20943 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 26, 1998 22 20944 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 20945 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 20946 1 2 INDEX OF PROCEEDINGS 3 Page 4 JENARD GROSS 5 Continued Examination by Mr. Rinaldi....20947 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 20947 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:00 a.m.) 3 THE COURT: Be seated, please. We'll 4 be back on the record. 5 Mr. Rinaldi, you may continue with your 6 examination. 7 MR. RINALDI: Yes. 8 9 CONTINUED EXAMINATION 10 11 Q. (BY MR. RINALDI) Good morning, 12 Mr. Gross. 13 A. Good morning. 14 Q. You said something during your 15 testimony yesterday that I thought it might be 16 helpful to follow up on. 17 I believe in response to one of my 18 questions, you made reference to the fact that 19 United Savings Association wanted to be one of the 20 surviving institutions or words to that effect. 21 Do you recall that? 22 A. Yes, sir. 20948 1 Q. What were you referring to there? 2 A. I was referring to the fact that during 3 that period of time, the savings and loan industry 4 was going through -- and I guess this goes back to 5 the '87-'88 era. 6 The savings and loan industry was going 7 through a very trying time. A lot of institutions 8 were failing. And so, you know, the regulators 9 were working with any number of plans to bring 10 institutions together, to take ones that were -- 11 that had already failed and blend them into one 12 that hadn't failed. And we were trying to get 13 in -- there were several false starts, half a 14 dozen different names, all sorts of programs to 15 try to prop up the capital. 16 And according to some of the notes or 17 some of the conversations we had had with the 18 regulators at that time, they had indicated that 19 we would be one of the surviving institutions. 20 Q. Do you recall, had there been a number 21 of institutions that had failed by the end of 22 1987? 20949 1 A. Yes, there had. 2 Q. And in your view, was the S&L industry 3 in shambles? 4 A. That's probably a fair statement. 5 Q. Okay. And I notice, if you take a look 6 at the document in front of you, 8030, you make 7 reference to the condition of the industry on the 8 second page under Paragraph A2. This is 9 Exhibit T8030. It's a new exhibit; so, I'm not 10 sure what the new tab number is. 11 Do you see there on the second page 12 under A -- 13 A. Yes, I do. 14 Q. -- 2? It talks about the state of the 15 industry in shambles? 16 A. Yes. 17 Q. Was there substantial negative net 18 worth in the industry at that point in time, sir? 19 A. Yes, sir. 20 Q. And here, it says $5 billion. That was 21 something you were aware of at the time? 22 A. This was -- this came from one of the 20950 1 reports. I'm not sure whether that was 2 5 billion -- well, I don't know whether it was 3 5 billion regulatory or 5 billion tangible net 4 worth, but that was a number that was used in one 5 of those studies. 6 Q. Then you make reference to branches. 7 "1800 branches. Need 650." 8 What does that refer to, sir? 9 A. That was also a study at that time 10 that -- I guess it was published, and I don't 11 recall where it was published. But it indicated 12 that there were 1800 branches in the state and 13 that probably 650 would be adequate for the 14 gathering of deposits in the state. 15 Q. So, it says, "Banks in desperate shape 16 likely to be absorbed and shrunk." 17 What is that referring to? 18 A. That's also referring to the same -- 19 the entire finance industry in the state was going 20 through a situation, and it's -- what that's 21 referring to is that a lot of the banks were also 22 either failing or on the verge of it. And I can't 20951 1 recall -- I do recall that eventually out of the 2 top ten bank holding companies, only one survived 3 in Texas. Seven failed and two were merged out. 4 But the whole -- you know, it was going on 5 everywhere. That's what I was referring to. 6 Q. Was Houston worse than other areas at 7 this point in time? 8 A. Yes. 9 Q. And that was a result of declines in 10 oil prices that had occurred over the past five or 11 six years prior to '87? 12 A. Yes. 13 Q. And had there been more failures in 14 Houston that in other places prior to 1987? 15 A. I don't recall. 16 Q. Now, yesterday, we were taking a look 17 at the minutes of the November 10th meeting of the 18 board where the bonuses were approved by the board 19 of USAT. 20 Do you recall that? 21 A. Yes, I do. 22 Q. And I had asked you whether you had 20952 1 voted for the -- voted first to defer all salary 2 increases until July 1st, 1988, and secondly 3 whether you had voted to approve the bonuses of 4 approximately $2 million that were mentioned in 5 the minutes of the November 10th, 1987 board 6 meeting of USAT. 7 Do you recall that? 8 A. Yes, I do. 9 Q. And I pointed to the fact that the 10 action of the compensation committee was 11 unanimously approved by the board. 12 Do you recall that, sir? 13 A. Yes, I do. 14 Q. Okay. And you indicated to me that 15 sometimes as the chairman, you didn't vote on 16 matters, correct? 17 A. That's correct. 18 Q. You didn't mean to suggest that you 19 didn't vote on this matter? 20 A. I don't recall. I certainly -- I'm not 21 trying to make an issue of whether I did or 22 didn't. You know, I could have. And if I didn't, 20953 1 I didn't. If I did, I did. 2 Q. Well, you were a member of the board as 3 the chairman, were you not? 4 A. That is correct. 5 Q. So, if Mr. Berner put down in the 6 minutes that there was unanimous approval, 7 wouldn't that include all the members of the 8 board, including the chairman? 9 A. I guess it does. You know, I'm not -- 10 I'm not interested in, you know, refuting the 11 issue. 12 Q. Okay. Now, let me ask you this. 13 Certainly, a unanimous approval would have 14 included Barry Munitz, wouldn't it? Was he on the 15 board of USAT at this point? 16 A. If he was present, it would include 17 him. Could I see the -- 18 Q. Okay. 19 A. I don't know who was present and who 20 wasn't. 21 Q. It indicates that all members of the 22 board were present with the exception of 20954 1 Dr. George Kozmetsky. 2 A. Okay. Then he would have been present. 3 He would have voted. 4 Q. So, he would have voted and approved 5 it, as well? 6 A. Yes. 7 Q. Do you recall what the size of the 8 bonuses were that you and Mr. Munitz received as a 9 result of the unanimous approval of the bonus 10 program on November 10th, 1987? 11 A. I do not, offhand. 12 Q. Would you take a look at the next 13 document in your pile, which is Tab 410, and it's 14 T8026. 15 A. Okay. 16 Q. And if you'd turn to the second page of 17 that document, it has the signature of Mr. Whatley 18 at the bottom; and it indicates that you received 19 a 235,000-dollar bonus. And then I notice 20 handwritten over on the side that it indicates 21 your salary was 291,000 -- 291.7K. 22 Was that, to the best of your 20955 1 recollection, your salary at or about this point 2 in time: $291,000? 3 A. I didn't think it was that much. 4 Q. Well, do you remember yesterday I 5 showed you that on January of 1987, your salary 6 was $250,000 and then you would have received a 7 16 percent raise which was an additional $40,000 8 that brought you up to 290? 9 A. Okay. You're right. Okay. 10 Q. So, by the end of 1987, you were still 11 earning approximately $290,000 annually; is that 12 correct? 13 A. That appears to be correct. 14 Q. Okay. And so, the bonus then would 15 have represented 80 percent of your salary; is 16 that correct? 17 A. Yes. 18 Q. Okay. And then it goes down, and I see 19 that Mr. Munitz is down here and he received a 20 65 percent bonus in the amount of $156,000. 21 Do you see that? 22 A. Yes, I do. 20956 1 Q. Okay. And is this, to the best of your 2 knowledge, the official approval by the 3 compensation committee of the bonuses that were 4 granted? 5 A. I don't know if this one is or the page 6 before it. I don't know which one. 7 Q. Well, the second one seems to be a 8 slight modification of the one before it. 9 A. I couldn't tell from looking at this 10 which is which. 11 Q. Okay. 12 A. I know -- I don't know if this first 13 one -- this is the one behind the rough draft or 14 whatever. 15 Q. But in any case, the bonus that you 16 purportedly received and Mr. Munitz received are 17 the same on either page, correct? 18 A. Yes, they are. 19 Q. Okay. And did any intervening events 20 occur or any intervening circumstances occur prior 21 to the end of the year that caused the bonus 22 schedule that was -- that you testified was 20957 1 recommended by Mr. Munitz and approved by 2 Mr. Whatley? 3 A. I don't recall. 4 Q. It didn't change, to your knowledge? 5 A. To the best of my knowledge. I'm sure 6 there's something that shows what I got paid and I 7 assume that's what I got paid, but I can't -- I'm 8 not -- without seeing the thing, I wouldn't be 9 able to, you know, say it. 10 Q. Now, sir, it indicates also here that 11 you received a payment of interest. 12 Do you recall that? See, it says 13 "includes interest, 68K"? 14 A. Yes. 15 Q. Okay. And so, that would have been the 16 interest on the note that you owed to UFG? 17 A. Yes. 18 Q. Okay. Now -- and was the purpose of 19 this bonus to reward you for your performance over 20 the previous 12 months? 21 A. Yes. 22 Q. Okay. Now, let's take a look at 20958 1 Exhibit 8033, and this is Tab No. 402. This is 2 United Financial Group's annual report, and we can 3 take a look and see what the performance had been 4 of UFG on which your salary -- or your bonus was 5 predicated. 6 Do you have that in front of you, sir? 7 A. I do. 8 Q. Now, if you turn to the third page or 9 the second page -- this is a two-sided document -- 10 there is a management letter. 11 Do you see that? 12 A. Yes, I do. 13 Q. And I notice at the end of that letter, 14 there is -- it appears to be your signature and 15 your name; is that correct? 16 A. Yes. 17 Q. Did you prepare the management letter? 18 A. No, I did not. 19 Q. Did you review the contents of the 20 management letter for completeness? 21 A. I assume I did. 22 Q. Okay. And that is your signature that 20959 1 appears at the end? 2 A. It is. 3 Q. And you wouldn't have signed the 4 document if you didn't agree with the contents, 5 would you? 6 A. That's correct. 7 Q. Okay. Now, in connection with the 8 annual reporting of UFGI and their 10Ks, did you 9 review the contents of the 10K to determine its 10 completeness? 11 A. I looked at it. I did not review it to 12 determine its completeness. We would have relied 13 upon the auditors and the legal people to do that. 14 Q. Okay. But you did, as chairman of the 15 board and president and CEO of UFGI, review the 16 annual report, did you not? 17 A. Yes, I did. 18 Q. And it indicates here that there had 19 been a net loss -- this is on the second page of 20 the document. 21 A. Of the management letter office. 22 Q. Yes. It's on the facing page, and it's 20960 1 also in the management letter -- that UFGI had 2 reported a loss of approximately $118 million or 3 $14.53 per share. 4 Do you see that? 5 A. Yes, I do. 6 Q. As the chief executive officer, was 7 that an alarming figure for you? 8 A. Yes, it was. 9 Q. Did you have serious concerns at this 10 point about the continued viability of UFGI? 11 A. Let's see. This is written when? This 12 is -- 13 Q. Well, I believe the final date of this 14 document would have been March the 28th, 1988, 15 which appears on Page 68, I believe. 16 A. We were concerned about the viability 17 of UFGI at that time. 18 Q. And at this point in time, not only had 19 you suffered over $118 million in losses in 1987. 20 Were you also projecting substantial 21 losses into 1988? 22 A. I believe we were. 20961 1 Q. And by the end of this year, the 2 shareholders' equity was a negative $42 million, 3 was it not, sir? I think you'll find that on the 4 facing page, 0658. If you look on this page right 5 there. It's H0658. And if you look at the last 6 number in the left-hand column, it indicates that 7 common stockholder equity is negative $42 million. 8 Do you see that? 9 A. In United Financial. 10 Q. In United Financial, that's correct. 11 A. That's correct. 12 Q. Was that of concern to you, sir? 13 A. Yes, it was. 14 Q. Did that mean that the 105,000 shares 15 that you are -- the -- strike that. 16 You owned approximately 110,000 shares 17 of UFG stock, did you not? 18 A. Yes. 19 Q. And what impact did this information 20 have on the value of your shares? 21 A. I think that probably those shares had 22 already declined in value; so, I don't think that 20962 1 this announcement had much impact one way or the 2 other. 3 Q. But if the institution or the 4 corporation had a deficit of $42 million in 5 equity, the shares of the corporation would have 6 been worth very little at this point in time; is 7 that correct? 8 A. That's correct. 9 Q. Now, turn with me, if you will, to the 10 second page -- numbered page of the document which 11 bears the Bates stamp H0664. And we have had a 12 couple of discussions about failure of net worth, 13 and I notice that it states here in -- under 14 "current condition" in the first full paragraph, 15 it talks about net worth. 16 A. The first paragraph under "current 17 condition"? 18 Q. Yes, that's correct. 19 A. You want me to read that? 20 Q. Well, no. Just the last sentence says, 21 "However, as a result of preliminary discussions 22 between the association and the Federal Home Loan 20963 1 Bank of Dallas field examiner, the association 2 believes it failed to meet its minimum capital 3 requirement as of September 30th and 4 December 31st, 1987." 5 Do you see that? 6 A. Yes, I do. 7 Q. And that's what we talked about 8 yesterday. And then if you turn to Page 19, which 9 is H0681, although I think it's been cut off -- 10 it's too low on the page -- and look down about 11 the third full paragraph. 12 Do you see that? It's a small 13 paragraph. 14 A. It starts "preliminary findings"? 15 Q. That's correct. And it goes on -- it 16 talks about the association having failed to meet 17 its regulatory capital requirements for the 18 quarterly periods ending September 30th, 1987, 19 December 31st, 1987. And then it says, the last 20 full sentence, "However, management agrees that as 21 of December 31st, 1987, the association was below 22 its required minimum regulatory capital." 20964 1 Do you see that? 2 A. Yes. 3 Q. Okay. So that as a member of 4 management, you were in agreement that at the 5 time -- that on December 31st, 1987, in fact, USAT 6 had failed its regulatory capital and, indeed, it 7 may well have occurred earlier on September the 8 30th, 1987? 9 MR. BLANKENSTEIN: Are you saying as of 10 or was he aware that the failure occurred as of 11 December 31st? 12 MR. RINALDI: Yes. 13 MR. BLANKENSTEIN: As of? 14 MR. RINALDI: Yes. 15 MR. BLANKENSTEIN: Okay. 16 Q. (BY MR. RINALDI) And that prior to 17 that, there had been a failure that had occurred 18 as of September 30th, 1987, as well? 19 A. I thought we said that we agreed as of 20 December 31st, but we didn't agree as of 21 September 30th. Isn't that what it says? 22 Q. Okay. I see -- I see the distinction 20965 1 you're making. That's fine. 2 So, you're saying there may have been a 3 question on the 30th of September; but certainly 4 there wasn't as to December 31st. 5 Now, when would you have learned that 6 USAT had failed its capital as of December 31st, 7 1988. 8 MR. VILLA: Excuse me, sir. You mean 9 '87? 10 MR. RINALDI: '87. 11 A. I believe it was sometime in February. 12 And I think yesterday I said sometime in March, 13 but I wasn't sure. But I think it was sometime in 14 February. 15 Q. (BY MR. RINALDI) Now, in order to 16 prepare the 10K, it's necessary to secure an 17 auditor's report, is it not? 18 A. Yes, it is. 19 Q. And the auditors would have reviewed 20 the regulatory capital of USAT at the end of 21 December 31st, 1987? 22 A. I believe they would. 20966 1 Q. And do you recall that in the auditor's 2 report, you were advised that USAT was failing its 3 capital requirement as of December 31st, 1987? 4 A. I don't recall it, but I'm sure -- you 5 know -- 6 Q. Well, let's take a look at the 7 auditor's report then. If you turn to Page 39 -- 8 A. Do I have it? 9 Q. Yes. It's the 39 of the document we've 10 been looking at. And this is, once again, the 11 annual report. It's T8033. 12 A. Okay. 13 Q. And it's Tab 402. And you see -- now, 14 what was the -- did the auditors just at the end 15 of the year hand you the auditor's report and tell 16 you "Here's our report," or did they advise you of 17 how the report was coming out prior to providing 18 you with a copy, sir? 19 A. I believe they typically advise us of 20 how the report was coming out ahead of the actual 21 issuance, but I can't recall specifically. 22 Q. Okay. And if you look at the third 20967 1 full paragraph there, it says "USAT is subject to 2 certain minimum regulatory requirements which were 3 not met on December 31st, 1987." 4 Do you see that? 5 A. I'm sorry. Which paragraph are we 6 reading? 7 Q. It's the first sentence of the third 8 paragraph down. It makes reference to the fact 9 that USAT had not met its minimum capital 10 requirements as of December 31st, 1987. 11 Do you see that? 12 A. Yes, I do. 13 Q. And that was provided to USAT -- I mean 14 UFGI on February the 5th, 1988. 15 Do you see -- 16 MR. VILLA: Your Honor, I don't 17 understand the question. What was provided? 18 MR. RINALDI: The auditor's report is 19 dated February the 5th, 1988. 20 MR. VILLA: This witness said he 21 doesn't know the procedure; and Mr. Crow testified 22 as to what the February 5th date indicates, which 20968 1 is the last day the auditors were at the 2 association, not the day they provided the report. 3 MR. RINALDI: Well, John -- 4 MR. VILLA: I object. You're 5 misleading this witness. 6 MR. RINALDI: You may object, John, but 7 you may not testify in this proceeding. 8 THE COURT: All right. Well, what's 9 your question, Mr. Rinaldi? 10 MR. RINALDI: Yes. 11 Q. (BY MR. RINALDI) Do you know what the 12 date that appears at the bottom of the auditor's 13 report refers to, sir? 14 A. I did not until this -- I did not -- I 15 do not. 16 Q. Until you were informed by Mr. Villa? 17 A. I would not have known what this date 18 was, no. 19 Q. Would you agree with me, though, sir, 20 that by February of 1988, USAT and UFG were aware 21 that USAT was failing its net worth capital as of 22 December 31st, 1987? 20969 1 MR. BLANKENSTEIN: Mr. Rinaldi, I'm 2 sorry. I didn't hear you. Did you say "during 3 February" or did you say "by February"? 4 MR. RINALDI: "By February." 5 MR. BLANKENSTEIN: So, that means 6 before the beginning of February? 7 MR. RINALDI: Yes. 8 A. I'm sorry. Would you restate the 9 question? 10 Q. (BY MR. RINALDI) Would you agree with 11 me that by February the 5th, 1988, as the chief 12 executive officer, chairman of the board, and 13 president of USAT and the chief executive officer 14 and president of UFGI, you would have been aware 15 that USAT, the principal subsidiary of UFGI, was 16 failing its net worth capital? 17 A. I certainly know that by March and I 18 think at sometime in February as to -- yeah. As 19 to what date it was, you know, there is no earthly 20 way I'm going to remember today what happened in 21 February and March of 1988. 22 Q. But you do recall that you spoke to the 20970 1 auditors or people on your staff spoke to the 2 auditors and were apprised on a regular basis as 3 to what the auditors' findings were? 4 A. I did not know what date the auditors 5 told them that this was going to be the content of 6 the letter. It was sometime in that range. 7 Q. Now, let's go back to Page 2 that we 8 looked at. And directing your attention to the 9 last paragraph on numbered Page 2 which is H0664, 10 it says, "UFGI in connection with" -- 11 THE COURT: Where are you reading, 12 Mr. Rinaldi? 13 MR. RINALDI: This is the 1987 annual 14 report, T8033. It's Page 2. It's Bates stamped 15 H0664. 16 Q. (BY MR. RINALDI) Do you see that, 17 sir? 18 A. Yes, I do. 19 Q. Okay. And this is the last sentence. 20 In the first sentence -- 21 A. I'm sorry. Which paragraph are you 22 reading? 20971 1 Q. Last paragraph, first sentence. "UFGI, 2 in connection with becoming a holding company, 3 agreed to maintain USAT's capital above the 4 minimum requirement level established by the 5 FSLIC. UFG has not been requested to provide 6 additional capital to USAT; but if requested, UFGI 7 currently does not have sufficient assets to 8 contribute to maintain USAT above its minimum 9 capital requirements." 10 Do you see that? 11 A. I do. 12 Q. Were you aware that as -- in connection 13 with becoming a holding company that UFGI had 14 agreed to maintain the minimum capital level of 15 USAT? 16 A. Yes, I was. 17 Q. And you were aware, then, that if USAT 18 fell below its minimum capital requirement, that 19 it was the obligation of UFGI to take action to 20 maintain USAT's capital? 21 MR. VILLA: Objection. Is he asking 22 for a legal conclusion from the witness? 20972 1 MR. RINALDI: I'm asking him what his 2 understanding is. 3 THE COURT: Okay. You may answer. 4 A. My understanding was that we were 5 supposed to -- that UFGI was supposed to -- first 6 of all -- okay. Was supposed to -- if called upon 7 by the regulators, had an obligation to maintain 8 the net worth of the institution. 9 Q. (BY MR. RINALDI) Okay. Now, 10 following the -- we were talking about the 11 bonuses, correct? 12 A. Yes. 13 Q. And we were looking at this just to see 14 what the performance of UFGI had been that had 15 warranted the bonuses. 16 Now, continuing along, do you 17 remember -- did you actually receive a bonus, and 18 from what entity was it paid? 19 A. It was paid from United Savings. 20 Q. And did they pay the entire $235,000? 21 A. Without going back and looking at the 22 check, I don't know. I would assume that they 20973 1 did, but I can't speak positively. 2 Q. Okay. You have before you, I think, in 3 your next document, Tab 479. It's T8034. 4 Do you have that? 5 A. Yes, I do. 6 Q. And I'd ask you to take a look at 7 pages -- 8 A. Yeah. Excuse me just a second. 9 Wouldn't this state what my bonus was, or would it 10 not? 11 Q. If you're referring to the 10K, I'm not 12 certain that it would. But certainly, the proxy 13 statement would. But this will tell you who paid 14 it and from what account it came and would 15 probably be more helpful. 16 A. All right. 17 Q. And if you'd turn to Page 9 first. 18 A. Page 9. Yes. 19 Q. Have you found 9? And this appears to 20 be an approval by -- is that Michael Crow's 21 signature? 22 A. Yes. 20974 1 Q. Okay. And this is the proposed 2 UFG/USAT bonus ranges. Those percentages are 3 dollars over 50. 4 Do you know what that refers to? Is it 5 over $50,000 or 50 percent of salary? 6 A. I have no idea. 7 Q. Okay. And then as you run your finger 8 down there, it indicates that Mr. Gross received 9 $235,000 in bonus, correct? 10 A. That's what it looks like. I see a 11 question mark, and I see some scribbling on the 12 right that I can't read. And it looks -- the 13 first thing is blotted. I haven't -- at this 14 point, I don't -- it looks like I did. I don't 15 know what the rest of the stuff says. 16 Q. Okay. And then below, it shows that 17 Mr. Munitz received 156,000, correct? 18 A. It's pretty scratched out, too. 19 There's something written beside it. I don't 20 know. 21 Q. All right. Then let's turn to Page 11 22 and Page 17 and maybe that will help us sort this 20975 1 out. 2 Do you see Page 11, there is a check 3 made out to you? 4 A. Yes. 5 Q. And that check's drawn on the payroll 6 account of United Savings Association of Texas, is 7 it not? 8 A. Yes, it is. 9 Q. And it's in the amount of $173,420.50. 10 Do you see that? 11 A. Yes, it is. 12 Q. Now, that's Check 5502. If you turn to 13 Page 17, I believe you'll find the posted stub for 14 that check. It's in the lower right-hand corner. 15 Do you see that? 16 A. Yeah, I see that. 17 Q. And it indicates that it's a bonus. 18 The full amount of the bonus is $235,000. And 19 then after withholding, it comes out to 20 $173,420.50. 21 Do you see that? 22 A. I see that. 20976 1 Q. Now, does that refresh your 2 recollection, sir? 3 A. It does. 4 Q. So that your bonus, including your 5 interest on your UFGI note, was paid for out of 6 the USAT payroll account, correct? 7 A. Yes. 8 MR. BLANKENSTEIN: Objection. The 9 bonus was paid out of the payroll account. He 10 received $235,000. 11 MR. RINALDI: That's what I said. 12 MR. BLANKENSTEIN: Less taxes. No, 13 that's not what you said. 14 Q. (BY MR. RINALDI) Was the bonus paid 15 out of the USAT payroll account? 16 A. The $173,000 was. 17 Q. And the full amount of the bonus was 18 235,000, and the difference between the 173,000 19 and the 235,000 is withholding, correct? 20 A. And other things. 21 Q. Okay. And a portion of that bonus was 22 intended to be interest on the note that you owed 20977 1 to UFGI? 2 A. Yes. 3 Q. And that was approximately $68,000, I 4 think we saw earlier? 5 A. Yes. 6 Q. Okay. Now, when we broke yesterday, I 7 had started to ask you about USAT's conflict of 8 interest policy, which is Exhibit T8012. 9 Do you have that document in front of 10 you? It would be 393. 11 A. I don't believe I have it. 12 Q. Okay. I have not given it to you. 13 Let me show you what's been previously 14 marked as T8012. And do you recall that you were 15 chairman of the ethics committee at USAT? 16 A. I don't recall. 17 Q. Take a look at Paragraph 6.1. It 18 indicates there shall be established an ethics 19 committee composed of the chairman of the board of 20 directors. 21 A. I'm sorry. What page is that on? 22 Q. It's on Page 10, Paragraph 6.1 of 20978 1 Exhibit T8012. 2 Do you see that? 3 A. Yes, I do. 4 Q. Was there an ethics committee 5 established by USAT that you sat on as a member? 6 A. I don't recall. 7 Q. Now, take a look at Paragraph 3.4B. 8 A. Excuse me. Can I look at it just a 9 second? 10 Q. Certainly. 11 A. (Witness reviews the document.) We're 12 on 6.1 here on Page 10? 13 Q. Yeah. Let's go back because I think 14 you raise an interesting point here. On the 15 second page of the document, it indicates that a 16 copy of this was to be distributed to all 17 employees and read by them. 18 Do you see that? 19 A. Yes. 20 Q. Okay. And then if you look at the 21 annual review, which is Paragraph 1.3 on Page 3, 22 it specifically states that "Every director, 20979 1 officer, and employee of the association shall be 2 provided a copy of this policy upon employment or 3 upon assuming office and shall certify that he or 4 she has read and understands this policy." 5 Do you see that? 6 A. I do. 7 Q. Do you recall, did you receive a copy 8 of this policy from Mr. Berner and did you read it 9 at or about January 1987? 10 A. I don't recall. 11 Q. Now, directing your attention to 12 Paragraph 3.4B, it states -- 13 A. 3.4B? 14 Q. On Page 6. It's the first full 15 paragraph. 16 Do you see that? 17 A. Yes. 18 Q. It says, "Directors, officers, and 19 employees of the association must exercise the 20 greatest care to excuse themselves from 21 participating in any association activity or 22 decision affecting any financial interest of such 20980 1 person." 2 Do you see that? 3 A. I see that. 4 Q. Did you believe that by voting to 5 approve the bonus plan on November 10th, 1987, by 6 which you were to receive a 235,000-dollar bonus 7 that you had participated in a decision affecting 8 your financial interest in violation of USAT's 9 ethics and conflicts of interest policies? 10 A. No, I didn't. I don't think I violated 11 the policy. 12 Q. Now, if you turn to Page 10, it talks 13 about conflicts of interest. 14 Do you see that? 15 A. Yes, I do. 16 Q. It says "All directors, officers, and 17 employees and affiliated persons of the 18 association have a fundamental duty to avoid 19 placing themselves in a position which creates or 20 which leads to or could lead to a conflict of 21 interest or appearance of a conflict of interest." 22 Do you see that? 20981 1 A. Yes, I do. 2 Q. Did you believe that by voting to 3 approve the bonus on November 10th, 1987, by which 4 you received a bonus of $235,000, that you had 5 placed yourself in a position which created or 6 could lead to a conflict of interest or appearance 7 of a conflict of interest in violation of this 8 policy? 9 A. Well, actually, the -- first of all, it 10 was an open board meeting, and all the outside 11 directors approved it. Had I stepped outside of 12 the room, there was -- it was still a unanimous 13 vote. But in addition to that, I have seen 14 documents recently that indicated that the 15 compensation committee was authorized by the board 16 to act on these matters without the approval of 17 the board, or -- excuse me -- that was a delegated 18 authority and did not require the board's action, 19 but they actually were acting for the board. 