23632 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 22, 1998 22 23633 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 23634 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 23635 1 2 INDEX OF PROCEEDINGS 3 Page 4 NEIL TWOMEY 5 Continued Examination by Mr. Rinaldi....23636 6 Examination by Mr. Nickens..............23725 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23636 1 P-R-O-C-E-E-D-I-N-G-S 2 (1:35 p.m.) 3 THE COURT: Be seated, please. The 4 hearing will come to order. 5 Mr. Rinaldi, you may continue. 6 MR. RINALDI: Thank you, Your Honor. 7 I'm trying to locate the starting point. I was 8 off by a year. That would explain the problem. 9 10 CONTINUED EXAMINATION 11 12 Q. (BY MR. RINALDI) Mr. Twomey, when we 13 stopped the last time, I noticed that I had at the 14 outset asked you several questions about the 15 overall strategy engaged in by USAT. And we had 16 talked about this sort of triad of mortgage-backed 17 securities in a risk-controlled arbitrage and also 18 high-yield bonds that were part of an arbitrage, 19 as well as the equity arbitrage. 20 Do you recall that? 21 A. Yes. 22 Q. Okay. First of all, you indicated that 23637 1 you were responsible for the supervision of a 2 number of large institutions in Texas, correct? 3 A. Yes. 4 Q. Approximately how many was that? 5 A. In 1988, I believe about 25. 6 Q. Okay. And of those 25, were a number 7 of them involved in risk-controlled arbitrages 8 involving mortgage-backed securities? 9 A. No. 10 Q. Approximately how many were engaged in 11 that kind of activity? 12 A. The only one I can recall is USAT. 13 Q. Okay. Now, with respect to high-yield 14 bonds, did a number of them have high-yield bonds 15 in their portfolios? 16 A. There were only three at that time. 17 Q. Of those three, did any of them have a 18 program similar to the high-yield bond program 19 that was implemented at USAT, that is trying to 20 duration match the bonds with certificates of 21 deposit? 22 A. I believe USAT was the only one. 23638 1 Q. And with respect to the equity 2 arbitrage aspect of their investments, were there 3 any other institutions that you supervised in 4 Texas that were involved in a similar kind of 5 program of equity arbitrage? 6 A. Again, USAT was the only one. 7 Q. Now, if you'd take a look at what's 8 been previously marked as Exhibit A11073. This 9 has not been previously admitted in the record. 10 It's a summary for the regulatory review committee 11 dated March the 25th, 1987. 12 Do you see that? 13 A. Yes. 14 Q. Can you describe for the Court what 15 this -- these summaries are? 16 A. After reviewing an examination report, 17 if there were any supervisory actions that had to 18 be taken, we would have to summarize the issues 19 and our proposed actions and bring them to what we 20 call the regulatory review committee or RRC and 21 that was made up of the senior officials at the 22 Federal Home Loan Bank of Dallas. And we would 23639 1 present our findings and present our 2 recommendations, and they would review that. And 3 they would either concur with our recommendations, 4 modify it, or reject it. 5 Q. Now, if you turn to the third page in 6 of this document -- it's Document OW1 -- I mean 7 Page OW152880 in Document A11073 -- there is a 8 recommendation and action plan that appears under 9 numbered Paragraph 3. 10 Do you see that? 11 A. Yes. 12 Q. And in the last sentence of that, it 13 makes a recommendation. 14 Did you come to some conclusion 15 regarding an appropriate course of action for the 16 Federal Home Loan Bank of Dallas with respect to 17 USAT after you had received at least some 18 indication of the exam results from Vivian Carlton 19 for the 1986 exam? 20 A. Well, we prepared this submission to 21 the RRC and we recommended that USAT be put under 22 a supervisory agreement that would address the net 23640 1 worths and other deficiencies and other violations 2 that were noted in Vivian Carlton's 1986 exam 3 report. 4 Q. Let's go back into the body of the RRC 5 document for a moment. And if you'd turn with me 6 to Page OW152879, at the top of the page, the 7 second sentence makes reference to "Again, during 8 early 1986, it was determined that United held 9 10 million in Ivan Boesky bonds." And I think we 10 talked about that the last time. 11 Do you recall that? 12 A. Yes. 13 Q. Then it says, "Although United had 14 tried to dispose of the investment, examiners 15 stated the examination had not been able to sell 16 them." 17 Do you see that? What is that making 18 reference to, sir? 19 A. Again, during this time, Your Honor, 20 Ivan Boesky was subject to several investigations. 21 And we became aware that certain bonds that were I 22 should regarding some investments that he had made 23641 1 were being held by USAT. And we were concerned 2 about those and their marketability, their value, 3 so forth. And we had stressed to the institution 4 that we would like to see them sold. 5 Q. Do you know whether they were 6 ultimately -- the institution was ultimately 7 successful in disposing of the bonds? 8 A. I believe they sold them sometime 9 later. 10 Q. And do you know whether they did so at 11 a loss or a gain? 12 A. I can't recall. 13 Q. Now, at the bottom of the page, it 14 talks about areas of concern. 15 Do you see that? 16 A. Yes, I do. 17 Q. And does that -- it makes reference 18 to -- it says -- it makes reference, among other 19 things, to potential losses due to junk bond 20 trading. 21 Do you know what you were referring to 22 or what is being referred to there? 23642 1 A. Again, Your Honor, junk bonds are 2 looked at as more risky. And with their 3 continuing decrease in net worth position -- to 4 put it simply, if you had a single-family 5 owner-occupied home, there would be a certain 6 percentage of your net worth basically allotted 7 for the risk involved in making that loan to an 8 individual with a good credit history. Obviously, 9 if you have something that's much more risky, 10 there would be a higher percentage of the net 11 worth basically allotted against that particular 12 asset. 13 So, the more your mix is in riskier 14 assets, the bigger your net worth should be 15 against potential of losses. 16 Q. Was it your understanding at this point 17 in time that USAT was engaging in trading of junk 18 bonds in order to generate gains to increase their 19 capital? 20 A. No. 21 Q. Then what are you referring to when it 22 says "potential losses due to junk bond trading"? 23643 1 A. Again, junk bonds reviewed by the 2 regulatory -- by me as being more risky than 3 normal, traditional thrift assets such as loans on 4 a single-family home. And again, with their 5 decreasing net worth and our discussions with them 6 over their net worth position, we were concerned 7 that if they continued to make large investments 8 in junk bonds with a shrinking net worth, we were 9 concerned that if suddenly the market turned 10 against them on their junk bond investments, they 11 wouldn't have the reserves necessary to cushion 12 the institution. 13 Q. Okay. And it then goes on and says, "A 14 substantial interest rate risk suggests that 15 United may become a problem institution." 16 What does that refer to? Do you see 17 where I'm reading from? It's right after the junk 18 bonds. 19 A. (Witness reviews the document.) 20 Q. And it makes reference to the fact that 21 United may become a problem institution. 22 A. Again, I cannot recall exactly what we 23644 1 meant by that phrase right there, "substantial 2 interest rate risk." Again, with decreasing net 3 worth, we are always concerned. 4 Q. And what do you mean by "a problem 5 institution"? 6 A. Well, if an institution actually -- is 7 just barely passing its net worth test with us or 8 meeting a net worth requirement and our 9 projections are showing that on an ongoing basis 10 on historical losses, they could fail their net 11 worth, it would start to be listed on our list as 12 a problem institution and later probably what we 13 call an SSC, severe supervisory case. 14 Q. Okay. And at this point in time in 15 March of 1987, did you consider USAT to be a 16 problem institution? 17 A. Potentially. 18 Q. And was that the reason for 19 recommending a supervisory agreement? 20 A. Yes. 21 Q. Now, you described yesterday -- I'm 22 sorry -- on Friday, I believe, how after 23645 1 recommending the -- a supervisory agreement, that 2 recommendation was not followed. 3 Do you recall that? 4 A. Yes. 5 Q. And can you just briefly describe for 6 the Court why that was? 7 A. At the regulatory review committee, 8 Mr. Selby, who was in charge of the committee and 9 the head of regulatory affairs at that time, was 10 concerned that we didn't have an accurate picture 11 of their statement of condition and we didn't know 12 their assets, liabilities, net worth. And because 13 in Vivian's 1986 exam she had commented on their 14 inability to properly show to her what their true 15 financial position was, he felt we should get the 16 outside independent CPAs to come in and review 17 their books and records and their systems before 18 we considered putting a supervisory agreement on 19 the institution. 20 MR. RINALDI: Your Honor, I would move 21 the admission of A11073. 22 MR. VILLA: No objection. 23646 1 THE COURT: Received. 2 Q. (BY MR. RINALDI) Mr. Twomey, would 3 you turn to what I hope is the next document in 4 your book? This should be Exhibit A111507. 5 Do you see that? 6 MR. VILLA: Excuse me. Could you give 7 us that number again? 8 MR. RINALDI: I believe it's A111507. 9 THE WITNESS: I have 11507. 10 MR. RINALDI: Then perhaps I have one 11 too many 1s. 12 A. It's a file memo from Ginger Baugh? 13 Q. (BY MR. RINALDI) Yes. 14 A. Okay. 15 Q. Is it 11507? 16 A. 11057. 17 Q. I see. Thank you. 18 Now, I believe that I may have shown 19 this to you at the end of the session on Friday. 20 MR. VILLA: Excuse me, sir. Could you 21 just identify the document so we know that we have 22 the same one? 23647 1 MR. RINALDI: Yes. It's a memo to the 2 file from Ginger Baugh dated August the 10th, 3 1987. And it's regarding a meeting on August the 4 7th, 1987, with USAT. 5 THE COURT: We have some problem here. 6 There is an A11057, which is a letter from 7 Mr. Pledger to the principal supervisory agent 8 dated August 20th, 1985. I have it as received on 9 the 18th. 10 MR. RINALDI: See, I think it may be 11 11507. I think I probably had it right to begin 12 with. 13 THE COURT: All right. What number are 14 we looking at now? 15 MR. RINALDI: I believe it's A11507. 16 It should be Baugh 54. 17 THE COURT: We'll be off the record for 18 a minute. 19 20 (Discussion held off the record.) 21 22 THE COURT: All right. We'll be back 23648 1 on the record. 2 MR. RINALDI: I am told the document is 3 A11157. 4 THE COURT: And that is the memorandum 5 from Ginger Baugh to the file dated August 10, 6 1987? 7 MR. RINALDI: That is correct. 8 Q. (BY MR. RINALDI) Now, you previously 9 testified that Ms. Baugh was your analyst, 10 correct? 11 A. Right. 12 Q. And was it her practice when there were 13 meetings with savings associations to memorialize 14 those meetings with memos to the file? 15 A. She was required to do it. 16 Q. Okay. And does this appear to be a 17 memo to the file regarding a meeting with USAT on 18 August 7th, 1987? 19 A. Yes. 20 Q. And in the second numbered paragraph, 21 it talks about a net worth requirement. 22 Do you see that? 23649 1 A. Yes. 2 Q. And it talks about "The issue continues 3 to be whether valuation reserves and loss 4 provisions at those dates were general or 5 specific." 6 A. Right. 7 Q. What is that making reference to at 8 this point? 9 A. If -- as a result of Vivian's '86 exam, 10 we had requested certain reserves be established 11 at the institution. And there was ongoing 12 discussions whether those reserves should be 13 general, which don't subtract away from your net 14 worth, versus specific reserves, which would 15 reduce net worth by an equal amount. 16 MR. VILLA: Your Honor, can we take a 17 one-second break? I know I introduced this 18 document. If we can just get the cross-reference, 19 all the other lawyers can have it, too. 20 THE COURT: I'm told it's A11078. 21 MR. VILLA: Tab 1760. 22 MR. RINALDI: It's 11078; is that 23650 1 correct? 2 THE COURT: A11078 was received August 3 the 20th. 4 Q. (BY MR. RINALDI) Now, was USAT 5 resistant to taking the write-downs that had been 6 recommended by Ms. Carlton? 7 A. Yes. 8 Q. And do you recall why it was they were 9 resistant to that? 10 A. Because it would impact their net 11 worth. And if their net worth declined by a 12 discernible amount, they were concerned that 13 because of all the repos they had outstanding, you 14 know, funding their mortgage-backed security 15 risk-controlled arbitrage, that perhaps Wall 16 Street, who were giving them the money, at the 17 time of maturity would have rolled them again and 18 start calling the money back. 19 Q. Now, if you look at the next paragraph 20 down that starts with the words "United stated," 21 it makes reference in that paragraph to providing 22 a comfort letter. 23651 1 Do you see that? 2 A. Yes. 3 Q. Okay. Do you know what that's making 4 reference to, sir? 5 A. They were asking for a letter from my 6 office that they could show to Pru-Bache and other 7 Wall Street firms basically saying there was no 8 immediate regulatory action being contemplated 9 against the institution. And they were hoping 10 that this comfort letter would take some of the 11 pressure off them from Wall Street regarding the 12 repo money. 13 Q. Now, it states in the last sentence of 14 the second paragraph under Item 2 that "Neil 15 stated that he would have to discuss with legal 16 possibilities of written comfort letter." 17 Do you see that? 18 A. Yes. 19 Q. What does that refer to? 20 A. Again, I didn't feel it was appropriate 21 for me to issue the letter on my own. I wanted my 22 legal department and other senior officers above 23652 1 me to, you know, review issuing such a letter. It 2 wasn't normal to do that. 3 Q. And in connection with giving comfort, 4 what was the nature of the comfort that you 5 anticipated you might be able to give to Wall 6 Street? 7 A. Other than that we're not contemplating 8 an immediate supervisory action such as shutting 9 the institution down or restricting their 10 activities, I don't know -- again, it's been a 11 number of years; so, I'm not really -- I can't 12 really remember all the specifics that might have 13 been in it. 14 Q. But at this point in time, Mr. Selby 15 had said he wasn't disposed to agreeing to a 16 supervisory agreement? 17 A. That's true. 18 Q. Turning then to the last page of the 19 document -- 20 MR. VILLA: Your Honor, I'm sure that 21 Mr. Rinaldi was just about to ask this question of 22 the witness, but I would request that the prior 23653 1 sentence be read into the record. "Neil offered 2 to meet personally with any brokers to give 3 regulatory feedback, verbal comfort on United's 4 part," to more completely describe the document. 5 Q. (BY MR. RINALDI) What does that make 6 reference to, Mr. Twomey? 7 A. Again, I was concerned about a 8 potential liquidity crisis regarding United. And 9 again, when you have an institution that's several 10 billion in size, if there was ever some type of 11 electronic run on the institution, that FSLIC 12 would have to immediately step in and ensure that 13 the depositors were getting their money. And if, 14 by talking to Wall Street, if Pru-Bache was to 15 call, I tried to very carefully assure them that 16 we are not taking any immediate action against the 17 institution. And I offered to do that. I don't 18 recall whether it actually occurred. It may have. 19 It may not have. But the idea in the back of my 20 mind was potential liquidity crisis. If these 21 lines started getting pulled, I'd have to somehow 22 scramble to get several million dollars into the 23654 1 institution and that would mean immediately 2 putting the institution through some type of 3 receivership. 