22527 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 15, 1998 22 22528 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 22529 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 22530 1 2 INDEX OF PROCEEDINGS 3 Page 4 Examination by Mr. Nickens..............22531 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 22531 1 P-R-O-C-E-E-D-I-N-G-S 2 (10:00 a.m.) 3 THE COURT: Be seated, please. The 4 hearing will come to order. 5 I believe at the conclusion of the last 6 session, the direct examination of Mr. Lapidus was 7 complete? 8 MR. VEIS: That's correct, Your Honor. 9 THE COURT: Mr. Nickens, are you going 10 to cross examine? 11 MR. NICKENS: Yes, sir, I am. 12 THE COURT: Proceed. 13 MR. NICKENS: Thank you. 14 15 EXAMINATION 16 17 Q. (BY MR. NICKENS) Mr. Lapidus, as you 18 know, my name is J.C. Nickens, and I'd like to ask 19 you some questions concerning the examination that 20 you did in December of 1988 of United Savings. 21 A. Okay. 22 Q. Now, that examination became part of 22532 1 what was called the Southwest Plan examination? 2 A. I don't know. 3 Q. You will agree with me that your 4 examination of USAT was an unusual examination in 5 your experience? 6 A. Yes, it was. 7 Q. And your report was not a normal or 8 standard report? 9 A. I'm not sure what you mean by that. 10 Q. Well, it was not a normal report as you 11 usually prepare, was it? 12 A. My portion of the report was prepared 13 as a normal report would be prepared. The final 14 report that was shown to me does not appear to be 15 a normal report. 16 Q. Well, let me ask you -- do you recall 17 we took your deposition -- 18 A. Yes, sir. 19 Q. -- in early -- the first week of 20 August? 21 A. Yes. 22 Q. And I'm going to hand you, after I get 22533 1 it out of the seal, copies of that deposition. 2 Now, you subsequent to your deposition 3 read the deposition, correct? 4 A. Yes, I did. 5 Q. And you signed it and made corrections? 6 A. Yes, I did. 7 Q. Now, let me ask you to look over at 8 Page 188 at Line 21. 9 Do you see that? 10 A. Yes. 11 Q. And in the midst of an answer, you 12 said, "This really wasn't a normal report 13 obviously since it wasn't a standard report where 14 there was a response and it was sent to the 15 institution with a letter and the board's 16 institution responded." 17 Now, you did say that. Right? 18 A. Yes, I did. 19 Q. Now -- and things -- you haven't 20 changed your testimony on that subject, have you? 21 A. No, I haven't. 22 Q. So, was it or was it not a normal 22534 1 report? 2 A. The final report that was issued or 3 whatever it was called that was shown to me is not 4 a normal report. 5 Q. Now, you did not directly follow the 6 standard program from the examination workbook or 7 handbook, did you? 8 A. No, I did not. 9 Q. And you were given a very limited 10 amount of time in which to do your work, were you 11 not? 12 A. Yes, I was. 13 Q. In fact, it was done -- all of your 14 work was done on sort of a hurry-up basis? 15 A. In effect, yes. 16 Q. And, of course, that was unusual. 17 Right? 18 A. Yes. 19 Q. Now, you were also told when you 20 started that you had to be finished by December 31 21 because the thrift was being sold to new owners, 22 correct? 22535 1 A. I do not remember being told that. 2 Q. Did you recall that at your deposition? 3 A. I thought that I recalled that I was 4 just told I had -- that we needed to finish by 5 December 31st. 6 Q. Let me ask you to look at Page 286 of 7 your deposition at Line 3. 8 Do you see that? And you're responding 9 to a question and your answer is, "I had a limited 10 amount of time to do it in since I was told I had 11 to be finished before December 31. That's what I 12 was told when I started." 13 A. Yes. 14 Q. Correct? 15 A. Right. 16 Q. And so, you were told that you had to 17 be finished by December 31? 18 A. Yes. 19 Q. And you were also aware of the fact 20 that the institution was going to be -- have new 21 owners, correct? 22 A. During the course of the examination, I 22536 1 was aware of that, yes. 2 Q. Okay. So, the distinction you're 3 making is that you may not have been aware at the 4 very beginning that they were to have new owners? 5 A. Yes. 6 Q. But you became aware of that shortly 7 after you arrived, correct? 8 A. Sometime after I arrived. 9 Q. Well, you did tell me that while you 10 were there, the Ranieri Wilson people were there 11 in substantial numbers, correct? 12 A. Yes, I did. 13 Q. And in a small way, they interfered 14 with your work in that there were some documents 15 you wanted that they were looking at? 16 A. That's correct. 17 Q. Now, you didn't start any of your work 18 until late November 1988, correct? 19 A. Correct. 20 Q. It was the weekend after Thanksgiving? 21 A. Probably that Monday morning, yes. 22 Q. Right. You didn't go until after the 22537 1 weekend following Thanksgiving? 2 A. Right. 3 Q. And you left sometime before Christmas 4 Eve? 5 A. Yes. 6 Q. So, some period of three to four years 7 constituted the time that you were given to 8 complete this examination? 9 A. Yes. 10 Q. And you were also told that you were 11 not to examine prior exams, weren't you? 12 A. Yes. 13 Q. Was that unusual? 14 A. Yes, it was. 15 Q. And you were told that you were to 16 determine who was responsible for the 17 mortgage-backed securities investments, correct? 18 A. Yes, I was. 19 Q. Now, was that unusual? 20 A. It was unusual that they made that 21 request. It was not unusual -- I mean, it would 22 be something I would normally try and find out. 22538 1 We need to know who is doing or who is in charge 2 of these activities. 3 Q. But in terms of the specific assignment 4 you were given, it was unusual? 5 A. Yes. 6 Q. And when did you learn that the 7 institution was to be taken over by the Ranieri 8 group? 9 A. I don't remember. 10 Q. But it was during your examination? 11 A. Yes. 12 Q. And there were something like 18 to 20 13 people from Ranieri Wilson in the institution 14 while you were there? 15 A. I thought there were. I mean, that was 16 my guess. 17 Q. Now, you completed your writing of the 18 examination, your portion of the examination, on 19 January 20th? 20 A. I think that's the right date, yes, if 21 that was that Friday. 22 Q. And you transmitted it to Ms. Bese? 22539 1 A. Yes. 2 Q. Now, that was after the institution had 3 been put into receivership, correct? 4 A. I guess so. 5 Q. Are you telling us that you weren't 6 aware of the fact that the institution had been 7 put into receivership on December 31 when you 8 wrote your comment? 9 A. I -- I don't honestly know. I had a 10 section of the exam to do, and I did it. The rest 11 of the exam really -- the rest of what was going 12 on in the institution really didn't impact on what 13 I was doing. 14 Q. So, you're telling us that the fact 15 that the institution was put into receivership on 16 December 31 didn't affect in any way what you 17 wrote on January 20th? 18 A. No. 19 Q. Now, you had your -- we have had a 20 week's recess and your testimony was a bit more 21 than a week ago, correct? 22 A. Yeah, I guess so. 22540 1 Q. And do you recall in response to a 2 question from Judge Shipe on an issue that I had 3 raised in reference to the work papers that 4 contain the Bruno memos -- do you recall that 5 testimony? 6 A. Whether or not I had those papers when 7 I was writing my comment -- 8 Q. Yes, sir. 9 A. -- I think. 10 Q. And you told the judge that you had had 11 them at the time you were writing your comment? 12 A. Yes. 13 Q. Now, is that correct? 14 A. I believe it to be correct. 15 Q. Now, on your deposition on August 6th, 16 you told me you didn't know whether you had 17 them -- whether they were available when you were 18 writing your comment, didn't you? 19 A. I guess so. 20 Q. Well, let's look. There is no doubt 21 about it. Let's look at Page 160 at line -- the 22 question you'll see that I was asking you about 22541 1 these exhibits was specific reference to 2 Exhibit 6. And at Line 14, you said, "Yes, I did 3 review these during the examination. I cannot 4 guarantee that I reviewed them in or would have 5 needed to look at them in January of '89." 6 Do you see that? 7 A. Yes. 8 Q. And then I went on and said, "You 9 cannot guarantee -- I'm sorry. You are not sure 10 whether they were sent to you when the three Fed 11 Ex packages were sent to you by Ms. Bese?" 12 You said -- what did you say? 13 A. I said, "No, I'm not sure they were 14 sent." 15 Q. And then on Page 162 at Line 9, I asked 16 you, "But you're not -- you can't tell us whether 17 you would have had that available to you at the 18 time you prepared your comments?" 19 And what was your answer? 20 A. I said, "No, I could not." 21 Q. Now, has your memory been refreshed as 22 to whether or not you had these documents 22542 1 available to you at the time that you wrote your 2 comments since your deposition? 3 A. No. But your question was for a 4 definite, if I could absolutely tell you that I 5 had them. And in the -- I believe in the 6 testimony, it was whether I thought I had them. 7 And I thought I did. 8 Q. Well, okay. Let's -- 9 A. At least, that's what I thought it was. 10 Q. Let's look at your testimony, then. 11 Let me see if I can -- I'll bring that for you as 12 soon as I get it here. It's at Page 22437. 13 Here's what you said to Judge Shipe, and let's 14 read Judge Shipe's answer -- question at 15 Page 22437. And you see we were talking about 16 whether you had these records. Right? 17 A. Uh-huh. (Witness nods head 18 affirmatively.) 19 Q. And Judge Shipe said, "Can you answer 20 that?" 21 And you said. "I looked at them during 22 the examination and I had them and I used them 22543 1 when I was writing my comment." 2 Now, was that definite or indefinite? 3 A. Well, it sounds like I was definite 4 there. 5 Q. All right. And you were mistaken? 6 A. I don't know. As far as I know, the 7 work papers were a whole when I had them. It 8 seems to me that they got separated after the 9 fact, after they were returned to Dallas and after 10 the FDIC had them and after the OTS had them and 11 after whoever copied them had them. 12 As far as I know, when they were -- 13 when I put them in the work papers and when the 14 work papers were sent back to me, they were whole. 15 Now, I can't guarantee that 100 percent; but 16 that's what I know. That's what I believe. 17 Q. But you didn't believe that at the time 18 of your deposition? 19 A. I don't know. I guess I didn't. 20 Q. And you reviewed your deposition a week 21 later, and you didn't change that testimony? 22 A. No, I didn't. 22544 1 Q. But something has happened to make you 2 feel more definite about it about a week ago? 3 A. Well, you know, I thought about it and 4 I listened to the conversations that you had and 5 about -- with Mr. Veis about how the documents had 6 been copied. And I -- after listening to these 7 conversations, I believe that my work papers were 8 whole when I had them. 9 Q. Now, those work papers contained the 10 so-called Bruno memos. Right? 11 A. Yes, they did. 12 Q. And you didn't say anything about those 13 when you were interviewed by the OTS in 14 preparation for your deposition, did you? I mean, 15 in preparation for your testimony, did you? 16 A. No, I did not. 17 Q. Now, you also, some years after you 18 completed your examination, were interviewed by 19 the FDIC, correct? 20 A. Yes. 21 Q. And they sent you some materials to 22 review? 22545 1 A. Yes. They sent me materials. 2 Q. And at the time of your deposition, you 3 had transmitted those materials to Mr. Veis? 4 A. Yes, I believe so. 5 Q. And they were forgotten when documents 6 were produced to me as to the documents that you 7 had, correct? 8 A. I guess so. 9 Q. And when I asked you about the 10 documents you reviewed, you forgot that you had 11 sent them to Mr. Veis, correct? 12 A. I believe when you asked me about -- 13 about documents, I told you in my deposition that 14 I had mailed them. 15 Q. Well, sir, you told me that you might 16 have some documents at your home that you might 17 have thrown away, didn't you? 18 A. Yes, I did. 19 Q. You didn't tell me anything about 20 sending any documents to Mr. Veis until Mr. Veis 21 made a statement on the record that they had 22 been -- he had overlooked them. 22546 1 Does that refresh your recollection as 2 to what happened? 3 A. I don't know if that's the exact form 4 of the questions and answers but -- 5 Q. And did you review those materials when 6 you received them from the FDIC? 7 A. No, I did not. 8 Q. And would you be willing to estimate as 9 to how many times in your deposition you told me 10 that, that you didn't review them? 11 A. I don't know. 12 Q. Well, for the record -- you might want 13 to check. People could check at Page 34, Page 50, 14 Page 88, Page 207, Page 214, Page 217, and at 15 Page 370. And just as an example of that, why 16 don't we look over at Page 370. 17 I'm referring you to Line 14 where I 18 asked you, "Have you gotten any information since 19 then?" 20 And you answered, "No. As we indicated 21 before, if anything was sent to me, I didn't read 22 it because I didn't need to and I wasn't going to 22547 1 take time out from my life and my work to spend 2 time on something that had absolutely no relevance 3 until I needed to look at it." 4 Now, you said that at the time of your 5 deposition. Right? 6 A. Yes. 7 Q. Now, that's not exactly correct, is it? 8 A. I don't know what you're talking about. 9 Q. Well, you did review the material the 10 FDIC sent you, didn't you? 11 A. I don't think so. 12 Q. Let me have that exhibit. I'm going to 13 show you a set of documents that we have marked as 14 Exhibit B4294. 15 Now, Exhibit B4294, Mr. Lapidus, are 16 the documents that were produced to us by the FDIC 17 after an order from Judge Hughes. Now, these are 18 the exhibits that were withheld from the 19 production that was forgotten at the time of your 20 deposition. 21 Can you identify them as such? 22 A. They look to be like some of the 22548 1 papers. 2 Q. You think there may be some more? 3 A. Well, I know that I sent -- when I sent 4 the two -- I sent two packs of papers two 5 different times. I thought they were maybe about 6 that big each (indicating). 7 Q. And you're indicating perhaps 3 inches 8 thick? 9 A. Yeah, or more. 10 Q. So, your recollection would be that the 11 total number of documents would be less than what 12 we have here as Exhibit 4294? 13 A. Yes. 14 Q. Now, with regard to whether you looked 15 at the documents, could you look over at the 16 second set? And there is a fax memorandum from 17 whom? 18 A. It says from me through Brian Fehr. 19 Q. And to Eileen Avila? 20 A. Yes. 21 Q. And then what's on the next page? 22 A. Looks like a series of documents with 22549 1 yes's and no's by them. 2 Q. Well, actually, Ys and Ns, correct? 3 A. Ys, Ns, and question marks. 4 Q. And you put those Ys and Ns on there, 5 didn't you? 6 A. Looks like I did, yes. 7 Q. And if we go over to the last few pages 8 of this particular portion of Exhibit B4294, you 9 put -- you made a computer listing of the 10 documents that you had received, didn't you? 11 A. I don't believe so. 12 Q. Well, you see that your listing starts 13 on Page 12 at Document 141? Or maybe I'm -- 14 excuse me. At Page 10 at Document 115? 15 A. Uh-huh. (Witness nods head 16 affirmatively.) 17 Q. And then we go over to the back of the 18 document, and we see that No. 1 starts on a 19 different format but with the Ns and the Ys? 20 A. Yes. 21 Q. Didn't you do that? 22 A. I don't think so. And this -- these 22550 1 back documents here don't appear to be part of the 2 original fax. 3 Q. Well, let's look at what you were sent. 4 If you look at the memorandum to you dated 5 January 17th from Ms. Avila, do you see that it 6 has the front pages? 7 A. January 17th, "I have enclosed a copy 8 of the document index showing documents received 9 from Davis, Markle & Edwards on January 15th. To 10 help me out, please mark and/or annotate the key 11 documents from your review." 12 Q. Do you see that? 13 A. Yes. And it looks like there is a 14 bunch of pages in here. 15 Q. Those are the ones that you marked up, 16 yes or no or question mark. Right? 17 A. Yes. 18 Q. So, you reviewed the documents? 19 A. Looks like I reviewed a list of 20 documents. 21 Q. You didn't review the documents before 22 you told them yes, no, question mark? 22551 1 A. I believe this question is, "Here is a 2 list of documents and descriptions. Tell me which 3 ones you think you need." 4 Q. Now, let me ask you to look over at a 5 document that's included in Exhibit 4294 that's 6 headed "agenda for 1/23/92 meeting." 7 A. "Agenda for 1/23/92 meeting." 8 Q. Now, what's the -- the first item, was 9 that a meeting that you were to have with the 10 FDIC? 11 A. (Witness reviews the document.) It 12 looks like someone's agenda. 13 Q. Well -- 14 A. I'm obviously listed on the agenda. 15 Q. Well, let's look at that a little bit. 16 On the first item, it's status reports and you're 17 the No. 2 person listed on status reports. Right? 18 A. Yes. 19 Q. And that was after you had reviewed the 20 documents for Ms. Avila, correct? 21 A. I don't think so. 22 Q. Well, look at the next item, 22552 1 Mr. Lapidus. 2 A. Well, it says here on the fax that I 3 sent on January 22nd that these were the list of 4 documents I thought I might need. And then this 5 says "agenda for January 23rd." 6 Q. And if you look at the second item, it 7 says, "discussion of claims." 8 A. Yes. 9 Q. What's the second bullet point under 10 that? 11 A. It says, "Result of Lapidus and Avila 12 review of documents." 13 Q. Now, are you telling us that it went on 14 the agenda and you hadn't and didn't review any 15 documents? 16 A. I don't know. I don't even know if I 17 went to this meeting. This is -- I don't know -- 18 I know I went to New York to talk to them. I 19 don't know if this -- a meeting was scheduled for 20 before or afterwards. 21 Q. Well, are you saying that you received 22 an agenda that indicated that you were to make a 22553 1 report on the results of your review of the 2 documents and you never reviewed the documents? 3 A. I don't see how I could have if I 4 requested from Cleveland by fax that these were 5 the documents that I thought I would need. 6 Q. So, you're saying you never reviewed 7 the documents? 8 A. I don't think I did. 9 Q. Now, you were very sure of that at the 10 time of your deposition. Right? 11 A. At the time of my deposition? 12 Q. Yes, sir. You were very sure you had 13 not reviewed any documents? 14 A. Yes, I was. 15 Q. In fact, you told me that you just 16 threw them in a drawer and had never looked at 17 them again? 18 A. Yes, I did. 19 Q. And if you look down on this exhibit, 20 Item No. 3B are your assignments -- 21 THE COURT: Excuse me, Mr. Nickens. 22 I'm having trouble finding that agenda. 22554 1 MR. NICKENS: Your Honor, it's -- I'm 2 sorry. It's not -- doesn't have a Bates number 3 and, therefore, I have trouble referring to it. 4 But at the top, it says Page 6 of 7. 5 And Your Honor, I have been asking him 6 about -- and I apologize. I wasn't aware -- the 7 second bullet point under No. 1, the second bullet 8 point under No. 3, and I just was asking him about 9 the Item 3B, "Lapidus assignments." 10 Q. (BY MR. NICKENS) Now, were those your 11 assignments, Mr. Lapidus? 12 A. That's what it says on this list. 13 Q. Now, are you still telling us that you 14 did no work and didn't review the documents the 15 FDIC sent you? 16 A. What I said was I went to a meeting. I 17 talked with them and told them what I thought. I 18 gave them some advice. They gave me some stuff I 19 guess I was supposed to look at. I went down to 20 Houston and saw what they were doing in their 21 review and gave them some more advice and talked 22 to them. And I think that's the last time I had 22555 1 any dealings with them. 2 Q. Did you review the documents they sent 3 you or not? 4 A. No, I didn't. 5 Q. Now, Mr. Lapidus, let me ask you some 6 questions about your report; and that's at A14106, 7 Tab 1847. And in that large stack of documents, 8 it should be on the very bottom there. 9 MR. NICKENS: Your Honor, we would 10 offer -- 11 MR. GUIDO: 14006? 12 MR. NICKENS: 14106. Your Honor, we 13 would offer B4294. 14 MR. VEIS: Your Honor, we object to the 15 extent that it purports to say anything -- 16 particularly the agenda -- that it purports to say 17 anything about purported assignments to 18 Mr. Lapidus. We don't know who authored the 19 document. We know it came from the FDIC's -- 20 apparently came from the FDIC and was sent to 21 Mr. Lapidus because it was among the documents 22 that he had in his possession. But that is no 22556 1 guarantee that the agenda accurately sets forth 2 anything other than someone's idea of what might 3 be discussed at some meeting that Mr. Lapidus 4 doesn't even know whether he attended. 5 So, to the extent that Mr. Nickens 6 seeks to prove anything through introducing this 7 agenda, we think it's hearsay and it shouldn't be 8 admitted. 9 THE COURT: Well, what you're arguing 10 is as to the weight of the document. I'll receive 11 it. 12 Q. (BY MR. NICKENS) Do you have your 13 comment in front of you, Mr. Lapidus? 14 A. Yes. 15 Q. Okay. And your part starts at 16 Enclosure 8, which is at Page OW154317, correct? 17 A. Yes. 18 Q. And you were first summarizing your 19 findings with regard to risk-controlled arbitrage, 20 correct? 21 A. I don't believe -- I don't see where I 22 mention risk-controlled arbitrage here. 22557 1 Q. Well, let me ask you the question then. 2 If we look at the second sentence of your -- your 3 report or comment, it starts out, "The institution 4 and its services corporation engaged in a high 5 interest rate risk leveraging strategy in an 6 attempt to generate a large net interest spread 7 between long-term fixed rate assets and short-term 8 liabilities." 9 Do you see that? 10 A. Yes. 11 Q. Now, was that a reference to 12 risk-controlled arbitrage? 13 A. Indirectly, yes. I did not believe 14 when I was there during the examination that the 15 institution had maintained a risk-controlled 16 arbitrage. And, therefore, I was not willing to 17 call it such. 18 Q. Well, the first investment in what was 19 called a risk-controlled arbitrage occurred in 20 1985. Right? 