the institution. It might show, you know -- it 5 would get down to what the changes were in 6 deposits in a branch in a given month or year to 7 date, whatever it might have been. It would show 8 what happened to jumbo CDs, growth or shrinkage, 9 and past deposits or number of deposits. Just a 10 real breakdown of every facet of the institution. 11 Q. And did you regularly then receive a 12 copy of the performance reports? 13 A. Yes, I did. 14 Q. And would that have been in your 15 capacity as director, or was that distributed to 16 the investment committee members or the executive 17 committee members? 18 A. It was distributed around. I'm not 19 sure who all it went to, but I know I got one 20 every month. 21 Q. After you got that, you reviewed it, 22 didn't you? 20862 1 A. I did. 2 Q. You paid fairly close attention to 3 everything that was in it? 4 A. I tried. 5 Q. And you would periodically, when you 6 had a question, write memos back to the 7 appropriate person that you supervised asking for 8 clarification of matters in the performance 9 reports, didn't you? 10 A. That's correct. 11 Q. Okay. Why don't we take look at 12 Exhibit B1911. 13 MR. RINALDI: Your Honor, this is a new 14 document. This is a memo by Mister -- well, I'll 15 ask Mr. Gross if he's ever seen it before. 16 Q. (BY MR. RINALDI) Mr. Gross, do you 17 recognize this document? 18 A. I don't recall it, but it looks like 19 something I dictated. 20 Q. Well, take a look at the document and 21 tell me: Does it appear to be a memo from you to 22 various individuals at UFG and USAT commenting on 20863 1 the performance report? 2 A. Yes. 3 Q. And this one is dated December 28th, 4 1987; and it's commenting on the previous month's 5 performance report, correct? 6 A. That's correct. 7 Q. Then I notice that out in the -- the 8 margin, it makes reference to Bruce. I presume 9 that "Bruce" was Bruce Williams? 10 A. I presume so. 11 Q. Do you see the handwriting up in the 12 corner that says, "Jim Wolfe, Bruce Williams, 13 please write a response back to me so can forward 14 to Jenard. M.C."? 15 A. Yes. 16 Q. Is that typically what would happen if 17 you raised an issue in Mr. Crow's area? 18 A. Yes. If I raised an issue, they would 19 respond back with an answer. 20 Q. Okay. And is it fair to say that the 21 performance report really covered all of the major 22 operations with respect to the institution? 20864 1 A. Yes. 2 Q. Every facet? 3 A. Well, to the best of my knowledge, it 4 did. 5 Q. And this was something that you 6 reviewed regularly as the CEO? 7 A. Yes. 8 Q. So, you would have been aware of all 9 the things that were going on at the institution, 10 correct? 11 A. That's a pretty broad statement. I 12 tried to be. I don't know that anybody could be 13 aware of everything that's going on in an 14 institution. 15 Q. Well, none of us are perfect obviously. 16 MR. RINALDI: I would move the 17 admission of B1911, Your Honor. 18 MR. BLANKENSTEIN: No objection. 19 THE COURT: Received. 20 Q. (BY MR. RINALDI) Mr. Gross, did there 21 come a point in time in 1987 when, as the 22 president and CEO of USAT, it came to your 20865 1 attention that the examiners believed that USAT 2 was failing its net worth capital? 3 A. Yes. 4 Q. And do you recall the circumstances 5 under which that matter came to your attention, 6 sir? 7 A. As best I recall, it would have been a 8 result of Vivian Carlton's report. 9 Q. And Ms. Carlton was who? 10 A. Was the chief examiner for the 11 examination. 12 Q. Let me hand you a copy of what's been 13 previously marked as T8014, sir; and I would ask 14 you to take a look at that for a moment. 15 Is that the report of Ms. Carlton or 16 the report pertaining to Ms. Carlton that you were 17 making reference to a moment ago? 18 A. May I take a moment and read it? 19 Q. Certainly, sir. 20 A. (Witness reviews the document.) 21 MR. VILLA: Mr. Rinaldi, is 8014 the 22 report or the report and the cover letter? 20866 1 MR. RINALDI: It's just the cover 2 letter. It's Tab 395. 3 A. Yes, sir. 4 Q. (BY MR. RINALDI) Do you recall having 5 received a copy of this as a member of the board 6 of directors of United Savings Association of 7 Texas? 8 A. I don't recall it, but I'm sure I did. 9 Q. Okay. And as the chairman of the 10 board, this is something that would have been 11 directed to you, correct? 12 A. Yes. 13 Q. Now, in the next-to-the-last paragraph 14 on the front page, it talks about the net worth 15 failure. 16 Do you see that? 17 A. As calculated by the examiner. 18 Q. That's correct. The examiner 19 calculated USAT was below its net worth by 20 $14.4 million. 21 Do you see that? 22 A. Yes, I do. 20867 1 Q. Was that a matter that was of great 2 concern to you at USAT at this point in time? 3 A. Yes, it was. 4 Q. And why is that, sir? 5 A. Because we were very concerned that our 6 net worth be above the required amount. And I 7 think we wrote comments as this said, wrote a 8 comment back pointing out questions that we had 9 with regard to her examination. So -- I'm sorry. 10 Q. I don't want to interrupt your answer. 11 A. That's all right. 12 Q. Is it fair to say, sir, that at this 13 time, you as the CEO did not believe that USAT had 14 failed its net worth requirement as of June 30, 15 1986? 16 A. That's correct. 17 Q. And so, there ensued after that a 18 series of correspondence back and forth between 19 USAT and the federal regulators over the question 20 of whether, in fact, USAT agreed with 21 Ms. Carlton's conclusion. 22 Is that a reasonable statement? 20868 1 A. Yes. 2 Q. And when those letters were sent back 3 and forth, were they letters that you -- that you 4 reviewed before they went out? 5 A. I don't recall. 6 Q. Would you have been advised as the CEO 7 of what steps, say, Mr. Berner was taking in order 8 to communicate with -- 9 A. I imagine Mr. Berner and Mr. Crow would 10 have written those, and I may or may not have read 11 them before they went out. 12 Q. Now, on the next page, it indicates in 13 the second full paragraph that there is 14 substantial problems with respect to the books and 15 records of USAT. 16 Do you see that? 17 A. I see that. 18 Q. Then it says -- and this is really 19 directed specifically to the board of directors. 20 It says, "As members of the board, you have the 21 responsibility to determine the true condition of 22 the association." 20869 1 Do you see that? 2 A. I do. 3 Q. Were you concerned when you received 4 this letter, sir? 5 A. We were. 6 Q. And what actions did you as the 7 chairman of the board take to ascertain the true 8 condition of USAT? 9 A. Well, to begin with, we -- we disagreed 10 with a number of the findings in her report and 11 had indicated those. And in the meantime, we were 12 having -- we attended a meeting in Dallas on 13 May 18th, 1987, so they could report their 14 concerns with regard to it. 15 Q. And Dallas was concerned, were they 16 not, about the fact that your books and records 17 were not in satisfactory form? 18 A. I think the problem with the books and 19 records was a lot of them were on computer and 20 didn't have hard copies, and there was some 21 difficulty that they had in dealing with those. 22 But I don't think that they proved to be in the 20870 1 state of disarray that she originally thought. 2 Q. But Dallas was concerned, wasn't it? 3 The Federal Home Loan Bank of Dallas? 4 A. Yes, they were. 5 Q. And they were very concerned about your 6 net worth failure or perceived net worth failure? 7 A. Yes, they were. 8 Q. Now, at this point in time, how would 9 you characterize the condition of USAT? 10 A. I would characterize it as in better 11 condition than most of the S&Ls in the state of 12 Texas and concerned with its financial condition 13 and trying to find solutions. At this point in 14 time, I believe -- I'm sorry. Which question? 15 I'm rambling. 16 Q. I was asking you to characterize the 17 financial condition of USAT at or about the point 18 in time of this letter, which is dated April the 19 16th, 1987. I remind you the letter reports a 20 period up to nine months earlier. 21 By 1987, what was the condition of 22 USAT? 20871 1 A. We thought we were still above 2 regulatory net worth. And, of course, Vivian 3 Carlton did not. And so, we -- at that point in 4 time, we still felt that we had a positive 5 regulatory net worth. Not positive, but above 6 minimum regulatory net worth. 