24072 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 24, 1998 22 24073 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 24074 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 24075 1 2 INDEX OF PROCEEDINGS 3 Page 4 NEIL TWOMEY 5 Continued Examination by Mr. Villa......24076 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 24076 1 2 P-R-O-C-E-E-D-I-N-G-S 3 (9:00 a.m.) 4 THE COURT: Be seated, please. The 5 hearing will come to order. 6 Mr. Villa, you may continue with your 7 cross-examination. 8 MR. VILLA: Thank you, Your Honor. 9 10 CONTINUED EXAMINATION 11 12 Q. (BY MR. VILLA) Good morning, 13 Mr. Twomey. 14 Mr. Twomey, have you done anything last 15 night to prepare for your testimony today? 16 A. No. 17 Q. Have you been provided any documents by 18 the OTS? 19 A. No. 20 Q. And you haven't discussed your 21 testimony with anybody? 22 A. I haven't. 24077 1 Q. Now, Mr. Twomey, yesterday I took you 2 through about ten -- I didn't count them when I 3 stopped -- instances in which you said in your 4 testimony in your deposition "I don't recall" and 5 you testified in response to Mr. Rinaldi's 6 questions, I would submit, a different answer in 7 which you did recall. 8 But I found one instance in this 9 transcript in which you recalled something during 10 your deposition and you forgot it by the time of 11 trial. So, I'd like to ask you about that. And 12 it's an issue on which we have devoted a good deal 13 of attention. 14 Do you remember, sir, that you sent a 15 letter on October 27, 1988, criticizing the USAT 16 contracts? Do you recall that, sir? 17 A. I recall two letters; but I probably 18 sent one in October, too. 19 Q. October 27, 1988, Twomey 20 Exhibit No. 80, I think it was I showed you during 21 your deposition testimony and Mr. Rinaldi showed 22 you. It's Exhibit B2487. 24078 1 Do you have a recollection of that, 2 sir? 3 A. Generally. 4 Q. Okay. And in your deposition, I asked 5 you when you had received the USAT contracts that 6 had been the topic of that testimony and when you 7 had received the USAT contracts that had been the 8 focus of that letter other than the Connell 9 contract because we know the Connell contract was 10 mailed to you on June 30th, 1988, by Mr. Berner. 11 Right? 12 A. Approximately that time, yes. 13 Q. Now, let me ask you to turn to your 14 deposition, Pages 672 and 673. And we have a 15 blowup of your deposition testimony to assist us 16 in looking at your deposition testimony on this 17 important issue. 18 MR. VILLA: Mr. Farley, if you'll just 19 put up Page 672. It's been suggested I haven't 20 shown the entire context; so, I'd like to put it 21 up here. And I'll read it for those of you who 22 can't see it. 24079 1 Q. (BY MR. VILLA) Question, "Back on the 2 record, Mr. Twomey. Do you recall when you 3 received the other employment contracts which are 4 referred to in Twomey Exhibit No. 70; that is to 5 say, other than the employment contract involving 6 Lawrence Connell?" 7 Answer, "No, not particularly. Summer 8 of 1988, probably July, but --" 9 Mr. Rinaldi: "If you don't recall, I 10 don't want you guessing. Do you have a 11 recollection?" 12 The Witness: "No, I don't have a 13 specific date." 14 Question, "July is close enough. Thank 15 you." 16 Mr. Rinaldi: "Well, let the record 17 reflect that he had no recollection and he did not 18 testify as to July." 19 Do you remember that, sir? 20 A. Well, I do remember it because I'm 21 reading it now, yes. 22 Q. So, in your testimony at the time of 24080 1 the deposition, I asked you the question when you 2 got the USAT contracts. And you said -- we can 3 argue about what you said, but many people -- 4 A. John, I don't think we can argue about 5 what I said. 6 Q. Excuse me, sir. The way the courtroom 7 works, I ask questions and you answer questions. 8 A. Well, I'll answer them then. 9 Q. Thank you. We can argue about what you 10 said, sir, but the transcript is the transcript. 11 Now, after the deposition was taken, 12 you were called to testify here at trial on the 13 same issue and Mr. Rinaldi asked you questions. 14 Now, let's look at the pages of the transcript 15 that involve that issue. It's Page 23423 of the 16 transcript. And Mr. Rinaldi asks you, question, 17 "And did Mr. Berner ever write back to you and 18 indicate to you that contracts had been entered 19 into by United Savings Association of Texas and 20 certain senior management on or about February 11, 21 1988?" That's the USAT contracts. We know that 22 only the USAT contracts were entered into on 24081 1 February 11, 1988. 2 Answer, "I believe he did. And then 3 Mr. Rinaldi stopped. 4 He said, "You believe he did. When 5 would that have been?" 6 And then you said, "I'm trying to 7 remember. I recall that we became aware of the 8 UFG contracts. I'm not -- I'm not sure when I 9 became aware of the February '88 contracts." 10 Right? Do you see that, sir? 11 A. Yes, I do. 12 Q. So, the one instance that I found so 13 far in the transcript that I'm sure Mr. Rinaldi 14 will review with care in which your testimony 15 changed from "I don't recall" to testimony that 16 was helpful to the OTS in their direct-examination 17 was the one instance in which you forgot about the 18 date that you had received the USAT contracts. 19 Isn't that right, sir? 20 A. No, John. 21 Q. It isn't? Maybe I can help you. Did 22 you prepare the S memo, sir? Did you help prepare 24082 1 the S memo? 2 A. I helped prepare it, yes. 3 Q. I'll direct your attention to -- and 4 you prepared that in December of 1988 to justify 5 whatever decisions you were making with respect to 6 USAT, right, that the FSLIC was making with 7 respect to USAT? 8 Do you remember that, sir? 9 A. John, the S memo is a supervisory 10 history memo; and it's required for us to submit 11 the history of the institution to the FSLIC when 12 there is an action being taken. 13 Q. Well, the S memo, which is T8142 in at 14 Tab 1450 -- and since Mr. Farley's got his hands 15 full, I thought I would put up Page 12 of the S 16 memo and ask you, sir, to read the first sentence 17 under "employment contracts." 18 A. I see it. 19 Q. It says, "On June 2nd, 1988, the 20 supervisory agent received (after requesting) 21 copies of employment agreements dated February 11, 22 1988, from" -- and then it goes on. 24083 1 Do you see that, sir? 2 A. Yes, I do. 3 Q. Are you the supervisory agent? 4 A. I was the supervisory agent at that 5 time. 6 Q. And did you assist in the preparation 7 of the S memo about four or five months after the 8 events in question, sir? 9 A. Yes, I did. 10 Q. I didn't see anything in the S memo 11 that gave any other date other than June for the 12 receipt of the USAT contracts. 13 Did you see it in there, sir? 14 MR. RINALDI: I'll just object at this 15 moment. There's no reference there to USAT 16 contracts. There were UFG contracts given on that 17 date. 18 Q. (BY MR. VILLA) Sir, we've seen four 19 sets of contracts dated February 11, 1988. We've 20 seen UFG contracts that were dated in 21 September 1987. We'll call that UFG 1. We saw 22 USAT contracts dated February 11, 1988. Then we 24084 1 saw contracts dated June 30, 1988, by UFG and 2 July 1, 1988, by USAT. 3 Have you seen any other contracts 4 besides those? 5 A. What I recall is at or around May of 6 1988, we requested USAT contracts. Mr. Berner 7 wrote back to me -- 8 Q. That is not my question. The question 9 is -- Mr. Rinaldi raised the issue as to whether I 10 might be misleading the Court, suggesting that 11 there was some other February 11, 1988 contracts 12 apart from the ones that are in controversy. And 13 my question to you as the supervisory agent is: 14 Do you know any other contracts that were entered 15 into on February 11, 1988, other than the USAT 16 contracts that you allege that you weren't aware 17 of or you've testified in this case that you 18 weren't aware of? 19 Do you, sir? 20 A. Well, let me pick a time frame. Okay? 21 And I'll tell you what I was aware of at a certain 22 time. And at the end of the year, I was aware of 24085 1 more than I was in June of 1988. 2 Q. Sir, I really don't want to hear your 3 chronology. I'm going to go through it in I 4 suspect you're going to think in painstaking 5 detail. 6 My question to you is: It says the 7 supervisory agent received, June, February 11, 8 1988. 9 Those are the USAT contracts that you 10 came into this court and said you didn't receive; 11 isn't that right, sir? 12 A. John, all I can say is there is an 13 error in the S memo regarding that date. 14 Q. Now, your recollection ten years after 15 the fact was -- at the time of your deposition 16 was -- well, we can make our own judgments as to 17 how good it was. 18 But are you telling me that in a 19 memorandum that you sent to the Federal Home Loan 20 Bank Board to justify closing one of the largest, 21 if not the largest, savings and loan in the State 22 of Texas, that you failed -- you made a mistake as 24086 1 to this critical issue? Is that what you're 2 telling us, sir? And you remember that now 3 looking back retrospectively? 4 A. John, I thank you for pointing out that 5 there is an error in the S memo. 6 Q. You're welcome, sir. 7 Now, sir, did you recall, sir, that the 8 UFG and USAT contracts were, in fact, identical, 9 the first set of UFG and USAT contracts? 10 A. I don't recall that right now. 11 Q. Now, isn't it true, Mr. Twomey, that 12 everyone was treating the USAT and UFG contracts 13 during this time period as substantively 14 identical? 15 A. In the sense that they were the same 16 entity or the contracts themselves were 17 practically identical? I'm trying to understand 18 your question. 19 Q. The substance of the contracts, apart 20 from the fact that they were different entities, 21 were that they were substantially similar; isn't 22 that right? 24087 1 A. Again, you're talking the fall UFG 2 contracts of 1987 and the -- 3 Q. February 1988 USAT contracts. 4 A. I just don't recall. I don't have a 5 problem with saying they are probably similar. 6 Q. Well, why don't we take a look at what 7 the contemporaneous record is. Let's look at 8 A3023. A3023.1, which is Tab 79A. 9 MR. VILLA: I'm afraid, Your Honor, 10 it's not in your book because it's so large. It's 11 the 10K with the exhibits. 12 Q. (BY MR. VILLA) And at the same time, 13 if you would look at A3015, which is the proxy 14 statement. This is the 10K and the proxy for UFG 15 that was submitted in nineteen -- March of 1988, 16 which was mailed to you by Mr. Berner. 17 Do you have those in front of you, sir? 18 A. Yes, I do. 19 Q. Now, the -- I think we've 20 established -- I won't go through the process of 21 establishing it with you. Well, perhaps I will. 22 Let's take a look at A3023.1, which is 24088 1 the full copy of the 10K. 2 A. Okay. 3 Q. Look at Page 64, which has a Bates 4 stamp on it of CN158960. 5 MR. RINALDI: 86 what? 6 MR. VILLA: 158960. 7 A. Looks like notes to the financials. 8 Q. (BY MR. VILLA) Notes to the 9 financials. Right. Actually, it's just above 10 "notes to the financials." It should say 11 "directors and officers of the registrant." 12 Do you see that? 13 A. Yes, I do. 14 Q. And it says, "Executive 15 compensation" -- under 11, "Executive 16 compensation. The information called for in 17 Item 11 is being incorporated by reference from 18 the 1988 proxy statement under the caption 19 'compensation of executive officers,' Pages 8 20 through 16." 21 Do you see that, sir? 22 A. Yes. 24089 1 Q. Now, let's look at the next exhibit, 2 which is the proxy statement, which was 3 incorporated by reference. 4 Do you have that before you, sir? 5 A. Yes. 6 Q. That's A3015, Tab 94. Will you go to 7 Page 9 of that for me, sir? 8 A. (Witness complies.) 9 Q. Let's look at "employment agreements." 10 Really, all we need to look at is the first and 11 last sentence of the first full paragraph entitled 12 "employment agreements." 13 "On September 9, 1987, Messrs. Berner 14 and Crow, together with certain other executive 15 officers (the employees) of the company and 16 USAT) -- employees of the company and USAT entered 17 into employment agreements (the agreements) which 18 expire on December 31, 1988, subject to the 19 extension upon the agreement of the company and 20 the particular employee." 21 So, this is the UFG contracts we're 22 talking about in the first paragraph? 24090 1 A. Right. 2 Q. I'm sorry. The first sentence. The 3 last sentence says, "In 1988, each of the 4 employees entered into a substantially similar 5 agreement with USAT which becomes effective only 6 in the event the company is unable to satisfy its 7 obligations under the agreements." And that 8 refers back there. 9 Do you see that, sir? 10 A. Yes, I do. 11 Q. Now, does that refresh your 12 recollection that in March and April and May and 13 June of 1988, people, you, Mr. Berner, were all 14 treating the UFG and USAT contracts as if they 15 were the same because they were substantially 16 similar? 17 Does that refresh your recollection, 18 sir? 19 A. John, what I recall is I sent 20 Mr. Berner a letter and asked for the USAT 21 contracts. He wrote back and told me he only had 22 the holding company contracts. He then sent the 24091 1 holding company contracts. That's what I knew at 2 the time. 3 Q. Now, sir, do you remember that during 4 this time period, it was the position of the 5 Federal Home Loan Bank -- Federal Home Loan Bank 6 Board that, in fact, the same standards applied to 7 contracts for the thrift and for the holding 8 company? 9 Do you remember that, sir? I'd like to 10 withdraw that question. I'll withdraw that 11 question. Let's do one other thing before we do 12 that. 13 Sir, in the Form 10K you have before 14 you, I'd like you to look at -- it's about an inch 15 from the end of the Form 10K -- at Bates stamp 16 Page UFG 2028815. 17 Do you see that? 18 A. Employment agreement. 19 Q. And that's the UFG employment 20 agreement, isn't it, sir? 21 A. Yes. 22 Q. So, you had in your hands when you 24092 1 received the Form 10K from Mr. Berner the 2 statement that the two contracts were 3 substantially similar, and you had in your hand 4 the form of the UFG contract. Right? 5 A. If Mr. Berner sent us the 10K, then we 6 had the 10K. 7 Q. Is there any doubt in your mind that he 8 sent you the 10K, sir? 9 A. I don't recall it specifically; but if 10 there is a cover letter that he sent it, then he 11 sent it. And then if we have a stamp on the 12 document saying we received it, then we received 13 it. 14 Q. Maybe you should look in your book, the 15 red book, about the 15th one in. It's B2101. 16 A. To be honest, John, I don't have any 17 problem with saying that we received it. We 18 received a lot of documents but -- 19 Q. I want to make a point. This one in 20 particular was sent directly to you with its 21 exhibits. 22 A. Okay. And again, the tab is? 24093 1 Q. B2101. It's about halfway through the 2 book. 3 Do you have that before you, sir? 4 A. Yes. 5 Q. Is that a letter dated March 30, 1988, 6 from Arthur Berner to you? 7 A. Yes, it is. 8 MR. VILLA: Your Honor, I move B2101 9 into evidence. 10 MR. RINALDI: No objection, Your Honor. 11 THE COURT: Received. 12 Q. (BY MR. VILLA) The first sentence of 13 B2101 says, quote, "I am enclosing one copy of the 14 annual report of United Financial Group, Inc. on 15 Form 10K as filed with the Securities and Exchange 16 Commission." 17 Do you see that, sir? 18 A. Yes, I do. 19 Q. So, he sent it to you on March 30, 20 1988, didn't he, sir? 21 A. Right. Within the 90-day filing. 22 Q. And since it was as filed with the 24094 1 Securities and Exchange Commission, it would have 2 included all of its exhibits, wouldn't it? 3 A. I have no problem with that. 4 Q. Okay. So, we don't have to guess as to 5 whether or not you had the Form 10K, the proxy 6 statement which was incorporated by reference and 7 would have to be filed at the same time, and all 8 the exhibits in March or probably April 1st, 1988? 9 You would agree with that? 10 A. I would assume everything they sent to 11 the SEC they might have sent to us. I have no 12 problems with that. 13 Q. So, now, the question I started to 14 explore with you was the question of whether or 15 not the supervisory agents for the Federal Home 16 Loan Banks had been instructed by Washington to 17 apply the same substantive standards to holding 18 company contracts as they did to the contracts of 19 the thrift. 20 And my question to you, sir, is: Do 21 you recall what the advice had been from 22 Washington on the question of whether the same 24095 1 standards applied to holding company contracts as 2 they did to thrift contracts? 3 A. I don't remember specific guidance, but 4 I don't see a problem with that type of 5 application. 6 Q. Let's help you perhaps refresh your 7 recollection. There is one more exhibit that is 8 not in your binder. It's Exhibit B1520, which has 9 been introduced in evidence at Tab 1619. 10 Sir, this is a letter -- you told us 11 about Julie Williams. Remember? 12 A. Yes. 13 Q. You mentioned her name. And she's the 14 person who signed this letter; is that right? 15 A. Yes. 16 Q. And this is the kind of advice that 17 from time to time the Federal Home Loan Bank Board 18 in Washington would issue advising supervisory 19 agents as to the substantive standards. 20 Do you remember that, sir? 21 A. Yes. If a supervisory agent asked a 22 particular question, hopefully the attorneys up 24096 1 there would respond. 2 Q. Let me direct your attention to the 3 No. 1 in the middle of the second full paragraph. 4 And this is the question that is being asked. 5 Question 1, "The authority of the Bank 6 Board or the FHLB of Seattle to review an 7 employment contract involving a savings and loan 8 holding company where the savings and loan holding 9 company is not a party but where the contract 10 provides for services to be rendered to the 11 institution and the institution reimburses the 12 holding company for the employee's salary." 13 Do you see that, sir? 14 A. Yes. 15 Q. Now, let's go to the last -- Page 4 16 under "discussion." And it's the last full 17 paragraph. 18 Do you see that? You can read that to 19 yourself, sir. 20 A. (Witness reviews the document.) 21 Q. Is that consistent, sir, with the 22 recollection that you had that you were applying 24097 1 the same standards to holding company contracts as 2 you were to thrift contracts? 3 A. Well, the way I read this is if the 4 holding company is obligating the subsidiary 5 thrift to basically compensate it for a contract 6 with employees of the thrift or even employees of 7 the holding company, then the same type of 8 requirements that you'd normally see if it was an 9 employee contract with the S&L should be applied. 10 So, if there was something unusual and 11 unsafe and unsound like golden parachutes or 12 something, then you should look at that, at 13 basically how that would affect the institution. 14 So, basically, I don't have a problem 15 with the interpretation. I think I basically 16 agree with it. 17 Q. During this time period -- the reason 18 that the S memo doesn't have any other dates for 19 the UFG contracts or USAT contracts is because 20 during this time period, you were treating or 21 looking at both contracts as the same and 22 analyzing them under the same standards. Since 24098 1 they had the same language and the same standards, 2 it didn't matter to you whether they were the UFG 3 or USAT contracts, did it, sir? 4 A. What I recall was the contracts were 5 received. I sent them on to legal, and I got 6 legal's analysis. And I used their guidance and 7 counsel as far as any actions I took, any requests 8 from the institution, et cetera, the letters that 9 I initiated in the fall of 1988, basically two 10 letters. One was to unwind the contracts, and the 11 other one was to try to terminate -- I don't 12 remember the specifics right here. But that's -- 13 when I got the letters or the contracts, I sent 14 them to legal. I asked legal's opinion. I think 15 Donna Guthrie -- Beverly Bermudez -- no. Donna 16 Guthrie did this one. She gave me a response, you 17 know. I looked at the response, and I acted based 18 on her guidance and counsel. 19 Q. Isn't what happened, that at the time 20 it was no big deal because everybody viewed the 21 contracts as the same but now we've gone back and 22 looked at this and cooked up some basis on which 24099 1 to criticize Mr. Berner, a basis that isn't in 2 your -- isn't in your S memo, is it, sir? 3 A. No, John. 4 Q. But now you remember the events better 5 than you did in 1988 and you're able to tell us 6 that your contemporaneous S memo was a mistake. 7 Right? 8 A. John, during the December period of 9 1988, I had responsibility for three or four 10 institutions that were part of FSLIC packages. 11 Marc Dunn had now come in and was the analyst. 12 Ginger had left the Federal Home Loan Bank and 13 gone to other -- other employment with Southwest 14 Savings, I believe. He was picking up the ball. 15 At the same time, we had three or four packages. 16 I was principally involved with the negotiation of 17 the operating agreement of at least three or four 18 deals in the latter part of December 1988. I was 19 working around the clock. We were putting S memos 20 together on numerous institutions. Institutions 21 that were being acquired, there were a lot of them 22 going through. We had to write the S memos and 24100 1 put them together. Now, John, if I made one 2 mistake in each S memo, one date, one number was 3 wrong, I still think I did a damn good job. Now, 4 if you want to go back and jump on my back on it, 5 fine. But the way I recall it, after sitting down 6 prior to the testimony and looking at what I 7 remember receiving from the FSLIC/Southwest Plan, 8 people saying they need this, they need this, they 9 need this, and the requests I made of USAT, their 10 response they gave to me, my understanding until 11 the Southwest Plan exam of Brenda Bese started 12 hasn't changed because I've had more time now to 13 look at other documents and fill in the holes and 14 remember how it all went together. And when it 15 came to December, sir, it was hectic. It was 16 nonstop. We were doing a lot of things, and we 17 didn't go out and have people suddenly come in and 18 augment our staff. We just had to do with the 19 staff we had, and we worked damn hard on it. 20 Q. I'm sure my clients who were fired as a 21 result of the memos generated during December 1988 22 appreciate the stress you were under, sir; but I'm 24101 1 required to ask you questions about what happened 2 during that time period. I'm not criticizing you 3 for making a mistake, sir. I'm just trying to 4 determine what it is -- what you knew and when you 5 knew it. So, if you see it as a personal 6 criticism, I didn't mean it, sir. 7 A. You're turning a typo into a grand item 8 when it's not really that big. 9 Q. Now, at your deposition, sir, and 10 during your testimony -- we're going to switch 11 topics for a minute. 12 You were shown a number of memoranda 13 from Art Berner regarding conversations with you. 14 Do you remember that? 15 A. Art was notorious for writing notes, 16 yes. 17 Q. And during Mr. Berner's testimony, we 18 were able to compare many of Mr. Berner's 19 memoranda with memoranda from Ginger Baugh and 20 Mr. Berner's memoranda -- memoranda from Peggy 21 Powers. And we found a pretty good correlation. 22 We never did find a single memo or note of any of 24102 1 your one-on-one telephone conversations with 2 Arthur Berner. 3 Did you keep any memos or notes of that 4 during that entire three-year period, sir? 5 A. It wasn't my standard method of 6 operation to do that. 7 Q. Didn't you tell us in your testimony 8 that Ginger Baugh -- I believe it was 9 Ginger Baugh -- was obliged to take notes or memos 10 of meetings with outsiders? 11 A. Well, whenever we have a meeting with 12 an outside party, group, it was the analyst's 13 responsibility to put together a memo regarding 14 what happened. But on a one-to-one conversation, 15 if somebody called me or I met with somebody 16 one-to-one, I normally didn't feel I had to sit 17 down and write a memo to the file. If I did, it 18 was probably because something momentous happened. 19 But otherwise, it wasn't my standard way of 20 operating. 21 Q. So, when you were the only person 22 present, you didn't keep any notes or memoranda of 24103 1 what occurred in discussions with Mr. Berner? Is 2 that what you're saying? 3 A. I didn't keep a diary, if that's what 4 you're talking about. 5 Q. You used to have a calendar, didn't 6 you? 7 A. Just -- which would be meetings, 8 schedule of meetings. 9 Q. Did you look at your calendar before 10 you testified here? 11 A. I don't have that calendar anymore, 12 sir. 13 Q. You had it in your garage, didn't you? 14 Didn't you take it back and keep it in the garage 15 of your house in California? 16 A. I had calendars for a while. But over 17 the years, I don't remember what I have as far as 18 calendars from the Eighties anymore. 19 Q. Well, didn't you -- when you left the 20 Federal Home Loan Bank of Dallas, didn't you take 21 all your calendars of meetings with you back to 22 your -- to California in 1990 or '91 and keep them 24104 1 in your garage? 2 A. For a time, I guess I did. 3 Q. And where are they now? 4 A. I haven't seen them in a long time. 5 Q. Did you think that calendars of your 6 meetings with all of these executives might be 7 relevant to the Federal Home Loan Bank of Dallas? 8 A. No. 9 Q. That you should have kept them in the 10 supervisory files? 11 A. No. My calendars were simply so I 12 could know what meetings were scheduled at what 13 time. Sometimes I had several meetings a day, and 14 it's just a simple matter of planning what you're 15 doing in the coming weeks. And once I wrote it in 16 the calendar, what am I supposed to do? Erase it 17 after it was over? I mean, it was just a way of 18 scheduling meetings and, simply, that's all it 19 should have been. 20 Q. Now, did you keep working files? 21 A. Pertinent -- you know, copies of 22 certain documents I did keep in my -- basically in 24105 1 my drawers at my office so I could quickly refer 2 to something. Yes, I did. 3 Q. And did you shred those at the time the 4 institution failed, and any that were left you 5 shredded at the time you left the Federal Home 6 Loan Bank of Dallas to take your job in 7 California; isn't that right, sir? 8 A. No. What I recall is moving some 9 barrels, and there was many -- you know, what I 10 viewed as duplicate documents sometimes many years 11 old, you know, I just put in my dumpster. And 12 that was about it because I was leaving my office. 13 I was, you know, seeing what was personal, turning 14 in manuals, and doing other things. 15 Q. And those came from your working files, 16 didn't they, sir, on each institution? 17 A. You can call them a working file. It 18 was really nothing more than a desk file. 19 Q. A desk file. 20 And when they went from the dumpster, 21 what happened? Did they go from the dumpster to 22 the supervisory files? 24106 1 A. No. I think generally, if I put them 2 in these particular barrels, they go out in the 3 trash. 4 Q. So, it's harder to reconstruct your 5 recollection of these events without your working 6 file or, no, desk file and without your calendars. 7 Let me ask you, sir: If you don't have 8 desk files and you don't have calendars, did it 9 become your practice at some point to start taping 10 conversations involving USAT? 11 A. No. 12 Q. And I asked you in your deposition 13 about that, and you denied it in your deposition, 14 as well. Remember that? 15 A. Yeah. I remember you showed me a 16 transcript or something. 17 Q. Well, let's look at that transcript. 18 That should be Exhibit -- Twomey Exhibit 22, which 19 is also A12074. And it's Tab 1521. 20 MR. RINALDI: 1274? 21 MR. VILLA: 12074. It's Tab 1521. 