21223 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 27, 1998 22 21224 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 21225 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 . 21226 1 2 INDEX OF PROCEEDINGS 3 4 GENARD GROSS 5 Examination by Mr. Guido................21228 6 . 7 . 8 . 9 . 10 . 11 . 12 . 13 . 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 21227 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 on the record. 5 Mr. Guido, last evening, I sustained an 6 objection to T8174 which is a demonstrative 7 exhibit offered by OTS. My primary concern was 8 the loan forgiveness amount of 835 which was a 9 negotiated amount, but this was in -- the quid pro 10 quo was the severance package; and upon 11 reflection, I'm going to receive that document. I 12 do not believe it is unduly misleading. Of 13 course, this doesn't foreclose any of the issues 14 surrounding the exhibits that are cited there; but 15 I think it's a receivable document. It would be 16 received. 17 Mr. Guido, are you ready to proceed? 18 MR. GUIDO: Yes, Your Honor. Before I 19 start, I would like to ask the Court on behalf of 20 the respondents and the OTS if we could break a 21 half an hour early before the end of the day so 22 that I may address some preliminary matters with 21228 1 the Court or procedural matters with the Court 2 that pertain to the documents that came in last 3 Friday. 4 In addition, the respondents would like 5 to address the issue of scheduling going forward. 6 So that we don't keep the witness here for an 7 unduly long period of time, we would like to 8 reserve, if possible, a half an hour at the end of 9 today to address those issues with Your Honor. 10 THE COURT: All right. Very well. 11 12 EXAMINATION 13 14 Q. (BY MR. GUIDO) Good morning, Mr. Gross. 15 A. Good morning. 16 Q. The -- you've been asked a number of 17 questions in the last day about your compensation. 18 I would now like to shift from that and talk about 19 the operations of USAT during the period of time 20 that you were an officer and director of USAT. To 21 put my questions in context, I have a few 22 preliminary questions which may overlap a little 21229 1 bit with questions that you've answered. 2 You were the chairman and CEO of USAT; 3 is that correct? 4 A. At what time? 5 Q. In February of 1985 until you resigned 6 sometime in 1988. 7 A. Chairman and CEO? 8 Q. Yes. 9 A. Let's see. No, I don't think that's 10 right. I think -- I think I was chairman from '85 11 until I resigned, but I think I was CEO until 12 Mr. Connell came in. 13 Q. Okay. So, you were CEO until sometime 14 in the spring or the summer of 1988? 15 A. The summer, I believe. 16 Q. But you were the CEO starting in 17 February of '85? 18 A. Yes. 19 Q. Okay. Now, you held positions at UFG, 20 did you not? 21 A. Yes, I did. 22 Q. What were those positions, and when did 21230 1 they start? 2 A. I went on the board of UFG in February 3 of '85. I believe I became president of UFG 4 either the end of '85 or the beginning of '86, 5 somewhere in there. 6 Q. Okay. 7 A. And then probably sometime in '88, if I 8 remember correctly, I believe I became chairman of 9 UFG also. 10 Q. Okay. Was that after Mr. Hurwitz 11 resigned in February of 1988? 12 A. Yes. 13 Q. Now, during that period of time you 14 were the president, were you the CEO of UFG? 15 A. I believe so. 16 Q. Okay. Now, prior to joining USAT and 17 UFG as chairman of USAT in '85 and president of 18 UFG in '85, had you known Mr. Hurwitz? 19 A. Yes, I had. 20 Q. And how did you know him? 21 A. Socially. 22 Q. Did you have discussions with him about 21231 1 becoming employed at USAT prior to joining USAT as 2 president or chairman of the board? Excuse me. 3 A. Yes, I did. 4 Q. Can you tell the Court about those 5 conversations? 6 A. I don't -- I can't -- see, I -- as I 7 remember, I met with Barry Munitz first. And then 8 I think after Barry proposed and I reflected on 9 the matter and agreed to it, I think I met with 10 Dr. Munitz and Mr. Hurwitz subsequent to that. 11 Q. Did you talk to Mr. Munitz before or 12 after you had become a consultant to USAT? 13 A. I talked to him before. He was the one 14 who approached me about becoming a consultant. 15 Q. Did he ask you to talk with 16 Mr. Hurwitz? 17 A. Yes. 18 Q. Did he indicate to you how he had 19 gotten your name? 20 A. Well, we had known one another for 21 several years, also. 22 Q. Okay. So, you had known Dr. Munitz, as 21232 1 well? 2 A. Yes. 3 Q. Okay. And he approached you? 4 A. Yes. 5 Q. Did he indicate to you what he wanted 6 to talk to you about about joining USAT? 7 A. Yes, he did. They were -- the two -- 8 they had just recently merged with another -- I 9 think it was Houston First American or Houston 10 First Federal, whatever. The two had merged, I 11 think, the prior year. And they were having a lot 12 of problems in real estate areas and wanted me to 13 come in as a consultant and see if I could help 14 them in that area. 15 Q. And what were you doing at the time? 16 A. I was -- I had sold -- I was -- had 17 always been self-employed, and I had pretty well 18 sold all of my apartment operations in '82 and I 19 believe had sold the savings and loan in '82 or 20 '83 and had a fair amount of time available. And 21 I was just primarily focusing on my own investment 22 activities. 21233 1 Q. What were those activities at the time? 2 A. Oh, we had some land, I believe; and we 3 had some -- well, some mortgages on apartments and 4 things of that sort. 5 Q. Were those the apartments that you had 6 sold in '82 or '83? 7 A. Some of them, yes. 8 Q. When you say you were a social 9 acquaintance with Mr. Hurwitz, what do you mean by 10 that? 11 A. Well, we would see them at parties. We 12 knew them. They lived not too far from us in 13 Houston; and, you know, I guess -- we would -- 14 when we had functions, we would invite them; and 15 when they had functions, they would invite us. As 16 I say, we would see them at other private parties. 17 Q. Did you count them within your circle 18 of close friends? 19 A. I wouldn't say close friends. I would 20 say casual friends. 21 Q. You said you invited them to social 22 functions at your home? 21234 1 A. Yes. 2 Q. They invited you to social functions at 3 their home? 4 A. Yes. 5 Q. What was your relationship with Barry 6 Munitz? 7 A. I think the same would apply. I had 8 also known him -- as I said earlier, I had been 9 involved in the Houston Grand Opera; and I believe 10 he was the president of the opera the year before 11 I became president. And so, we had worked 12 together on the opera board. 13 Q. Now, I'm going to ask you some 14 questions about both of their roles in USAT over a 15 period of time; and I'll be using documents to 16 refresh your recollection, if I may, because I 17 know it's a long time ago and dates can slip from 18 one's mind. 19 A. A lot of other things, too. 20 Q. Pardon? 21 A. A lot of other things, too. 22 Q. We'll try and help refresh your 21235 1 recollection. 2 I would like you to look at documents 3 A1102, A1140, A1109, A1110. Those are Tabs 128, 4 1407, 132, 133 as one batch of documents. I would 5 also -- I would like to ask you to take a look at 6 A1102, if I might. 7 A. (Witness reviews the document.) Do you 8 want me to read the whole thing? 9 Q. No. I'll direct your attention to 10 certain paragraphs. The first paragraph I would 11 like to direct your attention to is Paragraph 1 of 12 those minutes of February 14th, 1985. 13 Do you see it talks about the notice -- 14 the meeting being held pursuant to notice, and 15 then it says, "All directors were present except 16 Dr. LeMaistre." Then it indicates, "Certain 17 people in addition were present, including 18 Mr. Hurwitz." 19 Do you see that? 20 A. Yes, I do. 21 Q. Then it makes reference that the 22 meeting was conducted as a joint meeting of the 21236 1 board of directors of United Financial Group and 2 the association. 3 Was it a practice to hold the meeting 4 of the UFG board and USAT as joint meetings? 5 A. Yes. 6 Q. And was it Mr. Hurwitz' practice to 7 attend the meetings of USAT's board of directors? 8 A. To the extent they were joint meetings, 9 you know, and he was present, yes. 10 Q. Now, what -- do you know what the 11 reference is to joint meetings? 12 A. You know, we got into that yesterday; 13 and I was trying to remember whether they were 14 concurrent or consecutive. At this point, I don't 15 recall. 16 Q. So, they could have been concurrent? 17 A. You know, I think I may have said that; 18 and I've been reflecting on it. And they may have 19 been -- they may have been consecutive. I'm not 20 sure. 21 Q. Now, I would like to direct your 22 attention to Page 2 of that where it mentions the 21237 1 resolution resolved, No. 2 at the bottom of the 2 page. It makes reference to an executive 3 committee. 4 Do you see that? 5 A. Yes, I do. 6 Q. That indicates that you were on the 7 executive committee starting in February of 1985. 8 Do you see that? 9 A. Yes, I do. 10 Q. And Dr. Munitz was the chairman of that 11 committee. 12 Do you see that? 13 A. Yes. 14 Q. Then it makes reference to Mr. Bentley 15 and Mr. Williams and Mr. Whatley as being members 16 of that committee. 17 Do you see that? 18 A. I do. 19 Q. Now, I would like to direct your 20 attention to the second document, if I might, 21 which is A1140, which is at Tab 1407. 22 Do you see that? 21238 1 A. All right. 2 Q. Do you see the third paragraph? It 3 indicates that that is the date that Mr. Hurwitz 4 resigned as a member of the board of directors of 5 United Financial Group. 6 A. Oh, I had missread the date. I'm 7 sorry. It's 1988. I thought we were still back 8 in 1985. 9 Q. I'm sorry. I'm trying to block it in 10 with -- 11 A. All right. 12 Q. The first one is about the time that 13 you became an officer of USAT and UFG. The second 14 document is when -- indicates when Charles Hurwitz 15 resigned. 16 Do you see that? 17 A. I'm -- okay. It says that Mr. Hurwitz 18 was not present. 19 Q. Look at the fourth paragraph down. 20 A. Fourth paragraph, okay. I see that. 21 Q. Okay. Now, do you see the date 22 February 11, 1988? 21239 1 A. Okay. We've gone forward three years. 2 Q. I just want to make sure that that date 3 is clear in your mind because I'm going to ask you 4 some questions about that date as we go through. 5 So, I want you to -- and is that your 6 recollection, that that is the date that Charles 7 Hurwitz resigned? 8 A. It's not my recollection, but that's 9 what the -- I mean, I wouldn't have recalled the 10 specific date. 11 Q. All right. Now, I would like to direct 12 your attention to two other documents that you 13 have in front of you. One is Tab 132, which is 14 Exhibit A1109; and the second is Tab 133, which is 15 A1110. 16 The A1109 is the board of directors of 17 United Financial Group minutes, do you see that, 18 dated February 13th? 19 A. Okay. Now we've gone back two years. 20 Okay. 21 Q. Now we're going back two years. 22 A. All right. 21240 1 Q. I want to direct your attention to 2 Page 6 of that document. 3 A. I see that. 4 Q. Do you see the "resolved" in the middle 5 that talks about the executive committee? 6 A. Yes. 7 Q. Do you see the composition of the 8 executive committee there that has Barry Munitz as 9 chairman, you as a member, Charles Hurwitz as a 10 member, James Whatley as a member, and Gerald 11 Williams as a member? 12 A. Yes. 13 Q. Now, leave that page open. That's the 14 UFG board minutes. Now, I would like to direct 15 your attention to the minutes of the USAT board of 16 the same date, February 13th. I would direct your 17 attention to Page 2 of those minutes. 18 See at the top of the page, it 19 discusses the USAT executive committee? Do you 20 see that? 21 A. Yes, I do. 22 Q. It has all of the same members except 21241 1 Charles Hurwitz. 2 Do you see that? 3 A. I do. 4 Q. Did you ever have a discussion with 5 Charles Hurwitz of why he was on the UFG executive 6 committee and not on USAT's executive committee? 7 A. Not that I recall. 8 Q. You don't recall any discussions with 9 him about that? 10 A. No. 11 Q. Were the executive committee meetings 12 held jointly? 13 A. I don't remember. 14 Q. You don't recall? 15 A. (Witness shakes head negatively.) 16 Q. Did Charles Hurwitz attend the 17 executive committee meetings that you attended? 18 A. You know, I'm sure he -- I'm sure he 19 attended some of them. I can't specifically 20 recall which ones he did or didn't attend. 21 Q. Was there a distinction between USAT's 22 executive committee and UFG's executive committee 21242 1 when you were at USAT? 2 A. As I said, I really don't recall. 3 Q. Now, I would like to have you look at 4 two other documents. It's A10560 and A10561. 5 These are Tabs 174 and 175. 6 Let's start with A10560. It is a 7 memorandum dated May 1st, 1985, from Michael Crow 8 to Charles Hurwitz, to Barry Munitz, to you, 9 Jenard Gross, and Gerry Williams. It attaches 10 something called a mission statement. 11 Is that your handwriting on the 12 right-hand side there? 13 A. Yes. 14 Q. Have you seen this document before? 15 A. I have. In the last few days, I 16 remember seeing it. 17 Q. Did you also see this in the course of 18 your deposition taken by the OTS or depositions, 19 plural? Excuse me. 20 A. I could have. I don't remember. 21 Q. Have you reviewed those depositions? 22 A. Yes, I have. 21243 1 Q. When did you do that? 2 A. In the last week or so. 3 Q. Okay. At whose request? 4 A. At my attorney's request. 5 Q. Were they transmitting a request from 6 me? 7 A. I have no -- I don't know. 8 Q. Okay. 9 THE COURT: Could I ask what the last 10 word in that note is? 11 THE WITNESS: I'm sorry, sir? 12 THE COURT: On Exhibit A10560 of which 13 you say is your handwriting, what is the last 14 word? 15 THE WITNESS: It says "good venture 16 capital fund." 17 THE COURT: "Fund"? 18 THE WITNESS: Yeah. We were talking 19 about the possibility of setting up a venture 20 capital fund and having other savings and loan 21 associations put money in it. And then we had 22 someone who was going to manage that fund and 21244 1 invest those funds for them. That's what that 2 was. 3 Q. (BY MR. GUIDO) Will you point out where 4 in that memo it makes reference to the venture 5 capital fund you're talking about? 6 A. Let's see. (Witness reviews the 7 document.) I think what I was referring to 8 here -- and, again, this is some 13 years ago -- 9 is this Section 14 where we talked about marketing 10 their investment services to smaller savings and 11 loans. 12 Q. Does that say anything about raising 13 funds for a venture capital fund -- 14 A. It doesn't say that. I guess that's 15 the reason for my comment on the front page. 16 Q. Was there ever any effort at USAT to 17 raise funds from other savings and loans to be 18 part of a venture capital fund? 19 A. I believe there was, and I think we 20 found that they would have to take exams and it 21 would be a very complicated process of registering 22 with the SEC and so forth. So, we did not pursue 21245 1 it. 2 Q. Was that in relationship to becoming 3 investment advisors or in regard to USAT becoming 4 a venture capital fund? 5 A. I'm sorry? 6 Q. Was that in relationship to USAT 7 creating an investment advisory entity, or was 8 that in relationship to USAT creating a venture 9 capital fund? 10 A. I think we were talking about doing all 11 of that. 12 Q. Now I would like to direct your 13 attention to another one of those points, and 14 that's Point No. 11. See Point 11 says, "The 15 investment department is working effectively at 16 the present time, but the group agreed that a 17 monitoring process needs to continue"? 18 A. Yes. 19 Q. Okay. Now, who was the group that's 20 referred to? 21 A. It would be whoever attended this 22 meeting. 21246 1 Q. Do you recall the meeting? 2 A. I do recall the meeting. 3 Q. Okay. Who was in attendance at the 4 meeting? 5 A. Let me see. I know that I was there. 6 I know Gerry Williams was there. I know Mike Crow 7 was there. I know Barry was there. I know that 8 Charles was there. I believe a fellow named 9 Neurenberg from Bain & Company was there, if I 10 remember correctly. 11 Q. Was his first name David? 12 A. Could have been. I can't recall who 13 else was there. 14 Q. Who invited David Neurenberg to that 15 meeting? 16 A. I don't remember. 17 Q. What was his role at that meeting? 18 A. He was with a company called Bain & 19 Company, and they were -- they were considered the 20 leading business consulting firm in the United 21 States. And I believe we had retained them to -- 22 to look at United and look at what we were doing 21247 1 and what might be doable and try to develop a game 2 plan for generating operating profits and becoming 3 profitable, focusing on what would make the -- the 4 general lines of business that we ought to try to 5 pursue. 6 Q. Was Doug Hansen at that meeting? 7 A. What was the date of this meeting? 8 Q. It was sometime prior to May 1st, 1985, 9 based on this memorandum. 10 A. I don't know if he was already with 11 United at that time or not. I'm not sure. 12 Q. Was -- was Doug Hansen with Bain & 13 Company at the time? 14 A. I don't recall. I -- I don't recall 15 his being there. 16 Q. Now, what was the purpose of the 17 meeting? 18 A. Well, it was to try to develop a -- 19 well, it was to review what was being done and to 20 try to develop a strategy for successful 21 profitable operations in the future. 22 Q. Where was the meeting held? 21248 1 A. It was held in Austin. 2 Q. Okay. Was this what's referred to or 3 has been referred to as the Mustang Island 4 meeting? 5 A. No. That was another one. 6 Q. Okay. Did this have a reference -- was 7 this referred to as the Sandpiper? 8 A. No. Sandpiper was at Mustang Island. 9 Q. So, the Sandpiper and Mustang Island 10 are all one and the same? 11 A. Yes. Sandpiper is on Mustang Island. 12 Q. Thank you. 13 A. Okay. 14 Q. This makes reference that the group 15 agreed that a monitoring process needs to 16 continue. 17 Do you see that reference there? 18 A. I remember seeing it here. 19 Q. It's Point 11. 20 A. Point 11. 21 Q. We're still in that paragraph. 22 A. I see that. 21249 1 Q. Okay. It makes -- what's the 2 monitoring process that needs to continue 3 referring to? 4 A. You know, I don't have an independent 5 recollection today of what that was at the time. 6 Q. What is the investment department 7 that's being referred to there? 8 A. That would be the investment in -- that 9 would be in the area of Ron Huebsch, Joe Phillips, 10 that department. And they would have dealt with 11 corporate bonds, stock arbitrage, and 12 mortgage-backed securities. So, it would have 13 something to do with that area. 14 Q. And that was Mr. Huebsch and 15 Mr. Phillips. Right? 16 A. Yes. 17 Q. Anyone else? 18 A. There were other people in the 19 department. I can't recall who they were. 20 Q. Did Mr. Hurwitz have a role in those 21 decisions at that time? 22 A. In the investment decisions? 21250 1 Q. Yes. 2 A. I think -- I think that primarily his 3 role -- well, you say "at that time"; and I'm 4 trying to get a time frame. I'm not sure when we 5 started our investment committee meetings, when we 6 formalized them and when they were informal but -- 7 Q. This is May 1st, 1985. The record 8 shows that, formally, the investment committee 9 minutes started in April of 1986. 10 A. So, it wasn't in existence at that 11 time. I'm sure that he had input into the -- 12 primarily in the area of -- well, I don't recall 13 what he had then. I can recall by the time we got 14 to having a formal investment committee, he was 15 typically giving -- giving ideas about the various 16 companies. Ron Huebsch would present these 17 companies that we were considering acquiring 18 corporate bonds in, and then if Charles -- Charles 19 would make comments about maybe their management 20 or their products or their outlook for 21 profitability or whether he thought it was a good 22 investment or bad investment. 21251 1 Q. Now, look at the second sentence. It 2 says, "It was discussed that Mr. Hurwitz was the 3 only truly qualified individual to determine the 4 quality of some of the investments." 5 Do you see that? 6 A. I see that. I don't recall it. 7 Q. What was your experience at this time, 8 in May of 1985, in making investments in 9 high-yield bonds? 10 A. At that point in time, I had not made 11 investments in high-yield -- in high-yield bonds. 12 Q. What about Gerald Williams? 13 A. I can't speak for him. I don't know. 14 Q. What about Michael Crow? 15 A. I don't know. 16 Q. What about Barry Munitz? 17 A. I don't know what their experience was. 18 Q. Then it says, "It was also discussed 19 that the reporting process of purchases of 20 investments to Messrs. Gross and Williams needs to 21 be improved." 22 Do you see that sentence? 21252 1 A. Yes. 2 Q. Do you recall what that refers to? 3 A. I don't recall. 4 Q. Was there something about the reporting 5 process that was of concern to you at that time? 6 A. Well, I was always looking for the best 7 possible information I could get as quickly as I 8 could get it so I could always keep a handle on 9 what was going on. And -- but, you know, what 10 this specifically refers to, I'm not sure. 11 Q. Prior to May of 1985, did you approve 12 investments that were made by USAT in high-yield 13 bonds prior to them having been made? 14 A. I don't -- I don't recall. 15 Q. Now, I would like to direct your 16 attention to Item No. 13 on the memorandum. 17 Do you see the reference to investment 18 securities being a very sensitive area? 19 A. Yes, I do. 20 Q. Do you know what that paragraph refers 21 to? 22 A. Well, yes, I do. 21253 1 Q. What does it refer to? 2 A. I believe prior to my coming to United, 3 they -- I think that Mr. Hurwitz had attempted 4 to -- I think I saw this in the newspaper. I 5 believe he tried to acquire Castle & Cooke, and I 6 believe that United Savings bought some of the 7 shares in Castle & Cooke at that time. And as I 8 understood it, the regulators told them to divest 9 themselves of the shares, which they did. 10 So, I think what this is saying is we 11 wanted to make sure that whatever securities we 12 acquired were certainly not securities where there 13 would be any possible concern about that. 14 Q. Was another one of the companies that 15 Charles Hurwitz tried to obtain control of a 16 company called Amsted? 17 A. I don't recall. 18 Q. Was another one of them Pacific Lumber? 19 A. I do remember Pacific Lumber. 20 Q. Did USAT buy stock in Pacific Lumber? 21 A. Not that I know of. 22 Q. Pardon? 21254 1 A. Not that I know of. 2 Q. What do you mean -- you don't recall; 3 or as far as you know, it did not? 4 A. As far as I know, it did not. 5 Q. Did USAT ever initiate trades and 6 purchase -- to purchase Pacific Lumber stock that 7 you know of and then cancel the transaction and 8 transfer the stock to one of the other MAXXAM 9 entities? 10 A. Not that I'm aware of. 11 Q. Did anyone ever discuss it with you? 12 A. No. 13 Q. Okay. Has anyone ever discussed it 14 with you since you left USAT? 15 A. No. 16 Q. Now, I would like to direct your 17 attention to the second document, A10561, which is 18 the May 16th, 1985 minutes of the board of 19 directors of United Savings Association of Texas. 20 A. Okay. This is May 1985? 21 Q. May 16th, 1985. Do you have that? 22 A. I have it. 21255 1 Q. Now, this says it's a regular meeting 2 of the board of directors. 3 Do you see that? 4 A. Yes, I do. 5 Q. In the first paragraph. Then it says 6 that all members of the board were present when 7 the meeting was called to order. 8 Do you see that? 9 A. Yes. 10 Q. Then it says, "Also present were 11 Messrs. Hurwitz, Borman, Michael Crow, and James 12 Pledger." 13 Do you see that? 14 A. Yes, I do. 15 Q. Then it says it was conducted as a 16 joint meeting of the board of directors, correct? 17 A. Yes. 18 Q. Now, I would like to direct your 19 attention to Page 6 of that document and make -- 20 direct your attention to the second full paragraph 21 which starts with "Mr. Hurwitz briefed the board." 22 A. (Witness reviews the document.) 21256 1 THE COURT: Do you have a question, 2 Mr. Guido? 3 MR. GUIDO: I would like the witness to 4 read the paragraph. 5 Q. (BY MR. GUIDO) Have you finished the 6 paragraph? 7 A. No, I haven't. (Witness reviews the 8 document.) All right. I've read it. 9 Q. My first question for you: Was it 10 common practice for Mr. Hurwitz to brief the USAT 11 board on matters for its decision? 12 A. You know, I don't know that it was 13 common practice. I think it probably happened 14 occasionally. 15 Q. All right. Is this making reference to 16 the meeting that's referred to in Exhibit A10560? 17 A. Is that the one we just had? 18 Q. Yes. 19 A. Yes, it is. 20 Q. Okay. And look at the next paragraph 21 down. See where it says -- I think it's in the 22 third full sentence where it says, "Mr. Crow also 21257 1 displayed a proposed mission statement for the 2 association which reflected the conclusions 3 reached in the Austin meeting"? 4 A. I see that. 5 Q. Now, look at -- do you recall this 6 meeting? 7 A. Not specifically. 8 Q. Do you recall it generally? 9 A. You know, as I mentioned yesterday, in 10 the course of my approximately 900 days at United, 11 I must have had 2,000 meetings. So, I really do 12 not -- you know, if you hadn't shown me these 13 things, I would not have remembered it. You know, 14 I wouldn't have remembered specifically what 15 happened at a board meeting on May 16th, 1985, or 16 what was discussed and what wasn't discussed. 17 Q. This was a rather significant board 18 meeting, was it not? 19 A. It may have been, but there were a lot 20 of significant board meetings. 21 Q. The mission statement, A10560, where 22 decisions were made about the direction of USAT 21258 1 going forward that were summarized in this May 16 2 memorandum, did those recommendations come to 3 pass -- those decisions come to pass? The 4 decisions reflected in A10560. 5 A. I think maybe some of them did and some 6 of them didn't. 7 Q. Well -- 8 A. For instance, if I look at No. 1, we 9 did not go to "no branch configuration." If you 10 want to go one by one through here, I'll tell you 11 each one. 12 Q. Were branches sold off by USAT 13 subsequent to this -- 14 A. Yes, but not in this -- 15 Q. But there were some? 16 A. Some were. We opened branches after 17 this point in time; so, it's a mixed bag. 18 Q. Well, did the association divest itself 19 of its transaction system? 