21477 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 21478 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 21479 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 21480 1 2 INDEX OF PROCEEDINGS 3 Page 4 JENARD GROSS 5 Continued Examination by Mr. Guido......21482 Examination by Mr. Blankenstein.........21555 6 Examination by Mr. Nickens..............21669 Examination by Mr. Villa................21676 7 Further Examination by Mr. Rinaldi......21680 Examination by Mr. Schwartz.............21694 8 Further Examination by Mr. Guido........21727 Further Examination by Mr. Nickens......21743 9 Further Examination by Mr. Guido........21746 10 11 12 13 14 15 16 17 18 19 20 21 22 21481 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 Unless there are preliminary matters, 6 Mr. Guido, you may continue. 7 MR. GUIDO: Thank you, Your Honor. 8 Mr. Schwartz just gave me the exhibit 9 T8035, which I think he gave the corrected copies. 10 These were the checks and the W-2s that I 11 discussed with the witness yesterday. 12 THE COURT: All right. Would you go 13 through that exhibit and tell us what page, Bates 14 numbers, you have? Or are they all here 15 consecutively now? 16 MR. GUIDO: I think that there's still 17 the gaps that Mr. Nickens initially discussed with 18 you, Your Honor. The first page is CN03 -- it's 19 CN038953 is the first page. The second page jumps 20 to 956. And then it goes 956, 957, 8, 9. And 21 then it goes 960, 61, 62, 63, 64, 65, 66, 67, 68, 22 69. And then it jumps to 974, 975, 976, 977, 978, 21482 1 979, 980, 981, 982, 983, 984, and it ends with 2 985, Your Honor. 3 THE COURT: All right. Thank you. 4 MR. GUIDO: I'm sorry about the 5 confusion, Your Honor. 6 7 CONTINUED EXAMINATION 8 9 Q. (BY MR. GUIDO) Good morning, 10 Mr. Gross. 11 A. Good morning. 12 Q. You were the -- in addition to being a 13 chairman of United Savings Association, you were 14 the chairman of the ethics committee, were you 15 not? 16 A. I believe so. 17 Q. I want to ask you some questions about 18 your understanding of the responsibilities of 19 officers and directors of USAT before I ask you 20 some substantive questions. 21 Was one of the responsibilities of an 22 officer or director to avoid actual or apparent 21483 1 conflicts of interest? 2 A. I believe so. 3 Q. And was one of the obligations of an 4 officer or director the obligation to not usurp 5 corporate opportunities? 6 A. I don't know if that's in there or not; 7 but if it is, it would certainly come within 8 that -- 9 Q. Wasn't that a basic principle of 10 corporate law? 11 A. Yeah. I would think so, yes. 12 Q. And was one of the obligations of an 13 officer or director not to participate in directly 14 or indirectly purchasing debt of an affiliated 15 entity? 16 A. I'm not sure that that -- I don't 17 follow that. I'm not sure where -- are you saying 18 would it be a conflict of interest if you bought 19 debt of an affiliated entity? 20 Q. Yeah. If the association -- 21 A. Are you saying if the head of General 22 Motors bought some of the debt of GMAC, would that 21484 1 be a conflict of interest? 2 Q. Let's say the chairman of General 3 Motors -- 4 A. Okay. Bought -- 5 Q. -- directed General Motors to buy debt 6 of GMAC. 7 A. I guess I'd -- companies buy into 8 things all the time. I'm not sure I -- I think 9 that would probably involve the circumstances. I 10 wouldn't see it as a conflict of interest. 11 Q. How long were you the CEO of USAT? 12 A. A little less than -- well, let's see. 13 Three years -- about three years and four months. 14 Three years and -- something like that. 15 Q. Did it ever come to your attention that 16 there were regulations that determined how 17 affiliated party transactions should be handled? 18 A. I don't recall. 19 Q. Have you ever heard the concept of an 20 affiliated party in the context of a savings and 21 loan? 22 A. I've heard the term of -- concept of 21485 1 affiliated company, but I don't really -- I can't 2 think of anything that -- 3 Q. Well, did any issues ever come up about 4 making loans to any of the officers and directors 5 at USAT when you were there? 6 A. We had a policy. I think probably some 7 of the officers had home loans and things of that 8 sort, but I can't -- I can't recall anything else 9 offhand. 10 Q. Did any officers or directors have any 11 loans in addition to residential mortgage loans? 12 A. I don't recall any. 13 Q. Do you recall -- so, you don't recall 14 the question of affiliated party transactions 15 coming up at all when you were at USAT? 16 A. That doesn't ring a bell. 17 Q. It doesn't? 18 Have you ever heard the concept of 19 affiliated party transactions raising regulatory 20 problems before I just asked you that question? 21 A. No, sir, not that I recall. 22 Q. Now, with regard to the question of 21486 1 usurping corporate opportunities, was a question 2 raised during your tenure at USAT regarding your 3 and Mr. Hurwitz' purchase of stock in a company 4 called National Pipe Company? 5 A. I believe there was an issue raised. 6 Q. Can you tell the Court what you did 7 that raised that question? 8 A. Yes. United, I believe, bought some 9 stock in a company called National Pipe and 10 Tubing. And then after it had bought all that it 11 desired to buy, I also bought some stock in that 12 company. But I disclosed it, and it was approved 13 by the board. So, I realize it was raised later 14 and then we furnished the information to the 15 regulators. So, you know, I just -- 16 Q. During your tenure at USAT, did you 17 purchase stock in -- did you make purchases of 18 stock, excuse me, of companies that USAT had also 19 purchased stock in? 20 A. Yes, I did. 21 Q. Okay. Companies other than National 22 Pipe? 21487 1 A. I believe there was a second one. 2 Q. And what was the second one? 3 A. It was called, I believe, Gain 4 Electronics, Gain -- I believe it was Gain 5 Electronics. 6 Q. When was that? 7 A. I don't remember. 8 Q. When did you purchase it in 9 relationship to USAT's purchase? 10 A. After they did. 11 Q. Now, how did you learn about the value 12 of both of those investments: National Pipe and 13 the second one? 14 A. I don't remember about the National 15 Pipe, but Gain was a company, I believe, that 16 Dr. Kozmetsky was on the board of. 17 Q. Is that how you learned of it? 18 A. Yes. 19 Q. So, he had told you at a board meeting? 20 A. I don't remember, you know. 21 Q. Did you know that USAT had purchased 22 stock in the company? 21488 1 A. Yes, I did. 2 Q. Had you discussed the purchase of that 3 stock with anyone from the investment department 4 at USAT prior to making the purchase? 5 A. At this point, I don't recall. But I 6 know all of this was disclosed to the board, and 7 the board was aware of it and approved it all. 8 Q. My question was: Did you discuss it 9 with any of the members of the investment 10 department prior to making the purchase? 11 A. As I say, I don't recall. 12 Q. What about with National Pipe? Did you 13 discuss that investment prior to making it with 14 any members of the investment department? 15 A. I don't recall that either. 16 Q. And did you testify that you disclosed 17 the purchase of the second stock that you talked 18 about? 19 A. I believe that's correct. 20 Q. Do you recall when that was? 21 A. I would not have remembered it, but I 22 think I've seen some papers either here in the 21489 1 last few days in some of these minutes or 2 somewhere in the last week or so. And it seems to 3 me that may have occurred in 1987, but I'm not -- 4 I'm not certain. 5 Q. Now, was one of the responsibilities of 6 an officer or director of USAT to ascertain as 7 best as it could what the facts were underlying 8 any transaction before it was entered into? 9 A. I'm sorry. Would you repeat the 10 question? 11 Q. Was your understanding of one of the 12 responsibilities of an officer of a savings and 13 loan to ascertain the accuracy of facts upon which 14 he's relying in order to make decisions? 15 A. Well, you know, I think that you have 16 to assume that somebody providing you information 17 is providing you accurate information. I don't 18 think you can take everything that's provided to 19 you and go back and do the underlying work to see 20 if it's right or wrong because you'd never be able 21 to function. 22 Q. Were you -- was one of the 21490 1 responsibilities or your understanding of the 2 responsibilities of an officer or director is if 3 you ascertained that you did not have the facts to 4 properly exercise your discretion, that you should 5 take corrective action? 6 A. If I did not have the facts -- I'm 7 sorry. Could you read the question back? 8 Q. If, as a director, you determined that 9 you were not getting the facts accurately, was it 10 the obligation of an officer to take corrective 11 action? 12 A. You're saying if you as a director 13 doing something or you as an officer -- I'm not 14 sure what -- 15 Q. I'm specifically talking about officer, 16 not director. 17 A. I'm sorry. You said director. 18 Q. Excuse me. 19 A. Okay. So, if you as an officer -- 20 Q. Ascertain -- 21 A. -- ascertain that you're not getting 22 the facts -- 21491 1 Q. Are you obligated to take corrective 2 action? 3 A. I think you should certainly get -- 4 find out what the facts are, yes. 5 Q. Now, when you learned of the 6 rolldown -- do you recall the rolldown? 7 A. Yes, I do. 8 Q. You -- I think you testified that you 9 were surprised by the acceleration of prepayments? 10 A. That's -- no. I was -- I didn't say I 11 was surprised at the acceleration of prepayments. 12 I was surprised at the speed with which the 13 interest rates moved down. 14 Q. Oh. 15 A. You didn't get the acceleration of 16 prepayments because you -- the transactions -- 17 that's why you made the transaction, because you 18 didn't want that to occur. 19 Q. So, it wasn't -- you weren't surprised 20 that prepayments had accelerated given what 21 interest rates had done? 22 A. Prepayments didn't accelerate. All 21492 1 that is statistical, theoretical information. 2 It's what was going to happen. It's not that it 3 did happen. In other words -- 4 Q. I'm just trying to ascertain what you 5 testified that you were surprised about something. 6 A. I told you I was surprised at the speed 7 with which interest rates dropped. 8 Q. Okay. 9 A. And that would have caused -- that's 10 what -- when they dropped that rapidly, they would 11 have affected the rate of payoff. 12 Q. So, it was the rapidity and the degree 13 of the drop of interest rates that surprised you? 14 A. Yes. 15 Q. Now, I'd like to direct your attention 16 back to the discussion that we had yesterday with 17 regard to the collapse of USAT Mortgage Finance. 18 Do you remember that? 19 A. That's the one that was in 1985. 20 Q. That's right. Now, was one of the 21 responsibilities of an officer, your 22 understanding, to rely upon the advice of those 21493 1 who were given the responsibility for particular 2 functions? 3 A. Generally, I would say that's a 4 reasonable statement. 5 Q. Did you attempt to ascertain whether 6 the liabilities of USAT could have been absorbed 7 into -- or USAT Mortgage Finance, the liabilities 8 of USAT Mortgage Finance in December of '85 could 9 be absorbed into USAT? 10 A. I don't recall. 11 Q. And who was it that was responsible, 12 primarily responsible at USAT for ascertaining 13 whether or not USAT was and could be in compliance 14 with its federal regulatory obligations? 15 A. I believe -- if I remember correctly, I 16 believe that was Bruce Williams. 17 Q. Well, what was Jim Pledger's role? 18 A. I'm sorry. Would you repeat the 19 question? 20 Q. Who was it that was responsible for 21 ascertaining whether or not USAT was in compliance 22 with its regulatory obligation? 21494 1 A. Okay. I'm sorry. It would have been 2 Jim Pledger. 3 Q. Did Jim Pledger advise you that USAT 4 Mortgage Finance's assets could be absorbed into 5 USAT with little difficulty and comply with the 6 liability growth regulations? 7 A. I don't recall. 8 Q. Now, I'd like to move to a document 9 that we talked about yesterday; and that is at 10 Tab 1350. It's A1419, and it's the last two pages 11 of that document. 12 A. Is this one I have? 13 Q. Yes. You have it in front of you. 14 A. And what's the number of it? 15 MR. SCHWARTZ: Tab 1350, sir. 16 Q. (BY MR. GUIDO) It's A1419. 17 MR. SCHWARTZ: Mr. Guido, what's the A 18 number? 19 MR. GUIDO: A1419. It's a set of 20 investment minutes -- 21 MR. SCHWARTZ: It's at Tab 350. 22 Tab 350. 21495 1 MR. GUIDO: Oh, I'm sorry. 2 Q. (BY MR. GUIDO) Look at the last two 3 pages of the document. This is that Bruce 4 Williams memorandum that shows a negative spread 5 of .99. 6 A. Yes, I see that. 7 Q. Did you know that the spread had 8 increased by August of nineteen -- or decreased by 9 August of 1987 to minus 2.13 percent? 10 A. I don't -- I don't recall. 11 Q. Were gains taken out of that -- the 12 USAT Mortgage Finance portfolio to generate 13 profits to bolster quarterly earnings after 14 October of 1986? 15 MR. NICKENS: Your Honor, USAT Mortgage 16 Finance was not in existence at the time. 17 MR. GUIDO: I'll rephrase the question, 18 Your Honor. 19 Q. (BY MR. GUIDO) Were sales made out of 20 the mortgage-backed security portfolio at USAT 21 subsequent to October of 1986 and prior to August 22 of 1987 to generate gains to bolster profits? 21496 1 A. And that's out of the United -- 2 Q. -- Savings Association of Texas. 3 A. I believe there were some. 4 Q. Do you know the magnitude? 5 A. I do not. 6 Q. Do you know that the turnover in the 7 portfolio was in the range of 100 percent a month 8 during that time period? 9 A. You mean we turned over $3 billion 10 worth of mortgages per month? 11 Q. No. We're talking about USAT at this 12 time. We're talking about USAT, not United MBS. 13 A. What was the size of the portfolio? 14 Q. The sheet indicates what the size of 15 the portfolio was there. 16 Doesn't it say something like 1 billion 17 200 -- 18 A. You're saying there was a million 19 dollars' worth of turnover a month? 20 Q. Do you know whether it was in the 21 magnitude of 100 percent a month? 22 A. I certainly was not -- I don't -- I 21497 1 have no way of knowing, but I would -- I would be 2 surprised if it were that much. 3 Q. Well, what do you think it was? 4 A. I think that would be a lie. 5 Q. What do you think the turnover was? 6 A. I have no idea. 7 Q. Was it in excess of 50 percent? 8 A. All I know is that whatever the 9 turnover was, it was done within the framework of 10 what our accounting department and what 11 Peat Marwick thought was acceptable. 12 Q. Did Jim Wolfe know that USAT was making 13 sales out of its mortgage-backed security 14 portfolio to generate gains to bolster quarterly 15 profits? 16 MR. NICKENS: Your Honor, he'd have to 17 speculate about what Mr. Wolfe knew. He might ask 18 him if he told or became aware of that, but he 19 couldn't possibly say what Mr. Wolfe knew. 20 THE COURT: All right. Sustained. 21 Q. (BY MR. GUIDO) Did you tell Mr. Wolfe 22 that sales had been made out of the 21498 1 mortgage-backed securities portfolio at USAT to 2 generate gains to bolster profits? 3 A. I do not recall. 4 Q. Now, putting aside the accountants, do 5 you have any idea of what the magnitude of the 6 turn over was in the portfolio at USAT in its 7 mortgage-backed security portfolio between 8 October 1986 and August of 1987? 9 A. I do not. 10 Q. Have you ever attempted to ascertain 11 what that was? 12 A. I don't recall. 13 Q. Do you have a joint defense agreement 14 with the respondents in this case? 15 A. I don't know. I can ask my counsel. 16 Q. You don't know whether you have a joint 17 defense agreement? Have you ever consulted with 18 counsel for any other respondents? 19 A. Have I ever consulted -- 20 Q. Uh-huh. Have you discussed with them 21 the facts of this case? 22 A. Have I discussed with my counsel the 21499 1 facts of this case? 2 Q. No. Facts -- the facts of this case 3 with other respondents' counsel. 4 A. I have met with some of the other 5 counsel in this last week, if that's what you're 6 asking me. 7 Q. Did you discuss the facts of this case 8 with counsel for other respondents? 9 A. We certainly discussed the case. I 10 don't know if we -- when you say "the facts of the 11 case," what are you actually asking? 12 Q. The mortgage-backed security portfolio, 13 for example. 14 A. Yes. 15 Q. What did you discuss with them? 16 MR. BLANKENSTEIN: Objection, Your 17 Honor. 18 MR. NICKENS: Objection. We've had 19 this ruling before. 20 THE COURT: Sustained. 21 MR. GUIDO: I'm sorry. I didn't -- 22 THE COURT: I sustained the objection. 21500 1 You can ask him whether he consulted. But when 2 you get into what they said, I believe you're over 3 the line. 4 MR. GUIDO: Your Honor, I was asking 5 questions about his consultations with counsel for 6 other respondents, not with his own counsel. The 7 only ruling that I've heard is with regard to 8 consultations with one's counsel. I asked the 9 witness whether or not there was a joint defense 10 agreement. If there is, I'd just like to 11 ascertain it and I'll move on. 12 MR. BLANKENSTEIN: There is. 13 MR. VILLA: There is. 14 MR. NICKENS: There is. 15 MR. GUIDO: Thank you, Your Honor. 16 Q. (BY MR. GUIDO) Now, the -- in 1987, 17 when the -- after Sandy Laurenson had been hired, 18 a decision was made to increase the size of the 19 mortgage-backed securities portfolio; isn't that 20 correct? 21 A. That's correct. 22 Q. And a decision was made to add 21501 1 approximately $2 billion to that portfolio by the 2 end of 1987? 3 A. I don't remember, but that sounds 4 generally... 5 Q. Now, given what the results are that 6 are shown in Exhibit A1419, what was it that you 7 thought USAT could do going forward that it hadn't 8 been able to do previously? 9 A. We thought that we had hired one of the 10 top people in the industry from the firm that had 11 the greatest knowledge in this area. And we 12 thought that with her expertise, since this 13 mortgage-backed security area was the area that 14 the regulators strongly encouraged activity in, we 15 thought that by getting the best possible talent 16 that we could do well in it. 17 Q. And why was it that you set up a 18 separate subsidiary to handle those transactions? 19 A. I don't remember. 20 Q. I'd like you to take a look at a series 21 of documents that are at A1426, which is at 22 Tab 357; A1447, which is at Tab 1319; and T4366, 21502 1 which is at Tab 1660. 2 Now, the first document I'd like to 3 direct your attention to is at Tab 357. It's 4 A1426. That's the minutes of the investment 5 committee of United Financial Group and United 6 Savings Association of Texas dated January 1, 7 1987. 8 That was shortly after Ms. Laurenson 9 arrived, was it not? 10 A. I thought she arrived somewhere in -- I 11 thought September of '86. I'm really not sure. 12 Q. So, you think she arrived in September 13 of '86? 14 A. Well, you know, somewhere in that 15 general area; but I'm not sure. 16 Q. Now, I'd like to direct your attention 17 to the first page. See where it says she made a 18 report to the committee? 19 A. This is the second paragraph? 20 Q. Second paragraph on the first page. 21 A. (Witness reviews the document.) I see 22 that. 21503 1 Q. Okay. And you see it says a full 2 discussion was had of the portfolio sensitivity to 3 interest rates? 4 A. Yes. 5 Q. And what would happen if they were 6 increased or they were decreased? 7 A. I see that. 8 Q. Okay. Now I'd like to turn your 9 attention to the Bates stamp 5225, which has 10 what's called a liquidation value at the top of 11 the page. 12 A. I see that. 13 Q. Okay. Do you see the valuations based 14 on -- net liquidation value based on increases and 15 decreases in interest rates of 100 basis points? 16 A. Yes, I do. 17 Q. And it shows that as a negative value 18 in the portfolio of $100 million? 19 A. I see that. 20 Q. No change. And then if rates went up, 21 it would be increased to 147 million? 22 A. Yes, uh-huh. 21504 1 MR. NICKENS: Your Honor, he says the 2 portfolio; but this is the net of the swaps, I 3 believe, is what he's referring to. 4 MR. GUIDO: Well, this includes the 5 swaps. 6 MR. NICKENS: Previously, we've been 7 discussing the portfolio in terms of assets. And 8 the number here is net of the swaps. 9 MR. GUIDO: Your Honor, this includes a 10 calculation of the swaps, if that's what 11 Mr. Nickens is suggesting as a modification. 12 THE COURT: Swap figures are negative 13 and they are subtracted -- 14 MR. GUIDO: After you take into 15 consideration the swaps on that portfolio. 16 Q. (BY MR. GUIDO) Now, it says the 17 yield's a minus 100 million. If interest rates go 18 up 100 points, that loss could go up to 19 147 million. 20 Do you see that? 21 A. I see that. 22 Q. If rates go down 100 points, the loss 21505 1 would be 89 million -- 2 A. Could I ask a question? On this -- 3 when it says the mortgage-backed portfolio, is 4 this her portfolio or the institution's portfolio? 5 Who's portfolio is this? 6 Q. Well, what size was her portfolio? 7 A. Well, I can't see -- I can't -- this 8 just deals in yields; so, I can't tell. 9 Q. Well, what does the arbitrage portfolio 10 refer to in your understanding? 11 A. It could have been Joe's. It could 12 have been hers. I guess I'm trying to say, "What 13 portfolio are we looking at?" That's all I'm 14 trying to get at. 15 Q. What were the DARTs and AMPs? Let me 16 ask you that. 17 A. DARTs were Dutch Auction something. 18 They were -- they were seven-day securities that 19 repriced every seven days against mortgage-backs. 20 I don't know -- I don't remember what AMPs were. 21 Q. Okay. 22 A. But I -- from looking at this -- 21506 1 Q. But these were preferred stock 2 subsidiaries of USAT, weren't they? 3 A. They -- I don't recall. As I say, I'm 4 just trying to remember what DARTs were -- what 5 Dutch Auction was. 6 Do you remember? 7 Q. Dutch Auction Rates, I think is what 8 it -- 9 A. Well, anyway, I can't -- 10 Q. Okay. Why don't you assume for 11 purposes of the questions that this is the entire 12 MBS portfolio at USAT, including United MBS. 13 Okay? For purposes of my questions, you can 14 assume that. All right? 15 Do you have a problem with that 16 assumption, Mr. Gross? 17 A. Well, based on the questions you asked 18 me, I'd like to know what I'm answering. I don't 19 want to assume anything. 20 Q. Well, did you know that the portfolio 21 at USAT on January 21st, 1987, was favorably 22 positioned for an interest rate decline? 21507 1 A. I didn't recall that, no. 2 Q. Does this memorandum indicate that you 3 were informed of that? 4 A. That's what it would indicate. 5 Q. Were you speculating on the direction 6 of interest rates, Mr. Gross? 7 A. Absolutely not. 8 Q. No? 9 A. No, we were not speculating on interest 10 rates. 11 Q. What corrective action did USAT take -- 12 did the investment committee of USAT, under your 13 direction, take to adjust that portfolio to avoid 14 it being, quote, "favorably positioned for an 15 interest rate decline"? 16 A. I don't know. I don't have -- you 17 know, I can't even tell what portfolio I'm looking 18 at; so, I can't even -- first of all, I don't 19 remember. And even if I did remember, I wouldn't 20 know what portfolio I'm looking at. So, you know, 21 I don't know what to tell you. 22 Q. Well, let's go now to Exhibit A1447. 21508 1 That's the minutes of the investment committee of 2 June 11th, 1987. 3 A. I see that. 4 Q. Now, that also has a sensitivity 5 analysis at the back of it. And it also, in 6 Paragraph 2, it mentions -- 7 A. I'm sorry. What page are we on? 8 Q. The first page of the June 11th, 1987 9 minutes. Okay? See, Sandy Laurenson again made a 10 report to the committee. 11 A. Okay. 12 Q. It said the committee reviewed in 13 detail her report and the status of the portfolio. 14 A. Let's see. (Witness reviews the 15 document.) She discussed at length a Salomon 16 Brothers report which reflected a strategy similar 17 to that which the association was utilizing, and 18 she reported on mortgage-backed -- I'm sorry. I 19 don't see what -- I'm not finding what you 20 specifically just said now. 21 Q. It says, "a discussion" -- "The 22 committee reviewed in detail the report and status 21509 1 of the portfolio." 2 Do you see that? 3 A. Yes. 4 Q. Okay. Then it says -- 5 A. I would assume that in the report it's 6 referring back to the Salomon Brothers study. 7 Q. Oh. So, you reviewed in detail the 8 report of Salomon Brothers? 9 A. It says Ms. Laurenson discussed at 10 length a Salomon Brothers report which reflects a 11 strategy similar to that which the association was 12 utilizing. "The committee reviewed in detail the 13 report and the status of the portfolio." 14 Q. Well, what was the Salomon Brothers 15 report? 16 A. I really don't know. I don't remember. 17 Q. Do you know what the strategy was that 18 she was referring to? 19 A. I do not recall. 20 Q. Now, take a look at the last sentence. 21 See where it discusses what the effect would be if 22 interest rates stayed at one level or if they 21510 1 reduced to another level? 2 Do you see that? 3 A. I see that. 4 MR. NICKENS: Your Honor, it's not 5 "or." It says if they stayed at one level and 6 then reduced to 6 percent. 7 Q. (BY MR. GUIDO) And then reducing to 8 6 percent in '88. 9 Do you see that? 10 A. I see that. 11 Q. Now, let me direct your attention to 12 the sensitivity analysis in this report, which is 13 at Tab or Bates stamp 5864. 14 A. 5864? All right. I have that. 15 Q. Do you see where the market value of 16 the interest rates changed of the entire portfolio 17 or remained unchanged increased to a negative 18 $245 million? 19 THE COURT: I don't understand that 20 question. You say if they remained unchanged -- 21 MR. GUIDO: If interest rates remained 22 unchanged, the value of the portfolio was now gone 21511 1 from negative 100 million to a negative 2 $245 million, Mr. Gross. 3 A. I see that. 4 MR. NICKENS: Your Honor, I have this 5 objection. We've gone through this before. But 6 for the record, this is approximately six months 7 later. We know that during this period, 8 substantial additional assets were added to the 9 portfolio. The implication of the question is 10 that we're talking about the same portfolio when, 11 in fact, we know that it was substantially grown 12 during this very period. And so, we see here 13 additional line items with the -- that were not on 14 the earlier one. We have gone through this 15 before, but the implication in the question is 16 we're talking about the same items or the same 17 portfolio when it's actually quite different by 18 this time. 19 Q. (BY MR. GUIDO) Will you please answer 20 my question? 21 A. Would you repeat the question? 22 Q. My question is: Does this show that 21512 1 the losses unchanged are now negative 245 million? 2 A. That's what it shows, and I still can't 3 tell what portfolio it is. 4 Q. Well, did you -- I mean, here you have 5 two reports. January 21st shows losses of 6 $100 million. Right? You testified that you 7 hired an expert to manage the portfolio. And the 8 portfolio losses go from January 21st, when this 9 so-called expert was there, according to your 10 testimony -- and it goes to $245 million. 11 Why did it increase $145 million, 12 Mr. Gross? 13 A. As I say, I don't recall why it 14 increased 145 million. 15 Q. Is $145 million a lot of money? 16 A. It is, indeed. 17 Q. And it's a substantial part of USAT's 18 reported capital, is it not? 19 A. Yes. 20 Q. Have you ever made an attempt to 21 ascertain why that happened? 22 A. You know, as best I recall -- and I 21513 1 think I'm doing this more from having my memory 2 refreshed in the last week than what I really 3 recall. But Sandy's portfolio was designed to 4 have a relatively stable interest rate spread 5 which would have asset movement up and down. And 6 her attitude was "As long as you let my portfolio 7 run to maturity, no matter what the temporary 8 deflection is, you'll end up getting all your 9 money back and it provides the spread." 10 And that's what I recall. 11 Q. Well, why was her portfolio or her 12 management of the portfolio any different than 13 what happened with Joe's portfolio? 14 A. It was designed differently, and I'm 15 just not expert enough and I don't remember enough 16 to tell you what the design difference was. 17 Q. Well, take a look at this document 18 again, the spread -- the sensitivity analysis. 19 A. What page am I on now? 20 Q. It's at 56 -- 5864. 21 A. Okay. 22 Q. Okay? How much of the 245 million is 21514 1 in the Arb 1 and Arb 2 and IOs and POs? 2 A. How much of it? 3 Q. Uh-huh. 4 A. Looks like about $108 million, if I'm 5 adding that up right. 6 Q. And how much of the gain are in caps 7 and asset options? 8 A. About just right at 24, 25 million, I 9 believe. 10 Q. So, if you subtract those two figures, 11 you get about an 80-million-dollar negative 12 figure, do you not? 13 A. That's what it appears. 14 Q. If you take that off, you end up with a 15 165 million negative figure from the negative 16 figure that shows for the entire portfolio, does 17 it not? 18 A. I guess it does. That doesn't mean 19 anything. I don't know what that means. 20 Q. That doesn't mean anything to you? 21 A. No. 22 Q. So, you've never -- you have actually 21515 1 never made an attempt to go back and ascertain 2 what these figures represent? 