22 Q. (BY MR. VILLA) If you're having 24107 1 trouble, sir, it's the red book, blue tab. 2 MR. VILLA: If you look at the top, 3 Your Honor, you'll see the tab colors. At the 4 risk of being overprepared, I thought I might try 5 to keep people, including myself, from getting 6 lost in the books. 7 Q. (BY MR. VILLA) And this is the 8 transcript that we reviewed during your 9 deposition. 10 Do you remember that, sir? 11 A. Yes, sir. 12 Q. And at the top of this transcript, it 13 says, "Conversations between Vivian Carlton and 14 Karen something, examiner, with Neil on 9/17/86." 15 Do you see that? 16 A. Yes, I do. 17 Q. And you know Ms. Carlton has testified 18 in this trial that whoever taped her did so 19 illegally because she did not have knowledge or 20 consent to it. 21 Has the OTS told you that? 22 A. No. 24108 1 Q. Let's look at the word processing codes 2 up at the top there, the top of the first page. 3 They read, "exclamation point, PMK-4249-1," top of 4 the first page. 5 Do you see that, sir? 6 A. Yes, I do. 7 Q. Now, I'd ask you to turn to the next 8 document, sir, which is B1034, Tab 1522. 9 Do you have that in front of you? Is 10 it a memorandum dated June 6, 1986, from you to 11 Jon Scott? 12 A. Okay. B -- 13 Q. 1034, memorandum dated June 6, 1986. 14 It should be the next document in your book, sir, 15 unless I've made a mistake. 16 A. No. I've got it. 17 Q. Do you have that in front of you, sir? 18 A. Yes, I do. 19 Q. And is the word processing code up at 20 the top "exclamation point PMK/1009/2;"? 21 A. Yes, I see it. 22 Q. And down at the bottom left-hand 24109 1 corner, does it say "NT/GB/PMK"? 2 A. It does that. 3 Q. Now, this memorandum that you sent to 4 Jon Scott was prepared approximately three months 5 before the transcript, right, before the date of 6 the transcript, that's on the transcript? 7 A. Okay. 8 Q. So, whoever typed your memo to 9 Jon Scott also typed the transcript of the taped 10 conversation, didn't they, sir? 11 A. PMK, yes. 12 Q. And you still claim that you were not 13 involved in taping phone conversations involving 14 USAT? 15 A. It was not my practice. 16 Q. Well, let's distinguish -- I've learned 17 from Mr. Nickens' examination of you I have to be 18 real careful with my questions. 19 Let's distinguish between what your 20 practice was and whether or not you taped this 21 phone conversation. 22 Did you tape this one, sir? 24110 1 A. I don't recall. 2 Q. And if you'll look at -- go back a 3 document, several documents, to Exhibit B1739, 4 which is Tab 1523. It should be the second 5 document in your book. 6 Do you have that in front of you? Is 7 that a memo from Ginger Baugh to you and Danny 8 Thomas? 9 A. Hit me with that tab again. 15 -- 10 Q. I'm sorry. It's the third document in, 11 B1739, Tab 1523. 12 A. Yes, I have that document dated 13 September 3rd, '87. 14 Q. And if you'll look on the third page -- 15 it's a memo that's being sent to you and Danny 16 Thomas. Right? 17 A. Yes. 18 Q. And look at the third page of the 19 document, of the exhibit, the last line. 20 Do you see what it says? "Transcribed 21 copy of telephone conversation." And if you'll 22 look at what's attached, it's that telephone 24111 1 conversation. Right? 2 A. I see that. 3 Q. Is it still your testimony that it was 4 not your practice to tape telephone conversations 5 at USAT? 6 A. Absolutely. 7 Q. Let's turn from the question of trying 8 to reconstruct what evidentiary materials you 9 retained when you left the Federal Home Loan Bank 10 Board to another question, which is your trial 11 testimony and the substance of your trial 12 testimony in response to Mr. Rinaldi's questions. 13 You testified at the beginning of your 14 testimony that the Federal Home Loan Bank of 15 Dallas is not related in any way to the OTS. 16 Right? 17 A. Now, yes. 18 Q. Now. 19 Now, the Federal Home Loan Banks -- the 20 whole Federal Home Loan Bank system works closely 21 with the OTS to prosecute enforcement cases, don't 22 they, sir? 24112 1 A. No. 2 Q. They don't? 3 A. I don't know of a policy or requirement 4 to do that. I mean, we -- you know, Federal Home 5 Loan Bank's system is a government response 6 certified enterprise, federal instrumentality. 7 I'm sure we were cooperative with the government 8 because of that. I mean, I don't know where 9 you're going with this, John, but I mean we are a 10 separate corporation. We're a federal 11 corporation, and the OTS is a government agency 12 under the U.S. treasury. There's no -- 13 Q. There's no formal relationship? 14 A. There's no formal relationship. 15 Q. But, in fact, the two agencies work 16 hand and glove together, don't they, sir? 17 A. Well, we have access through FIREA. 18 It's contained in there where we can obtain 19 examination reports on FDIC, OTS, credit union, 20 Federal Reserve, OCC, institutions that are 21 members so we can be certain whether they are 22 being operated in a safe and sound manner because 24113 1 we're making credit decisions involving lending 2 money to those institutions. 3 Q. Now, what I'm talking about is this 4 buddy system you've got. Remember your buddy who 5 sent you the Treasury Department inspector general 6 report on you and your conflict of interest issue? 7 A. Yes. 8 Q. There's an old buddy system, isn't 9 there? You work with -- half the people from the 10 Federal Home Loan Bank Board and the Federal Home 11 Loan Bank of Dallas went to the new Federal Home 12 Loan Bank system, and the other half went to the 13 OTS. And it's an old buddy system between them, 14 isn't it? 15 A. I like to say we have a relationship 16 for informational purposes. But the person who 17 sent me the copy of that inspector general's 18 report does not work for OTS. 19 Q. Who does he work for? 20 A. He's retired. He used to work for OTS, 21 and now he's doing contract work. And that's how 22 he made me aware of the report. 24114 1 Q. Oh, it's interesting. It took us about 2 six months out under the Freedom of Information 3 Act to get a redacted copy of the report. So, 4 former OTS employees have some way of getting 5 these reports to -- 6 A. John. 7 Q. -- former OTS employees are going to 8 testify at trial to make sure they are prepared? 9 Is that how it works, sir? 10 A. John, when I was made aware of the 11 report probably in 1992, an attorney that I was 12 using made a FOIA, Freedom of Information Act 13 request for me to get a copy of that report. I 14 still haven't seen it. Through that formal 15 process, this person happened to be working with 16 something related to the goodwill cases. And 17 there's 110 institutions around the country that 18 have filed in the Court of Claims regarding the 19 FIREA and, as you're aware, generally the goodwill 20 case. I don't want to get into the specifics. In 21 his working on that, he came across a document, 22 this document. And he saw my name on it. And he 24115 1 said, "Do you want" -- "could I send you a copy?" 2 And I said "Sure." 3 Q. Who is he? 4 A. His name is Bob Bonchak. 5 Q. Now, we all know Mr. Bonchak. He used 6 to work at the Federal Home Loan Bank of Dallas, 7 didn't he? 8 A. Yes. And he used to work for the OTS 9 until he retired. 10 Q. In fact, he was the head of the 11 criminal section of the Federal Home Loan Bank of 12 Dallas, wasn't he, sir? 13 A. Yes, for some time. 14 Q. Now, we were exploring the question of 15 the relationship, whether it's formal or informal, 16 between the OTS and the Federal Home Loan Bank 17 system. 18 You have made yourself freely available 19 to the OTS lawyers to help prepare you, haven't 20 you, sir? 21 A. It's been the practice of the Bank to 22 do that, yes. 24116 1 Q. And prior to that, you were a career 2 employee of -- whether we call it the OTS or its 3 predecessors in interest, the supervisory and 4 examination arm of the thrifts of America. Right? 5 A. Basically a combination of about 16 6 years, yeah. 7 Q. Except for a brief interlude where you 8 went to California, some period between that job, 9 and you found a new job in Jefferson Savings; is 10 that right? 11 A. Federal. 12 Q. Jefferson Savings in Gretna, Louisiana? 13 A. I want to clarify. When you said that, 14 you know, I have been, you know, working with the 15 supervision of thrifts and S&Ls for about 16 and a 16 fraction years between the Federal Home Loan Bank 17 Board, the Federal Home Loan Bank of Dallas, and 18 the Federal Home Loan Bank of Boston, ending in 19 July of 1990. And then I worked for two private 20 employers between '90 -- including '93. And in 21 '94, I then came back to the Federal Home Loan 22 Bank, and I've been there for now four plus years. 24117 1 So, if you want to say in some way 2 associated with something Home Loan Bank Board or 3 bank, I've been associated now for over 20 or 21 4 years. 5 Q. And you've testified for the FDIC or 6 OTS or other government agencies in a half a dozen 7 cases, haven't you, sir? 8 A. I've testified for U.S. attorneys and I 9 have -- this might be the first one for OTS. But 10 primarily, primarily the U.S. Attorneys Office. 11 Q. Is that right? You told me about your 12 testimony -- 13 A. I may just be forgetting something. I 14 just -- 15 Q. You told me about your testimony when I 16 took your deposition. You said you didn't have 17 all your old testimonies, but I've collected them 18 all for you. 19 A. You were talking depositions and 20 testimony. You're thinking testimony. I'm 21 thinking court. I'm sorry. 22 Q. I see. If you include deposition 24118 1 testimony on cases that ultimately settled, you've 2 testified for the FDIC or RTC in a number of 3 different cases, haven't you? 4 A. I've been subpoenaed, yes. I'm not 5 sure in all cases it was just the RTC doing the 6 subpoenaing. It was the parties involved. I 7 think that would be a little more accurate. If 8 somebody is being sued by the RTC, they -- and I 9 was the supervisory agent or something, they 10 would -- I would get deposed in the case. 11 Q. Right. Like in this case, if the OTS 12 says that you're going to be a witness for them, I 13 take your deposition because I want to know what 14 you're going to say, if you remember. And that's 15 what happened in the other cases, isn't it? 16 A. Well, I think it was kind of much 17 more -- okay. I'm not an attorney, but I think it 18 was much early on. I think they were just 19 deposing all potential witnesses or anybody who 20 knew anything about it, and that would be the main 21 reason in those cases I would get deposed. 22 Q. But whether the deposition subpoena 24119 1 came from the outside party or whether it came 2 from the FDIC, you've testified on the side of the 3 government in a number of different S&L cases. 4 Wouldn't you agree with that? 5 A. Yes. 6 Q. Now, Mr. Twomey, you testified at 7 Pages 23240 through 43 of your testimony at length 8 about the shortage of examiners at the Federal 9 Home Loan Bank of Dallas from the beginning of the 10 time you arrived in December of 1988 -- '85 until 11 the beginning of 1988. 12 Do you recall that generally? 13 A. Generally, yes. 14 Q. Now, whatever shortage of examiners 15 existed at the Federal Home Loan Bank of Dallas, 16 did or did not exist, USAT was the subject of 17 three federal examinations from the time period 18 May 27, 1986, until it was closed in December of 19 1988, wasn't it, sir? 20 A. Three that I can recall right now, yes. 21 '86, '87, and '88. 22 Q. They were so closely scheduled that the 24120 1 report of the second examination was mailed to 2 USAT on July 28th, 1988, and the third examination 3 started about five weeks later, probably six. 4 Does that sound about right? 5 A. Yes, but -- if you want to hear the 6 "but." 7 Q. I'm happy to hear you, anything you 8 have to say. 9 A. If it hadn't been for the Southwest 10 Plan, then there probably wouldn't have been a 11 September 1988 exam of USAT. It probably would 12 have happened sometime in 1989. The Southwest 13 Plan exam was special in a sense that, A, we had 14 examiners from another district, you know, another 15 resource to put in here. And because of USAT's 16 request to participate in the Southwest Plan, 17 that's the reason for having a Southwest Plan -- 18 another exam there. 19 Q. Is that the reason, sir? Is that the 20 reason that USAT got so much attention? 21 A. Well, you've already said USAT was a 22 major institution in Texas, 5, $6 billion. And it 24121 1 was losing money in the entire time frame. 2 Presently, the new examination rules -- if a place 3 is well-capitalized, it has good CAMEL ratings, 4 it's not necessarily examined every year. They 5 space it out, and they do some type of interim in 6 between. But if an institution has problems, they 7 examine it more closely, at least on an annual 8 basis. So, I think it would fall into that. If 9 USAT is losing money in '86, losing money in '87, 10 losing money in '88, it's obviously not one that 11 we would feel comfortable putting on the side and 12 say, "Well, we've got so many other problems, 13 we'll get to that later." 14 Q. Isn't it true that senate Majority 15 Leader Byrd wrote and made sure that the Federal 16 Home Loan Bank of Dallas devoted adequate 17 attention to the examination and supervision of 18 USAT and actually asked Danny Wall, "Do you have 19 enough resources to get on USAT?" 20 Didn't that happen, sir? 21 A. He sent that letter to me and Danny 22 Wall? 24122 1 Q. Okay. Why don't you look at the next 2 document. Let me hear your answer before you look 3 at the next document. You don't recall the Senate 4 majority leader writing that letter and it getting 5 to you? 6 A. Sir, I don't remember the Senate 7 majority Byrd, I assume, at that time. I don't 8 remember who was Senate majority leader at that 9 point in time. I know Metzenbaum. I know 10 Dingell. And I know generally there was a lot of 11 attention paid in Washington to USAT and 12 Mr. Hurwitz. And that's the reason we asked for 13 information on their junk bonds, and that's the 14 reason -- but we didn't do anything extraordinaire 15 like look at a particular junk bond because this 16 is the one that he used with Milken and this is 17 the one that Centrust had or something like that. 18 I mean, if the Dingell committee member 19 investigator called me -- I think his name was 20 Jack Chessom -- and he would tell me, "Look. Does 21 USAT have this type of junk bond?" We could tell 22 him "no" or "yes." 24123 1 Q. Okay. Let's go back to Senator Byrd 2 Senator Byrd. We're going to talk about 3 Mr. Dingell and Mr. Chessom and all of the Senate 4 and Congressmen that called you that you remember 5 and some you probably don't. But let's deal with 6 Senator Byrd. Look at the next exhibit in your 7 book, which is B2156. It's the eighth document in 8 the red book. 9 A. 2156? 10 Q. Yes, sir. 11 A. Okay. 12 Q. It's not in evidence. Now, sir, this 13 is a copy of the questions for the record, Senator 14 Robert C. Byrd Committee on Appropriations, 15 Subcommittee on HUD and Independent Agencies, 16 Monday, April 25, 1988. Question is for chairman 17 of the Federal Home Loan Bank Board, Danny Wall. 18 Do you see that, sir? 19 A. Yes, I do. 20 Q. Now, let's look at the next document. 21 And we'll put them both in evidence together so we 22 can establish just how much you knew or didn't 24124 1 know about this question. 2 The next document is Exhibit B2193. 3 It's a letter dated May 16, 1988, signed by George 4 M. Barclay. 5 Do you see that? Back to Nancy Lytle 6 of the Office of General Counsel. 7 A. Yes. 8 Q. And the first sentence of Mr. Barclay's 9 letter says, "We have reviewed the questions posed 10 by Senator Robert C. Byrd and the Committee of 11 Appropriations, Subcommittee on HUD and 12 independent agencies dated April 25, 1988." 13 Do you see that? 14 A. Yes. 15 Q. And if you look at who's CC'd on 16 Exhibit B2193, it was you among others. Right? 17 A. Yes. 18 Q. Now, sir -- 19 MR. VILLA: Your Honor, I move into 20 evidence B2156 and B2193. 21 MR. RINALDI: No objection, Your Honor. 22 THE COURT: Received. 24125 1 Q. (BY MR. VILLA) Now, sir, let's look 2 at the last question of B2156, which is the series 3 of questions that Mister -- that Senator Byrd was 4 directing to Danny Wall. Danny Wall was the 5 chairman of the whole Federal Home Loan Bank 6 system. He was the -- 7 A. Chairman of the three-member board. 8 Q. Chairman of the three-member board. 9 And he was the highest regulator on thrifts in 10 America? 11 A. Yes. 12 Q. Okay. And the last question on the 13 last page of the Exhibit B2156 is, quote, "Is the 14 FHLB's review of USAT and UFG being delayed or 15 hampered by a lack of funds or by other priorities 16 for the use of funds? If so, what recommendations 17 would you have for Congress to help alleviate the 18 situation?" 19 Do you see that? 20 A. Yes, I do. 21 Q. Do you regard that as a fairly pointed 22 question coming from the Senate majority leader to 24126 1 the chairman of the Federal Home Loan Bank Board? 2 A. He asked a question. I don't have any 3 problem with the question. 4 Q. Do you get the point of the question? 5 A. Yeah. He wants to know if we need more 6 resources. 7 Q. He wants to make sure that USAT and UFG 8 are the focus of a lot of your resources, doesn't 9 he, sir? 10 A. No, I don't read it that way, John. 11 Q. I'm sure you don't. 12 Let's look at the answer. The second 13 exhibit, B2193, which is Mr. Barclay's letter of 14 May 16, 1988, responding. 15 Do you have that, sir? If you'll look 16 at the last -- the questions are answered by 17 numbers. So, if you'll look at the last question, 18 the last answer on the page, the second page, 19 No. 7, you can see what his answer is. Quote, 20 "Our review of USAT and UFG has not been delayed 21 or hampered by a lack of funds or by other 22 priorities for the use of funds." 24127 1 Do you see that? 2 A. Yes. 3 Q. Now, sir, whatever -- let me ask you 4 again: Whatever shortage of examiners were or 5 were not in existence at the Federal Home Loan 6 Bank of Dallas, isn't it true that you got the 7 message very, very pointedly as did Mr. Barclay 8 that the supervisory and examination staff should 9 be on top of UFG and USAT? Isn't that right, sir? 10 A. No. I think we treated USAT the way we 11 treat any institution in this situation. 12 Q. Now, how many times did the Senate 13 majority leader write Danny Wall and then have 14 them pass it on to you for comment about the other 15 90 institutions in your caseload, that you recall? 16 A. I had other Congressional and 17 Senatorial questions that were sent to Danny Wall 18 or his predecessor. And then they were filtered 19 down through the various levels, and then we would 20 have to answer the particular question and send 21 the response back up. 22 Q. Oftentimes, constituents believed that 24128 1 either thrifts or supervisors were mistreating 2 them; isn't that right? 3 A. During the Eighties, there was a number 4 of institutions that went to Congressional sources 5 to try to get some sort of regulatory relief, 6 that's true. 7 Q. And they would write their Congressman, 8 and their Congressman would write Mr. Wall. And 9 Mr. Wall would send it on to you and Mr. Barclay 10 and others. Right? 11 A. We had institutions making complaints. 12 We had customers making complaints. And they 13 would call their Congressman. The Congressman 14 would then forward it on to the regulatory 15 agency -- in this case, the Federal Home Loan Bank 16 Board -- and then those requests, comments, 17 complaints would then be forwarded down to the 18 supervisory agents eventually. And then we would 19 write up a response or do what we were directed to 20 as far as that, and then a response would be sent 21 up through the PSA back up to the Bank Board and 22 then from there back to the Congressman, who was 24129 1 hopefully the Congressman then, to the 2 constituents who were making the inquiry. 3 Q. And what was happening, which I think 4 was commonplace in the Congressional systems of 5 America, is that complaints were being made about 6 the way a thrift was treating a constituent or a 7 regulator was treating a thrift, and the 8 Congressman was trying to intervene and say, "Go 9 softer on these people." 10 My question is: How many times did you 11 have a Congressman or Senator do the other one and 12 call in and say, "I want to make sure you have 13 enough to really make sure you look at them"? 14 MR. RINALDI: Your Honor, Mr. Villa 15 seems to be testifying now. He hasn't asked him 16 what the nature of these inquiries were, whether 17 it was to go softer or harder. He seems to -- 18 THE COURT: Well, I think this question 19 is on that subject. 20 Can you answer that question? 21 A. Sir, these were just informational 22 questions. We were asked, we responded. We put 24130 1 in the form that the person asked for and we sent 2 it back up and that was it. 3 Q. (BY MR. VILLA) Let me go back to my 4 original question, sir. Whatever shortage of 5 examiners the Federal Home Loan Bank of Dallas 6 had, wasn't it true that the Federal Home Loan 7 Bank of Dallas devoted adequate resources to USAT 8 and UFG? 9 A. Adequate or appropriate, that's fine. 10 I can live with both of those. 11 Q. And any suggestion, if we misperceived 12 it in your direct testimony, that somehow there 13 wasn't enough examination personnel to adequately 14 look at USAT and UFG was a misimpression on our 15 part. Right? 16 A. Well, I don't know what your impression 17 was; but, you know, during the examination, they 18 tried to look at the key points and operations 19 of -- all the key points of any institution. And 20 using examination sampling techniques, obviously, 21 they don't look at every loan made between the 22 last -- the previous exam and the current exam, 24131 1 but they look at a sampling. They look at a 2 sampling. If they look at investments, they 3 should look at a sample of the trades, a 4 representative sampling. 5 I mean, if your thing is did we look at 6 every single item, we tried to look at all key 7 items, an emphasis on all. And they do the best 8 they can. 9 Q. Now, you've testified -- let's change 10 subjects a little. Walking through your 11 testimony. 12 You testified that you recommended to 13 the Regulatory Review Committee in 1987 a 14 supervisory agreement and that Joe Selby overruled 15 you; is that right? Did I get that right? 16 A. That's what I recall. 17 Q. And then you told us what his thinking 18 was. Right? Do you remember that? 19 A. He was concerned regarding the books 20 and records. 21 Q. If you'd turn to Page 355 of your 22 deposition -- let's go to Page 354, Line 6. I'll 24132 1 ask the questions, and you answer them. Okay? 2 The next sentence says, "In lieu of a 3 supervisory agreement, United has agreed to a 4 third-party review of its accounting systems and 5 its investment area, particularly in junk bonds. 6 Do you see that on Exhibit No. 38?" 7 A. "Yes, I do." 8 Q. Question, "What was the source of that 9 sentence?" 10 Go ahead, sir. You can read the 11 answer. 12 A. "Well, I can't specifically say where 13 this person pulled that language out, but I think 14 generally, it was generally known that Grant 15 Thornton was going to do a review of their 16 recordkeeping accounting procedures and then some 17 outside firm was going to go in and look at their 18 investment activities." 19 Q. Question, "I think earlier today, I 20 asked you who made the decision not to require 21 United to sign a supervisory agreement. And your 22 recollection was you didn't know; isn't that 24133 1 right?" 2 Then I'll read Mr. Rinaldi's part for 3 him. Mr. Rinaldi: "I think he said he didn't 4 recall." 5 And then you read your answer, sir. 6 A. And the witness says, "I don't recall 7 who did it." 8 Q. Okay. So, in your testimony here 9 today -- in your testimony in response to 10 Mr. Rinaldi, you said it was Joe Selby. And in 11 your testimony at the deposition, you didn't 12 recall who did it. And fortunately this time, we 13 actually had Mr. Rinaldi summarizing all your 14 prior testimony to make sure that I didn't take a 15 little bit out of context. 16 So, would it be fair to say that you 17 recalled -- you have -- Version 1, in your 18 deposition, you didn't recall. Version 2, it's 19 Joe Selby. Right? 20 A. In the deposition, I didn't recall; and 21 I didn't want to guess. Again, prior to the 22 testimony here, I looked at other documents. And 24134 1 the way the RRC worked was even though there were 2 other members on the committee, there was really 3 only one vote that counted. And when I looked at 4 other information, it suddenly came back to me. 5 Q. Let me ask you to take a look at the 6 next exhibit, which is A11084 in evidence at 7 Tab 1878. 8 A. Okay. Red book? 9 Q. Yes, sir. 10 A. 1174? 11 Q. 11084. It should be the next document, 12 sir. 13 A. Okay. 14 Q. And is this the summary of USAT 15 prepared for -- I'm sorry -- prepared on or about 16 October 1, 1987? 17 A. Yeah. It's a quarterly summary. 18 Q. And you would review these summaries 19 before they became final. Right? 20 A. Yes, I did. 21 Q. Let me direct your attention to the 22 third page under "supervisory actions to date." 24135 1 Do you see that? 2 A. Okay. Let me -- okay. Item 2, yes. 3 Q. Yes. "Supervisory actions to date." 4 Let me read the entry under 4/1/87. "RRC agreed 5 with SA recommendation to initiate an 6 audit/inspection of United's junk bond activities, 7 recordkeeping, and other areas to determine the 8 true condition of the institution." 9 Do you see that? 10 A. Yes, I do. 11 Q. And were you the SA? 12 A. I was the SA. 13 Q. And that was at your recommendation? 14 A. It was my idea. 15 Q. Was it Joe Selby's idea, or was it 16 yours? 17 A. He concurred with it. We wouldn't take 18 those actions unless Joe Selby concurred with 19 that. 20 Q. Didn't you just tell us that the RRC 21 didn't accept your recommendation, and then you 22 went through what Mr. Selby was thinking about? 24136 1 And now you're telling me that it's your 2 recommendation and they concurred with it? I 3 mean, that's what the document says. Would you 4 agree? 5 A. My recommendation in the RRC submission 6 was to go for a supervisory agreement. The 7 RRC/Joe Selby didn't wanting to for a supervisory 8 agreement. And basically -- and generally, I 9 won't say specifically he would say this. He 10 said, "Okay. Let's go another way." And then the 11 bottom line is, "What do you need?" 12 And what I needed was -- initially my 13 idea was to get another audit firm in there to do 14 an audit. And then it came down to, "Well, we 15 can't do that. That's too expensive. Let's get 16 another outside auditor to review systems and 17 records." And that's after a discussion, "what's 18 best, what's this? We can't do this. Let's go 19 this way." 20 Okay. Then there was a general 21 consensus, and Mr. Selby would agree -- agreed to 22 it that, "Okay. We're not going to go for 24137 1 supervisory agreement but we'll get them to agree 2 to get an outside auditor and we'll get them to 3 agree to have some type of outside investment firm 4 look over their investments portfolios," and that 5 was it. 6 Q. Now, let's turn to your books and 7 records concern, sir. You testified at length 8 during your direct testimony that the concern 9 about books and records concerns with respect to 10 USAT. Right? 11 A. Right. 12 Q. And I think I fairly grasped the thread 13 of your testimony that you were suggesting that 14 the books and records concerns impaired the 15 ability to understand USAT's investment 16 portfolios. Right? 17 Were you trying to give that sense to 18 the -- your testimony? 19 A. As it relates to the '86 exam? 20 Q. Well, let's start with the '86 exam. 21 A. It was my -- if I was trying to infer 22 something, imply something, it was simply because 24138 1 of the lack of ability to rely on their books and 2 records. I don't think I specifically said their 3 investments in the '86 exam. But I think if 4 you're an auditor or an examiner, and you 5 basically are looking at the balance sheet and 6 things don't tote up, you've got a concern of 7 where you're off. And if you go to their 8 subrecords and you still kind of put it together, 9 you have to question their ability to keep books 10 and records. 