21 A. I believe so. 22 Q. Some three and a half years before you 22558 1 arrived on the scene, correct? 2 A. Yes. 3 Q. And a lot of things had happened in 4 between? 5 A. Yes, they had. 6 Q. And at some point, it became your 7 belief that the -- what was known as Joe's 8 portfolio had lost its identity as a 9 risk-controlled arbitrage? 10 A. Yes. 11 Q. But you couldn't identify for us when 12 it lost its identity? 13 A. Not precisely, no. 14 Q. But it would have been after the 15 rolldown, correct? 16 A. Or during, depending on at what point 17 it ceased to be a viable strategy. 18 Q. And it would have been before 19 Ms. Laurenson took over the management of the 20 mortgage-backed securities portfolios. Right? 21 A. I don't know those exact dates. 22 Q. All right. You can't be precise as to 22559 1 the date. That's what I'm asking you about. But 2 it is your belief that it occurred -- that the -- 3 it lost its identity as a result of the rolldown? 4 A. Yes, that is my belief. 5 Q. And I think other records will 6 establish that that occurred before Ms. Laurenson 7 came to the institution. 8 If that is correct, would you agree 9 with me? 10 A. Yes. 11 Q. Now, does the comment that you make 12 here refer to Joe's portfolio? Does it encompass 13 Joe's portfolio? 14 A. It encompasses all their activities. I 15 know that they put on other swaps and other 16 hedging instruments other than what they had 17 originally in what you call Joe's portfolio. 18 Q. It was your intention to encompass all 19 of their mortgage-backed securities investments in 20 your comment. Right? 21 A. Yes. 22 Q. And so, it encompasses the DARTs and 22560 1 AMPs program? 2 A. Yes. 3 Q. And that wasn't a risk-controlled 4 arbitrage at all, was it? 5 A. I don't know. I thought they did 6 disclaim that there were hedges against those 7 programs. 8 Q. Well, you didn't know it was a 9 risk-controlled arbitrage at the time of your 10 deposition. Right? 11 A. No, I did not. 12 Q. So, nothing has happened since to lead 13 you to some different conclusion. Right? 14 A. I guess so. 15 Q. You don't know, correct? 16 A. Yeah. 17 Q. And does it encompass the unleveraged 18 MBS mortgage-backed securities that USAT owned? 19 A. Yes. 20 Q. Does it encompass the CMO programs that 21 USAT had using mortgage-backed securities? 22 A. The CMO program where they issued CMOs? 22561 1 Q. Yes, sir. 2 A. I don't believe so. 3 Q. And why not? 4 A. I don't think I included that as part 5 of my review. 6 Q. In fact, you didn't make any effort to 7 distinguish these various uses of mortgage-backed 8 securities for purposes of your analysis, did you? 9 A. No, I did not. 10 Q. And -- now, if you were analyzing who 11 was responsible for -- were you analyzing the 12 performance of the mortgage-backed securities at 13 USAT? 14 A. Yes, I was. 15 Q. And if you were -- were you analyzing 16 the performance of risk-controlled arbitrage? 17 A. I did not consider it a risk-controlled 18 arbitrage; so, I would not have been reviewing it 19 in that respect. 20 Q. So, with regard to your comments, 21 you're just commenting about all of the 22 mortgage-backed securities that USAT may have had 22562 1 with the possible exception of the CMOs? 2 A. Anything I looked at. I don't know if 3 the CMOs were included. I did not -- I don't 4 remember looking at them issuing CMOs. 5 Q. Now, you were not critical of how Joe's 6 portfolio was structured, were you? 7 MR. VEIS: At what point in time? 8 Q. (BY MR. NICKENS) Well, when you wrote 9 your comment. 10 A. You mean how it was originally 11 structured? 12 Q. Yes, sir. 13 A. I didn't actually look at how it was 14 originally structured. 15 Q. So, you're offering no opinions as to 16 whether it was properly structured? 17 A. No, I'm not. It could have been. 18 Q. And the same would be true with USAT 19 Mortgage Finance, the subsidiary that had a 20 risk-controlled arbitrage? 21 A. They could have been set up correctly. 22 Q. You don't know one way or another? 22563 1 A. No. 2 Q. And your comment is no comment on how 3 they were structured? 4 A. No. I didn't comment on the setup or 5 whether or not it was good or bad or whether or 6 not they did a good job on it. 7 Q. You didn't look at that? 8 A. No. That was not the focus. 9 Q. The same would be true for the focus on 10 the structure of United MBS? 11 A. I'm sorry. I don't understand the 12 question. 13 Q. Well, USAT Mortgage Finance was a 14 subsidiary set up in 1985 and United MBS was a 15 subsidiary set up in 1986. 16 Were you critical of either of the 17 structures of those investment in any way? 18 A. I don't think so. 19 Q. And, in fact, the structures of USAT's 20 RCAs were typical of the model used at that point 21 in time, weren't they? 22 A. I don't know. 22564 1 Q. Now, it was true that risk-controlled 2 arbitrage using mortgage-backed securities was 3 viewed as a proper investment for thrifts at that 4 point in time? 5 A. Yes, it was. 6 Q. And, in fact, your mentor, Mr. Kenney, 7 has written favorably concerning the use of 8 risk-controlled arbitrage? 9 A. I'm sure he did. 10 Q. You haven't read his articles? 11 A. There was something in the list of 12 documents that I looked at. I didn't read it in 13 detail. 14 Q. Was that the first time you had seen 15 Mr. Kenney's article? 16 A. I don't remember. I might have seen it 17 back when he wrote it. 18 Q. Now, in fact, risk-controlled arbitrage 19 was regarded as an appropriate strategy even for 20 problem institutions, wasn't it? 21 A. I don't know. The only thing I know 22 about risk-controlled arbitrage in that respect is 22565 1 if you set it up, you have to have the capability 2 to manage it properly. You have to have the 3 expertise in that area. 4 Q. Yes, sir. And that's not something you 5 looked at with regard to USAT, is it? 6 A. No, it is not. 7 Q. And you don't have any reason to 8 question the qualifications of the people that 9 they had running those portfolios, do you? 10 A. No. 11 Q. And could I ask you to look at 12 Exhibit B1619 at Tab 237? 13 A. I'm sorry. What page did you want me 14 to look at in here? 15 Q. Well, just the front page for the time 16 being. 17 Do you know Mr. Hjerpe? 18 A. No, I do not. 19 Q. Have you reviewed this working paper of 20 the Federal Home Loan Bank Board of May 11th, 21 1987? 22 A. Yes. I read through it quickly. 22566 1 Q. And it indicates, does it not, that 2 risk-controlled arbitrage is an appropriate 3 strategy for thrifts and even problem thrifts? 4 A. If you could show me where that 5 specific sentence is. 6 Q. Well, let me ask you -- without going 7 back through there, would you dispute it if it 8 says it? 9 A. No, I would not dispute it. This is a 10 paper issued by -- that the Federal Home Loan Bank 11 Board put out and I assume made available to all 12 officers of all institutions. 13 Q. Yes, sir. And, in fact, 14 risk-controlled arbitrage using mortgage-backed 15 securities was a widely-used strategy among 16 thrifts in the 1980s, was it not? 17 A. It was used by a number of thrifts. I 18 don't know if I would say that it was widely used. 19 I can't remember the exact percentage of 20 institutions that were actually involved with 21 risk-controlled arbitrage. 22 Q. Well, did you remember at the time of 22567 1 your deposition? 2 A. I don't remember. 3 Q. Let me ask you to look at Page 114. 4 Perhaps this is not precisely on point, 5 Mr. Lapidus. But I was asking you there about 6 whether the risk-controlled arbitrage was a 7 widely-accepted theory. 8 Do you see that at Lines 14 through 18? 9 A. Yes. And you said, "And it was a 10 widely-accepted -- it was widely accepted, 11 correct?" 12 "Yes." 13 Q. And so, are you telling us that you 14 know that it was a widely-accepted theory but 15 you're not aware about whether it was widely used? 16 A. Well, I know it was used by a number of 17 institutions. But if you want me to give you a 18 percentage, I can't. From my memory, I can't 19 remember how many did; but I believe it was less 20 than 50 percent and it may be as low as only 20 or 21 30 percent of the total institutions use it, maybe 22 even less than that. 22568 1 Q. Well, it was a big percentage of the 2 top 100 thrifts and almost all of the large Texas 3 S&Ls, wasn't it? 4 A. I will have to accept your knowledge in 5 that area. 6 Q. Well, let me ask you to look at 7 Exhibit B823 at Tab 234. 8 Have you reviewed this article by 9 Barbara Donnelly? 10 A. Yes, I read through it. 11 Q. And did you note at the bottom of the 12 right side, right-hand column, the comment there 13 about -- it's the carryover paragraph at the top. 14 "Among the practitioners of risk-controlled 15 arbitrage, which include a big percentage of the 16 top 100 thrifts and almost all the Texas -- large 17 Texas S&Ls, perhaps none is as avid," et cetera? 18 A. Yes. 19 Q. Okay. Now, do you have any information 20 to indicate that Ms. Donnelly reported 21 incorrectly? 22 A. I would assume that that was reported 22569 1 correctly. 2 Q. Now, one purpose of the strategy of 3 risk-controlled arbitrage was to reduce interest 4 rate exposure, wasn't it? 5 A. The strategy of a risk-controlled 6 arbitrage is to reduce the interest rate risk 7 exposure of buying more mortgage-backed securities 8 and financing them with short-term, volatile 9 liabilities. 10 Q. Well, the basic problem with thrifts 11 was that they borrowed short and invested long, 12 correct? 13 A. Yes, sir. 14 Q. And that created a mismatch that, when 15 you had volatile interest rate markets, that could 16 either be very good or very bad? 17 A. That's true. 18 Q. And one of the purposes of 19 risk-controlled arbitrage was to reduce that 20 interest rate exposure inherent in borrowing short 21 and investing long that was part of the 22 traditional S&L? 22570 1 A. I can't really agree with that. The 2 main reason of a risk-controlled arbitrage was so 3 that the institution could increase its total 4 assets and total liabilities and reduce that risk 5 of increasing those assets by setting up an 6 off-balance sheet hedging situation. And that's 7 what a lot of them did. They may have only -- 8 say, they were a billion dollars. They went out 9 and bought $500 million more in mortgage-backed 10 securities and then they financed them usually 11 with reverse repos and dollar rolls and they 12 hedged them. 13 This way, they can increase their total 14 assets, increase their potential earning 15 capabilities while attempting to reduce the 16 interest rate risk exposure from making a further 17 investment in that area. 18 That's what -- that's what I remember 19 most institutions doing. I do not remember very 20 many institutions taking their current portfolio 21 and putting a hedge against it. This was usually 22 done to increase asset size and increase potential 22571 1 earnings, not to reduce the existing risk that an 2 institution faced. 3 Q. Let's see if we can make a distinction. 4 What you're saying is that risk-controlled 5 arbitrage was a way of creating spread income? 6 A. Yes. 7 Q. And it was a way that was perceived as 8 being fairly low-risk? 9 A. Within reason. 10 Q. All right. And in comparison with the 11 standard way or the traditional business of S&Ls, 12 it was considerably lower than using deposits to 13 make home loans? 14 A. Again, with -- I would say with certain 15 stipulations. 16 Q. You would agree with that with some 17 reservations? 18 A. Yes. 19 Q. Now, there wasn't anything wrong with 20 the use of leverage in a risk-controlled 21 arbitrage, was there? 22 A. That's how it was done. 22572 1 Q. You couldn't -- it didn't make sense -- 2 the strategy didn't make sense without the use of 3 leverage, did it? 4 A. No. 5 Q. Now -- and the Federal Home Loan Bank 6 was well acquainted with the strategy, was it not? 7 A. Yes, it was. 8 Q. And they viewed it as a positive step 9 in reducing interest rate risk? 10 A. Again, I would say they viewed it as a 11 way for the institutions to earn additional 12 interest income without increasing its interest 13 rate risk. 14 Q. Okay. Well, let me ask you to look at 15 Exhibit B2018, which is not in evidence at this 16 time. 17 Could you tell the Court what B2018 is, 18 Mr. Lapidus? 19 A. It is a -- it is Memorandum SP74 to 20 principal supervisory agents from Darrell Dochow 21 regards to a risk-controlled arbitrage. 22 Q. This is an official comment by the 22573 1 Federal Home Loan Bank system? 2 A. Yes, it is. 3 MR. NICKENS: Your Honor, we offer 4 B2018. 5 MR. VEIS: No objection, Your Honor. 6 We would note that there are -- there is 7 marginalia throughout the document that are not 8 part of the SP memo. It appears to be material 9 originating with Mr. Crow. But with that 10 reservation, we have no objection. 11 THE COURT: Received. 12 Q. (BY MR. NICKENS) Do you see in the 13 first paragraph the introduction where 14 Mr. Dochow -- I don't know how he pronounces his 15 name either -- "Others, however, have taken 16 positive steps to reduce their interest rate risk 17 either through reducing the maturity of assets, 18 extending the maturity of liabilities, or by 19 hedging, synthetically altering the maturity of 20 assets and liabilities with futures, options, 21 interest rate swaps, caps, and/or collars in 22 similar transactions." 22574 1 Do you see that? 2 A. Yes. 3 Q. Now, do you disagree with this official 4 comment from the Federal Home Loan Bank system in 5 February of 1988? 6 A. No, I don't. 7 Q. And then below, it says -- the next 8 paragraph, second sentence, "Risk-controlled 9 arbitrage is one strategy that, properly executed, 10 should be neutral interest rate risk. A 11 well-constructed RCA strategy is primarily a 12 growth leveraging strategy. If RCA involves 13 hedging, it can be an effective method of 14 ameliorating interest rate risk generated by the 15 growth strategy." 16 Is that what you were trying to tell us 17 earlier? 18 A. Yes. 19 Q. It was a way of growing that was 20 regarded as being a reduction of interest rate 21 risk. Right? 22 A. Well, it says it's a way of growing 22575 1 that should be neutral to interest rate risk. It 2 might, as an overall impact, reduce the 3 institution's interest rate risk because of a 4 change in the percentages of high-risk assets or 5 interest rate risk assets and such. 6 Q. In fact, you did not look at USAT's gap 7 position before and after its risk-controlled 8 arbitrage investments, did you? 9 A. No, I don't think I did. 10 Q. And gap was the way that the Federal 11 Home Loan Bank went about measuring interest rate 12 risk, correct? 13 A. I believe at that time, it still was. 14 Q. That was the official way of measuring 15 interest rate risk. Right? 16 A. There was a point in time either during 17 that time or after that where we were trying to 18 get away from gap and trying to get into the 19 portfolio value analysis. 20 Q. Now, the 1988 examination handbook 21 which you did not follow had an entire section 22 devoted to risk-controlled arbitrage, didn't it? 22576 1 A. Yes. 2 Q. Let me ask you to look at 3 Exhibit B4287, which is a copy of those sections 4 that we've taken out and copied. 5 Can you identify Exhibit B4287 as a 6 copy of a section in September 1988 from the 7 examination handbook dealing with risk-controlled 8 arbitrage? 9 A. Yes. 10 MR. NICKENS: Your Honor, we offer 11 B4287. 12 MR. VEIS: No objection, Your Honor. 13 THE COURT: Received. 14 Q. (BY MR. NICKENS) Now, one of the core 15 tools of risk-controlled arbitrage was duration 16 matching; is that correct, Mr. Lapidus? 17 A. I believe so. 18 Q. But you don't agree with duration, do 19 you? 20 A. Well, I don't really like it that much, 21 but yeah. 22 Q. You don't -- well, at the time of 22577 1 your -- have you done any work to determine what 2 duration is since the time of your deposition? 3 A. Yes. 4 Q. And at the time of your deposition, you 5 will agree with me that you didn't have a ready 6 understanding of the concept? 7 A. Yes. 8 Q. And you've done some work since to 9 determine what it is, correct? 10 A. Correct. 11 Q. And it was a measurement of price 12 elasticity? 13 A. Modified duration, yes. 14 Q. And that's something that you've 15 learned since the time of your deposition? 16 A. I knew it before, too. It's just 17 something I forgot. 18 Q. You were embarrassed when I asked you 19 about it in your deposition and you couldn't 20 recall the parameters of the concept. Right? 21 A. I believe so, yes. 22 Q. Now, you're saying in your comment -- 22578 1 are you saying in your comment that 2 risk-controlled arbitrage increased United's 3 interest rate risk? 4 A. I believe I said it before. I did not 5 think that the institution had a legitimate 6 risk-controlled arbitrage and that it was a moot 7 issue. They had -- they had assets. They had 8 liabilities, and they had off-balance sheet items 9 such as swaps and caps and a collar and such. 10 Q. But you didn't look at what they were 11 doing when they set it up, did you? 12 A. No, I did not. 13 Q. You were looking at it in 1988? 14 A. Yes, that's right. 15 Q. December of 1988, correct? 16 A. Correct. 17 Q. And your evaluation was looking at it 18 as it stood at that point in time, correct? 19 A. How it got there to that point in time, 20 yes. 21 Q. But looking at how it got there, you 22 didn't look at where they started or how they 22579 1 started, did you? 2 A. I did not look -- if you mean such, I 3 did not look at how they originally set up the 4 risk-controlled arbitrage, no. 5 Q. And you didn't even measure the effect 6 on its gap -- 7 A. No. 8 Q. -- of any of these investments? 9 A. No, I don't think I did. 10 Q. But nevertheless, you said that this 11 was a high-risk strategy? 12 A. It is. 13 Q. In relationship to what, Mr. Lapidus? 14 High -- will you agree with me that "high" is a 15 comparative term? 16 A. Yes. 17 Q. Now, in relationship to what was this 18 strategy that you don't know how it was set up 19 high? 20 A. Well, if you want to compare an 21 institution that is not doing a risk-controlled 22 arbitrage, they have a certain amount of inherent 22580 1 risk, as you indicated. However, by leveraging 2 your assets and putting on more high -- longer 3 term assets and financing with short-term 4 liabilities, you are increasing interest rate risk 5 to the institution. If you set up a 6 risk-controlled arbitrage that is -- that 7 functions properly, you're going to reduce to some 8 point the effect of that risk. 9 However, the institution did not do 10 that. What I saw was the purchase of a large 11 volume of mortgage-backed securities, several 12 billion dollars of mortgage-backed securities, 13 where it was either inadequately hedged in part or 14 in whole or where hedges -- I could not determine 15 if it had been hedged in some parts at all. 16 Q. Well, how do you know if it was 17 inadequately hedged if you don't know how it was 18 structured at the beginning? 19 A. Because when you're looking at the 20 hedge and the hedge has absolutely no benefit to 21 the assets unless interest rates go up some 22 amount -- I can't remember how many points it 22581 1 would have to go up -- there is no -- there is no 2 benefit. 3 A hedge is -- what a hedge is supposed 4 to do is if interest rates go up, the value of the 5 asset or the cost of the liability, however you 6 want to look at the combination, the cost of the 7 liability in terms of special interest expense is 8 going to go up. The value of your assets is going 9 to go down. Your hedge should offset that 10 somewhat in terms of the hedge has an unrealized 11 value and the hedge also, in effect, would 12 compensate for the fact that the interest expense 13 went up. The hedge would essentially provide 14 interest income to offset that. 15 If rates went down, the cost of the 16 borrowings would decrease which would increase the 17 spread between the liability and the asset. But 18 the expense of the hedging instrument would have 19 an increased interest expense. 20 The goal, as you pointed out and I 21 think as everybody has pointed out, was to 22 establish -- basically to try and lock in a yield 22582 1 between the asset and liability. Now, what 2 happened was that the institution had taken these 3 hedges and put them on at higher rates and then 4 they dropped down the yield on their assets and 5 they put on more securities. 6 And effectively, when I was looking at 7 it, even further back -- I'm not sure exactly 8 when -- they could tell there was a negative -- 9 there was an interest expense on the hedge of, I 10 don't know, four or 500 basis points. And it 11 effectively wiped out any benefit -- income 12 benefit they would have had from the spread 13 between the asset and liability. That's obviously 14 a mismatched hedge. It had reached a point where 15 it did not provide any functional protection for 16 that asset. 17 Q. That's in December of 1988? 18 A. During the course of the time they had 19 it. I can't -- you know, there were pieces that 20 fell in and it became less and less. And, you 21 know, when rates change, sometimes it became a 22 little better. Sometimes it became a little 22583 1 worse. But the fact is when I looked at it, it 2 was not a risk-controlled arbitrage. There was 3 not any protection from changes in interest rates. 4 Q. Now -- but you don't know what it was 5 when it was started? 6 A. I can't say that I do. 7 Q. And in reaching your conclusions, for 8 example, you didn't did back and look at the 9 Salomon Brothers' presentation that was the model 10 for the first two risk-controlled arbitrages, did 11 you? 12 A. I'm sorry. I don't know. 13 Q. You didn't look at the 1985 business 14 plan, did you? 15 A. No, I did not. 16 Q. You didn't look at the 1986 business 17 plan, did you? 18 A. No, I did not. 19 MR. VEIS: Objection, Your Honor. 20 Q. (BY MR. NICKENS) You didn't look at 21 the ALCO minutes, did you? 22 MR. VEIS: There is a 22584 1 mischaracterization of the Salomon Brothers' 2 presentation. I understand there is not a model. 3 It was simply a presentation. 