3 A. Not in the last -- not in all these 4 years, I have not. 5 Q. The minutes don't show any effort to 6 ascertain what the basis of that was, do they? 7 MR. NICKENS: Well, Your Honor -- 8 Q. (BY MR. GUIDO) The minutes that you 9 have in front of you. 10 MR. NICKENS: He hasn't read the 11 minutes. Does he want him to read the minutes, or 12 is he going to tell him that they don't show it? 13 Q. (BY MR. GUIDO) Take a look that deals 14 with the portion of mortgage-backed securities 15 there. 16 THE COURT: What are we looking at now, 17 Mr. Guido? 18 MR. GUIDO: We're looking at Paragraphs 19 2 and 3, Your Honor, the paragraphs that address 20 the mortgage-backed securities in the minutes, 21 Your Honor. 22 MR. NICKENS: Well, Your Honor, how are 21516 1 we defining the minutes? The -- her report is 2 attached, which all it deals with is 3 mortgage-backed securities. That begins at 4 Page 5857 and goes on for 10 or 15 pages. Those 5 are part of the minutes. I gather Mr. Guido is 6 saying if you just look at the first two 7 paragraphs on the first page in the minutes, is 8 there a reference in those two paragraphs? 9 A. I'm sorry. What was your question 10 again? 11 Q. (BY MR. GUIDO) Is there any mention 12 in the minutes of the board of the investment 13 committee of an analysis of what happened for the 14 losses to have increased in the market value of 15 the portfolio at USAT? 16 A. I don't see it in these first two pages 17 of minutes. If you want, I'll try to flip through 18 some of this other behind here. But, you know, 19 that doesn't mean it wasn't discussed. It just 20 means -- something could have been discussed and 21 not be in -- it could have been discussed at prior 22 meetings or later meetings. But in these two 21517 1 pages, I don't see it. 2 Q. All right. Now, let's take a look at 3 another document; and that is T4366. This is a 4 memorandum from you to members of the strategic 5 planning committee dated April 27th, 1987. 6 Do you see that? 7 A. I see that. 8 Q. Now, do you recall writing this 9 memorandum? 10 A. I don't recall writing it; but, you 11 know, it indicates that I did. So -- it says what 12 it says. I don't specifically recall writing it. 13 Q. Have you read this recently? 14 A. I have seen it recently. 15 Q. Now, what is this issue that you're 16 addressing in this memorandum? 17 A. You know, interestingly enough, when I 18 read the first sentence, it says "It seems to me 19 that what keeps evolving at our investment 20 committee meetings is the obvious point that we do 21 not have a unified strategic plan or policy with 22 regard to interest rates." And yet, this is 21518 1 written three months after this January committee 2 meeting in which you raised the issue were we 3 speculating on interest rates. Obviously we 4 weren't speculating on interest rates since we 5 didn't have a unified policy. 6 Q. So, what was it? A crap shoot? 7 A. It wasn't anything. It was -- it was 8 not a crap shoot, and it was not a speculation. 9 It was a business decision. 10 Q. Based on what, Mr. Gross? 11 A. Based on the best thinking of the 12 people that we had on hand. 13 Q. Okay. Now, what was your experience 14 with mortgage-backed securities, Mr. Gross? 15 A. My experience, as I've said from day 16 one, was very limited. And that's the reason I 17 wrote all the memos and asked all the questions, 18 because I tried to learn and understand it. 19 Q. Had you previously described the 20 mortgage-backed security portfolio as a disaster? 21 A. I probably did use that. Might have 22 been a poor choice of words, but I think that's 21519 1 something I was quoted as saying. 2 Q. And had you not previously described 3 how you had gotten killed in the mortgage-backed 4 security area? 5 MR. NICKENS: What do we mean by 6 "previous," Your Honor? Previous to what? 7 Q. (BY MR. GUIDO) January 1987. 8 A. Could I see it? Could I see what I 9 said because I know you're going to quote me and 10 I'm sure you've got it. So, can I see what I 11 said? 12 Q. Well -- 13 A. A lot of times I agree to things and 14 don't know what I said. 15 Q. Well, I don't know whether this was on 16 my notice to counsel, Mr. Gross. But it's at 17 Tab 329, T4333, if you want to take a look at it. 18 It was on my list. 19 A. (Witness reviews the document.) 20 Q. See the last paragraph in that 21 memorandum on the first page? 22 A. On the first page? 21520 1 Q. Uh-huh. 2 A. (Witness reviews the document.) And 3 what is your question? 4 Q. Did you describe that your previous 5 experience in the mortgage-backed security 6 portfolio was that you got killed in the 7 mortgage-backed security area? 8 A. That is in this letter. 9 Q. And didn't you say it's because the 10 swaps were not properly designed in that 11 portfolio? 12 A. I did say that, and they were designed 13 with the information that we had been provided by 14 the best experts in the industry. But they 15 didn't -- they did not take into consideration 16 what occurred and the speed with which it 17 occurred. 18 Q. Doesn't this also say, "and didn't give 19 any thought to the possibility of prepayments"? 20 A. Well, that's -- that's a misstatement 21 on my part. That's what it says, but it did give 22 thought to prepayments. If it didn't give thought 21521 1 to prepayments, there wouldn't have been anything 2 in there, any swaps in there. If there weren't 3 going to be any prepayments, you wouldn't need the 4 swaps. 5 Q. Oh. Mr. Gross, what risk do you think 6 the swaps protected USAT from? 7 A. Interest rate movements. 8 Q. Upward. Right? 9 A. That's correct. 10 Q. Not downward. Right? 11 A. Well, as -- that's correct. 12 Q. Prepayments only accelerate when 13 interest rates go down; isn't that correct, 14 Mr. Gross? 15 MR. NICKENS: Your Honor, again I would 16 object. It is not necessary to shout at the 17 witness in order to get his information. 18 A. Would you restate the question? 19 Q. (BY MR. GUIDO) Swaps were not 20 designed to protect against prepayments, were 21 they, Mr. Gross? 22 A. I misspoke. You're correct. 21522 1 Q. Now, here you have a memorandum dated 2 January 22nd, 1987, which says that your swaps 3 weren't properly designed, they didn't give any 4 thought to the possibility of prepayments, and 5 that's how you got killed in the mortgage-backed 6 security portfolio. 7 Here, on April 27th, you're saying one 8 thing that's obvious to you is that you don't have 9 a unified strategic plan or policy with regard to 10 interest rates. 11 Do you see that? 12 A. I see that. 13 Q. Now, what was the reasonable business 14 decision that you were making at the time if, one, 15 you didn't know what the swaps were doing which 16 you still had on your portfolio, and two is you 17 didn't have any idea of what kind of plan you 18 would have to deal with interest rate risk when 19 the regulations required the association to take 20 into consideration interest rate risk in managing 21 its portfolios? 22 MR. NICKENS: I object to the compound 21523 1 nature of the question. I don't see how he could 2 possibly answer. He's asking him to consider 3 regs. He's summarized testimony about swaps and 4 about -- he can't possibly take all of that into 5 consideration. I object to the question. 6 THE COURT: Break it down, Mr. Guido. 7 Q. (BY MR. GUIDO) Were you aware that as 8 an officer of USAT that you were obligated to 9 develop a plan to deal with interest rate risk? 10 A. We had plans, but I didn't think they 11 were adequate plans. 12 Q. So, what were you doing expanding a 13 mortgage-backed security portfolio from $1 million 14 to $3 million if you didn't have a plan, 15 Mr. Gross? 16 A. We had a plan. What my -- what my -- 17 on the one hand, you say we didn't have a plan. 18 On the other hand, you say we had a plan to play 19 the interest rate risk. So, you know, I just -- 20 five minutes ago, you showed me a document and 21 said, "Here. Your plan is to speculate on 22 interest rates going down." 21524 1 Now, because this memo says something, 2 you say we don't have a plan. We either had a 3 plan or we didn't have a plan. If we had a plan, 4 then you've answered the question. If we didn't 5 have a plan, then we weren't speculating on 6 interest rates going down. 7 I mean, it can't be both ways 8 simultaneously. 9 Q. Is a plan to speculate on the direction 10 of interest rates -- 11 A. Is a plan. 12 Q. -- in your view a plan to minimize 13 interest rate risk? 14 A. Well, you know, it is a plan to 15 minimize interest rate risk if rates go down, 16 absolutely. I mean -- 17 Q. Now I'd like to direct -- 18 A. You can't have it both ways. 19 Q. Thank you, Mr. Gross. 20 Now, I'd like to move on to another 21 issue; and that is what happened afterwards. And 22 I'd like to direct your attention to B1899. 21525 1 A. Do I have that one? 2 Q. We're getting it for you, Mr. Gross. 3 This is a one-page memorandum dated December 16th 4 from Bruce Williams to you. 5 MR. GUIDO: I'd like to move the 6 admission of B1899, Your Honor. 7 MR. NICKENS: No objection, Your Honor. 8 THE COURT: Received. 9 Q. (BY MR. GUIDO) Now, you testified 10 that the purpose of the Sandy Laurenson portfolio 11 was to generate a spread over a period of time. 12 Do you recall that? 13 A. I do. 14 Q. And that -- you testified that there 15 might be temporary market value losses in that 16 portfolio but that Sandy Laurenson had assured you 17 that over time, the portfolio would readjust when 18 it got close to maturity. Right? 19 MR. VILLA: Objection. That misstates 20 his testimony. 21 A. I'm sorry. Would you -- 22 MR. VILLA: He talked about -- he 21526 1 talked about the sale of the mortgage-backed 2 securities at the end giving back the principal, 3 not that they were readjusting interest rates, 4 Your Honor. 5 Q. (BY MR. GUIDO) Remember I asked you 6 some questions and you volunteered some 7 observations about Sandy Laurenson's portfolio 8 with regard to it showing a market value loss over 9 a period of time? 10 A. Yes. 11 Q. And that -- you said that she told you 12 something about that that you found comforting 13 with regard to the negative figures that I was 14 showing you and it would explain that those 15 figures were not necessarily an accurate 16 reflection of what would transpire with that 17 portfolio over time; is that correct? 18 MR. NICKENS: Your Honor, I have this 19 objection. Those questions were related, and 20 Mr. Guido specifically excluded United MBS. He 21 was talking about the Bruce Williams memo, which 22 was an analysis, and he specifically said not to 21527 1 consider United MBS. And now he's presenting him 2 with a memo that is specifically directed to 3 United MBS and asking him to compare those two 4 facts which -- 5 MR. GUIDO: Your Honor, I'm not asking 6 this witness to compare those two facts and 7 Mr. Nickens, I think, knows that. 8 THE COURT: Well, all right. Restate 9 your question. 10 Q. (BY MR. GUIDO) You testified that 11 Sandy Laurenson told you something about the 12 United MBS portfolio, did you not? 13 A. Yes, I did. 14 Q. And what is it that you testified to? 15 A. I said that her portfolio was 16 structured in a manner that was going to give a 17 stream of income over the life and that even 18 though asset value would go up or down depending 19 on movement, as long as you stayed with the 20 portfolio till the end, you would recover 100 21 cents on the dollar of the asset value. 22 Q. Have you had an opportunity to review 21528 1 B1899? 2 A. I have not. 3 Q. Why don't you review Exhibit B1899, and 4 I'll ask you some questions about that portfolio. 5 A. (Witness reviews the document.) All 6 right. 7 Q. Does that indicate to you that the -- 8 there were sales made out of the hedged 9 transactions that generated gains to USAT? 10 A. That's what he's saying here, I 11 believe. 12 Q. And does this memorandum indicate that 13 the -- that those transactions generated part of 14 the spread that was reported for the year 1987? 15 MR. NICKENS: Your Honor, I object. 16 What the document shows is that they generated 17 losses. They reduced the spread. 18 Q. (BY MR. GUIDO) Let me walk you 19 through the chart. 20 THE COURT: We'll take a short recess. 21 22 21529 1 (Whereupon, a short break was taken 2 from 10:01 a.m. to 10:25 a.m.) 3 4 THE COURT: Be seated, please. We'll 5 be back on the record. 6 Mr. Guido, how much longer do you have? 7 MR. GUIDO: Probably half an hour, Your 8 Honor. 9 Q. (BY MR. GUIDO) Have you had an 10 opportunity to review Exhibit B1899 during the 11 break, Mr. Gross? 12 A. I did not. I'm sorry. 13 THE COURT: What's your question, 14 Mr. Guido? 15 Q. (BY MR. GUIDO) Would you please 16 review the document so that I can ask you 17 questions about your understanding of what this 18 document says? 19 A. All right. 20 Q. Thank you. Are you ready? 21 A. I'm ready. 22 Q. Now, the bottom -- the very last 21530 1 page -- sentence, it says -- see where it starts, 2 "The exclusion of these gains from the October and 3 year-to-date performance results in a significant 4 reduction in the calculated net interest margin"? 5 A. I see that. 6 Q. Does this indicate that the net 7 interest margin of 1.85 included the gains that 8 were made on the sales of the hedge instruments? 9 A. That's what it says. 10 Q. Okay. And that if you exclude those 11 gains, you end up with only .88 percent in the 12 spread? 13 A. I see that. 14 Q. Was the United MBS portfolio a 15 portfolio that was to be managed to maximize the 16 interest rate spread? 17 A. It was to maintain one. And normally, 18 these were based on about a 1 percent interest 19 rate spread. So, .88 would be very much in line 20 with the expectations. 21 Q. What was the spread when the portfolio 22 was put on in the spring of 1987? 21531 1 A. I do not know. 2 Q. Making sales out of the portfolio, 3 would those have resulted in a reduction of the 4 spread? 5 A. They could. 6 Q. Do you know whether they did? 7 A. I do not. 8 Q. Do you know whether or not the spread 9 declined between the spring of 1987 and February 10 of 1988 when Sandy Laurenson left USAT? 11 A. I do not. 12 Q. Did you instruct Sandy Laurenson to 13 make sales out of the portfolios of USAT's 14 mortgage-backed securities to generate gains as 15 often as she could? 16 A. I do not recall. 17 Q. Now, I'd like to direct your attention 18 to another issue; and that's the maturity matching 19 credit issue. And I'd like to direct your 20 attention to two documents: T5121, which is at 21 Tab 298, and T5125, which is at Tab 302. 22 Would you take a look at Exhibit T5121 21532 1 to start with? 2 A. (Witness reviews the document.) I've 3 read the first page. Do you want me to stop, or 4 do you want me to keep going? 5 Q. That's fine. Just read the first page. 6 That's all I need you to read for purposes of my 7 question, unless you'd like to read the second 8 page, as well. 9 A. Go ahead. 10 Q. See in the upper right-hand corner -- 11 this is a memo from you to Bruce Williams to you 12 and Mike Crow dated February 23rd, 1987? 13 A. I see that. 14 Q. See on the right-hand side, it says 15 "destroy after reading"? 16 A. I see that. 17 Q. Was it a common practice at USAT to 18 destroy documents that dealt with the management 19 of the association? 20 A. Not that I recall. 21 Q. Did you ever instruct Bruce Williams 22 that documents were not supposed to be destroyed 21533 1 after reading? 2 A. I don't recall. I don't recall the 3 document; so, I don't recall what -- 4 Q. You don't recall ever receiving this 5 document? 6 A. It indicates I did; but as I say, I 7 don't recall it. 8 Q. You don't have any reason to doubt that 9 you received the document, do you? 10 A. No, I don't have any reason to doubt 11 that I received it. I don't recall it. 12 Q. Now, this talks about a discussion of 13 the restructuring of the assets and liabilities of 14 USAT to take advantage of the maturity matching 15 credit, does it not? 16 A. I'm sorry. Where are you reading? 17 Q. It's the document itself. 18 A. Are you starting the first line or 19 where? 20 Q. It says, "Based upon our year end 21 maturity matching credit, USAT should receive." 22 Right? 21534 1 A. I see that. 2 Q. And then it discusses restructuring to 3 maximize the maturity matching credit, doesn't it? 4 A. It says, "The attached Exhibit 1 shows 5 the maximum combination of net losses and 6 increases in scheduled items which may occur 7 between February and June and still allow USAT to 8 exceed its regulatory net worth requirement." 9 Q. It talks about a restructuring in the 10 last paragraph, does it not? 11 A. "The asset/liability committee will 12 develop a proposal by mid-March which will outline 13 a number of alternatives for March 1987 14 restructuring (which establishes a September 3rd 15 1987 credit amount.) to optimize the matching 16 credit." 17 Q. Okay. So, that's February of '87. You 18 got that memorandum from Bruce Williams. Right? 19 A. Yes. 20 Q. Now let's go to T5125. 21 A. Okay. 22 Q. Have you seen this memorandum before? 21535 1 A. Not that I recall. 2 Q. Have you seen it recently? 3 A. I may have. I've seen so many 4 recently. I've probably looked at 10,000 5 documents the last week. So, this could well have 6 been among them. 7 Q. Do you see the first paragraph that 8 discusses transactions that occurred or describes 9 transactions that occurred with management 10 approval? 11 Do you see that? 12 A. (Witness reviews the document.) I 13 think I have seen this in the last few days now 14 that I'm reading along with you. 15 Q. Did the transactions that are described 16 in Paragraph 1 occur? 17 A. I think it turned out that they did 18 not. 19 Q. Which transactions did not occur? 20 A. I don't think -- as I say, I have no 21 independent recollection of this. I'm just 22 telling you what I think -- I have seen the 21536 1 document in the last few days. I think -- I don't 2 think that these were ever transferred -- I don't 3 think they were in United MBS to begin with is 4 what I had understood, but I have no independent 5 recollection one way or the other. 6 Q. The variable rate mortgage-backed 7 securities or the -- 8 A. The caps. 9 Q. And you don't have any independent 10 recollection one way or another? 11 A. No, I do not. 12 Q. Somebody showed you a document which 13 they purported claimed that that's what happened. 14 Is that it? 15 A. Well, you know, just like this document 16 purports this, whatever that document, it 17 purported that. 18 Q. So, somebody showed you a document 19 that -- 20 A. Yes. 21 Q. -- you interpreted to purport 22 something else? 21537 1 A. And as I say, I don't remember either 2 one of them. 3 Q. So, you don't have any independent 4 recollection -- 5 A. No. 6 Q. -- of the maturity matching credit? 7 A. No, I do not. 8 Q. Or an effort to take advantage of a 9 regulatory loophole? 10 A. Well, I think -- I would think -- I 11 don't think it was a regulatory loophole. I think 12 it was just a regulatory regulation. 13 Q. So -- what was the regulation? 14 A. I don't know. But I think the maturity 15 matching credit was a regulation. 16 Q. Does this make mention of a regulatory 17 loophole? 18 A. It does. As I say, I think that was a 19 poor choice of words. 20 Q. Okay. Now, I'd like to direct your 21 attention to one other document; and that's -- two 22 other documents. B885 and B1208. They have not 21538 1 been admitted into the record. 2 The -- while my co-counsel is looking 3 for those documents, let me ask you some questions 4 about your recollection of the subordinated debt 5 application that USAT was making. 6 Do you recall that in the 1986-'87 time 7 period, USAT was contemplating the issuance of 8 subordinated debt underwritten by Drexel Burnham 9 Lambert? 10 A. I remember the debt. I didn't remember 11 who was the underwriter. 12 Q. Have you ever met a man named David 13 Kenney from Drexel Burnham Lambert? 14 A. I may have. I don't recall him. 15 Q. Did you ever meet a Roger Stark from 16 Drexel Burnham Lambert? 17 A. That doesn't ring a bell either. 18 MR. BLANKENSTEIN: Your Honor, I'm 19 having trouble hearing Mr. Guido. I'm not sure I 20 should suggest this in the circumstances. I don't 21 want him to go back to his other volume, but I 22 couldn't hear his last question. 21539 1 MR. GUIDO: I will try and hit a happy 2 medium for you, Mr. Blankenstein. 3 Q. (BY MR. GUIDO) Did you have any 4 discussions at USAT with anyone with regard to the 5 issuance of subordinated debt by USAT? 6 A. I just -- I just remember that we filed 7 an application with the Dallas bank for permission 8 to issue -- it seems to me it was $50 million, if 9 I remember correctly. 10 Q. And do you recall that -- having 11 discussions with Mr. Berner with regard to the 12 issuance of that debt? 13 A. I'm sure we had discussions. I don't 14 recall them. 15 Q. Who was the person principally in 16 charge at USAT with negotiating with the 17 regulators or obtaining the regulators' approval 18 for the issuance of that debt? 19 A. Let's see. What was the date of this? 20 Q. Sometime in '86, '87. 21 A. Depending on -- if Jim Pledger was 22 still there, it would probably have been Jim. If 21540 1 he was gone, it would probably have been -- it 2 would probably -- in '86, it would probably either 3 be Jim Pledger or Gerry Williams. In '87, it 4 would probably be Art Berner. 5 Q. The -- who was it that had the 6 responsibility for negotiating with the 7 underwriters the documents to be filed with the 8 SEC to sell the $50 million worth of capital 9 notes? 10 A. I don't remember. 11 Q. What was the reason for attempting to 12 issue the $50 million in capital notes? 13 A. It was to add capital to the 14 institution. 15 Q. It was to add capital to the thrift? 16 A. Yes. 17 Q. Why did you want to add capital to the 18 thrift at that time? 19 A. To strengthen it. 20 Q. And was there anything in particular 21 about the financial condition of the thrift that 22 led you to want to add capital to the thrift? 21541 1 A. I think we're always interested in 2 adding capital to the thrift. You know, I don't 3 remember anything specifically at that time. 4 Q. Did you attempt to negotiate with more 5 than one underwriter the underwriting of the 6 issuance of the 50-million-dollar capital debt? 7 A. Well, I don't think -- as I say, I 8 don't recall negotiating with anybody with regard 9 to it. 10 Q. I'd like to direct your attention to 11 two documents now. One is A1521. It's the 12 minutes of the investment committee of July 20th, 13 1988. And the other is -- I think it's in the 14 record. And the other is Exhibit B1787. 15 MR. NICKENS: 1246. 16 Q. (BY MR. GUIDO) First tab number is 17 1246. 18 THE COURT: Mr. Guido, are we supposed 19 to have B -- okay. 20 MR. GUIDO: B1787 is a new document, 21 Your Honor. 22 Q. (BY MR. GUIDO) This is a memorandum 21542 1 from you to Mike Crow, Mr. Gross. 2 MR. GUIDO: I'd like to move the 3 admission of B1787. 4 MR. BLANKENSTEIN: No objection, Your 5 Honor. 6 THE COURT: Received. 7 Q. (BY MR. GUIDO) Now, I'd like to 8 direct your attention to B1787. 9 Have you read this document before? 10 A. Yes, in the last couple of days. 11 Q. Can you tell us what it is that you're 12 addressing in that memorandum? 13 A. There had been a memo from Mike Crow 14 that was coming about accounting for hedges, and I 15 had read it. And I just was commenting back to 16 him with regard to that memo. 17 Q. Look at the line at the top. It says, 18 "I read over your comments for accounting for 19 hedges and would like to add one caveat." Then 20 see the next sentence? It says, "It seems to me 21 that these hedges are not really much different 22 than when a man deals in real estate and is 21543 1 considered a real estate dealer." 2 Do you see that? 3 A. I see that. 4 Q. Now, what is it accounting-wise -- what 5 are the consequences of being classified as a real 6 estate dealer for accounting purposes? 7 A. I'm sorry. Would you repeat the 8 question? 9 Q. What is the consequence accounting-wise 10 for a person being classified as a real estate 11 dealer? 12 A. Well, it -- generally, that would mean 13 that he would be taking -- that he would -- 14 transactions in the course of business would be 15 treated as ordinary income rather than capital 16 gain. 17 Q. And so, you thought that there was some 18 sort of an analogy between that and the hedges? 19 Is that what this is saying? 20 A. No. As I say, I'm reading over his 21 comments here. And I'm setting forth -- I'm just 22 asking questions about what he's saying. He had 21544 1 outlined some things. I'm asking caveat about it. 2 I go on to say, "It seemed to me that even though 3 you had investment portfolio, you could from time 4 to time make some speculative trades without 5 tainting the entire portfolio." 6 I said, "I think the whole method of 7 doing this is to try to find out what the 8 technique would be and then establish what the 9 procedure would be, although we may decide we 10 don't want to do it anyway. But I just think we 11 ought to know what the proper steps are." 12 Q. What you're saying that -- what are you 13 referring to when you refer to a speculative 14 trade, Mr. Gross? 15 A. There was something in his -- I'd have 16 to -- there was something in his memo that alluded 17 to it, and I'm just asking for information back to 18 him. 19 Q. It says, "It would seem to me that even 20 though you had an investment portfolio, you could 21 from time to time make some speculative trades 22 without tainting the entire portfolio." 21545 1 Do you see that? 2 A. That's -- I just read it. It would 3 seem to me that that is probably the case. I 4 don't know it. And then I go on to say I think 5 the whole method of doing this is to try to find 6 out what the technique would be if there were 7 techniques. I'm just asking for information. 8 Then just establish what the procedure would be, 9 although we may decide we don't want to do it 10 anyway. 11 Q. What are the techniques that you're 12 asking him to ascertain to be done? 13 A. Whatever would conform to the -- if 14 there are things that are allowed in the framework 15 of the accounting rules that would allow that. As 16 I say, we haven't done them. I'm saying we may 17 never want to do them; but I think we ought to 18 another least know if it's permissible and, if so, 19 what they are. 20 Q. Doesn't this memorandum ask, "Can you 21 make speculative trades without tainting a 22 portfolio classified as an investment portfolio"? 21546 1 A. It says -- this is just my -- it says, 2 "It seems to me that even though you have one, 3 it's possible that you could from time to time 4 make some." And I'm asking whether it can be 5 done, and then I'm also saying I don't if we'd 6 ever want to do it anyway. 7 Q. Why are you asking the question? 8 A. I'm curious. 9 Q. You want to be able to make sales out 10 of the portfolio, recognize gains, and not taint 11 that portfolio's classification as an investment 12 portfolio; is that right? 13 MR. NICKENS: Your Honor, I object. 14 He's showing him the document without showing him 15 the document to which it responds. Mr. Guido has 16 designated that document. He knows that it 17 relates to a specific hedging technique associated 18 with one -- the futures. And now he's asking him 19 questions about a much broader subject, knowing 20 that he was responding to a narrower issue in that 21 memorandum. 22 THE COURT: All right. We've received 21547 1 the document. I think we've exhausted the 2 subject. Let's move on. 3 Q. (BY MR. GUIDO) Now I'd like to direct 4 your attention to A1521, Mr. Gross. It's the 5 investment committee minutes of July 20, 1988. 6 I'd like to direct your attention to the second 7 page. 8 A. (Witness reviews the document.) I'm on 9 the second page. 10 Q. Okay. Would you take a look at the 11 second full paragraph where it says "Mr. Bruno 12 discussed the mortgage-backed securities 13 portfolio"? 14 A. Okay. (Witness reviews the document.) 15 I see that. 16 Q. Okay. And do you see the last 17 sentence? He says, "He noted he was looking into 18 the question of unwinding some swaps and 19 determining its effect on the institution." 20 A. I see that. 21 Q. Then you see the paragraph where it 22 says, "the committee discussed in detail"? 21548 1 A. I see that. 2 Q. Then it says, "Mr. Crow and 3 Mr. Williams would request an opinion from 4 Peat Marwick." Right? 5 A. I see that. 6 Q. Now, I'd like to direct your attention 7 to a document that is -- it's part of this 8 exhibit. It's US3014750. 9 A. All right. 10 Q. Do you see that memorandum? 11 A. I see it. 12 Q. Did you write that memorandum? 13 A. I don't remember it, but I -- it looks 14 like it's from me. 15 Q. Okay. Look at the first sentence in 16 the second paragraph. It says, "I think in the 17 future when Dominic wants to propose a 18 transaction, it should be signed off on by Bruce 19 and Mike before the transaction comes before the 20 investment committee." 21 Do you see that? 22 A. Right. 21549 1 Q. Now, this is in light of discussing the 2 swaps that USAT had in its portfolio. Right? 3 A. I just say any proposal he has. 4 Q. This isn't in any context of him making 5 the proposal with regard to unwinding swaps? 6 A. I said, "I think in the future when 7 Dominic wants to propose a transaction, it should 8 be signed off on by Bruce and Mike before the 9 transaction comes before the investment 10 committee." That doesn't talk about swaps or 11 anything else. 12 Q. Why would Mike Crow and Bruce Williams 13 have to sign off on a transaction before it goes 14 to the investment committee? 15 A. The reason I suggested that is because 16 in the minutes, it was determined that they would 17 contact Peat Marwick and make sure that what they 18 were doing -- whatever he was proposing was okay. 19 So, I figured rather than have a 20 proposal come to the committee and then find out 21 what Peat Marwick had to say, the thing to do is 22 get them to either know ahead of time if they have 21550 1 to go to Peat Marwick, go before so that we don't 2 spend time on it and then refer it and then bring 3 it back. 4 Q. Peat Marwick, were they investment 5 advisors? 