20 Q. Did UFG have the same authority? 21 A. I don't know. 22 Q. And weren't these joint bonuses of UFG 20982 1 and USAT? 2 A. Mine was from USAT. 3 Q. So, you weren't given any bonus for 4 your services at UFGI? 5 A. The check came from USAT. 6 Q. I'm sorry. Because I thought at the 7 top of the bonus list that it indicated they were 8 bonuses for your service at USAT and UFGI. 9 A. I think -- well, could I see that 10 again? Where is that? 11 Q. I believe the list of bonuses would 12 appear at -- it's Tab 410, T8026. 13 A. Tab 410. I think probably that's 14 because some of the employees were maybe UFG 15 employees and some were USAT employees. I think 16 that's probably the reason that's up there. 17 Q. So -- let me ask you this. Was this 18 the only instance where -- strike that. 19 Were there any other -- any instances 20 where the question of conflicts of interest with 21 respect to your service at USAT were raised? 22 A. I don't recall any others. You're the 20983 1 first -- I think you're the first one to raise it. 2 Q. Oh, okay. 3 Now, did the payment of the bonuses 4 adversely impact USAT? 5 A. I think probably it was very beneficial 6 to USAT because the officers who received those 7 bonuses had been hired for the institution. And 8 at the time they were hired, they were given a 9 number of forms of compensation, short-term and 10 long-term. They were given salary. They were 11 given bonus. They were given stock options. They 12 were given a performance unit plan. Because of 13 the general economic conditions, financial 14 institutions in the state were in dire straits. 15 These people had already had their performance 16 unit plans wiped out. They had already had their 17 stock options collapse on them. 18 And so, the association now has a group 19 of officers who have had to take on a lot of the 20 added responsibilities during the past year, who 21 have gone through stressful, stressful times in 22 the industry and in the association. And they 20984 1 have seen a major portion of their long-term 2 incentive wiped out. And the key thing you've got 3 to do is to try to keep your people in place. So, 4 I think it was beneficial to the association to 5 try to hold these people and give them these 6 bonuses. 7 Q. So, the answer is "no"? 8 A. The answer is I did not think it harmed 9 the association. 10 Q. So, the answer was "no"? 11 A. That's correct. 12 Q. All right. 13 A. I'm sorry. I should have answered the 14 "no" first and then said that. 15 Q. Now, sir, do you recall whether the 16 bonuses resulted in USAT exceeding their projected 17 operating expenses for the year? 18 A. Offhand, I don't recall. 19 Q. Well, take a look at Exhibit B2019. 20 That's the plain exhibit that's not in an envelope 21 that's sitting right in front of you. 22 Do you see that? 20985 1 A. B -- 2 Q. B2019. Do you recognize this as a 3 performance report commentary that you prepared? 4 A. That's what it looks like, yes. 5 Q. Okay. And directing your attention -- 6 THE COURT: Mr. Rinaldi, am I supposed 7 to have a copy? 8 MR. RINALDI: Oh, I'm sorry. I 9 apologize, Your Honor. 10 THE COURT: Thank you. 11 MR. RINALDI: We would move the 12 admission of B2019. 13 MR. BLANKENSTEIN: No objection, Your 14 Honor. 15 THE COURT: Received. 16 Q. (BY MR. RINALDI) And directing your 17 attention to the fourth full paragraph, the second 18 sentence -- 19 A. I'm sorry. Which page? 20 Q. The first page. 21 A. First page. All right. 22 Q. It says, "On expenses, we were 20986 1 $1.9 million worse than planned for the year on 2 compensation." 3 Do you see that? 4 A. On page what? 5 Q. It's the second sentence, the fourth 6 paragraph. 7 A. Oh, I'm sorry. I was on the wrong 8 paragraph. Let's -- yes. 9 Q. Do you see that? 10 A. Yes. 11 Q. And it says that most of that is due to 12 branch sales not being completed in July. 13 Do you see that? 14 A. I see that. 15 Q. Okay. Does that refresh your 16 recollection that USAT had gone over its budget by 17 $1.9 million on compensation? 18 A. That's what it says. 19 Q. And that was almost the exact amount of 20 the bonuses that were paid at the end of the year, 21 isn't it, sir? 22 A. It is, but the bonuses would have been 20987 1 in the budget from day one because they were -- 2 they paid the bonuses every year. So, they would 3 have been -- that would not have been the thing 4 that -- we had a branch sale that was supposed to 5 go through in July which did not happen and, you 6 know, you -- 7 Q. Well, let me ask you this. You say the 8 bonuses would have been in there from day one. 9 Are you -- is it your testimony, then, 10 that people received bonuses irrespective of what 11 the performance of the individual was or the 12 financial condition of the institution? 13 A. No, but I think probably what happens 14 is when you do your budgeting at the beginning of 15 the year, you look at what bonuses typically have 16 been running and you would estimate a similar 17 number for the bonuses in the future. 18 Q. Do you recall that the bonuses at the 19 end of 1987 were a substantial increase over the 20 bonuses at the end of 1986? 21 A. I do not. 22 Q. If, in fact, that were the case, what 20988 1 would that be attributed to? Why would the 2 bonuses in 1987 that were paid in 1988 be higher 3 than those in 1986? 4 A. Could I see what we're talking about 5 numberwise? 6 Q. I can show you anecdotally individuals. 7 I can't show you the entire list. 8 A. I guess I'm having -- it strikes me 9 as -- I guess the thing I'm saying, because of the 10 loss of some people from '86, I would be 11 hard-pressed to think that the bonuses would have 12 been up substantially. They may have been. But 13 I'm trying to talk about something that I don't 14 have any fact basis on. 15 Q. No. I'm talking about the magnitude of 16 individual bonuses. For example -- 17 A. Go ahead. I'm sorry. 18 Q. Strike that. 19 Since you have no recollection of the 20 actual amount, perhaps it would be more fruitful 21 to go on to another question. 22 You indicated that you had concerns 20989 1 about the viability of UFGI at the end of 2 nineteen -- I mean the beginning of 1988; is that 3 correct? 4 A. Yes, it is. 5 Q. Okay. And I believe at this point in 6 time there was also a forbearance application 7 filed, was there not? 8 A. Yes. 9 Q. And what, in your mind, was the purpose 10 of the forbearance application? 11 A. Well, the forbearance application was 12 an application to the Federal Home Loan Bank 13 requesting that they forbear any capital 14 requirements and set forth a plan that would bring 15 the institution's capital back up to minimum 16 regulatory net worth within a time frame. 17 Q. Okay. So -- and a forbearance 18 application would not have been filed had there 19 not been a problem with respect to USAT's net 20 worth, correct? 21 A. That's correct. 22 Q. Now, would you take a look at what's 20990 1 been previously marked as Trial Exhibit 403? This 2 is Exhibit T8054. Now, this is a privileged and 3 confidential memo that was prepared by Mr. Arthur 4 Berner. 5 First of all, have you ever seen this 6 document before, sir? 7 A. I've probably seen it in the last week 8 or so. I don't know -- I don't think I ever saw 9 it before that because it was to his files. 10 Q. Would you take a look at Page 1, 11 Paragraph 2? 12 A. Page 1, Paragraph 2? Okay. 13 Q. And it indicates there that a question 14 of employment contracts arose when a number of 15 senior executives concerned about UFGI and the 16 association approached you and Barry Munitz 17 regarding the viability of the association. 18 Do you see that? 19 A. I do. 20 Q. Okay. Can you tell for me what refers 21 to? 22 A. Yeah. I can't recall the specifics. 20991 1 But generally, you know, as early as -- excuse me. 2 I've got a frog in my throat. 3 You know, as early as May of 1987, I 4 think we had written to Dallas and set out that 5 restructuring plan where we said that we, at some 6 period of time in '88, that we would probably go 7 below minimum net worth. And so, it's certainly 8 no secret to the employees of the institution. 9 And so, they were getting concerned 10 about the viability of the association; and they 11 were concerned about their jobs and their 12 employment. 13 Q. And so, what they wanted was a contract 14 that would assure that they were employed for a 15 specific period of time and that, if terminated, 16 they would receive some form of severance benefit? 17 A. I believe that's -- that's what -- 18 that's what evolved. 19 Q. Okay. And now, if you turn to the top 20 of the second page, it says -- it talks about -- 21 or the last paragraph on the first page -- 22 A. I'm sorry. Am I on the second or first 20992 1 page? 2 Q. Well, the paragraph runs over from the 3 first to the second page. And it talks about 4 employment agreements being reviewed by the 5 compensation committee -- 6 A. I'm sorry. 7 Q. Do you see that? 8 A. Am I on -- 9 Q. Page 1. Just read that. 10 A. "Committee reviewed the employment 11 agreements." 12 Q. And just read that paragraph that 13 begins at the bottom of 1 and goes over to Page 2. 14 A. (Witness reviews the document.) 15 Q. Do you recall that as a result of -- 16 A. I lost my train of thought. I'm sorry. 17 Q. Okay. I just had a -- 18 A. I think I need to read the paragraph 19 before it. 20 Q. Fine. Take whatever time you need. I 21 just wanted to ask you one question. 22 It makes reference to employment 20993 1 agreements being approved in September 1987. And 2 my only question to you is: Do you recall that in 3 about September of 1987, UFGI entered into 4 employment agreements with a number of senior 5 executives of UFGI and USAT? 6 A. I did not recall that. I've seen some 7 of those in the last week or so. 8 Q. Now, it goes on and I wanted to direct 9 your attention then to the third page of the 10 document. And if you'd read the two paragraphs 11 that begin with the word "in January 1988." 12 A. (Witness reviews the document.) I see 13 that paragraph. 14 Q. Okay. Did the senior executives then 15 come to you again -- after entering into contracts 16 in September 1987, did they then come to you again 17 and express to you their concern that UFGI would 18 not be a viable entity in the future? 19 A. I don't specifically recall it, but I 20 remember them coming to me. As to when they came, 21 I obviously -- this is probably correct. 22 Q. And then the next sentence says that it 20994 1 was possible that -- it makes reference to the 2 possibility that UFGI would have to put all of its 3 equity into USAT. 4 Do you see that? 5 A. I see that. 6 Q. And that was something as the chief 7 executive officer and president of UFGI you were 8 aware of at about this time? 9 A. Yes. 10 Q. Okay. And then the last sentence says, 11 "Since USAT could not dividend additional cash to 12 UFGI, it appeared as if over a long period of 13 time, unless there was a significant change in 14 circumstances, UFGI would not be viable." 15 Do you see that? 16 A. I see that. 17 Q. And this was -- does this reflect the 18 condition or the circumstances as you recall them 19 in January of 1988? 20 A. Yes. I think that's what -- I think we 21 said that even in the annual report that we read. 22 Q. Okay. Then it goes on in the next 20995 1 paragraph. It says, "It was recommended to the 2 compensation committee that a backup employment 3 agreement should be entered." 4 Do you see that? 5 A. I do. 6 Q. Do you recall why it was necessary to 7 have a backup employment contract for the senior 8 executives if UFGI had already entered into 9 employment contracts and had already agreed to a 10 salary structure and severance benefits in the 11 event that they were terminated? 12 A. I think -- as I said, I didn't even 13 recall any of this. So, I'm just again giving you 14 what I related from documents. If you ask me do I 15 recall it, the answer is no. 16 Q. Well, do you recall that a second 17 contract was entered into with USAT and the same 18 executives, sir? 19 A. I did not at the time. 20 Q. And as you sit here today, you don't 21 know why it was necessary for USAT to enter into a 22 contract with the same executives who had 20996 1 previously entered into contracts with UFGI? 2 A. Based on the information I've read, I 3 can make comments about it; but I don't -- I don't 4 recall it. 5 Q. What is your understanding as you sit 6 here? 7 A. It's my understanding now that the 8 reason for that was that they were concerned about 9 the viability and it was a belt and suspenders 10 situation and that it gave additional security to 11 the employees. However, there was a caveat in 12 that contract that said it only became effective 13 in case UFGI were unable to perform on its 14 contracts and then -- so, it was -- as I say, it 15 was really a backup situation. 16 Q. And this is what you've learned 17 recently; is that correct? 18 A. Yes. 19 Q. Now, do you recall who was paying the 20 salaries of the persons who had employment 21 contracts with UFGI in September of 1987? 22 A. USAT. 20997 1 Q. So, these were contracts entered into 2 between UFGI and the executives -- 3 A. I'm sorry. Would you restate the 4 question? I may have answered. 5 Q. Well, you may recall I asked you a 6 moment ago whether you recall that in September of 7 1987 employment agreements had been entered into 8 by executives of USAT and UFG with UFGI. Okay? 9 A. Yes. 10 Q. And pursuant to those contracts, it 11 provided for salaries and certain severance 12 benefits. 13 Do you recall that we talked about 14 that? 15 A. Yes. 16 Q. Now, was it your understanding that 17 UFGI was paying the salaries of those individuals 18 pursuant to those contracts? 19 A. No. 20 Q. Now, why would UFGI enter into a 21 contract with an employee and agree to pay their 22 salary and then not pay their salaries? 20998 1 A. It was -- I was not really a part of 2 those contracts. I'd have to see -- could I look 3 at one of the contracts? I really can't recall. 4 Q. I think I have one here. Let me take a 5 look. Let's take a look at B1743. This is a 6 contract between Michael Crow -- I'm sorry. It 7 would be Tab No. 1365. And then why don't we also 8 take a look at T8042, and that's Tab 416. 9 Let me hand you a copy of the contract. 10 A. And somewhere here we've got the 11 minutes of the compensation committee from 12 September. I wonder if we could get that, as 13 well. 14 Q. I'm sorry. I'm also handing you a copy 15 of Tab 416, T8042. 16 A. Okay. 17 Q. Do you see that? Now, these are two 18 contracts. 19 A. Yes. 20 Q. One is with Mr. Crow and the other is 21 with Mr. Crow. The first is dated September 17th, 22 1987, and the second is dated February the 11th, 20999 1 1988. 2 MR. VILLA: I believe you mean 3 September 9th, 1987. Right, sir? 4 MR. RINALDI: I'm sorry. What did I 5 say? 6 MR. VILLA: I believe the date of the 7 contract is September 9. 8 MR. RINALDI: Yes. I apologize. Thank 9 you for correcting me. 10 Q. (BY MR. RINALDI) And if you turn 11 to -- 12 THE COURT: Which exhibit, Mr. Rinaldi? 13 MR. RINALDI: Exhibit B1743, which is 14 the September 9th contract. 15 Q. (BY MR. RINALDI) And if you'd turn, 16 sir, to the third page of that document, it 17 indicates that Mr. Crow's salary is $171,656. 18 Do you see that? 19 A. Yes, I do. 20 Q. And then if you turn to the third page 21 of T8042, you will also see that Mr. Crow's salary 22 is $171,656? 21000 1 A. I'm sorry. Which page? 2 Q. They are both Page 3. It's Paragraph 3 5. 4 A. I've got that in here. Where else am I 5 looking? 6 Q. I'm sorry. I think we handed you 7 another contract. This should be it. And I think 8 if you'd just put the two together, you can see 9 them side by side. 10 Do you see at Paragraph 5, it has a 11 similar provision? 12 A. Yes, I do. 13 Q. Okay. Now, was it your understanding 14 that when UFGI entered into the September 9th, 15 1987 contract with Mr. Crow that UFGI was thereby 16 obligated to pay his salary? 17 A. I think they were obligated to pay it 18 if United Savings did not. 19 Q. So, the UFGI contract was then a backup 20 to United Savings? 21 A. At that point, they had no contract 22 with United Savings. It was merely a backup to 21001 1 their getting paid by United Savings. 2 Q. Oh, okay. 3 So, in other words, United Savings was 4 still going to pay the salary under the 5 September 9th, 1987 contract? 6 A. I'm sorry. Would you repeat that? 7 Q. Even though UFGI had entered into a 8 contract with the employees and agreed to pay a 9 salary, say, to Mr. Crow of $171,656 per anum, it 10 was not the intention of UFGI to pay that salary 11 unless UFGI -- USAT did not pay the salary? 12 A. That's correct. 13 Q. Now, there are severance provisions in 14 this contract. 15 Was it the intention of UFGI to pay the 16 severance provisions in the event that the 17 individual were terminated? 18 A. I believe it was. 19 Q. Now, why was it that UFGI was not going 20 to pay the salaries? Do you know? 21 A. Because those people were working for 22 United Savings Association, and that's where they 21002 1 were getting their money. 2 Q. Well, I guess the question is, then: 3 Why did UFGI even enter into the contract in the 4 first place? 5 A. It was an added level of comfort and 6 security to the employees. 7 Q. Okay. Now, is -- 8 THE COURT: We'll take a short recess. 9 10 (Whereupon, a short break was taken 11 from 10:04 a.m. to 10:25 a.m.) 12 13 THE COURT: Be seated, please. We'll 14 be back on the record. 15 Mr. Rinaldi. 16 MR. RINALDI: Thank you. 17 Q. (BY MR. RINALDI) Mr. Gross, I'm 18 handing you a copy of Exhibits T8038 and T8039. 19 The first is Trial Exhibit 411. The second is 20 Trial Exhibit 412. 21 Now, if you'd turn first to 411, that 22 is the minutes of the compensation committees of 21003 1 United Financial Group and USAT dated 2 February 11th, 1988. 3 Do you see that? 4 A. Yes, I do. 5 Q. Okay. And this is the compensation 6 committee meeting where it was agreed that UFGI -- 7 USAT would enter into what is referred to as a 8 corollary or a backup contract that we have talked 9 about before the break. 10 Do you recall that? 11 A. Can I stop just a second and look? 12 Q. Oh, yes, certainly. 13 A. (Witness reviews the document.) All 14 right. 15 Q. Now, it indicates that -- do you recall 16 having attended this meeting of the compensation 17 committee? 18 A. No, I don't. 19 Q. But it does indicate that you were 20 present, does it not? 21 A. Yes, it does. 22 Q. And typically when you attended 21004 1 compensation committee meetings, what was your 2 purpose for being there? 3 A. I was there just in case they had 4 something that they wanted to inquire of me about. 5 Q. Well, the compensation committee was 6 composed of outside directors, wasn't it? 7 A. Yes, it was. 8 Q. And the outside directors would have 9 only met on a quarterly basis; is that correct? 10 A. Yes, usually. 11 Q. They would have met together with the 12 full board, correct? 13 A. Yes. 14 Q. On the other hand, there was an 15 executive committee that met on a more frequent 16 basis, was there not? 17 A. I don't recall. I don't recall whether 18 the executive committee met more frequently or 19 not. 20 Q. But would you have been there to 21 apprise them of things that were going on at the 22 institution? 21005 1 A. Just to supply information they might 2 need from me. 3 Q. Okay. Now, if we drop down to the next 4 paragraph, it talks about that "in view of the 5 economic situation of UFGI." 6 Do you see that? 7 A. Yes, I do. 8 Q. And that's what we talked about a 9 moment ago about how there was concern that UFGI 10 had a problem with its viability? 11 A. That's correct. 12 Q. Okay. And as a consequence of that 13 concern, it was agreed to enter into what's called 14 here as a corollary contract, what we've 15 previously seen referred to as a backup contract. 16 Do you recall that? 17 A. Yes, I do. 18 Q. And it indicates here that the persons 19 that were going to receive the contracts, they are 20 identified in the middle of the page, those six 21 people. 22 Do you see that? 21006 1 A. I do see that. 2 Q. Now, why was it that a corollary 3 contract or a contract wasn't offered to 4 Mr. Munitz at this point in time? 5 A. I don't recall. 6 Q. Well, didn't you have concern that if 7 Mr. Munitz didn't have the same security as these 8 other six people that he might up and leave? 9 A. I don't think that he had one of the 10 original contracts. 11 Q. I understand that. But now we're 12 talking about you're wanting to keep your good 13 people and you're offering a contract to these six 14 people, but why not Mr. Munitz? 15 A. As I say, this was something that I 16 guess -- I don't know. 17 Q. Okay. How about you? How come you 18 didn't get a contract? 19 A. I had never felt I wanted a contract or 20 asked for one. 21 Q. Well, were you -- did you feel that 22 given the financial condition of USAT or UFG that 21007 1 you were going to leave the institution to do 2 something different? 3 A. I was not; so, I didn't have a problem. 4 Q. Had anyone approached you and said, 5 "Come on, Jenard. Let's go out" -- I'm sorry. I 6 sometimes pronounce your name improperly. 7 MR. BLANKENSTEIN: Perhaps after 80 8 some odd days of this trial, Mr. Rinaldi could get 9 Mr. Gross' name correct. 10 A. We're going to change my name to 11 "Jenard" next week. 12 Q. (BY MR. RINALDI) Let me apologize to 13 you, sir. I meant no disrespect by that. 14 A. No problem. 15 Q. Did you feel you needed a contract to 16 induce you to stay at USAT or UFGI? 17 A. I did not. 18 Q. And how about Mr. Munitz? Did you have 19 an occasion to talk to him about that? 20 A. I did not. 21 Q. Now, he was the president of Federated, 22 was he not? 21008 1 A. I don't know. 2 Q. Were you aware that he held a position 3 with respect to MAXXAM or MCO/Federated? 4 A. Yeah. But that was -- I never really 5 focused on what his roles there were. 6 Q. Now, after the -- at this point in 7 time, do you recall -- we had talked about UFGI 8 had lost $118 million. 9 Do you recall that you were projecting 10 substantial future losses of UFGI? 11 A. I don't recall, but I'm sure we were. 12 Q. Okay. Would you take a look at what's 13 been, I think, placed in front of you? It's 14 Exhibit T4476. I'm sorry. It was out of order. 15 Here. This is T4476, and it's Trial Exhibit 404. 16 Now, this is dated February the 4th, 17 1988. 18 Do you see that? 19 A. Yes, I do. 20 Q. And this would have been one day before 21 the date that appears on the auditor's report. 22 Do you recall receiving a memo from 21009 1 Mr. Crow in which he is projecting $100 million in 2 losses for the year? 3 MR. BLANKENSTEIN: Excuse me, 4 Mr. Rinaldi. Could you give us that tab number 5 again? 6 MR. RINALDI: Certainly. It's Tab 404. 7 MR. BLANKENSTEIN: 404? I'm sorry. 8 MR. RINALDI: Yes. 9 Q. (BY MR. RINALDI) Do you see that, 10 sir? 11 A. I see it. 12 Q. And do you recall receiving this memo 13 from Mr. Crow advising you that he was projecting 14 $100 million in losses for the year? 15 A. No, I don't. 16 Q. Now, can you tell, were these losses of 17 USAT or losses of UFGI? 18 A. It just says -- it doesn't say. 19 Q. Well, if he didn't want to show the 20 losses to the regulators, would that suggest to 21 you that the losses were at the USAT level? 22 A. It would suggest that. But as I say, I 21010 1 don't know. 2 Q. Is this consistent with your 3 recollection of what your views were regarding the 4 potential future losses of USAT in about February 5 of 1988? 6 A. I know that we were projecting losses. 7 I don't remember the magnitude. 8 Q. Okay. And in those projections, they 9 would have been put in the forbearance application 10 that was submitted to the Bank Board and would 11 reflect what your projections were? 12 A. I would assume they would have. 13 Q. And that was something that you would 14 have looked at before it was submitted to the Bank 15 Board? 16 A. Yes. 17 Q. And you certainly would have been aware 18 of its contents and the projections that were 19 being made? 20 A. I believe so. 21 Q. Okay. Now, turn your attention now to 22 Exhibit T8039. This is the next document, which 21011 1 is the board of directors meeting of USAT at which 2 the contracts were approved. 3 Now, it says on Page 26 of that 4 document that Mr. Berner presented a draft of the 5 forbearance application. 6 Do you see that? 7 A. This is not part of the document, is 8 it? I'm sorry. This is not part of the contract? 9 Q. I'm sorry? 10 A. Oh, I'm sorry. I thought I was 11 looking -- I'm looking at the minutes of the board 12 meeting. I beg your pardon. I thought you said 13 this was the contract. I misunderstood you. 14 Q. No. These are board minutes for 15 February 11th, 1988. On Page 26, the fourth 16 paragraph down talks about a draft of a 17 forbearance application that the company proposed 18 to finalize. 19 Do you see that? 20 A. I'm sorry. What page? 21 Q. The fourth paragraph down. 22 A. Where it says "Mr. Berner presented a 21012 1 draft of the forbearance application"? 2 Q. Yes. 3 A. I'm with you. 4 Q. Okay. And thereafter, the board 5 resolved that they would submit a forbearance 6 application to the Federal Home Loan Bank Board, 7 did they not? 8 A. Yes. 9 Q. And so -- and you, as CEO, would have 10 been aware that in that application they were 11 projecting future continued losses at the USAT 12 level. 13 Is that a fair statement? 14 A. Yes. 15 Q. Okay. And then on the next page, the 16 very next item that was considered was the 17 question of whether severance -- I mean employment 18 contracts should be given to employees of USAT. 19 Do you see that? 20 A. That's on the second paragraph? 21 Q. Yes, on Page 27. And that was 22 unanimously approved by the board, sir? 21013 1 A. Just a second. (Witness reviews the 2 document.) I see it, yes. 3 Q. Okay. And did you vote as a member of 4 the board to approve those contracts, sir? 5 A. As I said before, I didn't -- this 6 is -- 7 Q. You don't have an actual recollection? 8 A. No. 9 Q. But if the minutes show that it was 10 unanimously approved and you were at the board 11 meeting, would you have any reason to question the 12 accuracy of Mr. Berner's recitation here? 13 A. I don't recall any. 14 Q. Okay. Now, did you realize that when 15 you entered -- when you approved USAT entering 16 into these contracts that USAT was incurring an 17 obligation to potentially fund two times annual 18 salaries in severance for six executive officers? 19 A. Provided -- first of all, if USAT were 20 unable to pay their salaries to begin with and 21 then if UFGI were unable to, then it reverted back 22 to USAT. 21014 1 Q. Okay. And did you understand that 2 people were very concerned about the viability of 3 UFGI at this point in time and that you were 4 projecting over $100 million in losses at both the 5 USAT and UFGI level? 6 A. Yes. Well, I -- you know, I'd like to 7 see the forbearance agreement to see if that was 8 the number. You know, that may be a good number. 9 That may not be a good number. That was just a 10 number in Mike's statement. I don't know what we 11 were projecting. 12 Q. Okay. Well, I will represent to you 13 that the forbearance agreement is consistent with 14 that number. 15 A. Okay. 16 Q. We can pull it out at the break and 17 perhaps show it to you later; but in the interest 18 of time, I'd prefer to move along. 19 A. Okay. 20 Q. Now, did the board -- I mean the 21 compensation committee, in Exhibit T8038, at the 22 point in time when they were concerned about 21015 1 UFGI's viability, did they also approve a bonus 2 for you and Mr. Crow? 3 A. Yes, they did. 4 Q. Okay. So, in other words -- 5 MR. BLANKENSTEIN: You mean a bonus 6 agreement? 7 MR. RINALDI: Yeah. 8 MR. BLANKENSTEIN: The board of UFGI? 9 MR. RINALDI: Yes. 10 A. They approved a bonus agreement. 11 Q. (BY MR. RINALDI) Okay. And this is a 12 compensation committee that is both UFGI and USAT. 13 So, in the first -- or second paragraph -- 14 A. I'm sorry. Would you -- 15 Q. It's T8038. It would be the previous 16 document that we looked at. 17 A. That's not this one. 18 Q. And we looked at this, and I believe 19 you read it for a moment when I first showed it to 20 you. And we talked about the fact that in the 21 second paragraph, agreements are entered into with 22 six executive officers and approved by the 21016 1 compensation committee for action by USAT, 2 correct? 3 A. I'm sorry. I beg your pardon. I was 4 reading it, and I wasn't paying attention. I 5 apologize. 6 Q. In the second paragraph, it talks about 7 the compensation committee authorizing or 8 recommending to USAT that USAT enter into new 9 employment agreements with six executive officers, 10 correct? 11 A. Correct. 