4 THE COURT: Well, the witness can't 5 help us. 6 MR. NICKENS: Your Honor, the 7 presentation is in the record. We know what it 8 is. People can evaluate it. If they want to say 9 it's not a model or whatever, the point is he 10 didn't read it. He didn't look at it. 11 THE COURT: All right. We'll call it a 12 presentation. 13 Q. (BY MR. NICKENS) You didn't look at 14 the ALCO minutes? 15 A. No. 16 Q. You didn't look at the liability growth 17 application that described the strategy, did you? 18 A. No. 19 Q. You didn't look at the 1986 examination 20 examination, did you? 21 A. No. 22 Q. In fact, you were told not to look at 22585 1 it. Right? 2 A. That's right. 3 Q. You didn't look at the 1987 4 examination, did you? 5 A. No. 6 Q. You didn't look at the monthly 7 performance reports, did you? 8 A. I don't know. 9 Q. Well, there is nothing about them in 10 your comment, is there? 11 A. No. 12 Q. And if you had looked at them, you 13 would have made some notation of it, wouldn't you? 14 A. Probably. 15 Q. You didn't look at the regulatory 16 filings, did you? 17 A. No. 18 Q. You didn't look at the public filings 19 like the 10Ks, the 10Qs, the proxy statements, the 20 annual reports? You didn't look at any of that? 21 A. To the best of my knowledge, no. 22 Q. You didn't have time to look at all 22586 1 that, did you? 2 A. No. 3 Q. You didn't look at USAT's use of the 4 Sendero model, did you? 5 A. I don't believe so. 6 Q. And that was the very model that the 7 Federal Home Loan Bank Board was using for its own 8 purposes, wasn't it? 9 A. Yes. 10 Q. You didn't consider that? 11 A. It was not part of my review. 12 Q. Just how long did you -- what you did 13 was you looked at the investment committee 14 minutes, a few of the board minutes, and a few of 15 the executive committee minutes, didn't you? 16 A. In addition to other work papers and 17 reports that the institution had, yes. 18 Q. Well, how long did you spend reviewing 19 the investment committee minutes? 20 A. I can't say for sure. I don't think I 21 reviewed them consecutively like, I mean, straight 22 through. I think I probably did other things in 22587 1 between. 2 Q. Well, they covered a period from April 3 of 1986 through at least the first week of 4 December 1988, correct? 5 A. Yes. 6 Q. And the committee met every week? 7 A. Yes, they did. 8 Q. And that's about, what, 50 separate 9 minutes per year if you say there are a few in 10 there that get lost because of holidays? 11 A. Approximately. 12 Q. So, from the time period you were 13 looking at it, that was about 130 reports? 14 A. Probably. 15 Q. And the reports were, what, 20, 30, 40 16 pages in length? 17 A. The minutes themselves were a few pages 18 and then there were attachments, yes. 19 Q. But you read all of it, didn't you? 20 A. I read the minutes and the attachments 21 that I thought were germane to my review. 22 Q. Well, how much time would you say you 22588 1 spent on each one? 2 A. I don't know. Maybe ten minutes. 3 Maybe 20 minutes. Depending on -- maybe longer if 4 it was something interesting. Maybe less if there 5 was nothing that really caught my attention. 6 Q. Well, ten minutes would be six an hour? 7 A. Perhaps. 8 Q. You have 130 reports to review? 9 A. Yeah, I guess so. 10 Q. And you have four weeks at most to 11 complete all of your work? 12 A. Yes. 13 Q. Now, all of the notes you made are 14 reflected on one page. By the way, this isn't 15 counting the board minutes, is it? We're just 16 talking about the investment committee minutes? 17 A. Right. 18 Q. And -- or the executive committee 19 minutes. That doesn't count that, does it? 20 A. No. 21 Q. And the notes you made of the board and 22 executive committee minutes are reflected on 22589 1 Page OW181921 in Exhibit 14101, Tab 1842. 101 is 2 in front of you. 3 MR. GUIDO: The Bates stamp number? 4 MR. NICKENS: There is not a Bates 5 stamp. 6 MR. GUIDO: The imaging number. 7 MR. NICKENS: OW181921. 8 MS. CLARK: Try that page again. 9 MR. NICKENS: OW181921. It's right at 10 the beginning of your work papers. 11 A. Yes. 12 Q. (BY MR. NICKENS) Do you have that in 13 front of you? 14 A. Yes, I do. 15 Q. Now, this one page comprises all of the 16 notes that you preserved of your review of the 17 board minutes and executive committee minutes. 18 Right? 19 A. Yes, it is. 20 Q. And with regard to the investment 21 committee minutes, you just copied some pages and 22 occasionally made a note? 22590 1 A. Yes. It was faster and easier. 2 Q. Yes, sir. It was faster and easier. 3 But do you think it was more accurate? 4 A. I had those -- I had an exact copy of 5 the minutes that I could look at. 6 Q. You were working under very difficult 7 conditions, weren't you, Mr. Lapidus? 8 A. Yeah, I guess so. 9 Q. You had a very limited amount of time 10 in which you had to reach your conclusions. 11 Right? 12 A. Correct. 13 Q. And it was in a harem-scarem period of 14 time for the institution, wasn't it? 15 A. Yes. 16 Q. There were 18 to 20 people from Ranieri 17 Wilson in the institution? 18 A. I think so. 19 Q. Do you think that creates uneasiness 20 among the people that are working there? 21 A. Probably. I would assume that they 22 were under some amount of stress from the Ranieri 22591 1 people being in and from the examiners being 2 there. 3 Q. Now, is your -- your comment goes to 4 the asset/liability structure of USAT? 5 A. I'm sorry. You're talking about my 6 comment again? 7 Q. I'm looking down at the second 8 paragraph. 9 MR. GUIDO: What exhibit are we on? 10 MR. NICKENS: We are on Exhibit 14106, 11 Tab 1847. 12 Q. (BY MR. NICKENS) Your first comment 13 on the second paragraph relates to the 14 asset/liability structure of the institution? 15 A. It relates to -- that they did not 16 maintain documentation on the impact of their 17 investment strategies on the asset/liability 18 structure. 19 Q. But in reaching that conclusion, you 20 didn't look at the ALCO minutes? 21 A. No. 22 Q. Now, ALCO stands for asset/liability 22592 1 committee, correct? 2 A. Yes, it does. 3 Q. And would you expect that that's where 4 you might find some consideration of the impact on 5 the asset/liability structure? 6 A. Not necessarily. 7 Q. Well, does the Bank Board have specific 8 provisions relating to -- in its examination 9 handbook dealing with asset/liability committees 10 and what they are to do? 11 A. Yes, I believe so. 12 Q. And among the things that they do, 13 naturally enough, is look at asset/liability 14 structures? 15 A. Yes. 16 Q. Now, if you're looking for the impact 17 on asset/liability structure, why in the world 18 would you not look at the minutes of the 19 asset/liability committee? 20 A. Because they had a working and viable 21 investment committee that was made responsible for 22 the investment activities, which would include an 22593 1 analysis of the impact of their investment 2 strategy. That is the responsibility of that 3 committee. 4 Q. Well, if you had looked at the 5 asset/liability committee minutes, would you 6 have -- well, let's see what you would have found. 7 I will ask you to look at Exhibits A1609 at 8 Tab 491 and A -- just as examples -- A1610 at 9 Tab 492. 10 THE COURT: Mr. Nickens, we'll take a 11 short recess. 12 13 (Whereupon, a short break was taken 14 from 11:11 a.m. to 11:35 a.m.) 15 16 THE COURT: Be seated, please. We'll 17 be back on the record. 18 Mr. Nickens, you may continue. 19 MR. NICKENS: Thank you, Your Honor. 20 Q. (BY MR. NICKENS) Mr. Lapidus, when we 21 took our morning recess, I was asking you some 22 questions about the asset/liability committee. 22594 1 And I had referred you to a few of the minutes at 2 Exhibits A1609 and A1610. 3 Do you have those in front of you? 4 A. Yes. 5 Q. And if you look over at A1609 to 6 Item No. 5 on the second page where it says "gap 7 strategy." 8 A. Okay. 9 Q. Would you read Items A and B under -- 10 A. "First Boston was" -- 11 Q. You don't have to read it out loud. 12 Just to yourself. 13 A. Oh. (Witness reviews the document.) 14 Okay. 15 Q. Now, before you made your comments 16 about their asset/liability structure and 17 documentation concerning it, were you aware of the 18 fact that in 1985, USAT had contacted these 19 investment bankers concerning investment liability 20 models? 21 A. I don't remember. 22 Q. And similarly, if you look at 22595 1 Exhibit A1610, again under Item No. 5, 2 asset/liability models, would you read that? 3 A. (Witness reviews the document.) 4 Q. Before you made your comments about 5 their asset/liability structure, did you examine 6 the results of the Goldman Sachs study? 7 A. I don't think so. 8 Q. And, in fact, you weren't aware of this 9 or any of the other studies because you didn't 10 read the ALCO minutes, did you? 11 A. No, I did not read the ALCO minutes 12 and -- 13 Q. And, therefore, you were not aware of 14 the fact that USAT had contacted First Boston, 15 Salomon Brothers, and Goldman Sachs concerning 16 their asset/liability structure. Right? 17 A. I guess not. 18 Q. Now, were you aware of the fact that 19 Smith Breeden had looked at their asset/liability 20 structure, the institution as a whole? 21 A. I don't think so. 22 Q. Did you look at Smith Breeden's report? 22596 1 A. I don't know. 2 Q. In reaching your conclusions, did you 3 consider USAT's hiring and use of Dr. Walter 4 Mueller? 5 A. No. 6 Q. Do you know what he did for USAT? 7 A. No. 8 Q. In fact, at the time of your 9 deposition, you didn't recognize his name at all? 10 A. No. 11 Q. Now, let me ask you to look with regard 12 to Dr. Mueller's efforts at Exhibit A1415 at 13 Tab 346. This is, of course, among the material 14 that you reviewed, correct? 15 A. It's minutes from the investment 16 committee for October '86. There seems to be two 17 copies of it in here. 18 Q. Well, I think we can use either one. 19 If you would look over at US3010376, 20 it's a memorandum entitled "Smith Breeden 21 relationship" from Mike Crow to the investment 22 committee. 22597 1 Do you see that document? 2 A. Yes. 3 Q. And let me ask you to look over to the 4 second page of that document, which is US3010377. 5 Do you see there in the second 6 paragraph a discussion about an alternative 7 replacement for Smith Breeden? And that was the 8 services of Walter Mueller. 9 A. (Witness reviews the document.) Yes. 10 Q. And among the things Mr. Mueller was to 11 do in Item No. 1 was to construct numerous 12 in-house models for analysis of mortgage-back 13 securities/hedging including a portfolio model, 14 option model, prepayment models, cash flow models, 15 and several others. 16 Do you see that? 17 A. Yes. 18 Q. Now, in reaching your conclusions, did 19 you examine any of those models or their results? 20 A. I don't know. They may have been in -- 21 if he did them, they may have been in -- if they 22 were in their investment committee minutes, I 22598 1 might have seen them. 2 Q. But you don't know -- 3 A. Or the work papers. 4 Q. You don't know whether this material 5 was out there and you were simply unaware of it? 6 A. I would say at this point in time I'm 7 unaware of it. Back then, I don't know if I was 8 aware of it or not. 9 Q. And Item No. 2 indicates that they were 10 constructing an in-house association gap model 11 through Dr. Mueller? 12 A. That's what it said he would be doing, 13 I think. 14 Q. And did you look at that? That is, any 15 in-house gap model? 16 A. I don't think so. 17 Q. Now, let's look at what you copied from 18 these work papers. If you could look over at 19 A14101 at Page OW1 -- that's the first set of your 20 work papers. And I'd like for you to look at 21 Page OW182003. 22 A. (Witness reviews the document.) 22599 1 Q. Do you have that page in front of you? 2 A. Yes. 3 Q. Now, these are the pages you copied 4 from the minutes of October 31, 1986, that in our 5 record is A1415, correct? 6 A. It's the same October 30th page. 7 Q. Well, look at the next page. Look at 8 OW182004 of your minutes. 9 Does it not identify it as coming from 10 the October 31, 1988 investment committee minutes? 11 A. Yes. 12 Q. And what happened is you didn't copy 13 the second page of the memorandum, did you? 14 A. No, I did not. 15 Q. So, when you constructed your work 16 papers and you made your comment about 17 asset/liability structures, you omitted to include 18 the information about what Mr. Mueller or 19 Dr. Mueller was doing? 20 A. Excuse me, but what I said was -- 21 Q. Sir, the question is whether you 22 omitted the second page. 22600 1 A. What I said was, "The institution did 2 not maintain documentation which would indicate 3 the impact of those investment strategies on its 4 asset/liability structure or capital position." 5 Q. Yes, sir. And isn't the second page an 6 indication of analysis and documentation that 7 would come with that analysis? 8 A. The second page says that he would be 9 constructing in-house models and he would also be 10 reviewing the mortgage-backed securities and 11 constructing in-house association gap model. 12 A couple points. First of all, I don't 13 know when he would have started doing this. 14 Second of all, by this point, I believe most of 15 the activities had already been done, and I think 16 this was after the fact. I'm not sure precisely 17 when they ceased their activities, but I thought 18 it was sometime in the end of '86, beginning of 19 '87. I'm not sure. 20 Q. Are you telling the Court that what is 21 indicated that Dr. Mueller was to do would be 22 irrelevant to a consideration of whether or not 22601 1 there was an adequate analysis and documentation 2 of asset/liability structure? 3 A. What I'm saying is that whatever he did 4 was obviously after this date. 5 Q. Yes, sir. And you didn't examine it at 6 all, did you? 7 A. No, I don't think so. 8 Q. And in fact, you chose not to copy that 9 page that discussed his activities. Right? 10 A. Yes, I did. 11 Q. Now, would you agree with me, 12 Mr. Lapidus, that when you're looking for 13 something, it's sort of important where you choose 14 to look? 15 A. Yes. 16 Q. And, you know, as an example, you were 17 considering USAT's management of its 18 asset/liability structure among other things? 19 A. I don't think that that's exactly 20 right. 21 Q. Well, you certainly made comments about 22 that, didn't you? 22602 1 A. I made comments about their analysis of 2 their activities in relationship to their 3 asset/liability structure. 4 Q. But -- and whatever your comments 5 reflect and whatever your mission was, you chose 6 not to look at the ALCO minutes. 7 We've established that. Right? 8 A. I did not look at the ALCO minutes. 9 Q. Now, do you think that what you chose 10 to look at could have influenced your conclusions? 11 A. Yes. 12 Q. And do you still say that your 13 knowledge of USAT's receivership did not influence 14 in any way the conclusions you expressed in this 15 report? 16 A. I do not think it had any influence at 17 all. 18 Q. No influence at all? 19 A. No. 20 Q. Now, were you aware that management had 21 been fired? 22 A. No, I was not aware of that until you 22603 1 told me at the deposition. 2 Q. Nobody told you that USAT had gone into 3 receivership and that management had been fired 4 before you prepared your report? 5 A. No. 6 Q. And in your conversation with Ms. Bese, 7 that never came up? 8 A. I don't believe so. 9 Q. Now, would you say that it would have 10 been a trifle awkward if you had written a report 11 saying everything was okay after the Federal Home 12 Loan Bank had fired management? Wouldn't that 13 have been a bit awkward? 14 A. I don't know who fired them, and I 15 don't know why they were fired. I wrote the 16 report based on my findings. 17 Q. And one of the unusual aspects of your 18 mission was that you were to find out who was 19 responsible. Right? 20 A. For the activities, yes. 21 Q. Now, let me ask you to look back at 22 your report, which is -- we're again on 22604 1 Paragraph 2 of the second paragraph of Enclosure 8 2 to Exhibit 14106. 3 Do you have that? 4 A. Yes, sir. 5 Q. Now, in the second paragraph, the 6 second part of your criticism was that "In many 7 instances, they did not analyze the impact of 8 individual transactions such as the purchase of 9 the residual interest of a multiple-class security 10 residual or the interest-only portion of a 11 stripped MBS on the entire MBS portfolio." 12 Do you see that? 13 A. Yes, I do. 14 Q. Now, was that a criticism? 15 A. Yes, it was. 16 Q. Now, you gave two examples of these 17 many instances. Right? 18 A. Correct. 19 Q. Now, did you -- are there any others? 20 A. I think that would apply to almost any 21 new investment they did. They -- I never -- I 22 don't remember seeing any type of analysis that 22605 1 would have shown how it would impact. I think 2 when they did the POs, I think they may have 3 talked about the impact of the hedging; but I'm 4 not entirely sure. 5 Q. Well, I'm going to go back to some 6 examples, Mr. Lapidus, when we get to the 7 specifics of the investment committee minutes. 8 But you do know that every week they 9 included a sensitivity analysis at least after 10 Sandy Laurenson arrived, correct? 11 A. I think it was every week. 12 Q. I mean, it was in virtually every one 13 of the committee minutes that you looked at, and 14 that was a weekly occurrence. Right? 15 A. Yes. 16 Q. And you gave two examples of the many 17 instances, correct? 18 A. Yes. 19 Q. And would you say those two examples 20 adequately support your claim that there are many 21 instances? 22 A. This is a summary. You can't put every 22606 1 single item in there. 2 Q. Well, that would be true with minutes, 3 too, wouldn't it? 4 A. Well, that's why there's attachments 5 and work papers. 6 Q. I mean, it's a summary of what 7 occurred. You can't expect people to write down 8 every single thing that occurred, can you, any 9 more than we can expect you to have written down, 10 under the circumstances in which you prepared this 11 report, everything you did. Right? 12 A. Yes, I guess so. 13 Q. Now, let's look at your examples. 14 A. Okay. 15 Q. You say that -- and to do that, we have 16 to move over to the pages dealing with residuals 17 and IOs which is at OW154320. It's about three or 18 four pages over in your comment. Right? 19 A. Yes. 20 Q. The references there to residuals and 21 IOs is the same one you summarized in the first 22 page as the two examples of not providing adequate 22607 1 documentation, correct? 2 A. Yes. 3 Q. Now, you say that "USAT first 4 considered buying residuals at the meeting of 5 December 4th, 1986." 6 That's your first sentence. Right? 7 A. I said the first reference to 8 residuals. I don't know if that was the first 9 time. That's the first time I saw a reference. 10 Q. Okay. You, in fact, know that they had 11 considered buying residuals prior to that time, 12 don't you? 13 A. I believe that's what I said a few 14 sentences later. 15 Q. Well, what you say is that this was 16 first considered but you went back and said that 17 there were trade tickets that indicated that the 18 commitment to purchase was made before the 19 meeting. Right? 20 A. What I said was that -- 21 Q. Is that what you said? 22 A. I think you're -- what I said was in 22608 1 the -- the first time I saw a reference to 2 residuals in the investment committee minutes was 3 on December 4th. 4 However, my review indicated that trade 5 tickets existed that showed that the institution 6 had already committed to purchase those residuals 7 prior to that date. 8 Q. And were you trying to imply that 9 Ms. Laurenson had purchased something she wasn't 10 authorized to purchase? 11 A. I was just stating that the -- I was 12 just stating the information. I was not sure if 13 she had been given authority by members of the 14 investment committee. I was not sure if she had, 15 essentially, tacit approval before entering these 16 or she may have just entered into them on her own. 17 I don't know. 18 If she had entered into the residuals 19 on her own, I would have expected to see some kind 20 of statement from the committee saying, "Why did 21 you do this? Why did you enter into these 22 commitments before we authorized them?" 22609 1 Q. Well, you didn't mean to imply that the 2 residuals that were under consideration in the 3 minutes of December 4th were the ones that she had 4 already purchased, do you? 5 A. I believe -- I can't remember if they 6 were saying that the residuals she had purchased 7 was an accomplished fact and she was planning on 8 purchasing some more of them. I think that may 9 have been it. 10 However, this is the first time that 11 it's mentioned in the minutes. And before getting 12 into such a high-risk investment, the investment 13 committee should have discussed the issue. They 14 should have analyzed the impact of doing 15 residuals. They should have made approvals. 16 I don't know if there was -- if that 17 was an authorized activity for the investment 18 committee to approve in the first place. 19 Q. Sir, you wrote "A report was submitted 20 to the investment committee that the residuals had 21 already been purchased." Right? You didn't say 22 "residuals." You put "the residuals," correct? 22610 1 A. The ones that she had already committed 2 to. 3 Q. Weren't you trying to imply that they 4 had purchased residuals -- that she had purchased 5 these residuals before the committee had 6 considered them? 7 A. Yes. 8 Q. And didn't you know that the residuals 9 that you were referring to that had been purchased 10 were not the same ones that they were considering 11 at the meeting of December 4th, 1986? 12 A. I believe so. 13 Q. So, you knew that when you wrote this 14 paragraph? 15 A. Yes. 16 Q. Let's look at Exhibit A1421, Tab 352. 17 A. (Witness reviews the document.) 18 Q. Are these the minutes that we've been 19 discussing? 20 A. Yes. 21 Q. And if you look at the second page of 22 Exhibit A1421, in the fourth full paragraph, do 22611 1 you see a discussion there about a potential 2 purchase of CMO residuals? 3 A. Yes. 4 Q. And it was for a 15 million-dollar 5 purchase in the First Boston transaction? 6 A. Yes. 7 Q. Is there any indication there that this 8 was the first time the committee had ever 9 considered purchasing residuals? 