7 Q. And did you -- were the issues raised 8 by Ms. Carlton ultimately resolved one way or the 9 other? 10 A. Well, I believe, if I remember 11 correctly, that prior to the resolution of those 12 issues, we had another exam. And then by the end 13 of 1987, I believe we all agreed that we no longer 14 met our regulatory net worth. 15 Q. All right. Let me take -- let's take a 16 look at a couple of documents that might bear on 17 this subject. Would you take a look at -- during 18 this period of time in 1987, about April of 1987, 19 was USAT's condition deteriorating financially? 20 A. Yes. You know, Mr. Rinaldi, I'm trying 21 to go back to your question before. Something 22 just came to me that you were asking what we were 20872 1 doing. It seems to me -- I can't remember if it 2 was an outgrowth of the meeting we had with the 3 Dallas Home Loan Bank. But shortly somewhere 4 around that time, we, at the suggestion of the 5 Federal Home Loan Bank of Dallas, agreed to retain 6 I believe it was Grant Thornton to look at our 7 books and records. And then I believe we had 8 Merrill Lynch or Pru-Bache -- I believe it was 9 Pru-Bache come in and look at the corporate bonds 10 because those apparently were two areas of 11 concern. I don't know if they looked at the 12 equity arbitrage. I know they came in and looked 13 at those at the request of the Federal Home Loan 14 Bank, and both wrote letters to say they were 15 satisfactory. 16 Q. Now, did Vivian Carlton ever look at 17 the corporate bond portfolio during the 1986 exam 18 that preceded this letter? 19 A. In my year off, I don't know. 20 Q. No, no, no. This is the '86 exam 21 that's reported in April of '87. Well, if you 22 don't know sitting here, I don't want you to -- 20873 1 A. We had two exams and -- within the 2 year's time, and I'm not sure what happened when. 3 Q. Yeah. And this is the '86 exam that 4 ends in 1987, and then there's an '87 exam that 5 you'll see begins in the latter part of -- 6 A. If I remember correctly -- as I say, 7 this is going back 11 years. But it seemed to me 8 what happened was that the Federal Home Loan Bank, 9 to resolve the issue, suggested that we have Grant 10 Thornton review the books and records and then we 11 had the Pru-Bache review of the mortgage-backs -- 12 I'm sorry -- the high-yield bonds. And both of 13 those were performed and given to the Federal Home 14 Loan Bank, and both of them indicated that we 15 were -- that the -- that they thought our -- 16 everything was in good shape. 17 Q. Okay. Now, the question I asked you 18 earlier -- and perhaps this will jog your 19 recollection -- is about the financial condition 20 of USAT at or about the period that is reflected 21 on the -- in T8014; that is, around April or May 22 of 1987. 20874 1 Let me ask you to take a look at 2 something, what's been previously marked as 3 Exhibit A12235. This is Tab 888. 4 A. Do you want me to read this? 5 Q. I just want you to take a look at it, 6 and then I will direct you to several parts of it 7 and ask you if they reflect your recollection of 8 the condition of USAT at this point in time. 9 Do you recall, sir, that United Savings 10 Association provided a restructuring proposal to 11 the -- to the Federal Home Loan Bank of Dallas? 12 A. I didn't recall it, but I know we 13 were -- we were making several efforts at getting 14 additional capital. 15 Q. And if such a proposal had been made, 16 though you don't recall it now, you would have 17 been aware of that proposal at the time as 18 president and CEO of United Savings Association of 19 Texas. 20 Is that fair? 21 A. I think that's fair. 22 Q. Okay. Now, if you look at the first 20875 1 full paragraph of this document, it starts, 2 "Throughout 1986 and the first quarter of '87, 3 interest rates were generally declining." 4 A. The first or second paragraph? 5 Q. Second paragraph. Skipping to the last 6 sentence there, it says, "Extracting figures from 7 Exhibit 1 and adjusting them for the above gains, 8 one can clearly see that USAT was generating an 9 operating loss." 10 Do you see that? 11 A. Yes, I do. 12 Q. Now, if you turn over to the next page, 13 there's a little chart at the top. 14 Is it your recollection that in 1986 15 and -- throughout 1986 and the first quarter of 16 1987, USAT was generating operating losses? 17 A. Yes. You know, I don't recall it; but 18 I'm just reading over here on the first page. It 19 says, "For the past few years, regulatory net 20 income has been maintained through gains on sales 21 of loans and loan servicing, securities gains, 22 branch sale gains, and other non-recurring 20876 1 activities." 2 So, you know, that would indicate that 3 we were not generating from the operating income. 4 Q. Right. And that was the very point 5 that I was going to get to next. If you go down 6 further on the page -- and correct me if I'm 7 wrong, but I believe this indicates -- and I know 8 it's small writing. But it looks like there are 9 $70 million in operating losses in the year 1986; 10 is that correct? 11 A. It says -- I guess I'm not sure what 12 "pro forma net loss" is. That's backing out the 13 gains, I guess. Is that what that's saying or 14 what? 15 Q. You know, you're the CEO; and this was 16 your institution -- 17 A. This is 11 years old, and I'm not an 18 accountant. 19 Q. Yeah. Well, it says -- "pro forma," I 20 believe, would refer to an estimate. We're not 21 going to hold anybody to these numbers. Is that 22 consistent with your recollection that there were 20877 1 rather substantial operating losses during the 2 year 1986? 3 A. Yeah. I'm sure there were operating 4 losses, and this could be a good or bad number. I 5 have no way of knowing. 6 Q. Okay. Now, as we go further down -- 7 well, let me just ask you this: This was -- do 8 you recall that this is a document that was 9 prepared by your staff and submitted to the 10 Federal Home Loan Bank Board for its 11 consideration? 12 A. Do I recall it? No. 13 Q. Well, if that were the case, would you 14 expect the information contained in this document 15 to be accurate? 16 A. Yes, I would. 17 Q. Now, in the second full paragraph, it 18 states, "USAT's financial disposition today is 19 that significant future gains from asset sales are 20 not available." 21 Do you see that? 22 A. Yes. 20878 1 Q. That's consistent with what you 2 testified to a moment ago, that basically USAT was 3 selling assets in order to -- to offset operating 4 losses; is that correct? 5 A. Would you repeat the question again? 6 Q. That's consistent with what you pointed 7 out to me a moment ago that USAT was selling 8 assets in order to operate -- I think you pointed 9 out for me on the first page that there had been 10 branch sales, loan servicing, security gains, and 11 other non-recurring activities. Right? 12 A. It looks like we lost about 2 million 13 in the first quarter. Still, it's a loss. 14 Q. Then it goes on and it says, "Most of 15 the above-water assets have been liquidated, and 16 the remaining assets would not generate a 17 significant profit upon sale." 18 Do you see that? 19 A. I do. 20 Q. Is that consistent with your 21 recollection of the condition of USAT in about May 22 of 1987? 20879 1 A. I really don't recall. 2 Q. Then it goes on and says, "At the same 3 time, USAT's increase in problem assets and the 4 cost of carry on real estate investments which 5 generate no current income have resulted in a 6 substantial drain on the association's operating 7 income capacity. 8 Is that consistent with what you recall 9 in those days? 10 A. Yes. 11 Q. Finally, if we turn over to the next 12 page or the sentence that goes over, it says, 13 "Based on management's projections, USAT will 14 report a regulatory net loss of approximately 15 $18 million per quarter for the foreseeable 16 future." 17 Do you see that? 18 A. Yes, I do. 19 Q. Is that consistent with your 20 recollection? 21 A. Well, I wouldn't have recollected. If 22 you had asked me without looking at this, no, I 20880 1 wouldn't. 2 Q. But you do recollect today that at that 3 point in time, you were continuing to generate net 4 losses for the foreseeable future? 5 A. Yes, I think that's a fair statement. 6 Q. You just wouldn't recall the magnitude? 7 A. Yeah. 8 Q. Then it says, "Obviously, with this 9 scenario, USAT will fall below minimum regulatory 10 net worth at some point in the near future." 11 Do you recall that? 12 A. Yes. 13 Q. Is that consistent with your 14 recollection as stated there? 