22049 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 SEPTEMBER 1, 1998 22 22050 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 22051 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 22052 1 2 INDEX OF PROCEEDINGS 3 Page 4 KEVIN O'CONNELL 5 Continued Examination by Mr. Dueffert...22053 6 Examination by Mr. Eisenhart............22236 7 Further Examination by Mr. Leiman.......22246 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 22053 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:10 a.m.) 3 THE COURT: Be seated, please. We'll 4 be on the record. 5 Mr. Dueffert, you may continue with 6 your cross-examination. 7 MR. DUEFFERT: Thank you, Your Honor. 8 9 CONTINUED EXAMINATION 10 11 Q. (BY MR. DUEFFERT) Mr. O'Connell, as 12 we left yesterday, you testified that you did not 13 think there would be any information useful to 14 your analysis in the auditor's work papers and 15 that they were, in your words, superfluous, 16 correct? 17 A. Actually, could you show me 18 specifically? Because I also made reference to 19 the examiner's work papers. What specific 20 reference are you referring to? Could you point 21 me to the specific page that said that? I may 22 very well have, but what specific page are you 22054 1 making reference to? As you recall, I also -- 2 THE COURT: Well, let's determine 3 whether it's true or not, regardless of what you 4 said. 5 Q. (BY MR. DUEFFERT) At some point in 6 the process, did you consider the Peat Marwick 7 work papers superfluous? 8 A. Again, I don't recall that precise 9 phrase. I might have used it. But, no, I almost 10 always make decisions independent of what the 11 independent auditors decide, and I believe I did 12 state that it depends -- there would have to be 13 some fact dispute that the auditors could help out 14 with. 15 Q. I understand your answer. But your 16 first word was "no." So, are you telling me you 17 did consider the Peat Marwick work papers 18 superfluous? 19 A. I thought I said I don't recall using 20 that precise phrase. I might have. But again, if 21 you want to go through the specific -- 22 Q. Would you prefer the word "irrelevant"? 22055 1 A. They could be, yes. 2 Q. Did you consider them to be irrelevant? 3 A. I would say yes. 4 Q. And the examination work papers, as 5 well? 6 A. Again, I would say yes. 7 Q. Because, in your words, "the examiners 8 wouldn't be able to know what I already knew," 9 correct? 10 A. That is correct. That is one principal 11 reason, yes. 12 Q. If you would turn to your report. 13 A. The report? Okay. That was taken away 14 from me. 15 Q. We'll provide a copy. 16 A. Okay. (Whereupon the document was 17 tendered to the witness.) 18 Q. For the record, we are now looking at 19 Exhibit T7452, correct? 20 A. Yes. That's what it's marked here. 21 Q. And I would ask you to turn to 22 Paragraph 89 of your report. 22056 1 A. Okay. 2 Q. Would you please read that paragraph 3 into the record? 4 A. Certainly. Quote, "All and all, 5 Norwood was in substance a direct investment that 6 was disguised as a loan. USAT possessed all the 7 economic risk from the original 1984 acquisition, 8 to the 1985 restructuring, to the 1986 9 restructuring. All loan interest income and loan 10 fees that the association reported on this asset 11 were financed by USAT itself," end quote. 12 Q. Thank you. And then would you also 13 read one more paragraph into the record, 14 Paragraph 90? 15 A. Okay. Quote, "Reporting direct 16 investments as real estate loans is a clear 17 violation of regulations, and shows willful 18 neglect of regulatory requirements," end quote. 19 Q. You testified yesterday that United 20 improperly recorded the 30-million-dollar Norwood 21 loan as a loan, correct? 22 A. That is how they reported it to the 22057 1 examiners, yes. 2 Q. I would like to look at a few of the 3 work papers at this point. 4 A. Okay. 5 Q. Could we have Exhibit B1385, please, 6 which is at Tab 1186 already admitted into 7 evidence? 8 A. Okay. 9 Q. Is this a document you've reviewed? 10 A. Let me take a look at it first. 11 (Witness reviews the document.) I do know I have 12 seen a December 1986 TFR. Whether this is the 13 one, because I do see it's amended, I can't say 14 for sure. But I do recall seeing a 12/31/86 TFR. 15 Q. And do you recognize this as being an 16 excerpt from Peat Marwick audit work papers? 17 A. Oh. Oh, okay. By the bottom of the 18 document? "KPMG USAT confidential"? Oh, okay. 19 Let me get beyond the TFR. (Witness reviews the 20 document.) 21 Okay. I obviously do not recognize the 22 handwriting on the actual worksheets after this; 22058 1 but yes, this does appear to be part of the 2 Peat Marwick work papers. 3 Q. I'll ask you to turn to Bates No. KPMG 4 USAT 0622, which is the second-to-the-last page of 5 the exhibit. 6 A. Okay. 7 Q. Mr. O'Connell, you've never seen this 8 page before, have you? 9 A. This does not -- it does not look 10 familiar, no. 11 Q. What is the heading on the document? 12 A. "USAT direct investment for the month 13 of December 1986." 14 Q. And if you look to the first group of 15 entries, do they pertain to the Norwood loan? 16 A. Yes. It's listed as an adjustment. 17 I'd have to check exactly, an adjustment from 18 what. 19 Q. You don't know. Right? 20 A. No, I do not. Not without looking at 21 the document more carefully. 22 Q. Looking at this document alone, is it 22059 1 any indication that 100 percent of the Norwood 2 loan was reported as a direct investment? 3 MR. LEIMAN: Your Honor, may I ask a 4 question, just a clarification for the record? 5 The document itself that Mr. Dueffert's referring 6 to looks like it's printed on January 19th, 1986, 7 in the upper right part of the document which 8 makes me question why it says "direct investment 9 for the month of December 1986" on the left side 10 of the document. Maybe Mr. Dueffert could explain 11 how this report could have been printed a year 12 ahead of the point in time when it was talking 13 about purportedly. 14 MR. DUEFFERT: I will be happy for the 15 witness, as an expert with access to all of the 16 work papers, to try to address that issue, if it's 17 a question that's necessary. I don't think it is. 18 We'll see some other documents. 19 THE COURT: All right. 20 A. Again, Counselor, without looking 21 exactly at what the document shows and what the 22 adjustment is, I really couldn't say. 22060 1 Q. (BY MR. DUEFFERT) So, you have no 2 idea if the figure $15,751,628 represents the 3 disbursement on the 30-million-dollar Norwood loan 4 as of roughly December 1996, do you? 5 A. Not without -- 6 Q. I'm sorry. 1986. I apologize. 7 A. Not without looking at specific ledger 8 cards, no. I'd have to review that. 9 Q. Does the number appear correct to you 10 as a disbursement figure for the Norwood loan as 11 of December 1986? 12 A. That sounds approximately correct. I 13 believe about 22 million was paid out at the time 14 of the closing. 9.4 million of that was from UFC. 15 That would have left about -- actually, that would 16 be quite a bit of the loan disbursements. It 17 would be about $3 million of the loan 18 disbursements in the next six months. Sounds a 19 bit high; but it's possible, yes. 20 Q. You obviously haven't investigated 21 that, correct? 22 A. No, I have not. 22061 1 Q. Could we see Exhibit B4277, please? 2 A. Okay. 3 Q. Mr. O'Connell, for the record, would 4 you please identify Exhibit B4277? 5 A. This appears to be a summation of the 6 principal balance of the Norwood joint venture 7 loan as of -- last entry was December 16th, 1988, 8 and it goes back to July 31st, 1986. 9 Q. What is the amount listed as being 10 disbursed as of December 19, 1986? 11 A. Approximately $15.7 million. 12 Q. Could you read out the full amount, 13 please? 14 A. Sure. $15,751,628.45. 15 Q. And how does that compare to the entry 16 that we just saw on the USAT direct investment 17 worksheet? 18 A. They match precisely except for the 19 cents, but the dollar amount matches precisely. 20 Q. You didn't know about -- 21 A. Actually, Counselor, may I make one 22 slight clarification to yesterday -- since I see 22062 1 the final balance? Yesterday, I believe my best 2 memory was that the transaction when they -- when 3 the RTC came in, the cost basis was about 4 34 million. I see it actually was about 5 35 million. Since I see it was 25 million 4 plus 6 it would have been 9.4 million. So, it appears by 7 this that the actual cost basis was about 8 35 million. So, the sale would have been 9 4 million. I just want to make -- I think I said 10 34 and 3 yesterday. So, if I may make that 11 clarification. Go ahead. 12 Q. Does that have anything to do with the 13 topic we're discussing at this point? 14 A. I'm sorry. The document refreshed my 15 recollection. I apologize. 16 Q. Looking at this Peat Marwick work 17 paper, you didn't know about that document when 18 you accused United yesterday of improperly 19 reporting the 30-million-dollar Norwood loan as a 20 loan rather than a direct investment, did you? 21 A. Actually, I was familiar with the fact 22 that Peat Marwick on the GAAP statements did 22063 1 require most, if not all, of Peat Marwick -- 2 sorry -- most, if not all, of the Norwood 3 transaction to be reported as a direct investment. 4 I think that's actually in the work papers. 5 The issue is what they were reporting 6 to the examiners. And I believe there was, in 7 fact, a letter from the president, Jenard Gross, 8 continuing to refer to it as a loan. We can -- if 9 you'd like, we can try to find that letter. 10 Q. Well, let's take a look at the 11 examination work papers. Could we have 12 Exhibit B4276, please? 13 A. Okay. 14 Q. Mr. O'Connell, does anything about this 15 document appear familiar to you? 16 A. Again, yes. This appears to be a 17 direct investment worksheet in terms of how they 18 were coming up with the calculations for both the 19 state and federal direct investment requirements. 20 Q. You've told me in the past that you've 21 had access to the federal examination work papers, 22 correct? 22064 1 A. Not the entire set of work papers, but 2 regarding the work papers regarding these two 3 loans, yes. 4 Q. You haven't had access to the entire 5 set of work papers? 6 A. No. Just -- again, the work papers, 7 say, regarding the Gateway or the Couch or 8 something, no. It was just the work papers that 9 were provided in terms of these particular loans. 10 Q. Have you asked for any work papers that 11 weren't provided to you? 12 A. No. I was just interested in these 13 particular loans. 14 Q. Does the symbol at the bottom 15 right-hand corner on the first page of the exhibit 16 indicate anything to you? 17 A. The Bates number, not offhand, no. 18 Is that what you're referring to, 19 Counselor? 20 Q. Bottom right-hand corner. Other than 21 the exhibit number. I apologize. 22 MR. LEIMAN: Your Honor, if I might, 22065 1 could we -- the document that we were given is 2 missing quite a few pages. For example, it skips 3 from Page 3 to Page 7, skips from 8 to 10, goes 4 from 14 to 16, then up to 23. 5 Is there a complete version of this 6 document that we should be using rather than this 7 abridged -- 8 MR. DUEFFERT: The Bates number is 9 sequential. It is an actual excerpt from the work 10 papers. If Mr. Leiman would like to inspect the 11 full volume from which it comes, he's free to do 12 so at this point. 13 MR. LEIMAN: I'm not worried, Your 14 Honor, about the Bates numbering. I'm more 15 concerned about whether or not the people that did 16 the Bates numbering copied all the pages that 17 would be relevant. 18 THE COURT: Well, as I understand, it's 19 from the document that Mr. Dueffert has provided 20 and it looks like a fairly thick document. I 21 don't think you need to put the whole thing in 22 unless you develop something that requires that. 22066 1 MR. LEIMAN: Your Honor, since I don't 2 know what's on the missing pages, I won't know 3 what's relevant yet. But I will look right now. 4 THE COURT: Well, I don't want to hold 5 up the proceeding while you look. Let's proceed. 6 MR. DUEFFERT: Thank you, Your Honor. 7 Q. (BY MR. DUEFFERT) I'm not sure I 8 caught your last answer. 9 Does the symbol, apart from the -- if 10 you'll hold the document kind of -- 11 A. Okay. 12 Q. The symbol at the lower right-hand 13 corner near the exhibit number has no significance 14 to you; is that correct, sir? 15 A. No, it does not. 16 Q. So, you don't know if that would 17 indicate that the document, in fact, came from the 18 1987 federal examination of United's subsidiaries? 19 A. That is correct. I would not know 20 that. 21 Q. I see. I see a scribble of sorts. 22 It's actually initials at the -- kind of to the -- 22067 1 A. In the middle of the United Savings of 2 Texas stamp? 3 Q. Right. 4 A. Yes. 5 Q. Do you have any understanding of the 6 significance of that marking? 7 A. Okay. Presuming this is part of the 8 examiner's work papers, it was common practice for 9 examiners to actually initial pages to indicate 10 that they either reviewed it or were responsible 11 for it. 12 Q. Have you been forwarded the hearing 13 testimony of Vivian Carlton? 14 A. Yes, I have. 15 Q. And have you been forwarded the 16 exhibits that were used in her testimony? 17 A. Again, I've had access to all the T7000 18 series. If there were any other documents -- I 19 don't recall any specific documents relating to 20 the -- to Ms. Carlton other than the T7000 21 exhibits, no. 22 Q. Do you recognize that marking as being 22068 1 her initials? 2 A. Actually, I don't. I don't dispute it; 3 but I do not recognize her handwriting, no. 4 Q. Would it be fair to say that you don't 5 have great familiarity with the examination work 6 papers? 7 A. I think that would be a fair statement, 8 yes. 9 Q. I'll ask you to turn to the third page 10 of the exhibit. 11 A. Okay. 12 Q. And identify it -- 13 MR. SCHWARTZ: This is the wrong volume 14 you've given us. That's the 178 series. We need 15 the 176 series. 16 Q. (BY MR. DUEFFERT) For the record, 17 could you identify the third page of the exhibit 18 which bears the Bates stamp OW176063? 19 A. 063? Okay. Sorry. This is -- oh, 20 that's weird. Sorry. 21 Q. Why did you say "that's weird," sir? 22 A. Okay. The reason for that is that the 22069 1 format is similar to the prior exhibit you gave 2 me, Exhibit No. B1385. And on the 3 second-to-the-last page of that exhibit, again the 4 format looks very similar. The dates are 5 different. The first exhibit you gave me was for 6 the month of December 1986. The current exhibit 7 you have in front of me is for the month of 8 February 1987. And because of that, the numbers 9 are slightly somewhat off. Norwood, for instance, 10 is 15.7 million in the first exhibit and 11 16.8 million in the second. But it's still under 12 adjustments. If there had been audited 13 adjustments to what they originally were reporting 14 it, it should have been already been booked in 15 December. Why is it still being shown as an 16 adjustment? Why would they adjust it more than 17 once? That's why I said it was weird. 18 Q. I see. Have you reviewed this sheet 19 before right now? 20 A. The February 1987 document, no, I don't 21 believe I have. 22 Q. And for the record, what is the caption 22070 1 of that document? 2 A. The actual title or the -- 3 Q. The caption on the top of the -- 4 A. Sure. "USAT direct investment for the 5 month of February 1987." 6 Q. And you referred to a dollar figure 7 that is next -- or follows along from a line that 8 says "ADC loan-Norwood (100 percent)"? 9 A. That is correct. 10 Q. Would you read that number into the 11 record? 12 A. It is either 16,803,000 or 18 -- it 13 could be 883. 16 million 8 blank 3523? 5? If 14 there is another document you could refer, a 15 couple of these numbers are off. Approximately 16 16.8 million. Would that help? 17 Q. Turn to B4277 again, sir, which is the 18 disbursement sheet. 19 A. Okay. We can check that. 20 Q. If you look to Page 3 of the exhibit, 21 what is the disbursements listed on the 22 30-million-dollar Norwood loan as of February 20, 22071 1 1987? 2 A. Okay. Yes. That does help out. It is 3 $16,883,522.65 which, if you round up the dollar 4 amount, would be $523 which would be the number 5 for Exhibit B4726. 6 Q. The disbursement is identical to the 7 amount listed as a direct investment on the 8 February 1987 USAT spreadsheet, correct? 9 A. That is correct, yes. 10 Q. And that was information provided to 11 Vivian Carlton and her examination team, correct? 12 A. For the 1987 examination, yes. It 13 would -- that would -- yes. That would appear -- 14 that would appear so, yes. 15 Q. Okay. Turn ahead in the exhibit to 16 OW176067. 17 A. 7. Okay. What the hell? (Witness 18 reviews the document.) 19 Q. And just for the record, I'd ask you to 20 list the information on the document that we've 21 recently been discussing and the dollar figure 22 attributed to it. 22072 1 A. Okay. This would be the USAT direct 2 investment for the month of September 30th, 1987. 3 Again, under the terminology "adjustments," they 4 have "ADC loan-Norwood (100 percent) $20,740,300." 5 Q. And if you turn back to the 6 disbursement sheet and look at the entry for the 7 disbursements of the 30-million-dollar Norwood 8 loan for September 16, 1987, are those two 9 numbers -- 10 A. They are exact except for the three 11 cents on the funding sheet. 12 Q. One more. 13 A. Okay. 14 Q. Turn ahead two more pages. I'm sorry. 15 Turn ahead several more pages to OW176071. 16 A. 71. Okay. 17 Q. For the record, would you please 18 describe the document and the pertinent 19 information in it? 20 A. Sure. Again, it is -- the document is 21 entitled "USAT direct investment for the month of 22 December 31st, 1987." Again, under the category 22073 1 of "adjustments," we have "ADC loan-Norwood 2 (100 percent) $21,772,435." 3 Q. And if you compare that to the 4 disbursement sheet of Exhibit B47 -- I'm sorry -- 5 B4277, do you find a corresponding entry? 6 A. Yes, I do. The December 16th, 1987 7 figure totaled $21,772,434.66 which, when you 8 round up the dollar amount, will round up to $445 9 which was on the B13 -- sorry -- B4276 document. 10 MR. DUEFFERT: At this point, I'll move 11 the introduction of Exhibit B4276 and B4277. 12 MR. LEIMAN: Your Honor, I object to 13 the admission of B4276. Not to B4277. I still 14 don't have the complete document of this. We 15 didn't have the right pages. 16 MR. SCHWARTZ: They didn't provide us 17 with the right pages, Your Honor. 18 MR. DUEFFERT: Your Honor, a few 19 points. One, the witness has testified at some 20 length that although I don't think he's read them, 21 he has access to examination work papers of which 22 OTS has the originals probably right here in this 22074 1 building. 2 No. 2, it's obvious that this 3 information is of direct pertinence to his 4 opinions before this court. 5 Third, Mr. O'Connell testified 6 yesterday at Page 22033 as follows. "I don't 7 believe the Notice of Charges ever mentioned 8 direct investments, but I was asked to give an 9 independent assessment and I gave it." 10 I had assumed that this witness would 11 testify to the 12th claim for relief. This is a 12 matter that he has interjected at this point. I 13 think it's appropriate to put in the evidence to 14 show that there is no basis for it. 15 MR. LEIMAN: Your Honor, I'm not 16 objecting to the nature of the questions or the 17 testimony. All I'm objecting to, at this point, 18 is until I get a chance to see a complete exhibit, 19 that you defer ruling on it. 20 Now, with regard to the other exhibit 21 Mr. Dueffert's offering, we have no objection. 22 This was faxed at midnight, Your Honor. 22075 1 MR. DUEFFERT: Your Honor, they are 2 perfectly capable of having the expert augment the 3 information from the work papers. 4 THE COURT: All right. I'll receive 5 the documents. 6 Q. (BY MR. DUEFFERT) Mr. O'Connell, 7 looking at these three exhibits, they indicate 8 that the Norwood loan was recorded as a direct 9 investment by United, don't they? 10 A. Actually, Counselor, I can't come to 11 that conclusion because, as I said, I'm troubled 12 by the phrase "adjustments." I don't know why the 13 phrase "adjustment" would appear on every month; 14 so, I don't know what that means. 15 Q. So, despite seeing these three 16 exhibits, you still assume that United committed 17 fraud, correct? 18 MR. LEIMAN: Objection, Your Honor, to 19 the term fraud. Mr. O'Connell has never, ever 20 accused anywhere in his written report or 21 testimony USAT of committing fraud. I object to 22 the term, Your Honor. 22076 1 MR. DUEFFERT: May I clarify the 2 question? 3 THE COURT: Yes, you may. 4 MR. DUEFFERT: Thank you, Your Honor. 5 Q. (BY MR. DUEFFERT) For the record, 6 Mr. O'Connell, I'd ask you to read into the record 7 Paragraphs 12 and 14 of your report. 8 A. Sure. 9 Q. Under the heading "summary of 10 conclusions." 11 A. Okay. Paragraph 12, quote, "My 12 conclusions are summarized as follows: USAT 13 engaged in unsafe and unsound practices that, A, 14 overstated income; B, understated their capital 15 requirements; C, violated regulations regarding 16 loan underwriting; D, violated regulations 17 relating to the keeping of accurate and complete 18 books and records; and E, resulted in substantial 19 losses to the thrift, and ultimately the Deposit 20 Insurance Fund." 21 Q. Now, if you could please move to 22 Paragraph 14? 22077 1 A. Sure. Paragraph 14. Quote, "Further, 2 by engaging in the above activities, management 3 portrayed its financial condition as being 4 healthier than really existed, which could delay 5 necessary supervisory action to curtail their 6 speculative activities. The bases for these 7 conclusions are discussed in detail below," end 8 quote. 9 Q. And actually, for the record, I'll ask 10 you to read one last paragraph. 11 A. Okay. 12 Q. Paragraph 90, which is at the 13 conclusion of your section on the Norwood 14 transaction. 15 A. Okay. Again, quote, "Reporting direct 16 investments as real estate loans is a clear 17 violation of regulations, and shows willful 18 neglect of regulatory requirements," end quote. 19 Q. At the time you signed your report, up 20 until this morning, you had not seen the documents 21 I just showed you, correct? 22 A. I am fairly certain I did not see the 22078 1 figure -- the adjustments -- the page with the 2 adjustments because I would have remembered that. 3 So, no, I don't believe I saw those. 4 Q. And -- 5 A. The disbursement schedule, I probably 6 have at some point. 7 Q. Despite seeing the evidence you've just 8 seen, you still assume that with respect to the 9 Norwood loan, management portrayed its financial 10 condition as being healthier than really existed. 11 Right? 12 A. That is correct, yes. 13 Q. Let's move on. 14 Mr. O'Connell, you are here, are you 15 not, in part to offer your opinions with regard to 16 loan underwriting, correct? 17 A. That is correct. 18 Q. And market conditions are a factor in 19 loan underwriting, aren't they? 20 A. Yes, they are. 21 Q. Okay. Apart from all the information 22 that was in United's files and information that 22079 1 Mr. Leiman has provided to you and OTS enforcement 2 has provided to you, you didn't do any independent 3 research about market conditions in evaluating the 4 underwriting of these two loans, did you? 5 A. You mean other than what we say in the 6 loan files and the receivership files? No, I did 7 not. 8 Q. Now, by contrast, you did make an 9 independent assessment with regard to direct 10 investments? 11 A. That's part and parcel of reviewing the 12 overall loan files. Yes, I did. 13 Q. You didn't make an assessment of market 14 conditions even though they are referenced in the 15 12th claim for relief at Paragraph 272, correct? 16 A. That is correct, yes. 17 Q. And you didn't do any research into the 18 market conditions in San Antonio and Austin in the 19 mid-1980s, did you? 20 A. No, I have not. Again, no -- other 21 than what was in the loan files, no, I did not. 22 Q. Could we take a look, please, at 22080 1 Exhibit B961? 2 A. Okay. 3 Q. For the record, Exhibit B961 is 4 identified "Area Profile 1" dated May 1986 and it 5 suggests or indicates that it originated with 6 something called the Rice Center. 7 Mr. O'Connell, is this a document that 8 you have reviewed in the course of preparing your 9 opinions and conclusions in this case? 10 A. There were a number of economic 11 reports, shall we say community profiles and the 12 like in the loan files. This looks familiar in 13 format; but I certainly don't recall seeing it 14 specifically, no. 15 Q. The designation Exhibit B961 doesn't 16 indicate to you that it is a document that was 17 designated by respondents last August in this case 18 as a potential exhibit? 19 A. Actually, I'm afraid the number doesn't 20 mean anything to me in that respect, no. 21 Q. You did talk to Mr. Leiman about such 22 things as occupancy rates, correct, yesterday? 22081 1 A. Yes, certainly. 2 MR. DUEFFERT: Move the introduction of 3 Exhibit B961. 4 MR. LEIMAN: No objection. 5 THE COURT: Received. 6 Q. (BY MR. DUEFFERT) For the record, I'd 7 ask you to read the header that appears on the 8 front page right underneath "Area Profile No. 1" 9 and the date. 10 A. Sure. Quote, "A growth market in 11 San Antonio," unquote. 12 Q. And that pertains to the Westplex area, 13 does it not? 14 A. Yes. That is how it is titled, yes. 15 Q. You don't know anything about the Rice 16 Center, I take it? 17 A. Not really, no. 18 Q. Do you have any reason to dispute the 19 characterization of the Rice Center found at the 20 bottom of the first column on the first page of 21 the exhibit and carrying over to the top of the 22 second column? 22082 1 A. Oh, I see. Where it says -- where it 2 starts "Rice Center and its technical advisors"? 3 Is that how it starts? 4 Q. Yes. 5 A. Okay. No. I have no reason to either 6 confirm or dispute it, no. 7 Q. And if you turn to the -- oh, by the 8 way, the Westplex area is the area of San Antonio 9 surrounding Park 410, correct? 10 A. That is my understanding of how the 11 neighborhood is described, yes. 12 Q. I'll ask you to turn to the last page 13 of the exhibit. 14 A. Okay. 15 Q. Does the mailing label on that page 16 indicate that this document actually was received 17 or at least mailed to Stanley Rosenberg? 18 A. (Witness reviews the document.) Yes, 19 it does. 20 Q. Okay. And above the name "Rice Center" 21 on the mailing portion of that page, there is a 22 description of the Rice Center. And I would ask 22083 1 you to read that into the record. 2 A. Sure. Quote, "Published by Rice 3 Center, an educational non-profit corporation 4 affiliated with Rice University to facilitate and 5 encourage research and the dissemination of 6 knowledge regarding communities. This publication 7 is available at a modest cost," end quote. 8 Q. For the record, I'd ask you to read the 9 top two bullet points of the summary on that page; 10 and they are underneath the heading "economic 11 trends." 12 A. Okay. There are two bullet points. 13 Bullet, "The resident workforce in the 14 Westplex" -- and that's capital W-E-S-T, capital 15 P-L-E-X, one word -- "in the Westplex area is 16 expected to increase from 37,863 in 1985 to 53,198 17 by 1990, a 41 percent increase." 