10 A. There is no indication in these minutes 11 that this was the first time they were discussed 12 by the committee. However, this was the first 13 time that I saw a reference in the investment 14 committee to this activity. 15 Q. Well, if you look over to the page 16 called "activities," which is at US3005130, do you 17 have that page in front of you? 18 A. Yes. 19 Q. And does it show that they had already 20 purchased Merrill-Lynch T5 residuals in the 21 amount -- the principal amount of 28.2 million and 22 an ML T4 residual in the amount of -- well, with a 22612 1 market yield of 13.54 percent? 2 A. Yes, I see those, too. 3 Q. And this is among the documents that 4 you reviewed. Right? 5 A. Yes, it is. 6 Q. And when you were asked by Mr. Veis as 7 to the documentation supporting your comment, you 8 referred to the Merrill Lynch trade tickets which 9 were dated December 1, correct? 10 A. I believe so, yes. 11 Q. You didn't refer to any transaction 12 that is referenced which was approved here about 13 First Boston? 14 A. I believe that I was referencing these 15 minutes. And essentially, even though I was using 16 the trade tickets, I believe, this essentially 17 shows the same thing. This, I believe, is their 18 activity report for the week and this shows them 19 purchasing these residuals. And if you look at 20 the prior -- the minutes from the prior week, I do 21 not see any reference -- or I did not see any 22 reference in those minutes that they were going to 22613 1 be buying residuals. 2 Q. Sir, if you look at the next page, do 3 you see the plan for the week? 4 A. Plan for the week? 5 Q. Next page, US300531. 6 A. Yes. 7 Q. And the plan for the week, the first 8 item is "buy $18 million more residuals with 9 stable return patterns"? 10 A. Yes, I see that. 11 Q. Now, didn't that suggest to you that 12 they had already purchased the Merrill-Lynch and 13 were considering purchasing more? 14 A. I believe that this report is 15 Ms. Laurenson's report to the board. 16 Q. Do you think it is misleading how you 17 wrote your paragraph on residuals? 18 A. No, I don't. 19 Q. Did you mean to suggest that they 20 hadn't considered residuals before? 21 A. This was the first reference I had seen 22 to residuals. I did not see them saying -- in the 22614 1 week before or the weeks before saying, "We should 2 be looking into buying residuals. Here's an 3 analysis of the impact. This is what kind of 4 benefits will be derived from them. This is what 5 kind of risk there is." I did not see that. 6 Q. You didn't see that before? 7 A. No. And I also didn't see it at 8 this -- during this meeting either. 9 Q. You didn't? We're going to get to 10 that. 11 A. Okay. 12 Q. Did you mean to suggest that the -- 13 that Ms. Laurenson had gone ahead and purchased -- 14 made this First Boston purchase before it was 15 presented to the committee when you wrote up your 16 report? 17 A. I did not know -- I know that the 18 transactions were entered into before the 19 committee met. I did not know -- 20 Q. What transactions, Mr. Lapidus? 21 A. To buy the two residuals. 22 Q. The Merrill Lynch transactions. Right? 22615 1 A. The Merrill-Lynch and -- I guess they 2 are both Merrill-Lynch, aren't they? 3 Q. Yes, sir. 4 A. The two Merrill Lynch residuals, ML T5 5 and ML T4. 6 Q. And the minutes expressly reference a 7 First Boston transaction -- 8 A. Yes, they do. 9 Q. -- that they are considering for the 10 future? 11 A. Yes, they do. 12 Q. And did you mean to imply that she had 13 gone ahead and made that First Boston transaction 14 before the meeting? 15 MR. VEIS: Objection, Your Honor. 16 Asked and answered. Mr. Nickens has been beating 17 this horse for a long time. Mr. Lapidus has 18 answered the question, I believe, several times 19 already. 20 THE COURT: Well, I'm not sure. Let's 21 have it one more time. 22 A. I did not know if she had done it with 22616 1 authorization or not. I knew that the 2 transactions had been entered into before the 3 meeting. I knew that the prior meetings -- 4 Q. (BY MR. NICKENS) What transactions, 5 Mr. Lapidus? 6 A. The residuals transactions. 7 MR. VEIS: Objection. Asked and 8 answered. 9 A. I knew that they had been entered into 10 before this meeting. I knew that the prior 11 meetings did not reference any type of residual 12 activity. 13 That being the case, what I was trying 14 to show was that they had an activity. They 15 entered into it with or without the approval of 16 the committee. I don't know. Or members of the 17 committee. I didn't know that. I didn't mean to 18 say she was trying to do it on her own. I didn't 19 know what the facts were because I didn't have any 20 documents between her and Mr. Williams or her and 21 Mr. Crow or her and members of the committee 22 saying that this is a good idea. That's not 22617 1 there. 2 All I'm trying to say is they went into 3 residuals which are extremely high risk -- 4 Q. Or they may be low risk. Right? You 5 don't know? 6 A. Residuals are generally considered to 7 be high-risk. 8 Q. But you have to analyze the residuals, 9 don't you? 10 MR. VEIS: Argumentative, Your Honor. 11 MR. NICKENS: Well, he's said they are 12 high risk, and they are not in toto. 13 MR. VEIS: Mr. Nickens is not letting 14 Mr. Lapidus finish his answer. 15 THE COURT: All right. Let's have the 16 witness' response. 17 A. They were entering into residuals. 18 This is -- as far as I knew, they had not done 19 this before the December trade dates. There is no 20 analysis in any of the prior minutes that I could 21 see. There is no indication as to -- that they 22 were getting into residuals or why they were 22618 1 getting into residuals. 2 Here they were going into something 3 which I considered to be a risky activity, which 4 most people considered to be a risky activity. 5 And there was very little documentation about why 6 they were doing it and the benefits and the 7 impacts of it would have on the institution. 8 There was -- the prior meeting didn't say "Go 9 ahead and buy these residuals." 10 It's highly possible and highly likely 11 that she went to Mr. Crow or Mr. Williams or maybe 12 the entire investment committee in between the 13 meetings and said, "There is a great deal. If we 14 don't close on it today, we'll miss out on it. 15 You know, I'll give you the details later." 16 I don't know that. That was their 17 in-house activities. All I know is what the 18 documents show and the investment committee 19 minutes, the first time I saw mention of the 20 residuals was on December 4th and it was contained 21 either in the minutes or the attachment to those 22 minutes. 22619 1 Q. (BY MR. NICKENS) Sir, those mention 2 of the residuals refer to the First Boston 3 transaction. And you linked that with a 4 Merrill-Lynch transaction that had already 5 occurred, didn't you? 6 A. Yes. They are residuals. 7 Q. Now, let's look at what's in the 8 minutes. If you will go over to Page US305136, do 9 you see a page that says "option-writing -- buying 10 program"? 11 A. Yes. 12 Q. And it says "Goal: Alter unfavorable 13 return patterns at MBS/swap portfolio caused by 14 prepaying assets funded by fixed rate 15 liabilities." 16 Do you see that? 17 A. Yes. 18 Q. And that was one of USAT's problems at 19 the time Ms. Laurenson came, correct? 20 A. I don't know for sure. 21 Q. Look at the next page. She charts the 22 return patterns in a sensitivity analysis, 22620 1 correct? 2 A. She has the -- I'm assuming that the 3 dollar amounts are income. Of course, that's a 4 big assumption. And that's it's based over a 5 change of 50 or 100 basis points plus or minus. 6 Q. Well, she has charted what she has 7 identified as the problem on the prior page. 8 Can you agree with me on that? 9 A. It looks to me like she charted the 10 swaps and the assets. 11 Q. Well, her goal, what she said on the 12 prior page, was "alter unfavorable return patterns 13 in the MBS/swap portfolio." And then she has 14 charted those unfavorable return patterns. 15 Couldn't we agree on that? 16 A. Yes. 17 Q. Now, we look at the next page and she 18 does it graphically. Right? 19 A. (Witness reviews the document.) Yes. 20 Q. This page is a graphic representation 21 of the chart on the prior page. Right? 22 A. Yes. 22621 1 Q. And it says over there "liquidated 2 dollar value of mortgage swaps and financing." 3 Does that help you understand what was 4 referenced in the earlier page? 5 A. Okay. So, this was basically the 6 current market value and was not -- had nothing to 7 do with interest income or expenses. 8 Q. This was a sensitivity analysis. 9 A. Which she's done before. 10 Q. And then we look at the next page. She 11 says, "Problems with return pattern. Bullish, 12 negative spread." 13 A. Okay. 14 Q. Then she, on the next page, lists a 15 solution. Right? 16 A. Yes. It has two. 17 Q. And what's the second one? 18 A. "Buy securities that will generate 19 positive spreads." Then in parentheses, "CMO 20 residuals." 21 Q. Would you consider that a reason for 22 buying residuals? 22622 1 A. I would consider that a solution that 2 she arrived at. 3 Q. Well, would you consider that 4 documentation of a reason for purchasing residuals 5 that are referenced in the minutes? 6 A. I would say it would give a reason to 7 buy residuals. 8 Q. And she considered it under various 9 interest rate scenarios? 10 A. No, she did not. 11 Q. Let's look at the next page. 12 A. Not in these so far. 13 Q. She gives a consideration on the next 14 page of the option strategies? 15 A. Yes. 16 Q. And on the next page, she gives a 17 consideration of the shortening liability 18 duration, another part of the strategy? 19 A. Where it says "sell puts on mortgage 20 portfolio to generate income"? 21 Q. Yes, sir. Then on the next page, she's 22 outlining the use of puts to create an artificial 22623 1 dollar roll? 2 A. Yes. 3 Q. That would lower your cost, correct? 4 A. Uh-huh. 5 Q. Then she's got -- the next page, which 6 is US305144, is an explanation of residuals? 7 A. Yes. Looks to be a bullet point of 8 information on it in general. Not specifically. 9 Q. And the next page is a graphic 10 representation of the one-month LIBOR versus 11 current coupon Freddie Macs. 12 A. Yes. 13 Q. Then the next page is what? 14 A. Desirable CMO residual purchases. 15 Q. And it's explaining how the residuals 16 react to various interest rate scenarios. Right? 17 A. (Witness reviews the document.) It's 18 information. 19 Q. Well, is there anything you'd want to 20 add that you think ought to be said to the 21 investment committee? 22 A. Well, I'm not sure what -- how this was 22624 1 patterned. But when interest rates decline, if 2 you have variable rates tranches on the CMOs, that 3 of course is going to decline which should mean 4 that you have greater interest income in the 5 residual if your residual is interest income. 6 However, if you also have a pattern 7 where if you have prepayments, which they mention 8 here, you may be getting less interest income 9 because there is less underlying collateral for 10 the CMOs in total, which means the residual's 11 going to lose value. 12 Q. Let me ask you to look at the next 13 page, Mr. Lapidus. 14 Is that a scenario analysis for the 15 Merrill-Lynch 5, the Merrill-Lynch 4, and 16 something that's identified as the FOB? 17 A. Under the base case and plus or minus 18 up to 400 basis points, it shows what the PSA 19 would be, the interest rate risk, number of 20 duration -- 21 Q. Or internal rate of return? 22 A. Internal rate of return, sorry. 22625 1 Internal rate of return, duration. 2 Q. All right. This is a scenario 3 analysis, correct, that you said they didn't do? 4 A. This is an analysis that shows what the 5 internal rate of return is, what the duration is, 6 and what the estimated prepayments is. It does 7 not indicate how it's going to impact on the 8 institution. It also does not indicate on the 9 change of market value of these residuals? 10 Q. Well, that would be very easy to 11 calculate, wouldn't it, the internal rate of 12 return? That easily translates into yield, 13 correct? 14 A. That could be done, I guess. 15 Q. And yield easily translates into a 16 price, doesn't it? 17 A. It's usually a combination of yield and 18 prepayments and duration or some kind of estimate 19 of life. 20 Q. Now, if you have yield and duration, 21 you can get a price, correct? 22 A. Okay. 22626 1 Q. Okay. Now, this is what you said they 2 didn't do. Right? 3 A. They didn't get a price. They didn't 4 estimate how the impact -- the change would impact 5 on their asset structure. If they are getting 6 these residuals, as she said back here -- 7 Q. Let's examine this one at a time, 8 Mr. Lapidus. 9 This is a scenario analysis, is it not? 10 It's a scenario analysis for the residuals? 11 A. For these individual residuals, it is 12 an analysis. 13 Q. It's the very one you chose to 14 criticize and give as one example of their lack of 15 documentation. Right? 16 A. My criticism -- 17 Q. Isn't this the one that you chose to 18 criticize? 19 MR. VEIS: May he finish his answer? 20 MR. NICKENS: I don't think he has 21 answered, Your Honor. That's -- 22 THE COURT: All right. Well, let's 22627 1 have the answer. 2 A. Okay. My criticism was that they did 3 not maintain documentation which would indicate 4 the impact of these investment strategies on its 5 asset/liability structure or capital position 6 under different interest rate scenarios. This 7 looks like an analysis of the individual item. 8 This is not an analysis of how it's going to 9 impact on their investment portfolio. 10 Q. (BY MR. NICKENS) Well, let me ask you 11 about that then for a second. 12 We're talking about -- she was 13 authorized to purchase 15 million, correct? 14 That's what the minutes state? 15 A. Yes. 16 Q. And the portfolios total -- do they 17 give us a total over here? They have got -- well, 18 I don't believe we have a total; but you know that 19 it was well over a billion dollars, wasn't it? 20 A. Yes. 21 Q. And how many decimal points would you 22 have to go out to, Mr. Lapidus, to show the effect 22628 1 of a 15-million-dollar purchase on a 2 1-billion-dollar portfolio? 3 A. Seems to me there is a lot more than 4 $15 million here. 5 Q. Sir, I'm asking you about what we're 6 looking at here. 7 You're saying she should have done an 8 analysis of the effect of the overall portfolio of 9 the 15-million-dollar purchase that she was 10 authorized to make. Right? That's what you mean 11 by "individual transactions," correct? 12 A. Yes. 13 Q. Now, how many decimal points would one 14 have to go to in order to show any impact for a 15 15-million-dollar purchase on a 1-billion-dollar 16 portfolio? 17 A. I don't know. 18 Q. It would be miniscule. Right? 19 A. I don't know. They have $15 million. 20 If it -- let's see. How much did they -- 21 Q. Mr. Lapidus, what we're talking about 22 is if you have a 100 basis point movement, let's 22629 1 say the value of the security goes down by 2 30 percent: $5 million? 3 A. Okay. 4 Q. You would be calculating the effect of 5 a 5-million-dollar loss on a 1-billion-dollar 6 portfolio. 7 A. But if you're talking about a 8 5-million-dollar loss, you're going to be 9 comparing it, in effect, to the chart of the 10 return patterns. And since the total value -- 11 since the total market value would go up -- you 12 said, I'm sorry, by 100 basis points, an increase 13 of 100 basis points? 14 Q. I'm just -- you know, don't you, that 15 that would be a silly exercise for a portfolio 16 manager to engage in? 17 A. Well, I'm sorry. But if the total 18 value -- if the total market value was 88 million 19 and it would go to 116 million, that is -- that's 20 about 28 million. 5 million would be almost 21 20 percent of that. I think that -- 22 Q. Do you think a portfolio manager ought 22630 1 to show the impact on the overall portfolio in 2 these circumstances of a 15-million-dollar 3 purchase such as this one? 4 A. The reason she was buying this was how 5 it was supposed to impact on the portfolio. Yes, 6 I think it's important. 7 Q. And you don't think the pages that 8 we've gone through constitute an adequate analysis 9 of that purchase? 10 A. No, I do not. 11 Q. And you don't think that she adequately 12 documented what the purposes were of the 13 transaction? 14 A. I think that she adequately documented 15 in this report why she was doing these 16 investments. 17 However, if you look at the minutes, 18 this was done basically between meetings; and the 19 investment committee, which is responsible for 20 these activities, their sole discussion on it that 21 they record in the minutes was the approval of the 22 new purchase. There was no discussion as to how 22631 1 this was going to benefit the institution. 2 Q. There wasn't? 3 A. Not in the -- not in the minutes. In 4 the body of the -- of her report, it's there. 5 Q. Didn't we just look at her identifying 6 a problem, identifying possible solutions, and 7 considering the merits and demerits of each of 8 those possible solutions? Isn't that what we just 9 went through? 10 A. Yes. 11 Q. And wouldn't you consider that to be 12 documentation of the reasons for the purchase? 13 A. That's documentation that she gave to 14 the committee. There was no indication that the 15 committee actually discussed this. They may have 16 discussed it, but they did not -- they did not 17 think it important enough to put into their 18 summary of the minutes. What they thought was 19 important was that they would -- for the approval 20 of the $15 million. 21 Q. Well, let's look at the -- what's said 22 in the minutes. 22632 1 Can you go back to the second page of 2 the minutes, the fourth paragraph that I 3 referenced earlier? Does it not say, "After full 4 discussion of the proposed acquisition, it was 5 determined..." 6 A. It was determined that she was 7 authorized to acquire the CMO residuals in the 8 First Boston transaction up to $15 million. 9 Q. And on what basis are you saying there 10 wasn't a full discussion? 11 A. They were discussing this First Boston 12 transaction. They were not discussing -- there 13 was no indication that they were discussing the 14 residuals as a separate -- as a separate issue, 15 whether or not they should do it, what kind of 16 benefits there were. All it says is they had a 17 full discussion of her proposed acquisition of 18 $15 million in a First Boston residual. 19 Q. So, your report comes down to the fact 20 they didn't write down that we had a full 21 discussion of residuals instead of what they did 22 write down? 22633 1 A. In normal circumstances, an investment 2 committee would sit down and say, "We need a 3 report. We need an analysis of this type of 4 investment and how it's going to impact and how 5 it's going to benefit us. Give us a report. 6 We'll review it. We'll decide if we want to do 7 it." 8 Usually what happens is the report's 9 given and there is a discussion of the pros and 10 cons of whether or not entering into a transaction 11 is a good idea. Then they say, "we authorize you 12 to acquire residuals" -- or whatever it might 13 be -- "up to a certain-dollar amount. Let's start 14 out small maybe, buy one and see what the impact 15 is." 16 This was -- she already bought some 17 residuals. She wanted to buy more residuals. And 18 they were saying okay. We -- "We're approving 19 your purchase of this," but there is no evidence 20 in the minutes that they sat down and discussed 21 this issue and considered it and how it would 22 impact on the institution. 22634 1 Q. Well, what more are they supposed to 2 say than say "after a full discussion" in order to 3 indicate that there was a full discussion? 4 A. Well, I believe as you pointed out 5 earlier, this minute refers to a First Boston 6 acquisition. It does not refer to residuals in 7 general. 8 Q. And is that the basis for your 9 criticism? 10 A. Yes. 11 Q. Because you know this was a full 12 discussion as reflected in her documentation of 13 the pluses and minuses of the residuals. Right? 14 A. I know that they said they discussed -- 15 I know her report is attached. 16 Q. Okay. Now, let's look at another 17 comment that you make here. You go on to discuss 18 under "residuals" at the very end -- the first 19 paragraph, you say "Senior management had directed 20 that the residuals be sold due to their lack of 21 liquidity." 22 Do you see that? 22635 1 A. Yes. It's the last sentence in that 2 area. 3 Q. And that's in October of 1988, correct? 4 A. They were sold in October of 1988. I'm 5 assuming it was sometime in that or the prior 6 month or two. 7 Q. Now, what is the source of this 8 information? 9 A. I believe it was -- I'm not sure. I 10 think it was from the minutes probably or from 11 some kind of memo. 12 Q. Well, let me ask you to look at A14105. 13 That's part of your work papers. And if you can 14 look at -- it's Tab 1846. And I'd like you to 15 look at OW182371. 16 Are you there, Mr. Lapidus? 17 A. Yes. 18 Q. Is this memo from Mr. Bruno the source 19 of your comment that senior management -- what do 20 you say -- senior management had directed that the 21 residuals be sold due to their lack of liquidity? 22 A. (Witness reviews the document.) I 22636 1 believe this is at least part of it. 2 Q. Can you point us to anything else? 3 A. (Witness reviews the documents.) Not 4 immediately, no. 5 Q. Okay. Now, if you look at the Bruno 6 memo at 182371, it says "at the direction of 7 senior management," which is what you've written 8 in your comment. Right? 9 A. Uh-huh. (Witness nods head 10 affirmatively.) 11 Q. Now, which senior management was that? 12 A. I don't know. 13 Q. Was it Mr. Connell? 14 A. I don't know. This was a memo -- 15 Q. Mr. Connell was the man that was 16 brought in at the insistence of the Federal Home 17 Loan Bank? 18 A. I don't know. I know that this was a 19 memo from Dominic Bruno to the investment 20 committee which was made a part of the investment 21 committee minutes on the sale of the residuals. 22 Q. Now, in looking at Bullet Point No. 1, 22637 1 do you see anything in there about being sold due 2 to ill liquidity? We're going to go back -- the 3 first paragraph, do you see anything there? 