6 A. We're talking about the accounting. 7 That's what this says. It says over here "The 8 committee discussed in detail the accounting 9 aspects of this transaction." 10 Q. The accounting? 11 A. That's what it says on Page 2 here. 12 Q. Was USAT's mortgage-backed security 13 portfolio managed to generate accounting gains? 14 A. No. It was not managed to get 15 accounting gains. We did take gains in there. We 16 took them always within the framework of what 17 Peat Marwick said was permissible. And 18 apparently, this transaction concerned Bruce and 19 Mike; and they said, "Let's go talk to 20 Peat Marwick before we do anything and run an 21 analysis." 22 And all I'm saying here in my thing, it 21551 1 seems to me that to save that from happening, the 2 thing to do is to go to Peat Marwick first before 3 you bring it to the committee so you don't have to 4 do it twice. 5 Q. Does that mean -- does this memorandum 6 mean that Dominic Bruno has to get Peat Marwick's 7 approval before he does a transaction? 8 A. No. It means that they have to sign 9 off on it because they are familiar with Peat 10 Marwick's accounting requirements. And he's -- he 11 is not. 12 Q. Now I'd like to show you Exhibit B1783 13 which your memorandum was responding to. 14 MR. GUIDO: For purposes of completion 15 of the record at Mr. Nickens' suggestion, Your 16 Honor. This I don't think has been admitted in 17 the record. 18 THE COURT: It's in the record, 19 Mr. Guido. Let's proceed. 20 MR. GUIDO: I'm sorry. 21 Q. (BY MR. GUIDO) Is this the memorandum 22 that you were responding to with your Exhibit B -- 21552 1 your memorandum which has been marked B1787? 2 A. I believe it is. 3 Q. I'd like to turn to the documents that 4 I couldn't find earlier. Exhibit B885 and B1208 5 are the documents. 6 Now, look at B885. It's a memo from 7 Art Berner to Charles Hurwitz, Barry Munitz, 8 Jenard Gross dated March 20, 1986. 9 Do you see that? 10 MR. NICKENS: For the record, Your 11 Honor, it's also to Mr. Gerry Williams. 12 Q. (BY MR. GUIDO) Mr. Gerry Williams. 13 Excuse me. 14 A. I see that. 15 Q. Now, the -- this discusses the 16 50-million-dollar capital note offering, doesn't 17 it? 18 A. (Witness reviews the document.) Do you 19 want me to read the entire letter? 20 Q. I mean, you can read the fourth 21 paragraph on Page 1. 22 A. I see that. 21553 1 Q. Okay. Do you recall discussing with 2 Mr. Berner or any of the recipients of that 3 memorandum Drexel's view of the conditions that it 4 believed were necessary to do a capital note 5 offering? 6 A. I don't recall that. 7 Q. Do you recall having any discussions 8 with people about Drexel's view that MCO and 9 Federated had to have a direct control 10 relationship before it could issue subordinated 11 debt for USAT? 12 A. I don't recall that either. 13 Q. Now, I'd like to direct your attention 14 to the second document, Exhibit B1208. 15 MR. NICKENS: Your Honor, for the 16 record, Exhibit B885 which has just been discussed 17 has already been admitted as Exhibit T1118 at 18 Tab 1643. 19 Q. (BY MR. GUIDO) Now, the second 20 document is Exhibit B1208. 21 A. I see that. 22 Q. That's a letter from Art Berner to Bill 21554 1 Eckland dated December 4th, 1986. 2 Do you see that? 3 A. I do. 4 Q. And it shows that you got a copy of 5 that letter? 6 A. Yes. 7 Q. And then it has attached to it a letter 8 from Roger Stark at Drexel Burnham Lambert 9 addressed to you? 10 A. I see that. 11 Q. Did you request that letter? 12 A. I don't recall. I don't recall 13 requesting -- I don't remember it. 14 Q. Do you recall what the purpose of the 15 letter was? 16 A. Well, let me read it. (Witness reviews 17 the document.) I really don't. 18 MR. GUIDO: I move the admission of 19 Exhibit B1208, Your Honor. 20 MR. BLANKENSTEIN: No objection. 21 THE COURT: Received. 22 MR. GUIDO: No further questions, Your 21555 1 Honor. 2 THE COURT: Mr. Blankenstein, are you 3 going to cross-examine the witness? 4 MR. BLANKENSTEIN: Yes, I am. 5 THE COURT: Mr. Blankenstein, you may 6 proceed with your cross. 7 MR. BLANKENSTEIN: Thank you, Your 8 Honor. 9 10 EXAMINATION 11 12 Q. (BY MR. BLANKENSTEIN) Mr. Gross, good 13 morning. 14 A. Good morning. 15 Q. I've put some binders up by the witness 16 stand which I may ask you to refer to from time to 17 time. 18 But before we start that, we've known 19 each other for some time now, haven't we, 20 Mr. Gross? 21 A. Yes, sir. 22 Q. How long have I represented you? 21556 1 A. About four or five years, I believe. 2 Q. And you first retained me to deal with 3 an investigation brought by the FDIC? 4 A. Yes. 5 Q. And that investigation then turned into 6 this proceeding? 7 A. Yes, it did. 8 Q. And it's taken some time for you -- 9 before you had this opportunity to get on the 10 stand and tell your story and answer the charges 11 that the OTS made against you? 12 A. Yes. 13 Q. Well, you've been on the stand for more 14 than four days now; and I promise that I won't 15 take that long in the questioning. 16 A. That helps. 17 Q. Before we start talking about what 18 happened, let's spend -- at United, let's spend a 19 few minutes talking about your background. 20 Are you married, Mr. Gross? 21 A. I am. 22 Q. Do you have any children? 21557 1 A. I do. 2 Q. Any grandchildren? 3 A. Yes. 4 Q. I think you've told us you're 68 and 5 soon to be 69, but we don't know where you grew 6 up. 7 A. I grew up in Nashville, Tennessee. 8 Q. Can you tell the Court a little about 9 your background before you went to college? 10 A. Yes. I grew up in Nashville. My dad 11 had a little grocery store in Nashville. And as a 12 kid, I went to West High. And when I was younger, 13 I sold magazines and cut grass. And when I got a 14 little older, I worked in my dad's store. And 15 then later on, I worked -- sold women's shoes on 16 Saturdays. 17 Q. You've already heard -- we've already 18 heard that you graduated from Vanderbilt, but we 19 don't know whether you received any academic 20 honors? 21 A. I did. I graduated magna cum laude and 22 Phi Beta Kappa. 21558 1 Q. Did you go to work immediately upon 2 graduation? 3 A. I did. 4 Q. Where did you start working? 5 A. Morris Furniture Company. 6 Q. And what was your job at the furniture 7 company? 8 A. I was an executive trainee, which meant 9 I got to work at the warehouse. 10 Q. And how much money did you make at the 11 Morris furniture store? 12 A. $150 a month. 13 Q. It must have went a long way back in 14 Nashville in the 1950s, Mr. Gross. 15 A. As a matter of fact, I lived at home at 16 that time so I could make ends meet. 17 Q. How long did you work at the furniture 18 company? 19 A. Till the end of the year. Till the end 20 of 1950. 21 Q. And where did you work next? 22 A. Then I went to work for United Medical 21559 1 Equipment Company in Kansas City. 2 Q. What was your job there? 3 A. Selling medical equipment. 4 Q. How much did you get paid in that job? 5 A. Well, it was a commission job; but I 6 was probably making 10, $12,000 a year there. 7 Q. How long did you stay with the medical 8 equipment company? 9 A. Well, except for an interruption in the 10 Army in '53 and '54, I stayed with them until the 11 spring of 1955. 12 Q. What happened in the spring of 1955? 13 A. Well, I was in a doctor's office one 14 day trying to sell him an x-ray machine; and he 15 had a rendering over here on the wall of an 16 apartment project he was investing in. And I was 17 trying to sell him an x-ray machine. And he was 18 telling me what a great investment apartments 19 were, and he did a better selling job on me than I 20 did on him. 21 So, I got interested in apartments. 22 And then I started watching the want ads and 21560 1 looking around for lots. I saw an ad in the 2 newspaper and called a guy and I bought two -- two 3 little lots which each had an eight-unit apartment 4 project. 5 And the fellow I bought the lots from 6 had a friend who was an architect. So, he gave me 7 the name of an architect. So, I went to the 8 architect and I said, "Well, I've got this lot. 9 I'd like to get some plans for a little eight-unit 10 apartment building." 11 So, he said -- I said, you know, "About 12 how much do you think it will cost?" 13 He said, "It will probably cost about 14 $40,000." 15 So -- he said, "You can probably go" -- 16 he gave me the name of a mortgage company. He 17 said, "You can probably go over there and get a 18 loan for the 40,000 since you've got the land." 19 So, he drew the plans and I went to the 20 mortgage company and got the loan. Then we took 21 the bids, and I think the low bid came in at about 22 $55,000. 21561 1 Q. Did you have the difference? 2 A. It was $15,000. I didn't have $15,000. 3 So, we had a problem. So, I said, "Well, you 4 know, that's -- what do we do now? I thought this 5 was supposed to cost 40,000." 6 So, he said, "Well, let me take some 7 subbids. I don't think that's right." So, he 8 took the subbids, and they came in at about 9 $39,000. 10 So, I said, "Well, that's all right; 11 but what does that do for me?" 12 He said, "Well, if you want to build it 13 yourself," he said, "I'll charge you a 1 percent 14 supervisory fee and I'll come by every morning and 15 tell you what to do." 16 So, being young and foolish and not 17 knowing any better, I figured, well, you know -- I 18 said, "How long will it take?" He said 90 days. 19 So, I did a quick calculation. I knew I wasn't 20 making $15,000 every 90 days in the medical 21 business. So -- medical equipment business. 22 So, I quit my job and, sure enough, 21562 1 he'd come by every morning and say, "You need 2 this. You need that." I didn't know what a 3 16-penny nail was or a stud or a joist, but I 4 jumped in and had at it. So, that's how I got 5 started. 6 Q. And except for the time you were at 7 United, you stayed in the real estate business 8 ever since? 9 A. Yes, I have. 10 Q. What is it about the real estate 11 business that kept your interest for over 40 12 years? 13 A. Well, there's a sense of creativity. 14 You start with a piece of raw land out there on 15 the -- wherever and you get an idea and then you 16 create a building. You see it coming out of the 17 ground and taking shape and eventually you see 18 lights coming on at night and you see people 19 living in it. It's very much like having another 20 child, I guess really. 21 Q. Have you been successful as a real 22 estate developer? 21563 1 A. Yes, I have. 2 Q. Have there been good times and bad 3 times, as well? 4 A. Oh, absolutely. 5 Q. Did you have a philosophy to get 6 through the bad times? 7 A. Well, you know, generally we've gone 8 through these business cycles over the years. And 9 they used to last, typically, four years. You'd 10 have two years and then you'd slump down to a 11 bottom. Two years later, then you'd be back up on 12 a peak. And we just -- you just worked hard and 13 toughed it out in the bad times so you could make 14 it through the next cycle. And you knew that if 15 you got through the bad times, it was going to get 16 good again and you'd be okay. 17 Q. I think you said you built -- your 18 first unit was an eight-unit apartment house? 19 A. Yes, sir. 20 Q. Have you always run your own company 21 since you started in '55? 22 A. Yes, I have. 21564 1 Q. And is the name of that company Gross 2 Builders? 3 A. Yes. 4 Q. How many people do you currently 5 employ? 6 A. I think probably a little over 100,000. 7 Q. Do you have any partners at Gross 8 Builders? 9 A. Not in Gross Builders, no, sir. 10 Q. Why not? 11 A. I just always liked -- wanted to be my 12 own boss, have my own responsibilities and 13 obligations, you know. You are going to do things 14 based on your own judgment and you stand or fall 15 by your decisions. 16 Q. I do think you testified that you had 17 partnerships in connection with that you put 18 together? 19 A. That's correct. 20 Q. And who were some of your partners? 21 A. Well, I've had a couple of insurance 22 companies as partners. I've had Ben Love and Dan 21565 1 Arnold, who were past chairman of two of the two 2 largest banks in Houston. I've had Charles 3 Duncan, who was chairman of Coca Cola and was 4 Secretary of Defense -- excuse me -- Energy. Bob 5 Clark's one of my partners. He used to be head of 6 the Office of Controller -- Office of Currency and 7 Control. And Lloyd Bentsen and family and a 8 number of other prominent Houstonians, four people 9 who are heads of major New York stock exchange 10 companies. 11 Q. I think you've told us in your previous 12 testimony that you're having some memory problems. 13 Is that -- 14 A. Yes. 15 Q. Have they -- has there been sufficient 16 concern that you've consulted your doctor about 17 it? 18 A. I have. 19 Q. And what did your doctor say? 20 A. Well, unfortunately, he says that it's 21 just -- it's primarily the result of old age, 22 which didn't thrill me when he said that; but 21566 1 that's -- and that -- 2 Q. What's the state of your memory these 3 days, Mr. Gross? 4 A. Well, it's not getting any better. In 5 fact, you know, it really gets embarrassing at 6 times. I'll be sitting at a meeting and somebody 7 will bring up something I mentioned in a meeting 8 last week and I won't have an idea of what he's 9 talking about or I'll call my secretary to get 10 somebody on the phone. I can't think of -- I can 11 see his face, but I can't think of his name to 12 tell her who to call. So, it's definitely a 13 problem. 14 Q. So, it's affecting your business? 15 A. It is. And, you know, it's very 16 concerning because I love what I do and I want to 17 stay in it. But it's -- the outlook is not 18 wonderful. 19 Q. Well, just try the best you can to 20 answer my questions and I'll try and refresh your 21 memory as we go along if it's necessary. 22 In the more than the 40 years that 21567 1 you've been in the real estate business, about how 2 many projects have you been involved with? 3 A. In excess of 100. Maybe a couple 4 hundred. I'm not sure. Quite a few. 5 Q. I think you told Mr. Leiman earlier 6 this week that they were principally residential 7 apartments; is that right? 8 A. Yes. 9 Q. And the projects were located in about 10 five states? 11 A. Six. 12 Q. Six? 13 A. I had forgotten one. 14 Q. How many apartment units would you 15 estimate that you've built over the years? 16 A. Well, I have built over 15,000 units 17 and I have acquired probably another 4500 from 18 lenders and rehabilitated them. So, about -- 19 close to 20,000. 20 Q. How do you feel about having provided 21 housing for so many families? 22 A. Well, it's a very good feeling because 21568 1 you have a sense of satisfaction that you have 2 provided a service in the community and provided 3 good housing for a large segment of the 4 population. 5 Q. You think you put a good product out in 6 the market? 7 A. We absolutely do. In fact, I've lived 8 in my own protect. My son has lived in our 9 product. So, we feel that we've put out a 10 top-quality apartment. 11 Q. I think you also told Mr. Leiman that 12 you were involved in commercial real estate 13 projects, as well; is that correct? 14 A. That's correct. 15 Q. All in Texas? 16 A. We've also done something in Florida, I 17 believe. 18 Q. How did you finance your residential 19 and commercial projects? 20 A. With banks, savings and loans, and 21 insurance companies. 22 Q. What did that require you to do? 21569 1 A. Well, first, you have to start by 2 getting at -- finding a site. Of course, the most 3 important thing is location. And you always seek 4 to get a premier location. Then you're concerned 5 about traffic. You want to see what the 6 competition is in the area, what the growth is in 7 that area, what the growth is in the city. You're 8 looking at -- you have to look at the specific 9 site for the zoning, the soil conditions, all of 10 the things that might prevent you from using it 11 for that purpose, whether it's a wetlands study or 12 environmental study. And then you put all that 13 together and get your plans drawn and you get your 14 financial statement and all your feasibility 15 information. Then you just take it down to your 16 lender and they evaluate it. 17 Q. How many times have you applied for a 18 loan for your business reasons? 19 A. I'm sure in excess of a couple hundred 20 times. 21 Q. Do you consider yourself an experienced 22 borrower, Mr. Gross? 21570 1 A. I really do. 2 Q. In addition to having been on the 3 receiving end of real estate loans, you've had 4 some experience on the lending side, as well? 5 A. Yes, I have. 6 Q. I think you testified you were a 7 director of the Robstown S&L? 8 A. Robstown. 9 Q. Robstown. Excuse me. And Gulf 10 Savings? Gulf Coast Savings? 11 A. Gulf Coast Savings, yes. 12 Q. Did you serve on the board of any 13 banks? 14 A. Yes. I served on the board of Central 15 National, and I've served on the board of Spring 16 Branch Bank. 17 Q. Did you serve on the loan committee of 18 any of those thrifts or banks? 19 A. Both -- I served on the loan committee 20 at Gulf Coast Savings. In fact, I chaired the 21 loan committee there. And I served on the loan 22 committee at Spring Branch Bank. 21571 1 Q. And those committees approved real 2 estate loans? 3 A. Real estate and, of course, the bank 4 approved commercial loans, as well. 5 Q. And did you -- do you have any other 6 banking experience? 7 A. Well, I served on the Federal Reserve 8 Board Bank here from 1986 to 1992. 9 Q. What were your duties as a member of 10 the Federal Reserve in Houston? 11 A. Well, I guess the most relevant duty of 12 a board member is to provide input and you would 13 tell them what's going on in your particular 14 industry and what you might know about what's 15 going on in the economy in general. And that 16 information filters up to Washington and then 17 becomes what's called the beige book. 18 Q. What's the beige book? 19 A. Excuse me. Beige book. And what you 20 read about every month in the Wall Street Journal. 21 It's the monthly report that the Fed puts out that 22 discusses what's going on in the economy. And the 21572 1 first section deals with the national economy, and 2 then each section behind it deals with each of the 3 district banks, what's going on in their area. 4 And then the other thing that we've got to do, we 5 got to vote on the discount rate. But we always 6 voted wrong and they never listened to us anyway. 7 Q. The beige book gave you information 8 about the economy in Texas? 9 A. Yes. 10 Q. Did you find that information useful at 11 United? 12 A. We did. In addition to that, the 13 economists for the board would give a report every 14 moment covering economic situations in the nation 15 and the state and in the local community. 16 Q. Before we turn to -- when you started 17 at United -- let's talk a few minutes about your 18 philanthropic, civil, and charitable activities. 19 Can you describe for the Court what 20 those activities have been and are, Mr. Gross? 21 A. Well, they have been quite varied. And 22 I guess in years gone by, I was active, as 21573 1 mentioned earlier, as chairman and president of 2 the Houston Grand Opera. I also served on the 3 Symphony board and the Performing Arts board. In 4 more recent years, I've gotten more involved in 5 education and health, and I served two years as 6 chairman of the University of Texas Health Science 7 Center board here, and I'm currently serving on 8 the M.D. Anderson board. 9 In addition to that, I've been very 10 much involved in education. I recently finished a 11 six-year term as board member at one point, 12 secretary of the board of Texas Southern 13 University. 14 In addition to that, I am currently 15 chairman of their foundation and I have been -- 16 served on the investment committee of the 17 University of Houston. And right now, we're 18 building its graduate housing at Rice University 19 here. We're going to -- we're donating half the 20 proceeds back for that. 21 And another interesting project we did 22 recently was President Carter, you know, this 21574 1 Habitat for Humanity. We agreed to do one of the 2 houses here for one of the poor families. And we 3 took all our subs and workers and people. My son 4 supervised it. In one week's time, they built a 5 house and then you turn over the keys to this new 6 family. And both my son and my wife were out 7 there every day in this 95-degree weather 8 hammering nails and putting in installation. 9 So, it was a very gratifying 10 experience, as well. And I guess I've been on the 11 Salvation Army board, treasurer of San Jacinto 12 Girl Scouts, which sells $4 million worth of 13 cookies every year. So, I've had a very active 14 time with that. 15 Q. Have you eaten up all the cookies, 16 Mr. Gross? 17 A. I gain a lot of weight whenever they 18 come out, and they do make some good ones now. 19 Q. Why do you involve yourself with such 20 an extensive roster of good works over the years? 21 A. Well, I just thoroughly enjoy it. I 22 really believe that we've all got an obligation to 21575 1 give back to our community. And as such, I've 2 endeavored to take time to reach out a helping 3 hand because others did the same for me when I was 4 trying to get started. 5 Q. Well, let's turn to when you started 6 United. 7 You started there as consultant in 8 1984? 9 A. Yes, sir. 10 Q. Had you done any business with United 11 before joining as a consultant? 12 A. I had not. 13 Q. Never financed any of your real estate 14 projects with United? 15 A. I did not. 16 Q. Now, Mr. Munitz approached you to take 17 that position -- Dr. Munitz approached you to take 18 that position; is that right? 19 A. Yes, he did. 20 Q. Why did you take the job? 21 A. Well, you know, I had -- I had 22 successfully turned around by then 3,000, 3500 21576 1 apartments that had been problems. And I was 2 certainly well-versed in the real estate world. 3 And as I had testified earlier, I had sold my 4 apartments and I had sold the savings and loan. 5 So, I had a good bit of spare time on my hands. 6 So, it just looked like a good 7 challenge and a good opportunity. So, I decided I 8 would take it on. 9 Q. How much did you get paid as a 10 consultant? 11 A. I think it was either 7,000 or 7500 a 12 month, I believe. 13 Q. Before you started as a consultant, did 14 you try to find out what was going on at United? 15 A. I did. 16 Q. What did you find out? 17 A. Well, I had taken their annual reports 18 and looked over them and, of course, what I found 19 out was that they had been losing money every year 20 since about 1980 or 81. And they had negative 21 interest spread and were having a lot of problems 22 in their real estate area, primarily in the 21577 1 residential real estate area. 2 Q. Was that something that was unique to 3 United? 4 A. No. It was not unique to United. It 5 was -- the negative interest rate spread was 6 throughout the state and, really, throughout the 7 nation because when interest rates got deregulated 8 in 1979, '80, whenever it was in there, what 9 happened is all -- you know, there's probably a 10 trillion dollars' worth of home mortgages 11 scattered all over the state, most of which -- 12 well, for instance, if you go up to Massachusetts, 13 they were at 6 percent usury rate and New York had 14 an 8 percent and we had a 10 percent usury rate. 15 Well, when interest rates got deregulated, they 16 went up to 12, 13, 14 percent. 17 So, you're sitting there with all these 18 house loans which may have averaged an 8 or 19 9 percent yield and you've got -- you're paying 20 out far more than you're getting in. 21 So, everybody was running this negative 22 interest rate spread. And that's why, you know, 21578 1 Congress saw that the whole industry was in a 2 disastrous condition so they passed the 3 Garn-St. Germain Act. 4 Q. I know you said you hadn't done any 5 business with United; but before 1984, what kind 6 of thrift was United? What kind of institution 7 was it? 8 A. It was what you used to refer to as a 9 traditional thrift in that they had a lot of 10 branches and they gathered their deposits through 11 the branch system and then they made single-family 12 loans primarily for their portfolio but would 13 typically sell a certain number of them in a 14 secondary market. That was what a typical S&L 15 would do. They would usually make a few more 16 loans than were in their portfolio, and they would 17 sell them in the secondary market to others. 18 Q. What was happening to traditional 19 thrifts in Texas during the early 1980s? 20 A. They were all losing money. They had 21 negative spreads. So, they were all having 22 economic problems. 21579 1 Q. And United was suffering from the same 2 problem? 3 A. Yes. 4 Q. Is that what you found when you did 5 your investigation? 6 A. Yes, they were. The thrifts in Houston 7 had a little different problem in that they had 8 that problem but, in addition to it, they just had 9 the economic problem. The first oil crash that we 10 had had which, compared to the second one wasn't 11 that bad, you we thought it was terrible at the 12 time. But from early '82, the price of oil went 13 down and Houston lost 165,000 jobs from January of 14 '82 to July of '83. And the end result was you 15 just had a glut of housing here. People were 16 just, you know, moving out of town to get jobs. 17 And so, consequently, there were a lot 18 of foreclosures. There were a lot of home 19 builders who were in the midst of construction who 20 went into bankruptcy, just a lot of problems in 21 that whole area. 22 Q. Could United have continued in business 21580 1 as traditional thrift lending into the Houston 2 real estate market? 3 A. No, sir, they couldn't because there 4 wasn't anything on the demand side. 5 Q. Had United -- had United's management 6 come up with a strategy to try and deal with that 7 problem? 8 A. They had what was referred to as a 9 wholesale strategy. 10 Q. What did that mean to you? 11 A. Well, basically, what it meant was if 12 you refer to the past as retail activity, this 13 was -- the concept was to reduce the quantity of 14 transactions on the deposit gathering side instead 15 of having all these branches gather more funds 16 through jumbo CDs. 17 In particular, in Houston, they had 80 18 some-odd branches because there was a merger of 19 three different entities. So, they were 20 overbranched here. And the idea was to get rid of 21 a bunch of these branches and gather -- you could 22 gather money much more cheaply with the telephone 21581 1 gathering jumbo CDs. So, that was one aspect of 2 it. 3 The other aspect of it was to reduce 4 transactions -- excuse me -- was to reduce 5 transaction costs on the lending side by going 6 into larger loans, which also gives you a better 7 credit risk than you have in a single-family house 8 loan. You get an experienced developer who's got 9 a better financial statement who has a good track 10 record, and you can look at each item more 11 thoroughly than you would on a house loan. 12 And so, they started into that area and 13 they started into the -- I guess they also went 14 into -- another advantage of that is you've got 15 those deals -- a lot of them had floating rate 16 loans so that if rates moved up, you wouldn't be 17 locked in the way you were on a 30-year mortgage. 18 So, they did those things. And I think 19 they were also doing some merchant banking. And I 20 think they -- you know, they were doing the 21 high-yield bond portfolio and they were doing the 22 equity arbitrage and things of that sort. That's 21582 1 what I would call a wholesale strategy. 2 Q. Did you agree with the decision to move 3 to a wholesale strategy? 4 A. I thought it made a lot of sense. 5 Obviously, the retail strategy had failed. That's 6 what had gotten them into the dire straits they 7 were in at that time. And so, this was -- 8 Garn-St. Germain created these opportunities and 9 just seemed -- the Federal Home Loan Bank felt 10 that savings and loans needed to grow their way 11 out of their problems. They had this big block of 12 homes that had these fixed rate interest rates. 13 There's nothing you can do about that. So, all 14 you can do is add additional assets. And in doing 15 so, try to get enough yield on them to try to 16 offset the negative spread on interest rates that 17 you had from the traditional thrift. 18 Q. Did you think the strategy was going to 19 work? 20 A. Well, I thought it was going to take an 21 awful lot of hard work; but I really believed it 22 would work. 21583 1 Q. When you got to United in '84, what was 2 the state of the real estate operations? What was 3 going on in the real estate department? 4 A. The real estate -- the real estate 5 operation was the thing I focused on. And of 6 course, there were a lot of problems -- 7 MR. SCHWARTZ: Excuse me. Could you 8 clarify the time period you're talking about? 9 When he was a consultant, or when he came on as -- 10 Q. (BY MR. BLANKENSTEIN) When you 11 started in 1984 as a consultant, what was the 12 state of real estate operations at United? 13 A. Well, there were a lot of problems, as 14 came out earlier. The two institutions had merged 15 recently, and there was an awful lot of disarray. 