12 Q. And then in the immediate next 13 paragraph, there is apparently a discussion by the 14 compensation committee of UFGI. 15 Do you see that? And that pertains to 16 an arrangement with two officers of UFGI whereby 17 notes which these officers had executed in 18 connection with acquisition of certain stock of 19 UFGI would be prepaid. 20 Do you see that? 21 A. I don't know if "prepaid" is the proper 22 word. 21017 1 Q. Well, it's not my word. That's 2 Mr. Berner's word. 3 A. Okay. 4 Q. Have you had a chance to look at that, 5 sir? 6 A. (Witness reviews the document.) Okay. 7 I see that, yes. 8 Q. Now, do you recall what that paragraph 9 refers to? 10 A. Yes, I do. 11 Q. Did there come a time in about 1985 12 when you acquired some shares of UFGI? 13 A. Yes. 14 Q. And did you purchase those shares with 15 a note that was given to you by UFGI? 16 A. Well, actually, I made two acquisitions 17 in 1985. One I purchased with cash, and one I 18 purchased with the note. 19 Q. And the cash was actually in two 20 tranches. There was a 3,000-share purchase and 21 then a 2,000-share purchase? 22 A. There was a 5,000-share purchase in 21018 1 early '85 and a 2,000 back in '84. 2 Q. Okay. And -- but in addition to that, 3 you purchased 105,000 shares of USAT -- of UFGI 4 stock, did you not? 5 A. Yes. 6 Q. And the funds for purchasing those 7 shares were provided to you by UFGI, correct? 8 A. Yes. 9 Q. Okay. And in connection with that, you 10 gave a note and pledged the stock to secure the 11 indebtedness, correct? 12 A. Yes, I did. 13 Q. Okay. Let me show you a copy of what's 14 been marked as T8175. 15 MR. RINALDI: This is a new document, 16 Your Honor. 17 Q. (BY MR. RINALDI) Now, these aren't 18 necessarily in order because we left them in the 19 form we found them. But on Page 002319, which is 20 about six pages into the document, there is a 21 promissory note. 22 Do you see that? 21019 1 A. Yes, I do. 2 Q. And it's in the amount of $761,250. 3 A. I liked your number better the first 4 time. 5 Q. Now, how did the subject of the 6 purchase of the 105,000 shares of UFGI first 7 arise, sir? 8 A. As best I recall, a block of stock came 9 upon the market; and I think UFGI bought it and 10 then came to the senior officers of the 11 institution and offered the proposal to them of 12 buying the stock with a 100 percent loan on it. 13 And just -- I can't remember how many of the 14 officers. Those who were interested acquired 15 stock. 16 Q. Now, you say stock of UFGI came to -- 17 became available. 18 Did UFGI buy its own stock back? 19 A. You know, I don't recall the 20 particulars. I think they did, but I'm not sure. 21 Q. Now, who brought the subject of the 22 stock's availability to your attention, sir? 21020 1 A. It would either have been Barry Munitz 2 or Charles Hurwitz. 3 Q. Okay. And do you recall what you were 4 told at that point in time when the stock was 5 brought to your attention? 6 A. Yes. We were told that this would 7 be -- this was something that was being provided 8 by the company as an added incentive to the 9 officers and that the company was willing to do 10 this because if we had additional ownership in the 11 institution, we would have additional incentive 12 and motivation to strive to make it successful 13 because we would derive more benefit from its 14 success. 15 Q. And the company, therefore, agreed to 16 loan you the $761,250 to purchase the 105,000 17 shares? 18 A. Yes. 19 Q. Now, when you entered into this 20 agreement, did you understand that if the value of 21 the shares were to decline and at some future 22 point in time they had no value, that you were 21021 1 obligated to pay the face amount of the promissory 2 note? 3 A. Yes, I did. 4 Q. Did anyone make any promises to you 5 that, over time, UFGI or USAT would see that the 6 principal amount of the note would be paid off for 7 you? 8 A. No, they did not. 9 Q. Did anyone make any promises to you 10 that, over time, the interest that became due and 11 owing each year on the note would be paid by USAT 12 or UFGI? 13 A. No. 14 Q. Now, after you entered into this 15 transaction, did you pay interest on the face 16 amount of the note, sir? 17 A. Yes, I did. 18 Q. And was that paid for out of a bonus 19 that was given to you by USAT or UFGI? 20 A. Well, it was paid for out of my bank 21 account. 22 Q. Okay. We saw that in 1987, you were 21022 1 given a bonus that included a portion for purposes 2 of paying the interest on the note. 3 Do you recall that? 4 A. I recall that. 5 Q. Okay. Now, in the prior years, were 6 you also given bonuses which included a portion 7 for the payment of the interest on the notes? 8 A. I don't think that that was the reason. 9 I think what -- and I -- you know, this is all 10 hazy. And I saw -- it seems to me that we might 11 have gotten part of the bonus a few days early 12 because we had to pay -- I think the interest was 13 due on December 31st. The bonus wasn't usually 14 paid until the 1st or 2nd or 3rd. So, there might 15 have been a prepayment to cover part of the 16 interest, but I don't think that -- 17 Q. Now, what year would we be talking 18 about here? Would this be 1987, or did you 19 receive a portion of the bonus in 1985 or '86 for 20 purposes of paying the interest on the note? 21 A. I just don't recall. 22 Q. After you entered into the promissory 21023 1 note, what occurred with respect to the value of 2 USAT -- UFGI's stock? 3 A. It declined. 4 Q. And as it declined, did you have any 5 conversations with either Barry Munitz or 6 Mr. Hurwitz regarding the fact that the stock was 7 worth significantly less than the note for which 8 it was pledged to secure? 9 A. I don't recall that. 10 Q. When was the first time the subject 11 came up of UFGI agreeing to provide you with a 12 bonus agreement that would provide for the paying 13 down of this 761,250-dollar debt, sir? 14 A. I do not recall. 15 Q. Now, I notice that on the compensation 16 committee minutes of February 11th, 1988, at which 17 you were present, a proposal was made to implement 18 a bonus by UFGI. 19 Do you see that? 20 A. That was on which -- 21 Q. T8038. 22 MR. RINALDI: Your Honor, I would move 21024 1 the admission of Exhibit T8175. 2 MR. BLANKENSTEIN: Just one second, 3 Your Honor. No objection. 4 THE COURT: Received. 5 Q. (BY MR. RINALDI) Now, I notice that 6 this comes up on February 11th, 1988. Prior to 7 the compensation committee considering this matter 8 at the behest of Barry Munitz, did you have a 9 conversation with Mr. Munitz? 10 A. I do not recall. 11 Q. Did it come as a surprise to you, then, 12 when, in the course of the compensation committee 13 meeting, Mr. Munitz proposed that a special bonus 14 be provided by UFGI to pay off your note and that 15 of Mr. Crow's? 16 A. As I say, I had not remembered the 17 meeting. So, I really can't remember. 18 Q. Now, let's take a look at Tab 414, 19 T8040. This is the actual bonus agreement. 20 Before you take a look at it, can you 21 describe for me in your own words what you recall 22 the bonus provided for? 21025 1 A. Yes. It provided for the reduction -- 2 it provided, I think, a minimum bonus for the next 3 five years of 10 percent of the value of the note 4 and, at the end of the sixth year, for the balance 5 of the note, provided they stayed as an employee 6 of the institution. 7 Q. And do you recall that it also provided 8 for an additional bonus that would provide for the 9 payment of all future interest on the note? 10 A. I don't believe so. 11 Q. I'm sorry. That may have come later. 12 Excuse me. 13 So, initially, it was your obligation 14 to have paid the interest? 15 A. No. 16 Q. Whose obligation was it? 17 A. You misstated your question. I'm 18 sorry. 19 Q. All right. Well, then let me go back. 20 Let's take a look at the bonus agreement that sits 21 in front of you. 22 Open the document, please. It's 21026 1 Tab 411. I'm sorry. Tab 414, T8040. 2 A. All right. 3 Q. All right? And if you -- directing 4 your attention to the first paragraph, it talks 5 about a minimum bonus. 6 What was the minimum bonus? Do you 7 recall? Now, this is -- the Paragraph 1 -- 8 A. I'm not reading the same thing you're 9 reading. I've got a bonus agreement -- doesn't 10 even have a minimum bonus that I see. On the 11 first paragraph? 12 Q. No. First numbered paragraph. I'm 13 sorry. Please forgive me. 14 A. (Witness reviews the document.) Okay. 15 What was the question? 16 Q. Is that what you were referring to when 17 you talked about they were going to give you a 18 payment of 10 percent or a payment each year to 19 pay down the note? 20 A. Yes. And there was a caveat which I 21 had forgotten, and that is should the price of the 22 stock come back up to whatever the balance was -- 21027 1 let's see. The price of the stock -- just a 2 second. 3 Q. You mean if the stock had some value, 4 then that would reduce -- 5 A. If the shares should ever exceed the 6 purchase price, then future payments would 7 terminate. 8 Q. So, in other words, the shares were 9 pledged to secure the note. And if the shares 10 went up in value or had some value, then that 11 would reduce the amount of the note and also 12 reduce the amount of the bonus that you were 13 entitled to receive? 14 A. Yes. 15 Q. Okay. And then in Paragraph 3, it 16 talks about an extraordinary bonus. 17 Is this the bonus that was contemplated 18 would be paid in five years or six years hence, as 19 you mentioned? 20 A. Yes, sir. 21 Q. And that would have completely paid off 22 the obligation to -- under the note; is that 21028 1 correct? 2 A. That's correct. 3 Q. And was the purpose for giving this 4 bonus in order to entice you to stay on? 5 A. Yes, it was. 6 Q. Okay. And so, if you continued to work 7 at the institution and the institution continued 8 to thrive, your bonus would be paid. And 9 ultimately, that three-quarters-of-a-million 10 liability would be paid off; is that correct? 11 MR. BLANKENSTEIN: I think Mr. Rinaldi 12 is misstating the terms of the bonus, the 13 arrangement. I don't think there is any condition 14 about the financial position of the -- of UFGI's 15 condition for the award of the bonus. 16 Q. (BY MR. RINALDI) Sir, if you 17 continued to be employed by UFGI, was it your 18 understanding that the -- through 1993 that the 19 entire three-quarters-of-a-million-dollar 20 obligation would be paid off? 21 A. That is correct. 22 Q. And do you consider that to be a 21029 1 substantial incentive for you to stay at UFGI? 2 A. I thought it was a significant 3 incentive to stay. 4 Q. Okay. Now, did there come a time when 5 the bonus agreement was amended? 6 A. Yes. There did come a time it was 7 amended. 8 Q. Okay. And was that in about April of 9 1988? 10 A. I believe it was. 11 Q. Okay. And would you take a look at 12 Exhibit T8059, which is Trial Exhibit 2 -- I mean 13 424? 14 Now, before you look at that, let me 15 ask you: After the bonus was entered into on 16 February the 11th, did the financial condition of 17 UFGI improve at all? 18 A. No, it didn't. 19 Q. It continued to deteriorate, did it? 20 A. That's correct. 21 Q. Okay. Now, directing your attention 22 then to T8059, which is Tab 424, take a look at 21030 1 that and tell me if you recognize that document. 2 A. (Witness reviews the document.) You 3 want me to read it or just glance at it? 4 Q. Well, just take a look at it. And in 5 particular, I would like you to look at 6 Paragraph 6. 7 A. I did sign it. 8 Q. I'm sorry. And you indicated that that 9 is a document that you executed? 10 A. Yes. 11 Q. Okay. And if you look at Paragraph 6, 12 does it provide for an additional bonus over and 13 above the minimum bonus and the extraordinary 14 bonus that were in the February 11th, 1988 15 agreement? 16 A. Yes, it does. 17 Q. Okay. And can you describe for the 18 Court what the purpose of the additional bonus 19 was? 20 A. This was to include the interest to be 21 paid on the note. 22 Q. So that -- and annually, approximately 21031 1 what was the interest on the note? 2 Do you recall? 3 A. It was keyed to prime; so, it depended 4 on what prime was at the time. 5 Q. Okay. However, we did see that, I 6 think, in 1987, the interest was, I think, around 7 $68,000? 8 A. I think that's a little overstating it 9 because I looked at my tax return. I don't think 10 it was quite that much. 11 Q. Okay. But it would have been in the 12 vicinity of 65,000, something like that? 13 A. I think it was 62, 63, somewhere in 14 there. 15 Q. Okay. So, UFGI was now obligating 16 itself to continue to pay the interest on the 17 three-quarters-of-a-million-dollar note until the 18 note was paid off. 19 Is that fair? 20 MR. BLANKENSTEIN: Objection. He 21 stated that they were continuing to pay. They 22 assumed that obligation under this bonus 21032 1 arrangement. We established in the February 2 agreement that there was no arrangement to pay the 3 interest. 4 Q. (BY MR. RINALDI) Had the interest 5 been paid in 1987 for you? 6 A. For me? 7 Q. Yes. 8 A. No. 9 Q. Had you been given a bonus for the 10 purpose of paying the interest, sir? 11 A. Somebody wrote on there about that, but 12 I -- if you look at the percentages of bonus and 13 start computing out -- where is that document 14 again? We've got that floating around here 15 somewhere. 16 Q. Oh, you mean the salary and bonus 17 increases? 18 A. Yes. Do you know which one that is? 19 Q. Certainly. If you just give me a 20 moment, I can certainly locate it. It would be -- 21 I believe it's Tab 410, and it's Exhibit T8026. 22 There you are, sir. 21033 1 Is that the document you're referring 2 to? 3 A. Yes. 4 Q. Okay. And is there some question in 5 your mind whether a portion of the bonus was 6 intended to pay your -- or was intended to offset 7 the interest expense on your note? 8 A. If that were the case, if that's what 9 you want to call that, then I guess what you would 10 say is that my bonus was instead of, let's say, 11 the 80 percent shown here, would have been 80 12 minus 68, which would have been 162 -- 13 Q. $167,000? 14 A. So, would be about a 55 percent bonus. 15 So, you know, whoever prepared this sheet may have 16 looked at it this way. I just looked at it -- I 17 was getting a bonus -- I was getting a bigger 18 bonus percentagewise than other people because I 19 was the chief executive officer. 20 Q. I see. 21 A. Otherwise, I would have been down 22 here -- percentagewise down here below Williams 21034 1 and Wolfe and so forth. 2 Q. Well, let me ask you this: Who signed 3 off on those? Was it Mr. Munitz? 4 A. No. It was Mr. Whatley. 5 Q. Well, I understand that. But doesn't 6 Mr. Munitz indicate that after the document was 7 prepared that he had reviewed it and indicated 8 that -- something about it being the official 9 list? 10 Do you have some doubt that Mr. Munitz 11 intended that bonus amount would include interest 12 on your note. 13 MR. VILLA: Objection. I'm not sure 14 what he's referring to about what Mr. Munitz did 15 and didn't intend. 16 A. All Mr. Munitz did was run this 17 official list which it says over here on base 18 salary. I don't know what that is. 19 Q. (BY MR. RINALDI) But it's sort of 20 summarized because I think we've sort of clouded 21 some facts here. 22 You received a bonus of $235,000? 21035 1 A. That's correct. 2 Q. And that was paid in 1988 for services 3 in 1987? 4 A. That's correct. 5 Q. And at least the salary and bonus 6 approvals page that's signed by Mr. Whatley 7 indicates that a portion of that bonus was 8 intended to be for the purpose of paying interest 9 on a note. 10 Is that fair? 11 A. That's what it says. 12 Q. Okay. And prior to February the 11th, 13 you had no bonus agreement or no other written 14 contractual arrangement with UFGI or USAT whereby 15 they would pay the interest on your note? 16 A. That's correct. 17 Q. And after February 11th, there was 18 still no arrangement for UFGI or USAT to pay the 19 interest on the note until April the 25th, 1988? 20 A. That's correct. 21 Q. And on April the 25th, 1988, the 22 February 11th bonus that you previously entered 21036 1 into was modified to provide for an additional 2 bonus, was it not? 3 A. Yes, it was. 4 Q. And the additional bonus provided for 5 the payment of all future interest on the note so 6 long as you remained employed at UFGI? 7 A. That's correct. 8 Q. Now, was there also a change of control 9 provision in the April 25th, 1988 bonus agreement? 10 A. Was there a change of control -- 11 Q. Yeah. 12 A. -- in the April 25th one? 13 Q. Yeah. This is Exhibit T8059. Did you 14 understand -- 15 A. Yes. I see it here. 16 Q. And what was your understanding of the 17 change of control provision? Did you understand 18 that if there was a change of control and you were 19 terminated without cause that you would be 20 entitled to a severance bonus that would pay off 21 the note? 22 MR. BLANKENSTEIN: Are you asking him 21037 1 whether -- 2 MR. RINALDI: I'm asking him what he 3 understood. Did he understand that? 4 MR. BLANKENSTEIN: Is that a 5 conjunctive -- do both of them have to occur, both 6 conditions? 7 Q. (BY MR. RINALDI) Sir, what did you 8 understand? 9 A. Let me read what it says. I don't 10 remember. (Witness reviews the document.) It 11 says, "If employee leaves the employ of the 12 company after a change of control as defined 13 below, such departure shall, for purposes of this 14 agreement, be deemed a termination by the company 15 without cause." Now, do I need to read beyond 16 that? 17 Q. Well, did you understand that if you 18 were terminated without cause, you would have no 19 obligation to pay off the note or the note would 20 be paid off? 21 A. That's correct. 22 Q. So, in other words, at a point in time 21038 1 when UFGI was or -- strike that. 2 At the point in time when executive 3 management was questioning the future viability of 4 UFGI, UFGI entered into an agreement with you to 5 pay off your note; is that correct? 6 A. Provided I stayed for an additional six 7 years. 8 Q. And in the event that you were 9 terminated, you would have no obligation under the 10 note; isn't that correct? 11 A. If I was terminated without cause, 12 that's correct. 13 Q. Okay. Sir, after you entered into the 14 new -- or I'm sorry. After you and the other 15 members of the board of USAT approved the 16 February 11th, 1988 contracts, did there come a 17 time when it was brought to your attention that 18 because of the resignation of directors of UFGI, 19 that there had been a change of control in the 20 September 9th, 1987 UFGI contract? 21 A. Yes. 22 Q. Okay. And can you describe for the 21039 1 Court what you recall about that? 2 A. Best I recall, Jeff Gray -- I think he 3 approached Art Berner, if I remember correctly -- 4 said, "Look. There has been a change of control 5 of the company in accordance with my contract and 6 I would like to be paid off." 7 And Art said, "Well, that's not what we 8 had meant when we wrote the change of control 9 provision in the contract." 10 And so, at that point -- I'm sorry. 11 Would you repeat the question? 12 Q. If the change of control had occurred 13 and Mr. Gray had left, what was your understanding 14 of the obligation that UFGI had to Mr. Gray under 15 its September 9th, 1987 contract? 16 A. Well, there was a dispute. In other 17 words, I think Art Berner's position was that it 18 hadn't been triggered; and Jeff's position was 19 that it had been. 20 So, my guess is that had he left the 21 institution, that we would have ended up 22 litigating or arbitrating or something over the 21040 1 issue. 2 Q. Okay. And my question was: In the 3 event that Mr. Gray were correct, what was 4 Mr. Gray entitled to? 5 Do you recall that? 6 A. Let's see. We've got that contract 7 here. Do you know which one that is? 8 Q. Well, if Mr. Gray's is the same as 9 Mr. Crow's, take a look at Exhibit B1743. 10 Do you see that? 11 A. 1743? 12 Q. What is the tab number for it? Here it 13 is, sir. 14 A. Thank you. 15 Q. Let me just ask you this: Do you 16 recall that generally all of the contracts both 17 with USAT and UFGI had severance provisions that 18 would provide for two years' annual salary in the 19 event of termination of an employee? 20 A. That sounds right, but I don't know if 21 that... 22 Q. Do you recall that if Mr. Gray were 21041 1 correct, that the triggering of the change of 2 control would have resulted in substantial 3 payments having to be made by UFGI to members of 4 the executive -- senior executive staff of UFGI? 5 A. Yes, I do. 6 Q. Okay. Now, did there come a time when 7 you were approached by Mr. Crow and Mr. Crow 8 suggested a mechanism for resolving the change of 9 control problem? 10 A. I don't remember if it was Mr. Crow or 11 Mr. Berner, but I know that it was brought up. 12 Q. Okay. Take a look at Tab 1372, which 13 is 8046. I'm about to hand that to you. 14 MR. BLANKENSTEIN: Is that T8046? 15 MR. RINALDI: Yes. T8046. 16 Q. (BY MR. RINALDI) And I'll hand this 17 to you, sir. 18 A. I see that. 19 Q. Okay. Now, do you recognize this 20 memorandum? 21 A. I've seen it in the last few days. I 22 did not recall having seen it in the past. 21042 1 Q. Do you have any reason to doubt that 2 Mr. Crow provided you with a copy of this 3 memorandum at or about the time that it's dated? 4 A. No. 5 Q. And it starts off and says, "proposed 6 contract solution." 7 Do you see that? 8 A. Yes, I do. 9 Q. And in the first paragraph, it talks 10 about "With the resignation of three directors 11 subsequent to the February 11th, 1988 meeting" -- 12 strike that -- "subsequent to the February 11th, 13 1988 board meeting, a change of control has 14 occurred under the definition in the employment 15 contracts entered into by six executives." 16 Now, are the contracts being referred 17 to there the September 9th UFGI contract? 18 A. As I say, I don't remember the letter; 19 so, I don't know -- that's the only contract that 20 was outstanding at that time, wasn't it? 21 Q. Well, there was also, as it indicates 22 in the first sentence, the February 11th, 1988 21043 1 contract. 2 A. No. It says under the -- no. There is 3 a period. Under the contract -- there is a period 4 in there. I don't read that that way. 5 Q. Okay. Well, did you understand -- let 6 me hand you a copy of what's been marked as 7 Exhibit -- Trial Exhibit 463, and it's 8 Exhibit B2082. And this is the letter that was 9 given to you or was given to the board by 10 Mr. Gray. 11 Do you recognize that, sir? 12 A. I don't -- you know, I don't remember 13 seeing it. That doesn't mean I didn't. 14 Q. Okay. But it's addressed to UFGI, 15 correct? 16 A. Yes. 17 Q. And it makes reference to a change of 18 control in the September 9th, 1987 agreement 19 between the company and Mr. Gray. 20 Do you see that? 21 A. Yes. 22 Q. Does that refresh your recollection, 21044 1 then, that the change of control that Mr. Crow was 2 referring to in his memorandum to you related to 3 UFGI's contract? 4 A. Yes, sir. You were asking me which. 5 It says the September 9th one. So, that -- 6 Q. Okay. And he goes on. He says, "There 7 needs to be a restructuring of the employment 8 contracts," and then there is a series of bullets. 9 Do you recall that Mr. Crow proposed 10 that in order to resolve this change of control 11 issue that the executives who had contracts with 12 UFGI should be given new contracts with both UFGI 13 and USAT? 14 A. He says restructuring. Whether that's 15 new or amending that one, I don't know. But they 16 certainly need to be changed. 17 Q. Okay. And do you recall that under 18 that restructuring, that the salary of the 19 individuals involved was going to be increased -- 20 strike that. 21 Do you recall that the salary structure 22 was going to be changed? 21045 1 A. Yes, I do. 2 Q. And what is it that you recall was 3 going to be done with respect to the salary? 4 A. I'm just reading. It says, "Effective 5 January 1st, 1988, add 1987 actual bonus amounts 6 to base salary figures immediately. This would 7 fully compensate individuals, even if some outside 8 entity/authority removed bonuses entirely." 9 Q. Okay. Now, what does that last 10 sentence -- what do you understand that last 11 sentence to mean, "This would fully compensate 12 individuals even if some outside entity/authority 13 removed bonuses entirely"? 14 A. I think he's saying if somebody else 15 took over the institution, did away with the 16 bonuses, that this would be a method of 17 compensating the individuals. 18 Q. Was there a concern at this point in 19 time that if USAT were placed into receivership, 20 that -- into receivership, the contracts could be 21 voided and that no bonuses could possibly be paid 22 to the senior executives? 21046 1 A. I don't -- you know, I don't think that 2 was a major concern at this time because we had 3 never even gotten a notice that we were below 4 regulatory net worth, I don't believe, at that 5 time. 6 Q. Well, but surely by this point in time 7 you had spoken to your auditors? 8 A. Yeah. But, you know, you're trying to 9 talk without looking at what was going on in the 10 meantime. We've got a forbearance agreement in. 11 They have told us we were going to be survivors. 12 We were trying to get into the Southwest Plan. 13 We're talking about trying to get some FSLIC real 14 estate and give the subordinated notes to get 15 capital. There is about half a dozen things going 16 on to improve the institution. And, you know, 17 they don't want us to fail either. They were 18 trying to work with us to make sure that we were 19 survivors. 20 So, I don't -- you know, whether it 21 could have been -- I guess it could have been, but 22 I don't think that anybody's worried about -- you 21047 1 know, I don't think that's an issue in this. 2 Q. Well, do you recall that Mr. Berner had 3 contacted a Tom Leahey from Kirkpatrick & Lockhart 4 during this time frame and asked Mr. Leahey 5 specifically whether USAT entered into contracts 6 with its executive staff that provided for 7 severance benefits, whether the contracts could 8 result in an unsafe and unsound practice? 9 A. I don't recall that. 10 Q. Do you recall that Mr. Leahey wrote 11 back and said such contracts, in the event USAT 12 was placed into a receivership, were likely to be 13 voided by the FSLIC? 14 MR. VILLA: Objection. That misstates 15 the letter. He knows it misstates the Leahey 16 letter. Misstates the evidence in the record, 17 Your Honor. Object to the question. 18 THE COURT: Restate the question. 19 Q. (BY MR. RINALDI) Do you recall 20 whether Mr. Berner advised you that he had 21 received a letter from Mr. Leahey in which 22 Mr. Leahey had informed him that in the event of a 21048 1 receivership, it was his experience that 2 employment contracts were subject to being voided 3 by the FSLIC? 4 A. I don't recall. We're talking about 5 UFG contracts, aren't we, not USAT contracts? 6 Q. Well, as you recall, there was a second 7 set of contracts entered into on February the 8 11th, 1988. 9 A. But we were talking about Jeff Gray's 10 letter, and he refers to the UFG contract. 11 Q. I know. And now we're talking about 12 how to solve the change of control problem, and 13 the proposal is to enter into new contracts, 14 correct? 15 A. Excuse me. I dropped my glasses. 16 Q. Sure. I'm sorry. 17 A. Okay. 18 Q. And the proposal at this point is to 19 enter into new contracts, sir, to resolve the 20 change of control problem under the old UFG 21 contract. 22 A. Well, there was some different language 21049 1 in the USAT contracts that was put in because it 2 was a thrift. And I'd have to read the language. 3 I imagine it made it clear that if the regulators 4 came in, they could do anything they wanted to do. 5 Q. And you understood that, didn't you? 6 A. Yeah. So, that's why -- 7 Q. Okay. 8 A. But that's in the February contract. 9 Q. My question to you was: Was one of the 10 reasons for putting the bonus into the base salary 11 so that in the event that the contracts were 12 ultimately voided, the bonuses that wouldn't be 13 paid until the end of the year would have already 14 at least partially been paid as salary? 15 MR. BLANKENSTEIN: What contracts are 16 we talking about, Mr. Rinaldi? I'm confused. 17 MR. RINALDI: We're talking about the 18 proposed new contract that Mr. Crow is proposing 19 to Mr. Gross in his memo dated March the 22nd, 20 1988. And if you read the document that's in 21 front of you, Mr. Blankenstein, you will see that 22 Mr. Crow advises Mr. Gross that this would -- by 21050 1 entering into a new contract and rolling the bonus 2 into the base salary, that, quote, "This would 3 fully compensate individuals even if some outside 4 entity/authority removed bonuses entirely." 5 And I'm asking Mr. Gross if the reason 6 for making that proposal or considering that 7 proposal was to pay the bonus as part of salary so 8 that in the event that USAT went into receivership 9 and USAT was unable to pay bonuses, the bonuses 10 would have been partially paid. 11 A. And my answer to you is I don't recall, 12 but I don't think that was what they were trying 13 to do. 14 Q. (BY MR. RINALDI) Well, let me ask you 15 this. If you don't recall, how can you -- 16 A. Okay. Then I just don't recall, 17 period. 