4 Q. And is that what you were referring to 5 when you talked about giving regulatory feedback 6 in the -- that it's attributed to in the memo? 7 A. Yes. 8 Q. Now, turning to the last page of the 9 document, which is OW157685, and in particular, 10 Item 13 -- now, we've talked about a review of 11 books and records and also a third-party review of 12 their high-yield bond portfolio. 13 Do you recall that last time? 14 A. Yes. 15 Q. Now, this makes reference to, 16 Paragraph 13, high-yield bond review. "Neil 17 stated that he would advise Art whether 18 Merrill-Lynch or Morgan Stanley would be our 19 approved choice for the review. The scope would 20 include high-yield bonds, equity arbitrage, 21 mortgage-backed securities, policies and 22 procedures to see if they support the activities 23655 1 and to see if United follows established policies 2 and procedures, review personnel to see if they 3 have the expertise to handle the job." 4 Do you see that? 5 A. Yes. 6 Q. At this point in time, what was the 7 contemplated scope of any review of their 8 investment activities at USAT? 9 A. Well, it was pretty much as laid out in 10 that paragraph. We wanted somebody, an outside 11 party principally from Wall Street, to be able to 12 go in there and look at their mortgage-backed 13 securities, look at their junk bonds, and the 14 trades coming out of both of them. 15 Q. How about the equity arbitrage? I 16 notice it's mentioned there. Was that of concern 17 to you at this point? 18 A. Not as much as the junk bonds. 19 Q. In sort of the order of things, was the 20 junk bond portfolio of greatest concern to you 21 vis-a-vis the mortgage-backed portfolio and equity 22 arbitrage? 23656 1 A. Yes. Definitely the junk bonds. 2 Q. Now, it also makes reference to -- that 3 you wanted to see if the policies and 4 procedures -- to review the policies and 5 procedures to see if they support the activities. 6 What was that referring to? 7 A. Well, for the mortgage-backed 8 securities, for the junk bonds, and for the equity 9 arbitrage, equity securities, I should say, they 10 had policies and procedures regarding each of 11 those, and we wanted to sure that their 12 established policies and procedures were being 13 adhered to by the staff on a day-to-day basis. 14 Q. In connection with this review, did you 15 anticipate that there would be a review of their 16 actual trades to see if they were consistent with 17 those policies? 18 A. At this time, I anticipated it. 19 Q. Now, turn to the next document in your 20 book, which is A11079. And it's at Tab 1680. 21 This is a memo from Arthur Berner to the files and 22 as Mr. Villa, I think, pointed out some time ago, 23657 1 occasionally we have mirror memos, one by 2 Mr. Berner and one by Bank Board personnel of the 3 same meeting. And this appears to be one of those 4 memos from Mr. Berner's perception of what 5 occurred with respect to the August 7th, 1987 6 meeting with yourself and other members of the 7 Federal Home Loan Bank of Dallas. 8 Do you see that? 9 A. Yes. 10 Q. Now, if you'd turn to Item 10 of 11 Mr. Berner's memo which is on the second page, it 12 is Exhibit OW005758. 13 Do you see that? 14 A. Yes. 15 Q. And if you'd just read to yourself 16 Item No. 10. 17 A. (Witness reviews the document.) Okay. 18 Q. There is a reference there where you 19 say -- he attributes to you that he -- I presume 20 that's you -- thought it might not involve the 21 mortgage-backed securities portfolio since this 22 was not as risky as the high-yield bonds and 23658 1 equities. 2 Do you see that? 3 A. Yes. 4 Q. Was it your -- does that accurately 5 reflect your views regarding the three portfolios? 6 A. At that time, yes. 7 Q. In other words, you thought that the 8 mortgage -- the junk bond portfolio presented a 9 higher degree of risk than the mortgage-backed 10 securities portfolio? 11 A. Yes. 12 Q. Do you recall at this point discussing 13 with Mr. Berner the possibility that a review of 14 the mortgage-backed security portfolio might not 15 be necessary? 16 A. No, I don't recall that. 17 Q. Okay. Now, if you'll turn to the next 18 document in your book, it's A12169. This is 19 A11084, and apparently it has not been admitted. 20 And this is a -- well, let the witness describe 21 what it is. 22 Do you recognize this document? 23659 1 MR. EISENHART: Does this document have 2 a tab number or are we going to get copies of it 3 or what? 4 MR. RINALDI: There are copies, but it 5 should have been put on your pull list. 6 MR. EISENHART: It's not on the list. 7 8 (Discussion held off the record.) 9 10 THE COURT: What is the document we're 11 supposed to be focused on right now? 12 MR. RINALDI: As I understand, the 13 documents is delineated A11084. This is a 14 document dated October 1st, 1987. On the second 15 page, it says "Significant supervisory case report 16 as of October 1st, 1987." And the institution 17 about which it is reporting is United Savings 18 Association of Texas. 19 Q. (BY MR. RINALDI) Mr. Twomey, do you 20 recognize this document? 21 A. Yes, I do. 22 Q. And would you describe for the Court 23660 1 what this document represents? 2 A. I believe -- it's been some time, but 3 on a quarterly basis, we used to have to summarize 4 our potential or problem cases for senior staff 5 and, once a quarter, a review with the senior 6 staff what actions we may be taking or what 7 problems we saw with the different institutions. 8 And basically, this is the cover sheet for that. 9 And at this point in time, we had deemed United to 10 be a significant supervisory case, commonly 11 referred to as an SSC, which was filed with 12 Washington on a monthly basis. 13 So, basically, we have a summary sheet. 14 We attach the SSC to it. And then we would have a 15 discussion with senior management. They would 16 look over our strategy, our actions, our comments; 17 and they would make suggestions or give us 18 direction. 19 Q. And what is the significance of being 20 an SSC? 21 A. Again, it's a significant problem case 22 or a potential problem case. Based on United's 23661 1 size and operating results, it would fall into 2 that category. 3 Q. So that as of October 1st, 1987, it was 4 considered a significant supervisory case? 5 A. Yes. 6 Q. Now -- 7 MR. RINALDI: Your Honor, I would move 8 the admission of A11084. 9 MR. VILLA: No objection. 10 THE COURT: Received. 11 Q. (BY MR. RINALDI) Now, directing your 12 attention to Page OW157751 and the second full 13 paragraph, would you read that paragraph to 14 yourself that refers to the "fiercely contested"? 15 And then I have a question for you. 16 A. (Witness reviews the document.) Okay. 17 Q. As of October 1st, 1987, was the 18 question of whether United had engaged -- had 19 failed its net worth still being disputed by the 20 institution? 21 A. Yes. 22 Q. And if you drop further down on the 23662 1 page, particularly to the entry that talks 2 about -- the entry 08/28/87, in other words August 3 the 28th, '87, do you see that? 4 A. Yes. 5 Q. And the second paragraph talks about 6 "Merrill-Lynch bid on the review of United's 7 investments. However, the bid was for 100,000 and 8 United refused to accept." 9 Do you recall what that's making 10 reference to? 11 A. Yes. We had -- we had come up with 12 Merrill-Lynch. It was agreeable. That firm was 13 agreeable to USAT and was agreeable to us. And 14 two or three individuals from Merrill-Lynch went 15 down there to -- for an initial meeting with the 16 USAT group. But when it came to the compensation 17 for this review, USAT objected. They didn't want 18 to pay the 100,000-dollar fee that Merrill-Lynch 19 was requesting. 20 Q. And ultimately, were efforts then made 21 to obtain a different entity to conduct the review 22 of the -- of USAT's investment activities? 23663 1 A. Yes. 2 Q. And would you take a look at the next 3 page? There is an entry, September 30th, 1987. 4 And it makes reference to a Prudential Bache bid 5 of 30,000. 6 Do you see that? 7 A. Yes. 8 Q. What does that -- what is that in 9 reference to? 10 A. Again, the alternate -- again, 11 Pru-Bache was acceptable to us. And they 12 negotiated with USAT, and 30,000 ended up being 13 the fee that Pru-Bache would receive on their 14 review of really only the junk bonds. 15 Q. Had Merrill-Lynch offered to review 16 activities other than junk bonds? 17 A. Yeah. We were talking about a larger 18 scope with Merrill-Lynch, I believe. 19 Q. Okay. Now, directing your attention to 20 the next document, which is Tab 282 and it's 21 Exhibit B1742, this is a letter from Neil Twomey 22 to Arthur Berner dated September the 9th, 1987. 23664 1 Do you recognize this document, sir? 2 A. Yes. 3 Q. And there's a discussion in the first 4 full paragraph about the Merrill-Lynch Capital 5 Markets. 6 Do you see that? 7 A. Yes, sir. 8 Q. Then it goes on and it says in the last 9 sentence of the first paragraph, "However, it is 10 encumbent upon you to ensure that the review is 11 performed as soon as possible by individuals with 12 the necessary expertise to make the appropriate 13 determination based on that review." 14 What were you referring to there, sir? 15 A. Again, we still were looking for 16 somebody to come in and review the institution's 17 investments, junk bonds. And again, when 18 Merrill-Lynch fell out, we couldn't get agreement 19 on Merrill-Lynch, this is the period before 20 Pru-Bache was designated as the possibility. 21 Q. And as the supervisory agent for USAT, 22 were you the one that was responsible to choose 23665 1 the entity that would conduct the review; or was 2 that within the domain of USAT? 3 A. I believe it was simply that we would 4 agree on certain firms with USAT, that we could 5 come up with three names. And after that, as far 6 as the fee and the individuals, it was up to USAT. 7 We would concur; but as long as we found an 8 acceptable firm, we didn't care who did it. 9 Q. Okay. Now, in your letter in the next 10 paragraph down in the second sentence, it says, 11 "The scope of the review at a minimum should 12 include an analysis of the following." 13 Do you see that? It's the second full 14 paragraph on the first page. 15 A. I'm sorry. (Witness reviews the 16 document.) Yes. 17 Q. And can you just briefly describe for 18 the Court what you intended in terms of the scope 19 of the review that would be undertaken by the 20 entity that reviewed USAT's high-yield bond 21 portfolio? 22 A. Yes. Your Honor, we expected at least 23666 1 United's written investment policy and procedures 2 objectives would be reviewed. They would also 3 review -- the expertise and the skills of the 4 people running their different portfolios would be 5 looked at. We also wanted them to look at their 6 portfolios, the composition, how they were mixed, 7 any trading activities, you know, any buy-sell out 8 of each of those portfolios out of a reasonable 9 period of time. And look at the reports that 10 those portfolio managers submit to senior 11 management to see if they provide enough 12 information for monitoring and oversight of the 13 portfolios. 14 Q. Now, after you had designated in this 15 letter your desired scope of the review, was a 16 review conducted by Prudential Bache? 17 A. Yes. 18 Q. And did you subsequently at some time 19 after September receive a report from Prudential 20 Bache regarding their review? 21 A. Yes. Several months later. 22 Q. Okay. Would you take a look at 23667 1 Exhibit A14092, which appears at Tab 1509? I 2 think it's the next document, isn't it? 3 A. Okay. Yes, I have it. November 24th, 4 1987? 5 Q. Okay. And would you take a look at 6 that document and tell me if that appears to be 7 the report that Pru-Bache prepared? 8 A. Yes. It's signed by Raymond Lemanski. 9 Q. And was Mr. Lemanski the individual 10 that conducted the review of USAT's high-yield 11 bond portfolio? 12 A. Yes. 13 Q. Now, in the -- did the Pru-Bache review 14 cover all of the items within its scope that you 15 had requested in your September 9th, 1987 letter? 16 A. No. 17 Q. And what did it cover? 18 A. It covered everything but actually 19 looking at the trades, I believe. 20 Q. And why was it that you had requested 21 that they look at the trades? 22 A. I thought it was common sense for them 23668 1 to also look at the purchase and sales out of the 2 portfolio just as a matter of due course. 3 Q. Was that to determine whether it was 4 consistent with their policies and objectives? 5 A. Yes. 6 Q. Now, after you -- how would you -- 7 well, turn to the next document, which is A12199. 8 And this is another significant supervisory case 9 report review. This one's dated June the 1st, 10 1988. 11 A. Yes. 12 Q. And do you recognize this document? 13 A. Yes. 14 Q. And this is something that would have 15 been prepared by your staff in connection with the 16 supervision of USAT? 17 A. Yes. 18 Q. Now, directing your attention to 19 Page OW150767, after you -- and in particular, to 20 the bottom of the page, the last paragraph. And 21 if you'd read that to yourself, I have a couple of 22 questions for you. 23669 1 A. (Witness reviews the document.) Okay. 2 Q. It says that the third-party review was 3 completed and that it -- that the high-yield bond 4 activity was conducted in a satisfactory manner. 5 Do you recall that Pru-Bache had 6 reported that? 7 A. Yes. 8 Q. The next sentence, however, makes 9 reference to certain pertinent information which 10 may be considered objectionable. 11 Do you know what that's referring to? 12 A. Yes. A conversation I had with 13 Mr. Lemanski. 14 Q. Okay. And can you relate to the Court 15 what Mr. Lemanski had said? 16 A. With regard to reviewing the trades and 17 Mr. Lemanski indicated that his attorneys -- he 18 had had a discussion with his attorneys at his 19 firm, and they had taken objection for him to 20 include anything regarding the trades out of the 21 junk bonds to be included in the report that he 22 provided us. 23670 1 Q. Did he give you any verbal report, 2 then, on the trading activity that -- to the 3 extent he may have reviewed it? 4 A. No. He didn't give me any detail that 5 I can recall. 6 Q. As a consequence, did you ever receive 7 from Mr. Lemanski any information regarding the 8 trading activity in USAT's high-yield bond 9 portfolio? 10 A. Not that I can recall. 11 Q. Okay. Now -- 12 MR. RINALDI: Your Honor, I would move 13 the admission of A12199. 14 MR. VILLA: No objection. 15 THE COURT: Received. 16 Q. (BY MR. RINALDI) Now, the next 17 document in your book is a letter dated June 30th, 18 1986, to Mr. L.A. Anderson from Joe H. Phillips. 19 And it indicates a copy to Ginger Baugh. 20 Do you see that? 21 A. Yes. 22 MR. VILLA: Your Honor, may we have the 23671 1 numbers? 2 MR. RINALDI: I'm sorry. It's Tab 257, 3 and it's B1075. 4 Q. (BY MR. RINALDI) Did there come a 5 point in time when, as a courtesy to the Federal 6 Home Loan Bank Board, USAT began to send copies of 7 these letters which were sent to Mr. Anderson to 8 the Bank Board? 9 A. Yes. 10 Q. Do you remember when that practice 11 began? 12 A. Oh, sometime in 1986. 13 Q. Was it around the time that Terry Smith 14 had gone out to look at the USAT high-yield bond 15 portfolio? 16 A. Well, he -- Terry Smith and Jon Scott 17 did that in May of 1986. So, I'm not sure exactly 18 when it started; but it definitely did start in 19 '86. 20 Q. Okay. And I think if you'd turn to the 21 next page, there may be a copy of the Jonathan 22 Scott memo, the next document. And does it 23672 1 indicate the date of the -- you indicated May. 2 THE COURT: Are we looking at another 3 exhibit now? 4 MR. RINALDI: It may not be in his 5 book. 6 Q. (BY MR. RINALDI) You indicated May. 7 A. Yeah. Sometime around that period of 8 '86. 9 Q. Did -- at this point in time, around 10 May or June of 1986, did you begin to receive, 11 then, copies of these documents on an monthly 12 basis? 13 A. Yes. 14 Q. And what did the Bank Board do with 15 these documents after they received them? 16 A. We just kept them for information 17 purposes because of several inquiries that we were 18 receiving. 19 Q. Was any analysis done by the Bank Board 20 of the trading activity of the equity arbitrage 21 securities that are listed in this document? 22 A. No. 23673 1 Q. Was any analysis done of the high-yield 2 bonds that are listed in this document? 