16 They had -- you know, we found that they had 700 17 single-family home loans that were six months 18 delinquent that nobody had ever given -- never 19 been sent out a late payment notice, not even -- 20 let alone a delinquency. They never sent out 21 something showing late payment. They had home 22 builders that were in bankruptcy. They had -- in 21584 1 one instance we found in San Antonio, they hadn't 2 billed the construction interest to the builders 3 there for three months. Some of the files were -- 4 a lot of the files either were missing or had 5 items missing from them. 6 There was just a lot of disorganization 7 and confusion in the area. 8 THE COURT: We'll take a short recess. 9 10 (Whereupon, a short break was taken 11 from 11:24 a.m. to 11:45 a.m.) 12 13 THE COURT: Be seated, please. We'll 14 be back on the record. 15 Mr. Blankenstein, you may continue. 16 MR. BLANKENSTEIN: Thank you, Your 17 Honor. 18 Q. (BY MR. BLANKENSTEIN) Before we took 19 our break, Mr. Gross, you were describing problems 20 that you found in United's real estate operations. 21 What did you attribute those problems 22 to? 21585 1 A. The bulk of those problems were due to 2 the -- you know, the collapse of the economy here 3 in Houston, the decline in the price of oil. And, 4 you know, in Houston, we thought that in excess of 5 50 percent of the economy was oil-based. It 6 turned out that we were all in the oil business. 7 We just didn't know it. So, when it went, the 8 whole economy went. When you lose 165,000 jobs in 9 a year and a half time, while people are in the 10 process of building, you just create a huge excess 11 of supply. 12 Q. Did the mergers you had mentioned have 13 any effect on how -- on United's real estate 14 operations? 15 A. Well, of course, they had two separate 16 groups and two separate sets of records and two 17 separate everythings and they were trying to get 18 them all merged together. But they thought they 19 were going to -- if you looked back at those 20 annual reports, they were supposed to have that 21 done by '84 and I don't think it ended up 22 happening till sometime in late '85. 21586 1 Q. Did you make an assessment of the loan 2 portfolio that United had when you were there -- 3 when you were working as a consultant? 4 A. Yes, I did. And I think -- you know, 5 the main thing that I concluded was, you know, 6 they had all these loans that were below market 7 interest rates; and they just weren't being -- 8 they weren't covering the interest expense they 9 were paying on the deposits. 10 Q. What were the riskiest loans in 11 United's portfolio at the time? 12 A. Well, at that time, it was 13 single-family house loans because that's where 14 they were getting killed on losses. And the other 15 areas were doing pretty decently. 16 Q. What was your recommendation as 17 consultant to United in how they should position 18 themselves in the future in the real estate on 19 lending operations? 20 A. Well, I suggested that they focus on 21 reducing the size of the single-family residential 22 loan portfolio, that they go more into -- they 21587 1 were already in the secondary market, but I just 2 thought that they should focus on where they were 3 doing originations to sell in the secondary market 4 and get out of -- cut back on the portfolio loans 5 and that they should shift over into larger loans, 6 commercial loans, commercial real estate loans 7 that would give them more opportunity to derive 8 income that would offset the cost of funds that 9 they were bearing. 10 Q. What were the benefits that you saw 11 from moving into the commercial loan area? 12 A. Well, as I said -- 13 Q. The commercial real estate loan area, I 14 think you said. 15 A. Well, what you do is you get -- you 16 get -- the size of the transaction goes up; but in 17 addition to that, you have people who have been in 18 that industry a long time, who know what they are 19 doing. You've got more substantial financial 20 statements of people going into -- you know, who 21 are doing the deals. They are more sophisticated. 22 And I think you've got a much better opportunity 21588 1 for success and profit than you do in the other 2 areas. 3 Q. When did your work as a consultant end 4 at United? 5 A. I guess it ended February of 1985. 6 Q. And what started then, Mr. Gross? What 7 job did you take at that time? 8 A. Then unfortunately, I became chairman 9 of United Savings because Mr. Popejoy went 10 elsewhere. 11 Q. And why did you take the job -- you 12 became CEO, right? 13 A. Yes, I did. 14 Q. Why did you take the job? 15 A. I saw it as an excellent opportunity. 16 And you know, as I said before, I mentioned the 17 business cycles going up and down. And we had 18 just been through this terrible down surge of 19 probably the sharpest we had seen in Houston since 20 I had been here. And we had bottomed out in late 21 '83, and we had started back up with about 80 or 22 90,000 of the jobs we had lost. 21589 1 So, if you stood there looking at it, 2 you could extrapolate out and if it follows the 3 old sign wave you up and down, we're headed into 4 an up cycle. And I felt that in all probability 5 that the Houston economy would come back very 6 strongly, we would continue our growth as we had 7 for the last 40 years, and that I could step in 8 there and take over the reins and turn that 9 institution around and make a success out of it. 10 And I guess I was egocentric enough to think that 11 I could get in there and provide the catalyst to 12 make it successful. 13 Q. Did you have a specific vision of your 14 role as CEO? 15 A. Yes. I looked upon myself as a policy 16 maker, a strategy maker, someone who would go 17 out -- because of my relationships in the 18 community, I knew most of the major developers 19 here and in some of the other communities in the 20 state. 21 So, I thought I could bring good, new 22 business into the institution. And I was going to 21590 1 take over the responsibilities of the real estate 2 area, as well. 3 Q. Did the buck stop at the CEO office? I 4 think that's what you said to Mr. Leiman the other 5 day. 6 A. Yes, it did. You know, I'm a firm 7 believer that you can delegate authority but you 8 can't delegate responsibility. And, you know, 9 when it's all over with, I can say that this is 10 his decision or that decision; but the board is 11 going to look to me. They are not going to look 12 to him. So, I can't -- I can't pass it off. 13 Q. Mr. Rinaldi said it was your show at 14 United, and you said "I tried to." Right? 15 A. I did. I absolutely did. 16 Q. Did you run United alone? 17 A. No. We had an outstanding executive 18 team. And, you know, I will have to say that 19 when -- there was always a focus on excellence 20 among the people. And just like, you know, when 21 you wanted to hire somebody, you got a headhunter. 22 You got the best person you could find for the 21591 1 job. And when you wanted a consulting company, 2 you went to the best consulting company around to 3 bring them in to look. 4 So, it was always the concept of 5 getting the best talent you possibly could. 6 Q. Let's talk for a moment about the 7 senior managers at United during the time you were 8 there. 9 Can you name the people who were the 10 principal managers that you relied upon? 11 A. Well, among those were -- there was 12 Mike Crow. There was Art Berner. There was Jim 13 Wolfe. There was Bruce Williams. There was Ron 14 Huebsch. At the time, Gene Stodart, for example. 15 Some of those people -- Jeff Gray. 16 Q. Did you come to some judgment about the 17 capabilities of that team as a whole? 18 A. Yes, I did. 19 Q. And what -- what was your judgment? 20 What did you think about them? 21 A. I thought we had a dedicated, bright, 22 hard-working group of executives who put in long, 21592 1 long hours. There was no 9:00 to 5:00 program in 2 our organization. 3 Q. Did the federal regulators share your 4 view of United's team? 5 A. Yes, they did. 6 Q. Let's turn to Exhibit A6022, which 7 should be the first Exhibit -- the second exhibit 8 in your book. 9 MR. SCHWARTZ: Do you have a tab 10 number? 11 MR. BLANKENSTEIN: Tab 468. 12 Q. (BY MR. BLANKENSTEIN) Do you have 13 that, Mr. Gross? 14 A. Yes, sir, I do. 15 Q. And this is the report of the 16 examination of -- the 1987 examination of United; 17 is that right? 18 A. Yes, it is. 19 Q. And it was sent to you by cover letter 20 of July 28th, 1988? 21 A. Yes. 22 Q. And if you turn to the third page of 21593 1 the examination, of the examination report -- do 2 you have it? It's Bates stamped US3010971. 3 A. Oh, I'm sorry. 71 -- oh, here we go. 4 I've got it. I was looking earlier on. I've got 5 it. 6 Q. And is the page entitled "management" 7 at the top? 8 A. Yes. 9 Q. And if you look down towards the bottom 10 of the page, it says "experience and background"? 11 A. Yes. 12 Q. Can you just read the first two 13 sentences under that into the record? 14 A. "USAT's current management consists of 15 seven EVPs, 12S VPs, and 54 VPs. This group 16 appears to be motivated and skillful in their 17 respective areas." 18 Q. Let's talk for a minute, Mr. Gross, 19 about the particular members of the team that made 20 up United's management. Let's start with 21 Mike Crow. 22 A. All right. 21594 1 Q. You worked for Mr. Crow for about three 2 and a half years; is that right? 3 A. Yes, I did. 4 Q. What can you tell us about Mr. Crow? 5 What was his job? 6 A. Well, Mike was originally chief 7 financial officer; and he had, I believe, held 8 that same position at First City National Bank 9 which was, at that time, the largest bank in 10 Houston. And Mike was a very dedicated, 11 meticulous, hard-working person who really ran a 12 tight ship and tried to keep -- was very 13 meticulous in questioning and detail-oriented. 14 Q. Did you think he did a good job? 15 A. He did a fine job. 16 Q. What about Art Berner? What was 17 Art's -- 18 A. Well, Art, I guess, initially was 19 general counsel. And then later on, he took on 20 the job of liaison with the regulators. And Art 21 came from a background of general counsel for an 22 oil company and some other companies in Houston 21595 1 and then expanded his role to get into the 2 regulatory area. He was sophisticated, 3 knowledgeable, and again, very thorough. 4 Q. What about Bruce Williams? 5 A. Bruce, I think, also came from First 6 City. As you can see, we robbed a lot of people 7 from First City because that was the premier bank. 8 Just like all the mortgage companies in Houston 9 robbed people from American General because that's 10 the premier insurance company. Everybody in 11 Houston would try to get people either from First 12 City or from Texas Commerce. 13 And Bruce came from there, and Bruce 14 was our treasurer -- Bruce was our treasurer. And 15 as you see from the memos, he was very insightful 16 and went into great analysis to determine the real 17 meaning of what was going on. 18 Q. What about Jeff Gray? 19 A. Jeff Gray had been president of 20 American General -- that's a good example. 21 There's one we stole from American General. He 22 had been president of American General Mortgage 21596 1 Company, which was the largest both single-family 2 and multi- -- and commercial real estate lender 3 in -- I guess in Texas really. Not only that, but 4 they also represented Metropolitan Life down here. 5 And all the loans that Metropolitan made, American 6 General had pieces of those loans. So, they were 7 as broad-based as you could have possibly had. 8 And he had 25 years experience, had been president 9 of their mortgage company. 10 Q. Did you mention Jim Jackson? 11 A. Jim Jackson, I think, came to us from 12 MCorp, which was the third largest bank holding 13 company. And Jim ran our money desk and he set 14 up -- we had always had a jumbo CD operation, but 15 he expanded it and made it where we were gathering 16 funds all over the nation and did an outstanding 17 job. In fact, he did such a good job that the 18 Federal Home Loan Bank at times had us raising 19 funds for a number of the problem thrifts in the 20 state that needed infusion. We would take -- 21 somebody would call up and say, "I've got a 22 million, $2 million." Our money desk would then 21597 1 scatter around all these institutions and we would 2 earn a fee. So, he generated fee income. 3 Q. What about Ron Huebsch? 4 A. Ron Huebsch and I didn't have 5 day-to-day working relationship. He was on a 6 different floor. But Ron had 25 years of 7 experience in doing what he was doing, and he made 8 money for us. 9 Q. Now, was there another alumnus of First 10 National (sic) who was at United when you got 11 there? 12 A. That was Gerry Williams. 13 Q. And he was the president? 14 A. He was the president and chief 15 operating officer. 16 Q. Was he your principal deputy? 17 A. He was. 18 Q. Do you remember Mr. Williams' 19 background and experience before United? 20 A. He had been, I think, executive 21 vice president at First City. Had formerly been 22 chief financial officer, and he also oversaw chief 21598 1 financial operations at First City. 2 Q. How did you and Mr. Williams divide up 3 your responsibilities for managing United? 4 A. Well, generally, I was -- I tried to 5 oversee policy, strategy, new business. And then 6 I -- formerly, everybody had flowed up to chief 7 operating officer; but I switched it to where the 8 commercial real estate was flowing to me and 9 everything else was flowing to him. 10 Q. Why did you and Mr. Williams divide up 11 the responsibilities that way? 12 A. Because I was -- I had been consulting 13 with them and, of course, I had many, many years 14 of experience in real estate. At that time, I 15 guess it wasn't 40 -- it must be 35. So, that was 16 an area of focus that I could relieve him from and 17 give him more time to spend on all the other 18 areas. 19 Q. Mr. Williams left in the beginning of 20 1987? 21 A. Yes, he did. 22 Q. Did you hire another president right 21599 1 away to replace him? 2 A. We did not. 3 Q. Who performed the duties that 4 Mr. Williams was previously carrying out? 5 A. We sort of spread them around. I took 6 on a number of his duties. Art Berner took on 7 some of those, such as working with the regulatory 8 officials. Mike Crow took on some of them, such 9 as human resources and some of the operating and 10 administrative items. 11 Q. You said your job duties changed 12 somewhat when Mr. Williams left. What additional 13 duties did you perform? 14 A. Well, up until then, except for the 15 commercial real estate, only Gerry directly 16 reported to me. After that, I guess -- well, Jeff 17 Gray then started reporting to me and I think Jim 18 Jackson. And I'm not sure who else; but somebody 19 else, also. Well, of course, Art started 20 reporting to me directly, as well as Mike. 21 Q. After Mr. Williams left, did you get 22 more involved in the non-real estate aspects of 21600 1 United's business on a day-to-day basis? 2 A. Yes, I did. 3 Q. Now, I think you said that you had 4 calculated that perhaps you were at some 2,000 5 meetings or something like that in all your time 6 at United. Is that about right? 7 A. And that was probably an 8 understatement. 9 Q. And a lot of those meetings were 10 committee meetings? 11 A. Yes. 12 Q. What committees did you sit on? 13 A. Well, let's see. I sat on the 14 executive committee. I sat on the real estate 15 committee -- real estate investment committee. I 16 sat on the senior loan committee. I guess 17 technically, I sat on -- I guess the chairman of 18 the board sits on all committees, I guess, either 19 indirectly or as an ex officio member. And I 20 tried to put in appearances so I would have a 21 feeling of what was going on because I felt it 22 very important that I know what was going on in 21601 1 the institution. I wanted -- I told everybody I 2 didn't want problems kept down. I wanted to know 3 what problems were and that they would bring them 4 up to the top, we could deal with them. If we 5 could deal with them when they were small 6 problems, then they wouldn't be big problems. And 7 so, I tried to get enough appearances in that I 8 would have an idea as best I could of what was 9 going on in as many places as possible. 10 Q. One of the areas that you tried to get 11 a handle on what was happening was with the area 12 of investments? 13 A. Yes, it was. 14 Q. And did you try and become an expert on 15 the management of the investment portfolios that 16 United had? 17 A. No. I tried to rely on the people who 18 ran each section of that because I knew they were 19 experts. I mean, you take somebody like Ron 20 Huebsch. He's been in that business for 25 years. 21 There's no way in the world I'm going to be able 22 to know what he knows. And the same would be true 21602 1 of a Joe Phillips or Gene Stodart or Sandy 2 Laurenson. But what I wanted to do was understand 3 the philosophy and what they were trying to do and 4 what their goals were and how we got there. 5 Q. In the real estate area -- you 6 testified that was the area which had the greatest 7 knowledge and experience and expertise. But even 8 in that area, was it possible for you to learn the 9 details of every loan? 10 A. No. That's beyond the pale. We had 11 top-flight people in there, and I tried to get an 12 insight into all the loans that we made. But they 13 gathered the data, and they synthesized it and 14 they put it in an easily-digestible form. And 15 then -- you know, while they were working on one, 16 their offices were right down the hall from me and 17 we would -- it was very collegial. We would chat 18 about these things long before they actually came 19 to committee. So, I had a feel of them as they 20 were moving along. 21 Q. What did you bring to the real estate 22 loan process? What do you think your contribution 21603 1 was? 2 A. Well, I brought 40 years of experience 3 and a broad brush view both from having been a 4 borrower and having been a lender. And, you know, 5 I knew things from the borrower's perspective, 6 what his needs and wants were. And I knew what 7 the lender's needs and wants were and I could 8 bring some balancing to that and some insight into 9 just the general overview of real estate. 10 Q. Let's talk for a minute about how you 11 operated as a CEO. We've seen a number of memos 12 that you've written -- a lot of memos that you've 13 written about different aspects of United's 14 business. 15 Did you know how some of the managers 16 referred to those memos? 17 A. Yes, I did. 18 Q. And what did they call them? 19 A. They didn't say it in front of me. 20 They called them Jenard-o-grams. 21 Q. And how did you typically prepare those 22 Jenard-o-grams? 21604 1 A. You know, I guess it's a stream of 2 consciousness. I'm looking at something and 3 I'm -- I think I'm one of these people who has a 4 dictating machine attached to my hand. It's been 5 there for the last 40 years, whether I'm walking 6 on a construction job making notes or whether I'm 7 sitting in an office looking -- I always have a 8 dictating machine with me, and I make notes of 9 whatever I see. And, you know, it's a stream of 10 consciousness and it's -- I probably should go 11 back and edit a lot of them before they go out. 12 But expediency let's a lot of them go out without 13 being edited. 14 Q. Well, what were you trying -- what were 15 the purpose of those memos, and what were you 16 trying to impart to the executives at United? 17 A. I was trying to raise issues with them 18 or concerns with them or have them answer 19 questions I just didn't understand about 20 something. And sometimes I would ask a question 21 which turned out to be a silly question, but I 22 just didn't understand what I was looking at. And 21605 1 when they later explained it, it made good sense. 2 But I was trying two things. I was trying to get 3 knowledge so I could better understand what was 4 going on, and I was trying to help give them 5 direction. 6 Q. Sometimes you didn't get it right in 7 your memo? 8 A. That's correct. I did not. 9 Q. And Mike Crow or someone else would 10 correct your view of what it was? 11 A. Yes. And there were a number of 12 corrections. It wasn't just Mike. Sometimes 13 Bruce would, sometimes Art would, and sometimes 14 somebody else would. 15 Q. I think Mr. Guido showed you two memos: 16 B1783 and B1787. I don't think they are in that 17 book. 18 MR. BLANKENSTEIN: I think they are 19 both new exhibits. 20 MR. SCHWARTZ: What are the numbers? 21 MR. BLANKENSTEIN: 1783 and 1787. It's 22 at Tab 296. 1787 is new. 21606 1 A. B1787 and B1783? 2 Q. (BY MR. BLANKENSTEIN) Yes, Mr. Gross. 3 If we start with B1783, this is a memo 4 of October 1st, 1987, from you to Mr. Gross; is 5 that right? 6 A. Mr. Crow. 7 Q. Mr. Crow. I'm sorry. I must have 8 caught that disease. 9 A. At least you didn't call me Mr. Berner. 10 So, we're making progress. 11 Q. I didn't call you "Jenard" either. And 12 the subject is accounting for hedges. 13 Is that right? 14 A. Yes. 15 Q. And the second memo, B1787 -- 16 MR. RINALDI: Does that have a tab? 17 MR. BLANKENSTEIN: I think it was 18 admitted today, Mr. Rinaldi. Mr. Guido asked 19 Mr. Gross some questions about it. 20 Q. (BY MR. BLANKENSTEIN) And this is 21 your memo in response to Mr. Crow's memo; is that 22 right? 21607 1 A. Yes, it is. 2 Q. And you and Mr. Guido discussed your 3 views about the appropriate accounting for hedges; 4 is that right? 5 A. Yes. 6 Q. And did Mr. Crow respond to you? Do 7 you remember? 8 A. I -- 9 Q. Well, why don't I show you 10 Exhibit B1789. 11 Now, this is a memo from Mr. Crow to 12 you, Mr. Gross, dated October 7th, 1987 and it's a 13 response to your memo; is that right? 14 A. Yes, sir. 15 Q. And did Mr. Crow set you straight about 16 the appropriate accounting for hedges? 17 A. Yes, he did. 18 Q. And when you and Mr. Crow had a 19 discussion about appropriate accounting and you 20 had different views, who usually won? 21 A. He did. 22 Q. Now, did you go back and correct your 21608 1 earlier memo on the accounting issue? 2 A. No. 3 Q. Why didn't you do that? 4 A. Because as I said in there, you know, I 5 was just asking for information. And he answered 6 the questions. That was the end of it. 7 Q. When you dictated those Jenard-o-grams, 8 did you think that 12 years later, every word that 9 you wrote would be subject to critical examination 10 by a team of OTS lawyers? 11 A. No, sir. 12 MR. BLANKENSTEIN: Your Honor, I'd like 13 to offer B1789. 14 MR. RINALDI: We're having trouble 15 locating the document. 16 17 (Discussion held off the record.) 18 19 MR. RINALDI: No objection, Your Honor. 20 THE COURT: Received. 21 Q. (BY MR. BLANKENSTEIN) Does the phrase 22 "bad news to the top" have any meaning for you? 21609 1 A. Yes, it does. 2 Q. And what does it mean? 3 A. I told everybody I just didn't want 4 things kept under the rug. If we had a problem, I 5 wanted it pushed all the way up so I knew what was 6 going on so we didn't get any surprises. 7 Q. Why did you think that made sense as a 8 management approach? 9 A. Because you can't solve a problem if 10 you're not aware of it, and it is important to be 11 aware of what's going on in the institution. 12 Q. Was it -- was it an easy job trying to 13 manage United through the economic times of the 14 1980s? 15 A. It was not. 16 Q. Can you explain to the Court what sort 17 of economic conditions you faced? 18 A. Well, as I said, after we thought we 19 were coming back, having gone through the first 20 recession, it looked like we were getting -- we 21 were coming back. And then in 1986, the second 22 oil shock hit which was even worse than the first 21610 1 oil shock. Oil went from, like, 28, $30 a barrel 2 to down below $10 a barrel. Whereas we had 3 recovered 80 something thousand of those 160 we 4 lost, we started down again. In that time, from 5 the peak in '81 to the trough in '87, we actually 6 lost 205,000 jobs, which somebody said was the 7 equivalent of losing San Francisco, to put it in 8 perspective. And, you know, we just had -- we had 9 a depression on our hands and it was -- it was -- 10 nobody had ever been through anything like this 11 before. 12 And, you know, Houston in 1987 -- I 13 think we took -- there were 34 -- 32 or 34,000 14 homes foreclosed in Houston. During that period 15 of time, something like -- and it went on into the 16 late Eighties. But something like 80 percent of 17 all apartment projects in this area went into 18 bankruptcy. And the end result was that, you 19 know, all the S&Ls had problems and all the banks 20 had problems. You know, it didn't make any 21 difference what you did or where you were. I saw 22 people with 200-million-dollar statements one year 21611 1 being in Chapter the following year. I mean, it 2 was just -- it was mind boggling. 3 And the end result of all of this was 4 that, you know, all the thrifts failed. You know, 5 we had five major thrifts in Houston. United had 6 its game plan and University had its game plan, 7 which was primary to lend on land and apartments. 8 And Commonwealth had its game plan. Its game plan 9 was primarily to focus on building one of the 10 largest servicing portfolios in the country. And 11 Benjamin Franklin had its plan, which was 12 primarily focusing on single-family residential. 13 And Gibraltar had its plan, which was somewhat 14 similar to our plan. 15 But no matter what plan you had, 16 everybody ended up in the same place. Everybody 17 ended up being wiped out and had negative net 18 worth. And everybody sits and talks about the -- 19 you know, the savings and loan debacle, but nobody 20 really looks and sees what really happened. If 21 you walk around town today, you won't find a major 22 bank with a local name on it. Out of the ten top 21612 1 bank holding companies in Texas in 1984, only one 2 survived intact. There was not a single major 3 bank in Houston that did not fail or get merged 4 out. And the end result was that -- you know, we 5 don't have a major bank based in Texas anymore. 6 We've got one, but it's a small-sized bank. But 7 there's not a single major bank that's based here. 8 And the banks that failed -- not all of them. 9 Just the holding companies, the top ten holding 10 companies, that group that failed, their total 11 assets exceeded the assets of the entire savings 12 and loan industry. We had 201 savings and loans 13 in Texas and only 41 survived. Not a big one at 14 all. So, it was just -- you know, it was just a 15 bloodbath. 16 Q. When you were going through these hard 17 economic times, did you ever think about just 18 closing the doors of United? 19 A. You know, I've watched over the years. 20 I've invested over the years, and I've seen the 21 economic cycles go up and down. And an industry 22 goes through a ringer and whichever companies 21613 1 survive eventually prosper enormously. I mean, if 2 you look, even today, you went through the 3 terrible beating of the steel industry in the 4 Eighties. And nowadays, the steel companies 5 survived and are doing well. All of the makers of 6 gypsum boards, Sheetrock, went broke in the late 7 Eighties. Today, there is an acute shortage of 8 Sheetrock and prices are sky high and they are 9 making huge profits. The same is true of cement. 10 If you can be the last kid on the 11 block, the survivor, you're going to make a lot of 12 money. And, you know, I was not used to admitting 13 failure in life. And I believed that somehow, if 14 I worked hard enough and tried hard enough, we 15 would figure out a way to save the institution and 16 bring it out on the other side. 17 Q. Did you think -- well, was your view 18 about United's chances of surviving, was that 19 shared by the regulators? 20 A. Well, I think we were advised on a 21 number of occasions that we were going to be one 22 of the surviving institutions. There was things 21614 1 around between Neil Twomey and Art Berner about we 2 were going to be one of the survivors. They 3 talked to us about -- I can't remember whether it 4 was in '86 or '87 -- about taking over the 5 management of some of the thrifts that had failed 6 in the state. 7 So, there was a lot of that going on. 8 But at all times, we were under the impression 9 that we were going to be one of the survivors. 10 Q. Although you were the CEO, there was a 11 board of directors to whom you were responsible; 12 is that right? 13 A. Yes. 14 Q. And let's talk about some of the 15 individuals on United's board who are not 16 respondents in this case. 17 What can you tell us about Mr. C.E. 18 Bentley? 19 A. Well, Sonny Bentley first started out, 20 I think, in the savings and loan in Abilene, 21 Texas, became head of that institution. It merged 22 with, I believe, Southwest. And he, I believe, 21615 1 later became chairman of Southwest Savings, which 2 later became United Savings. And he became the 3 chairman of United. And he had 25 years at least, 4 maybe 30 years' experience in the savings and loan 5 industry, was thoroughly knowledgeable about real 6 estate, and, you know, the institution from which 7 he came had done real estate joint ventures and 8 things in the past. And he was a sophisticated, 9 well-respected S&L executive. 10 Q. I know I'm going to get this name 11 wrong. Charles LeMaistre? 12 A. Yeah. Charles LeMaistre was on our 13 board. He was the president of M.D. Anderson 14 Cancer Hospital here, and he was an M.D., built 15 one of the top two cancer centers in America here. 16 And he contributed to the board in areas of 17 administration and operations. 18 Q. Ed Keltner? 19 A. Ed Keltner was an attorney who had 20 owned a savings and loan in Fort Worth and that 21 had been acquired by one of -- either Houston 22 First or United. And he had come on the board 21616 1 when that institution was acquired. He had many 2 years' experience in the savings and loan business 3 and was a significant contributor to the board. 4 Q. Steve Silverman? 