20 A. Not completely, no. 21 Q. It did sell off a substantial number of 22 its loans and the servicing that went with those 21259 1 loans, did it not? 2 A. It did. 3 Q. And that's No. 3. Right? The selling 4 of the servicing? 5 A. Well, it says -- we did not sell all 6 loan servicing. We didn't get out of mortgage 7 loan origination. 8 Q. What percentage of USAT's asset 9 portfolio prior to this meeting was in loans that 10 USAT originated? 11 A. I don't know. 12 Q. What percentage was it after USAT began 13 performing mortgage-backed securities? 14 A. I do not know. I can tell you that the 15 philosophy behind it was to reduce transaction 16 costs. If we could sell mortgage -- individual 17 home loans and buy mortgage-backed securities, we 18 would have a package of mortgage-backed securities 19 on which we got one check every month as opposed 20 to maybe having 250 or 300 or a thousand houses 21 that we would be getting checks on every month and 22 have a thousand files in the warehouse. That was 21260 1 the concept behind it. We didn't completely 2 achieve it. 3 Q. But steps were taken to implement that 4 decision? 5 A. Yes. 6 Q. Now, it says under Item 5, "A priority 7 is a creation of commercial lending function." 8 Did that occur? 9 A. That really never happened. 10 Q. Did USAT increase its lending on 11 construction projects? 12 A. Well, this says "commercial 13 construction." It says, "A priority is the 14 creation of a commercial construction lending 15 function which will be a major division or perhaps 16 a separate subsidiary of the company." 17 That did not happen. 18 Q. But did USAT initiate commercial 19 construction lending subsequent to -- 20 A. Well, this says they were to do it 21 as -- I can't recall any construction loans. We 22 did make some construction loans after this date. 21261 1 I can't recall that we got profit participations 2 on any construction loans. 3 Q. Okay. But construction loans were 4 made -- 5 A. Yes, but that's not what this says. If 6 you're asking me did we make construction loans, 7 yes. If you're asking me did we do what this 8 paragraph says, no. 9 Q. Did USAT increase its investments in 10 mortgage-backed securities subsequent to this 11 meeting? 12 A. Yes, it did. 13 Q. Okay. And did it do so substantially? 14 A. Let's see. This is 1985? 15 Q. Yes. 16 A. Yes, it did. 17 Q. And was it on the order of magnitude of 18 two to $2 and a half billion? 19 A. I believe it was. 20 Q. And subsequent to this meeting, did 21 USAT increase its equity arbitrage activities? 22 A. I believe they did. 21262 1 Q. And did it do so substantially? 2 A. I would have to see the numbers. I 3 don't remember. 4 Q. We'll get to those later on. 5 A. I'm sure you've got them. I have 6 confidence. 7 Q. Thank you. 8 Did USAT increase its investments in 9 high-yield bonds subsequent to this meeting? 10 A. I believe they did. 11 Q. And were those three concepts embodied 12 in the mission statement that's Exhibit A10560? 13 A. Well, let's see. (Witness reviews the 14 document.) I'm trying to see -- I don't know 15 that -- let's see. I don't specifically see that 16 in here. 17 Q. You don't specifically see that in 18 there? 19 A. Do you know which paragraph it is? 20 Q. Take a look at "marketable securities," 21 Item No. 4 on Page 2 of the exhibit. 22 Do you see that? 21263 1 A. Item No. 4? 2 Q. "Marketable securities." 3 Do you see that? 4 A. Yes, I do. 5 Q. That makes mention of investments in 6 non-hostile takeover activities -- 7 A. Wait a minute. No. 4 says we would 8 decide as quickly as possible to make -- 9 Q. I said on Page 2. I think you're 10 looking on Page 3 of the exhibit. 11 A. This is missing. Am I looking at the 12 wrong thing? I've been looking at this. 13 Q. You were looking at the summary of the 14 strategic planning retreat. 15 A. Right. 16 Q. I just directed your attention to 17 Page 2 of the mission statement. 18 A. Okay. I missed that. 19 Q. Item No. 4, Bullet Point 4, see 20 "marketable securities"? 21 A. All right. "Marketable securities." 22 Okay. Oh, this says, "Above is activity to be 21264 1 retained/or expanded." 2 Q. All right. Take a look under 3 "marketable securities." 4 A. All right. 5 Q. Was equity arbitrage one of those 6 activities that was addressed as being -- to be 7 retained or expanded? 8 A. Yes. 9 Q. Okay. That was my question. 10 A. Okay. I missed it. I'm sorry. 11 Q. Then see the next item. It says, 12 "Investment in fixed and floating rate investments 13 for a spread"? 14 A. I see that. 15 Q. That makes reference to high-yield 16 bonds, doesn't it? 17 A. That would -- that could either be the 18 high-yield bonds or the mortgage-backed 19 securities, I would think. 20 Q. So, it could be one or the other? 21 A. Right. 22 Q. So, the mission statement includes 21265 1 investments in equity arbitrage, investments in 2 high-yield bonds, and investments in 3 mortgage-backed securities, does it not? 4 A. It seems to, yes. 5 Q. Now, the board meeting on Page 7 -- go 6 back to the board meeting, Page 7, A10561. Look 7 at Page 7. 8 A. I'm on Page 7 now? 9 Q. Page 7 of the board minutes. Do you 10 see that? See the first word at the top, 11 "Mr. Borman"? 12 Do you see that? 13 A. Yes. 14 Q. Now, drop down to the third paragraph. 15 See where it says, "Mr. Kozmetsky recommended and 16 the board agreed that no action should be taken 17 until a more definitive plan of operation is 18 established detailing the method of attracting 19 deposits and investment plans until such plan is 20 presented to and approved by the board." 21 Do you see that? 22 A. I do. 21266 1 Q. So, the board said, "Okay, we heard 2 you. We heard the mission statement. We heard 3 the proposal, and we're tabling it." 4 Isn't that essentially what it says? 5 MR. NICKENS: Your Honor, I object. 6 That's not a fair characterization of this 7 document. They are talking about -- he may know; 8 and if he does, that's fine. As a 9 characterization of this document, they are 10 talking about the branch sales in the middle of 11 this; and I wouldn't want the record to reflect 12 some agreement with that summary unless the 13 witness has some recollection of what that was 14 being discussed. 15 A. The bottom line, as I told you before, 16 I don't remember the meeting; and I really don't 17 remember Dr. Kozmetsky's recommendation. 18 Q. (BY MR. GUIDO) Well, do you see where 19 it makes reference to investment plans in that 20 paragraph? 21 A. I see -- okay. It looks to me like -- 22 well, you know, you can't tell what this is 21267 1 referring to, whether it's talking about what 2 Gerry Williams said in the paragraph before or 3 whether it's going back to what Borman was talking 4 about, the brokered CDs to offset the branch sale. 5 All I can do is read you what it says 6 here. 7 Q. Does this indicate that whatever was 8 raised was tabled? 9 A. Whatever was raised was what? 10 Q. Whatever proposal was raised at this 11 meeting was tabled. 12 A. Well, I don't know -- when it says 13 "agreed that no action should be taken," I don't 14 know what -- about what? I mean, in other words, 15 the sentence doesn't say what he's talking about. 16 Q. Let me rephrase the question, then, 17 Mr. Gross. 18 Anywhere in these minutes, does it show 19 that the mission statement was adopted by the 20 board? 21 A. I haven't read it, but -- if you'll 22 tell me that it was not, I'll accept that. 21268 1 Q. You don't have any reason to dispute 2 the minutes? 3 A. I told you, I don't remember the 4 meeting. 5 Q. So, whatever the minutes say, the 6 minutes say? 7 A. That's -- yes. 8 Q. Now, we just went through the mission 9 statement. Do you have any recollection of when 10 the board ever adopted the mission statement 11 that's reflected in A10560? 12 A. I do not. 13 Q. Now, look at the next-to-the-last 14 paragraph -- 15 THE COURT: Which -- are we on the 16 minutes now? 17 MR. GUIDO: Of the minimums, Page 7. 18 Q. (BY MR. GUIDO) It says, "Mr. Keltner 19 asked about regulatory compliance, and Mr. Hurwitz 20 stated the association will maintain 60 percent of 21 its assets in mortgage or mortgage-related 22 investments which will qualify the institution as 21269 1 a savings and loan association." 2 Do you see that? 3 A. Yes, I see that. 4 Q. What is this 60 percent of assets 5 referring to? Do you know? 6 A. As I say, I don't -- that's -- I 7 believe that's the thriftness test. 8 Q. What is the thriftness test, Mr. Gross? 9 A. The thriftness test is that to be 10 considered a savings and loan association, you 11 have to have 60 percent of your assets in housing. 12 I can't remember where they draw the line, whether 13 it's 1 to 4 housing or whether it includes 14 apartments. Basically, it's housing. 15 Q. Does that include mortgage-backed 16 securities insured by Ginnie Mae, Fannie Mae, or 17 Freddie Mac? 18 A. Yes, it does. 19 Q. Does that include high-yield bond 20 investments? 21 A. No, it does not. 22 Q. Does that include investments in common 21270 1 stock? 2 A. No. 3 Q. Does that include investments in real 4 estate development projects? 5 A. I guess we did have some condo 6 projects, and I don't know if they are for sale if 7 that qualifies or not. But, you know, it could 8 have or it could not have; but the commercials 9 would not. 10 Q. Pardon? 11 A. The commercial ones would not. I 12 believe if -- for instance, condos built for sale, 13 they may have. 14 Q. What about a loan like the Park 410 15 loan? 16 A. That would not. 17 Q. Now I would like to turn to another set 18 of documents, and those are at Tab 174 -- 19 MR. NICKENS: That's what we were on, 20 wasn't it? 21 Q. (BY MR. GUIDO) -- which is Exhibit -- 22 I'm sorry. 21271 1 Tab 1295, which is A1590; Tab 1291, 2 which is B665 -- I'm sorry. 1294, which is B3925; 3 Tab 871, which is T4304; Tab 873 which is -- I'm 4 sorry. Let me back up. 5 Tab 1295, which is A1590; Tab 1294, 6 which is B3925; Tab 871, which is T4250; Tab 873, 7 which is T4304; Tab 569, which is T4320; Tab 877 8 which is T4364. And then two documents that have 9 not been admitted in the record as far as I can 10 tell: B1879 and T9009 which is a newly-numbered 11 exhibit which I transmitted to counsel yesterday 12 or the day before. 13 THE COURT: We'll take a short recess. 14 15 (Whereupon, a short break was taken 16 from 10:00 a.m. to 10:25 a.m.) 17 18 THE COURT: Be seated, please. We'll 19 be back on the record. 20 Mr. Guido, you may continue. 21 MR. GUIDO: Thank you, Your Honor. 22 Q. (BY MR. GUIDO) I've pulled and had 21272 1 placed on the desk in front of you, Mr. Gross, 2 some documents that are referred to as the 3 strategic planning committee. What I would like 4 to do is, going through them at this point -- 5 we're going to go through them two times. 6 A. Okay. 7 Q. Right now, we're going to go through 8 them; and I want to direct your attention to the 9 people that they were addressed to and ask you 10 some questions about how the meetings occurred and 11 what their purposes were in general. 12 So, the first item I would like to 13 direct your attention to is a document that's been 14 marked as A1590. It's at Tab 1295. And in that 15 document, if you would look at -- there are three 16 references that I want to direct your attention 17 to. The first is Page US300803. 18 A. I'm sorry. I must -- 19 Q. It's Bates stamped in the right-hand 20 corner. It's US300830. 21 A. Okay. 22 Q. I think I may have missread it. The 21273 1 first word -- the first letters in the left-hand 2 corner say "JG." 3 A. I see that. 4 Q. Okay. And then look at the very bottom 5 of the page. There's a -- do you see the "CH" 6 down there? 7 A. Yes. 8 Q. That -- I would like to direct your 9 attention to US3008032, 8032. 10 A. I have it. 11 Q. Do you see in the middle of the page 12 the "CH" that appears there? 13 A. Yes. 14 Q. And these notes have been testified to 15 by Bruce Williams, and he identified the "CH" as 16 Charles Hurwitz as attending this meeting. 17 Then -- 18 MR. NICKENS: Your Honor, I'm not sure 19 that's the testimony. I believe this issue has 20 come up once before about this handwriting. But 21 if he wants to tell him to assume that for these 22 questions, but I'm not sure that's the testimony. 21274 1 MR. GUIDO: Just assume that for the 2 question, Mr. Gross. 3 THE COURT: Do we know who wrote these 4 notes? 5 MR. GUIDO: Your Honor, the portion 6 I've just directed you to, do you remember there 7 was a question about who wrote what portion of 8 these notes? The handwritten portion I'm asking 9 about, Bruce Williams testified that he wrote 10 these, I think, on cross-examination from Mary 11 Clark. I think that the question pertained to the 12 earlier pages -- 13 MR. NICKENS: Your Honor, that's simply 14 not the case. You raised the issue yourself, and 15 it -- 16 THE COURT: Didn't look to me like it 17 was the same handwriting in some places. 18 MR. GUIDO: Right, Your Honor. 19 THE COURT: All right. 20 MR. GUIDO: For purposes of my 21 question, Your Honor, I would like to move on to 22 the next document. 21275 1 THE COURT: All right. Move on. 2 Q. (BY MR. GUIDO) B3925, which is 1294, do 3 you see that? It's a memo from Mike Crow dated 4 April 28th, 1986; and it's directed to a number of 5 people including you and Charles Hurwitz and Barry 6 Munitz. 7 Do you see that? 8 A. Yes, I do. 9 Q. It makes reference to the strategic 10 planning committee. 11 A. I see that. 12 Q. Okay. And then I would like you to 13 take a look at -- I think it's Tab 871, T4250 14 that's in front of you. 15 Do you see that? 16 A. Yes, I do. 17 Q. And that is a document that makes 18 reference to the strategic planning committee 19 meeting of September 22nd, 1986. 20 Do you see that? 21 MR. NICKENS: Your Honor, I believe the 22 document says "strategic management committee." 21276 1 Q. (BY MR. GUIDO) "Strategic management 2 committee." Do you see that? 3 A. It says something like that. It's hard 4 to read. I guess that's what it was. It's 5 illegible. 6 Q. Who is that addressed to at the top? 7 A. Charles Hurwitz, Jenard Gross, Barry 8 Munitz, Gerry Williams, Mike Crow, Art Berner, Jim 9 Jackson, Bruce Williams. 10 Q. Okay. I would like to direct your 11 attention now to T4304, which is at Tab 873, which 12 is the next document in that stack. 13 A. I have that. 14 Q. Okay. And what does that make 15 reference to? 16 A. It says, "Strategic planning committee, 17 November 17th, 1986." 18 Q. Okay. And that has addressees, does it 19 not? 20 A. I beg your pardon? 21 Q. Does that include Charles Hurwitz, you, 22 and Barry Munitz as recipients of the memorandum? 21277 1 A. Yes, it does. 2 Q. Take a look at the next, which is 3 Tab 569, T4320. That makes reference to strategic 4 planning meeting notes of December 17th, 1986, 5 does it not? 6 A. It does. 7 Q. And it's from Doug Hansen again to 8 Charles Hurwitz, Jenard Gross, Barry Munitz, and 9 others? 10 A. Yes. 11 Q. And then I would like to direct your 12 attention to T4364, which is at Tab 877. That's a 13 memo from Mike Crow. It says, "Attached are a few 14 overview comments related to the strategic 15 planning committee meeting Monday." 16 And it includes Charles Hurwitz, Jenard 17 Gross, and Barry Munitz as well, does it not? 18 A. Yes. 19 Q. And then there's B1879. 20 A. Oh, that's this one? Okay. 21 Q. Do you see that? This is a memo from 22 Barry Munitz to Art Berner, Mike Crow, Jenard 21278 1 Gross, and Charles Hurwitz dated December 4th, 2 1987; and it's a packet of materials -- 3 THE COURT: Mr. Guido, I don't -- 4 MR. GUIDO: This hasn't been admitted, 5 Your Honor. I thought it had been brought up. I 6 would like to move the admission of Exhibit B1879, 7 Your Honor, which is four pages of a document from 8 Barry Munitz dated December 4th, 1987, to Art 9 Berner, Mike Crow, Jenard Gross, Charles Hurwitz, 10 Bruce Williams regarding the subject matter 11 strategic planning agenda, Sunday, December 6th at 12 2:00 p.m. It's Bates stamped US1946, 47, 48, and 13 49. 14 MR. NICKENS: Your Honor, my document 15 has five pages. If he's -- and the order of the 16 Bates numbers has been changed. The order of the 17 document that I have is US1948, 49. Then it goes 18 to 47 and 46. I gather you're not offering 50? 19 MR. GUIDO: I'm sorry. There is a 50. 20 That has a newspaper article making reference to 21 Lincoln Savings and Loan. The imaging numbers, 22 Your Honor, are OW045505 through 45509. 21279 1 THE COURT: Are you offering that 509? 2 MR. GUIDO: Your Honor, I -- for my 3 purposes, I don't need 509; so, I'm not offering 4 509. 5 MR. NICKENS: I think it is a part of 6 the document, Your Honor, and should be a part of 7 the exhibit. That is, it was a part of 8 Exhibit B1879. 9 THE COURT: Well, is there some 10 reference in the preceding pages to this newspaper 11 article? 12 MR. NICKENS: There is, Your Honor. 13 There's an internal reference. 14 THE COURT: All right. We'll leave 15 that on, and I'll receive the document. No 16 objection to it? 17 MR. NICKENS: No objection to this 18 document. It raises this issue that I would like 19 to alert the Court to because we're going to come 20 to some other documents. The imaging numbers 21 reflect a number that was put on these documents 22 after they had been assembled by counsel and in 21280 1 some cases reassembled. So, the fact that the 2 imaging numbers are consecutive only indicates 3 that at some point in time shortly before the 4 trial, they were in that order. 5 The Bates numbers, on the other hand, 6 indicate the numbers from the original source 7 documents and the order in which they were at that 8 time and, therefore, should be a more reliable 9 basis for how they would have been filed -- would 10 have been originally filed. 11 The reason that becomes important -- 12 it's not important in this case as far as I 13 know -- that is, in the case of B1879 -- is that 14 there are some subsequent documents where the OTS 15 apparently has assembled documents from a variety 16 of sources with various Bates numbers that have 17 consecutive imaging numbers but only reflect the 18 fact that they had been assembled at that point in 19 time in that order. 20 I just mention this to alert the Court 21 to the fact that there are going to be some issues 22 of this nature coming up. 21281 1 MR. GUIDO: Mr. Nickens is correct. It 2 doesn't come up in this context. It will come up 3 in a few different ways as we go forward. It 4 turns out that there were documents that were 5 imaged that have imaging numbers which no longer 6 are in the OTS files, from what I can ascertain. 7 And Mr. Nickens, in one of the depositions 8 recently, produced some of those documents that 9 the OTS did not have. So, there will be some 10 questions that will come up like that. With 11 regard to this particular document, I don't 12 believe that that is a problem. 13 MR. NICKENS: We got the imagined 14 documents from the OTS. 15 MR. GUIDO: Your Honor, there's no 16 doubt about that. I just wanted to clarify that 17 there will be questions -- 18 THE COURT: Well, we'll address those 19 issues as they arise. This one, it looks like the 20 Bates numbers were somehow transposed in the -- 21 MR. GUIDO: That's correct, Your Honor. 22 Somebody put these documents in the order that 21282 1 they are now and they are imaged in that order. 2 THE COURT: Well, am I correct that the 3 page imaged 1946 doesn't have anything on it, does 4 it, or it's been taken out? 5 MR. NICKENS: 1946, Your Honor, bears 6 the imaging number -- it comes after 1947, and it 7 appears to be just a file label for the 12/6/87 8 strategic planning meeting. 9 MR. EISENHART: Your Honor, I think it 10 would have been copied because if I remember, our 11 contractor did the imaging at the OTS and they 12 were told when file labels had any kinds of 13 notations on them that they were to be copied as 14 part of the file. 15 MR. GUIDO: Your Honor, in fact, this 16 document appears in the A exhibits as well in a 17 different form; but the substance of the first 18 four pages or three pages plus the file label that 19 Mr. Eisenhart just referred to are in that 20 document, as well. 21 THE COURT: All right. Let's move on. 22 Mr. Guido, you may continue. 21283 1 MR. GUIDO: Thank you, Your Honor. 2 Q. (BY MR. GUIDO) This document is dated 3 December 4th, 1987; and it refers to a strategic 4 planning agenda. And it includes you, Charles 5 Hurwitz, and Jenard Gross. 6 I would like to now direct your 7 attention to -- 8 A. I'm sorry. I am Jenard Gross. 9 Q. You, Jenard Gross. 10 A. I thought you said you, Charles 11 Hurwitz, and Jenard Gross. I'm no longer 12 Mr. Berner. 13 Q. I'm sorry. I have no comment. 14 Now, all of these memoranda refer to an 15 entity called the strategic planning committee. 16 Can you tell us what the strategic 17 planning committee was? 18 A. It was a committee -- excuse me -- that 19 met to discuss just planning for the institution. 20 Q. Planning for the institution? 21 A. Yes. 22 Q. What sort of planning for the 21284 1 institution? 2 A. Well, generally, I guess, long-term 3 policies. 4 Q. Did it set portfolio limits? 5 A. I don't recall. 6 Q. Did it set profit targets? 7 A. Not that I -- I don't recall. 8 Q. Well, what do you mean by "long-term 9 objectives"? 10 A. I said long-term policies. Just, you 11 know -- they are trying to look down the road and 12 determine the direction the institution should go. 13 Q. Well, does that include what its 14 portfolio should consist of? 15 A. That would certainly be -- the overall 16 portfolio makeup of it would certainly be an item. 17 Q. Did it include personnel matters? 18 A. You know, I don't really recall it. I 19 would not think that that would be -- unless we 20 were going to open a new department or something, 21 but I would -- I don't recall that it would deal 22 with something like personnel matters. 21285 1 Q. Let me show you one more document. 2 That is the -- it's a document I've had marked as 3 T9009, and I think that this is the issue that I 4 think that Mr. Nickens is raising about whether or 5 not the document all fits together. And it may be 6 that we're talking about two -- two documents. 7 This is making reference -- the first 8 page of this document makes reference to a 9 strategic planning committee of June 9th, 1988. 10 It says "agenda." 11 Do you see that? 12 A. I don't see the word "committee"; but 13 yes, it does say "strategic planning agenda." Am 14 I reading what you're reading? 15 Q. No. It's the second document. 16 A. Okay. 17 Q. Excuse me. See where it says 18 "Strategic planning committee, June 9th, 1988, 19 agenda"? 20 A. I see that, yes. 21 Q. Now -- then it has attached to it a 22 two-page memorandum from you dated June 9th, 1988. 21286 1 Do you see that? 2 A. I see that. 3 Q. Okay. And I think that Mr. Nickens has 4 correctly pointed out that these have different 5 original Bates stamp numbers on them. The first 6 page is US3001763, and the two-page memorandum by 7 you is Bates stamped US195 and US196. 8 Do you see that? 9 A. Yes. I'm sorry. I thought you were 10 talking to the judge. 11 Q. No. I was talking to you, Mr. Gross. 12 A. I see what you're talking about, yes. 13 MR. GUIDO: Your Honor, what I would 14 like to do is separate out the two documents in 15 light of Mr. Nickens' observation and have the 16 one-page document marked as T9009 and the second 17 document, the two-page document by Mr. Gross dated 18 June 9th, 1988, marked as T9009.1. 19 MR. NICKENS: I think our system on 20 this has been to have a letter symbol. So, I 21 think T9009A -- we're not entirely consistent in 22 that regard, Your Honor. 21287 1 MR. GUIDO: That's fine with me, 2 Your Honor. 3 THE COURT: All right. 4 MR. NICKENS: No objection. 5 THE COURT: We'll mark the strategic 6 planning committee, June 9 agenda as T9009. 7 That's received. And the other one is T9009A. 8 Received. 9 Q. (BY MR. GUIDO) Now, Mr. Gross, this 10 document, T9009, makes reference to a strategic 11 planning committee again. 12 Do you see that? 13 A. Yes, I do. 14 Q. And it makes reference to an operation 15 boot strap staff meeting. 16 Do you see that? 17 A. I do. 18 Q. Can you tell us, do you recall what the 19 operation boot strap staff meeting was? 20 A. It sounds like one of my 21 colloquialisms, but I don't recall it. 22 Q. Did you prepare this? 21288 1 A. No. 2 Q. Whose handwriting is that on there? 3 A. I don't know. 4 Q. Now, take a look at T9009A. 5 A. Do you want me to just pull these 6 apart? 7 Q. Just pull them apart. This is a 8 memorandum from you to Charles Hurwitz, Mike Crow, 9 Art Berner, Barry Munitz, Bruce Williams. 10 It's summarizing the strategic planning 11 committee meeting. Right? 12 A. Yes. 13 Q. It has the same recipients on it as the 14 previous memorandum that I showed you that we went 15 through referring to the strategic planning 16 committee meetings? 17 THE COURT: Which previous document are 18 you referring to? 19 MR. GUIDO: The previous documents 20 being B3925, T4250, Your Honor, T4304, T4320, 21 T4364, and B1879. 22 THE COURT: Well, I'm looking at 3925. 21289 1 It has a longer list than this one. 2 MR. GUIDO: Yes, Your Honor. 3 Q. (BY MR. GUIDO) Does this include -- the 4 recipients of the June 9th, 1988 list include the 5 recipients on the earlier strategic planning 6 committee memorandum, Mr. Gross? 7 A. If you'll give me the numbers, I'll go 8 look. As the judge said, I know there are some 9 others. I don't know if all of these are on all 10 of them. 11 Q. Do you remember Charles Hurwitz being 12 on the other ones? 13 A. I remember -- yeah. Would you say the 14 numbers again? Let me take a quick look. 15 Q. B3925 -- let me ask you: Are Charles 16 Hurwitz, Barry Munitz, and yourself listed as 17 recipients of those memoranda? 18 A. I believe so. 19 Q. Okay. Thank you. 20 Now, remember I asked you about that 21 February 11th, 1988 meeting of UFG's board of 22 directors and Charles Hurwitz' resignation? 21290 1 A. Yes, I do. 2 Q. Why is Charles Hurwitz being referred 3 to on June 9 -- getting a copy of a June 9th, 1988 4 memoranda from you regarding activity of the 5 strategic planning committee after he had resigned 6 as chairman of UFG? 7 A. I don't recall. 8 Q. Was he still involved in the activities 9 of the strategic planning committee after he 10 resigned as chairman of the board of UFG? 11 A. As I said, I don't even remember the 12 meeting; so, I really... 13 Q. Do you know why you would have 14 addressed a memorandum to him after he had 15 resigned as the chairman of UFG? 16 A. As I said, I really don't recall. 