3 A. No. 4 Q. Who would have retained this document? 5 Ginger Baugh? 6 A. Ginger Baugh for the supervisory file. 7 Q. And was Ginger Baugh competent to 8 conduct a review of the equity arbitrage 9 portfolio? 10 MR. EISENHART: Your Honor, I'm not 11 sure the question is clear. He's talking about 12 analysis and review. It's not clear to me whether 13 he's asking whether anybody read them or whether 14 they read them and did something more. 15 Q. (BY MR. RINALDI) Did anybody read 16 them? 17 A. We basically just received them, and we 18 didn't do any analysis on them. We just -- 19 basically, we received them and filed them for 20 future needs. 21 Q. Okay. And what was the purpose of 22 retaining these in your records? 23674 1 A. During this period of time, there was a 2 couple of Congressional committees that were 3 actively looking at MAXXAM and Mr. Hurwitz. And 4 consequently, they were making several inquiries 5 of what junk bonds might be in USAT's portfolio. 6 And we felt it was necessary to keep this 7 information so we could properly respond to any 8 Congressional inquiry or any Bank Board inquiry 9 from Washington. 10 Q. Okay. 11 THE COURT: Excuse me. Were these the 12 junk bonds or were these equity arbitrage or both? 13 MR. RINALDI: Why don't we ask the 14 witness? 15 Q. (BY MR. RINALDI) On Page -- 16 MR. RINALDI: I'm sorry. Is there 17 something humorous, John? 18 MR. NICKENS: I apologize. I thought 19 the judge was directing the question to the 20 witness. 21 THE WITNESS: Either way, I'll respond. 22 THE COURT: All right. Would you 23675 1 respond? 2 THE WITNESS: It's a combination of 3 both. They are -- with the coupons, these are -- 4 should be the junk bonds. Where you see the 5 shares, particularly on the second page, these are 6 equities that were held by USAT. 7 THE COURT: The first page is junk 8 bonds? 9 THE WITNESS: It looks like it's junk 10 bonds. Where you see coupon and the maturity 11 date, that would be an indication that it's a 12 security. Then starting one-third down the second 13 page, Your Honor, it starts talking about RCA, 14 Republic Air. These -- looks like Republic -- 15 these are common shares -- shares they held in 16 those companies, sir. Equity. 17 Q. (BY MR. RINALDI) And then as you turn 18 over to what would be OW160625, those again appear 19 to be bonds? 20 A. Looks like bonds. 21 Q. And then as you turn to OW160626, do 22 those appear to be bonds or equities? 23676 1 A. Because they have a column marked 2 "shares," these would be common stock shares. 3 Appears to be. 4 Q. Now, on the front page of the cover 5 letter, it talks about "During the month of May, 6 the association experienced excess liquidity and 7 purchased the non-liquidity securities shown on 8 Enclosure 1." 9 Do you see that? 10 A. Yes. 11 Q. Then it says, "Market conditions during 12 the month presented opportunities to realize gains 13 or preserve capital of non-liquidity securities 14 are also shown on Enclosure 1." 15 Do you see that? 16 A. Yes. 17 Q. What does it mean -- or what did you 18 understand it to mean that "Market conditions 19 during the month presented opportunities to 20 realize gains"? 21 A. I mean, this is June 30th, 1986. I 22 don't really know what they might have been 23677 1 talking about anyway. This was a report that was 2 requested by the state regulator, and we were just 3 getting a courtesy copy. And we were only using 4 this to keep track of the portfolio they currently 5 had, and that's it. 6 Q. In connection with the management of 7 the equity arbitrage portfolio, did you understand 8 that there would from time to time be sales from 9 which they would realize gains? 10 A. From the equity? 11 Q. Yes. 12 A. From buying the -- yeah. Again, 13 underneath their strategy that they told me that 14 they would be looking for opportunities where a 15 company was about to be purchased and they would 16 look for a -- where the stock was underpriced, 17 purchase the stock and wait until the transaction 18 was closed, and then settle up. 19 Q. And when you settle up, that results in 20 a realized gain? 21 A. Hopefully. 22 Q. Now, yesterday when we were -- I'm 23678 1 sorry. Friday, I believe, I showed you a copy of 2 the subordinated debt application. And in it, I 3 made reference to a -- an option that had been 4 entered into between MAXXAM or MCO on the one hand 5 and Drexel Burnham Lambert on the other hand. 6 Do you recall that there was testimony 7 to that regard? 8 A. Yes. There were 300,000 shares of the 9 holding company stock? 10 Q. Yes. 11 A. Yes. 12 Q. Now, would you take a look at 13 Exhibit B1739, which I believe has been previously 14 admitted at Tab 1523. 15 A. Yes. 16 Q. Take a moment to look at this memo, in 17 particular, the first two pages, and then I have a 18 couple of questions I want to ask you. 19 A. (Witness reviews the document.) 20 Q. Now, in the first -- have you had a 21 chance to look at it? 22 A. Yes. 23679 1 Q. Do you recognize that document, sir? 2 A. Yes. It's a memo from Ginger to myself 3 and Danny Thomas. 4 Q. And in the first line, it says, "As you 5 requested, please find attached a summary of the 6 ownership of United to the extent we have that 7 information." 8 Do you see that? 9 A. Yes. 10 Q. Now, who had requested this information 11 from Ms. Baugh? 12 A. I did. 13 Q. And what was the reason for requesting 14 it, Mr. Twomey? 15 A. I was, you know, now aware that Drexel 16 owned shares in the holding company. And because 17 of ongoing questions concerning Drexel, I wanted a 18 detailed breakout of their ownership and, at the 19 same time, I requested a breakout of the detailed 20 ownership of UFG by other known parties. 21 Q. And it indicates that Drexel owned 22 6 percent of the outstanding shares of UFG. 23680 1 Do you see that? 2 A. Yes. 3 Q. From a regulatory standpoint, did that 4 have any significance, if their share ownership 5 was limited to 6 percent? 6 A. Not at 6 percent. We were concerned 7 that it might -- could possibly exceed 10 percent. 8 Q. And in the event that it were to exceed 9 10 percent, what effect would that have? 10 A. Drexel would be deemed an affiliated 11 party, and all the transactions with United would 12 come under review of the PSA. 13 Q. Now, as we go further down, we see that 14 MCO Holdings, Inc. owned 13.49 percent of UFG. 15 Do you see that? 16 A. Yes. 17 Q. And then Federated Development Company 18 owned 9.8 percent of UFG? 19 A. Yes. 20 Q. And then if we turn over to the top of 21 the next page, it indicates that jointly, I guess 22 using simple addition, they had -- they owned 23681 1 23.3 percent of the common stock of UFG. 2 Do you see that? 3 A. Yes, I do. 4 Q. Below that, it makes reference again to 5 the put/call option as we've referred to it. 6 Do you see where it talks about MCO 7 Holdings, "MCO also has a call option for 300,000 8 shares"? I'm sorry. It's on the first page. 9 A. Okay. Yes. The fourth paragraph from 10 the bottom. 11 Q. Yes. Now, you testified previously 12 that you thought you became aware of that at or 13 about the time the sub debt application was 14 submitted. 15 Do you recall that? 16 A. I believe so. 17 Q. Were you concerned by the fact that 18 this option existed between MCO and Drexel? 19 A. Not particularly. 20 Q. Did you believe that the 300,000 shares 21 that had been optioned to MCO should be 22 attributable to MCO for purposes of determining 23682 1 whether they owned over 25 percent of the 2 outstanding shares of UFG? 3 MR. EISENHART: Your Honor, I object. 4 I'm not sure on what basis Mr. Twomey would have 5 to opine on that subject. That's a legal issue 6 and certainly one of the central legal issues in 7 this case. He's not a lawyer. I'm not sure what 8 use his opinion on that subject would have. 9 THE COURT: Well, we'll hear his 10 opinion. 11 A. If I thought -- even if I thought they 12 were controlled by MCO, I would have then referred 13 this to Julie Williams in our securities division 14 up in Washington and asked for an opinion. 15 Q. (BY MR. RINALDI) And who was 16 Ms. Williams? 17 A. Ms. Williams at that time was an 18 attorney with the Federal Home Loan Bank Board in 19 Washington, D.C. And she was, I believe, in 20 charge of the security division which would review 21 these types of questions. 22 Q. Was Ms. Williams also involved in the 23683 1 negotiations with MCO relating to the net worth 2 condition and its modification that we spoke about 3 last Friday? 4 A. Yes. 5 Q. And was she involved in the 6 negotiations? Do you know? 7 A. I don't know how personally she was, 8 but she would definitely have to approve anything 9 that was negotiated. 10 Q. Okay. Now, did you ever learn that MCO 11 had given a letter of credit to Drexel in order to 12 assure that if Drexel were to exercise the put 13 option, that the -- there would be funds available 14 to -- for the purchase of the shares by MCO? 15 A. I did not know this in the time frame 16 '86, '87, or '88. 17 Q. Were you ever told that MCO had agreed 18 to indemnify Drexel Burnham Lambert against any 19 loss associated with the ownership of these 20 shares? 21 A. Again, I was not told that at any time 22 during 1986, '87, or '88. 23684 1 Q. Now, would you take a look at the next 2 document, which is Tab 36 and it's Exhibit A2074? 3 A. Schedule 13D? 4 Q. That's correct. And in particular, if 5 you would turn to Page CN026777. 6 A. CN triple 7? 7 Q. CN026777. It should be page -- 8 A. 16 out of 67? 9 Q. That's correct. 10 And if you'll just read to yourself the 11 first sentence on that page, I have a question I'd 12 like to ask you. 13 A. (Witness reviews the document.) 14 Q. Or actually, if you'd read the entire 15 paragraph. 16 A. Okay. (Witness reviews the document.) 17 Q. Now, in the last sentence of that 18 paragraph -- does the first sentence of the 19 paragraph appear to describe the option as you 20 understood it? 21 A. Yes. 22 Q. Now, in the last sentence of the 23685 1 paragraph, it states, "In the event that MCO 2 exercises the call but does not make full payment 3 to DBL for the shares or that DBL exercises the 4 put but does not receive full payment for the 5 shares, DBL may draw upon a letter of credit 6 obtained by MCO in the amount of the shares' 7 purchase price." 8 Were you ever aware of that 9 information? 10 A. Again, not in 1986, '87, or '88. 11 Q. If you had known that information, 12 would it have changed your view regarding MCO's 13 holding of those shares? 14 MR. EISENHART: I'm going to object. 15 He's simply calling for speculation here. The 16 witness said he didn't know about it. He 17 obviously didn't have any view on the subject 18 except perhaps what he's been fed now by counsel. 19 THE COURT: Denied. You can answer. 20 A. If I had known this, it would have 21 changed my opinion, and I still would have 22 referred it to our Washington office to get their 23686 1 written opinion. 2 Q. (BY MR. RINALDI) And why would it 3 have changed your opinion, if you have an opinion? 4 A. Because this is an economic 5 transaction. This transaction is done. They have 6 done -- this transaction has already occurred. 7 Therefore, as far as I'd be concerned, MAXXAM 8 controls those additional 300,000 shares. 9 MR. EISENHART: Your Honor, I'm going 10 to move to strike that testimony. This witness 11 has not been offered as an expert witness on the 12 Drexel option or the economics of this 13 transaction. They have designated an expert 14 witness on this subject. They are apparently not 15 going to call him, and now they want to sneak in 16 through Mr. Twomey the testimony that they were 17 supposed to have -- or that they said they were 18 going to put in through Mr. Corcoran. 19 THE COURT: All right. Denied. 20 Q. (BY MR. RINALDI) Now, directing your 21 attention to Page OFD2644 in that same document or 22 I guess if we use the CN numbers, it's CN026799, 23687 1 22 pages further on in the document. 2 A. I have the page. 3 Q. Okay. And it makes reference to an 4 indemnification. And again, sir, were you aware 5 that MCO, as part of the option arrangement, had 6 agreed to indemnify Drexel Burnham Lambert against 7 any loss associated with the transaction as 8 reflected in this Paragraph 8? 9 A. No. I don't recall any 10 indemnification. 11 Q. And would that have affected your views 12 regarding the ownership of the shares had it been 13 brought to your attention in 1986, '87, and '88? 14 A. Yes. 15 Q. And how would it have affected your 16 view, sir? 17 A. Again, I would have been concerned. An 18 economic transaction had already occurred, and I 19 would have then again asked our Washington office 20 to review our findings and see if they concurred. 21 Q. And that would have been Julie 22 Williams? 23688 1 A. Again, Julie Williams. 2 Q. Now, if you -- 3 MR. VILLA: Your Honor, I would like to 4 object to this testimony on one other ground. The 5 Notice of Charges in this case alleges that the 6 OTS wasn't -- or the Federal Home Loan Bank Board 7 wasn't notified of the Drexel option. If you 8 remember my opening statement, I referred to 9 either five or seven documents which disclose the 10 Drexel option to them. 11 Now, they have evolved their theory by 12 picking out particular issues in the Drexel 13 option, allegedly a letter of credit, which they 14 have now elevated to some point that makes it more 15 important than the existence of the Drexel option. 16 This isn't what they charged. They 17 charged we weren't told about the Drexel option. 18 When they saw the overwhelming documents that 19 there were, they have now changed their theory. 20 This is not what they alleged in the case. It's a 21 pretty obvious end runaround of the fact that they 22 now realize all of these things are now in 23689 1 Mr. Twomey's hands. 2 Now, if the Court wants to hear the 3 evidence, I understand the Court wants to hear the 4 evidence, but that wasn't what was charged in the 5 Notice of Charges. So, I object. 6 MR. RINALDI: Your Honor, we have 7 objected from the outset that the option was never 8 fully disclosed, that they made substantial 9 misrepresentations about the nature of the 10 ownership of -- MAXXAM'S ownership of UFG stock. 11 Mr. Villa may not like the idea that they didn't 12 disclose the letter of credit or the 13 indemnification, but it goes to the very issue of 14 was there complete disclosure of the nature of 15 MCO's ownership of shares of UFG. 16 THE COURT: All right. I've heard it. 17 Let's proceed. 18 Q. (BY MR. RINALDI) Sir, directing your 19 attention to Exhibit A12191. This, I believe, is 20 a document that probably was admitted in another 21 form. But it is the first interim report prepared 22 by Vivian Carlton. However, it is attached to a 23690 1 cover letter that's sent by you to Lawrence J. 2 White. 3 Do you see that? 4 A. Yes, I do. 5 Q. And who was Mr. Lawrence J. White? 6 A. He was one of the three members of the 7 Federal Home Loan Bank Board. There were three 8 members appointed by the president, and he was a 9 member at that time. 10 MR. RINALDI: Your Honor, I would move 11 the admission of Exhibit A12191. 12 MR. VILLA: May I simply inquire, is 13 this -- is the interim report already in? 14 MR. RINALDI: I believe that it would 15 have been put in through Ms. Carlton. 16 MR. VILLA: And the purpose of this is 17 to also -- is to get in the letter, not just to 18 have a duplicate of a report? 19 MR. RINALDI: Yeah. I had some 20 questions I wanted to ask him about the letter. 21 MR. VILLA: Okay. No objection. 22 THE COURT: Received. 23691 1 Q. (BY MR. RINALDI) Mr. Twomey, why was 2 the interim report that had been prepared by 3 Vivian Carlton being sent to Mr. White? 4 A. Because he requested it. 5 Q. And was USAT an institution that was of 6 interest to people in Washington at this point in 7 time? 8 A. I'd say yes because Mr. White is in 9 Washington. 10 Q. But he didn't share with you at this 11 point in time why it is he was seeking the interim 12 report? 13 A. I probably was aware at the time we 14 prepared this to go to Washington what his -- why 15 he was interested. But again, it's been ten 16 years; and I don't really remember the exact 17 rationale. All I knew is this was a rush, and you 18 can see on the page where this thing was faxed the 19 same day it was prepared because they wanted it 20 immediately. 