18 Q. Okay. Now, turning your attention to 19 the last bullet point, it indicates that the 20 contracts would be secured by letters of credit 21 paid directly to the executive in case of 22 non-performance by the company. 21051 1 Do you see that? 2 A. I do. 3 Q. Now, why were you considering a letter 4 of credit? 5 A. Because we were a company that had been 6 going through transition. And prior to this, even 7 though these officers had had -- not had 8 contracts, as we were bringing in new senior 9 officers, we had on two separate occasions prior 10 to this given senior officers salaries and secured 11 them with letters of credit. 12 So, this -- you know, what they are 13 really saying, you know, it's the old story. When 14 you bring a new employee and you give them a 15 higher pay and you've got the existing employees 16 saying, you know, "Hey, what am I? Chopped 17 liver?" 18 So, you've got a situation where you've 19 got six senior officers who have a lot of 20 experience and you've brought in two other people 21 and given them contracts, given them letters of 22 credit to secure them. And you say, "Hey, boys. 21052 1 You've been here too long and worked too hard. 2 You're not entitled to what the new people got." 3 Q. And who were the new people that you 4 brought in, sir? 5 A. The ones I can recall offhand would 6 have been Sandy Laurenson and I believe Gene 7 Stodart. 8 Q. Okay. And Sandy Laurenson, you had to 9 go all the way to New York for, didn't you, to 10 find someone to manage the mortgage-back 11 securities risk-controlled arbitrage portfolio? 12 A. We basically went looking for the most 13 competent person we could find at that time; and 14 whether they were in New York or Houston or in 15 Humble, Texas, that's what we were looking for. 16 Q. Yeah. And at that point in time, 17 because as you described earlier, Ms. Laurenson 18 was coming to USAT, an entity that was having some 19 substantial financial problems, she wouldn't have 20 come unless you could give her some kind of 21 guarantee that if she came and the institution was 22 not viable in the future, that she would be 21053 1 guaranteed some portion of her salary; isn't that 2 correct? 3 A. That's correct. 4 Q. So, the reason you gave the letter of 5 credit was to entice her to come in the first 6 instance, wasn't it? 7 A. I don't know what -- what difference 8 does it make? I don't understand -- you know, if 9 you're doing that to -- 10 Q. Sir -- 11 MR. BLANKENSTEIN: Why don't you let 12 him answer the question? 13 MR. RINALDI: Well, I don't want to 14 interrupt you, sir. 15 THE COURT: All right. Would you 16 answer his question? 17 THE WITNESS: Yeah. I can't see -- if 18 you're saying. "gee, I'm hiring this person from 19 afar to come down here and work" and they say, 20 "I'm only going to come down because I want a 21 letter of credit," and then you hire another 22 one -- and I don't know where he came from, but 21054 1 wherever he came from, I'm sure we paid his 2 transportation expenses. But be that as it may, 3 we offered him a letter of credit. 4 Now, here's Mike Crow sitting here 5 who's been here five or six years. And up until 6 now, he's never had a contract and he's never had 7 a secured contract. 8 So, I can't -- you know, if I'm an 9 employee of an organization and they start giving 10 people that are coming in new things they are not 11 giving me, at some point I'm going to start 12 looking around for another roost in which to 13 light. 14 And, you know, you've got -- you 15 can't -- No. 1, these people had -- could see 16 other people in the institution getting them and, 17 you know, there is nothing that gets out quicker 18 than what somebody else is making in an 19 institution. And so, you've got to somehow get 20 parody. 21 Q. (BY MR. RINALDI) Sir, why didn't you 22 just hire somebody in Houston to manage your 21055 1 risk-controlled arbitrage mortgage-backed security 2 portfolio? 3 A. I'm sorry. Would you repeat the 4 question? 5 Q. Why didn't you just hire a local person 6 to handle your risk-controlled arbitrage 7 mortgage-backed portfolio? 8 A. We thought the person we hired was 9 better than anybody we happened to find locally. 10 Q. Were there a lot of people locally that 11 were capable of managing the kind of 12 mortgage-backed security risk-controlled arbitrage 13 portfolio that you were operating? 14 A. I really don't recall. 15 Q. And why was it necessary to go -- to 16 bring in Mr. Stodart from outside of Houston? 17 Were there a lot of people in Houston that were 18 competent to manage the high-yield bond portfolio? 19 A. We did a headhunter search and we 20 interviewed a number of people and he turned out 21 to be the best one for the job. So, we hired him. 22 Q. And in order to entice those people to 21056 1 come here, you had to give them letters of credit? 2 A. That's correct. 3 Q. Okay. Now, what was the condition or 4 the availability of thrift executives in Houston 5 in 1988? 6 A. Well, let's even say there was a large 7 supply of them. Do you realize if we had taken 8 six senior officers and given them two times their 9 annual salary and they had all walked out the 10 front door, we would have lost our major resource 11 and hope for getting in the Southwest Plan. You 12 know, one of the comments of Vivian Carlton was 13 our turnover of senior personnel. And one of the 14 things that we were most -- one of the things that 15 Neil Twomey referred to and one of the things that 16 everybody talked about was the quality of our 17 management team. 18 And to say here we're going to throw 19 everybody out the front door, give them two times 20 their annual salary and then we're going to hire 21 these other people and run into a situation like 22 we did with Larry Connell, having to give him a 21057 1 hundred thousand-dollar signing bonus, you know, 2 you're trying for continuity. You're in a crisis. 3 And to take the guys who know about the 4 forbearance plan or who know about all these other 5 plans and say, "Here's a check. Go away," and 6 then start all over and have to let these other 7 people get trained, you'd go -- you'd be over -- 8 you know, drown. 9 Q. Is it fair to say, then, sir, that you 10 believed that there had been a change of control 11 with the resignation of the directors and that 12 these individuals could leave and collect two 13 times annual salary from UFGI? 14 A. Well, I'm not an attorney. I know that 15 I had a bonus contract. I didn't try to say my 16 bonus was triggered. But I will say that -- you 17 know, as you well know, when there is this side 18 presenting an argument and this side presenting an 19 argument, it's going to go -- as I say, to 20 arbitration and litigation. And the risk of the 21 ill will that you're going to create with those 22 officers if some of them stay while they litigate 21058 1 versus the others who walk out the front door and 2 give you a shortage, it's just -- I mean, it's 3 beyond the pale. 4 THE COURT: We'll take a short recess. 5 6 (Whereupon, a short break was taken 7 from 11:25 a.m. to 11:45 a.m.) 8 9 THE COURT: Be seated, please. We'll 10 be back on the record. 11 Mr. Rinaldi, you may continue. 12 MR. RINALDI: Thank you, Your Honor. 13 Q. (BY MR. RINALDI) Mr. Gross, when we 14 broke, we had just been speaking about the 15 availability of thrift executives in Houston and 16 Texas. 17 Do you recall that? 18 A. Yes, sir. 19 Q. Okay. Would you agree that there were 20 a substantial number of unemployed thrift 21 executives in Houston and Texas in 1988? 22 A. I would imagine that's probably a true 21059 1 statement. 2 Q. And in light of that fact, where did 3 you think that the executives of USAT were going 4 to go if they determined that they should leave 5 the institution? 6 A. Well, you know, they don't have to stay 7 in this industry. And one of the executives who 8 had left that year had been hired by the Federal 9 Home Loan Bank to run another thrift and someone 10 was a consultant. But, you know, there is no 11 reason they had to stay in Houston. For instance, 12 Gerry Williams got a wonderful job up in Ohio, I 13 think, when he left. So, there was no reason to 14 say they are chained to Houston and there is no 15 reason they are chained to this industry. And the 16 chances are -- you know, the way it works is I 17 would go get a job before I quit. I'd find a 18 place to work, and then I'd tell you, "I've gone." 19 Q. Now, did anyone come to you and say to 20 you that if they didn't get a substantial raise 21 and a severance package that included two times 22 annual salary secured by a letter of credit or 21060 1 some other feature, that they were going to leave 2 the institution? 3 A. You put a bunch of things in. Run it 4 by me again, if you will. 5 Q. Well, did anyone come to you and tell 6 you if they didn't get an employment contract 7 along the lines that you were proposing at this 8 point in time, that they were going to leave USAT? 9 A. Well, Jeff Gray had already made it 10 clear that he was considering leaving. 11 Q. He thought that the change of control 12 provision had been triggered? 13 A. Yes. And whether -- you know, I 14 imagine -- I can't really recall. I'm sure that 15 there was a lot of concern -- people don't walk up 16 to you and say, "If you don't do this for me, I'm 17 leaving." They are going to go -- you know, they 18 are going to go get another option and then come 19 back and talk to you. 20 Q. Well, let me ask you this. At this 21 point in time, were you planning on leaving? 22 A. No, I wasn't. As I said, if I wanted 21061 1 to leave -- I could have taken the same position 2 that Jeff Gray did. 3 Q. And you also would have been subjected 4 to the 750,000-dollar note that you still owed? 5 A. Well, I would have been forgiven that 6 note under the terms of it. 7 Q. Well, did the change of control 8 provision come in initially, or was that a 9 subsequent provision to the April 25th amendment? 10 MR. BLANKENSTEIN: I'm not sure what 11 he's asking. Are you asking about the February 12 and April contracts? 13 MR. RINALDI: Yeah. 14 Q. (BY MR. RINALDI) Did the original 15 February 11th contract have a change of control 16 provision? 17 A. Are you asking about my bonus 18 agreement? 19 Q. Yeah. 20 A. My bonus agreement had the change of 21 control in it. 22 Q. But you didn't believe that a change of 21062 1 control had occurred. Right? 2 A. I was -- you know, I was determined to 3 stay and make the institution survive and prosper. 4 My whole philosophy all down the line was that we 5 were going to be a survivor and we were going to 6 come out of this thing successfully. 7 Q. So that, from your perspective, you 8 didn't need a new employment contract with any 9 severance benefits in order to stay on, did you? 10 A. And I didn't ask for one. 11 Q. How about Mr. Munitz? Why did 12 Mr. Munitz have a need for a new employment 13 contract? 14 A. You know, I -- as I told you before, 15 most of the compensation work was done between 16 Mr. Munitz and Mr. Whatley, and I really don't 17 know -- the contract was offered to me. Whether 18 it was offered to him or whether he asked for it, 19 I really can't tell you. 20 Q. Well, he asked for one, didn't he? 21 A. I don't know. 22 Q. You didn't attend meetings with 21063 1 Mr. Whatley and Mr. Munitz at which Mr. Munitz 2 said to Mr. Whatley, "I think Jenard Gross and 3 myself should be given employment contracts"? 4 A. I don't recall that. 5 Q. In fact, you attended several meetings 6 at which that was discussed, didn't you? 7 A. I don't recall his ever saying that -- 8 he telling Mr. Whatley he wanted contracts for the 9 two of us. 10 Q. Now, let me ask you this. Why was it 11 necessary to give a new contract to Mr. Crow? I 12 mean, he also had a provision in his contract -- I 13 mean a note that he owed to USAT -- UFGI, didn't 14 he? 15 A. That's correct. 16 Q. And in the event that Mr. Crow were to 17 leave voluntarily, he would have been obligated to 18 pay the full amount of the note back to UFGI, 19 wouldn't he? 20 A. No. He had -- wait a minute. If he 21 left on the change of control issue, he wouldn't 22 have to pay it back. 21064 1 Q. Right. But Mr. Crow didn't believe 2 there was a change of control either, did he? 3 A. Let me -- I don't know what anybody 4 else believed. Mr. Berner did not believe it, and 5 he was our general counsel. 6 Q. And he would have been the person you'd 7 rely on for these kinds of determinations; is that 8 correct? 9 A. That's correct. 10 Q. Now, did Mr. Crow ever tell you that if 11 he didn't receive a substantial salary increase by 12 rolling his prior year's bonus into his base 13 salary for 1988 that he would leave? 14 A. I don't recall his having done so. 15 Q. Did he ever tell you that he 16 wouldn't -- he would leave unless he received an 17 employment agreement with USAT and UFGI? 18 A. I don't recall. 19 Q. And how about Mr. Berner? Why was it 20 necessary to give Mr. Berner a new contract? 21 A. You know, I thought we had covered 22 that. But I guess the bottom line of this whole 21065 1 issue is, you know, we're running a large 2 organization. And, you know, when you've got a 3 sizable company to run, one person can't run it. 4 And -- 5 Q. Did Mister -- 6 A. Excuse me. And if what you're trying 7 to do is keep highly-motivated employees working 8 hard as a team because you want to hang around -- 9 I mean, we've been through this before. It's 10 obvious when all these people have a shot at two 11 times their annual salary -- there might be a 12 kicker in that. Was there a bonus in that 13 severance, as well? I can't recall. But whatever 14 it was in there -- and you're saying to them, you 15 know, "We gave this to Stodart and we gave this to 16 the other ones and we're not" -- you know, you've 17 got a chance at two times and, you know, there is 18 an awful lot of ego involved in human relations. 19 And you just can't, in a period of stress, you 20 can't just tell everybody, "Well, trust me. 21 Everything's going to work out all right. Don't 22 worry about it." If you're giving security to 21066 1 other people, you owe it to them, too. 2 And now, they have got a legitimate 3 issue. They have got a legitimate issue, and I 4 don't know how it's going to come out if it gets 5 into court or arbitration. It may be that we'll 6 have to pay all six of these people two times 7 their annual salary, and it could be that we'll 8 lose all six of these people. 9 As I said before, I just want to keep 10 the team intact. And, you know, Vivian Carlton 11 had said it was -- made comments about the fact 12 that we were losing -- the turnover of senior 13 personnel in 1987. And so, we were trying to 14 address that because we were very interested in 15 getting into the Southwest Plan and we knew that 16 we had a good team and we didn't want to lose 17 them. 18 So, the fact that you give them a 19 little more when they could have gotten more by 20 walking out the front door is just a way of 21 offsetting your risk that you had the other way if 22 they go. 21067 1 Q. Did Mr. Berner ever tell you that he 2 was going to leave unless he got a 60 percent 3 salary increase, sir? 4 A. I told you, I don't recall. 5 Q. Now, would you take a look at what's 6 been previously admitted as Exhibit T8050? It's 7 Trial Exhibit 418. And maybe you can help us out 8 with this one, sir, because these are the minutes 9 of the compensation committee of United Financial 10 Group, Inc. and United Savings Association of 11 March 30th, 1988. 12 Do you see that, sir? Take a moment to 13 read them. 14 A. (Witness reviews the document.) All 15 right. I've read it. 16 Q. Okay. And you attended the board 17 meeting of the compensation committee again on 18 March 30th, 1988, correct? 19 A. Yes, I did. 20 Q. Now, did you -- it says, "Mr. Berner 21 reviewed in detail the current status of 22 employment contracts." And then it says, "He 21068 1 presented a proposal which was discussed with and 2 approved by the committee." 3 Do you see that? 4 A. Yes. 5 Q. Okay. Did you, along with Mr. Munitz, 6 make a recommendation to the committee at that 7 meeting? 8 A. I really don't recall. 9 Q. Well, what is the proposal that's being 10 referred to there by Mr. Berner? 11 Do you recall? 12 A. It's not attached to this; so, I don't 13 recall what it is. 14 Q. It talks about the resolution of a 15 problem. 16 Do you remember what the problem was 17 that -- 18 A. That's the problem we've been 19 discussing, the change of control problem. 20 Q. Okay. And so, there was a proposal 21 made to the USAT board and the UFGI boards, 22 correct? I'm sorry. Strike that. 21069 1 There was a proposal made to the UFGI 2 and the USAT compensation committees, correct? 3 A. Yes. 4 Q. And what was the composition of the 5 compensation committee at this point in time? 6 A. What was it? 7 Q. Yes. 8 A. It was Mr. Whatley. 9 Q. Okay. And so, a proposal was made to 10 Mr. Whatley; and that was one that was formulated 11 by whom? 12 A. You know, I'm not sure who actually 13 formulated it. 14 Q. Did you participate in the meetings 15 that led up to the recommendation, sir? 16 A. I did not formulate the proposal. 17 Q. Did you participate in the meetings 18 that led up to the recommendation that was made to 19 Mr. Whatley? 20 A. I don't recall. 21 Q. Okay. And did Mr. Whatley then approve 22 the proposal that was made by Mr. Berner? 21070 1 A. Yes. 2 Q. Now, do you recall what it's talking 3 about, "retaining a compensation specialist to 4 pass on the fairness of the proposal"? 5 A. I didn't -- I didn't recall it, but -- 6 I did not recall at the time. 7 Q. Okay. Now, from looking at these 8 minutes, you can't really tell what actually 9 occurred at the minutes -- at the compensation 10 committee, can you? 11 A. No, sir. 12 Q. But have you had occasion in reviewing 13 the documents to review a document that further 14 elaborates on what occurred at the compensation 15 committee? 16 A. Yes, I have. 17 Q. And let me show you a copy of T8053, 18 which is Trial Exhibit 421, and ask you if you 19 recall seeing that document before. 20 A. (Witness reviews the document.) I've 21 seen it in the last couple of weeks. 22 Q. Now, it indicates that Mr. Berner 21071 1 prepared this document and that it was privileged 2 and confidential attorney work product. 3 Do you see that? 4 A. Yes, I do. 5 Q. Was it Mr. Berner's practice to attach 6 work products to the compensation committee 7 minutes? 8 A. I certainly don't recall. 9 Q. Well, do you recall him ever putting 10 confidential or privileged documents in the 11 minutes? 12 A. I don't recall seeing the compensation 13 committee minutes and going into them extensively 14 in the past. 15 Q. Okay. Now, do you recall attending the 16 meeting at which all of these subjects that are 17 listed on the first -- I mean these two pages of 18 this document were discussed with Mr. Whatley? 19 A. I don't recall it, but obviously -- but 20 my name is on here. I'm sorry. Would you restate 21 the question? 22 Q. Well, do you recall -- 21072 1 A. Do I remember attending the meeting? 2 No. 3 Q. Now, the memo says that -- in the first 4 sentence -- that it's going to -- the directors 5 are going to take the position that there's been 6 no change of control. 7 Do you see that? 8 A. Yes, I do. 9 Q. And that's what you related to us 10 earlier about how it was the board of directors' 11 view that it had never been the intent that there 12 had been a change of control under the contracts 13 of UFGI? 14 A. That's correct. 15 Q. Then in the next sentence, it says, "We 16 will change current salaries effective 17 January 1st, 1988, to reflect the true market 18 value of certain employees equal to the 1987 19 salary plus bonus received in 1988 for 1987 work." 20 Do you see that? 21 A. Yes, I do. 22 Q. Was that the proposal or substantially 21073 1 similar to the proposal we talked about earlier 2 that Mr. Crow made to you in his March 22nd, 1988 3 memorandum? 4 A. That looks like part of it, yes. 5 Q. Okay. And was Mr. Crow, then, the 6 source of that suggestion? 7 A. I don't know that he was the original 8 source, but he certainly wrote it in that 9 document. 10 Q. Okay. And after he submitted the 11 document to you, did you then review it with 12 Mr. Munitz? 13 A. Typically, on matters of compensation, 14 I would have just passed it off to him. You know, 15 I would get -- typically on any given day, I would 16 get about 4 inches in my in box. And I would just 17 try to look at what it pretty much dealt with. 18 And if it was something that dealt with 19 compensation, I would pass it on to Munitz. If it 20 was something that had to do with legal, I would 21 pass it on to Berner. If it was something that 22 had to do with finances, I would pass it on to 21074 1 Crow, and just sort of distribute it out. 2 Q. Did you agree with the proposal that 3 bonuses should be rolled into the salary to 4 increase the base salary, sir? 5 A. Yes. 6 Q. Okay. And did you then present that as 7 a proposal, along with Mr. Munitz, to Mr. Whatley? 8 A. I did not present this proposal to 9 Mr. Munitz. 10 Q. Okay. Well, then, maybe we're -- we 11 have a semantic difference. 12 Did you attend the meeting at which the 13 proposal was presented to Mr. Whatley? 14 A. It certainly appears I did. 15 Q. Okay. And did you support Mr. Whatley 16 adopting that proposal? 17 A. I agreed with what he proposed. 18 Q. You agreed with what who proposed? 19 A. With what Mr. Whatley had proposed. 20 Q. Okay. And what he proposed -- well, 21 strike that. 22 Mr. Whatley never proposed anything -- 21075 1 A. I agreed with Mr. Whatley's program. 2 Q. You mean the one that was proposed to 3 him by Mr. Munitz? 4 A. Yes. 5 Q. Okay. And you agreed with Mr. Munitz' 6 proposal. Is that a fair statement? 7 A. Yes. 8 Q. And you testified earlier that 9 typically on compensation matters, the proposal 10 would be made by Mr. Munitz to the compensation 11 committee and then they would act on Mr. Munitz' 12 proposals? 13 A. Yes. 14 Q. Okay. And is it the best of your 15 belief today that that's what occurred on March 16 the 30th, 1988? 17 A. Looking at this, that's what I believe, 18 yes. 19 Q. Okay. And I said March the 30th. The 20 document is actually dated March the 31st; but it 21 reflects that a meeting was held on March the 22 30th, correct? 21076 1 A. Yes. 2 Q. Okay. And then as we go down further, 3 it talks about, in Paragraph 5, a special 1988 4 bonus. Do you see? And that it would be paid 5 25 percent initially and 75 percent over time 6 after January 1989. 7 Do you see that? 8 A. Yes, I do. 9 Q. Do you recall what that made reference 10 to? 11 A. That was just part of this overall 12 package that is resolving -- excuse me. I've got 13 a frog in my throat this morning. 14 That was just part of the overall 15 package that was created to try to offset the 16 potential claims that we were facing. 17 Q. Okay. And can you just describe that? 18 Is that what's come to be known as the executive 19 bonus, sir? 20 A. If there is something labeled that. 21 It's called a special bonus here. Somewhere along 22 the line, it might have been referred to as that. 21077 1 Q. Can you just explain to us in your own 2 words how you recall that it was going to work? 3 A. What it says is that 25 percent of it 4 would be paid currently, and the balance would be 5 paid in January of 1989. 6 Q. Okay. And did you support that 7 proposal that was made by Mr. Munitz to 8 Mr. Whatley? 9 A. Yes, I did. 10 Q. Okay. And then the sixth thing says, 11 "We will provide for amended employment 12 contracts." 13 A. I'm sorry. Let me -- it also said if 14 they left prior to the first of the year, they 15 would forfeit the remaining 75 percent." 16 Q. Okay. So, this was a mechanism to keep 17 people there? 18 A. It was a golden handcuff. 19 Q. Okay. Now, Paragraph 6 says, "Will 20 provide for amended employment agreements." 21 Do you see that? 22 A. Contracts. 21078 1 Q. Yes. Did you agree with that proposal? 2 A. Yes. 3 Q. Then if you go on further, it says, 4 paren, that "The contracts would be along the 5 lines of the draft attached for those with 6 contracts now plus new contracts for Jenard Gross 7 and Barry Munitz." 8 Did you support that proposal that was 9 made to Mr. Whatley, that new contracts be made 10 available to Mr. Gross and Mr. Munitz? 11 A. I had no objection to it. 12 Q. So, is it fair to say that you did not 13 object when the subject was brought up by 14 Mr. Munitz? 15 A. That's correct. 16 Q. Did you understand that as a result of 17 this, you were going to receive approximately a 18 55 percent salary increase over and above the 19 $290,000 you were currently earning? 20 A. Well, I really wasn't going to receive 21 a salary increase. I was going to -- as I told 22 you earlier, United had a policy of paying a 21079 1 smaller salary and a larger bonus than most 2 financial institutions. And all we were doing was 3 combining the two and paying them on a monthly 4 basis. 5 Q. The bonuses at United were always 6 discretionary, weren't they? 7 A. Yes, they were. 8 Q. And so, in the event that the 9 institution did poorly or in the event that an 10 individual poorly performed his job, there was 11 always the possibility that that individual might 12 get a small bonus or no bonus at all, wasn't 13 there? 14 A. There is that possibility. 15 Q. However, under the new program, all 16 bonuses were guaranteed, correct? 17 A. They were going to be paid on a monthly 18 basis as part of the salary. 19 Q. And they were guaranteed irrespective 20 of the level of performance that the individual 21 performed at? 22 A. No. If he performed badly, you would 21080 1 let him go. 2 Q. And if you let him go, you'd have to 3 give him two years -- 4 A. No. If it was for cause, you wouldn't 5 have to give him anything. 6 Q. Now, following this meeting with 7 Mr. Whatley, is it your recollection, then, that 8 the bonuses -- I mean the salary adjustments and 9 the changes in the compensation that are set forth 10 in this document were carried out by USAT and 11 UFGI? 12 A. I'm pretty sure they were. You know, I 13 don't -- I don't have any reason to think they 14 weren't. 15 Q. Okay. Now, let me ask you this. It 16 says in Paragraph 2 that the new salaries were to 17 reflect the true market value of certain 18 employees. 19 How did you determine what the true 20 market value was of the various employees that 21 were going to be affected? 22 A. We took the premise that their bonus 21081 1 that they had received last year plus their salary 2 was at true market value and to verify that, 3 that's the way I understood it. 4 Q. And did you understand at this point in 5 time that all of the contracts for employees 6 including yourself -- 7 A. I'm sorry. 8 Q. Did you understand at this point in 9 time that all of the employment contracts with the 10 senior executives that were going to be entered 11 into would be secured by a letter of credit or 12 some similar mechanism? 13 A. I believe there was something here -- 14 let me see. Just a second. Yes. I think it 15 was -- I believe that's correct. But somewhere in 16 here -- all I see right now alludes to the bonus. 17 Q. Well, let me ask you this. Do you see 18 at the bottom of the page where it makes reference 19 to "a contract along the lines of the draft 20 attached"? 21 A. Yes, I see that. 22 Q. And do you recall that the draft that 21082 1 was attached provided for a letter of credit? 2 A. No, I don't. 3 Q. Okay. Let me ask you to take a look at 4 Exhibit T8052, and this is Tab 420. 5 Have you had a chance to look at that, 6 sir? 7 A. No. I -- 8 Q. Okay. Well, take a look at the first 9 paragraph. It says, "The following are notes and 10 suggestions to be discussed with Jim Whatley at 11 the compensation committee meeting and reflect 12 meetings on March 28th and 29th, 1988, among 13 Messrs. Gross, Munitz, and Berner." 14 Do you see that? 15 A. I do. 16 Q. Does that refresh your recollection 17 that, in fact, prior to the March 30th, 1988 18 meeting with Mr. Whatley, you had met with 19 Mr. Gross -- I'm sorry -- with Mr. Munitz and 20 Mr. Berner and discussed a possible solution to 21 the change in control issue? 22 A. I don't recall this meeting. 21083 1 Q. But you wouldn't dispute that you 2 received a copy of this memo? 3 A. No. 4 Q. Do you have any reason to believe 5 that -- to think that it doesn't accurately 6 reflect what occurred? 7 A. Not -- no. 8 Q. And then if you take a look at the 9 employment agreement that's attached, and if you 10 turn, I believe, to Section 9 I which, I believe, 11 appears on Page 13 -- 12 A. 9 -- oh. Page 13? 