4 A. No. 5 Q. Now, if we look at the second page, 6 there is a suggestion about liquidity. Right? 7 A. Yes. 8 Q. And the residuals, correct? 9 A. Uh-huh. (Witness nods head 10 affirmatively.) 11 Q. But what Mr. Bruno is saying is that 12 they are difficult to sell because they are 13 illiquid, correct? 14 A. Yes. 15 Q. And he's saying that "because of a 16 restructuring that is anticipated, we've been 17 ordered to sell them," correct? 18 A. It says that it is confronting and 19 anticipating a comprehensive company-wide 20 restructuring program. It does not say that. 21 Q. It says "Part of this restructuring 22 program will probably entail the liquidation of 22638 1 all MBS assets within USAT." Right? 2 A. Yes. 3 Q. And he is suggesting that because they 4 are illiquid, it might be better to sell them now 5 if we can get a decent price than under some kind 6 of fire sale scenario at a later time. Right? 7 A. Yes. 8 Q. Now, you didn't say anything about the 9 restructuring in your memo, did you? 10 A. No. 11 Q. Do you think it's a fair summary to say 12 that they were sold due to their illiquidity? 13 MR. VEIS: Your Honor, I believe that 14 Mr. Nickens is leaving out -- and this is 15 misleading. He's leaving out the prior sentence 16 which talks about the rationale behind it, the 17 sales deriving from the inherent liquidity of the 18 residuals. If he can ask a question about the 19 complete thought in the document. 20 THE COURT: All right. Mr. Lapidus, 21 read the entire paragraph and answer the question, 22 please. 22639 1 THE WITNESS: Okay. (Witness reviews 2 the document.) Okay. I've read the paragraph. 3 Q. (BY MR. NICKENS) The question is: Do 4 you think that was -- your comment was that the 5 residuals were sold due to their illiquidity? 6 A. Yes. 7 Q. And do you think that's a fair summary 8 of the source document for your comment? 9 A. Yes. I probably used these -- this 10 memorandum to write -- used it to write that 11 sentence. 12 Q. Isn't what is reflected here, that an 13 anticipated restructuring is causing the sale of 14 these securities? 15 A. That's part of it. 16 Q. And that's the part you left out? 17 A. Yes, I did. 18 MR. NICKENS: Your Honor, this might be 19 a point where we can take a break. I'm going to 20 move on to another subject. 21 THE COURT: All right. We'll adjourn 22 till 2:00. 22640 1 2 (Whereupon, a lunch break was taken 3 from 12:29 p.m. to 2:05 p.m.) 4 5 THE COURT: Be seated, please. We'll 6 be back on the record. 7 Mr. Nickens, you may continue. 8 MR. NICKENS: Thank you, Your Honor. 9 Q. (BY MR. NICKENS) Mr. Lapidus, when we 10 took our lunch recess, we had been discussing 11 residuals and your use of those as an example of 12 documentation issues. 13 Your second example deals with purchase 14 of IOs. 15 A. Okay. 16 Q. Well, just to get our place, we're 17 talking about the second example in the second 18 paragraph on the first page of your comment at 19 OW154317. Right? 20 A. Right. 21 Q. And then there is more detail about 22 that at OW154320 under a paragraph that you've 22641 1 labeled "interest-only MBS," correct? 2 A. Yes. And there's two more paragraphs 3 on the following page. 4 Q. Yes, sir. The total comment goes over 5 to the following page. 6 Now, your example relates to a purchase 7 of IOs referenced in a meeting of January 28th, 8 1987; is that correct? 9 A. Yes. 10 Q. And your criticism is an alleged 11 failure to include a sensitivity analysis of the 12 proposed purchase? 13 A. I said what they said in that meeting 14 and the February 18th meeting and that no 15 additional reasons for the investment were 16 provided. There was no indication that the 17 institution analyzed the potential changes in 18 yield or market value of these investments under 19 different interest rate scenarios. 20 Q. That's a sensitivity analysis. Right? 21 A. Yes. 22 Q. All right. Now, did you ever determine 22642 1 whether they purchased these securities? 2 A. I know they purchased some IOs. 3 Q. Yes, sir. They purchased IOs prior to 4 this time, had they not? 5 A. I don't know. 6 Q. One of your two examples to support 7 your conclusion is about a purchase -- a proposed 8 purchase that you don't know whether it happened 9 or not. 10 Is that sort of where we are? 11 A. I'd have to look at my work papers to 12 see what I have in there. 13 Q. Now, let's look at the earlier purchase 14 of IOs. And if you could, look back at 15 Exhibit A1414 at Tab 345, which are the minutes of 16 October 22nd, 1986. 17 Now, also, while we're looking at 18 these, Mr. Lapidus, perhaps you would want to look 19 at your work papers in Exhibit A14101 -- that's 20 Tab 1842 -- at OW182001. 21 A. 182 what? 22 Q. 001. Now, looking at your work paper, 22643 1 that is a scenario analysis for the proposed 2 transaction of buying IOs. Right? 3 MR. VEIS: I'm sorry. What is the OW 4 number? 5 MR. NICKENS: OW2001. 6 MS. CLARK: 18. 7 MR. NICKENS: 182001. Excuse me. 8 Q. (BY MR. NICKENS) That is a 9 sensitivity analysis that you were critical of 10 them not having on the January proposed purchase, 11 correct? 12 A. (Witness reviews the document.) This 13 work paper of mine discusses as of the 10/22/86 14 investment committee meeting. It's not in 15 relationship to what I was talking about here. 16 Q. Well, but we're talking about your 17 example on the IOs. And I believe we've 18 established that you don't know whether that 19 purchase was made. Right? 20 A. I haven't checked my work papers to see 21 if that purchase was made. 22 Q. And I'm asking you about an earlier 22644 1 purchase of IOs which you documented in your work 2 papers which are reflected on October 22nd, 1986. 3 A. It says it's a proposed transaction? 4 Q. For Fannie Mae stripped MBS 11 and a 5 half percent coupon, 9 percent Ginnie Mae GPMs, 6 correct? 7 A. Yes, that's what it says. 8 Q. And there is an analysis there that is 9 a sensitivity analysis for the proposed 10 transaction. Right? 11 A. (Witness reviews the document.) 12 Q. Isn't that what it is, Mr. Lapidus? 13 A. Well, I am trying to read through it 14 right now. (Witness reviews the document.) Looks 15 like an analysis. I'm not sure how it exactly 16 relates to this purchase. 17 Q. Well, you haven't had a chance to study 18 it, correct? 19 A. Well, I'm studying it right now. And 20 the first part of the -- of this scenario is the 21 CPR, which is the prepayment estimate. 22 The second part says "beginning and 22645 1 ending mortgage yield," which is for a 9 and a 2 half percent mortgage yield. Then it says, "BEG 3 R/R and END R/R," which I will assume for the time 4 being that says beginning reverse repo and ending 5 reverse repo because the next one says "cost to 6 stretch repo, beginning hedge cost for Ginnie 7 Mae" -- and then it -- I'm not sure what that 8 says. Is that a "put"? It's hard to read that. 9 Then it says "ending hedge" -- 10 Q. Mr. Lapidus, if you need to think about 11 it, you don't have to read it into the record. 12 A. I'm not reading it into the record, per 13 se. I'm just saying that there is a lot of 14 information here and I'm not sure that this is 15 talking about this Fannie Mae 11 and a half 16 percent stripped and 9 percent Ginnie Mae. You 17 asked me a question, and I'm trying to answer it. 18 Q. So, you can't tell by just looking at 19 it whether this is a sensitivity analysis for this 20 proposed transaction? 21 A. It may relate to it, but I can't tell 22 that for sure. 22646 1 Q. And is there listed at the bottom the 2 risk for the proposed transaction? 3 A. There are three risks listed. 4 Q. Now, is this the kind of analysis that 5 you were critical for their not including on other 6 transactions? 7 A. This analysis would not be sufficient. 8 Q. And what is it it's lacking? 9 A. Well, for one thing, it doesn't talk 10 about the -- I'm assuming these are IOs since it 11 doesn't specifically say that they are. I'll just 12 make that assumption. 13 It doesn't talk about the market value 14 of those IOs over a change in time. It doesn't 15 talk about the -- from what I can tell, it doesn't 16 discuss the benefit that's going to be derived for 17 it, or it might discuss that. 18 It doesn't show what the impact of 19 prepayments might be in terms of the value and/or 20 the loss in value due to prepayments on the 21 underlying collateral, to list a few things. 22 Q. It's just not sufficient for your 22647 1 purposes, is it? 2 A. No. 3 Q. So, this kind of documentation isn't 4 enough either? 5 A. I do not think that it is. 6 Q. But it is clear that USAT, prior to 7 this January proposed transaction which we don't 8 know happened or not, had experience with IOs? 9 A. Assuming these are IOs, I would say 10 probably. 11 Q. And you could go back and check the 12 reports to see when they first purchased IOs, 13 couldn't you? 14 A. Yeah, I guess so. 15 Q. Now, would that make a difference to 16 you as to what kind of presentation you would 17 expect somebody to make? 18 A. It would depend on why they were 19 getting into IOs. Did they try these in the past 20 and they were failures? Is this something that's 21 an ongoing activity? 22 I'm not sure why I didn't discuss this 22648 1 earlier '86 activity. There may have -- 2 Q. Could it be because there was a 3 sensitivity analysis there? 4 A. You mean that I purposely left it out? 5 Q. Well, that's -- did you? 6 A. No, I did not. 7 Q. Now, you wouldn't expect a portfolio 8 manager to come in and make a brand-new 9 presentation on securities that the institution 10 had already purchased and had experience with, 11 would you? You wouldn't want to start over at the 12 beginning of the alphabet in explaining what the 13 securities were about if they had already done 14 that and already purchased them and had experience 15 with them? 16 A. Well, it seems to me that they did do 17 this. In the February minutes, they were talking 18 about how these investments had attractive yields 19 and these investments could be repo'd and were 20 qualifying assets. It seemed to me, reading from 21 my summary, that in those minutes, they were 22 treated as a proposed transaction. They were 22649 1 saying what the benefits would be to the 2 institution. 3 Q. But my question, Mr. Lapidus, is: You 4 wouldn't expect a portfolio manager who three 5 months before had made a presentation on IOs and 6 the risk and the rewards to come in and start all 7 over again with that same kind of presentation 8 three months later on another transaction of a 9 similar nature, would you? 10 A. Probably not. 11 Q. All right. That person wouldn't stay 12 there very long doing that, would they? 13 A. I don't know. I can't judge what the 14 management would have thought. 15 Q. Well, it's just common sense, isn't it? 16 You wouldn't expect some person to come in and 17 tell you the same thing every week? 18 MR. VEIS: Asked and answered. 19 THE COURT: Sustained. 20 Q. (BY MR. NICKENS) Now, let's move, if 21 we can, to your discussion about POs. This 22 references back to the last paragraph on the first 22650 1 page of your comment at OW154317. 2 Do we have our place? 3 A. I don't need this 1414 now? 4 Q. No, you don't. We're finished with 5 that. 6 MR. GUIDO: What is the imaging number? 7 MR. NICKENS: OW154317. 8 Q. (BY MR. NICKENS) And we're talking 9 about the last paragraph where you talked about 10 numerous document deficiencies. 11 A. Correct. 12 Q. And you cited two examples involving 13 POs or perhaps one example involving two 14 purchases? 15 A. Yes. 16 Q. Are there any more examples? 17 A. Of document deficiencies? 18 Q. Yes, sir, that that paragraph refers 19 to. 20 A. Well, as I said earlier, the residuals 21 and the IOs, those are documentation deficiencies. 22 My opinion is that they did not have sufficient 22651 1 analysis for these activities. 2 Q. Now, if you -- you explain a bit more 3 about what you meant with the POs in your 4 paragraph on POs at Page OW154321, correct? 5 A. Yes. There are three paragraphs. 6 Q. And you say, "They have not yet 7 responded to this request." That's the last 8 sentence on the paragraph involving POs? 9 A. Yes. 10 Q. Now, when did that request go out? 11 A. I think it was on maybe December 22nd. 12 I think they were given a written request for an 13 explanation. 14 Q. And you left town on December 23rd, 15 correct? 16 A. 23rd or 24th. I'm not sure which. 17 Q. I believe Christmas was on a Sunday 18 that year. Christmas Eve was on a Saturday. 19 A. So, I left on the 23rd then. 20 Q. Right. And you directed the memo to 21 whom? 22 A. It was either Mr. Crow or Mr. Williams. 22652 1 I know it's in here somewhere in one of my work 2 papers. 3 Q. Yes, sir. If you want to look at 4 page -- under Exhibit A14102, Page No. OW182568. 5 That's the one we had trouble reading in your 6 direct. 7 A. You said 568? 8 Q. Yes, sir, I believe so. 9 A. That's the one. 10 Q. And the following page -- well, but you 11 can tell to whom it's directed. Right? 12 A. Yes. It's to Mr. Williams. 13 Q. Mr. Bruce Williams? 14 A. Yes. 15 Q. On the 22nd of December? 16 A. Yes. 17 Q. And Mr. Williams, you now know, was 18 terminated on the 31st of December? 19 A. Yes. 20 Q. And on January 20th, you wrote that 21 they haven't yet responded, correct? 22 A. Yes. 22653 1 Q. And you didn't know that Mr. Williams 2 had been terminated -- 3 A. No, I did not. 4 Q. -- at the end of the year? 5 A. No, I did not. 6 Q. Does that sort of put the failure to 7 receive a response in a different light? 8 A. I'm not sure I understand what you 9 mean. He didn't respond before I left, and I had 10 not received any correspondence from Brenda 11 indicating that they had responded. 12 Q. Well, I'm asking you, sir: You 13 directed it to a person just a few days before 14 Christmas and a week before he was fired. And you 15 had some implicit criticism of not having 16 responded. And I'm saying now that you know those 17 facts, doesn't that put your criticism in a 18 different light? 19 A. I'm sorry, but there is no criticism 20 there. All I was stating was a statement of fact. 21 As of the time I wrote the report, I did not have 22 a response. 22654 1 Q. So, you didn't intend -- 2 A. It was not -- I'm sorry. I did not 3 really consider that much of a criticism. You 4 know, sometimes there is a while between 5 responses. And I realize that not being in that 6 area, not being able to go into his office or ask 7 him whether or not he was there made it difficult 8 to get a response. And I didn't know what 9 priorities he had given it. All I was saying was 10 I didn't have a response at that point. 11 Otherwise, if he had a response, he would have put 12 the response in the report. 13 Q. Didn't you think somebody reading this 14 would read that as a criticism? 15 A. No. 16 Q. You didn't think that somebody might 17 read that and think that there wasn't a response? 18 That is, they didn't have anything to say? 19 MR. VEIS: He's asking the witness to 20 speculate, Your Honor. 21 MR. NICKENS: I'm asking about his own 22 thoughts, Your Honor. 22655 1 THE COURT: All right. Denied. 2 A. I'm sorry. Could you repeat the -- 3 Q. (BY MR. NICKENS) Didn't you think 4 that someone looking at this might think that 5 there was no response and take it as a criticism? 6 A. No. I mean, when you're writing a 7 report, if you don't have a response at all by the 8 time the examination is finished, then you 9 would -- then you would make an indication saying 10 "management was unable to respond to this during 11 our time and they promise a response" or something 12 like that. 13 The fact is, I expected Brenda Bese, as 14 EIC, to follow up on these areas and get the 15 responses for my various questions for the entire 16 report. I mean, that's usually what happens, is 17 management makes some kind of response. Whether 18 or not it answers the questions or whether or not 19 it's acceptable, that's -- they usually have an 20 opportunity to respond. And my assumption was 21 that the responses would be put into the report. 22 Q. But this was, as we've already 22656 1 established, an unusual examination? 2 A. Yes. 3 Q. And part of the fact of it being 4 unusual was that management didn't have a chance 5 to respond, did it? 6 A. As far as I know, to my issues, I don't 7 think they did respond. 8 Q. And you had met and spoken with 9 Mr. Bruce Williams? 10 A. Yes. 11 Q. And did you make any effort to call him 12 to say, "Bruce, I sent you that memo right before 13 Christmas. What's the answer?" 14 A. No. 15 Q. Now, let's -- now, your complaint was 16 that the purchase price and the book value of the 17 security for accounting purposes were different. 18 Does that sort of summarize it? 19 A. Not really. My concern was that what 20 they had entered on their books was different from 21 what the broker said. So, I didn't know this -- I 22 didn't know whether it was true or not, but it is 22657 1 possible that the institution may have sent the 2 amount that they listed as their asset to the 3 brokers. This would require -- one of the things 4 I expected them to produce at some point was that 5 they would produce the wire transfers or some sort 6 of document like that that would indicate exactly 7 how much was sent to the brokers to clarify this 8 issue. 9 For all I know, it was just an 10 accounting mistake. But I didn't know that 11 because I didn't have enough information. And my 12 request for that information basically met with 13 the fact that I -- that I ended up writing it down 14 in writing and presenting it to him so that he 15 could presumably have someone look into it before 16 I came back. The assumption was when I left that 17 I would be coming back. 18 Q. Yes, sir. And these securities are 19 POs, correct? 20 A. They are -- yes. They are 21 principal-only securities. 22 Q. All right. And the book values of POs 22658 1 change from month to month? 2 A. Yes, they did. 3 Q. Because -- two reasons. Right? You 4 have to either amortize or accrete, as the case 5 may be, any premiums or discounts. Right? In the 6 case of POs, we would be talking about accreting 7 discounts. Right? 8 A. Right. And treating part as interest 9 income and part as principal repayment. 10 Q. Because the PO is always sold at a 11 discount to par? 12 A. Yes. 13 Q. And from an accounting point of view, 14 you have to accrete the increase in value on that 15 PO over time? 16 A. You have to account for the payments 17 and treat a portion of it as income and a portion 18 of it as the repayment of your original 19 investment. 20 Q. And in the case of IOs and POs, the 21 accounting rules also require adjustments based 22 upon differences between actual prepayments and 22659 1 assumed prepayments, do they not? 2 A. Yes, I believe so. 3 Q. And that was a result of the Financial 4 Accounting Standard 91? 5 A. Again, I would have to assume so. 6 Q. Do you know when Financial Accounting 7 Standard 91 became effective? 8 A. No. 9 Q. Was it at or about the same time that 10 these securities were purchased? 11 A. I don't know. 12 Q. But in any event, both of these factors 13 can change the book value of an IO or a PO from 14 month to month, correct? Both the process of 15 accreting or amortizing and recasting based upon 16 changes in prepayments? 17 A. Yes, it can change. But I don't 18 understand -- I don't understand your question, I 19 guess. 20 Q. Well, let's see if we can -- did you 21 actually check the general ledger to determine if 22 the POs had been revalued or recast pursuant to 22660 1 the requirements of Financial Accounting Standard 2 91? 3 A. No. 4 Q. And -- 5 A. Well, I looked at the sheet of paper 6 that purported to be what was entered into the GL. 7 Q. Well, you've testified in your direct 8 testimony that you relied on Pages 01 -- 182859 9 and 860, which is in A14103. It's OW182859. 10 Do you have 182859 in front of you? 11 A. No. 12 Q. It's in Exhibit A14103, which is the 13 third volume of your work papers. And the page 14 reference is 182859. 15 MR. GUIDO: 182 what? 16 MR. NICKENS: 859. 17 Q. (BY MR. NICKENS) Now do you have it 18 in front of you? 19 A. Yes. 20 Q. Do you recall in your direct testimony 21 I asked for which column you were referring to in 22 reference to finding this discrepancy? 22661 1 A. Yes. I said that I -- I believe I said 2 that I took it from the negative amount in cash 3 flow, which would have been the payment. 4 Q. Yes, sir. Now, this is not a page from 5 the general ledger, is it? 6 A. It's a page that was assumed to be used 7 for the general ledger. 8 Q. And it doesn't purport to show the 9 purchase price, does it? 10 A. I think it does. It shows what they 11 said the cash flow out was. 12 Q. Well, it says "cash flow" with a 13 beginning balance of 20,815,676, correct? 14 A. That's correct. 15 Q. And this document is dated 16 September 1988, correct, up in the upper left-hand 17 corner? 18 A. September 29th, 1988. 19 Q. Now, this -- these securities were 20 purchased in the period of October, November, and 21 December of 1987? 22 A. The Ginnie Mae 11 and a half percent, 22662 1 Kidder Peabody Trust No. 8 was purchased in 2 November '87. And I think -- is the Ginnie Mae 3 Trust 35 the other one? 4 Q. Yes, sir. 5 A. That was purchased in December '87. 6 Q. Was that the settlement date or the 7 purchase date? 8 A. I'd have to look at the actual trade 9 tickets. 10 Q. Well, in any event, the financial 11 markets during this period were particularly 12 volatile after the stock market crash of 13 October 1987, were they not? 14 A. I don't know offhand. 15 Q. You don't recall the effect of the 16 stock market crash on the financial markets in -- 17 A. Normally, it would increase the 18 interest on an investment, which would normally 19 increase the price and decrease the yield. 20 Q. You mean there would be people going to 21 bonds as opposed to equities? 22 A. Yeah, faith of quality. 22663 1 Q. Well, let me ask you to look at 2 Page No. OW182837. It's a few pages before. 3 A. Okay. 4 Q. This is a paper from your work papers. 5 Right? 6 A. Yes. 7 Q. And -- but it's a document that was 8 prepared by the association? 9 A. Yes. 10 Q. And it was to indicate a trend analysis 11 for various mortgage-backed derivatives, correct? 