15 A. Yes. 16 Q. So that by May of 1987, you were aware 17 that USAT was losing substantial amounts of money 18 and that within a short time or within the 19 foreseeable future, it would be going below its 20 minimum capital requirement; is that correct? 21 A. Yes. Sometime within the next -- well, 22 sometime -- we didn't think it was going to happen 20881 1 anytime in the immediate future; but within the 2 next 12 to 18 months, it would be likely. 3 Q. Well, did there come a point in time 4 when you received a memo from -- strike that. 5 Let's go back for a moment. During 6 this period of time, you were very much concerned, 7 were you not, with the question of whether USAT 8 was meeting its net worth requirements? 9 A. Yes. 10 Q. And, in fact, periodically, net worth 11 calculations were done at USAT in order to 12 ascertain how it was doing with respect to its 13 regulatory net worth requirement; isn't that 14 correct? 15 A. Yes. 16 Q. And how frequently were those reports 17 generated for you? 18 A. I don't recall whether they were 19 monthly or quarterly. 20 Q. And you were responsible for -- strike 21 that. 22 As the chief executive officer and the 20882 1 president, those reports were made available to 2 you, were they not? 3 A. Yes. 4 Q. And you were very much aware of the 5 condition of the institution in terms of its net 6 worth compliance, were you not? 7 A. Yes. 8 Q. Now, did there come a point in time 9 when it was brought to your attention by the 10 persons that you supervised that they believed 11 USAT had either failed or was about to fail its 12 minimum capital requirements? 13 A. Yes. 14 Q. And what point in time would that have 15 been, sir? 16 A. I would not have known without 17 reviewing documents recently; but having reviewed 18 those documents, it would have been the end of 19 1987. 20 Q. Take a look at what's been previously 21 marked as T8022, which is Tab 396, and tell me if 22 this is a document that you recently reviewed with 20883 1 respect to this subject of net worth failure. 2 A. Yes, it is. 3 Q. Okay. And it states in the first full 4 sentence there, "Based on current estimates, it 5 appears as if United will fail to meet its minimum 6 regulatory net worth at October 31, 1987." 7 Do you see that? 8 A. I'm sorry. 9 Q. It's the first sentence of the 10 document. 11 A. Yes, I see that. 12 Q. This was written by Arthur Berner, 13 correct? 14 A. Yes. 15 Q. Now, Mr. Berner, was he the individual 16 that prepared net worth calculations? 17 A. No. 18 Q. It would have been another individual? 19 A. Yes. 20 Q. Do you know why Mr. Berner was sending 21 you this letter? 22 A. I think he was concerned about our 20884 1 dipping below regulatory net worth and what the 2 implications would be if we did. 3 Q. And so, was the purpose of this memo to 4 advise you of the potential impact of a net worth 5 failure? 6 A. What could be the impact of a net worth 7 failure. 8 Q. And prior to receiving this memo, did 9 you understand that certain regulatory actions 10 could be taken in the instance that a net worth 11 failure were to occur? 12 A. Yes, I did. 13 Q. And generally, what was your 14 understanding at or about this point in time as to 15 what could occur with respect to a -- were a net 16 worth failure to occur? 17 A. Well, the things that could occur were 18 this list that he shows in here, reading from the 19 regulations. 20 Q. And in the event of such a net worth 21 failure, would -- if any of these actions that are 22 listed here were taken by the Bank Board, would 20885 1 they have impacted on the manner in which USAT was 2 conducting its business? 3 A. They could. 4 Q. Well, if United could no longer -- 5 turning to the second page -- 6 A. If you look at the first item, it says 7 that these include -- if we were able to increase 8 our regulatory capital, then all of these others 9 would be non-events. 10 Q. Okay. 11 A. And we had a number of things in the 12 hopper at this time trying to accomplish that. I 13 think in addition to the restructuring, we were 14 working on several different plans. One, we were 15 trying to get into what was going to be the 16 Southwest Plan. Another, we were trying to find a 17 way to raise a capital note. We looked at the 18 possibility of taking over some other 19 institutions. 20 Q. Now, you indicated that you were going 21 to try to raise a capital note. In fact, the 22 application to issue subdebt had been submitted to 20886 1 the Bank Board back in 1986, had it not? 2 A. Well, we were having additional talks 3 about trying to do that at this point in time as 4 well and even well into '88. 5 Q. Right. In 1986 when the application 6 was made, you were advised by Drexel Burnham 7 Lambert that they thought at that point in time it 8 might be possible to raise capital; is that 9 correct? 10 A. I don't recall. 11 Q. Do you recall that at that period of 12 time, Drexel said that, in effect, if MCO or 13 Federated were willing to purchase a portion of 14 the subdebt, that they thought it might be 15 possible to -- to issue subdebt at that point in 16 time? 17 A. I didn't recall the specifics. I just 18 knew that we were trying to do it. 19 Q. But you did not have any luck at that 20 point in time? 21 A. No. We were still trying to figure out 22 a way to do it at this point in time. Another was 20887 1 we were trying to figure out a way to get some 2 real estate from FADA and give back some 3 subordinated notes in exchange for capital. We 4 were looking at a lot of other possibilities at 5 that time. 6 Q. When you ascertained that there was 7 going to be a net worth failure, what was the 8 first thing or one of the first things that USAT 9 did? 10 A. I believe one of the first things that 11 we did was to file a forbearance application. 12 Q. And what is a forbearance application, 13 sir? 14 A. It's an application to the Federal Home 15 Loan Bank to ask them to waive any of these 16 requirements that they could establish; and in 17 that, you would provide a capital plan that, over 18 a period of time, would restore the capital of the 19 institution. 20 Q. And you wouldn't have considered filing 21 a forbearance application unless you believed that 22 you were failing your net worth, would you? 20888 1 A. That's correct. By the end of the 2 year, we were at that point. 3 Q. Okay. And do you recall that because 4 of your concern over the net worth failure, you 5 contacted the Federal Home Loan Bank Board to 6 apprise them of the condition of the institution? 7 A. I don't recall that, but -- 8 Q. Well, let me ask you to take a look at 9 what's been previously marked, I believe, as 10 Exhibit B1855. This is Tab 1682. It's a memo 11 from Arthur Berner to Charles Hurwitz, Barry 12 Munitz, Jenard Gross, and Mike Crow. And if I 13 didn't mention this, it's dated November 18th, 14 1987. 15 Did Mr. Berner periodically -- strike 16 that. 17 You testified a while back that 18 Mr. Berner took on some more responsibilities when 19 Jenard -- Gerald Williams left of interfacing or 20 being a liaison with the Federal Home Loan Bank of 21 Dallas. 22 Is that fair? 20889 1 A. Yes. 2 Q. I don't want to mischaracterize your 3 testimony. 4 A. That's correct. 5 Q. In that regard, did Mr. Berner 6 regularly meet with persons from the Federal Home 7 Loan Bank of Dallas regarding the institution and 8 its examination and other issues arising with 9 respect to USAT? 10 A. Yes, he did. 11 THE COURT: Mr. Rinaldi, we'll take a 12 short recess. 13 14 (Whereupon, a short break was taken 15 from 3:19 p.m. to 3:43 p.m.) 16 17 THE COURT: Be seated, please. We'll 18 be back on the record. 19 Mr. Rinaldi, you may continue. 20 Q. (BY MR. RINALDI) Mr. Gross, when we 21 broke, we were looking at Document B1855, which is 22 the memo from Mr. Berner to yourself. 20890 1 A. Is that it? 2 Q. No. Maybe I hadn't handed it up to you 3 yet. I'm sorry. 4 MR. NICKENS: Here it is. 5 MR. RINALDI: I'm sorry. Your Honor, 6 did I hand a copy up to the Court? 7 THE COURT: We have a copy. 8 MR. RINALDI: Okay. So, I did hand it 9 up. Apparently, it got misplaced here. 10 THE COURT: I'm showing it as having 11 been received on the 19th. 12 MR. NICKENS: It's Tab 1862. 13 MR. RINALDI: Okay. Then it's 1855 -- 14 1862 -- 15 MR. NICKENS: 1682. Excuse me. This 16 is catching. 