18 Second bullet, "The 125-million-dollar 19 Sea World aquatic theme park, scheduled to open in 20 1988, is expected to create 900 permanent jobs, to 21 draw 3 million tourists annually, and to serve as 22 an economic stimulus for hotel, retail, and office 22084 1 development in the Westplex area," end quote. 2 Q. Thank you. And for the record, I'd ask 3 you to read only one more bullet point, which is 4 the top one under the next heading, "demographic 5 trends." 6 A. Okay. Again, the bullet point before 7 it, "By the year 1990, population in the Westplex 8 area is expected to reach 126,017 people, a 9 34 percent increase over the 1985 population of 10 93,942, and 10 percent of the 1,252,000 population 11 forecast for Bexar County in 1990," end quote. 12 Bexar is B-E-X-A-R. 13 Q. Are you sure it's pronounced that way? 14 A. Frankly, no. 15 Q. In preparing your opinions and 16 conclusions, I take it you didn't look for this 17 type of contemporaneous market information that 18 might not have been provided to you by Mr. Leiman 19 or OTS? 20 MR. LEIMAN: Object to the question as 21 being way too vague. What does he mean by "this 22 type of information"? Does he mean positive 22085 1 information, information which shows growth 2 trends? Could he clarify the question, please? 3 THE COURT: Well, we've just looked at 4 the information. I think the question is clear 5 enough. 6 A. Again, Counselor, I just looked at the 7 documents that were in the receivership's loan 8 files. 9 Q. (BY MR. DUEFFERT) Did you review the 10 newspaper article quoted at Paragraph 272 of the 11 Notice of Charges? 12 A. Since I don't recall the article -- if 13 you can refresh my memory. I may have, but I 14 don't recall the article. 15 Q. I'll direct you to a sentence at the 16 bottom of Page 101 -- I'm sorry. I'll wait for a 17 second. 18 Are you on Page 101 of the Notice of 19 Charges? 20 A. Yes, I am. 21 Q. I'll direct you to a sentence at the 22 very bottom of that page and ask you to read it 22086 1 into the record. 2 A. Sure. Actually, the entire paragraph 3 or just the -- 4 Q. I think that sentence would be 5 sufficient. 6 A. Okay. Fine. Quote, "In December 1985, 7 San Antonio's major newspaper carried the 8 headline" -- another quote -- "'Real estate boom 9 city turns to bust,' end quote, and reported" -- 10 another quote -- "'Overbuilding of offices, 11 retail, apartments, and lost financing lead to 12 plenty of foreclosures,'" end quote and end quote. 13 Q. Before you finalized your report, did 14 you do anything to verify whether that article 15 provided a fair and balanced picture of what was 16 being reported in the market at the time? 17 A. Again, no, not really. 18 Q. Could we have Exhibit B399, please? 19 For the record, I will identify 20 Exhibit B399 as an article from the Sunday Express 21 News of San Antonio dated October 27, 1985. The 22 headline reads, "San Antonio enjoying a great deal 22087 1 of growth," correct? 2 A. That is correct, yes. 3 Q. And I guess I'd just ask you to read 4 the first two paragraphs into the record. 5 A. Okay. 6 MR. LEIMAN: Your Honor, before 7 Mr. O'Connell does that, would Mr. Dueffert please 8 identify whether the by-line and the person 9 mentioned in the by-line is a staff writer for the 10 newspaper or whether this person is essentially 11 putting together an infomercial? 12 MR. DUEFFERT: Your Honor, I don't 13 think I'm -- I don't know how to respond to that. 14 I don't think it's my obligation. 15 MR. LEIMAN: Your Honor, it looks like 16 an advertisement. I don't object to putting in 17 newspaper articles so long as they are legitimate 18 newspaper articles. This looks like a commercial 19 to me, like an advertisement. 20 THE COURT: All right. Well, you may 21 develop that on your redirect. Let's proceed. 22 A. Okay. Quote, "The working adjectives 22088 1 in San Antonio's commercial real estate lexicon 2 for the last 24 months is 'growth'" -- growth in 3 quotation marks -- "'growth' from both private and 4 government sectors and growth certain to sustain 5 the momentum of economic progress in San Antonio," 6 end paragraph. 7 New paragraph, "From the Sea World 8 announcement in early '85 to the revelation of two 9 multi-million-dollar grants, one for downtown 10 revitalization and the other for expansion of the 11 UT Health Science Center in mid-October, 1985 has 12 been a year which will bolster the future of 13 San Antonio's economy," end quote. 14 Q. Thank you. If contemporaneous 15 published reports indicated that the real estate 16 market in the Park 410 neighborhood, in fact, had 17 better prospects than almost any other 18 neighborhood in Texas as of early 1986, would that 19 change your opinion in any way? 20 A. No. You're still talking about a 21 speculative project. You're still speculating on 22 continued growth. You're still speculating on 22089 1 increased prices to fund the investment as opposed 2 to the actual collateral itself. 3 Q. Exhibit B4265. 4 THE COURT: Did you offer B399? 5 MR. DUEFFERT: I would be pleased to, 6 Your Honor. 7 THE COURT: Received. 8 MR. LEIMAN: For the record, Your 9 Honor, I object. 10 Q. (BY MR. DUEFFERT) For the record, 11 Exhibit B4265 is an article from the Austin 12 American Statesman. 13 A. Okay. 14 Q. Dated Thursday, September 5, 1985. And 15 I will direct your attention to the -- 16 A. Okay, yes. I do see the date. Okay. 17 It's hard to read. 18 Q. I'll direct your attention to the 19 article that is on the bottom of the exhibit which 20 is entitled "Leasing survey eases oversupply 21 worry." 22 A. Okay. 22090 1 Q. And if you would just like to read the 2 bottom paragraph of the second column of that 3 article going into the middle paragraph of the 4 third column. 5 A. Just to be sure that -- you're talking 6 about the paragraph that begins "she forecasts"? 7 Q. Correct. Thank you. 8 A. That's fine. Okay. Quote, "She 9 forecasts that Austin will have a one-year supply 10 for office space available for lease at the end of 11 this year and the end of 1986. Woods projects 12 4.7 million square feet will come on line during 13 1986 and in 1987 she said 5.2 million square feet 14 should be built, or about a one-and-a-half-year 15 supply." 16 Q. Next paragraph, please. 17 A. Sure. Quote, "'In other words, even 18 though the market is going through a boom, so is 19 office absorption,' Woods says. If absorption 20 holds steady, the office market does not look so 21 bad after all." 22 Q. And finally, if you could just read the 22091 1 top paragraph of the next column. 2 A. Sure. And this is quote -- and this 3 itself is a quote. "We are assuming that the 4 market is ongoing, that, like a food chain cycle, 5 as one tenant leaves, there is another to take its 6 place," end quote, Woods said. 7 New quote, "What we are observing" -- 8 I'm sorry -- "What we're observing is; there are 9 enough new firms starting up that are going into 10 the lower-priced buildings. It seems, amazingly 11 enough, to work out very well," end quote. 12 Q. And again, this article shows what kind 13 of information was being reported in the market, 14 does it not? 15 A. It's certainly one opinion that's being 16 reported in the market, yes. 17 Q. And it's not something you uncovered in 18 your own research? 19 A. No, it would not. Although frankly, I 20 will say, forgetting her opinion, the hard facts 21 don't look good. 22 Q. Well, if the intersection in Austin in 22092 1 which the Norwood project was located, in fact, 2 was one of the best-situated sites in all of Texas 3 for a development project in 1986, would that 4 change your conclusion in any way? 5 A. Counsel, I have no idea how I would 6 have been able to judge if it was one of the best 7 locations in all of the state of Texas. I would 8 take the data as it is presented. 9 Q. I'm actually asking you something of a 10 hypothetical based, to some extent, on facts. But 11 take it as a hypothetical. If the area of Austin, 12 the intersection of -- do you know the highways? 13 A. Yes. I believe so. 14 Q. What are they? 15 A. I think I actually spelled it out in 16 the report. But offhand, I don't recall them. 17 Q. That's fine. If the intersection of 18 Austin in which the Norwood project was located, 19 in fact, was one of the best-situated sites in all 20 of Texas as of 1986 for development projects, 21 would that change your opinion in any way? 22 A. Counselor, I'll be very candid. I've 22093 1 been in the regulatory field a long time. If 2 somebody came to me and made that kind of 3 remarkable assertion, that it's not just the best 4 site in the area or the best site in the city but 5 the best site in entire state, I would look very 6 skeptical at them. That just does not sound like 7 a factual statement. That sounds like a purely 8 unsubstantiated opinion. 9 Q. I'm a lawyer. And I get to ask you 10 questions because you're an expert witness. 11 Could you answer the question? 12 A. Counselor, I'm afraid, as I said, the 13 first thing I would ask you to do is if somebody 14 came to me with that type of a hypothetical, I 15 would say, "How do you know that? How do you 16 prove that?" 17 Q. I'm asking you as an expert to assume 18 it's true. 19 A. Okay. Ask the question again. This is 20 going to be hard for me to grasp, but go ahead. 21 Ask me again. 22 Q. If the intersection in Austin in which 22094 1 the Norwood project is located, in fact, was one 2 of the best-situated sites in all of Texas for a 3 development project in 1986, would that change 4 your conclusions in any way? 5 A. No, it would not. The underwriting is 6 the underwriting. 7 Q. And location has nothing to do with 8 underwriting, correct? 9 A. Oh, sure it does. The fact that -- 10 when we were going through the appraisals, we were 11 specifically talking about locations, comparables 12 in the area, occupancy rates in Austin and 13 San Antonio. Of course it means -- of course it 14 means something. And frankly, as I'm going 15 through this, her opinion is somewhat different 16 than the actual projection she made. 17 Q. Sir, I've asked you a hypothetical 18 question. I haven't asked you about the article. 19 A. Okay. 20 Q. Exhibit B763, please. 21 MR. DUEFFERT: Your Honor, I will move 22 the admission of Exhibit B4265. 22095 1 MR. LEIMAN: No objection. 2 THE COURT: Received. 3 A. Okay. 4 Q. (BY MR. DUEFFERT) Mr. O'Connell, is 5 this a document that you recognize? 6 A. No. I don't believe I've seen this 7 before. I may have, but I certainly don't recall 8 it. 9 Q. Again, the exhibit designation B763 10 doesn't indicate to you that it's a document that 11 the respondents designated as an exhibit perhaps a 12 year ago? 13 A. It does not -- again, the B763 doesn't 14 ring a bell to me one way or the other. 15 Q. For the record, I would ask you to 16 identify the title of the document, including the 17 headline. 18 A. Sure. The title of the document -- 19 actually, Counselor, if I may, does this mean -- 20 is this supposed to be words, or is this just a 21 bad fax? This -- was that just nothing? 22 Q. I'm only asking you for the title. 22096 1 A. Okay. Well, I'm just wondering if that 2 was supposed to be the title on top. Okay. 3 Assuming that was just nothing up there, what I 4 can read is "410 Westplex, a dynamic planned 5 business community, spring 1986." 6 Q. And the headline? 7 A. Sure. "Westside Freeway under 8 construction." 9 Q. And this appears to be a brochure, does 10 it not, put out by a business association 11 affiliated with 410 Westplex? 12 A. That is what it reads like, yes. 13 Q. And does this document indicate to you 14 that there is a reasonable basis to believe that 15 at least two lanes -- at least four lanes of the 16 Westside Highway were under construction as of 17 spring 1986? 18 A. Yes. 19 Q. In fact, there is a picture of it on 20 the bottom left-hand corner, although it's 21 difficult to see. Right? 22 A. Oh, the groundbreaking picture? 22097 1 Q. Yeah. 2 A. Yeah. 3 MR. DUEFFERT: I'll introduce 4 Exhibit B763, please. 5 MR. LEIMAN: No objection, Your Honor. 6 THE COURT: Received. 7 Q. (BY MR. DUEFFERT) Could we have 8 Exhibit B36, please? 9 THE COURT: It looks like we have a 10 B763, which is showing ownership of UFG stock, a 11 colored exhibit. 12 MR. DUEFFERT: We will have it remarked 13 during the break and offer this as a new exhibit. 14 THE COURT: Could we be off the record 15 for a moment? 16 17 (Discussion held off the record.) 18 19 THE COURT: All right. We'll be back 20 on the record. 21 I had received B763, which is titled 22 "410 Westplex" and it's dated spring 1986. 22098 1 Q. (BY MR. DUEFFERT) All right. And I 2 will now ask the witness to look at B36. 3 A. Okay. 4 Q. Once again, to -- well, for the record, 5 this appears to be another brochure or portion 6 thereof from 410 Westplex, if you'll look at the 7 second page. And then the top page has a 8 compilation of copies of newspaper clippings. And 9 my understanding is this was probably both sides 10 of a two-page document. 11 A. Okay. 12 Q. Is this a document with which you are 13 familiar? 14 A. Again, no, I don't recall seeing this. 15 I may have, but I do not recall it. 16 Q. And again, the designation B36 does not 17 indicate it's something that the respondents 18 designated as an exhibit in this case 19 approximately a year ago? 20 A. Again, the number doesn't mean anything 21 to me, no. 22 MR. DUEFFERT: Move the admission of 22099 1 Exhibit B36. 2 MR. LEIMAN: Your Honor, I object to 3 the admission. It's an undated document. Counsel 4 has indicated it may not even be complete. I'm 5 not sure what the point of these two pages is. 6 MR. DUEFFERT: Your Honor, it's a 7 document that originates from 410 Westplex, which 8 is the business association surrounding Park 410. 9 It is a brochure that reproduces newspaper 10 clippings. I could spend the next five minutes 11 asking him about them. I don't know if we need to 12 do that at this point. 13 MR. LEIMAN: Your Honor, my only point 14 here is I'm not certain what the assertion or what 15 is to be gained by this document. If it's merely 16 being offered to show that the 410 Westplex 17 Business Association put out these two pages, I 18 guess that's fine. But if it's to show anything 19 else, I would object. It has no value. 20 MR. DUEFFERT: I can ask some further 21 questions if it lacks foundation. 22 THE COURT: All right. 22100 1 Q. (BY MR. DUEFFERT) Mr. O'Connell, if 2 you look at this grouping of clippings on the 3 front page, the montage, there is in the upper 4 right-hand corner a headline saying "Sea World 5 expects 3 million first year." 6 Do you see that? 7 A. Yes, I do. 8 Q. Is that prediction consistent with the 9 prediction you've seen in such sources as the 10 Love & Dugger appraisal you were discussing with 11 Mr. Leiman yesterday? 12 A. Love & Dugger did presume there was 13 going to be a positive economic impact from the 14 Sea World development. The precise prediction, I 15 don't recall. We can look at the document. But I 16 do recall they were expecting positive economic 17 results from it. 18 Q. Farther down below on the document, do 19 you see a headline saying "VTI sets plant 20 construction for '87"? 21 A. Correct. 22 Q. Is that comparable to any predictions 22101 1 you've seen in the appraisals you've reviewed? 2 A. Again, there were representations in 3 the appraisals about some high-tech firms moving 4 into the area. Offhand, I don't recall if VTI was 5 one of them. But yes, I do recall seeing some 6 indication of high-tech firms' interest in the 7 area. 8 Q. Do you see above that a clip that says 9 "Developers announce plan for 388-acre Park 410 10 West"? 11 A. Yes. 12 Q. Have you attempted to locate the 13 original of that clipping to try to read the 14 entire thing? 15 A. Again, Counselor, since I am not 16 familiar with the document, no, I would not have 17 done that. 18 Q. In fact, you've gone and looked for 19 original, full copies of none of these clips, 20 correct? 21 A. That would be correct, yes. 22 Q. But it does appear from the face of the 22102 1 document that these clippings were submitted as 2 part of a brochure put out by 410 Westplex, 3 correct? 4 MR. LEIMAN: Your Honor, I object to 5 the question. He couldn't possibly know. These 6 are undated. Moreover, on the next page of the 7 exhibit, Page 2, it says "1986 was a pivotal 8 year." 9 There is no indication that -- as to 10 the reliability of any of these, whether they are 11 made up, whether he went to a print shop somewhere 12 or in an arcade in Atlantic City and had these 13 made up, put his picture on Time Magazine. I 14 don't understand what the reliability of this 15 document is or how we can question from it, Your 16 Honor. 17 MR. DUEFFERT: May I take one moment? 18 We identified this as a potential exhibit roughly 19 a year ago. Mr. O'Connell says he's had access to 20 boxes of documents. This is a directly pertinent 21 document that we identified. In a year, he's done 22 no follow-up on this information. We've given the 22103 1 OTS one year to make objections as to 2 authenticity. That was the purpose of designating 3 it prior to the hearing. 4 THE COURT: All right. I'll receive 5 it. 6 Q. (BY MR. DUEFFERT) One last newspaper 7 article, and then we'll finish. Could we have 8 Exhibit T7357, please? And we've taken the 9 liberty of creating a more legible version of this 10 exhibit. This was a document that was identified 11 by OTS as one of their exhibits. 12 A. Okay. 13 Q. Mr. O'Connell, are you familiar with 14 this 1987 newspaper article that's reproduced in 15 Exhibit T7357? 16 A. Oh, okay. Actually, Counselor, here it 17 is. Yes, I do see this. I don't -- no, I'm 18 certain I've never seen this before. 19 Q. I'm sorry. Could I hear that answer 20 again, sir? 21 A. I'm certain I've never read this. I 22 may have seen it, but I probably just skipped 22104 1 right over it. 2 Q. This is actually one of the T7000 3 series of exhibits, correct? 4 A. That's correct. 5 Q. For the record, would you please just 6 identify the date of the article and the newspaper 7 from which it's drawn? 8 A. Sure. August 9th, 1987. 9 Q. And newspaper? 10 A. Oh, sorry. The Express News of 11 San Antonio, Texas. 12 Q. And if you could, read into the record 13 the first column of the article. 14 A. Okay. "Northwest San Antonio." Sorry. 15 Quote, "Northwest San Antonio, where Sea World is 16 under construction, is the hottest real estate 17 niche in town," end quote. 18 Q. Continue in that column. 19 A. Okay. New paragraph. Quote, "Although 20 land sales still are few, real estate brokers say 21 a vast majority of their inquiries are from people 22 curious about far west San Antonio," end quote. 22105 1 Q. And continue. 2 A. Pardon me? Oh, continue? Okay. New 3 paragraph. Quote, "When the current real estate 4 doldrums finally fade and the Sea World park opens 5 next year, real estate brokers believe that 6 developers, land speculators and investors will be 7 clamoring for a piece of the action," end quote. 8 Continue? 9 Q. Why don't you continue for two more 10 paragraphs? 11 A. Okay. New paragraph. It's a quote. 12 "'Northwest San Antonio is going to explode,' end 13 quote, says Charles Martin Wender, owner of 14 thousands of acres near Sea World." 15 New paragraph, "Monied interests, 16 including major hotel operators, already are 17 looking hard at the area and a few have made 18 investments," end quote. 19 Q. This dates from before the 20 restructuring proposals made by the Park 410 21 borrowers in late 1987 and 1988, correct? 22 A. That would be correct, yes. 22106 1 Q. If the evidence in this proceeding 2 shows that Park 410's neighborhood, in fact, was 3 among the most favorable in Texas even in the 4 worst market conditions of mid-1987, would that 5 change your opinion in any way? 6 A. It depends on what the nature of the 7 evidence would be. I really don't consider 8 newspaper articles to be hard evidence unless they 9 have some specific hard facts. I think you 10 noticed in my opinion, I did not quote any 11 newspaper articles. People should not make loans 12 based on newspaper articles. Regulators should 13 not regulate based on newspaper articles. 14 Q. That seems fair. 15 MR. DUEFFERT: This might be an 16 appropriate time for a break. 17 THE COURT: All right. We'll take a 18 short recess. 19 20 (Whereupon, a short break was taken 21 from 10:15 a.m. to 10:40 a.m.) 22 22107 1 THE COURT: Be seated, please. We'll 2 be back on the record. 3 Mr. Dueffert, you may continue. 4 MR. DUEFFERT: Thank you, Your Honor. 5 Q. (BY MR. DUEFFERT) I'll ask you to 6 take a look, Mr. O'Connell, at Paragraph 260 of 7 the Notice of Charges, which I think is before 8 you. 9 A. Okay. 10 Q. And that paragraph -- 11 A. Hold it, hold it, hold it. Okay. 12 Q. -- references a 400 percent increase 13 in land development loans by USAT from 1983 to the 14 end of 1986, correct? 15 A. That is correct, yes. 16 Q. And it refers to several competitors of 17 USAT and lists them as University Savings, 18 Gibraltar Savings, First Texas of Dallas, and 19 San Antonio Savings, correct? 20 A. Also correct, yes. 21 Q. I'd like to explore a bit just what 22 that really meant. 22108 1 First, what was the -- by your most 2 generous possible estimate, what was the largest 3 disbursement United had on the Park 410 and 4 Norwood projects in the years 1986 or 1988? 5 A. Actually, for the Norwood, I think we 6 had that in front of us today. And again, I 7 believe the figure would have been around 8 $35 million, which would have been the 9 $9.4 million investment from UFC and I believe it 10 was about a 25.4-million-dollar loan as of 11 December of '88. 12 With regards to Park 410, I believe it 13 was between 72 to $73 million. 14 Q. And totaling those, you get something a 15 little less than 120 million? 16 A. Actually, significantly less. Closer 17 to about -- about 108 million, I believe. 18 Q. And, say, as of 1977 (sic), United's 19 assets were roughly what? 20 A. 1987? 21 Q. Yes. 22 A. As I recall, roughly about 6 billion. 22109 1 We actually have a TFR in front of us. We can 2 double check that. 3 Q. What I'm aiming for is I'd just like -- 4 what percentage of United's total assets are 5 represented by the Park 410 and Norwood loans? 6 A. Something less than -- assuming all of 7 my recollections are accurate, it would have been 8 something less than 2 percent. In the high 1.8, 9 1.9 percent range. 10 Q. And that's the 12th claim for relief. 11 Right? 12 A. Yes, that is correct. 13 Q. Looking at the other so-called 14 competitors of United identified in Paragraphs 259 15 and 260 of the Notice of Charges, have you done 16 any kind of peer analysis to explore United's 17 position vis-a-vis those four thrifts? 18 A. No. That wasn't within the scope of 19 the analysis, no. 20 Q. It is within the -- it's raised by the 21 4th claim of relief -- the 12th claim of relief, 22 isn't it? 22110 1 A. I believe so. 11th claim actually, 2 isn't it? 3 Q. We went through that yesterday. I 4 think it's the 12th. 5 Briefly, I would just like to show you 6 a book. And if you'd like to identify this for 7 the record. 8 A. Okay. 9 Q. Sir, can you identify the book I've 10 given you? 11 A. Oh, okay. This is a 1988 -- actually, 12 why don't I turn inside to see the specific date? 13 Okay. 14 Okay. This is a 1988 Sheshunoff, 15 S-H-E-S-H-U-N-O-F-F, Savings and Loan 16 Associations, Texas, 1988 Summation based on -- as 17 I'm looking on the inside page, based on 18 December 1987 data. December 31st, 1987 data. 19 Q. Okay. And you also have before you an 20 excerpt from that, correct? 21 A. Sure. Do you want me to actually 22 verify that it's a clip page? 22111 1 Q. Well, if you look at the green tab, 2 you'll find it. 3 A. Okay. Yes. I actually see the arrow 4 there. 5 Q. Okay. And I just want you to help me 6 out here and read for me -- first off, where in 7 this chart would one find a percentage of assets 8 devoted to ADC loans? 9 A. That would be the -- that would be the 10 sixth category under "asset overview" next to 11 "non-residential real estate." 12 Q. All right. And what figure do you see 13 for United? 14 A. United shows 4.1 percent. 15 Q. 4.1 percent. Gibraltar? 16 A. Which is on top, is 22.4 percent. 17 Q. University? 18 A. That's the fourth institution, 19 26.4 percent. 20 Q. 26.4 percent. First Texas? 21 A. That's No. 5. It would be 9.4 percent. 22 Q. And finally, San Antonio? 22112 1 A. That would be No. 9, 21.4 percent. 2 Q. So, of those five thrifts, USAT had the 3 lowest percentage of ADC loans, correct? 4 A. Yes, that is correct. 5 Q. In fact, as of 1986 or -- I'm sorry -- 6 the as-of date of that document was? 7 A. I believe the inside front cover -- the 8 first page actually says -- I'll just -- why don't 9 I quote so I don't -- quote, "This publication 10 contains financial analyses using data taken 11 primarily from the FHLBB quarterly thrift 12 financial report as of December 31st, 1987, for 13 federally insured savings and loan associations." 14 Q. So, as of the end of 1987, the end of 15 what the Notice of Charges describes as a buildup 16 of ADC loans by USAT, USAT remained substantially 17 under -- remained substantially under all the 18 other thrifts in ADC lending, didn't it? 19 A. Yes. That is -- that is what it shows 20 here, yes. 21 Q. First Texas was the closest but still 22 had more than twice USAT's percentage of ADC 22113 1 loans, correct? 2 A. Yes. 9.4 percent versus 4.1 percent 3 for USAT. 4 Q. And the other three thrifts had 5 probably about five times as many ADC loans as 6 USAT had or more? 7 A. If terms of University, it's actually 8 over six times, I believe. 9 Q. Does the fact that USAT was 10 substantially under this peer group identified by 11 the Notice of Charges affect your opinion in any 12 way? 13 A. No. As I said, doing a peer analysis 14 of other Texas thrifts wasn't part of the -- was 15 not part of my assignment. 16 Q. But you were designated on the 12th 17 claim for relief, correct? 18 A. I believe so. 19 Q. You didn't make an independent 20 assessment of this information? 21 A. No, I did not. 22 Q. And if the evidence shows that USAT did 22114 1 not vigorously pursue ADC loans but, instead, was 2 selective and careful in deciding to proceed with 3 Park 410 and Norwood, would that change your 4 conclusion in any way? 5 A. Let me have that question reread. 6 7 (The record was read by the court 8 reporter, as requested.) 9 10 A. Sure, it would. 11 Q. (BY MR. DUEFFERT) In what way? 12 A. If there was, indeed, careful due 13 diligence done in terms of going forward with 14 those transactions, certainly that would be -- 15 that would clearly go into the question of safety 16 and soundness. 17 Q. Let's move on. 18 Do you dispute that with regard to both 19 Park 410 and Norwood, the borrowers involved in 20 the 1986 transactions were reasonably wealthy and 21 experienced developers? 22 A. The only one I could say for a fair 22115 1 amount of confidence is I do believe 2 Mr. Rosenberg's financial statements represented a 3 high degree of liquid assets. The rest of the 4 borrowers, I'd have to review again. So, I really 5 can't say one way or another without looking at 6 the core documents again. 7 Q. Despite your preparation, you can't 8 tell me about GMR's balance sheet? 