11 And generally, that's real -- more in 12 the '86 exam, it's my impression it was a general 13 problem with their books and records. 14 Q. Well, let's take a look at -- well, let 15 me ask you: Are you saying that -- I believe 16 Peat Marwick certified their financial statements 17 each year. Right? Do you remember that? 18 A. Peat Marwick was their outside auditor 19 at that period of time, and they relied on the 20 information supplied to them by management. 21 Q. Well, my question is: Peat Marwick in 22 1985, 1986, 1987 certified their financial 24139 1 statements. 2 Are you telling me that after 3 Peat Marwick certified their financial statements, 4 their books and records don't tote up? Is that 5 what you're telling me? 6 A. I'm telling you what my examiner told 7 me. 8 Q. So, Ms. Carlton told you that they 9 couldn't add up their assets and liabilities even 10 though Peat Marwick was certifying their 11 financials? Is that what she told you? 12 A. What I remember regarding the '86 exam 13 is there was a problem with their books and 14 records. Now, what Peat Marwick may have done and 15 how they were able to resolve and how many 16 manhours they spent on the institution's books and 17 records, I don't know. 18 Q. Well, let's try to get straight what 19 Ms. Carlton told you. 20 Are you telling us that Ms. Carlton's 21 criticism of the 1986 -- in the 1986 exam that she 22 told you about that you now recall -- even though 24140 1 I asked you about it in your deposition and you 2 didn't recall it -- her criticism that she told 3 you about was that there was a problem involving 4 toting up the assets and liabilities because if 5 you can't tote up your assets and liabilities, you 6 can't figure out the condition of the investment 7 portfolio? I'm trying to see how these things 8 relate to one another, sir. 9 A. What I'm saying is that in her 10 examination report there was a comment regarding 11 the books and records. Now, I can't remember 12 right here specifically what the issues were. But 13 if she says there was -- in her examination 14 report, she refers to a problem with books and 15 records, that was the concern that I'm talking 16 about. 17 Q. Well, let's not incorporate anything by 18 reference. You came in here, and you talked about 19 books and records and how it impaired the 20 abilities of the examiners to look at the 21 investment portfolios. 22 Are you testifying or are you not 24141 1 testifying that the books and records problems 2 impaired Ms. Carlton's ability to look at the 3 investment portfolios in the 1986 exam and that 4 she told you that? What's your testimony at this 5 point on that issue? 6 A. What I recall is there's a comment in 7 the 1986 examination report regarding books and 8 records. And what I recall generally is that 9 because there was this concern at that time, the 10 examination was ended. She wrote the examination 11 report up. We processed it. We asked for a 12 supervisory agreement from the RRC. The RRC 13 didn't want to go for a supervisory agreement. 14 And after discussion, they said, "Let's get them 15 to agree to get an outside auditor to review their 16 books and records systems. Get Grant Thornton" -- 17 not Grant Thornton -- "get an outside investment 18 firm to look over their investment portfolios 19 generally." So, we didn't go for a supervisory 20 agreement. 21 Q. Sir, at the risk of interrupting your 22 answer, all I asked you, sir, was not -- 24142 1 MR. RINALDI: Your Honor, he's giving 2 his answer. 3 MR. VILLA: That is not the question I 4 asked. I asked the question as to whether or not 5 Ms. Carlton's -- Ms. Carlton's criticisms that she 6 conveyed to him on books and records related to 7 investment securities -- 8 MR. RINALDI: And he was just getting 9 to that, Mr. Villa, but you interrupted him. He 10 was just talking about the Pru-Bache report and 11 the reasons why they needed it. 12 THE COURT: All right. Let's hear the 13 answer. Continue, Mr. Twomey. 14 A. Sir, I mean, primarily, the books and 15 records issue is what was in the 1986 exam. 16 Again, we -- I took what I thought was the 17 appropriate recommendation to the RRC. The RRC 18 said, "Go this way." We went that way. We got 19 Pru-Bache eventually, and we got Grant Thornton in 20 there. The institution's directors agreed to do 21 that, and that's, in sum, where we stood after 22 everything was done with the 1986 exam. 24143 1 Q. (BY MR. VILLA) Do you remember what 2 you said in your deposition about the books and 3 records issue with respect to the 1986 exam, sir? 4 A. Not specifically. 5 Q. Well, let's find out. Turn to Page 271 6 of your testimony. Actually, it starts at the top 7 of Page 272. And this relates to this issue. 271 8 gives you the context that it's in connection with 9 the RRC meeting that we just talked about. I'll 10 read the question. You read the answer. 11 Question, "And do you recall that you 12 recommended that another accounting firm other 13 than United's auditors should, quote, 'thoroughly 14 audit their books and records'?" 15 A. "I remember the issue, but I don't 16 remember the specifics surrounding it." 17 Q. Question, "By looking at Page 3 of this 18 exhibit under 'recommendations and action plan,' 19 the first sentence says -- the first sentence 20 reads, quote, 'We recommend that an unaffiliated 21 auditing firm be sent to United to thoroughly 22 audit their books and records.'" Then there's a 24144 1 series of objections. 2 And I ask you whether you see that. 3 Question, "Does this refresh your recollection 4 that you recommended that an unaffiliated auditing 5 firm be sent into United to thoroughly audit its 6 books and records?" 7 A. And the answer to that, Line 4 of 273, 8 is "yes." 9 Q. "You can't recall what prompted that; 10 is that correct?" 11 And would you read your answer, sir? 12 A. I say, "Well" -- I start off 13 "Specifically" -- then I correct myself. I say, 14 "Well, generally, there were three things. Best I 15 can remember this exam, prior exam, United had a 16 problem with its books and records. Second thing 17 is during 1986 and maybe in '87, they were 18 continuing to file amended reports to the 19 corporation changing their numbers, income, 20 assets, liabilities a number of times. The third 21 thing, opinion of the examiners, a number of 22 people working in the operations at United were 24145 1 that former Pete" -- "a number" -- sorry -- "a 2 number of people working in the operations at 3 United were former Peat Marwick and the questioned 4 relationship between the former Peat Marwick 5 people and the current Peat Marwick people." I 6 assume the outside auditor. "But I can't give you 7 an item-by-item, report-by-report, name-by-name." 8 Q. Okay. Thank you. And that's the 9 testimony you gave in 1997 as to the relationship 10 between the books and records problem -- strike 11 that -- what you recalled as the books and records 12 problem. Right? 13 A. Yeah. In fact, I had forgotten about 14 the Peat Marwick reference. 15 Q. Where did Mike Crow come from? 16 A. Today, I don't recall. But if he came 17 from Peat Marwick, that's fine. 18 Q. He came from Arthur Andersen, didn't 19 he? 20 MR. VILLA: Your Honor, if this is a 21 good time to take a break, my next session will 22 take a while. 24146 1 THE COURT: All right. We'll take a 2 short recess. 3 4 (Whereupon, a short break was taken 5 from 10:23 a.m. to 10:47 a.m.) 6 7 THE COURT: Be seated, please. We'll 8 be back on the record. 9 Mr. Villa, you may continue. 10 MR. VILLA: Thank you. 11 Q. (BY MR. VILLA) Mr. Twomey, let's 12 change subjects to the question of the testimony 13 you gave about USAT refusing to take the 14 write-downs that the examiners had concluded ought 15 to be taken down in their assets at the conclusion 16 of their 1986 exam. 17 Do you remember testifying about that? 18 A. Yes. 19 Q. So, the 1986 examination report would 20 have been delivered, I believe it was March or 21 April 1987, and then for a period in 1987, there 22 was an ongoing discussion with United about 24147 1 whether or not USAT would take down -- take the 2 write-downs on the assets. 3 That's what you testified to, correct? 4 A. Yes. 5 Q. Now, sir, do you recall whether there 6 was any legislation enacted in August of 1987, 7 federal legislation, to address what were 8 perceived as nationwide problems in the 9 supervision of banks and thrifts? 10 A. There was the -- I'll call it CEBA. I 11 can't remember what CEBA stood for. 12 Competitive -- sorry. I won't even guess. But 13 CEBA, approximately 1987. And it did address that 14 if an institution had a problem with the directed 15 write-downs, that they gave them an avenue to 16 proceed as far as some type -- they called it an 17 arbitration, but it really wasn't an arbitration. 18 Q. So, you know where I'm going, don't 19 you, sir? 20 A. I know what CEBA was generally. I 21 can't go back on the specifics. 22 Q. Well, why don't you look at the next 24148 1 exhibit. Exhibit B4337. 2 Is that a section of Public Law 100-86, 3 dated August 10, 1987? 4 Do you see that, sir? 5 A. Yes, I see the page. 6 Q. And that is from the Competitive 7 Equality Banking Act of 1987, CEBA, as it's 8 referred to. Right? 9 A. Yes. 10 Q. Now, do you recall, sir, that in 1986 11 and in 1987, culminating in August of 1987, 12 that -- I believe it's about the tenth document in 13 the red book. Maybe twelfth. 14 In about August of 1987, there had been 15 a chorus throughout the country of arguments 16 between financial institutions and their examiners 17 and their supervisors as to the valuation of loans 18 and other assets. Right? 19 A. Yes. 20 Q. And there had been disputes with 21 respect to virtually all aspects of financial -- 22 the regulated financial institutions which led 24149 1 Congress to take the highly unusual step of 2 enacting in CEBA, Section 22A of CEBA, a procedure 3 by which there was actually an arbitration over 4 the question of whether write-downs had to be 5 taken on assets and the values -- the appraisal 6 value of assets. 7 Do you remember that, sir? 8 A. Yes, I do. 9 Q. And if you look at the second page of 10 the document, B4337, you'll see Section 22A, 11 "informal review of certain supervisory 12 decisions." 13 THE COURT: Excuse me, Mr. Villa. I 14 think I may have the wrong document. 15 MR. VILLA: I'm sorry, Your Honor. 16 Perhaps we'll give you another one. Just before 17 4335 should be 4337. 18 THE COURT: I have two 4335s and no 19 4337. 20 MR. VILLA: Thank you, Your Honor. 21 THE COURT: Okay. 22 MR. VILLA: Your Honor, I move into 24150 1 evidence Exhibit B4337. 2 MR. RINALDI: No objection, Your Honor. 3 THE COURT: Received. 4 Q. (BY MR. VILLA) And if you'll look at 5 Page 2 of that, that's the appraisal -- that's the 6 arbitration procedure that you were referring to, 7 isn't it, sir? 8 A. Section 22A. 9 Q. Section 22A. 10 A. Right. 11 Q. And it institutes a formal arbitration 12 procedure where institutions who disagree with 13 their examiners can have the decisions filter up 14 to the principal supervisory agent -- in this 15 case, George Barclay -- in order to resolve 16 questions of appropriate asset classifications and 17 the value of properties. Right? 18 MR. RINALDI: Your Honor, just by way 19 of an objection, I really don't have any objection 20 to this line of questioning about what his general 21 recollection is. What I am concerned about is 22 Mr. Villa is characterizing a piece of 24151 1 legislation, the reasons why it was passed, and so 2 on. And it strikes me that he's trying to get him 3 to agree to all of that. I mean, if the -- if he 4 could just ask him what his understanding was, it 5 would probably make it easier because I don't want 6 it to come back that this man has given a legal 7 opinion as to what the reasons were or what was in 8 Congress' mind. If I'm -- 9 MR. VILLA: Well, Your Honor, I object. 10 The procedure has never been on their direct they 11 can use leading. And on cross, I have to not use 12 leading questions. But I think that the history 13 of CEBA he readily agreed to, and I think it's 14 fairly well understood and, indeed, evident from 15 the face of the statute. But I think I should be 16 permitted to use leading questions with respect to 17 this witness. 18 THE COURT: Do you agree with 19 Mr. Villa's characterization of the purpose of 20 this 22A section? 21 THE WITNESS: Yes, Your Honor, 22 generally. I mean, I won't opine legally. But I 24152 1 mean, my -- the way it impacted us, yes. 2 Q. (BY MR. VILLA) Thank you. And if 3 you'll look at the next exhibit, sir, B4335, can 4 you identify that for me, sir? 5 A. It's a Memorandum R-76 to the 6 professional staff, examination supervision by 7 Darrell Dochow, and it's regarding the informal 8 review of certain supervisory decisions. 9 Q. And it's dated July 7, 1988, isn't it? 10 A. Yes. 11 Q. And you would have received this in the 12 ordinary course? 13 A. I should have. 14 MR. VILLA: Your Honor, I move B4335 15 into evidence. 16 MR. RINALDI: No objection, Your Honor. 17 THE COURT: Received. 18 Q. (BY MR. VILLA) And if you look in the 19 introduction section, I believe the third sentence 20 down, it says, quote, "Because valuation methods 21 necessarily involve judgment, certain supervisory 22 decisions may be controversial." 24153 1 Do you see that, sir? 2 A. Yes, I do. 3 Q. And that was the -- that was, in fact, 4 the genesis of the old arbitration procedure that 5 was ultimately implemented by the Federal Home 6 Loan Bank system in 1988. Right? 7 A. Probably '87. 8 Q. '87. 9 So, sir, it wouldn't be fair to suggest 10 that USAT was the only institution that was 11 arguing about asset classifications in the year 12 1987, would it? 13 A. In the entire country, probably not. 14 Q. Might there be two? 15 A. I don't readily recall others. But if 16 you -- if there were other institutions that had 17 disagreements regarding write-downs, there 18 probably were. I think it's reasonable to assume 19 that there was somebody else out there who didn't 20 like their write-downs. 21 Q. But in your caseload of 90 of the 22 thrifts in Texas, you can't recall any others that 24154 1 ever disputed a write-down except USAT? 2 MR. RINALDI: I'm just going to object. 3 I believe his testimony is at this point in time, 4 when the CEBA legislation was passed, his caseload 5 was around 25. 6 MR. VILLA: Okay. 7 Q. (BY MR. VILLA) Of the 25 largest 8 institutions in Texas, you don't recall any of 9 them ever disputing -- 10 A. Ever? Let's -- time frame. In '87, I 11 generally did not have this, where they are 12 refuting to the point of asking for arbitration, 13 no. Later in 1990, I did have an institution 14 that -- somewhere along the line, I had one that 15 wanted to go the arbitration route and have an 16 outside arbitrator look at the information and 17 then go to the PSA. 18 Q. Now, sir, you didn't understand my 19 question. My question was: Are you suggesting -- 20 strike that. 21 We shouldn't take from your direct 22 testimony, your statement that USAT was disputing 24155 1 the loan classification, any implication that USAT 2 was alone in the universe of 12,000 banks and 3 thrifts as the only financial institution during 4 '86 and '87 that was disputing loan 5 classifications? We shouldn't take that 6 implication from your testimony, should we, sir? 7 A. No. 8 Q. In fact, it was a widespread issue 9 throughout the entire supervision of financial 10 institutions in America, wasn't it, sir? 11 A. I don't know if I want to say something 12 like that because I don't have the entire universe 13 of S&Ls -- sir, the beginning of 1986, the Bank 14 Board instituted a new asset classification reg. 15 Prior to that, the only time a loan might be 16 deemed substandard is because of late payments. 17 And we adopted a reg that was closer to what the 18 commercial banks had. 19 So, if we looked at a loan and there 20 was inherent weaknesses in there, we could 21 classify other than pass -- substandard, doubtful, 22 loss. And it was a new reg basically implemented 24156 1 at the beginning of 1986. And you know, what 2 ended up happening was the substandard area became 3 more actual delinquent or already foreclosed 4 property. The loss part of it became where we had 5 an appraised loss or had a strong indication of 6 what the loss was. 7 In the middle, there was this doubtful 8 area where the examiner would have an opinion that 9 this is a 50 percent write-off but we didn't have 10 the benefit of an appraisal. And it may not be 11 slow. 12 And what ended up happening was that 13 the supervisory agents had to sit down and review 14 all the classifications on every loan, every 15 examination that was being held where they 16 classify anything substandard, doubtful, or loss, 17 and we had to sign off on it basically. We had to 18 agree with the examiners write-ups, and then it 19 became part of the examination. 20 Now, later, in what I thought was 21 August 1987, CEBA was passed. And we set up 22 another procedure that if an institution 24157 1 questioned the write-downs, an outside party would 2 come in, review it, and make a report to the PSA. 3 That's the way I remember it. I don't recall how 4 many institutions, even if the 9th District did 5 it. I definitely don't know how many institutions 6 in the United States ever did it. I can only 7 think of one offhand, and there may be more. I 8 don't want to limit myself. I can only think of 9 one that started to go through the formal process, 10 and I don't even remember if they ever finished 11 it. 12 Q. I think my question, sir, had to deal 13 with the time period 1986, 1987, not the formal 14 process. My question is, sir: In your caseload 15 that went from 90 to 25 during that time period, 16 was USAT the only financial institution that was 17 disputing loan classifications or asset 18 classifications or appraisal values in discussions 19 with its examiners? 20 A. With their examiners? No. 21 Q. Did USAT -- did USAT implement or take 22 advantage of this arbitration procedure in 1988? 24158 1 Was it the one, the one thrift that you 2 were talking about? 3 A. I don't recall that USAT availed itself 4 of CEBA. 5 Q. Now, Mr. Twomey, I'm going to switch 6 gears again, away from whether or not other 7 institutions disputed asset classifications to a 8 new subject. And this is Prudential Bache. 9 Now, you testified yesterday -- day 10 before yesterday, I guess, at some length about 11 the process of changing from Merrill-Lynch as a 12 reviewer of USAT's junk bond activities to 13 Prudential Bache. 14 Do you remember that? 15 A. Yes. 16 Q. And you told us about how the scope of 17 the inquiry had been narrowed and narrower than 18 you had originally desired. Right? 19 A. Yes. 20 Q. And there seemed to be some suggestion 21 or at least ambiguity as to who was responsible 22 for those two decisions, so I thought I'd look at 24159 1 the documentary record of that. 2 Would you look at Exhibit B4331? It 3 should be the next document in your packet, sir. 4 Do you have that before you? 5 A. Yes, I do. 6 Q. And is it a two-page document? The 7 first page is a memo from Ginger to Neil dated 8 6/19/87, and the second page is a memo to the file 9 from Peggy Powers dated June 17, 1987. 10 Is that what you have before you, sir? 11 A. Yes. 12 MR. VILLA: Your Honor, I move B4331 13 into evidence. 14 MR. RINALDI: No objection, Your Honor. 15 THE COURT: Received. 16 Q. (BY MR. VILLA) Now, sir, let me 17 direct your attention first to Paragraph No. 2 of 18 the memo. And let me read it. "With respect to 19 the Merrill-Lynch review of junk bond activities, 20 I have" -- I'm sorry -- "of United's junk bond 21 activities, I have had unfavorable feedback on 22 Merrill-Lynch's third-party reviews. Their scope 24160 1 letter for San Jacinto looks skimpy, and I am told 2 that we can probably expect a skimpy report 3 regardless of the scope set. Also, their fees 4 seem to increase each time they are requested to 5 do another review. The review at San Jacinto will 6 cost the association $500,000. Are the examiners 7 in the FHLB system who are sufficiently 8 knowledgeable of securities investments to look at 9 United's bond trading activities objectively?" 10 Sorry. "Are there examiners in the FHLB system 11 who are sufficiently knowledgeable of securities 12 investments to look at United's bond trading 13 activities objectively? Maybe someone from the 14 New York district." 15 Do you see that? 16 A. Yes, I do. 17 Q. Now, at the top, there are the words to 18 Ginger written. 19 Is that in your hand, sir? 20 A. Yes. 21 Q. Then if you look back down at the 22 bottom, there is Footnote 2. 24161 1 Do you see that? Like, the third line 2 from the bottom of the page. 3 A. Yes. 4 Q. It says, "I may have a second group." 5 And then it's signed "Neil." 6 Is that what it says, sir? 7 A. Yes, it is. 8 Q. Now, does this -- let's start off with 9 what you recall about this issue. 10 Do you recall, sir, that you had had 11 Merrill-Lynch do a review of the junk bond 12 activities at San Jacinto? 13 A. I may be able to help you out. I 14 didn't get San Jacinto as an institution to 15 supervise until approximately July 1st of 1987. 16 Q. Why don't we -- why don't you answer my 17 question first? 18 Did you have -- oh, what you're saying 19 is that you weren't the supervisory agent for 20 San Jacinto when Merrill-Lynch conducted their 21 review of its junk bond activities; is that right? 22 A. That's right, John. 24162 1 Q. I see. Now, when you responded to 2 Mr. Rinaldi's questions -- strike that. 3 $500,000 is a lot of money to pay for a 4 review of San Jacinto's junk bond portfolio. 5 How big was it? 6 A. Hundreds of millions, but I don't 7 know -- here today, I don't want to guess. 8 Q. I don't remember your testimony 9 precisely, but I thought Mr. Rinaldi asked you 10 questions as to whether any other associations in 11 your -- in your caseload held substantial amounts 12 of junk bonds. 13 Did you include San Jacinto when you 14 responded to his questions? 15 A. I thought I did. 16 Q. And you think the transcript will 17 reflect that you said San Jacinto? 18 A. I think it should. 19 Q. Okay. Let's go back to the size of 20 San Jacinto's junk bond portfolio. This 21 500,000-dollar fee is apparently five times the 22 initial fee that USAT was being charged. 24163 1 Do you remember whether San Jacinto's 2 junk bond portfolio was five times that of USAT's? 3 A. John, I don't recall the size of 4 San Jacinto's portfolio, junk bond portfolio. 5 Q. Reviewing this document and 6 particularly Ms. Baugh's notes, does this help you 7 refresh your recollection that the genesis of the 8 criticism of Merrill-Lynch came not from USAT but 9 from Ginger Baugh on June 19, 1987, as a result of 10 the unfavorable work that they had done at 11 San Jacinto? 12 A. No. What I recall is -- I had 13 forgotten about Peggy Powers' memo. I hadn't seen 14 this. I don't know if you -- I don't know if it 15 was an exhibit to my deposition, but I hadn't seen 16 this before. At least, I don't recall it. I 17 don't remember this other memo, but I don't have a 18 problem where I sent it on to Ginger if I received 19 it. And I say, "Ginger, set up a meeting with 20 Randy German," who is our -- at that time, one of 21 our district accountants. And on two, which I 22 assume is on the second paragraph, I may have had 24164 1 a suggestion regarding a second group. 2 Q. First of all, wasn't Randy German at 3 this time with Grant Thornton? 4 A. I'm sorry. I'm thinking Randy Johnson. 5 You're right. Randy German was with Grant 6 Thornton. 7 Q. Let's deal with the issue of where the 8 genesis was for the unhappiness with 9 Merrill-Lynch. 10 My question to you, sir, doesn't have 11 to do with Randy German and where he did or didn't 12 work. 13 My question was: Does this refresh 14 your recollection that it was Ginger Baugh who 15 raised with you unhappiness with Merrill-Lynch 16 long before USAT had anything to do with it? 17 Does this refresh your recollection on 18 that issue, sir? 19 A. It fills in some blanks; but generally, 20 my recollection of the events regarding 21 Prudential, going to Pru-Bache, was simply 22 Prudential was suggested inside regulatory 24165 1 affairs. We met with their representatives. I 2 met with their representatives, I believe. They 3 went down to USAT. And at that point in time, I 4 believe, the best I can recall, Mr. Berner told me 5 that they were going to charge a 100,000-dollar 6 fee and USAT thought that was too much money and 7 they weren't going to pay it. 8 Q. Now, was this Prudential or 9 Merrill-Lynch? 10 A. I'm sorry. Merrill-Lynch. I meant to 11 say Merrill-Lynch in those times I said 12 Prudential. 13 Q. Let's try to get this straight. 14 Sometimes we're thinking about the wrong things 15 when we answer, and it doesn't help us. 16 So, your testimony is you believe that 17 Merrill-Lynch went down to -- 18 A. USAT. 19 Q. Let's back up. Let's deal with the 20 Ginger Baugh memo before we get into what you 21 remember or don't remember. 22 Do you remember this memo? Do you 24166 1 remember Ms. Baugh bringing up to you unhappiness 2 with Merrill-Lynch? 3 A. I didn't until you showed this to me. 4 I'm looking more at Peggy Powers' memo and this 5 together. I remember that Merrill-Lynch was also 6 doing some work at San Jacinto Savings, San Jac; 7 but to the extent of people being unhappy and not 8 getting the product they expected, yeah, that does 9 remind me by looking at this memo that somebody 10 had expressed a concern. 11 Q. It wasn't somebody who had expressed a 12 concern. That's the issue here, sir. It was 13 Ginger Baugh. Do you understand the issue? 14 You've pointed the finger at Mr. Berner and United 15 as the person who nixed Merrill-Lynch and 16 criticized them. 17 My question is: It wasn't somebody who 18 expressed the concern. It was Ginger Baugh who 19 did it, wasn't it, sir? 20 A. If -- okay. Let's back up one second. 21 I see Neil -- I see this being put together -- 22 this very well could have been put together by 24167 1 Ginger. I don't have a problem with saying this 2 is a memo from Ginger to me. That's no problem at 3 all. 4 All I can tell you is moving on after 5 receipt of this -- and I don't even know the date 6 it happened -- I met with three individuals from 7 Merrill-Lynch. Merrill-Lynch then went down to 8 USAT, and then I was informed that they were not 9 going to proceed -- and I think it was Mr. Berner. 10 I'm trying to remember. You know, it was somebody 11 else who called me, and they basically said that 12 the fee was too much. It was $100,000 and that 13 USAT didn't want to pay it. 14 And at that point -- then, I don't 15 remember how, but Pru-Bache was probably 16 suggested. We talked to them, and they went down. 17 They agreed on a price, and Pru-Bache then did the 18 review at USAT involving the junk bonds. 19 Q. So, your answer is this doesn't refresh 20 you that it was Ginger Baugh who first raised the 21 criticism of Merrill-Lynch, just so I get that 22 straight? You can run through the chronology as 24168 1 many times as you want. 2 My question to you is: Does this 3 document refresh your recollection, sir, that it 4 was Ginger Baugh and not USAT who began the 5 criticisms of Merrill-Lynch? 6 A. I recall there was some criticisms 7 raised -- I mean, looking at this, somebody had 8 criticisms of Merrill-Lynch's review at San Jac. 9 I have no problem with that. 10 Q. Do you understand the difference 11 between somebody and Ginger Baugh? Do you have a 12 hard time answering my question? 