17 Q. Now, I would like to go through another 18 set of minutes with you and ask you some questions 19 about the procedure for those minutes and who the 20 participants were. The first document is A1408, 21 which is at Tab 545. The second is A1409, which 22 is at Tab 380. The third is A1411 at Tab 547. 21291 1 The next is A1419 at Tab 350. The next is 2 A1420 -- 28 at Tab 359. 3 Now, the documents that I just gave you 4 for the strategic planning committee, could you 5 put those aside? I'll be coming back to those. 6 A. All right. (Witness reviews the 7 documents.) 8 Q. Now, I would like you to take a look 9 first at T545, which is A1408. It's the minutes 10 of the investment committees of United Financial 11 Group/United Savings Association of Texas. 12 Do you see that? 13 A. I do. 14 Q. Then it says, "Present at the meeting 15 were Messrs. Gross, Hurwitz, Williams, Crow, 16 Huebsch, Berner and Jacobson." 17 Do you see that? 18 A. Yes. 19 Q. I would like to direct your attention 20 to the second document in the stack which is 21 Tab 380, A1409. 22 A. A1409. Okay. 21292 1 Q. That says it's a meeting with the 2 investment committee of United Financial 3 Group/United Savings Association of Texas dated 4 September 18th, 1987. 5 Do you see that? 6 A. I see that. 7 Q. See it says present were Mr. Hurwitz, 8 Mr. Gross, Mr. Williams, Mr. Phillips, 9 Mr. Jacobson, and Mr. Hansen? 10 Do you see that? 11 A. Yes. 12 Q. Let's go to the third document. This 13 is at Tab 359, A1428. 14 Do you see that? 15 A. No. I'm sorry. I have the wrong one 16 here. 17 Q. Excuse me? 18 A. I've got 1411 as my next one. What 19 should I have next? 20 Q. Let's go from the beginning. You have 21 A1408? 22 A. That was the first one. 21293 1 Q. You have A1409? 2 A. That's the second one. 3 Q. And then you have A1411? 4 A. That's the third one. 5 Q. That's the minutes of the investment 6 committee of United Financial Group/United Savings 7 Association of Texas, correct? 8 A. Yes, it is. 9 Q. It says present at the meeting were 10 Jenard Gross, Charles Hurwitz, Barry Munitz, and 11 others. 12 Do you see that? 13 A. Yes, I do. 14 Q. Let's go to Tab 350, which is the next 15 document, A1419. 16 Do you see that? 17 A. A1419? 18 Q. Yes. 19 A. I have it. 20 Q. It says, "Minutes of the investment 21 committee of United Financial Group/United Savings 22 Association of Texas." Right? 21294 1 A. Yes. 2 Q. It says, "All members of the committee 3 were present with the exceptions of Messrs. Munitz 4 and Hurwitz." 5 Do you see that? 6 A. Yes. 7 Q. Let's go to Tab 359 which is A1428. 8 That says it's the minutes of the investment 9 committee of United Financial Group/United Savings 10 Association of Texas February 4, 1987. 11 Do you see that? 12 A. Yes. 13 Q. It says, "All members of the committee 14 were present with the exception of Mr. Hurwitz and 15 Dr. Munitz." 16 Do you see that? 17 A. Yes. 18 Q. Was Mr. Hurwitz a member of the 19 investment committee of UFG and/or USAT? 20 A. I would have to look at the chart and 21 see, but -- you know, I just don't recall. I just 22 don't remember. Let's see. This is February of 21295 1 '87? 2 Q. Yeah. 3 A. I would have to look at, you know, what 4 the organization charts show. I know he would 5 have been, I guess, chairman of the board at that 6 time. I don't know if -- 7 Q. Of UFG? 8 A. Yes. This is a UFG minute. 9 Q. Now, each of these minutes say 10 "investment committee of United Financial 11 Group/United Savings Association of Texas." 12 Were there two investment committees, 13 or was there one? 14 A. You know, I would have to look -- I 15 know each institution had -- you know, each 16 corporation had committees, and I can't remember 17 whether UFG had a separate one. But, you know, 18 I'm sure there is a document that can tell me. 19 Q. Well, why would these minutes refer to 20 Mr. Hurwitz being a member of the committee if he 21 were not? 22 A. You know, I didn't write the minutes. 21296 1 I can't tell you. And I don't know that he was or 2 wasn't -- I don't know that there was or wasn't an 3 investment committee -- that's all I'm telling 4 you -- of UFGI. 5 Q. You were the president of UFG. Right? 6 A. That's correct. 7 Q. And you were the chairman of the board 8 of USAT. Right? 9 A. That's correct. 10 Q. And you were the chairman of USAT's 11 investment committee, were you not? 12 A. Yes. 13 Q. Okay. And you chaired the investment 14 committee meetings. Right? 15 A. Yes. 16 Q. Did you ever attend an investment 17 committee meeting that you did not chair? 18 A. I do not recall. 19 Q. Now I would like to direct your 20 attention to another set of the minutes. And that 21 is Tab 1333, which is Exhibit A1463; Tab -- excuse 22 me. It's Tab 1329 at A1458; Tab 336, which is 21297 1 A1470; Tab 1597, which is A12132; Tab 340, A1478; 2 Tab 341, which is A1479; Tab 1221, which is A1496; 3 and Tab 1245, which is A1520. 4 Mr. Gross, I would like to direct your 5 attention to the first document, A1459. 6 A. I'm sorry. What is your first number? 7 I have 1333. What's yours? 8 Q. Let's do 1333 first. The first one is 9 Tab 1333. It's A1463. 10 A. Yes. 11 Q. See at the top, it says, "Minutes of 12 investment committee, United Savings Association 13 of Texas, September 23rd, 1987"? 14 Do you see that? 15 A. I see that. 16 Q. Does that refresh your recollection of 17 whether or not there were one or two investment 18 committees? 19 A. It really doesn't. 20 Q. It doesn't help? 21 A. No. 22 Q. Do you see where it says, "A meeting of 21298 1 the investment committee was held" in the first 2 paragraph? 3 A. Yes. 4 Q. It says, "All members of the committee 5 were present." 6 Do you see that? 7 A. Yes. 8 Q. This one says, "Also present was 9 Mr. Charles Hurwitz." It doesn't make reference 10 to his being a member of the committee, does it? 11 A. I see that. 12 Q. Take a look at the next document in 13 your stack. What's the second document in your 14 stack? 15 A. The second one is 1329, 1448. 16 Q. A1448. That's August 25th, 1987 -- 17 A. August 26th, mine is. 18 Q. I'm sorry. 26th? 19 A. Right. 20 Q. Do you see where that makes reference 21 to the investment committee of United Savings 22 Association of Texas? 21299 1 A. Yes, I do. 2 Q. It doesn't make any reference to United 3 Financial Group. 4 Do you see that? 5 A. I see that. 6 Q. And it says -- see the first paragraph 7 where it talks about who was present? 8 A. (Witness reviews the document.) Yes, 9 where it says, "Also present, Mr. Hurwitz." 10 Q. Okay. Then let's take a look at the 11 third document, which is Tab 336, A1470. 12 What investment committee does that 13 make reference to? 14 A. That also says United Savings. 15 Q. And does it make reference to the 16 attendance of the members of the committee? 17 A. Yes. 18 Q. All right. And does it indicate that 19 other people were also present? 20 A. It does. 21 Q. And does that include Charles Hurwitz 22 and Barry Munitz? 21300 1 A. Yes. 2 Q. Now I would like you to take a look at 3 A12132, which is at Tab 1597. 4 A. I'm sorry. What was your number on it? 5 I've got -- 6 Q. I have Tab 1597. 7 A. I have A12132. 8 Q. Yes, sir. 9 A. Okay. 10 Q. That makes reference to the minutes of 11 the investment committee again. Right? 12 A. Yes. 13 Q. It says United Savings Association of 14 Texas. Right? 15 A. Yes, it does. 16 Q. And then it says -- makes reference to 17 the members being -- of the committee that were in 18 attendance. Right? 19 A. Yes. 20 Q. Then it says, "Also, Mr. Hurwitz was in 21 attendance." Right? 22 A. Yes. 21301 1 Q. And then let's look at the next 2 document, which is Tab 340, A1478. That makes 3 reference to an investment committee meeting of 4 November 25th, 1987. Right? 5 A. It does. 6 Q. And what entity is that making 7 reference to? 8 A. United Savings Association of Texas. 9 Q. Okay. It says which members of the 10 committee were present. Right? 11 A. Yes. 12 Q. It also indicates that Mr. Hurwitz was 13 in attendance. Right? 14 A. Yes. 15 Q. Then let's look at the next document, 16 Tab 341, A1479. This is now December 4th, 1987. 17 What entity is that referring to? 18 A. United Savings Association of Texas 19 investment committee. 20 Q. And that makes reference to the members 21 of the committee who were present. Right? 22 A. Yes. 21302 1 Q. It also indicates Mr. Hurwitz was in 2 attendance, correct? 3 A. Yes. 4 Q. Now let's take a look at 1221, A1496. 5 That's the minutes of the investment committee 6 again. This time March 16th, 1988. Right? 7 A. Yes. 8 Q. And what entity is referred to there? 9 A. United Savings Association of Texas. 10 Q. And does it indicate which members of 11 the committee were present? 12 A. Yes. 13 Q. And does it also indicate that 14 Mr. Charles Hurwitz was in attendance? 15 A. Yes, it does. 16 Q. Then the last document is Tab 1245, 17 which is A1520. That makes reference to minutes 18 of an investment committee, does it not? 19 A. Yes, it does. 20 Q. And what entity does it refer to? 21 A. This is United Financial Group, Inc., 22 and United Savings Association of Texas. 21303 1 Q. This is July 13th, 1988, is it not? 2 A. Yes, it is. 3 THE COURT: Would you speak up? 4 MR. GUIDO: I'm sorry. It says 5 July 13th, 1988. 6 Q. (BY MR. GUIDO) Right? 7 A. Yes. 8 Q. It says that all members of the 9 committee were present. Right? 10 A. Yes. 11 Q. It says, "Also present was Mr. Charles 12 Hurwitz." Right? 13 A. Yes. 14 Q. Now, the last two documents are dated 15 after Mr. Hurwitz resigned as chairman of UFG, are 16 they not? 17 A. Yes, they are. 18 Q. And they both indicate that Mr. Charles 19 Hurwitz was in attendance at the investment 20 committee. Right? 21 A. Yes. 22 Q. Just like the minutes that I showed you 21304 1 or your memorandum to Mr. Hurwitz dated after he 2 resigned. Right? 3 A. Yes. 4 Q. Why did Mr. Hurwitz resign from the 5 chairmanship of the board of UFG? 6 A. I do not recall. 7 Q. Did you have any discussions with him 8 about it? 9 A. No, I didn't. 10 Q. Why did he attend these two meetings of 11 the investment committee after he had resigned as 12 chairman of the board of UFG? 13 A. You know, I do not know. 14 Q. Did you raise a question with him at 15 the time of why he was in attendance? 16 A. You know, I don't recall. 17 Q. Did Mr. Hurwitz receive any 18 compensation from USAT at the time you were the 19 chairman of the board? 20 A. I don't believe -- I don't believe so. 21 Q. I would like to show you three 22 documents. One is A3013. The second is T8035, 21305 1 and the third is T8034. A3013, I think, is 2 already in the record at Tab 88. I've been 3 informed that T8034 is already in the record at 4 Tab 479. 5 The T8035 is Bates stamped CN038953 6 through CN038985. It's a packet of checks and 7 correspondence and W-2s. 8 MR. GUIDO: I move the admission of 9 that packet of documents, Your Honor. 10 MR. NICKENS: Your Honor, Mr. Guido has 11 inaccurately described the numbers. There is a 12 gap at CN38953 through 56. So, 54 and 55 are 13 missing. And then at 69 to 74, there's a gap. 14 So, 70 through 73 are missing. 15 We don't know what those documents are. 16 He didn't accurately describe them with those 17 omissions. We have no objection to the document 18 or documents, more accurately. 19 THE COURT: All right. The exhibit 20 identified as T8035 is received. 21 MR. GUIDO: Thank you, Your Honor. 22 Q. (BY MR. GUIDO) Now, I would like to 21306 1 direct your attention to A3013, if I might, which 2 is the -- 3 A. Okay. 4 Q. Do you have that? 5 A. I have it. 6 Q. Can you identify what the document is? 7 A. This is -- looks like the -- this front 8 page look likes an invitation to the annual 9 meeting. And then I guess behind it is a notice 10 of the annual meeting and the proxy statement. 11 Q. Now, the -- did United Financial Group 12 report its finances to its shareholders on a 13 consolidated basis? 14 A. Let me look -- I thought I saw in one 15 of these that it did. Can you point me to the 16 page? 17 Q. I'm just asking you the question. 18 Do you know? 19 A. I think they did, but I -- you know, I 20 would have to look in here and find it and see. 21 Q. Take a look at Page 15. I want to 22 direct your attention to one of the notes there. 21307 1 A. I'm on Page 15. 2 Q. Do you see that? 3 A. Yes. I see Page 15. 4 Q. Look at Item No. 6. 5 Do you see that? 6 A. Yes. 7 Q. It makes reference to Charles Hurwitz, 8 does it not? 9 A. Yes. 10 Q. And it makes reference to him having 11 received $200,000 under the incentive cash bonus 12 plan. 13 Do you see that? 14 A. Yes, I do. 15 Q. Do you know what that refers to? 16 A. We must have had an incentive cash 17 bonus plan at the time, but I don't remember what 18 it was. 19 Q. Okay. But this indicates he received 20 $200,000 in 1985, does it not? 21 A. That's what -- yes. 22 Q. Now, take a look at T8035. 21308 1 A. Okay. Here we go. 2 Q. It's the document that I just moved its 3 admission. 4 Do you see the first page of that 5 document is a W-2? 6 A. Yes. 7 Q. What tax year is that for? 8 A. I beg your pardon? 9 Q. What tax year is that for? 10 A. Wage and tax statement for 1986. 11 Q. Does that show Charles Hurwitz 12 receiving $200,000 for 1986? 13 A. Yes, it does. 14 Q. Now, I want to direct your attention to 15 the second page. 16 A. I see that. 17 Q. Well, I want to direct your attention 18 to CN038974. 19 A. CN038974? That's back here somewhere. 20 Q. Mine was out of order. 21 A. I have it. 22 Q. That's a W-2 for 1987, is it not? 21309 1 A. Yes, it is. 2 Q. And it's to Charles Hurwitz. Right? 3 A. Yes. 4 Q. That shows a payment of $230,000 for 5 Charles Hurwitz, doesn't it? 6 A. Yes, it does. 7 Q. Now, I want to direct your attention to 8 CN038985. 9 A. I don't have that. I only go to 84. 10 THE COURT: Is that the same exhibit, 11 Mr. Guido? 12 MR. GUIDO: It is T8035, Your Honor. 13 THE COURT: Well, mine ends at 14 CN038076. 15 16 (Discussion held off the record.) 17 18 THE COURT: All right. I think we had 19 better go through this exhibit page and page and 20 determine which ones are included. It looks like 21 we have several different versions here. I know 22 that Mr. Nickens indicated certain missing pages, 21310 1 but I think we had better go through and determine 2 which ones are a part of the official exhibit 3 that's admitted. 4 Can you -- I assume you have a complete 5 exhibit that you -- 6 MR. GUIDO: Your Honor, I have an 7 exhibit that apparently is in a different order 8 than the witness'. Can I postpone and cover this 9 subject matter after lunch? 10 THE COURT: Yes. 11 MR. GUIDO: There are only three pages 12 of the document that I wanted to address, and I 13 was doing it by the Bates stamp number. And I 14 don't understand why the witness doesn't have 15 CN039885. 16 THE COURT: I didn't have that copy. 17 Now I have that page. 18 MR. GUIDO: The only three documents 19 that I was going to ask the witness questions 20 about were CN038953, CN038974, and CN038985, 21 Your Honor. 22 THE COURT: Well, why don't you go 21311 1 ahead and ask your questions. We'll straighten up 2 the exhibit after lunch. 3 Q. (BY MR. GUIDO) Let me show you the -- 4 A. I think I have it. He gave me another 5 one. 6 Q. Now, that is a check off of a payroll 7 account. 8 Do you see that? 9 A. Yes, it is. 10 Q. And it makes reference to the USAT 11 payroll account. 12 Do you see that? 13 A. Mine -- well, it says -- yes. It says 14 "United Financial Group, Inc." on top. 15 Q. Then it has printed "USAT payroll 16 account"? 17 A. I see that. 18 Q. Now, did USAT have a payroll account at 19 the time that you were the chairman of the board 20 of USAT? 21 A. I believe it did. 22 Q. Now, I would like to direct your 21312 1 attention to a document that is in the record 2 which is T8034. 3 A. I have it. 4 Q. Okay. And I would direct your 5 attention to -- these have Bates stamps that 6 start, looks like, with a "C," do you see that, 7 and then a lot of zeros and then a 1 on the first 8 page? 9 A. Yes. 10 Q. I would like to direct you to the page 11 that is Page 4. 12 A. I see that. 13 Q. Do you see that? 14 A. Yes. 15 Q. The supplement to UFG/USAT board 16 compensation committee bonus action? 17 A. I see that. 18 Q. And do you see your reference there? 19 A. Yes. 20 Q. Is that an accurate reference to the 21 bonus? 22 MR. NICKENS: Is the question whether 21313 1 he received a bonus in that amount? 2 Q. (BY MR. GUIDO) Did you receive a bonus 3 in that amount? 4 MR. GUIDO: Thank you, Mr. Nickens. 5 A. I think I did. 6 Q. (BY MR. GUIDO) Now, it makes reference 7 to "Charles Hurwitz, UFG chair, bonus 230." 8 Do you see that? 9 A. Yes. 10 Q. Now I would like to direct your 11 attention to Page No. 6 of that, C with all of the 12 zeros, and I think it's -- it's Page No. 6. 13 Do you see that? 14 A. Yes. 15 Q. See Item No. 2, "Hurwitz receives no 16 salary. Bonus is for investment leadership"? 17 A. I see that. 18 Q. Now that we've gone through these 19 documents, does that refresh your recollection 20 that Charles Hurwitz received a bonus for the 21 services that he provided to USAT? 22 A. You know, I see it there. I didn't 21314 1 recall it and would not have remembered it. 2 Q. Well, do you remember it now that 3 you've had your memory refreshed? 4 A. No. I have no idea -- I do not 5 remember what his bonus or salary was for those 6 years. But the papers are the papers, and they 7 state what they state. 8 Q. Do you recall the -- one of the first 9 documents that I showed you? Do you remember the 10 mission statement, which was A10560, which is at 11 Tab 174? It was the Michael Crow May 1, 1985 12 memorandum. 13 A. Would you give me that number again? 14 Q. A10560, which is Tab 174. 15 A. Here we go. All right. 16 Q. Do you remember I directed your 17 attention to Item No. 11? I think it's on the 18 fourth page of the memo or Imaging Number OW04596. 19 Do you remember that? 20 A. I see that, yes. 21 Q. Do you remember I directed your 22 attention to the reference to Mr. Hurwitz? 21315 1 A. Yes. 2 Q. And the reference was he was the only 3 truly qualified individual to determine the 4 quality of some of the investments? 5 A. I see that. 6 Q. Does that refresh your recollection 7 that Mr. Hurwitz was compensated out of the USAT 8 payroll account for investment services he 9 provided USAT? 10 A. No. As I say, I really just thought he 11 was paid from UFG but not -- I do not recall that 12 he was paid from USAT. 13 Q. Now, do you remember I asked you 14 questions about the role of the strategic planning 15 committee and -- 16 A. I guess the thing that I don't 17 understand -- I saw it was paid on the USAT 18 account, but I really don't know -- it said at the 19 top "UFGI"; so, I assumed it was UFGI. 20 Q. For GAAP purposes, did UFGI report its 21 finances on a consolidated basis with USAT? 22 A. As I said, I don't recall that -- you 21316 1 know -- 2 Q. Pardon? 3 A. I said I do not recall. I'm sure we 4 can look at one of these annual statements and 5 determine that. 6 Q. Whatever the annual statement says 7 is -- 8 A. Yeah. That's fine. 9 Q. You just don't recall? 10 A. No. 11 Q. I would like to direct your attention 12 to a document that is B1702. It's a memorandum 13 from you dated July 13th, 1987. 14 THE COURT: We'll take a short recess. 15 16 (Whereupon, a short break was taken 17 from 11:23 a.m. to 11:45 a.m.) 18 19 THE COURT: Be seated, please. We'll 20 be back on the record. 21 Mr. Guido, you may continue. 22 Q. (BY MR. GUIDO) Mr. Gross, I would like 21317 1 to show you Tab 1658, which is B1702. 2 A. (Witness reviews the document.) 3 Q. Have you ever seen this document 4 before? 5 A. I don't recall it. 6 Q. Do you recall that at some time in 7 1987, there was a project underway by the legal 8 department to develop some policies and procedures 9 for the investment committee of USAT? 10 A. I don't remember that. 11 Q. You don't remember that occurring? 12 A. No, sir. 13 Q. The -- you do recall the strategic 14 planning committee, though, do you not? 15 A. Yes. 16 Q. You do recall the investment committee, 17 do you not? 18 A. I do. 19 Q. The investment committee made 20 investments, did they not? 21 A. Yes, they did. 22 Q. Did the strategic planning committee 21318 1 set long-term policies for the investment 2 committee to follow? 3 A. I think they tried to set -- to 4 establish long-term policies, and it was more of a 5 planning group. As I said, you know, we looked 6 over the -- the one meeting that we did have, 7 there were strategic ideas, some of which came to 8 fruition and some never happened. So, I can't -- 9 you know, I'm not sure that they set a policy 10 like -- you know, they may have said that we will 11 invest in X, Y, and Z; but I don't think they got 12 into saying how much we'll invest in X, Y, Z. I 13 think it was a broad, general direction type 14 thing. 15 Q. And it wasn't a decision-making body 16 that set limits for portfolio sizes? 17 A. I don't believe so. 18 Q. Now, isn't it true, as you state here 19 in Paragraph 2, that you had the view in July of 20 1987 that you needed to prepare an overall 21 comprehensive coherent investment committee policy 22 for all of the amendments for MBS, for stocks, and 21319 1 for bonds? 2 A. I see that. 3 Q. Isn't that true? 4 A. Yeah. Let me read the whole thing, if 5 you don't mind. (Witness reviews the documents.) 6 Yes. I think what I'm saying is we 7 have a policy we amended a lot of times; and we 8 need to take it and get an overall policy which 9 incorporates all the amendments into the policy 10 rather than having to either look at the tag-in or 11 remember what the amendment is. 12 Q. Is it true that you also felt that you 13 needed to limit each area of activity and what the 14 current level of activity was in each of those 15 areas? 16 A. I said we needed to know what those 17 limits are in each area of activity and what the 18 total current investment is in that area. Yes. 19 I'm just trying to set up a mechanism that every 20 time they make a trade or any kind of transaction, 21 they will know that they are staying within 22 whatever the limits are for that particular 21320 1 activity. 2 Q. Okay. So that you were concerned in 3 July about what the limits were and whether or not 4 they were being exceeded by people executing 5 transactions. Right? 6 A. I wanted to make sure we did not exceed 7 them, yes. 8 Q. So, you were talking about the limits 9 of sizes of portfolios, were you not, at that 10 time? 11 A. Yes. 12 Q. Now, take a look at the next paragraph. 13 There, is it not true that you're commenting on 14 the text of the policies? 15 A. It looks like I'm reviewing information 16 that's been sent to me. It says "Caldwell to 17 Berner memo, June 30th, 1987." It looks like I 18 must be reviewing that and commenting on whatever 19 the items are in that document. 20 Q. All right. And doesn't it direct the 21 recipient's attention to the guidelines with 22 regard to portfolio size? 21321 1 A. Yes. 2 Q. Okay. And doesn't it make reference to 3 change in the high-yield bond portfolio size to 4 $700 million? 5 A. I haven't gotten down that far. 6 (Witness reviews the document.) What I'm doing, 7 I'm sitting here giving my comments on the 8 document that they have prepared, and I'm saying 9 we shouldn't be buying triple Cs -- I'm saying 10 that they hadn't mentioned industry concentration. 11 I think that ought to be mentioned. And any kinds 12 of companies we want to have and don't have -- if 13 I remember correctly, at one time there was some 14 issues of whether we should buy companies that 15 deal with, you know, gambling companies and 16 casinos. 17 The next thing, I must be reading 18 something in there where it says to change to 19 $700 million. 20 Q. The limit. Right? The high-yield bond 21 limit? 22 A. Yes. That's what it would appear to 21322 1 be. That must be in the document, and I must be 2 commenting on it. 3 Q. Okay. But the last sentence says, "We 4 need to allude to the strategic planning committee 5 setting limits on each group." 6 Isn't it true that prior to July 13th, 7 1987, the strategic planning committee was setting 8 the portfolio limits for high-yield bonds, 9 mortgage-backed securities, and equity arbitrage? 10 A. I don't recall. 11 Q. Isn't that what that makes reference 12 to? 13 A. That's what it makes reference to. I 14 don't remember it. 15 Q. Now, let's take a look at one of the 16 documents that I showed you with regard to the 17 strategic planning committee and Mr. Hurwitz' 18 participation in that. That is A1590. 19 A. Is this one I already have? 20 Q. Yeah. You already have it. 21 A. A -- 22 Q. At Tab 1295. 21323 1 A. Tab 1295? Here we go. All right. 2 Q. Take a look at the Bates stamp 8030 3 that I showed you. 4 A. All right. 5 Q. Do you see the very last reference to 6 "CH" on that page? 7 A. Yes. 8 Q. Okay. Doesn't that show that 9 Mr. Hurwitz is raising a question about "What is 10 the maximum equity arbitrage can USAT leverage its 11 stock in UFC to?" 12 A. I can't -- I can't read what this is 13 saying. What is that? "Maximum equity"? 14 Q. "Equity arbitrage." 15 A. You're a better decipherer than I am. 16 I have to tell you the truth. Can we -- 17 Q. "Leverage"? 18 A. I'll take -- yeah. Yeah, I can't read 19 it; but I'll take your word for it. 20 Q. Okay. 21 A. Let me look -- I don't know even know 22 what this is. What is this? 21324 1 Q. This is a page that Bruce Williams 2 testified that he wrote with regard to the meeting 3 of the strategic planning committee. 4 MR. NICKENS: Your Honor, I have an 5 objection. 6 MR. GUIDO: You can assume that for 7 purpose of my objection. 8 MR. NICKENS: We've had someone review 9 Mr. Williams' testimony. He testified that these 10 were his notes but not what was being said at the 11 meeting. These were his thoughts at the meeting. 12 That's a summary of the transcript at 13218, 13 Lines 2 through 11. 14 Q. (BY MR. GUIDO) So, these are 15 Mr. Williams' -- take Mr. Nickens' word for it. 16 These are Mr. Williams' notes that he was jotting 17 down at the meeting. 18 A. What is the question? 19 Q. The question is: Is the reference to 20 Charles Hurwitz "What is the maximum equity 21 arbitrage can we leverage stock in UFC?" 22 Do you see that? 21325 1 A. Yes. I see that. 2 Q. So, that issue came up at this 3 strategic planning committee meeting, did it not? 4 A. You know, as I've told you, I don't 5 even remember the meeting. 6 Q. Okay. 7 A. And -- are you saying that the initials 8 represent somebody's initials to Bruce or Bruce's 9 initials to somebody? 10 Q. Bruce testified that when he wrote down 11 those initials "CH," he was referring to Charles 12 Hurwitz. 