9 A. Offhand, no, I cannot. 10 Q. Or the background of IPIC? 11 A. Again, no. Not without reviewing the 12 core documents again, no. 13 Q. And could you tell me anything of 14 substance about Mr. Krasovec's financial 15 statement? 16 A. I recall his reported net worth -- in 17 fact, I think it primarily came from the -- again, 18 it came from the underwriting documents presented 19 to, I think it was the senior loan committee. In 20 fact, I'm remembering, I believe, a stated net 21 worth of about 13 million. Liquid assets somewhat 22 less than that, significantly less than that. 22116 1 Again, without knowing specifically how the 2 breakdown of that net worth is, no, I would not -- 3 I would not make an opinion one way or another. 4 Q. Your -- first of all, do I understand 5 correctly that the track record and wherewithal of 6 a principal in a development project is an 7 important factor in underwriting? 8 A. Certainly, yes. 9 Q. You don't point anywhere in your report 10 to any information regarding the track record and 11 wherewithal of the borrowers/principals in the 12 Park 410 and Norwood transactions, do you? 13 A. That is correct, yes. 14 Q. The track record and wherewithal of the 15 Park 410 and Norwood borrowers are not negative 16 facts about those loans, correct? 17 A. Actually, for Norwood, it probably is 18 because of the switching of the borrowers from 19 Block and Gordon to Krasovec and Minch. It was -- 20 as I recall, Block and Gordon had much more 21 detailed experience laid out than Krasovec and 22 Minch did, and I believe they also had higher net 22117 1 worths. But the reason I didn't go too much into 2 the financial background is that the evidence 3 suggested that the guarantees had really no 4 substance behind them. So, no, I didn't go too 5 much into that. 6 Q. So, you're saying Krasovec's 7 wherewithal and track record was not significant 8 to you? 9 A. Actually, I think I said it was 10 inferior to that that was represented by the 11 original borrowers, Block and Gordon? 12 Q. So, it was significant to you? 13 A. Yes. It would have -- it is 14 significant, yes. 15 Q. But you didn't cite the positive 16 financial features of GMR or IPIC or Mr. Rosenberg 17 in your report? 18 A. That is correct. I did not. 19 Q. Those features don't support criticisms 20 of the loans. Right? 21 A. Actually, I'm not sure about that, 22 Counselor, for the very simple reason I don't 22118 1 believe they ever had experience in this type of a 2 transaction. 3 Q. So, you would still be able to 4 criticize them? 5 A. Yes. 6 Q. But you certainly don't cite any 7 positive features about their wherewithal or track 8 record. Right? 9 A. That is correct, yes. 10 Q. And you would find it very hard to say 11 something positive about a loan that took major 12 losses, wouldn't you? 13 A. Clearly, the weight of the evidence 14 would be against such a loan, yes. 15 Q. I'd like a simple answer. 16 You would find it very hard to say 17 something positive about a loan that took major 18 losses, wouldn't you? 19 A. I think I already did answer that 20 question. It's certain possible I could find some 21 positive things; but generally, yes, the weight of 22 the evidence would be against it. 22119 1 Q. Without qualification, can you answer 2 that question? 3 MR. LEIMAN: Asked and answered, Your 4 Honor. 5 A. I think I just did. 6 MR. LEIMAN: He's already answered it 7 twice. 8 THE COURT: All right. Sustained. 9 Q. (BY MR. DUEFFERT) I'm a little 10 interested in how regulators use the term "risk" 11 and "risky." 12 A. Okay. 13 Q. Could we have Exhibit T8142, please, 14 which is at Tab 1450? 15 Mr. O'Connell, does this appear to you 16 to be a December 20, 1988 memorandum to the 17 Federal Home Loan Bank Board from Billy Wood? 18 A. Yes. 19 Q. Would you turn to Page 9 of the 20 memorandum, please? 21 A. Sure. 22 Q. There is a chart -- 22120 1 A. Excuse me, Counsel. I just -- I do 2 recall seeing this document, but I do -- I frankly 3 didn't recall the date discrepancy before. 4 If you'll notice, the front page is 5 dated December 20th. The other pages are dated 6 December 15th. 7 Q. With that clarification -- 8 A. The only -- I see -- this may have just 9 been a mistake in the Federal Home Loan Bank of 10 Dallas, but can I presume that your questions are 11 going to be on the assumption that this -- say, 12 for instance, the last pages were not a draft? 13 That this is -- 14 Q. I'm only asking you about Page 9. 15 A. Okay. 16 Q. It's Bates numbered OW075448. 17 A. Okay. 18 Q. Do you see presented -- 19 MR. LEIMAN: Excuse me, Your Honor. We 20 apparently don't have a copy. 21 Do you have an extra copy, 22 Mr. Dueffert? I know you identified it on your 22121 1 list. We just don't have a copy of it. 2 Q. (BY MR. DUEFFERT) Turning to Page 9, 3 do you see financial data concerning USAT from 4 December 31, 1985, until September 30, 1988? 5 A. Yes, I do. Financial summary, right. 6 Q. And do you see a line about five down 7 that is listed as "high-risk loans"? 8 A. Yes, I do. 9 Q. For purposes of this memorandum, the 10 Federal Home Loan Bank Board of Dallas defined 11 high-risk loans as being every ADC loan, every 12 commercial loan, every loan for five or more 13 dwellings, didn't it? 14 A. And loans to facilitate. Yes, it's 15 actually noted here. 16 Q. So, at least in this memorandum, the 17 regulators defined as "high risk" every loan that 18 was not a single-family mortgage, didn't they? 19 A. Not entirely, Counselor. I believe 20 there were other types of loans that aren't listed 21 as high risk; but they tend to be not material, 22 for instance for sheer loans. 22122 1 So, instead of going through the entire 2 line items, I think we should just -- I mean, it's 3 described here. I think the document ought to 4 speak for itself, frankly. 5 Q. Okay. So the record is now clear, why 6 don't you just read the definition of "high-risk 7 loans." 8 A. All right. There is an asterisk by the 9 phrase "high-risk loans," and the asterisk reads 10 as follows. Quote, "High-risk loans include" -- 11 another quote -- "five or more dwellings, 12 commercial, 'acquisition, development and 13 construction loans,' end quote, and, quote, 'loans 14 to facilitate,'" end quote. 15 Q. Finally, I note that the numbers for 16 what are called high-risk loans decline each 17 period from 1985 onward. 18 Do you see that? 19 A. Yes, I do. 20 Q. And you don't note that fact anywhere 21 in your report, I take it? 22 A. No, not at all because I believe what 22123 1 the results show is that they were making more 2 high-risk loans but more high-risk loans were 3 turning into delinquencies and REO. If you'll 4 observe -- if you'll observe those two numbers 5 together, delinquent loans and REO jump from 6 approximately 800 million as of December '85 to 7 approximately $1 billion as of December of '86. 8 Q. Mister -- you can put that one aside. 9 Mr. Leiman asked you questions about United's 10 records with respect to these two loans. 11 A. That is correct. 12 Q. Do you agree that the underwriting 13 documents for the Park 410 loan appear complete? 14 A. Actually, Counselor, I'd have to give 15 two answers on that. My recollection -- in fact, 16 I think I even commented on this in the 17 deposition. 18 My recollection of the closing books -- 19 that the closing books are generally 20 well-documented and well laid out, the actual 21 legal documents. But my belief is the overall 22 underwriting file was seriously deficient. 22124 1 Q. Could you please go back to your 2 report? 3 A. Sure. 4 Q. And let's take a look at Paragraph 93. 5 A. Okay. I've got it. Sorry. Okay. 6 Paragraph 90. 7 Q. Would you read, please, Paragraph 93 8 into the record? 9 A. 93? Okay. Quote, "On the Park 410 10 transaction, the association failed to record its 11 joint venture interest in the original 1985 12 acquisition. The joint venture interest, coupled 13 with the fact that the association was funding all 14 expenses of their portion of the venture, showed 15 that Park 410 was, in substance, a direct 16 investment in real estate," end quote. 17 Q. By that paragraph, you imply that 18 United failed to report its interest in the 1985 19 joint venture for Park 410 as an investment in its 20 own books and records, don't you? 21 A. Excuse me? Do you want to -- 22 MR. LEIMAN: Mr. Dueffert, I don't 22125 1 think he understands the question. 2 A. Yes. Could I have the question reread? 3 Q. (BY MR. DUEFFERT) I'll be happy to 4 re-ask it. 5 You say in the first sentence, "On the 6 Park 410 transaction, the association failed to 7 record its joint venture interest in the original 8 1985 acquisition." 9 A. Okay. 10 Q. Second sentence of that paragraph says 11 that "The joint venture interest, coupled with the 12 fact that the association was funding all expenses 13 of their portion of the venture, show that Park 14 410 was, in substance, a direct investment in real 15 estate." 16 A. Okay. 17 Q. And that is underneath the heading 18 captioned "USAT engaged in a number of activities 19 to structure equity investment in real estate to 20 appear as real estate loans." 21 A. Okay. 22 Q. Paragraph 93 implies that United failed 22126 1 to record its interest in the 1985 joint venture 2 as an investment in its own books and records, 3 doesn't it? 4 A. Oh, I see. Okay. I'm sorry. 5 Counselor, I don't think I made the conclusion on 6 that. I just made fact statements. I'm sorry if 7 you read that implication into it. But that's -- 8 I don't believe I made that -- if that is what you 9 implied into it, but I did not make any 10 conclusions with those -- with those statements. 11 I thought those were basically fact statements. 12 Q. You're saying that Paragraph 93 is a 13 fact statement, not a conclusion? 14 A. That's basically correct. Well, I 15 stand corrected. It does say that Park 410 was, 16 in substance, a direct investment in real estate. 17 But I don't believe -- yeah. No, I did not -- I 18 don't believe in the report I ever said that the 19 original 1985 acquisition was not reported as a 20 direct investment. I will -- we can go back in 21 the rest of the report. 22 Q. Well, let's just go back one page. 22127 1 What is the heading at the bottom of 2 the prior page? 3 A. Okay. 4 Q. For the record. 5 A. Okay. "Conclusions." Okay. 6 Q. And you still think it's unreasonable 7 to read Paragraph 93 as a conclusion. Right? 8 MR. LEIMAN: Your Honor, that's not 9 what he said. He said he didn't mean that. 10 THE COURT: He didn't mean what? 11 MR. LEIMAN: He didn't mean it was 12 unreasonable to read it that way. What he said 13 was that's not the implication that he -- it's not 14 the meaning that he gave to it. Now, I think if 15 he wants to ask the witness what the meaning was, 16 that's fine. But he shouldn't put words in the 17 witness' mouth. 18 THE COURT: Well, he's looking at the 19 document but -- is 93 a conclusion, Mr. O'Connell? 20 THE WITNESS: Yes, it is. But I mean, 21 I did not make a conclusion -- and I've gone 22 through the document, the entire document, not 22128 1 just that one paragraph. And no, I did not 2 criticize USAT for not recording the 1985 3 transaction as a direct investment. 4 Q. (BY MR. DUEFFERT) And you're telling 5 me that I -- you are testifying that you believe 6 it's unreasonable of me to read that paragraph and 7 take it to mean that United failed to record its 8 interest in the 1985 joint venture as an 9 investment in its own books and records? 10 A. Actually, Counselor, in the way you 11 just described the context of how you could read 12 that, no. I think that -- I could see how you 13 could come to that conclusion, yes. I -- I regret 14 if that is the implication that was left. 15 Q. Let's take a look at another exhibit, 16 T7055, please. 17 MR. DUEFFERT: Your Honor, as a matter 18 of housekeeping, I have not yet moved B4275 into 19 evidence, which is the excerpt from the treatise 20 and will do so now. 21 MR. LEIMAN: Your Honor, this wasn't on 22 their list. We got this today. But we have no 22129 1 objection to admitting it. 2 THE COURT: Received. 3 Mr. Dueffert, how about T7357? 4 Have you offered that? 5 MR. DUEFFERT: If I have not, I do so 6 at this time. 7 MR. LEIMAN: What is it? No objection, 8 Your Honor. 9 THE COURT: Received. 10 Q. (BY MR. DUEFFERT) And for the record, 11 would you please identify this document, 12 Mr. O'Connell? 13 A. Yes. This is a memorandum from a David 14 Graham to agreeing Wickliff, W-I-C-K-L-I-F-F. 15 Subject matter, Park 410 West-Property dated 16 April 2nd, 1985. 17 Q. And this is a document you reviewed 18 prior to finalizing your report, correct? 19 A. Yes, it is. 20 Q. And the second paragraph of this 21 memorandum indicates that Mr. Graham was directing 22 Mr. Wickliff to establish the Park 410 Joint 22130 1 Venture interest under, quote, "USAT-land under 2 development," close quote, in the real estate 3 report, correct? 4 A. That is correct. 5 Q. And that would be an investment 6 account, correct? 7 A. That is also correct, yes. 8 MR. DUEFFERT: If that document is not 9 in evidence, I will move it in at this point. And 10 for the record, that is T7055. 11 MR. LEIMAN: No objection. 12 MR. DUEFFERT: I have been advised at 13 this point that it is, and it's Tab 641. I 14 apologize. 15 Q. (BY MR. DUEFFERT) Mr. O'Connell, I 16 don't have an index of yesterday tomorrow; but as 17 I was listening, I don't believe I ever once heard 18 you mention the $10 million in letters of credit 19 that were a feature of the Park 410 loan. 20 Do you think I'm wrong? 21 A. Offhand, I don't recall mentioning it 22 either, no. 22131 1 Q. In fact, you testified yesterday that 2 with regard to the Park 410 loan, United bore, 3 quote, "all the economic risk of the transaction." 4 Right? 5 A. That is correct, yes. Actually, did I 6 say that or did I say "substantially all"? 7 Q. Would you like to see your testimony? 8 A. Sure. What page number? 9 Q. Page 22008. You have a long answer. 10 A. Okay. 11 Q. And then the last sentence is the one 12 that I focused on personally. 13 A. Okay. 14 MR. LEIMAN: Your Honor, excuse me for 15 one moment. The copy of the transcript that I 16 have from yesterday, there is mention to letters 17 of credit on Page 22021. 18 Does that help, Mr. Dueffert? 19 MR. DUEFFERT: No. That was an earlier 20 question, but I appreciate it. 21 MR. LEIMAN: It's right here, and they 22 related to letters of credit at the time these 22132 1 loans were approved. 2 A. Actually, as a matter of fact, 3 Mr. Leiman, that is right. In fact, I mentioned 4 it another time. 5 Q. (BY MR. DUEFFERT) But Mr. O'Connell, 6 I do have a question pending at this point. 7 A. I apologize. Back to 22008. 8 Q. Is it your recollection that you 9 testified -- 10 A. Excuse me. Could I read the whole -- 11 is it the question that starts on Page 22007? 12 Q. Yes, sir. 13 A. Okay. That's fine. (Witness reviews 14 the document.) Oh, okay. That's fine. 15 Q. And do you still -- 16 A. Okay. 17 Q. -- stand by your testimony that -- 18 A. Actually, Counselor, the -- 19 Q. Sir, I'm not done with my question. 20 A. Okay. Go ahead. 21 Q. Do you stand by your testimony that 22 the -- with regard to the Park 410 loan, the 22133 1 thrift owned all the economic risk of the 2 transaction? 3 A. Actually, Counselor, I didn't say that 4 if you read what I actually stated. The question 5 had to do with underwriting and speculation, and 6 then I made -- I did make mention of both Norwood 7 and Park 410, about expenses being paid, et 8 cetera. And then I said, "So, in that sort of a 9 situation, yes, I believe it is unsafe and 10 unsound." I was then describing a type of a 11 situation which was unsafe and unsound, but I 12 didn't specifically cite Park 410 or cite Norwood 13 as being the -- there is a basic safety and 14 soundness issue, and I used those two as an 15 example. But I -- that statement should not be 16 used as directly relating to either Park 410 or 17 Norwood. 18 Q. Even though Mr. Leiman asked you "which 19 project are we talking about"? 20 A. Yes. And as you said, in the long 21 answer, I did talk about both of them. But no. 22 I'm glad you brought this up because I would have 22134 1 been surprised if I had said all the economic risk 2 for Park 410 because you have that 3 10-million-dollar letter of credit and/or -- I 4 think there was some CDs, actually, if my 5 recollection is right. But that $10 million of 6 additional collateral was actually very important 7 to my determining in my own mind that 8 Mr. Rosenberg wasn't a controlling person. So, 9 I'm surprised by that. I would have been 10 surprised by that. 11 Q. Do you agree that top 25 percent 12 guarantees protect the most vulnerable portion of 13 loan proceeds, don't you? 14 A. That wouldn't be my language; but I 15 wouldn't disagree with it, no. 16 Q. And with regard to the letters of 17 credit, cash collateral was not required by the 18 express terms of any regulation or policy 19 regarding ADC loans, was it? 20 A. Again, that is correct. No, it would 21 not have been required. 22 Q. Indeed, no Federal Home Loan Bank Board 22135 1 policy or regulation expressly required a lender 2 making an ADC loan to obtain guarantees. Right? 3 A. Again, that is correct, yes. 4 Q. And the letters of credit in the 5 Park 410 loan eventually were collected on. 6 Right? 7 A. Yes. That is my understanding, that 8 upon liquidation, that 10 million was, indeed, 9 collected by the RTC. 10 Q. You used the term yesterday with regard 11 to the approval process for Park 410, "rubber 12 stamp." 13 Do you remember that? 14 A. That is correct. 15 Q. And I believe it appears in your expert 16 report, does it not? 17 A. Yes. Again, that is correct. 18 Q. And if you could just point us all to 19 what paragraph, that would be helpful. 20 A. Oh, okay. Actually, "rubber stamping" 21 is the precise phrase I used. Paragraph No. 65. 22 Q. Mr. O'Connell, I'd like to go back one 22136 1 minute. 2 A. Okay. 3 Q. Remember, we were just talking about 4 Park 410 and the amount of economic risk borne by 5 United? 6 A. That is correct. 7 Q. And you responded that although the 8 question was what projects are you talking about, 9 it was a long answer and, at the end, you didn't 10 get there. Right? 11 Could you please turn to Page 21811 of 12 yesterday's transcript? 13 A. 811. Okay. 14 Q. Are you with me? 15 A. Okay. You're right. Okay. Good 16 point. 17 Q. Did you not respond on page -- of the 18 transcript, 21811, in part, "but in the 1986 19 transaction" -- and this pertains to Park 410 -- 20 "the association still had the entire economic 21 risk of the transaction that it should have 22 remained as a direct investment"? 22137 1 A. That's correct. That is -- that's 2 clearly a misstatement on my part. I should have 3 said "substantially all the risk." 4 Q. Let's go back to rubber stamping. 5 A. Okay. 6 Q. You've studied the record in this case 7 at some length, correct? 8 A. Yes. 9 Q. Which board members voted to approve 10 the 80-million-dollar Park 410 loan in 1986? 11 A. My recollection is that the vote was 12 nine to one and that all of the board members 13 voted for it except, I believe, Mr. Winters. 14 Q. You remember that Mr. Winters 15 dissented. Can you name any of the board members 16 who voted for the loan? 17 A. Offhand, no. I do recall -- I think it 18 was Mr. Munitz who actually made the motion or 19 seconded the motion. I'd rather defer to the 20 actual document. But I do recall the vote was 21 nine to one. I'd have to check the actual board 22 minutes to know all the board members. 22138 1 Q. And do you know how many outside 2 directors voted to approve the loan? 3 A. Again, it would have been everyone 4 except Mr. Winters. 5 Q. And do the names Duckett, Keltner, 6 Silverman, Sterling, and Whatley help refresh your 7 memory? 8 A. Yes. In fact, I think Mr. Duckett 9 actually seconded the motion. I believe Mister -- 10 my recollection is Mr. Munitz made the motion and 11 Mr. Duckett seconded it or perhaps it was the 12 reverse. But again, we can check the document 13 itself. 14 Q. Now, you mentioned that Mr. Winters 15 dissented the vote? 16 A. That is correct. 17 Q. You would still call the vote a rubber 18 stamp even if two directors dissented, wouldn't 19 you? 20 A. I would -- actually, if you read the 21 entire paragraph, I would say it was a rubber 22 stamp if the board simply ratified the decision 22139 1 without taking some steps to discipline the senior 2 loan committee or take some steps to ensure that 3 its policies were being enforced. 4 In fact, I think Mr. Gross himself 5 said, "Well, they could theoretically have fired 6 us." 7 So, if you're asking me what I mean by 8 "rubber stamping," I think I just answered that. 9 The board needed to take some steps to be sure 10 their policies are being enforced. 11 Q. Again, the paragraph in your report 12 you're reading from, which number? 13 A. No. 65. 14 Q. So, you're saying that if three 15 directors of United in May of 1986 dissent like 16 Mr. Winters -- 17 A. That is correct. 18 Q. -- but, nonetheless, the loan is 19 approved and no instructions are given to the 20 senior loan committee or any kind of punishment 21 for them -- 22 A. Okay. 22140 1 Q. -- you would still call that board 2 action a rubber stamp. Right? 3 A. Oh, sure. I mean, this is -- either -- 4 if the board is going to have policies, the 5 policies versus to be enforced. If they are not 6 going to be enforced, if the board isn't going to 7 take any steps to enforce it, then the policies 8 are worthless. Management is then under -- 9 management basically knows they have a blank check 10 to violate the policies. 11 Q. You wouldn't change your conclusion 12 that the vote was a rubber stamp no matter how 13 many directors dissented so long as the bottom 14 line was an approval of the loan. Right? 15 A. If -- putting it this way, if the vote 16 was ten to nothing but the board specifically 17 cited management for failure to -- failure to 18 abide by the policy and specifically cited 19 management for putting the board really in an 20 impossible position, if there was some measure 21 of -- and they didn't necessarily have to fire 22 them -- some measure of censure toward management 22141 1 for overstepping their bounds, then it could have 2 been ten to nothing and then it would have been a 3 different response. But the key is not the vote. 4 The key is the action or, in this case, the lack 5 of same. 6 Q. And you're saying that Paragraph 65 7 doesn't relate to the action of the board? 8 A. Of course it does. It relates to -- 9 they actually ratified it and they took absolutely 10 no effort that I could see to see that their 11 policies and procedures were kept. 12 Q. Let's move on to Norwood. 13 A. Okay. 14 Q. Start at the beginning, 1984 loan. 15 A. Correct. 16 Q. I believe you told Mr. Leiman yesterday 17 that you believe that the original Block loan, the 18 Deauville loan, the '84 Norwood loan, had what you 19 called numerous red flags, correct? 20 A. Again, I may have said "numerous." But 21 I believe one red flag in particular. But if I 22 said "numerous," you can point me to the specific 22142 1 quote. 2 Q. Well, I don't have "numerous" in my 3 outline; but I think I remember two red flags. 4 A. Okay. 5 Q. One of them was that it is your view -- 6 let's start -- you disregard -- as a factual 7 matter, on the 1984 Block loan, the relevant terms 8 are you have a purchase of land for roughly 9 15.9 million. Right? 10 A. That is correct. 11 Q. And you have a loan from United that's 12 of $18 million? 13 A. Approximately that, yes. 14 Q. And then you have 100 percent 15 guarantees, personal guarantees, from Mr. Block 16 and Mr. Gordon, correct? 17 A. That was correct, yes. 18 Q. And I believe the other red flag you 19 mentioned, which I probably should summarize, is 20 that the 1984 Bolin appraisal presented a value of 21 $28.8 million? 22 A. Actually -- yeah, I believe that's 22143 1 correct, although with I thought when we saw the 2 actual '84 underwriting, that was 28.5 but there 3 was a slight discrepancy -- 4 Q. Did you say 28.5? 5 A. Yeah. As I recall, there was a slight 6 discrepancy between what was in the underwriting 7 document and what the as of December of '94 -- as 8 of December 84 appraisal actually showed. 9 Q. Let's start with the guarantees. 10 A. Okay. 11 Q. It's your view that if a guarantee is 12 released in the future, even if it's for some 13 business reason, the guarantee wouldn't have 14 substance from the very beginning. Right? 15 A. The Federal Home -- the Federal Home 16 Loan Bank Board and I believe even the independent 17 auditors have generally taken a very dim view 18 towards guarantees in viewing guarantees as 19 evidence of repayment because there has been a 20 long history that they have been very hard to 21 collect on. 22 So, yes, I've always been very 22144 1 skeptical of that. 2 Q. Do you have a since of Mr. Gordon's net 3 worth in late 1984? 4 A. As I recall, it was quite substantial. 5 I think he had financial statements -- I'm not 6 sure if they were dated '84 or '83. But as I 7 recall, well in -- the net worth was well in 8 excess of the actual loan. 9 Q. Which means he could support 10 100 percent of the guarantee? 11 A. In theory, yes, if my recollection is 12 correct. 13 Q. And likewise, I take it you believe the 14 guarantees of Mr. Krasovec and Minch in the 1986 15 loan were of no substance? 16 A. That is correct, yes. 17 Q. I believe you used the word "toothless" 18 in your report. 19 A. Did I? 20 Q. I think you did, but I don't think it's 21 worth searching at this point. We'll get there. 22 Now, do you know who approved the 1984 22145 1 Block loan? 2 A. Again, there was a senior loan 3 committee meeting. I do recall Mr. Graham's 4 signature. I think Mr. Williams may have 5 attended. I'd have to check the actual 6 signatures. 7 Q. I'll tell you or represent to you -- 8 and I believe it is true -- that the other two 9 that I know of are Graham and -- I'm sorry. The 10 four signatures are Gerry Williams, David Graham, 11 Mr. Bentley, and Mr. Crow. 12 Does that sound in accordance with your 13 recollection? 14 A. It sounds consistent. Again, I'd 15 rather rely on the documentation, but that's fine. 16 Q. I actually have only one follow-up on 17 that, which is: As of 1984, Sonny Bentley led 18 United's real estate operations, correct, and 19 lending operations? 20 A. I know he was involved. But frankly, I 21 don't want to testify as to the actual 22 corporate -- the entire corporate chart; but I 22146 1 know he was involved in it, yes. 2 Q. Mr. Leiman didn't give you 3 Mr. Bentley's testimony at this hearing, did he? 4 A. Actually, I don't believe I've read it, 5 no. He may very well have given it to me and I 6 have not read it, but no. I'm fairly certain I 7 haven't read it. 8 Q. And you haven't read the testimony of 9 Mr. Gerald Williams either. Right? 10 A. Actually, I did. In fact, I thought I 11 mentioned that yesterday. 12 Q. In this proceeding? 