13 A. I'll accede. Okay? If you tell me 14 this is from Ginger Baugh, I have no problem 15 recognizing this is from Ginger Baugh. I just 16 don't remember Ginger actually raising this. This 17 is a memo. I don't have a problem with what's in 18 the memo. I don't have a problem with the facts 19 that are in the memo. 20 Q. Now, Footnote 2 says, "I may have a 21 second group." 22 Do you see that? 24169 1 A. Uh-huh. (Witness nods head 2 affirmatively.) 3 Q. Was it you who came up with Prudential 4 Bache? 5 A. No. I wouldn't have come up with it by 6 myself. 7 Q. When you speak of the word "I," who are 8 you referring to? 9 A. I may have knowledge of a possibility 10 that there's another firm that we may want to try 11 to contact. 12 Q. And what was the second group you had 13 in mind? Was it Prudential Bache? 14 A. It may have been Pru-Bache. It may 15 have been somebody else. Merrill-Lynch came up 16 when the idea of having the junk bonds being 17 reviewed, I had a discussion with Walter Faulk who 18 was under Joe Selby running the supervisory group. 19 Mr. Faulk is the person who suggested we contact 20 Merrill-Lynch. 21 Now, he may have at the same time have 22 also said, "Well, here's somebody else if they 24170 1 don't work out." I don't recall. It was probably 2 Walter Faulk who also came up with Pru-Bache as a 3 possibility, or it may be somebody else. I don't 4 remember where Pru-Bache's name was thrown in. I 5 do know that Merrill-Lynch was suggested to be 6 contacted by Walter Faulk. 7 Q. Now, let's look at the next document, 8 sir. We focused on what the genesis was from -- 9 moving from Merrill-Lynch to Prudential Bache and 10 who might have made the suggestion. Now I'd like 11 to turn to the issue of the scope of the study. 12 Do you see B1715? 13 A. Yes, I see it. 14 Q. And is it a memo -- actually, a buck 15 slip from Ginger to Neil? 16 A. Yes. It's a memo slip from Ginger to 17 me. 18 MR. VILLA: Your Honor, I move B1715 19 into evidence. 20 MR. RINALDI: No objection, Your Honor. 21 THE COURT: Received. 22 Q. (BY MR. VILLA) Let me read it. It 24171 1 says, "Neil, I think we could do this proposed 2 review for a lot less than $100,000. It sounds as 3 though the reviewer will just look at the 4 information provided by United rather than really 5 doing an independent review of the junk bond 6 area," close quote. 7 Do you see that? 8 A. Yes, I do. 9 Q. Now, you can't tell by looking at this 10 document what she's referring to. But if you look 11 at the next document, B4333 -- do you see that, 12 sir? Do you have B4333 before you? 13 A. Yes, I do. It's a draft to the USAT 14 board. 15 Q. It's a fax that looks like it came to 16 the Federal Home Loan Bank Board on Page 1. The 17 date, July 20. And then it says, "Ginger, FYF," 18 which is for your file? Is that what it means? 19 A. Yes. 20 Q. And "NT" underneath it. Right? 21 A. That's right. 22 Q. And then attached to it is a draft 24172 1 proposal from Merrill-Lynch, correct? 2 A. Yes. 3 Q. Now, if you take a look at the 4 pagination, both the Bates stamp numbers which are 5 in the right-hand column and the imaging number on 6 the left side, you see that these documents were 7 found in the file with the memo on top, 8 Ms. Baugh's buck slip right on top of the 9 Merrill-Lynch proposal. Right? 10 A. Yes. 11 Q. So, that's what it appears? 12 A. It appears. 13 MR. VILLA: Your Honor, I move B4333 14 into evidence. 15 MR. RINALDI: No objection. 16 THE COURT: Received. 17 Q. (BY MR. VILLA) And, in fact, the two 18 tie together because in her buck slip, she refers 19 to the 100,000-dollar fee and the fact that it's 20 United. And if you look at the proposal itself, 21 it is, in fact, a 100,000-dollar fee that is 22 proposed on the second page of the proposal down 24173 1 at the bottom. And it's directed to United. 2 Right, sir? 3 A. Yes. 4 Q. Now, the observation that Ms. Baugh 5 makes about this is that the, quote, "Reviewer 6 will just look at the information provided by 7 United rather than really doing an independent 8 review of the junk bond area." 9 Do you see that? 10 A. Yes. 11 Q. Does that refresh your recollection 12 that the constriction, if that's what you were 13 suggesting in your direct testimony, on the scope 14 of the junk bond review did not come from United? 15 It came from Merrill-Lynch? 16 Does that refresh your recollection, 17 sir? 18 A. No. I think this points out that 19 Ginger correctly pointed out that they weren't 20 doing everything that we originally were 21 requesting them to do in the draft that they sent 22 us. 24174 1 Q. And where did that -- where did the 2 limitation on the scope narrower than the scope 3 you said you had originally hoped for, where did 4 that come from? 5 A. Well, I don't recall what conversations 6 we might have had before they sent this draft to 7 us. But I know it was our intent to try to have 8 the trades looked at, namely a more intensive 9 review. Now, this is what they sent us as their 10 draft. 11 Q. As a result of your conversations with 12 them? 13 A. Yeah. They sent this to us. And 14 Ginger's pointing out that they are not doing it. 15 Q. Now, ultimately, you had to approve the 16 scope of the third-party review. Right? 17 A. Ultimately, I would have. I should 18 have. 19 Q. And you accepted the Prudential Bache 20 review; is that correct? 21 A. I don't recall right now what -- you 22 know, I probably had some type of scope letter 24175 1 that I had to approve. Regarding Pru-Bache, yeah; 2 but I just don't remember all the particulars that 3 were in it right now. 4 Q. My question is: Did you -- when 5 Prudential Bache sent their report to you, did you 6 send it back and say, "This isn't what I asked 7 for? This is not acceptable"? 8 Did you do that, sir? 9 A. No. 10 Q. And ultimately, United had to receive a 11 third-party independent review of a reviewer that 12 was satisfactory to you under a scope that you 13 were prepared to accept. Right? That was part of 14 the deal that you proposed to United in lieu of a 15 supervisory agreement? 16 A. That was the deal proposed. 17 Q. Now -- and you don't recall at this 18 point and looking at these documents doesn't 19 refresh your recollection that it was, in fact, 20 the Federal Home Loan Bank of Dallas who was 21 unhappy with Merrill-Lynch and that it was, in 22 fact, Merrill-Lynch that constricted originally 24176 1 the scope of the junk bond examination? It 2 doesn't help you refresh your recollection on 3 those two points? 4 A. It's my recollection that the 5 Merrill-Lynch people went down to United; and at 6 that time, I was told they weren't going to do the 7 review. That's what I recall. 8 Q. Let's turn to your testimony about the 9 fact that Mr. Lemanski left something out of the 10 Prudential Bache report at the request of his 11 lawyer. 12 Do you remember that? 13 A. Yes. 14 Q. And you told us that you could not 15 recall his verbal report in response to 16 Mr. Rinaldi's questions. Right? 17 A. Oral report. 18 Q. Oral report. You could not recall? 19 A. Not the specifics. 20 Q. I'd like you to take a look at the next 21 document in the record, which is A11091. These 22 are minutes of a telephone conversation -- could 24177 1 be a meeting or a telephone conversation -- of 2 March 4, 1988. And it says, "Attorney Pru-Bache." 3 It has Mr. Lemanski, you, Ginger Baugh, and we 4 looked at this in your deposition. It was 5 produced to us by the Federal Home Loan Bank of 6 Dallas in the document production. 7 Do you see that before you, sir? 8 A. Yes, I do. 9 MR. VILLA: Your Honor, I move A11091 10 into evidence. 11 MR. RINALDI: No objection, Your Honor. 12 THE COURT: Received. 13 Q. (BY MR. VILLA) Let's see if we can 14 refresh your recollection about the verbal report 15 that you got from Mr. Lemanski. 16 Now, this report date or the date on 17 this memo is March 4, 1988, which would have made 18 it, what, four or five months after the date of 19 the Prudential Bache written report. Right? 20 A. Well, the way I remember it, the report 21 is dated as of the time they did -- I think he was 22 going down to do the review. But even before we 24178 1 received the written report, Mr. Lemanski and his 2 attorney, we got on a conference call and 3 discussed what was going to be in the report. 4 Namely, he was giving us a preview. I could be 5 wrong; but I mean, I recall we got -- had this 6 oral discussion or preview of what was going to be 7 in the report and then received a hard copy later. 8 We didn't have the hard copy first and this. 9 I may be wrong; but when we were 10 looking at the report during prior testimony, I 11 mean, it didn't ring true that the date was 12 sometime in 1987, I believe. It just didn't -- it 13 didn't comport to my recollection that we got it 14 later. 15 Q. Okay. Let's go through one thing at a 16 time. 17 Do you recall, sir, that in November of 18 1987, you received an oral report from Pru-Bache 19 that was generally good? 20 A. Well, with this exhibit -- I mean, I'm 21 assuming that this conversation took effect -- 22 happened on March 4th, '88. Are you referring 24179 1 to -- 2 Q. Let's try to distinguish -- there are 3 three events I'm going to focus on. The first one 4 is an oral report in November of 1987. The second 5 one is a written report on November 24, I think, 6 1987. And the third one is the oral -- or the 7 meeting or telephone call in March of 1988. 8 Now, let's focus on the first of these 9 three, the first oral report, not the one that's 10 reflected here, not the one that's reflected here. 11 A. All right. 12 Q. The one you just told us about in your 13 memory. You said you had a memory that at or 14 about the time or perhaps even prior to receiving 15 the first -- the written report, you had a 16 conversation with Mr. Lemanski and his attorney; 17 is that right? 18 A. Not his attorney. 19 Q. Just Mr. Lemanski? 20 A. Yes. 21 Q. Now, this is the oral report that's at 22 or before the time the written report is 24180 1 delivered. Right? 2 A. I had a telephone conversation with 3 Mr. Lemanski after he'd done his review, and he is 4 just telling me what's going to be in the report. 5 That's the conversation that I was talking about 6 that you've already referenced in previous 7 testimony. 8 What I recall then is we -- the group 9 here, the Federal Home Loan Bank people you see in 10 this memo, then got together for a conference 11 call. 12 Q. Let me interrupt you. I'm going to 13 allow you to answer that. But let's just deal 14 with one meeting at a time. Okay? And then we'll 15 go through it and I'll give you a full opportunity 16 to answer with respect to the second conversation. 17 The first conversation you had with 18 Mr. Lemanski, he told you that the report was 19 generally good. Right? Do you remember that? 20 Not this one. Don't get yourself confused. Not 21 the March 4, 1988. 22 A. Well, is there something else I should 24181 1 be looking at for this? Is there another memo to 2 the file? 3 Q. Sir, why don't we just deal with your 4 testimony and your recollection. 5 A. Okay. 6 Q. Do you recall that the first oral 7 report you got on Prudential Bache was generally 8 good? 9 A. I believe -- the best I can recall is 10 when I spoke to Mr. Lemanski, that he said that 11 they -- they had the right procedures. They had 12 the right policies. And generally, everything 13 else was -- met industry standards. They had the 14 right reports. They had the right system. The 15 people had the right expertise. 16 So, generally, he came off and said, 17 "that's it." And then he said to me, when it came 18 to looking at the individual trades, he couldn't 19 do that because of concerns raised by his 20 attorneys. 21 Q. Now, in your deposition, I asked you 22 that, and do you recall what you answered? 24182 1 A. No. 2 Q. Would you look at Page 390, Line 5? 3 And it begins above that because we're talking 4 about the Prudential Bache report. 5 Question, "Let me restate my question. 6 Is there anything in the portion of Exhibit No. 43 7 that I read to you that is inconsistent with the 8 views that you held in November of 1987?" 9 Answer, "Well, what I can tell you is 10 the facts were that we had an outside party review 11 their accounting and bookkeeping and recordkeeping 12 systems, and we had a written opinion on that. At 13 this time, we probably had at least an oral report 14 by Pru-Bache and that was generally good. I can 15 remember that." 16 And then you talk about "I don't 17 remember making the statement too big to fail. I 18 just don't recall making that statement. That's 19 basically it." 20 Was that your testimony when I took 21 your deposition about the oral report? 22 A. Yes, sir. 24183 1 Q. And was the oral report generally good, 2 sir? 3 A. Generally good, yes. 4 Q. Okay. So, first, we've got the oral 5 report. Then we've got the written report that's 6 in evidence. Right? 7 A. Right. 8 Q. You've seen that. Now let's turn to 9 this third part of it, which was the meeting or 10 telephone call referenced on March 4, 1988. 11 Let me ask you, sir: Do you recall 12 this meeting or telephone call? 13 A. I do recall this conference call. 14 Q. Okay. What do you recall -- what are 15 the -- let me just take a look at the first 16 sentence of it and ask you: Do you recall 17 Mr. Lemanski saying "United's trading desk, quite 18 a good job at analyzing audits" -- I'm sorry -- 19 "analyzing credits," et cetera? 20 Do you remember him saying that? 21 A. I don't remember him exactly saying 22 that, but this generally purports -- I mean, I 24184 1 quickly read it -- to basically the highlights of 2 what Lemanski told us on a telephone conference 3 call. 4 Q. And the second line is "Stodart was 5 good, young staff but well-supervised." 6 Do you see that, as well? 7 A. Yes, I do. 8 Q. And the third line, "Concentrations - 9 relatively well-diversified." 10 Do you see that? 11 A. Yes, I do. 12 Q. And is that all consistent with your 13 recollection? 14 A. Yes, it is. 15 Q. Now, down to the second line from the 16 bottom, it says, quote, "This concludes report 17 process," close quote. 18 Do you see that? Second line from the 19 bottom? 20 A. Yes, I do see that line. 21 Q. I just want you to see it to start off 22 with. 24185 1 Do you remember anything that 2 Prudential Bache provided other than what is in 3 this -- I'm sorry. Strike that. 4 Do you remember Prudential Bache giving 5 you any report after the discussion that is set 6 forth in the March 4, 1988 notes that we have just 7 reviewed? After -- a later point in time that 8 would have amended or revised or modified in any 9 way the conclusions that are set out in this memo? 10 A. No, John. 11 Q. Okay. Now, sir, when I took your -- at 12 the time of your deposition, you didn't recall a 13 conversation in March of 1988, did you? 14 A. I recall -- maybe I didn't recall it at 15 the deposition; but again, I knew there was this 16 conference call. I'm not sure of the time. 17 Again, it's out of sequence as far as what I can 18 remember. I thought we did this type of 19 conference call first and got the report later. I 20 mean, based on the date of the report, it looks 21 like we got the report and then a long time later 22 we had this conference call. And I honestly still 24186 1 believe today it was the other way around, but I 2 can't argue with dates on the materials. 3 MR. VILLA: Your Honor, I move A11091 4 into evidence. 5 MR. RINALDI: No objection. 6 THE COURT: I thought I received that. 7 I'll receive it again. 8 Q. (BY MR. VILLA) Now, Mr. Twomey, let's 9 talk for a minute about Mr. Connell's contract and 10 his compensation. 11 Do you recall that Mr. Rinaldi asked 12 you a series of questions about his compensation? 13 He asked you whether you, quote, "swallowed hard," 14 close quote, because you thought his compensation 15 was excessive. And he asked you did you swallow 16 hard about that and you answered, quote, "I made 17 the decision. It was my responsibility." 18 Do you remember that testimony? 19 A. I believe so. 20 Q. And I suppose here in Texas, we'd say 21 that you were a stand-up guy. You took 22 responsibility even though that compensation was 24187 1 high. You were the supervisory agent. You were 2 going to make that decision, and Mister -- you're 3 going to accept Mr. Connell's compensation. 4 Right? 5 A. Well, I didn't object to the contract. 6 Q. And specifically on the questions of 7 compensation, you swallowed hard. You made the 8 decision. It was your responsibility. Right? 9 A. I made the decision. 10 Q. Now, when you wrote the letter of 11 October 27, 1988, to USAT, do you want to guess as 12 to whether or not you criticized his 13 compensation -- Mr. Connell's compensation as 14 excessive? 15 A. I didn't criticize Mr. Connell's 16 compensation as excessive. 17 Q. "We have reviewed employment 18 contracts" -- I'm now looking at Exhibit B2487, 19 which is in evidence at Tab 98. And reading from 20 the first sentence, "We have reviewed employment 21 contracts that United Savings Association of Texas 22 entered into with various members of senior 24188 1 management." Then it goes through, and the second 2 one is Lawrence Connell. Right? 3 A. That's right. 4 Q. The second line, "Each and every 5 contract reviewed was found to be in violation of 6 563.39 of the regulations in significant respects. 7 Further, because these contracts provided for 8 excessive compensation and severance payments, 9 their execution at a time when United was 10 approaching, or had actually reported insolvency, 11 represented an unsafe and unsound practice by the 12 board of directors and senior management of 13 United." 14 Did I read that correctly, sir? 15 A. Absolutely perfectly. 16 Q. Is it still your testimony that that 17 letter did not criticize Mr. Connell's 18 compensation as excessive? 19 A. It's still my testimony that we weren't 20 going to be -- through that letter, I was not 21 criticizing Mr. Connell's package. I mean, we did 22 review all the contracts and we did -- and that 24189 1 letter does say that there is a violation 2 regarding 563.39. 3 The way I recall the situation, though, 4 is that we were going -- we were addressing the 5 other persons mentioned in the contract and 6 excluding Mr. Connell. 7 Q. I see. It says, "Because these 8 contracts provided for excessive compensation" -- 9 do you see the words "excessive compensation"? 10 A. You're right. I see it right there. 11 Q. So, if some OTS enforcement lawyer 12 would pick this up ten years later, they could go 13 after Mr. Connell. They would never know that you 14 had been a stand-up guy and you had accepted his 15 compensation and you had not intended to go after 16 him; isn't that right? 17 A. Unless they talked to me. 18 Q. Isn't it a fact that you were 19 criticizing his contracts along with everybody 20 else's at the time, and now it's come to your 21 attention that you got his contract much earlier. 22 So, you're now trying to go back and rewrite 24190 1 history and say, "Well, I had cut out Mr. Connell 2 separately. I was treating him differently than 3 everybody else, and somehow this letter was 4 written inaccurately." 5 Isn't that what happened, sir? 6 A. No. 7 Q. You remember clearly how his contract 8 was handled. 9 Is that what you're telling us, sir? 10 A. I remember we received his contract. 11 His contract was then reviewed by our legal 12 department. And they made numerous exceptions, a 13 numerous, long write-up concerning it. 14 Q. Well, sir, why don't you turn to 15 Page 667? 16 A. Of my deposition? 17 Q. Of your deposition. You can read 667 18 to get the background so that there will be no 19 question about the -- what I'm talking about. And 20 I'm going to start reading at Page 670. If you'd 21 just read those two pages to yourself. 22 A. Okay. 667 and 6 -- 24191 1 Q. Start at 667 and go on down there. 2 A. (Witness reviews the document.) 3 Q. Have you read it, sir? 4 A. I'm at the bottom of the page, yeah. 5 (Witness reviews the document.) Okay. I'm down 6 to Line 9 on 668. 7 Q. Okay. Well, I actually meant -- let's 8 start on Page 670. The intervening section talks 9 about your possible willingness you had to show 10 flexibility to senior officers coming into 11 troubled associations. And then I asked you 12 questions beginning at Page 670. And that was 13 just for the context of it. Now, my questions 14 begin on Page 670, Line 9. 15 Question, "I think my question is were 16 you willing to show more flexibility in the terms 17 of the employment contracts in order to attract a 18 highly-qualified CEO to an institution like 19 United? And I mean more flexibility than you 20 would for current management contracts." 21 Answer, "Well, I think the documents 22 have indicated that the exhibits that we have gone 24192 1 through, an exhibit from time to time references 2 in there that it was felt that hiring of an 3 experienced CEO was very important to United. And 4 at that time, I don't think United was under a 5 supervisory agreement with us. So, I don't recall 6 what I might have communicated to the institution 7 regarding Larry Connell's contract. But what 8 flexibility we may have been considering, using 9 your terminology, I just don't recall how 10 internally it was discussed, how internally it was 11 processed, how internally we arrived at a decision 12 one way or the other, or how we communicated that 13 to USAT if we, indeed, did." 14 Question, "Do you recall whether you 15 reached a supervisory exception for Mr. Connell's 16 contract?" 17 Answer, "Well, my previous response is 18 that I don't recall." 19 Question, "You can answer the question 20 'no.' We've been using the word 'flexibility.' 21 You used the word 'supervisory exception' at the 22 beginning of this. So, if you say you don't 24193 1 recall, I understand that, sir. I'm not trying to 2 put you through reviewing everything. But when we 3 use different terms, sometimes they are different 4 questions." 5 Answer, "You know what? All right, 6 John. I just don't recall how it was processed, 7 if it was processed, if a decision was made, and 8 if a decision was made, whether or not the 9 decision was communicated." 10 Do you see that, sir? 11 A. Yes, I do. 12 Q. And your testimony today is that you 13 actually went through this process. You came to a 14 decision in your mind as a stand-up guy that you 15 weren't going to criticize his -- Mr. Connell's 16 compensation even though I think we'll both agree 17 that the letter does that, doesn't it, sir? 18 A. The letter makes reference that it's 19 not in compliance with 563.39. 20 Q. It calls it excessive, doesn't it? 21 Compensation -- "provided for excessive 22 compensation." 24194 1 Have I misread the words? 2 A. No, you have not. 3 Q. So, the testimony you came here to give 4 was that you had this process and you had made an 5 exception for Mr. Connell. And then when I showed 6 you the letter, your testimony was, "Well, the 7 letter is somehow a mistake. What I was really 8 thinking was that there was an exception for 9 Mr. Connell and it just failed to be reflected in 10 the letter. It's just like the S memo. It's just 11 another one of those mistakes." 12 Then I read you your testimony where 13 you say you don't remember anything about how 14 Mr. Connell's contract was processed, if it was 15 processed, or what happened to it? 16 A. Well, there is a difference in time 17 between the time of the deposition and what I did 18 to prepare for my testimony at this point in time. 19 Q. Right. Between those two times, you've 20 talked to the OTS lawyers, haven't you, sir? 21 A. Yes, I have. 22 Q. When exactly did it come to you that 24195 1 you had made a supervisory exception for 2 Mr. Lawrence Connell's contract? 3 A. Well, partly when I was reviewing a 4 memorandum from Beverly Bermudez regarding the 5 contract. 6 Q. The one I showed you in your 7 deposition? 8 A. Probably. 9 Q. Now, sir, can we agree whatever was 10 going through your mind that from the date that 11 the Connell contract was mailed to you on or about 12 June 30th, 1988, through the date October 27, 13 1988, you have seen no document which indicates 14 that you expressed any criticism of that contract 15 or any portion of it to USAT? 16 Would you agree with me on that? 17 A. John, I can't recall how, if, or ever 18 we communicated to USAT what our findings were on 19 Larry Connell's contract from the time it was 20 received up to the date you just specified, 21 October 27, 1988. 22 Q. My question is: Do you recall seeing 24196 1 anything which suggests that you did communicate 2 it -- did communicate your criticisms from 3 June 30, 1988, to October 27, 1988? Have you seen 4 any letter, memorandum, note that would suggest 5 that you had communicated those criticisms, sir? 6 A. John, I don't remember -- I don't 7 presently recall that we communicated, before this 8 date, any criticisms of Larry Connell's contract 9 to USAT. 10 Q. That is to say, before the date 11 October 27, 1988, correct? 12 A. Exactly. 13 Q. And Mr. Dermody, who's been presented 14 as an expert -- you know Allan Dermody. Right? 15 A. I know Allan Dermody. 16 Q. He's testified in this case that he 17 hasn't found anything in the file either that 18 would support that. 19 So, you wouldn't dispute him on that. 20 Right? 21 A. I don't -- again, I don't dispute that. 22 I don't recall actually sending something in 24197 1 writing back to USAT. 2 Q. Now, isn't the truth, sir, that you 3 just failed to act on the Connell contract; and at 4 some later point in time, USAT patterned all of 5 its contracts after that? And once that happened, 6 you had to invent this story about a supervisory 7 exception? Isn't that what happened, sir? 8 A. No. 9 Q. And since the deal you had with Art 10 Berner was that -- the deal was Berner would send 11 you the Connell contract. And if you had 12 problems, you were supposed to get back to him. 13 Right? 14 A. Yes. 15 Q. So, if he didn't hear from you, he was 16 justified in assuming that there were no problems. 17 Right? 18 A. I didn't get back to him. 19 Q. Now, your testimony is that you've 20 developed this exception at some point in time for 21 the Connell contract; and Art Berner is left 22 dangling out there because he never got anything 24198 1 in writing from you; isn't that right, sir? Isn't 2 that about what it amounts to? 3 A. I did not give anything in writing to 4 USAT before that October 27th date that referenced 5 anything to Larry Connell's contract that I can 6 recall. 7 Q. And so, Art Berner doesn't have any way 8 of proving that the understanding between you-all 9 was that if there's no problems with the contract, 10 you are to get back to him. He's out there 11 dangling on those contracts. And, in fact, it was 12 your -- your supervisory approach, wasn't it, 13 sir -- you didn't like to have things in writing. 14 Wasn't that your supervisory approach? 15 A. No. John, you mentioned contracts. I 16 thought we were only talking about Larry Connell's 17 contract. 18 Q. We'll get to the other contracts. 19 Sir, wasn't it your approach that you 20 didn't like to have things in writing? 21 A. Not that I recall. 22 Q. Why don't you look back in your -- in 24199 1 the red book to the blue tab, which is the 2 transcript of the telephone conversation that you 3 did not tape. I'm sorry. It's A12074 in evidence 4 at Tab 1521. And start at Page 9. 5 Do you have that? This is a 6 transcript. This is on a different issue. It 7 starts at Page 9, and it's Bates stamped 153384. 8 Terry: "And then another thing is if 9 the subsidiary is not a financial subsidiary and 10 they give them money and that subsidiary purchases 11 some mortgage-backed securities for whatever 12 reasons they choose to deduct that out as well, 13 that subsidiary is not a financing subsidiary." 14 Neil: "What do they have -- what do 15 they have to say when you asked them about this?" 16 Terry: "They said, well, since they 17 purchased mortgage-backed securities, Dallas says 18 I don't have to include it as a direct investment. 19 But on their quarterly reports, they are showing 20 $230 million as direct investments to the above. 