13 Q. You see at the bottom -- 14 A. I've got it. 15 Q. And it states that "During the term of 16 this agreement, the company shall obtain and 17 maintain a letter of credit with a national bank." 18 Do you see that? 19 A. I do. 20 Q. Does that refresh your recollection 21 that at the time Mr. Whatley presented the 22 proposal, it was the intention that the proposed 21084 1 employment agreements to be entered into by USAT 2 and UFGI would be secured by letters of credit? 3 A. Yes, it does. 4 Q. Okay. Now, sir, following this -- the 5 meeting on March 30th -- by the way, do you recall 6 when you met with Mr. Whatley whether there had 7 been any other meetings that same day involving 8 the board of directors of USAT? 9 A. Since I don't recall meeting with 10 Mr. Whatley, I don't recall the other meeting. 11 Q. Okay. Well, maybe we can jog your 12 recollection. Take a look at Exhibit 8049, which 13 has previously been admitted as Tab 405. 14 A. 8049. I'm sorry? 15 Q. I'm handing it to you, sir. 16 A. All right. 17 Q. I get a little slow on the draw here. 18 Okay. Take a look at 8049, and tell me if you 19 recognize that document. 20 A. I thought by now I had all of them over 21 here. 22 Q. No. We have a few to go. 21085 1 A. Okay. I see this. 2 Q. And I believe in the third paragraph, 3 it makes reference to a statement made by you. 4 So, I presume that you were in attendance. 5 Do you see that? 6 A. Yes, I do. 7 Q. It says, "Mr. Gross stated that the 8 purpose of the meeting was to hear the final field 9 examination results of the Federal Home Loan Bank 10 of Dallas' 1987 examination." And this took place 11 on March 30th, 1988, correct? 12 A. Correct. 13 Q. And do you recall what occurred at this 14 meeting? 15 A. Not without reading the minutes, I 16 don't. 17 Q. Do you recall that a meeting occurred 18 between the directors of USAT and the Federal Home 19 Loan Bank of Dallas at which they advised you that 20 they had concluded that USAT was failing its net 21 worth capital? 22 A. Well, I don't recall it. 21086 1 Q. Well, then take a moment to read the 2 minutes. 3 A. (Witness reviews the document.) All 4 right. 5 Q. And do you recall at that meeting that 6 Ms. Carlton informed the directors that the 7 Federal Home Loan Bank Board had concluded that 8 USAT was failing its minimum capital requirement 9 by $112 million? 10 A. Well, I don't -- I don't see it in 11 here, but I don't doubt it. 12 Q. Well, you indicate that Ms. Carlton 13 presented an agenda and attachments. And there 14 are attachments. And if you take a look at 15 OW054327, which I think is the fifth page into the 16 document, you will see an Attachment 2. 17 Now, I realize it's a little hard to 18 read; but it says, "United Savings Association of 19 Texas, Regulatory Capital Analysis, December 31st, 20 1987." 21 Do you see that? 22 A. Yes, I do. 21087 1 Q. And if you run your finger down the 2 left-hand column to the number that has the double 3 underline, it says, "Deficit minimum regulatory 4 capital requirement." 5 A. I see that. 6 Q. And it indicates it's association, and 7 the number is $53,659,000. 8 Do you see that? 9 A. Yes, I do. 10 Q. Was it your understanding that at this 11 point in time, March 30th, that the association 12 calculated its deficit minimum regulatory capital 13 requirement at $53,699,000 (sic)? 14 A. I don't have the document in front of 15 me. I assume that's correct. I don't -- we've 16 got -- somewhere in here, we've got the annual 17 report to show that, but I just -- I don't know if 18 that's right, but I will assume it conformed to 19 whatever was in that. 20 Q. Well, do you recall that there was a 21 meeting in which you had this discussion with the 22 examiners? 21088 1 A. I know we had a negative -- I know we 2 had -- we were below minimum net worth. As far as 3 what the number was, I just really don't know. 4 Q. Okay. And do you recall that it was on 5 the magnitude of 50 million? 6 A. I didn't realize it was that sizable. 7 Can we -- we've got that annual report here 8 somewhere. 9 Q. Well, I believe the annual report has a 10 slightly different number; but I don't think it's 11 materially different. 12 A. Well, as I say, whatever the number is 13 in there, that's fine with me. I just don't 14 know -- this isn't a number we prepared. I gather 15 it's something she prepared. 16 Q. Okay. Well, let's take a look at the 17 annual report. Let's see. The number on that 18 is -- and I think I know the page number, too. 19 A. Yeah. We all know we were below 20 regulatory net worth. I just don't know the 21 amount. 22 Q. It's at Tab 402. 21089 1 A. It is 402. 2 Q. And I think if you look -- 3 A. This is UFGI again. Somewhere in here, 4 there's USAT. 5 Q. What I think you're going to find is 6 that UFGI has to publicly disclose the fact of the 7 net worth failure, and I believe that the page you 8 want to look at is Page 58. 9 A. 58? 10 Q. Yes, sir. It is part of Footnote 14. 11 In fact, it's the third full paragraph of Footnote 12 14. 13 Do you see that? 14 A. This says federal income taxes. 15 Page 58? I'm looking at 59. I'm sorry. 16 Q. Right here. And you'll see that it 17 talks about the net worth failure. And in this 18 document, it indicates -- 19 A. It says 45 million. 20 Q. 45.6 million, slightly lower than the 21 number that Ms. Carlton had in -- at the 22 March 30th meeting. 21090 1 Now, was there still a dispute that you 2 recall regarding the amount of the net worth 3 failure? Because I think you'll see in the next 4 column, it indicates that the regulators compute a 5 slightly higher deficit. 6 Do you see that? 7 A. I see that. 8 Q. And I'm now referring to Exhibit 8047 9 at Page OW054327. 10 A. I see that. 11 Q. And it was the examiners' view that you 12 were 112 million under your capital requirement, 13 correct? 14 A. Yes. 15 Q. Okay. Now, do you recall whether the 16 compensation committee met before or after -- I 17 guess if you don't remember the meeting, you don't 18 remember when it occurred. 19 Would it have been the practice to hold 20 the compensation committee meeting before or after 21 the board meeting? 22 A. The practice was to hold it before. 21091 1 Q. Okay. So, by the time you had 2 completed the compensation committee meeting and 3 Mr. Whatley had approved the new salary structure, 4 you were aware of that at the time that you met 5 with Ms. Carlton, correct? 6 A. Yes. 7 Q. Okay. At the meeting with -- at -- 8 with Ms. Carlton and the other regulators which 9 occurred the same day, did you advise them about 10 your concerns over executive officers leaving 11 USAT? 12 A. Well, she had already advised us of her 13 concerns. 14 Q. Did you advise her that in order to 15 address the problem that you perceived, that you 16 were proposing to enter into new employment 17 contracts that would increase the salary of those 18 executives by the amount of their 1987 bonus that 19 was paid in 1988? 20 A. I don't recall. 21 Q. Did you tell her that you were 22 contemplating entering into new employment 21092 1 agreements that would provide for annual severance 2 benefits that would be two times annual salary and 3 secured by a letter of credit? 4 A. I don't recall that one way or the 5 other. I know that she had seen those other 6 contracts that had been secured by letters of 7 credit, but I don't recall. 8 Q. And when you say "seen those other 9 contracts," you're talking about the contract of 10 Sandy Laurenson and you're talking about the 11 contract of Mr. Stodart? 12 A. Yes. 13 Q. Had you shown her copies of the 14 February 11th, 1988 contracts that were entered 15 into by USAT? 16 A. Let's see. Where is that? Let's see. 17 Where are the board minutes from that meeting, 18 February 11 meeting? 19 Q. You mean the meeting at which they were 20 approved? 21 A. Yes, sir. 22 Q. And Ms. Carlton was there, was she not? 21093 1 A. Yes. 2 Q. And do the minutes -- 3 A. I'm sorry. Yes, she must have known 4 about them, then. 5 Q. Right. And was that pointed out to you 6 recently, sir; or do you recall independently that 7 she was at the meeting? 8 A. I read it when you gave it to me here 9 earlier today. 10 Q. All right. And at the time of the 11 meeting, it indicated that the contracts would 12 have no effect unless UFG was unable to perform, 13 didn't it? 14 A. Yes, it did. 15 Q. Okay. And at the time the meeting was 16 held, anybody reading that would have thought that 17 it created no obligation on USAT; isn't that 18 correct? 19 A. That's correct. 20 Q. Okay. And further -- 21 A. Well, it would create no obligation on 22 USAT unless UFGI were unable to perform at such 21094 1 time as the termination were triggered. 2 Q. Okay. And were copies of the contracts 3 provided to Ms. Carlton at the February 11th, 1988 4 meeting? 5 A. I don't recall. 6 Q. So, in other words, the information she 7 would have had regarding those contracts would 8 have been contained -- or, in substance, what 9 appears in the minutes, correct? 10 A. Well, she would have heard the 11 discussion going on at the meeting, as well. 12 Q. And the discussion would have reflected 13 that the contracts would create no liability for 14 USAT unless UFGI had insufficient assets to 15 perform, correct? 16 A. I believe that's correct. 17 Q. Okay. Now, following the approval of 18 the new salary structure at the March 30th, 1988 19 compensation committee meeting, did the board of 20 USAT or the board of UFGI approve the actions or 21 the proposal of the compensation committee? 22 A. Let's see. 21095 1 Q. Well, let me put it a different way; 2 and perhaps we can move this along. 3 After Mr. Whatley adopted the 4 resolution -- 5 A. Excuse me one second. 6 Q. -- the proposal that was made by 7 Mr. Munitz at the compensation committee meeting 8 on March the 30th, were salaries increased, sir? 9 A. Excuse me just one second. Let me look 10 at something in here. (Witness reviews the 11 document.) Okay. I'm sorry. Would you repeat 12 the question? 13 Q. Well, why don't I do this. Take a look 14 at what's been marked as T8055, and this is 15 Tab 422. And this occurs four days following the 16 compensation committee on March the 30th, 1988, at 17 which a proposal was made by Mr. Berner, 18 Mr. Munitz, and yourself to Mr. Whatley. Okay? 19 A. I see that. 20 Q. You see that? 21 A. Yes. 22 Q. Okay. And after Mr. Whatley agreed to 21096 1 the new -- to the proposal, were salary increases 2 implemented, sir? 3 A. I believe they were. 4 Q. Okay. And if you look at the second 5 page of T8055, did you authorize the 6 implementation of those salary increases? 7 A. Yes, I did. 8 Q. And that's your signature that appears 9 on the first and fourth pages? 10 A. I think it's the second and fourth. 11 Q. I'm sorry. The second and fourth 12 pages. Thank you for correcting me, sir. 13 A. Yes. 14 Q. And as a result of this salary 15 increase, your base salary went from $291,656 to 16 $458,656, didn't it? 17 A. Yes, it did. 18 Q. Okay. And Mr. Crow and Mr. Berner and 19 Mr. Munitz were also -- their salaries were also 20 increased by the amount of their bonus that was 21 for 1987 that was paid in 1988, correct? 22 A. Yes. 21097 1 Q. And then on the second page, do these 2 reflect the new bonuses that were being authorized 3 under -- 4 MR. BLANKENSTEIN: You mean the third 5 page? 6 MR. RINALDI: I'm sorry. 7 Q. (BY MR. RINALDI) Third and fourth 8 pages. It talks about a 25 percent of '87 bonus 9 and pro rata bonuses. 10 Do you see that? 11 A. Yes, I do. 12 Q. Does this reflect the payment of the 13 initial 25 percent of the bonus that we discussed 14 was being proposed at March 30th, 1988, to the 15 compensation committee meeting? 16 A. I believe it does. 17 Q. So that within a week of Mr. Whatley 18 receiving your proposal, the compensation 19 committee -- I mean the salary increases and 20 bonuses were implemented, correct? 21 A. Yes. 22 Q. Now, if you'd turn to 8056 -- strike 21098 1 that. 2 A. Do I have that already? 3 Q. No, no, no. I think I'll just skip 4 that, and this will move the whole thing right 5 along. 6 Would you take a look at T8034? This 7 is a document you've seen before, and I just 8 wanted to -- yes. That's the one. And I just 9 wanted to ask you one thing. 10 If you'll turn to Page 31 of that 11 document -- 12 MR. BLANKENSTEIN: I'm sorry, 13 Mr. Rinaldi. I missed the exhibit number. 14 MR. RINALDI: Oh, I'm sorry. It was 15 Tab 479, T8034. 16 Q. (BY MR. RINALDI) Now, if you turn to 17 Page 31, does that -- does that reflect the 18 increase in your salary that was approved on -- or 19 implemented in T8055? 20 A. It appears to. 21 Q. Okay. And directing your attention to 22 the top of the page, it indicates that the 21099 1 effective date of the change is 1/1/88. 2 Do you see that? 3 A. Yes. 4 Q. Do you recall whether the salary 5 increases were going to be implemented 6 retroactively to January 1st, 1988? 7 A. Yes, they were. 8 Q. So, was one of the results of that that 9 immediately each of the recipients of a salary 10 increase would get a retroactive payment? 11 A. Yes, it did. 12 Q. Okay. Now, let's take a look at 13 Page 26, which is about three pages back. If you 14 take a look there, you'll see that there is a 15 check issued -- drawn on United Savings 16 Association of Texas issued to Mr. Jenard Gross in 17 the amount of $66,800. 18 Do you see that? 19 A. I see that. 20 Q. And it indicates that 41,750 is a 21 bonus. 22 Do you see that? 21100 1 A. Yes, I do. 2 Q. And then is the other 41,750 the 3 retroactive portion of your salary increase? 4 A. Yes. I see that. 5 Q. Okay. So, in other words, you then 6 received an 83,500-dollar bonus and retroactive 7 salary payment? 8 A. Yes. 9 Q. Okay. And these were paid on April the 10 5th, 1988, the day following the approval that 11 appears in T8055? 12 A. In what? 13 Q. The check was issued the day after you 14 approved the payments that are reflected in 15 Exhibit T8055? 16 A. I think that's right. I don't see 17 that. Here it is. Yes. 18 Q. Okay. Now, had USAT budgeted for these 19 new salary increases? 20 A. I don't believe so. 21 Q. And was there a problem associated 22 with -- 21101 1 A. I'm sorry. Let me back up. Would you 2 ask the question again? 3 Q. Had USAT budgeted for the new salary 4 increases? 5 A. They had budgeted in the budget. I'm 6 relatively certain that they would have had in 7 there the last year's salaries and last year's 8 bonus so they would have had those dollars 9 budgeted in there. 10 Q. Okay. Well, let's take a look at 11 Exhibit T8168. 12 A. Okay. 13 Q. And this is, again, one of these 14 performance reviews, only this is dated April the 15 28th and it's for the March report. 16 Do you see that? 17 A. Yes, I do. 18 Q. And then in the second paragraph, it 19 makes reference to the fact that "USAT is going to 20 have to look for ways of saving some money on our 21 budget this year. Otherwise, we're going to be 22 significantly over budget." 21102 1 Do you see the reference to that? 2 A. I do. 3 Q. And then it says, "I guess we are 4 talking about something on the magnitude of 5 2.5 million. So, we really need to start looking 6 at that." 7 Do you see that? 8 A. I see that. 9 Q. And was the $2.5 million the additional 10 expenses that USAT had incurred in connection with 11 the implementation of these new contractual 12 arrangements and the new budget? 13 A. I'm sorry. No. I actually just erred. 14 It looks like it should have been 1,165,000 rather 15 than 2,500,000. 16 Q. I see. How do you come to that 17 conclusion, sir? 18 A. I looked at the amount of the special 19 bonus, which is 1,165,000, and that's where I came 20 up with the number. 21 Q. The amount of the special bonus was 22 1,165,000? 21103 1 A. Yes. So, that should have been the 2 number I had in there rather than what I have in 3 there. 4 Q. Okay. But there was also a salary 5 increase, wasn't there? 6 A. No. What I just told you was that -- 7 what you're calling a salary increase is merely 8 the equivalent of the salary plus the bonus of 9 '87, and that would have already been budgeted in 10 '88. So, the budget would not have gone up 11 2.5 million. It would have gone up just the new 12 amount of the new bonus, which is 1,165,000 and I 13 just -- you know, I just made a mistake in my 14 remarks there. 15 Q. I see. And so, in the attachment from 16 Mr. Crow back to you, did Mr. Crow also make a 17 mistake? 18 A. Let me take a look at his. (Witness 19 reviews the document.) Yes, he did. 20 Q. Now, Mr. Crow, he was the chief 21 financial officer, wasn't he? 22 A. He probably just took the number I had 21104 1 thrown out and responded back. All he's saying is 2 we're going to look at ways to reduce it. He 3 didn't say, "I examined your thing and I find it 4 to be correct or incorrect." He's just saying 5 we're going to take a look at it. And when they 6 looked at it, they found out I was in error. 7 Q. Now, let me see if I've got this 8 straight. Bonuses at USAT were discretionary, 9 correct? 10 A. That's correct. 11 Q. So, by rolling the bonus into the 12 salary, you were taking all discretion out of the 13 bonus? 14 A. Yes. 15 Q. And you, therefore, increased the base 16 salary so that would have increased the cost to 17 the institution by the amount of the bonus, 18 correct? 19 A. Since the institution had been paying 20 bonuses from as long as I had been there, I'm sure 21 that the people in the accounting department and 22 the budgeting area would have budgeted in annually 21105 1 a number for bonuses. And they would certainly 2 have been at least as much as the prior year's 3 bonus. You know, that would be -- that's just 4 ordinary budgeting practice. 5 Q. So, even though USAT was failing its 6 minimum capital requirement as of December 31st, 7 1987, it's your belief that they would have 8 continued to budget for bonuses for the year 1988 9 at the same level of bonuses that had been paid in 10 1987? 11 A. Yes, because I believe it was -- as you 12 saw in those minutes of the board on March 30th, 13 we were talking about the Southwest Plan. We were 14 talking about that FSLIC issue. As you know, we 15 already had a forbearance proposal in. And even 16 though the institution was losing money, you had a 17 good team that the regulators thought was a good 18 team, and we were trying not to have any more 19 people leave us from that team. And we were 20 trying to follow up on the regulators' comment 21 about the turnover of executive personnel. 22 And so, in all, you know, I just -- 21106 1 it's something that would have been in the budget 2 and would have been anticipated. 3 Q. Now, sir, would you take a look at -- 4 THE COURT: Mr. Rinaldi, we'll adjourn 5 until 2:00 o'clock. 6 7 (Whereupon, a lunch break was taken 8 from 12:36 p.m. to 2:05 p.m.) 9 10 THE COURT: Be seated, please. We'll 11 be back on the record. 12 Mr. Rinaldi, you may continue. 13 MR. RINALDI: Thank you, Your Honor. 14 Q. (BY MR. RINALDI) Mr. Gross, when we 15 left off, we were talking, I think, about the 16 executive bonus plan. I had a couple questions I 17 wanted to ask you about. 18 I'm handing you a copy of what's 19 previously been marked as T8062, and it's Trial 20 Exhibit 427. And in order to expedite matters, 21 I'm also handing you a copy of T8066. This is a 22 new exhibit that has not previously been admitted. 21107 1 It's a letter from you to Dr. Munitz dated 2 May 5th, 1988, communicating his participation in 3 the executive bonus plan. 4 Would you first take a look at the 5 first document that I gave you; that is, the trust 6 agreement. 7 Do you see that, sir? 8 A. Yes, I do. 9 Q. Do you recognize that document? 10 THE COURT: Did you say that's in 11 evidence? 12 MR. RINALDI: T8062 is in evidence at 13 Tab 427, and that's the United Savings Association 14 of Texas 1988 executive bonus plan. 15 A. I don't recall seeing it. 16 Q. (BY MR. RINALDI) Well, do you recall 17 when we discussed the means by -- the salary and 18 bonus provisions that were approved at the 19 March 30th, 1988 meeting of the compensation 20 committee, it included a program whereby a 21 25 percent -- a bonus would be awarded to 22 individuals that would be paid 25 percent 21108 1 immediately and the remainder of the money would 2 be placed in trust? 3 A. I believe that's right. 4 Q. Okay. Now, this purports to be an 5 executive bonus plan; and it indicates -- if you 6 look at the last page of the document, it makes 7 reference to the 75 percent portion due to the 8 employee on 1/3/89. 9 Do you see that? 10 A. What page are you on? 11 Q. The last page of the document. It 12 bears the Bates stamp UFG A0718. 13 Do you see that? 14 A. Let me get back to it. Yes, I see 15 that. 16 Q. And you see it talks about a 75 percent 17 portion due to the employee on 1/3/89? 18 A. Yes, I do. 19 Q. Okay. Does this appear to be the trust 20 that was set up in order to hold the 75 percent 21 portion of the bonus that was to be deferred until 22 January 3rd, 1989? 21109 1 MR. BLANKENSTEIN: Excuse me, 2 Mr. Rinaldi. Are you asking him whether this last 3 page is the trust agreement? 4 MR. RINALDI: No. The document to 5 which the page is attached. 6 MR. BLANKENSTEIN: Oh, okay. 7 A. It would appear to be. 8 Q. (BY MR. RINALDI) Okay. As a 9 consequence of creating that bonus plan, do you 10 recall that money was placed into trust for the 11 purpose of funding the future payments? 12 A. I don't recall. I don't recall that 13 money was placed in at that time. 14 Q. Take a look at the next document, sir. 15 It's T8066. 16 A. All right. 17 Q. Now, do you recognize this document? 18 A. Do you want me to read it? 19 Q. Yeah. Well, take a moment to just look 20 at it. And also, I'd ask you: Is that your 21 signature that appears on the second page of the 22 document? 21110 1 A. Yes, it is. 2 Q. Okay. 3 MR. RINALDI: Your Honor, we would move 4 the admission of T8066. 5 MR. BLANKENSTEIN: No objection. 6 THE COURT: Received. 7 Q. (BY MR. RINALDI) Now, it indicates in 8 the first sentence that "The committee of United 9 Savings Association of Texas 1988 executive bonus 10 plan takes pleasure in confirming your selection 11 as a participant in a plan for the year which ends 12 December 31st, 1988." 13 Do you see that? 14 A. Yes, I do. 15 Q. Were you a member of the committee that 16 administered the United Savings Association of 17 Texas executive bonus plan? 18 A. I don't know. 19 Q. Do you recall whether you sent a letter 20 similar to this to all of the individuals who had 21 been designated participants in the plan? 22 A. I don't recall. I certainly don't deny 21111 1 I sent this letter. 2 Q. Okay. Now, directing your attention to 3 the -- to that first paragraph, it indicates that 4 Mr. Munitz is eligible to receive a bonus for the 5 1988 calendar year in the amount of $117,000. 6 Do you see that? 7 A. Yes, I do. 8 Q. Am I correct in assuming that 9 Mr. Munitz was being paid a 117,000-dollar bonus 10 as part of the executive bonus plan by USAT? 11 A. That's what this appears to indicate. 12 Q. And this would be the amount that would 13 be put into trust for purposes of funding the 14 deferred portion of the bonus? 15 A. I believe that's what it says. 16 Q. Okay. And if you look over at the 17 other document I've shown you -- that is, the 18 trust agreement itself on the last page -- 19 A. I'm sorry. 20 Q. That's T8062. If you'll look at the 21 last page of that. 22 A. It goes back to Page 18? 21112 1 Q. Yes. 2 A. All right. 3 Q. Does it indicate there that Mr. Munitz 4 was to receive 117,000? 5 A. Yes, it does. 6 Q. Does this, then, the list that appears 7 on the last page of T8062 appear to be a list of 8 the amounts that were being placed into trust to 9 pay the deferred portion of the executive bonus? 10 A. It appears to be. 11 Q. Thank you, sir. 12 Now, after the salary increases were -- 13 strike that. 14 After the salary adjustments were made 15 whereby the '87 bonuses were rolled into the '88 16 base salary and after the executive bonus plan was 17 put into effect, did USAT and UFG proceed forward 18 with amending or modifying their contracts with 19 their senior executives? 20 A. Yes, it did. 21 Q. And do you recall about when that would 22 have occurred, sir? 21113 1 A. Oh, seems to me it was sometime around 2 the middle of the year, I believe. 3 Q. Okay. Take a look at T8079. These are 4 the minutes of the special board of directors 5 meeting of United Financial Group dated June 28th, 6 1988. And let me also hand you a copy of 8078. 7 These are the minutes of the special board of 8 directors meeting of United Savings Association of 9 Texas dated the same date. 10 First, let's take a look at the UFG 11 minutes. 12 A. (Witness reviews the document.) 13 Q. And in particular, I'd direct your 14 attention to the third page of the document. 15 Are you looking at the third page 16 there, sir? 17 A. Yes, I am. 18 Q. And does it appear that on -- this is 19 the meeting at which UFG approved entering into 20 new employment contracts with executive officers 21 of United Savings -- of United Financial Group? 22 A. That's what it appears. 21114 1 Q. Okay. Now, I would direct your 2 attention to the second paragraph. It indicates 3 there that -- well, it says "Barry A. Munitz." 4 That's Dr. Munitz we've been referring to. He was 5 among the individuals that was going to receive a 6 contract? 7 A. Yes. 8 Q. Okay. And he had not previously had a 9 contract, had he? 10 A. That's correct. 11 Q. And at the same time, Jenard M. Gross 12 was also going to receive a contract; and you had 13 not previously had a contract? 14 A. Yes. 15 Q. And at this point in time, did the 16 board of directors vote and unanimously approve 17 the entry into the contracts? 18 A. I think that according to this -- it 19 says that as a contract related to any member of 20 the board of directors, such member abstained from 21 the discussion and the vote. 22 Q. Okay. So, can you explain -- do you 21115 1 recall the meeting at which the board approved 2 these contracts, sir? 3 A. I do not. 4 Q. Okay. So, you -- do you recall that 5 when a particular contract came up with respect to 6 an individual, that individual would abstain and 7 the remaining members of the board would vote? 8 A. I don't recall the meeting; so, I 9 really can't recall whether each one abstained. 10 Q. Okay. And at this point in time, do 11 you recall who would have been on the board of 12 UFG? 13 A. At that time, it would have been 14 Mr. Whatley -- this is UFG? 15 Q. Yes. 16 A. Mr. Whatley. I would have been on it. 17 Mike Crow, Art Berner, Paul Schwartz. I'm not 18 sure who else was on it. 19 Q. How about Mr. Munitz? 20 A. Yes. He would have been on it. 21 Q. All right. So, that would have been 22 six people. Now, I note that Mr. Schwartz was not 21116 1 present. It indicates that he was not at the 2 meeting on the first page. 3 Do you see that? 4 A. Yes, I do. 5 Q. So, it would have been Mr. Gross -- 6 yourself, that is -- Mr. Crow, Mr. Berner, 7 Mr. Munitz, and Mr. Whatley that were present, 8 correct? 9 A. Yes. 10 Q. So that four of the five directors who 11 were voting to approve the contracts were all 12 themselves going to receive contracts with UFGI? 13 A. That is correct. 14 Q. And so, when the other four voted on 15 the contract of any person who was going to 16 receive a contract, that fifth person would 17 abstain? Is that your understanding? 18 A. That's what it says. 19 Q. Okay. Now, previously -- prior to 20 entering into this contract, did -- strike that. 21 Would you take a look at Exhibit 437? 22 This is Trial Exhibit 437. It's T8083. 21117 1 A. I'm sorry. I thought you meant this 2 document. 3 Q. No. 4 A. 8083. All right. 5 Q. Yes. Now, do you recognize that 6 document, sir? 7 A. I don't recall it, but obviously 8 Mr. Whatley signed it. It indicates it's a 9 contract with me. 10 Q. Okay. And pursuant to the terms of the 11 contract, it incorporates a salary on Page 3 of 12 $458,656. 13 Do you see that in Paragraph 5? 14 A. Yes, I do. 15 Q. And that was the amount to which your 16 salary had been increased in April of 1988 as a 17 result of rolling the '87 bonus into the '88 base 18 salary? 19 A. Yes. 20 Q. Okay. Now, if you'd turn back to 21 Page 2, it indicates that there the terms of the 22 contract. And the term of the contract is through 21118 1 1991. 2 So, is it fair to say that this 3 contract would have had a duration or a term of 4 slightly over three years? 5 A. This is June 30th; so, it would be -- 6 yes, about three and a half years, it would 7 appear. 8 Q. Okay. And prior to entering into this 9 contract, was there any express or understood term 10 of your employment with USAT or UFG? 11 A. Pardon? Prior -- 12 Q. Yeah. Was there any express term of 13 your employment, or did you just serve at the will 14 of the board of directors? 