13 MR. NICKENS: Williams testified that 14 he guessed "CH" meant Charles Hurwitz was his 15 testimony. 16 A. I guess what I'm trying to find out 17 from you, are you saying that he's saying this is 18 what somebody said; or is he saying that he needs 19 to give somebody that answer or ask somebody that 20 question? I don't really -- 21 Q. (BY MR. GUIDO) As I recall the 22 testimony -- 21326 1 THE COURT: What's your question, 2 Mr. Guido? 3 Q. (BY MR. GUIDO) My question is: Do you 4 recall that in any strategic planning committee 5 meeting, there were discussions about setting 6 limits on the equity arbitrage portfolio? 7 A. As I said, I don't recall. 8 Q. Okay. Let's go to the next document. 9 I would like to direct your attention to B1623. 10 It's a new document that has not been admitted. 11 It's a memorandum dated May 15th, 1987, to Gene 12 Stodart from Michael Crow. 13 THE COURT: And that's not a document 14 that I have? 15 MR. GUIDO: No, Your Honor. 16 THE COURT: All right. 17 MR. GUIDO: We're waiting for it to be 18 pulled. 19 This is a memorandum from Michael Crow 20 to Gene Stodart dated May 15, 1987, Your Honor. 21 It's Exhibit B1623. It's Bates stamped US1861. I 22 move the admission of this one-page exhibit, 21327 1 Your Honor. 2 MR. NICKENS: No objection. 3 THE COURT: Received. 4 Q. (BY MR. GUIDO) Now, Mr. Gross, what's 5 the executive management committee meeting? 6 A. I was -- I saw that, and that certainly 7 doesn't say it's a strategic planning committee 8 meeting. So, that was the first thing that came 9 to my mind. 10 I guess he's referring to the executive 11 committee of the association. 12 Q. So, this is saying the executive 13 committee of the association set those limits? 14 A. I'm guessing. I can't speak -- I am 15 copied on it, but I don't remember it. 16 Q. You don't remember this? 17 A. No, sir. 18 Q. This says that a decision had been made 19 to commit the -- set the limit for junk bonds to 20 $700 million. 21 A. I see that. 22 Q. Does that refresh your recollection 21328 1 with regard to your memorandum of July that I 2 asked you about where it talks about the 3 700 million? 4 A. I saw that. I don't know why, but I 5 never remembered it going above $650 million. I 6 had that number stuck in my mind. I don't recall 7 this. 8 Q. You don't recall the limits eventually 9 went as high as $750 million? 10 A. No, I don't. 11 Q. Now, I would like to direct your 12 attention to another document that is not in the 13 record. It's T9006. And I've been informed by my 14 staff that this is a document that I provided to 15 opposing counsel yesterday or the day before. It 16 turns out we already have a T9006 in the record so 17 that this document I'd like to have marked as 18 T9006A, following Mr. Nickens' instructions on how 19 we mark duplicate numbers. 20 MR. NICKENS: It's the same document, I 21 believe. 22 21329 1 (Discussion held off the record.) 2 3 THE COURT: We're showing T9006 as a 4 memorandum from Robert C. Pozen to Art Berner on 5 moving assets and liabilities to subsidiaries 6 which is dated August 12, '86. 7 MR. GUIDO: That was why I was informed 8 by my staff after I put this number on it, 9 Your Honor, that I had overlapped numbers. That's 10 why I ask that the Mike Crow memorandum of 11 November 6, 1987, be marked as T9006A. 12 THE COURT: So, there's no connection 13 between that and 9006? 14 MR. GUIDO: No, Your Honor. 15 THE COURT: All right. 16 MR. GUIDO: There's no connection 17 between the two. 18 MR. BLANKENSTEIN: Your Honor, to avoid 19 confusion, it might be better to assign it a new 20 number. 21 THE COURT: Generally, when we say "A," 22 there's some connection to the basic exhibit 21330 1 number. 2 MR. GUIDO: I propose, then, 3 Your Honor -- to be on the safe side, let's mark 4 this 9015. I know that's well beyond any numbers 5 that we've used. 6 MR. NICKENS: I think the last one is 7 9013, so well beyond -- it is beyond, Your Honor. 8 THE COURT: All right. 9 MR. GUIDO: I thought it was 11. I 10 should say I'm sure that it's beyond. 11 THE COURT: You're offering T9015? 12 MR. GUIDO: Yes, Your Honor. 13 MR. NICKENS: Which is a one-page 14 document bearing the CN530458. 15 MR. GUIDO: That's correct. 16 THE COURT: Received. 17 Q. (BY MR. GUIDO) Have you had an 18 opportunity to read this document while we've been 19 discussing its number? 20 A. I have. 21 Q. Does that refresh your recollection 22 that the strategic planning committee set limits 21331 1 on the portfolio sizes? 2 A. Yeah. If you're asking me, I do recall 3 it, no. I see what's written here. 4 Q. Isn't it true that portfolio limit 5 sizes were set at the strategic planning committee 6 pursuant to discussions between you and Charles 7 Hurwitz? 8 A. It would be that the strategic planning 9 committee discussed among the members of the 10 strategic planning committee. 11 Q. Well, let's talk about the size of the 12 high-yield bond portfolio. 13 What's your recollection about the size 14 of the high-yield bond portfolio? 15 A. You know, I just told you what my 16 recollection was. It shifted over the years. But 17 I thought it had peaked out at $650 million at 18 some point, and I thought we scaled it back to 19 $450 million. That was my best recollection. 20 Q. Okay. Let's talk about how it changed 21 over time, what your recollection is about how it 22 changed over time. 21332 1 When did it peak at about $650 million? 2 A. I do not recall. 3 Q. Why don't we take a look at 4 Exhibit A1485. That's Tab, I think, 1211. 5 MR. BLANKENSTEIN: Could you give me 6 that exhibit number again? 7 MR. GUIDO: It's A1485. 8 Q. (BY MR. GUIDO) Do you have 1485 in 9 front of you? 10 A. I do. 11 Q. Now, take a look at -- that's the 12 minutes of January 6, 1988. And I want to direct 13 your attention to the fourth page of the exhibit 14 which I think is US3012565. 15 A. I see the 565 at the end. I can't see 16 some of the other numbers. 17 Q. And at the top, it has the heading "UFG 18 portfolio position limits." 19 Do you see that? 20 A. I do. 21 Q. Now, let's go through that, if we may. 22 A. All right. 21333 1 Q. Did USAT, in response to your concerns 2 in July of 1987, develop a format for reporting 3 position limits and position sizes for the various 4 portfolios? 5 A. I don't remember. 6 Q. Does this appear to be such a document? 7 A. This appears to be a portfolio position 8 showing the position limits on January 6th of '88, 9 yes. 10 Q. And actual size. Right? 11 A. Right. 12 Q. See the reference to high-yield and 13 increased term notes? 14 A. Right. 15 Q. Do you see the position limit of 16 $700 million? 17 A. I see that. 18 Q. Do you see the actual 673 million? 19 A. I see that. 20 Q. Now, this is January 6th, 1988? 21 A. That's correct. 22 Q. And you said that you thought that the 21334 1 portfolio size had peaked somewhere around 2 650 million? 3 A. That's what I remembered. Obviously, I 4 was in correct. 5 Q. Okay. 6 A. That's -- you asked me for my memory. 7 Q. That's fine. 8 Now, what was the high-yield bond 9 portfolio size back in May of 1985? 10 A. I do not know. 11 Q. Was it under $200 million? 12 A. You know, if you show me something, 13 I'll be happy to look it up. 14 Q. You indicated that the portfolio size 15 was scaled back, did you not? 16 A. To my knowledge, I thought it was. 17 Q. Why? 18 A. I don't recall at this time. 19 Q. You don't know why it was scaled back, 20 but you remember that it was scaled back? 21 A. That's my best recollection. 22 Q. I've shown January 6, 1988, where the 21335 1 investment committee minutes showed it as 2 $673 million; and now you're saying it was scaled 3 back and you don't recall why? 4 A. That's -- I told you it was 650. I was 5 wrong. So, you know, all I'm telling you is what 6 I can remember. 7 Q. All right. And you don't remember why 8 it was scaled back? 9 A. No, I don't. 10 Q. Do you remember when it was scaled 11 back? 12 A. I do not. 13 Q. Let me show you another document, 14 A1524, which is at Tab 1250. That's the minutes 15 of the investment committee of August 25th, 1988. 16 I'm sorry. It's August 25th, 1988. 17 I would like to direct your attention 18 to the Bates stamp US3014711.001. It's in larger 19 type than the one we've previously -- 20 A. My numbers don't start out that way. I 21 have US3012562 going on up from there. 22 THE COURT: That's what I have. 21336 1 THE WITNESS: What am I looking for? 2 MR. GUIDO: It's at imaging number, 3 Your Honor, OW0495777. 4 MR. NICKENS: The difficulty is that's 5 the first imaging number on the document. None of 6 the other pages that precede it have imaging 7 numbers. 8 THE COURT: And your US number on that 9 is? 10 MR. GUIDO: US3014711.001, Your Honor. 11 THE COURT: All right. 12 MR. GUIDO: I think this is one of 13 those documents that when counsel for one of the 14 respondents was putting together the A series 15 documents, that there were -- there were documents 16 that were found to be together and that these 17 numbers -- I think that David Griffith explained 18 to us at one time what they meant. 19 But basically, the document was added 20 to the original Bates stamp number. These numbers 21 were added on as the Bates stamp number, 22 Your Honor. 21337 1 THE COURT: This document is in 2 evidence? 3 MR. GUIDO: It is in evidence, 4 Your Honor. 5 THE COURT: All right. 6 Q. (BY MR. GUIDO) Now, I would like to 7 direct your attention to the high-yield bond 8 portfolio size that shows on that document. 9 A. I see that. 10 Q. Does that show it was $624 million as 11 of August 24th of 1988? 12 A. It does. 13 Q. Now, when did you resign? 14 A. November 23rd was my actual separation. 15 I think I resigned -- tendered my resignation the 16 end of October, and we negotiated out and approved 17 a settlement. The actual date, I think, was the 18 22nd or 23rd of November '88. 19 Q. Now, I would like to show you another 20 document, which is A1531 which has been admitted 21 at Tab 1256. I want to direct your attention to 22 Bates stamp US3014555.001. This is another one of 21338 1 those documents that have the additions that 2 respondents found and added to the documents that 3 had the original US numbers on them. 4 Do you see that that's another 5 portfolio position limit document? 6 MR. NICKENS: What was the page 7 reference, Your Honor? 8 MR. GUIDO: US3014555.001. 9 A. All right. What is your question? 10 Q. (BY MR. GUIDO) Is that also another one 11 of those portfolio position limits -- 12 A. Yes, it is. 13 Q. And that shows the high-yield bond 14 portfolio being $492 million. 15 Do you see that? 16 A. Yes, sir. 17 Q. Now, between August and October, the 18 portfolio shrunk from 624 to 492 million. 19 Do you see that? 20 A. I do. 21 Q. Is that what you were referring to when 22 you said the portfolio was reduced? 21339 1 A. Yeah. I guess that's what I was 2 alluding to. I just had a broad memory of it 3 going down. I didn't remember when. I was 4 obviously wrong about the limit because this shows 5 a limit of 750, and I thought it only went to 650. 6 Q. You thought the limit only went to 650? 7 A. Yes. 8 Q. And this shows a limit of 750? 9 A. Yes. That's why -- yeah. I don't 10 know -- you know, I don't know when we increased 11 those limits. I didn't remember that being a peak 12 limit. I thought the peak limit we ever had was 13 650, and I thought it was scaled back to 450. 14 Q. Now, with regard to this -- does this 15 refresh your recollection, given the time 16 sequences, of why the portfolio size shrunk from 17 625 to -- in this case, I think it was 492; is 18 that right? 19 A. Yes. It really doesn't. I'm still 20 trying to figure out how I messed up on the 650 to 21 750. I just don't remember. 22 Q. Now, was this at the time, September 21340 1 and October -- was it during that period of time 2 that the management of USAT was looking forward to 3 becoming a part of the Southwest Plan? 4 A. That's correct. 5 Q. Were the sales made and the size of the 6 high-yield bond portfolio reduced at that time in 7 order to become more attractive to the decision 8 makers in terms of USAT's participation in the 9 Southwest Plan? 10 A. As I recall -- and as I say, you've 11 already seen once how my memory is because I 12 couldn't remember the limits. But as best I 13 recall, when we were meeting with them, the 14 high-yield bonds were not an issue because they 15 were taking those as a marketable security. And 16 since it was a marketable security, they were 17 saying it was not a covered asset. And so, 18 their -- I don't think they cared -- they did not 19 tell us to cut down the size of it or anything 20 like that. So, that was -- they weren't insuring 21 that or they weren't, you know, whatever you 22 call -- you know, that was not one of the -- 21341 1 guaranteed assets? Is that the proper -- 2 Q. Covered assets? 3 A. Covered assets. The junk bonds were 4 not going to be one of the covered assets; and, 5 therefore, it didn't make any difference to them. 6 Q. So, why did you reduce the size of the 7 portfolio? 8 A. I don't remember now. 9 Q. Okay. But you don't think it had 10 anything to do with qualifying for the 11 Southwest Plan? 12 A. No. 13 Q. During that period of time, had the 14 regulators been raising questions with USAT about 15 the safety of its high-yield bond portfolio? 16 A. You know, I don't remember which year 17 it was. I don't know if we were in '87 or '88. 18 At some point, they did raise the issue. And we, 19 at their -- with their -- they made the 20 recommendation that we go out and have 21 Prudential-Bache look at the high-yield bond 22 portfolio and issue a report on it. And they did 21342 1 so, and they said that they found the portfolio to 2 be okay. And that report was then given to the 3 Federal Home Loan Bank. 4 So, you know, I don't know if my timing 5 is right; but that's -- I do recall that. 6 Q. Take a look at T9009A, which is a 7 document that I introduced today. That was your 8 June 9th, 1988 memorandum. 9 A. Do you want me to read the whole thing? 10 Q. No. I'm going to direct your attention 11 to the paragraph that starts at the bottom of the 12 page, T9009A. 13 A. I have it. 14 Q. See it says, "Then we discussed the 15 junk bonds," making reference to the strategic 16 planning committee? 17 THE COURT: Which paragraph are you on? 18 MR. GUIDO: The last paragraph on the 19 first page, Your Honor, that says, "Then we 20 discussed the junk bonds." 21 THE COURT: Thank you. 22 Q. (BY MR. GUIDO) Do you see that? 21343 1 A. I see that. 2 Q. It says -- isn't it true that you were 3 saying that we're going to touch base with George 4 Barclay and feel his pulse about the junk bond 5 situation? 6 A. That's what it says. 7 Q. Weren't you concerned about the Federal 8 Home Loan Bank Board's view of USAT's junk bond 9 holdings as of June 9th, 1988? 10 A. I don't recall what this has to do 11 with. I don't know if we were talking about 12 asking for an increase in the amount of junk 13 bonds. You know, I just don't know what it is. 14 Q. We just looked at three -- 15 A. As I say, you're asking me; and I don't 16 know. 17 Q. You don't know? 18 A. No. 19 Q. Do you have any reason to dispute the 20 fact that you were telling your colleagues that 21 USAT -- at USAT that you or someone else was going 22 to get in touch with George Barclay of the Federal 21344 1 Home Loan Bank and feel his pulse about the junk 2 bond situation? 3 A. Not at all. That's what it says. 4 Q. Did you feel that the high-yield bonds 5 or junk bonds posed a risk to USAT? 6 A. There's risk in every investment, but 7 I -- and at times, I probably made an expressed 8 concern about the risk in high-yield bonds. On 9 the other hand, I think that was one segment of 10 the portfolio that was profitable. 11 Q. Did you express to members of the 12 investment committee that you were concerned about 13 the size of USAT's junk bond portfolio? 14 A. I do not recall. 15 Q. Did you express to Charles Hurwitz that 16 you felt that the high-yield bond portfolio was 17 too large for an institution such as USAT? 18 A. I do not recall. 19 Q. Did you participate in determining what 20 the size of the high-yield bond portfolio was at 21 USAT? 22 A. I don't remember, but -- but I -- you 21345 1 know, I must have. I can't recall. You know, I 2 can't recall sitting in a meeting and deciding; 3 but just knowing how the institution works, I 4 would -- it's likely that I did. 5 Q. Well, we have a memo here where you're 6 discussing the question of high-yield bonds and 7 trying to get the pulse of the Federal Home Loan 8 Bank. Right? 9 A. That's right. You're asking me do I 10 remember it. I'm answering you and saying I do 11 not specifically remember the decision making with 12 regard to the high-yield bond portfolio. 13 Q. Did you ever participate in discussions 14 with regard to the size of the high-yield bond 15 portfolio in relationship to the qualified thrift 16 lender test? 17 A. I don't recall. 18 Q. Do you recall you testified earlier 19 that high-yield bonds didn't -- weren't qualified 20 assets under the qualified thrift lender test? 21 Right? 22 A. I recall that. 21346 1 Q. And did you participate in decisions 2 establishing the size of the mortgage-backed 3 security portfolio? 4 A. I probably did. 5 Q. Did you give instructions to Sandy 6 Laurenson directing her to a target size of the 7 mortgage-backed security portfolio? 8 A. I don't recall doing so. 9 Q. Do you recall the creation of United 10 MBS? 11 A. I've looked at some documents in the 12 last week or so that indicate that we did it. Had 13 you walked up to me a month ago and said do I 14 recall it, I would not have. 15 Q. Do you recall, based on the documents 16 you reviewed, the size of that mortgage-backed 17 security portfolio? 18 MR. NICKENS: We're talking about 19 United MBS? 20 MR. GUIDO: United MBS. 21 A. I can tell you what the overall 22 portfolio was. 21347 1 Q. (BY MR. GUIDO) Let's go back to one of 2 the documents that I showed you. Maybe that will 3 refresh your recollection about the size of the 4 portfolio. 5 A. Okay. 6 Q. Take the very last document that we 7 talked about, which is A1531. 8 A. I have it. 9 Q. Look at the portfolio position limits 10 there. 11 THE COURT: Would you restate that 12 number again, please? 13 MR. GUIDO: Your Honor, that is 14 Exhibit A1531. It's the October 5th, 1988 15 minutes. 16 A. What page were we on? 17 Q. (BY MR. GUIDO) That's one of those -- 18 A. US pages? 19 Q. US3014555.001. 20 A. I have that. 21 Q. Do you see the reference to United MBS? 22 A. I do see that. 21348 1 Q. Do you see there's a limit size and an 2 actual size? 3 A. Yes, I do. 4 Q. The actual size is 1,475,000,000? 5 A. I see that. 6 Q. I would like to direct your attention 7 to A1485, which is the minutes of January 6th 8 which I showed you just before that. 9 A. A1485? Here we go. 10 Q. Okay. I direct your attention to the 11 fourth page of that exhibit, which is US3012565. 12 Do you remember you said you could read the 565? 13 A. Yeah, I do. 14 Q. Do you see United MBS there? 15 A. I see that, yes. 16 Q. Do you see it has a portfolio limit of 17 1.835 billion? 18 A. I see that. 19 Q. And an actual of 1.811 billion? 20 A. Yes. 21 Q. Do you recall the buildup in the 22 mortgage-backed security portfolios that occurred 21349 1 after Sandy Laurenson was hired? 2 A. I remember it does increase in size. 3 Q. Can you tell us why it was increased in 4 size? 5 A. It went back to the basic reason that 6 we had invested in mortgage-backed securities. We 7 had been unsuccessful -- since the early Eighties, 8 United had been unsuccessful in establishing an 9 operating income stream. And as a result of that, 10 the feeling was that if you could follow this 11 mortgage-backed securities strategy, that you 12 would be able to establish a steady flow of income 13 which would help offset the losses which were 14 occurring in the non-earning assets, the 15 foreclosures, the delinquencies, the investment 16 real estate that was earning no income. And that 17 was the purpose for putting it on. 18 Q. Putting on the United MBS portfolio? 19 A. Well, putting on the entire -- Joe's 20 portfolio as well, the earlier portfolio. 21 Q. What about USAT Mortgage Finance? Do 22 you remember that? That was created in November 21350 1 of 1985 and collapsed in December of '85. 2 Was that the purpose of that portfolio, 3 as well? 4 A. You know, again, I didn't remember that 5 until I've looked at some papers in the last few 6 days. And that was a -- that was a totally 7 different situation. That was in 1985, if I 8 remember correctly. 9 Q. I'm asking about its creation, not its 10 collapse. 11 A. I'm sorry. What was the question? 12 Q. Was the purpose of purchasing the 13 mortgage-backed securities portfolio in the USAT 14 Mortgage Finance subsidiary the same purpose that 15 you bought the mortgage-backed securities for 16 United MBS? 17 A. Not exactly. 18 Q. Okay. Tell us why not exactly. 19 A. As I recall, the -- what was it -- what 20 was the -- 21 Q. United Mortgage Finance. 22 A. United Mortgage Finance was set up in 21351 1 1985. There was a -- there was a regulation which 2 allowed setting these up in the subsidiary, and it 3 allowed the -- let me stop and think a minute. 4 What it allowed was the -- by putting 5 it in the subsidiary, the mortgage-backs that you 6 acquired there did not count toward your liability 7 growth limitations. And so, that's why that -- 8 that portfolio was created. You could have, as I 9 remember, three or four or $500 million worth of 10 assets down there but that all that would be 11 counted for liability was the equity you put 12 down -- and the equity was probably about 5 13 percent -- so that you could increase the number 14 of mortgage-backed securities that you had without 15 growing the liability of the institution that 16 much. 17 At that time, you had liability growth 18 limits that were set by the Federal Home Loan 19 Bank. 20 Q. What do you think that the rule was 21 with regard to the liabilities of United MBS, 22 Mr. Gross? 21352 1 A. I'm sorry. 2 MR. NICKENS: Your Honor, what rule? 3 Q. (BY MR. GUIDO) What was your 4 understanding of the rule with regard to liability 5 growth with regard to the liabilities of United 6 MBS? 7 A. You know, I just told you what I 8 thought they were. 9 Q. So that they were the same for United 10 MBS as they were for USAT Mortgage Finance? 11 A. I'm sorry. I -- I thought -- I 12 misunderstood your question. 13 United MBS occurred, what, in late '86 14 and '87 and were brought in the association 15 because the rules under which the prior one was 16 created were -- were -- they were changed; and it 17 was, therefore, for -- the business purpose it was 18 created for did not work, and we disposed of the 19 mortgage-backed securities that I recall. 20 Q. Putting aside your understanding or 21 lack of understanding of the regulations for a 22 minute, okay, you testified that what you were 21353 1 attempting to do with United MBS was earn a spread 2 between your liabilities and the mortgage-backed 3 securities. Right? That was the purpose. Right? 4 A. Yes. 5 Q. Was that -- was that how you expected 6 to earn an income from United Mortgage Finance, as 7 well? 8 A. Yes. 9 Q. And it was that -- was what you 10 expected to earn an income off of what you 11 referred to as Joe's portfolio? 12 A. Yes. 13 Q. Now, were there any mortgage-backed 14 securities that USAT held that were unhedged 15 portfolios? 16 A. I believe there were. 17 Q. You do? 18 A. Yeah. 19 Q. Which ones? 20 A. You know, I don't -- I do not recall, 21 but I believe there were some in the portfolio. 22 Q. What is it that leads you to believe 21354 1 that? 2 A. I just -- something somewhere. 3 That's -- but I don't -- I can't give you anything 4 specific. 5 Q. Okay. Now, with regard to the 6 mortgage-backed security portfolio and the size of 7 the mortgage-backed security portfolio, did you 8 have any discussions in the strategic planning 9 committee with regard to the size of the 10 mortgage-backed securities portfolio affecting 11 USAT's qualification under the qualified thrift 12 lender test? 13 A. I can't recall specific conversations 14 about it. 15 MR. GUIDO: Your Honor, I'm about to 16 move on to another subject. 17 THE COURT: All right. We'll adjourn 18 until 2:00. 19 20 (Whereupon, a lunch break was taken 21 from 12:34 p.m. to 2:05 p.m.) 22 21355 1 THE COURT: We'll be back on the 2 record. 3 Mr. Guido. 4 MR. GUIDO: Thank you, Your Honor. 5 Q. (BY MR. GUIDO) I would like to now turn 6 to what is referred to as the USAT Mortgage 7 Finance issue. Remember we -- do you remember I 8 was asking you some questions about the entity 9 that was created in November of '85 -- 10 A. Yes. 11 Q. -- and collapsed at the end of '85? 12 Now I would like to ask you a few more 13 specific questions about that, if I may. 14 A. All right. 15 Q. I would like you to take a look at the 16 exhibit that is marked as A1218, which is in the 17 packet of materials -- 18 A. Wait a minute. I have the wrong thing. 19 I have 1479. 20 Q. I thought that they were put in front 21 of you. Excuse me. I would also like you to look 22 at A1220. 21356 1 Now, let me address with you the 2 question of what it is we're discussing when we're 3 discussing USAT Mortgage Finance. 4 Do you recall that USAT Mortgage 5 Finance was initially created to purchase 6 $500 million worth of mortgage-backed securities 7 financed with reverse repurchase agreements? 8 A. I did not recall. I've seen some 9 papers to that effect in the last couple of days. 10 I would otherwise have no independent recollection 11 of it. 12 Q. Just so it's clear for the record we're 13 talking about the same thing. 14 A. Right. 15 Q. That's what we're talking about. And 16 that when it was collapsed, that $150 million of 17 the mortgage-backed securities were taken into 18 USAT, absorbed into USAT, and $350 million of the 19 mortgage-backed securities were sold? 20 A. I just thought the whole thing got 21 sold; but I think I've seen something to that 22 effect, also. Had you asked me, without my seeing 21357 1 anything, I would have told you all 500 million 2 got sold. 3 Q. I'm trying to speed this up for you and 4 for the Court. 5 A. Okay. 6 Q. So, when the entity was dissolved and 7 the assets were sold, a portion of them were sold 8 and a portion of them were then transferred back 9 into USAT, did you participate in any of the 10 discussions that resulted in that decision being 11 made? 12 A. I may have. I don't recall the 13 specifics. 