12 A. It was the changes over a period of 13 time from January '87 to March 31st, '88, I 14 believe is what it was. 15 Q. Now, you had this when you wrote your 16 comment, correct? 17 A. Yes. 18 Q. And can you find the POs you questioned 19 on this trend analysis? 20 A. Let's see. 21 Q. You might want to look down where it's 22 listed as POs at the bottom of the page. 22664 1 A. Yes, I see them listed there. 2 Q. And you have a listing under "original 3 book value"? 4 A. Yes. 5 Q. And that's the same number that you 6 referenced earlier, is it not? 7 A. Yes, it is. 8 Q. Okay. 9 A. For both of them, I believe, yes. 10 Q. All right. And do you notice that 11 symbol to the right of the row on each of those? 12 A. The little star thing? 13 Q. Something that looks like a number sign 14 perhaps? 15 A. Yes. 16 Q. Well, what did that mean? 17 A. Well, assuming that carries over to the 18 next page, it says, "January book value is 19 substituted for original book value." 20 Q. Well, now, did you notice that fact at 21 the time that you wrote your comment? 22 A. (Witness reviews the document.) I 22665 1 don't think so. 2 Q. Could it be that that would explain the 3 discrepancy you postulated? 4 A. I can't tell. 5 Q. But we do know that the figure that you 6 used as original book value was, in fact, the 7 January value, if this document is correct. Is 8 that not true? 9 A. I don't know. It's a possibility. 10 Q. That's something you would want to look 11 into if you were given another chance. Right, 12 Mr. Lapidus? 13 A. Yes. And that's something that the 14 institution, if it was a known fact, should have 15 been able to respond to be me right away. 16 Q. Right. Except they were fired? 17 A. What about when I was sitting in his 18 office talking about it with him? 19 Q. Do you have a recollection of that, 20 Mr. Lapidus? 21 A. No, but he obviously didn't give me an 22 answer. 22666 1 Q. You said you didn't have a recollection 2 of that? 3 A. No. 4 Q. So, you don't know whether you talked 5 to Mr. Williams about this or not? 6 A. I remember talking -- bringing it to 7 his office and giving it to him. I don't remember 8 the conversation. 9 Q. In any event, this is something that 10 one would want to go back and look at now that we 11 realize from your own documentation that the book 12 value was substituted in January -- the original 13 book value was substituted -- the January book 14 value was substituted for the original book value, 15 correct? 16 A. Of course I would investigate anything 17 that would clarify that issue. 18 Q. And do you know if that was pursuant to 19 the requirements of Financial Accounting Standard 20 91 which became effective on December 15th, 1987? 21 A. I don't know that. 22 Q. And have you looked in your own 22667 1 accounting -- I mean your own regulatory handbook 2 to see the discussion about Financial Accounting 3 Standard 91 and the inconsistencies that it can 4 create? 5 A. I don't remember looking at it. I 6 don't remember. 7 Q. Now, you also say in your comment that 8 the book balance on the POs had decreased to 9 90.7 million with unrealized losses of 23.4. 10 Do you see that at the -- in the middle 11 there of that second paragraph? There is a sort 12 of break in the page with that 6 percent. And 13 just above that, do you see that sentence? 14 A. Yes. 15 Q. Okay. Now, let me ask you to look at 16 Page 182850 which, again, is just a few pages over 17 from the exhibit we were just looking at. 18 A. Okay. 19 Q. Do you have that? 20 A. Yes. 21 Q. Now, can you identify that as the 22 source of your statement that the book balance had 22668 1 decreased to 90.7 million with unrealized losses 2 of 23.4 million? 3 A. Well, it might have been from that; or 4 it might have been from my own work paper where I 5 did further analysis which, I believe, is -- well, 6 I guess the most readable one is OW182867. 7 Q. Well, where in there does it reflect 8 this $90.7 million of decrease and 23.4 million in 9 unrealized losses? 10 A. In one of the bottom lines, it says 11 "total POs held" -- you really can't read it well. 12 If you go across and look under "book," it says 13 90,717,955. And if you go over to the market loss 14 at 10/4/88, you will see $23,413,183. I also 15 calculated market price based on information 16 provided by Bear Sterns, and I don't remember how 17 I got that. The institution may have provided it, 18 or it may have come from some other source. 19 Q. Well, if we go back -- wasn't the 20 source of your summary, at least one source, the 21 Document 182850? 22 A. Yes, that was the starting point. 22669 1 Q. Now, let's look at those two columns. 2 To get the so-called unrealized loss, what you did 3 was subtract the book value from the current face, 4 correct? 5 A. I don't know -- I don't think that's 6 true. You can see where I have the market values. 7 On Page 182867, you see where I have the 9/30/88 8 book and two rows over from that, under the 9 10/4/88, those are the prices that the institution 10 provided or used? And it was those that were used 11 to calculate the market losses, and that's where I 12 came up with the 23.4 million. If you subtract 13 90.7 million from 113.4 million, you would come up 14 with 22.6 or 7, I think, which would be a 15 different number, just adding in my head. 16 Q. Well, clearly, it wouldn't be proper to 17 subtract the book value from the current face to 18 come up with something called unrealized loss, 19 would it? 20 A. No, it wouldn't. 21 Q. Because neither one of those 22 recognizes -- is a current market value, is it? 22670 1 A. No. 2 Q. Now, you also say in your report that 3 the yield on the remaining POs averaged only 4 6 percent, correct? 5 A. Yeah. 5.98 percent, based on my work 6 paper. 7 Q. Now, is the source of this statement 8 Exhibit 182850? 9 A. I used the information from there to 10 make the calculation, yes. 11 Q. Now -- and how did you calculate that 12 figure? 13 A. Well, since I can't see -- since my 14 formulas, of course, don't show up on this page, I 15 would assume that I took the yield and I -- to 16 arrive at the average, I probably multiplied it 17 times the book value. And I did a weighted 18 average calculation. That's where I came up with 19 a yield of 5.98 percent or 6 percent. 20 Q. Well, a PO is some cash flow that you 21 will receive in the future, correct? 22 A. Yes. 22671 1 Q. How do you calculate the yield? 2 A. I didn't. The institution did, or 3 someone for the institution did. 4 Q. Well -- but how do you go about 5 calculating the yield? 6 A. Well, you make an estimate of the 7 prepayments and use that to determine how soon 8 you'll get the money back. And you usually base 9 it -- that's how you get your yield, based on your 10 assumptions of how soon the principal payments 11 will be received. 12 Q. And if the yield on a PO goes down, 13 that simply means that interest rates have gone up 14 and that prepayment assumptions have slowed, 15 correct? 16 A. Yes. 17 Q. So, what you're reporting in saying 18 that the yield on the POs had gone only to 19 6 percent is that interest rates have gone up? 20 A. From when they were originally 21 purchased. 22 Q. So, why do you say "only 6 percent"? 22672 1 A. Well, because earlier I say the 2 anticipated yield on this security was 3 8.9 percent. So, it's dropped basically 290 basis 4 points from what they originally expected to 5 receive. 6 Q. Because interest rates have gone up? 7 A. In effect, yes. 8 Q. So, what we're reporting is that 9 interest rates have gone up? 10 A. If you want to put it that way. 11 Q. Well, you certainly don't hold 12 management of USAT responsible for the fact that 13 interest rates go up? 14 A. No, I don't hold them responsible for 15 that. 16 Q. Now, let me ask you to look at 17 exhibit -- Page 182259. It's in Exhibit A14103. 18 I'm sorry. 259. 19 A. It says "IO position prior to Friday's 20 trades." 21 Q. Let me make sure that I've got the 22 right page. 22673 1 MR. VEIS: What exhibit number are you 2 looking at? 3 Q. (BY MR. NICKENS) I'm sorry. I think 4 what I want you to look at is what we were looking 5 at before. That's Page No. 182859. You looked at 6 it before. 7 A. Okay. 8 Q. This is the one that you said was the 9 basis for your claim there was a discrepancy under 10 the cash flow column, correct? 11 A. I would say it was a concern. 12 Q. Yes, sir. But this is the page that 13 you identified as the basis for that? 14 A. Yes. 15 Q. Okay. Now, the yield that is listed on 16 this security is 6.61 percent, correct? 17 A. That's what it shows the internal rate 18 of return as, yes. 19 Q. And how would you go about calculating 20 that? 21 A. Normally, there is a relationship 22 between the amount you pay and when you anticipate 22674 1 the prepayments -- basically the security to 2 prepay the majority of the -- of the principal. 3 And then you calculate the yield based on that. 4 Q. Well, sir, wouldn't you take the 5 interest income and divide it by that 20,800,000 6 and then multiply that by 12 since this is an 7 annual figure? 8 A. Your income on this, basically using 9 the 20.8 million and the actual principal of 25 -- 10 basically .9 million, it's the difference between 11 that and when you receive it or how long it will 12 take you to receive it is what you base your yield 13 on. 14 If you anticipate receiving that in 15 four years versus ten years, in four years you 16 will assume a much higher yield. In ten years, 17 you would assume a lower yield. 18 Q. Sir, my question is this: Simply 19 calculating the yield, wouldn't you simply take 20 the interest income divided by the cash flow 21 figure and multiply by 12 since you would come up 22 with a monthly figure? 22675 1 A. I'm sorry. 2 Q. Let me do it this way. I will tell you 3 that if you take 114,713 and divide it by 4 20,815,000 and multiply it by 12, you get 6.61. 5 A. Well, actually, what they did is -- to 6 be honest, when you're doing something like this, 7 you take the 6.61 percent and you multiply it 8 times the 20,815,000 or whatever, and then you 9 divide by 12. Then you take the total payment 10 that you receive. And the amount that you 11 consider to be interest, you claim as interest 12 income, and the remainder becomes the principal 13 reduction. 14 Q. Now, if they had actually paid, as you 15 indicated, 13.2 million instead of 20.8, what 16 would the yield be? 17 A. I would assume that the yield would be 18 a good deal higher. 19 Q. So, the yield that you are indicating 20 only 6 percent is a function of the accounting 21 conventions, isn't it? 22 A. Yes. 22676 1 Q. And are you familiar with the 2 accounting conventions for IOs and POs? 3 A. Not specifically, no. 4 Q. And you didn't know their accounting 5 conventions? 6 A. The institution's? 7 Q. Yes, sir. 8 A. No. 9 Q. And in calculating that yield figure, 10 one would have to know the accounting conventions 11 to know what the true yield was, wouldn't they? 12 A. No. 13 Q. Well, are you telling us that they paid 14 13 million and had a 6.61 percent yield? 15 A. No. What I'm saying is that the 16 institution made an estimate of their yield based 17 on their information, and I took their estimates 18 and that's what I used. I used their information, 19 their work to make my determination as to what the 20 yields were on the securities and what their 21 overall yield was. 22 Q. But you didn't understand what 22677 1 accounting conventions that they were either 2 following or constrained to follow? 3 A. Well, you do have to use -- you do have 4 to assume in some instances that the institution 5 is following their accounting requirements 6 correctly. That's what the auditors are for, to 7 make sure that they are doing that. 8 Q. And USAT had independent auditors, 9 correct? 10 A. I believe so. 11 Q. Now, you also state in your comment 12 that the POs did not provide protection against 13 rising rates. Let's see if we can find -- that's 14 at the bottom of the first paragraph under 15 "principal-only MBS." 16 A. (Witness reviews the document.) Yes. 17 Q. Now, when you wrote that, did you note 18 that USAT was buying IOs and POs at the same time? 19 A. In this particular case, I was talking 20 about their PO activity. Their IO activity, I had 21 discussed in the prior section. 22 Q. But if you look -- let me ask you to 22678 1 look at Exhibit A1437 at Tab 364. 2 A. Is this something I have? 3 Q. No. We'll get it for you. 4 This is the time period we're talking 5 about, isn't it, Mr. Lapidus? 6 A. This is as of April '87. I assume -- 7 it's the same date as what I have for the 8 committee meeting. 9 Q. And if you look over on the second 10 page, there is an explanation that Ms. Laurenson 11 makes of her strategy in dealing with a rising 12 interest rate environment. 13 A. Okay. 14 Q. And it involves a combination of IOs, 15 POs, caps, and puts, correct? 16 A. Actually, it says here that there were 17 three separate transactions. The high coupon 18 principal-only MBSs to hedge the Arbitrage 1 19 portfolio, the IO MBSs as a replacement for 20 mortgage-backed securities and investment 21 portfolio, and to purchase up to $100 million of 22 an interest rate cap that has a preferred stock 22679 1 subsidiary. 2 These are three separate activities to 3 basically impact on three different parts of the 4 institution's overall portfolio. 5 Q. Well, let me ask you to look over at 6 US3005592, which is Ms. Laurenson's report. 7 A. I'm sorry. It says Page 2, "mortgage 8 market April 8th, '87"? 9 Q. Yes, sir. 10 A. Okay. 11 Q. And it indicates that she says that 12 prepayments are going to be hard to predict in the 13 near term? 14 A. Okay. 15 Q. Well, what was the effect of her 16 strategy, Mr. Lapidus? Did you look at that? 17 A. I am looking at it now. (Witness 18 reviews the document.) Okay. Basically, she's 19 saying that if you assume that borrowers who have 20 higher coupon or higher interest rate loans 21 believe that the market has bottomed out and they 22 are going to be refinancing, that assuming there's 22680 1 going to be a rising market, assuming there's 2 going to be rising rates and prepayments, by 3 buying the PO, it would benefit the institution in 4 the effect that over some period, whatever that 5 period is, they are hoping that these individuals 6 will refinance their loans. 7 Q. Well, sir, maybe I can be more precise 8 in my question. I was trying to get at what the 9 effect of her strategy was because you were 10 criticizing her for buying POs because it didn't 11 protect against increasing rates. Right? 12 A. Yes, I believe I did. 13 Q. Let's look at Exhibit A1438 at Tab 365. 14 And I'm going to reference -- refer you to 15 Page US3005617. 16 A. 5617? 17 Q. Yes, sir. That's the sensitivity 18 analysis for the overall MBS portfolio. 19 A. Okay. 20 Q. And can you compare that to the 21 sensitivity from the prior week? 22 A. Okay. 22681 1 Q. The effect of her strategy has been to 2 protect the portfolio against rising rates, hasn't 3 it? 4 A. (Witness reviews the document.) Well, 5 first of all, there's two things. It looks like 6 there's such a significant shift, if this is 7 correct, in the -- on 5594, it says that the 8 base -- I assume value of the DARTs and AMPs is 9 1.6 million negative. And on 5617, it basically 10 shows that that's 18.8 million negative. There's 11 such a significant shift in the values, assuming 12 those are correct, that I don't know if you can be 13 really making a comparison as to whether or not 14 those POs and IOs provided the type of benefits 15 you're looking for. 16 My second issue with her assumption 17 here on Page 5592 is that it's basically a bet 18 that -- over that apparently period of time, she's 19 anticipating huge prepayments and she's buying 20 those POs for that. That, to me, is kind of 21 speculative. 22 Q. Sir, if you -- you didn't conclude that 22682 1 the -- that USAT was involved in speculative 2 activity, did you? 3 A. In this particular case? I don't think 4 I said that. 5 Q. Well, in fact, what you reported was 6 that they were not so much speculating as they 7 were trying to make money. Right? 8 A. Yes. 9 Q. And that was -- at the time that you 10 had done your examination, your conclusion was 11 they were not so much speculating as they were 12 simply trying to make money? 13 A. Well, there is a relationship between 14 speculation -- but you asked me to analyze this 15 today, making this comparison, and I'm telling you 16 that this is what I see now. 17 Q. Yes, sir. And if you go back and look 18 at these from week to week, you will see, will you 19 not, that what she did was to try to protect the 20 portfolio against rising rates? You don't know? 21 A. I don't know. You want me to come to a 22 conclusion based on this now? 22683 1 Q. No, sir, not today. But one could do 2 that. Right? And what you would do is go back 3 and look at what's reported in these investment 4 committee minutes and the various sensitivity 5 analyses. Right? 6 A. It's possible. I can't say what the 7 conclusion would be. 8 Q. Let me ask you -- let's go back. 9 A. Are we done with these pages? 10 Q. Yes, sir, I believe so. 11 Another conclusion that you expressed 12 in your comment on the first page -- and now we're 13 at the third paragraph -- was that the institution 14 also engaged in a form of gains trading. 15 Do you see that? 16 A. Yes. 17 Q. Now, is that a criticism? 18 A. Yes, it is. 19 Q. And that phrase, is that yours or 20 someone else's? 21 A. I don't know. 22 Q. We looked at this in your deposition, 22684 1 and we saw some -- we found some prior drafts of 2 your comment, didn't we? 3 A. Yes, we did. 4 Q. And this comment about gains trading 5 had been added, correct? 6 A. The -- I think the basic conclusion was 7 that we were not sure if that was in the comment 8 that I mailed to Brenda Bese. I thought we 9 decided that it was possible that it was since it 10 could have been one of the recommendations that 11 Larry Kenney made instead of just to put a word to 12 what I was describing. 13 Q. Your initial reaction to looking at it 14 was that it looks like someone else. 15 Do you recall that? 16 A. I think so. 17 Q. And eventually, you said this may -- 18 you indicated this may have been what you said or 19 what you were told to say. Right? 20 A. I don't know if "what I was told to 21 say" would be a proper definition. I believe -- I 22 know that Larry Kenney made a number of different 22685 1 recommendations to me in terms of my comment 2 writing. 3 Q. Well, let me ask you to look at 4 Page 241 of your deposition. At Line 5, I asked 5 you, "And now is that what you said or what you 6 were told to say?" 7 And you answered? 8 A. "I don't remember." 9 Q. "It could be either one?" 10 A. I said "yes" or "yeah." 11 Q. Now, gains trading is characterized, is 12 it not, Mr. Lapidus, by the purchase of a security 13 as an investment and the subsequent sale of the 14 same security at a profit within several days or 15 weeks? 16 A. That is one -- that is a general 17 statement as to what it could be. 18 Q. Well, what are you using as your 19 definition for gains trading? 20 A. Well, in the case of the institution, 21 their sales were possibly over a longer period of 22 time. I do not remember that they had -- I don't 22686 1 think they had very many pair-offs. They may have 2 had some. But the -- even though it was over a 3 longer period of time, the basic effect was the 4 same. They were selling securities, and they were 5 taking gains. 6 Q. Sir, but I'm asking you about your 7 definition. Where can we look to determine what 8 an appropriate definition of gains trading is? 9 A. I believe in one of those items that 10 you were going to use as an exhibit, there was a 11 definition of gains trading in there. 12 Q. Yes, sir. But that wasn't the one you 13 were using, was it? 14 A. No, not precisely. 15 Q. In fact, you don't know which one was 16 used because you're not sure who put that in 17 there. Right? 18 A. I guess so. 19 Q. Now, let me ask you to look at that 20 exhibit, which is Exhibit B4193 at Tab 1180. 21 A. I don't think this is the right one. 22 Q. I'm sorry. 22687 1 A. I don't think this has -- this isn't 2 the definition that I was looking for. 3 Q. Is this it? 4 A. Yeah, but -- 5 Q. Well, if you look over -- you have 6 Exhibit B4193. And if you look over at the page 7 with the Bates Nos. CN101330 -- 8 A. Yes. There is a definition of gains 9 trading in here similar to the one I was looking 10 at. 11 Q. Right. And it's characterized by, as I 12 indicated, a purchase and sale of the same 13 security at a profit within several days or weeks. 14 Right? 15 A. Yes. It says it is characterized by. 16 Q. And that's not what USAT was doing, was 17 it? 18 A. Well, they were not selling them within 19 several days or weeks. 20 Q. Right. And, in fact, your reference to 21 gains trading was to the rolldown. Right? 22 A. Yes. 22688 1 Q. It didn't include the value trades or 2 other things. You were talking about the 3 rolldown, correct? 4 A. I can't say 100 percent that it didn't 5 include some of the value trades since they were 6 doing those for profits. However, the majority of 7 what I saw as having most negative impact was the 8 rolldowns. 9 Q. And, in fact, you told me in your 10 deposition that it did not refer to the value 11 trades. Right? 12 A. If you say so. 13 Q. Well, let me -- Page 244. 14 A. I'll just assume you're right. 15 Q. Okay. For the record, one can check it 16 at 244. 17 A. Okay. 18 Q. Now, what you describe in here was 19 selling higher coupon MBS and reinvesting in lower 20 coupon MBS? 21 A. Yes. 22 Q. And that's the rolldown? 22689 1 A. That's what they described it as, yes. 2 Q. Now, gains trading must be motivated by 3 an intent to realize gains. Right? 4 A. Generally speaking, yes. 5 Q. And without such motivation, there 6 cannot be any gains trading, can there? 7 A. I guess I'd have to agree with you on 8 that. 9 Q. Now, did you realize that USAT was not 10 recognizing gains from the rolldown when the sales 11 were made? 12 A. I believe up to a certain point, they 13 weren't. And I believe they were told to by their 14 accountants, to recognize it. 15 Q. Yes, sir. They were not recognizing 16 gains at the time the decision was made to sell 17 the securities. Right? You've been told that 18 since, haven't you? 19 A. Yes. 20 Q. You didn't know that at the time you 21 wrote this comment? 