17 MR. RINALDI: You have to keep these in 18 order or it throws us off. Thank you. 19 Q. (BY MR. RINALDI) Mr. Gross, would you 20 take a look at that memo and just -- is this 21 similar or the kind of memo that Mr. Berner would 22 prepare for yourself and the others -- 20891 1 Mr. Hurwitz, Mr. Gross, Mr. Munitz, and 2 Mr. Crow -- whenever he had conversations with the 3 regulators? 4 A. May I take a look at it? 5 Q. Sure. 6 A. (Witness reviews the document.) 7 Q. Mr. Gross, I only have a couple of 8 questions to ask you about the document; and 9 perhaps I can rephrase them. 10 When Mr. Berner had conversations with 11 the regulators about a matter relating to USAT, 12 was it his practice to circulate a memorandum 13 memorializing the conversation? 14 A. I think sometimes he did, and I think 15 sometimes he just dictated to the file. So, I 16 don't -- there was no set pattern. I'm not sure. 17 Some of it would go just to file, and some of it 18 would be to others. 19 Q. I, too, have seen some documents that 20 indicate to the file; but then usually at the end, 21 it indicates a CC to other individuals if it was 22 sent to that person. 20892 1 Do you recall that? 2 A. I don't recall that -- he did do some 3 of this, and he did do some of the other. Without 4 seeing the other, I can't refer to the CC. 5 Q. When Mr. Berner, however, spoke with 6 the regulators, did he frequently circulate a 7 memorandum of the kind that's exhibited in B1855 8 advising yourself and others of the contents of 9 those conversations? 10 A. Sometimes he did. 11 Q. And do you have any reason to believe 12 that you didn't receive a copy of B1855? 13 A. I do not. As I say, I don't recall it. 14 Q. Okay. Now, Paragraph 3 indicates that 15 Mr. Berner was sufficiently concerned about United 16 going below its minimum regulatory capital that he 17 brought the subject to the attention of the -- of 18 the regulators. And it indicates in the second 19 sentence there, "I told them as a public company, 20 we would be obligated to make a press announcement 21 and, therefore, we would like to have worked out 22 with the Dallas bank a forbearance program so that 20893 1 we can announce that at the same time." 2 Do you see that? 3 A. I do. 4 Q. Do you recall that when it came to your 5 attention as the CEO and president of USAT that 6 USAT was -- was likely to go below its minimum 7 regulatory capital, that you urged Mr. Berner to 8 bring the matter to the attention of the 9 regulators? 10 A. I don't recall. 11 Q. Okay. Now, as the CEO, was it your 12 desire that Mr. Berner keep the regulators 13 informed of matters pertaining to USAT on a 14 regular basis? 15 A. Yes. 16 Q. Now, directing your attention to 17 Paragraph 6 on the next page, it indicates "Neil 18 and I promised to keep the lines of communication 19 open and going both ways and that as he heard of 20 any additional problems or concern, he would let 21 me know so long as I let him know of any problems 22 at United." 20894 1 Do you see that? 2 A. Yes. 3 Q. As the CEO, was it your directive to 4 Mr. Berner that he should keep the lines of 5 communications open with the regulators? 6 A. Yes, it was. 7 Q. And was it also your desire that he 8 advise them of any problems that might arise with 9 respect to the institution? 10 A. Yes. 11 Q. And did you also expect that if any 12 changes were being made at the institution, that 13 that's something he would have brought to their 14 attention? 15 A. Could you give me an example of what 16 you're -- 17 Q. Well, if you're going to, for example, 18 incur or engage in a new type of investment, is 19 that the kind of thing that -- 20 A. I guess if it was the type of 21 investment we hadn't done before and it might be 22 something we had to get their approval of, I'm 20895 1 sure we would do it. 2 Q. At this point in time, though, USAT is 3 at or about to fail its minimum capital 4 requirement, is it not? 5 A. It's close. But, you know, again, 6 there's a lot of things out there we're trying to 7 do to keep from having it happen. 8 Q. I understand that, but none of those 9 things as yet have worked? 10 A. Right. 11 Q. As you recall when I showed you the 12 document earlier in May, you were projecting at 13 that point in time an 18-million-dollar per 14 quarter loss on a going-forward basis, correct? 15 A. Somebody was. I don't know that I was. 16 Q. Well -- 17 A. Mike Crow or whoever prepared that 18 report was projecting that, yes. 19 Q. And the person that prepared that 20 report would have been knowledgeable on those 21 matters, would they not? 22 A. You know, I assume they would, but I 20896 1 don't know who prepared it or anything at this 2 point in time. 3 Q. I guess the point I'm trying to make, 4 sir: You would have expected that to be the best 5 estimate then available as to the institution's 6 future operating losses, would you not? 7 A. Yes. 8 Q. Now, would you turn -- would you take a 9 look, then, at Exhibit B1885? 10 MR. RINALDI: Your Honor, I believe 11 this is a brand new exhibit. So, I'm handing a 12 copy up to the witness; and I'll hand two copies 13 up to the Court. 14 Q. (BY MR. RINALDI) Now, after Mr. Berner 15 contacted Mr. Twomey in November and advised him 16 of the net worth or the potential net worth 17 failure, do you recall whether Mr. Berner had 18 further communications with yourself and 19 Mr. Hurwitz and Mr. Munitz and Mr. Crow regarding 20 future communications with the Bank of Dallas? 21 A. I don't recall. 22 Q. Now, in Paragraph 2, he states in this 20897 1 memorandum -- do you recognize this memorandum? 2 A. I've seen it in the last week. I would 3 not have remembered seeing it. 4 Q. Okay. Do you have any reason to doubt 5 that that was provided to you by Mr. Berner as the 6 CEO and president of USAT at or about 7 December 9th, 1987? 8 A. No. 9 MR. RINALDI: Your Honor, I would move 10 the admission of B1885. 11 MR. BLANKENSTEIN: No objection, 12 Your Honor. 13 THE COURT: Received. 14 Q. (BY MR. RINALDI) Now, in the first full 15 paragraph at the top, it talks about the strategic 16 planning committee on December 6, 1987. 17 Do you see that? 18 A. Yes. 19 Q. What was the strategic planning 20 committee, sir? 21 A. That was a committee that met from time 22 to time to lay out the general direction of the -- 20898 1 the overall direction of the institution. 2 Q. And when you say "the institution," you 3 mean of USAT? 4 A. Yes. 5 Q. Okay. And who were the members of that 6 committee? 7 A. I don't recall. 8 Q. Did they include the individuals at the 9 top of the page that are listed under 2? 10 A. As I say, I would have to refer to a 11 list and see. I just don't know. 12 Q. Well, as you recall, was Barry Munitz a 13 member of the strategic planning committee? 14 A. Yes. 15 Q. How about Mike Crow? 16 A. Yes. 17 Q. And Mr. Berner, I take it? 18 A. Yes. 19 Q. And how about Mr. Hurwitz? 20 A. If Mr. Hurwitz was a member, I guess 21 this would have been at the UFG level. 22 Q. Were there more than one strategic 20899 1 planning committee? 2 A. I don't recall. 3 Q. Okay. Now, it indicates in the first 4 sentence that -- of the document, "We discussed 5 the need for enhancing our contacts with the major 6 executive personnel at the Federal Home Loan Bank 7 of Dallas." Then he goes on and says, "In this 8 connection, I would like to make the following 9 personal observations." 10 Do you see that? 11 A. Yes. 12 Q. Why was it important to maintain or 13 enhance USAT's contact with the major executive 14 personnel at the Federal Home Loan Bank of Dallas? 15 A. May I read this? 16 Q. Sure. 17 A. (Witness reviews the document.) Well, 18 the reason this is important is that they are 19 going to be making decisions in the near future 20 about the institutions that are going into the 21 Southwest Plan or whatever is going to evolve and 22 they had indicated that we were going to be one of 20900 1 the survivors. And so, it was important that we 2 maintain good close contact with them and let them 3 know what was going on and work with them. And 4 he's just -- looks to me like he's outlining 5 various ways of accomplishing this. 6 Q. And did you expect that Mr. Berner 7 would provide any relevant information that 8 might -- any information that might be relevant to 9 the Bank Board's decision with respect to the 10 Southwest Plan or any other kind of workout plans? 11 A. It would either be Mr. Berner or 12 Mr. Crow. 13 Q. And as the CEO, you felt that it was 14 important, did you not, to keep the Federal Home 15 Loan Bank Board apprised of relevant information 16 that might reflect upon USAT's eligibility to 17 participate in the Southwest Plan or any other 18 workout plans. 