13 A. I thought so. If not, then I made a 14 mistake. Did we go through -- I'm not sure. Did 15 we go through the various trial testimony? Maybe 16 I just said I've read a fair degree of trial 17 testimony. But I think I did, yes. 18 Q. You -- with regard to the appraisal 19 issue, you said that the fact that the appraisal 20 was in excess by some substantial figure, 28.8 21 million versus land acquisition price of 15.9 22 million for the land, was an obvious red flag? 22147 1 A. Yes. 2 Q. And it's a discrepancy that should have 3 raised questions? 4 A. Yes. 5 Q. And I believe you have a statement to 6 that effect at Paragraphs 69 to 70 of your report. 7 A. Yes. 8 Q. Do you know who Joseph Huber is? 9 A. The name is vaguely familiar; but no, I 10 can't place his specific role in the United 11 Savings organization or in any specific loan. But 12 I have seen the name before. 13 Q. Well, I've been advised by my staff 14 that we don't have the materials that we need to 15 pursue that line of questioning; so, I'm going to 16 set it aside for a moment. 17 A. Okay. 18 Q. Is -- it's your testimony that there 19 were -- with regard to the 1986 Norwood loan, in 20 light of the extensions that led up to it, it's 21 your testimony that there were no sound business 22 reasons for United to finance the development of 22148 1 the Norwood property in 1986, isn't it? 2 A. Did I actually testify to that, or did 3 I -- 4 Q. It's a question actually. 5 A. Okay. Thank you. Let me have -- I 6 thought you asked first if I testified to that. 7 Could I have the question reread? 8 Q. Well, I'll re-ask the question. 9 A. Okay. 10 Q. It's your view that there were no sound 11 business reasons for United to finance the 12 development of the Norwood property in 1986, isn't 13 it? 14 A. The question really is would the -- 15 paying for the development of the property, would 16 that have enhanced the value above and beyond the 17 property as it currently existed? Frankly, I'd 18 have to see an actual feasibility study. The 19 Appraisal Associates of Austin appraisal would 20 indicate no, it would not have been a sound 21 decision. But I don't think I specifically 22 criticized the development. I criticized the 22149 1 continuing restructurings and attempt to pretend 2 that it was a performing asset. 3 Q. I wasn't asking about what the document 4 said. I'm asking about your view. 5 Based on everything you've read, the 6 record -- and it's your view, isn't it, that there 7 were no sound business reasons for United to 8 finance the development of the Norwood property in 9 1986. Right? 10 A. Counselor, please don't put words in my 11 mouth. I don't think I would have said there were 12 no sound reasons. As I'm sure, there would be 13 reasons to certainly consider it. But the weight 14 of the evidence, particularly the triple A 15 appraisal, my current assessment would be no, it 16 would not have been a sound decision. But I don't 17 want to say that there would not have been any 18 positive arguments in favor of it. 19 Q. Do you reference any of those arguments 20 in your report? 21 A. No, I did not. 22 Q. Do you dispute that Mr. Krasovec and 22150 1 Mr. Minch, in late 1985 and early 1986, worked on 2 obtaining approvals and zoning from the city which 3 could add substantial value to the project? 4 A. Yes. I think that was actually spelled 5 out in the -- in the 1986 underwriting documents 6 that in order for the zoning approvals to be 7 finalized, they needed some additional funds. 8 So, yes, they -- there was some 9 preliminary work done, yes. 10 Q. And that's not referenced anywhere in 11 your report, correct? 12 A. Again, that is correct. 13 Q. And history showed that employment and 14 other economic factors in Austin actually 15 increased, got better, during the oil price 16 decline of 1981-1982, correct? 17 A. Actually, Counselor, I do not know. 18 Q. That's not the kind of information 19 you've researched as part of your assignment. 20 Right? 21 A. Again, no. 22 Q. Even though that information might put 22151 1 United's decisions in context? 2 A. Counselor, any institution that would 3 make a 1986 decision based on 1982 conditions, I 4 would not have very kind words to say. So, 5 certainly, no, I would not have looked at the 6 '81-'82 economic reports. 7 Q. And that's your testimony despite the 8 fact that the oil price decline of late '85 and 9 '86 was the first one since the oil price decline 10 of 1981-'82? 11 A. Again, that would be correct, yes. 12 Q. Your testimony yesterday also suggested 13 that Krasovec and Minch's $22,000 per month in 14 developers' fees were not earned. Right? 15 A. Did I specifically say that? 16 Q. I used the word "suggested." 17 A. Where do you think I suggested that? 18 Q. Well, it's a question. 19 A. Okay. 20 Q. Let me ask it again. 21 A. Okay. 22 Q. Your testimony yesterday suggested that 22152 1 Krasovec and Minch's $22,000 per month in 2 developers' fees were not earned. Right? 3 A. I don't believe I suggested that at 4 all. I criticized the fact that the so-called 5 borrowers were themselves getting paid. But you 6 keep on making that statement. Please show me 7 where you think I made that suggestion. 8 Q. Well, I'm not going to ask you more 9 about yesterday's testimony. I would like to take 10 a look for a second at B1110. 11 Is this a July 17, 1986 letter from 12 David Graham to Jeffrey Minch? 13 A. Yes. 14 Q. And is this a document that you're 15 familiar with? 16 A. Yes, I have seen this. 17 MR. DUEFFERT: I move the introduction 18 of Exhibit B1110. 19 MR. LEIMAN: No objection. 20 THE COURT: Received. 21 Q. (BY MR. DUEFFERT) My only question 22 on -- 22153 1 A. One slight -- for some reason, I seem 2 to think this was in the T7000 series. I think it 3 had a slightly different number when I saw it, but 4 I have seen this. 5 Q. My only question on this document is it 6 does indicate some oversight by David Graham and 7 United regarding the expenditures made by 8 Mr. Minch and Mr. Krasovec, correct? 9 A. I believe so, but let me just reread it 10 again. (Witness reviews the document.) Okay. 11 Could you ask -- I think the answer is yes. 12 Could I have the question reread? 13 Q. All I asked is -- the letter indicates 14 some oversight by United and Mr. Graham of 15 expenditures by Krasovec and Minch? 16 A. Yes, it does. 17 Q. Now, I think you -- you dismiss 18 guarantee of Krasovec and Minch as worthless and 19 of no substance because United eventually chose in 20 1988-1989 to remove Norwood Properties rather than 21 litigate with them or put them into bankruptcy, 22 don't you? 22154 1 A. Counselor, I don't recall testifying to 2 that. Again, if you can point to where I said 3 that, I'll be happy to do so. 4 Q. You understand that -- you've 5 testified -- you told me a few minutes ago that 6 the guarantees of Krasovec and Minch you deemed to 7 be worthless, of no substance? 8 A. That is correct, yes. 9 Q. I'm not saying that you've testified to 10 this part before. 11 A. Okay. 12 Q. You dismiss the guarantees of Krasovec 13 and Minch because United eventually chose to 14 remove Norwood Properties from the UFC Joint 15 Venture rather than litigate with Krasovec and 16 Minch or put them into bankruptcy, don't you? 17 A. Actually, Counselor, it's a bit more 18 complicated than that. The evidence that I saw 19 indicates that Krasovec and Minch themselves 20 voluntarily withdrew from the venture. It wasn't 21 just a decision by United, but Krasovec and Minch 22 themselves made the decision to walk. 22155 1 So, it was more than just the question 2 of what United finally did in formally ending the 3 guarantees. It was a whole range of information 4 including, as I said, the indication that Krasovec 5 and Minch voluntarily walked away, as well as the 6 testimony, trial testimony I've seen, both of 7 Mr. Seidman and of Mr. Minch. 8 Q. So, your review of the testimony from 9 the hearing tells you that Mr. Krasovec, for 10 example, perceived no risk on his guarantee? 11 A. That is particularly true with regard 12 to Mr. Seidman's testimony. I'm sorry if I'm 13 mispronouncing it. But as I recall, Mr. Seidman, 14 when he actually brought up the possibility, 15 Mr. Krasovec was astonished by it and I thought it 16 was perhaps one of the more memorable aspects of 17 the trial. Actually tried to choke Mr. Seidman, 18 that Mr. Krasovec said he thought there was no 19 guarantee involved. 20 So, everything I've seen is that 21 Krasovec and Minch, when they entered into the 22 transaction, felt there was no substance to the 22156 1 guarantees. 2 Q. And your recollection of the testimony 3 is that Mr. Krasovec jumps over the table and goes 4 for Mr. Seidman's throat because he didn't 5 perceive any risk? 6 A. That is correct. 7 Q. Why don't we take a look at the trial 8 transcript again? And we're going to hand up what 9 I believe are some books of testimony. And 10 unfortunately, we have to use rather large books 11 simply because it's available. But we won't be 12 doing this much. 13 MR. LEIMAN: Do we have -- is there a 14 copy available for us? 15 Q. (BY MR. DUEFFERT) And we are going to 16 be looking for Mr. Seidman's testimony as of 17 December 18, 1997. 18 A. I think you've actually tabbed it on my 19 copy. I don't know about the others. 20 MR. LEIMAN: Your Honor, could we take 21 five minutes so that we can go get our copies of 22 these transcripts? 22157 1 MR. DUEFFERT: Your Honor, I'm just 2 reading one paragraph, and I have a pending 3 question. 4 THE COURT: Well, do you have a copy 5 for OTS? 6 MR. LEIMAN: It will only take us two 7 minutes to get it. 8 MR. DUEFFERT: One moment, Your Honor. 9 We'll have an extra copy. 10 MR. LEIMAN: Thank you. 11 Q. (BY MR. DUEFFERT) Could you please 12 read into the record -- I believe the passage to 13 which you were referring is found at Pages 11422 14 and the next page, 11423. And if you could just 15 read Mr. Seidman's answer, I'd appreciate it. 16 A. Sure. Okay. Should we start -- okay. 17 We'll start with the question "okay? "Okay. 18 Also, we talked about" -- is that where you would 19 like me to start? 20 Q. I believe the answer is relatively 21 self-contained. I believe you can start reading 22 at the bottom of Page 11422. 22158 1 A. Good. Answer, quote, "Well, when that 2 issue was pressed during the course of several 3 conversations, I don't think Mr. Minch worried 4 about his guarantee too much because I don't think 5 he felt like he had much of a net worth to worry 6 about. 7 "Mr. Krasovec, on the other hand, was 8 quite concerned about his guarantee and was quite 9 active in reminding me about how important that 10 guarantee to him when I suggested to him at one 11 point during the meeting that we weren't about to 12 remove him from it." 13 Question, "What did he do?" 14 Answer, "He jumped across the 15 conference room table and went for my throat, 16 among witnesses." 17 Q. That's enough, sir, unless you believe 18 it's -- I think that's sufficient. 19 A. Well, no. Actually, because you asked 20 how I read this and it was the next question and 21 answer which explains how I interpreted it. 22 Q. Feel free. 22159 1 A. Question, "Did he say anything at the 2 time when he did that?" 3 Answer, "Well, I was in such -- yes, he 4 did. I was in shock when it happened. He pulled 5 himself back off the table or Mr. Minch pulled him 6 back over the table. Something to the effect 7 that, you know, 'I was never supposed to have to 8 worry about this guarantee,'" end quote. 9 Q. And you take that testimony in total to 10 mean, don't you, that Mr. Krasovec perceived no 11 risk in his guarantee? 12 A. Counselor, what I have said -- and I'll 13 restate it again -- the entirety of the testimony, 14 the entirety of the actions that Messrs. Krasovec 15 and Minch believed at the start of this 16 transaction they had no risk, that when 17 Mr. Seidman came in and actually talked about the 18 possibility they might actually enforce this 19 guarantee, Mr. Krasovec was shocked. 20 What ultimately happened after that is 21 when Mr. Seidman and I believe Mr. Berner talked 22 about it, Mr. Berner was concerned about lender 22160 1 liability. He did not want to do anything about 2 enforcing the guarantee. And ultimately, in 3 January 1988, as is stated in the corporation's 4 minutes, Krasovec and Minch voluntarily withdrew 5 from the joint venture. 6 Q. And -- 7 A. That is what -- that is what is seen in 8 the records. 9 Q. And do you dispute that as of late 1987 10 and early 1988, there were sound business reasons 11 for United to reach a settlement with Mr. Krasovec 12 and Mr. Minch? 13 A. I would say yes. 14 THE COURT: You do dispute that there 15 were? 16 THE WITNESS: No. I think there 17 were -- the guarantees never had any substance; 18 so, the fact that they eventually entered into an 19 agreement to actually put the release of the 20 guarantees in writing, all that's doing is 21 reflecting economic reality. 22 So, I don't -- if the guarantees never 22161 1 had any substance to begin with, releasing them 2 from worthless guarantees, there is no reason not 3 to do that. 4 Q. (BY MR. DUEFFERT) The RTC, as a 5 matter of agency policy, wouldn't pursue on 6 guarantees when doing so was not economically 7 feasible, would it? 8 A. No, they would not. 9 Q. I'd like to move on to appraisals for a 10 while. 11 A. Okay. 12 Q. In Paragraphs 49 and 83 of your report, 13 you indicate that an as-is appraisal was required 14 by a regulation with respect to the Park 410 and 15 Norwood loans, correct? 16 A. That is correct. 17 Q. And it's your view -- you believe that 18 even in approving a development loan, thrifts are 19 required to look for an as-is rather than an 20 as-developed appraisal, don't you? 21 A. Yes. They have to look at the value of 22 the property as it currently exists. 22162 1 Q. And an appraisal that supports a 2 development loan was not permitted to make 3 projections or assumptions about the value of 4 improvements on that property? 5 A. No. I never testified to that. In 6 fact, I believe I testified just the opposite. 7 That for a piece of land that is going to be 8 developed, they actually have to do an income 9 assessment. 10 One of the three elements of an 11 appraisal -- the cost approach, market approach, 12 and income approach -- they have to make 13 projections about the cost involved to develop. 14 They then have to make projections about how much 15 the project was going to sell out for. But all of 16 these future expenses, all of these future 17 revenues, they all have to be discounted back to 18 the present because they are all uncertain. They 19 are all -- as I said, they are projections. And 20 there has to be an uncertainty factor built into 21 those numbers to come back to the current value. 22 I guess what I'm trying to say -- 22163 1 Q. Are you telling me that the 2 developmental approach for an as-is appraisal is 3 the same thing as an as-developed appraisal? 4 A. No. An as-developed appraisal is 5 basically a future value. It is an appraisal of a 6 property after it is finished, after it is 7 completed. But the problem is that's not for 8 another couple of years. 9 In order to get the current value of 10 the property, they have to discount to the present 11 the uncertainty factor, what could happen if the 12 projects expenses run out, the economy goes in the 13 tank, other factors run out. You have to present 14 value to future events whereas an as-developed 15 appraisal just assumes de facto that all the 16 improvements are in. Everything was done 17 according to budget and the economy and other 18 special factors are still as they existed two 19 years prior. And I'm using two years because that 20 was the median estimate for the cost to develop 21 Park 410. But no, the income approach to value 22 assumes a development. They then just have to 22164 1 bring it back and discount it back to the current 2 condition. 3 Q. And when you use word "discount," are 4 you referring to a discounting back to present 5 value? 6 A. Yes. 7 Q. Or are you referring to a discounting 8 of the likelihood that good things will happen in 9 the future? 10 A. A discounting factor is -- basically, 11 the discounting factor is basically to deal with 12 uncertainty. Obviously, the uncertainty could be 13 positive. It could be negative. But there is an 14 uncertainty factor involved. 15 Q. Mr. Leiman asked you about an appraisal 16 known as the Austin Appraisal Associates 17 appraisal. 18 You're familiar with that, correct? 19 A. I've seen it, yes. 20 Q. That was an as-developed appraisal, 21 correct? 22 A. Actually, no, Counselor. We could 22165 1 actually look at it again. But they actually gave 2 two values. They gave it as-is and then, after 3 they did a projection, they then gave an 4 as-developed. 5 So, they actually gave two separate 6 valuations. But you can't just say it was purely 7 an as-developed. We can look at the appraisal 8 again. 9 Q. I understand that. I understand that 10 the Appraisal Associates of Austin report 11 presented two values: An as-is value and an 12 as-developed value, correct? 13 A. Okay. 14 Q. Correct? 15 A. That is correct. 16 Q. And one of the things you discussed was 17 that it was based on -- the as-developed value was 18 based on 125 acres? 19 A. That is correct, yes. 20 Q. The as -- the Love & Dugger appraisal 21 we looked at yesterday presented an as-is value. 22 Right? 22166 1 A. That is correct, yes. 2 Q. And it did not present an as-developed 3 value, correct? 4 MR. LEIMAN: Your Honor, could I ask 5 counsel to clarify which of the Love & Dugger 6 valuation appraisals he's referring to? Because 7 we looked at a couple of them. 8 MR. DUEFFERT: I believe we looked at 9 only one yesterday; but for the record, it has an 10 "as of" date of December 31st, 1985. It's the one 11 you spent most of your time with yesterday. 12 A. That is correct. The Love & Dugger 13 appraisal does presume development, but it did 14 discount it back to current value, yes. 15 Q. (BY MR. DUEFFERT) And you would call 16 that an as-is appraisal, correct? 17 A. That is correct. The current value of 18 the land, when we get back to the as-is value -- 19 Q. There is no question pending, sir. 20 MR. LEIMAN: I think he's trying to 21 answer the last question. Counsel moved from 22 Norwood to Park 410, and I think he's trying to 22167 1 answer the question on Park 410 more completely, I 2 think. 3 THE COURT: All right. Finish your 4 answer. 5 THE WITNESS: Okay. The current value 6 of the land includes implicit in it the future of 7 potential development. So, an as-is appraisal, 8 under the income approach, can project 9 development. They just have to discount it back. 10 But the current value of the land does, indeed, 11 have implicit within it the possibility of future 12 development. 13 THE COURT: So, you're saying there is 14 no difference between the future developed and 15 discounting it back to an as-is of raw land. 16 THE WITNESS: That is correct. For 17 property that is going to be developed, that is 18 correct. 19 Q. (BY MR. DUEFFERT) Let me try this 20 because I really think the terminology in your 21 report is something I want to understand. 22 A. Okay. 22168 1 Q. You were referring to with the 2 Love & Dugger report what I understand to be the 3 as-developed approach of arriving at an as-is 4 value? Strike that. That question was not -- 5 that was my mistake. 6 The Love & Dugger appraisal that you 7 looked at yesterday with Mr. Leiman used a 8 developmental approach to arrive at an as-is 9 value. Right? 10 A. That is correct, yes. 11 Q. The Love & Dugger appraisal that you 12 looked at with Mr. Leiman -- and for the record, I 13 probably should name the -- T7143 at Tab 711, for 14 the record -- that appraisal valued a 400 roughly 15 acre tract of land without improvements, correct? 16 A. That is correct, yes. 17 Q. It did not value any improvements to 18 the land, correct? 19 A. That is also correct, yes. 20 Q. The discounting back process that 21 you're referring to attempts, as a matter of 22 developing the as-is figure, to value the latent 22169 1 developmental potential in the land. Right? 2 A. That is also correct, yes. 3 Q. But it would not value, say, Park 410 4 with streets and gutters and curbing and drainage. 5 Right? 6 A. That is correct, yes. 7 Q. It valued 400 acres of raw land? 8 A. Yes. The state -- the status of the 9 property as it existed as of December '85, yes. 10 Q. The Schulz appraisal that United 11 actually relied on in making the Park 410 loan was 12 an as-developed appraisal, correct? 13 A. That is correct. 14 Q. And it, unlike the Love & Dugger 15 appraisal, valued the streets and curbs and 16 drainage and the other improvements that were to 17 be funded by the proceeds of the loan, correct? 18 A. Let me have that back again. 19 MR. DUEFFERT: Would you like me to 20 re-ask it? 21 THE COURT: Yes, please. 22 Q. (BY MR. DUEFFERT) The Schulz 22170 1 appraisal that United relied on valued all of the 2 improvements that were planned by GMR to be built 3 on the property? 4 A. That is correct. 5 MR. LEIMAN: Your Honor, I object. Let 6 me interpose an objection. There is no indication 7 that they relied on it since they didn't have the 8 appraisal until after the SLC had already voted. 9 If the question is as to the so-called verbal 10 number that they received from Mr. Schulz, that's 11 a different question. I just don't want the 12 answer to be confused as to -- his answer to 13 indicate that he's agreeing with counsel as to 14 whether or not they had received it. 15 THE COURT: Well, they are separate 16 issues. 17 MR. DUEFFERT: I have no intention 18 of -- 19 Q. (BY MR. DUEFFERT) I'm not sure if we 20 had an answer. Let me try one more time. 21 The Schulz appraisal, unlike the 22 Love & Dugger appraisal, valued the curbs and 22171 1 grading and streets and sewage and all the other 2 improvements that GMR was going to put on the 3 property. And then, after estimating -- just 4 strike that. 5 The Schulz appraisal valued the land 6 with improvements. Right? 7 A. That is correct, yes. 8 Q. And is that what you understand to be 9 an as-developed appraisal? 10 A. Yes. 11 Q. And based on Paragraph 49 of your 12 report -- 13 A. Okay. 14 Q. -- is it your testimony that for 15 purposes of obtaining an appraisal in accordance 16 with Memorandum R-41B with relation to a 17 development loan, United was required by 18 regulation to obtain only an as-is appraisal? 19 A. Yes. That is the -- that is the 20 interpretation of the Federal Home Loan Bank 21 Board, yes. 22 Q. And the appraisal that United looked to 22172 1 should not value or attempt to value the 2 improvements that are planned for the property? 3 A. No. Again, that is not true. Again, 4 to the extent that there is a development 5 approach, they do have to value the potential 6 developments. But they have to discount them for 7 the fact that they are projected. 8 Q. I'm not asking about discounting. I'm 9 asking about raw land value versus land value with 10 improvements. 11 A. And the question is again? 12 Q. For purposes of compliance with 13 Memorandum R-41B, is it your understanding that 14 United was required by regulation to obtain an 15 as-is appraisal -- that is, an appraisal that 16 valued only the raw land without improvements? 17 A. That is correct, yes. 18 Q. Mr. O'Connell, your background 19 educationally is in speech and communications, 20 correct? 21 A. That is correct. 22 Q. And you are not yourself a credentialed 22173 1 appraiser? 2 A. That is also correct. 3 Q. Just like you're not an accountant, 4 correct? 5 A. Also correct. 6 Q. Now, in matters of appraisal practice 7 and appraisal standards, you would defer to the 8 expertise of Mr. Douglas Lovell, would you not? 9 A. Yes, generally. Doug does make 10 mistakes, but usually he's a staff appraiser for 11 the Atlanta office. 12 Q. And he's a very knowledgeable staff 13 appraiser, correct? 14 A. Yes. He's been around for quite some 15 time. 16 Q. He holds himself out to be something of 17 an architect of R-41C, does he not? 18 A. That, I don't know frankly. 19 Q. But you're saying you would generally 20 defer to his expertise? 21 A. Usually, yes. 22 Q. In appraisal matters? 22174 1 A. That is correct. 2 Q. With regard to the interpretation of 3 R-41B, I take it you would always defer to his 4 expertise, wouldn't you? 5 A. Again, Doug does make mistakes. But in 6 general, yes, I'd give his opinion great weight, 7 yes. 8 Q. Have you reviewed the report of Jay 9 Massey, who is another of the expert appraisers 10 designated by OTS in this case? 11 A. Yes, I have. 12 Q. And you understand that he also is a 13 professional appraiser and designated with 14 credentials? 15 A. That is also my understanding, yes. 16 Q. And would you also defer to 17 Mr. Massey's expertise in matters of appraisal 18 practice and appraisal standards? 19 A. Again, I would give Mr. Massey great 20 weight, yes. 21 Q. Have you reviewed the testimony of 22 Mr. Lovell? 22175 1 A. Yes, I did. 2 Q. He testified that Memorandum R-41B did 3 not require an as-is appraisal for purposes of a 4 development loan, did he? 5 A. Actually, Counselor, if you could show 6 me his testimony, we can see specifically what he 7 said. 8 Q. Let us take a look. 9 THE COURT: All right. We'll adjourn 10 until 1:30. 11 12 (Whereupon, a lunch break was taken 13 from 12:02 p.m. to 1:35 p.m.) 14 15 THE COURT: Be seated, please. We'll 16 be back on the record. 17 Mr. Dueffert, you may continue. 18 MR. DUEFFERT: Thank you, Your Honor. 19 Q. (BY MR. DUEFFERT) Mr. O'Connell, I'd 20 like to move back for one second from appraisals 21 and go back to the rubber stamp. 22 A. Okay. 22176 1 Q. As an initial matter, you don't find 2 the size, $70 million, of the delegation to the 3 senior loan committee to be unreasonable, do you? 4 A. I haven't opined on that before. It 5 certainly was within regulatory limits. If 6 you're -- I'll just say that. But no, I have not 7 opined on that before one way or the other. The 8 regulatory limits, I believe, at the time were up 9 to the association's regulatory net worth. 10 Q. You do, however, criticize the senior 11 loan committee approval document or proposal for 12 not containing a discussion of United's prior 13 investment in the joint venture. Right? 14 A. That is correct. 15 Q. And I believe at Paragraphs 61 and 63 16 of your report, you claim that that omission was 17 an egregious omission of material fact? 18 A. I believe that is correct, but I'll 19 double check it. (Witness reviews the document.) 20 Actually, Mr. Dueffert, to be precise, I didn't 21 specifically cite that particular item; but I did 22 cite that item as well as the failure to mention 22177 1 the Love & Dugger appraisal. So, the two 2 deletions together should be viewed as the 3 egregious omission of material facts. Whether or 4 not -- if that -- if that omission itself had been 5 the only thing that had been missing, whether or 6 not I would have made the same conclusion, I'm 7 frankly not sure. 8 Q. Is it your position that the senior 9 loan committee members of which had discussed the 10 Park 410 loan both formally and informally on many 11 occasions in the prior six months and at least 12 several of whom voted to approve the investment 13 back in 1985 were not aware of the venture? 14 A. Let me have that question back again. 15 Q. I'll try. 16 A. Okay. 17 Q. Is it your position that the members of 18 the senior loan committee, with their history, 19 were not aware of the prior joint venture? 