15 A. I served at the will. Yes, sir. 16 Q. Okay. So, they could have terminated 17 you at any time? 18 A. Yes. 19 Q. Okay. And as a result of this 20 contract, the new salary level was locked in for 21 the duration of the year? 22 A. Unless there were cause. 21119 1 Q. And in addition to that, you were 2 guaranteed employment with UFGI through the end of 3 1991? 4 A. Yes. 5 MR. BLANKENSTEIN: You're misstating 6 the contract. He could be terminated, 7 Mr. Rinaldi. 8 MR. RINALDI: He said that. 9 Q. (BY MR. RINALDI) And, sir, as a 10 result of your entering into this contract, do you 11 recall that you were provided with a severance 12 agreement as part of the contract whereby if you 13 were terminated by USAT -- I'm sorry -- UFGI, that 14 you would be entitled to two years' severance 15 benefits? 16 A. I think that's somewhere in here. 17 Let's see if I can find it. 18 Q. Take a look at -- I believe it's 19 "compensation upon termination," and that's 20 Paragraph 9 on Page 13. 21 A. (Witness reviews the document.) 22 Q. And do you recall that this contract 21120 1 provided for severance benefits, sir, in the event 2 you were terminated without cause? 3 A. I see it does say that in here. 4 Q. Okay. And in the past, you had had no 5 entitlement to such benefits? 6 A. That is correct. 7 Q. And if the severance benefits were 8 twice your annual salary, their value would have 9 been nearly a million dollars, correct? 10 A. That's correct. 11 Q. Okay. And do you also see that under 12 the provisions of this contract on Page 18, that 13 UFGI was under an obligation to secure the 14 severance benefits either through the creation of 15 a trust or a letter of credit? 16 A. I'm sorry. Where are you now? 17 Q. I'm on Page 18. And then as you read 18 over to Page 19, it says, "The company" -- the 19 first sentence -- "shall deliver or cause to be 20 delivered to the executive an unconditional 21 irrevocable letter of credit." 22 Do you see that? 21121 1 A. I see that. 2 Q. And what did you understand the purpose 3 of the letter of credit was, sir? 4 A. It was to secure the obligation of the 5 severance. 6 Q. Okay. Now, on the same date -- that 7 is, on June the 28th, 1988 -- did USAT also 8 approve -- the board of USAT also approve an 9 employment contract with you? 10 A. I believe they did. 11 Q. Okay. And if you take a look at T8079, 12 which is the other set of minutes that I handed up 13 to you -- is that it? 14 A. I've got it. 15 Q. Are those the minutes of the board of 16 directors meeting of USAT in which the USAT 17 contracts were approved, sir? 18 A. May I take a moment? 19 Q. Certainly. 20 A. (Witness reviews the document.) 21 Q. And, sir, directing your attention to 22 the first full page of that, the fourth paragraph, 21122 1 the fourth through sixth paragraphs -- 2 A. I'm sorry. Which page are we on? 3 Q. The first page, Paragraphs 4, 5, and 6, 4 does this appear to be the meeting in which the 5 contract between you and United Savings 6 Association of Texas was approved by the board? 7 A. I'm sorry. 8 Q. This should be Exhibit 8078. I'm 9 sorry. Did you -- 10 A. I'm sorry. I'm on 807 -- I've got 11 United Financial Group. I beg your pardon. I'm 12 looking at the wrong one. 13 Q. I apologize. I probably -- here we 14 are. I put the other one up here, and then it got 15 shuffled underneath. 16 A. (Witness reviews the document.) 17 Q. Now, does this appear to be the board 18 of directors meeting at which the new contracts 19 with USAT -- I'm sorry -- revised contracts with 20 USAT were approved? 21 A. Yes. 22 Q. Okay. And was this the first time, 21123 1 then, that you and Mr. Munitz had entered into any 2 contractual arrangement with USAT? 3 A. Yes. 4 Q. And if you take a look at Exhibit 8087, 5 do you recall that the contract you ultimately 6 executed with USAT contains substantially similar 7 provisions to those of the UFG contract? 8 A. (Witness reviews the document.) 9 Q. The term of employment, for example, on 10 Page 2, was for four years or -- strike that -- 11 through the end of December 31st, 1991? 12 A. Yes. 13 Q. And the salary that's indicated here on 14 Page 3 was the same as the salary with respect to 15 UFGI? 16 A. Yes. 17 Q. And we can go through it, but is it 18 your recollection that it had a similar severance 19 provision secured by a letter of credit? 20 A. I believe so. 21 Q. Okay. Now, directing your attention to 22 Page 29 of the document, it has an additional 21124 1 paragraph. And I'd just like to ask you what your 2 understanding was. 3 A. Page 29? 4 Q. Yes, sir. And it says, "E, The terms 5 and conditions of this agreement shall become 6 effective but only if UFG shall be unable to 7 comply with all of its obligations and make all of 8 its payments as set forth and under the UFGI 9 agreement." 10 Do you see that? 11 A. Yes, I do. 12 Q. Okay. Now, under the UFGI agreement, 13 what payments did you understand UFGI was 14 responsible for making? 15 A. Well, basically, as I understood the 16 agreement, the agreement was that United continued 17 to pay my salary as it had in the past and that 18 UFGI was responsible for the severance payment. 19 Q. Okay. And did that mean that UFGI 20 would be responsible for setting up a trust and 21 funding the trust to pay the severance benefit? 22 A. I don't know. 21125 1 Q. Okay. Now -- so that the salary amount 2 that appears on Page 5 -- I mean Page 3 under 3 Paragraph 5, it was your expectation that that 4 would be paid by USAT? 5 A. Yes. 6 Q. And USAT was now under an obligation to 7 continue to provide employment to you at that base 8 salary for the period through December 31st, 1991? 9 A. Yes. As I say, unless there was cause 10 for termination. 11 Q. Okay. Now, let's go back to the 12 minutes -- 13 A. Excuse me one second. There is also 14 some -- in the United contract, there is also -- 15 USAT, there is also special provisions in there 16 dealing with FSLIC regulations. 17 Q. Okay. Now, let's go back to the 18 minutes of the board at which this document -- or 19 the agreement was approved. Now, that's 8078. 20 You just had it in front of you a moment ago. 21 A. Yes, I do. 22 Q. Do you still have that? 21126 1 A. Uh-huh. (Witness nods head 2 affirmatively.) 3 Q. Now, at this point in time, sir, what 4 position did you occupy at USAT? 5 A. At USAT at this point in time, I 6 believe I am president and chairman of the board. 7 Q. And were you also the chief executive 8 officer? 9 A. Yes, I was. 10 Q. Okay. Now, turning your attention to 11 Page 2 of this document, there is a discussion in 12 the second full paragraph. It says, "Mr. Gross 13 stated that it was appropriate at this point to 14 discuss the possible employment of Lawrence 15 Connell as president and chief executive officer 16 of the association." 17 Do you see that? 18 A. Yes, I do. 19 Q. Okay. And then after you brought that 20 subject up at the board -- by the way, did the 21 board agree to attempt to hire Mr. Connell as 22 president and chief executive officer of USAT? 21127 1 A. Yes, it did. 2 Q. Now, if previously you were the 3 chairman of the board, chief executive officer, 4 and president of USAT, after Mr. Connell's hiring 5 what positions did you anticipate you would 6 continue to hold, if any, at USAT? 7 A. I would still be chairman of the board. 8 Q. Okay. And if you were chairman of the 9 board, did that mean that Mr. Connell was going to 10 assume some of your responsibilities as president 11 and as chief executive officer? 12 A. Yes. 13 Q. And subsequently, was Mr. Connell 14 hired? 15 A. Yes, he was. 16 Q. Okay. And he, too, was given an 17 employment contract, was he not? 18 A. Yes, he was. 19 Q. Now, his employment contract was only 20 with USAT; isn't that correct? 21 A. I don't recall. 22 Q. Now, if Mr. Connell was being hired, in 21128 1 essence, to take over your duties as president and 2 CEO, why wasn't the level of compensation afforded 3 to you adjusted to reflect the fact that 4 Mr. Connell was going to take on some of the 5 duties that you had performed in the past, sir? 6 A. I do not recall. 7 Q. That would have been Mr. Munitz' call? 8 A. It would have been Mr. Whatley's call. 9 Q. Well, Mr. Munitz would make 10 recommendations to Mr. Whatley, and Mr. Whatley 11 would then act on those recommendations? 12 A. Well, Mr. Whatley would -- everything 13 that Mr. Whatley did did not necessarily flow from 14 Mr. Munitz. 15 Q. Was it your understanding that 16 Mr. Whatley was -- during this period of time was 17 taking actions on behalf of the board, or was he 18 simply making recommendations to the board for 19 board approval? 20 A. Mr. Whatley was -- in what respect? To 21 what are you referring? 22 Q. Well, Mr. Whatley recommended that 21129 1 these employment contracts be approved, did he 2 not? 3 A. Yes, he did. 4 Q. Okay. But the board approved them, did 5 they not? 6 A. Yes, they did. 7 Q. Okay. And did you understand that 8 Mr. Whatley, as the sole member of the 9 compensation committee, believed at this point in 10 time that he was only making recommendations to 11 the board and that the board would have to act on 12 his recommendations before they would become 13 effective? 14 A. I believe that's correct, but I'm not 15 sure. 16 Q. Okay. Now, with respect to -- on the 17 day that -- on June 28 -- well, strike that. 18 The UFG contracts were approved on the 19 28th, and then I believe the date that your 20 contract with UFG bears is June the 30th, the last 21 day of June of 1988. 22 A. Are both of them dated the same? I've 21130 1 got -- 2 Q. No. And then if you take a look at the 3 USAT contract -- correct me if I'm wrong -- but I 4 believe it's dated -- is this that document? 5 A. Right here. 6 Q. What is the date on USAT? 7 A. 30th of June. This is the first day of 8 July. 9 Q. Is there some reason why the contracts 10 were dated one day apart, that you recall, if they 11 were approved on the same date? 12 A. I don't recall. 13 Q. Okay. And do you recall that the 14 financial condition of USAT and UFGI was at or 15 about June 30th, 1988, when these contracts were 16 entered into? 17 A. Yes, I do. 18 Q. Okay. And could you describe for the 19 Court what that was? 20 A. United was below its regulatory net 21 worth. United Savings Association was below its 22 regulatory net worth and UFGI -- well, probably -- 21131 1 I'm not sure about what UFGI's situation was at 2 that point. 3 Q. Okay. Let me hand you a copy of what's 4 previously been admitted as T8095. This is 5 Exhibit -- Tab No. 406A, and this is the second 6 quarter results of UFGI. 7 MR. VILLA: What's the tab number on 8 that one again? 9 MR. RINALDI: Tab 406A is what I have. 10 Here's an extra copy, if you'd like, John. 11 Q. (BY MR. RINALDI) Now, periodically, 12 did Mr. Crow provide quarterly reports to the 13 board of directors of UFGI regarding the financial 14 performance of both UFGI and USAT? 15 A. I believe he did. 16 Q. And directing your attention -- and in 17 connection with those reports, we've seen in at 18 least one prior report that there was a regulatory 19 compliance section. 20 Do you recall that, sir? 21 A. I'm sorry? 22 Q. That there was a regulatory compliance 21132 1 section that dealt with the question of the 2 compliance with minimum capital requirements. 3 A. In Mr. Crow's report? 4 Q. Uh-huh. 5 A. I don't recall. 6 Q. Turn to the fourth page of the 7 document, which is UFGJ2613. 8 A. I see it. 9 Q. Okay. And do you see there that it 10 indicates that USAT reported regulatory capital of 11 86 million as of June 30, 1988? 12 A. Yes, I do. 13 Q. And it indicates there that that was 14 163 million below the minimum regulatory capital 15 requirement. 16 Do you see that? 17 A. Yes. 18 Q. At this point in time, did you have any 19 expectation that USAT was going to survive without 20 assistance from the Federal Home Loan -- or the 21 FSLIC? 22 A. At that point in time, I believe we 21133 1 did. 2 Q. You believe that it was possible -- 3 A. That it was possible, yes. 4 Q. Did there come a time when your views 5 changed? 6 A. I don't recall. 7 Q. Let me ask you this. Do you remember 8 in about April that you were interviewed by an 9 individual from Hewitt & Associates, April of 10 1988? 11 A. I don't recall. 12 Q. Well, do you recall that a company 13 named Hewitt & Associates was retained to look at 14 various aspects of USAT's -- I'm sorry -- UFG's 15 employment practices and that, in connection with 16 that, they interviewed you? 17 A. I didn't recall it, but I saw in the 18 minutes of the June 30th meeting that they were -- 19 that they did do a study. 20 Q. All right. Well, let me hand you a 21 copy of what's been marked as T8061 and tell me if 22 you recognize that document, sir. 21134 1 MR. RINALDI: Tab No. 426. 2 A. I don't recall seeing this. 3 Q. (BY MR. RINALDI) Okay. Now, turning 4 your attention to the first full page, it 5 indicates that -- the first paragraph, it talks 6 about "the following executives participated in 7 interviews." 8 Do you see that? 9 A. I see that. 10 Q. And it indicates that you were 11 interviewed as the chairman, CEO, and president of 12 USAT? 13 A. Yes, I see that, also. 14 Q. Okay. But you have no independent 15 recollection of having participated in the 16 meeting; is that correct? 17 A. I do not. I don't deny it. I just 18 don't recall it. 19 Q. Okay. Now, directing your attention to 20 the first full page of the document, it talks 21 about -- and this is a document that was prepared 22 in April of 1988. 21135 1 It indicates under the third bullet 2 point, "financial situation"? 3 A. Yes. 4 Q. First it says, "below 3 percent net 5 worth requirement." 6 Do you see that? 7 A. I see that. 8 Q. And is that consistent with your 9 assessment of USAT at or about April 1988? 10 A. Yes, it was. 11 Q. Okay. And then it says, "approaching 12 negative net worth." 13 Is that consistent with your assessment 14 of the financial condition of USAT at or about 15 April of 1988? 16 A. I don't think -- I don't recall it. I 17 thought we had a good bit of net worth left at 18 that point in time. I know we were below 19 regulatory minimum, but I thought we still had net 20 worth left. 21 Q. Well, did you believe at that point in 22 time that within sometime in the relatively near 21136 1 future, USAT was going to have negative net worth? 2 A. Yes. In fact, I think that May of 1987 3 restructuring proposal which we sent to the 4 Federal Home Loan Bank had projected that sometime 5 in '88 that would probably occur. 6 Q. Okay. And then the next point that's 7 made there is that "cannot be economically revived 8 without government assistance." 9 Do you see that? 10 A. I see that. 11 Q. Was that consistent with your 12 understanding the financial condition of USAT at 13 or about April of 1988? 14 A. No, it wasn't. 15 Q. In other words, you believed at that 16 point in time it would have been possible to have 17 revived USAT without any assistance from the 18 federal government? 19 A. Yes. Could we go back? Do we have 20 some minutes here from the June board meeting? 21 Q. Certainly. You mean the special board 22 meeting? 21137 1 A. Yes. And I believe -- 2 Q. I believe that is 8078, sir. 3 A. I thought I saw something in one of 4 those two. 5 Q. 8078, I believe, is -- do you have the 6 set here? 7 A. I need USAT. 8078 is the one I'm 8 looking at? No, it's here. 9 Q. 8078 would be USAT, and 8079 would be 10 UFGI. 11 A. Let me just look and see what we said 12 here. (Witness reviews the document.) 13 We discussed the Southwest Plan, status 14 of the association, forbearance application, the 15 association's request to acquire failed S&Ls, as 16 well as its request for open bank assistance with 17 CMO preferred stock transaction. It also says we 18 were putting together presentations for FSLIC. 19 So, we had all of these different 20 things that we were still trying to hopefully put 21 together. 22 Q. Okay. So that -- did all of those 21138 1 options that you were pursuing -- or did any of 2 those options that you were pursuing, could they 3 have been undertaken without government 4 assistance? 5 A. Well, if I remember the forbearance 6 application, there was a capital plan put in 7 there; and I don't know that it would -- I don't 8 recall the particulars of it. I don't know if it 9 required something from the government or not. 10 Had we been given some failed S&Ls, we 11 could have perhaps recovered the -- gotten enough 12 capital in there then not to have direct 13 assistance. 14 Q. Now, what was your understanding of the 15 process by which USAT would have acquired S&Ls? 16 A. That would have been the Southwest 17 Plan. 18 Q. And so, you would have been given 19 S&Ls -- 20 A. Yes. 21 Q. -- but at the same time, you would 22 have been given money or assets to -- 21139 1 A. Yeah. I don't recall the particulars 2 of the program of the Southwest Plan, but that 3 was -- they were taking failed S&Ls and putting 4 them into existing ones and using that as a 5 vehicle to bolster the capital. 6 Q. But was it your understanding that the 7 Southwest Plan would not have required any FSLIC 8 assistance if you had participated in it as an 9 acquirer? 10 A. It wouldn't have required them to 11 infuse money into us. We would have taken failed 12 associations, and that would have provided the 13 capital. 14 Q. And so, it is your understanding as you 15 sit here today that had you been an acquirer under 16 the Southwest Plan, there would have been no need 17 to infuse capital into USAT? 18 A. I think that -- as I understood the 19 program, that was the idea of it. 20 Q. Okay. So, in other words, when 21 Hewitt & Associates interviewed the senior 22 executives of USAT, their views as reflected in 21140 1 the Hewitt summary of executive interviews, which 2 is T8061, was somewhat more pessimistic than 3 yours? 4 A. Okay. I'm lost. I'm lost. What's 5 the -- 6 Q. It's T8061, and it's the first full 7 page -- it's the fourth page into the document. 8 Maybe I can help you. T8061. And I was just 9 saying that we had been reading on Page 1 the 10 various bullet points. 11 And this purports to be generally the 12 view of the persons interviewed. They generally 13 indicated that USAT could not be economically 14 revived, and I was just asking: You were somewhat 15 more optimistic, is that correct, regarding USAT's 16 future than the other executives? 17 A. I was hopeful. 18 Q. Okay. Now, if you turn to the next 19 page, the second bullet point down says, 20 "Regulators may keep the S&L but wipe out the 21 holding company." 22 Do you know what that makes reference 21141 1 to? 2 A. I'm just reading the same thing that 3 you're reading. 4 Q. Well, was it your understanding that if 5 USAT did obtain assistance from the FSLIC, that 6 the FSLIC would terminate the shareholder interest 7 in USAT? 8 A. I don't recall. 9 Q. Okay. But you understand what I'm 10 saying? That if assistance were given to USAT, 11 that any shareholder interest in UFG's stock would 12 be rendered valueless? 13 A. I understand what you're saying; but as 14 I say, I don't know what -- 15 Q. You never had any understanding one way 16 or the other? 17 A. I don't recall that. 18 Q. Okay. Now, do you recall that USAT had 19 received a letter -- I'm sorry -- UFG had received 20 a letter from Neil Twomey in about May of 1988 or 21 '87? 22 A. I don't recall. 21142 1 Q. Take a look at what's previously been 2 marked as T2013. This is Tab 71. 3 Have you had a moment to look at that 4 document? 5 A. Yes. I've glanced at it. I haven't 6 read it. 7 Q. Well, it's from Mr. Twomey. Who was 8 Mr. Twomey? 9 A. He was our supervisory agent with the 10 Federal Home Loan Bank of Dallas. 11 Q. Okay. And it was directed to the board 12 of directors of United Financial Group. 13 Would that have come to your attention 14 as the chief executive officer and president of 15 United Financial Group? 16 A. Yes, it would. 17 Q. Okay. And it makes reference to the 18 fact that UFG, in connection with the acquisition 19 and merger of First Financial of Texas, had agreed 20 to the following stipulation. And then the 21 stipulation talks about UFG's obligation to 22 maintain the net worth of USAT. 21143 1 Do you see that? 2 A. Which paragraph are you looking at? 3 Q. Well, it's the first full paragraph and 4 then the quoted section. Take a moment to read 5 that to yourself. 6 A. (Witness reviews the document.) 7 MR. VILLA: I believe you meant the 8 resolution and not the stipulation. Right, sir? 9 MR. RINALDI: I beg your pardon? 10 MR. VILLA: The question you put to the 11 witness -- I object to the question. 12 MR. RINALDI: I don't think there is 13 even a question. I think he's just reading it, 14 John. I will ask him a new question. 15 MR. VILLA: Okay. 16 A. The last word is cut off of all these 17 lines. Do you have a -- 18 Q. (BY MR. RINALDI) I think if you 19 probably look behind that, there is a better copy. 20 A. I see all these -- it totally wipes out 21 that last word or two. (Witness reviews the 22 document.) I see that. 21144 1 Q. Okay. Now, sir, in the last sentence, 2 it says, "Inasmuch as United is below its minimum 3 net worth requirement, UFG is hereby directed to 4 advise the supervisory agents of the steps that 5 would be taken to infuse capital into United. 6 Your response should be received by this office no 7 later than May 31st, 1988." 8 Do you see that? 9 A. Yes, I do. 10 Q. Did -- as a result of receipt of that 11 letter, did UFGI infuse any capital into USAT? 12 A. Well, the letter doesn't say that we 13 had to infuse it. All it says is asking us to 14 advise what steps will be taken to infuse capital. 15 Q. Okay. And were any steps taken that 16 resulted in the infusion of capital into USAT? 17 A. The only thing I can think of that 18 infused any capital is technically by reducing 19 debt when we brought in the PennCorp debt. That 20 that did have an effect of infusing some capital. 21 Q. Well, that reduced the liability of 22 USAT -- of UFGI, but it didn't necessarily cause 21145 1 any capital to flow into USAT, did it? 2 A. I don't recall if they infused any 3 capital, but this doesn't -- 4 Q. Now -- 5 A. -- direct them to do so. 6 Q. Okay. You mentioned the PennCorp debt 7 resolution. Take a look at T2012 and tell me if 8 you have seen that document before. 9 A. (Witness reviews the document.) I see 10 that. 11 Q. And do you recognize that document, 12 sir? 13 A. No, I don't. 14 Q. Okay. It's a letter to George Barclay 15 from Art Berner, and it makes reference to a 16 memorandum relating to United Financial Group's 17 debt and preferred stock. And it says, "As 18 Jenard Gross and I explained, we have the ability 19 to pay this debt off in extremely large discount, 20 but we are not sure how long this opportunity will 21 be available." 22 Do you see that? 21146 1 A. I do. 2 Q. Okay. Now, did you have -- do you 3 recall having a discussion with Mr. Barclay, the 4 president of the Federal Home Loan Bank of Dallas, 5 regarding the debt restructuring of PennCorp? 6 A. I don't specifically recall it; but 7 based on this, I don't deny it. 8 Q. Okay. And was the debt being 9 restructured on a favorable basis to UFGI? 10 A. Yes, it was. 11 Q. And can you just describe for the Court 12 generally what that was? 13 A. As I recall, I think that -- I think 14 I've seen some -- in here, I think it was in these 15 June 30 -- I believe they had about $50 million 16 worth of debt in preferred stock which we brought 17 in for around 10, 11, $12 million, something 18 lining that. 19 Q. Now, what was your understanding of why 20 PennCorp was willing to sell some $50 million in 21 debt or compromise $50 million in debt for a 22 payment of $10 million, sir? 21147 1 A. Because they were concerned about the 2 viability of United Financial Group would be my 3 supposition. 4 Q. Now, at this same point in time, if you 5 look at the last -- let's see -- Page 3 of that 6 same document. And in particular, I direct your 7 attention to the footnote. 8 A. I'm sorry. Page 3? 9 Q. Yes. It's not the third page. It's 10 numbered Page 3. 11 A. Okay. I've got it. 12 Q. There is a footnote in there that says, 13 "The UFG board has determined not to make the 14 May 1st scheduled dividend or sinking fund 15 payments on this preferred stock." And it's the 16 preferred stock Series B. 17 Do you see that? 18 A. I do. 19 Q. Do you recall that at or about May of 20 1988, UFGI's board determined not to make a 21 May 1st scheduled dividend or sinking fund payment 22 on the Series B preferred stock? 21148 1 A. I do not. 2 Q. And I take it from your answer you 3 don't recall what the reason was that they 4 declined to make the payment? 5 A. I do not. 6 Q. Okay. 7 A. This is what? A letter -- this is the 8 backup of a letter to him? Is that what this is 9 that I'm looking at? 10 Q. I don't -- yeah. This is basically a 11 memo that's prepared by your counsel describing 12 the PennCorp debt restructure. And I was simply 13 pointing you to -- 14 A. Okay. I see it. 15 Q. Now, sir, following the entry into 16 these new contracts at a time when USAT was some 17 $160 million below its minimum net worth 18 requirement, did there come a time when USAT 19 decided to place moneys into escrow to fund the 20 severance agreements or severance provisions under 21 the USAT employment contracts? 22 A. I remember something about putting some 21149 1 money into escrow, but I can't -- I don't remember 2 the particulars. 3 Q. Take a look at what's been marked as 4 T8106. This was previously admitted as Trial 5 Exhibit 441. And tell me if you recognize that 6 document, sir. 7 A. (Witness reviews the document.) 8 Q. Does that appear to be your signature 9 that appears -- that appears at the bottom of the 10 document, sir? 11 A. Yes, it does. 12 Q. Okay. And do you recall circulating 13 this document to the individuals who had 14 employment contracts with USAT? 15 A. No, I don't. 16 Q. Okay. Now, it indicates in the first 17 sentence that "Pursuant to your employment 18 contract (the employment contract with United 19 Savings Association of Texas) (USAT), USAT's 20 obligation with respect to severance benefits 21 payable under the employment contract are to be 22 secured by an unconditional irrevocable letter of 21150 1 credit (the letter of credit) or with cash 2 deposited with the trustee by USAT in a trust 3 account maintained for your benefit (the trust 4 account)." 5 Do you see that? 6 A. Yes, I do. 7 Q. Now, do you recall, did USAT attempt to 8 obtain letters of credit to secure the severance 9 benefits under its employment agreements that it 10 had entered into on July 1, 1988, with its 11 executive management? 12 A. I think we attempted to and were 13 unsuccessful. 14 Q. And do you recall why that was, sir? 15 A. I do not. 16 Q. Okay. And the next paragraph then 17 says, "USAT has determined that it will not be 18 feasible to obtain a letter of credit or to 19 establish a trust account." 20 Do you recall why it wasn't feasible to 21 establish a trust account? 22 A. No, I don't. 21151 1 Q. And then it says, "In lieu thereof, 2 USAT has deposited an aggregate amount of 3 $6,612,980 with First City National Bank." 4 Do you see that? 5 A. Yes. 6 Q. Okay. And the purpose of that -- what 7 was the purpose of putting that money into the 8 escrow, sir? 9 A. It says "With respect to USAT's 10 obligation to pay severance benefits under all 11 executive employment agreements to which it is a 12 party." 13 Q. And do you recall that USAT, in fact, 14 created the escrow and funded it with $6.6 million 15 in order to secure the severance benefits under 16 the USAT contracts? 17 A. I don't recall. 18 Q. But this is your signature, and you 19 have no doubt that that was done, do you, sir? 20 A. I have no reason to doubt it. 21 Q. Okay. Now, let me hand you a copy of 22 what's been previously marked as Exhibit T8108. 21152 1 This is Trial Exhibit 443. And I'd ask you to -- 2 A. Are we through with these? 3 Q. Yes. I think we're pretty much through 4 with those. I'll ask you to take a look at that, 5 sir. 6 A. (Witness reviews the document.) You 7 want me to read it? 8 Q. Well, I have a couple questions; but 9 those are a fairly long set of notes. So, rather 10 than trying to read the whole document, there is 11 another document I'd like you to look at in 12 conjunction with that. 13 Did there come a time, sir, when USAT 14 was approached by the Federal Home Loan Bank Board 15 and advised that given the financial condition of 16 USAT, that the Bank Board believed that USAT 17 should enter into a consent agreement with the 18 Bank Board? 19 A. I believe so. 20 Q. Okay. And was a special meeting of the 21 board of directors of USAT convened for the 22 purpose of discussing USAT's possible execution of 21153 1 a consent agreement? 