19 Is that fair? 20 A. Yes. 21 Q. Now -- and then directing your 22 attention to the Point No. 6 or Paragraph 6 on the 20901 1 last page, it says, "Finally, I believe it's 2 important for us to be up front with the 3 regulators as possible." I'm sorry. Strike that. 4 I read it badly. 5 "Finally, I believe it is important for 6 us to be as up front with the regulators as we can 7 possibly be. I think that they resent surprises; 8 and to the extent that we know of things coming 9 up, we should apprise them of these matters." 10 Do you see that, sir? 11 A. Yes, I do. 12 Q. And did you share Mr. Berner's views in 13 that regard? 14 A. Yes. 15 Q. And was it your expectation that 16 Mr. Berner would be as up front as possible with 17 the regulators? 18 A. Yes, it was. 19 Q. And did you further believe that he 20 would not create any surprises? 21 A. We were certainly trying to avoid any. 22 Q. Did you further believe that he would 20902 1 apprise them of any matters that might be of 2 surprise to them as soon as those matters came up? 3 A. Yes. 4 MR. VILLA: I object to the form of the 5 question. 6 THE COURT: It was a little awkwardly 7 worded. 8 MR. RINALDI: I'll reask the question. 9 Q. (BY MR. RINALDI) Was it your 10 expectation that Mr. Berner, to the extent that he 11 knew of things coming up, would apprise the 12 regulators of those matters? 13 A. I'm sorry. Would you say it one more 14 time? 15 Q. Was it your expectation as the CEO and 16 president of USAT that to the extent that 17 Mr. Berner learned of things that were coming up 18 that might be of interest to the regulators, that 19 he would apprise the regulators of those matters? 20 A. I think if they were significant, that 21 he should do so. 22 Q. When you say "significant," what do you 20903 1 mean by "significant"? 2 A. Well, the things that come to mind 3 would be any -- you know, anything of major impact 4 on the institution. 5 Q. And did you consider things that would 6 adversely impact the net worth of the institution 7 to be of significance to the regulators? 8 A. I think -- you know, I think the fact 9 that we thought -- we would possibly be going into 10 a negative net worth -- excuse me. Not a negative 11 net worth. Drop below -- drop below minimum net 12 worth requirement would be a significant item of 13 which he should apprise them. 14 Q. And if there were additional operating 15 expenses that were unanticipated, is that 16 something that -- that you would have expected 17 Mr. Berner to have brought to the attention of the 18 regulators? 19 A. I think it would depend on the 20 magnitude of those. 21 Q. Now, after you received Mr. Berner's 22 memo, did you have occasion to consider as part of 20904 1 the strategic planning committee whether USAT 2 should perhaps alter its existing operating 3 strategy? 4 A. I don't recall. 5 Q. Okay. Well, let me hand you a copy of 6 what's been marked as T8030. 7 MR. RINALDI: Now, this is a new 8 document, Your Honor. I'm handing two copies up 9 to the Court. 10 Q. (BY MR. RINALDI) It is a -- a document 11 entitled "notes"; and it bears your name at the 12 top, Mr. Gross? 13 A. I see that, yes, sir. 14 MR. BLANKENSTEIN: Mr. Rinaldi -- 15 Q. (BY MR. RINALDI) And it has the date of 16 November 30, 1987. 17 MR. BLANKENSTEIN: Mr. Rinaldi, could 18 you repeat the -- 19 MR. RINALDI: It's T8030. 20 Q. (BY MR. RINALDI) Now -- 21 MR. RINALDI: Do you want me to wait, 22 Paul? 20905 1 MR. BLANKENSTEIN: I don't seem to have 2 it. 3 4 (Discussion held off the record.) 5 6 Q. (BY MR. RINALDI) Now, did you prepare 7 this document, sir? 8 A. Yes. 9 Q. Okay. 10 MR. RINALDI: Your Honor, we move the 11 admission of T8030. 12 Q. (BY MR. RINALDI) Now -- 13 THE COURT: Just hold it a minute. 14 MR. BLANKENSTEIN: No objection. 15 THE COURT: Received. 16 Q. (BY MR. RINALDI) Now, in the -- on the 17 first page, it talks about general notes regarding 18 USAT strategy. 19 Do you see that? 20 A. Yes. 21 Q. And it talks about rethinking the basic 22 strategy. 20906 1 Do you see that? 2 A. I do. 3 Q. Was USAT rethinking at this point in 4 time its basic strategy it had pursued over the 5 past two years? 6 A. I don't recall. 7 Q. Okay. Now, turning your attention to 8 the second page of this document -- I really only 9 have one or two questions -- it talks about on the 10 second page a new strategy. If you go down to B, 11 it says, "Where are we?" 12 Do you see that? 13 A. I do. 14 Q. And Point No. 2 says, "below regulatory 15 net worth." 16 Was it your understanding, sir, that on 17 or about November 30th, 1987, USAT, so far as you 18 were concerned, had gone below its minimum net 19 worth? 20 A. I don't believe so. In fact, I don't 21 believe we actually determined we were below 22 regulatory net worth until sometime in March of 20907 1 '88. 2 Q. So, when you wrote this memorandum on 3 November 30th, you didn't believe what it said? 4 A. I was looking at the future. I wasn't 5 looking at that day. This is a new strategy for 6 the future. I am anticipating we are probably 7 going to go below. 8 Q. Item B says, "Where are we?" It's not 9 future tense. It's present tense. 10 A. It also says "a new strategy," which I 11 would think of as something for the future. 12 Q. Well, I understand the strategy is for 13 the future. Here we're talking present tense, 14 aren't we: "Where are we?" 15 A. I see that. 16 Q. Okay. So, my question to you is: As 17 the chief executive officer and the president of 18 United Savings Association of Texas, was it your 19 belief on November 30th, 1987, that USAT was below 20 its regulatory net worth? 21 A. I do not recall. 22 Q. If you do not recall, would this 20908 1 document then be the best evidence of what your 2 state of mind was on November the 30th, 1987, sir? 3 A. It may have been my state of mind that 4 day; but if it was, it turned out to be erroneous. 5 Q. So, are you telling me now that you 6 later determined after writing this memorandum 7 that, in fact, USAT was not below its minimum 8 capital requirement? 9 MR. BLANKENSTEIN: I'll object. That 10 mischaracterizes the testimony. I don't think he 11 testified -- he testified he thought -- that he 12 was speaking into the future, that he was 13 anticipating it dropping below regulatory net 14 worth. Now he's made it as a conclusion that 15 Mr. Gross has stated on the witness stand. That's 16 not what happened. That's not the testimony. 17 MR. RINALDI: Your Honor, I asked him 18 if he believed on November the 30th that they were 19 below their net worth. He said he did not recall. 20 I asked him whether this would be the best 21 evidence of what his state of mind was regarding 22 the question of whether they were below regulatory 20909 1 net worth at that point or not. That's where the 2 examination questioning was. 3 A. And then what I told you was that may 4 have been my state of mind on that day. I don't 5 recall. Regardless of whether it was or not, I'm 6 thinking in the future. I'm thinking we're going 7 to go below regulatory net worth. In fact, I 8 think it was March before we ascertained that we 9 were below regulatory net worth as of the 31st of 10 December. So, obviously, at that point in time, 11 that was not the case. 12 Q. (BY MR. RINALDI) So, it's your 13 testimony now that you did not learn until March 14 of 1988 that USAT had, in fact, failed its minimum 15 capital requirement? 16 A. As of December 31st, that's correct. 17 Q. Now, let me just ask you: How often 18 did you do these net worth calculations, sir? 19 A. I believe we did them monthly. 20 Q. Would it surprise you if, in fact, it 21 was done on a more frequent basis? 22 A. You know, it wouldn't surprise me. You 20910 1 know, you're asking me for events that occurred, 2 oh, a good 11 years ago. 3 Q. Well, sir, wasn't it a critical issue 4 in the life of USAT as to whether it had gone 5 below its net worth requirement? 6 A. You had showed me a document a few 7 minutes ago where Art Berner is writing a memo in 8 October saying he thought we were below regulatory 9 net worth; and a few days later, it turned out 10 that we weren't. You know, the assumption is it's 11 going to happen somewhere along the line; and 12 nobody knows when it's going to happen. 13 Q. You said after Art Berner wrote the 14 memo, there was a document that indicated you had 15 not gone below the net worth. 