21 Q. Okay. Now, directing your attention to 22 Page OW157769, and the last sentence or the last 23692 1 paragraph, it states, "As shown above, the 2 association's investment securities represent a 3 volatile and risky practice. Moreover, the recent 4 October 1987 stock market crash resulted in 5 substantial realized as well as unrealized 6 losses." 7 Did you view, at this point in time, 8 the investment securities of the association as 9 representing a risky practice? 10 A. There was risk, but I wouldn't 11 categorize it as a risky practice. This is right 12 after the 1987 stock crash, and a lot of different 13 securities had been adversely impacted by the loss 14 of market value. 15 Q. And it indicates at the bottom there 16 that there had been some losses associated with 17 the crash in October of 1987? 18 A. Yes. 19 Q. And was it on the magnitude of 20 $50 million, if you recall? 21 A. I recall the $50 million, yes. 22 Q. And then, if you turn to the next page, 23693 1 it makes reference to Drexel Burnham Lambert. 2 Do you see that? Was it your 3 understanding that Drexel Burnham Lambert came to 4 acquire a greater ownership than 6 percent, that 5 it rose to 9.7 percent? 6 A. Well, I believe the 9.7 percent also 7 included the 300,000 shares we discussed earlier. 8 Q. Well, do you recall that initially, 9 Ms. Baugh in her memo to you indicated that Drexel 10 only owned 6 percent? 11 A. Yes. 12 Q. And you think the 300,000 shares 13 accounted for the difference between the 6 and the 14 9.7 percent? 15 A. I believe so. 16 Q. Okay. And do you remember the other 17 day, I asked you -- you commented that you thought 18 that Drexel was the major underwriter of a 19 majority of USAT and its subsidiaries' corporate 20 bonds. 21 Do you recall that? 22 A. That they purchased, yes. 23694 1 Q. Is this the source of the information 2 or the source of -- when I asked you if you had 3 seen that somewhere, was it based upon -- 4 A. Just basically discussions I had with 5 different CFOs. It was my general opinion during 6 that time frame that Drexel, particularly Milken's 7 office, was the catalyst for a lot of the 8 different junk bond securities that were out 9 there. 10 Q. Well, but at the bottom of 11 Page OW157770, does it appear that that's what you 12 were advised by Vivian Carlton in her interim 13 report? 14 A. Yes. 15 Q. Would that have been one source of that 16 information then? 17 A. Yes. 18 Q. Okay. Then turning to the next 19 document, which is the second interim report, this 20 is Exhibit Twomey 51, and it's Tab 1497, I 21 believe. And in particular, turning to 22 Page OW158352, there is a reference to the 23695 1 examination -- or a comment regarding the review 2 of investment securities during the 1987 3 examination. 4 Could you take a moment to just look at 5 that? And then I have a couple questions for you. 6 THE COURT: Mr. Rinaldi, is that 7 document in evidence? 8 MR. RINALDI: Yes, I believe it is, 9 Your Honor. It should be Tab 1497. It's referred 10 to as Twomey 51. It's one that came in -- 11 MR. BLANKENSTEIN: Your Honor, we have 12 it in as A14070. 13 THE COURT: Thank you. 14 MR. VILLA: Sir, can you give us the 15 page reference again? 16 MR. RINALDI: Yes. It would be the 17 third page in. It is OW158352. 18 MR. VILLA: I don't believe we're 19 looking at the same document. 20 MR. RINALDI: It's the second interim 21 exam dated March the 10th, 1988. 22 MR. VILLA: And your Bates range, sir, 23696 1 starts at 15? 2 MR. RINALDI: Why don't we use the 3 other set of numbers, which is OW1339? Does that 4 work for you? 5 MR. BLANKENSTEIN: No. 6 MR. RINALDI: This is the document you 7 gave the witness at his deposition, Mr. Villa. 8 And it has a "VC" at the bottom of it which 9 indicates it came from Vivian Carlton's records. 10 MR. VILLA: I'm not arguing with 11 counsel. I think the document in evidence, 12 unless -- at least mine begins with Bates stamp 13 No. 128899. And -- 14 THE COURT: That's the document that I 15 have. 16 MR. VILLA: Yes, Your Honor. I think 17 we ought to just use the same document. I'm not 18 pointing fingers. I'm just trying to -- 19 MR. RINALDI: Fine. We can use that 20 document, and I will transpose the page numbers. 21 I guess we'll have to give this to the witness, 22 and I will count pages. 23697 1 How is that? 2 THE WITNESS: No problem. 3 Q. (BY MR. RINALDI) If you'll look to 4 the third page of the document, which is 5 Page No. 3 -- 6 A. And I've read that paragraph. 7 Q. You have? Okay. 8 Do you recall whether Ms. Carlton was 9 able to complete the examination of the investment 10 securities of USAT during the 1987 examination? 11 A. I recall she wasn't able to, and she 12 had to refer to the institution's outside 13 independent auditors to get their opinion 14 regarding the institution's transactions. But 15 this first paragraph has to do with reports that 16 they were not filing with -- as required by 17 insurance regulation 563.17(4) regarding futures 18 and options trading. 19 Q. Well, but in the first sentence, it 20 says, "The review of the association's investment 21 securities activities is incomplete." 22 Do you see that? 23698 1 A. Yes. 2 Q. Do you recall whether she was ever able 3 to review the trading activity of USAT with 4 respect to its mortgage-backed security 5 risk-controlled arbitrage portfolio? 6 MR. VILLA: Your Honor, I object to 7 this testimony. If he's going to say what 8 Ms. Carlton told him, then we can hear what 9 Ms. Carlton told him. If he's going to read the 10 document, then it's the document. Instead of him 11 simply putting ideas in Ms. Carlton's mind and 12 having him testify to it, I think we ought to know 13 what the source of the information is. 14 So, I object. This is like Ms. Bese 15 information. If she told it to him, he ought to 16 say that. If it's from the document, we ought to 17 learn that, too. 18 THE COURT: All right. Restate your 19 question. 20 Q. (BY MR. RINALDI) Did you discuss the 21 1987 examination with Ms. Carlton from time to 22 time? 23699 1 A. Yes. 2 Q. And this would have been during the 3 course of her conducting the examination? 4 A. Yes. 5 Q. And in that regard, did you have any 6 discussions that you recall with Ms. Carlton 7 regarding her -- whether she was able to complete 8 her review of the investment securities activities 9 at USAT? 10 A. Yes. 11 Q. And what do you recall? 12 A. That because of all the different 13 records, she was unable to complete the review. 14 Q. Do you recall whether she took some 15 action in lieu of completing the review in order 16 to satisfy herself that their trading -- strike 17 that -- that their investment activities were 18 appropriate? 19 A. She discussed the issues with the 20 outside auditors. 21 Q. And that's what's reflected in the 22 third paragraph on the third page of the exhibit? 23700 1 A. Yes. 2 Q. Now, directing your attention to the 3 tenth page of the document, it makes reference to 4 United MBS Corporation. And it describes, in the 5 last paragraph, how United MBS generates income by 6 entering into reverse repos and dollar roll 7 contracts collateralized by their Fannie Mae, 8 Ginnie Mae, and Freddie Mac mortgage-backed 9 securities. 10 Do you see that reference? 11 A. Yes. 12 Q. Does that appear to describe the MBS 13 risk-controlled arbitrage that United was involved 14 in through its subsidiary, United MBS? 15 A. Yes. 16 Q. Do you recall having any discussions 17 with Ms. Carlton regarding that portfolio? 18 A. Not specifically. 19 Q. She makes reference in here to the fact 20 that it appears that no speculation is involved in 21 the portfolio. 22 Do you see that? 23701 1 A. Yes. 2 Q. Do you recall having any discussion 3 with Ms. Carlton about her views with respect to 4 the lack of speculation in the portfolio? 5 A. Well, I just may have some general 6 impressions. I don't recall anything of that 7 specific conversation. 8 Q. And what were your general impressions 9 regarding that portfolio? 10 A. It was a risk-controlled arbitrage 11 portfolio, and nothing particularly out of the 12 ordinary. 13 Q. Was your impression that it had been 14 financially successful for USAT? 15 A. Yes. I think they were reporting that 16 they had a positive spread. 17 MR. VILLA: Your Honor, just so we can 18 be clear, this is based upon the conversations 19 with Ms. Carlton even though it isn't a specific 20 one? That's why my prior objection -- if we have 21 the source of the information, that's fine. But 22 this man simply trying to tell us what he thought 23702 1 Ms. Carlton was thinking is inappropriate. So, if 2 he tells us that this is based upon a conversation 3 with Ms. Carlton, we will note that. If he can't 4 remember the specific conversation, I'd note that, 5 as well. So, I would ask that if he's asked these 6 generalized questions, he be asked the source of 7 the information. 8 Q. (BY MR. RINALDI) Sir, in connection 9 with Ms. Carlton's 1987 examination, did you have 10 any discussion with her regarding the 11 mortgage-backed security risk-controlled arbitrage 12 that USAT had been engaged in? 13 A. Yes. 14 Q. And do you have any general 15 recollection of what she communicated to you 16 regarding that risk-controlled arbitrage activity? 17 A. Yes. 18 Q. And what, to the best of your 19 recollection, do you recall? 20 A. There were no specific exceptions. It 21 was generally being conducted as it had been 22 portrayed to us, as a risk-controlled arbitrage. 23703 1 And at the time, there was some type of positive 2 spread, whatever that may be. 3 Q. Did she ever tell that you there were 4 large unrealized losses in the portfolio that 5 you're aware of? 6 A. From her 1997 exam? 7 Q. 1987 exam. 8 A. '87. I'm sorry. No. 9 Q. How about from her 1986 exam? 10 A. No. 11 Q. Now, I'd like you to take a look at 12 Exhibit A11160 again, which is Tab 1861. I've 13 shown this to you once before, but I -- is that it 14 right there? It's Tab 1861. 15 16 (Discussion held off the record.) 17 18 MR. RINALDI: Let's just skip it. I 19 had requested that the thing be available. I 20 guess it slipped through the cracks. 21 A. A11160? 22 Q. (BY MR. RINALDI) Yes. 23704 1 A. Okay. We found it. 2 Q. And there is just one reference I 3 wanted to direct you back to in Paragraph No. 1 or 4 Roman I. It's the second sentence that talks 5 about -- now, this is a document that you would 6 have prepared, correct? 7 A. Yes. 8 Q. And is this a document you would have 9 prepared based upon information that you received 10 from Ms. Carlton during the '87 examination? 11 A. Yes. 12 Q. Okay. And in particular, under Roman 13 Numeral I, the second sentence reads, "United has 14 postured itself as a non-traditional institution 15 focusing heavily on the investment and 16 mortgage-backed securities areas which have 17 generally been quite successful." 18 Do you see that? 19 A. Yes. 20 Q. Was it your understanding at or about 21 May 27th, 1988, that the mortgage-backed 22 securities risk-controlled arbitrage investments 23705 1 of USAT had been quite successful up to that date? 2 A. Yes. 3 Q. Now, prior to that time, had you 4 received any communication from USAT or any of its 5 employees indicating that there had been problems 6 with respect to their mortgage-backed portfolios 7 or their mortgage-backed risk-controlled arbitrage 8 investments? 9 A. No. 10 Q. Let me show you a copy of what -- or 11 hand up to you a copy of what's been previously 12 marked as A10649. This is a memo dated July the 13 3rd, 1986, that was prepared by Mike Crow and it 14 was sent to Jenard Gross and Gerry Williams. 15 A. Yes. 16 Q. And it makes reference to a discussion 17 that Mr. Crow had with Mike Giarla of Smith 18 Breeden Associates on June 30th, 1986. 19 Do you see that? 20 A. Yes. 21 Q. Does anyone at USAT ever advise you 22 that they had retained Smith Breeden to -- in 23706 1 connection with the management of their 2 risk-controlled arbitrage mortgage-backed security 3 investments? 4 A. I believe so. But, you know, I cannot 5 specifically recall. 6 Q. And do you recall at what point in time 7 you might have received that information? 8 A. Probably early on in -- sometime in '86 9 or '87. 10 Q. Okay. Did they ever disclose to you 11 the results of Smith Breeden's work with respect 12 to USAT's mortgage-backed security risk-controlled 13 arbitrage transactions? 14 A. Not that I can recall. 15 Q. Okay. Would you take a look at page -- 16 the second page of the document? At the bottom, 17 read the third bullet point. 18 A. (Witness reviews the document.) Okay. 19 It continues on to the top of the next page. I've 20 read it. 21 Q. Yes. Did they ever disclose to you 22 that the structured arbitrage was going to -- 23707 1 well, did they disclose the information that's 2 contained in that bullet point? 3 A. Not that I can recall. 4 Q. And then if you turn to Schedule C, 5 which is referenced in the bullet point, which 6 appears at OW005977 -- 7 A. I have it. 8 Q. And it indicates on the -- do you see 9 where it says "base" in the middle of the page? 10 A. Yes. 11 Q. If you go down to -- it's -- the first 12 line indicates the mortgage pools. 13 Do you see that? 14 A. Yes. 15 Q. And it indicates a value for them? 16 A. Yes. 17 Q. And then below that, it indicates 18 swaps, caps, and collars? 19 A. Yes. 20 Q. And it indicates an 86-million-dollar 21 negative value. 22 Do you see that? 23708 1 A. Yes. 2 Q. And then below that, there is a total 3 of $58,036,000. 4 Do you see that? 5 A. Yes. 6 Q. Did USAT disclose to you at or about 7 this point in time or at any subsequent point in 8 time that -- prior to the 1988 Southwest 9 examination that there were large unrealized 10 losses in the mortgage-backed security 11 risk-controlled arbitrage investments? 12 A. No. 13 Q. Was that information that you would 14 have found useful as a supervisory agent? 15 A. Yes. 16 Q. And why is that? 17 A. It would have changed the way I was 18 looking at their risk-controlled arbitrage or 19 their mortgage-backed securities. 20 Q. And what do you mean by that? 21 A. Well, obviously, if somebody as 22 reknowned as Smith Breeden had come in and done a 23709 1 review, we would have asked for copies of their 2 reports and done our own analysis. 3 Q. Does the fact that they were -- had 4 significant unrealized losses in the portfolio 5 something that would have concerned you given the 6 net worth condition of USAT? 7 A. Yes. 8 Q. Why is that? 9 A. The possibility of those losses being 10 realized would drastically reverse their net worth 11 position. 12 Q. Now, would you turn to the next 13 document which should be T4422? 14 THE COURT: Mr. Rinaldi, how much more 15 do you have? 16 MR. RINALDI: I have about maybe 15 17 minutes. 18 THE COURT: All right. We'll take a 19 short recess. 20 MR. RINALDI: Thank you, Your Honor. 21 22 23710 1 (Whereupon, a short break was taken 2 from 3:03 p.m. to 3:25 p.m.) 3 4 THE COURT: Be seated, please. We'll 5 be back on the record. 6 Mr. Rinaldi, you may continue. 7 Q. (BY MR. RINALDI) Mr. Twomey, would 8 you turn to the next document, which is T4422? I 9 believe your book is opened to that. This is 10 Tab 886. And on the cover of it, it talks about 11 the strategic planning committee and it's a memo 12 dated December 10th, 1987. And then attached to 13 it is a confidential United Savings Association of 14 Texas strategic profile. 15 Do you see that? 16 A. Yes. 17 Q. In the last paragraph before the word 18 "results," on the first page, which is OW45511, it 19 says, "United embarked upon a wholesale strategy." 20 Do you see that? 21 A. Yes. 22 Q. And then it just goes on to describe a 23711 1 wholesale strategy. And then below that, it talks 2 about results. 3 Do you see that? 4 A. Yes. 5 Q. What was your understanding of what 6 the, quote, "wholesale strategy" was with respect 7 to United? 8 A. My understanding of United's strategy 9 was primarily in mortgage-backed security through 10 a risk-controlled arbitrage. 