21 But they say that that's totally independent when 22 it comes to direct investment calculation." 24200 1 Neil: "Well, I agree with you that 2 this is not a financial subsidiary. And they may 3 have asked somebody up there, and somebody may 4 have taken the impression that they were talking 5 about a financial subsidiary." 6 Terry: "They have nothing in writing, 7 or they forgot who they talked to." 8 Neil: "That's real good." 9 Isn't that your supervisory approach? 10 Isn't that why we can't find your working files, 11 sir, or your calendars? 12 A. No. 13 Q. Is that your supervisory approach, sir? 14 A. No. 15 Q. If you have -- if the thrift executive 16 has nothing in writing, he's just dangling out 17 there like Mr. Connell would be if we read that 18 letter and like Mr. Berner is today. Right? 19 A. John, I'm sorry I didn't put something 20 in writing before that date regarding Larry 21 Connell; but I just didn't do it. 22 Q. Not as sorry as Mr. Berner is. 24201 1 MR. VILLA: Your Honor, this is a good 2 place for me to stop. 3 THE COURT: If you had to put something 4 in writing, what would you have written? 5 THE WITNESS: What I should have done 6 is written to Mr. Berner and say "There are 7 concerns in the contract and we are taking 8 supervisory exception." I should have put that in 9 writing. 10 THE COURT: And what would that have 11 meant? 12 THE WITNESS: That -- okay. Before I 13 could have written that letter -- again, this was 14 being discussed internally -- I should have 15 written Mr. Berner a letter saying that there are 16 problems relating to 563.39. However, because of 17 the need of the institution to get a qualified 18 senior executive in as a new president -- and it 19 could have been Bill Popejoy or Larry Connell. It 20 didn't matter who that individual was -- that we 21 needed to do this. And I should have written a 22 letter, and I should have put it on the record. 24202 1 And I didn't do it. And that's -- and I -- I 2 don't have a problem with admitting that. I know 3 we discussed it internally. I know we said, you 4 know, we needed to get a Larry Connell type in 5 there. But at the time, the only contract -- you 6 know, we knew of the UFG contracts. We didn't 7 know about any -- that this was going to be a 8 prototype for other contracts. We just didn't 9 know that. We were looking -- this person is 10 coming from the outside. How do you induce 11 somebody to go into a troubled situation versus 12 somebody who's already there? I mean, if they 13 don't like it, they just leave. And with 14 Mr. Connell and other people during this time, 15 many times, we had to come up -- we had to come up 16 with some type of management consignment program 17 because we also had to indemnify these people so 18 later on they wouldn't get sued for their actions 19 at these institutions. 20 So, in lieu of the indemnification, we 21 would agree to signing bonuses and some type of 22 six-month severance, nine-month severance, a year 24203 1 severance. And that did happen other times at 2 other institutions. But where Mr. Connell is 3 coming from the outside, to get him into United, 4 you know, they start talking about severance and 5 signing bonuses, principally we just did it. But 6 we did it on other occasions, too. And we 7 probably should have written letters in every one 8 of those occasions. But there are other instances 9 where we did get people from the outside, induced 10 them to come in. And if we didn't get them FSLIC 11 indemnification so if they ever got sued, they 12 would be protected, we came up with a large bonus. 13 We had one person named Wageman who came in to run 14 a group of S&Ls put together called Sunbelt, and 15 he got a 500,000-dollar signing bonus just to go 16 in there. 17 And so, it happened from time to time. 18 And it wasn't as much as we never did this or this 19 is the only time this ever happened. It did 20 happen during this period of time trying to get 21 good people, good quality managers to get in there 22 and run an institution. 24204 1 Now, could they cure the problem? No. 2 They weren't going to cure the problem. But they 3 weren't going to make it worse, and they were 4 going to start addressing them to stop the 5 bleeding. 6 And that's basically why we needed 7 somebody like Larry Connell in an institution like 8 United. And if the price that had to be paid and, 9 ultimately, it might have been a FSLIC price that 10 had to be paid of giving him bonuses and giving 11 him severance, then we were going -- I agreed with 12 making a supervisory exception regarding that. 13 And John's absolutely right. I should 14 have gone on the record. I should have sent 15 Mr. Berner a letter. I don't have any problem 16 admitting that. I was also doing a lot of other 17 things, but that's not an excuse. That's what 18 should have happened. 19 I had no knowledge -- no idea at any 20 time that, "Oh, this is a prototype. We can use 21 this in every case." I mean, Mr. Berner knew this 22 was a high point with us, to get a CEO in there. 24205 1 I mean, we had been talking to them for a year. 2 "We've got questions regarding senior staff. We 3 think you should bring in a strong S&L executive," 4 you know, time and time again. Oral, writing, 5 other times, we did it. 6 And then when the Southwest Plan was 7 coming together, my hope was that United is going 8 into insolvency. If they get a top-notch 9 executive in there and they get reconstituted on 10 various different ways, whatever way, they solve a 11 6-billion-dollar problem. 12 When you have an institution that's 13 hemorrhaging millions and millions of dollars a 14 month and there's no hope for it, the only thing 15 is you get some type of FSLIC recap. 16 Now, I didn't care who came in and did 17 it. But if it meant that, you know, United's 18 management team in the summer of 1988 with Larry 19 Connell would be acceptable, that was fine with me 20 because later, Mr. Connell could work out the 21 problems with running the institution as far as 22 what management team should be there. 24206 1 And that's -- that's what it came down 2 to. The idea is Larry gets in there. He starts 3 working on the problems. If a FSLIC 4 recapitalization comes through and United is a 5 survivor in that as far as being the lead 6 institution and they put more institutions to it, 7 that's fine because Mr. Connell, in our opinion, 8 had the ability to do that. Okay? If somebody 9 else totally came in -- Ron Perelman with Revlon, 10 he bought the institution and he totally threw out 11 management, that was fine. 12 But from the time of the summer of '88 13 to the time maybe somebody else came in, what the 14 hope was was that a strong executive would be 15 running the place properly and addressing the 16 problems. You know, we just fully recognized 17 there was no superman around here. There was 18 nobody who was going to do it perfectly, turn it 19 around. 20 And so, it was just a mere fact. The 21 numbers were stacked up against you. But you 22 could -- instead of making it worse, you could 24207 1 make it better. And if he saved $10 million or 2 $1 million, then the price to pay to get him in 3 there was worth it to FSLIC in the end, in my 4 opinion. 5 And that's what it all came down to. 6 THE COURT: All right. 7 MR. VILLA: Your Honor, may I ask two 8 other questions -- 9 THE COURT: All right. 10 MR. VILLA: -- based on that? 11 Q. (BY MR. VILLA) Now, after you sent 12 this letter to Mr. Berner, would it be fair to say 13 that United took immediate action to redraft the 14 contracts, to try to get the money back from 15 escrows and trusts, to get compensation studies 16 and the like? 17 Do you recall that, sir? 18 A. Yes, I do. 19 Q. So, if this hypothetical letter that 20 the Court asked you about had been sent three and 21 a half months earlier when you now agree that you 22 should have sent it, do you have any reason to 24208 1 believe that Mr. Berner would have taken the 2 actions to implement these contracts for which he 3 and all of these other people are being sued? 4 Do you understand my question? 5 A. I understand your question. But what I 6 would have had a problem already with would be 7 if -- and you pointed out in the 10K where there 8 was -- where there could be a renegotiation of the 9 contracts. I still right now don't recall that we 10 knew about the new USAT contracts in February of 11 1988. We did know about the UFG contracts, I 12 believe, October of 1987 because Art sent them to 13 us. 14 Now, I would ask -- I really would have 15 a serious problem that if they entered into new 16 contracts and raised compensation levels up and 17 changed the monetary amount, why didn't Art send 18 those to me in the -- when we requested the 19 initial request for USAT contracts? 20 Q. You're not listening to my question. 21 My question was -- the first time that you 22 breathed a word of complaint about these 24209 1 contracts, the USAT and UFG boards took a series 2 of actions that Mr. Berner testified about for 3 about two and a half hours to implement your 4 suggestions. 5 My question to you is if you had sent 6 that letter when you now agree you should have 7 sent criticizing the Connell contract three months 8 earlier, isn't it reasonable to conclude that 9 Mr. Berner would have said, "No, we're not going 10 to enter into these contracts. Contrary to my 11 belief, these contracts are a problem. I just 12 heard from Neil. Let's not do it. Let's talk to 13 the regulators." 14 Isn't that a reasonable conclusion as 15 to what would have happened in this hypothetical 16 world if you had sent the hypothetical letter? 17 A. Yes. 18 MR. VILLA: No further questions on 19 this issue. 20 THE COURT: We'll adjourn until 1:30. 21 22 24210 1 (Whereupon, a lunch break was taken 2 from 12:01 p.m. to 1:35 p.m.) 3 4 THE COURT: Be seated, please. We'll 5 be back on the record. 6 Mr. Villa, you may continue with your 7 cross-examination. 8 MR. VILLA: Thank you, Your Honor. 9 Q. (BY MR. VILLA) Mr. Twomey, at the 10 conclusion of the testimony this morning, in 11 response to the Court's question, you testified 12 that you believed that you had reached a 13 supervisory exception for the Larry Connell 14 contract. 15 Do you recall that? 16 A. Yes. 17 Q. And do you also recall that prior to 18 that, you and I had gone through your testimony 19 where you said that you didn't know if it was 20 processed, how it was processed, what the outcome 21 was, and whether United had been told. 22 Do you remember that, as well? 24211 1 A. I think that was from my deposition. 2 Q. From your deposition testimony. You do 3 remember that, though? 4 A. Yes. 5 Q. Now, sir, have you seen any -- you also 6 told us that you were able to testify more fully 7 here than you had in your deposition because you 8 had seen supervisory documents which helped you 9 refresh your recollection. Right? 10 A. True. 11 Q. Have you seen any supervisory documents 12 that show that the Federal Home Loan Bank of 13 Dallas or you reached a supervisory exception for 14 Mr. Connell's contract? 15 A. No. I can't say that there's a memo to 16 the file or something similar to that at all. 17 Q. Now, I have seen three documents that 18 bear on this issue; and we're about to go through 19 them. But just so I understand clearly, your 20 recollection is refreshed between the time of the 21 deposition and the time of trial to remember the 22 supervisory exception that you granted Mr. Connell 24212 1 and the reasons for it. But you haven't seen a 2 document that helps you remember that; is that 3 right? 4 A. I saw other documents that when I saw 5 it in the entire context, I -- you know, you 6 generally recall things when you look at something 7 else, even if it isn't totally related to the item 8 at hand. 9 Q. Well, let's look at the documents that 10 bear on the question of whether or not you gave a 11 supervisory exception to the Connell contract. 12 The first one is Exhibit B2313, which is about the 13 15th document in the red book. It's in evidence 14 at Tab 485. 15 A. John, you're going to have to help me 16 with that tab again. I'm sorry. 17 Q. It's Exhibit B2313, and it's Tab 485. 18 And it should be about the 15th document in your 19 book. 20 Do you have it before you, sir? 21 A. Yes. 22 Q. And is it a memorandum dated July 15, 24213 1 1988, from Beverly Isaiah-Bermudez to you? 2 A. Yes. 3 Q. And this is one of the memos, I 4 believe, that Mr. Rinaldi asked you about in your 5 direct testimony. Right? 6 A. Yes. 7 Q. Now, looking at this memo, is there any 8 indication here that Mister -- that the Federal 9 Home Loan Bank of Dallas is giving a supervisory 10 exception for the Connell contract? 11 A. No. 12 Q. In fact, this is quite critical of the 13 Connell contract, isn't it, sir? 14 A. Yes. 15 Q. Now, let's turn two documents deeper 16 into the book, which is Exhibit T8093, Tab 1866. 17 And are you looking at a memo dated July 27, 1988, 18 from you and Ginger Baugh to David Bradley? 19 A. I'm sorry. T8093. 20 Q. Do you have that before you, sir? 21 A. Dated July 27th, 1988. 22 Q. Yes. Now, the discussion that I see on 24214 1 the Connell contract is the last paragraph on 2 Page 1. And it reads, "Larry Connell's employment 3 agreement. In early July 1988, Mr. Larry Connell 4 sent to the supervisory agent a copy of his 5 employment agreement for our review. The 6 agreement includes provisions for excessive 7 compensation and golden parachute provisions. The 8 legal department prepared a memorandum listing 9 their objections to the various provisions of the 10 agreement and suggested submitting the agreement 11 to RRC for recommendations. As RRC has been 12 dissolved, we propose directing United to revise 13 the agreement in accordance with FHLB policy and 14 Section 563.39 and 563.17 of the insurance 15 regulations." 16 Do you see that? 17 A. Yes. 18 Q. Is there anything in there which would 19 suggest to you that a supervisory exception had 20 been granted for the Connell contract or that you 21 had even recommended one? 22 A. No. 24215 1 Q. In fact, it's directly contrary to your 2 testimony this morning that you had recommended a 3 supervisory exception because of all the need to 4 bring in a high-level CEO to bring United out of 5 its problems? 6 A. I basically said ultimately, we came to 7 that realization, yes. 8 Q. Now, the third document that I see that 9 bears on the question of whether or not 10 Mr. Connell was given a supervisory exception is 11 your letter of October 27, 1988, which is 12 Exhibit B2487. 13 And in that document, on the first 14 page, Mr. Connell is treated exactly the same way 15 as the other officers and employees, isn't he, 16 sir? 17 A. Yes. 18 Q. Now, do you know of any other document 19 besides these three documents that bear on the 20 question of whether or not a supervisory exception 21 was given to Larry Connell -- for Larry Connell's 22 contract? 24216 1 A. I'm not aware of any. 2 Q. So, what document or fact, sir, came to 3 your attention between the time of your testimony 4 in your deposition and your testimony at the time 5 of trial that allowed you now to conclude with 6 such clarity that a supervisory exception was 7 given for Mr. Connell? 8 A. Well, as you probably previously noted, 9 what we called the RRC had been dissolved. And 10 lacking RRC, the only thing we could do was bring 11 those matters that were -- the deficiencies that 12 Beverly Bermudez had noted in her memorandum 13 regarding Larry Connell's contract to my superior, 14 which was Dave Bradley. And we did that. 15 And I think this is the memo -- I 16 didn't remember the form it took when I was doing 17 the deposition. But this is basically us, Ginger 18 and myself, telling Dave Bradley that these are 19 the outstanding issues. 20 At the same time, there were several 21 conversations going on between ourselves and other 22 senior officials of the Regulatory Affairs 24217 1 Committee regarding Larry Connell going in there; 2 and it also had to relate to the Southwest Plan. 3 But we brought the issues. We disclosed the 4 issues to the next person up. We told them what 5 was going on. And basically, we reached an 6 understanding that we had to go ahead and get 7 Connell in there despite what's in the contract. 8 Q. Did you understand my question, sir? 9 A. I thought I did, and I thought I 10 responded. 11 Q. What document or fact -- let's start 12 off with document. 13 What document allowed you to now 14 testify with such clarity to the question of a 15 supervisory exception for Larry Connell when, in 16 your deposition, you had no recollection of how 17 the Connell contract was processed and in the 18 documents that you've seen that bear on it, all 19 three of them indicate that no supervisory 20 exception was given. 21 What document can you point us to that 22 helps us understand why you've now come to this 24218 1 revelation? 2 A. The only document I knew that 3 internally we brought deficiencies noted in Larry 4 Connell's contract to the attention of my 5 superiors, this is basically -- this is probably 6 one of the forms we did it in, in this particular 7 memo. 8 Q. That's the July 27 memo you're talking 9 about, sir? 10 A. It's the July 27 memo. And it was my 11 recollection it was decided that, "Okay. Despite 12 any deficiencies, the overriding thing is we need 13 Connell in there." 14 Now, when Art Berner sent me Connell's 15 contract, I don't believe it was signed. So, 16 somehow, some way, some method -- and I didn't 17 do -- I can't find it in writing. I would have 18 assumed I had done it in writing. I have not seen 19 a document that would support that at all. But 20 some way, some manner, some means, I had to notify 21 Mr. Berner that it was okay to go ahead with 22 Mr. Connell's contract because I don't think he 24219 1 would have gone ahead without some type of 2 affirmation from us. Now, that's the best I can 3 do. 4 Q. So, perhaps this is one of the 5 telephone conversations or discussions that we 6 don't have a record of; but your best recollection 7 would be that you did affirm to Mr. Berner that 8 the Connell contract was okay? 9 A. Given Mr. Berner's affinity for keeping 10 memorandums of my conversations, quite frankly, I 11 would have hoped that there was something around 12 where Mr. Berner memorialized the conversation. 13 But given that omission on my part, an 14 error on my part where I didn't put it in writing 15 and spell it out whereas most likely, all I did 16 with Mr. Berner is probably say, "It's okay for 17 you to go ahead with Larry Connell's contract," I 18 cannot tell you when, if, and how or where in time 19 I may have had that conversation with him. But I 20 don't think Mr. Berner would have gone ahead with 21 that contract, had Mr. Connell execute it, without 22 some type of positive communication from us. 24220 1 Now, how it occurred, I don't know. 2 Okay? And after our discussion this morning, I 3 had assumed that I put something in writing. I 4 didn't put it in writing, and that is obviously an 5 omission on my part. 6 Q. And you assumed that Mr. Berner would 7 have had to have a positive affirmation from you 8 because the way Mr. Berner responded to the 9 criticisms in October of 1988 was to take all 10 reasonable good faith efforts to change the 11 employment contracts as you had requested. Right? 12 A. I think the action that Mr. Berner took 13 after we discovered the -- from the interim 14 reports regarding employment contracts were 15 basically things that we were directing him to do. 16 He did them. Most of the things were unwound. 17 Most of the things were agreed to with possibly 18 the exception of the trust account, the best I can 19 recall. 20 Q. Now, sir, isn't it true that, in fact, 21 you had a history of simply failing to act on USAT 22 applications when you were at the Federal Home 24221 1 Loan Bank of Dallas? And on one or more 2 occasions, you were criticized by your 3 highest-level supervisors for inexcusable delay on 4 a USAT application. 5 Do you remember that? 6 A. No. 7 Q. Well, let's look at Exhibit A11063. It 8 was also Twomey Exhibit 15 in your deposition. 9 Is that a memorandum from Joe Selby, 10 the executive vice president of regulatory 11 affairs, to Roy Green, the president of the 12 Federal Home Loan Bank of Dallas dated May 19, 13 1986. Subject, United/Houston. 14 Do you see that, sir? 15 A. I do see that. 16 MR. VILLA: Your Honor, I move A11063 17 into evidence. 18 MR. RINALDI: No objection. 19 THE COURT: Received. 20 Q. (BY MR. VILLA) Now, the text of this 21 three-sentence memorandum says, "No excuse for the 22 delay. And the automatic approval did become 24222 1 effective in April. I suggested the new letter 2 giving tentative approval until the exam is 3 complete with the association told not to increase 4 investment until final approval is given (if it 5 is), not legally binding but analyst thinks they 6 will comply. Signed, Joe Selby." 7 Do you see that? 8 A. Yes, I do. 9 Q. And that was a direct investment 10 application, wasn't it, sir? 11 A. I assume so, yes. 12 Q. And under the direct investment 13 applications under 563.9-8(g), if an application 14 is filed and no action is taken on it within 30 15 days, it's automatically approved by regulations. 16 Right? 17 A. Yes. 18 Q. And what happened was that you delayed 19 the handling of this application according to 20 Mr. Selby without excuse. And by operation of 21 law, the application was approved and then the 22 Federal Home Loan Bank had to go back and tell 24223 1 USAT something which was not legally binding but 2 tell them that they couldn't do it anyway. 3 Isn't that what happened, sir? 4 A. I know there is a letter going out to 5 them regarding tentative approval regarding 6 waiting for the exam results, something to that 7 effect. 8 Q. Let me return to my prior question. 9 Isn't it true that you had been criticized by the 10 highest-level supervisors in the Federal Home Loan 11 Bank of Dallas for inexcusable delay in handling 12 USAT matters? 13 A. I didn't recall this memo. 14 Q. Now that you recall the memo, does it 15 change your answer in any way? 16 A. I don't recall that Joe Selby spoke to 17 me about this. But he may have, and I just have 18 forgotten it. 19 Q. Is it possible, sir, that there was 20 never a supervisory exception here at all and 21 that, in fact, you simply delayed acting upon the 22 Connell contract for four months and then when it 24224 1 came up, in order to obscure the fact that you 2 inexcusably delayed responding, you developed a 3 supervisory exception theory that has no basis in 4 any document that we have seen in this case? 5 Isn't that possible, sir? 6 A. No. 7 Q. Now, Mr. Twomey, let's change gears a 8 little bit. 9 In his examination, Mr. Nickens 10 suggested to you that the reason you changed your 11 view of management was to try to justify the fact 12 that you were trying to deliver the bank to 13 Mr. Ranieri. 14 You probably gathered the point of his 15 questions. Right? 16 A. I believe so. 17 Q. And you've denied that. You said you 18 found out about certain important facts for the 19 first time in the Southwest Plan examination that 20 led you to change your mind about United Savings 21 Association of Texas' management. Right? 22 A. Yeah. The interim reports that we 24225 1 received. 2 Q. Now what we're going to do is we're 3 going to go through those reasons that you justify 4 your change of opinion about. 5 And one of them -- I'm not going to 6 replow Mr. Nickens' ground -- that is to say, 7 documents and issues -- documents that he has used 8 with you, I'm not going to go through. But 9 there's some other documents that I think might 10 bear upon your knowledge. 11 One of the important facts that you 12 mentioned several times was the fact that USAT had 13 a 200-million-dollar market loss in its 14 mortgage-backed securities. Right? 15 A. Yes. 16 Q. And another one of those facts was that 17 USAT's compensation levels were excessive. Right? 18 A. Yes. 19 Q. And another one of those facts is that 20 USAT had put money into other financial 21 institutions to pay for executive bonuses and 22 severance pay. Right? 24226 1 A. Yes. 2 Q. And another one of those facts is that 3 USAT contracts had golden parachutes with two 4 years, two years' severance attached to them. 5 Right? 6 A. Yes. 7 Q. So, when you learned of these facts, 8 Mr. Twomey, you came to the conclusion that USAT's 9 management wasn't fit to run a financial 10 institution and you had to have them dismissed. 11 Is that your testimony today? 12 A. I couldn't trust them, and that's the 13 conclusion I reached, yes. 14 Q. Now, let's talk about the 15 200-million-dollar loss. 16 You testified that the first time you 17 found out about the 200-million-dollar loss was 18 when you received the interim exam report dated 19 December 19, 1988. Right? 20 A. Yes. 21 Q. And prior to that, you thought that -- 22 you had the impression that the portfolio had been 24227 1 financially successful, the MBS portfolio. Right? 2 A. Yes. 3 Q. And this had affected various of your 4 management evaluations. Right? 5 A. Yes. 6 Q. UFG was a public company. Right, sir? 7 A. Yes, it was. 8 Q. And it filed Form 10Ks and Form 10Qs 9 like all other public companies? 10 A. Yes, it did. 11 Q. And the federal regulations required 12 USAT and UFG to send their Form 10K directly to 13 you, didn't it, sir? 14 A. I don't recall a reg that required it, 15 but we did receive the copies of their documents 16 routinely after they filed with the SEC. 17 Q. Well, when you say "their documents," 18 you mean their 10Ks and 10Qs? 19 A. 10Ks, 10Qs, 8Ks, Form 8s. 20 Q. Let's just look at Exhibit B4267, which 21 is the regulation, which is in evidence at 22 Tab 1781. 24228 1 Do you see that before you, sir? 2 A. Yes, I do. 3 Q. And do you see that under 584.1(a)(2), 4 each savings -- registered savings and loan 5 holding company, including subsidiary savings and 6 loan holding company, shall file an annual report 7 on Form HB-11? 8 A. That's true. 9 Q. Do you see that, sir? 10 A. Yes, I do. 11 Q. And then if you look down at the bottom 12 of that column, A4, it says "Registration 13 statements, annual reports," which is what we just 14 talked about, "and the HB-12 are filed with the 15 corporation by transmitting the original and two 16 copies thereof to the District Office of 17 Examinations and Supervision." And it gives their 18 address and two copies to the supervisory agents. 19 Right? 20 A. Yes. 21 Q. And you are the supervisory agent, 22 correct? 24229 1 A. Yes. 2 Q. Now, let's look at the next exhibit, 3 which is Exhibit B4266 in evidence at Tab 1782. 4 Do you recognize that, sir, as the 5 instructions for the filing of annual Form HB-11? 6 A. Yes. The annual report for holding 7 companies. 8 Q. Annual report for holding companies. 9 Now, I'd like to direct your attention 10 to the last page of that under "instructions for 11 exhibits," No. 3. 12 Do you see that, sir? 13 A. Yes. 14 Q. And it says, "The following exhibits 15 are to be filed as a part of this report. Such 16 exhibits are appropriately lettered or numbered 17 for convenient reference." And then it includes 18 under 3B reports on Forms 8K and 10K and any 19 amendments thereto filed with the Securities and 20 Exchange Commission pursuant to the requirements 21 of the Securities and Exchange Act of 1934 for the 22 fiscal year under report." 24230 1 Do you see that, sir? 2 A. I see that. 3 Q. Does that refresh your recollection 4 that savings and loan holding companies were 5 required to send to you directly two copies of 6 their annual report, and their annual report under 7 the regulations included the Form 10K? 8 A. What I remember is they did have to 9 file this annual report Form HB, and that report 10 was normally reviewed -- received only -- you 11 know, received annually. And this is what we 12 would look at as far as information on the holding 13 company. 