16 What were you making reference to? 17 A. In the last week, I've looked at about 18 10,000 documents; and one of them happened to be 19 one that -- that showed that we still had positive 20 net worth on October 31st. 21 Q. Oh. Well, then perhaps maybe I can 22 help you with that. 20911 1 Are you making reference to the third 2 quarter financial statements that came out on 3 October 31st, 1987? 4 A. I don't recall. It seems to me it was 5 something -- I thought it was from Mike Crow, but 6 I don't recall offhand. 7 Q. Okay. All right. But is it fair to 8 say, sir, that USAT knew to a certainty in October 9 of 1987 that they were either failing or about to 10 fail their net worth and it was just a question of 11 time? 12 A. Well, it didn't have to be a question 13 of time. We could get one of these other things 14 to happen. This is the whole concept of trying to 15 be the last kid on the block because we know we've 16 been told we're going to be one of the surviving 17 institutions. So, it's a matter of when something 18 happens as to whether we're going to fail or we're 19 not going to fail. If we can get one of these 20 infusions, be it a FADA infusion, be it a group of 21 small institutions that -- they mentioned we might 22 pick up some in San Antonio or Austin or other 20912 1 places. There's all sorts of possibilities. 2 Q. Uh-huh. Now, you recall you said you 3 thought on October 31st, 1987, that, in fact, you 4 weren't failing your net worth. These are the 5 third quarter financial results for USAT. 6 Do you see that? I think if you turn 7 to the second page -- 8 MR. BLANKENSTEIN: What is the exhibit 9 number first? 10 MR. RINALDI: I'm sorry. This is 11 T8024, Tab 398. 12 Q. (BY MR. RINALDI) And take a look at the 13 second page of that document. 14 Do you see that? 15 A. I do. 16 Q. There's a regulatory net worth 17 calculation, correct? 18 A. Yes. 19 Q. And it indicates that on October 31st, 20 1987, by the calculation of USAT, you are still 21 $12 million or almost $13 million above your net 22 worth requirement, correct? 20913 1 A. Correct. 2 Q. Then I draw your attention to 3 Footnote 2. It indicates that -- that there is 4 still pending a dispute with the regulators over 5 $94.7 million in assets. 6 Do you see that? 7 A. Yes. 8 Q. And one of those disputed assets is the 9 Couch loan, is it not? 10 A. Yes. 11 Q. And would you agree with me that if the 12 dispute were resolved adversely to USAT, it would 13 require an additional $18.9 million in capital 14 write down? 15 Do you see that? It's Paragraph 2. 16 A. Paragraph 2? I do see that. 17 Q. So that if that dispute were resolved 18 adversely to USAT, USAT on October 31st would have 19 failed its minimum capital requirement, correct? 20 A. Would have. But that hadn't been 21 resolved. We had received no notification from 22 the Dallas Federal Home Loan Bank that we had 20914 1 failed it. 2 Q. In fact, ultimately, that was resolved 3 adversely to USAT, was it not? 4 MR. VILLA: Your Honor, it's not clear 5 to me what he's talking about. There are four 6 separate issues that compose that amount. Is he 7 referring to all of those? 8 MR. RINALDI: I asked him if that 9 concluded the Couch Mortgage. 10 Q. (BY MR. RINALDI) Do you know whether 11 that $18.9 million was resolved adversely to USAT? 12 A. I don't recall. 13 Q. Then it indicates in Paragraph 3, 14 "Included in the net worth is $13.2 million of 15 general reserves as originally determined by the 16 regulators which they now believe might be 17 specific reserves. Actual net worth would be 18 decreased by this amount." 19 Do you see that? 20 A. I see that. 21 Q. So, is it fair to say that if the third 22 point was resolved adversely to USAT, that also 20915 1 would have put them below their minimum capital 2 requirement? 3 A. That's the way it would appear. 4 Q. Now, the third quarter financial 5 results come after three-fourths of the year are 6 finished, correct? 7 A. Yes. 8 Q. And there is still a quarter yet to go; 9 is that correct? 10 A. Well, this is -- I'm sorry. No. This 11 is ten months. 12 Q. Okay. Ten months. So, there is still 13 two months left to go? 14 A. Yes. 15 Q. At this point in time, you were 16 projecting $18 million in operating losses per 17 month, were you not? 18 MR. VILLA: I believe you misspoke. 19 You mean per quarter? 20 MR. RINALDI: Per quarter, yes. 21 Q. (BY MR. RINALDI) Do you remember the 22 memo I showed you earlier where USAT wrote to the 20916 1 regulators and said, "For the foreseeable future, 2 we will be projecting $18 million in losses per 3 quarter"? 4 A. Yes. 5 Q. So that at this point in time, if your 6 projections were accurate, USAT by the end of the 7 year would have had essentially no regulatory net 8 worth positive -- 9 A. They would have had regulatory net 10 worth. 11 Q. I'm sorry. Over and above their 12 minimum capital requirement. 13 A. If those projections were correct -- 14 MR. BLANKENSTEIN: I think if the 15 projections are correct, it would be almost a 16 million dollars in excess net worth. 17 MR. RINALDI: I think 997,000, yes. 18 A. I'm sorry. I'm lost. 19 Q. (BY MR. RINALDI) Well, sir, do you 20 recall that you were projecting $18 million per -- 21 per -- per quarter in losses for the foreseeable 22 future? 20917 1 A. The memo was projecting that, yes. 2 Q. So, that would have been about 3 $6 million in losses per month, correct? 4 A. Yes, but they are obviously wrong. For 5 the year to date, we've only incurred 10 million. 6 Well, I'm sorry. That was per -- that's my 7 mistake. We had incurred that. So, it's likely 8 that we would go below regulatory net worth around 9 the end of the year unless something were to 10 happen that would provide some infusion of 11 capital. 12 Q. Okay. Sir, do you recall at that point 13 in time that because of the financial condition of 14 USAT, it was determined that salary increases for 15 the end of 1987 would be deferred? 16 A. I don't think that's -- I don't think 17 that's correct. I think if I remember correctly, 18 everybody at that time was being reviewed on the 19 anniversary date of their employment. And I think 20 what the decision was was that we would defer 21 that -- defer the evaluations -- try to get them 22 all on one day of the year instead of doing one 20918 1 January 15th and one January 20th and one 2 February 12th. You do all of them at the same 3 time. And I think it was deferred out to February 4 with the caveat that those who got that deferral 5 would then be adjusted to offset that delay. 6 Q. Is that something that you recall 7 sitting here today or something that you were 8 apprised of at or about the time of the end of 9 1987? 10 A. It's something I've seen in the last 11 week. 12 Q. Did someone point that out to you? 13 A. As I say, I've been reading lots of 14 documents. 15 Q. Mr. Gross, let me ask you this: In 16 fact, wasn't the real purpose for deferring 17 salaries to effectuate a savings because of the 18 impending net worth failure? 19 A. No. 20 Q. You've read the documents. Isn't that 21 what the documents say? 22 A. I don't think so. Could you show it to 20919 1 me? 2 Q. Sure. Take a look at Exhibit 8167, 3 Tab 1369. Is that the document that you were 4 shown? 5 A. (Witness reviews the document.) 6 Q. Is this the document you were making 7 reference to, sir? 8 A. I'm still reading it. (Witness reviews 9 the document.) It does say that in it. 10 Q. It does say what? 11 A. It does say that this will result in 12 reduced operating expenses for the first half of 13 1988. 14 Q. Does that refresh your recollection 15 that the purpose for deferring the salary 16 increases was to effectuate a reduction in 17 operating expenses for the first half of 1988? 18 A. That's what it says. 19 Q. Okay. And was one of the reasons that 20 you were deferring those operating expenses 21 because you were facing imminent net worth 22 failure? 20920 1 A. If we're referring about '88, I guess 2 we would assume, based on all the projections, 3 that probably would already have occurred. 4 Q. And -- now, look further down on the 5 second page of this document. It says at the 6 bottom of the page, the last paragraph -- 7 second-to-the-last paragraph, "Rest assured that 8 merit increases will be based on performance. 9 It's our objective to reward excellent performance 10 with excellent compensation and to penalize 11 mediocre performers through administration of the 12 salary budget." 