11 Q. Did that also include the junk bonds, 12 as you understood it? 13 A. Well, that was the primary investment. 14 Next-to-the-largest, I would say, would have been 15 the junk bond portfolio. And then, of course, 16 United did hold other loans, single-family loans. 17 And, of course, finally, they had the equity 18 investments. 19 Q. Now, at about the time of the 1987 20 exam -- that is, at the end of 1987 and the 21 beginning of 1988, did anyone ever tell you at 22 United that the results of their wholesale 23712 1 strategy over the past three years had not been 2 good? 3 A. No. 4 Q. If you'd turn to the next page, at the 5 top of the page, it says -- makes reference to 6 "many of the major activities as part of the 7 wholesale activities have been disappointing." 8 Do you see that? It's in the first 9 sentence at the top of the page. 10 A. Yes. 11 Q. Do you recall having any discussions 12 with people at United around the end of 1987 where 13 they related to you that the major activities as 14 part of the wholesale strategy had been 15 disappointing? 16 A. No. 17 Q. And if you'll direct your attention to 18 the last two bullet points on that same Page 2, if 19 you'll take a moment to read them. 20 A. (Witness reviews the document.) Yes. 21 Q. Now, it indicates that one of its 22 mortgage-backed portfolios, Joe's portfolio, had 23713 1 lost $57 million, producing an annualized return 2 on assets of negative 2.67 percent. 3 Do you see that? 4 A. Yes. 5 Q. Was that information that was ever 6 conveyed to you by United Savings Association of 7 Texas during any time that you served as 8 supervisory agent? 9 A. Not that I recall. 10 Q. Now, the next bullet point down talks 11 about the United MBS Corporation. 12 Do you see that? 13 A. Yes. 14 Q. And the last sentence says, "Counting 15 mark-to-market losses, the activity has lost 16 $96 million for a negative return of 17 5.99 percent." 18 Do you see that? 19 A. Yes. 20 Q. Did anyone at United ever convey that 21 information to you at or about the time of this 22 memo; that is, the end of 1987, beginning of 1988? 23714 1 A. Not that I recall. 2 Q. When was the first time that you 3 actually learned that there were large unrealized 4 losses in the mortgage-backed security 5 risk-controlled arbitrage portfolios at United? 6 A. Probably the latter part of '88. 7 Q. And would that have been information 8 that you obtained in connection with the Southwest 9 examination? 10 A. Yes. 11 Q. Take a look at B2699, which should be, 12 I believe, in -- there it is right there. This is 13 the exam report, is it not? And if you turn to -- 14 for the Southwest Plan examination -- and if you'd 15 turn to OW154228. 16 A. Yes. I have the page. 17 Q. I'm sorry. I think I've given you -- 18 first paragraph -- 154226. No, no. I was right. 19 Excuse me. 20 Now, this is part of the Interim Report 21 No. 5? Can you tell? I think if you flip back to 22 OW154220, you'll see that that's where the report 23715 1 begins. 2 A. Yes. This is dated December 19th, 3 1988. 4 Q. Now, it indicates on Page OW154228 near 5 the bottom of the page in the last sentence in the 6 next-to-the-last paragraph, "The unrealized loss 7 is based on market value of the MBS and the hedges 8 at that date was in excess of $200 million." 9 Do you see that? 10 A. Yes. 11 Q. Was this the first time that you were 12 aware that there was a substantial loss in the 13 mortgage-backed security risk-controlled arbitrage 14 portfolio when you received Enclosure No. 5? 15 A. Approximately that time, yes. 16 Q. So, it would have been sometime in 17 December of 1988? 18 A. I believe so. 19 Q. And prior to that time, had Vivian 20 Carlton ever advised you that there was 21 substantial unrealized losses in the hedges 22 related to USAT's MBS arbitrage portfolios? 23716 1 A. In Vivian's two prior exams, no. 2 Q. You don't recall her telling you that 3 there were large losses? 4 A. I don't recall that at all. 5 Q. Okay. Sir, would you turn now to what 6 should be the last document in your book? It's 7 Exhibit B4287. It should be Tab 1850. 8 Now, first of all, do you recognize 9 this document, sir? 10 A. Yes. 11 Q. And can you describe for the Court what 12 it is? 13 A. In 1988, the Federal Home Loan Bank 14 Board had come out with a regulatory handbook that 15 replaced older manuals that we had had for some 16 time. And this is an insert into that manual on 17 how to conduct examinations. 18 Q. And this particular insert, 19 Section 450, deals with what subject? 20 A. Risk-controlled arbitrage. 21 Q. And if you look at the third paragraph 22 on Page 450.1, could you -- it states, "RCA is the 23717 1 purchase of mortgage-related assets, normally a 2 mortgage-backed security (MBS) funded by a 3 short-term liability, such as a reverse repurchase 4 agreement (reverse repo)." 5 Do you see that? 6 A. Yes. 7 Q. And then if you'll read on the 8 remainder of that paragraph, I have just a couple 9 of questions I wanted to ask you about. 10 A. (Witness reviews the document.) Okay. 11 Q. Does that paragraph generally describe 12 what you understood the nature of USAT's 13 mortgage-backed security risk-controlled arbitrage 14 was? 15 A. Yes. 16 Q. Now, it -- in the middle of that 17 paragraph, it says, "Generally, the RCA's goal is 18 to earn a spread of 100 basis points on the 19 mortgage-related assets over the cost of funding." 20 Do you see that? 21 A. Yes. 22 Q. And was it your understanding that the 23718 1 goal of USAT's mortgage-backed security 2 risk-controlled arbitrage was to earn a spread? 3 A. A positive spread, yes. 4 Q. Now, would you turn to Page 450.2 and 5 450.3 in the document? And beginning at the 6 bottom of Page 450.2, it talks about 7 implementation risk. 8 Do you see that? 9 A. Yes. 10 Q. And then it says, "The risk that the 11 program is managed inappropriately which 12 includes," and it talks about some risk that may 13 result from inappropriate management of a 14 risk-controlled arbitrage mortgage-backed security 15 portfolio. 16 And on the next page, it discusses the 17 subject of the allure of gambling. 18 A. Yes. 19 Q. It says, "The leverage potential is 20 great in an RCA strategy and some institutions may 21 view an RCA framework as a mechanism to out-guess 22 the market and make a large profit, i.e., a 23719 1 one-time yield on interest rate. For example, an 2 institution could leverage an investment by 3 several multiples and leave it unhedged. Thus, 4 they stand to realize a large-spread profit on the 5 assets over the cost of short-term funding if 6 interest rates decline. But an institution is 7 extremely susceptible to losses if rates increase 8 or if large prepayments occur on premium 9 securities." 10 Do you see that? 11 A. Yes. 12 Q. Did you understand that this was a 13 potential risk associated with the implementation 14 of a risk-controlled arbitrage if the program was 15 not managed appropriately? 16 A. Yes. 17 Q. Did you ever advise United Savings 18 Association of Texas that engaging in the activity 19 described in the handbook in this paragraph 20 "Allure of Gambling" was an appropriate practice 21 for USAT to engage in? 22 A. No. 23720 1 Q. Did you ever tell USAT it was okay to 2 leverage its MBS by several multiples and leave it 3 unhedged? 4 A. No. 5 Q. Did you ever encourage such activities 6 on the part of USAT? 7 A. No. 8 Q. Did USAT ever tell you they were 9 engaged in those kinds of activities that are 10 described under the "Allure of Gambling"? 11 A. No. 12 Q. During the three years you were the 13 supervisory agent of USAT, did you consider 14 leveraging an MBS investment by several multiples 15 and leaving it unhedged to be inconsistent with 16 safety and soundness principles? 17 A. It was not -- it was not a safe and 18 sound practice. 19 Q. Now, the next paragraph talks about -- 20 and I'm making reference to Page 450.3 -- about 21 trading. 22 Do you see that? 23721 1 A. Uh-huh, yes. 2 Q. Is the type of trading described in the 3 paragraph on Page 450.3 of the regulatory handbook 4 another type of risk you understood was associated 5 with an MBS risk-controlled arbitrage if the 6 program was not managed appropriately? 7 A. Yes. 8 Q. Did you ever authorize or approve of 9 USAT to engage in trading of its mortgage-backed 10 security risk-controlled arbitrage investments by 11 making buy and sell decisions for short-term 12 speculative purposes rather than long-term 13 purposes consistent with profitability? 14 A. No. 15 Q. Did you ever encourage such activities? 16 A. No. 17 Q. During the three years you were the 18 supervisory agent of USAT, did you consider such 19 trading activities as described on Page 450.3 of 20 the regulatory handbook under the title "Trading" 21 to be inconsistent with principles of safety and 22 soundness? 23722 1 A. Yes. 2 Q. Then the next paragraph down talks 3 about mismatched hedges. 4 Was this another type of risk that you 5 understood was associated with the implementation 6 of a mortgage-backed security risk-controlled 7 arbitrage if assets and liabilities were either 8 unhedged or improperly hedged? 9 A. Yes. 10 Q. Did you ever give authorization or 11 approval to USAT to leave the assets and 12 liabilities in their mortgage-backed security 13 risk-controlled arbitrage portfolios unhedged or 14 improperly hedged? 15 A. No. 16 Q. Did you ever encourage such activities? 17 A. No. 18 Q. Were you ever told by USAT -- did USAT 19 or anyone from USAT ever tell you that they were 20 engaging in such activities? 21 A. No. 22 Q. During the three years you were the 23723 1 supervisory agent of USAT, did you consider it to 2 be inconsistent with safety and soundness 3 principles to permit the assets and liabilities of 4 a mortgage-backed security risk-controlled 5 arbitrage to be unhedged or improperly hedged? 6 A. Yes. 7 Q. And now, if you'd turn to Page 450.7, 8 and I'd direct your attention to the second column 9 on the right-hand side of the page where it talks 10 about accounting gains and losses versus the 11 economics of the transaction. 12 Do you see that? 13 A. Yes. 14 Q. It says, "Supervisory personnel should 15 be alert for the potential differences between the 16 accounting for gains and losses under GAAP and the 17 actual economic gains or losses in an RCA. The 18 accounting for gains and losses can diverge from 19 the economics of the transaction." 20 What do you understand they are 21 referring to in this paragraph, sir? 22 A. The proper or timely recognition of 23724 1 gains and losses from your portfolio. 2 Q. Now, in a mortgage-backed security 3 risk-controlled arbitrage portfolio, is the 4 practice of recognizing gains on sales of MBS to 5 increase regulatory capital while deferring the 6 losses on the corresponding hedges a practice 7 which is inconsistent with principles of safety 8 and soundness? 9 A. Yes. 10 Q. Did you ever approve USAT recognizing 11 gains in the MBS risk-controlled arbitrage 12 portfolios while deferring the losses on the 13 corresponding hedges? 14 A. No. 15 Q. Did you ever encourage such a practice 16 by USAT? 17 A. No. 18 Q. Did they ever tell you they were 19 engaging in such practices? 20 A. No. 21 Q. If you had learned that they were 22 engaging in such practices, would you have 23725 1 considered that an unsafe and unsound practice? 2 A. Yes. 3 MR. RINALDI: Your Honor, I think that 4 concludes my examination of this witness. 5 THE COURT: Mr. Villa, are you going to 6 cross-examine? 7 MR. VILLA: Your Honor? 8 THE COURT: Are you going to 9 cross-examine? 10 MR. VILLA: We are going to 11 cross-examine. 12 MR. NICKENS: I'm going to start out, 13 Your Honor. 14 15 EXAMINATION 16 17 Q. (BY MR. NICKENS) Mr. Twomey, for the 18 record, my name is J.C. Nickens. I think we met 19 briefly back at the time of your deposition in 20 March of 1997. You may not recall that. I want 21 to ask you a few questions concerning your 22 testimony. 23726 1 With regard to the questions you've 2 just been asked by Mr. Rinaldi, has your wife ever 3 told you that she had gone to the moon? 4 A. No. 5 Q. Do you conclude from that that she's 6 gone and not told you? 7 A. Since there's only been a set number of 8 astronauts that have been on the moon and I don't 9 think a woman has been up there, I'd probably have 10 another way to determine that. 11 Q. The risk-controlled arbitrage and MBS 12 activities at USAT were examined by outside 13 auditors, correct? 14 A. They have independent auditors, yes. 15 Q. And they were examined over the period 16 covered by this case on -- by your examiners on 17 three separate occasions? 18 A. Examination of '86, '87, and '88. 19 Q. Yes, sir. 20 A. Yes, they were examined by my examiners 21 with the Federal Home Loan Bank Board. 22 Q. And so, do you conclude that because 23727 1 you were -- you don't -- well, and this happened, 2 what, 12 years ago? 3 A. '86, '87, and '88. 4 Q. So, you've forgotten some of the things 5 that you were told back at that time? 6 A. I don't remember everything I was told 7 for a three-year period. I remember a lot. 8 Q. Well, I'm trying to get at what we 9 should conclude from the fact that you may not 10 have been told that some things did not occur or 11 did occur. 12 A. By who? 13 Q. By Ms. Carlton, by the people at USAT, 14 that you don't recall that anymore. 15 A. I think you'd have to be much more 16 specific than these generalizations. 17 Q. Well, before we get into the details of 18 that, let me ask you some background questions. 19 How much time have you spent preparing 20 for your testimony? 21 A. Well, there's been at least four 22 occasions where I've reviewed the binders that 23728 1 Mr. Rinaldi sent to me. 2 Q. And where are those binders? 3 A. In my office in Dallas. 4 Q. Back in Dallas? 5 A. (Witness nods head affirmatively.) 6 Q. How many such binders? 7 A. There's probably at least six or seven 8 binders themselves. 9 Q. And these are all documents that were 10 selected by Enforcement for you to review in 11 preparation for your testimony? 12 A. Yes. 13 Q. And then you had discussions with 14 counsel for Enforcement concerning your testimony? 15 A. Yes. 16 Q. And how much time would you estimate 17 that you have spent either in discussions with 18 them or reviewing these documents? 19 A. Recently, OTS counsel came up to my 20 office; and we spent about three hours one day. 21 I've come down here on at least two occasions and 22 spent at least half a day each occasion talking to 23729 1 counsel. And throw in another day in total based 2 on some telephone conversations, inquiries, that 3 type of stuff. 4 Q. That's about two and a half days of 5 preparation time? 6 A. Probably. 7 Q. And have you spoken to anyone else 8 concerning your testimony other than counsel for 9 the OTS? 10 A. About the specifics of the case? 11 Q. Have you spoken to anyone else about 12 your testimony? 13 A. Again, I have not talked to anybody 14 about the specifics of my testimony regarding the 15 case. I have to talk to my boss and other related 16 parties because I'm out of the office. 17 Q. Well, have you talked about the 18 substance of your testimony -- obviously, you have 19 to make arrangements to not be at work. But I'm 20 concerned or would be interested in conversations 21 concerning the substance of your testimony. 22 A. No. 23730 1 Q. And do you have any -- personally 2 maintain any documents concerning USAT? 3 A. The only documents I have regarding 4 USAT are the ones that the Office of Enforcement 5 has sent to me. 6 Q. So, all of the documents that you have 7 reviewed prior to your testimony were given to you 8 by the OTS? 9 A. Yes. 10 Q. And now, of course, your deposition was 11 also taken in this matter back in 1997, as I 12 mentioned? 13 A. Yes. St. Patrick's Day, 1997. 14 Q. Mr. Villa asked you questions over a 15 span of several days? 16 A. Three and three quarter days. 17 Q. And at that point in time, you looked 18 at some 80-odd documents that he had selected for 19 you? 20 A. At least. 21 Q. And at that point in time in 22 preparation for your deposition, you had reviewed 23731 1 three to four boxes of documents selected by 2 Enforcement over a two-day period, correct? 