5 A. Steve Silverman was general counsel for 6 PennCorp. PennCorp had owned one of the 7 predecessor institutions -- I'm not sure which 8 one -- and had sold it either to United or Houston 9 First. But the end result was they had a lot of 10 debt that was owed them, and they had three 11 representatives on the board. He was their 12 general counsel and one of those three 13 representatives. 14 Q. Barry Sterling? 15 A. Barry Sterling -- of course, as far 16 as -- Barry Sterling's claim to fame was the fact 17 that he had Ironhorse Winery out in California and 18 he always brought wine. But he was one of the 19 executives of PennCorp and very knowledgeable in 20 the world of finance and the world of investments 21 because they were primarily an insurance company. 22 Q. George Kozmetsky? 21617 1 A. Well, George Kozmetsky was, of course, 2 internationally known. He was a successful 3 businessman. He was one of the founders of 4 Teledyne Corporation, along with Singleton. And 5 in later years, he left Teledyne, was involved in 6 a good bit of venture capital, took over as 7 chairman of the School of Business of the 8 University of Texas, and built it into one of the 9 top 20 business schools in the United States. 10 Q. James Whatley? 11 A. Jim Whatley was chairman of a company 12 called Kaneb, K-A-N-E-B, which was a major oil and 13 gas pipeline company. He was a knowledgeable, 14 well-respected CEO and leader in that industry. 15 And they had acquired Southwest Savings sometime, 16 I guess, back in the late Seventies. I don't know 17 when. And I believe he became chairman of the 18 board at that time and then stayed on the board 19 when it became United. And so, he had a lot of 20 really broad-based business experience, as well as 21 savings and loan experience. 22 Q. L.L. Duckett? 21618 1 A. L.L. Duckett was a savings -- he was an 2 attorney, also. And he was from El Campo, Texas. 3 And one of the institutions had acquired the 4 savings and loan in El Campo, and he came on the 5 board as a result of that. 6 Q. Now, that's eight directors, seven of 7 who were outside directors; is that right? All 8 except Mr. Bentley? 9 A. Yes. 10 Q. How would you characterize the 11 collective experience and knowledge of those 12 directors about financial matters, thrift matters? 13 A. Well, just from what I've rattled off 14 here, it's obvious that we had tremendous 15 knowledge in the savings and loan industry. And 16 in addition to that, we had a vast wealth of 17 experience in the broad financial world. And then 18 with George Kozmetsky, in the large business 19 world. 20 So, I think we had a wonderful, 21 wonderful board in place there. 22 Q. Would you characterize them as honest 21619 1 and independent-minded people? 2 A. Oh, absolutely. As you can see from 3 the minutes, they had no qualms in being 4 independent at what they thought at the board 5 meetings. 6 Q. Were they actively engaged in 7 supervising United? 8 A. Yes, they were through the -- you know, 9 through policy at the board meetings. I mean, 10 they weren't involved in day-to-day operations, 11 but they were involved in policy and had a very 12 hands-on type of approach. 13 Q. Now, another member of the board was 14 Barry Munitz, who is one of the respondents in 15 this case. 16 Did you know Dr. Munitz before you came 17 to work at United? 18 A. Yes, I did. 19 Q. And can you tell the Court a little bit 20 about Dr. Munitz? 21 A. Well, Dr. Munitz, of course, is a very 22 bright individual. He had a Ph.D. When I first 21620 1 met him, he was president of the University of 2 Houston. And then subsequent to that, he, I 3 think, went to work at United. And he was a 4 wonderful administrator and people person. He 5 just had great synthesizing or organizing skills; 6 and he focused on primarily personnel, head 7 hunting, working with consultants, all sorts of 8 things in those -- in the people area. And also, 9 he was involved in the compensation area. 10 Q. The compensation area at United? 11 A. Yes. 12 Q. Did you know Charles Hurwitz before you 13 began working at United? 14 A. Yes, I did. 15 Q. Now, you know Mr. Hurwitz is one of the 16 respondents in this case? 17 A. Yes, I do. 18 Q. What was the nature of your 19 relationship with Mr. Hurwitz? 20 A. It was a social relationship. 21 Q. Had you done any business with him 22 before joining United? 21621 1 A. I had not. 2 Q. Now, the OTS claims that you were 3 Mr. Hurwitz' tool at United and that you did 4 whatever he wanted you to do. 5 What do you have to say about that? 6 A. Well, I think I was my tool. I 7 wasn't -- I have always believed that, you know, 8 you've got to run your own show and do your own 9 thing. And, you know, one of the reasons I didn't 10 have a contract for years is because I figured if 11 I didn't run it the way everybody -- the board 12 wanted me to run it, they would let me go and that 13 would be all right. But I certainly was not 14 beholden to anybody in the position. 15 Q. Now, Mr. Hurwitz wasn't a member of 16 United's board. Right? 17 A. Not United Savings, no. 18 Q. But he was on the board of UFG? 19 A. Yes, he was. 20 Q. And UFG was United's parent? 21 A. That's correct. 22 Q. Was Mr. Hurwitz interested in what was 21622 1 going on at United? 2 A. Well, I think that would be his job, to 3 be interested, because this was the principal 4 asset of that holding company. 5 Q. Was there anything that you found 6 unusual about Mr. Hurwitz' role as an officer of 7 UFG and as a director of UFG in how he related to 8 what was going on at United? 9 A. No. I think his main focus was on 10 policy and strategy, and he never really got -- 11 you know, he would sit in on meetings, and he 12 would -- I think, for instance, he didn't get into 13 day-to-day operating situations. He probably -- 14 he sat -- he attended a number of probably more 15 investment committee meetings than anything else. 16 He attended a number of real estate meetings. And 17 broad brush, I would say that he was more involved 18 in the investment committee. And, you know, when 19 Ron Huebsch would make his presentations, if 20 Mr. Hurwitz knew something about a particular 21 company or its management or its product, he would 22 contribute that to help us evaluate whether we 21623 1 should buy it or not buy it, whereas on the real 2 estate committee, he -- I don't think he would 3 listen. He might occasionally ask some questions 4 but by and large, he was less participatory there 5 than he was in the investments, which I felt 6 was -- although he was interested in real estate 7 and involved in it, I think his strongest suit, 8 you know, was stocks and bonds. 9 Q. But he wasn't involved in day-to-day -- 10 Mr. Hurwitz wasn't involved in the day-to-day 11 operation of United, was he? 12 A. No. 13 Q. You said he occasionally attended 14 meetings of the senior loan committee? 15 A. Yes. 16 Q. And mostly as an observer? 17 A. Yes. 18 Q. Did Mr. Hurwitz ever push the senior 19 loan committee to approve any particular loan? 20 A. No. 21 Q. What about the Park 410 loan? 22 A. No, he did not. 21624 1 Q. What about the Norwood loan? 2 A. No. You know, the Park 410 loan, you 3 know, sprang from United -- I think before I got 4 there, United had wanted to buy that in 1984, and 5 the loan didn't come on until 1986. So, I think 6 if you read those notes in there, it said that 7 David Graham and Gem Childress had tried to buy it 8 in '84 and they thought it was an excellent 9 opportunity. 10 Q. You are aware, aren't you, Mr. Gross, 11 that OTS has asserted that you've acted in concert 12 with Mr. Hurwitz to exercise control over United? 13 A. I am aware of that. 14 Q. And one of the items they rely upon is 15 the fact that you and Mr. Hurwitz served as 16 members of UFG's board at the same time you served 17 on the board of Weingarten Realty. 18 A. I'm aware of that. 19 Q. Can you describe for Judge Shipe the 20 circumstances by which you became a director of 21 Weingarten Realty? 22 A. Yes, sir. Before -- before I became 21625 1 chairman of United, in 1984 United had bought a 2 large block of stock in Weingarten Realty. And I 3 think in 1985, United entered into a standstill 4 agreement with Weingarten. And I think Weingarten 5 wanted to go public, if I remember correctly, or 6 something, and they were worried that activity in 7 that segment of stock might have an effect on 8 that. 9 So, they entered into a standstill 10 agreement. And as part of the standstill 11 agreement, it was agreed that United would have 12 two board members put on Weingarten's board. And 13 so -- I'm sorry -- two members put on Weingarten's 14 board. And so, as a result of that, Mr. Hurwitz 15 and I were put on the board of Weingarten Realty. 16 Q. And you were nominated by United to 17 Weingarten's board to serve to protect the 18 interest of United in Weingarten Realty? 19 A. That's correct. 20 Q. Did United later sell its interest in 21 Weingarten? 22 A. Yes, they did. 21626 1 Q. Did you remain on Weingarten's board 2 after that? 3 A. I did not. 4 Q. Did you own stock in Weingarten Realty? 5 A. Yes, I did. 6 Q. When did you buy that stock? 7 A. In either 1968 or 1969. 8 Q. And I think you said United bought its 9 interest in Weingarten sometime in 1984? 10 A. 1984, that's right. 11 Q. Did you ever sell your stock in 12 Weingarten Realty? 13 A. No, I did not. 14 Q. Now, when United's board selected you 15 to be one of its representatives, did they know 16 about your stockholding in Weingarten? 17 A. Yes, they did. 18 Q. That had been fully disclosed to 19 United? 20 A. Yes. 21 Q. Was it also a matter of public 22 disclosure? 21627 1 A. Yes, it was. 2 Q. And let me -- if you could turn to 3 Exhibit T808 -- excuse me -- B573. It should be 4 in your book. 5 MR. SCHWARTZ: Tab number? 6 MR. BLANKENSTEIN: Tab 1616. 7 A. I'm sorry. B what? 8 Q. (BY MR. BLANKENSTEIN) 573. 9 A. Okay. I have it. 10 Q. If you'd turn to Page 32 -- 11 MR. BLANKENSTEIN: Just let me describe 12 for the record that Exhibit B573 is a prospectus 13 for Weingarten Realty that was issued on 14 August 16th, 1985. 15 Q. (BY MR. BLANKENSTEIN) And if you 16 start on Page 31 and you turn over to Page 32, 17 does it contain a list of the directors and 18 executive officers of Weingarten? 19 A. Yes, it does. 20 Q. And the first name on Page 32 is what, 21 Mr. Gross? 22 A. Jenard M. Gross. 21628 1 Q. And does it show the number of shares 2 that you held? 3 A. It does. 4 Q. Now, the other thing that OTS points 5 out to support its claim that you acted in concert 6 with Mr. Hurwitz are the circumstances surrounding 7 your 1985 purchase of UFG stock. 8 Are you familiar with that? 9 A. Yes, I am. 10 Q. Now, Mr. Rinaldi asked you a fair 11 number of questions on this subject; so, I'll try 12 to move through it as quickly as possible. 13 When was the first time you bought UFG 14 stock? Do you remember? 15 A. I believe it was back in 1984. 16 Q. And why did you buy the stock? 17 A. You know, I just -- I saw what was 18 going on, you know, that the two institutions were 19 merging and I had read some of the stuff about 20 what they had in mind. I thought it was a good 21 investment. 22 Q. Thought the stock would go up? 21629 1 A. Absolutely. 2 Q. Did you buy more shares -- how many 3 shares did you buy at that time? 4 A. I believe I bought 2,000 shares in 5 1984. 6 Q. Did you buy more shares later on? 7 A. Yes, I did. 8 Q. When? 9 A. Sometime in the spring of 1985, I 10 believe. 11 Q. And how many shares did you buy at that 12 time? 13 A. 5,000 shares. 14 Q. And by this time, you were already -- 15 A. I was already chairman of the 16 institution. 17 Q. And did you buy those shares for a 18 particular purpose? Do you remember? 19 A. I think I bought them in my IRA 20 account. 21 Q. And what was your IRA account? 22 A. You know, that's a retirement account. 21630 1 That's a long-term holding. I just put it in 2 there as an investment because I thought over the 3 years, it would be a valuable asset. 4 Q. Did you buy another larger block of 5 stock later in 1985? 6 A. Yes, I did. 7 Q. And can you tell us the circumstances 8 surrounding that purchase of stock? 9 A. Yes. As I related earlier, there was 10 apparently -- I think United Financial acquired a 11 block of stock that was available and offered it 12 to a number of the senior officers of the 13 institution. And the idea behind it was that they 14 were offering it to us and giving us a 100 percent 15 loan, which meant that we wouldn't have to put up 16 any money. 17 And the incentive for them was by 18 having us have additional ownership in the 19 institution, we would be more motivated to try to 20 make the institution succeed and perform so the 21 stock would go up. And from our point of view, it 22 was a good deal because we didn't have to put the 21631 1 money up to acquire the stock. 2 Q. You said it was offered to others at 3 United, as well? 4 A. Yes, it was. 5 Q. This opportunity. 6 Do you know who they were? 7 A. Oh, I know it was Charlie Patterson, 8 Gerry Williams, Mike Crow, Gem Childress, David 9 Graham. I can't remember if there were some 10 others or not. But I know at least -- I know 11 those took it. I think it was offered maybe to 12 some more than that. But it was the top 13 executives was the idea. 14 Q. How was it determined the amount of 15 shares that any particular executive would get? 16 A. Well, I've forgotten what the number of 17 shares were that were available. What I think I 18 told them was "Everybody decide what they want, 19 and I'll take whatever is left." 20 Q. And how many shares did you wind up 21 buying? 22 A. I ended up with 105,000. 21632 1 Q. But if the other executives had taken 2 more, you could have wound up with less? 3 A. That's correct. 4 Q. Or you could have wound up with more? 5 A. That's right. 6 Q. Did you think it was a good investment 7 again? 8 A. I did. 9 Q. Did you -- did the fact that UFG had 10 offered to loan you the money to purchase the 11 stock, did that make the purchase more 12 economically attractive to you? 13 A. Oh, absolutely. 14 Q. Why is that? 15 A. Because I didn't have to come up with 16 the money. I had paid cash for the other two 17 transactions. I didn't have to come up with the 18 cash to cover this one. 19 Q. Did UFG offer to finance the purchase 20 of the other officers, as well, who bought stock? 21 A. Yes, they did. 22 Q. And do you remember the terms of the 21633 1 loan that you had? 2 A. I would not have remembered. I've 3 looked at it the last few days, and I think 4 what -- it carried an interest rate of prime 5 payable December 31st of every year. And I 6 believe the note was due, I believe, in December 7 of 1990, I believe. 8 Q. When you bought the shares in 1985, did 9 you understand that you were obligated to pay back 10 the principal? 11 A. Yes, I did. 12 Q. Did anyone make any promises to you at 13 the time that you wouldn't have to pay the 14 principal back? 15 A. No, they didn't. But I was very 16 optimistic. I knew I was going to pay it back out 17 of my gains. 18 Q. Was there a hint -- did anybody make a 19 hint that you wouldn't have to pay it back in the 20 future? 21 A. No, not at all. 22 Q. Did you also understand that you were 21634 1 obligated to pay the annual installments of 2 interest on the loan? 3 A. Yes. 4 Q. And did you, in fact, pay the interest 5 on the loan? 6 A. I did. 7 Q. I'm going to show you your tax 8 returns -- 9 THE COURT: Mr. Blankenstein, we'll 10 adjourn until 2:00 o'clock. 11 MR. BLANKENSTEIN: Thank you. 12 13 (Whereupon, a lunch break was taken 14 from 12:36 p.m. to 2:05 p.m.) 15 16 THE COURT: Be seated, please. We'll 17 be back on the record. 18 MR. GUIDO: Your Honor, I have a 19 preliminary matter that Mr. Blankenstein was 20 gracious enough to let me bring up. 21 Mr. Villa pointed out to you this 22 morning that T8090, the exhibit that he had which 21635 1 was the petition for review in the 5th Circuit, 2 was not a complete copy. I have extra copies for 3 the Court. I have given Mr. Villa a complete 4 copy, and I have extra copies for the Court if the 5 Court's copy isn't complete. This is a ten-page 6 document. It has a signature page with Art 7 Leibold and Bettina Lawton on the tenth page of 8 the document, Your Honor. 9 THE COURT: This seems to be complete. 10 MR. GUIDO: The Court's copies are 11 complete? 12 THE COURT: Yes. 13 MR. GUIDO: Thank you, Your Honor. 14 THE COURT: All right. 15 Mr. Blankenstein, you may continue. 16 MR. BLANKENSTEIN: Thank you, Your 17 Honor. 18 Q. (BY MR. BLANKENSTEIN) Before we 19 broke, I had asked Mr. Gross whether he had paid 20 interest on the loan that you had obtained from 21 USAT regarding your stock purchase. And you said 22 you had? 21636 1 A. I did. 2 Q. I've shown you your tax returns for 3 1985, '86, and '87 which we've marked as B4269, 4 B4270, and B4271. They are redacted versions of 5 Mr. Gross' tax return for those years. Copies 6 have been provided to OTS. 7 MR. BLANKENSTEIN: Your Honor, I'd move 8 those tax returns into evidence. 9 MR. SCHWARTZ: Could you repeat the 10 numbers, please? 11 MR. BLANKENSTEIN: B4269, B4270, and 12 B4271. 13 MR. RINALDI: Your Honor, my only 14 problem is when we subpoenaed this information 15 from Mr. Blankenstein, we were only given W-2 16 information that's almost illegible. Now we find 17 out that he wants to put into evidence the 1040s. 18 And you may recall the difficulty we had the other 19 day in trying to decipher what his income was from 20 various sources. It seems to me that if these are 21 available, that rather than having these 22 heavily-redacted forms, we ought to at least have 21637 1 a form that's available so that the Court can see 2 what the sources of income were. This was 3 subpoenaed from Mr. Gross some time ago, and it 4 was never produced to us during the administrative 5 phase. 6 So, if we're going to put in these 7 heavily-redacted documents, I would request that 8 the documents contain all of the information 9 relating to his taxes so that we can see what the 10 sources of his income were during these years and 11 where it came from. That was subpoenaed a long 12 time ago. It was my understanding the information 13 was not available, and that's why we got the 14 badly -- I mean the bad copies of W-2s that no one 15 can read. 16 MR. BLANKENSTEIN: Mr. Rinaldi's memory 17 must be faulty. In connection with the subpoena 18 that he had provided to Mr. Gross, we reached the 19 conclusion or agreement that we would provide the 20 W-2 forms. Those were -- because that was the 21 only information relevant to their claims of 22 compensation. Other sources of Mr. Gross' income 21638 1 are totally irrelevant to the proceedings. 2 THE COURT: All right. I'll receive 3 the documents. 4 Q. (BY MR. BLANKENSTEIN) Mr. Gross, how 5 can you tell from those tax returns whether you 6 paid interest on the note? Why don't you start 7 with the tax return for 1985. 8 A. In looking over here -- of course, I 9 can look at the front and tell it's my tax return. 10 And I look in here on this Statement 5, and it 11 shows "interest expense, United Financial Group, 12 $37,844." 13 Q. And the outstanding amount of the loan 14 was $7,762,000 approximately? 15 A. Yes, approximately. 16 Q. And it was -- in 1985, it was 17 outstanding for about six months? 18 A. Yes. 19 Q. And do you remember what the interest 20 rate was on that? 21 A. I do not. My guess -- you know, it was 22 prime rate. 21639 1 Q. And do you remember what the prime rate 2 was in 1985? 3 A. I do not. But working backwards, this 4 would be -- I would guess it must have had to be 5 around -- 6 Q. Well, if you don't remember -- I just 7 wanted to know if you remember. 8 Are you confident that this is the 9 interest payment -- reflects the interest payment 10 that you made on your loan? 11 A. I'm confident it is. 12 Q. Now, if you'll take a look at the next 13 exhibit, which is the tax return for 1986, you 14 also have an entry on the schedule for interest 15 expense? 16 A. Yes. It says "interest expense United 17 Financial Group, $63,517." 18 Q. And the last tax return, which is the 19 one for 1987, again would the interest expense be 20 reflected on that schedule? 21 A. Yes. "United Financial Group, 22 $62,506." 21640 1 Q. Thank you, Mr. Gross. 2 Turning to another subject, Mr. Gross, 3 I'm going to talk to you about your compensation 4 that you received while you were at United. 5 Do you recall that Mr. Rinaldi spent 6 about a half a day asking you questions about 7 compensation? 8 A. Yes, I do. 9 Q. I have maybe three or four questions to 10 ask you. 11 A. All right. 12 Q. Who set the salary that you received at 13 United? 14 A. The compensation committee. 15 Q. Did you have any input in that 16 decision? 17 A. I did not. 18 Q. Who determined the amount of the annual 19 bonus that you received at United? 20 A. That also was the compensation 21 committee. 22 Q. And was the compensation committee 21641 1 constituted of outside directors? 2 A. Yes. 3 Q. Let's move on, Mr. Gross, to the net 4 worth maintenance. 5 Do you remember Mr. Rinaldi showed you 6 a May 13th, 1988 letter from Mr. Twomey that was 7 directed to the board of directors of 8 United Financial Group? 9 A. Yes, I do. 10 Q. And that letter -- do you remember what 11 that letter requested of the board? 12 A. As I recall, it asked the board to 13 advise him about what they intended to do to 14 maintain the net worth, I believe, of United 15 Savings. 16 Q. Did the letter direct United Financial 17 Group to infuse capital into USAT? 18 A. It did not. 19 Q. When did you resign, Mr. Gross, from 20 both United and UFG? 21 A. November 23rd, 1988. 22 Q. Between May 13th, 1988, and 21642 1 November 23rd, 1988, do you ever remember 2 receiving any directive, order, order from any 3 federal regulator or directive sent to UFG that 4 they should infuse capital into United? 5 A. I do not. 6 Q. All right, Mr. Gross. Let's talk about 7 your favorite subject, real estate. 8 According to OTS, the Park 410 and 9 Norwood loans were the result of unsafe and 10 unsound lending practices. 11 Do you agree with that? 12 A. I do not at all. 13 Q. Well, let's go through what the loan 14 procedures were at United before we talk about the 15 two loans in particular. Okay, Mr. Gross? 16 A. All right. 17 Q. Let's try and walk through this process 18 to provide the Court with some background about 19 how loans were processed at United. 20 Before we do that, who were -- the 21 heads of the real estate department were 22 Mr. Graham and Mr. Childress? 21643 1 A. That's correct. 2 Q. And can you tell us a little bit about 3 Mr. Graham? 4 A. Mr. Graham had been running the real 5 estate department at United and had been involved 6 in the real estate department since, I believe, 7 the mid-to-late Seventies. In fact, even today, 8 he's heading the real estate department of a major 9 S&L in Houston. 10 Q. Did you consider Mr. Graham 11 knowledgeable about the commercial real estate 12 market in Houston and other parts of Texas? 13 A. Absolutely. 14 Q. What about Mr. Childress? 15 A. Mr. Childress also had a lengthy 16 background in real estate lending and joint 17 ventures, and he did a great job for us. And when 18 he left, for a while he ran a failed thrift for 19 the -- for FSLIC. And I think now he's -- I 20 believe he's with a mortgage company now, if I'm 21 not mistaken. 22 Q. Let's see if we can walk through how 21644 1 the typical loans were processed by United. Let's 2 start with how a project might come to the 3 attention of United. 4 Can you explain that to the Court, how 5 United might find out about a real estate project? 6 A. Well, generally, there were several 7 ways. Of course, first of all, we had a customer 8 base. And when they would have new projects, they 9 would frequently come to United. 10 Additionally, our customers would refer 11 business to us. And then, of course, the real 12 estate department would go out soliciting 13 business. I mean, that was part -- you know, 14 gathering new business. In fact, I did some of 15 the seeking of new business, as well. 16 Q. Once a project came to United's 17 attention, what would happen next? 18 A. Well, generally, a developer would 19 bring a project in to the real estate department; 20 and there would be an initial screening process to 21 determine whether there was any interest on our 22 part in looking at it. 21645 1 Q. What sort of information did United 2 have available to itself in order to make this 3 initial screen? 4 A. Well, in addition to what the builder 5 brought in, we had the Metro Studies which we got 6 all the time and -- 7 Q. Now, what's the Metro Studies? 8 A. Metro Study is a company that does real 9 estate studies on major cities throughout Texas 10 and in -- but the first section of the study would 11 deal with population growth and job growth, 12 general economic conditions. And then it breaks 13 down into sections of real estate and what's going 14 on in commercial, what's going on in residential, 15 even to breaking down the individual subdivisions 16 and the rate of home sales and the rate of lot 17 development and the number of undeveloped lots 18 available in the marketplace. So, you had that on 19 all the cities. 20 And then, of course, they had their own 21 experience from the association's activities that 22 they -- that were going on in those communities. 21646 1 Q. What percentage of potential projects 2 fell out because of this initial screen? 3 A. I would say probably 75 percent of 4 projects fell out for one reason or another. 5 Q. How come so many? 6 A. Well, you know, we were just highly 7 selective; and we were trying to do our best to 8 make sure that the projects that we looked at were 9 good projects. 10 Q. Once the project got past this initial 11 screening process, what would happen next? What 12 would the real estate department do with regard to 13 working up the proposals for the loan or the 14 investment? 15 A. Well, they would review the information 16 that the builder/developer had provided to them, 17 such as the plans and specifications and the 18 survey and look at the location and see if they 19 thought it was a good location. They would look 20 at his feasibility study. They would then run 21 economic numbers to see if there was economic 22 viability. They would look at his credit report. 21647 1 They would look at his financial statements. 2 There was a whole gamut of things that they would 3 run to see if the -- if the -- to do their due 4 diligence and their underwriting. 5 Q. Were you involved in that process at 6 that stage? 7 A. We were -- my office was right down the 8 hall, and they would sort of keep me posted on 9 what was going on, where they were, what they were 10 looking at. If they had any particular issues 11 that might arise with something, they might 12 discuss it with some of the members of the real 13 estate committee. 14 Q. And they -- when you say "they" -- 15 A. "They" being Gem Childress or David 16 Graham. 17 Q. Real estate loans or -- and real estate 18 investments over a certain size had to be 19 presented to either the senior loan committee or 20 to the real estate investment committee; is that 21 right? 22 A. That's correct. 21648 1 Q. And how -- how did the senior loan 2 committee learn of the proposal? Was it presented 3 to them for the first time when they were 4 requested to make a decision, or were they in 5 contact with -- did they have other periodic 6 updates along the way? 7 A. I think most of the members of the real 8 estate committee would get some input as to what's 9 going on as the proposed loan is working its way 10 through the real estate department. So, it was 11 not a surprise when it got there. 12 Q. When a proposal was ready for final 13 presentation, who generally made the presentation? 14 A. It would usually be either Gem 15 Childress or David Graham. 16 Q. What sort of materials were put 17 together in connection with that presentation? 18 A. There would usually be a loan 19 application and there would be the backup 20 information, depending on what -- it might have 21 included the plans and specs or it might include a 22 site layout and they would include survey. They 21649 1 would include the financial information, the 2 credit reports, their analysis and, you know, what 3 they saw in it and things of that sort. 4 Q. Would there be any other type of backup 5 information, feasibility studies, market studies? 6 A. There -- sometimes, those were in the 7 committee. Sometimes they had been looked at 8 ahead of time. 9 Q. Do you remember how long the committee 10 might spend discussing a project when it was 11 presented for final approval? 12 A. You know, it depended. Most -- as we 13 saw earlier, most of those meetings lasted in the 14 range of an hour vicinity. But in general, the 15 committee had already looked at these before they 16 actually came before the committee. So, you may 17 spend 30, 45 minutes on one. You may spend an 18 hour on one. You may spend 15, 20 minutes on one. 19 It just depended on what the loan was. 20 Q. Was the time spent in the committee 21 discussing the particular project in committee the 22 only time that the members of the senior loan 21650 1 committee might spend talking about the project? 2 A. No. You know, as I said before, a good 3 bit of time was spent outside the actual 4 committee. But in many instances, as you looked 5 at those minutes that came through here, you saw 6 that some of these loans were talked about in 7 committee three or four times before they were 8 actually presented to the committee. 