20 A. No. I have not stated that position. 21 Q. Now, the Park 410 loan, in fact, was 22 approved by both the senior loan committee and the 22178 1 full board of USAT, correct? 2 A. That is correct, yes. 3 Q. And the board ratified the senior loan 4 committee's decision with respect to Park 410, 5 didn't it? 6 A. That is also correct, yes. 7 Q. And in the process, the board ratified 8 the senior loan committee's interpretation of its 9 own delegation, didn't it? 10 A. Actually, I did not see any such 11 statement. All they did -- the only -- we can 12 again look at the document, Counselor. But I 13 believe all they did is they just ratified the 14 overall loan. I did not see them make a statement 15 about the interpretation of policy. 16 Q. Did the board of USAT have the power to 17 ratify an interpretation of one of its own 18 policies? 19 A. Yes. 20 Q. Let's talk about the interpretation for 21 a second. 22 First, could we have Exhibit A1098, 22179 1 which is located at Tab 792? 2 A. Okay. 3 Q. And this is the August 29, 1984 minutes 4 of the board of directors of USAT, correct? 5 A. That is correct, right. 6 Q. And if you could, for the record, point 7 us to the page on which the delegation at issue is 8 described. 9 A. Actually, I don't think this is the 10 board -- I don't think this is the most recent 11 ratification of their policies. I thought it was 12 actually February 1985. 13 Q. Actually, didn't the board re-ratify 14 that policy in February of 1985 and February of 15 1986? 16 A. I believe so. I would prefer the -- 17 Q. Do you know of any material changes 18 between August of 1984 and February 1986? 19 A. Offhand, no. 20 Q. And would you accept my representation 21 that the language in the relevant portion is 22 identical? 22180 1 A. I have no reason to dispute that 2 representation. 3 Q. I'd like us to focus on the language in 4 this set of minutes. And if you could point us to 5 where the delegation is, please. 6 A. Okay. It would be under chapter -- I 7 guess you could say Chapter 2 in which there is a 8 series of resolutions regarding delegations to the 9 senior loan committee to approve all loans made 10 and purchased by the association. And then it 11 goes into a number of subdelegations, if you will, 12 specifying where the senior loan committee had to 13 make assessments and where the -- up to the limits 14 to where the senior loan committee could make an 15 approval. 16 Q. To perhaps clear up the record, are you 17 looking at the second page of the exhibit which is 18 Bates stamped US3003046? 19 A. That is correct, yes. 20 Q. And we are looking at Paragraph C at 21 the bottom of that page? 22 A. Actually, A and C. I mean, the -- A is 22181 1 actually the one where it says "the senior loan 2 committee shall directly consider and approve all 3 loans in excess of the amount designate." And 4 then it goes on, and C is where it says when the 5 loan is supposed to go to the board of directors. 6 Q. And could you please read that 7 provision into the record? 8 A. Sure. Just Section C? 9 Q. Please. 10 A. Quote, "Any loan-to-one-borrower or 11 guarantor in excess of $70 million shall be 12 presented to the board of directors for 13 consideration after receiving a favorable 14 recommendation from the senior loan committee," 15 end quote. 16 Q. Now, apart -- we're talking here, 17 moving ahead now, to the senior loan committee's 18 action in March of 1986. 19 A. Okay. 20 Q. The procedure by which they approved 21 $70 million of the loan and reserved 10 million 22 for final board approval. 22182 1 A. Okay. 2 Q. Now, apart from the members of the 3 senior loan committee, who, to your knowledge, was 4 made aware of that interpretation? 5 A. I do recall I believe Mr. Hurwitz was 6 CC'd on the senior loan committee minutes. I 7 don't -- that's the only one I'm fairly certain 8 of. I'd like to see the -- if I could see the 9 distribution list, I could be more certain. But 10 that's the only name that stands out right now. 11 Q. Have you seen any evidence in the 12 record that outside counsel was consulted with 13 respect to the delegation from the board? 14 A. Outside counsel, no. I don't 15 believe -- I cannot recall any such document. 16 Q. Could we have Exhibit T7066, please? 17 MR. DUEFFERT: I'm sorry. One moment, 18 Your Honor. 19 May we go off the record for a moment, 20 Your Honor? 21 THE COURT: All right. We'll be off 22 the record. 22183 1 (Discussion held off the record.) 2 3 THE COURT: Back on the record. 4 MR. DUEFFERT: Thank you, Your Honor. 5 Q. (BY MR. DUEFFERT) Mr. O'Connell, have 6 you seen T7066 before? 7 A. Yes. I believe I have. 8 Q. I would ask you to first, I guess, 9 describe the document. 10 A. This appears to be a -- well, first of 11 all, this is a handwritten note -- a copy of a 12 handwritten note from David. And when I saw it, I 13 presumed it to be David Graham -- to someone by 14 the name of Steve. And it is written on the first 15 page of the -- actually, an amended first page of 16 the loan committee approval -- senior loan 17 committee approval, actually, of March 17th, 1986. 18 And shall I read the handwritten note? 19 Q. If you could, yes. 20 A. Sure. Quote, "Steve: Updated 21 approval-please note guarantor change. Also, 22 please be sure next draft has restrictions due to 22184 1 appraisal values and board approvals. Signed, 2 David." 3 MR. DUEFFERT: Move T7066 into 4 evidence. 5 MR. LEIMAN: Your Honor, I object to 6 the introduction of this document. We already 7 have in evidence a signed approval of this. There 8 is no indication as to who wrote the handwritten 9 information at the top. We don't know who Steve 10 is. This is not dated. Unless there is some 11 foundation laid by Mr. Dueffert -- and I don't 12 think he can do it through this witness -- I would 13 object to the document. It's completely 14 untrustworthy as to what this is. 15 MR. DUEFFERT: Your Honor, it's one of 16 their exhibits. It's a T exhibit. It pertains to 17 the loan, and the witness has reviewed it. 18 MR. LEIMAN: Your Honor, the fact that 19 it was included among our thousand exhibits and we 20 didn't use it -- the fact we didn't use it I think 21 is more telling than the fact that he's trying to 22 use it. I just don't see any reliability here. 22185 1 There is no foundation that's been laid as to what 2 this is. 3 THE COURT: I'll receive the document. 4 Q. (BY MR. DUEFFERT) Mr. O'Connell, have 5 you reviewed the full closing binders for the 6 Park 410 transaction? 7 A. Yes, I have. 8 Q. And are you aware that outside counsel 9 prepared those documents? 10 A. Yes, I am aware of that. 11 Q. And can you identify the name of the 12 law firm that was involved in preparing those 13 documents? 14 A. Offhand, no. If you have the documents 15 in front of me, I could identify it. But no, 16 offhand, I don't recall. 17 Q. Does the name Schlanger, Cook come to 18 mind? 19 A. Yes. That is familiar. 20 Q. Does it sound like the law firm that 21 assisted in preparing the documentation for the 22 Park 410 loan? 22186 1 A. As I said, it sounds familiar that they 2 were involved in it. But again, I don't -- I'd 3 rather see the actual documents. I have no reason 4 to dispute that. 5 Q. Do you know the names of any of the 6 attorneys who were involved in the preparation on 7 those closing binders? 8 A. Again, I'd have to review the 9 documents. Offhand, no. 10 Q. Does the name Steve Lerner ring a bell? 11 A. Yes. I believe I saw his name on 12 some -- some cover letters, yes. 13 Q. In the agreement that is contained in 14 those closing binders, the loan agreement between 15 the Park 410 borrowers and United, there is a 16 clause, is there not, that pertains to what 17 happens if the board does not approve the loan 18 amount in excess of $70 million? 19 A. Yes, there is. 20 Q. Is it your understanding that 21 Schlanger, Cook was involved in the preparation of 22 that document? 22187 1 A. As I said, I understood that outside 2 counsel was involved in it. Again, I'm relying on 3 your representation that it was Schlanger & Cook. 4 Q. As part of your review of the 5 documents, has it been a relevant point of inquiry 6 to try to understand the role of outside counsel 7 in preparing the documentation? 8 A. Would you have that read back? 9 MR. LEIMAN: Yeah. I was just going to 10 object to the -- I'd like to clarification as to 11 what documents he's talking about, not those 12 documents. 13 A. I'd like that read back. 14 MR. DUEFFERT: I actually would just 15 withdraw the question. 16 THE COURT: All right. 17 Q. (BY MR. DUEFFERT) Could we have 18 Exhibit T587, please? Strike that. 19 Exhibit T7587, please, which is at 20 Tab 655. 21 A. Okay. 22 Q. And for the record, Mr. O'Connell, this 22188 1 is the May 8, 1986 minutes of the meeting of the 2 board of directors of United Savings Association 3 of Texas, correct? 4 A. That is correct, yes. 5 Q. Would you turn to Page 5 of the 6 exhibit? That is the board resolution by which 7 the -- a loan in the amount of $80 million to Park 8 410 West Joint Venture was approved, correct? 9 A. Yes, that is correct. Although, I 10 should -- this is an unsigned document, Counselor. 11 I have no reason to question it, but I just note 12 that it is an unsigned document. 13 Q. From the paragraphs preceding the 14 resolution paragraph, does it appear to you that 15 the members of the board of directors were aware 16 of the manner in which the senior loan committee 17 had interpreted its delegation? 18 A. Okay. Let me have that read back 19 again. 20 Q. I'll do it. 21 A. Okay. 22 Q. From looking at that document, is it 22189 1 apparent that the full board was aware of how the 2 senior loan committee was interpreting its 3 delegation? 4 A. Yes. 5 Q. Could we have Exhibit T7565, please? 6 And I understand this is admitted at Tab 1793. 7 A. Okay. 8 Q. Is this document familiar to you? 9 A. Yes. I have seen this before. 10 Q. And what is it? 11 A. It's a certification of a board 12 resolution signed by the then corporate secretary 13 of the thrift, James L. Pledger, P-L-E-D-G-E-R. 14 Q. And he is, at that point in time, 15 July 7, 1986, the general counsel of USAT, 16 correct? 17 A. I believe so. Here he's signing off as 18 the corporate secretary; but I believe he also 19 served as counsel, yes. 20 Q. Do you know of any subsequent positions 21 he held? 22 A. I believe I've read in depositions 22190 1 later, he joined either the -- I believe either 2 the Savings and Loan Commissioner's Office or 3 actually the State Banking Office for the State of 4 Texas. 5 Q. It is apart from Exhibit T7565 that 6 Mr. Pledger was aware of the manner in which the 7 senior loan committee had interpreted its 8 delegation, correct? 9 A. Yes, that is correct. 10 Q. Have you reviewed the recent hearing 11 testimony of Vivian Carlton? 12 A. Yes, I have. 13 Q. And are you aware of whether or not she 14 had adverse comment on the manner in which the 15 senior loan committee interpreted its delegation? 16 A. I'm aware she didn't -- I realize that 17 she delegated the review of the loan to someone 18 else, but no. The answer is she did not have any 19 adverse comment. 20 Q. The delegation in question, moving back 21 to A1098, reads -- again, we're at the bottom of 22 Page 2, Paragraph C. 22191 1 A. Okay. Going back to the 2 December '84 -- or the '84 document? 3 Q. Yes. August '84. And it is, for the 4 record, T1098. 5 A. A1098. 6 Q. I'm sorry. A1098. 7 A. Okay. That's fine. 8 Q. And again, it reads "Any 9 loan-to-one-borrower or guarantor in excess of 10 $70 million shall be presented to the board of 11 directors for consideration after receiving a 12 favorable recommendation from the senior loan 13 committee," correct? 14 A. Correct. 15 Q. Was this a loan-to-one-borrower 16 guarantor in excess of $70 million? 17 A. Yes. 18 Q. Was this loan presented to the board of 19 directors for consideration? 20 A. I would say no because the loan had 21 already closed. I would say it was really 22 presented to them for ratification. 22192 1 Q. That's your interpretation? 2 A. Correct. 3 Q. Finally, "after receiving a favorable 4 recommendation from the senior loan committee." 5 The senior loan committee did favorably 6 recommend this loan, correct? 7 A. That is correct, yes. Actually, 8 they -- as you well know, they actually approved 9 the initial closing of the loan, yes. 10 Q. You have an interpretation of the 11 delegation? 12 A. That is correct. 13 Q. Will you admit that the interpretation 14 that was reviewed and apparently approved or at 15 least not objected to by all of the members of the 16 senior loan committee of United, the board of 17 United, Vivian Carlton, United's outside counsel, 18 and United's general counsel, if all of those 19 people had a different interpretation, would you 20 insist that that interpretation was unreasonable? 21 A. Let me have that question back again. 22 Q. I will admit that that was an 22193 1 inartfully phrased question; so, perhaps I should 2 try over again. 3 THE COURT: Restate it. 4 Q. (BY MR. DUEFFERT) You have your 5 interpretation. Right? 6 A. That is correct. 7 Q. You don't admit, do you, that there was 8 another reasonable interpretation of that 9 delegation that would be reasonable? 10 A. Okay. Let me have that back again. 11 Q. You don't admit, do you, that there is 12 another reasonable interpretation of that 13 delegation? 14 A. Okay. You threw in a negative there; 15 but no, there could be another reasonable 16 interpretation of the delegation, sure. 17 Q. Other than yours? 18 A. Certainly. 19 Q. And is it one that would be consistent 20 with the interpretation that was reviewed by 21 Vivian Carlton, United's full board, the senior 22 loan committee, Mr. Pledger, and United's outside 22194 1 counsel? 2 A. Okay. Let me have that question back. 3 THE COURT: Well -- 4 Q. (BY MR. DUEFFERT) Is it that hard of 5 a question? 6 A. You threw in quite a few people. I'm 7 not aware of Ms. Carlton -- you asked the question 8 did Ms. Carlton have any adverse comment, but 9 you're making it sound as if she actually endorsed 10 the action. 11 That's why -- could you have the 12 question read back again? 13 THE COURT: Well, let's move on. 14 MR. DUEFFERT: Let's move on. 15 THE COURT: Your misgiving about that 16 question was the inclusion of Ms. Carlton? You 17 didn't have any misgivings about the others? 18 THE WITNESS: Actually, the main 19 misgiving I have is -- I think we spoke about this 20 earlier -- is that in substance, once the loan was 21 closed, it was a fait accompli. That once money 22 had been out the door, it effectively was an 22195 1 80-million-dollar loan because we could not cut 2 off the development without harming the property. 3 If you'll recall, I believe the budget 4 was showing about a 77-million-dollar cost to 5 develop. Once they approved the loan closing, 6 they basically were committed to going as far as 7 they could or else it would harm the project. 8 It is very, very difficult to make a 9 partial funding of a construction development loan 10 and then try to cap it because you're basically 11 saying "The transaction is no longer viable. 12 We're going to stop development before it's 13 complete." 14 So, that's the principal problem, plus 15 the fact they actually booked fees and took the -- 16 they actually booked the 2.4-million-dollar fees 17 based on 80 million at the time of closing. Not 18 at the time that the board ratified it, but at the 19 time of closing. And that is 3 percent of 20 80 million, not of 70 million. 21 So, from the standpoint of what 22 actually closed, the economic substance of that 22196 1 transaction was an 80-million-dollar loan from the 2 start. 3 Q. (BY MR. DUEFFERT) I have two 4 follow-up questions to that statement. 5 First, Mr. O'Connell, have you heard of 6 a reversing entry? 7 A. Oh, sure. We're talking about an 8 accounting ledger -- 9 Q. Yes. 10 A. -- entry? Sure. 11 Q. No. 2, what do you know about Phase 3 12 as planned by GMR and as proposed in the Park 410 13 development plan? 14 A. Phase 3 was to be the final phase of 15 the development. As I recall, that was to be -- 16 and the budget was not even to begin, I think, 17 until Year 3 of the Park 410 development, and 18 that's presuming that various sales had been able 19 to be retained beforehand. That's the best of my 20 recollection. 21 Q. Is there any relationship between 22 Phase 3 and the prospect that the board might not 22197 1 approve the top $10 million? 2 A. That is a possibility, yes. 3 Q. I'd like to move on to appraisals. 4 A. Okay. 5 Q. And again, we're looking at Paragraphs 6 49 and 83 of your report which deal with -- which 7 state or indicate that an as-is appraisal was 8 required by regulation. 9 A. That is correct. 10 Q. And I guess I would like to focus on 11 Paragraph 49 because that's the Park 410 loan. I 12 believe you testified to this this morning, but I 13 don't have a transcript so I want to make sure the 14 record is clear on one point. 15 Is it your testimony, Mr. O'Connell, 16 that in approving a development loan, thrifts were 17 not entitled under Memorandum R-41B to rely on an 18 as-developed appraisal, meaning an appraisal of 19 the improvements of the property? 20 A. I don't think that's the definition of 21 an as-developed appraisal. They -- the 22 institution could rely on projections of 22198 1 developments, but it had to be present valued back 2 to the current state of the property. 3 Q. In other words, you have to back the 4 cost of expenses out? 5 A. You would have to back the expenses out 6 of the appraised value certainly, yes. 7 Q. Now, before the break, I asked you 8 whether you would defer to the expertise of 9 Mr. Douglas Lovell and I believe you answered 10 "generally, yes"? 11 A. That is correct. 12 Q. And we are here talking about appraisal 13 practice. 14 A. Again, correct. 15 Q. And are you telling me that there are 16 some occasions in an interpretation of Memorandum 17 R-41B where you would think that Mr. Lovell is 18 wrong and you are right? 19 A. Actually, I can't think of any offhand, 20 no. 21 Q. And I take it you wouldn't suggest that 22 on a very basic issue, such as whether an as-is or 22199 1 as-developed appraisal was required for purposes 2 of supporting a development loan, that your view 3 would trump Mr. Lovell's? 4 A. No. I don't believe so, no. 5 Q. Do you recall that Mr. Lovell testified 6 that Memorandum R-41B did not require an as-is 7 appraisal for purposes of a development loan? 8 A. Actually, I recall Mr. Lovell making 9 note of the fact that an as-is appraisal was not 10 defined. But I also recall him testifying, I 11 think -- in fact, in response to your question, 12 that one of his objections to the Schulz loan was 13 that it was not an as-is appraisal. 14 Q. Are you saying that it was not an as-is 15 appraisal or that it did not present an as-is 16 number along with the as-developed number? 17 A. Let me have that again. 18 Q. Are you -- 19 THE COURT: All right. Restate it, 20 Mr. Dueffert. 21 Q. (BY MR. DUEFFERT) Let us look at the 22 transcript and see what he said. How about that? 22200 1 A. Okay. 2 Q. November 19th -- 3 A. Whoops. Hold on. Hold on. Okay. 4 Q. Okay. Now, this, I believe, is 5 probably where you pointed to a question of 6 whether the memorandum had the words "as-is" in 7 it. 8 Is that what you characterize it says? 9 A. What page? 10 Q. I'm sorry. I apologize. Page 7939 to 11 7940. 12 A. 7939? 13 Q. 7939 to 7940. 14 A. Okay. I'm sorry. I apparently was on 15 the 11/20. Sorry. Actually, no, it was not. The 16 cite that I was referring to, I believe, was in 17 response to your question -- 18 THE COURT: I don't think we're making 19 good record. 20 Can you state your question, 21 Mr. Dueffert? 22 MR. DUEFFERT: I think that's 22201 1 appropriate, Your Honor, and I apologize. 2 Q. (BY MR. DUEFFERT) When I asked 3 Mr. Lovell earlier in the hearing -- and we are 4 here looking at the transcript Page 7939 to 5 Page 7940 -- I asked him, "Did R-41B require an 6 appraiser presenting an appraisal report for 7 development loan like Park 410 or Norwood to 8 present both as-is and as-developed value 9 conclusions?" 10 His answer was, "R-41B only uses the 11 as-is conclusion in connection with REO and LTF 12 lending decisions for the purposes of establishing 13 the book value of the assets which mainly require 14 the as-is value of them. There is nothing in 15 R-41B that says anything about as-is, as of 16 completion, as of stabilized occupancy, for 17 example." 18 Question, "This isn't an REO or LTF 19 situation, is it?" 20 Answer, "Well, it's my understanding 21 that it wasn't at that point, no." 22 Now, if you'd next turn to Page 7982, 22202 1 which I believe is in the next day of testimony. 2 November 20, 1997. 3 A. Right. Okay. 4 Q. And I'll quote from the record at 5 Page 7982. 6 A. Right. 7 Q. Question, "You said yesterday that 8 nothing in the text of R-41B required the 9 appraisers to present an as-is value. Right?" 10 Answer, "Well, it does. It addresses 11 it specifically relative to REO and LTF." 12 Question, "For purposes of the 13 appraisal reports we're looking at in this 14 proceeding, R-41B doesn't require an as-is value. 15 Right?" 16 Answer, "For loan appraisal, there were 17 no definitions relative to as-is, as of complete, 18 as of stabilized occupancy. They simply weren't 19 included." 20 Do you recall that Mr. Lovell told the 21 Court that for purposes of a development loan, 22 Memorandum R-41B required an as-developed 22203 1 appraisal? 2 A. Actually, Counselor, if we -- if you 3 turn back to -- I believe it is the 7998 to 8005, 4 I believe what he stated is that R-41B does 5 require an as-developed valuation because to be 6 able to present value it back to the present, you 7 need to have some estimation of what the value is. 8 But on the bottom of Page 8003, when 9 you asked the question, "Is your primary reason 10 for criticizing Ed Schulz' appraisal he fails to 11 supply the as-is value?" 12 He did answer, "That is one of my 13 objections to the appraisal from an R-41B 14 perspective, yes." 15 Q. I'll direct you before we get done with 16 this exercise to one passage directly above that. 17 A. Okay. 18 Q. And it's at the very end of Page 8001. 19 A. Okay. 20 Q. And I say, "And the Love & Dugger 21 report" -- and here, we are speaking of the 22 Love & Dugger appraisal dated December 31st or as 22204 1 of December 31st, 1985. 2 A. I believe so, yes. 3 Q. "And the Love & Dugger report is 4 incomplete because it doesn't value the collateral 5 of Park 410 property at the end of the loan 6 process; isn't that right?" 7 Answer, "That's one of the defects, 8 yes, one of the things that made -- you would have 9 to have as an ingredient in underwriting that type 10 of loan." 11 A. That is correct. 12 Q. You interpret that to mean that for 13 purposes -- taking those three pieces of testimony 14 and -- you interpret that to mean that for 15 purposes of a development loan, a thrift is 16 obligated to get an appraisal that values the raw 17 land instead of the land with improvements? 18 A. What I've said -- and probably not very 19 well -- is that for raw land that is going to be 20 developed, an appraiser has to implicitly include 21 the potential development into the value of the 22 land. 22205 1 Therefore, under the income approach to 2 value, he has to project, he has to anticipate the 3 land is going to be developed, but he also then 4 has to anticipate how much the land is going to be 5 worth when it is developed and then present value 6 all of that back to the present. 7 And frankly, this -- I'm kind of 8 startled that we've had all this discussion about 9 as-is because, as I'm sure you're aware of, 10 Counselor, management of USAT itself kept using 11 as-is appraisals in their underwriting documents. 12 It was fairly widely understood within 13 the savings and loan industry what an as-is 14 appraisal was and that it was required. In fact, 15 I believe in one of the documents you presented 16 here, there is reference to the Bolin appraisal as 17 being a, quote, "as-is appraisal." 18 Q. Mr. Lovell, at Pages 8001 and 8002, 19 indicates that the Love & Dugger appraisal is 20 incomplete because it doesn't value the collateral 21 of Park 410 property at the end of the loan 22 process. Right? 22206 1 A. That is correct. 2 Q. Do you disagree with Mr. Lovell that 3 the 1986 Love & Dugger appraisal was incomplete? 4 A. Yes. I would agree with that. 5 Q. Would you agree that the Love & Dugger 6 appraisal was not in compliance with the 7 requirements of Memorandum R-41B for purposes of 8 supporting a development loan? 9 A. Yes. I would agree with that. 10 Q. So, your testimony now is that the 11 Love & Dugger appraisal that you discussed with 12 Mr. Leiman yesterday and that we've been 13 discussing in fits and starts throughout the day 14 was not in compliance with Memorandum R-41B for 15 purposes of a development loan, correct? 16 A. That is correct, yes. Actually, that's 17 not the only reason it wasn't in compliance with 18 it; but that is certainly one of the reasons, yes. 19 As I recall, it was actually made for the joint 20 venture. And for that purpose, it wouldn't have 21 been able to support the loan, also. 22 Q. Well, it's not addressed to United, 22207 1 correct? 2 A. That is correct. 3 Q. So, it wasn't addressed to United, and 4 it wasn't in compliance with Memorandum R-41B, and 5 it valued the raw land? 6 A. That is correct. 7 Q. If the Love & Dugger appraisal wasn't 8 in compliance with R-41B for purposes of a 9 development loan, would that be a reasonable 10 reason for United, even if it knew about the 11 appraisal, not to rely on it? 12 A. Oh, certainly. I don't think it's a 13 question of their relying on it. But clearly, it 14 is useful information. If an appraisal that's 15 actually made for the borrower comes up with that 16 type of valuation, it is something -- it is a 17 pertinent fact that they should know about. 18 Q. I guess my question, I think, is the 19 converse which is you've just testified that Love 20 & Dugger's appraisal was not in compliance with 21 Memorandum R-41B for purposes of a development 22 loan. Right? 22208 1 A. That is correct. 2 Q. All by itself, that is a good reason 3 not to rely on it. Right? 4 A. That is correct. I mean -- but again, 5 the question is given the fact that the joint 6 venture paid for it, given the fact that the 7 association was picking up half the cost of it, 8 they should be aware of an appraisal that is made 9 for the joint venture that comes up with a 10 radically different valuation than what they were 11 talking about. But you're quite right. The 12 appraisal could not be used, in my view -- and I 13 think Mr. Lovell would agree -- could not have 14 been used to support a loan amount. 15 Q. You nevertheless conclude in 16 Paragraph 56 of your report, open quote, "to 17 disregard their opinion was egregiously unsafe and 18 unsound." Right? 19 A. Well, actually, the precise was that 20 "Given that Love & Dugger's prior valuation came 21 in very close to the actual 1985 sales price, to 22 disregard their opinion was egregiously unsafe and 22209 1 unsound." 