22 A. No. 22690 1 Q. Now, it's not possible to have gains 2 trading if you're not recognizing the gains, is 3 it? 4 A. Are you sure that all of these sales 5 occurred before the situation? 6 Q. I am sure that they were not informed 7 until July of 1986 that the accountants required 8 them to recognize the gains. 9 A. And there were no rolldowns or 10 transactions after that date? 11 Q. Well, there are transactions after that 12 date. But I thought you told us that the rolldown 13 was what you were referring to. 14 A. Yes, I believe so. 15 Q. So, if, in fact, they were not 16 recognizing gains, they could not have been gains 17 trading. Right? You just didn't know that. It's 18 an easy mistake to make. You didn't know it? 19 A. I don't really know at this point. 20 Q. But you do know that you couldn't call 21 somebody -- couldn't say somebody was gains 22 trading if they weren't recognizing the gains. 22691 1 You know that, don't you? 2 A. I guess so. 3 Q. Now, at page -- going back to your 4 report at Page OW154319. This is under the 5 category of portfolio activity, Mr. Lapidus. You 6 indicate in that second full paragraph that the 7 yield on the mortgage-backs had decreased 410 8 basis points, correct? 9 A. Yes. 10 Q. Now, is that a criticism? 11 A. It's a statement of fact. And if you 12 want to consider it a criticism -- 13 Q. Well, I can tell you I don't want to 14 consider it a criticism; but my opinion probably 15 doesn't count. 16 The question is: Do you consider it a 17 criticism? 18 A. In and of itself, not really. 19 Q. What happened to interest rates during 20 that two-year period? 21 A. They dropped. 22 Q. And to say that the yield decreased is 22692 1 simply to say -- talking about mortgage-backs -- 2 is to say that interest rates have gone down, is 3 it not? 4 A. Well, there's also a direct 5 relationship between their sales activity and 6 their rolldown activity. 7 Q. Well, let's talk about that. Have you 8 looked -- what you're talking about is that they 9 sold -- as interest rates went down, they sold the 10 higher coupons and bought lower coupons? 11 A. Yes. And they also bought other lower 12 coupons as additional investments. 13 Q. Now -- and you were putting a cause and 14 effect relationship between that sales activity 15 and the decrease in the yield. Right? 16 A. Well, there is a relationship. 17 Q. Yes, sir. But what would have happened 18 if they hadn't sold and bought lower coupon? 19 A. There would have been some prepayments. 20 I don't know how much. 21 Q. And if there had been -- you haven't 22 looked at that, have you? 22693 1 A. And analyzed the impact of prepayments 2 on the securities they sold? No. 3 Q. Right. Or compared what would have 4 happened to them had they not sold and invested in 5 the lower coupons? You don't know whether it 6 would have been better or worse than this 410 7 basis point drop, do you? 8 A. No. 9 Q. And the fact of the matter is you're 10 not really interested in why it declined. You're 11 just observing that it did? 12 A. Yes. 13 Q. Now, you report that the, quote, 14 "unrealized loss" was in excess of $200 million. 15 A. For the assets and the hedges, yes. 16 Q. Is that a criticism? 17 A. I would say it is. 18 Q. What was the size of the portfolio? 19 A. Maybe about 3 billion, I think. I'm 20 not sure what the exact amount was at 21 September 30th. I'd have to look at my work 22 papers. 22694 1 Q. And an unrealized loss of 200 million 2 on a 3-billion-dollar portfolio is, what, about 3 6 percent? 4 A. I think so, but the losses weren't the 5 only things that -- their spread was minimal at 6 best. 7 Q. The spread had deteriorated? 8 A. Yes. 9 Q. But you wouldn't -- $200 million is, of 10 course, a lot of money in any situation. But on a 11 3-billion-dollar portfolio, is that a high, 12 medium, or low response to increased rates? 13 A. I would say it was medium to high. I 14 think my problem was, if you want to call it that, 15 is that they had basically locked in their losses 16 on their hedges and bought their mortgage-backed 17 securities at basically the lowest point. And the 18 combination of the fact -- when rates rose, it 19 actually -- their losses on their hedges actually 20 decreased while their losses on their assets 21 increased. 22 Q. What happened was interest rates went 22695 1 down dramatically and then up dramatically, 2 correct? 3 A. Basically. 4 Q. And a lot of thrift institutions were 5 hurt in those interest rate movements, correct? 6 A. Yes. 7 Q. Now, in the third paragraph on 8 Page 154 -- 9 THE COURT: Mr. Nickens, we'll take a 10 short recess. 11 12 (Whereupon, a short break was taken 13 from 3:17 p.m. to 3:40 p.m.) 14 15 THE COURT: Be seated, please. We'll 16 be back on the record. 17 Mr. Nickens, you may continue. 18 MR. NICKENS: Thank you, Your Honor. 19 Q. (BY MR. NICKENS) Mr. Lapidus, before 20 we go on to the minutes, I would like to return to 21 a subject we discussed this morning. I'm going to 22 give you a bunch of documents that -- I will tell 22696 1 you these flags and markings are things that I put 2 on there in looking at them after I had received 3 these documents as a part of the production. 4 Can you -- I would like to refer you 5 back to this discussion this morning about 6 Exhibit B4294 which were the documents -- the 7 discussion about the documents that you received 8 from the FDIC. 9 A. Okay. 10 Q. And do you remember we discussed the 11 index where you had marked Y and N and question 12 mark? 13 A. Yes, sir. 14 Q. And you indicated that you were 15 indicating in response to the question about 16 documents that you wanted to see? 17 A. Yes. 18 Q. Now, if you look at that index and the 19 stack of documents that I've given you, can you 20 confirm that they conform to that index? 21 A. Let's see. (Witness reviews the 22 documents.) 22697 1 Is the index you're talking about the 2 one where -- the typed one where it has the Ns and 3 Ys typed? 4 Q. Well, there are two parts of it. Why 5 don't you look at the one -- let's see if we can 6 identify this. There is no Bates number, but it 7 is attached to the memorandum to you of 8 January 17th from Eileen Avila. 9 A. The one that has -- starts at No. 1? 10 Q. Yes, sir. 11 MR. VEIS: Mr. Nickens, what do these 12 documents purport to be? 13 MR. NICKENS: These are part of the 14 documents that were produced to me as documents 15 that Mr. Lapidus had. 16 MR. VEIS: Are they marked with an 17 exhibit number of any kind? 18 MR. NICKENS: No, because I've had -- 19 I've explained to the Court I had to put this 20 together over lunch. I've taken a sample of these 21 documents which I'm going to ask him about, but I 22 want him to have the complete ones. But we didn't 22698 1 want to make nine copies of this 7-inch -- which 2 are all copies of documents which are essentially 3 in the record already, Your Honor. The 4 significance of them being the questions I'm going 5 to get to about his review. I will make them 6 available for them to look at to confirm that or 7 whatever they want to do. They were part of the 8 documents produced to me. 9 MR. VEIS: In the first instance, we 10 weren't provided -- I mean, other than a vague 11 notice that Mr. Nickens might use documents that 12 were exhibits in Mr. Lapidus' deposition, we were 13 given no notice of this. 14 Second, Mr. Lapidus has testified both 15 in his deposition and today that he didn't look at 16 the documents. 17 So, we don't understand what the point 18 of pursuing this is at all. 19 MR. NICKENS: Well, I'll get to that 20 pretty soon here, Your Honor. 21 THE COURT: Okay. Let's proceed. 22 Q. (BY MR. NICKENS) Does it appear, 22699 1 Mr. Lapidus, that this stack of documents I've 2 given you conforms to the index that was supplied 3 to you? 4 A. (Witness reviews the documents.) Can 5 I just save time and assume that it is? 6 Q. I'll make them available to -- 7 MR. VEIS: We don't want that, Your 8 Honor. If we're going to identify these as 9 documents, then they ought to be identified. We 10 don't want him making assumptions. 11 Q. (BY MR. NICKENS) Let me ask you to 12 look over to where the blue page is in the stack. 13 Look over to that blue page. 14 THE COURT: It seems to me this is a 15 legitimate inquiry. We have a list of documents 16 on Exhibit B4294 that we received this morning, 17 and it has his handwriting -- Mr. Lapidus' 18 handwriting on there. 19 MR. VEIS: That's correct, Your Honor. 20 THE COURT: It seems to me that that is 21 sufficient connection to have these other 22 documents identified and see if they are the ones 22700 1 that are indexed on that. 2 MR. VEIS: In that case, Your Honor, 3 they should be marked and identified specifically 4 in some fashion. One of the problems is that they 5 are not marked. There is no exhibit number. 6 MR. NICKENS: Your Honor, I'm happy to 7 leave them here and have them marked and then do 8 whatever we want. We were unable to do that in 9 the usual process because of the shortage of time 10 and the volume of the documents. I wouldn't want 11 to keep Mr. Lapidus here for that purpose. But 12 certainly, I will make them available to 13 enforcement to examine whatever -- I have gone 14 through these documents. And they appear, one by 15 one, to conform to the index that Mr. Lapidus had. 16 MR. VEIS: Your Honor, we had a week's 17 break, more than a week's break. Mr. Nickens 18 identified quite a number of other documents to us 19 first with a very large -- with a nine-page list 20 and subsequently cut it down to a smaller list 21 beginning, I believe, last Friday which we 22 received two more faxed lists yesterday. But now 22701 1 we have a stack of documents that looks to be 2 about 6 inches thick that were not designated 3 previous to just now. If Mr. Nickens -- 4 Mr. Nickens has had a week to duplicate these, to 5 designate them, and do whatever he has to do. 6 THE COURT: What's your objection? 7 MR. VEIS: First off, I question the 8 relevance. And second, it violates the procedures 9 that we've agreed upon in terms of we had no 10 notice of this. 11 MR. NICKENS: Your Honor, I really had 12 no notion of the significance of these documents 13 until the testimony this morning. This was done 14 over lunch. And the significance of it is that 15 many of them are marked with his initials. He's 16 testified he never reviewed anything, and the 17 documents are marked with his initials or his -- 18 his Ys and Ns. 19 THE WITNESS: I don't think -- I don't 20 know if they are or not. 21 MR. NICKENS: Well, I'll demonstrate 22 that for you, Mr. Lapidus, if we can get to it. 22702 1 THE COURT: All right. I'd like to 2 proceed. I mean, it looks like if we're going to 3 put that stack of documents in, we would have 4 another 120 exhibits. That seems to be what's 5 listed on the index. I don't think that's 6 necessary. But some questions on whether they are 7 identified on the index seems to be appropriate. 8 MR. GUIDO: Your Honor, I know we have 9 one lawyer, but the procedure is rather strange. 10 Mr. Nickens has just indicated that 11 these documents are essentially, in his view, 12 different documents than are already in the record 13 because they have some notation on them, Your 14 Honor. 15 It seems to me that for purposes of 16 adjudicating the issue of what Mr. Nickens just 17 alleged to the Court that the documents are going 18 to have to be part of the record or they at least 19 have to be identified in some way. And Mr. Veis 20 should have the opportunity to be able to read 21 along with the witness, as should the Court, to 22 ascertain whether or not what Mr. Nickens and the 22703 1 witness are talking about, the Court or Mr. Veis 2 have any idea of what's being discussed here. 3 THE COURT: I'm not objecting to the 4 receipt of certain of these documents. I'm just 5 questioning whether it's necessary to put the 6 whole stack into the record, to mark them as 7 exhibits. I don't know where Mr. Nickens is going 8 on this. 9 MR. NICKENS: Your Honor, I have taken 10 a few of the documents which I have marked with an 11 exhibit reference that I planned to offer just 12 illustrating where he has put his "N" or "Y" on 13 the documents. That is what I plan to put in the 14 record. But obviously, the whole stack which was 15 produced to me by the OTS is available to them and 16 they can be looked at in any way they want. I 17 just -- they are copies of many of the exhibits 18 that are in this case. 19 MR. VEIS: Your Honor, it strikes me 20 that I think we've lost -- recognizing Mr. Nickens 21 has the right to cross-examine in the fashion he 22 believes is appropriate, the fact of the matter is 22704 1 Mr. Lapidus came in here to testify about the 2 report that he prepared, the comment enclosure 3 aid, in his work papers and that's what he's 4 testified about. 5 I think that this whole issue of 6 subsequent meetings with the FDIC and these 7 documents is a frolicking detour. It simply -- it 8 has nothing to do with what he wrote in 1988, and 9 that's what he's testifying about. 10 THE COURT: Well, do we know when he 11 reviewed these documents, when he put this "Y" and 12 "N" on? 13 MR. VEIS: Well, Your Honor, it appears 14 it was in 1992 based upon what was -- 15 THE COURT: All right. He put the 16 designation on then, but isn't that an indication 17 that he had reviewed them prior to his report? 18 MR. VEIS: I'm not sure that that 19 indicates that he reviewed them at all. I think 20 that it indicates, as he testified, he reviewed 21 the index. 22 THE COURT: All right. Well, let's get 22705 1 the testimony on this. 2 Q. (BY MR. NICKENS) Mr. Lapidus -- 3 A. Can I clarify something? 4 Q. Yes. 5 A. If it would make it easier? 6 Q. From my point of view. Yes. What 7 would you like to say? 8 A. This January '92 fax transmittal that 9 was from -- basically from me to Eileen Avila says 10 these are the documents that I marked "yes" or 11 "no" that I think are -- might be useful. This is 12 January '92, not during -- it's obviously well 13 past the time I wrote the comment. 14 Now, these documents that you've told 15 me under the blue sheet that have Ys and Ns on 16 them, I don't know that I marked these Ys and Ns. 17 It looked like these Ys and Ns were marked by some 18 person based on the Ys and Ns that I marked. 19 Q. Well, let's compare the Ys and Ns, 20 Mr. Lapidus. Are you saying you did not mark 21 these documents? 22 A. I'm saying I don't know if I marked 22706 1 them. And I don't know why -- if I marked this 2 list here, why I would have marked them there? 3 Q. Well, that's the question that we have. 4 But you say you don't know? 5 A. I don't know. I don't think I -- I 6 don't think I did mark them. I think these were 7 marked by someone else in response to my fax 8 transmittal that said that these were the ones, 9 after reading the summaries, that I thought were 10 important. 11 Q. Mr. Lapidus, you were -- part of what 12 you were asked by the FDIC to do was to recreate 13 your work papers, wasn't it? 14 A. I think there was some kind of memo in 15 there about that. I don't -- 16 Q. Why was it necessary to recreate the 17 work papers? 18 A. I believe there was some confusion 19 there. I think they wanted me to help them create 20 my work papers and the analysis of the purchase 21 and sales using my format to look at every single 22 transaction. And I think we discussed that in the 22707 1 deposition, that I helped them set up work papers 2 and that they had people fill them in. 3 Q. Let me show you an exhibit that we have 4 marked as B4300. And the first one is a 5 December 4th, 1987 memo from Mr. Barclay to 6 Mr. Berner. And there is an "N" -- there is an 7 "N" that appears on the upper right-hand side of 8 that paper. 9 A. Yes. 10 Q. Is that your "N"? 11 A. As I indicated, I don't know if it is 12 or not. 13 Q. Even comparing it to the Ns and Ys that 14 you identified on the index that were yours, you 15 can't say that's your "N"? 16 A. No. 17 Q. Look at the next document, the "Y," 18 which is the strategic planning meeting 19 December 6, 1987. 20 You can't identify that as your "Y"? 21 A. Actually, if I -- I'm not a handwriting 22 analyst. But if I look at this page here, 22708 1 whatever it's called, where it starts out at the 2 top -- I guess Document No. 115, assuming that's 3 the document number, 11/18/87, that particular 4 page, if I look at the Ys that are there and the 5 "Y" on this page, they do not look like the same 6 kind of Ys. 7 Q. So, you can't identify this as your own 8 handwriting? 9 A. I don't think so. My -- that "Y" is 10 straight. My "Y" seems to curve. 11 MR. NICKENS: Your Honor, we offer 12 B4300, and we'll make available the entire stack 13 for examination for whoever wants to use it. 14 MR. VEIS: Your Honor, if I might just 15 have a moment to review this. 16 With the exception of the final 17 document -- Mr. Nickens, I hope you'll correct me 18 if I'm wrong -- it appears that all of the other 19 documents are either Federal Home Loan Bank, in 20 the case of the first document, or USAT-generated 21 documents. 22 On that basis, we have no objection to 22709 1 their admission. In fact, I believe Mr. Nickens 2 has represented that they are already in evidence. 3 Is that correct, sir? 4 MR. NICKENS: Not all of them. I have 5 not made that effort, Your Honor. They do appear 6 to be mostly documents that are in evidence. 7 Q. (BY MR. NICKENS) Now, Mr. Lapidus, I 8 want to -- 9 MR. NICKENS: I'm sorry, Your Honor. I 10 may have interrupted your ruling. 11 THE COURT: I'll receive the document. 12 Q. (BY MR. NICKENS) Mr. Lapidus, I'm 13 going to show you the front page of B4300 and the 14 first page of the -- your fax to Ms. Avila, which 15 is marked with what you said were your Ns and Ys. 16 Are you telling me those two Ns are not 17 from the same hand? 18 MR. VEIS: Objection. Asked and 19 answered, Your Honor. 20 THE COURT: Well, let's have it one 21 more time. 22 A. I do not think that they are -- that 22710 1 the B4300, that that "N" and "Y" are my 2 handwriting. 3 Q. (BY MR. NICKENS) And looking at the 4 next page, you're telling us that that -- 5 THE COURT: Which page is that on, 6 Mr. Nickens? 7 MR. NICKENS: Your Honor, I'm sorry. 8 It's the one that appears as the second page of 9 B4300, and it is entitled United Savings 10 Association of Texas Strategic Planning Meeting, 11 December 6th, 1987, and is marked with a "Y." 12 Q. (BY MR. NICKENS) That's not your "Y"? 13 A. I don't think it is. 14 Q. Mr. Lapidus, you testified concerning 15 some conversations with Mr. Bruno; is that right? 16 A. Yes. 17 Q. And you testified that Mr. Bruno 18 supplied you with certain exhibits that had not 19 been made part of the investment committee 20 minutes? 21 A. Yes. 22 Q. To whom were those exhibits addressed? 22711 1 A. I think there was one to several people 2 that were members of the investment committee, and 3 I think there was one to -- either Mr. Williams or 4 Mr. Crow. And the third one -- I'd have to look 5 at them to tell you the exact -- the first one is 6 to Mike Crow. 7 MR. VEIS: Do you have an exhibit 8 number? 9 MR. NICKENS: This is Exhibit A14105, 10 and we're looking at Page OW182275. 11 Q. (BY MR. NICKENS) To Mr. Crow? 12 A. The second one is to Jenard Gross and 13 Mike Crow. 14 Q. Excuse me. You're looking at OW182335. 15 A. And the third one is to Jenard Gross, 16 Larry Connell, and Mike Crow. 17 Q. And you're looking at OW182340, 18 correct? 19 A. Yes. 20 Q. Now, none of them are addressed to the 21 investment committee, are they? 22 A. No, they are not. 22712 1 Q. And were any of them addressed to 2 Mr. Berner, the secretary of the investment 3 committee? 4 A. I don't believe so. 5 Q. And were any of them a part of any 6 report that Mr. Bruno made to the investment 7 committee? 8 A. I don't know. 9 Q. Did Mr. Bruno tell you that he 10 expressed the ideas reflected in these memoranda 11 in investment committee minutes and those thoughts 12 were recorded in those minutes? 13 A. I don't remember. 14 Q. Did he tell you that he was given the 15 opportunity to present his views to the board of 16 directors of USAT? 17 A. I don't know. 18 Q. Now, have you actually read the memos? 19 A. Yes. 20 Q. And isn't the gist of them that 21 Mr. Bruno was urging the management of USAT to 22 take greater risk with its mortgage-backed 22713 1 securities portfolio? 2 A. I think that would have to be an 3 assumption on my part. If I remember correctly, 4 some of the activities he was suggesting might be 5 considered speculative or -- "speculative" is not 6 the right word. Might be considered to be riskier 7 than what they were doing currently. 8 Q. Okay. Now, you were in court when you 9 heard Mr. Veis say that OTS enforcement had not 10 seen these memos until the time of your 11 deposition? 12 A. Are you talking about the memos with my 13 handwriting on them, or are you talking about -- 14 Q. Yes, sir. The memos with your 15 handwriting. 16 A. I believe that is true. 17 Q. And your deposition was taken in the 18 early part of August? 19 A. Yes, I think so. 20 Q. Let me show you exhibits that we have 21 marked as Exhibits 4292 and 4293. I'm sorry. 22 B4292 and B4293. 22714 1 A. (Witness reviews the documents.) 2 Q. Mr. Lapidus, do you have B4292 and 3 B4293 in front of you? 4 A. Yes. 5 Q. And B4292 is a copy of the May 17th 6 memo with your notations? 7 A. Yes, it is. 8 Q. And it bears the indication that it 9 came from the work papers? 10 A. Yes. 11 Q. And it bears an exhibit reference 12 called Crouser Exhibit 44? 13 A. And 46. 14 Q. Yes, sir. Well, let's concentrate on 15 44 first. 16 What's the date of that exhibit 17 reference? 18 A. 4/30/97. There is some, I guess, 19 initials after that. 20 MR. NICKENS: And Your Honor, I will 21 say this document is in as T6079 at Tab 246 22 without the Crouser exhibit label. 22715 1 Q. (BY MR. NICKENS) Do you know what 2 that Crouser exhibit label means, Mr. Lapidus? 