9 Q. Do you remember when Mr. Leiman was 10 asking you questions about your observations as a 11 consultant and one of the things that you had 12 noted in your -- as a criticism was that too 13 little time was spent in the senior loan committee 14 studying loans. 15 Do you remember that? 16 A. Yes, I remember that. 17 Q. Now, did you change your view about 18 that once you became a member of the real estate 19 operation at United? 20 A. I did, because I really didn't 21 understand it that they were communicating with 22 one another ahead of the loan committee meetings 21651 1 and discussing them long before they came into the 2 actual -- for the actual approval. 3 Q. In going over, I think, in general how 4 United did its underwriting, we haven't discussed 5 appraisals yet. And Mr. Leiman spent some time 6 talking to you about appraisals. 7 Do all lenders on real estate use 8 outside appraisers? 9 A. Not all lenders, no, sir. 10 Q. How do you know that? 11 A. Well, you know, a lot of the insurance 12 companies I do business with don't require them. 13 Q. Do you remember which ones? 14 A. Well, American General doesn't require 15 one. Mass Mutual doesn't. Nationwide doesn't. 16 Unum doesn't. GE Capital has a life insurance 17 company subsidiary. I can't think of the name of 18 it. They don't require it. So, there's quite a 19 few insurance companies that do all their -- 20 whatever appraisal work they do is internally. 21 They do not have an external appraisal 22 requirement. 21652 1 Q. But the federal regulations required 2 thrifts to obtain an outside appraisal. Right? 3 A. I believe thrifts and banks. 4 Q. What role did appraisals have in 5 United's underwriting process? 6 A. It was used as a corroborative tool to 7 establish the value of the collateral. 8 Q. When you say "corroborative tool," what 9 do you mean by that? 10 A. Well, our real estate department did 11 its own independent underwriting and evaluating 12 and arrived at what they thought was the value of 13 the property and the loan amount on the property. 14 And then when the appraisal was done, it would 15 substantiate or not substantiate that 16 underwriting. 17 Q. And what would happen if it didn't 18 substantiate the underwriting? 19 A. Well, if it didn't substantiate the 20 underwriting, one of three things happened. 21 Either we would reduce the loan or we would get 22 additional collateral or we would reject the loan. 21653 1 Q. Did the senior loan committee always 2 have an appraisal in hand when it approved the 3 loan? 4 A. No, it did not. 5 Q. What was the practice at United in that 6 regard? 7 A. The practice was to issue a commitment 8 with a clause in it which said that the commitment 9 that was being issued by the institution was 10 subject to obtaining a satisfactory R-41B 11 appraisal prior to funding. 12 Q. Was the practice you described unique 13 to United? 14 A. Oh, no. Everybody in the industry did 15 that, both in savings and loan and in the banking 16 industry. 17 Q. Was it -- was that also your personal 18 experience before you joined United? 19 A. It was my experience with the 20 institutions that I did business with, which were 21 many. 22 Q. Now, Mr. Gross, did you review 21654 1 appraisals at United? 2 A. No. David Graham and Gem Childress 3 would review the appraisals. 4 Q. Did you think they were competent to 5 perform that job? 6 A. I had the utmost confidence in their 7 competency. 8 Q. Let's turn to the two loans involved in 9 this case. The first loan is Park 410, and I 10 think I have given you a copy of the -- which is 11 T7670, which is the loan -- the senior loan 12 committee approval of the Park 410 loan dated 13 March 17th, 1986. And it's at Tab 654. 14 A. Yes, sir. Can I look at it just a 15 minute? 16 Q. Certainly. 17 A. Thank you. (Witness reviews the 18 document.) All right. 19 Q. Mr. Gross, can you turn to the fifth 20 page of the exhibit? 21 A. Yes, sir. 22 Q. Is that your signature there? 21655 1 A. It is. 2 Q. Does that indicate that you approved 3 this loan? 4 A. It does. 5 Q. Can you tell us why you thought this 6 was a good loan? 7 A. Well, you know, this was a piece of 8 property that was located on -- location was 9 great. It was on Highway 410, which is the loop 10 going around San Antonio. 11 MR. SCHWARTZ: Excuse me. If I could 12 interrupt, are you looking at A1643, Tab 159? 13 MR. BLANKENSTEIN: No. I'm looking at 14 T7670, which is what I said. 15 MR. SCHWARTZ: And the tab number? 16 MR. BLANKENSTEIN: 654. 17 MR. SCHWARTZ: Excuse me. 18 Q. (BY MR. BLANKENSTEIN) Sorry, 19 Mr. Gross, for the interruption. Maybe we can 20 start again. 21 I had asked you why you thought 22 Park 410 was a good loan. 21656 1 A. Well, it was -- as I say, we always 2 start out with location; and it was on Loop 410, 3 which was the major loop around San Antonio, on 4 which a great deal of the 5 office/hotel/motel/commercial shopping center had 6 developed in over the last so many years. 7 At this particular point, it was going 8 to be the intersection of the announced Northwest 9 Freeway which was a new freeway opening up 10 downtown San Antonio all the way out to 410 and 11 past 410 on out to 1604, which was where the new 12 Sea World was -- had been announced which -- 13 Q. Had the highway been built yet? 14 A. It had not, but it had been announced 15 and the funds for the feeder roads had been 16 approved. And I think, if I remember correctly, I 17 think -- maybe it's in this report right here, if 18 I remember correctly. I think everything was 19 supposed to be in in five to seven years, if I 20 remember correctly. And so anyway -- and Sea 21 World had been announced. 22 Q. What was important about Sea World? 21657 1 A. Well, Sea World was a major theme Park 2 that was being built out there; and they were 3 predicting something like 3 million tourists a 4 year and 900 permanent jobs. But, you know, 5 construction always creates more jobs than the 6 permanents. So, there would have been more jobs 7 out in that area during the period of 8 construction. 9 Q. And why is the number of jobs 10 important? 11 A. Because job growth relates to spending, 12 how much income there is in the area. And that 13 determines the demand for houses, for shopping, 14 for apartments, for offices, for hotels/motels, 15 whatever it may be. That drives it. 16 We had looked at the -- San Antonio had 17 good job growth. In fact, had excellent job 18 growth in the last couple of years starting in the 19 early Eighties but getting progressively better. 20 This area had had good growth of not just jobs but 21 also population, housing being built in the area. 22 So, it looked like an outstanding location. 21658 1 And United had looked at it in 1984 and 2 done all this due diligence because they had tried 3 to buy it in '84, were not successful, and then 4 GMR acquired the property shortly thereafter. And 5 GMR was a company that was well-capitalized and 6 had a strong board. One of the investors and 7 board members was a company called Lazard 8 Brothers, which is an international investment 9 banker. They had actually done a 100-acre 10 development over on the next exit going east from 11 here and, in the early Eighties, had been very 12 successful. 13 Q. Why is that important to you, that they 14 had a successful development in the area? 15 A. Well, because they are a sophisticated 16 developer. They have experience not just in that 17 thing, but they have got in the immediate area -- 18 they have got hands on right there and they have 19 been successful and now they were thinking they 20 would move to the next intersection and repeat 21 their former success. 22 So, they were in there with a strong 21659 1 net worth here of something like $20 million and 2 $8 million in cash. And they also had as partners 3 with them a firm called Grieshaber and Roberts. 4 And that was the premier commercial brokerage firm 5 in San Antonio. And, you know, while brokers like 6 to make fees for brokers to think that a location 7 is good enough to invest money, take personal 8 liability is additional indication that they 9 thought it was a good location and a good 10 property. 11 In addition to that, they had one of 12 the premier real estate attorneys from one of the 13 major law firms in San Antonio, Stanley Rosenberg, 14 who was also a participant in the venture and a 15 guarantor of the loan. 16 And all told, they had net worth of 17 some $82 million and cash of some $21 million and 18 they were putting up part CDs and part letters of 19 credit in the amount of $10 million and then 20 giving additional guarantees of another 21 $10 million on the loan. 22 And, you know, for all -- the fact that 21660 1 all of these people who had deep experience in 2 San Antonio were verifying what United believed in 3 '84 when they tried to buy it gave added substance 4 to the validity of our evaluation. 5 Q. Did you personally visit the property? 6 A. I did. 7 Q. Why? 8 A. You know, I -- I generally want to see 9 what's going on. I have always tried to set foot 10 on a piece of property before I bought it and 11 before I was going to make a loan of this 12 magnitude. 13 Q. Kind of touch the dirt? 14 A. There's something about just kicking 15 the dirt on the site that gives you some -- an 16 extra feel of it. 17 Q. Now, let's talk for a minute about the 18 Norwood loan, and that's Exhibit T7020, and 19 Exhibit 7021. 20 A. I have those. 21 Q. 7020 is the June 2nd, 1986 approval of 22 the senior loan committee. And 7021 is the 21661 1 approval the same day of the real estate 2 investment committee. 3 Do you have those, Mr. Gross? 4 A. Yes, I do. Could I look at them for 5 just a second? 6 Q. Certainly. 7 A. (Witness reviews the documents.) All 8 right. Thank you. 9 Q. Before we talk about Norwood, I'd like 10 to go back to Park 410 and ask you one more 11 question. 12 The Park 410 loan was $80 million; is 13 that right? 14 A. Yes, sir. 15 Q. Were you concerned about the size of 16 the loan? 17 A. You know, I'm always concerned about 18 any loan. But I thought that that was probably 19 one of the better loans that we had looked at and 20 examined because of the strength of the people 21 attached to it and all the things I've been over 22 before. So, I felt very comfortable with it. 21662 1 Q. Let's turn to the Norwood loan, then. 2 And if you take a look at 7021, and if you look at 3 the last page of that exhibit, which is Page 6, is 4 that your signature on there? 5 A. Yes, it is. 6 Q. And that's the real estate investment 7 committee approval? 8 A. Yes, it is. 9 Q. And does that reflect an investment in 10 the property by United? 11 A. Yes, sir. 12 Q. And how much was United investing? 13 A. The investment was -- I think it was a 14 little over -- I think $9,400,000. 15 Q. And if you turn to 7020, did you sign 16 that one, as well, on Page 4? 17 A. Yes, I did. 18 Q. And that's the senior loan committee 19 approval? 20 A. Yes. 21 Q. And that's approving a loan of 22 $30 million? 21663 1 A. Yes, it is. 2 Q. Did you think it was a good -- that 3 Norwood was a good project for United? 4 A. I did, indeed. 5 Q. Why is that? 6 A. Well, first of all, again, I go back to 7 location, location, location. And this is at the 8 intersection of Interstate 35, which is a major 9 north/south freeway through -- it's the only 10 freeway through -- north/south freeway through 11 Austin, and Highway 183 which was the major artery 12 looping from the northwest down to the southeast. 13 And it, too, had most of the major suburban, 14 office, commercial shopping, hotel/motel 15 developments as well as I-35. And even though 16 Austin was starting to show signs of vacancies in 17 the downtown area, there was a trend both in 18 Austin and San Antonio, as well as the United 19 States in general, of office buildings moving from 20 downtown into suburban markets. 21 And so, I thought that, you know, the 22 general indication was that this was a premier 21664 1 location and two excellent freeways, 2 thoroughfares. And 183 had been scaled, I think, 3 to be made into a six-lane expressway. 4 Q. Now, you mentioned that there had been 5 some dropoff in the vacancy -- I mean in the 6 occupancy rates of commercial office space in 7 Austin; is that right? 8 A. Yes, I did. 9 Q. And you said it was away from the 10 downtown -- it was in the downtown area? 11 A. Primarily in the downtown area. 12 Q. Do you remember whether it affected the 13 area where Park 410 was located? 14 A. No. You mean Norwood? 15 Q. Norwood. I'm sorry. I misspoke. 16 A. As best I recall, I think the occupancy 17 was still pretty good out there. 18 Q. Well, let me show you what's been 19 marked as T7436, which is a newspaper article from 20 the American Statesman which is an Austin 21 newspaper. And it says, "Office buildings sprout 22 while Austin occupancy rate drops." 21665 1 Do you see that? That's the headline. 2 MR. NICKENS: I think it says "droop." 3 MR. BLANKENSTEIN: Droop. I'm sorry. 4 Q. (BY MR. BLANKENSTEIN) Now, I see a 5 map on the lower right-hand side of that first 6 page of Exhibit 7436. 7 Do you see that? 8 A. Yes, I do. 9 Q. And it's divided up into eight sectors? 10 A. Yes. 11 Q. Can you tell from that map what 12 sector -- 13 A. Eight or nine sections. 14 Q. I'm sorry. What sector or section is 15 the Norwood property -- would the Norwood property 16 be in? 17 A. It's in Sector 7. 18 Q. And is there an occupancy rate listed 19 for Sector 7? 20 A. Yes, there is. 21 Q. And one for April of -- what was the 22 occupancy rate for April of 1985? 21666 1 A. It showed 98 percent. 2 Q. What does the 98 percent occupancy rate 3 tell you? 4 A. It indicates that there is a shortage 5 of office space in the area. 6 Q. And what sort of project was the 7 Norwood project? 8 A. The Norwood project was primarily 9 focused on office and then, I believe, hotel/motel 10 and I believe some restaurants. 11 MR. BLANKENSTEIN: Your Honor, I would 12 move T7436 into evidence. 13 MR. SCHWARTZ: No objection, Your 14 Honor. 15 THE COURT: Received. 16 Q. (BY MR. BLANKENSTEIN) Mr. Gross, just 17 a few final questions. I asked you at the outset 18 how long I had been representing you, and I think 19 you said about five years. 20 Do you remember that? 21 A. Yes, I did. 22 Q. Who's paying my fees, Mr. Gross? 21667 1 A. I am. 2 Q. Is MAXXAM or anyone else indemnifying 3 you for those fees and other expenses you've 4 incurred in this case? 5 A. They are not. 6 Q. Did you work hard while you were at 7 United? 8 A. I worked very hard. I was 9 conscientious. I did everything in my power to 10 make the institution successful. I worked very, 11 very lengthy days. Many times, six and seven days 12 a week. And at every point, I tried the best I 13 could to turn the institution around. 14 Q. Did you expect to spend the last part 15 of your 60th decade trying to deal with the 16 government in a case like this? 17 A. I did not. 18 Q. How do you feel about the fact that an 19 agency of the United States has accused you of 20 reckless behavior and gross misconduct while you 21 were at United? How has that affected you? 22 A. Well, to say it's devastating would be 21668 1 an understatement. I have spent all of my life 2 trying to build on a basis of integrity, and I 3 have always tried to conduct myself in a manner 4 that was above and beyond reproach. And, you 5 know, your good name is one of the few things that 6 you want to protect and take with you, and it's -- 7 it's caused a lot of sleepless nights. It's 8 caused a lot of nervous symptoms. It's caused a 9 lot of anguish to me and to my family. And as I 10 say, if we all hadn't worked so hard and done 11 everything in our power to make United successful, 12 to make it a survivor, you know, it might not be 13 as devastating. But as I say, it's been a 14 horrible, horrible experience and one that I don't 15 think is justified. 16 MR. BLANKENSTEIN: No further 17 questions, Your Honor. 18 THE COURT: Mr. Nickens, do you have 19 some questions? 20 MR. NICKENS: Just a couple, Your 21 Honor. 22 21669 1 2 EXAMINATION 3 4 Q. (BY MR. NICKENS) Mr. Gross, Mr. Guido 5 asked you some questions about Exhibit B1702, 6 which is at Tab 1658, which referenced a memo 7 "Investment committee policies," Caldwell to 8 Berner memo, June 30th, 1987." I'm going to hand 9 you a document which has been marked as 10 Exhibit B4273. 11 Can you identify that B4273 as the 12 document that is referenced in Exhibit B1702? 13 A. (Witness reviews the document.) It 14 would appear to be the same one. 15 Q. And this is the one you were reviewing 16 and giving your comments as reflected in the other 17 exhibit, correct? 18 A. Yes, it was. 19 MR. NICKENS: Your Honor, we offer 20 B4273. 21 22 21670 1 (Discussion held off the record.) 2 3 MR. RINALDI: Fine. 4 THE COURT: Received. 5 MR. NICKENS: No further questions, 6 Your Honor. 7 THE COURT: Any other respondents? 8 MR. EISENHART: I have no questions, 9 Your Honor. 10 MR. GRIFFITH: No questions, Your 11 Honor. 12 MR. VILLA: No questions, Your Honor. 13 THE COURT: All right. Is there any 14 redirect? 15 MR. SCHWARTZ: Your Honor, we're in 16 somewhat of a dilemma. Based on representations 17 from Mr. Blankenstein, we had expected that his 18 examination of Mr. Gross would continue for most 19 of the day and would -- and that redirect would 20 carry over. Based on that understanding, 21 Mr. Leiman had to go to see his wife in South 22 Carolina that -- she was taking the family on 21671 1 vacation and they needed some help driving back. 2 So, if I could have some time, I could probably 3 put on the redirect if that won't be objectionable 4 to the respondents. But Mr. Leiman is not here to 5 do it. 6 MR. BLANKENSTEIN: Your Honor, as I 7 understand the arrangements when OTS decided to 8 have multiple questioners, they were going to be 9 available to complete the examination. And I 10 think you limited it to three questioners and no 11 more. Mr. Leiman should have been available to 12 complete Mr. Gross' examination. I do think it's 13 inappropriate to carry this witness over until 14 Monday. 15 THE COURT: I don't want to do that. 16 MR. BLANKENSTEIN: Excuse me? 17 THE COURT: I don't want to do that. 18 MR. SCHWARTZ: Nevertheless, Your 19 Honor, I think it's a two-way street. It was 20 based on representations from Mr. Blankenstein 21 that Mister -- 22 MR. RINALDI: Your Honor, I have some 21672 1 questions for the witness with respect to the 2 compensation issues. I believe that Mr. Guido has 3 some questions. And since the rules clearly 4 provide that Mr. Schwartz can do the redirect, 5 I -- my suggestion would be that Mr. Guido and I 6 ask him whatever questions we have and then 7 perhaps take a couple minutes to collect our 8 thoughts after which, when we have completed our 9 examination, perhaps Mr. Schwartz could then 10 complete his. 11 MR. BLANKENSTEIN: As I understood your 12 ruling, Your Honor, there would be no more than 13 three examiners. Mr. Leiman was the examiner, 14 then Mr. Guido, and Mr. Rinaldi. 15 THE COURT: I don't have my order 16 before me, but I know I did say three as a 17 maximum. 18 MR. RINALDI: Your Honor, if it pleases 19 the Court, Mr. Schwartz obviously has worked on 20 the real estate case with Mr. Leiman; and he would 21 simply be asking him redirect questions relating 22 to the same subject area that Mr. Leiman would 21673 1 cover were he here. It seems totally within the 2 intent of your prior order that no more than three 3 examiners should be allowed to ask him questions, 4 and Mr. Schwartz would simply be in a position to 5 ask him those questions that Mr. Leiman might ask 6 were he present. 7 MR. NICKENS: Your Honor, may I 8 inquire? Is it the OTS's intention to finish 9 Mr. Gross' redirect in the time that we have this 10 afternoon, regardless of who asks the questions? 11 MR. SCHWARTZ: Mr. Rinaldi? 12 MR. RINALDI: What? 13 MR. SCHWARTZ: You have a question 14 posed by Mr. Nickens as to the length of redirect 15 on compensation and securities issues. 16 MR. RINALDI: Given the brevity of the 17 direct, I only have -- on cross on compensation 18 issues, I have about four or five areas that we 19 should be able to go into quickly. I would say 15 20 minutes. 21 MR. BLANKENSTEIN: Your Honor, I asked 22 four questions about his compensation. I don't 21674 1 understand how we can have 15 minutes of redirect 2 examination on that. 3 MR. RINALDI: Well, you'll see. They 4 are all germane directly to the issues that you 5 raised. 6 THE COURT: All right. Let's see how 7 much Mr. Guido has. 8 MR. GUIDO: Your Honor, I have about 15 9 minutes. I just have three small areas. 10 Mr. Nickens has asked questions about investment 11 committee policies or is about to -- 12 MR. BLANKENSTEIN: Mr. Nickens didn't 13 ask any questions about -- he's put in one 14 document. 15 MR. GUIDO: And I have a clarification 16 question about those documents. There are two 17 areas that came up with the witness during 18 cross-examination that I'm going to ask the 19 witness about, Your Honor. 20 THE COURT: I see no reasons why we 21 can't complete this witness today. 22 MR. NICKENS: I don't want, because of 21675 1 this issue about Mr. Leiman's absence, to 2 encourage anyone to try to extend this over to 3 Monday. There were discussions about how much 4 time was here, and Mr. Leiman is not here. But I 5 do not want that circumstance to encourage anyone 6 to take more time than is absolutely necessary to 7 complete this witness. 8 THE COURT: Well, we'll finish him 9 today. 10 MR. GUIDO: Thank you, Your Honor. 11 MR. RINALDI: Thank you. 12 THE COURT: We'll take a short recess. 13 MR. SCHWARTZ: Your Honor, if I can ask 14 a point of clarification, is -- am I to understand 15 your ruling that I will be permitted to conduct 16 the real estate examination? 17 THE COURT: Yes. 18 MR. SCHWARTZ: Thank you. 19 20 (Whereupon, a short break was taken 21 from 2:50 p.m. to 3:10 p.m.) 22 21676 1 THE COURT: Be seated, please. We'll 2 be back on the record. 3 MR. VILLA: Your Honor, at the risk of 4 recanting on my prior statement, I actually have 5 about one minute of questions. 6 THE COURT: Proceed. 7 MR. VILLA: Thank you. 8 9 EXAMINATION 10 11 Q. (BY MR. VILLA) Mr. Gross? 12 A. Yes, sir. 13 Q. When you were questioned by 14 Mr. Rinaldi -- and I'm directing the Court's 15 attention to Page 21189 of the transcript -- he 16 asked you the following question. Question, "Let 17 me ask you this. Did you later learn that the 18 regulators were unaware of the employment 19 contracts that USAT approved on June 28, 1988?" 20 Answer, "Later on, I did learn of 21 that." 22 Question, "And what was the regulators' 21677 1 reaction at the time they found out about it?" 2 Answer, "I don't recall. I can't 3 remember. I know we have got some correspondence 4 on it." 5 Now, sir, I'd like you to turn to 6 Exhibit A11031, which is Tab 467. 7 Do you have that before you, sir? 8 A. Yes, I do. 9 Q. And can you tell me what that is? 10 A. That's a letter from -- dated 11 June 30th, 1988, from Art Berner to Neil Twomey. 12 It says, "As discussed, I am enclosing a copy of 13 the employment contract we will be entering into 14 with Larry Connell. I would appreciate your 15 reviewing this agreement and letting me know if 16 you see any major problems. Art Berner." 17 Q. Now, sir, do you know what contract 18 Mr. Berner was sending to Mr. Twomey on June 30th, 19 1988? 20 A. It says he was sending the one he was 21 going to enter into with Larry Connell. 22 Q. And do you recall which company 21678 1 Mr. Connell had a contract with, whether it was -- 2 A. United -- excuse me. 3 Q. Whether it was United -- I'm sorry -- 4 USAT or United Financial Group? 5 A. USAT. 6 Q. And do you recall whether or not that 7 contract was approved on June 28th, 1988, by the 8 board of USAT? 9 A. I believe it was. 10 Q. Let me direct your attention now to the 11 other exhibit that should be up there, which is 12 Exhibit 1380 -- I'm sorry -- Tab 1380, and it's 13 Exhibit T8089. 14 Do you have that before you, sir? 15 A. I do. 16 Q. And can you tell us what that is? 17 A. That's Art Berner's notes about the 18 meeting that we had with the Federal Home Loan 19 Bank and with George Barclay in Dallas on 20 July 5th, 1988. 21 Q. And is there any discussion there of a 22 contract that's pertinent to the question of 21679 1 whether or not the Federal Home Loan Bank of 2 Dallas was aware of the USAT contracts dated -- 3 that were approved on June 28th, 1988? 4 A. Yes. It says, "Jenard Gross began the 5 meeting by claiming we had made an offer to Larry 6 Connell. We forwarded a contract to him, and he 7 indicated he would sign it and return it to us 8 within the next day or so. Mr. Barclay asked 9 whether or not the Dallas bank needed to approve 10 the contract and was told by Mr. Twomey and 11 Mr. Thomas that they did not have to approve it. 12 I mentioned in the meeting that I had forwarded a 13 copy of the contract to Neil Twomey. Neil stated 14 since he had been out of the office for the last 15 few days, he had not gone through his in box and, 16 therefore, had not reviewed the contract." 17 Q. Mr. Gross, when you answered in 18 response to Mr. Rinaldi's questions that the 19 regulators were unaware of the employment 20 contracts that had been approved by USAT on 21 June 28th, 1988, were you correct? 22 A. No, sir, I was not. 21680 1 Q. And the documents you've just seen here 2 indicate to you what? 3 A. That they had copies of the contract. 4 Q. At least of Mr. Connell's contract? 5 A. Yes. And they were all the same 6 contract. 7 MR. VILLA: Thank you. No further 8 questions. 9 10 FURTHER EXAMINATION 11 12 Q. (BY MR. RINALDI) Just following up on 13 Mr. Villa's last question, sir, you met with the 14 Bank Board, did you not, on July the 5th, 1988, 15 and discussed specifically the employment contract 16 that was termed into -- had been entered into with 17 Larry Connell, did you not? 18 A. That's correct. 19 Q. And approximately a week earlier, on 20 June 28th, 1988, the board, including yourself, 21 had approved employment contracts for nine other 22 senior executives of USAT, had they not? 21681 1 A. They had. 2 Q. And when you met with the regulators on 3 July the 6th, 1988, you told them that you were 4 contemplating entering into an agreement with 5 Mr. Connell and you gave them Mr. Connell's 6 contract; is that correct? 7 A. That's correct. 8 Q. And you didn't mention -- 9 A. Well, actually, I think they had 10 already sent it up. 11 Q. And you didn't mention a word about the 12 other nine employment agreements; is that correct, 13 sir? 14 A. I don't see anything that indicates it; 15 so, I really don't know. 16 Q. In fact, sir, you never told the 17 regulators about the other employment agreements 18 until some months later when Brenda Bese came in 19 and conducted an examination for the 1988 20 examination; isn't that correct? 21 A. I don't recall that. 22 Q. And do you recall that at that point in 21682 1 time, she specifically asked for contracts and 2 that it wasn't until September 1988 that the Bank 3 Board had any idea that those contracts had been 4 entered into? 5 A. I wasn't aware of that. 6 Q. Sir, you testified at some considerable 7 length about the condition of the thrift industry 8 in 1987 and '88 and the period shortly before USAT 9 had failed. And you talked about, I believe, 10 Gibraltar, Commonwealth, University, Benjamin 11 Franklin. 12 Do you remember that? 13 A. Yes, I do. 14 Q. And they were all having problems, 15 weren't they? 16 A. Yes, they were. 17 Q. In fact, I think you referred to it as 18 a bloodbath. 19 Isn't that what you said? 20 A. I believe so. 21 Q. And by a bloodbath, did you mean that 22 there were a lot of thrifts that were failing or 21683 1 had failed? 2 A. Yes. 3 Q. Okay. And in that context of a 4 bloodbath, were there a lot of thrifts trying to 5 hire away your executive staff in 1988, sir? 6 A. I have no idea whether they were or 7 they weren't. 8 Q. Now, in response to one of 9 Mr. Blankenstein's questions, you stated -- and I 10 don't want -- I'll try to paraphrase it because at 11 the time I tried to write it down verbatim and 12 it's sometimes difficult and I don't have the 13 transcript. But as an aside, you said, "one 14 reason I didn't have a contract for years" is that 15 you figured that if things went well, you'd be 16 okay and if it didn't, the board would let you go 17 and you would be all right, or words to that 18 effect? 19 A. I believe that's what I said. 20 Q. That's an accurate paraphrasing of what 21 you said? 22 A. Fairly accurate. 21684 1 Q. Is it fair to say that when you went to 2 USAT, you hoped that things would work out well, 3 but you didn't feel any need for an employment 4 contract in 1985? 5 A. That's correct. 6 Q. And it wasn't until March of 1988 that 7 the subject of employment contracts for either 8 yourself or Mr. Munitz ever came up; isn't that 9 correct? 10 A. It could have come up before, but I 11 never asked for one at that time. I didn't ask 12 for one before. 13 Q. In March of 1988 after it had become 14 apparent that USAT couldn't survive without 15 assistance, why did you and Mr. Munitz suggest to 16 Mr. Whatley that you and Mr. Munitz be given 17 employment contracts, sir? 18 MR. BLANKENSTEIN: Objection, Your 19 Honor. Misstates the evidence the testimony in 20 evidence in the case. 21 THE COURT: Well, restate the question. 22 You can ask him whether he did or didn't. 21685 1 Q. (BY MR. RINALDI) Sir, in March of 2 1988, you and Mr. Munitz approached Mr. Whatley, 3 did you not, and suggested to him that new 4 employment contracts be entered into with the 5 senior executives of USAT; isn't that correct? 