2 So, what I was stating there, as I 3 think is fairly obvious, I did not state that it 4 was in compliance with R-41B but that 5 Love & Dugger's prior history of valuations were 6 at least consistent with prior sales. 7 Q. You don't disclose in your report in 8 your opinion that the Love & Dugger appraisal is 9 not in compliance with Memorandum R-41B for 10 purposes of a development loan, do you? 11 A. No, I do not, that's correct. 12 Q. Are you aware that Mr. Massey, in his 13 expert report, also concluded that the 14 Love & Dugger appraisal was not to be relied on 15 for loan underwriting purposes? 16 MR. LEIMAN: Your Honor, is the -- is 17 there a reference to Mr. Massey's report? Is that 18 in evidence? Perhaps we can get a tab number from 19 Mr. Dueffert. 20 MR. DUEFFERT: I'm asking the witness 21 if he is aware of information in another 22 appraiser's report from an appraiser we haven't 22210 1 seen. I think it's a fair question. 2 THE COURT: All right. 3 A. I'm not familiar with that particular 4 phrase. I do recall that he had some criticisms 5 of both the Love & Dugger and the Schulz 6 appraisals. But offhand, I don't recall. 7 Q. (BY MR. DUEFFERT) Do you remember 8 that he concluded that the Love & Dugger appraisal 9 that we reference or that you reference in 10 Paragraph 56 of your report was not in compliance 11 with Memorandum R-41B for purposes of supporting a 12 development loan? 13 A. I do recall his citing R-41B 14 violations, yes. 15 Q. As an expert witness, do you think you 16 have some obligation when you say, quote, in 17 Paragraph 56, "to disregard their opinion was 18 egregiously unsafe and unsound" to also advise the 19 parties and the Court of your opinion that the 20 appraisal didn't comply with R-41B? 21 A. Actually, Counsel, again you're trying 22 to suggest what words I should use. I thought I 22211 1 had made it clear in the prior phrase why I 2 thought it was unsafe and unsound. The 3 Love & Dugger appraisal of 1984 was very 4 consistent with what the sales price was in early 5 1985. That was the reason why I thought their 6 valuation would be useful and that the -- and that 7 the parties should be aware of that. 8 Q. Let's move on for a moment. 9 A. Okay. 10 Q. There was another appraisal, and it is 11 Exhibit T7701, Tab 734. And this is the Appraisal 12 Associates of Austin report regarding the Norwood 13 project. 14 A. Okay. 15 Q. I believe the word "appraisal shopping" 16 was used yesterday in connection with that 17 document. Maybe I'm wrong. I'll withdraw that 18 question. 19 A. Okay. 20 Q. Mr. Leiman asked you about 21 Exhibit T7701. Right? 22 A. That is correct. 22212 1 Q. That appraisal report is not addressed 2 to United, correct? 3 A. Again, no. It is addressed to 4 Mr. Minch. 5 Q. And Mr. Minch testified that United 6 never knew about that appraisal. Right? 7 A. I don't specifically recall that exact 8 quote, but I do -- I do recall saying he does not 9 recall ever sending it to them. But I don't 10 recall his flat negative saying that he certainly 11 didn't know about it. If you'd like to show me 12 specifically, fine. But the only thing I recall 13 is he does not recall ever sending it to them. 14 Q. Well, let's take a look, and then we'll 15 move on from this area. 16 A. Okay. That's fine. 17 Q. Apparently, if you could look at Volume 18 1 of your trial transcripts. 19 A. Okay. 20 Q. We're looking for November 12. 21 A. November 12th. Okay. 22 Q. This was the volume passed out this 22213 1 afternoon, I believe. 2 THE COURT: You said "trial 3 transcript"? 4 MR. DUEFFERT: I apologize. Transcript 5 of the hearing. 6 THE COURT: Oh, okay. 7 Q. (BY MR. DUEFFERT) The testimony of 8 Mr. Minch at hearing transcript Page 6690. 9 A. 6690. Okay. 10 Q. And I believe, if you look at the 11 bottom of 6690 starting at Line 20, the question I 12 believe is by me. "Okay. Just a few final 13 questions. We talked earlier today about an 14 appraisal that was prepared by the Appraisal 15 Associates of Austin. Do you remember that?" 16 Answer, "Yes." 17 Question, "Do you recall ever providing 18 a copy of that appraisal to United?" 19 Answer, "I did not." 20 Question, "Why did you not provide it?" 21 Answer, "Because Appraisal Associates 22 was not on the approved list of appraisers 22214 1 provided to me by United." 2 Does that refresh your recollection as 3 to Mr. Minch's thinking about not forwarding the 4 appraisal to United? 5 A. Yes. 6 Q. Was it a regulatory requirement that 7 thrifts use appraisers on their approved list? 8 A. Yes. In fact, the appraisers were 9 supposed to be approved by the board of directors 10 before they would be retained, yes. 11 Q. Finally, Mr. Lovell also testified that 12 the AAA appraisal did not conform with Memorandum 13 R-41B to support a development loan. Right? 14 A. That is correct, yes. 15 Q. Let's go back to where we started today 16 and talk a little bit more about the books and 17 records issue that you raise in your report. 18 A. Okay. 19 Q. As of 1985, did Federal Home Loan Bank 20 Board policies indicate that contemporaneous 21 review by auditors and examiners was irrelevant to 22 management decisions regarding the reporting of 22215 1 loan transactions? 2 A. Let me have that question back again. 3 Q. I can re-ask it. 4 A. Okay. 5 Q. 1985, did the Bank Board -- policies of 6 the Bank Board indicate the contemporaneous review 7 by auditors and examiners was irrelevant to 8 management decisions about the reporting of ADC 9 loans? 10 A. No, they did not. 11 Q. Can we take a look, please, at 12 Exhibit B4172? 13 A. Okay. 14 Q. Mr. O'Connell, do you recognize B4172 15 as being a copy of 50 Federal Register 18233 and 16 following pages? 17 A. I'm not -- oh. Well, that's what it 18 says here, yes. 19 Q. That's the cite? 20 A. Right. 21 Q. And for the record, if you would just 22 read the name of the document into the record or 22216 1 the title and date. 2 A. Sure. "Rules and Regulations, Federal 3 Home Loan Bank Board, 12 CFR Part 571 (85-291) 4 Accounting Policy Relating to Acquisition, 5 Development and Construction Loans. Tuesday, 6 April 30th, 1985." 7 Q. Is this a policy statement that you 8 consulted in the course of preparing your opinions 9 or conclusions in this proceeding? 10 A. I think we had that yesterday. In 11 terms of how -- in terms of immediately 12 beforehand, or is it that something I've consulted 13 numerous times before? Within what time? Within 14 a month before preparing the opinion? 15 Q. You don't cite this in your expert 16 report, do you? 17 A. No, I do not. 18 Q. Did you review this document before 19 determining that you would not review the 20 Peat Marwick work papers and examination work 21 papers on the grounds that they were irrelevant or 22 superfluous? 22217 1 A. Excuse me? Let me have that question 2 back again. 3 Q. I can try again. 4 A. Okay. 5 Q. Did you review this policy statement 6 before reaching your determination that you 7 weren't going to review the Peat Marwick work 8 papers or the examination work papers on the 9 grounds that they were irrelevant or superfluous? 10 A. No, not at all. I mean, this policy 11 statement had nothing to do with deciding the fact 12 that I had the actual audit reports and I had the 13 actual examination reports so that I didn't need 14 the actual work papers. But yeah, this policy had 15 nothing to do with that. 16 Q. Could I direct you to Page 5 of the 17 document? 18 A. Sure. 19 Q. I'll ask you to read the bottom 20 paragraph into the record. 21 A. Okay. Excuse me. Where it says 22 "market value versus net realizable value"? 22218 1 Q. No. I believe we're on Page 5 which I 2 have as being "examiner challenge of 3 classification decisions." 4 A. Oh, I'm sorry. Okay. The 5 second-to-the-last paragraph. Okay. That's fine. 6 Q. Do you see the paragraph that begins 7 "concern was raised"? 8 A. Yes, right. 9 Q. Could you just read that, please? 10 A. The whole or just a couple of 11 sentences? 12 Q. Actually, I'd like the whole thing. 13 A. Okay. Quote, "Concern was raised by 14 commenters that the adoption of the statement of 15 policy would lead to examiner challenges of the 16 classification decisions made by insured 17 institutions in consultation with their 18 independent public accountants. The board wants 19 to take this opportunity to restate its belief 20 that the classification of ADC transactions is 21 best left to the insured institution and its 22 independent public accountant. The board does 22219 1 expect, however, the classification decisions made 2 by the institutions will be documented by 3 reference to the criteria included in the AICP" -- 4 all capitals there -- "'notice to practitioners,' 5 unquote, and in the policy statement being adopted 6 today. The board further expects examiners to 7 review this documentation just as they review 8 other decisions and classification issues during 9 the examination process. Should a question arise 10 as to the classification of specific transactions, 11 the board expects its supervisory agents to review 12 the examiner's comments and discuss the issue with 13 the institution and its independent public 14 accountants," end quote. 15 Q. So, according to the Federal Home Loan 16 Bank Board, in April of 1985, the way the process 17 is supposed to work for the classification of ADC 18 loans is that the auditors are supposed to advise 19 and there is supposed to be oversight by examiners 20 and supervisory agents. Right? 21 A. I wouldn't actually use that phrase, 22 no. "Oversight" implies that we have 22220 1 transaction-by-transaction approval authority of 2 some sort. I wouldn't use that -- I wouldn't use 3 the word "oversight." 4 Q. Well, let's break it into two pieces. 5 According to the Federal Home Loan Bank Board in 6 1985, auditors -- Peat Marwick in this case -- 7 certainly were supposed to advise United regarding 8 the accounting and reporting and classification of 9 ADC loans? 10 A. That I would agree, yes. 11 Q. And the Federal Home Loan Bank Board, 12 at the same time, expected -- in the last sentence 13 of the quote, "expects its supervisory agents to 14 review the examiner's comments and discuss the 15 issue with the institution and its independent 16 public accountants." 17 Above that, "The examiners are supposed 18 to review the documentation just as they review 19 other decisions and classification issues during 20 the examination process." Right? 21 A. That is correct. 22 Q. What word would you use to describe the 22221 1 participation of examiners and supervisory agents 2 in the loan or the ADC classification process? 3 A. Again, as I think I discussed with 4 Mr. Leiman, when examiners go in, they have to 5 sample and they have to test. So, yes, there will 6 be some transactions that they will review; but 7 they certainly can't review every transaction. 8 That's why I'm a little nervous about that. 9 Q. But "oversight" is not the word you 10 would pick? 11 A. No. My own personal view would be 12 test, quite frankly. 13 Q. One way or the other, this policy 14 pertains directly to who was responsible for 15 determining the accounting treatment of ADC loans. 16 Right? 17 A. You could read it that way, yes. 18 Q. Could we have Exhibit B4 -- 640, 19 please? 20 MR. DUEFFERT: If the record is 21 unclear, that is B640. By the way, I will move 22 into evidence Exhibit B4172. 22222 1 MR. LEIMAN: No objection. 2 THE COURT: Received. 3 Q. (BY MR. DUEFFERT) Mr. O'Connell, is 4 Exhibit B640 familiar to you? 5 A. Yes. I believe I've seen this before. 6 Q. And when did you see it? 7 A. It was not before I did the opinion. 8 It was in the -- in the subsequent -- in fact, it 9 was not even before I saw the -- before my 10 deposition. So, it would have been sometime after 11 probably September of last year. I can't 12 specifically recall the date. 13 Q. Do you see on the last two pages of the 14 document, there is a memorandum from Chuck 15 Doolittle to Mike Crow regarding direct 16 investment? 17 A. That is correct. 18 Q. All right. And then on the last page, 19 there is a discussion of the revision of 20 calculations regarding certain investments 21 including Park 410 West? 22 A. Again, that is correct, yes. 22223 1 Q. All right. And then under Footnote 2 2 of that table, there is a further discussion of 3 the Park 410 Joint Venture agreement, correct? 4 A. Yes. 5 Q. The second two pages of this exhibit 6 have been admitted into evidence under I believe 7 No. T7663. But the exhibit -- the T exhibit did 8 not have the first page attached to it, and I'd 9 like you to take a quick look at that. 10 A. Okay. 11 Q. And again, this is a document 12 concerning direct investment issues dated 13 November 5, 1985. Right? 14 A. That is correct. 15 Q. And there is a discussion for the first 16 two or three paragraphs of the memo, everything 17 before the final paragraph, regarding direct 18 investments at United as of December 5, 1985, or 19 at least during that period. Right? 20 A. Again, that is correct, yes. 21 Q. I just would direct you to the final 22 paragraph. 22224 1 A. Okay. 2 Q. Which states, quote, "While this is 3 good news in terms of having more direct 4 investment room" -- and I believe that in this 5 case, the author is referring to the Chuck 6 Doolittle memo to which it is attached -- 7 A. Actually, my reading of this, is this 8 Mr. Crow's signature? 9 Q. Well, it's Mr. Crow's signature on top, 10 as I understand it, on the note. 11 A. Okay. 12 Q. And I -- one more time. 13 A. Okay. 14 Q. It reads, "While this is good news in 15 terms of having more direct investment room, I 16 have asked Jim Wolfe to have Peat Marwick look 17 into this. It is a little hard to believe. We 18 need to make sure that Childress/Graham/Doolittle 19 have the story straight. Since the figure is in 20 the footnotes to the financial statements, it is 21 really difficult to accept that it is incorrect, 22 but I suppose it is possible." 22225 1 My question for you, sir, is this 2 exhibit describes a process for the reporting of 3 direct investments by United in November 1985, 4 doesn't it? 5 A. Let me have that question restated. 6 Q. Let me try again. 7 A. It seems to report the results of some 8 process that Mister -- 9 Q. Let me do it simple. 10 A. -- Doolittle had done. 11 Q. The cover memorandum indicates that Jim 12 Wolfe and Peat Marwick were involved in decisions 13 regarding the reporting of real estate loans at 14 United. 15 A. That is correct, yes. 16 Q. And the exhibit also indicates that 17 Chuck Doolittle had input into that decision? 18 A. Again, that would be correct. That is 19 the way I've read this. 20 Q. And do you recall that Chuck Doolittle 21 was involved in the preparation of thrift 22 financial reports? 22226 1 A. Yes. I've seen his name on several 2 TFRs, yes. 3 Q. Does this exhibit indicate that United 4 involved the outside auditors in its decisions 5 regarding direct investment issues just as 6 contemplated by the Federal Home Loan Bank Board 7 in its policy statement of April 1985? 8 A. Again, yes, that is what this 9 indicates. 10 MR. DUEFFERT: I move Exhibit B640 into 11 evidence. 12 MR. LEIMAN: Your Honor, I'd note that 13 the second and third pages of this are already in. 14 Is this being admitted as a single 15 document? 16 THE COURT: Yes. 17 MR. LEIMAN: No objection. 18 THE COURT: Received. 19 Q. (BY MR. DUEFFERT) Could we next have 20 Exhibit B831, please? 21 A. Okay. 22 Q. Mr. O'Connell, is Exhibit B831 a 22227 1 document you have reviewed prior to today? 2 A. Yes, it is. 3 Q. And did you review it as you were 4 reviewing exhibits designated by respondents in 5 this matter? 6 A. No. It wasn't -- in fact, actually, 7 I'm glad you corrected me. I did not actually 8 view this exhibit in terms of the exhibit number 9 on this copy. I did, in fact, get a copy of the 10 audit partner letter from a different source. 11 Q. To clarify the record, you were saying 12 that you have reviewed a different copy of the 13 notice to practitioners that begins at KPMG 05999. 14 Right? 15 A. I'm sorry. I'm getting completely 16 confused here. Back up a second. Time out. 17 What I've actually seen -- and I'm glad 18 you're doing this. What I've actually seen is the 19 actual attachment that was a notice to 20 practitioners from the AICP. 21 This document -- I think you're right. 22 I think the first time I saw the Peat Marwick 22228 1 document was in the respondents' exhibits. But 2 the actual -- the actual notice to the AICP, I saw 3 sometime separately. 4 Q. And with regard to the first three 5 pages of the exhibit, you didn't encounter it as 6 you were going through audit work papers. Right? 7 A. I might very well have because I 8 thought the audit work papers that I saw were 9 provided by the respondents, either Mr. Freibert 10 or the other experts. 11 Q. The top three pages is a memorandum on 12 Peat Marwick letterhead to US audit and tax 13 partners dated February 10, 1996, correct? 14 A. That is correct, yes. 15 Q. And it is captioned "Accounting for 16 acquisitions, development, or construction ADC 17 arrangements." Right? 18 A. Again, that is correct. 19 Q. And in the first page of this document, 20 it references and describes a change in the 21 accounting guidelines for the accounting of ADC 22 arrangements. Right? 22229 1 A. Okay. Yes. You're talking about 2 Point 1? 3 Q. Well, I'm talking about the character 4 of the first page. 5 A. Oh, okay. 6 Q. Do you agree with me? 7 A. Yes. He's advising other partners that 8 this new statement supersedes prior statements, 9 yes. 10 Q. The rules changed on February 10, 1986. 11 Right? 12 A. That is correct. 13 Q. And this is a notification that the 14 rules changed? 15 A. Again, that is correct. 16 Q. Now, Page 2 of the exhibit again deals 17 with procedures at Peat Marwick. 18 A. Okay. 19 Q. Have you reviewed these procedures in 20 preparation for your testimony here for today? 21 A. Again, I would have to say no. I'm 22 familiar with the actual attached statement, the 22230 1 notice to practitioners; but I don't recall 2 reading this specific document to any 3 particular -- I don't recall actually reading the 4 actual cover document. 5 Q. Although it's a little lengthy, it's 6 important. And I would ask you to read into the 7 record the paragraph on Page 2 that begins with 8 "if" and then going through the three lettered 9 paragraphs. 10 A. Okay. So, basically the whole 11 paragraph then? 12 Q. Correct. 13 A. Quote, "If a personal guarantee by the 14 borrower is the major factor that will be decisive 15 in determining that an ADC arrangement(s) will be 16 accounted for as a loan as opposed to an 17 investment in a joint venture and also assuming 18 the income recognition is material, then; A, the 19 ADC arrangements will be deemed to be, quote, 'a 20 critical audit' -- to be a, quote, 'critical audit 21 area,' unquote, requiring review by the engagement 22 partner (see Paragraphs 10-14 of the accompanying 22231 1 notice for specific items to be considered). 2 Point B, a second audit partner, normally the SEC 3 reviewing partner or the partner who is or will be 4 the pre-issuance reviewing partner, must review 5 the engagement team's memorandum that presents the 6 conclusions on the accounting for the ADC 7 arrangement(s). C, if the engagement team and the 8 second partner do not agree, they should consult 9 with the DPP, Mr. Erickson, E-R-I-K-S-O-N, or 10 Mr. Shanahan," S-H-A-N-A-H-A-N. 11 Q. You will agree with me, won't you, that 12 the procedure set forth in that text describes a 13 very substantial amount of scrutiny by 14 Peat Marwick regarding United's accounting 15 treatment of ADC loans? 16 A. No. This is general policy statement. 17 I don't see United discussed anywhere. 18 Q. Let's try it again. You told me that 19 the rules had just changed. 20 A. That is correct. 21 Q. And at that point, early 1986, in the 22 audit industry as well as in the federal 22232 1 examination area, there was a substantial amount 2 of focus regarding the reporting of ADC 3 transactions, wasn't there? 4 A. Let me have that read back again. 5 THE COURT: Mr. O'Connell, I hope you 6 can listen to the question the first time. We're 7 wasting a lot of time by having the question 8 several times. 9 THE WITNESS: I'm just trying to be 10 very careful of what he's asking. 11 THE COURT: Well, the question was: 12 Was there a lot of notice being given to this area 13 at the time? That's not so complicated. 14 A. I would have to say there was a fair 15 amount of notice. 16 THE WITNESS: The reason I say that, 17 Your Honor, there were a number of regulatory 18 initiatives at the time. Frankly, in the Federal 19 Home Loan Bank, I think the most attention was 20 probably to the new classification of assets 21 regulation. That's why I'm hesitant to use the 22 word "substantial." Yes, there was a fair amount 22233 1 of notice about it. 2 Q. (BY MR. DUEFFERT) The notice to 3 practitioners dated February 10, 1986, together 4 with 12 CFR 571.17 that we looked at yesterday, 5 this was the other governing standard regarding 6 the reporting of ADC transactions, correct? 7 A. Yes, that is my understanding. 8 Q. And is this notice to practitioners 9 cited or discussed in your expert report? 10 A. Not specifically, no. 11 MR. DUEFFERT: I move the admission of 12 Exhibit B831. 13 MR. LEIMAN: No objection. 14 THE COURT: Received. 15 Q. (BY MR. DUEFFERT) Could we have 16 T7081, please, which is at Tab 708? 17 A. Okay. 18 Q. Mr. O'Connell, Exhibit T7081 an exhibit 19 with which you are familiar? 20 A. Yes. 21 Q. And on the -- halfway through the first 22 page -- and this is a construction loan checklist, 22234 1 acquisition, development, construction loans that 2 the borrower listed as Park 410 West Joint 3 Venture. 4 A. Okay. 5 Q. Halfway down the first page, there is 6 an indication, is there not, that one third of the 7 $2.4 million in loan fees for the Park 410 loan 8 were deferred at the election of USAT, correct? 9 A. Actually, I think that was the standard 10 regulatory practice; but, yes. At the date of 11 this transaction -- the date of this document, 12 yes. However, I believe that $800,000 was booked 13 into income before the end of the year. 14 Q. Do you refer in your expert report to 15 the 800,000-dollar deferral of a portion of the 16 Park 410 loan fee? 17 A. No, I did not. 18 Q. And finally, Mr. Leiman has asked you 19 questions about books and records and missing 20 files and documentation issues yesterday. 21 Do you remember that? 22 A. Yes. 22235 1 Q. Does this document reflect that United 2 had a system for tracking and trying to make sure 3 that all the appropriate documents were maintained 4 in loan files? 5 A. Yes. This does appear to be a 6 checklist of various documents that should be 7 retained by the association, yes. 8 MR. DUEFFERT: Your Honor, we're having 9 a hard time locating an exhibit. Perhaps this 10 would be a good time for a break. 11 THE COURT: Okay. We'll take a short 12 recess. 13 14 (Whereupon, a short break was taken 15 from 2:55 p.m. to 3:15 p.m.) 16 17 THE COURT: Be seated, please. Back on 18 the record. 19 Mr. Dueffert, you may continue with 20 your cross-examination. 21 MR. DUEFFERT: Thank you, Your Honor. 22 Actually, I've decided I have no further questions 22236 1 for the witness. I believe some of my colleagues 2 may. 3 THE COURT: Mr. Eisenhart. 4 MR. EISENHART: Thank you, Your Honor. 5 I have just a few questions. 6 7 EXAMINATION 8 9 Q. (BY MR. EISENHART) Mr. O'Connell, my 10 name is Frank Eisenhart and I represent one of the 11 respondents in this case. 12 A. Good afternoon. 13 Q. Good afternoon to you. 14 As I understand it, you were first 15 approached by the OTS concerning this case in late 16 1995; is that correct? 17 A. That is correct, yes. 18 Q. Had you had anything to do, prior to 19 then, with United Savings Association of Texas? 20 A. I don't believe so, no. 21 Q. So, that hadn't formed any part of your 22 career or responsibilities at OTS prior to late 22237 1 1995? 2 A. No. I don't believe so, no. 3 Q. And as I recall the testimony on the 4 first day you were here, what you were asked to do 5 in 1995 was to give some comments on a draft of 6 the Notice of Charges in this case? 7 A. Again, yes, that is correct. 8 Q. And you did that, I gather? 9 A. Yes. 10 Q. And are the sections of the Notice of 11 Charges that you commented on essentially the ones 12 we've been dealing with here which is, I think, 13 the 11th and 12th Notice of Charges? 14 A. Yes, I believe so. 15 Q. 11th and 12th claims. Excuse me. 16 A. Right. 17 Q. The ones concerning the real estate 18 transactions? 19 A. Yes, that is correct. 20 Q. Now, in the course of helping them 21 draft these two portions of the Notice of Charges, 22 were you shown any documents by the OTS lawyers or 22238 1 otherwise given information about these 2 transactions? 3 MR. LEIMAN: Objection. He didn't say 4 he drafted -- help draft it. He said he made some 5 comments on it. That mischaracterizes his 6 testimony. 7 MR. EISENHART: All right. I'll accept 8 that modification. 9 Q. (BY MR. EISENHART) In the course 10 doing whatever it was you did, were you shown any 11 documents? 12 A. Yes, I was. I believe -- and now I'm 13 going purely on memory here. I believe the core 14 underwriting documents, which would have been the 15 senior loan committee decision memorandums, what I 16 refer to. In fact, several minutes of -- either 17 it was the real estate investment committee or the 18 senior loan committee minutes. I don't think I 19 got the -- I don't think I got the appraisals at 20 that time; but I did get copies, I believe, of 21 some notes and some joint venture agreements and 22 some guarantees. I frankly don't recall -- I may 22239 1 have gotten the appraisals and just plain 2 forgotten about them. 3 Q. These were provided to you by OTS 4 counsel? 5 A. That is correct. 6 Q. Who was it, Mr. Leiman, that you were 7 working with? 8 A. Yes. 9 Q. Now, at that time, was there any 10 understanding that you would have any further 11 involvement in this case? 12 A. No. 13 Q. And did you save those documents you 14 had been given? 15 A. No. In fact, I just gave them right 16 back to him. 17 Q. Now, you were again contacted, I think 18 you said, about ten months later toward the end of 19 1996? 20 A. Again, yes. 21 Q. This time, it was in connection with 22 giving an expert opinion and actually testifying 22240 1 in the case; is that correct? 2 A. Again, yes. 3 Q. And at that time, I believe you 4 testified you were shown a larger number of 5 documents by OTS counsel? 6 A. Yes, that is correct. 7 Q. And I think you said in response to a 8 question by Mr. Leiman that you went to -- I think 9 what used to be a training room at the OTS 10 headquarters and there were lots of documents on 11 shelves lining the walls? 12 A. Not at that time. Actually, at that 13 time, the amount of documents would have fit on a 14 table. So, it was only -- it was only one office. 15 I believe I went to the training room after we got 16 more of the respondents' exhibits. 17 Q. Okay. Well, focusing for the moment on 18 the documents that you reviewed prior to drafting 19 and signing your report -- 20 A. Okay. 21 Q. -- were these all documents that were 22 given to you or furnished to you by OTS counsel? 