3 A. Yes. 4 Q. Now, have you reviewed your deposition? 5 A. Not for some time. 6 Q. Did you sign your deposition? 7 A. I cannot recall. 8 Q. And you say it hasn't been some time. 9 How long has it been since you reviewed your 10 deposition? 11 A. Probably a few months. 12 Q. And how many times have you read it? 13 A. Well, I read it in detail after I 14 received it after my deposition the first time. I 15 probably looked at certain parts of it sometime a 16 few months ago. 17 Q. Did you make any changes to your 18 deposition testimony? 19 A. I don't recall if I signed an errata 20 sheet or whatever they call it. I may have. I 21 just don't recall. Again, you're talking a year 22 and a half ago when I signed the deposition. And 23732 1 it was very lengthy. 2 Q. But you do believe you signed it? 3 A. Right now, I just don't recall. I 4 haven't thought about it at all. And that was 5 only a year and a half ago. I'm sure you're going 6 to make the point. 7 Q. Well, I guess the point makes itself, 8 doesn't it? 9 A. That's why you're a good attorney. 10 Q. Now, have you reviewed anyone else's 11 testimony either in court or by way of deposition? 12 A. No. 13 Q. Have you discussed with anyone the 14 substance of other persons' testimony? 15 A. No. 16 Q. Now, in addition to your deposition in 17 this matter, you were interviewed on at least four 18 occasions prior to your deposition, correct? 19 A. Yes. 20 Q. And Steptoe & Johnson, a Washington law 21 firm, interviewed you in 1991? 22 A. Yes. 23733 1 Q. And that was in connection with a study 2 that they were doing investigating the Southwest 3 Plan assistance agreements? 4 A. Yes. 5 Q. And they made a report to the Congress 6 and to the oversight board of the RTC in 7 December 1990? 8 A. I think they -- okay. I thought they 9 interviewed me in '91, but I'll go with your 10 dates. 11 Q. Okay. But they did send you a copy of 12 their report? 13 A. A draft, yes. 14 Q. And the report contained references to 15 your interview information? 16 A. Yes. 17 Q. Then you were interviewed by a Houston 18 law firm on behalf of the FDIC in 1992? 19 A. Yes. I believe in May '92. 20 Q. And did you receive any report or 21 document of that interview? 22 A. No. 23734 1 Q. And then a Chicago law firm interviewed 2 you also on behalf of the FDIC concerning the 3 events at USAT? 4 A. At least twice, yes. 5 Q. And the second one was only about six 6 or seven months prior to your deposition? 7 A. Yes. 8 Q. Now, would you say that your 9 recollection of these events at the time of these 10 interviews and at the time of your deposition was 11 better or worse than it is today? 12 A. Well, at the time I had the interviews, 13 I didn't have the benefit of any documents to 14 really look at. So, it was strictly memory. The 15 time of my deposition, I didn't have access to the 16 supervisory documents that were referred to here 17 today. And so, it's kind of a little bit apples 18 and oranges. 19 Q. So, among -- well, are you saying that 20 you weren't shown many of those supervisory 21 documents at the time of your deposition? 22 A. Prior to my deposition? 23735 1 Q. At the time of your deposition. 2 A. I'm going to say prior to my 3 deposition, I did not really review all the 4 supervisory documents. 5 Q. And among the three to four boxes of 6 documents that you were given to review, those did 7 not include prior -- prior to your deposition, it 8 did not include supervisory documents? 9 A. Again, I believe it was two boxes. And 10 they contained examination work papers related to 11 USAT exams. 12 Q. Well, you do recall at the time of your 13 deposition you indicated it was three to four 14 boxes? 15 A. I recall two boxes right now. 16 Q. Well, let's -- 17 A. But I'll defer to what's in the 18 deposition. I don't have a problem with that. 19 Q. Well, it's not a matter of record 20 unless we look it up, Mr. Twomey, unless you tell 21 me that you recall that you told us it was three 22 to four boxes at the time of your deposition. 23736 1 A. As I said, I'll defer to what's in my 2 deposition. 3 Q. Okay. So, you will agree that you told 4 us that it was three to four boxes at the time of 5 your deposition? 6 A. I said I defer to what's in my 7 deposition. I recall two today. And if I said 8 three to four, then I said three to four. 9 Q. Let me ask you to look at your 10 deposition then. 11 A. Is there a particular page? 12 Q. Yes, sir. Page 7 starting at Line 3. 13 And why don't I just read the question, and you 14 can read the answer? Would that be okay with you? 15 A. Okay. Line 6, it looks like I -- 16 Q. Well, I'm going to start at Line 3, if 17 we could, with the question. Mr. Villa asked you, 18 "What volume of materials did you review?" 19 And you said? That's at Line 4. 20 A. Yes. I see it. I mean, what do you 21 want me to do? 22 Q. I'd like for you to read it. 23737 1 A. "Could you be more specific" was the 2 answer. 3 Q. And Mr. Villa asked, "How many pages?" 4 And you answered? 5 A. "I looked at three or four boxes of 6 material." 7 Q. And the question was "Three to four 8 boxes of material; is that right?" 9 And you answered? 10 A. "Yes." 11 Q. "How long did you spend reviewing 12 them?" 13 A. "Two days." 14 Q. "Do you recall whether these were files 15 that had been generated during the time period 16 when you were the supervisory agent for United 17 Savings Association of Texas?" 18 A. "Yes" was the answer. 19 Q. Now, does that refresh your 20 recollection that what you were reviewing were 21 supervisory files? 22 A. Well, I believe I already answered the 23738 1 question before, that the files I looked at were 2 basically examination work papers and other 3 related documents to the examinations. 4 Q. And your prior testimony doesn't 5 refresh your recollection on the subject? 6 A. My prior testimony? Could you be 7 specific? 8 Q. Okay. Let me ask you to look back at 9 Page 7 again. 10 A. Hang on. I closed the book. 11 Q. It's actually Page 8. 12 A. Yes. 13 Q. Line 8, you were asked the following 14 question, "Which documents do you recall 15 reviewing?" 16 And what was your answer? 17 A. "I don't recall them right now. Just 18 supervisory files." 19 Q. Yes, sir. So, at the time of your 20 deposition, you told us you reviewed the 21 supervisory files. Right? 22 A. I made a generalization regarding the 23739 1 files. That's all. 2 Q. And today, a year and a half later, you 3 have a better recollection that your deposition 4 was incorrect? 5 A. No. What I was referring to then 6 was -- I was saying these were supervisory files, 7 all-inclusive, including the examination. The 8 files I recently reviewed that were sent to me 9 were more supervisory documents generated by my 10 office and sent to my office. 11 Q. Sir, are you trying to tell us that 12 when you described the documents that you reviewed 13 as supervisory files, that you meant something 14 else? 15 A. I believe I just answered that. I 16 referred to them as general supervisory files, 17 generally supervisory files, including things that 18 normally would be in the examination's supervisory 19 files. That includes examination reports. 20 Q. But it also includes supervisory files, 21 doesn't it? 22 A. Supervisory files, so we can be clear 23740 1 on this, are the files that are usually generated 2 or sent to the supervisory agent and have -- 3 pertain to the supervision of the FSLIC 4 institution during that time period. 5 Q. Weren't you shown a lot of documents 6 that had your name on them in those three to four 7 boxes of exhibits? 8 A. Prior to my deposition in March of 9 nineteen -- 10 Q. '97. 11 A. -- 97, I believe they were mostly -- 12 there was some supervisory files. There were a 13 lot of work papers pertaining to the examinations. 14 Q. Weren't there just a lot of documents 15 that had your name on them? 16 A. I'm sure my name was over a number of 17 documents. 18 Q. Now, let me ask you some questions, 19 Mr. Twomey, concerning the role of the supervisory 20 agent in the regulatory framework of thrifts as it 21 existed back in the mid to late Eighties. 22 Now, you were USAT's supervisory agent 23741 1 from December 1985 until it was put into 2 receivership at the end of December 1988? 3 A. Yes. 4 Q. And as the super -- USAT's supervisory 5 agent, you had the responsibility of monitoring 6 its activities? 7 A. I reviewed reports, examination reports 8 and other information sent to me to determine 9 safety -- to determine whether it was a risk to 10 FSLIC, yes. 11 Q. Okay. And you would call that a 12 responsibility for monitoring its activities. 13 Right? 14 A. I just wouldn't put it that way, but 15 okay. 16 Q. And you had the responsibility in some 17 respect of responding to its needs and requests; 18 that is, the institution's needs and requests? 19 A. They would make applications, yes. 20 Q. And as you indicated, your 21 responsibilities included reviewing examination 22 reports? 23742 1 A. Yes. 2 Q. It included reviewing other financial 3 information? 4 A. Thrift reports, yes. 5 Q. Or whatever financial information was 6 made available to you, that was part of your 7 responsibilities, wasn't it? 8 A. Yes. 9 Q. And you processed applications from the 10 institution? 11 A. Yes. 12 Q. And you took corrective action where 13 necessary? 14 A. Yes. 15 Q. Now, among the supervisory regulators, 16 you had the direct responsibility of knowing USAT 17 better than anyone else, didn't you? 18 A. Yes. 19 Q. And you also had the responsibility of 20 looking out for the Bank Board's interests? 21 A. FSLIC's interests, yes. 22 Q. Now, let me ask you some questions 23743 1 about the state of the thrift industry in Texas at 2 this period of time. 3 You have testified that USAT was not, 4 of course, your only responsibility? 5 A. That's right. 6 Q. And -- but all of your responsibility 7 involved institutions here in Texas, correct? 8 A. I was responsible for a number of 9 institutions in Texas, and that number would 10 change from time to time based on different 11 reorganizations and caseload changes at the Dallas 12 Bank, yes. 13 Q. I'm just trying to establish that it 14 was in Texas. 15 Did you have responsibilities outside 16 the State of Texas? 17 A. For very few institutions. 18 Q. And can we agree that the thrift 19 industry in Texas in the late Eighties was in very 20 serious and poor financial condition? 21 A. Yes. 22 Q. Now, to put some numbers on this, could 23744 1 I ask you to look at Exhibit T8142, which is at 2 Tab 1450? That's the S memo. 3 A. Yes. 4 Q. I'm going to ask you to look over at 5 Page 14. 6 A. I have it. 7 Q. And do you see there is a paragraph 8 there called "Condition of the Industry"? 9 A. Yes. 10 Q. And then if you turn the page to 11 Page 15, there's a second paragraph describing the 12 State of Texas? 13 A. Yes. 14 Q. And it indicates -- as of 15 September 30th, 1988, what was the industry's 16 position with regard to capital? 17 A. It was in poor position. 18 Q. Well, had it -- let's put numbers on 19 that. This report -- did you help prepare this 20 report? 21 A. Yep. Yes, I did, sir. 22 Q. And it indicates that at this point in 23745 1 time, the capital for the industry was a negative 2 6.1 billion. Right? 3 A. Yes, sir. 4 Q. Which was more than 5 percent of the 5 total liabilities of all the institutions in the 6 state. Right? 7 A. Yes. 8 Q. And the number of institutions were 9 going -- the number was going down very quickly, 10 correct? 11 A. Yes. 12 Q. Now -- and a number of the institutions 13 which -- over which you had supervisory authority 14 were, in fact, in serious financial difficulty, 15 correct? 16 A. That's why they were in my caseload. 17 Q. Well, in fact, you were -- a number of 18 troubled institutions were put in your caseload? 19 A. That's right. 20 Q. And most of them failed, didn't they? 21 A. Yes. 22 Q. Now -- in fact, if we could look at 23746 1 Exhibit B2654. 2 Can you identify for the Court 3 Exhibit B2654? 4 A. Yeah. It's a summary of various 5 institutions that were in my caseload at that 6 time. 7 MR. NICKENS: Your Honor, we offer 8 B2654. 9 MR. RINALDI: No objection, Your Honor. 10 THE COURT: Received. 11 Q. (BY MR. NICKENS) Mr. Twomey, Franklin 12 Federal is the first on the list, correct? 13 A. Yes. 14 Q. Was that the Franklin Federal that 15 resulted from a merger of Franklin and Credit Bank 16 Savings? 17 A. Yes. On September 30th, 1988. 18 Q. And that was a result -- that merger 19 was a result of a failure of one or both? 20 A. Both. 21 Q. And what happened to the merged 22 institution? 23747 1 A. It was part of the so-called Southwest 2 Plan, and the institutions -- assets and 3 liabilities from both institutions were sold to 4 Club Corp. America which formed a holding company 5 that acquired those assets as the new Franklin 6 Federal Bank. 7 Q. So, each institution had failed. They 8 were merged, and then the merged entity failed. 9 Is that what I -- 10 A. No. I didn't say that. 11 Q. The merged entity that sold its assets 12 had survived? 13 A. Yes. Franklin Federal survived to 14 just -- existed till a few years ago. Actually, 15 probably December of 1997. And then it was sold 16 to Norwest Savings -- Norwest Bank. Excuse me. 17 Q. Now, San Antonio Savings Association, 18 had it failed before you left the Federal Home 19 Loan Bank of Dallas? 20 A. I believe it was resolved sometime in 21 early 1990. 22 Q. And that means it had failed? 23748 1 A. Yes. 2 Q. And now, United is next on the list. 3 And I'm going to come back and talk to you some 4 about United. If we could skip over that, we go 5 to San Jacinto Savings? 6 A. Yes. 7 Q. Did San Jacinto Savings -- had it 8 failed before you left the Federal Home Loan Bank 9 of Dallas? 10 A. I think it was resolved after I left. 11 Q. And that's where Mr. Connell went after 12 he left Bank United in the early part of 1989? 13 A. Yes. 14 Q. Now, next on your list is First Texas 15 Savings Association. 16 Did it fail? 17 A. Yes. You actually combined First Texas 18 and Gibraltar. They were underneath the same 19 holding company. 20 Q. They were both declared insolvent and 21 merged into one entity, correct? 22 A. Yes, on December 27th, 1988. 23749 1 Q. Just three days before the insolvency 2 or the receivership of United, correct? 3 A. Yes. 4 Q. Now -- so, Gill Savings Association, 5 that was another institution under your 6 supervisory authority? 7 A. Yes. 8 Q. Did it fail? 9 A. Yes. 10 Q. Now, did any large Houston thrift 11 survive without either merger or government 12 assistance? 13 A. I believe -- do you want to give me a 14 definition of large? Like over 250 million or 15 something? 16 Q. Well, let's say over 1 billion. 17 A. Okay. The only one I can think of is 18 Guardian. 19 Q. Now, did any similarly large 20 San Antonio thrifts survive? 21 A. USAA Federal Savings Bank. 22 Q. Any others? 23750 1 A. That's about the only -- there weren't 2 that many large institutions in San Antonio. 3 Q. Did any of a similar size Dallas 4 institutions survive? 5 A. They may have, but I primarily didn't 6 have any Dallas institutions. I was basically 7 San Antonio, Austin, and Houston. 8 Q. The truth of the matter is that 9 basically, no matter what strategy these thrifts 10 tried, they simply couldn't overcome the economic 11 forces that beat them down, could they? 12 A. Is that your opinion? 13 Q. I'm asking you. 14 A. There were various forces out there 15 combined with the management and direction they 16 received from their own board of directors. 17 Q. But isn't it the case, Mr. Twomey, that 18 basically these institutions survived because of 19 the economic conditions they were dealing with in 20 the State of Texas at the time? Excuse me. 21 A. Yeah. 22 Q. Went into receivership and did not 23751 1 survive because of those economic conditions? 2 Do you disagree with that? 3 A. There were various negative economic 4 conditions that existed at the time that adversely 5 affected a number of thrifts and banks. 6 Q. And they basically, with the exceptions 7 you mentioned, failed regardless of what 8 strategies they took to try to deal with those 9 problems. Right? 