13 Do you see that? 14 A. I do. 15 Q. Was that the operating philosophy of 16 USAT, to reward excellent performance and to 17 penalize mediocre performance? 18 A. Yes. 19 Q. Did you receive -- did you distribute a 20 copy of this memo? 21 A. I'm sure it was -- well, I -- I don't 22 have any idea. 20921 1 Q. It talks about distributing it to 2 department heads, and then it also further talks 3 about a copy of this being given -- it being 4 discussed with the employees or -- strike that. 5 I don't want to mischaracterize the 6 document. If you look at the second paragraph, I 7 believe it talks about -- 8 A. What this says is that Mike is sending 9 this to me for my signature, and I don't see my 10 signature on it. As I say, I don't recall the 11 document. It could or could not have gone out. 12 Q. Were the salaries deferred? Do you 13 recall? 14 A. I don't recall. 15 Q. You don't recall whether salary 16 increases were deferred at the end of 1988? 17 A. No, I don't. 18 Q. '87. I'm sorry. 19 A. I don't. 20 Q. Now, would you take a look at the -- 21 take a look at what's been previously marked as 22 T8027. This is the minutes of the compensation 20922 1 committee dated November the 10th, 1987. 2 Have you had a chance to look at that, 3 sir? 4 A. I haven't read it completely. 5 Q. I only have two questions or three 6 questions. 7 A. All right. 8 Q. First of all, it appears at the top of 9 the document -- 10 MR. BLANKENSTEIN: Mr. Rinaldi, do you 11 want him to read the document? 12 MR. RINALDI: Fine. He can read the 13 entire document. I have two questions to two 14 sections that I'll direct him to. If you would 15 like to direct him to other things -- I'm simply 16 trying to expedite this. 17 Q. (BY MR. RINALDI) Take your time to read 18 the document, sir. 19 A. (Witness reviews the document.) 20 THE COURT: Do you have a question, 21 Mr. Rinaldi? 22 MR. RINALDI: I do. I was simply 20923 1 deferring to the witness. 2 Q. (BY MR. RINALDI) Are you finished 3 reading it, sir? 4 A. Yes. 5 Q. I notice in the first full sentence, it 6 refers to -- second sentence -- "Also present were 7 Messrs. Gross, Munitz, and Berner." 8 As the chief executive officer and 9 president of USAT, did you attend meetings of the 10 compensation committee? 11 A. In earlier times, I had not. It looks 12 like at this one, I was present. 13 Q. Is it your recollection that in later 14 times, you did attend the compensation committee 15 meetings? 16 A. I think I did attend some others after 17 this. 18 Q. When you talk about earlier as opposed 19 to later, can we put a time frame on that? 20 A. I really can't. 21 Q. Okay. By the end of 1987, you were 22 beginning to attend the meetings? 20924 1 A. Yes. 2 Q. Is that fair? 3 A. That's fair. 4 Q. Okay. And I suppose that we can always 5 go back and look at the meetings because they will 6 note your presence? 7 A. Right. 8 Q. You were not a member of the 9 compensation committee, correct? 10 A. That's correct. 11 Q. Okay. Now, directing your attention to 12 the fourth paragraph down, it makes reference to 13 the discussion in the memo that I showed you a 14 moment ago about deferring salary increases for 15 all persons earning over 35,000. 16 Do you see that? 17 A. Yes, I do. 18 Q. So, does that refresh your recollection 19 that ultimately, consistent with the memo that -- 20 that had been submitted to you by Mr. Crow, which 21 is T8167, that ultimately the compensation 22 committee adopted the recommendation that salary 20925 1 increases be deferred? 2 A. I don't recall it, but I don't disagree 3 with it. It probably occurred. 4 Q. Okay. Now, the next paragraph says, 5 "The committee then reviewed proposed bonuses for 6 key employees." It says, "A schedule showing 7 recommended bonuses was presented to the 8 committee." 9 Do you see that? 10 A. I do. 11 Q. Now, how did the management of USAT 12 recommend bonuses to the compensation committee? 13 A. Usually, this was done with, I believe, 14 Dr. Munitz in consultation with Mr. Whatley. 15 Q. And did Dr. Munitz prepare a schedule 16 of recommended bonuses? 17 A. Yes. And he may have -- you know, he 18 would get input, I think, from the various 19 officers with regard to the people under them, I 20 believe. 21 Q. So, in other words, Dr. Munitz would 22 have come to you and asked your input on 20926 1 Mr. Berner? 2 A. Typically, what he would do would be to 3 prepare a schedule and then show me what he had in 4 mind and see if I had any -- if there was anything 5 with which I disagreed. 6 Q. And take a look at what's at 7 Exhibit T8026. Sir, then as you go further down 8 the page, it indicates that -- 9 MR. VILLA: Excuse me. Which exhibit 10 are you on? 11 MR. RINALDI: I'm on T8027. I was 12 going to ask him to look at another exhibit, but 13 it appears -- this is Exhibit 8026. I don't know 14 if this was put on the pull list. If you -- this 15 is the list of bonuses that were -- 16 MR. BLANKENSTEIN: We have copies of 17 it. Thank you. 18 MR. VILLA: Tab 410. 19 MR. RINALDI: Is it Tab 410? 20 MR. VILLA: Yes, sir. 21 Q. (BY MR. RINALDI) Let me ask you to take 22 a look at Exhibit 8026. Now, you indicated a 20927 1 moment ago that Mr. Munitz, you see, would prepare 2 a list of bonus recommendations. 3 Is this the kind of list that you were 4 making reference to? 5 A. Yes, it is. 6 Q. Okay. And if you look at the second 7 page, it says, "The official list from Barry 8 Munitz, 12/10/87." 9 MR. BLANKENSTEIN: Excuse me. We don't 10 have a second page on our exhibit. 11 MR. RINALDI: It's Tab 410. It's got 12 handwriting on the side. It's the same exhibit. 13 Q. (BY MR. RINALDI) Do you recognize the 14 handwriting there, sir? 15 A. No, sir. 16 Q. Okay. And so, if I get this straight, 17 Mr. Munitz would prepare a recommendation -- 18 A. Yes. 19 Q. -- of proposed -- of bonuses? 20 A. Yes. 21 Q. And those would then be circulated to 22 supervisors? 20928 1 A. Yes. 2 Q. Including yourself? 3 A. Yes. 4 Q. For your comment? 5 A. That's correct. 6 Q. Okay. And so, you would have received 7 a copy of the -- the bonus projections that are 8 set out on T8026. 9 Do you see that? 10 A. It may have been Mr. Munitz in 11 conjunction with Mr. Whatley. 12 Q. Okay. And then, ultimately, it has 13 Mr. Whatley's signature at the bottom, correct? 14 A. Yes. 15 Q. Okay. Now, if you look back at T8027 16 which is the compensation committee minutes, it 17 indicates that the -- on T8027 -- do you have 18 T8027? 19 A. Yes, I do. 20 Q. It's the minutes. I believe it 21 indicates in the minutes that the -- the bonus 22 schedule that was presented to the committee was 20929 1 approved. 2 Do you see that? 3 A. Yes, I do. 4 Q. Okay. And then if you look at the last 5 paragraph, it says, "It was noted that such 6 bonuses would not be paid until January 1988 and, 7 therefore, no announcement would be made of the 8 bonuses so that in the event there were 9 intervening circumstances, they could be taken 10 into consideration at a further meeting." 11 Do you see that, sir? 12 A. I do. 13 Q. Do you recall what intervening 14 circumstances the compensation committee wanted to 15 consider before paying the bonuses? 16 A. I do not. 17 Q. Was the compensation committee apprised 18 of the imminent net worth failure at the time that 19 it approved the bonus schedule? 20 A. They were certainly aware of the 21 condition of the institution at that time. 22 Q. And as the chief executive officer and 20930 1 the president of the institution, you would have 2 apprised them of that circumstance, would you not? 3 A. If I hadn't, Mike Crow would have. But 4 they would have been made aware of it. 5 Q. And that's because that would have been 6 an important consideration that they would have to 7 take into account in determining whether to grant 8 bonuses or not? 9 A. The proper statement is they would have 10 been apprised of our condition. I'm sure they 11 were apprised of our concern of net worth failure. 12 As to whether it was imminent or whatever, you 13 know, that's -- 14 Q. Well -- but isn't that a factor that 15 you as the chief executive officer would have 16 brought to their attention? 17 A. I think it had been brought to their 18 attention we would probably have a net worth 19 failure, especially since they were aware of the 20 fact even as early as June of 1986 that the 21 examiners had thought we had one. And I believe 22 the board subsequently had a meeting with the 20931 1 Federal Home Loan Bank of Dallas with regard to 2 that, if I remember correctly. 