14 Q. And the form -- and the Form HB-11 -- 15 is it HB or -- yeah, HB-11 would include the Form 16 10K, wouldn't it, sir? 17 A. Yes, it would. 18 Q. And that would be another document that 19 you would look at when you received it. Right? 20 A. Yes. 21 Q. Now, sir, let's start off with the 22 question of -- well, let's just look at B4332, 24231 1 which is two more exhibits in. It's some 2 handwritten notes. 3 Do you see that, sir? 4 A. Yes. 5 Q. And they are dated, it looks like, 6 either February 2nd, 1987, or February 3rd, 1987? 7 A. Yes. 8 Q. It says, "United Savings Association of 9 Texas" at the top? 10 A. Yes, it does. 11 MR. VILLA: Your Honor, I move B4332 12 into evidence. 13 MR. RINALDI: No objection, Your Honor. 14 THE COURT: Received. 15 Q. (BY MR. VILLA) Do you recognize this 16 as the handwriting of Ginger Baugh? 17 A. No, but it probably is. 18 Q. The last line says, quote, "Requested 19 all SEC filings," close quote. Right? 20 A. Right. 21 Q. And that's because you and Ms. Baugh 22 were examining the SEC filings and wanted to know 24232 1 what was going on with United, correct? 2 A. I think it was more the fact that since 3 UFG was a public company, we were requesting that 4 we receive the SEC filings so, you know, we could 5 basically look at the documents to better 6 understand what was happening at USAT. 7 Q. So, the answer to my question is "yes"? 8 A. I'd say yes. But as you noted before, 9 with form HB-11, we were receiving them anyways. 10 Obviously, we were reemphasizing that for some 11 reason but probably just to get more information 12 from USAT. 13 Q. Good. Let's look at the information 14 you received pursuant to this request. 15 Would you look at the next exhibit, 16 A3040? 17 A. Form 10Q? 18 Q. It's the Form 10Q, yes, sir. And does 19 it appear to be the Form 10Q for the quarter ended 20 June 30, 1987? 21 A. Yes, it does. 22 Q. And I believe you testified in your 24233 1 direct testimony you were looking at the UFG 2 securities filings more intently in the later time 3 period. 4 Do you remember that? 5 A. Yes. 6 Q. So, deciding that you had three years 7 of supervision, we'll cut it in half and we'll 8 look at the last 18 months. And the first one of 9 these would be the Form 10Q for the quarter ending 10 June 30, 1987. 11 MR. VILLA: Your Honor, I move A4030 12 into evidence. 13 MR. RINALDI: No objection. 14 THE COURT: Received. 15 Q. (BY MR. VILLA) Now, sir, you had 16 spent, I think you told us in the questioning by 17 Mr. Rinaldi, several years -- several stints being 18 sent from your position at the Federal Home Loan 19 Bank of Boston to assist in the processing of 20 Form 10Ks and 10Qs when they got backlogs at the 21 Federal Home Loan Bank system in the 1980s. 22 Right? 24234 1 A. Yes. 2 Q. So, you're generally familiar with the 3 format of 10Ks and 10Qs. Right? 4 A. Yes. 5 Q. Let me direct your attention on 6 Exhibit A3040 to Page 7 of this document. 7 Do you see that, sir? It doesn't have 8 a very good Bates numbering system on it. Kind of 9 says GS002855 down at the bottom? 10 A. Yes. And starts off with Item 3, 11 "mortgage-backed securities" on top? 12 Q. Right. Let's look at -- under June 30, 13 1987, what the market value of the mortgage-backed 14 securities, the Ginnie Mae, Freddie Mac, and 15 Fannie Mae securities is. 16 What is that, sir? 17 A. 3 million -- I'm sorry. 3,544,000,000. 18 Q. $877. 877,000. Right? 19 A. Yes. 20 Q. And let's look at the carrying value. 21 What do you see that to be? 22 A. $3,711,692,000. 24235 1 Q. Now, I've got a calculator here, but I 2 hope you'll trust me that it shows a difference 3 between the two of about $167 million. 4 Does that look about right to you? 5 A. Yes. 6 Q. So, when you received and reviewed this 7 document, you would have been aware of a 8 167-million-dollar mark-to-market loss in the 9 mortgage-backed securities. 10 Would you agree with that? 11 A. Yes. 12 Q. Let's look at the next document, A3041. 13 Do you recognize this, sir, as the Form 14 10Q for United Financial Group for the quarter 15 ended September 30, 1987? 16 A. Yes. 17 MR. VILLA: Your Honor, I move A3041 18 into evidence. 19 MR. RINALDI: No objection, Your Honor. 20 THE COURT: Received. 21 Q. (BY MR. VILLA) Let me direct your 22 attention to Page 7 of this document under 24236 1 "mortgage-backed securities." 2 Do you see that, sir? 3 A. Yes, I do. 4 Q. I'm going to read it for you and try to 5 save you trying to find it. 6 MR. RINALDI: I'm sorry. Which page, 7 sir? 8 MR. VILLA: It's Page 7. It's Imaging 9 No. OW153111, and it's about an inch half down 10 from the top. 11 Q. (BY MR. VILLA) Does it show there, 12 sir, the market value of the mortgage-backed 13 securities as $3,244,000,684? 14 A. Yes. 15 Q. And does it show the carrying value at 16 $3,596,080,000? 17 A. Yes. 18 Q. And according to my calculator, which 19 is always dangerous, it shows a mark-to-market 20 loss of $351 million. Right? 21 A. Yes. 22 Q. And you would have known that when you 24237 1 received and reviewed the Form 10Q. Right? 2 A. Yes. 3 Q. Now, sir, let's look at the next 4 document in your book, which is the Form 10K for 5 the year ending December 30, 1987. 6 Do you have that before you, sir? 7 A. Yes, I do. 8 Q. This is Exhibit A3023. It's in 9 evidence at Tab 79. And this is the one that we 10 saw earlier that Mr. Berner had mailed to you. 11 Right? 12 A. I assume so. 13 Q. Do you remember I showed you the letter 14 that Mr. Berner had mailed you, the Form 10K for 15 the year ending December 30, 1987 as filed with 16 the Securities and Exchange Commission? 17 A. Yes. 18 Q. Okay. So, this is the document that he 19 mailed to you on March 30, 1988. 20 Would you agree with me on that, sir? 21 A. No problem with it. 22 Q. Let me direct your attention now -- 24238 1 well, before we do that, why don't you just look 2 at the next document. And you can see, in fact, 3 that that's the letter, the transmittal letter. 4 It's Exhibit B2101. That's the transmittal letter 5 we previously talked about Mr. Berner sending this 6 document to you. 7 Would you agree? 8 A. Yes. 9 Q. Now, sir, let's look at page -- let me 10 get the right page for you, sir -- Page 40 of the 11 Form 10K. 12 A. Okay. "Consolidated statement of 13 financial condition"? 14 Q. Yes. It is Page 40. 15 Do you see that, sir? 16 A. Yes. 17 Q. And does it show the carrying value for 18 the year 1987 at $3,586,551,000? Do you see that 19 in the first parentheses in the line that goes 20 across? 21 A. Yes. 3,357,000,000? 22 Q. Yes. 24239 1 A. Okay. 2 Q. And if you look at the carrying value 3 in the columns next to it, do you see the number 4 $3,586,551,000? 5 A. Yes. 6 Q. And would that indicate a 7 229-million-dollar mark-to-market loss? 8 A. Yes. 9 Q. Let's look at Exhibit A3042, which 10 should be two deeper in your book. 11 Is that the UFG Form 10Q for the 12 quarter ending March 31, 1988? 13 A. Yes. 14 MR. VILLA: Your Honor, I move A3042 15 into evidence. 16 MR. RINALDI: No objection. 17 THE COURT: Received. 18 Q. (BY MR. VILLA) Now, would you go to 19 Page 3 of this document, sir? 20 A. Okay. 21 Q. And do you see a carrying value of 22 2 billion -- 24240 1 MR. RINALDI: I'm sorry. Which page, 2 John? 3 MR. VILLA: It's Page 3. It bears 4 Imaging No. CN070895. Do you have it? 5 MR. RINALDI: Uh-huh. 6 Q. (BY MR. VILLA) Now, do you see the 7 market values and carrying values on this one, 8 sir? 9 A. Yes, I do. 10 Q. And does it show a carrying value of 11 $2,894,000,826? 12 A. Yes, it does. 13 Q. And does it show a market value of 14 $2,738,346,000? 15 A. Yes. 16 Q. And according to my calculations, 17 that's a mark-to-market loss of $156 million. 18 Right? 19 A. Yes. 20 Q. And you would have received this in 21 the -- at the end of the first quarter 1988 when 22 it was filed with the Securities and Exchange 24241 1 Commission. Right? 2 A. Yes. 3 Q. And it was your practice to review it. 4 Right? 5 A. Yes. 6 Q. Let's look at Exhibit 30 -- A3043. 7 Is that a Form 10Q for the quarter 8 ended June 30, 1988? 9 A. Yes, it is. 10 MR. VILLA: Your Honor, I move A3043 11 into evidence. 12 MR. RINALDI: No objection, Your Honor. 13 THE COURT: Received. 14 Q. (BY MR. VILLA) I'd like you to go to 15 Page 3, and let's take a look at the carrying and 16 market values. 17 Does it show a market value of 18 $2,673,913,000? 19 A. Yes. 20 Q. And does it show a carrying value of 21 $2,867,391,000? 22 A. Yes, it does. 24242 1 Q. And that would show a mark-to-market 2 loss of $194 million. Right? 3 A. Yes. 4 Q. Now, sir, is it still your testimony 5 that the first time you found out about a 6 mark-to-market loss in the mortgage-backed 7 securities was on December 19, 1988, when Ms. Bese 8 allegedly brought it to your attention? Is that 9 your -- 10 A. Yes. 11 Q. Are you thinking about United Savings 12 Association of Texas in responding to my 13 questions? 14 A. Yes, I am. 15 Q. Do you know that under the securities 16 laws, the world is put on notice of what's in 17 public filings with the Securities and Exchange 18 Commission? 19 Do you know that, sir? 20 A. Yes, I do. 21 Q. And you as supervisory agent here 22 received five securities filings which, by your 24243 1 own admission over the last 15 minutes, display 2 losses running as high as $351 million in the MBS 3 mark-to-market. Right? 4 A. Yes. 5 Q. But it's your testimony that you didn't 6 know about it? 7 A. My testimony is when I was reviewing 8 these filings, you know, looked at the filings, 9 reviewed the filings -- I don't care which way you 10 want to put it -- I was looking at the 11 mortgage-backed security as an investment 12 portfolio. And I was well aware that there are 13 shifts in interest rates and, therefore, shifts in 14 market value up and down. And you yourself, as 15 you've gone through this -- sometimes it was as 16 high as over 200-million-dollar loss and as low as 17 a 150-million-dollar loss. You used different 18 numbers. But that's what was reflected because of 19 interest rates. 20 What mattered was this was a 21 risk-controlled arbitrage. Therefore, these 22 mortgage-backed securities were held for 24244 1 investment purposes. And yes, there were market 2 losses. The reason the interim report surprised 3 me is from what I was being told, this wasn't an 4 investment portfolio. It was a trading portfolio. 5 Q. Wait a second. Your testimony to us 6 was that you found out about a 200-million-dollar 7 mark-to-market loss in the MBS. It wasn't that 8 you figured out that under the -- or you believed 9 that under the then existing accounting rules, 10 that the -- the accountants were supposed to 11 handle it one way as opposed to the other. 12 Is it your testimony now that it's an 13 accounting issue that made you concerned here? 14 A. It was my understanding that United was 15 operating a risk-controlled arbitrage and that the 16 mortgage-backed securities were being held for 17 duration and they weren't being held for 18 investment purposes and they were not being held 19 for a trading portfolio where, you know, given 20 market opportunities, you would sell them for 21 gains and so forth. 22 During the examination, the '88 24245 1 Southwest Plan examination, when it was winding 2 down, they made me aware that the portfolio was, 3 indeed, operated the way I understood it to be 4 operated from -- in '86, '87, and through most of 5 '88. 6 Q. Haven't you just changed your testimony 7 from the 200-million-dollar mortgage-backed 8 securities mark-to-market loss because you 9 realized that it is not even remotely possible in 10 view of the securities filings you've been sent, 11 and now you're talking about the question of how 12 the accountants account for it? Isn't that what 13 just happened over the last 20 minutes? 14 A. No, sir. I'm not talking about how the 15 accountants reported it. I mean, their 16 accountants were looking at -- I think also 17 looking at it as a risk-controlled arbitrage. 18 Q. And to this day, you don't know that it 19 isn't a risk-controlled arbitrage, do you, sir? 20 A. It was the findings from the 21 examinations that I felt that instead of being a 22 risk-controlled arbitrage, it wasn't. And if it 24246 1 wasn't a risk-controlled arbitrage, it was a 2 trading portfolio. 3 Q. Let me just read your question and 4 answer from the testimony in response to 5 Mr. Rinaldi. Page 23385. 6 Question, "When you received Interim 7 Report No. 5, had you previously been aware that 8 there existed an unrealized loss of $200 million 9 in the mortgage-backed portfolio at USAT?" 10 Answer, "No, no." 11 "Prior to receiving this report from 12 Ms. Bese, had it been your general impression that 13 the mortgage-backed security risk-controlled 14 arbitrage at United had been financially 15 successful?" 16 Answer, "Yes." 17 So, your testimony now is it's not as 18 you answered Mister -- if I were to ask you the 19 question "When you received Interim Report No. 5, 20 had you previously been aware that there existed 21 an unrealized loss of $200 million in the 22 mortgage-backed portfolio at USAT," your answer 24247 1 today would be "yes, yes" instead of "no, no"; is 2 that right? 3 A. No, because if this was a 4 risk-controlled arbitrage, then -- the institution 5 in my opinion wouldn't have to realize basically 6 marking the portfolio to market. If they held the 7 mortgage-backed securities strictly in a trading 8 portfolio, they should be marking to market at 9 least -- in this case, probably every month, but 10 at least every quarter. 11 Now, if it was a risk-controlled 12 arbitrage, there really isn't a 200-million-dollar 13 loss because they are holding them for the 14 duration. And, therefore, they are match funded 15 with another -- with the short-term borrowed money 16 and they are not about to sell them. 17 If you're going to hold it basically to 18 maturity, then you do not have to worry about 19 selling an investment and losing on the principal 20 because of a shift in the market. 21 That was my understanding. And the 22 reason I was surprised with the interim report was 24248 1 simply that if this isn't a risk-controlled 2 arbitrage, there's a 200-million-dollar loss that 3 I didn't recognize before. 4 Q. What do you mean you didn't recognize? 5 You were aware of it, but you decided not to 6 factor it into your analysis. Right? 7 A. Because if it's a risk-controlled 8 arbitrage, you don't have to realize it. You're 9 not marking your portfolio to market and adjusting 10 your -- right now, if you have a trading 11 portfolio, it's my understanding of the 12 accounting -- 13 Q. Sir, I don't need to know the -- I just 14 need to know your answer. I understand the 15 accounting. I think we all understand the 16 accounting. 17 My question to you, sir, is: You were 18 fully aware of the 200-million-dollar loss. You 19 just discounted it because you thought that the 20 appropriate accounting convention didn't require 21 did to be recognized; is that correct? 22 A. Right. 24249 1 Q. Okay. So, if I were to ask you the 2 question "When you received Interim Report No. 5, 3 had you previously been aware that there existed 4 an unrealized 200-million-dollar loss in the 5 mortgage-backed portfolio at USAT," your answer 6 would be "yes, yes," not "no, no"; is that 7 correct? 8 A. Well, you're putting words in my mouth. 9 What I was trying to say in response to that is it 10 was $200 million now that impacted the institution 11 where, before, they didn't have to realize it. 12 The word is realize. They would have to recognize 13 it then, and that was the problem. 14 Before, if they had a difference 15 between their carrying cost and their market cost, 16 it didn't make -- they didn't have to recognize it 17 because it was in their investment portfolio. It 18 was held as an investment. And that was my 19 understanding of the accounting at the time. 20 Q. Now, sir, did you know -- so -- just so 21 we get it straight, I'm about to take you through 22 the examination work papers in some excruciating 24250 1 detail to demonstrate that all of the examiners 2 were well aware of the 200-million-dollar loss, 3 mark-to-market loss. 4 But you don't dispute that anymore. 5 Your view is currently that everybody was aware 6 that there was a mark-to-market loss of up to 7 $350 million but they discounted the significance 8 of it. 9 Is that where you are -- 10 A. Yes. 11 Q. -- at least as of 2:20? 12 A. Yes. 13 Q. Okay. So, you wouldn't dispute it, 14 sir, that the examiners were well aware of the 15 200-million-dollar mark-to-market loss in the 16 mortgage-backed securities. Right? 17 A. Which exam? I just didn't want to -- 18 Q. 1987 exam. 19 A. No. They would be aware of it. 20 Q. Did they discuss that with you in the 21 conversations that you now recall that you had 22 with Vivian Carlton? 24251 1 A. No, I don't recall it. 2 Q. In your December 15, 1988 memo 3 justifying the dismissal of my clients, did you 4 put in anything about a 200-million-dollar 5 mortgage-backed securities loss? 6 A. Again, it's been previously discussed; 7 but I don't have it in front of me. I probably 8 did put in there about the 200-million-dollar loss 9 of the institution. I don't -- don't know because 10 it probably had been prior to the interim report 11 being received. But I cannot of recall. 12 Q. You probably did and then you realized 13 that the report came afterwards and you're now 14 coming to the realization that this fact that 15 you've elevated as an important basis for firing 16 my client isn't and couldn't be in your memo, 17 isn't it, sir? 18 A. I don't know -- sir, I don't have the 19 memo sitting in front of me. 20 Q. Okay. I'll be happy to make sure that 21 you can take a look at it. We'll take a moment, 22 sir, and give you the next binder and let you look 24252 1 for the 200-million-dollar loss that is so 2 important in your testimony. 3 Let me show you what's been marked as 4 T8145, which is your memo justifying the 5 dismissal. We're going to be spending a lot of 6 time with this document. If you'll look three 7 pages in, you'll see the discussion of 8 mortgage-backed securities. 9 Do you see anything in there about a 10 200-million-dollar mark-to-market loss? 11 A. No. That's why I wanted to see the 12 document, because I wasn't sure. 13 Q. That's why you wanted to see what, sir? 14 A. That's why I wanted to see the 15 document. I wasn't clear that that number was in 16 this memo. 17 Q. So, I think we've probably discussed 18 the 200-million-dollar mark-to-market loss and the 19 extent to which it affected your judgments in 20 December of 1988. 21 Let's turn to the question of moving 22 money out of USAT to other financial institutions. 24253 1 Another reason you changed your view was that you 2 learned for the first time that USAT had moved 3 money out of its coffers to other financial 4 institutions to secure severance and executive 5 bonus arrangements. Right? That's your 6 recollection? 7 A. From the interim reports, yes. 8 Q. Now, I'd like to focus your attention 9 first on what we call the executive bonus plan. 10 It's a plan by which USAT paid out 25 percent of 11 the 1987 year bonuses. It paid it out in, I 12 think, April of 1988. And they put 75 percent of 13 the bonus in Texas Commerce Bank. Okay? That's 14 the one I want to talk about first. 15 And if the employee stayed through the 16 end of the year 1988, on January 3rd, 1989, they 17 would receive that payment. 18 So, are you thinking about the same one 19 I'm thinking about? Because the two get 20 confusing. 21 A. This is about $800,000 in total. 22 Q. So, let's look first, sir -- you were 24254 1 aware of the executive bonus plan fairly early on, 2 weren't you, sir? Let me direct your attention -- 3 and it's about the fourth document from the end of 4 the red book. I've been accused of being overly 5 focused on colors, but I think it's a little 6 easier when you have so many documents. 7 A. Okay. Fourth from the back? 8 Q. Yes, sir. Do you see Exhibit A1156, 9 Tab 1413? 10 A. I have it. 11 Q. And is that the minutes of the board of 12 directors meeting of United Savings Association of 13 Texas dated September 8, 1988? 14 A. Yes. 15 Q. And let's look at the first full 16 paragraph. 17 Do you see your name as being present 18 at the meeting? 19 A. Yes, I do. 20 Q. And are there other employees of the 21 Federal Home Loan Bank of Dallas and of the 22 examination group? 24255 1 A. Yes. 2 Q. Mr. Marc Dunn was your supervisory 3 analyst. Right? 4 A. Right. 5 Q. And who are the other individuals that 6 are present? 7 A. Ms. Donna Guthrie would have been -- is 8 a district -- an attorney working for the Federal 9 Home Loan Bank of Dallas, and Brenda Bese is the 10 examiner-in-charge and Diane -- I'm not sure how 11 to pronounce that last name, but she probably is 12 one of her assistants, Brenda Bese's assistants. 13 Q. Is it typical to have five regulators 14 at one board of directors meeting? 15 A. No. 16 Q. In fact, you probably pretty close to 17 outnumbered the board of directors at that 18 meeting, didn't you, sir? 19 A. By that time, yes. 20 Q. I'd like you to turn to the second page 21 of the minutes beginning with "Mr. Gross," the 22 paragraph that begins "Mr. Gross," the third 24256 1 paragraph down. 2 Could you read that to yourself through 3 the "resolved"? 4 A. (Witness reviews the document.) Yes, I 5 see it. 6 Q. Do you recall, sir, attending a USAT 7 board of directors meeting at which the USAT board 8 dissolved the executive bonus trust and took the 9 money out because it believed that it was about to 10 go in the Southwest Plan and that there was no 11 reason to hold that money in a trust? 12 Do you remember that, sir? 13 A. I'll be honest with you. I just don't 14 remember attending this meeting. I don't have a 15 problem saying I was there. But honestly, I may 16 have been there because it was the beginning of 17 the Southwest Plan examination of the institution 18 which should have began around that time. But 19 honestly, I just don't remember the meeting. 20 Q. You don't recall being present when the 21 whole executive bonus plan was discussed and they 22 voted -- the board voted to take the money out 24257 1 because it looked like the Southwest Plan deal was 2 going through and they might as well pay the 3 people the bonus that they earned by staying? You 4 don't remember that? 5 A. Honestly, John, I don't remember it. 6 Q. Now, do you recall, sir, after USAT 7 closed, that -- let me ask you if you recall this 8 scenario which I think we've established with 9 documents, but tell me if you recall it. 10 The money was taken out of Texas 11 Commerce Bank, held briefly, and then the 12 Southwest Plan deal didn't close at the end of 13 September. So, it was put back in Texas Commerce 14 Bank and ultimately Texas Commerce Bank wouldn't 15 let go of the money without a lawsuit. 16 Do you remember that? 17 A. What I recall, John, is after one of 18 the interim reports, you know, we became aware of 19 the money deposited in the trust. We directed 20 that the money be returned, that the trustee at 21 the bank would release the money back. And even 22 up until the receivership, that hadn't been 24258 1 resolved. And I believe I sent a letter to the 2 institution basically saying that the bank was now 3 not to pay out the funds because the money was in 4 some type of dispute. 5 Q. Do you remember, sir, that there was 6 litigation arising out of this in which the FDIC 7 contended as a matter of fact that the existence 8 of the executive bonus trust had been concealed 9 from you and that was a litigated factual issue as 10 to whether or not it was concealed from you. And 11 it was resolved by a federal judge in this 12 building. 13 Do you remember that, sir? 14 A. I wasn't part of that litigation, sir. 15 Q. Let me direct your attention to 16 Page 851. I'm sorry. Look at the next exhibit, 17 which is B3808, Tab 1430. If you'll go to the 18 third page, the one that starts Page 851. The 19 first full paragraph in the left column, "The 20 Court holds United did not conceal the transfer. 21 Members of the FHLB were present at the board 22 meeting when the managers discussed and ratified 24259 1 the plan and trust. Upon United's full 2 disclosure, the FHLB did not object. United did 3 not attempt to hide the money at Texas Commerce." 4 Then it goes on to talk about the legitimate 5 business purposes. And then it says, "There was 6 no fraudulent transfer of funds." 7 Do you see that? 8 A. Yes. 9 Q. When it says that members of the FHLB 10 were present at the board meeting when the 11 managers discussed and ratified the plan, they are 12 referring to you, aren't they, sir? 13 A. If you're referring to that September 14 board meeting, yes. 15 Q. So, your testimony to me about ten 16 minutes ago that the first time you knew about 17 these executive bonus plans was when you received 18 these interim reports is not accurate, is it, sir? 19 You were there at the board meeting 20 when they discussed it on September 8, 1988, 21 weren't you, sir? 22 A. John, I don't recall that being -- I 24260 1 don't even recall being at that board meeting, but 2 I do not recall that item at all. I have -- if 3 the minutes of the meeting show that I was there, 4 I have no problem with being, you know -- quote, 5 "agreeing" that I was there. But I was not 6 focused on the discussion regarding bonus moneys. 7 I don't recall it at all. And the first time I 8 remember seeing this is when Brenda Bese wrote it 9 up and sent it to me. 10 Q. Well, sir, my clients are being held 11 responsible for entering into plans with the 12 suggestion that -- richly presented by the OTS, 13 that this was all some nefarious plot to hide 14 money from the Federal Home Loan Bank Board. 15 Now, sir, isn't the truth of the matter 16 that you were sitting there at the meeting when 17 the plans were discussed and it was of such little 18 consequence to you that you can't even remember it 19 today? 20 A. What I also have a question about for 21 you is if Brenda Bese was at the meeting, I don't 22 recall her referencing that meeting in her interim 24261 1 reports to us, to me. 2 Q. You know, sir -- 3 A. Am I wrong, John? I mean, if I'm 4 wrong, I'm wrong. 5 Q. I don't recall it either, sir, because 6 at the time, in September of 1988, it seemed a 7 wise decision to have the executive bonus plan to 8 keep those people there. Therefore, nobody 9 objected. And at the end of the year when people 10 were looking around for reasons to fire these 11 people, they very conveniently forgot that they 12 were at these meetings. 13 Isn't that what happened? 14 A. I don't know if I like the word 15 "conveniently." If we were at the meeting and it 16 was discussed -- I, first of all, don't remember 17 being at the meeting. I don't remember it being 18 discussed. I also have a question if Brenda Bese 19 and her assistants were also at the meeting and 20 they were writing the interim report that sparked 21 this whole conflict regarding the employment 22 contracts, if it was an issue raised at the 24262 1 meeting, how come she didn't remember it and I 2 didn't remember it? There's two people who were 3 at the meeting, and we don't remember the 4 discussion, the action taken by the board, or 5 whatever. I don't recall. 6 Now, the minutes are the minutes. And 7 if they accurately portray what happened at the 8 meeting, that's right. But if I don't recall the 9 discussion, that's my -- I'm telling you I just 10 don't recall. I don't even recall being at the 11 meeting. I was at a lot of meetings. I don't 12 recall this meeting. I don't recall that 13 discussion. I also -- you know, I also look to 14 the examiner-in-charge when she reports to me. 15 Now, maybe I'm wrong. Maybe there is a 16 reference in her interim reports that has 17 previously discussed at this board meeting or 18 something and then okay. Now, if I'm wrong, then 19 I'll admit I'm wrong. But I just don't remember 20 this being discussed at that particular meeting. 