3 A. Well, I assume it's like from my 4 deposition. It was one of the exhibits from 5 Crouser. 6 Q. On April 30th, 1987? Would that be -- 7 A. Yeah, I guess so. I'm not an expert in 8 this field. 9 Q. And then similarly with B4293, it bears 10 the exhibit label for Ms. Crouser Exhibit 46 of 11 the same date? 12 A. Yes. 13 MR. NICKENS: Your Honor, we offer 14 B4292 and B4293. 15 MR. VEIS: No objection, Your Honor. 16 THE COURT: Received. 17 Q. (BY MR. NICKENS) Now, if we assume 18 that OTS attended the deposition of Ms. Crouser, 19 it was clear that Mr. Veis was mistaken in 20 indicating they hadn't had these documents prior 21 to that time? 22 MR. VEIS: Your Honor, what I stated -- 22716 1 and I'm not sure that impeaching a lawyer through 2 a witness is exactly the way to go here. But what 3 I stated was that those documents were not 4 included in the work papers in the files of the 5 OTS. 6 Now, the fact that two loose documents 7 were in a deposition that lasted some four days 8 and was attended by an OTS attorney doesn't 9 necessarily mean anything other than that the 10 other side had them and used two documents. 11 The fact of the matter is that those 12 documents were not returned in the work paper 13 files, and the work papers files were what 14 Mr. Lapidus was shown by me and what I reviewed 15 when I discussed these matters with Mr. Lapidus. 16 So, there is no mistake on my part as 17 to what was available out of those work papers. 18 Now, it is correct that the Crouser exhibits are 19 part of the record of the deposition and the 20 proceeding. But my point remains that when the 21 work paper files which are two exhibits that are 22 well over an inch thick, these work papers, these 22717 1 documents were not returned to OTS' work paper 2 files following the imaging. Now, said, there is 3 no explanation. We make no assumptions as to what 4 the explanation was. The fact of the matter is 5 they weren't there. Mr. Lapidus didn't see them. 6 I didn't see them. I didn't show them to 7 Mr. Lapidus because I didn't have them to show to 8 him. That's the explanation. 9 MR. EISENHART: Your Honor, may I make 10 one point here? Mr. Veis talks about documents 11 not having been returned to OTS following the 12 imaging. 13 MR. VEIS: To the file. 14 MR. EISENHART: The fact is documents 15 were imaged on OTS' premises. They were copied on 16 OTS' premises. They never left the premises. 17 It's not a question of anything having been 18 returned. Nothing ever went out. 19 MR. VEIS: Well, Your Honor, the 20 documents were imaged on OTS' premises. The 21 theory was that they would be returned to the 22 files from whence they came following that 22718 1 imaging. And the fact is that these documents 2 were not returned to those files. And for that 3 reason, they were unavailable to us. 4 Now, they may have been put in another 5 file. I don't know. But the fact is that there 6 are hundreds of feet of files. Ms. Carlton, for 7 example, testified there are 30 boxes of work 8 papers relating to the 1986 and 1987 examinations 9 alone. There are thousands, if not a million, 10 pages of documents in this case. 11 If documents are misplaced in a file 12 with no indication of where they have gone, it is 13 truly chasing a needle in a haystack. So, 14 Mr. Eisenhart's point is well taken. They may 15 well be on the premises of OTS or they may not. 16 We don't know. But the fact of the matter is 17 since they weren't returned to the file from 18 whence they came, they weren't available to us. 19 MR. NICKENS: Your Honor, I don't want 20 to get too far away from the point here. The 21 point was having to do with his testimony about 22 Mr. Bruno and whether or not -- the question that 22719 1 came up was why wasn't Mr. Bruno questioned about 2 this. Mr. Veis offered the explanation at the 3 time that they didn't have the documents. Now, in 4 fact, it's very clear they did have the documents. 5 What I want to ask Mr. Lapidus about is 6 whether he was questioned concerning his 7 conversations with Mr. Bruno which he frankly has 8 indicated in his deposition, which I assume he 9 will say, that he had not told the OTS about these 10 conversations at the time he was interviewed. 11 That's the point that I'm trying to get into the 12 record. 13 THE COURT: All right. Pose your 14 question? 15 Q. (BY MR. NICKENS) Mr. Lapidus, you met 16 on two separate occasions with the OTS counsel 17 when you were being interviewed prior to being 18 identified as a witness in this matter, correct? 19 A. Yes. 20 Q. And you didn't tell the OTS enforcement 21 of your conversations with Mr. Bruno at that time? 22 A. No. 22720 1 Q. You didn't mention these Bruno memos at 2 those meetings? 3 A. I did not mention those memos 4 specifically, no. 5 Q. Now, I want to ask you some questions 6 about the review of the investment committee 7 minutes if I can find my place. 8 Now, in many instances, you didn't copy 9 all of the pages of the minutes. Right? 10 A. That is correct. 11 Q. And in several instances, you didn't 12 copy any pages from the weekly meetings? 13 A. I guess so. I don't know. 14 Q. Now, does that mean that you didn't 15 review them? 16 A. No. 17 Q. Well, how do we know they were reviewed 18 if we don't have any notes or copies? 19 A. I don't know. As I said, when I did 20 the investment committee minutes, I decided to 21 copy those pages that I thought were pertinent to 22 my review. Those pages I did not think pertinent, 22721 1 I did not copy. 2 Q. So, what happens is that you didn't 3 document your review? 4 A. I'm sorry. I don't understand your 5 question. 6 Q. Well, you're telling us that we should 7 not conclude from the fact that there are no 8 copies of the investment committee minutes of many 9 weeks -- we should not conclude from that that you 10 didn't review those minutes? 11 A. Yes, I would say that. 12 Q. And so -- but you would agree with me 13 that you failed to document your review, if that 14 is the case? 15 A. If you mean that I didn't write down 16 "reviewed X meeting," did not bother to make any 17 copies, I did not do that. 18 Q. We should not conclude that you didn't 19 review the minutes from the mere fact that you 20 didn't document your review? 21 A. I'm sorry. I'm confused. 22 Q. I'll try again. 22722 1 And I'll show you some of this as we 2 move along here a little bit. But just because 3 there are no copies made of any particular meeting 4 doesn't mean you didn't read the minutes from that 5 meeting. Right? 6 A. Yes. 7 Q. And -- but the absence of that 8 documentation -- that is, a copy or a note -- 9 should not lead us to conclude that you didn't 10 review those meetings? 11 A. As far as I know, I read all the 12 meeting -- I reviewed all the meetings and I 13 copied what I thought was pertinent. If I didn't 14 copy it, I read it but I didn't think it was 15 important. 16 Q. And so, what we have is that you didn't 17 document all of your review? 18 A. I guess so. 19 Q. Okay. Now, would you hold USAT to any 20 higher standard than you hold yourself for 21 documentation? 22 A. Yes. 22723 1 Q. They have some higher obligation to 2 document their meetings than you do to document 3 your criticisms? 4 A. Where I made a criticism, I documented 5 it. I'm not sure what you're trying to get at. 6 Q. Well, let's look at some of the 7 minutes. Let me ask you to look at Exhibit A1402 8 at Tab 539. 9 A. 14102? 10 Q. 1402. A1402. 11 A. I'm sorry. I guess I'm looking at the 12 wrong place. 13 Q. Do you have that in front of you? 14 A. Yes. 15 Q. Now, this is a situation where -- well, 16 you may want to look at OW181986, which are the 17 pages you copied from these minutes which should 18 be in A14101. 19 MR. VEIS: Could we have that Bates 20 number again? 21 MR. NICKENS: The OW number is 181986. 22 Q. (BY MR. NICKENS) Do you have both 22724 1 documents in front of you, Mr. Lapidus? 2 A. Yes. 3 Q. And I will tell you that your document 4 indicates 7/16/86 investment committee minutes. 5 A. Yes. 6 Q. And I will tell you that I checked that 7 and it appears that that was a mistake, that they 8 came from the July 23rd, 1986 minutes. 9 Are you willing to accept that? 10 A. May I ask you a question? 11 Q. Yes, sir. I don't know if I can 12 answer, but I will -- 13 A. Well, in Exhibit A1402, there is a date 14 on the top, 7/16/86. Is this -- 15 Q. Oh, I see what you're saying. Okay. 16 A. It looks like that's something the 17 institution -- 18 Q. That was something on the document. 19 You didn't put in July 16th, 1986? 20 A. Apparently not. I just wrote in 21 "investment committee" underneath that. 22 Q. I apologize, Mr. Lapidus. 22725 1 In any event, we're looking at the 2 minutes of July 23rd. You chose to copy these two 3 pages. Right? 4 A. It looks like I copied other pages, I 5 think, going backwards. But -- 6 Q. From those minutes? 7 A. I don't know. Are these the only two 8 pages I copied from these minutes, or did I copy 9 more? 10 Q. Well, sir, I've already made a mistake. 11 But I believe so, Mr. Lapidus. That was my 12 purpose in illustrating that point. 13 MR. VEIS: Your Honor, there appears to 14 be some -- there appears to be a memo dated 15 August 25th following that. So, assuming the 16 dates are correct, one would assume that's not a 17 part of those same minutes. 18 THE COURT: I think we'd better have 19 the question posed again and see if the witness 20 can make -- 21 MR. NICKENS: Yes, Your Honor. 22 Q. (BY MR. NICKENS) Mr. Lapidus, are the 22726 1 only -- are those the only two pages that you 2 copied from the minutes of July 23rd, 1986, which 3 is Exhibit A1402? 4 A. It looks to be. 5 Q. And you did not copy the minutes 6 themselves? 7 A. It does not appear that I did. 8 Q. And among the things that were said 9 there on the second page, W101013, the minutes 10 that you did not copy, was the instruction that a 11 similar list was to be provided each month. 12 A. Okay. 13 Q. Do you see that? 14 A. Where you have it highlighted? 15 Q. Well -- 16 A. It's highlighted in here. 17 Q. Yeah. You shouldn't have a highlighted 18 version. 19 A. I'll look at the other page. Okay. 20 This one isn't highlighted. The third paragraph 21 of the second page says, "After full discussion, 22 it was determined that Mr. Phillips should present 22727 1 a similar list at the second meeting of each month 2 and discuss these transactions in detail," 3 referring to a list of mortgage-backed security 4 trades for July '86 which is discussed in the 5 previous paragraph. 6 Q. And there was a reference to Smith 7 Breeden or Drexel Burnham making a presentation 8 discussing mortgage-backed security tactics and 9 strategies? 10 A. Yes, there is. 11 Q. Did you not deem that important to your 12 mission, Mr. Lapidus? 13 A. Well, you know, the -- if you look -- I 14 have a copy of a Smith Breeden presentation. I 15 don't see anything material in this -- in those 16 paragraphs that would be necessary for me to copy 17 it. 18 Q. So, you didn't deem that important to 19 your mission? 20 A. No. If I -- if I read the presentation 21 and found it worthwhile, I would put it in. The 22 fact that they basically were talking about doing 22728 1 something that they might do and the only thing of 2 interest was the fact that they had a list of the 3 trades. And that's what I included, a list of the 4 trades. 5 Q. Let me ask you to look at Exhibit A1412 6 at Tab 343. 7 A. Is this something I already have? 8 Q. No. 9 A. Okay. This is minutes of the 10 investment committee, October 8th, '86. 11 Q. And specifically, I want to ask you 12 about Exhibit 3004 -- excuse me -- Page 13 No. US3004917, which is entitled United Regarding 14 Mortgage-backed Securities Trading Policy. 15 A. I see the piece of paper and the title. 16 Q. And you didn't copy that? Let me ask 17 you to assume that. 18 A. Okay. 19 Q. Was this document important to your 20 mission? 21 A. It might have been. Then again, it 22 might not have been. I think the title to this 22729 1 policy is not exactly accurate in terms of -- 2 Q. The fact of the matter is you didn't 3 check prior policy -- investment policies, did 4 you? 5 A. I think we already discussed that, and 6 I said no. 7 Q. All right. You had determined that the 8 policy in effect at the time of your examination 9 was adequate. Right? 10 A. Yes. 11 Q. And you did not go back and try to 12 check prior policies? 13 A. No, I did not. 14 Q. So, you don't know what -- you had some 15 questions for Mr. Veis about, you know, what would 16 be adequate. 17 You don't know what's in the record 18 with regard to those policies because that was not 19 something you were looking at. Right? 20 A. Yes. 21 Q. Now, let me ask you to look at 22 Exhibit A1414 at Tab 345. I asked you about this 22730 1 once before earlier today. 2 A. I have it then? 3 Q. You should have it. 4 A. Okay. A1414 is the minutes of the 5 investment committee, October 22nd, '86. 6 Q. Yes, sir. And look at the second page, 7 the second paragraph there dealing with 8 Ms. Laurenson. 9 A. (Witness reviews the document.) Okay. 10 Q. And then I questioned you earlier about 11 US3004953. 12 Would you say that the purpose of the 13 trades were adequately set forth in these minutes? 14 A. I thought 4953 had to do with the IOs 15 or POs or whatever they were. 16 Q. IOs, yes, sir. 17 A. I believe the second paragraph of the 18 second page is talking about too many Freddie Mac 19 9 percent mortgage-backed securities. I guess -- 20 Q. And the second paragraph is talking 21 about a proposed transaction? 22 A. It says, "She noted that the 22731 1 association had, perhaps, too many of Freddie Mac 2 9 percent mortgage-backed securities and that she 3 would be attempting to take profits in the 4 securities and diversify the portfolio." 5 Q. Let me ask you -- I want to try to 6 shorten this, Mr. Lapidus. Let me ask you to look 7 at Exhibit 1416 at Tab 347. And I want to refer 8 you to Page No. US3005047, which is a document 9 that at the top says Summary of Swaps to Take 10 Profits. 11 A. Yes. 12 Q. Would you conclude that at least one 13 purpose of the swaps was to take profits? 14 A. That's what it says. That's the title 15 of it. 16 Q. Let me ask you to look at Exhibit 1417, 17 Tab 348. 18 A. Okay. 19 Q. And with particular reference to 20 US3010347. 21 MR. GUIDO: What's that number again? 22 MR. NICKENS: US3010347. 22732 1 Q. (BY MR. NICKENS) Do you see there 2 setting out the goals for each segment of the 3 portfolio? 4 A. Yes. 5 Q. Including, under "investment," "use 6 opportunities to take profits and swap to higher 7 yielding securities. Use opportunities to shorten 8 swap maturities. Take fee income and reduce swap 9 yields by writing puts on five- to 10-year 10 treasuries." 11 Do you see that? 12 A. Yes. 13 Q. Would this be the sort of information 14 that would enlighten you in terms of trying to 15 determine what the portfolio manager's goals were? 16 A. It might. 17 Q. Let me ask you to look at Exhibit 1419, 18 please, at Tab 350. 19 A. Okay. 20 Q. By the way, you did note that when 21 Ms. Laurenson came, she instituted a reporting 22 system that included a market review and a 22733 1 sensitivity analysis and daily mark-to-market and 2 information of that nature, did you not? 3 A. I have seen it in the minutes, that she 4 did have reports. 5 Q. And that same format was carried 6 forward by Mr. Bruno throughout 1988, was it not? 7 A. I believe so. 8 Q. Now, with regard to Exhibit A1419, let 9 me ask you to look over at Page US301314. It says 10 "activities" at the top. 11 A. That's 313. 12 Q. Okay. This was typical of 13 Ms. Laurenson's format, correct? 14 A. Yeah. I mean, it looks familiar. 15 Q. And she would list activities, next 16 week's plans, and then profit and loss highlights? 17 A. I don't remember if she did this every 18 week, but -- 19 Q. Well, is this a good format or 20 inadequate format, Mr. Lapidus? 21 A. It's okay. 22 Q. Okay. And under -- and in this 22734 1 particular document, it notes that next week's 2 plan was to continue to take profits, primarily 3 from the investment portfolio, and look for buying 4 opportunities in the MBS sub. Correct? 5 A. That's what it says, yes. 6 Q. And would that be instructive in trying 7 to understand what the purpose was of various 8 transactions that followed? 9 A. Well, it's a goal. You'd have to look 10 and see what they actually did. 11 Q. And then in Footnote No. 2, 12 Ms. Laurenson writes, "Unrealized gains of close 13 to $14 million exist in a USAT investments 14 portfolio. Taking gains today, however, would 15 result in a lowered yield on the remaining 16 portfolio. The decision has to be made whether or 17 not this income is more valuable now in a lump sum 18 or would benefit the company more as a part of a 19 larger, ongoing interest rate, interest income 20 stream." 21 Do you see that? 22 A. Yes. 22735 1 Q. And that was set forth in the 2 investment committee minutes. Right? 3 A. Yes. 4 Q. All right. Now, is that a dilemma that 5 most investors in income-producing properties 6 face? 7 A. I'm sorry. 8 Q. Well, a person that owns an 9 income-producing property has to make a decision 10 of whether to hold it for the income or perhaps to 11 sell it and redeploy the assets, doesn't he? 12 A. Well, that's true. 13 Q. And that's a decision that one who has 14 income-producing property has to make on a 15 day-to-day basis? 16 A. Well, there are also other 17 considerations such as taxes and -- 18 Q. Sure. 19 A. -- the impact of -- 20 Q. Is there anything wrong with making 21 those kind of considerations? 22 A. Well, I think you're trying to talk 22736 1 about apples and oranges, comparing income 2 properties to an institution's investment 3 portfolio. 4 Q. Well, even in an investment portfolio, 5 doesn't the institution have to look to make a 6 decision as to whether that future income is more 7 valuable as such or selling the property may be 8 more valuable at the time? Isn't that an 9 appropriate decision-making process? 10 A. I don't think so. I mean, there's some 11 very specific accounting rules that have to do 12 with whether you have an investment or whether you 13 have a trading portfolio. And then you have the 14 other situation where you're talking about the 15 unrealized gains on their investment portfolio and 16 not talking about the hedges that exist, if they 17 do exist, against those particular gains and how 18 that's going to impact on the institution. 19 Now, she clearly states that by taking 20 gains, you're going to have lower yields. And 21 now, according to this, as far as I know, she's 22 talking about their investment portfolio and not 22737 1 their trading portfolio. And it doesn't seem to 2 me to be -- I don't know. I don't think I have 3 the whole picture here. But it doesn't -- it 4 seems to me that she's talking about trading her 5 portfolio. 6 Q. Well, certainly making those 7 considerations, you wouldn't think there is 8 anything wrong with that, would you? 9 A. I'm sorry. I thought I just said I 10 would have problems with their doing that with 11 their investment portfolio. 12 Q. Well, from an accounting point of view, 13 that would be reviewed by the accountants? 14 A. Examiners also review their activities. 15 And when they -- you know, they might review that 16 activity. 17 Q. All right. But you didn't look at the 18 1986 or 1987 exams? 19 A. No, I did not. 20 Q. Mr. Lapidus, USAT was put into 21 receivership and the new entity was sold to 22 Mr. Ranieri at the end of 1988, just, you know, in 22738 1 the midst of your completing your project, 2 correct? 3 A. That's what has been represented to me, 4 yes. 5 Q. Were you part of the process to deliver 6 this bank to Mr. Ranieri? 7 A. I don't think so. 8 MR. NICKENS: That's all I have, Your 9 Honor. 10 THE COURT: Are you going to have some 11 redirect, Mr. Veis? 12 MR. VEIS: Yes, Your Honor. I think it 13 may be considerable. It may be wise to break for 14 the day if it's convenient. 15 MR. NICKENS: Your Honor, I have a 16 scheduling issue. We were told that Mr. Crystal 17 is the next witness, and I, in fact, was told that 18 he could not go beyond yesterday or, excuse me 19 could not -- he certainly couldn't go beyond 20 yesterday. 21 He couldn't -- his time -- his schedule 22 would not allow him to be here later than 22739 1 tomorrow. And as a result, I have done my best to 2 make a representation that I made to OTS that I 3 would take today and today only. 4 My question is: Are we changing the 5 schedule? If we have extensive redirect of 6 Mr. Lapidus, then how are we going to get 7 Mr. Crystal on and off according to his schedule? 8 MR. GUIDO: Your Honor, I'm the one 9 who's had the conversations with Mr. Nickens. And 10 I don't see where if we break now and Mr. Veis has 11 an opportunity to condense his questions, whether 12 or not that's going to delay completing 13 Mr. Crystal. 14 The questions that were asked of this 15 witness deal with a number of the mortgage-backed 16 securities matters which I have handled, Your 17 Honor, and that go to the question of the 18 investment committee minutes, not so much this 19 witness' direct testimony. It seems to me that a 20 break would speed up the process as we go. 21 THE COURT: Well, if it speeds it up, 22 that's fine. But how about Mr. Crystal? How long 22740 1 is he -- 2 MR. GUIDO: Mr. Crystal is going to be 3 finished by tomorrow, Your Honor. And we're going 4 to finish Mr. Crystal sometime in either -- before 5 the first break or shortly after the first break 6 tomorrow, Your Honor. 7 THE COURT: Mr. Veis, how long do you 8 think you're going to take on this -- 9 MR. VEIS: I need to discuss it with 10 Mr. Guido, but I would expect somewhere between 30 11 minutes and an hour; but possibly that could be 12 condensed by my discussions with Mr. Guido. 13 THE COURT: All right. We'll adjourn 14 until 9:00 o'clock. 15 16 (Whereupon at 4:34 p.m. 17 the proceedings were recessed.) 18 19 20 21 22 22741 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 15th 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 22742 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 15th 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