3 Q. Now, let me give you a copy of what's 4 been previously marked as T8028, which is the 5 board minutes at which the same salary increases 6 and bonuses are considered. I'll put that in 7 front of you. 8 Take a moment to look at it, sir. 9 A. (Witness reviews the document.) 10 MR. RINALDI: This is Tab 397. 11 A. All right. 12 Q. (BY MR. RINALDI) Now, directing your 13 attention to the first page of that document, 14 these are the minutes dated November the 10th, 15 1987. These are approximately a week and a half 16 or so after Mr. Berner had sent you his letter 17 advising you of a potential net worth failure. 18 Do you see that, the date? 19 A. The date, yes. 20 Q. And in the first full paragraph, it 21 indicates that you were acting as chairman of the 22 meeting; and Mr. Berner took the notes or the note 20932 1 of the minutes. Above that, it says, "Also 2 present were Mr. Hurwitz and Mr. Michael Crow." 3 Was it Mr. Hurwitz' practice to attend 4 meetings of United Savings Association of Texas' 5 board? 6 A. He obviously was at this one; and I 7 believe in some instances, we did have joint 8 meetings of both boards. So, I guess at those 9 meetings, he would certainly be present. 10 Q. Does this indicate it was a joint 11 meeting, sir? 12 A. You really can't tell from this. 13 Q. How does one tell whether you have a 14 joint or a separate meeting? 15 A. I guess if we looked at the meetings of 16 UFGI and see if they were dated the same day, it 17 would be likely we did have a joint meeting. 18 MR. NICKENS: Your Honor, the document 19 says the meeting was held in conjunction with a 20 meeting of United Financial Group, Inc. board of 21 directors, the second sentence. 22 MR. RINALDI: It does not say, though, 20933 1 it was a joint meeting; and I was going to ask him 2 whether they were held seriatim or whether they 3 were held together. 4 A. I don't know what "seriatim" means. 5 Q. (BY MR. RINALDI) One after the other, 6 sir. 7 A. I don't recall. 8 Q. All I'm asking -- I don't want to 9 confuse you on this one. Normally, would you 10 consider UFG matters and then adjourn the meeting 11 and then the people who were not directors of USAT 12 would leave and then USAT's board would meet; or 13 would you just meet at one big meeting? 14 A. We would meet at one big meeting. 15 Q. Okay. That's fine. 16 Now -- and that would explain why 17 Mr. Hurwitz was at this meeting, because he was 18 there for the UFG meeting. Right? 19 A. That would be correct. 20 Q. Okay. Then let's turn to the second 21 page of the document, and you'll see that the 22 board unanimously approves the deferral of the 20934 1 salaries. 2 Do you see that? It's about the third 3 full paragraph -- I mean the second full paragraph 4 after the "resolved" clause. 5 A. Yes, I see that. 6 Q. Okay. And then immediately following 7 that, it says, "Mr. Whatley then reviewed the 8 compensation committee's action on proposed 9 bonuses. He noted that the bonuses would be going 10 to approximately 70 people and that the total 11 amount would be less than $2 million." 12 Do you see that? 13 A. I do. 14 Q. Now, sir, if you were deferring the 15 salary increases in order to reduce the operating 16 costs at the end of 1987, why was it that you were 17 at the same time granting bonuses which would 18 increase the operating costs by some $2 million? 19 A. There were two reasons. Number one was 20 because the bonus was for 1987 work; and a lot of 21 these people, as I said, had taken on additional 22 loads during 1987. 20935 1 The second reason was because the -- 2 excuse me a second. A second reason was because 3 United's policy was to pay lesser salary than 4 typical in the industry and bigger bonuses which 5 we felt was a better motivational tool. As a 6 result of that, you were paying these people what 7 they would be fairly entitled to in the 8 marketplace. 9 In addition to that, it was 10 important -- we had had several people leave 11 during the year. It was important to keep our 12 executive personnel in place, especially as we 13 tried to get into the Southwest Plan or something 14 like that. 15 One of the strong points we had was the 16 management team, and we wanted to try to keep them 17 in place and not have additional defections. 18 Q. Sir, you made a couple of references to 19 USAT paying below-market salaries and, therefore, 20 that they had to increase their -- and I don't 21 want to misstate what you said. 22 Do you recall that you said it was your 20936 1 operating philosophy to pay lower salaries and 2 then give bonuses? 3 A. Bigger bonuses. Lower salaries than 4 typical savings and loans and bigger bonuses. 5 Q. While you were the chief executive 6 officer and the president of the institution and 7 prior to the net worth failure on December 31st, 8 1988, did USAT ever hire a consultant or have 9 anyone do a market study to determine levels of 10 compensation for similarly-situated people at 11 comparable institutions in the Houston area? 12 A. Yes. 13 Q. And who did that, sir? 14 MR. VILLA: Your Honor, did he mean 15 December 31st, 1987? 16 MR. RINALDI: Yes. 17 MR. VILLA: Thank you. 18 A. Dr. Munitz had, on several occasions, 19 had such studies done. 20 Q. (BY MR. RINALDI) Who performed those 21 studies, sir? 22 A. I don't recall whether it was Hewitt or 20937 1 somebody else, but there were some prepared. 2 Q. Let me see if I've got this straight. 3 We're talking about prior to the end of 1987, sir. 4 A. That's correct. Prior to the end of 5 1987. 6 Q. And have you ever -- did you see any of 7 those studies in the preparation for your 8 testimony here today? 9 A. No. 10 Q. Have you ever seen one of those 11 studies, or were you just told about them by 12 Dr. Munitz? 13 A. I was told about them. I don't think I 14 ever specifically saw one. 15 Q. And you indicated that perhaps it was 16 done by Hewitt? 17 A. I believe so. It may have been done by 18 another firm, but I think they -- 19 Q. Are you perhaps confusing this with the 20 studies that were done in 1988 by Hewitt & 21 Associates and Wyatt & Company? 22 A. No, I don't believe so. 20938 1 Q. Well, I don't want to -- you know, I 2 don't want to cause you to give an answer that may 3 be incorrect because of the fact that you've seen 4 some documents. 5 But you're telling me now that you've 6 never seen such a study? 7 A. I don't recall seeing a study. I do 8 recall the institution having some done. 9 Q. And you recall that it was reported to 10 you by Barry Munitz? 11 A. Yes. 12 Q. And do you know when that study was 13 conducted? 14 A. I don't recall. 15 Q. You don't recall for what period it 16 covered? 17 A. No. 18 Q. Now, sir, did you vote for the -- for 19 the approval of the bonuses? 20 A. Well, typically -- actually, the -- 21 Q. This is on November 10th, 1987. It 22 indicates at the bottom that -- does it indicate 20939 1 that the -- yeah. It says, "The action of the 2 compensation committee was unanimously approved by 3 the board." 4 Do you see that? 5 A. I do. 6 Q. Okay. Does that mean that you voted to 7 approve the bonuses that had been recommended by 8 the compensation committee? 9 A. When I chaired the meeting, it was not 10 formally my practice to vote. It's quite possible 11 that I did. 12 Q. When I read through these minutes and 13 it says "unanimous approval," that means everybody 14 but the chairman voted? 15 A. It's possible, but it was not my 16 practice to consistently vote during the meeting. 17 Q. Did you vote at this meeting? 18 A. I don't recall. As I say, it's 19 possible I did. 20 Q. Were you aware that USAT had a 21 conflicts of interest policy? 22 A. Yes, I was. 20940 1 Q. And were you aware that that policy 2 prohibited you from engaging in any vote from 3 which you might receive a personal financial 4 benefit? 5 A. Right offhand, I don't recall. 6 Q. Let me give you a copy -- 7 THE COURT: Mr. Rinaldi, we'll adjourn 8 until 9:00 tomorrow. 9 10 (Whereupon at 4:42 p.m. 11 the proceedings were recessed.) 12 . 13 . 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 20941 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 25th 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 . 20942 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 25th 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