21 I don't remember the meeting, and I don't remember 22 the issue being discussed. 24263 1 Q. Well, I appreciate a man who's willing 2 to admit he's wrong. Unfortunately, these people 3 were fired ten years ago, and they have been sued 4 for the last five years. 5 So, the question that's being presented 6 here, sir, is whether this was concealed from you, 7 not whether you and a heavy workload you had in 8 December of 1988 forgot about the fact that you 9 were sitting at the meeting when it was discussed. 10 My question to you with respect to this 11 meeting is: Do you think it is a fair criticism 12 of my clients that they concealed from you the 13 executive bonus trust, given the board meeting 14 minutes you've just read and the Court opinion on 15 the litigated issue of whether or not you were 16 present at the meeting? 17 Do you think it's a fair criticism of 18 my clients which would justify their dismissal? 19 A. Well, if you look at the court decision 20 relying on the fact of the minutes, I have no 21 qualms with the Court -- where the Court was 22 looking at it. 24264 1 I'm just telling you that the first 2 time I can recall regarding the issues raised 3 through the employment contracts was when Brenda 4 Bese sent me her interim report on it, which was 5 not in December. I believe it was sometime in 6 October. 7 Now, if she attended a meeting in 8 September and she's on site and then she sends me 9 a report, then I guess we have two people 10 forgetting that we were both attending a meeting 11 where this was discussed. 12 Now, I don't know how to tell you that 13 happened; and I don't think the word "conveniently 14 forgot" is at all an excuse. If it was discussed 15 at that meeting while I was there, you know, I 16 just don't remember it. I don't remember being at 17 the meeting. 18 Now, if that's what the minutes of the 19 meeting say, fine; but I don't remember it. The 20 first time the issues regarding the new contracts 21 came up was when Brenda Bese told me about them in 22 her interim reports. 24265 1 Q. That's what we're trying to figure out, 2 sir. In the examination work papers that you now 3 claim were in those four boxes that you reviewed 4 prior to your deposition testimony, did they show 5 you Ms. Bese's summary of the minutes? Did you 6 see that in there? 7 A. No. 8 Q. Now, let me return to my question. 9 Based upon what you've seen here, do you think it 10 was -- would be fair to justify the dismissal of 11 my clients from USAT and their pursuit as 12 defendants in this case on the theory that the 13 executive bonus trust was concealed from the 14 federal regulators? 15 Do you think it's fair or not? Why 16 don't you try to give me a "yes" or "no" and then 17 explain your answer? 18 A. Yes or no, huh? All I can say to you, 19 John, is the way I recall in 1988 when I was told 20 by Brenda Bese about the deal. And I looked at 21 the compensation, the severance, and the bonus 22 plan together. I'm not doing what you're doing, 24266 1 splicing them up and saying, "Okay. Here -- let's 2 look at this piece of pie, look at this piece of 3 pie, look at that piece of pie." I looked at the 4 whole thing. 5 Now, you know, all I can say is I don't 6 remember being at the meeting. And that's not 7 convenient. I'm just saying I don't remember. I 8 don't remember it being mentioned in Brenda Bese's 9 report to me, which I relied on. And when -- you 10 know, it was the whole thing together where I 11 based any decision later on in the year. But in 12 September and October, this -- you know, I don't 13 recall the meeting; and I don't recall this being 14 discussed at the meeting. And that's it. 15 Q. And you can't answer my question "yes" 16 or "no," or you don't want to? 17 A. I'll be really -- if you rephrase the 18 question, I will try to do my best to answer. I'm 19 sorry. 20 Q. No. I think we understand where you're 21 coming from, sir. 22 Now, the other issue was excessive 24267 1 salaries and bonuses. We're going to try to deal 2 with these issues one at a time. 3 You said you allegedly changed your 4 mind about USAT's management because you learned 5 for the first time as a result of the Southwest 6 Plan examination interim reports of the excessive 7 compensation of USAT officers. Right? 8 A. Yes. 9 Q. And that would have occurred sometime 10 in the last quarter of 1988. Right? 11 A. Again, with the interim reports from 12 Brenda Bese. 13 Q. Well, you would agree with me now that 14 based upon your October 27, 1988 letter, you 15 believe that at least Lawrence Connell had 16 excessive compensation and you were aware of that 17 on or about June 30th, 1988. You were aware of 18 his contract on or about June 30th, 1988. Right? 19 A. I think the matters that troubled us 20 regulatory-wise regarding Larry Connell's contract 21 was a signing bonus and a golden parachute, the 22 guaranteed severance. And also, there was 24268 1 probably prescribed language that wasn't in the 2 agreement. 3 Q. Would you look back at Exhibit T8093, 4 Tab 1866? It's in the red binder, and it's about 5 the 15th document in. It's a memo from you to 6 Ginger Baugh to David Bradley dated July 27, 1988. 7 Do you have that before you now, sir? 8 A. Yes. 9 Q. Now, you just said "I think the things 10 that bothered us about the Connell contract were 11 the severance provisions or something along those 12 lines. It wasn't excessive compensation." 13 That's what you just told me about 90 14 seconds ago. Right? 15 A. Well, what I said 90 seconds ago is I 16 believe this was a signing bonus. And I referred 17 to a golden parachute, but a guaranteed severance. 18 Q. I see. But not excessive compensation. 19 That wasn't one of your concerns. Right? 20 A. Well, if you're getting a signing 21 bonus, that's part of your compensation. 22 Q. Now, you've read it, haven't you? You 24269 1 know what I'm pointing to. Your memo, the 2 July 27, 1988 memo from you and Ginger Baugh to 3 David Bradley, says, quote, "The agreement 4 includes provisions for excessive compensation and 5 golden parachute provisions," doesn't it, sir? 6 A. Yes, it does. 7 Q. So, you're trying to suggest to me that 8 your concern about the Connell contract really 9 wasn't about compensation. And then when you came 10 back and looked at your memo, you realized it was 11 excessive compensation, wasn't it? 12 A. Well, before we go tit for tat into 13 that, it might be better if we look at the Beverly 14 Bermudez -- I think that's her write-up on that 15 which -- you might know the tab better than I do. 16 Q. I'll be happy to show it to you, sir. 17 It's Exhibit B2313. 18 Didn't Ms. Bermudez look at the legal 19 issues involved in the contract? 2313. It should 20 be two forward from where you are. 21 A. Okay. 22 Q. You can read the second-to-the-last 24270 1 paragraph of 2313, which is in evidence at 2 Tab 485. I'll read it. 3 "This department suggests that the 4 proposed contract be submitted to the Regulatory 5 Review Committee for recommendations due to policy 6 considerations involving the excessive 7 compensation and golden parachute provisions." 8 Now, does that refresh your 9 recollection that your views and the views of 10 everybody else, so far as we can tell, was that 11 the Connell contract was excessive compensation. 12 Right? 13 A. Yes. 14 Q. So, we were trying to establish, sir, 15 when it was that you first became aware of this 16 excessive compensation issue at USAT. And I 17 wanted to establish that you were clearly aware of 18 excessive compensation or what you viewed as 19 excessive compensation in July of 1988 because you 20 either wrote or received two memos that addressed 21 that issue in connection with the Connell 22 contract. Right? 24271 1 A. Yes. 2 Q. Okay. And as far as we know, you took 3 no action on that contract. We've agreed to that. 4 Right? 5 A. I think you showed an earlier memo 6 where we brought it to the attention of Dave 7 Bradley at least because no RRC was in existence 8 at that time. 9 Q. Now, Ms. Vivian Carlton was the 10 examiner on the '87 examination. And she 11 testified in this case that she concluded that the 12 USAT officers' compensation was excessive and that 13 she discussed that information with you and 14 Ginger Baugh during the course of the '87 15 examination. 16 And my question to you, sir, is: Did 17 that happen? 18 A. No, I don't recall her having that 19 conversation with me in conjunction with the 1987 20 exam. 21 Q. So, if she's testified that she brought 22 it to your attention, you would say that she was 24272 1 in error on that? 2 A. No. I'd just say I don't have a 3 recollection of Vivian bringing that to my 4 attention. 5 Q. So, she could have brought it to your 6 attention and you could have forgotten it. Is 7 that where we are? 8 A. I just said I have no recollection of 9 her doing that. 10 Q. Well, let's put it this way. If it's a 11 big issue with you, justifying dismissal of all of 12 my clients or most of them, don't you think it's 13 the kind of thing that you would remember? 14 A. Yes. 15 Q. So, you think that Ms. Carlton was in 16 error in her statements to this Court that she 17 found it and she discussed it with you? 18 A. I just don't recall that conversation. 19 Q. Now, sir -- 20 MR. VILLA: Your Honor, I'm about to go 21 into other area. 22 Would the Court like me to go another 24273 1 15 minutes or take a break now? 2 THE COURT: We'll take a break. 3 4 (Whereupon, a short break was taken 5 from 2:46 p.m. to 3:08 p.m.) 6 7 THE COURT: Be seated, please. We'll 8 be back on the record. 9 Mr. Villa, you may continue. 10 Q. (BY MR. VILLA) Mr. Twomey, another 11 reason you gave for changing your view of USAT's 12 management was the fact that USAT had instituted 13 severance arrangements known as golden parachutes 14 allowing its executives to receive twice their 15 annual salary and that they were secured by a 16 trust. Right? Or was it an escrow. Perhaps an 17 escrow. 18 A. Escrow, yes. 19 Q. Now, Mr. Twomey, we talked about the 20 fact that Mr. Connell's agreement which you 21 received on June 30 or July 1st, thereabouts, 22 before July 4th 1988, contained the golden 24274 1 parachute provisions with the severance, the 2 trust, the letter of credit, and the like. 3 Do you recall that? 4 A. Yes. 5 Q. And is there any doubt in your mind 6 that the provisions in Mr. Connell's agreement 7 were substantively -- substantively the same as 8 the provisions in all the other agreements that 9 you're being critical of in your testimony here? 10 Is there any doubt in your mind about 11 that? 12 A. All I can say is I know there is a 13 severance arrangement with Larry Connell's 14 contract. I don't recall if it was escrow or a 15 letter of credit. But there was a severance 16 agreement. Letter of credit or putting it in 17 escrow is tantamount to guarantee him payment no 18 matter what. 19 Q. Well, why don't we go back and look 20 very briefly. I won't detain us long. If you go 21 back and look at -- it's Exhibit B2313, Tab 485. 22 It's about the 15th tab in the red book. It's 24275 1 Ms. Isaiah-Bermudez' memorandum. 2 Can you tell by looking at that whether 3 the golden parachute's in there, sir? 4 A. Well, the first -- in the very first 5 page, the bottom paragraph refers to the golden 6 parachute. 7 Q. And does it also -- if you look in the 8 middle of the second page of her memorandum, it 9 says, quote, "Section 9I mandates the delivery of 10 a letter of credit or the establishment of a trust 11 account to guarantee the availability of funds in 12 the event payment default -- in the event payment 13 default on the part of the association occurs." 14 Do you see that? 15 A. Yes, I do. 16 Q. So, it would be fair to say that in -- 17 by July 15, 1988, you were aware of the fact that 18 at least from Mr. Connell's contract, that they 19 had the golden parachute provisions, the 20 severance, and that they had the security 21 arrangements of either a letter of credit or a 22 trust account to secure those payments. Right? 24276 1 A. Yes. 2 Q. And that is substantively the same as 3 the provisions in the other contracts. 4 Would you agree with me there? 5 A. Yes. 6 Q. Okay. Now, your testimony is that you 7 don't recall that there were any other contracts 8 and consequently, you were looking at the 9 Connell -- at least the most recent testimony that 10 I recall is that your current belief is that you 11 didn't think that the Connell contract was a model 12 or a part of a group of similar contracts; is that 13 right? 14 A. I thought the Connell was a unique 15 situation in that he was being hired as the 16 president of the institution. 17 Q. Well, let's distinguish between two 18 things. 19 The first question is whether 20 Mr. Connell's contract was one of a group of 21 similar contracts that were all being entered into 22 at or about the same time. 24277 1 And the second issue is whether you 2 would decide to treat him differently than other 3 people who got similar contracts because of his 4 importance, in your view, to the survival of the 5 association. 6 I'm focusing on the first issue. As a 7 matter of fact, did you know that Mr. Connell's 8 contract was going to be one of a group of similar 9 employment contracts that were all going to be 10 entered into at the same time? 11 A. No. 12 Q. Let me direct your attention to 13 Exhibit T8072, which is not in your book. And 14 it's in evidence at Tab 431. 15 Do you have before you a letter dated 16 June 1, 1988, from Arthur Berner to you, sir? 17 A. Yes, I do. 18 Q. Let me direct your attention to the 19 middle of the second full paragraph. Well, let's 20 look at the entire second paragraph. 21 It says, quote, "Please be advised that 22 in connection with the FHLB-Dallas request to 24278 1 employ a senior executive officer of which you are 2 aware, we have discussed the need for providing an 3 employment agreement to this person and other key 4 personnel." 5 Do you see the clause "other key 6 personnel"? 7 A. I do. 8 Q. Then it says, "As a result, United 9 Savings has retained a compensation consultant to 10 review the agreements and to make recommendations 11 for improvement of the current agreements. We 12 expect a report within the next three weeks, and 13 it is, therefore, probable that United Savings 14 Association will enter into employment contracts 15 with these and perhaps other key employees." 16 Do you see that? And then in the last 17 line, it says "Any such contracts will, of course, 18 comply fully with applicable regulations." 19 Do you see that, sir? 20 A. Yes, I do. 21 Q. Does that refresh your recollection 22 that Mr. Berner advised you at the end of May 1988 24279 1 that the Connell contract was going to be one of a 2 group of a number of contracts with other key 3 employees of USAT? 4 Does that refresh your recollection of 5 that issue? 6 A. Yes. 7 Q. And if you had thought about it at the 8 time, you would have been -- you would have 9 realized that these new contracts that are being 10 amended by Hewitt and by USAT were going to be 11 offered not only to Mr. Connell but to the other 12 six individuals. Right? 13 A. Well, I don't know that; but if you say 14 they were under consideration through this -- I 15 don't have a problem with saying that they are 16 looking at reviewing contracts based on some type 17 of compensation study. 18 Q. I don't know that I said "reviewing." 19 It says, "Therefore, probable that United Savings 20 Association will enter into employment contracts." 21 Do you see that? 22 A. I do see that language. 24280 1 Q. It wasn't a question of doing a 2 compensation study. It was that they were going 3 to enter into contracts. You see? That's the 4 issue. 5 Does that refresh your recollection now 6 that Mr. Berner informed you that Mr. Connell's 7 contract was to be one of a group of contracts for 8 Mr. Connell and other key employees of USAT? 9 A. It does refresh my memory. 10 Q. Now, sir, let me direct your attention 11 to another issue that we talked about very 12 briefly. 13 So, just to bring this to closure, if 14 you had put everything together with respect to 15 the Connell contract and the contracts of the 16 other individuals, you would have realized that 17 the letters of credit and the trust agreements to 18 secure severance wouldn't just apply to 19 Mr. Connell but would apply to perhaps other key 20 employees of USAT. Right? 21 A. No, I don't agree with that. 22 Q. It refreshes your recollection that 24281 1 Mr. Berner told you that the Connell contract was 2 one of a group of contracts to be entered into 3 with other key employees, and the Connell contract 4 had a provision that gave him two years' annual 5 salary and bonus for severance and to secure that 6 with a letter of credit or -- and/or trust. 7 Now, sir, when you put those two 8 concepts together, if you had been thinking about 9 it at the time, wouldn't you have realized that 10 the other contracts would also be of a similar 11 nature? 12 A. I just don't read that in what Berner 13 sent to me at this time. What I read in here is 14 that they are having a compensation study done. 15 They are going to review the present agreements, 16 and they are going to make recommendations to 17 improve those current agreements. 18 I don't see in here that "we are going 19 to mirror, as a prototype, Larry Connell's 20 contract." If they are going to mirror Larry 21 Connell's contract, why are they bothering with a 22 compensation study? If they are going to do the 24282 1 same thing for these other six, nine, twelve key 2 executive officers, then why do a compensation 3 study and then add these provisions to those 4 contracts, their existing contracts? And then 5 whatever you say you want to do -- I mean, the way 6 I read it is they have a -- they have retained a 7 compensation consultant to review the agreements 8 and make recommendations for improving the current 9 agreements. 10 Q. By the way, which company is retaining 11 the compensation consultant as you read that 12 sentence? 13 A. I assume USAT. 14 Q. United Savings. Right? And when they 15 talk about "current agreements," would you read 16 that as supplying to USAT agreements? 17 A. Actually, UFG agreements because those 18 are the only agreements I knew of at the time. 19 Q. Isn't it clear from this paragraph, 20 sir, that he's advising you that the compensation 21 consultant is going to review the existing USAT 22 agreements and make recommendations for 24283 1 improvement and that the new agreements that come 2 out are going to be offered to Larry Connell and 3 other key employees? Isn't that the reading of 4 this that you would have had when you received 5 this document in June of 1988? 6 A. I cannot tell you what my reading of 7 the document was in 1988. The only thing I can 8 tell you right now -- because I just don't recall. 9 The only thing I can tell you right now, if I read 10 this document, the only agreements that are 11 mentioned in here are the UFG agreements. And it 12 seems like United has retained a compensation 13 specialist to make recommendations, I'm assuming, 14 regarding those agreements. 15 There is ambiguity between if he's 16 talking UFG, how come United is talking about 17 redoing the agreements? I would just assume that 18 he's really talking about the UFG agreements. 19 Q. So, your answer is you can't 20 remember -- you can't remember what you were 21 thinking in June of 1988. Right? 22 A. When I received this document, the only 24284 1 thing I was focusing on in 1988 was the fact that 2 we had the UFG employment agreements for those 3 people because I needed the information regarding 4 the Southwest Plan, and that was my focus. That's 5 the reason they were requested in the first place. 6 Q. Do you remember what your thought 7 process was in June of 1988? Yes or no? I'm 8 trying to figure out whether you're now giving me 9 your position or whether you're reading the 10 document or whether you can tell us what your 11 thought process is? Which one of the three is it 12 right now? 13 A. What I'm saying is regarding the second 14 paragraph, I don't know what I was thinking when I 15 read that in 1988. However, the reason that this 16 came to me is it had the UFG contracts attached. 17 And the reason I needed the UFG contracts is I 18 needed the information regarding -- submissions 19 regarding the Southwest Plan, management 20 assessments and all the other stuff that we were 21 being required to submit regarding the FSLIC 22 Southwest Plan. 24285 1 The only reason in the first place, 2 John, we even asked for this stuff is, you know, 3 the Southwest Plan. 4 Q. So, your recollection today is that you 5 did not understand this document to refer to 6 potential contracts with others, other key 7 employees of USAT? 8 A. My reading of it today, it's obvious 9 that the outside consultant is reviewing the 10 contracts, is going to make recommendations; but 11 when all those modifications are going to take 12 place, it's at some future date. 13 Q. And who did you think was going to hire 14 Larry Connell? The holding company or the thrift? 15 A. I believe USAT. 16 Q. Now, Mister -- now, would it be fair to 17 say, Mr. Twomey, that in early July 1988, you were 18 aware of contracts -- at least one contract by 19 USAT which had a severance provision, a trust, and 20 a letter of credit provision in it. Right? And 21 that was Mr. Connell's contract? 22 A. Yes. 24286 1 Q. And the issue that -- the issue that 2 you are saying changed your mind is that there 3 wasn't just one contract, but there were multiple 4 contracts. Right? That's what caused you to 5 reach the conclusion adverse to our clients? 6 A. Yes. 7 Q. But in looking at the documentary 8 record of this case, you've been unable to point 9 to any single document which in any way 10 distinguishes between Larry Connell and all the 11 other people except your final decision to dismiss 12 my clients and to elevate Mr. Connell to various 13 positions at other thrifts. Right? There's no 14 document that bears on this distinction -- 15 A. There's no other documents considering 16 Larry Connell's contract that I'm aware of that 17 were at USAT or UFG. 18 Q. Now, there's no internal document that 19 supports your distinction that the -- that the 20 Federal Home Loan Bank of Dallas was treating 21 Mr. Connell's severance and letter of credit and 22 trust arrangements any differently than anybody 24287 1 else's. Right? 2 A. I'm not aware of any internal or an 3 external document going to USAT that says that. 4 Q. Okay. Now, Mr. Twomey, let's turn to 5 another subject. 6 As the supervisory agent, you would 7 have received a copy of the draft federal 8 examination report before it became final. Right? 9 A. Any of the exams. '86, '87, and '88. 10 Q. So, the answer to my question is "yes"? 11 A. Yes. 12 Q. And you would have looked at and 13 reviewed the report; is that right? 14 A. Normally, yes. 15 Q. Let me direct your attention to -- if 16 you'll look in the green book, the first document 17 in the green book, which is Exhibit A6022, 18 Tab 468, which is the federal examination report 19 of Ms. -- the result of the 1987 examination 20 performed by Vivian Carlton and her crew. 21 Do you have that before you, sir? 22 A. Okay. Nineteen -- 24288 1 Q. 1987 exam. 2 A. Okay. And its tab number? 3 Q. It's the first document in the green 4 book. 5 Do you have it before you, sir? 6 A. Starts off with the July 28, 1988 7 letter to the board of directors? 8 Q. Yes, sir. Let me direct your attention 9 to Page A-2.1 of that report, which is US3010998. 10 US3010998. It also bears the number A-2.1. 11 Do you have that before you, sir? 12 A. Yes, I do. 13 Q. Can you tell me what entity is paying 14 the salaries and bonuses of the officers indicated 15 there? 16 A. Unless there is a footnote that I don't 17 see, these are the officers and directors of USAT, 18 and they are being paid by USAT. 19 Q. Well, you testified in your direct -- 20 and this would include Mr. Gross, Mr. Crow, 21 Mr. Berner, Mr. Gray, Mr. Jackson and on the next 22 page, I think Mr. Wolfe and Mr. Williams. Right? 24289 1 A. Yes. 2 Q. You testified in your direct testimony 3 that Arthur Berner did not tell you in June of 4 1988 that the salaries and bonuses of the 5 individuals covered by contracts were being paid 6 by USAT. 7 Do you remember that testimony, sir? 8 A. I'm trying to remember whether it 9 was -- I'm just trying to remember. I thought 10 USAT was paying the salaries of its officers and 11 directors. There was a UFG contract, but I still 12 thought USAT was paying the salaries. 13 Q. You were asked at Page 23424 of the 14 transcript, question, "Now, did he," referencing 15 Mr. Berner, "tell you that USAT was paying the 16 salaries and bonuses that were in the UFG 17 contracts that he provided you?" 18 Answer, "I don't believe he did." 19 I think that most of us here in the 20 courtroom might have drawn a conclusion from that 21 that you were somehow misled into believing the 22 identity of the company that was paying the 24290 1 salaries and bonuses of the USAT officers. 2 So, what you're telling me now is that 3 even though Art Berner never told you, you were 4 clearly aware that it was, quote, "from the 5 association" who was paying their salary and 6 bonuses. Right? 7 A. I honestly don't think I ever thought 8 otherwise. I thought, either directly or 9 indirectly, USAT was paying the salaries. 10 Q. I see. We probably misunderstood the 11 question. The way it was asked implied perhaps 12 that you didn't know. And the fact is Mr. Berner 13 didn't tell you, but it was clear from the 14 examination reports and the other dealings you had 15 with him. Right? 16 A. And I didn't ask him that question 17 either. I believed just the way the examination 18 reports, this is the way -- if the holding company 19 was paying somebody's salary, it would be 20 footnoted here that they are being paid through 21 the holding company. 22 That's a normal footnote regarding this 24291 1 compensation page. 2 Q. So, by November 7, you know about the 3 salaries and the bonuses. You know about the 4 contracts. I'm trying to pick a date. 5 November 7. Right? You know about the contracts. 6 Right? It's easy just to look at this. 7 A. I'm just looking at the -- okay. Go 8 ahead. 9 Q. Your October 27, 1988 letter references 10 the contracts, doesn't it, sir? And it criticizes 11 the contracts? 12 A. Well, the employment contracts with 13 USAT, yes. 14 Q. Okay. Well, we'll just stick with USAT 15 for the time being. 16 So, by November 7, 1988, you were aware 17 of the USAT employment contracts. Right? 18 A. Yes. 19 Q. And the contracts would put within them 20 the severance, both the salary and bonuses, 21 correct? 22 A. Yes. 24292 1 Q. And you would also have known about the 2 escrow for severance payments because that's 3 referenced in the contract. Right? 4 A. Yes. 5 Q. And you would have known about the 6 executive bonus plan. Even if you forgot about 7 the September 8 meeting, you would have known 8 about it by this point. 9 You would agree with that? 10 A. Yes. 11 Q. So, I don't know -- is there any 12 compensation issue that you didn't know of by 13 November 7, 1988? 14 A. Not that I can recall. 15 Q. Now, we talked about the November 7, 16 1988 board minute meeting. And Mr. Rinaldi had 17 asked you about it in his direct, and I asked you 18 about it in my cross. 19 Let me ask you to look at T8117, which 20 is the next document in evidence at Tab 447. And 21 this is the board meeting at which the consent 22 agreement was executed. 24293 1 Do you have that before you, sir? 2 A. Yes, I do. 3 Q. And do these minutes show you as being 4 present? 5 A. Yes, they do. 6 Q. I'd like you to look from the top of 7 Page 3 of the minutes to the middle of Page 4. I 8 won't read it and drive the court reporters batty. 