14 Q. I would like to direct your attention 15 to A1218, which is at Tab 1389. Those are the 16 minutes of the executive committee of United 17 Financial Group. 18 A. I see that. 19 Q. Do you see that? 20 A. Yes. 21 Q. And do you see that you are listed as 22 one of the people who were in attendance as a 21358 1 member of that committee? 2 A. Yes. 3 Q. And do you see in the paragraph -- the 4 first full paragraph that there's a discussion 5 about USAT Mortgage Finance and what should be 6 done with regard to that entity in light of the 7 anticipated issuance of new regulations that would 8 affect that entity? 9 A. I see that. 10 Q. Now I would like to direct your 11 attention to A1220, which is at Tab 13 -- 1390. 12 A. All right. 13 Q. That also makes reference to the 14 executive committee meeting of December 12th, 15 1985, does it not? 16 A. Yes, it seems to. 17 Q. And it discusses alternatives, does it 18 not, with regard to what to do about USAT Mortgage 19 Finance in light of anticipated regulatory 20 developments? 21 A. I see that. 22 Q. Now, what -- do you recall at the 21359 1 December 12th meeting whether there was any 2 discussion about absorbing the entire portfolio of 3 USAT Mortgage Finance into USAT? 4 A. I do not. 5 Q. You don't recall one way or the other? 6 A. No, I do not. 7 Q. Now I would like to direct your 8 attention to another document which is B697, which 9 is at Tab 1310. 10 Have you seen this memorandum before? 11 A. Let's see. (Witness reviews the 12 document.) I've seen this in the last few days. 13 Q. Okay. Did you write the memorandum? 14 A. It would appear I did. 15 Q. Do you have any reason to suspect that 16 you didn't? 17 A. As I say, it says what it says. I 18 don't remember, but it -- it shows my name on it. 19 Q. Okay. Now, this is -- has a 20 distribution list that includes Charles Hurwitz 21 and Barry Munitz. 22 Do you see that? 21360 1 A. I see that. 2 Q. Okay. And the -- and the minutes of 3 December 12th that we just looked at, A1218, show 4 that Barry Munitz and Charles Hurwitz were at that 5 executive committee meeting of December 12th? 6 A. Yes, I saw that. 7 Q. Now, have you reviewed this memorandum? 8 A. Like -- I read over it. I don't really 9 recall what it said. Do you want me to take a 10 minute and read it? 11 Q. Please. 12 A. (Witness reviews the document.) I've 13 read it. 14 Q. Okay. That memorandum shows that you 15 knew that there was an 11-million-dollar -- 16 approximately an 11-million-dollar profit earned 17 on the disposition of the mortgage-backed 18 securities out of the USAT Mortgage Finance 19 subsidiary, does it not? 20 A. That's what it indicates, yes. 21 Q. And it shows that you knew at the time 22 there was an 11-million-dollar loss on the swap 21361 1 side of the transaction that was to be deferred, 2 does it not? 3 A. That's what it says, yes. 4 Q. So, you knew at the time that a gain of 5 $11 million was being recognized at the same time 6 a loss of $11 million was being deferred? 7 A. That's -- that's what it appears, yes. 8 Q. Okay. Now, look at the bottom 9 paragraph. Doesn't that show that that 10 transaction was entered into in order to report a 11 2.5-million-dollar profit in the fourth quarter 12 which was what USAT wanted it to be? 13 A. The transaction was entered into 14 because of a change in interpretation of the 15 regulations which eliminated the business purpose 16 for having those mortgage-backs in that sub. 17 Q. What was the change in the regulations? 18 A. You know, at this point in time, I 19 really can't tell you. It was something to the 20 effect about -- I really don't remember what it 21 was. It was something that came down from 22 Washington at that point which prohibited the -- 21362 1 the treatment of the mortgage-backs in that sub 2 the way they would have been treated before that. 3 Q. Are you saying that the regulations 4 that were changed were regulations that said that 5 the liabilities of the financing sub could no 6 longer be excluded from the accounting of the 7 liabilities, of USAT's liabilities? 8 A. It was something more technical than 9 that. I don't know what it had to do with, with 10 the swaps or the repos. It was something in the 11 mix of the structure that was being changed by 12 the -- by the Federal Home Loan Bank which 13 prevented the accomplishment of the business 14 purpose that this transaction was set up for. 15 Q. Well, is this memorandum that you wrote 16 on December 17th a memorandum that you intended to 17 memorialize the decision making? 18 A. This is what I was -- what I was doing 19 was setting forth here what I understood that Ron 20 and Joe Phillips were recommending that we do with 21 regard to unwinding the -- the sub. 22 Q. What do you mean what you do? You mean 21363 1 whether you should do it or not? Is that what 2 this -- 3 A. No. How -- the mechanics of doing it. 4 Q. Where does it address the mechanics of 5 doing it? 6 A. This talks about what they are 7 retaining and what they are liquidating and all 8 that stuff. 9 Q. I thought you said that was dictated by 10 the regulations. Why are two investment 11 department people making that decision? 12 A. They are telling me what they are doing 13 to conform with the new regulations, as I 14 understand it. 15 Q. Where does it address the regulations 16 at all in this memorandum? 17 A. It does not, but that's what triggered 18 this whole thing. 19 Q. Well, you're saying the regulation is 20 what triggered the whole thing? 21 A. Something -- this sub was set up 22 sometime in 1985 with the understanding that the 21364 1 portfolio put down there would -- the assets down 2 there would not be considered to be counting -- I 3 guess it's liability because we're talking about 4 liability growth. It's -- I'm lost. It's either 5 the liability -- something was down there that 6 when they changed the regulations, I think it 7 would affect their liability growth, if I'm not 8 mistaken. 9 Q. Let's take that as a given. Okay? 10 A. Okay. 11 Q. For purposes of my questions, that's 12 sufficient. 13 A. All right. 14 Q. If you couldn't count those liabilities 15 outside of USAT anymore, did you consider whether 16 or not they could be absorbed within USAT? 17 A. As I recall, we had already had a 18 problem earlier that year where we had exceeded 19 liability growth and we were very sensitive to it. 20 And I was under the impression that it was 21 possible we would exceed it if we left this down 22 in the sub; and that's the reason we decided that 21365 1 the best thing we could do is if the sub didn't 2 work anymore, we were going to unwind it. 3 Q. Take the profits into further gains. 4 Right? 5 A. Well, you know, that's really -- what 6 you're saying is correct; but, you know, things 7 are never as simple as they seem to be. And swaps 8 are not a marketable security. A swap is a -- is 9 a -- an arrangement entered into between two 10 parties where one trades a stream of fixed 11 interest and somebody else trades a stream of 12 floating interest. And it's a transaction made 13 between two parties. 14 To undo a swap, a -- you can't make -- 15 you can't go out in the public market and buy it 16 in. You've got to go back and negotiate with 17 somebody as to terms. And it's not likely that 18 you're going to get a swap favorably resolved. 19 So, without -- 20 Q. I'm sorry. I'm not following you, and 21 I don't think that has anything to do with this 22 memo. Can you explain where in this memo it 21366 1 addresses the question of whether or not you 2 dispose of swaps? 3 A. It says it's going to reverse the swaps 4 and keep them intact. 5 Q. So, they can reverse the swap. Right? 6 Is that what you're referring to? 7 A. Yes, that's what I'm referring to. 8 Q. What is the difficulty of doing so if 9 they say they can do it? 10 A. There's a difference between reversing 11 a swap and cancelling a swap. 12 Q. What's the difference? 13 A. When you reverse a swap, all you do is 14 put one on that reverses that transaction; and 15 that's what caused it to run off over that period 16 of time. 17 Q. I think you're anticipating questions, 18 Mr. Gross. Will you please answer my question? 19 A. Okay. 20 MR. NICKENS: Your Honor, I object. 21 The question was: You recognized gains while 22 deferring losses? And the witness was trying to 21367 1 explain exactly how that process came about. And 2 now Mr. Guido has accused him of not answering the 3 question. 4 THE COURT: All right. Let's have 5 another question, Mr. Guido. 6 Q. (BY MR. GUIDO) Now, based on your 7 testimony, you said that the reason that the sales 8 were made out of the mortgage-backed security -- 9 USAT Mortgage Finance was because of the liability 10 growth regulation. Right? 11 A. That is my understanding. 12 Q. Now -- and you indicated that this 13 memorandum reflected the decision making that led 14 to that decision, did you not? 15 MR. NICKENS: That was not his 16 testimony. He said it reflected the mechanics of 17 it. The "decision making" testimony was 18 Mr. Guido's testimony. 19 Q. (BY MR. GUIDO) What does this document 20 reflect, Mr. Gross? 21 A. This memo reflects the mechanics of 22 what they are going to do to wind up the sub. 21368 1 Q. And does it also address what the 2 consequences are for USAT in doing what it was 3 they were instructed to do? 4 A. Would you restate the question? 5 Q. Does this document also reflect what 6 the consequences were of them doing what they were 7 instructed to do in liquidating a portion of the 8 USAT Mortgage Finance portfolio? 9 THE COURT: I'm not sure I understand 10 the phrase "they were instructed." Who were 11 "they"? 12 MR. GUIDO: Mr. Huebsch and 13 Mr. Phillips, Your Honor. 14 MR. NICKENS: Your Honor, the witness' 15 testimony was that they were making a 16 recommendation. Now, Mr. Guido has taken that and 17 put it into "they were instructed to do," which 18 there is no testimony supporting that. 19 MR. GUIDO: Let me rephrase the 20 question, Your Honor. I'll start at the 21 beginning. 22 Q. (BY MR. GUIDO) Who made the decision to 21369 1 liquidate the $350 million of mortgage-backed 2 securities, Mr. Gross? 3 A. I don't recall. 4 Q. Mr. Huebsch and Mr. Phillips weren't 5 responsible for making decisions about whether or 6 not USAT was in compliance with its regulations, 7 were they? 8 A. It was -- they might have been in on 9 the discussion. I don't know who made the actual 10 decision. 11 Q. Who had the responsibility at USAT to 12 make a decision about whether or not the 13 liabilities of USAT Mortgage Finance created a 14 regulatory problem for USAT? 15 A. That would probably have been -- Jim 16 Pledger would have been the one who said there was 17 a problem. He was our counsel at that time. 18 Q. And what did Mr. Pledger recommend? 19 A. I don't know this -- I don't have a 20 document before me that says what he recommended. 21 Q. Okay. Who was the decision-making 22 authority on what to do with regard to those 21370 1 assets of USAT Mortgage Finance if they created a 2 liability growth problem for USAT? 3 A. Well, probably -- probably this would 4 have been decided down at the Mike Crow/Bruce 5 Williams level or at the Gerry Williams level. 6 Q. Now, isn't this something that was 7 discussed at the executive committee level? 8 A. Yes, it was. 9 Q. So, was the decision made at the 10 executive committee level? 11 A. I think what they decided was to see 12 what comes out of Washington is what I thought. 13 Q. Something came out of Washington. 14 Right? 15 A. That's right. 16 Q. Who made the decision to sell the 17 $350 million worth of mortgage-backed securities? 18 A. Actually, it was probably made by Gerry 19 or Mike. 20 Q. Gerry? 21 A. Williams. 22 Q. Or Mike Crow? 21371 1 A. That would be my guess. 2 Q. Do you recall being consulted on that 3 decision? 4 A. I don't recall. 5 Q. So, you don't know whether or not you 6 participated in the decision? 7 A. I do not. 8 Q. Okay. And it's your recollection that 9 the decision to sell those mortgage-backed 10 securities was because there was some liability 11 growth problem? 12 A. That's correct. 13 Q. Okay. You were the chairman of USAT. 14 Right? 15 A. Yes, I was. 16 Q. And were you the CEO at the time, as 17 well? 18 A. Yes, I was. 19 Q. So, it was your responsibility to make 20 decisions about investments of USAT? 21 A. Well, the way this flowed -- this -- 22 you know, Gerry Williams, the chief operating 21372 1 officer, and I was, of course -- I was primarily 2 focused on strategy, policy, and real estate; and 3 everybody else flowed to Gerry. So, yeah, I was 4 probably kept informed of what was going on. But 5 this was not an area of my particular focus, and 6 they would have made the decisions regarding it. 7 Q. Well, why were you writing a memorandum 8 and reporting to Gerry Williams and Mike Crow 9 about the decision? 10 A. I was trying to synthesize what I 11 understood the thing was. As you have seen, I 12 wrote thousands of memos trying to understand 13 things and trying to synthesize them back and make 14 sure that I understood what was going on so if 15 there was any confusion, they would let me know. 16 This was not an area of my expertise, and I'm a 17 writing a memo back to make sure I had it right. 18 Q. Well, wasn't the crucial decision 19 whether or not the liability growth regulation had 20 been violated by USAT Mortgage Finance's 21 $500 million worth of MBSs? 22 A. Well, I think that's a fair statement. 21373 1 Q. Why doesn't the memorandum address that 2 issue? 3 A. It's just an internal memo commenting 4 on what they are proposing to do. You know, it's 5 not -- it's not a thing that is literary work. 6 Q. What was the significance of the 7 2.5-million-dollar profit? 8 A. I don't recall. 9 Q. Did Ron Huebsch or Joe Phillips have 10 responsibility for whether or not the branch sale 11 that's referred to in Paragraph 2 goes through? 12 A. No. 13 Q. Did they have any responsibility for 14 the operating losses of 4.5 million in October and 15 the 2.5 million in December that's reported in 16 there? 17 A. No. 18 Q. All right. Did they have any 19 responsibility for the loan portfolio that had 20 losses in it for the quarter that's referred to 21 there? 22 A. No. 21374 1 Q. This memorandum is not only 2 memorializing what Ron Huebsch and Joe Phillips 3 told you, is it? 4 A. That's correct. 5 Q. Why doesn't the memorandum also address 6 the issue of whether or not the liability growth 7 regulation could be complied with through actions 8 other than the sale of the mortgage-backed 9 securities? 10 A. Because these were the decisions that 11 had been made after looking at the various 12 options. 13 Q. I would like to move on to another 14 topic, if I may, and I would like you to look at a 15 series of documents. The first one is A10623, 16 which is at Tab 863. The second is B1054, which 17 has not been admitted into the record as yet. The 18 third is T4246, which is at Tab 335. The fourth 19 is A10666, which is at Tab 870. The fifth is 20 T4250, which is at Tab 871. The sixth is T4251, 21 which is at Tab 567. The last is T4302, which is 22 at Tab 566. 21375 1 Let's start with Tab 863, which is 2 A10623, Mr. Gross. Do you remember earlier today 3 I asked you questions about a meeting that 4 occurred in May of 1985 and I asked you whether or 5 not that meeting had been held at Mustang Island 6 and you corrected me and said no, it had not? 7 A. Yes, I remember that. 8 Q. This memorandum is from Doug Hansen to 9 you and Barry Munitz and Gerry Williams, Mike 10 Crow, Art Berner, and Bruce Williams. Its subject 11 matter is the Mustang Island follow-up. It has a 12 date of April 17th, 1986. 13 Do you see that? 14 A. I do. 15 Q. Now, this is making reference to the 16 meetings that occurred at Mustang Island that you 17 testified to that I was mistaken about when they 18 occurred. Right? 19 A. Yes. 20 Q. And who else participated in those 21 meetings at Mustang Island? 22 A. I don't recall. I assume the people he 21376 1 names there. 2 Q. Did Charles Hurwitz attend that 3 meeting? 4 A. I believe he did, but I'm not sure. 5 Q. Okay. Did David Neurenberg attend that 6 meeting? 7 A. No. 8 Q. Did any outsiders attend that meeting 9 from USAT? 10 A. Not that I recall offhand. 11 Q. Now, what was the purpose of that 12 meeting? 13 A. That was -- that, again, was a 14 strategic planning meeting to try to look to the 15 future and see the general direction in which the 16 association might move. 17 Q. Well, at the meeting, were there 18 discussions about what to do with the swaps that 19 were on the mortgage-backed security portfolio 20 after the collapse of USAT Mortgage Finance? 21 A. I don't recall. 22 Q. Take a look at Point No. 3. 21377 1 A. (Witness reviews the document.) 2 Q. It says, "Now that mortgages have 3 prepaid, we have an excess of long-term swaps 4 which are unmatched and are expenses." 5 Do you see that? 6 A. Yes. 7 Q. "We should take this into consideration 8 when matching new assets. Maybe we will not have 9 to raise as much brokered funds because we already 10 have excess swaps in place." 11 Do you see that? 12 A. I see that. 13 Q. Is that referring to the swaps that 14 were purchased as part of the USAT Mortgage 15 Finance portfolio? 16 A. I wouldn't think so. 17 Q. Is that making mention to different 18 swaps? 19 A. That's the way I would read this. I 20 don't remember, but that's the way I would read 21 it. 22 Q. Is this making mention of the swaps 21378 1 that were part of the portfolio that Joe Phillips 2 purportedly rolled down at the beginning of 1986? 3 A. I don't have any -- I don't remember. 4 Q. Take a look at Point No. 4 where it 5 says "profit targets." See what it says in terms 6 of your goal? 7 A. (Witness reviews the document.) I see 8 that. 9 Q. Now, see -- why was it the most 10 important thing to show some profits each quarter, 11 not necessarily increasing profits? 12 A. I'm sorry. What was the question? 13 Q. Why was it important or the most 14 important thing to show some profits each quarter 15 but not necessarily increasing profits as that 16 memorandum reflects? 17 MR. BLANKENSTEIN: You're asking why 18 Mr. Hansen thought it was important? 19 Q. (BY MR. GUIDO) I'm asking: Why was it 20 important? 21 A. I don't even believe that's what it 22 says here, if I'm reading it right. 21379 1 Q. Look at the next-to-the-last sentence 2 under Point 4 under "profit targets." 3 A. I guess -- of course, these are the -- 4 if you read at the top, he says, "Please give me 5 your comments as to the relative priorities of the 6 following issues raised at our meetings and please 7 indicate the issues for which you will take 8 primary responsibility. I will revise this memo." 9 What I'm reading in the first sentence, 10 he says "Shows small quarter-to-quarter earnings 11 increases." And then down here, he says, "The 12 most important thing is to show some profits each 13 quarter, not necessarily increasing profits." You 14 know, these are his comments; and I can't -- I 15 don't know what he's saying there. 16 Q. Well, let's take the first sentence. 17 It says, "Our goal..." 18 A. I see that. 19 Q. Who's he referring to there? 20 A. I assume he's referring to the 21 institution. 22 Q. Okay. Do you recall what the profit 21380 1 targets were? 2 A. I do not. 3 Q. So, you wouldn't have any basis to 4 dispute whatever the record is in this proceeding? 5 A. No, no. That's correct. 6 Q. Now, the purpose of the transactions 7 that were entered into as part of this so-called 8 rolldown -- do you remember that, that set of 9 transactions that Joe Phillips did at the 10 beginning of 1986? 11 A. Yes. I remember the rolldown. 12 Q. What was the purpose of that? 13 A. As I recall, the purpose of that was to 14 deal with a very rapid decline in interest rates 15 during that period of time which necessitated the 16 rolling down which means if you have a high coupon 17 mortgage and interest rates are falling, you need 18 to sell it and replace it with a lower coupon 19 because if you don't, as rates keep declining, 20 people will eventually pay off those mortgages and 21 you will -- your asset will have gone away but 22 you'll still have your liability. 21381 1 Q. What did that do to the spread income 2 that you indicated was the goal of USAT in 3 entering into the mortgage-backed security 4 portfolios? 5 A. That narrowed the spread. However, as 6 long as you reinvested the proceeds, it should 7 maintain the income stream. 8 Q. It should maintain the income stream; 9 so, the portfolio should show a positive yield? 10 A. It will be a narrow yield, but it 11 should -- it should be a positive yield. 12 Q. All right. Now I would like to show 13 you Exhibit B1054, which is a document that has 14 not been introduced into the record as yet. 15 MR. NICKENS: Your Honor, our records 16 indicate that this document has been introduced as 17 Exhibit A10645 at Tab 867. 18 MR. GUIDO: A10645? 19 MR. NICKENS: 45. 20 MR. GUIDO: At what tab? 21 MR. NICKENS: Tab 867. 22 THE COURT: We're showing another 21382 1 document as A10645. 2 MR. NICKENS: Different than this one, 3 Your Honor? 4 THE COURT: Is this a letter from 5 Mr. Crow to -- 6 MR. NICKENS: This is Crow to Gross, 7 Munitz, and Williams dated June 23rd, 1986. 8 THE COURT: I think it is in. Go 9 ahead. 10 Q. (BY MR. GUIDO) A10645 is a memo that 11 deals with third and fourth quarter income 12 planning. 13 Have you seen this memorandum before? 14 A. I don't recall it, but it indicates I 15 got a copy of it. 16 Q. Do you see where the first sentence 17 says, "Non-operating gains will be necessary to 18 report profits for the third and fourth quarters"? 19 Do you see that? 20 A. I do. 21 Q. Now, take a look at some of the options 22 there. It talks about the sale of various assets, 21383 1 does it not, starting on Page 2 as options to deal 2 with the non-operating gains? 3 A. I see that. 4 Q. Okay. And do you see one of the 5 options, Option No. 2, is to sell USAT's Ginnie 6 Mae portfolio held for general purposes outside of 7 the structured arbitrage and cash flow bonds? 8 A. I see that. 9 Q. Okay. And do you see that -- what it 10 says about the disadvantages of doing so? 11 A. I see that. 12 Q. What does it say the disadvantages 13 would be? 14 A. "Ongoing profitability would be 15 diminished. Current 23.3 million portfolio Ginnie 16 Mae securities yield on a book basis 11.22 percent 17 and a comparable reinvestment would yield 18 approximately 9.60 percent. Therefore, net 19 interest income would decline by the yield 20 differential times the outstanding balance 21 (approximately 300,000 per year for the first 22 year.)" 21384 1 Q. So, is this option essentially saying 2 the advantages, it would generate a capital gain, 3 but the disadvantages, it would reduce the net 4 interest spread? 5 A. Yes. But I don't think he's 6 considering if you're investing entire proceeds. 7 I see what he said. I don't think he's correct. 8 It says what it says. 9 Q. Okay. Now, look at Option No. 4. 10 Option No. 4 deals with selling part or all of the 11 fixed rate junk bond portfolio. 12 Do you see that? 13 A. I see that. 14 Q. And does it indicate what one of the 15 advantages would be? 16 A. It would produce a gain of 17 approximately $17.9 million. 18 Q. And does it indicate that the 19 disadvantage would be that it would be an exchange 20 of net gain for a reduction in ongoing earnings? 21 A. That's what it says. 22 Q. Okay. Now, look at Option No. 5. 21385 1 A. I see that. 2 Q. That says sell mortgage-backed 3 securities related to cash flow bond Series E? 4 A. I see that. 5 Q. It says the advantage is that that 6 would produce a capital gain. Right? 7 A. Yes. 8 Q. Okay. And the disadvantage is that 9 that would create a negative spread situation 10 going forward. Right? 11 MR. NICKENS: Well, that's one of 12 several things mentioned there, Your Honor. 13 Q. (BY MR. GUIDO) One of several 14 disadvantages. Excuse me. 15 A. I see that. 16 Q. I would like to direct your attention 17 to Tab 335, which is T4264. 18 MR. NICKENS: T4246. 19 MR. GUIDO: T4246. Excuse me. Thank 20 you. 21 Q. (BY MR. GUIDO) Now, that's the minutes 22 of the strategic planning committee dealing with 21386 1 the -- 2 A. No. 3 Q. I'm sorry. That's a memorandum from 4 Doug Hansen to Charles Hurwitz, you, and 5 Mr. Munitz and others regarding growth and capital 6 strategy for the next six months, is it not? 7 A. Yes, it is. 8 Q. It is dated September 8th, 1986. 9 Right? 10 A. Yes. 11 Q. It addresses a number of issues which 12 it describes as summarizing the current thinking 13 on those issues, does it not? 14 A. Summarizes the current thinking on a 15 number of questions, right. 16 Q. Okay. Now, it has various conclusions 17 about various subject matters, does it not? 18 A. Yes. And I think these are his 19 conclusions, but -- 20 Q. Pardon? 21 A. I think these are his conclusions, yes. 22 Q. His conclusions from what? Do you 21387 1 know? 2 A. You know, I don't know. 3 Q. Okay. Now, it makes reference about 4 "United probably has enough capital to avoid a 5 supervisory letter." 6 Do you see that on Item No. A on the 7 first page? 8 A. Yes. 9 Q. Do you know what a supervisory letter 10 is that's referred to there? 11 A. Yes. A supervisory letter would be a 12 letter written when you go below your minimum net 13 worth requirement. 14 Q. And what are the consequences of a 15 supervisory letter? 16 A. Well, a supervisory letter generally 17 sets forth a series of things on which you have to 18 get permission from the Federal Home Loan Bank of 19 Dallas to maintain certain activities. 20 Q. Is one of those permission to have 21 brokered deposits above a certain amount? 22 A. Yes, it is. 21388 1 Q. Is one of those to get permission for 2 making investments outside of qualified thrift 3 lender assets? 4 A. I don't recall. 5 Q. Is one of those getting permission to 6 make direct investments of a certain size? 7 A. I think so. I know we've got that list 8 somewhere. I've seen it during the last couple of 9 days. I imagine that's one of those in there, but 10 I don't recall. 11 Q. So, you've seen a list that enumerates 12 a bunch of restrictions? 13 A. Yes. 14 Q. And one of those is a restriction on 15 brokered deposits? 16 A. Yes. 17 Q. Do you recall any of the other 18 restrictions? 19 A. I think one of them is -- as I recall, 20 one of them is separating any deposit above a 21 passbook rate, if I remember correctly. 