6 A. I do not recall approaching Mr. Whatley 7 with regard to my contracts. 8 Q. Well, what had changed in the interim 9 between 1985 when you indicated that you were 10 happy to work without a contract and 1988 when, 11 all of a sudden, it was proposed that you be -- 12 you be given a contract that had two years' annual 13 severance benefits? 14 A. As far as I was concerned, I didn't ask 15 for one at the beginning and I didn't ask for one 16 then. So, nothing had changed. 17 Q. Well, let's take a look at that, sir. 18 You indicated that -- and I just want to make sure 19 I got it right. You said Mr. Munitz was involved 20 in compensation. 21 What did you mean by the statement that 22 Mr. Munitz was involved in compensation? 21686 1 A. As I told you all along earlier on, I 2 said the areas of his activity were -- he was the 3 liaison for the compensation committee that dealt 4 with compensation matters. 5 Q. Was he then solely responsible for the 6 proposal that salaries be increased by the amount 7 of the 1987 bonus? 8 A. I don't recall. 9 Q. And then you went on and you testified 10 that the compensation committee set your salary 11 and that you had no input. 12 Do you remember testifying to that in 13 response to -- 14 A. I do. 15 Q. Didn't you have meetings with Barry 16 Munitz and Art Berner on March 28th and 17 March 29th, 1988, where you discussed specifically 18 the 1988 salary increases and the executive bonus? 19 A. We -- I've seen documents that indicate 20 that we did have those meetings. 21 Q. All right. Would you take a look at 22 what's been previously marked as Tab 420? And 21687 1 it's Document 8052. 2 A. (Witness reviews the document.) What 3 do you want me to read? 4 Q. Just read the first sentence of the 5 document. It says, "The following are notes and 6 suggestions to be discussed with Jim Whatley at 7 the compensation committee meeting and reflect 8 meetings of March 28th and 29th, 1988, among 9 Messrs. Gross, Munitz, and Berner." 10 Do you see that? 11 A. I see that. 12 Q. So, you met with Mr. Gross and you met 13 with Mr. Munitz and you discussed the salary 14 increases that were subsequently granted in April 15 of 1988, correct? 16 MR. BLANKENSTEIN: I think he still 17 thinks he's examining Mr. Berner. This is 18 Mr. Gross. 19 Q. (BY MR. RINALDI) I'm sorry. You met 20 with Mr. Munitz and Mr. Berner, did you not? 21 A. That's what it indicates here. 22 Q. And the three of you agreed to suggest 21688 1 to Mr. Whatley a number of things that are listed 2 on T8052; isn't that correct? 3 A. No. It says we -- the notes reflect 4 the suggestions. The proposal -- as I said 5 before, the proposal as to what my salary would be 6 came from Barry Munitz and not from me. That's 7 the way it worked. 8 Q. Okay. But my question is: You said 9 you had no input into your salary. And, in fact, 10 it shows here that you were at a meeting on the 11 28th and the 29th where the very subject of your 12 salary increase, along with the increase of 13 others', was discussed. 14 A. But if somebody gives me the numbers 15 and says "this is what we're recommending," you 16 know, I don't know what -- I don't know how that 17 indicates I had input. 18 Q. And then at the bottom, it says -- 19 A. I was made aware of, I guess. That's a 20 fair statement. 21 Q. Okay. And at the bottom in 22 Paragraph 6, it says, "We will provide for amended 21689 1 employment contracts (along the lines of the draft 2 attached) for those with contracts now plus new 3 contracts for Jenard Gross and Barry Munitz." 4 Now, it doesn't say "Arthur Berner." 5 It talks about "we." 6 Now, did you participate in those 7 discussions where it was discussed to suggest to 8 Mr. Whatley that you and Mr. Munitz receive 9 contracts? 10 A. I think the suggestion arose earlier 11 than those particular meetings. 12 Q. But did you participate in these 13 meetings where the suggestion -- where this 14 subject was discussed? 15 A. It appears I did. 16 Q. Okay. And as a result of those 17 meetings, it was decided to suggest to Mr. Whatley 18 that you and Mr. Munitz receive contracts, wasn't 19 it? 20 A. It was not a result of those meetings. 21 The proposal had already been proposed, and it was 22 one of the things that -- I don't even know 21690 1 that -- well, it was discussed at those meetings 2 apparently. But all I'm saying to you is the 3 proposal was not an outgrowth of that meeting. 4 The proposal preceded the meeting. 5 Q. Yes. But at the meeting, the proposal 6 was discussed and then it was -- it indicates here 7 these are suggestions to be discussed with 8 Mr. Whatley. 9 A. I see that. 10 Q. And you were at the meeting where those 11 suggestions were formulated. And then the next 12 day, on March the 30th, you discussed it with 13 Mr. Whatley, did you not? 14 A. Whether I discussed my contract, I 15 can't tell you. 16 Q. So, in your mind, you had no input into 17 the decisions with respect to your salary or your 18 bonus or your contract; is that correct, sir? 19 A. That's correct. 20 Q. Now, the final question I have for you 21 is -- relates to the subject of the net worth 22 maintenance letter that was sent to you by 21691 1 Mr. Twomey on March the 13th. Do you recall that? 2 MR. VILLA: On May the 13th. 3 Q. (BY MR. RINALDI) May the 13th. 4 Excuse me. I flipped the page. I believe it 5 appears at T8069, and it's Tab 429. I think we 6 have to pull this one. 7 Is it already up here, sir? It may 8 well be. 9 A. What are we looking for? 10 Q. 429, Tab 429. 11 MR. BLANKENSTEIN: Why don't we -- 12 Mr. Rinaldi, why don't I just give you this one? 13 MR. RINALDI: Fine. A well-highlighted 14 copy. 15 Q. (BY MR. RINALDI) Take a look at that, 16 sir. 17 A. I see it. 18 Q. Okay. It appears I -- now, this is the 19 May 13th document. It's T8070, is it? 20 A. No. That's another document. This is 21 the wrong document. I think -- you want the net 22 worth maintenance. This is the wrong one. 21692 1 THE COURT: Which document are we 2 supposed to be focused on right now? 3 MR. RINALDI: I'm sorry, Your Honor. 4 It should be T8070. There were two documents with 5 the same date. 6 MR. NICKENS: What tab? 7 MR. RINALDI: Tab 71. 8 Q. (BY MR. RINALDI) Apparently, it is in 9 as -- I'm sorry, sir. It is T2013. 10 A. Oh, I see. 11 Q. Now, I believe in response to a 12 question that your counsel asked, you indicated 13 that you were not specifically directed by 14 Mr. Twomey to infuse capital but that it -- in the 15 last sentence, it says "Inasmuch as United is 16 below its minimum net worth, UFGI is hereby 17 directed to advise the supervisory agent of the 18 steps which will be taken to infuse capital into 19 United." 20 Do you see that? 21 A. I see that. 22 Q. Okay. And did UFGI advise the 21693 1 supervisory agent of the steps it was taking to 2 infuse capital? 3 MR. BLANKENSTEIN: Your Honor, this is 4 beyond the scope of my examination. He's redoing 5 his direct examination of Mr. Gross. 6 THE COURT: Is this your last question, 7 Mr. Rinaldi? 8 MR. RINALDI: It is. 9 THE COURT: All right. Let's have the 10 answer. 11 A. All right. What did you say? 12 Q. (BY MR. RINALDI) What steps did you 13 take to advise the supervisory agent to -- it 14 indicates here that you were supposed to advise 15 the supervisory agent of the steps that will be 16 taken to infuse capital. 17 You said that you hadn't infused 18 capital. 19 A. That's right. 20 Q. Did you take any steps to advise him 21 that you were going to infuse capital? 22 A. I believe we did. 21694 1 Q. And what did you advise him of? 2 A. I believe -- as I recall, there was 3 something -- Mr. Berner wrote him a letter and 4 said as soon as they heard the outcome of the -- 5 of the application for -- on the PennCorp debt and 6 the forbearance, they would -- we could respond 7 better. 8 Q. Yes. And after you heard the outcome, 9 did Mr. Berner, on behalf of the board, ever make 10 any further response? 11 A. I don't recall. 12 MR. RINALDI: Thank you. I have no 13 further questions. 14 15 EXAMINATION 16 17 Q. (BY MR. SCHWARTZ) Good afternoon, 18 Mr. Gross. My name is Scott Schwartz. 19 We have never met before, have we? 20 A. No, we have not. 21 Q. I'm just going to cover some of the 22 things regarding real estate which seemed to cover 21695 1 a good portion of your cross-examination by your 2 counsel. 3 One of the things that you mentioned 4 was that the items that were looked at in 5 connection with doing a real estate project -- and 6 you mentioned a number of things: The location, 7 competition, growth in the area and the city, 8 zoning, soil conditions, and other things which 9 might prevent the project. 10 Do you recall that testimony? 11 A. Yes. 12 Q. What specifically did you look at to 13 learn about those things in connection with the 14 Norwood and the Park 410 projects in Austin and 15 San Antonio? 16 A. You know, I reviewed these things 13 -- 17 12, 13 years ago, and I can't tell you what I 18 specifically looked at at that time. 19 Q. You can't identify a single thing that 20 you can recall looking at to provide any of that 21 information as you sit here today? 22 A. Well, I know I looked at financial 21696 1 statements. And as I say, I know I looked at 2 the -- 3 Q. Well, financial statements wasn't one 4 of the things you identified in response to that 5 question; but go on. 6 A. I thought I mentioned that, credit 7 reports, or was that to another question? 8 Q. That was in response to another 9 question, at least according to my notes. 10 A. Let's see what else. I looked at a lot 11 of items in conjunction with it. At this point, I 12 can't specifically name them. 13 Q. You mentioned the beige book as one of 14 the things that you relied on for information. 15 Do you recall that testimony? 16 A. Yes. 17 Q. And that was during the time of the 18 Park 410 and the Norwood loan, or do you not 19 recall looking at the beige book in connection 20 with those loans? 21 A. I was on the Federal Reserve board at 22 that time and, you know, I would look at that 21697 1 every month when it came out. 2 Q. I'm sorry. When did you become a 3 member of the Federal Reserve board? 4 A. January '86. 5 Q. And was the information in the beige 6 book put into the files of United? 7 A. I don't recall. 8 Q. If it was there, do you recall your 9 attorneys ever showing you anything in connection 10 with the beige book from the files of United? 11 MR. BLANKENSTEIN: Objection, Your 12 Honor. 13 THE COURT: Sustained. 14 Q. (BY MR. SCHWARTZ) You testified that 15 in 1984, the time period, there was an oil crisis 16 that had started in I guess the 1982 time period 17 and that had continued throughout Texas to affect 18 the economy throughout Texas from '82 to '84-'85 19 time frame? 20 A. I was speaking about Houston at that 21 time, I believe is what I said. 22 Q. So, the '82 oil crisis did not effect 21698 1 other places other than Houston? 2 A. It affected certain parts of the state, 3 but didn't affect a lot of other parts of the 4 state. 5 Q. Okay. And so, in connection with the 6 '82 to '84-'85 time frame, you -- is it your 7 testimony, then, that the other parts -- that 8 San Antonio and Austin were unaffected by the drop 9 in oil prices in that time? 10 A. That's right. They were having strong 11 job growth at that time. 12 Q. You said that some of the effects of 13 the oil crisis on United was that there were a lot 14 of bankruptcies and foreclosures. 15 Do you recall that? 16 A. Yes, I do. 17 Q. And you mentioned that builders were in 18 bankruptcy? 19 A. Yes. 20 Q. Now, in 1984 when you came into United 21 as a consultant -- and this was during that time 22 period that you were talking about the oil 21699 1 problems hitting the Houston at least -- now your 2 testimony is more clear -- in the 1984 time frame, 3 but you mentioned some things that were problems 4 that you encountered in United that included the 5 bankruptcy filings, the foreclosures. Then you 6 said files missing and documents missing from 7 files? 8 A. Yes. 9 Q. Was that related to the oil crisis? 10 A. No. I think he asked me what problems 11 I found in the real estate area. 12 Q. And you mentioned general 13 disorganization in the real estate area. 14 Was that also related to the energy 15 crisis? 16 A. That, as I think I also said, was 17 related to the merger of the two institutions. 18 Q. And at that time, in 1984, you said 19 that Mr. Graham had been the head of the real 20 estate department since the 1970s, as you recall? 21 A. You weren't -- I don't think you were 22 here the other day. We went through this all in 21700 1 my prior testimony, and what I said was most of 2 these problems dealt with the area in which 3 Mr. Patterson was in charge because there were two 4 separate real estate departments and the 5 single-family residential, the condos, the 6 construction loans on houses, the installment loan 7 portfolio, the -- all these things were in 8 Mr. Patterson's department. And that was -- we 9 went through a whole list, and you probably 10 weren't here. 11 Q. Did Mr. Patterson report to Mr. Graham 12 or Mr. Childress? 13 A. No. 14 Q. So, is it your testimony, then, that 15 the development or the developmental real estate 16 or commercial real estate projects, that section 17 was in perfect order at United? 18 A. I didn't say it was in perfect order. 19 Q. Okay. What problems existed in the -- 20 in the commercial areas of the real estate during 21 that time period? Were there also missing loan 22 files? 21701 1 A. We were doing this with -- from my 2 notes. And I think there was something in my 3 notes about some commercial loan files. But, you 4 know, if you want to show me my notes again, I'll 5 see what applied to commercial. 6 Q. That's okay, sir. 7 You also identified that one of the 8 reasons that you wanted to shift from home loans 9 into developmental loans or larger loans was 10 because of the background of the borrowers. You 11 would have a better feel for their ability to 12 repay or something to that effect? 13 A. Yes. The quality of the borrowers. 14 Q. What was Mr. Krasovec and Mr. Minch's 15 background in developing multi-use projects? 16 A. Well, I know that they had done office 17 buildings before. 18 Q. What was their background in developing 19 projects where there were offices, apartments, 20 restaurant pads, and warehouses? 21 A. I'd have to see their resumes to answer 22 that question. I don't remember. 21702 1 Q. And I just wanted to clear something 2 up. You testified that in 1986, the -- in the 3 second oil crisis, when the second oil crisis 4 hit -- the first one being in the '82 time period 5 and then the results of that were felt from '82 to 6 '85. And then the second one hit and the price, I 7 think you testified, dropped from $35 to $10 a 8 barrel? 9 A. That's correct. 10 Q. So, at the time the second oil crisis 11 hit, you already knew or had a track record, if 12 you will, of what the effect on the economy would 13 be of an oil crisis; is that true? 14 A. Well, we -- that's a relatively correct 15 statement, yes. 16 Q. And isn't it true, also, that the 17 second oil crisis began to -- that the price per 18 barrel of oil began to fall at the end of 1985. 19 And by March of 1986, the price had dropped at 20 that point to $10 a barrel but that it was a 21 gradual but incremental downturn in the price per 22 barrel of oil from, say, November of '85 until a 21703 1 low point in March of '86? Is that consistent 2 with your recollection? 3 A. I was thinking it had bottomed out in 4 '87, but maybe that was the economy bottomed out 5 in '87 and the oil -- I thought the oil bottomed 6 out in '87. It could have been bottomed out in 7 '86. 8 Q. You just don't know one way or the 9 other? 10 A. In fact, if you could show me the 11 charts, I could tell you. 12 Q. Unfortunately, I didn't have the time 13 to pull those. 14 A. I somehow thought there was a blip from 15 29 to 32 and then -- 16 MR. BLANKENSTEIN: Your Honor, if he 17 doesn't have the information, I'm not sure what 18 the basis of the question is then. 19 MR. SCHWARTZ: Asking what his 20 recollection is, Your Honor. 21 THE COURT: All right. Next question. 22 Q. (BY MR. SCHWARTZ) You said that among 21704 1 the things you looked at were Metro Studies, and 2 Mr. Blankenstein asked you a couple questions 3 about Metro Studies. 4 Do you recall that? 5 A. I do. 6 Q. One of the documents that 7 Mr. Blankenstein identified that contains Metro 8 Studies is Exhibit T7651 at Tab 689, which should 9 be in the notebooks that Mr. Perry provided to you 10 during your examination by Mr. Blankenstein. 11 MR. BLANKENSTEIN: Can you tell me what 12 document you're looking at? 13 MR. SCHWARTZ: T7659, I believe it is, 14 at Tab -- 15 MR. BLANKENSTEIN: Are you talking 16 about 7651? 17 MR. SCHWARTZ: 7651 at Tab 659. 18 MR. BLANKENSTEIN: Are you representing 19 this is a Metro study? 20 MR. SCHWARTZ: I am not representing 21 this is a Metro study. I thought that's why it 22 was among the documents that you had identified, 21705 1 sir. 2 MR. BLANKENSTEIN: No. 3 MR. SCHWARTZ: Well, this was among the 4 documents that was in the files of United in 5 Mr. Blum's file. 6 Q. (BY MR. SCHWARTZ) Would you take a 7 look and -- 8 MR. BLANKENSTEIN: Your Honor, before 9 Mr. Schwartz continues with the examination, this 10 is not a Metro study. It's an Austin growth watch 11 report. Perhaps Mr. Schwartz wouldn't mislead the 12 witness in that regard. Why don't you tell him 13 what the document is before you ask him a question 14 about it. 15 MR. SCHWARTZ: Actually, I wasn't even 16 going to tell the witness what it was, Your Honor. 17 I was going to ask him to see if he could identify 18 it. So, that's what I'm going to do at this 19 point. 20 MR. BLANKENSTEIN: You represented that 21 it was a Metro study. 22 MR. SCHWARTZ: I thought it was based 21706 1 on it being in your -- if I could continue, Your 2 Honor. 3 Q. (BY MR. SCHWARTZ) Would you please 4 take a look at Exhibit T7651? And would you turn 5 to Page Bates stamped or Imaging No. OW195357. 6 A. I'm sorry. OW195 -- 7 Q. 357, sir. Are you familiar with the 8 City of Austin growth watch reports? 9 A. I don't know that I -- until the last 10 few days, I don't recall having seen it. 11 Q. Okay. Well, Mister -- would you turn 12 to Exhibit -- I mean to Page OW195368? And if 13 you'll -- I'm sorry. Turning back to 358, you'll 14 see that this is the northeast inventory City of 15 Austin growth report for March of 1986. 16 A. I'm sorry. What page are we on now? 17 I'm totally lost. 18 Q. I apologize. It's my mistake for the 19 confusion. Just to confirm the date, I'm looking 20 at OW195358, which is just -- 21 A. Okay. 22 Q. And you'll see down there that that's 21707 1 the northeast inventory report of March 1986. 2 Do you see that? 3 A. I see that. 4 Q. Now, if you would turn with me to 368. 5 Are you there, sir? 6 A. Yes, I am. 7 Q. Okay. And the first -- the first 8 asterisked paragraph there reports that "Even if 9 the area should capture 25 percent of new office 10 development in the metropolitan area at the 11 long-term absorption rate estimated by the Lindley 12 Group (2.2 million square feet per year), it 13 should take up to 45 years for the planned 14 25 million square feet of office space to be 15 absorbed." 16 Do you see that, sir? 17 A. I see that. 18 Q. And further down on that page, it says 19 just above the line "conclusions," "Given the 20 amount of development already in the planning 21 process, land use in the area will be largely 22 committed for the next 35 to 50 years prior to 21708 1 completion of the comprehensive plan." 2 Do you see that, sir? 3 A. I see that. 4 Q. Were you aware of that at the time that 5 you were looking at reports from Austin in 6 connection with any of the material that you saw 7 related to the Norwood project? 8 A. Could I ask you -- what are you 9 representing this is that I'm looking at? 10 Q. It's a City of Austin -- I believe it's 11 called the growth watch report, and it was 12 produced to us from the file -- from Mel Blum's 13 Norwood files. 14 A. Okay. Could I have a minute to look at 15 it? 16 Q. Certainly, sir. 17 A. (Witness reviews the document.) As 18 best I can tell, what this report seems to be is 19 an evaluation of the northeast quadrant of the 20 city as to the zoning of various tracts there. 21 And what it says, if I'm reading this 22 right, is -- I think it only says about 20 percent 21709 1 of what he's referring to is currently zoned and 2 the other is either possible or proposed or might 3 be zoned. 4 And so, I think what -- you know, in 5 reading this, I think somewhere -- let me just 6 look at this. 7 I guess what I'm trying to say is this, 8 I don't think, is what you're representing it to 9 be because, you know, this is 1998. They have had 10 an office building boom in Austin for the last two 11 or three years. Downtown rents are sky high. 12 They are building all kinds of new office 13 buildings. And this says it takes 45 years for 14 the -- this isn't planned office space. This is 15 planned zoning for office space. I mean, that's a 16 totally different ballgame. You're talking 17 about -- you know, all this is saying is all of 18 the property -- it's only 20 percent that is zoned 19 now. And if the other 80 percent is eventually 20 approved for zoning, it would allow the 21 opportunity for land to be zoned -- 22 Q. What page are you reading from, sir? 21710 1 A. I'm reading from what he says here. 2 Q. Which is what page, sir? 3 A. "Even if the area should capture 4 25 percent of new office development in the 5 metropolitan area, at the long-term absorption 6 rate estimated by the Lindley Group (2.2 million 7 square feet per year), it could take up to 45 8 years for the planned 25 million of square feet of 9 office space" -- that -- come on down here -- as I 10 say, if you look back to this front executive 11 summary -- 12 Q. What page are you looking at, sir? 13 A. Looking at Page 195360. 14 Q. 19 -- 15 A. -- 5360. This is talking about zoning. 16 It's not talking about building. It says, "This 17 study was initiated as the near Northeast Area 18 Zoning Study, the fourth in a series of original 19 zoning studies to assign permanent zoning to land 20 inside the city with interim zoning." 21 Q. Down at the bottom, it says "27 22 development projects have been approved or 21711 1 proposed for the area. The" -- 2 A. For the zoning, not more building. For 3 zoning. There is a difference. 4 Q. Sir, it doesn't say whether -- first of 5 all, the document says what it says. 6 MR. BLANKENSTEIN: Is there a question 7 here? 8 Q. (BY MR. SCHWARTZ) And it says, "27 9 development projects have been approved or 10 proposed for the area. These developments -- 11 development plans total 26,000 dwelling units and 12 55 million square feet of non-residential floor 13 area." 14 That would be office space. Right? 15 And the northeast quadrant is the area that 16 comprised -- in which the Norwood development 17 would have been built; is that correct? 18 A. Could I -- it talks about land use. It 19 doesn't talk about building. I just think you -- 20 you know, if you want to -- I'll sit here and 21 read, but this -- what you're characterizing is 22 not what it says. 21712 1 Q. Well, sir, if you look at the first 2 sentence of the -- of Page 60, 360, under 3 "executive summary" where you were just reading, 4 it says, "This report summarizes the most 5 information -- the most recent information 6 available on land use activity and trends in 7 Austin's northeast area." It doesn't say zoning. 8 But put that aside for the minute. All I'm asking 9 you is -- my question -- 10 A. It says, "This report was prepared by 11 the Special Programs Division of the Office of 12 Land Development Services, in cooperation with the 13 Planning and Growth Management Department." And 14 what they are trying to do in this report -- 15 Q. Where are you reading from, sir? 16 A. On the acknowledgement page over here, 17 OW195359. It talks about how many acres there are 18 in the area, how much is inside the city, how much 19 is outside, and how much is currently developed 20 and how much is currently planned. And it 21 accounts for half -- it's talking about vacant 22 land. It's not talking about improvements. 21713 1 Q. My question to you, sir, was with 2 respect to the information on Page 368 which is 3 what I read to you. 4 Were you aware of the City's reports 5 regarding that information -- that area at that 6 point in time? 7 MR. BLANKENSTEIN: That may be the 8 current question, but it wasn't the question 9 before. 10 THE COURT: All right. Did you hear 11 that question, Mr. Gross? 12 THE WITNESS: I don't know if I was 13 aware of this at that time or not. 14 Q. (BY MR. SCHWARTZ) You also testified 15 earlier that you reviewed plans and specs, 16 feasibility studies -- excuse me. I apologize. I 17 misspoke. 18 You said that the real estate 19 department reviewed plans and specs, feasibility 20 studies, and the economics of a deal and the 21 financial statements. 22 Did you review plans and specs for 21714 1 projects, feasibility studies? You testified that 2 you did review financial statements, and I didn't 3 get an answer on economics of a project. 4 A. I did not go into the detail that the 5 real estate department went into in looking at 6 each and every proposed loan or joint venture. 7 They would discuss these with me from time to 8 time. They would bring me information. I 9 reviewed information on them. I did not sit and 10 read every page of every document. 11 Q. Mr. Blankenstein showed you this 12 newspaper article regarding office space in Austin 13 and he showed you that chart, correct? 14 A. Yes. 15 Q. The information on that chart which 16 indicated, I believe, it was 98 percent occupancy 17 in that section -- 18 A. Let me see if I can find it. Just a 19 second. 20 Q. Well, here's a copy, sir. 21 A. All right. 22 Q. That information is certainly 21715 1 inconsistent with -- is certainly inconsistent 2 with what's reported in the City of Austin growth 3 report; is that correct? 4 MR. BLANKENSTEIN: Objection, Your 5 Honor. He's misrepresenting what the City of 6 Austin growth report represents. He asked 7 Mr. Gross that question. Mr. Gross explained it 8 to him. And he, I guess, doesn't learn from 9 Mr. Gross' explanation as to what that growth 10 report stated. 11 MR. SCHWARTZ: My question stands, Your 12 Honor. 13 The question is: Is it consistent 14 with. 15 THE COURT: All right. Can you answer 16 that? 17 THE WITNESS: It is consistent. 18 Q. (BY MR. SCHWARTZ) Okay. If you would 19 look at the article in the fourth paragraph down, 20 do you see it starts out "however"? 21 A. Yes. 22 Q. It talks about rent concessions 21716 1 necessary in the area? 2 A. Let's see. I see that. 3 Q. Okay. Do you recall being advised that 4 rent concessions were being given in the Austin 5 area around Norwood -- excuse me -- at the time 6 the loan committee approved the Norwood project? 7 A. I don't recall. 8 Q. Do you know what rent concessions are, 9 sir? 10 A. I do. 11 Q. What are they, briefly? 12 A. They are perks or benefits given to 13 adjust the rent on an apartment or an office or 14 shopping center, whatever it may be, piece of real 15 estate. 16 Q. And why are rent concessions given? 17 A. To get tenants to occupy the space. 18 Q. Are rent concessions consistent with a 19 strong -- with a strong office market? 20 A. Define the word "concession" before I 21 answer the question. 22 Q. Well, you just defined it as an 21717 1 incentive to get people to rent office space. So, 2 I'm asking you about -- 3 A. Even in a strong market, usually some 4 concessions are given. 5 Q. And is it more common that rent 6 concessions are given in a weak market? 7 A. I would say probably larger concessions 8 are given in a weak market, but I think that 9 concessions are given in strong markets, as well. 10 Q. Mr. Blankenstein asked you questions 11 about the appraisal, the practice at United of 12 obtaining appraisals. 13 I believe your testimony was that 14 appraisals were obtained to substantiate the 15 conclusions reached by the real estate department 16 regarding the value of the property. 17 Is that basically consistent with your 18 testimony? 19 MR. NICKENS: Your Honor, I think the 20 word was "corroborate." 21 A. And it was the value of collateral, I 22 guess, instead -- I think I probably used. 21718 1 Q. (BY MR. SCHWARTZ) Okay. The value of 2 the collateral? 3 A. Yes. 4 Q. With that correction, did I -- is that 5 essentially what your testimony was? 6 A. And the word "corroborate." 7 Q. Corroborative. Okay. 8 Would you take a look at 9 Exhibits 7670 -- T7670, which is at Tab 654 which 10 should be in your book. 11 A. Do I have it? Oh, wait. I'm sorry. 12 What's the tab? 13 Q. Tab 654, which is the March 17th -- 14 A. Wait just a minute. I spilled some 15 water here. 16 Q. Certainly. Do you need another napkin? 17 A. I'm sorry. What tab are we looking 18 for? 19 Q. We're looking at 654. And then I'm 20 also going to ask you to pull out -- 21 A. I don't have it that way. I have Ts 22 and Bs and numbers. 21719 1 Q. T7670. Well, I can just show you mine. 2 Here you go, sir. That's T7670. And I'm also 3 showing you Tab 687, which is T7020, and Tab 688 4 which is T7021. 5 Tab 687, T7020, is the senior loan 6 committee approval of the Norwood project on 7 June 2nd, 1986. And 688, T7021, is the June 2nd, 8 1986 approval of the real estate investment 9 committee. 10 A. Do I have all of these? Oh, you're 11 giving them to me? 12 Q. I'm giving you those, sir. 13 Would you show me where in there it 14 reports that the real estate department has 15 corroborated or substantiated the value of the 16 property. 