10 A. Well, there were other institutions 11 that didn't fail; but, you know, I don't have a 12 complete list for you. 13 Q. Now, you indicated in your direct 14 testimony that United was the only institution 15 using mortgage-backed securities for 16 risk-controlled arbitrage that you were aware of? 17 A. That I could recall. 18 Q. Let me ask you to look at 19 Exhibit B2684, and the tab number is 236. 20 Mr. Twomey, this document has been 21 previously admitted into the record of the case, 22 and it purports to list the top 100 thrifts and 23752 1 mortgage-backed securities holdings as of 2 June 30th, 1988. 3 A. Yeah. 4 Q. Now, do you see No. 11? That's 5 Guardian Savings, correct? 6 A. Yes. 7 Q. Now, are you telling us that Guardian 8 Savings owned about $3 billion of mortgage-backed 9 securities in unhedged portfolios? 10 A. I wasn't supervisory agent for 11 Guardian. 12 Q. So, you're not telling us that? 13 A. I'm telling you that I wasn't the 14 supervisory agent of Guardian, and I'm not that 15 specifically -- I knew they had a large Ginnie Mae 16 portfolio, but I didn't get into the detail of 17 what they were doing with it. 18 Q. And you would certainly prefer that 19 they hedge it rather than own it unhedged, 20 wouldn't you? 21 A. Again, I wasn't the supervisory agent 22 for guardian. What they were doing or what they 23753 1 weren't doing, I just don't know. 2 Q. Well, let's -- apart from Guardian, 3 let's talk about Thrift A that owns $3 billion of 4 mortgage-backed securities. 5 As a regulator, would you prefer that 6 they own those through a hedged program or an 7 unhedged program? 8 A. Well, we were always concerned about 9 fluctuations in interest rates and what it would 10 do to portfolios because thrifts are normally 11 asset long and liability short. And we don't want 12 to get them into a serious imbalance situation. 13 So, what we commonly refer to as gap, 14 G-A-P, was the management of the institution to 15 basically get the gap down as close to possible as 16 zero so when there was an interest rate move, the 17 institution wouldn't be adversely affected. 18 Now, take a mortgage-backed security 19 portfolio. I'm sure they were using, especially 20 on $3 billion, some type of hedging techniques. 21 Q. So, the answer to my question is that 22 yes, you would prefer that they use hedging 23754 1 techniques. Right? 2 A. I'll stand with my answer. You can put 3 any answer you want in the book. 4 Q. Well, risk-controlled arbitrage was an 5 accepted hedging technique for mortgage-backed 6 securities, wasn't it? 7 A. It involved mortgage-backed securities, 8 yes. 9 Q. And, in fact, the Federal Home Loan 10 Bank in September of 1988 issued a chapter in its 11 regulatory handbook for that very strategy, 12 correct? 13 A. Well, the Federal Home Loan Bank Board 14 did. 15 Q. Yes, sir. 16 A. The Federal Home Loan Bank of Dallas 17 did not. 18 Q. The Federal Home Loan Bank Board I 19 should in its regulatory handbook a chapter on 20 risk-controlled arbitrage. Right? 21 A. Yes. 22 Q. Now, that was because it was being 23755 1 widely used. Right? 2 A. Well, I imagine, as -- I think it 3 starts off talking that some institutions had been 4 using risk-controlled arbitrage, and this was to 5 give guidance for the review of that portfolio. 6 Q. Now, let's look down at No. 30. That's 7 Bright Banc of Dallas. That was not one of your 8 institutions, correct? 9 A. No. 10 Q. But you're not telling the Court that 11 Bright Banc owned a billion and a half of unhedged 12 mortgage-backed securities? 13 A. I'm not telling the Court anything 14 about Bright Banc because, again, I was not the 15 supervisory agent of Bright Banc. What strategy 16 they may have been using, what business plan they 17 may have been following I am just not cognizant 18 of. 19 Q. Okay. Now, let me ask you to look down 20 at No. 80. This is the 80th institution in the 21 United States in terms of its ownership of 22 mortgage-backed securities, and it is called First 23756 1 Texas Savings Association of Dallas. Right? 2 A. Yes. 3 Q. Now, that was an institution under your 4 supervisory authority, correct? 5 A. Yes. 6 Q. And it failed three days prior to 7 United? 8 A. Yes. 9 Q. Now, are you saying that they owned 10 600 million of unhedged mortgage-backed 11 securities? 12 A. No. 13 Q. Did they hedge those securities? 14 A. I believe they had some hedging 15 regarding their MBS portfolio. 16 Q. And was it in a risk-controlled 17 arbitrage? 18 A. Not that I recall. 19 Q. Well, what kind of hedging was it? 20 What hedging instruments did they use? 21 A. To protect yourself from different 22 movements in interest rates -- 23757 1 Q. Yes, sir. 2 A. -- you can purchase certain hedging 3 instruments that will kind of offset on a 4 proportional amount. 5 Q. Yes, sir. My question is a little bit 6 more specific than that. 7 What kind of hedging instruments did 8 First Texas use? 9 A. Being that it's 11 or 10 years since 10 then, I can't recall. I could probably recall if 11 I had access to the supervisory documents related 12 to First Texas. 13 Q. Well, sir, you don't remember; but you 14 can tell us it wasn't a risk-controlled arbitrage? 15 A. I don't recall a risk-controlled 16 arbitrage there. 17 Q. And did they duration match their 18 assets and liabilities? 19 A. In 1988? 20 Q. Yes, sir. 21 A. I just don't recall. 22 Q. Now, you testified on your 23758 1 direct-examination that examiners from outside of 2 the 9th district were brought in to do Southwest 3 Plan examinations, correct? 4 A. Yes, sir. 5 Q. And that was because a question had 6 arisen in connection with the first two 7 acquisitions under the Southwest Plan? 8 A. Yes. 9 Q. And those acquisitions had been 10 criticized because the CEO, the chief executive 11 officer of one of those institutions was on the 12 board of directors of the Federal Home Loan Bank 13 of Dallas, correct? 14 A. Yes. I believe it was Mr. Todd Miller. 15 Q. And there were people that were 16 critical of that relationship? 17 A. Yes. 18 Q. And so, outside examiners were brought 19 in to avoid a repeat of that criticism which was 20 described as a possible incestuous relationship 21 between the regulators at the Dallas Bank and the 22 persons involved in the Southwest Plan; isn't that 23759 1 correct? 2 A. I don't know the source of that; but 3 relatively, it was to avoid an appearance of a 4 conflict. 5 Q. You don't know the source of the word 6 "incestuous"? 7 A. Well, I can get a dictionary. I'm not 8 sure where you're reading that phrase from, but I 9 don't necessarily disagree with it. 10 Q. Well, let me ask you to look at 11 Exhibit A11098 at Tab 1693. 12 Do you have Exhibit A11098 in front of 13 you? 14 A. Yeah. Looks like a copy of a pencil 15 summary of a meeting. 16 Q. And it's marked at the top as "Twomey 17 Exhibit 53." 18 Do you recall you were asked about this 19 document at the time of your deposition? 20 A. Yes. 21 Q. And it reflected a meeting between 22 Mr. Gross and Mr. Berner for United and various 23760 1 officials from the Federal Home Loan Bank of 2 Dallas? 3 A. Yes. 4 Q. And included the head of the bank, 5 Mr. Barclay? 6 A. The PSA, George Barclay, yes. 7 Q. And included yourself and Ms. Baugh -- 8 A. Yes. 9 Q. -- among others? And then there's a 10 reference to a comment at the very top or the 11 middle of the page by Mr. Barclay. It says, 12 "FSLIC is intrigued. We believe United has good 13 management, good management team, but needs solid, 14 hard-driving, experienced financial CEO" or -- 15 A. CEO. 16 Q. Was that comment made by Mr. Barclay? 17 A. I believe so. 18 Q. And then the following comment on the 19 Southwest Plan says, "Follow-up exam by FSLIC, due 20 diligence," and then can you read that? "To 21 assure" -- 22 A. You've put in the word -- 23761 1 Q. "To assure no incestuous relationship 2 between United and Dallas Bank"? 3 A. I'll take your reading of it. It's 4 hard to read. 5 Q. Well, if you have a different reading, 6 I'm not foolproof on these things. We'd like your 7 testimony. 8 A. I'm not going to guess. 9 Q. Now, does that indicate what the source 10 of the word "incestuous" concerning bringing in 11 these outside examiners was? 12 A. I have no idea, but it was probably 13 from the Bank's side. 14 Q. Would you attribute that to 15 Mr. Barclay? 16 A. I wouldn't attribute it to anybody 17 specifically. But -- 18 Q. You wouldn't expect Mr. Gross or 19 Mr. Berner to be making such a comment, would you? 20 A. Not reasonably, no. 21 Q. Okay. Now, in fact, your analyst, 22 Ms. Baugh, went to work for one of the original 23762 1 acquirers, the Southwest Savings Association of 2 Dallas, didn't she? 3 A. Yes. Somewhere around August or 4 September of 1988. 5 Q. That was a few months after the first 6 acquisition by Southwest Savings? 7 A. I believe their acquisition was in May. 8 I'm not sure of the exact day, but May of '88, 9 yes. 10 Q. And so, in about August -- I'll call 11 that a few months later -- she went to Southwest 12 Savings? 13 A. Yes. 14 Q. By the way, Southwest Savings failed, 15 too? 16 A. Yes, it did. 17 Q. Now, who is Jonathan Hefron? 18 A. Jonathan Heffron, when I came to the 19 Federal Home Loan Bank, was an executive 20 vice president, head of the legal department, and 21 head of administrative services at that time. 22 Q. He was the general counsel of the 23763 1 Dallas Bank, wasn't he? 2 A. Yes. You could call him that. 3 Q. And didn't he go to work after leaving 4 the bank for one of the acquiring entities that 5 received substantial government assistance from 6 FSLIC? 7 A. Not directly. 8 Q. Well, you mean he didn't go directly 9 there? 10 A. That's what I said. 11 Q. How long was it after the receivership 12 and reorganization that Mr. Heffron went to 13 United? 14 A. Probably two years. 15 Q. Now, that move worked out very well for 16 Mr. Heffron, didn't it? 17 A. He's still a senior officer at Bank 18 United. Yes, I would say so. 19 Q. Did -- was any question ever raised 20 about the propriety of Mr. Heffron's move to 21 United? 22 A. No, because -- well, prior to really 23764 1 kicking off the Southwest Plan, Mr. Heffron went 2 to work for a thrift. In fact, it was Salem -- 3 no -- King Cooperative Bank, I believe, in 4 southern New Hampshire. And he worked there for 5 two years. 6 Q. Now, you also left the bank to go to 7 work for an acquiring group that was managing the 8 assets of a California thrift, didn't you? 9 A. Yes, I did. 10 Q. And you left the Dallas Bank and became 11 a vice president of American Real Estate Group? 12 A. I became the senior vice president. 13 Q. Okay. Of American Real Estate Group? 14 A. Yes. 15 Q. And American Real Estate Group managed 16 the assets of NuWest Federal? 17 A. Yes, they did. 18 Q. And NuWest Federal was a 19 newly-organized thrift to buy assets out of the 20 failure of American Savings? 21 A. Yes. 22 Q. Now, who owned the American Real Estate 23765 1 Group? 2 A. The -- it was owned by a holding 3 company, and the holding company was basically 4 controlled by Robert Bass Investment Group out of 5 Fort Worth. 6 Q. Was Robert E. Bass a part of the Bass 7 family of Fort Worth, Texas? 8 A. Yes. 9 Q. And did the Bass brothers have dealings 10 with thrift institutions you supervised? 11 A. Not that I'm aware of. 12 Q. Well, let me ask you to look back at 13 Exhibit B2654, which is the list of your large 14 thrift groups. 15 A. I've got it. Sorry. 16 Q. Do you see at the very bottom of the 17 page, it says, "The examination continues on 18 12/28/88. Information previously requested of 19 San Jacinto was sent to American Real Estate Group 20 for use in its evaluation of NACO/TTI? 21 A. Yes. 22 Q. Now, did American Real Estate Group 23766 1 ever buy any assets from Southwest Plan 2 candidates? 3 A. No. 4 Q. Were you ever accused of any conflict 5 or appearance of a conflict in connection with any 6 FSLIC assistance agreement or deal? 7 A. No. 8 Q. Was any question ever raised about a 9 conflict of interest or appearance of a conflict 10 between your position at the Dallas Bank and the 11 position you took with American Real Estate Group? 12 A. Yes. 13 Q. And that was in connection with Oak 14 Tree Savings? 15 A. Yes. 16 Q. Now, I asked you about whether you were 17 ever accused of a conflict of interest in 18 connection with any FSLIC assistance deal, and you 19 answered "no." 20 A. Regarding FSLIC assistance acquisition? 21 Q. Yes, sir. 22 A. No. 23767 1 Q. Do you recognize the name Oak Tree 2 Savings? 3 A. Yes, I do. 4 Q. Was an issue raised about your dealings 5 with Oak Tree Savings? 6 A. With my dealings? I wouldn't put it 7 that way. 8 Q. Well, was there a criminal referral 9 made concerning allegations against you about Oak 10 Tree Savings? 11 A. Not that I'm aware of. 12 Q. You're not aware of that? Let me show 13 you a document that we have marked for 14 identification purposes as B4327. 15 Mr. Twomey, are you saying you were 16 unaware of the investigation reflected in B4327? 17 MR. RINALDI: Just a second, Your 18 Honor. The only objection I'd make is his 19 question was: Was there a criminal referral? And 20 now he's moved away from that. I haven't seen 21 this document and had an opportunity to review it. 22 Have you withdrawn the previous 23768 1 question? 2 MR. NICKENS: I certainly have not. 3 Q. (BY MR. NICKENS) Were you familiar 4 with this matter as described in B4327? 5 A. I'd rather get back to the prior 6 question. I'm not aware of any criminal referral 7 made. To me, a criminal referral is a possibility 8 of any action; and it's usually referred to the 9 U.S. Attorneys Office. And I'm not aware of 10 anything like that. 11 Q. So, you're making the distinction 12 between the U.S. Attorneys Office and the Office 13 of Inspector General for alleged improper, 14 unethical conduct on your part -- 15 A. A criminal referral refers to me what 16 we used to call Form 366. Form 366 is we have an 17 appearance of a criminal violation or a violation 18 of Title 18. We would fill that out. After it's 19 processed by our office, we would then send it to 20 the attention of the appropriate U.S. Attorneys 21 Office. 22 Q. Well, you were certainly aware of 23769 1 whatever it was, the Oak Tree investigation, 2 correct? 3 A. Yes. 4 Q. In fact, you were quoted in the 5 Washington Post concerning that investigation? 6 A. Yes. 7 Q. Let me ask you to look at the second 8 page of Exhibit B4327. I'm sorry. Page 4. 9 Do you see there in the second 10 paragraph, "The servicing U.S. Attorneys Office 11 declined prosecution in the matter"? 12 A. Paragraph -- sorry. 13 Q. It's right -- it's the second 14 paragraph. Part of it's blacked out. This is a 15 FOIA production. Part of it is blacked out. It 16 refers there -- 17 MR. RINALDI: Which page are you at? 18 MR. NICKENS: It's 2 at the top and 4 19 at the bottom. 20 A. Penciled 4. 2 at the top. 21 Q. (BY MR. NICKENS) Now, that's what you 22 were referring to about a criminal referral? 23770 1 A. Your question was: Was I aware of a 2 criminal referral. Okay? 3 Q. Yes, sir. 4 A. Again, I'm not aware of a criminal 5 referral. One could have been made without my 6 knowledge. But I'm not aware -- I've never seen 7 one, and all this tells me is a U.S. Attorneys 8 Office -- I'm not even sure which one -- declined 9 prosecution. And no U.S. Attorneys Office ever 10 called me. No F.B.I. agent ever called me and 11 contacted me. So, I have no real knowledge of 12 that matter other than what I read here. 13 Q. And ultimately, the Inspector General's 14 office concluded through its investigation that 15 the charges had not been substantiated, that you 16 knowingly, willfully, and intentionally violated 17 applicable disclosure of conflict of interest 18 statutes? 19 MR. RINALDI: Where are you reading, 20 from sir? 21 MR. NICKENS: I'm reading from the 22 first page in the second paragraph, top of the 23771 1 second paragraph. 2 MR. RINALDI: Where it says "they did 3 not substantiate"? 4 MR. NICKENS: That was the question. 