22 Q. And what would be the effect of that? 21389 1 What would have been the effect for USAT? 2 A. Well, I think you had to get permission 3 to do so. 4 Q. If you didn't get permission, what 5 would have been the effect for USAT? 6 A. You would not get anything other than 7 passbook savings, which is very minor savings and 8 deposits. 9 Q. Which was a very small portion of 10 USAT's deposits, correct? 11 A. Right. 12 Q. Now, this says -- do you see Item No. 2 13 under A, it says, "The danger point is 12/86. The 14 last item of required net worth will be calculated 15 under the old rules"? 16 Do you see that? 17 A. No. 18 Q. "A" on the first page. A2. 19 A. I see that. I see that. 20 Q. What was it about December 1986 that 21 was so crucial for USAT in terms of meeting its 22 minimum regulatory net worth requirement? 21390 1 A. It seems to me he's saying some rules 2 are going to change on December 31st of 1986, but 3 I don't know what's -- I think -- you never want 4 to drop below minimum net worth, whether it's in 5 1986 or 1982 or 1992 or when. 6 Q. What was it factually about USAT's 7 operations that made December of 1986 so crucial 8 in terms of meeting its net worth requirements? 9 A. I don't know of anything. 10 Q. Did the maturity matching credit exist 11 for the quarter ending 12/1986? 12 A. I do not recall. 13 Q. This memorandum addresses the maturity 14 matching credit, does it not? See Item No. C on 15 Page 2. 16 A. Okay. Let's see what it says. 17 (Witness reviews the document.) 18 Q. Do you see where, under C2, it talks 19 about the maturity matching credit in relationship 20 to the first quarter '87? 21 A. I see that. 22 Q. Does that refresh your recollection 21391 1 that the maturity matching credit came into effect 2 in 1987? 3 A. You know, it doesn't refresh my 4 recollection. I don't -- you know, I don't -- you 5 know, whatever it says, it says. So, if that's 6 right, I guess it did. But I don't recall it. 7 Q. Now, look at Page 468. 8 A. I'm sorry. Page what? 9 Q. Bates stamped US468. 10 A. Bates stamped 468? 11 MR. NICKENS: My copy doesn't have a 12 Bates stamp. 13 A. I have 8182, 8180. 14 THE COURT: My copy does not have Bates 15 stamps on it. 16 MR. GUIDO: Okay. Let me use the 17 imaging number that's on the Court's copy. 18 THE COURT: If you just say which sheet 19 it's on, I think we can follow. 20 MR. GUIDO: It's the next-to-the-last 21 page, Your Honor. It's OW0181. 22 Q. (BY MR. GUIDO) Do you see the reference 21392 1 to Smith Breeden senior management meeting? 2 A. I see that. 3 Q. Do you know what Smith Breeden was? 4 A. Yes, I do. 5 Q. What was it? 6 A. They were a company who specialized in, 7 I guess, consultant work with -- to savings and 8 loans associations, primarily in the field of 9 mortgage-backed securities. 10 Q. Okay. And did USAT retain them to get 11 their advice? 12 A. They did. We did. 13 Q. And does this memorandum indicate that 14 there's a meeting to be held on September 15th, 15 1986, with Smith Breeden to discuss their findings 16 and recommendations? 17 A. I don't know if this is the first 18 meeting or final meeting. I can't tell from this. 19 Q. But it does discuss a meeting? 20 A. Yes. 21 Q. And it indicates that you and Charles 22 Hurwitz will be attending that meeting along with 21393 1 Barry Munitz, does it not? 2 A. And a lot of other people. 3 Q. And a lot of other people? 4 A. Yes. 5 Q. Now, let's take a look at A10666, which 6 is a memorandum that makes reference to that 7 meeting. I would like you to take a look at that. 8 A. (Witness reviews the document.) All 9 right. 10 MR. NICKENS: Your Honor, Mr. Guido 11 says "makes reference to the meeting." Mr. Giarla 12 was quite clear that this was his memorandum of a 13 presentation of that meeting. 14 Q. (BY MR. GUIDO) With that correction, 15 Mr. Gross, I would like to ask you some 16 questions -- 17 A. This was a presentation made by 18 Smith Breeden at that meeting. 19 Q. That's what Mr. Nickens recalls 20 Mr. Giarla testified. 21 Mr. Giarla was an associate of 22 Smith Breeden. Do you recall that? 21394 1 A. No. 2 Q. Do you recall who was at that meeting 3 from Smith Breeden? 4 A. Seems to me I remember meeting 5 Mr. Smith at one time. I met somebody from Kansas 6 City with that firm. If you hadn't just told me 7 who Mr. Giarla was, I would not have known the 8 name. 9 Q. Now, this memorandum discusses various 10 issues; and one of the things that it addresses is 11 on the third page of the memorandum, that at 12 US205 -- do you see that? 13 A. Yes, I see that. 14 Q. The third page -- the third page of the 15 exhibit -- the third page of the exhibit -- I 16 think you've gone beyond where I was in the 17 document. 18 A. You said 205? 19 Q. I'm sorry. You have a different copy. 20 A. Oh, I have two 205s. 21 Q. Take a look at the page that says 22 "Condensed balance sheet and liquidation value 21395 1 July 31, '86" at the top. See where it has "gains 2 or loss from book value" on it? 3 A. I see that. 4 Q. Okay. Look down at the 5 next-to-the-last line at the bottom. It says 6 "interest rate swaps." 7 Do you see that? 8 A. I'm on the wrong -- I'm not looking -- 9 my next-to-the-last line says "goodwill." I'm 10 sorry. I was up here. 11 Q. I'm not on the assets. I'm in the 12 next-to-the-last line of the page. 13 Do you see where it says "interest rate 14 swaps"? 15 A. I do see that. 16 Q. It shows a negative of $122 million? 17 A. I see that. 18 Q. Do you recall the Smith Breeden people 19 doing an analysis of USAT's mortgage-backed 20 securities portfolio and informing you that your 21 swaps, if marked to market, had a 22 122-million-dollar loss in them? 21396 1 A. I don't recall that. 2 Q. Do you recall that -- that 3 Smith Breeden made some recommendations to you 4 about what you should do in light of the condition 5 of USAT's mortgage-backed securities portfolio? 6 A. The only -- the only recommendation I 7 remember Smith Breeden making to us -- it's been 8 some 12 years ago -- they suggested, as I recall, 9 that we grow the portfolio by 10 billion worth of 10 mortgage-backed securities. 11 Q. You recall that? 12 A. Yes, I do. I recalled something wrong 13 this morning anyway. One more wrong recall 14 wouldn't shake me up either. 15 That's what I recall. 16 Q. Take a look at Page 9 of the document. 17 The page numbers are at the top. 18 A. I see that. 19 Q. Okay. It says "recommendations." 20 Right? 21 A. Yes. 22 Q. One of them, if you look, it says 21397 1 "increase consolidated assets through service 2 corporations." 3 Do you see that? 4 A. I see that. 5 Q. Now, what does it look like in terms of 6 the size of the asset increase that they are 7 recommending there? 8 A. That looks like a billion dollars. 9 Q. The advances to service corporations 10 would create an asset increase of a billion 11 dollars. Right? 12 A. Yes. 13 Q. Then it also makes mention to margining 14 equity arbitrage, does it not? 15 A. It does. 16 Q. And that indicates an increase in 17 assets of what, half a billion dollars, doesn't 18 it? 19 A. Yes. 20 Q. And then "swaps in existing portfolio," 21 do you see that? 22 A. I do. 21398 1 Q. What's that refer to? 2 A. I don't know. 3 Q. Okay. How does this set of 4 recommendations square with your recommendation? 5 A. Very badly. You know, you asked me 6 what I recalled. I'm just telling you what I 7 recalled. 8 Q. That's fine. 9 A. Let me read something down here at the 10 bottom. 11 Q. I'm just trying to clarify your 12 testimony, Mr. Gross. 13 A. Yeah. (Witness reviews the document.) 14 As I say, you asked me my recollection; and that's 15 what I remember. 16 Q. Now, this does discuss a number of 17 options, does it not, that would include 18 increasing the mortgage-backed securities 19 portfolio? 20 A. Yes, it does. As I recall, they wanted 21 a huge increase in the portfolio. 22 Q. That's your recollection? 21399 1 A. Yes. 2 Q. Did you also recall that they 3 recommended that you take gains on the portfolio 4 as an immediate strategy to offset operating 5 losses? 6 A. No, I do not recall that. 7 Q. Do you see that as Point No. 1 on 8 Page 9? 9 A. I do see that. 10 Q. Now I would like to direct your 11 attention to T4250, which is also in the -- 12 THE COURT: We'll take a short recess. 13 14 (Whereupon, a short break was taken 15 from 3:03 p.m. to 3:25 p.m.) 16 17 THE COURT: Be seated, please. We'll 18 be back on the record. 19 Mr. Guido, you may continue. 20 MR. GUIDO: Thank you, Your Honor. 21 Q. (BY MR. GUIDO) There are three 22 documents that I'm going to be showing you. One 21400 1 is Tab 871, which is T4250, Mr. Gross, which I 2 mentioned to you before the break. The second is 3 Tab 566, which is T4302. And then the third is 4 Tab 567, which is 4251. 5 Turning to Tab 871, T4250, which is 6 another one of those Doug Hansen memoranda -- do 7 you have that before you? 8 A. I do. 9 Q. That says it's regarding a strategic 10 management committee meeting of September 22, 11 1986. And I would like to direct your attention 12 to the page that's Bates stamped US2072. 13 A. I have 2070. 14 Q. I would like to direct your attention 15 to Page 2072. 16 A. I'm sorry. I beg your pardon. Okay. 17 Q. Do you see "earnings and growth 18 strategy"? 19 A. Yes, I do. 20 Q. Do you see where it says "Prospects for 21 positive GAAP and RAP earnings are poor at 6/87"? 22 A. I see that. 21401 1 Q. And then do you see the reference to 2 "our actual net worth"? 3 A. I can't read what it says here. 4 Q. Okay. Let me direct you down to the -- 5 A. I can read some words here. 6 Q. Let me direct you to the third bullet. 7 "We need earnings and good net worth in the third 8 quarter as we still will be bargaining with the 9 examiners and looking for a capital note issue." 10 Do you see that reference there? 11 A. I do see that. 12 Q. Now, do you recall that USAT at the 13 time had a proposal to the Federal Home Loan Bank 14 Board to authorize it to issue capital notes to 15 increase net worth? 16 A. I know we had one. I don't remember 17 when. 18 Q. Okay. And do you recall that in 1986 19 the examiners were claiming that USAT was 20 obligated to write down some of its real estate 21 assets or real estate loans? 22 A. I'm sorry. Would you repeat the 21402 1 question? 2 Q. Do you recall that in 1986 the 3 examiners were advocating that you should be 4 required to recognize some losses in your real 5 estate loan and asset portfolios? 6 A. I know they -- they were in in '86. 7 I'm not sure -- I don't think that actually came 8 out until '87, though, did it, if I remember 9 correctly, that their suggestion -- 10 Q. The final report came out in 1987. 11 You're correct about that. 12 A. Yeah. 13 Q. What I'm asking you is: Did the 14 examiners that were at USAT in 1986 tell you that 15 you should write down some of your real estate 16 loans and asset portfolios? 17 A. As I say, I don't think they told us 18 that until '87. 19 Q. Did they tell you that they thought 20 that you needed to do so or that they had reached 21 the conclusion that you would probably have to do 22 so? 21403 1 A. I believe that's correct. 2 Q. And you were bargaining with the 3 examiners about that, were you not? 4 A. We were -- I think that's probably a 5 poor choice of words. We were -- I think we 6 presented our reasons for disagreeing with the 7 examiners to the Bank Board in Dallas. 8 Q. Okay. So, you contested it? 9 A. That's a better word. 10 Q. You weren't bargaining, were you? 11 A. No. 12 Q. You were contesting it? 13 A. That's a good word. 14 Q. And you were vigorously contesting 15 that, weren't you? 16 A. I don't know about vigorously, but we 17 were contesting it. 18 Q. I would like to direct your attention 19 to the next bullet which says, "There's a strong 20 case for taking portfolio gains in the third 21 quarter in order to shore up reserves in the 22 capital position." 21404 1 A. I see that. 2 Q. Okay. "Third quarter results need to 3 be close to those forecast in the regulatory 4 business plan." 5 Do you see that? 6 A. I see that. 7 Q. Now, turn to the next page. See the 8 reference in the middle of the typewritten -- see 9 the reference to First Boston? That's probably 10 the easiest bullet. 11 A. Yes. 12 Q. Drop down to the next bullet. 13 A. Okay. 14 Q. That says, "Quarter end actions will be 15 considered next Monday day." 16 Do you see that? 17 A. I see that. 18 Q. "We should take all MBS and liquidity 19 portfolio gains, monitor equity arbitrage results, 20 alert Joe as to the possibility of taking junk 21 bond gains, and track the profit and capital 22 positions closely." 21405 1 MR. NICKENS: I think it says "timely," 2 Your Honor. Never -- I take that back. I believe 3 it says "closely." I apologize. 4 A. The only thing -- you know, I'm sure 5 you have a better copy; but I can't make out the 6 "MBS." Mine is blurred, but -- it's blotted out 7 here with a white mark. Where you said "MBS," 8 that may be there. It may not. I can't tell from 9 my copy. Something is there. 10 Q. (BY MR. GUIDO) Now, let me drop you 11 down two more bullet points. "Junk bonds may not 12 be able to grow this year as the parent cannot 13 grow and its sub would cause us to exceed the 14 investments in subsidiary limitations." 15 Do you see that? 16 A. I do. 17 Q. "There is a tradeoff between moving 18 junk bonds to a sub and creating new subs for the 19 purpose of shrinking and doing new risk-controlled 20 arbitrage." 21 Do you see that? 22 A. I do see that. 21406 1 Q. Do you recall that at the time in 2 September of 1986 that USAT was bargaining with 3 the examiners about write-downs, it was 4 considering how it could bolster its net operating 5 income through gains from the sales of 6 mortgage-backed securities? 7 MR. BLANKENSTEIN: Objection, 8 Your Honor. He asked him before whether he was 9 bargaining. Mr. Gross said he wasn't. Now he's 10 come back and used that same word again. He's 11 trying to mislead the witness. 12 MR. GUIDO: I'm sorry. 13 Q. (BY MR. GUIDO) At the time you were 14 contesting the examiners' views that USAT should 15 recognize a write-down, were you considering the 16 sale of mortgage-backed securities to generate 17 gains? 18 A. I do not recall. 19 Q. Do you have any reason to dispute the 20 accuracy of the statements that are made in this 21 document? 22 MR. NICKENS: Your Honor, he hasn't 21407 1 read the entire document. If we -- he said he 2 didn't recall. Not recalling is itself some 3 reason to dispute something, but he would have to 4 read the entire document to accurately answer the 5 question at least. 6 Q. (BY MR. GUIDO) Let's go on to the next 7 document, Mr. Gross. It's Tab 567, T4251. This 8 one isn't very long, Mr. Gross. So, would you 9 please read the document? 10 A. Okay. (Witness reviews the document.) 11 MR. NICKENS: Do you mean the first 12 page or -- 13 MR. GUIDO: The whole document. 14 Q. (BY MR. GUIDO) Are you looking at T -- 15 A. I'm looking at T4302. Do I have the 16 right one? 17 Q. No. I said Tab 567, T4251, I think. 18 A. I'm sorry. This was the next one up. 19 Okay. I've got that one. All right. (Witness 20 reviews the document.) 21 Q. Does the first page say September 23rd, 22 1986 on your copy? 21408 1 A. Yes, it does. 2 Q. Okay. Have you read the document? 3 A. Oh, okay. (Witness reviews the 4 document.) 5 MR. NICKENS: Your Honor, what is 6 the -- I ask what is the document. The reason I 7 ask is because our copy of T4251 consists of four 8 copies of the same document. 9 MR. GUIDO: I have one copy of the 10 document. 11 THE COURT: Mine has two pages. The 12 first is a note and the next are some tables. Do 13 I have the right exhibit? 14 MR. GUIDO: That's right, Your Honor. 15 It's a memorandum from Mike Crow to Jenard Gross, 16 Gerry Williams dated September 23rd, 1986, with a 17 schedule attached to it. 18 A. I've looked at it. 19 Q. (BY MR. GUIDO) Okay. Now, the first 20 page says, "The attached schedule presents our 21 best estimate of gains that will be needed for 22 quarterly earnings. We are proceeding with taking 21409 1 these gains." 2 Do you see that? 3 A. I see that. 4 Q. And then on the second page, do you see 5 where it says, "Gains to alleviate deficit"? 6 A. I see that. 7 Q. One of the items is mortgage-backed 8 securities, $1.9 million. Right? 9 A. Yes, I see that. 10 Q. The other is junk bonds, $6.0 million? 11 A. I see that. 12 Q. At the time that you were contesting 13 with the examiners in September of 1986 the 14 write-downs that they were arguing that USAT 15 should take on its real estate and mortgage-backed 16 securities, were you in the process of taking 17 gains out of the mortgage-backed securities and 18 high-yield bond portfolio to bolster quarterly 19 earnings? 20 A. According to this document, that's what 21 we were planning to do. I don't have independent 22 recall of it. 21410 1 Q. All right. Then look at Tab 566, 2 T4302. That's a memorandum dated November 13th, 3 1986, from Mike Crow to Bruce Williams? 4 A. Yes. 5 Q. Okay. It says, "We had a discussion at 6 the investment committee on selling junk bonds for 7 profits for purposes of quarterly earnings." 8 Right? 9 A. Yes. 10 Q. You were the chairman of the investment 11 committee, were you not? 12 A. I was. 13 Q. Do you recall discussions in the fall 14 of -- and winter of 1986 on making sales out of 15 the high-yield bonds for purposes of generating 16 profits to bolster quarterly earnings? 17 A. I don't recall. 18 Q. Okay. Do you recall discussions in the 19 fall and the winter of 1986, discussions in the 20 investment committee to make sales out of the 21 mortgage-backed security portfolio in order to 22 generate gains to bolster quarterly profits? 21411 1 A. I don't recall that. I will say as 2 best I recall, going back even to 1981 or '82, 3 United was not generating operating profits. And 4 I think most every -- every annual report that I 5 can recall refer to the fact that any earnings 6 came from sales, you know, from taking gains as 7 opposed to operating profits. So, you know, 8 whether we had discussions at that particular 9 time, I just think, you know, it had been 10 happening. 11 Q. What was the purpose of the rolldown 12 that you testified to earlier that Joe Phillips 13 did in the beginning of 1986? 14 A. It was to rebalance the portfolio 15 because interest rates had just dropped 16 dramatically. 17 Q. When did that rolldown end? 18 A. Sometime in the first quarter of '86, I 19 believe. 20 Q. So, it ended in the first quarter of 21 '86. Why were sales made out of the 22 mortgage-backed securities portfolio after the 21412 1 first quarter of 1986 in 1986? 2 MR. NICKENS: Can we be more precise in 3 the time, Your Honor? That leaves nine months. 4 MR. GUIDO: It's intended to go nine 5 months, Your Honor. 6 Q. (BY MR. GUIDO) During the period of 7 time after the rolldown in 1986 which you just 8 testified was over in the first quarter of 1986, 9 why were sales made out of the mortgage-backed 10 security portfolios at USAT? 11 A. There would have been different reasons 12 for different sales. In the first and second 13 quarters, any sales that we made would not have 14 been made for gain purposes because at that time, 15 we were deferring gains anyway. So, any sales -- 16 you know, if we took any -- if we made any sales 17 in the second quarter, we wouldn't have recognized 18 the gains anyway. 19 Q. Well, what happened when you did the 20 rolldown, Mr. Gross? What happened to the gain? 21 A. What happened to the gain? It was 22 deferred. 21413 1 Q. They were deferred. And they were put 2 into the basis of the mortgage-backed securities, 3 were they not? 4 MR. NICKENS: Your Honor, there's no 5 reason for Mr. Guido to shout at the witness. He 6 can ask a question and get an answer. There's no 7 reason for shouting. 8 THE COURT: All right. 9 MR. GUIDO: I'm sorry, Your Honor. 10 Q. (BY MR. GUIDO) What would happen to 11 those gains? 12 A. They were deferred. 13 Q. Okay. And they went into the basis of 14 the newly-acquired mortgage-backed securities in 15 one way or the other, did they not? 16 A. I'm not an accountant; so, I'm really 17 not sure I understand your question. 18 Q. Well, what happened to the gains when 19 they were deferred, Mr. Gross? 20 A. They sit out there as a deferred gain. 21 Q. And you are a real estate investor, are 22 you not? 21414 1 A. I am. 2 Q. And you have rolled gains from one 3 asset into another, have you not? 4 A. Define what you're saying before I 5 answer the question. 6 Q. You don't recognize a gain for tax 7 purposes. You include it in the basis of the 8 newly-acquired property? That's what I'm asking 9 you about. 10 A. I don't believe we have done that. 11 Q. You've heard of it, though, haven't 12 you? 13 A. I've heard of it. 14 Q. What happens to those deferred gains 15 when one sells a subsequently-acquired property? 16 A. I've never thought about it. 17 Q. How long have you been in the real 18 estate business? 19 A. I've been in it since 1955. 20 Q. And you never even thought about it? 21 MR. BLANKENSTEIN: Objection, 22 Your Honor. He asked him before whether he did. 21415 1 Mr. Gross said he didn't do it. There's no reason 2 for him to have thought about something he had 3 never done. Mr. Guido is implying that he's not 4 answering the question truthfully. 5 THE COURT: Next question. 6 Q. (BY MR. GUIDO) The -- after June of 7 1986, what were the purposes for the sales of the 8 mortgage-backed securities out of USAT's 9 portfolios? 10 A. There were several purposes, among 11 which were taking gains. But they were taken in 12 the framework of an investment portfolio; and they 13 were taken with the guidance of our accountants, 14 Peat Marwick, so that we maintained the integrity 15 of the investment portfolio. 16 Q. So, they were -- let me ask you some 17 questions. You just testified they were taken in 18 the context of an investment portfolio. Right? 19 A. That's what I said. 20 Q. And you testified earlier today that 21 the purpose of the investment portfolios and 22 mortgage-backed securities was to earn a spread. 21416 1 Right? 2 A. That's correct. 3 Q. What happened to the spread, Mr. Gross, 4 in the mortgage-backed security portfolio at USAT 5 in 1986? 6 A. I do not recall '86. I know that it 7 declined. But I also know that when Sandy's 8 portfolio was structured, it was structured so 9 that the spread was maintained through the life of 10 the portfolio. 11 Q. Well, let's first address the -- the 12 mortgage-backed security portfolio before the 13 creation of the Sandy Laurenson portfolio. I 14 would like you to look at Tab 350, which is A -- 15 which is A1419 which is the December 25th, 1986 16 investment committee meeting minutes. Tab 350. 17 MR. NICKENS: We used it earlier today. 18 19 (Discussion held off the record.) 20 21 Q. (BY MR. GUIDO) I would like to direct 22 your attention, Mr. Gross, to the last two pages 21417 1 of the investment committee minutes of -- before I 2 do so, will you look at the first page of the 3 minutes and tell me who was in attendance at that 4 meeting? 5 A. "All members of the committee were 6 present with the exception of Mr. Munitz and 7 Hurwitz. Also present were Walters, Stabell, 8 Terry Dorsey, and Gary Jacobson." 9 Q. So, the records indicate that you were 10 present at that meeting? 11 A. They do. 12 Q. Take a look at the last two pages. 13 This is a memorandum from Bruce Williams to you, 14 Gerry Williams, and Mike Crow dated November 24th, 15 1986. And it discusses the performance of USAT's 16 mortgage-backed security arbitrage programs. 17 Do you see that? 18 A. Yes, I do. 19 Q. Take a look at the second page in the 20 middle of the page. What does it show happened to 21 the spread on the mortgage-backed security 22 portfolio? 21418 1 A. Let me read the first page. Just a 2 second. (Witness reviews the document.) Would 3 you repeat the question? 4 Q. That shows a negative spread of 5 .99 percent, does it not? 6 A. It does. 7 Q. How can a negative spread of 8 .99 percent in a mortgage-backed security 9 portfolio be consistent with it being an 10 investment portfolio to maintain a net interest 11 spread, Mr. Gross? 12 A. Well, it goes on down below and does 13 another exercise and shows that the overall 14 economic impact is a virtual wash. 15 Q. So, how can -- what do you mean -- 16 let's, first of all, take what it goes on to do 17 down below. 18 Did that ever happen? 19 A. I have no idea. I really don't know. 20 Q. Okay. Isn't that an assumption, a 21 theoretical assumption that Mr. Williams made to 22 rationalize taking gains out of USAT's 21419 1 mortgage-backed security portfolio? 2 A. The gain -- let me go back and read the 3 front page again. (Witness reviews the document.) 4 I guess the problem that you don't seem to -- you 5 don't have an option about doing the rolldown. 6 The rolldown had to be accomplished because the 7 assets were going to go away. And the problem 8 here is that the tables on which the assumptions 9 were prepared -- well, when we were presented it 10 the first time I sat in on a meeting with Salomon 11 Brothers, they talked about a 200 basis point 12 spread with a locked-in return within that range 13 and the need for an occasional balancing of the 14 portfolio. What they didn't say was that in a -- 15 in a sharp move down, it took more than an 16 occasional balancing -- a much more rapid 17 balancing. But be that as it may, the bottom line 18 of this is that he's saying that most of the gains 19 that he's alluding to are as a result of the MBS 20 rolldown which we had to do, otherwise the assets 21 would have gone away and we would have been in 22 much worse shape. 21420 1 Q. Do you know when Mr. Bruce Williams 2 testified was the period of the rolldown that he 3 was referring to here? 4 A. I have no idea. 5 Q. The period you're talking about ended 6 in the first quarter of 1986. Right? 7 A. You asked me when it was, and that was 8 my best recollection. 9 Q. This says that gains on sale through 10 October are being considered, does it not? 11 A. But it also says -- let's see what it 12 says here. What it says is that since the 13 inception of the mortgage-backed security 14 arbitrage program, the association has recognized 15 approximately 67 million in gains on sales through 16 October 1986. These gains were largely 17 attributable to the mortgage-backed security 18 rolldown program from high coupon to current 19 coupon securities. 20 Now, he doesn't give a breakout of 21 what's what. So, I don't really know whether -- 22 how much of it -- he says it is largely 21421 1 attributable to that. All I'm saying to you is if 2 that's the case, those rolldowns had to occur. 