22241 1 A. Yes, that is correct. 2 Q. And this, again, was Mr. Leiman? 3 A. Mr. Leiman and, to some extent, 4 Mr. Rinaldi, yes. 5 Q. Okay. And I think you said that you 6 asked them for certain documents, or did you just 7 look at what they gave you? 8 A. Yes. I did ask for some specific 9 documents, yes. 10 Q. Okay. And I think you said that there 11 was nothing you asked for that you were not given, 12 if I remember your testimony correctly? 13 A. At that time, that is correct, yes. 14 Q. Were one of the documents that you 15 asked for the loan files for these two loans as 16 they would have existed at the time the loans were 17 made? 18 A. No. I would not -- I knew that 19 couldn't happen; so, I would not have asked that, 20 no. 21 Q. Isn't it a fact, Mr. O'Connell, that 22 the documents that you saw and that the OTS made 22242 1 available to you prior to your authoring your 2 opinion were documents that had been in the 3 collection -- in the possession of the 4 institution, the FDIC, and the OTS for some years? 5 A. I believe so, yes. But I frankly 6 can't -- I have no idea, you know, physically 7 who's been holding those documents all those 8 years. I believe so, but -- 9 Q. And these documents were no longer in 10 the files in which they were maintained at the 11 institution, were they? 12 A. No. I don't believe so, no. 13 Q. And they had been put into binders. 14 They had notes appended to them? 15 A. That I don't recall, frankly. I -- 16 yeah. I don't want to talk about -- I don't 17 recall notes being appended to them offhand. 18 Q. Do you recall notes being made on them? 19 A. Frankly, I don't recall. I thought 20 most of the documents I saw were basically 21 unmarked. They may very well have been, but I 22 don't recall them offhand. 22243 1 Q. Well, do you have any way of knowing, 2 Mr. O'Connell, as you reviewed those documents 3 prior to writing your opinion in 1996, did you 4 have any way of knowing whether those were in the 5 same condition and the same order and in the same 6 completeness as they would have been available to 7 people at the institution at the time these loans 8 were made? 9 A. To the extent that the documents were, 10 of course, unmarked, I did make the assumption 11 that if they were unmarked that these were in a 12 similar condition in 1986. But in terms of 13 completeness, no, I did not -- I could not make 14 that assumption. Again, I could not -- I could 15 not go into a time warp and look at the loan files 16 as they existed 12 years ago. 17 Q. So, you have no way of knowing whether 18 what you looked at in 1986 was the same material? 19 A. '96. 20 Q. I'm sorry. '96 was the same body of 21 material that the people at the institution would 22 have been looking at in 1986? 22244 1 A. Well, actually, to some extent, there 2 was a lot of documents that they could not have 3 seen. There were many 1987, '88, '89 documents 4 that clearly could not have been in the files in 5 1986. 6 Q. But you would agree with me that you 7 had no way of knowing whether what you were 8 looking at was what was the same as what they 9 would have been looking at? 10 A. That is correct, yes. 11 Q. Thank you. 12 MR. EISENHART: That's all I have, 13 Mr. O'Connell. 14 MR. BLANKENSTEIN: No questions, Your 15 Honor. 16 THE COURT: Mr. Keeton? 17 MR. KEETON: I have no questions, Your 18 Honor. 19 THE COURT: I have one. 20 THE WITNESS: Okay. 21 THE COURT: Are you -- you said that 22 Mr. Lovell makes mistakes. My only question was: 22245 1 Did that refer to anything that he did in this 2 case? 3 THE WITNESS: Oh. In terms of his 4 general overall opinions, I would say no. I 5 thought -- I actually just made that as kind of a 6 self-obvious question. You know, we all make 7 mistakes. But no, I'm not aware of any of the 8 opinions that he gave that I would have disagreed 9 with. 10 THE COURT: Thank you. 11 Redirect, Mr. Leiman? 12 MR. LEIMAN: Your Honor, if we could 13 have a few minutes to organize our materials. We 14 thought that the respondents were going to go all 15 day. And if we could have about five minutes, 16 that would be fine. 17 THE COURT: We'll be off the record. 18 19 (Short break.) 20 21 THE COURT: We'll be on the record. 22 Mr. Leiman. 22246 1 MR. LEIMAN: Thank you, Your Honor. 2 3 FURTHER EXAMINATION 4 5 Q. (BY MR. LEIMAN) Mr. O'Connell, did I 6 or did any member of OTS ever place any 7 restriction on your access to the books and 8 records that were in the possession of OTS 9 regarding the real estate loans that you've 10 testified to in this matter? 11 A. No, you have not. 12 Q. You had access, didn't you, to the 13 books and records of the institution as they were 14 made available from the FDIC and the RTC in a 15 training room as Mr. Eisenhart pointed out. 16 Right? 17 A. That's my understanding, yes. But 18 again, I just want to make it clear, you know that 19 I did not physically see the transfer of the 20 documents from the RTC to the trading room; but 21 that is my understanding, yes. 22 Q. I don't believe, Mr. O'Connell, that we 22247 1 need to establish a chain of custody with respect 2 to those records. I think that the records -- the 3 records that you saw were the records that you 4 saw. 5 A. That's correct. 6 Q. I just want to establish that, in fact, 7 you were never restricted in that regard. 8 Did you see records that related to 9 matters other than the real estate claims? 10 A. Oh, sure. Quite a bit. The records 11 obviously would mix and match to some extent. 12 There would be references to other transactions. 13 For instance, I think there were other 14 transactions regarding Mr. Rosenberg, and that was 15 LTOB issues, that for loans-to-one-borrower, you 16 have to aggregate all loans to Mr. Rosenberg. And 17 I believe there were other loans either to 18 Mr. Rosenberg or a relative of his. So, yes, 19 there would be some cross referencing to other 20 transactions. 21 Q. Mr. O'Connell, did you ever see any 22 loan documents that related to real estate 22248 1 documents that would have related to a transaction 2 known as Gateway? Did you ever see any? 3 A. Yes, I did. 4 Q. Okay. Did you ever see any reference 5 to Stanley Rosenberg relating to a real estate 6 transaction known as Northlake? 7 MR. DUEFFERT: Your Honor, just an 8 objection. We have two loans at issue in this 9 case. I object to scope and -- 10 THE COURT: Sustained. 11 MR. LEIMAN: I'll move on, Your Honor. 12 Q. (BY MR. LEIMAN) Did you personally go 13 through documents that had been made available -- 14 you personally, did you look for documents looking 15 for Park 410 and Norwood transaction documents? 16 A. Yes, I did. 17 Q. All right. Did you find any? 18 A. Yes. Quite a few, as a matter of fact. 19 Q. And were they significant in any way in 20 connection with writing your report? 21 A. Yes. 22 Q. What about in connection with your 22249 1 testimony here today? 2 A. Yes, very much so. 3 Q. Okay. Can you venture a guess, 4 Mr. O'Connell, as to how many boxes you might have 5 seen down in the OTS training room? 6 A. Oh, God. There are, I think, literally 7 hundreds of boxes in the OTS training room. I 8 think I went through -- I can't believe I went 9 through more than 50, but at least 25. That's 10 about the best that I can do. 11 Q. Is it fair to say that you saw -- in 12 the course of preparing your report and in the 13 course of preparing for your testimony here today, 14 you went through literally thousands and thousands 15 of documents? 16 A. Well, I'm not sure -- thousands and 17 thousands of pages; but of course, many of the 18 documents had hundreds of pages. But clearly 19 thousands and thousands of pages, yes. 20 Q. Were you somewhat surprised that you 21 could not remember a specific reference in a 22 specific document that was shown to you by 22250 1 Mr. Dueffert? For example, the reference to the 2 document he showed you in connection with -- let 3 me pull it out here. I believe you said you 4 didn't remember the document. This Peat Marwick 5 document. Do you remember that? 6 A. Yes. 7 Q. And you remember Mr. Dueffert asked you 8 about it? 9 A. Yes, I do recall that. 10 Q. Are you -- 11 THE COURT: Would you cite the -- 12 MR. LEIMAN: Yes, sir. It's 13 Exhibit B831. 14 Q. (BY MR. LEIMAN) I think you 15 equivocated and you weren't certain as to whether 16 or not you had actually seen this or not. 17 MR. DUEFFERT: I just object. I think 18 he testified very clearly he hadn't seen the first 19 three or fours pages of the document, but he had 20 seen the publicly-available bulletin accounting 21 treatment that's attached to it. 22 THE COURT: What is your testimony? 22251 1 THE WITNESS: My recollection is that I 2 actually saw this in the overall respondents' 3 presentation. I seem to have a recollection of 4 seeing that; but the only thing I know that I've 5 actually read carefully would have been the actual 6 public document which I've been familiar with 7 before. 8 So, I think I've seen it; but the main 9 thing I would have noticed is the actual 10 attachment. 11 Q. (BY MR. LEIMAN) Mr. O'Connell, you 12 said earlier in your testimony words to the 13 effect -- and I'm not -- I'll just paraphrase 14 this -- that you had available to you, in 15 preparing for your testimony today and in 16 preparing your report, more information than had 17 been available to the examiners in 1986 and in the 18 subsequent examination in 1987. 19 Is that a fair, accurate statement of 20 what you had mentioned? 21 A. Yes. 22 Q. Why is it that you had more information 22252 1 available to you? 2 A. Part of -- well, part of it obviously 3 is because of future events, future developments, 4 that we were able to see what actually happened in 5 the post '86-'87 era. In addition to that, we 6 have seen obviously respondents' documents 7 regarding a great number of matters. Plus, of 8 course, I've seen all the depositions. I 9 shouldn't say all the depositions, but I think 10 I've read most of the deposition and hearing 11 testimony vis-a-vis the real estate transactions. 12 So, just a number -- there is a great 13 deal more material that I've had available to me 14 than the examiners would have had available back 15 in 1986 or '87. Plus, of course, I had the 16 advantage of just specializing on two loans for 17 several weeks. 18 The examiners had many loans, and they 19 had to split their attention among many different 20 loans for just one examination report. 21 Q. Were you in some way criticizing the 22 examiners? 22253 1 A. No. 2 Q. Were you merely stating a fact that 3 time had passed since they had done their 4 examination and documents had been produced? 5 A. Right. And the fact that I had more 6 time to be able to concentrate on these two 7 transactions than they would have had. 8 Q. Let's -- let me ask you this follow-up 9 question. 10 Why is it significant, in your mind, 11 that you had more information? What's the 12 significance of that to you? 13 A. Just that I had a greater body of data 14 from which to make conclusions from. 15 Q. Let's look, please, at Exhibit A11042. 16 I think that can be found at Tab 982. 17 Mr. O'Connell, you were handed a few 18 moments ago A11042 which is a report of 19 examination in connection with USAT. And this was 20 done by whom? 21 A. It was done by the Federal Home Loan -- 22 well, actually, the Federal Home Loan Bank of 22254 1 Dallas was the supervisory agent. Neil Twomey 2 signed off. But I believe a number of out of 3 district -- oh, I'm sorry. This is the '86 exam. 4 I apologize. I'm confusing the date. This was 5 actually done by Federal Home Loan Bank of Dallas 6 personnel. 7 Q. Does the name Vivian Carlton ring a 8 bell as the EIC? 9 A. Yes, that's correct. 10 Q. Okay. Let's look, please, at Page 24. 11 A. Okay. 12 Q. Now, if you would, please read for 13 me -- 14 A. Time out, Counselor. 23 and 25 -- 15 where is 24? At least in my copy. 16 Q. Check -- 17 A. Oh. 18 Q. The pages may be out of order. 19 A. At least in my copy, 24 is actually 20 before 23. 21 Q. Did you find page No. 24? 22 A. Yes. 22255 1 Q. All right. Read aloud into the record 2 the first two paragraphs that are shown in this 3 section under "records, systems, and controls." 4 A. Okay. Quote -- 5 MR. DUEFFERT: Your Honor, objection. 6 Beyond the scope. We're not talking about our two 7 loans again. 8 THE COURT: Sustained. 9 MR. LEIMAN: Your Honor, if I might 10 address this. Mr. Eisenhart was suggesting in his 11 cross-examination that somehow, the books and 12 records were in dandy condition back in 1986 and 13 had Mr. O'Connell somehow been there at that time, 14 he would have been able to see that they really 15 were okay. Now, the examiners here have stated 16 very clearly that that was not the case. It was 17 anything but the case. 18 THE COURT: Well, we are unable to tie 19 that to the records of these loans. So, I'm not 20 sure what the relevance of this is. I mean, the 21 institution's records may have been in a shambles, 22 but were these loan files in shambles? 22256 1 MR. LEIMAN: Well, may I ask the 2 witness that question? 3 THE COURT: Yes, you may. 4 Q. (BY MR. LEIMAN) Can you discern 5 anything from the fact that what Ms. Carlton wrote 6 here with her examination team as to the books and 7 records of the institution with regard to these 8 two loans? 9 A. Only in the very general sense of the 10 examiners would have found it difficult to come to 11 any conclusions about the loans, presuming 12 pertinent details and pertinent facts were not 13 evident. But again, not knowing the status of the 14 loan files at that time, I can't really say 15 anything more than that. 16 Q. Have you read the Texas report of 17 examination? 18 A. Of that same year? Yes, I have. 19 Q. All right. Are you aware of a similar 20 problem cited there in connection with the books 21 and records? 22 A. Yes, I am. 22257 1 Q. Mr. O'Connell, in the course of your 2 career, both at the Federal Home Loan Bank of 3 Chicago as well as at headquarters in Washington, 4 D.C., have you had occasion to deal with failed 5 thrifts from the state of Texas? 6 A. Yes, I have. 7 Q. Do you believe that you have a good and 8 solid familiarity with the problems that were 9 prevalent in Texas in the period 1985 through 10 1988? 11 A. I have some familiarity with them; but 12 frankly, my specialty at that time was with 13 Lincoln and with some MCPs. There were clearly 14 some MCPs in Texas. I am fairly familiar with it. 15 But the actual region that I dealt with was not 16 specifically the state of Texas. 17 So, the only thing I can say is I have 18 some familiarity with it; but I could probably 19 name other people who have more familiarity with 20 it. 21 Q. What was the nature of the problem with 22 thrifts in Texas that you encountered? 22258 1 MR. DUEFFERT: Your Honor, objection. 2 THE COURT: Sustained. 3 Q. (BY MR. LEIMAN) Take a look at B961 4 that Mr. Dueffert asked you about. It should be 5 in front of you. 6 A. Okay. 7 Q. This is the Rice Center Area Profile. 8 A. Okay. It is probably here, but it may 9 not be directly in front of me. Hold on a second. 10 What was the number again? 11 Q. B961. 12 A. Okay. 13 Q. It may not be in a folder, 14 Mr. O'Connell. Let's see. 15 A. Rice Center. Okay. I found it. 16 Q. Are you personally familiar with the 17 Rice Center? 18 A. No. 19 Q. Okay. Look, please, with me at 20 Page No. 3. Before we do that, Mr. O'Connell, let 21 me ask you something. 22 Do you remember when it was that the 22259 1 senior loan committee of USAT approved the 2 Park 410 transaction? 3 A. I believe it was March of 1986. 4 Q. All right. What's the date on this 5 Area Profile 1 that's shown here as B961? 6 A. May 1986. 7 Q. So, there could not have been any 8 access to this document by USAT underwriters, 9 could there? 10 A. It would not appear so, no. 11 Q. All right. Look with me to Page 3 of 12 this. 13 Do you see in the center column 14 "business parks of 60 acres or more"? Do you see 15 that? 16 A. Yes. 17 Q. And do you see that there are a number 18 of those listed? 19 A. Yes. 20 Q. All right. Now, look at the bottom of 21 the page. 22 A. Okay. 22260 1 Q. Do you see that there are listed here 2 for comparison purposes by the Rice Center and its 3 Area Profile 1, they list 1,338 acres of 4 competing -- of area that includes the Westplex 5 area? 6 Do you see that? 7 A. Yes, I do. 8 Q. All right. Please turn to the next 9 page under "multi-use developments." 10 A. Okay. 11 Q. See where it says "Several multi-use 12 developments that combine commercial..."? See 13 that? 14 A. Okay. 15 Q. All right. And then go down to the 16 bottom of the page. 17 A. Okay. 18 Q. I'm sorry. I misspoke. Go to the next 19 paragraph where it says "Westover Hills is a 20 7,500-acre project --" 21 A. Right. 22 Q. -- "bordered by Potranco Road on the 22261 1 south and Loop 1604 on the west." 2 A. Correct. 3 Q. If Westover Hills were adjacent to the 4 Park 410 property, would you surmise that that 5 property was competing with Park 410? 6 A. Certainly, yes. If that was the case. 7 Q. In fact, is it reasonable to surmise in 8 your opinion as an underwriter that all of the 9 properties that are listed here in this Area 10 Profile 1 would be competing for clientele just as 11 Park 410 would have been? 12 A. Yes. My reading of the -- my reading, 13 going back to that list of the prior page, is it 14 does appear to all relate to in the Westplex area. 15 So, yes, these would be competitor sites. 16 Q. All right. Let's put that aside. 17 Mr. Dueffert showed you a number of 18 what appear to be newspaper articles. Right? 19 A. That is correct. 20 Q. Let's look at the first one that he 21 showed you. I think it was B4265. 22 A. Okay. Okay. 22262 1 Q. Do you have any familiarity with real 2 estate writers or newspaper writers at all? 3 A. From a personal familiarity, no, I 4 don't know any personally. Obviously, I have read 5 a great deal of real estate newspapers and 6 publications. But I don't think I know anyone 7 personally. I don't think I know one that 8 personally. 9 Q. Would it -- in your opinion, would it 10 be significant that the person that's being relied 11 upon for the opinion in the leasing survey 12 concerning this column by -- on real estate in 13 this newspaper by Kim Tyson, I guess it is, that 14 the person being interviewed is a leasing broker? 15 A. Oh, sure. 16 MR. DUEFFERT: Your Honor, I'll object 17 to the foundation, that the witness said he would 18 not use newspaper articles for underwriting 19 purposes. With that testimony, I don't think it's 20 appropriate to have these kinds of questions. 21 THE COURT: Denied. 22 Q. (BY MR. LEIMAN) What was your answer? 22263 1 My question was: Is it significant that the 2 person being quoted here is a leasing broker? 3 A. Yes. The way I would basically take 4 that is that this is an individual who has a 5 vested interest in trying to suggest a healthy 6 market, trying to encourage clients to lease 7 space, and basically this is not -- I would say 8 this is not generally an objective observer, 9 basically. 10 Q. Please look at -- 11 A. I don't want to say that the person is 12 necessarily lying because she actually seems to 13 have some interesting hard data here. But I'm 14 just saying looking at the perspective of it, you 15 have to realize they have a vested interest. 16 Q. Mr. O'Connell, look at 3999. 17 A. Okay. And that is what? 18 Q. Well, it purports to be an article that 19 appeared in the Sunday Express News in 20 San Antonio. 21 A. Okay. 22 Q. In October of 1985. Do you have that 22264 1 in front of you? 2 A. Yes. 3 Q. All right. Have you ever heard of S -- 4 capital S-A-B-O-R, Sabor Commercial Investment? 5 Do you know what that is? 6 A. No. It does not ring a bell. 7 Q. Please -- 8 A. You're presuming the title of the 9 person who wrote this, you're saying? 10 Q. Yeah. I'm looking at the by-line here. 11 A. Okay. 12 Q. So, you wouldn't know who that is? 13 A. No. And I'm not familiar with the 14 firm, no. But it does indicate -- right. This is 15 not a staff writer of the -- of the Express News. 16 This would appear to be some sort of an officer of 17 a development or actually some sort of a 18 commercial investment firm. 19 Q. Look at the last -- very last two 20 paragraphs on this page. 21 A. Okay. 22 Q. It talks about "two notes of caution 22265 1 appear on the horizon for real estate in 1986." 2 A. Okay. 3 Q. Do you see that? 4 A. Yes. 5 Q. "And they are greatly reduced under 6 activity in view of new government regulations and 7 a workoff of sizable vacancies in certain market 8 areas due to the substantial amount of development 9 activity that's taken place in the last 36 10 months." 11 Do you see that? 12 A. Yes. 13 Q. Then it goes on and says, "The 14 long-term outlook for San Antonio is still good." 15 A. Right. 16 Q. I'm not going to ask you whether or 17 not, as an underwriter, you would base an 18 underwriting decision on a newspaper article. 19 What I am going to ask you is this: Does a 20 newspaper article generally give some indication 21 to real estate underwriters that additional 22 information should be obtained in connection with 22266 1 a decision to make a loan or get involved in a 2 real estate investment? 3 A. Yes. In fact, I think that really is 4 the -- that's really the only purpose for the 5 newspaper articles, is to convey information, not 6 opinions or outlooks. If the newspaper -- 7 newspaper writers can be very skeptical. They can 8 be very optimistic. But if they make reference to 9 some actual hard data, economic studies, actual 10 results, that is something that could be served as 11 a lead for underwriters. But no, they certainly 12 should not be taking action just based on a 13 newspaper column. 14 Q. Take a look, please, at T7357. This is 15 the article that Mr. Dueffert showed you about. 16 It's titled, from the Express News, "The Biggest 17 Game in Town." 18 A. Okay. 19 Q. Do you have that in front of you, 20 Mr. O'Connell? 21 A. Yes. 22 Q. All right. I don't want you only to 22267 1 focus on the first page. I'd like you to take a 2 look at the continuation of this article, which is 3 the fourth page of the exhibit. 4 A. Okay. 5 Q. Are you there? 6 A. Yes. 7 Q. Do you see in the first full paragraph, 8 it says, "But Tom Callahan of Pannell, Kerr, 9 Forster, an accounting firm that performs 10 feasibility studies" -- do you see that? 11 A. Right. 12 Q. It says that he "performs feasibility 13 studies for proposed hotels, is not so bullish for 14 immediate land purchases for hotel sites." Right? 15 A. Okay. 16 Q. "We're counseling our clients to wait 17 and see." 18 What's the date of this pick up 19 article? 20 A. August 9th, 1987. 21 Q. All right. Now, USAT couldn't have 22 possibly known about this, could they? They 22268 1 couldn't have known about this newspaper article 2 at that point in time? 3 A. You mean at the time of the 1986 4 transactions? 5 Q. Yes. 6 A. No, of course not. 7 Q. I apologize for the incomplete, 8 inartful question. 9 A. No, of course not. 10 Q. Have you seen any newspaper articles 11 that, in fact, would have indicated something to 12 USAT underwriters in addition to that done by, for 13 example, the San Antonio Express News that would 14 have suggested that they should have been more 15 cautious in their underwriting? 16 A. Yes, I have. 17 Q. All right. And as you've indicated, 18 the utility of newspaper articles is limited. 19 Right? 20 A. I've always viewed them as so, yes. 21 Q. All right. Let me ask you a question 22 about your report. Switch gears for a moment. 22269 1 A. Okay. 2 Q. Mr. Dueffert asked you about the net 3 worth of borrowers. 4 Do you remember that? 5 A. Yes. 6 Q. All right. And he asked you why you 7 didn't cite positives, positive factors in your 8 report. I think you said something, that the net 9 worth was not an issue because the guarantees were 10 worthless. 11 Do you remember saying something to 12 that effect? 13 A. Something to that effect, yes. 14 Q. Explain for us what you meant by that. 15 A. Well, I think I already did. The 16 experience of the Bank Board has been that 17 personal guarantees should be viewed with great 18 skepticism and that for real estate transactions, 19 they should always be looking directly at the 20 actual collateral securing the loan. 21 In addition, the Bank Board always 22 preferred to see actual equity put up by the 22270 1 borrowers as opposed to a guarantee. In fact, in 2 terms of whether an asset should be classified as 3 an ADC loan or an investment, the Bank Board 4 basically does not count guarantees as a major 5 factor. They do count equity, that substantial 6 equity by the borrowers is very much a factor. 7 And I believe that's -- we could cite the overall 8 accounting policies, if you want me to quote from 9 those. 10 But unfortunately, our experience has 11 been guarantees are generally not to be relied 12 upon. 13 Q. Why are they not to be relied upon? 14 What happens? 15 A. Several reasons. The first one being 16 that at the time that guarantees are given, 17 particularly for ADC loans, the ADC loans are 18 structured so that they can't did into default for 19 several years. And by the time several years have 20 gone by, oftentimes the financial statements of 21 the particular borrowers will deteriorate. That's 22 particularly the case if the economy is going bad. 22271 1 It's somewhat of a vicious circle there. 2 If the economy is going bad and ADC 3 loans are falling into default, you'll find that 4 the borrower's other properties, because most 5 borrowers tended to be very leveraged, they had 6 more than just one loan -- their other properties, 7 their other valuations were also declining. 8 For instance, a classic example would 9 be Mr. Rosenberg. And although obviously this is 10 going to be information that was well past the day 11 of the underwriting, but as the years went on, I 12 believe one of the RTC -- I believe one of the RTC 13 documents reported about six of its partners were 14 in bankruptcy and that he himself was down to -- 15 down to less than a couple of hundred thousand 16 dollars of net worth as opposed to, I think, about 17 40 million several years before. 18 So, financial statements at the time of 19 the loan -- an ADC loan being made may not have 20 any relevance to the time that the ADC loan 21 actually goes into default. 22 In addition to that, most financial 22272 1 statements aren't audited. So, to the extent that 2 they show valuations based on their only personal 3 assessment of real estate, that can prove to be 4 very inflated. 5 Q. When you said the guarantees were 6 worthless, did you have in mind either of the 7 particular loans that -- or both of the loans that 8 were the subject of your testimony? 9 A. Actually, both the loans. And as I 10 said, in general, Bank Board examiners have found 11 personal guarantees to be unreliable. 12 Q. Mr. Dueffert showed you something 13 called the Sheshunoff report or book. 14 A. Yes. 15 Q. Part of a book. Okay. 16 He wrote down some ADC statistics on a 17 pad of paper that was here. 18 Do you remember that? 19 A. Yes, I do. 20 Q. He mentioned that there was some -- 21 that about 4.1 percent of the assets of USAT were 22 comprised of ADC loans. 