17 MR. BLANKENSTEIN: That's not the 18 testimony. The testimony was that the appraisal 19 corroborates the value of the collateral. The 20 appraisal wasn't obtained. It clearly states 21 that, that the approval was made. 22 MR. SCHWARTZ: Strike the question. 21720 1 Q. (BY MR. SCHWARTZ) With 2 Mr. Blankenstein's objection in mind, would you 3 please show me where in those documents it 4 identifies the real estate department's valuation 5 of the value of this property? 6 MR. DUEFFERT: Your Honor, if we could 7 have a second. Mr. Schwartz reeled off about four 8 exhibits real quickly. We don't have them before 9 us. If he could slowly go through them, we could 10 find them. 11 MR. SCHWARTZ: It's T7670 at Tab 654, 12 sir. 13 THE COURT: All right. Let's take that 14 one. One at a time. 15 MR. SCHWARTZ: All right, sir. 16 Q. (BY MR. SCHWARTZ) First of all, just 17 to identify it for the record, that is the 18 Park 410 approval on March 17th, 1986; is that 19 correct? 20 A. March 17th, 1986. 21 Q. Okay, sir. Would you show me where on 22 there it indicates the real estate department's 21721 1 valuation of the Park 410 property? 2 A. I don't think I said that it would show 3 on the application for the loan. I said that they 4 did that. 5 Q. So, when you went to the senior loan 6 committee, you just expected that -- otherwise, 7 why would they be giving you the loan? Is that an 8 assumption you made when you went into the 9 meetings? 10 A. As I said before, we relied -- let me 11 just see what I can find in here. (Witness 12 reviews the document.) Let me stop and read and 13 see what it says. (Witness reviews the document.) 14 Okay. Now, would you repeat your 15 question? 16 Q. The only -- the question was if you 17 could identify where in there it indicates the 18 real estate department's valuation of the value of 19 this security? 20 A. I don't see it in here. 21 Q. Also on the front of that document, I 22 think it indicates the financial -- a very brief 21722 1 summary of the financial statement of 2 Mr. Rosenberg, among others? 3 A. I see that. 4 Q. Among the documents that 5 Mr. Blankenstein identified which should be in 6 your book is B563 -- and I don't have the tab 7 number marked on here. 8 A. I'm about to drown in a sea of 9 documents here. 10 Q. It's overwhelming for me, too. 11 MR. DUEFFERT: Your Honor, for the 12 record, I believe it's Tab 772. 13 Q. (BY MR. SCHWARTZ) Okay. It's B563. 14 You can go ahead and take a look at my copy. 15 That's the August 1985 financial statement of 16 Mr. Rosenberg, correct? 17 A. It would appear to be. 18 Q. And that indicates his cash assets at 19 $12 million, correct? 20 A. Yes. 21 Q. And it goes on for about five pages 22 listing the source of his -- descriptions of his 21723 1 assets? 2 A. I see that. 3 Q. And then there's two lines devoted to 4 liabilities, is that right, on the sixth page? 5 A. I see that. 6 Q. Did you ask questions about the nature 7 of his liabilities after he goes on for five pages 8 listing the sources of his assets? 9 A. I don't recall. 10 Q. And also, the $12 million is consistent 11 with what's on the approval sheet, Tab 654 I think 12 it is, of the Park 410. That's the 13 12-million-dollar amount; is that correct? 14 A. Yes. 15 Q. And that was some -- what's the date of 16 the financial statement again, sir? 17 A. August of 1985. 18 Q. Okay. So, there's -- that financial 19 statement was at least eight months old? 20 A. It depends on -- it depends on when in 21 August it was. But it could be six and a half 22 months old. Could be seven and a half months old, 21724 1 something like that. 2 Q. Okay, sir. 3 A. I would assume if it's August, it's 4 usually the end of the month. So, I would assume 5 it's four, five, six -- six months and 17 days. 6 Q. Okay, sir. You also testified that -- 7 in connection with the appraisals, that one of 8 three things could happen if the appraisals were 9 not substantiated or corroborated or whatever word 10 you want to use. 11 A. Okay. 12 Q. Do you recall that? 13 A. Yes, I do. 14 Q. One of them was obtaining additional 15 collateral? 16 A. Right. 17 Q. One of them was to reduce the value of 18 the loan amount? 19 A. Yes. 20 Q. One of them was to reject the loan? 21 A. Right. 22 Q. There is a fourth alternative, too, 21725 1 isn't there? 2 A. What is that? 3 Q. Isn't it also possible to get a higher 4 appraisal? 5 MR. BLANKENSTEIN: Maybe that's one of 6 Mr. Schwartz' options. Certainly the witness 7 hasn't testified that way. 8 MR. SCHWARTZ: I don't understand the 9 legal nature of that objection. I would like the 10 witness to answer the question, Your Honor. 11 THE COURT: All right. 12 A. You know, we got an appraisal and we 13 had an appraisal. Now, what is your question? 14 Did we get a higher appraisal? 15 Q. (BY MR. SCHWARTZ) Yes, sir. 16 A. We didn't go get a higher appraisal. 17 Q. On the Park 410 loan, United was the 18 only institution that was interested in making 19 this loan. 20 Are you aware that other lenders had 21 been contacted to make this loan? 22 A. I don't recall. 21726 1 Q. That Alamo, specifically, had turned it 2 down? 3 A. As I say -- 4 Q. Gibraltar? 5 A. I don't recall that. 6 Q. By the way, did you kick the dirt in 7 Austin for the Norwood project, as well? 8 A. I have been on that site, yes. 9 Q. Did you kick it before the -- before 10 you made the loan? 11 A. Yes. 12 Q. And does "kicking the dirt" give you 13 some idea of the growth in the area? 14 A. No, but the information that we gather 15 from other sources give us that. 16 MR. SCHWARTZ: That's all I have, Your 17 Honor. 18 THE COURT: Mr. Guido. 19 20 21 22 21727 1 2 FURTHER EXAMINATION 3 4 Q. (BY MR. GUIDO) Good afternoon, 5 Mr. Gross. 6 A. Good afternoon. 7 Q. I only have a couple of questions. 8 A. I don't believe it. 9 Q. I appreciate your humor. 10 A. Could I put you under oath and let you 11 make that statement? 12 Q. You testified on cross-examination that 13 in your view, USAT's problem was the business 14 cycle. 15 Do you recall that? 16 A. I do. 17 Q. I'd like to show you the document which 18 is in the record as T8030. It's at Tab 1797. 19 It's a memorandum. It's one of your notes that 20 you would write -- 21 THE WITNESS: Excuse me. Your Honor, 22 could I take a short break? 21728 1 THE COURT: We'll take a short recess. 2 3 (Whereupon, a short break was taken 4 from 4:02 p.m. to 4:20 p.m.) 5 6 THE COURT: Be seated, please. We'll 7 be back on the record. 8 Mr. Guido, you have a few questions? 9 MR. GUIDO: Yes, Your Honor. 10 THE COURT: Proceed. 11 THE WITNESS: You said a couple. 12 Q. (BY MR. GUIDO) Mr. Gross, would you 13 take a look at 8030 which I've put in front of 14 you? Do you recall my question was that you said 15 that USAT's problem was the business cycle. 16 Do you recall your testimony with 17 regard to that? 18 A. I recall that. 19 Q. Okay. Take a look at Item 4 in your 20 notes in 8030. See where it addresses 21 mortgage-backed securities, junk bonds, stock 22 arbitrage? 21729 1 A. I see that. 2 Q. And do you see where it says you can't 3 get a -- you can get a yield but can't manage risk 4 well? 5 A. I see that. 6 Q. Is that your view of the management of 7 the mortgage-backed securities, junk bonds, and 8 stock arbitrage portfolios at the time? 9 MR. DUEFFERT: Excuse me, Your Honor. 10 I'm fairly young, but I can't hear his question. 11 Q. (BY MR. GUIDO) Was that your view of 12 the management of the mortgage-backed securities, 13 junk bonds, and stock arbitrage portfolios at the 14 time? 15 A. (Witness reviews the document.) It 16 would indicate that I prepared these. So, those 17 are some observations that I had made with 18 regard -- 19 Q. Okay. And do you see where it 20 indicates that the asset value loss overwhelmed 21 the income stream? 22 A. I see that. 21730 1 Q. Okay. Was that your view at the time? 2 A. I think we discussed that earlier. I 3 think that's -- again, we discussed Sandy's 4 portfolio that was -- she said was designed to 5 maintain the income stream even with these big 6 swings in asset value, and that's what had 7 occurred there. 8 Again, my observation is right; but 9 what she is saying is if we held it to the end, we 10 would not incur loss. 11 Q. Well, turn to the last page and let's 12 look at your views under "assets." 13 A. All right. 14 Q. Take a look and see "mortgage-backed 15 securities," Item No. 5 there. 16 A. I see that. 17 Q. See where it says "wind down"? 18 A. I see that. 19 Q. That doesn't indicate that you accepted 20 Sandy Laurenson's rationale for the 21 mortgage-backed security portfolio at this time, 22 does it? 21731 1 A. I'm saying that was her rationale for 2 that occurring, and this is obviously one of the 3 things that I'm suggesting that we follow as a 4 strategy for the future. 5 Q. To wind it down? 6 A. Yes. 7 Q. What does "wind down" mean to you? 8 MR. NICKENS: Your Honor, this goes far 9 beyond anything on our direct. He prefaced it by 10 saying "you expressed a view about real estate 11 being the problem," and now he's going back into 12 his mortgage-backed securities examination. 13 MR. GUIDO: Your Honor, I think the 14 question was -- and he said -- that USAT's 15 problems was the business cycle. I'm now 16 addressing the extent to which USAT's problem was 17 the management of USAT, Your Honor. 18 THE COURT: All right. 19 Q. (BY MR. GUIDO) Look at Item No. 6, 20 what your views are on junk bonds. 21 What does that say? 22 A. It says, "A disaster waiting to 21732 1 happen." But the disaster never occurred. That's 2 an observation I made. 3 Q. Did the business cycle put the junk 4 bonds on USAT's portfolio? 5 A. You know, if that's what you're trying 6 to deal with, let's back off and deal with it and 7 let's talk about the business cycle. 8 At the time this was all going on, we 9 had some $700 million in non-performing assets and 10 we charged off a lot of other assets. And those 11 asset losses which, again, were primarily real 12 estate and, to a great extent, residential as well 13 as commercial stemmed from the business cycle. 14 The losses there inundated the institution. The 15 high-yield bond portfolio always operated 16 profitably. This is written right after the stock 17 market crash of 1987. And until then, the equity 18 arbitrage portfolio had operated profitably. Like 19 everybody in the stock market, it took a bath. 20 But even with that, by '88, it recovered. And 21 over the length of the cycle, it was profitable. 22 If you take the size of the 21733 1 institution, which was approximately $3.4 billion 2 at the time of the merger, and take $700 million 3 worth of assets plus whatever else may have been 4 charged off in the interim, you would have a huge 5 number. And most of those losses came about 6 through the economic cycle, and I think it's an 7 extremely valid statement. 8 Q. Do you know what the losses were in the 9 mortgage-backed security portfolio at USAT? 10 A. We've been through that about three or 11 four times. And what I told you is that Sandy -- 12 all I can do is represent -- at that moment in 13 time, at that flash, it was X and then it was Y 14 and then it was Z. But the thesis was that it 15 would maintain its stream of income and 16 eventually, it would be -- 17 Q. No. I understand what the theory was. 18 I asked you: Do you know what the actual losses 19 were on the mortgage-backed securities portfolios 20 at USAT? 21 MR. NICKENS: At what point? Actual 22 losses? 21734 1 MR. GUIDO: When they were liquidated. 2 MR. NICKENS: You mean after the 3 institution was taken over? 4 A. I have no idea. 5 Q. (BY MR. GUIDO) Do you know what the 6 losses have been calculated by the expert 7 witnesses who have testified in this case? 8 A. I do not know. 9 Q. Now, I'd like to direct your attention 10 to a document that Mr. Nickens showed you. It's 11 the second document in the stack in front of you. 12 He introduced this document saying that it was the 13 document that was referred to in a document that I 14 had shown you earlier. 15 Do you recall that occurring with 16 Mr. Nickens? 17 A. Do you have the other document? 18 Q. No, I don't. I don't have the other 19 document. 20 Do you recall Mr. Nickens showing you 21 this document and introducing it into the record 22 and indicating it was a document that was referred 21735 1 to in a document that I had shown you? 2 A. I remember him saying that. 3 Q. Okay. Thank you. 4 Now, will you take a look at the next 5 document that's in front of you which is at A1128A 6 which is at Tab 1449? 7 A. I see that. 8 Q. Okay. And I direct -- and that says -- 9 if you look on the second page, it says it's the 10 minutes of the board of directors of United 11 Savings Association of Texas. 12 A. I'm sorry. Oh, the second -- you 13 know -- okay. The first page of the minutes? 14 Q. The first page has the exhibit number 15 on the file folder. Okay? 16 A. K005538. 17 Q. That's the page. It says 18 February 19th, 1987. 19 Do you see that? 20 A. I do. 21 Q. It talks about the minutes of the board 22 of directors of United Savings Association of 21736 1 Texas, does it not? 2 A. Yes. 3 Q. Okay. Now, turn to K005603 on that 4 document. 5 A. (Witness reviews the document.) All 6 right. I have that page. 7 Q. Okay. And you see that it has down 8 there columns. Securities, one column. 9 Authorized transactions, another. 10 Is that the page you're looking at? 11 A. Security, authorized transactions, 12 maximum balance outstanding. 13 Q. Now, see the "resolved" right before 14 that? 15 A. Yes. 16 Q. It says, "It shall be the policy of 17 United Savings Association of Texas to undertake 18 trading activities related to the mortgage-backed 19 securities investment portfolio trading operation 20 from time to time in order to reduce the net 21 interest rate exposure of the association." 22 Do you see that? 21737 1 A. I see that. 2 Q. Okay. Now, take a look at the exhibit 3 that Mr. Nickens introduced into the record in the 4 course of your cross-examination. 5 Would you take a look and see if you 6 can find, under February 19th, any mention of that 7 resolution? 8 A. (Witness reviews the document.) 9 Q. February 19th, 1987. I think if you'd 10 turn to Page 9, it will speed up the process. 11 A. (Witness reviews the document.) Do I 12 see anything there mentioning -- 13 Q. Uh-huh. 14 A. No, I do not. 15 Q. Do you know why the board of directors' 16 policy isn't included there? 17 A. I have no -- I do not know why, but my 18 whole purpose of my memo originally was to try to 19 get all of this put together in one place where it 20 could be readily available. And why it's not 21 here, I have no earthly idea. 22 Q. Now, this says -- if you look at Page 2 21738 1 of Exhibit B4273, it explains what this is a 2 summary of. Page 2 of the exhibit. Just look at 3 the second page of the exhibit. 4 A. Okay. 5 Q. Okay? See at the top it explains what 6 it is? Says it's derived, for the most part, from 7 the minutes of the investment committee. 8 Do you see that? 9 A. I see that. 10 Q. Okay. Take a look at Page 2 of the 11 document, which is the third page of the exhibit. 12 See May 8, 1986? 13 A. Yes, I do. 14 Q. It says "UFG board of directors" there? 15 A. I see that. 16 Q. Okay. There is at least one entry in 17 here from the board of directors minutes. 18 Do you know why the board of directors 19 minutes were excluded from the summary? 20 A. I do not know. 21 Q. Was it an attempt by someone, do you 22 know, to mislead? 21739 1 A. It was not -- I do not know, but I'm 2 sure it was not an attempt to mislead. 3 Q. Okay. Now, I'd like to ask you one 4 other question. 5 You testified that when you joined USAT 6 as a consultant you had successfully turned around 7 3,000 apartment units, I think is what your 8 testimony was? 9 A. That's correct. 10 Q. You also testified that you were a real 11 estate developer, were you not? 12 A. That's correct. 13 Q. And when you developed properties, did 14 you obtain financing for those properties? 15 A. Yes, I did. 16 Q. Okay. And you were a developer -- real 17 estate developer until 1984 when you joined USAT. 18 Right? 19 A. That's correct. 20 Q. And that -- you also testified that the 21 economy, because of the oil crisis, had 22 deteriorated around 1984. 21740 1 Do you recall that testimony? 2 A. No. I think I said the economy started 3 deteriorating in 1982 and '83 and was recovering 4 in '84. 5 Q. Okay. Now, you indicated that you 6 developed the properties. You now testified that 7 you financed them with first mortgages. Right? 8 A. Yes. 9 Q. Now, you've also testified that you had 10 limited partnerships that you created? 11 A. I testified to partnerships. 12 Q. Partnerships that you created. 13 And did you sell the properties that 14 you developed, financed with mortgage money, to 15 investors? 16 A. We sold them to third parties, yes. 17 Q. Okay. And did you take back financing 18 for the purchase price? 19 A. In some instances, we did. In some, we 20 did not. 21 Q. Second mortgages. Right? 22 A. Well, sometimes second. Sometimes what 21741 1 we call a wraparound mortgage. 2 Q. Okay. Tell us what a wraparound 3 mortgage is. 4 A. A wraparound mortgage is a mortgage 5 that is placed on a property when a sale is made 6 which gives you better control of the underlying 7 asset. 8 Q. Now, when you took back that financing, 9 what happened to the payments from the investors 10 on that financing when the economy deteriorated in 11 '82, '83? 12 A. It depended on -- some of them, nothing 13 happened. In '82 and '83, I'd have to look back 14 but -- 15 Q. Did a number of those investors not pay 16 on their mortgages, their wraparound mortgages? 17 A. In '82 and '83, I don't think so. 18 Q. So that those mortgages were performing 19 mortgages? 20 A. Yes. 21 Q. You didn't have to take back any 22 property? 21742 1 A. We took a couple back, but much later 2 on. 3 Q. After '82, '83? 4 A. Yes. 5 Q. Prior to joining USAT? 6 A. I don't -- I'd have to go look. I'm 7 not sure. 8 Q. But you did -- you do recall that a 9 number of them went default? 10 A. As I say, I think there were two. 11 Q. Two went default? 12 A. I believe so. 13 Q. Out of how many? 14 A. Oh, I would imagine 10 or 15. 15 Q. Okay. Two out of about 10 or 15. What 16 did that do to your cash flow? 17 A. Reduced it some. 18 Q. And what did it do to your assets? 19 A. To my assets? 20 Q. Uh-huh. 21 A. I don't think it really did anything to 22 my assets. 21743 1 Q. Did it have any impact on your ability 2 to service the first mortgages on the other 3 properties? 4 A. Oh, no. 5 Q. So, you didn't have any problem 6 servicing those mortgages -- 7 A. No. 8 Q. -- on the properties? 9 MR. GUIDO: No further questions, Your 10 Honor. 11 MR. NICKENS: Your Honor. 12 THE COURT: Mr. Nickens, you have a 13 question? 14 MR. NICKENS: Just a few, Your Honor. 15 16 FURTHER EXAMINATION 17 18 Q. (BY MR. NICKENS) If you would look at 19 Exhibit T8030, Mr. Gross. This is the one that 20 Mr. Guido questioned you about. 21 Mr. Guido asked you about Roman Numeral 22 IV -- 21744 1 A. Yes. 2 Q. -- in relationship to questions -- 3 cross-examination of you about your testimony 4 concerning the state of the economy. 5 Would you read to the Court what Roman 6 Numeral III is? 7 A. Roman Numeral III says, "Real estate 8 investment in a bad economic and political 9 environment. Texas depression, tax law changes." 10 Q. Would you turn the page and look at the 11 second page of Exhibit T8030 under "premises"? 12 What does No. 2 say? 13 A. "State industry in shambles. Net 14 worth. 1800 branches, need 650. Banks in 15 desperate shape. Likely to be absorbed and 16 shrunk." 17 Q. What does No. 3 say? 18 A. "Unfavorable economic climate. Tax 19 laws, volatility of interest rates at all times. 20 Peak market depressed. Likely national recession 21 as soon as credit markets tighten. We are a high 22 risk borrower." 21745 1 Q. Were those items indicative of the 2 economic crisis that Texans were suffering through 3 at this period of time? 4 A. Yes, they were. 5 Q. Now, let me ask you about the 6 document -- and I don't have a copy. B4273 that 7 Mr. Guido questioned you about. Look at the first 8 page and read to the Court what the person is 9 purporting to review. 10 A. "Attached here to is a revised summary 11 of investment committee policies and procedures as 12 prepared jointly by Walter Sanders and the legal 13 department." 14 Q. Does it purport to review board 15 minutes? 16 A. It does not. 17 Q. Could that be a possible explanation as 18 to why a board policy is not included in a 19 document purporting to review investment committee 20 policies? 21 A. Yes, it could. 22 MR. NICKENS: No further questions, 21746 1 Your Honor. 2 MR. GUIDO: I only have one question, 3 Your Honor. 4 THE COURT: All right. Do any of the 5 other respondents -- 6 MR. BLANKENSTEIN: No questions, Your 7 Honor. 8 MR. GUIDO: I only have one other 9 question. 10 11 FURTHER EXAMINATION 12 13 Q. (BY MR. GUIDO) Did the investment 14 committee operate independently of the board of 15 directors? 16 A. No, it did not. 17 MR. GUIDO: No further questions, Your 18 Honor. 19 THE COURT: All right. Thank you, 20 Mr. Gross. You may step down. 21 THE WITNESS: Thank you. 22 THE COURT: We'll adjourn -- are there 21747 1 any other matters -- 2 MR. GUIDO: Your Honor, Mr. Nickens and 3 I are still discussing the scheduling matter. We 4 hope to be able to give you a report early next 5 week. 6 MR. NICKENS: There is one other 7 matter. We would like to know who the witnesses 8 for next week will be. We believe that 9 Mr. O'Connell is going to take the greater part of 10 the three-day schedule; but in the event that he 11 is not available, who will the next witness be? 12 MR. GUIDO: Your Honor, we believe that 13 it will be either Mr. Twomey or Mr. Lapidus 14 depending on whether or not Mr. Lapidus has 15 already committed himself to do some examinations 16 for the OTS. That's the order we intend to 17 proceed with. And I think that with regard to 18 Mr. Lapidus, Mr. Nickens has something to say. 19 MR. NICKENS: Well, that's a rather 20 dramatic difference, Mr. Lapidus or Mr. Twomey. 21 Mr. Twomey is a witness for whom we would expect 22 to be on the stand several days. And Mr. Lapidus, 21748 1 I took his deposition during the course of the 2 proceeding, as you recall. And he indicated that 3 the FDIC had given him a series of documents which 4 now the FDIC has claimed are privileged and will 5 not be produced to us. And I've been informed by 6 Mr. Guido that the OTS won't produce them because 7 the FDIC asserts a privilege to them. 8 This is a matter that I need to raise 9 with the Court as to whether or not we are 10 entitled to those documents. Mr. Lapidus was an 11 examiner brought in in the Southwest examination. 12 And I will file the appropriate papers prior to 13 Mister -- Monday, prior to Mr. Lapidus' testimony. 14 But your ruling on that might influence whether or 15 not we are prepared to go forward with Mr. Lapidus 16 on Wednesday or so if he should be available. We 17 need to know whether it's Twomey or Lapidus, in 18 any event. 19 THE COURT: Well, it sounds like it may 20 be a problem with Mr. Lapidus. 21 MR. GUIDO: Your Honor -- 22 THE COURT: Is the situation that he 21749 1 has relied on documents that are now claiming to 2 be privileged? 3 MR. GUIDO: No, Your Honor. I think he 4 testified that he never even looked at the 5 documents. It's some documents that were sent to 6 him that he put in either the basement of his 7 house or they were at his mother's. But he 8 testified at the deposition that he didn't look at 9 the documents, Your Honor. 10 The other thing I have to point out, 11 Your Honor, is that the letter from the Federal 12 Home Loan Bank Board went to Mr. Nickens quite 13 some time ago. It went to his regular office -- 14 THE COURT: What letter is this? 15 MR. GUIDO: The letter from the FDIC 16 indicating that there were documents that they 17 wouldn't produce. We have produced to him 18 everything that -- other than what the FDIC 19 claimed privilege to. And he was notified at the 20 time of the deposition that that would -- that we 21 would claim -- we felt obligated to claim whatever 22 privilege the FDIC wanted to argue about that. 21750 1 They did send him a letter some time 2 ago. It never got to him until yesterday because 3 he's been working in a different office. And we 4 understand his problem with this. I have been 5 trying to accommodate him with this, and we've had 6 discussions about this problem. But I think 7 attached to my letter today is the FDIC's letter, 8 and it is some days ago, Your Honor. 9 MR. NICKENS: Well, Your Honor, the 10 implication is that I've had this for some time 11 and sat on it. The fax line is dated 8/25, three 12 days ago. And it was delivered to my other 13 office, where they knew I wasn't at the time. But 14 in any event, we have not sat on our rights with 15 regard to Mr. Lapidus. I have written a letter 16 which was not replied to until this document, and 17 then the OTS did not inform me of their position 18 formally by letter until this morning by 19 Mr. Guido's letter of August 28th, today. 20 THE COURT: This sounds like a familiar 21 dispute from some time ago before this thing 22 started. 21751 1 MR. NICKENS: Mr. Hargett had a similar 2 issue, Your Honor. He was an expert witness in -- 3 Mr. Lapidus is not an expert witness. He is a 4 fact witness to whom the FDIC gave certain 5 documents. And contrary to Mr. Guido's 6 representation, he identified those documents at 7 the time of his deposition. 8 Now, interestingly, he identified them 9 differently than what I'm now told they are. He 10 told me that they were witness interview notes. 11 And I am now told that they are analyses of the 12 FDIC's case that they shared with him back in 1991 13 and refuse to produce at this point in time. 14 THE COURT: All right. Are you going 15 to file something? 16 MR. NICKENS: I will file something, 17 Your Honor. We just need to know -- and the 18 reason, Your Honor, is that Mr. Villa would handle 19 the -- or part of the examination of Mr. Twomey. 20 I will handle the examination of Mr. Lapidus. And 21 it has been our practice for them to inform us, 22 you know, who the witnesses are going to be the 21752 1 following week on the prior Thursday. Mr. Villa 2 will have to make different arrangements if it's 3 going to be Mr. Twomey, and that's the reason that 4 we're asking for notice as to who the witness -- 5 who they intend to call. Frankly, it is our 6 expectation that Mr. O'Connell will take the 7 entire time. But if he doesn't, we'd like to know 8 who's next. 9 MR. GUIDO: Your Honor, Mr. Nickens, I 10 think, has correctly indicated what his and my 11 conversations have been for a number of days. I 12 have always indicated that it was either 13 Mr. Twomey or Mr. Lapidus. I have also always 14 indicated to him that I was sensitive to his 15 interest in raising a challenge to the FDIC's 16 privilege and that I understood that that was one 17 of the factors. That's why I said it's either one 18 or the other. We're not particularly happy about 19 breaking up Mr. Twomey either. But we felt 20 obligated to indicate to Mr. Nickens where we were 21 going after Mr. O'Connell is on the stand. 22 Mr. Nickens has been telling me all along that 21753 1 Mr. O'Connell is going to take the full week just 2 as a representation. 3 THE COURT: Mr. Lapidus raises these 4 questions. I may need some time to rule on it. 5 MR. GUIDO: Your Honor, we'll just have 6 to start with Mr. Twomey, although the OTS isn't 7 happy about splitting direct testimony of a 8 witness. That may be what we have to do to move 9 this along. 10 THE COURT: All right. 11 MR. NICKENS: Your Honor, at some 12 point, they ought to be able to tell us who they 13 intend to call just as a matter of courtesy in 14 terms of our preparation, particularly before an 15 extensive break. It just makes it -- it makes a 16 big difference as to who's working on what this 17 weekend and travel plans and things of that 18 nature. 19 MR. EISENHART: Your Honor, I'm hearing 20 a voice from the back of the room saying Twomey is 21 not available. 22 MR. RINALDI: He was supposed to 21754 1 have -- we thought he'd go on this week. But the 2 schedule has slipped. And when I spoke to him 3 last -- he's the vice president of the Federal 4 Home Loan Bank of Dallas -- and he told me that 5 he's not available on Wednesday. I specifically 6 asked him about four hours ago. 7 THE COURT: Well, we're only going 8 three days. I think we're going to have to work 9 those three days. So, you'd better have a witness 10 here. I think you should notify the respondents 11 at this time who your witness is going to be. 12 MR. GUIDO: Your Honor, then we intend 13 to call Mr. Lapidus. If that's it, we'll have to 14 argue about the issue or if the Court rules, after 15 seeing the motion, which you've indicated is very 16 similar to a motion -- 17 THE COURT: This may be different. 18 MR. GUIDO: -- that has previously been 19 ruled upon, then we'll have to address that. 20 THE COURT: We'll adjourn until 21 9:00 o'clock Monday. 22 MR. NICKENS: Thank you, Your Honor. 21755 1 2 (Whereupon at 4:44 p.m. 3 the proceedings were recessed.) 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 21756 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 28th 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 21757 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 28th 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