3 Q. Well, let's take the .99 percent 4 negative spread. Okay? First of all, let's 5 attribute it all to the so-called rolldown, 6 Mr. Gross. Okay? 7 A. All right. 8 Q. You're saying you were surprised by the 9 increase in prepayment speeds. Is that what 10 you're saying? 11 A. That's what I'm saying. 12 Q. And you're saying that you're surprised 13 because that conflicts with what Salomon Brothers 14 advised you previously? 15 A. Salomon Brothers and First Boston and 16 Goldman Sachs, all of them. 17 Q. Were you in the real estate business in 18 the 1979 through '81 time period? 19 A. Yes, I was. 20 Q. Do you know what happened to interest 21 rates during that time period? 22 A. They went up very sharply. 21422 1 Q. Do you know what happened to the real 2 estate market? 3 A. Well, you know, it depended on where 4 you were. Where we were, it prospered very 5 nicely. 6 Q. Did interest rates decline after that? 7 A. Yes, they did. 8 Q. And did they decline rapidly? 9 A. Yes, they did. 10 Q. Do you know what happened to prepayment 11 speeds in that time period? 12 A. I was not -- you know, I was not in 13 the -- mortgage-backed securities had not been 14 created in that time period. 15 Q. So, you don't know? 16 A. Well, nobody -- nobody -- you know -- 17 Q. You're saying there's no historical 18 data for prepayment speeds in that time period? 19 A. No. All I'm saying is mortgage-backed 20 securities were not a trading vehicle, investment 21 vehicle. I think Salomon Brothers came out with 22 that in the early Eighties, and it was not in 21423 1 that -- you know, it just began somewhere around 2 '82, '83, '84, somewhere in there. 3 Q. Is a Ginnie Mae a mortgage-backed 4 security? 5 A. Pardon? 6 Q. Was a Ginnie Mae a mortgage-backed 7 security? 8 A. Yes, it is. 9 Q. Did Salomon Brothers create Ginnie 10 Maes? 11 A. They -- I really can't -- I don't know. 12 Q. Did Ginnie Maes exist in the '80 13 through '84 time period? 14 A. I assume -- I really don't know, but I 15 believe they did. 16 Q. When Salomon Brothers gave you your 17 advice that you're referring to, did they do it in 18 a document you were referring to? 19 A. Yes, they did. 20 Q. Did that document discuss discount 21 mortgage-backed securities? 22 A. At this point in time, I really don't 21424 1 recall. That's some almost 14 years ago. 2 Q. Do discount mortgage-backed securities 3 react differently to changes in interest rates 4 than current coupon mortgage-backed securities? 5 A. When you say "differently," in what 6 respect. 7 Q. Do prepayments react differently to 8 changes in -- 9 A. The prepayments, yes, they would. 10 Q. Do you know whether or not Salomon 11 Brothers, when it was giving its presentation to 12 you, was discussing discount mortgage-backed 13 securities as opposed to current coupon 14 mortgage-backed securities? 15 A. I really don't remember. 16 Q. Now, let's go back to the Bruce 17 Williams memorandum. The memorandum discusses the 18 gains that were taken. Right? 19 A. It does. 20 Q. It talks about $67 million worth of 21 gains that were taken to date. Right? Then it 22 talks about the loss on the swap side mark to 21425 1 market. Right? 2 A. Yes. 3 Q. Now, do you know what would have 4 happened if USAT, when it sold its mortgage-backed 5 securities in the spring of 1987 under the 6 purported rolldown, had also sold or mirrored its 7 swaps as it had done when it disposed of the 8 mortgage-backed securities from USAT Mortgage 9 Finance? 10 MR. BLANKENSTEIN: Mr. Guido, did you 11 mean the spring of 1986 or -- 12 MR. GUIDO: '86. I'm sorry. 13 MR. NICKENS: Your Honor, I don't 14 understand the question. They replaced the 15 securities. Is Mr. Guido asking if they replaced 16 the securities and then buy additional swaps? 17 MR. GUIDO: I'll rephrase the question, 18 Your Honor. 19 THE COURT: All right. Rephrase it. 20 Q. (BY MR. GUIDO) Instead of the purported 21 rolldown in the spring of 1987, USAT had disposed 22 of the mortgage-backed securities and also 21426 1 disposed of the swaps, do you know what would have 2 been the impact on USAT Mortgage Finance? 3 MR. BLANKENSTEIN: Mr. Guido, I think 4 you're in the wrong year again. 5 MR. GUIDO: '86. Excuse me. 6 A. Would you restate the question? I got 7 distracted. 8 Q. (BY MR. GUIDO) When Mr. Phillips did 9 the purported rolldown in the spring of 1986, 10 instead of rolling it down into lower coupons and 11 keeping the portfolio, do you know what would have 12 been the impact if he had sold the mortgage-backed 13 securities and also disposed of the swaps either 14 by way of bargaining with the counterparty or by 15 putting on a mirror swap as was done with USAT 16 Mortgage Finance? 17 A. Well, the main thing that would have 18 happened is we would have been going counter to 19 the -- them trying to create the stream of income. 20 Q. Well, did you create a stream of 21 income? 22 A. We tried. We did our best. We took 21427 1 the information that was given to us, and we tried 2 to structure a program. We had somebody on board 3 that we thought was able to do those things, and 4 we were falling -- following what was considered 5 the best concept in the industry that the Federal 6 Home Loan Bank had a philosophy of growing your 7 way out of your problems in those days. 8 Their main vehicle was mortgage-backed 9 securities. And they put Tom Popejoy in at FCA in 10 California. In fact, if they hadn't given him 11 that job, he would have had this job; and I 12 wouldn't be sitting here today. Because he took 13 the job at FCA, I came here. 14 The end result was with the approval of 15 the Federal Home Loan Bank, he added 15 billion of 16 mortgage-backed securities to the portfolio of FCA 17 in California trying to grow them out of their 18 problem. Now, it didn't work; but that was the 19 best thinking of the day. 20 That was what everybody hoped was going 21 to be a solution of a problem that was created 22 when the interest rates were allowed to be 21428 1 deregulated in 1980 and '81 which created the 2 great operating losses for the institutions 3 because they paid higher rates of interest on the 4 deposits than they had on the mortgages. 5 You know, to sit here and say that 6 because the program wasn't successful even though 7 we were doing our best and even though we were 8 following what the regulators were saying was the 9 best hope, you know, that just doesn't follow. 10 Q. What did the regulators tell you about 11 a rolldown or how to rebalance the portfolio in 12 the spring of 1986, Mr. Gross? 13 A. I do not recall. 14 Q. Do you recall what you testified to in 15 your administrative and investigative depositions 16 about what you should have done? 17 A. I do not at this time. 18 Q. Do you recall that you testified that 19 if interest rates had moved at least 60 or 70 20 basis points, that's when Mr. Phillips should have 21 started rolling down the portfolio? 22 A. I said that, and that was just an 21429 1 off-the-cuff number extrapolating from government 2 bonds. And I don't know if that's a good or bad 3 number. 4 Q. You just shot that number off your 5 head. Is that what you're saying? 6 A. I knew that for a government bond, it 7 would be about 50 basis points. It could have 8 been 80 or 90. Could have been 100. Could have 9 been 70, somewhere in that range. 10 Q. Somewhere in that range, from your 11 experience, you assumed that someone should 12 rebalance a portfolio if there's that size of a 13 decline in interest rates? 14 A. That's what -- that would be my 15 observation in hindsight, yes. 16 Q. That's hindsight? 17 A. Yes. 18 Q. That's not your understanding back in 19 the spring of 1986? 20 A. Oh, no. 21 Q. What was your understanding back then? 22 A. I would say at that point, I did not 21430 1 have that much experience with a significant drop 2 or the effects of a rolldown. So, at that time, I 3 just didn't know. 4 Q. You didn't know? 5 A. I didn't know. 6 Q. What was the size of the 7 mortgage-backed security portfolio at USAT at that 8 time when you were the chairman? 9 A. I think it was about $500 million or 10 so. 11 Q. Plus the USAT Mortgage Finance 12 portfolio. Right? 13 A. Not at that time. 14 Q. In December of 1985 just prior to the 15 rolldown. 16 A. I thought we were talking about March 17 of '86. 18 Q. March of '86 was the end the rolldown, 19 wasn't it? 20 A. You told me it went longer than that; 21 so, I'm not really sure. 22 Q. I'm sorry. I haven't said anything 21431 1 about -- I said that Mr. Williams had testified to 2 something. 3 A. He would know better than I do. I'll 4 put it that way. 5 Q. Now, when the rolldown first started -- 6 that started sometime in the beginning of 1986, 7 correct? 8 A. You know, I'm not sure it started -- it 9 could have started in December of '85 or January 10 of '86, somewhere in that general time frame. 11 Q. And that the portfolio was somewhere 12 around a billion dollars at that time, was it not? 13 Mortgage-backed securities. 14 MR. NICKENS: At what time are we 15 talking about? 16 MR. GUIDO: December 1985, 17 January 1986. 18 MR. NICKENS: Well, they are distinctly 19 different. 350 million was sold in December. So, 20 it makes a big difference whether it's December or 21 January. 22 THE COURT: All right. What's your 21432 1 question? 2 Q. (BY MR. GUIDO) In December of 1985, 3 what was the size of the mortgage-backed security 4 portfolio at USAT? 5 A. At the beginning of December, it was 6 probably around a billion dollars. At the end of 7 December, it was probably $350 million less. 8 Q. In October 1986, what was the size of 9 the portfolio? 10 A. I don't know. 11 Q. Take a look at the memorandum. Does it 12 tell you? 13 A. A billion -- looks like 1,001,705,000. 14 Q. So, between that period of time, it was 15 somewhere between 650 in January 1, '86; and 16 November 24th, it was somewhere around a billion? 17 A. On November 24th of 1986, it was a 18 billion dollars; and actually, without seeing 19 something like this, I can't tell you what it was 20 in December and January. 21 MR. VILLA: Your Honor, for purposes of 22 accuracy, the memo that we're looking at has a 21433 1 parenthetical that said it's excluding the new MBS 2 subsidiary and the AMPs. I think by asking the 3 witness to look at this, perhaps we're not getting 4 an accurate picture of the picture either from its 5 spread or from its size. That's at the top of the 6 second page of the exhibit. 7 MR. GUIDO: My questions on this line 8 have all been excluding United MBS. I've only 9 been asking questions about USAT's portfolio. I 10 was about to turn to United MBS's portfolio, 11 Your Honor. 12 THE COURT: Well, you asked earlier 13 about adjourning half an hour early. 14 MR. GUIDO: This would be a good time 15 to do so, Your Honor? 16 THE COURT: Yes. 17 MR. GUIDO: Thank you, Mr. Gross. We 18 will convene tomorrow morning. 19 THE COURT: I assume you want this 20 scheduling and other matters on the record? 21 MR. GUIDO: On the record, Your Honor. 22 Your Honor, we have two matters, one of 21434 1 which I would like to raise and one which the 2 respondents would like to raise. 3 The first one is that, Your Honor -- 4 pertains to an exhibit that was put into the 5 record at the end of the day last Friday which is 6 at Tab 1788. It's Exhibit B2668. 7 I did not object to that exhibit at 8 that time; and, in fact, I specifically asked 9 questions about that exhibit. And the rules 10 expressly provide that if one does not object to 11 the admission of an exhibit, that objection is 12 waived. 13 I'm now going to -- despite all of 14 that, Your Honor, I am moving to strike 15 Exhibit B2668 which is at Tab 1788. That 16 document, Your Honor, is a document that came in 17 during the period of time when there was a great 18 deal of confusion where there had been an 19 objection made to my use of exhibits which I 20 thought had got into my possession by respondents' 21 counsel. 22 As you recall, I misstated the fact of 21435 1 how I had received the respondents' exhibits; and 2 I misstated that. When the document came in, 3 Your Honor, I was not in a position to be able to 4 object to this document because it didn't appear 5 on anyone's list. And at that point in time, I 6 was not comfortable being able to make any 7 representations to the Court about anything about 8 any documents since I wanted to ascertain what the 9 facts were with regard to this document before I 10 did so. 11 I should have -- and I did not -- have 12 objected and asked the Court to reserve the 13 admission of that document. Since we were at the 14 end of the testimony with the witness and we were 15 going to be adjourning, I did not make that 16 objection which I should have done at the time. 17 And I did it basically, Your Honor, because I was 18 confused about what the facts were. I had just 19 made a misstatement to the Court about a certain 20 set of facts. So, I felt that I didn't want to 21 make another representation about a document. 22 The basis for my objection to the 21436 1 introduction of this document, Your Honor, is 2 twofold. One is that it was not on the 3 respondents' notice list to me; so, I didn't have 4 an opportunity to prepare the response. But 5 second of all is that it's neither material nor 6 relevant to the proceedings in this case. This 7 document was a document that was used as the basis 8 for the filing of a petition before the 9 5th Circuit challenging the -- the order of the 10 OTS -- or the Federal Home Loan Bank at the 11 time -- of awarding the bid of Mr. Ranieri to 12 acquire USAT or United -- Bank United subsequent 13 to the placing in receivership. 14 The document is being introduced, I 15 believe -- was introduced with regard to the claim 16 that the MAXXAM bid was worth $100 million more to 17 the regulators than the Ranieri bid, Your Honor. 18 We believe that that issue has been adjudicated 19 before the 5th Circuit and, therefore, the 20 document is neither material nor relevant to this 21 proceeding. 22 I have the pleadings of that and the 21437 1 Order of the Court which I would like to direct 2 your attention to, Your Honor, as I go on. These 3 documents have previously been provided to 4 respondents' counsel so that they could have an 5 opportunity to respond to the argument, 6 Your Honor. 7 The first document that I would like to 8 give you is the petition for review in that 9 proceeding which is T9010, Your Honor. The second 10 is the petitioner's motion to expand the record 11 before the Court to include, among other things, 12 the memorandum which is Exhibit 2668. The third 13 is the 5th Circuit's order expanding the record to 14 include the Michael Salomon memo, which is 2668. 15 And then the last, Your Honor, is the -- the last 16 document, Your Honor, is -- the last document, 17 Your Honor, is the order of the 5th Circuit with 18 regard to the petition of the respondents for 19 review of the Order of the Federal Home Loan Bank 20 Board. And I would like to direct your attention 21 to particularly the specifics of the Court's 22 Order. 21438 1 It says that they asked -- MAXXAM has 2 asked to reverse the Order of the Federal Home 3 Loan Bank Board awarding the Hyperion Group or the 4 Ranieri bidders' application to acquire USAT as 5 part of the Southwest Plan and that it seeks to 6 grant its petition and declare it to be the 7 successful bidder. 8 The Court goes on to say, Your Honor, 9 that it -- the relief sought by MAXXAM in this 10 appeal are unavailable and that the Federal Home 11 Loan Bank committed no reversible error in denying 12 MAXXAM's petition for review. 13 So, in essence, what the Court did in 14 that case, Your Honor, is that it said that the 15 facts that were relied upon and brought to its 16 attention, particularly the Michael Salomon 17 memorandum which the Court has before it, are not 18 facts sufficient to warrant a reversal of the 19 Federal Home Loan Bank Board's decision to grant 20 the bid of the Ranieri group and to reject the bid 21 of the MAXXAM group. And in particular, it says, 22 "In the course of doing so" -- I direct your 21439 1 attention to Page 2 of the memorandum where the 2 Court says that the filing of that instant action 3 was not willfully untimely or they have not -- 4 MAXXAM has not satisfied the Court that the filing 5 of the instant action was not willfully untimely 6 or that the timeliness of such filing shortly 7 after the commencement of legal action by the 8 government against MAXXAM's principal owner and 9 executive, referring to this action, Your Honor, 10 was not too much of a coincidence to be a 11 coincidence, Your Honor. 12 We believe that the memorandum that was 13 introduced into this record, Your Honor, has been 14 litigated -- the facts in this memorandum have 15 been litigated in the 5th Circuit and the 16 respondents are estopped from utilizing that 17 memorandum in this proceeding. For that reason, 18 we believe it's not immaterial nor relevant to 19 this proceeding; and we move to have it stricken 20 from the record. I'm sorry I didn't raise it at 21 the time. 22 As you can see, these are documents 21440 1 that I had to go back to Washington to retrieve to 2 be able to make this argument to the Court. I 3 made it as timely as I could. I gave notice to 4 opposing counsel. I indicated to them I was going 5 to bring it up at the earliest possible time. We 6 agreed, counsel, by me waiting until the end of 7 the day and the first opportunity to do so in this 8 proceeding would not be a waiver. 9 Respondents have indicated to me that 10 they are going to still argue that I have waived 11 any objection to this document being part of this 12 record in light of the fact, one, that I didn't 13 object to it and, two, that I asked questions 14 about it when Mr. Berner was on the stand. 15 Your Honor, I believe that the 16 circumstances of what happened on last Friday are 17 sufficient to grant our motion to strike it in 18 light of the fact that what all this will do is to 19 send us down a path of basically entirely 20 irrelevant issues to this proceeding, Your Honor, 21 and will just further delay what has become a 22 rather lengthy proceeding as it is. 21441 1 For that reason, I move to strike the 2 document. 3 MR. VILLA: Your Honor, Mr. Guido 4 presented at the conclusion of Mr. Berner's 5 examination, as you recall, a number of documents 6 that he hadn't had on his list and raised an issue 7 at that time suggesting -- and I think impugning 8 the motives of the entire UFG board -- suggesting 9 that they had supported the MAXXAM bid and that 10 they were hostile to Mr. Ranieri because of some 11 self-interest and not the interest in getting the 12 best bid. That was clearly the implication of 13 about 15 pages of his cross-examination, and he 14 did so by utilizing documents that he had not told 15 us about. 16 When he raised that issue and he opened 17 the door to the question of was UFG trying to do 18 the best they could for getting the best bid or 19 were they trying to line their own pockets, it 20 seems to me he put directly into controversy the 21 issue of whether or not the MAXXAM bid was, in 22 fact, better. He knows that the financial 21442 1 analysis of the MAXXAM bid shows that it's 2 $100 million better. The document that we pulled 3 out is self-authenticating. It has an FOIA. It 4 came from the Federal Home Loan Bank Board under 5 an FOIA request. It has been on our master 6 exhibit list for over a year, properly identified. 7 It was an issue that he opened up. I 8 responded to it appropriately at the time. I 9 handed him the document. He read it. He made no 10 objection. He hardly could, in view of the issue 11 that he had raised. 12 I asked about three questions about the 13 document. He asked, I think, the same number or 14 more than I did about the document on an issue 15 that he opened up. 16 Under the circumstances where there is 17 no argument that it's not an authentic document, 18 where there is no argument that the document does 19 not involve many of the same players that are 20 involved in this that we have had testimony about 21 including Marta Berkley, John Beaty, Mr. Ranieri, 22 Stuart Root, Mr. Lycos, Mr. Twomey, Mr. Patriarka. 21443 1 Under the circumstances, what has 2 happened here is that he's opened up an issue; and 3 he happened to get it pushed back in his face and 4 now he wishes he hadn't done it. 5 I've never seen a case in which a party 6 can raise an issue and when it turns out that the 7 evidence that comes in is more powerful than the 8 evidence that he raised, that he can now say, 9 "Let's go back and wipe it all out." 10 I'm sure he does not want this record 11 to reflect that the MAXXAM bid was $100 million 12 better. He was hoping by bringing up this issue 13 at the end of Mr. Berner's examination that we 14 wouldn't be able to respond. Well, we did. 15 That's what litigation is about. And I don't 16 think we can now go back and start opening up 17 every exhibit that has been put into this case and 18 say, you know, "I was tired. It was at the end of 19 the day. I was distracted. I would like to go 20 back and look at about 40 of the exhibits that I 21 agreed to put in, I didn't object to, that I had 22 questions about, and I would like now to move to 21444 1 strike them." I've only been in practice 25 2 years, and never heard it before. I don't think 3 it's warranted in this case. 4 There's no argument as to authenticity. 5 There's no argument -- and the reason that he's 6 making such a big deal out of it is because he 7 really doesn't want now that $100 million in here. 8 The 5th Circuit case has absolutely nothing to do 9 with it. The 5th Circuit opinion which I invite 10 the Court to read is based primarily on the 11 question of whether or not the petition was 12 timely. The Court said in the 5th Circuit a lot 13 of water has passed under the bridge since that 14 bid and we're not going to start it over again. 15 The 5th Circuit did not say that MAXXAM's bid was 16 not $100 million better. And if they had, 17 Mr. Guido would have read it. 18 Now, as to finally the issue of 19 estoppel, the issue of estoppel -- we've argued 20 that the Texas Commerce Bank case estops this 21 tribunal from deciding issues like the executive 22 bonus, unsafe and unsound, all kinds of issues, 21445 1 and this Court has ruled against us. There is no 2 estoppel. 3 Your Honor, if there is no estoppel 4 there, there can hardly be an estoppel here. My 5 client, Arthur Berner, was not a party to the 5th 6 Circuit case. He had nothing to do with it. The 7 5th Circuit case was decided on purely procedural 8 grounds. 9 Under the circumstances, Your Honor, 10 they have spent -- they have devoted the end of 11 their examination of Arthur Berner to impugn his 12 integrity and that of all the UFG directors. And 13 under the circumstances, if I'm not allowed to 14 respond to it, then it's an unfair way in which 15 they present their evidence. 16 He knew it was appropriate when I 17 raised the issue and put it in front of him. 18 That's the reason he didn't object, not because he 19 was distracted. So, I think the motion should be 20 denied; and I don't think that after 15 weeks of 21 trial that we ought to start going back and 22 retrying days and weeks and exhibits and exchanges 21446 1 that we've had sometime in the last year and a 2 half. I believe the motion should be denied. 3 Finally, I would point out that there 4 never has been and there never can be -- I can 5 demonstrate -- any question as to the authenticity 6 of this document. 7 THE COURT: Mr. Guido. 8 MR. GUIDO: Your Honor, I'm not 9 objecting to the authenticity of the documents. 10 What I'm arguing is that the 5th Circuit has held 11 that the Federal Home Loan Bank Board committed no 12 reversible error in denying MAXXAM's position for 13 review. It essentially concluded that the Federal 14 Home Loan Bank Board had concluded properly that 15 the Ranieri bid was superior to the MAXXAM bid. I 16 believe also that the Michael Salomon memorandum 17 will indicate that the Ranieri bid was superior to 18 the MAXXAM bid when the Court reads the entire 19 document. All I was trying to do is avoid us 20 going down this tangent. 21 Mr. Villa is now talking about a whole 22 other group of people relevant to this proceeding. 21447 1 The memorandum speaks for itself, the Michael 2 Salomon memorandum, about the quality of the 3 management and what the Federal Home Loan Bank 4 Board's view was of the quality of the management. 5 The 5th Circuit upheld the Federal Home 6 Loan Bank Board's decision with regard to whether 7 or not it wanted the risk of turning over a thrift 8 with a subsidiary from the federal government to 9 someone that, by his own admission, had already 10 lost $350 million for the taxpayers because that's 11 what Mr. Berner admitted, that the thrift was 12 underwater. So that I don't believe that the 13 document shows that the MAXXAM bid was 14 $100 million superior. 15 I think the issue was litigated in the 16 5th Circuit; and I believe, for that reason, that 17 that issue is estopped from being raised in this 18 proceeding. That's why I offered these documents, 19 to demonstrate to the Court that this issue that 20 Mr. Villa is trying to raise now has already been 21 litigated previously. He may have raised issues 22 about other litigation, and Your Honor may have 21448 1 determined that there was no collateral estoppel 2 here. 3 I would ask the Court to read these 4 papers and decide for yourself whether or not it 5 has been collaterally estopped. In either case, I 6 would like to offer T9010, T9011, T9012, T9013 for 7 the record as well, Your Honor. But I do move to 8 strike the document. I'm sorry I didn't raise it 9 at the time. 10 I'm not trying to litigate something 11 that had gone on weeks and months ago. I've 12 raised it at the first opportunity that I had to 13 raise the issue before the Court after being able 14 to locate the documents. I truly never believed 15 that the issue was going to come up in the light 16 of the 5th Circuit's decision, Your Honor. Since 17 it has, I am moving to strike the document; and I 18 have offered these four exhibits as a basis for 19 doing so, Your Honor. 