22273 1 Does that ring a bell? 2 A. That sounds familiar, yes. 3 Q. Okay. Is there a correlation or 4 relationship of some kind between the fact that an 5 institution has 4.1 percent of its assets in ADC 6 loans and doing underwriting in less than a 7 thorough manner? 8 A. I'm afraid you lost me there. 9 Q. Is there some connection between the 10 fact that USAT had 4.1 percent of its assets in 11 ADC loans and the fact that you found in your 12 report and it was your opinion that USAT had done 13 an unsafe and unsound job in underwriting both 14 Park 410 and Norwood? 15 A. If you're trying to ask -- if you're 16 trying to ask me did the macro number of the 17 thrift have anything to do with the specific 18 underwriting of those two loans, the answer is no. 19 Is that what you're trying to get to? 20 Q. I want to know if there is a connection 21 between the two. I mean, I'm not -- 22 A. No. 22274 1 Q. Let me rephrase this question. Let me 2 ask you a different question. 3 Is the fact that ADC loans comprised 4 4.1 percent of the total loans of USAT an excuse 5 for not undergoing thorough underwriting? 6 A. No, of course not. 7 Q. Why not? 8 A. The issue of underwriting is supposed 9 to be for every loan that you make. And 10 obviously, the more -- the larger the loan, the 11 more extensive the underwriting, the more 12 extensive the analysis. 13 What an institution's overall macro 14 number is in terms of any specific type of loan 15 item should not be a factor in items of how they 16 individually underwrite loans. 17 Q. Have you had any prior experience 18 testifying about ADC lending? 19 A. Yes. 20 Q. When was that? 21 A. From 1989 through 1992, I testified 22 at -- in two federal courts, one of which was the 22275 1 evidentiary hearing of Lincoln Savings in front of 2 Judge Stanley Sporkin, and then -- that was in '89 3 and '90. 4 And in 1992, an actual civil case 5 brought by subordinated debtholders of American 6 Continental Corporation. There was a trial in 7 Tucson, Arizona, in front of Judge Richard Bilby. 8 And in both of those cases, we went extensively 9 through transactions which the institution 10 referred to as real estate sales and real estate 11 financing. But the Federal Home Loan Bank Board 12 deemed to be, in fact, in substance, the 13 association still had complete and total economic 14 risk of all the transactions and were, in fact, 15 real estate investments all the way through. 16 Q. Was there a similarity between the 17 matters you testified to in connection with 18 Lincoln and the loans -- the transactions that you 19 reviewed in connection with USAT for your 20 testimony? 21 MR. EISENHART: Your Honor, I would 22 object to this. We have quite enough on our hands 22276 1 trying this case. I don't think we need to retry 2 Mr. Keating's case. 3 THE COURT: I'll sustain the objection. 4 MR. LEIMAN: I might try another 5 question, Your Honor. 6 THE COURT: Well, it just seems to me 7 if we go down this road, we're going to be looking 8 into what the Lincoln case was all about. And 9 then we have to come back to this one. It's a 10 little out of record, I think. 11 MR. LEIMAN: Your Honor, what I'd like 12 to do is simply ask him if he applied the lessons 13 learned in Lincoln to what he's testified to here 14 in this case. 15 MR. DUEFFERT: Your Honor, I think 16 what's appropriate is that he applied regulations 17 and accounting procedures. I think it's 18 inappropriate. 19 MR. LEIMAN: May I adopt that, Your 20 Honor? 21 THE COURT: Yes, you may. 22 Q. (BY MR. LEIMAN) What accounting 22277 1 procedures and regulations that you applied there 2 have you applied in this matter? 3 A. Okay. Quite a few of them ranging from 4 appraisal practices to the accounting for loans, 5 accounting of direct investments, accounting of 6 income and the like, and ultimately disputing the 7 results of independent auditors. 8 So, in that sense, there were those 9 similarities. There are also significant 10 differences between the two cases. 11 Q. Could we -- let's see. T7529. 12 MR. LEIMAN: It may be a new exhibit, 13 Your Honor. I'm not certain. Actually, there 14 are -- 15 MR. EISENHART: Your Honor, if this is 16 a new -- oh, he's giving us copies. 17 Q. (BY MR. LEIMAN) Mr. O'Connell, do you 18 have what's been marked T7529 in front of you? 19 A. Yes, I do. 20 Q. All right. Have you seen this document 21 before today? 22 A. Yes, I have. 22278 1 Q. All right. First of all, would you 2 identify the document for me? 3 A. It's actually support for the 1987 4 examination report, and the title of it is "Total 5 of classified loans: Previous and current exam." 6 Work papers for these -- oh, and that's it. The 7 next is actually -- starts to discuss what 8 actually has happened. But it's "total classified 9 loans: Previous and current exam." 10 Q. Who would have prepared this document? 11 A. One of the examiners during the '87 12 examination report. 13 Q. All right. Would you look with me, 14 please, at the fourth entry down on -- in the 15 first section. 16 Do you see where it says in the second 17 column "Norwood"? 18 A. Right. 19 Q. What do you understand this to mean 20 where it states Norwood and it talks about 21 $21,523,473? Do you see that? 22 A. Yes. 22279 1 Q. What's the significance of this to you? 2 A. The way I read this -- and frankly, it 3 was consistent with what the examination narrative 4 actually said about classified assets -- is the 5 examiners actually had a classified loan for 6 Norwood in the amount of 21,521,000. In fact, 7 there is even a loan number regarding that. 8 However, underneath that is something 9 referred to -- not a loan number -- but "UFC to 10 Norwood, $9,400,000." I believe the examination 11 report does refer to that as an investment. 12 Q. And yet here, it talks -- does it talk 13 about the 21 million -- 14 21-and-a-half-million-dollar figure? 15 A. Yes. That actually has a specific loan 16 number cite. 17 Q. All right. Is this consistent with 18 what you found in connection with your report? 19 A. Yes, it is. 20 Q. How? 21 A. From the standpoint of both the '87 22 examination report, a response from Mr. Gross to 22280 1 the examination team -- now we're really getting 2 confused. 3 There was a 1987 response by the thrift 4 to the Federal Home Loan Bank of Dallas in 5 response to the '86 exam. As I recall, the '86 6 exam wasn't actually transmitted until the next 7 year. In that exam, again Mr. Gross refers to 8 Norwood as a loan. So, yes, there were specific 9 citations referring to Norwood as a loan. 10 MR. LEIMAN: Your Honor, I move T7529 11 into evidence. 12 MR. DUEFFERT: No objection, Your 13 Honor. 14 THE COURT: Received. 15 Q. (BY MR. LEIMAN) T7530, please. 16 Mr. O'Connell, you have in front of you 17 T7530. 18 Do you see that? 19 A. Yes, I do. 20 Q. Have you seen this document before? 21 A. Again, yes. This was support for the 22 1987 examination report. 22281 1 Q. Mr. O'Connell, would you turn with me, 2 please, to the final page of this document, of the 3 exhibit? 4 A. Okay. 5 Q. And if you would, look, please, about 6 two-thirds of the way down the page holding it 7 horizontally. 8 Do you see that? 9 A. Correct. 10 Q. All right. Is there any significant 11 data that you see on the page related to Norwood? 12 A. Again, there is a reference to Norwood 13 under the commercial loan trial balance. So, 14 that -- yeah. The title of the document is 15 "Commercial Loan Trial Balance, United Savings of 16 Texas." 17 Q. What's a commercial loan trial balance? 18 A. For most institutions -- and I'm 19 presuming it occurs for United, as well -- there 20 is actually a trial balance of various types of 21 loans. Since the Federal Home Loan Bank Board 22 does require a breakdown of loan types in its 22282 1 TFRs, most institutions have running trial 2 balances of various loan types. 3 My understanding of this document would 4 be this was a trial balance for what they refer to 5 as commercial loans. And it appears that under 6 what -- actually, I'm a little surprised by that 7 because commercial loans and construction loans 8 are somewhat different. But -- because I always 9 see construction loans on the line underneath 10 that. But be that as it may, it's called a 11 commercial loan trial balance. 12 Q. Is this consistent with your report in 13 connection with the classification, the 14 appropriate classification that should have been 15 made regarding Norwood? 16 A. Yes, it is. 17 Q. All right. How? How is it consistent? 18 A. Again, indications in both the 19 examination report and, as I said, in the 20 association's own letter to the supervisory agent, 21 continue to refer to the 30-million-dollar 22 transaction as a loan, not as an investment. 22283 1 Q. Mr. O'Connell, let me show you what's 2 been marked T -- 3 MR. LEIMAN: Your Honor, I move 4 Exhibit 7530 into evidence. 5 MR. DUEFFERT: Could I have just a 6 representation from OTS that since this document 7 is not Bates numbered, that it is, to your 8 knowledge, consecutive and complete? 9 MR. LEIMAN: To the best of my 10 knowledge, it's consecutive and complete. 11 THE COURT: And the number is T7530? 12 MR. LEIMAN: That's right. 13 MR. DUEFFERT: No objection. 14 THE COURT: Received. 15 MR. LEIMAN: If I might, Your Honor, 16 I'd like to ask Mr. Dueffert if he has a copy of 17 T7474. We seem to be short a few copies. I 18 believe you identified it on the list that you 19 provided to us. And my question to you is: Do 20 you have copies here in the courtroom? If not, 21 I'll have copies made. 22 MR. DUEFFERT: If the Court pleases, I 22284 1 will try to be responsive; but it probably would 2 take us a couple minutes to do so. 3 With Mr. Farley's assistance, I think 4 we can be of help. 5 MR. LEIMAN: I have them for you. I 6 didn't for you, Mr. Dueffert. 7 Q. (BY MR. LEIMAN) Mr. O'Connell? 8 A. Yes. 9 Q. Would you please look at T7474? 10 A. Yes. 11 Q. Have you seen this document before? 12 A. Yes. 13 Q. When did you have occasion to see it? 14 A. Sometime last fall when I was in the 15 former OTS training room. 16 Q. Okay. Was this document significant to 17 you in connection with forming your opinion either 18 regarding your written opinion or your testimony 19 here today? 20 A. Regarding my testimony today, yes. In 21 fact, I believe, Mr. Leiman, I even pulled it out 22 and showed it to you. 22285 1 Q. Oh. Well, okay. Why don't you 2 enlighten us, Mr. O'Connell, as to the manner in 3 which it was significant. 4 A. What this indicated was that -- and 5 it's unclear here who actually -- 6 Q. First of all, tell me what it is. 7 A. It's called an ADC considerations 8 worksheet. And the way this reads -- and it is 9 unclear, frankly, whether this is from 10 Peat Marwick or whether this was an internal -- an 11 actual internal document. But it was to help 12 ascertain whether or not an ADC loan was to be 13 classified as a loan or as an investment. 14 And the reason that it struck my 15 attention was they clearly -- whoever prepared 16 this clearly was familiar with the problems 17 relating to this transaction, particularly the 18 page -- the very last page, Page 6. 19 Q. What is it about Page 6 that we should 20 focus on, Mr. O'Connell? 21 A. Towards about three-quarters of the way 22 down, it says, "Note: Any yes answers indicate 22286 1 that the asset should be classified as a loan." 2 But if you go above it, you will find that of the 3 seven categories, only one check mark is a "yes." 4 The other six are "no." Yet, despite the fact 5 that by their own checklist, "The dominant 6 evidence seems to suggest this is not a loan," you 7 will find whoever did this, PE -- I'm not sure if 8 I even want to get that name -- whoever checked 9 this off decided that the asset nevertheless 10 should be a loan receivable. 11 Q. Did that appear to be inconsistent with 12 the findings that are laid out here on Page 6 of 13 this document? 14 A. That is the way I read them, yes. 15 Q. Why would it be inconsistent? 16 A. Well, as I said, of the seven 17 categories that are checked off, six of them are 18 conceded to be "no." And frankly, one could even 19 argue that the one item that was marked a "yes" 20 frankly probably should be a "no" itself because 21 it says the loan is not for a project being built 22 speculative for sale or lease. It is, too, at 22287 1 this time. Nothing was being built. But since 2 there were no interest payments being made and it 3 was a 100 percent loan, the only way the loan was 4 going to get repaid is if it was actually sold. 5 There weren't going to be -- the loan was not 6 going to be paid off by any payments from the 7 borrowers since the loan was paying off the -- the 8 proceeds of the loan were paying off all the 9 expenses. 10 Q. Mr. O'Connell, I think you said that 11 you suspected but had no certainty that this might 12 have been an auditor's work paper; is that right? 13 A. I believe so, yes. It's very unclear. 14 Q. Okay. Did -- in your view of the 15 examination, documents, work papers, and reports 16 of examination, did the federal 1986 or 1987 17 examination deal with the ADC classification 18 question regarding the Norwood transaction? 19 A. I don't believe the -- no, I don't 20 believe either the federal or the state 21 examination dealt with that. I will state, I 22 believe, the state examiners raised questions 22288 1 about Park 410; but I don't believe -- I don't 2 recall any discussion of the ADC direct investment 3 limitation issue by the federal examiners. 4 Q. Does that then lead you to the 5 conclusion by process of elimination that this 6 would have been the auditor's work papers? 7 A. Well, it could be an internal work 8 paper. That's what I'm suggesting. I don't want 9 to say this is a Peat Marwick document without 10 more foundation. But all I can say is it was 11 within -- I believe this was within the documents 12 that I saw in that big training room. 13 Q. Mr. O'Connell, did you use T7474 in 14 connection with formulating your opinion for 15 testimony? 16 A. It certainly was -- it's been 17 supportive of my testimony, yes. 18 Q. Was it instrumental in forming your 19 opinion or corroborating your opinion? 20 A. Actually, corroborating my opinion. I 21 basically had come to the same conclusions as this 22 checklist indicated. 22289 1 MR. LEIMAN: Your Honor, I move T7474 2 into evidence. 3 MR. DUEFFERT: No objections, Your 4 Honor. 5 THE COURT: Received. 6 Q. (BY MR. LEIMAN) Let me show you 7 another exhibit, T7137, Mr. O'Connell. 8 A. Okay. 9 Q. Mr. Dueffert asked you during his 10 cross-examination about directors responsibilities 11 and board of director actions. 12 Do you remember that? 13 A. Yes. 14 Q. Are you familiar with memorandum R-62? 15 A. Yes, I am. 16 Q. Describe briefly what it is. 17 A. Essentially, it is a summation of 18 directors' responsibilities that was issued by the 19 Office of Examinations and Supervision of the 20 Federal Home Loan Bank Board. The Office of 21 Examinations and Supervision was the headquarters 22 branch of the Federal Home Loan Bank Board that 22290 1 dealt with examinations and supervision. And this 2 is dated May 8th, 1985. It was from William 3 Schilling, who I believe was the director of the 4 Office of Examinations and Supervision at that 5 time. 6 Q. What do you understand, Mr. O'Connell, 7 to be the key focus of R-62 or focuses of R-62? 8 A. Essentially, to lay out what OES 9 considered to be the primary responsibilities of 10 an institution's board of directors. 11 Q. You testified in your examination both 12 today and yesterday about the manner in which the 13 board of directors of United Savings approved and 14 subsequently ratified the 80-million-dollar loan 15 to Park 410. 16 Do you remember your testimony about 17 that? 18 A. Yes, I do. 19 Q. In terms of your criticism regarding 20 the board of directors' action, were you critical 21 not only of the fact that they didn't take action 22 in connection with the senior loan committee but 22291 1 in terms of what they actually affirmatively did? 2 Why don't you just tell me what -- explain again 3 why you found it unsafe and unsound in connection 4 with their actions, approving the -- ratifying 5 that loan for 80 million. 6 A. As I tried to explain, the economic 7 substance of the transaction indicated that an 8 80-million-dollar loan had been made. As I said, 9 they took the 2.4-million-dollar fee income, which 10 was a fee income of $80 million, and they booked 11 that from the loan proceeds immediately. They 12 also -- making an ADC loan of that amount, they 13 put the project in danger of having a lesser value 14 if they cut off funding before all improvements 15 are completed. 16 That having been the case, the board of 17 directors was basically faced with a fait 18 accompli. Remember, the loan had already been 19 funded. The board of directors did not have a 20 chance to consider the transaction before the loan 21 had been funded. 22 Now, the board obviously had the 22292 1 ability, if they wanted to, to make an 2 80-million-dollar loan. But what I'm concerned 3 about is that when the board of directors sets 4 policies and procedures and examiners go into an 5 institution, they are expected to be able to find 6 credible these policies and procedures and that 7 the board is going to adopt them. 8 By ratifying this type of a 9 transaction, the board has implicitly said to the 10 management that the policies and procedures really 11 aren't binding. That if you have to break them, 12 break them, and we'll ratify them later. And that 13 tells me as an examiner that these policies and 14 procedures are more cosmetic than real. 15 Q. Mr. Dueffert showed you T7565. Can you 16 pull that out? That's the certification of a 17 resolution. 18 A. Okay. I think I've got it. That was 19 signed by Mr. Pledger, I believe? 20 Q. That's right. And also, he showed you 21 T7587, which would have been the minutes of the 22 board of directors on May 8th, 1986. 22293 1 A. Okay. What was that number again? 2 Q. 7587. 3 MR. DUEFFERT: Mr. Leiman, is there a 4 tab number, or was this document previously 5 designated? 6 MR. LEIMAN: It's T7587, Mr. Dueffert. 7 I think you used this with the witness. I'm not 8 sure what the tab number is. 9 MR. SCHWARTZ: Tab 655. 10 A. Okay. Oh, I'm sure it's here. Yes. I 11 know what it looks like. There's just a stack of 12 material right now here. Oh, thank you. Okay. 13 Q. (BY MR. LEIMAN) Mr. O'Connell, look 14 at Page 5 of this document, of 7587. Okay? 15 A. Okay. 16 Q. Take a look at that. Do you see it 17 says, "On motion by Dr. Munitz and seconded by 18 Mr. Duckett, the following resolution was 19 adopted"? 20 The purpose of this resolution here is 21 to do what? 22 A. The way I read this is to ratify the 22294 1 action of the senior loan committee for the 2 80-million-dollar loan. 3 Q. Was the board of directors, in doing 4 this, affirmatively stating that it had given up 5 its authority to control loans in excess of 6 $70 million? 7 A. No. It doesn't say that directly, no. 8 Q. I'd like you to now look at T7137. 9 A. Okay. 10 Q. It's a document I showed you a few 11 minutes ago. And I'd like you to look at the last 12 two lines on the page. 13 A. Would you describe it again? 14 Q. It's R-62. 15 A. Oh, okay. So, it's not in a folder. 16 Right. 17 Q. It's late in the day, Mr. O'Connell. I 18 understand. 19 A. Yes. Here it is. 20 Q. Take a look at the last two lines on 21 the first page, and it carries over to the next 22 page. 22295 1 Do you see that? 2 A. What's in quotation marks? 3 Q. Yes, sir. Would you read it? 4 A. Okay. Sure. Quote, "Directors who 5 willingly allow others to make major decisions 6 affecting the future of the corporation wholly 7 without supervision or oversight may not depend on 8 their lack of knowledge for that ignorance itself 9 as a breach of fiduciary duty," end quote. 10 Q. Does that quote have any significance 11 in relationship to what your testimony was with 12 respect to the board of directors' action 13 regarding Park 410? 14 A. Essentially, yes. It gets in the 15 question that the board cannot just delegate their 16 responsibility. They may be able to delegate 17 their decision-making, but the ultimate 18 responsibility still rests on the board of 19 directors. 20 Q. Can you understand why Mr. Pledger 21 would have certified a resolution as shown here in 22 T7565? 22296 1 A. Okay. Right. 2 Q. Do you have any understanding as to 3 what the nature of this particular action was by 4 Mr. Pledger as shown here in T7565? 5 MR. DUEFFERT: Objection as to 6 foundation. I think it calls for speculation. 7 THE COURT: You're asking him for the 8 motivation of Mr. Pledger or -- 9 MR. LEIMAN: What his understanding 10 would be as to what the -- why this exists or what 11 you understand it -- perhaps a better question is 12 what do you understand it to be doing? 13 A. Basically, as the corporate secretary 14 of the association, he's just certifying that this 15 resolution of the board of directors was actually 16 passed on such-and-such a date. The motivation, 17 no, I really don't know. 18 Q. (BY MR. LEIMAN) To your knowledge, is 19 there some -- can you think of any reason as to 20 why there would be a certification of this 21 resolution when the board of directors had voted 22 already in T7587? 22297 1 A. I can think of reasons why a corporate 2 secretary is asked to certify a board of 3 directors' resolutions, and there are a number of 4 reasons. Sometimes, the borrower actually 5 requests it. Sometimes it is done for some legal 6 reason. Sometimes when people are making 7 applications. Particularly in front of the 8 Federal Home Loan Bank Board, we request certified 9 copies of board resolutions certifying the action. 10 So, I can think of a number of reasons 11 why people would do this. But again, for this 12 particular one, no, I don't know. 13 Q. Do you happen to know if there was any 14 question as to the legality of the resolution that 15 was passed as shown here on T7587 on May 8th, 16 1986? 17 A. Again, no, I do not know. 18 Q. You were shown Exhibit B1110 by 19 Mr. Dueffert. Would you pull that out, please? 20 A. Could you describe it? 21 Q. It's a one-page document dated July 17, 22 1986. 22298 1 MR. LEIMAN: Your Honor, I would move 2 R-62 into evidence at this time -- it's T7137 -- 3 if it's not already admitted. 4 MR. DUEFFERT: No objections, Your 5 Honor. 6 THE COURT: Received. 7 Q. (BY MR. LEIMAN) Do you have 8 Exhibit B1110 in front of you? 9 A. Not yet, no. 10 Q. All right. Mr. O'Connell, it won't be 11 in a folder. 12 A. Oh, the David Graham letter. Sure. Do 13 I still have that? I believe that was given to me 14 this morning, and I'm not sure if I still -- some 15 documents have been taken back. I don't -- yes, I 16 still do have it. 17 Okay. July 17th, 1986 by Mr. Graham to 18 Mr. Minch? 19 Q. Yes. 20 A. Okay. 21 Q. Mr. Dueffert asked you about this 22 July 17th, 1986 letter, didn't he? 22299 1 A. Yes, he did. 2 Q. All right. Let me ask you a question, 3 also, in connection with this letter from David 4 Graham to Jeffrey Minch. 5 Was the loan -- was the Norwood -- 6 strike that. 7 Was the Block/Gordon/Krasovec/Minch 8 Norwood loan, the one that was in existence at the 9 beginning of 1986, was that loan delinquent, to 10 your knowledge, at the time that this letter was 11 written on or about July 17th, 1986? 12 A. Actually, it wasn't just delinquent. I 13 believe it was in formal default because the 14 principal went above the actual loan amount. 15 Q. What is the significance of that? 16 A. It's a defaulted loan. It's -- at that 17 point, it would have been referred to as -- 18 actually, it wouldn't have been referred to as a 19 scheduled item, but it would have been something 20 that the association should have self-classified. 21 And clearly, it would be a non-performing asset at 22 this time. 22300 1 Q. How would that be taken into account in 2 connection with underwriting the 30-million-dollar 3 Norwood transaction, a 39.4-million-dollar Norwood 4 transaction? 5 A. Well, that again gets into the basic 6 underlying theme of what I've been stating in the 7 expert opinion and the -- and the testimony, which 8 is one of the constant themes of problem 9 institutions is the continuing attempt to pour 10 more good money after bad to try to keep bad loans 11 from basically going into foreclosure, going into 12 default. 13 There was a great line in a book about 14 the Penn Square fiasco of 1982 in which the former 15 chairman was criticized for having the philosophy 16 that any problem could be solved with more money. 17 And that is precisely the type of situation that 18 we have seen time and time again in terms of 19 problem institutions. Whenever the problem loan 20 gets -- whenever a problem loan develops, they 21 pour more money into it. And it's that 22 39-million-dollar transaction that was the reason 22301 1 that the Deposit Insurance Fund took such a loss. 2 I mean, by pure mathematics, if the association 3 had just bit the bullet even here -- forget the 4 June 1985 transaction. Even if they just bit the 5 bullet here and kept the loan at $21 million and 6 expensed whatever losses were there, then that was 7 it. That would be -- the maximum loss would be 8 21 million. But by continuing to pour more money 9 into it and trying to spin its way out of trouble, 10 they expanded the amount of loss to the Insurance 11 Fund. 12 Q. Is there some inference that can be 13 drawn concerning USAT's management in light of the 14 fact that this loan was delinquent and then 15 restructured as you put it in your testimony? 16 A. Actually, I think I just answered that, 17 that it shows a reckless disregard for safe and 18 sound practices. You have to recognize a problem 19 loan very quickly and basically cut off the 20 losses. You don't add -- pouring good money after 21 bad, I'm afraid, is a cliche. But in this case, 22 it is an accurate one. 22302 1 Q. What about in connection with 2 management of the loan itself? 3 A. Again, I would make the same statement, 4 yeah. 5 MR. DUEFFERT: Your Honor, I'm sorry. 6 Objection. Time is passing. I think this witness 7 ought not be held over. And I understand 8 background is useful, but to talk about Penn 9 Square, we have more general concerns. 10 MR. LEIMAN: Your Honor, given that 11 Mr. O'Connell has been on the witness stand now 12 for two days, my redirect of him has been going on 13 for about, I guess, 40 minutes, 45 minutes, and 14 that he's been on cross-examination for most of 15 the day. Perhaps -- 16 THE COURT: How much more do you have? 17 MR. LEIMAN: Your Honor, I'd like an 18 opportunity to go through my notes and perhaps we 19 could clean this up in the morning in about 30 20 minutes, 45 minutes. 21 MR. DUEFFERT: Your Honor, I don't 22 think that's necessary. 22303 1 THE COURT: We'll adjourn until 2 9:00 o'clock tomorrow. 3 4 (Whereupon at 4:35 p.m. 5 the proceedings were recessed.) 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 22304 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 1st day of 17 September, 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 22305 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 1st day of 18 September, 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