2 A. I know there was a board meeting. I 3 don't know if it was special or just a regular, 4 whatever it was. 5 Q. Okay. And do you recall that USAT 6 retained the assistance of an outside counsel of 7 Kirkpatrick & Lockhart, an individual named Thomas 8 Leahey, in order to provide advice to the board of 9 directors of USAT regarding the possible execution 10 of a consent agreement? 11 A. I did not recall that. 12 Q. Okay. Let me hand you a copy of what's 13 been previously admitted as T8107. This is 14 Tab 442. And I'd ask you to take a look at that, 15 sir. 16 A. (Witness reviews the document.) 17 Q. Now, sir, in the first full paragraph 18 of T8107, Mr. Leahey writes to Mr. Berner, the 19 general counsel of USAT, and says, "Prepare to her 20 to the meeting of the board of directors of United 21 scheduled for 7:30 tomorrow morning to consider 22 the consent agreement requested by the supervisory 21154 1 agent of the Federal Savings and Loan Insurance 2 Corporation, we have reviewed both the agreement 3 and the applicable laws that may affect the 4 decision of the board with respect to signing the 5 agreement." 6 Do you see that? 7 A. Yes, I do. 8 Q. Now, prior to October 3rd, 1988, had 9 the Federal Home Loan Bank of Dallas submitted a 10 draft consent agreement to the board of directors 11 for their consideration? 12 A. I don't recall. 13 Q. Okay. But based upon the letter that 14 Mr. Leahey writes, does it appear that a draft was 15 made available to Mr. Berner at sometime prior to 16 October 3rd, 1988? 17 A. I don't know if we actually received 18 something in writing or they just said they are 19 going to send one. 20 MR. VILLA: Your Honor, at the risk of 21 preempting a series of questions, I think we went 22 through an argument as to whether or not part of 21155 1 this case is violation of the consent agreement. 2 And the Court ruled on that. I just want to -- I 3 didn't want to interrupt Mr. Rinaldi's examination 4 unnecessarily. But if he's going into the 5 question as to whether any compensation 6 arrangement here violates a proposed or actual 7 consent agreement, I think the Court has ruled on 8 that issue and that it is not in the Notice of 9 Charges as of present. I assume he will abide by 10 the Court's prior ruling, but I don't want to get 11 too far into this and then find out that we're in 12 an area that the Court has already ruled out of 13 bounds. 14 MR. RINALDI: First of all, Your Honor, 15 I think that Mr. Villa somewhat overstates his 16 position. The only reason I'm going into this is 17 to find out what information this individual had 18 before him before participating in the October 4th 19 meeting. 20 Number two, it seems to me that if the 21 employment practices here violated a consent 22 agreement, that clearly is unsafe and unsound 21156 1 practice. And if it were an unsafe and unsound 2 practice, that is clearly something that's been 3 alleged in the notice. 4 Now, that doesn't happen to be where 5 I'm going; but I certainly don't feel foreclosed 6 from making those allegations if it comes to pass 7 that, in fact, with the knowledge of a consent 8 agreement being in place, actions were taken that 9 were inconsistent with the term of the consent 10 agreement. 11 But at this point, all I'm trying to do 12 is establish when they obtained the draft and what 13 his understanding was regarding the advice that 14 they received from counsel. 15 THE COURT: All right. We'll take a 16 short recess. 17 18 (Whereupon, a short break was taken 19 from 3:05 p.m. to 3:30 p.m.) 20 21 THE COURT: Be seated, please. We'll 22 be back on the record. 21157 1 Q. (BY MR. RINALDI) Mr. Gross, directing 2 your attention to Exhibit T8108, that's the 3 minutes of the board of directors meeting of USAT 4 dated October the 4th, 1988. And in particular, 5 directing your attention to the fourth page of 6 that document, in the fourth paragraph down, there 7 is a discussion. 8 A. I'm sorry. What page? 9 Q. Page No. 4 of Exhibit T8108 in the 10 fourth paragraph down. 11 A. Got it. 12 Q. Okay. And it makes reference to "The 13 board then reviewed in detail a proposed consent 14 agreement prepared by the Federal Home Loan Bank 15 of Dallas." 16 Do you see that? 17 A. I see that. 18 Q. And the next sentence says, "Mr. Leahey 19 discussed each item of the consent agreement and 20 answered questions from the board." 21 Do you recall that Mr. Leahey appeared 22 at the October 4th -- or at a meeting of the board 21158 1 of USAT and discussed with the board members the 2 proposed consent agreement that the Federal Home 3 Loan Bank Board was suggesting that USAT should 4 enter into? 5 A. I remember the two attorneys attended a 6 board meeting. I wouldn't have known the date nor 7 what they -- what was discussed. 8 Q. Do you recall that Mister -- or at 9 least one of those individuals, Mr. Leahey, 10 discussed with the board their fiduciary duties as 11 they pertained to creditors of USAT if it was 12 determined that USAT was insolvent? 13 A. I do not. 14 Q. Did you understand that once a 15 determination was made by the board that USAT was 16 insolvent, that the directors owed a fiduciary 17 duty to the creditors of USAT? 18 A. I don't recall. 19 Q. Do you recall whether you received a 20 copy of T8107, which is the letter to Mr. Berner 21 from Mr. Leahey? 22 A. To the best of my knowledge, I do not 21159 1 recall having ever seen this. 2 Q. Okay. And if you look at the second 3 page, Paragraph 2, do you see about three lines 4 down the sentence that begins "if the board 5 reasonably determines"? 6 A. I'm on Page 2, three lines down. "To 7 whom the board" -- 8 Q. No. It's bullet -- Paragraph 2, and 9 then it's the tenth line down. 10 A. Tenth line. All right. 11 Q. And the sentence begins, "If the board 12 reasonably determines that United is insolvent, we 13 believe that the board members should take into 14 account the interest of the creditors of United 15 and that the failure to do so could be the basis 16 for subsequent action against them by a receiver 17 for United." 18 Do you see that? 19 A. I see that. 20 Q. Do you recall discussing that 21 subject -- 22 A. No. Go ahead. 21160 1 Q. -- during the October 4th, 1988 2 meeting? 3 A. I do not. 4 Q. Now, after Mr. Leahey discussed with 5 the board the consent agreement, the board, on 6 Page 6, appears to have taken some action. 7 A. Are we through with this for the 8 moment? 9 Q. Yes, we are for the moment. 10 A. Back over here. What page? 11 Q. Page 6. 12 A. All right. 13 Q. And it's the last -- the first full 14 paragraph on that page talks about the boards 15 discussing a desire to place moneys pursuant to 16 the previously-executed employment contracts into 17 escrow. 18 Do you see that? 19 A. I do. 20 Q. And do you recall I showed you before 21 the break a letter dated October the 3rd, 1988, in 22 which you advised certain recipients of employment 21161 1 contracts from USAT that USAT was planning to put 2 severance moneys into escrow? 3 A. Let me see that. I don't recall the 4 date; but if that's what it is, that's what it is. 5 Q. Okay. That would be Exhibit T8106. It 6 would probably be in the pile there, sir. 7 Well, do you recall that I showed you a 8 letter in which you indicated that that was what 9 USAT was -- 10 A. Yeah. Whatever the date was, it was. 11 Q. Now, when the board determined that it 12 was going to put money into escrow in order to 13 fund those employment contracts, do you recall 14 what the financial condition of USAT had become? 15 A. Well, it was below regulatory net 16 worth. 17 Q. And take a look at Page 3. And if you 18 look down at the fifth full paragraph, there is a 19 discussion which it appears that you participated 20 in. And it says, "Mr. Gross noted that the 21 association's negative net worth position would 22 exceed 400 million without dealing with the 21162 1 current goodwill on the association's books in 2 excess of 150 million." 3 Do you see that? 4 A. I see that. 5 Q. So, by this time, October 1988, USAT 6 had a substantial negative net worth, correct? 7 A. It definitely did, but I don't know 8 when this 400 million would be because that says 9 "would exceed" it. So, apparently, it doesn't 10 sound like it's current. 11 Q. Okay. Well, then let's look and see 12 what Mr. Crow reports on Page 2 of the minutes. 13 He talks about the September losses would be 14 significant. And then in the last couple of 15 sentences, it makes reference that the negative 16 net worth of the company at September 30th, 1988, 17 would exceed 200 million. 18 Do you see that? 19 A. Where is this? I'm sorry. 20 Q. This is at the top of Page 2. 21 A. I'm sorry. I'm back on Page 3. Okay. 22 On the top of Page 2. Let me go back and read the 21163 1 paragraph. (Witness reviews the document.) Yes. 2 He said it would exceed $200 million. 3 Q. That's correct. 4 A. Yes. 5 Q. Now, if we go back to Page 6 where we 6 had just looked at the escrow agreement, under 7 that escrow agreement, it indicated that 8 $6.6 million was going to be placed into an 9 escrow. 10 A portion of that would have gone to 11 fund the severance benefits to which you were 12 entitled, would they not? 13 A. We're on Page 6 whereabouts? 14 Q. Well, I believe it would have been the 15 prior exhibit that I showed you which was -- 16 A. I'm on 8108, I believe. 17 Q. -- T8106. It doesn't indicate it in 18 that document, but let me see if I can find the 19 document in your stack right here. This is T8106. 20 I believe that this is the letter that you sent to 21 Mr. Munitz. And it indicates you're setting up or 22 intend to set up an escrow to be funded with 21164 1 $6.6 million of assets of USAT, correct? 2 A. I see it, yes. 3 Q. Now, you also had an employment 4 agreement with USAT, correct? 5 A. Yes, I did. 6 Q. So, a portion of that $6.6 million 7 would have been placed in escrow for your benefit, 8 correct? 9 A. That's correct. 10 Q. Okay. And did you think that it 11 violated USAT's conflict of interest policies for 12 you to vote to approve the creation of an escrow 13 account whereby moneys were placed in escrow for 14 your personal benefit to fund your severance 15 arrangement with USAT? 16 A. I did not. And, you know, I think 17 we've been over this several times. There's still 18 negotiations going on about who's going to acquire 19 United. We're trying to keep it intact. We're 20 trying to keep the management team intact. And I 21 think we are doing what's in the best interest of 22 the association. 21165 1 Q. And did you feel, as a director, that 2 it was appropriate for you to utilize $6.6 million 3 of USAT's capital in order to fund the severance 4 benefits under the USAT employment agreements 5 when, at that point in time, USAT had a negative 6 net capital of in excess of $200 million? 7 A. You know, we had our regulatory 8 attorney. You said that Mr. Leahey was a 9 regulatory attorney. He was sitting there in the 10 meeting. If what we were doing was inconsistent 11 with what he thought was proper, I guess he -- I 12 certainly think he would have said, "Y'all 13 shouldn't do that." 14 Q. Now, in his letter, he said that y'all 15 owed a fiduciary duty to the creditors of USAT. 16 Do you recall that? 17 A. I do. 18 Q. And if you go back to that letter, 19 T8107, on the second page -- 20 A. I recall that we went through that a 21 few minutes ago. 22 Q. Right. But if you go back to that, it 21166 1 indicates that the principal under Texas Depositor 2 Preference Statute, "The primary, if not sole 3 creditor, would be the FSLIC in its capacity as 4 potential subrogee to the rights of the insured 5 depositors." 6 Do you see that? That's on Page 2. 7 A. Give me the exhibit number. 8 Q. It's T8107, and it's the sentence that 9 begins -- the last sentence on the second page 10 that goes over to the third page. 11 A. "This is consistent with the fact that 12 United is insolvent"? Is that where you're 13 starting? 14 Q. Yeah. Then do you see "under the 15 Texas," the last three words on that page? 16 A. I see. "Under the Texas" -- I see 17 that. 18 Q. Now, if USAT used its assets to fund 19 severance benefits, did you believe that that 20 would be consistent with the fiduciary obligations 21 that Mr. Leahey indicates were owed to USAT's 22 creditor, the FSLIC? 21167 1 MR. BLANKENSTEIN: Your Honor, 2 Mr. Gross has testified that he has no memory of 3 ever receiving that letter and any advice from 4 Mr. Leahey to that effect. Mr. Rinaldi's asking 5 him a question that doesn't have a proper 6 foundation. 7 MR. RINALDI: I'm just asking him about 8 his general understanding of whether he thought -- 9 THE COURT: All right. Restate your 10 question. 11 Q. (BY MR. RINALDI) Do you believe it 12 breached your fiduciary obligations that you owed 13 to the creditors of USAT and, in particular, to 14 the FSLIC, the principal creditor of USAT, for the 15 board of directors to utilize $6.6 million to fund 16 their own severance benefits? 17 A. No, sir, because if I remember those 18 contracts correctly, I think there is a clause or 19 a page or so in there that says that FSLIC can 20 come in and do whatever they want to with them. 21 Q. Now, do you remember we showed -- 22 looked at the contracts a while ago and the 21168 1 contracts said that USAT had no obligation to fund 2 the severance benefits -- do you recall that -- 3 unless and until UFG was unable to comply? 4 A. I think it said it had no obligation to 5 pay them. 6 Q. Okay. 7 A. I need to see the verbiage in that. 8 I'm really not sure. 9 Q. Why don't we take a look, then, at the 10 contract that was entered into. Let's see if I 11 can find it for you. Here we are. 12 Here's the USAT contract. It's T8087. 13 A. And what are we -- where are we on 14 this? 15 Q. I believe it's the last sentence or the 16 last phrase in the document. If you'll bear with 17 me, I will find it for you. I think it's Page 29. 18 It says, "The terms and conditions of this 19 agreement shall become effective..." 20 Do you see that? This is Page 29. 21 A. I'm sorry. I'm on the wrong page. Let 22 me catch up with you. Okay. 21169 1 Q. "The terms and conditions of this 2 agreement shall become effective if, but only if, 3 UFG shall be unable to comply with all of its 4 obligations and make all of its payments as set 5 forth under the UFGI agreement." 6 Do you see that? 7 A. I see that. 8 Q. Okay. Now, one of UFGI's obligations 9 was to create a letter of credit or a trust to 10 fund the severance benefits, was it not? 11 A. I believe so. 12 Q. And rather than funding the benefits, 13 USAT undertook to fund those benefits, did it not? 14 A. Yes, it did. 15 Q. Okay. So, did that mean that UFGI was 16 unable to comply under the terms of the agreement 17 that had been entered into between UFGI and the 18 executive officers? 19 A. I just don't recall. 20 Q. Well, if it hadn't been able to comply, 21 wouldn't UFGI have funded the severance benefits 22 rather than USAT? 21170 1 A. I would think so. But as I say, I 2 just -- I don't recall what the circumstances 3 were. 4 Q. Now, going back to the first page of 5 T8108, it says "Mr. Connell reviewed" -- 6 A. Wait, wait. 7 Q. Oh, I'm sorry. That would be the 8 minutes of the October 4th, 1988 -- 9 A. All right. I have this. 10 Q. -- board of directors meeting. And 11 directing your attention down to the last full 12 paragraph, it says, "Mr. Connell reviewed in 13 detail the current status of the Southwest Plan 14 negotiations concerning the association." 15 Do you see that? 16 A. Yes, I do. 17 Q. And then he goes down about six lines 18 further, and it says, "Any restructuring and 19 recapitalization of United Savings Association of 20 Texas which included FSLIC assistance would 21 require placing the association into receivership 22 and forming a new association with the current 21171 1 shareholders' interest being eliminated." 2 Do you see that? 3 A. I see that. 4 Q. Okay. At or about October 1988, was it 5 your understanding that if USAT was going to 6 receive some FSLIC assistance, it would only be 7 done under the circumstance where the existing 8 shareholders' interest would be eliminated? 9 MR. BLANKENSTEIN: Your Honor, I think 10 in all fairness Mr. Rinaldi should read the next 11 sentence of the minutes into the record, as well, 12 to give the witness a full understanding of what 13 happened at that meeting. 14 MR. RINALDI: Well, if you'll allow me 15 a moment, I will get to that. 16 Q. (BY MR. RINALDI) Was it your 17 understanding, sir, that if there were to be any 18 assistance provided by FSLIC, that you had -- that 19 Mr. Connell had been advised it would only be done 20 under the circumstances where the shareholders' 21 interest would be eliminated? 22 A. That's what it says. And then it goes 21172 1 on to say, "However, the association's negotiating 2 team was trying to resist this conclusion and, in 3 addition, was trying to require any new equity 4 participant to provide some value for the 5 company's shareholders." 6 Q. Okay. Now, my question to you is: Who 7 were the shareholders who would have been 8 eliminated if USAT had been placed into 9 receivership? Was that the shareholders of UFGI? 10 A. Yes, it would be. 11 Q. And to your knowledge, who were the 12 principal shareholders of UFGI? 13 A. Well, I guess some of the larger ones 14 would have been MCO and Federated. 15 Q. And did Drexel Burnham Lambert also 16 have a position in that corporation? 17 A. I believe so. 18 Q. Now -- 19 A. Yeah. I don't know -- I'm not sure at 20 that time if they did. I know they had had a 21 position. 22 Q. Okay. And then Mr. Berner says, "The 21173 1 association's negotiating team was trying to 2 resist this conclusion and that, in addition, was 3 trying to require any new equity participant to 4 provide some value for the company's 5 shareholders." 6 Do you see that? 7 A. Yes, I do. 8 Q. So, is it fair to say that Mr. Berner 9 was trying to preserve some value for Federated 10 and MCO in the negotiations regarding the 11 receivership? 12 A. Well, it says the negotiating team as 13 opposed to Mr. Berner. 14 Q. And was Mr. Berner a member of that 15 team, sir? 16 A. Yes, he was, as was Mr. Connell. 17 Q. Yes. But Mr. Connell says above that 18 they had been -- they had been advised that they 19 had -- that any restructuring and recapitalization 20 of United would result in shareholder interest 21 being eliminated. But let's go on. 22 On the next page, Mr. Leahey then 21174 1 advises the board in the fourth paragraph down -- 2 Mr. Leahey says, "As regulatory counsel to the 3 association, Mr. Leahey stated that it was the 4 general policy of FSLIC to require a total 5 elimination of shareholder interest in any 6 association which received FSLIC assistance." 7 Do you see that? 8 A. Yes, I do. 9 Q. And then another two paragraphs down, 10 Mr. Berner again states that "In the negotiations 11 with all potential equity participants (e.g., 12 those persons who are reviewing the desirability 13 of providing equity to the new association), the 14 association's management was attempting to require 15 these new equity participants provide some type of 16 interest in the new association to the company's 17 shareholders." 18 Now, as a director of USAT, did you 19 feel that you had any fiduciary obligation to 20 preserve the equity of UFGI once you had 21 determined that USAT was insolvent? 22 A. I'm sorry. Would you restate the 21175 1 question? 2 MR. VILLA: I object to the form of the 3 question. I don't understand how you preserve the 4 equity -- you mean the equity of UFGI in USAT? 5 MR. RINALDI: Yes. The shareholder 6 interest of UFGI. 7 Q. (BY MR. RINALDI) As a director of 8 USAT, did you feel you had any fiduciary 9 obligation to try to preserve the shareholder 10 interest of UFGI and its shareholders in USAT once 11 you had determined that USAT was insolvent? 12 A. As a director of USAT, I guess my 13 primary obligation is to USAT. 14 Q. And did you understand that USAT, once 15 it became insolvent, had an obligation to preserve 16 its assets for the benefit of its creditors? 17 A. Yes, I did. 18 Q. And -- 19 A. Well, let's me say this. Is that what 20 he says up here? 21 I'm not sure -- I had not seen this 22 letter; so, I don't -- unless it's mentioned in 21176 1 this meeting, I would not necessarily be aware of 2 that. 3 Q. Well, did Mr. Berner keep the board 4 apprised of their obligations as directors in 5 connection with their considering matters before 6 the board? 7 A. I don't recall whether he kept us 8 apprised of this particular thing. I really -- 9 you know, as I said, I don't remember what 10 happened at this meeting; so, there is just no way 11 for me to know. 12 Q. Well, then perhaps we should move on. 13 Now, after the -- during the period you 14 were considering the employment contracts, do you 15 recall that you received a letter from Neil Twomey 16 on May the 13th, 1988, making inquiry about any 17 existing employment contracts that USAT might have 18 or its subsidiary or affiliates might have? 19 A. I see that. 20 MR. BLANKENSTEIN: Mr. Rinaldi, the 21 exhibit number, please? 22 MR. RINALDI: Yes. Just a moment. 21177 1 I've just handed the witness Exhibit No. T8069, 2 which is Tab 429. 3 Q. (BY MR. RINALDI) Take a moment to 4 look at that, would you, sir? 5 A. (Witness reviews the document.) 6 Q. Now, do you recall receiving a copy of 7 that letter from Mr. Twomey as the president of 8 United Savings Association of Texas? 9 A. I don't recall it. 10 Q. Okay. Now, do you recall -- 11 A. Go ahead. I'm sorry. 12 Q. Do you have any doubt you received it? 13 It appears it's addressed to you. 14 A. No, I don't doubt it. 15 Q. And at this point in time, USAT had 16 entered into employment agreements in February of 17 1988 with a number of executive officers of USAT, 18 correct? 19 A. That's correct. 20 Q. Okay. Now, take a look at T8071. This 21 is the response that -- well, first of all, do you 22 recall that after receiving that letter that you 21178 1 gave it to Mr. Berner for him to respond to? 2 A. Yes, I do. Well, you know, that would 3 be my normal practice. 4 Q. And so, after you gave it to Mr. Berner 5 for him to respond to, take a look at the next 6 document I've just given you that's Tab 412. It's 7 T8039. I'm sorry. It's Tab 430. It's T8071. 8 Now, do you recall whether you ever 9 received a copy of this letter from Mr. Berner? 10 A. I do not recall receiving a copy, and 11 I'm not copied on it. 12 Q. Now, it says in the first -- the second 13 full paragraph, "Please be advised that the 14 association has not entered into employment 15 agreements with such officers or employees and, by 16 such, it's referring to officers of United Savings 17 Association of Texas." 18 Do you see that? 19 A. I see that. 20 Q. Do you know why Mr. Berner did not 21 disclose to the regulators the existence of the 22 February 11, 1988 contracts at this point in time? 21179 1 A. I do not, unless they were just -- I 2 just do not know why. 3 Q. Does it surprise you that Mr. Berner 4 would not be totally frank and open with the 5 regulators in response to their inquiry? 6 MR. VILLA: Objection to form. 7 THE COURT: Sustained. 8 Q. (BY MR. RINALDI) Yesterday we had a 9 discussion about maintaining lines of 10 communication with the Federal Home Loan Bank 11 Board. 12 Do you recall that? 13 A. I do. 14 Q. And in connection with dealing with the 15 Federal Home Loan Bank Board, was it your 16 instructions to Mr. Berner that he should maintain 17 the lines of communication with the Bank Board? 18 A. Yes. 19 Q. And I believe in another memo, you 20 indicated -- or he indicated that you should try 21 to avoid surprises. 22 Do you remember that? 21180 1 A. I do. 2 Q. Now -- oh, I'm sorry. 3 MR. RINALDI: There is a transposed 4 number, Your Honor. 5 Q. (BY MR. RINALDI) Take a look at Trial 6 Exhibit B2211. And this is Tab 1376. 7 Do you recognize that document, sir? 8 A. I don't recall seeing it. 9 Q. Okay. Now, it is directed to the board 10 of directors of United Financial Group, Inc., 11 correct? 12 A. Yes. 13 Q. And in the normal course of events, if 14 a letter were directed to the board, would that 15 come across your desk? 16 A. It could have come across my desk, or 17 it could have been that whoever was sorting out 18 the letters saw that it had to do with the Dallas 19 Bank and might have just given it to Art directly. 20 Q. But you have no independent 21 recollection of having ever seen this letter 22 before? 21181 1 A. Not until the last couple of days. 2 Q. Now, I'm going to show you a copy of 3 what's been marked as T8072, and this is Tab 431. 4 I'd ask you if you've ever seen a copy of that 5 letter. 6 A. Not until the last few days. 7 Q. Okay. Now, sir, after -- after the new 8 USAT contracts were entered into and Mr. Connell 9 was made an offer, did you have occasion to talk 10 to the regulators regarding the employment of 11 Mr. Connell? 12 A. I believe we met with Mr. Barclay 13 sometime in June or July, somewhere -- sometime in 14 that time frame and let him know that we were 15 hiring Larry Connell. 16 Q. Okay. And you told them that you were 17 about to offer Mr. Connell a contract, and do you 18 recall that you asked them if they wanted to see 19 Mr. Connell's contract? 20 A. I don't recall that. 21 Q. Okay. There seem to be two 22 documents -- 21182 1 (Discussion held off the record.) 2 3 Q. (BY MR. RINALDI) Would you take a 4 look at what's previously been marked as Trial 5 Exhibit 1380? And it's Exhibit T8089. This is a 6 memo drafted by Arthur Berner relating to a 7 meeting that you apparently had with George 8 Barclay on July the 5th, 1988. 9 A. I see that. 10 Q. Okay. And it says, "Jenard Gross began 11 the meeting by explaining that we had made an 12 offer to Larry Connell." 13 Do you see that? 14 A. Yes. 15 Q. And does this appear to be a 16 memorialization of the meeting that you and 17 Mr. Berner had with the regulators? 18 A. That's what it appears to be. 19 Q. Okay. And that would have then 20 occurred on approximately July 5th, 1988. In 21 other words, about four days after you had entered 22 into new employment agreements with -- or agreed 21183 1 to enter into new employment agreements with the 2 executive officers of USAT; is that correct? 3 A. Yes. 4 Q. Okay. Now, you sent a copy of 5 Mr. Connell's contract to Mr. Twomey at the 6 Federal Home Loan Bank Board, did you not, or 7 Mr. Berner did that? In the second paragraph, it 8 indicates -- 9 A. I didn't send it to him; so, I guess 10 Mr. Berner must have. 11 Q. Okay. But Mr. Berner's memo states 12 that "We have forwarded a contract to him and he 13 had indicated that he would sign it and return it 14 to us within the next day or so." So, a copy was 15 sent to Mr. Connell. 16 And then it goes on and says, 17 "Mr. Barclay asked whether or not the Dallas Bank 18 needed to approve the contract, and he was told by 19 Mr. Twomey and Mr. Thomas that they did not have 20 to approve it." 21 And then Mr. Berner says, "I mentioned 22 in the meeting that I had forwarded a copy of the 21184 1 contract to Neil Twomey." 2 Do you see that? 3 A. Yes, I see that. 4 Q. Now, was the Neil -- was the contract 5 that was signed by Mr. Connell substantially 6 similar in its form to the contract that was 7 signed by the other nine executive officers of 8 USAT who received employment contracts on 9 July 1st, 1988? 10 A. I believe it was. 11 Q. Okay. And -- 12 A. Except I think he was getting a -- I 13 think he was getting a signing bonus, if I 14 remember correctly. But other than that, I 15 believe they were similar. 16 Q. And did you view the Connell contract 17 as something of a model upon which the other 18 contracts would follow? 19 A. I'm not sure I understand the question. 20 Q. Well, they had similar provisions, did 21 they not, with respect to severance? 22 A. I believe they did. 21185 1 Q. And they had similar provisions, did 2 they not, with respect to the manner in which 3 those severance benefits were to be secured? 4 A. Well, you know, without putting the two 5 side by side, I'm just really speculating. I 6 guess I need to put them side by side and just 7 walk through them and see. But I've got -- I 8 have -- I don't -- at that time, I didn't think 9 there was any difference. But I have really no 10 idea whether there was or there wasn't. 11 Q. Okay. Putting aside the differences, 12 in your mind, when you submitted the Connell 13 contract to the regulators, was it your 14 understanding or belief that if the regulators had 15 no objection to the Connell contract, that that 16 would, in effect, be an expression of no objection 17 to the remaining contracts that had been entered 18 into? 19 MR. BLANKENSTEIN: Your Honor, I don't 20 believe that -- I believe that Mr. Gross stated 21 that he had no memory of he personally having 22 submitted Mr. Connell's contract to the 21186 1 regulators. I'm not sure whether -- 2 Q. (BY MR. RINALDI) I'm using the term 3 USAT when I'm talking about the submission of the 4 contract, sir. 5 A. I don't recall. 