20 THE COURT: What's your response to 21 Mr. Villa's claim that you opened the door by 22 suggesting that the UFG people were working for 21449 1 one side or the other and that this was -- 2 MR. GUIDO: Your Honor, I don't think 3 that whether or not, given the 5th Circuit's 4 opinion -- that you can't just take a look at the 5 $100 million in context. You have to look at it 6 in terms of what was going to happen. It may have 7 looked like, on paper, that there was a 8 100-million-dollar benefit to USAT. But the 9 people who did the dollars and cents analysis, 10 just crunching the numbers, they didn't know what 11 Mr. Berner testified about, that Mr. Hurwitz had 12 withdrawn putting up the money to make his bid and 13 that people were not so willing to accept his view 14 that his bid had real money behind it. 15 There's nothing in this document to 16 suggest that Michael Salomon or any of the people 17 that he was summarizing the results from knew any 18 of those facts, Your Honor. All of the facts that 19 pertain to the awarding of the thrift to the 20 Ranieri group have all been included in that 21 proceeding. I'll be perfectly happy to provide 22 the Court with that entire record. I have to tell 21450 1 you, it is very, very extensive, Your Honor. And 2 this issue has been reviewed; and, as a 3 consequence, the Federal Home Loan Bank Board 4 determined that the bid was not superior. And so, 5 therefore -- and the Court upheld it. Therefore, 6 there can't be any credible evidence that responds 7 to the OTS putting an issue of whether or not 8 they -- UFG management was essentially working to 9 promote the MAXXAM bid as opposed to the Ranieri 10 bid because it's already been litigated. All of 11 the arguments have been made. 12 The Court has already determined that 13 the Federal Home Loan Bank Board properly 14 determined that the Ranieri bid was superior to 15 the MAXXAM bid, Your Honor. If we're going down 16 that road, we're going to litigate an issue that 17 came up in another case; and I do not believe that 18 this documents contradicts what Mr. Villa has 19 charged the testimony that was elicited from 20 Mr. Berner in response to my questions that the -- 21 that the USAT and UFG management were working with 22 the MAXXAM group to promote MAXXAM's interest in 21451 1 becoming participants in the Southwest Plan. I 2 don't think the document has anything to do with 3 that. Two, I think that the issue has been 4 resolved factually by the 5th Circuit adverse to 5 those parties and, therefore, there's collateral 6 estoppel. That is why I say it's neither material 7 nor relevant to this proceeding. 8 MR. VILLA: I'm not trying to litigate 9 the 5th Circuit case. That's not the issue here. 10 The issue is what motivated the management of UFG. 11 Was the management of UFG motivated by trying to 12 line their own pockets as Mr. Guido assiduously 13 attempted to demonstrate with Mr. Berner, or were 14 they motivated to get the best bid with the 15 government for $100 million as I proved? He 16 doesn't like the way that that balance ended up 17 being tipped. I am not trying to litigate the 5th 18 Circuit case, Your Honor. 19 MR. EISENHART: Your Honor, I was 20 involved in the 5th Circuit case on behalf of 21 MAXXAM. I'm not going to try to go through what 22 Mr. Guido just said and point out all of the 21452 1 inaccuracies in his accounting. There are enough 2 of them in there to keep us here forever. 3 Was it possible for the 5th Circuit at 4 this date to undo an action that had been taken in 5 1988? MAXXAM contended that it had not been 6 properly informed of the results of the bidding in 7 1988; that, in fact, it had been mislead by the 8 Bank Board as to whether its bid was superior to 9 that of the Ranieri group. It had been told that 10 there was a better bid. 11 We learned many years later that, in 12 fact, it was not a better bid. The only issue 13 that the 5th Circuit decided was whether anything 14 could be done about that at this point. It never 15 reached the issue of whether anything should be 16 done. It never adjudicated the merits of any of 17 the claims that were present as Your Honor will 18 see from the decision of the 5th Circuit. The 19 only thing it decided was that at this late date, 20 nothing could be done about it. 21 THE COURT: Well, I am concerned that 22 we're opening up a lot of issues here that don't 21453 1 belong in this case. I think, though, we have 2 2668 in evidence; and I'm not inclined to strike 3 it at this point. 4 I'll receive the documents that 5 Mr. Guido has offered, but I do not want to 6 litigate who had the best offer and that sort of 7 thing here. That just doesn't seem to me like 8 it's raised by the notice. There are a lot of 9 information here that I might be curious about, 10 but I don't believe it belongs in this case. I'll 11 receive all of these documents. 12 MR. GUIDO: Thank you, Your Honor. I 13 would like to just ask you to read -- in response 14 to what Mr. Eisenhart said about what the 15 5th Circuit did -- to read the last paragraph 16 carefully because I think the Court addresses both 17 the timeliness and the substance of the petition 18 in that case, Your Honor. 19 We would like to now address the issue 20 of scheduling. Respondents counsel have raised 21 with me a number of times what's going to happen 22 with the schedule after October 12th. They said 21454 1 they would like to raise with you their views 2 about where we are and where we're heading. 3 So, at this point in time, I would like 4 to defer to counsel. I've had discussions with 5 them about it; but I would like for them to be 6 able to express to you their concerns about 7 scheduling as we go forward, Your Honor. 8 THE COURT: Well, maybe we should start 9 out by where the OTS stands or is going to stand 10 in October. 11 MR. GUIDO: Well, Your Honor, we have 12 three -- in our discussions with the respondents, 13 we have three major witnesses that are left. One 14 is Mr. Hurwitz. The second is Mr. Munitz, two of 15 the respondents. The third, the respondents have 16 indicated that they have a great deal of 17 cross-examination for Mr. Twomey, who was the 18 supervisory agent. Those are the major witnesses 19 that are left. 20 I have about a half a dozen of what I 21 and Mr. Nickens have characterized as cameo 22 witnesses, Your Honor; and I don't even know at 21455 1 this point in time whether or not they will be 2 called. I was going to use the break to ascertain 3 whether or not there was even any need for them. 4 One of the problems with some of those cameo 5 witnesses is the respondents have indicated to me 6 that they have a great deal of cross-examination 7 for those witnesses. For example, Mr. Stodart, 8 the last manager of the high-yield bond portfolio. 9 I don't want to prolong this proceeding 10 any longer, and one of the things that I was 11 hoping to do with the respondents is to figure out 12 whether or not they were going to call some of 13 these people so that I could do my little piece 14 with them on cross-examination. 15 We essentially, Your Honor, have three 16 witnesses which the respondents have indicated, 17 given their expanded definition of 18 cross-examination, are going to take quite a 19 while. And I had originally scheduled for all of 20 these people to be finished by the middle of 21 September. 22 Given what I have been told in the last 21456 1 few days by respondents' counsel, I'm not so sure 2 that can be done given the expanded concept. 3 THE COURT: You don't have any expert 4 witnesses you're going to call? 5 MR. GUIDO: I don't have any expert 6 witnesses left to call. I have one witness, Grave 7 Crystal, who was a very small -- oh, excuse me -- 8 and Kevin O'Connell who was being called next 9 week. I was addressing the issues coming up after 10 the break. There are two experts, Kevin O'Connell 11 on real estate and Grave Crystal on the 12 compensation issue. Our direct, we expect to be 13 very brief with them. Respondents have indicated 14 that they have -- at least with regard to Kevin 15 O'Connell, they may have extensive 16 cross-examination. 17 THE COURT: Mr. Rinaldi, I believe, 18 earlier stated he was going to call Mr. Ranieri. 19 You're not going to call him? 20 MR. GUIDO: I had mentioned that. At 21 this point in time, we don't anticipate calling 22 Mr. Ranieri. I have to -- I mean, there are a 21457 1 couple of things I have to do. One of them was to 2 finish with this witness to see what there is 3 that's being contended by the respondents with 4 regard to the mortgage-backed security portfolio. 5 In light of the testimony of Dominic Bruno and in 6 light of the testimony of Mr. Berner and in light 7 of the exhibits that are in, we don't anticipate 8 calling Mr. Ranieri at this point in time. 9 THE COURT: You're not going to call 10 Mr. Connell either; is that right? 11 MR. GUIDO: Mr. Connell I've -- I put 12 in the category of a cameo witness. There isn't a 13 lot that I have for him. If we do call 14 Mr. Ranieri, it's only for a small amount. The 15 respondents have indicated that they may have a 16 great deal of questions for him and we may forego 17 and let them call Mr. Ranieri and we'll ask our 18 questions on cross-examination. 19 With regard to the issues that we would 20 call him about, we believe that Dominic Bruno has 21 testified about those issues and that Mr. Berner 22 in his testimony provided us with a sufficient 21458 1 basis to rely on Dominic Bruno's testimony and the 2 exhibits that were introduced for that testimony. 3 So, at this point in time, we do not 4 anticipate calling Mr. Ranieri, Your Honor. We do 5 anticipate three major witnesses being called and 6 then half a dozen of what I call cameo witnesses 7 that we would be calling. 8 THE COURT: So, you expect to conclude 9 your case before we conclude in October? 10 MR. GUIDO: We definitely hope so, 11 Your Honor. I had scheduled to finish it well 12 before that, and I do think that we will be able 13 to conclude the case before -- I think the last 14 date that you had on your calendar was 15 October 12th, the last break that indicated when 16 we were ending. But we were planning on finishing 17 before then, even with this expanded concept of 18 cross-examination that's occurred in this 19 proceeding. 20 THE COURT: Well, we're doing that to 21 save time. 22 MR. GUIDO: Well, I understand. I hope 21459 1 we are. I don't know whether the Court will view 2 that after it hears what the respondents have to 3 say about their side of the case. 4 MR. NICKENS: Your Honor, I have for 5 several weeks now been raising with Mr. Guido the 6 question of scheduling. You may recall a few 7 weeks ago a question about a calendar came up. My 8 concern was that it was clear that based upon the 9 scheduling that we had done, that we had -- we had 10 believed that the date where you expected us to be 11 finished was October 16th and that it was becoming 12 increasingly clear that it was unlikely that the 13 OTS was going to finish their case by 14 October 16th. And not to quote Yogi Bear more 15 than necessary, it was deja vu all over again with 16 the proceeding that we had last year. As we 17 approached the deadline, the case got longer and 18 longer; and there was not time for our case. 19 Mr. Guido has indicated to me at various points he 20 thought it would go faster. 21 The truth is we have a witness -- we 22 have Mr. Gross and Mr. O'Connell which will take 21460 1 us to the break. After the break, we have 17 2 trial days -- that's assuming through the 16th 3 which has been our assumption. And so, there's 17 4 trial days. 5 Mr. Twomey, I have told Mr. Guido for 6 weeks that it would take at least five days and 7 that it was our belief that Mr. Munitz and 8 Mr. Hurwitz would probably, as has been 9 demonstrated with each of the respondents, 10 probably consume a week each. That's 15 days. 11 That's not even counting the so-called cameo 12 witnesses who are, in fact, significant witnesses 13 potentially who have been on their list; and they 14 have never indicated whether they have decided to 15 call them or not. They have passed them in 16 various places but never made any commitment. 17 So, it has become clear to us that it 18 is at a point where it seems like by the 16th of 19 October or thereabouts, the OTS should be finished 20 with their case and not leaving us any time for 21 the presentation of our case. And so, I have 22 asked -- you know, we need to raise this with you 21461 1 because we didn't know what your contingencies 2 were and what your schedule was, although we 3 believed that it was the 16th. 4 We're at a point where people have 5 other commitments that occur after that time, and 6 there is some time that is going to need to be set 7 aside for the presentation of our case. We have 8 nine expert witnesses, maybe half a dozen 9 potential fact witnesses, and a few other 10 witnesses that will consume several weeks of trial 11 time for our presentation, which had all been 12 planned on this schedule. 13 Now, when we adjourned -- and Mr. Villa 14 could address the details of this. But when we 15 adjourned in December, it was on the 16 representation that the OTS case could be 17 concluded in three weeks. We're well past that 18 deadline, and we're looking at the next three 19 weeks before they can be finished. And we need 20 some guidance from the Court as to where we're 21 going to go after the 16th because, to me, it's 22 absolutely clear at this point that we're not 21462 1 going to be finished. I'm hopeful that we could 2 at least be finished and close the OTS case 3 before -- before recessing and the necessity of 4 scheduling the final portions of the case. 5 That's our concern. I mean, that's the 6 issue. I don't think there's any significant 7 doubt that it will be October 14th, 15th, or 16th 8 before the OTS is prepared to rest their portion 9 of the case. 10 MR. VILLA: Your Honor, I also ask that 11 it be taken up because I do have an active trial 12 schedule next year that has been built around this 13 case, including -- I think I sent you a letter 14 that reflected the views of the federal judge in 15 El Paso who wanted me to express his thankfulness 16 for moving the date for one of my other trials. 17 We're very concerned about trying to set up enough 18 time so that they are done and we can schedule our 19 time. 20 Our concerns, if they don't close by 21 October 16th, is -- I went back and looked at 22 their transcript. And on December 2nd of last 21463 1 year, Transcript Page 8567, they said they had 2 three weeks left. On December 16th, Transcript 3 Page 1000975, they said they had three weeks left. 4 That's 13,000 pages of transcript since then. 5 To the extent that there's any 6 suggestion that we're taking an unduly amount of 7 time, I've put on three of the respondents myself. 8 It's taken three days and 45 minutes out of the 9 months we've been here. I don't think there's a 10 reason to point fingers. But at some point, the 11 OTS case has to come to a conclusion; and it seems 12 the October 16 day is the appropriate day, if we 13 can know it will come to a conclusion during this 14 three weeks of remaining trial. 15 We've been pretty good on the defense 16 side in identifying exactly how long our witnesses 17 and examinations are going to go. I'm very 18 concerned because of my own trial schedule, and I 19 am particularly anxious to know that the OTS case 20 will be done on the 16th so that the next block of 21 time, whenever it is scheduled, is our case and 22 the case is over. 21464 1 THE COURT: Mr. Guido, are you prepared 2 to commit to finishing your case by mid-October? 3 MR. GUIDO: Your Honor, we will commit 4 to mid-October if that's the Court's wishes. 5 THE COURT: That's my wish. 6 MR. GUIDO: I would hope that we could 7 do so. As I told the Court, I had scheduled 8 the -- that that -- that we would get finished 9 before that. But what my co-counsel and I are 10 concerned about is that we make any commitments 11 about a firm deadline, that we can see a lot of 12 time eaten up with cross-examination. 13 Mr. Villa may say he's being very 14 efficient but I think that he indicated something 15 previously and I think he indicated to me recently 16 that cross-examination takes, what, 60 percent of 17 direct? 18 MR. VILLA: No. The exact percentage 19 is you've taken 69.7 percent and we've taken 30.3 20 percent of the trial. 21 MR. NICKENS: We have kept careful 22 records both by page and by amount of time, 21465 1 Your Honor, since this became evident to us that 2 it could be a problem in the midst of the early 3 proceedings. And these numbers 70/30 have been 4 sort of eerily consistent in terms of the usage of 5 time. We are not pointing fingers. We want to 6 get the matter resolved so that we can reasonably 7 plan other commitments that we have in our 8 practices and to get this matter for the Court 9 concluded. 10 THE COURT: All right. I'm prepared to 11 assure the respondents that we will finish the OTS 12 case by conclusion of this session in mid-October. 13 I just think the OTS is going to have to, one way 14 or another, bring it to a close. I hear your 15 suggestion that your time may be taken up by 16 cross-examination, but I don't expect that to be a 17 problem. 18 MR. GUIDO: Your Honor, we will do 19 everything in our power to comply with the Court's 20 wishes. If it turns -- one of the ways that we 21 can deal with this -- and I'll discuss this with 22 co-counsel -- is for us passing with the two 21466 1 remaining respondents; and as long as they agree 2 that they are going to put them on the stand to 3 testify about the substance of the matter, then we 4 will cross-examine them about it. That might 5 speed things up. 6 One of the things that I have noticed 7 in observing this proceeding -- and partially, 8 it's because the OTS choose to prove its case 9 through the words and documents of the respondents 10 and not put a summary witness on to testify about 11 what the paper record shows is we tend to hear the 12 same thing from the same witness. First the OTS 13 puts the witness on, and it was about day one in 14 terms of their encounter. And then the 15 respondents feel obligated to do so because they 16 feel it's important for them to ask the questions 17 that way. That has turned out to be what I 18 believe is a rather duplicative process. It has 19 resulted in what I think is an extension beyond 20 what I contemplated, Your Honor. What I will do 21 is sit down with opposing counsel, try and come up 22 with a schedule that will finish this 21467 1 expeditiously as possible. 2 It's the OTS' interest in making sure 3 that we just, you know, plunge ahead, Your Honor, 4 and we get this over with both in terms of the 5 OTS' case and the respondents' case. 6 So, if we can do that in that fashion, 7 that would be our preference. What concerns me 8 and has concerned me in my discussions with 9 respondents is are they talking about another big 10 break? Because I don't think that's in anybody's 11 interest at this point in time for there to be 12 another big break. I would like to see us -- that 13 we proceed with this matter and get the whole case 14 submitted to Your Honor so that we can then 15 start -- and I think we need to talk very soon 16 about scheduling the briefings, the submissions of 17 proposed findings of fact, Your Honor, so that we 18 can move this along quicker than it has without 19 pointing any fingers at anybody in terms of how 20 the proceeding has progressed so far. 21 But I will sit down with opposing 22 counsel. I will do everything in my power and 21468 1 within my co-counsel's power to expedite the 2 matter so that we have at least our part of it 3 done before the 16th with the understanding that 4 the respondents are talking about basically six 5 weeks for their case is what I think they have 6 mentioned to me before. 7 But I do think that if we're going to 8 now set some deadlines, I think we need to set 9 deadlines for all parties involved in this case so 10 that we can get this matter over with, Your Honor. 11 MR. KEETON: Your Honor, everybody can 12 be polite. But I'll point fingers, and the finger 13 points over there. Twice they have used up the 14 full time when, the first time around, they were 15 only going to use half the time. As far as them 16 saying we need another block of time but quickly, 17 a lot of us made plans that this would be over. 18 We have other plans and other commitments. 19 Your Honor probably has other commitments. For 20 the OTS to now say we're going to impose a 21 deadline on us is crazy. 22 MR. NICKENS: Your Honor, we're not in 21469 1 a position to go substantially past the 16th. We 2 could go some past, but I for one have a trial 3 setting in December. Mr. Villa has a trial 4 setting the first part of January. And it will be 5 necessary from our point of view, unless we 6 reorganize things very substantially, to take some 7 sort of recess at the conclusion of the OTS' 8 schedule and reschedule the time necessary to put 9 in our case. 10 THE COURT: When are you proposing? 11 MR. NICKENS: Your Honor, I would 12 suggest, based upon the schedule that I'm aware of 13 of the counsel here -- I don't know about your 14 schedule -- that it would be February to allow 15 Mr. Villa to finish his case in January, which is 16 the case that was deferred in the -- the original 17 one. It's now that that case is set in the first 18 part of January. 19 Our case, contrary to the indication 20 from Mr. Guido -- I have indicated to him that it 21 is our belief that our case plus an equal amount 22 of time for them will take approximately nine 21470 1 weeks. That's four weeks for us -- four and a 2 half weeks for us, four and a half weeks for them 3 in the cross-examination of those witnesses who 4 are primarily expert witnesses where our 5 experience is that the cross-examination is often 6 longer than the direct. 7 MR. VILLA: Your Honor, if -- if the 8 OTS has us call Dr. Munitz and Mr. Hurwitz, it 9 does tend to shift that number over more onto our 10 side. I think -- I heard coming out of 11 Mr. Guido's mouth a suggestion that if we're going 12 to start imposing limits, it ought to be on 13 everybody. They have had six months. Are they 14 going to try to put a six-week limit on us? I 15 say, Your Honor -- you know, I've got a firm trial 16 setting on May 4 for a multi -- probably a 17 several-month trial where Mary Clark is my 18 co-counsel. I have a firm trial setting on 19 January 4 that the judge in El Paso set around 20 this case specifically to accommodate this case. 21 I can see if we started in February, 22 the last part of it, I'm not going to be able to 21471 1 be here. It seems to me the only window that we 2 have -- and Ms. Clark is going to have to be with 3 me. I don't know what's going to happen at that 4 point. 5 I'm suggesting that the only rational 6 thing I see at this point in time is to start 7 again sometime probably in the second week in 8 February to give me time to move back from El Paso 9 to Houston. I think the estimated time we gave 10 did not include having Dr. Munitz and Mr. Hurwitz 11 in our case. That would extend it from anywhere 12 from five to ten days, five to ten trial days. 13 THE COURT: I suggest the parties 14 discuss this among themselves. I think some 15 recess after the conclusion of the October session 16 is appropriate, and I'll be receptive and arrange 17 my schedule to accommodate this case if that's 18 possible. So, I believe the parties should come 19 to some agreement on this. 20 Mr. Guido. 21 MR. GUIDO: Your Honor, if we're 22 talking about October 15th until February, we're 21472 1 talking about an enormous block of time where this 2 proceeding then goes into recess similar to what 3 happened previously. 4 I don't think that that is an 5 appropriate block of time. And you indicated that 6 your schedule is flexible. If there are any dates 7 between October 15th and February 1st that are not 8 convenient, we would appreciate knowing that; but 9 the OTS is obviously going to address this issue 10 of a long delay. I have to consult with the 11 director of Enforcement. 12 THE COURT: I don't have anything set. 13 I do have cases that I would like to fit in during 14 that period. If the parties are prepared to go, 15 say, in November, December, I'll be here. 16 Are the parties scheduled -- does the 17 parties' schedule prevent us going, say, after a 18 short break in October to continue to the 19 conclusion of this matter? 20 MR. NICKENS: I doubt that we could get 21 to the conclusion, Your Honor. What I think might 22 be available would be a few weeks in November. 21473 1 That is, prior to Thanksgiving. But we will look 2 at the schedule in light of what you've told us 3 and do our best, and we will then inform the Court 4 with what our conclusions are. 5 THE COURT: All right. 6 MR. KEETON: But, Your Honor, this is 7 on both sides, the mobilizing of all the people 8 who are here and who are not here. You don't just 9 have a week or two. You start getting into 10 Thanksgiving, and you start getting into the 11 holiday scene in December. And we all have other 12 things we've been putting off because of this 13 case. 14 I think we ought to get a block that is 15 a real block. Mr. Guido complains, but it's he 16 and his side that's used up the time. It's only a 17 three-month plus delay. Last time, it was six 18 months. So, we're cutting it back if we go in 19 early February, which is pretty tough on people 20 coming out of trials and things. I'm only saying 21 for Mr. Guido to say can't we get a little time in 22 November here and there, it doesn't work that way. 21474 1 THE COURT: That's not very good -- if 2 we're only going to have a couple of weeks or 3 something, that is not a very good arrangement. 4 We have to get all of our documents assembled. 5 MR. NICKENS: I certainly agree. It's 6 going to turn out that the rational result would 7 be to finish the OTS case, take the minimum amount 8 of recess necessary, and then get it finished, set 9 aside enough time, which I believe will be eight 10 to nine weeks to get it finished. 11 THE COURT: Let's consider that part. 12 The parties will confer before this session is 13 concluded, and we'll try to firm up the schedule. 14 MR. NICKENS: Thank you, Your Honor. 15 MR. GUIDO: Thank you, Your Honor. 16 THE COURT: We'll adjourn until 9:00 17 tomorrow. 18 19 (Whereupon at 4:54 p.m. 20 the proceedings were recessed.) 21 . 22 . 21475 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 27th 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 . 21476 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 27th 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