5 Q. (BY MR. NICKENS) What happened is 6 that the investigation eventually concluded that 7 the evidence did not substantiate that you had 8 knowingly, willfully -- 9 MR. RINALDI: Just a second, Your 10 Honor. You know, what's sauce for the goose is 11 sauce for the gander. I believe that the other 12 day, when I attempted to read from a document that 13 wasn't in evidence, Mr. Nickens took me to task 14 and said that he resented my putting anything into 15 the record which wasn't -- until the document had 16 been admitted. 17 Frankly, I don't know that this has to 18 do with anything in this case. It relates to a 19 different institution. And Mr. Nickens, by his 20 own admission, says the information developed in 21 the investigation did not substantiate 22 Mr. Twomey's knowing, willful, and intentionally 23772 1 violated applicable disclosure conflict of 2 interest statute. And if you go on, you see a 3 question was raised and nothing came of it. In 4 addition to which, there has been no -- to my 5 knowledge, Mr. Twomey's never seen this document 6 before. And -- or at least he indicates he's 7 unfamiliar with the contents. And I don't know 8 who they are going to offer to authenticate this 9 document. 10 MR. NICKENS: Your Honor, this document 11 was identified for impeachment purposes only 12 because in his deposition, Mr. Twomey was asked 13 the question about whether any issue had ever been 14 raised. And he said not to his knowledge. And 15 so, you know, I'm happy to offer the document. 16 But I had intended, as I have, to use it for 17 impeachment purposes. If Mr. Rinaldi wants the 18 document to be in evidence, I'm happy to offer it. 19 MR. RINALDI: No. I have no desire to 20 put the document in evidence since it completely 21 exonerates the individual. 22 MR. NICKENS: I don't know that that's 23773 1 an objection, Your Honor. Either he wants it in 2 evidence or he doesn't. But I'm happy to offer 3 it. If that's an objection, he needs to say so. 4 MR. RINALDI: My only objection, Your 5 Honor, was that he was reading from the contents 6 of the document. If the witness indicates that he 7 had no knowledge that there was a criminal 8 referral or knowledge of the document, I don't 9 think the document should come in unless he has a 10 sponsor for it. 11 THE COURT: I'm not sure we have an 12 answer to the question. The witness has a 13 definition of what a criminal referral is, which 14 may be proper. The question is has he seen this 15 document before. 16 A. Very recently, Your Honor, a friend of 17 mine made a copy -- I'm not sure how -- you know, 18 there's a lot of redacted parts out -- and sent me 19 something on this. 20 A number of years ago when this all 21 came up, I asked, you know, to meet with the 22 inspector general to, you know, give my 23774 1 cooperation. The problem that came up, Your 2 Honor, was that I got a call from a reporter from 3 the Wall Street Journal and the Washington Post. 4 And despite my obvious saying I had nothing to do 5 with it, they went ahead and published anyway. 6 So, at that time, I called the -- got 7 ahold of the inspector general and made 8 arrangements to meet with those people and sat 9 down, gave them every bit of information I 10 possibly could. 11 And then later, this report or parts of 12 this report were read to me by -- I believe it was 13 Bill Fulweiter from the Federal -- at that time, 14 OTS. And he read to me the parts that said I was 15 exonerated, and that was the end of it. I think I 16 do have this document now. I'm not sure it's 17 exactly the same as this one. There was so much 18 redacted out, you couldn't read it and really make 19 a lot of sense out of it. 20 So, I may have -- I probably -- I do 21 have a version of this. I'm not sure if it's 22 exactly the same as this, but I only received it 23775 1 within the last four or five months. 2 Q. (BY MR. NICKENS) And does your copy 3 of the document have a reference to the referral 4 of the Attorney General's office? 5 A. I'm not sure if it does or it doesn't. 6 I really only looked at the first page, and that 7 was about it. 8 Q. Now, Mr. Twomey, I would like to move 9 on to another subject. I would like to ask you 10 some information concerning your involvement in 11 the Southwest Plan. 12 A. Sure, sir. 13 Q. Now, the Southwest Plan started out as 14 something called the Texas Plan which the Federal 15 Home Loan Bank Board organized in late 1987, 16 correct? 17 A. Yes. 18 Q. And its purpose was to merge and 19 recapitalize the many insolvent thrifts that were 20 in Texas? 21 A. Yes. 22 Q. And you've told us that in May of 1988, 23776 1 several institutions went through a receivership 2 and were acquired by Coastal Savings and Southwest 3 Savings? 4 A. Yes. 5 Q. And Southwest Savings -- well, was Mike 6 Patriarca the lead negotiator for several of the 7 Southwest Plan acquisitions, including USAT? 8 A. Including USAT, yes. I'm not sure of 9 the total he might have been involved with. 10 Q. Now, who was Mr. Patriarca? 11 A. Mr. Patriarca was the head of 12 regulatory affairs at the Federal Home Loan Bank 13 of San Francisco. 14 Q. And as far as Mr. Patriarca was 15 concerned, your role was simply to supply his 16 office with copies of documents he requested and 17 things of that nature? 18 A. If Mr. Patriarca would ask me for 19 information, I would supply it. 20 Q. Sir, I'm asking you if that was your 21 role vis-a-vis the lead negotiator for the United 22 receivership. 23777 1 A. If Mr. Patriarca asked us a question, 2 we'd do our best to get the answer for him. 3 Q. Did you have any other role, other than 4 copying documents that he requested? 5 A. Probably. 6 Q. Now, do you recall telling us just 7 Friday that your role was to supply his office 8 with copies of documents he requested and things 9 of that nature? 10 A. Yes. 11 Q. Now are you telling us that you had a 12 larger role? 13 A. What I said was if Mr. Patriarca made a 14 request, we would go ahead and try to act on that 15 request. 16 Q. Did you have any other role with regard 17 to Mr. Patriarca? 18 A. Again, if Mr. Patriarca or his 19 assistant requested information, requested us to 20 take an action, you know, anything else on that 21 line, I think we would just respond to it. 22 Q. Now, you told us that the decision as 23778 1 to who got FSLIC assistance in connection with the 2 Southwest Plan was made in Washington by the 3 Federal Home Loan Bank Board? 4 A. Yes. The three-member board would have 5 to vote on it. 6 Q. And you were not involved, you have 7 told us, in the process of matching institutions 8 with buyers? 9 A. That's correct. 10 Q. That, too, was handled in Washington? 11 A. Well, I think I testified that 12 Patriarca and other regional district directors or 13 presidents of banks were involved in different 14 negotiations. 15 Q. Now, you had described your involvement 16 in the Southwest Plan decision-making as 17 diminimous, correct? 18 A. I don't recall negotiating any 19 financial deals. 20 Q. Sir, I'm using the term you used on 21 Friday. Would you want to change it today? 22 A. No. 23779 1 Q. And your role, you have said, was 2 merely to supply information to the decision 3 makers when requested? 4 A. Yes. 5 MR. RINALDI: Your Honor, wait a 6 second. I think that mischaracterizes his 7 testimony. 8 THE COURT: Well, let's get it -- he 9 can tell us if it does. 10 MR. RINALDI: But he said three times 11 if Mr. Patriarca asked him to do something, if he 12 asked him for information, he did what he 13 requested or he obtained the information. He said 14 he responded to whatever it is Mr. Patriarca 15 asked. And now Mr. Nickens wants to pars this 16 down to "all you did was provide documents," and 17 that's not what he said. 18 MR. NICKENS: I'm quoting from his 19 testimony on Friday, Your Honor. And I'm giving 20 him an opportunity, should he choose to take it, 21 to change his testimony before we look at some of 22 the evidence. 23780 1 THE COURT: Can you tell us what your 2 role was? Was it in addition to furnishing 3 documents, or was it something else? 4 THE WITNESS: Sir, Mr. Patriarca was 5 negotiating with the potential acquirers for the 6 package that became Bank United. He probably was 7 negotiating with other packages. I just don't 8 recall them all. He would make requests for 9 information or his assistants would make requests 10 for information. At some times, they also -- to 11 prepare the institution for receivership -- asked 12 us to take some actions or requested United to do 13 some actions. They may have asked for other 14 things; but basically, we were responding to 15 whatever request or action that Mr. Patriarca 16 would make. 17 After -- my understanding, that after 18 Mr. Patriarca had, you know, reviewed and made a 19 selection regarding who would acquire the -- what 20 was to become Bank United, then FSLIC in 21 Washington got involved. But I'm not -- I wasn't 22 really involved in that process. Later, after in 23781 1 this case, the Ranieri group was picked as the 2 bidder, successful bidder for Bank United, we 3 dealt on the phone with representatives from the 4 Ranieri group to put in what we call an operating 5 group agreement, sometimes called a supervisory 6 agreement. And this was basically how we wanted 7 them to report their actions to us, what reports 8 were going to be required, what kind of 9 investments they may get into. So, we had some 10 type of control of the institution once they took 11 over. That's about the only time we really 12 interfaced with the potential buyers as far as, 13 you know, what kind of information we needed, what 14 operating restrictions were put on them, what 15 reports they should turn in to us, and that's the 16 best I can recall. 17 Q. (BY MR. NICKENS) Well, in fact -- 18 well, that's substantially more than supplying 19 documents, isn't it? 20 A. Well, you were referring to Michael 21 Patriarca. 22 Q. Yes, sir. And? 23782 1 A. What you're talking about is a process. 2 Q. Do you know Kathleen McNulty? 3 A. I know Kathleen McNulty. 4 Q. Who is she? 5 A. She was an assistant to Mr. Patriarca, 6 the best I can recall. 7 Q. And you had extensive conversations 8 with Ms. McNulty about United, didn't you? 9 A. I'm sure Ms. McNulty called me numerous 10 times to ask me about USAT. 11 Q. And you told her that USAT was suitable 12 as an acquirer of the Pear II-B plan, correct? 13 A. I probably did at some time. 14 Q. Except that you indicated that 15 Mr. Hurwitz could not be involved with any such 16 acquisition in any way. Right? 17 A. I don't recall it, but you probably 18 have a document that says it. 19 Q. I sure do. 20 A. Okay. 21 Q. All right. Now, would you say that's 22 something more than copying documents? 23783 1 A. I believe that they may have asked my 2 opinion. 3 Q. Would you say that's something more 4 than copying documents? 5 A. Sir, as I said before, I responded to 6 their requests. 7 Q. Would you say that's having a role in 8 determining who got what as far as FSLIC 9 assistance is concerned? 10 A. Sir, as I said before, if they asked me 11 a question, I did my best to answer the question. 12 If they asked for a document, I did my best to do 13 that. If they asked me to take an action, I tried 14 to take the action. 15 Q. Is that the same way you're doing your 16 best to answer my questions? 17 A. You bet. 18 Q. All right. Now, would you say that 19 advising them that USAT was an eligible acquirer 20 for Pear II-B assets but Mr. Hurwitz could not be 21 involved was something more than copying 22 documents? 23784 1 MR. RINALDI: I'm going to object at 2 this point, Your Honor. He said he didn't have 3 any recollection of that, but he said he was sure 4 that Mr. Nickens had a document or he did -- he 5 indicated he had no recollection of it. If 6 Mr. Nickens believes that that's what he did and 7 the record so reflects, he should indicate -- show 8 a document to him. But to ask him about what he 9 says he doesn't recall and ask him if what he 10 doesn't recall constitutes being involved is 11 somewhat absurd. 12 MR. NICKENS: Well, Your Honor, I think 13 the witness has been quite specific with regard to 14 what his role was and didn't say he didn't recall. 15 But I would be happy to refer him to Exhibit 4322. 16 Q. (BY MR. NICKENS) This is a letter 17 from Mr. Patriarca to Mr. Lycos dated 18 September 12th, 1988, correct? 19 A. Yes. 20 Q. And if you look down at the fourth 21 paragraph, "Kathleen also talked to Jim Smith and 22 Bill Twomey (United) at the Dallas Bank on 23785 1 September 9th, 1988. Both reaffirmed that they 2 are favorably disposed toward all three 3 institutions and that each should remain under 4 active consideration for Pear II-B." 5 Do you see that? 6 A. Yes. 7 Q. Now, did you have that conversation 8 with Kathleen McNulty? 9 A. I don't recall it. 10 Q. Did you have it or not? 11 A. I said I do not recall the 12 conversation. 13 Q. And it goes on to say that Kathleen's 14 conversation with the SAs also disclosed the 15 following. United's preposed recapitalization 16 cannot include any involvement by Charles Hurwitz, 17 its current controlling shareholder. Hurwitz has 18 been mentioned in connection with insider trading 19 under review by the SEC and in the Drexel/Milken 20 junk bond investigation. United says it is not a 21 problem for them to exclude Hurwitz." 22 Now, did you make that comment? 23786 1 A. The second sentence is something 2 similar to what I remember from the time that 3 Hurwitz was mentioned in connection with insider 4 trading under review by the SEC and in the 5 Drexel/Milken junk bond investigation. 6 Q. And no such charges were ever brought, 7 were they? 8 A. I thought I was answering a question. 9 You want to interject some more, go ahead. 10 What I don't recall saying -- I really 11 don't recall "United's proposed recapitalization 12 cannot include the involvement of Charles 13 Hurwitz." I don't recall. Okay? "United says it 14 is not a problem for them to exclude Hurwitz." I 15 don't recall that either. 16 MR. NICKENS: Your Honor, we offer 17 B4322. 18 A. That was the last sentence on the 19 bottom of B. "United says it is not a problem for 20 them to exclude Hurwitz." I don't know the source 21 of that. 22 MR. NICKENS: Your Honor, we offer 23787 1 B4322. 2 MR. RINALDI: No objection, Your Honor. 3 THE COURT: Received. 4 MR. NICKENS: Your Honor, I am toward 5 the end of this. It's toward the end of the day. 6 I don't know what your wishes are. But we 7 would -- if this is an appropriate breaking point, 8 I will stop. But we would ask that counsel be 9 instructed not to discuss these matters with the 10 witness while he's on the stand. 11 THE COURT: All right. He is so 12 instructed. We'll adjourn until 9:00 o'clock 13 tomorrow. 14 MR. RINALDI: With that regard, I have 15 no problem not discussing it while the witness is 16 on the stand provided that, in the future, we can 17 have the same understanding with respect to 18 Mr. Nickens' clients. It seems to me that if 19 that's the process we're going to follow -- and 20 it's one that we've adhered to in the past -- they 21 should very well be subjected to the same 22 restrictions so that in the future when 23788 1 respondents come to the stand that we can rest 2 assured that once they step off the stand, they 3 are not continuing their conversations with 4 counsel. 5 THE COURT: You're talking about 6 respondents' witnesses or respondents themselves? 7 MR. RINALDI: Respondents themselves. 8 MR. VILLA: Your Honor, I've tried a 9 fair number of cases and never heard the rule 10 applied to a party in the case. I think it 11 applies to fact witnesses in the case, Your Honor. 12 And I've observed that rule, and several times 13 Mr. Guido has cross-examined people that I have 14 asked questions in cross just to make sure that I 15 didn't talk toe them, and he found out that I 16 didn't. So, I would be happy to observe that rule 17 on fact witnesses, not as to parties. 18 THE COURT: All right. I think that's 19 a proper rule. We'll adjourn until 9:00 o'clock 20 tomorrow. 21 (Whereupon at 4:45 p.m. 22 the proceedings were recessed.) 23789 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 22nd 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 23790 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 22nd 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