6 Q. Did you believe that when Mr. Twomey 7 didn't immediately come back and object to 8 Mr. Connell's contract, that it was, therefore, 9 okay for USAT to enter into similar contracts with 10 the remaining executives of USAT? 11 A. I don't really recall focusing on it 12 one way or the other. 13 Q. So that the fact that Mr. Twomey didn't 14 get back to you one way or the other didn't 15 necessarily suggest to you that Mr. Twomey was 16 agreeing that the contract was in an appropriate 17 form? 18 A. You say was in or inappropriate? 19 Q. Was in an appropriate format. 20 A. I just don't recall. 21 Q. Okay. Now, during the course of this 22 meeting, I notice you have a wide range of 21187 1 discussions. I mean, if we go down to the fifth 2 paragraph, it says, "Mr. Gross then asked whether 3 or not there was any outstanding issues relating 4 to the Southwest Plan." 5 Do you see that? 6 A. I see that. 7 Q. And then we go on and in the next 8 paragraph, you talk about the examination. 9 Do you see that? 10 A. Yes. 11 Q. And then in the next paragraph, it 12 talks about the forbearance application? 13 A. Yes. 14 Q. And in the last paragraph on the page, 15 it talks about an application to continue raising 16 brokered CDs. 17 Do you see that? 18 A. Yes. 19 Q. And on the next page, we talk about the 20 Southwest Plan in the first paragraph and the good 21 bank/bad bank concept in the third paragraph. 22 Do you see that? 21188 1 A. Let me slow down. Are you going to ask 2 me questions on these? Do you want me to read 3 them? 4 Q. No. I just -- was it your recollection 5 that at this meeting, you had a broad range of 6 discussions with Mr. Twomey regarding the future 7 of USAT? 8 A. Yes. 9 Q. And during the course of this meeting, 10 did you advise Mr. Twomey that USAT had approved 11 contracts for nine executive officers in addition 12 to Mr. Connell on July the 1st -- or on June the 13 28th, 1988? 14 A. I don't recall. 15 Q. If you had advised Mr. Twomey of that 16 fact, do you think it would appear in Mr. Berner's 17 memorialization? 18 A. I can't speak for Mr. Berner. 19 Q. Did you think that that was an 20 important fact that the regulators would be 21 interested in knowing in about July of 1986? 22 A. Well, it's -- 21189 1 Q. I'm sorry. 1988. 2 A. Well, I really relied on Art to handle 3 the communications with the regulators. And so, I 4 would assume that he would respond to Neil from 5 time to time. And so, I didn't think this was a 6 matter that would necessarily come up at this 7 meeting. 8 Q. Let me ask you this: Did you later 9 learn that the regulators were unaware of the 10 employment contracts that USAT approved on June 11 the 28th, 1988? 12 A. Later on, I did learn of that. 13 Q. And what was the regulators' reaction 14 at the time they found out about that? 15 A. I don't recall. I can't remember. I 16 know we've got some correspondence on it. 17 Q. Do you recall that you received a 18 letter from Neil Twomey, the supervisory agent, on 19 October the 17th, 1988, addressed to the board of 20 directors of USAT? This is Trial Exhibit 444, and 21 it's Exhibit T8111. 22 MR. BLANKENSTEIN: I believe you -- 21190 1 Mr. Rinaldi, you misstated the date of the letter. 2 MR. RINALDI: October the 27th, 1988. 3 MR. BLANKENSTEIN: I believe you said 4 it was the 17th. 5 MR. RINALDI: I stand corrected. Thank 6 you, Paul. 7 A. (Witness reviews the document.) 8 Q. (BY MR. RINALDI) Do you recognize 9 this letter, sir? 10 A. I don't remember receiving it. 11 Q. Is it likely that it would have come to 12 your attention as a member of the board of 13 directors? 14 A. I'm sure it would have. 15 Q. And do you recall that Mr. Twomey 16 expressed the view that all of the employment 17 contracts that had been entered into by USAT were, 18 in his view, unsafe and unsound because they were 19 entered into at a point in time when USAT was 20 failing its capital requirement or approaching 21 negative capital? 22 A. I see that. I don't see about the 21191 1 negative capital. I just see -- 2 Q. Well, "insolvency" I think is the term 3 he uses. 4 A. Okay. 5 Q. Do you recall at the time at or about 6 October the 27th, 1988, receiving -- or this 7 matter coming up as an issue? 8 A. I don't recall it, but -- I mean, I 9 don't recall the timing. I know that we got the 10 notice, and I think we complied with his letter. 11 Q. Okay. And when you say you think you 12 complied with his letter, do you recall that in a 13 subsequent meeting with the board, at which the 14 board was considering the consent agreement, that 15 Mr. Twomey appeared before the board and addressed 16 the board regarding the issues that are set forth 17 in the October 27th, 1988 letter? 18 A. No, I don't. 19 Q. Take a look at what's been previously 20 marked as Trial Exhibit 447. It's T8117. These 21 are the minutes of the board dated November the 22 7th, 1988, and they are of the board of USAT. 21192 1 A. I see that. 2 Q. Okay. And directing your attention to 3 the bottom of Page 2 and then over to Page 3, do 4 you see that there is a discussion where it 5 states, "Mr. Berner stated that at a recent 6 meeting of representatives of the association and 7 representatives of the Federal Home Loan Bank of 8 Dallas, a concern had arisen relating to the 9 employment contracts and levels of compensation 10 which could be a factor in the association's 11 participation in the Southwest Plan"? 12 A. I see that. 13 Q. Okay. And do you recall that as a 14 result of the Bank Board raising its concerns 15 about the employment contracts as well as the 16 executive bonus plan, that the board determined to 17 take action to remove certain moneys that had been 18 set aside in escrow? 19 A. Yes. 20 Q. Okay. And is it your recollection that 21 the reason the board determined to unwind the 22 escrow arrangement was that if they did not, it 21193 1 would jeopardize the potential participation in 2 the Southwest Plan? 3 A. I believe that's correct. 4 Q. And do you recall that the board also 5 determined to withdraw certain moneys that had 6 been placed in a trust for purposes of funding the 7 executive bonus plan payments that were due in 8 January of 1989? 9 A. I don't recall that, but -- you know, I 10 don't doubt it. 11 Q. Now, after you had received the letter 12 from Mr. Twomey or after -- strike that. 13 After Mr. Twomey had sent the letter to 14 the board of directors advising them on October 15 the 27th, 1988, that he believed that the 16 employment contracts entered into by USAT were 17 unsafe and unsound, did you thereafter tender your 18 resignation on or about October 31st, 1988? 19 A. Yes, I did. 20 Q. And take a look at what's been 21 previously marked as T8114. It's Trial 22 Exhibit 446, but there appear to be multiple 21194 1 copies in here. 2 Here is T8114, and I'd ask you to turn 3 to the second page and tell me, is that your 4 signature that appears on the second page? 5 A. Yes, it is. 6 Q. Okay. And take a moment to read the 7 letter, and then I have a couple of questions for 8 you. 9 A. All right. (Witness reviews the 10 document.) All right. I've read it. 11 Q. Okay. Now, directing your attention to 12 the second paragraph, it talks about the fact that 13 you have too many potential conflicts to continue 14 to serve in any significant capacity with UFG. 15 Do you recall what the problem was 16 regarding conflicts of interest, sir? 17 A. Yes, sir. I had attended that 18 October 4th board meeting and listened to the two 19 attorneys, and it just seemed that we were going 20 to get to a point where it was possible that the 21 interest of United Savings and the interest of 22 United Financial might not be identical and that 21195 1 it would be very difficult to serve in the 2 position of being director of both of them 3 simultaneously. So, that was -- prompted my 4 decision. 5 Q. So, you were very acutely aware of 6 conflicts of interest, were you not? 7 A. Yes, I was. 8 Q. And did you believe that it was a 9 conflict of interest, sir, for you to vote to set 10 aside $6.6 million in an escrow fund to fund 11 severance benefits from which you would personally 12 benefit? 13 A. I did not. 14 MR. VILLA: Objection. Asked and 15 answered. This witness is getting tired, Your 16 Honor. It's 4:15, and this is about the sixth 17 time we've been through these questions with this 18 witness. I object. Asked and answered. 19 THE COURT: Well, it's been answered 20 again. Let's move on. 21 Q. (BY MR. RINALDI) Sir, can you just 22 describe for the Court what your proposal was with 21196 1 respect to the resolution of your claims regarding 2 USAT and UFG? 3 A. There were a series of different 4 proposals. One of them was that I would -- if 5 this were satisfactory, I would terminate my 6 contracts with both United Financial Group and 7 United Savings Association, which run through 8 1991, and have the debt on the stock forgiven. 9 And that was the sum and substance of it. 10 Q. And so, you were proposing to exchange 11 your severance benefits under the contracts that 12 were entered into at the end of June and the 13 beginning of July 1988 with USAT and UFG in return 14 for a forgiveness of the 762,000-dollar debt you 15 owed on the note to UFGI? 16 A. Yes. And I was proposing to resign 17 from UFGI and remain on at USAT. And then I said 18 if that wasn't acceptable, I gave two or three 19 other proposals. 20 Q. Okay. And ultimately, how did the 21 matter resolve itself? 22 A. Well, the way it resolved itself was 21197 1 after I had done that, Art told me that, well, 2 Neil Twomey had told him that they felt at this 3 point in time we were too heavy executive 4 salarywise at the top and, out of the two people, 5 I drew the short straw. 6 So, with that in mind, it was obvious 7 that they wanted Larry Connell in and Dallas 8 wanted me out. And so, in view of that, I just 9 said, "Well, that's fine. If you'll release me 10 from my note, I'll cancel the two contracts and go 11 on, just resign from everything." 12 Q. Now, it indicates down here in the 13 fourth paragraph that begins on the bottom of the 14 page, "It would appear that United Financial Group 15 has no near-term funding requirements which it's 16 unable to meet and, therefore, is in a solvent 17 condition at this time." 18 Do you see that? 19 A. I see that. 20 Q. In your view, UFGI had no obligation to 21 fund the severance benefits? 22 A. Well, it had money on hand if it wanted 21198 1 to. 2 Q. But it chose not to? 3 A. I'm sorry. I misunderstood the 4 question. Would you repeat the question? 5 Q. Well, on October the 4th, the board of 6 USAT took $6.6 million in assets of USAT and 7 deposited it in an escrow account to fund 8 severance benefits. 9 Do you recall we discussed that? 10 A. Yes. 11 Q. And we also discussed that under the 12 UFG contract, UFG had an obligation to fund those 13 same benefits. 14 Do you recall? 15 A. Yes, I do. 16 Q. Okay. And my question to you is: If 17 UFGI had no near-term funding requirements which 18 it was unable to meet, why didn't UFGI fund the 19 severance benefits? 20 A. I was thinking in terms of the 21 761,000-dollar range. I really hadn't focused on 22 the other -- on the 6-million-dollar category. 21199 1 Q. Well -- but isn't it true that under 2 the employment agreements, UFGI had agreed that it 3 would provide funding for the severance agreements 4 through either a letter of credit or a trust? 5 A. Yes. 6 Q. And it had failed to do that, had it 7 not? 8 A. Yes. I do not recall why it did not do 9 that. 10 Q. Would you have considered that a near 11 term funding requirement that it was unable to 12 meet? 13 A. As I say, I just don't recall why it 14 did not make it. 15 Q. Okay. And as a consequence of your 16 proposal, did you ultimately then resolve your 17 claims with USAT and UFG? 18 A. Yes, I did. 19 Q. And how were they resolved, sir? 20 A. They were resolved by my severing my -- 21 cancelling my contract. We entered into a 22 severance agreement in which I basically gave up 21200 1 the two contracts and received a cancellation of 2 the note. 3 Q. And the two contracts that you gave up 4 were the UFG contract that was entered into when 5 UFG had negative equity, shareholder equity, and 6 the USAT contract that was entered into when USAT 7 had -- was failing its capital requirement by some 8 $160 million. 9 Do you recall that? 10 A. I'm not sure what they were failing by 11 at that time, but that's -- there were -- this 12 was -- on June 30th, I don't recall how much they 13 were under at that time; but I know they were 14 under. 15 Q. They were substantially under, correct? 16 A. Yes. 17 Q. And do you recall that at that point in 18 time, UFGI had negative shareholder equity, as 19 well? 20 A. Yes, I do. 21 Q. Okay. Now, sir, I have two more 22 exhibits to show you and then I think we are 21201 1 finished. First, would you take a look at 2 Exhibit T8159? 3 A. Do I already have that? 4 MR. SCHWARTZ: No, sir. 5 Q. (BY MR. RINALDI) I'm handing you a 6 copy of what's been marked as T8159. 7 MR. RINALDI: And this is a new 8 exhibit, Your Honor, so I'm handing two copies up 9 to the Court. 10 MR. BLANKENSTEIN: Mr. Rinaldi, can you 11 identify 8159? We don't have it here. 12 MR. RINALDI: It's just his W-2 forms 13 that were produced as Gross Exhibit 1 at his 14 deposition. T8159. 15 MR. VILLA: Do you have additional 16 copies of that, sir? 17 MR. BLANKENSTEIN: Is that on the list 18 that you sent us? 19 MR. RINALDI: I believe it is. Yes. 20 It's the last one. 21 MR. BLANKENSTEIN: Do you have 22 additional copies? We don't seem to have that. 21202 1 MR. RINALDI: I only have one or two 2 questions. I can share my copy with you. 3 MR. BLANKENSTEIN: Your Honor, can I 4 suggest perhaps a short break while we make copies 5 of that? 6 THE COURT: All right. We'll be off 7 the record. 8 9 (Discussion held off the record.) 10 11 THE COURT: We'll be back on the 12 record. I wanted to raise a question about T8089. 13 We're having trouble finding in the record where 14 that was received. I believe you gave a tab 15 number. 16 MR. RINALDI: Yes. And you know, I 17 believe it's one of those documents that came in 18 under a different number. And I, for the life of 19 me, couldn't figure out which it was. I believe 20 it may be -- the alternative number -- the tab is 21 1380. 8089 -- no. That's 79. 80. 22 It shows that it's Trial Exhibit 1380, 21203 1 and it's Exhibit T8089. It also has a 2 corresponding, what do you call, B number, I 3 believe. And that was, at one time, something 4 that confused me. Let me see if I can find the B 5 number. B2296. 6 Is it possible that you have it in that 7 format? 8 MR. SCHWARTZ: B2296. 9 THE COURT: Well, I think it was 10 identified back on -- 11 MR. RINALDI: Was it identified -- 12 THE COURT: July 17th. 13 MR. RINALDI: Is it possible it was 14 identified and not offered? Well, I would offer 15 it at this time. I thought Mr. Berner was 16 examined on it last week. 17 THE COURT: He may have been. 18 MR. VILLA: No objection if you would 19 like to move it into evidence. 20 THE COURT: All right. It is received. 21 MR. RINALDI: Okay. And I have an 22 extra copy right here and perhaps two. 21204 1 Does the Court need a copy of this? 2 THE COURT: 8089? 3 MR. RINALDI: Yes. 4 THE COURT: No. I have a copy, and it 5 was identified on the record; but I don't have any 6 record of it having been received. 7 MR. RINALDI: Okay. 8 Q. (BY MR. RINALDI) Mr. Berner, would 9 you take a look at what's been marked as -- 10 A. I'm Mr. Gross. 11 Q. I'm sorry. Mr. Gross -- 8159, and I'd 12 ask you if you recognize that. 13 A. Well, it's very, very blurry; but this 14 looks like -- this first one is a wage and tax 15 statement for 1985. 16 Q. And it's from USAT? 17 A. Yes, it is. 18 Q. And this is for the year 1985? 19 A. Yes. 20 Q. And that would have been when you first 21 began at USAT? 22 A. Yes, it would. 21205 1 Q. And it reflects that your wages for 2 1985 were reported at $142,500 on one and 3 $2,582.10 on the other, correct? 4 A. Let's see. Yes. 5 Q. And these are the wage and salary 6 information that you produced to us at the time of 7 your deposition. 8 Do you recall that? 9 A. No, I don't. 10 Q. Okay. Let's go on, then. 11 MR. BLANKENSTEIN: Your Honor, does 12 Mr. Rinaldi intend to offer this into evidence? 13 MR. RINALDI: Yes, I do. 14 MR. BLANKENSTEIN: Well, even though 15 it's not on his list, I have no objection. 16 THE COURT: Received. 17 Q. (BY MR. RINALDI) And if you'd turn to 18 the third page in, it indicates that in 1986, you 19 had earnings at United Savings of Texas of 20 $297,144. 21 Do you see that? 22 A. Yes, I do. 21206 1 Q. And then there is also a smaller one 2 below that that indicates $3,378.20? 3 A. Yes. These are awfully hard to read, 4 but it looks like that's right. 5 Q. Well, I apologize for the quality. As 6 you know, they were produced to us by your 7 counsel. 8 Do you know why there are frequently 9 two of these -- 10 A. I can't read what that says down there. 11 Q. Is one for your services as director 12 and the other is your services as an officer? 13 A. I don't think so. I think -- I don't 14 know if it's -- it might have been life insurance 15 or something like that. I'm not sure. Doesn't 16 that look like L-I-F-E down there? As I say, it's 17 so blurred. That may be what it is. 18 Q. All right. Let's go on, then. And two 19 pages further on, we see there are also 1987 W-2s. 20 Do you see that? 21 A. I can't tell. I can tell on the 6300, 22 and it does say "life." So, I guess that must be 21207 1 what that is. 2 Q. Oh, I see. Okay. And then below 3 that -- 4 A. The bottom one, the year is missing; 5 so, I don't know. 6 Q. So, you don't know what year that's 7 from? 8 A. From this, I can't tell. 9 Q. Okay. Well, do you presume that 10 because the one above it is '87, that the one 11 below it is, as well? 12 MR. BLANKENSTEIN: Objection, Your 13 Honor. Pure speculation. 14 MR. RINALDI: I don't want the witness 15 to speculate. 16 Q. (BY MR. RINALDI) Let's go on to the 17 next-to-the-last page of the document -- I'm 18 sorry -- where the 1988 W-2 form appears. 19 Do you see that? 20 A. Yes, I do. 21 Q. It's three from the end. Okay? And in 22 that statement, it indicates wages and 21208 1 compensation of $1,527,166.41. 2 Do you see that? 3 A. I see that. 4 Q. Okay. Now, do you know, was the 5 forgiveness of your note considered income to you? 6 A. Yes -- excuse me. 7 Q. No. I was finished. 8 A. Yes, it was. 9 Q. And is that income as a result of the 10 forgiveness then included in the wages amount that 11 appears here of $1,527,166.41? 12 A. Yeah, I guess. I'm trying to decipher 13 this. Down here, it says "comp, 822" -- let's 14 see. If you subtract 822 from 59 -- 15 Q. All right. 16 A. I -- 17 Q. My only question to you, sir: Did 18 ultimately you, for income tax purposes, declare 19 the note forgiveness as income to yourself? 20 A. Yes, I did. 21 Q. Okay. And that would have been in the 22 face amount of the note plus any interest that had 21209 1 accrued on the note at the time of the 2 forgiveness? 3 A. Yes. 4 Q. Okay. And do you recall that that 5 approximated $835,000? 6 A. 761,000 plus whatever the accrued 7 interest would be. 8 Q. Sir, I'll hand you another exhibit. 9 This has been marked as T8174. This is a 10 demonstrative exhibit, and this will be the last 11 exhibit for the day. 12 MR. RINALDI: I'll hand those up to the 13 Court. 14 Q. (BY MR. RINALDI) Sir, I have prepared 15 or had prepared a chart here, and I'd like for you 16 to take a look at it. And then I have a few 17 questions to ask you, and there is a copy of that 18 right -- of the chart at T8174. 19 Now, on December 31st, 1987, do you 20 recall that your base salary with respect to USAT 21 and UFG was $291,656, sir? 22 A. Yes. 21210 1 Q. Okay. And after December 31st, 1987, 2 do you recall that you received additional 3 compensation over and above the base salary? 4 A. I do. 5 Q. And do you recall that as of 6 December 31st, 1987, USAT was failing or it was 7 determined that as of that date, USAT had failed 8 its net capital requirement? 9 A. I'm sorry. Would you repeat that? I 10 was looking at this instead of listening to you. 11 I'm sorry. 12 Q. Okay. Do you recall that as of that 13 date, USAT had failed its net capital requirement, 14 as of December 31st, 1987? 15 A. Yes. 16 Q. Okay. Now, on January 1 of 1988, your 17 base salary was 291,656; is that correct? 18 A. Yes. 19 Q. Okay. Now, in January of 1988, after 20 USAT had failed its net worth capital requirement, 21 you received a performance bonus. 22 And we went through this, did we not. 21211 1 MR. BLANKENSTEIN: Your Honor, that's 2 misleading the witness. The determination that 3 they failed the net worth occurred after 4 January 1st, 1988. 5 MR. RINALDI: I'm not going to quibble 6 over this, Paul. I'll rephrase the question 7 because I think we've probably 10 pages, if not 8 more, testimony -- 9 THE COURT: All right. What's your 10 question, Mr. Rinaldi? 11 Q. (BY MR. RINALDI) Sir, after 12 December 31st, 1987, the date upon which the 13 auditors determined that USAT had failed its net 14 worth obligation, did you receive a performance 15 bonus in the amount of $235,000? 16 A. I did. 17 Q. Okay. And that was a performance bonus 18 for 1987 that was payable in 1988, correct? 19 A. I believe that's correct. 20 Q. Okay. And then on April 5th, 1988, do 21 you recall that you received a salary increase of 22 $167,000 per year? 21212 1 A. Yes. 2 Q. Okay. Now, I have not included on here 3 the full amount of it because you did not work the 4 full year, did you? 5 A. No, I did not. 6 Q. Your severance occurred in November, 7 did it not? 8 A. Yes, it did. 9 Q. And so, we have prorated it to indicate 10 that the amount that you received as a result of 11 the salary increase was only for 11 months and not 12 12 months. 13 Do you see that? 14 A. I see that. 15 Q. And that amount approximated $148,241. 16 Does that appear reasonable to you, 17 sir? 18 A. If you run them -- if it's -- you know, 19 whatever it is, it is. 20 Q. All right. Did you also receive the 21 first 25 percent of your executive bonus in the 22 amount of $41,750 on or about April 5th, 1988? 21213 1 A. I did. 2 Q. Okay. And subsequent to that, on June 3 the 30th, 1988, you entered into an employment 4 agreement with USAT -- I'm sorry -- UFG. 5 Do you recall that? 6 A. Yes, sir. 7 Q. And pursuant to that employment 8 agreement, you were entitled to receive a 9 severance package valued at $1,028,000. 10 Do you recall that? 11 A. That's correct. 12 Q. And on the day -- a day after that, you 13 entered into a similar employment agreement with 14 USAT that also provided for a severance agreement 15 with a package worth $1,028,000, correct? 16 A. Yes. 17 Q. And then at the bottom of the page, we 18 see that on November 22nd, 1988, you entered into 19 a separation agreement pursuant to which you 20 released UFG and USAT from its obligation under 21 the June 30th and July 1st employment 22 agreements -- 21214 1 A. As well as the bonus, executive bonus. 2 Q. Right. And in return for which you 3 were forgiven an 835,000-dollar debt. 4 Do you see that? 5 A. I see that. 6 MR. BLANKENSTEIN: Your Honor, I just 7 want to make it clear for the record that the 8 witness has pointed out that Mr. Rinaldi's chart 9 doesn't include the bonus agreement that was 10 entered into in April of 1988. 11 MR. RINALDI: That's absolutely 12 correct. And I believe that as a consequence of 13 the bonus agreement, he did not receive any money, 14 did he? I was simply trying to reflect the moneys 15 that he received in 1988 as compensation in one 16 form or the other. 17 MR. BLANKENSTEIN: Mr. Rinaldi also -- 18 his chart indicates he received no money on the 19 severance packages and the other two agreements. 20 I'm just trying to point out for the sake of 21 completeness that there was another agreement to 22 which Mr. Gross had entitlement for a severance 21215 1 which would have extinguished the amount of the 2 note. Mr. Rinaldi simply failed to include it on 3 his chart. 4 MR. RINALDI: Your Honor, this is for 5 demonstrative purposes. And it strikes me that if 6 Mr. Blankenstein wishes to testify in this 7 proceeding, he's certainly able to do so. There 8 is cross-examination and redirect. 9 THE COURT: All right. Well, let's 10 move on. 11 Q. (BY MR. RINALDI) Sir, following 12 the -- well, looking at this chart, it indicates 13 that in 1988, you received total compensation, 14 including debt forgiveness, bonuses, and base 15 compensation of $1,551,647; is that correct? 16 A. Well, you know, the way you've run your 17 numbers -- but what you're doing is you're taking 18 1987 bonus and because it has to be paid in 1988, 19 calling it 1988 compensation, which it really is 20 not. At the head of that, it says "1988 21 compensation." And the compensation was for '87 22 and not for '88. So, the 235,000 doesn't belong 21216 1 in there. 2 Q. Okay. And the question I have for you, 3 sir: Of the total amount that you received in 4 1988, $1,259,991 was moneys that you received over 5 and above your base salary, correct? 6 A. Well, as I say, you're saying "total 7 compensation benefits received after that." All 8 I'm saying to you is they are not 1988 -- it's not 9 a 1988 benefit. It's a 1987 benefit which was 10 received in 1988. 11 Q. And -- 12 A. So, you need to subtract $235,000 from 13 the numbers. 14 Q. That's not the question I asked you, 15 sir. You need to listen. 16 A. I'm sorry. I missed your question. 17 What was it? 18 Q. Were you paid and did you receive 19 moneys from USAT and UFG in the total amount of 20 $1,551,647 in 1988? 21 MR. BLANKENSTEIN: Objection. The 22 question is misleading. There is imputed income 21217 1 there. 2 Q. (BY MR. RINALDI) I believe I have 3 previously indicated to you that there is an 4 835,000-dollar amount that represents a debt 5 forgiveness, correct? 6 A. Correct. 7 Q. And that was treated as income for 8 purposes of your taxes, was it not? 9 A. That's correct. 10 Q. And so, you had debt forgiveness and 11 the income in 1988 that emanated from USAT and UFG 12 in the amount of $1,551,647; is that correct, sir? 13 A. It may be correct, but it is not right. 14 Q. Well, did you receive that amount of 15 money or debt forgiveness from UFG and USAT in 16 1988? 17 A. Not for 1988 compensation, which is 18 what you've got on the top. 19 Q. Okay. Well, then ignore what it says 20 on the top. Okay? 21 Was the compensation paid in 1988, sir? 22 Let me just say this to you, Mr. Gross. You have 21218 1 informed both myself and the Court three times now 2 that this bonus that was paid in January of 1988 3 was for 1987 performance. And do you see what's 4 written there? It says "January 1988 for '87 5 performance." 6 A. I see that. 7 Q. Okay. So, I am not trying to mislead 8 you. I'm not trying to put words in your mouth. 9 I'm simply asking you: In 1988, did you receive 10 payments from USAT and UFG or debt forgivenesses 11 totaling $1,500,000? 12 A. Well, I stand on what I said before. I 13 received a combination of income, debt forgiveness 14 in that year, part of which was for '87. 15 Q. Okay. 16 A. And part of which was debt forgiveness. 17 Q. Okay. And that's what's indicated up 18 here, that it was a January payment for '87 19 performance, correct? 20 A. That's correct. 21 Q. And of those payments, 1,012,000 -- I'm 22 sorry -- $1,259,991 were payments over and above 21219 1 your base salary at the beginning of the year? 2 A. That is correct. 3 Q. And all of those payments were made 4 after December 31st, 1987, at a point in time that 5 it was determined that USAT was failing its net 6 capital requirement? 7 A. As previously said, we knew in February 8 that it was failing as of December 31st. 9 Q. And as it was previously said, you had 10 predicted that failure for some considerable time 11 before that, had you not? 12 A. Yes, we had. 13 Q. And, in fact, you had written several 14 memos in which you indicated that you thought it 15 had failed as early as November, did you not? 16 A. I don't believe so. 17 Q. All right. 18 MR. RINALDI: I have no further 19 questions for this witness, Your Honor. 20 THE COURT: All right. We'll adjourn 21 until 9:00 o'clock tomorrow. 22 MR. RINALDI: Before we adjourn, I move 21220 1 the admission of T8174. 2 MR. BLANKENSTEIN: I'm going to object 3 to this on the grounds that it's misleading and 4 incomplete. 5 MR. VILLA: I join that objection. 6 It's quite misleading. 7 THE COURT: Sustained. 8 9 (Whereupon at 4:46 p.m. 10 the proceedings were recessed.) 11 12 13 14 15 16 17 18 19 20 21 22 21221 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 26th 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 21222 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 26th 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