9 But I think you'll be able to tell by looking at 10 that page and a half that in that page and a half, 11 you are raising with the board of directors the 12 full scope of the employment and compensation 13 issues that you have testified about today. 14 I'd like you to review that and satisfy 15 yourself that these are the issues. 16 A. (Witness reviews the document.) Okay. 17 I've read the entire page. 18 Q. Now, sir, these are the employment 19 issues that we've discussed over the past several 20 days in your direct and cross. Right? 21 A. Yes. 22 Q. And you raised these with the board of 24294 1 directors of USAT at this meeting. Right? 2 A. Yes. 3 Q. And I'd like to direct you to the last 4 page of the minutes, three paragraphs from the 5 bottom of the page. And then I'm going to read 6 that paragraph and ask you if you remember this. 7 Quote, "Before adjourning the meeting, 8 Mr. Twomey on behalf of the FHLB-Dallas stated 9 that he wished to place on record his belief that 10 the management of the association was cooperating 11 with the Federal Home Loan Bank of Dallas and the 12 FSLIC in resolving all outstanding issues relating 13 to the Southwest Plan, including the compensation 14 issue. He noted that the management of the 15 association had been working diligently over the 16 past year in the best interest of the association 17 in order to reduce losses." 18 Do you see that, sir? 19 A. Yes, I do. 20 Q. Now, look at the next exhibit, which is 21 Exhibit B2534. 22 Do you see a letter dated November 14, 24295 1 1988, from Arthur S. Berner to you enclosing a 2 copy of these minutes? It says, quote -- strike 3 that. 4 Is there a letter dated November 14, 5 1988, from Mr. Berner to you? 6 A. Yes. 7 MR. VILLA: Your Honor, I'd move 8 Exhibit B2534 into evidence. 9 MR. RINALDI: Do you have a copy of it? 10 MR. VILLA: Yes. It's not been 11 admitted. 12 MR. RINALDI: No objection, Your Honor. 13 THE COURT: Received. 14 Q. (BY MR. VILLA) Sir, do you remember 15 ever -- let's start off with do you remember ever 16 calling Mr. Berner and saying -- start with the 17 first one. 18 Do you remember asking Mr. Berner to 19 send you a copy, particularly of the minutes of 20 this meeting, because of its importance involving 21 employment contracts? 22 Do you remember that, sir? 24296 1 A. No. 2 Q. Do you remember, sir, ever contacting 3 Mr. Berner and telling him that the minutes of 4 this meeting inaccurately reflected your views 5 toward United on November 7, 1988, after you had 6 learned all of the facts that we have now gone 7 through about the compensation arrangements? 8 Did you ever call him and say, "This is 9 not accurate"? 10 A. No. 11 Q. Does it sound to you, sir, like the -- 12 do you recall saying that at the meeting? 13 A. No. 14 Q. Do you deny it? 15 A. I have no basis to deny it. 16 Q. Because you couldn't remember the 17 meeting. Right? 18 A. I can remember getting the consent 19 agreement; but basically, that's it. 20 Q. Okay. Now, would you agree with me, 21 sir, that the language I have just read to you 22 doesn't sound like you're getting ready to fire 24297 1 all the management of USAT, does it? 2 A. No. The way it's worded here, it 3 doesn't. 4 Q. Now, after November 7, 1988, you didn't 5 learn anything new about the compensation 6 arrangements. But you did learn that Mr. Ranieri 7 looked like he was going to win the bidding, 8 didn't you? 9 A. Somewhere in the middle -- beginning to 10 the middle of December of 1988, there was a 11 meeting where all the different parties being 12 worked on -- at that time, we were being 13 advised -- at least by that time, we were at least 14 being advised who was now won the bids, the way I 15 remember it being put, and who FSLIC was now 16 negotiating with. And Ranieri's group or Hyperion 17 Partners was one of those groups. 18 Q. And is it still your testimony, sir, 19 that the reason that you -- in your mind that you 20 justified dismissal of my clients was compensation 21 and not the need to deliver the bank to 22 Mr. Ranieri? Is that still your testimony? 24298 1 A. My testimony was I was concerned 2 regarding the employment contracts and not the 3 latter. 4 Q. And not the contact with the Ranieri 5 group. Right? 6 A. That's right. 7 Q. But when asked, you can't tell us a 8 thing you found out about the employment contracts 9 after November 7, 1988. Right? 10 A. Not that I can recall. 11 Q. Now, sir, let's take a look at -- I'm 12 not going to walk you through all of your 13 memorandum talking about dismissal of my clients 14 because Mr. Nickens has done such a workmanlike 15 job on mortgage-backed securities, but I am going 16 to take a look at a few of the issues that he 17 hasn't picked up on. 18 Let's look at T8145. It's the next 19 document in your book. Do you have that, sir? 20 A. Yes, I do. 21 Q. It's in evidence at Tab 1865. 22 A. Yes. 24299 1 Q. And this is -- if you look at the 2 second page, this is your dismissal 3 recommendation. Right? 4 A. The memo attached, yes. 5 Q. And this is the recommendation we 6 looked at, and you were looking for the 7 200-million-dollar mortgage-backed securities 8 mark-to-market loss. 9 Do you remember that, sir? 10 A. I remember that discussion. 11 Q. And you didn't find it. Right? 12 A. That's right. 13 Q. Now, at the beginning of this memo, the 14 second paragraph said, quote, "On September 7, 15 1988, a Southwest Plan examination commenced and 16 the following matters of supervisory concern have 17 been brought to our attention as a direct result 18 of the ongoing examination." Right? 19 A. Yes. 20 Q. Now, was that an effort -- the way that 21 was drafted, was that an effort to try to suggest 22 to the reader that all of these matters that are 24300 1 in this memo have just been discovered and hadn't, 2 in fact, been looked at thoroughly in two prior 3 examination reports? 4 Is that the reason you drafted that 5 sentence just the way you did? 6 A. Well, that's exactly the way I'd read 7 that sentence, as this is information from the 8 Southwest Plan examination. 9 Q. No. No, no, no. That's not the 10 question I asked you, sir. 11 It's clearly information from the 12 Southwest Plan examination. The question I had 13 is: Is the reason you're writing it this way to 14 try to convey to the reader that we hadn't looked 15 at these things earlier and failed to object to 16 them, and we've just found them now and we're 17 shocked and amazed to find them? 18 Isn't that the sense of this sentence? 19 A. No. 20 Q. No? Well, let's look back in the 21 mortgage-backed securities section, Page 3 -- 22 Page 4 of the memo. Or it's actually Page 3 of 24301 1 the memo under "mortgage-backed securities," the 2 second full paragraph. 3 It reads, quote, "The examiner's 4 initial review of the limited amount of internal 5 correspondence and the minutes of the investment 6 committee meetings revealed a number of 7 questionable decisions made by the aforementioned 8 individuals," and then it keeps going. 9 Do you see that? 10 A. Yes. 11 Q. The word "revealed," wasn't that put in 12 there to suggest that, my Lord, the Southwest Plan 13 examiners have just found something that justifies 14 firing these people? Isn't that the way you put 15 it in? 16 A. No. 17 Q. It wouldn't read too well if what we 18 had in there was a memo that said, "We looked at 19 these activities in '86 and didn't criticize them 20 and we looked at them in '87 and didn't criticize 21 them. But now, when we're getting ready to figure 22 out who's going to get the bank, I think it's time 24302 1 for us to reverse our course"? 2 It wouldn't read well that way, would 3 it, sir? 4 A. No, it wouldn't. 5 Q. Now, sir, just on the general 6 question -- I'm breaking my promise. I'm going to 7 ask you a question about mortgage-backed 8 securities. 9 It says that "The examiner's initial 10 review of a limited amount of internal 11 correspondence and the minutes of the investment 12 committee." 13 Sir, wasn't it the protocol of the 14 examiners while you were at the Federal Home Loan 15 Bank of Dallas to look at investment committee 16 meetings in all of the examinations -- the '86, 17 the '87, as well as this Southwest Plan? 18 A. Yes. 19 Q. So, the information that you're laying 20 out here, if somebody were to missread this and 21 try to -- and take from it that this is 22 information that had just come to your attention 24303 1 as a result of the Southwest Plan and that this 2 had just revealed new things to you, that would be 3 inaccurate because the first two sets of examiners 4 would have seen it, as well; isn't that right? 5 A. I would assume so. 6 Q. Do you recall, sir, in your testimony 7 saying that one of the reasons for dismissing Art 8 Berner -- strike that. 9 Do you think that that's a fair -- do 10 you think it would be fair to justify the firing 11 of my clients based upon a new examination where 12 two sets of examiners had looked at prior 13 documents and had not raised objections and the 14 third set comes in and raises a different set of 15 conclusions? 16 Do you think it would be fair? 17 A. We act on what basically the new 18 information is. If something wasn't brought to 19 our attention in the past and now it is, we act on 20 the new information. 21 Q. So, if Ms. Carlton was aware of things 22 and didn't bring it to your attention, then you 24304 1 feel that you would be justified today in writing 2 a memo saying that events that occurred in '86, 3 the rolldown and the like, would all justify 4 firing these people. Right? 5 A. No, sir. I didn't say that. 6 Q. Let's look at another reason that you 7 said you justified firing my clients, ending their 8 banking careers. And that is the question of the 9 fact that UFG had refused to infuse capital when 10 directed to do so by the agency. 11 Remember, you testified to that in 12 response to Mr. Rinaldi's examination? 13 A. Yes. 14 Q. The first date that you directed UFG to 15 infuse capital into USAT was in a letter dated 16 December 8, 1988, wasn't it, sir? 17 A. Yes. 18 Q. You sent a letter on May 13, 1988. But 19 all you asked them for at that point was to give 20 you a plan. Right? 21 A. That's correct. 22 Q. So, you sent a letter to UFG on 24305 1 December 8, 1988, directing them to infuse capital 2 into USAT. And on December 15, 1988, you send a 3 memo and you justify firing these people for 4 refusing to do so. Right? 5 A. I think you said December 8th. You 6 meant December 28th or something. 7 Q. December 8th. Let's go back to the 8 document. 9 A. Well, whatever. I was unsure of the 10 date. That's all. 11 Q. Well, I don't want to confuse you, sir. 12 Why don't you look at Exhibit T2021, Tab 73. It's 13 probably two documents down. 14 A. The green book or the red book? 15 Q. The green book, sir. 16 Do you have it before you? 17 A. Not yet. Hang on. What was the tab 18 number? 19 Q. T2021, Tab 73. 20 A. December 8th, 1988. 21 Q. Now, sir, this is the first time that 22 you directed UFG to infuse capital into USAT. Are 24306 1 we agreed on the date now, December 8, 1988? 2 A. Yes. 3 Q. And on December 15, 1988, you justify 4 the dismissal of these individuals based upon 5 their refusal to take this action. Right? 6 A. That's in the memo, yes. 7 Q. Well, that's also what you testified to 8 in response to Mr. Rinaldi's questions. Right? 9 A. Yes. 10 Q. For a man that took four months to act 11 on Mr. Connell's contract, you expect UFG to take 12 pretty quick action, don't you, Mr. Twomey? 13 A. In regard to the December 8th letter? 14 Q. Yes, sir. You fire people seven days 15 after sending them the letter or consign their 16 careers to the deep seven days after sending the 17 letter. Right? 18 A. That's what's in that memo assessing 19 management, yes. 20 Q. Isn't it true that all you were doing 21 was filling the file full of absolutely 22 transparently wrong reasons to fire these people 24307 1 because you had to get them out to allow Ranieri 2 in? You can't defend this, can you, sir? 3 A. No. I -- to the first question, no. 4 MR. RINALDI: Just a second. Your 5 Honor, he asked him two questions. 6 MR. VILLA: That's correct. 7 MR. RINALDI: And he said "no." And I 8 want to just make it clear for the record that he 9 wasn't saying no in response to "you can't defend 10 this, sir." 11 MR. VILLA: That's fine. Yes, I agree. 12 THE COURT: Let's have a new question. 13 MR. VILLA: I agree with my learned 14 opponent's objection. 15 Q. (BY MR. VILLA) Can you defend, sir, a 16 decision to dismiss these individuals based upon 17 their alleged refusal to act on your December 8, 18 1988 letter? Can you, sir? Do you think that's a 19 fair thing to do? 20 A. I believe I said in prior testimony the 21 primary reason for the termination was really the 22 employment contracts, even though this is also 24308 1 included in the memo that UFG hasn't recapitalized 2 USAT. 3 Q. Well, that's exactly -- that's exactly 4 the point I was exploring with you, sir. The 5 memo's got a lot of different parts, and somebody 6 reading it would think that there are a lot of 7 different reasons for firing these people. But as 8 we go through them and peel them off as little 9 pieces of an onion, they all seem to go away. 10 And my question is one at a time. Do 11 you think it would be fair in any way to justify 12 firing these people based upon their refusal to 13 respond to a letter that you mailed on December 8, 14 1988, and a decision you reached on December 15, 15 1988? 16 A. My December 8th letter of 1988 was to 17 the holding company and directing them to 18 recapitalize the institution. It's mentioned in 19 this memo. 20 Q. I understand that. You have 21 justified -- in your memo, you have all these 22 different bases for your decision; and somebody 24309 1 reading the memo, like your superiors and the 2 Federal Home Loan Bank Board in Washington, would 3 think that all these reasons were really what you 4 were thinking there was some basis for it. 5 And I'm going through one at a time and 6 looking at them, and now I'm looking at this one 7 about the refusal to respond to a direction to 8 infuse capital into USAT. And I think we've 9 established that factually, you mailed the letter 10 on December 8, 1988, and you came to the 11 conclusion that their failure to take action by 12 December 15, 1988, justified firing them. 13 My question to you is: Do you think 14 that's a fair factor to take into consideration 15 when terminating people's careers? 16 A. All I can say is that is that was an 17 assessment letter that was addressed to Bob Brick. 18 And that memo regarding all the issues regarding 19 USAT were then attached to the FSLIC 20 recommendation letter. The primary reason that I 21 can recall today for asking for the terminations 22 was just the employment contracts. There are 24310 1 other reasons, concerns, things that had never 2 been corrected over time. But if you want to go 3 for primary, it was the fact that they got into 4 the employment contracts in the first place. 5 Q. And they wouldn't have done that if you 6 had sent your letter back a little sooner; isn't 7 that right? 8 A. It's my belief that Berner knew that 9 this was a special instance, having Larry Connell 10 in there. Now, it's obvious that I cannot find a 11 letter to Mr. Berner or an internal memorandum or 12 some type of thing regarding, as you call it, the 13 supervisory exception. 14 However, Mr. Connell went ahead; and 15 that contract was executed by USAT. It never 16 entered my mind that this was going to be a 17 prototype for two-year severance agreements and 18 bonuses with the other top management of USAT at a 19 time when the institution was insolvent. 20 Q. Now, Mr. Twomey, didn't both Mike Crow 21 and particularly Art Berner object to orders that 22 you gave to sell USAT assets for the benefit of 24311 1 Ranieri Wilson? 2 A. I'm not aware that there are directions 3 given to them -- and "orders" you can substitute 4 freely -- where they were told -- I believe it was 5 mortgage-backed securities. It may be other 6 assets -- to sell those assets. 7 It is my understanding -- the best I 8 can remember is Michael Patriarca or somebody from 9 FSLIC told me to advise them or, in one case, 10 Mr. Crow -- I'll look at the memo. I recall it 11 was always Patriarca telling me to tell them. 12 There was never a memo in evidence earlier where 13 Mike Crow told me that Patriarca had told him. I 14 was always on the understanding Patriarca or FSLIC 15 told me, and then I would tell them that certain 16 assets had to be sold or certain changes on the 17 portfolio had to be made. It was never put to me 18 at all that the Ranieri group had some type of 19 direction to this. It was always my understanding 20 that they were somehow balancing a portfolio for 21 the acquisition, but I didn't know why. 22 Q. Well, maybe you can learn by looking at 24312 1 two more exhibits. Exhibit B2610. It's two 2 deeper in the green book. It's Tab 1283. It's a 3 memo dated December 19, 1988, from Mike Crow to 4 Art Berner. And it recounts a meeting with you, 5 you and representatives of Ranieri Wilson in 6 person, not by phone. 7 Do you have that before you, sir? 8 A. Yes. 9 Q. Have you been shown this document 10 before by the OTS? 11 A. No. 12 Q. I want you to take a minute and read 13 it. I'm going to ask you some questions 14 particularly about the second page. 15 A. (Witness reviews the document.) I've 16 read the memo. 17 Q. Now, do you remember I think the first 18 question I asked you when I stood up was about 19 whether or not you had had any meetings with 20 Ranieri Wilson prior to the receivership. And 21 your answer was that you had answered my question 22 correctly in the deposition because you had only 24313 1 had telephone calls with representatives of 2 Ranieri Wilson. 3 Do you remember that, sir? 4 A. Yes. 5 Q. Now, this was a meeting that involved 6 the sale of some significant -- 1.2 -- according 7 to this, Paragraph 3, "a proposed transaction 8 involving $1.2 billion in mortgage-backed 9 securities." 10 Do you see that? 11 A. Yes, I do. 12 Q. And would you agree with me that you 13 were at a meeting with Ranieri Wilson prior to the 14 closing of United in which you and members of 15 Ranieri Wilson and others discussed the wisdom of 16 selling $1.2 billion in mortgage-backed securities 17 in order to reduce the goodwill problem that 18 Mr. Ranieri would encounter when he bought the 19 association? 20 A. The only thing I can offer to you is I 21 just don't remember the meeting. I don't remember 22 meeting Scott Shea at this time. And honestly, I 24314 1 don't -- until you showed me this memorandum, I 2 didn't remember the meeting at all. And I still 3 have trouble remembering the meeting. It's just 4 the memo's here. I'm listed as a participant in 5 the meeting. And it doesn't -- you know, my 6 recollection was of dealing with the 7 representatives of Ranieri Wilson on the operating 8 agreement, dealing with these asset sales based on 9 whatever Patriarca or FSLIC, you know, told me 10 they wanted done. But that's it. I really don't 11 recall this meeting. 12 I have -- I'm not going to say the 13 minutes are inaccurate. In fact, they are pretty 14 detailed. It's just I just -- until I saw this, I 15 had no remembrance of this meeting. 16 Q. 1.2 billion-dollar MBS sale is a pretty 17 big sale, wouldn't it be? 18 A. John, this could have been 10 billion 19 or 100 billion, and it could have been discussed. 20 And I'm telling you, you are right. This is a big 21 transaction. And I, until you showed me this 22 memorandum, honestly did not remember the meeting. 24315 1 There's some other players in here from 2 Merrill-Lynch, and I -- Jan Holtz rings a bell, 3 but I just -- I would not have put her together 4 with Bank United or USAT at any time. 5 Q. And going to the bottom of Page 2, you 6 don't recall the fact that you and Mr. Scott were 7 going to study the situation and come back to the 8 group with a directive. 9 Do you see that? 10 A. Again, I just don't remember the 11 meeting. And I don't even know what follow-up 12 action might have occurred. 13 Q. Let me turn to Page 3. It says, quote, 14 "Mr. Twomey then stated he may give Bowers Esby a 15 call this weekend with an order to begin selling 16 the mortgage-backed securities. At that point, 17 Mr. Connell and I stated that United's management 18 and board would need something in writing which 19 allowed for this disposition. Mr. Twomey was 20 requested by Mr. Connell to issue a memorandum 21 directing the sale to occur, and Mr. Twomey 22 responded by requesting that Mr. Connell give him 24316 1 a letter outlining the actions, quote, 'we,' close 2 quote, wanted to take. After some discussion, 3 Mr. Connell agreed that he would forward 4 Mr. Twomey such a letter the following day. That 5 concluded the business of the meeting." 6 Do you see that, sir? 7 A. Yes, I do. 8 Q. Now, do you recall an exchange in which 9 you were talking -- you said that you were going 10 to decide over the weekend whether or not these 11 MBS should be sold in order to reduce 12 Mr. Ranieri's goodwill burden, and Mr. Connell 13 said that the president of -- the president of 14 USAT said, "Look, if you want us to do it, you 15 have to give us a directive under the consent 16 agreement." And your response to Mr. Connell is, 17 "No, no. You send me a letter asking for it." 18 Do you remember that exchange 19 occurring? 20 A. No. And I have a problem with the 21 first part of this where it says "Neil Twomey may 22 give Bowers Esby a call this weekend with an order 24317 1 to begin selling." I mean, that is totally out of 2 my preview -- purview of doing things. It's 3 totally outside what I can remember from that time 4 of how I would have been acting regarding any 5 institution. I wouldn't be calling -- if 6 Bowers Esby -- and I'm going to assume they were 7 brokers of some type -- is selling securities or 8 selling -- or has securities of United to sell, 9 it's just not the way I recall at all that I would 10 have been conducting myself. 11 Q. Let me ask you, sir -- particularly 12 this last paragraph where it's reported -- and I 13 know you disagree with it, or I'm not sure whether 14 you do because you didn't remember the meeting 15 until I showed it to you. But sir, is the way 16 that you're alleged to have conducted yourself 17 using the consent agreement to direct current 18 management to make a request to you as if it's 19 coming from them to sell large pools of assets in 20 order to benefit the new acquirer, is that a way a 21 supervisory agent from the Federal Home Loan Bank 22 of Dallas is supposed to conduct himself? 24318 1 A. No. If we were making -- normally, if 2 we are making a direction underneath the consent 3 agreement to sell an asset or do something, it 4 would be in the form of a letter referencing the 5 consent merger agreement, referencing the 6 particular section. That's the way I would have 7 done it at that time. 8 I don't recall this interplay going 9 back and forth. I do recall that Bank United 10 wanted in writing, probably a couple of different 11 times -- I'm not sure all the instances -- that if 12 we are doing this, you have to direct us to do 13 that. 14 And again, I don't think I had a 15 problem with sending out that letter because I 16 thought -- and I can't go -- you know, I can 17 remember the -- I thought it was much later, the 18 first time that Mike Crow and Patriarca, they had 19 that September memo that was shown to me. I would 20 have thought it was much later in the game, toward 21 December. But if there was another sale being 22 directed, it wasn't something that I believe I 24319 1 would have initiated. I believe that if there was 2 something coming down, it came from whoever was 3 negotiating for FSLIC. And that's really it. 4 I just -- John, I just don't remember 5 the Merrill-Lynch people that are mentioned in 6 here at a meeting with Scott Shea, who I met -- he 7 was the director of Bank United when I was the 8 supervisory agent there. And I -- you know, I -- 9 Q. He's Mr. Ranieri's No. 2. Right? 10 A. Well, yeah. I don't have a problem 11 with that. But, you know, I know Scott. But I 12 thought I met Mr. Shea after the receivership. I 13 don't recall this meeting. 14 MR. RINALDI: Your Honor, I just have 15 one question I wanted to clarify for the record. 16 The question that started out was: Was that an 17 appropriate way to conduct himself as -- 18 MR. VILLA: As a supervisory agent for 19 the Federal Home Loan Bank of Dallas. 20 MR. RINALDI: And I wasn't sure if he 21 gave an answer to that question. And if he did, 22 I'd just be curious to know what it was. 24320 1 MR. VILLA: We'd all be curious. Thank 2 you, sir. 3 Q. (BY MR. VILLA) If what is reported in 4 here is accurate -- and you can't remember one way 5 or the other that the meeting even occurred -- you 6 testified under oath in your deposition that you 7 never met with Ranieri Wilson. 8 Start from the beginning. You 9 testified under oath in your deposition you never 10 met with Ranieri Wilson before the receivership. 11 Right? 12 A. That's right. 13 Q. And if you had any recollection of this 14 meeting, the testimony you gave in your deposition 15 would be -- 16 A. Wrong. 17 Q. -- a serious problem. 18 So, I think we've got to the point of 19 realizing that you have no recollection of this 20 meeting. 21 My question to you, sir, is: If the 22 meeting occurred as Mike Crow says it did in this 24321 1 memo, do you think the way that you're described 2 as conducting yourself as the supervisory agent, 3 particularly with the last paragraph, with the way 4 that a supervisory agent with the Federal Home 5 Loan Bank of Dallas should act. 6 MR. RINALDI: Your Honor -- 7 THE COURT: I thought you wanted the 8 answer to that question, Mr. Rinaldi. 9 MR. RINALDI: I guess what troubles me 10 with this whole thing is he's asking about 11 something he says he doesn't remember anything 12 about, and now he wants him to speculate about 13 what he -- whether -- well, he wants him to 14 speculate about that. He said he doesn't recall 15 it. And you know, if he doesn't recall it, he 16 doesn't recall it. I can live with that. But 17 apparently, counsel wants him to now speculate 18 about something going beyond that. That's what 19 troubled me in the first place. He asked him this 20 question that was really kind of speculative in 21 nature, and there was this long discourse. And -- 22 THE COURT: Well, let's have the answer 24322 1 to the question. I'll deny your objection. 2 A. Well, to start out with, I don't 3 remember the meeting; and I don't remember acting, 4 you know, as prescribed in here. I do remember 5 there were sales of assets -- 6 THE COURT: Mr. Twomey, I don't think 7 that's responsive to the question. 8 THE WITNESS: Sorry, Your Honor. 9 THE COURT: The question is: Would 10 that be the proper procedure for a supervisory 11 agent to follow, if that's true, what you're 12 ascribed as doing there? 13 THE WITNESS: Sir, it's not the way I 14 believe I acted, and I don't think it's in the 15 standard way that one would be acting as the 16 supervisory agent. I have a problem with this 17 because I just don't recall it or ever -- I just 18 don't -- first of all, I don't recall. But I 19 really do have a problem with -- I feel like if I 20 was calling somebody, it's just out of my standard 21 operation, way of doing things. 22 It's just -- I just don't have a 24323 1 recollection of this, and it is outside the 2 standard way I would be conducting myself as a 3 supervisory agent. 4 Q. (BY MR. VILLA) Do you recall, sir, 5 that Mike Crow resigned from the board of UFG as a 6 result of the fact that he believed that he was 7 being instructed by you to take actions that were 8 detrimental to USAT and he didn't feel like he 9 could work for both companies, given the nature of 10 the instructions? 11 Do you remember that? 12 A. No, I don't recall it right now. 13 Q. Do you remember that Art Berner was 14 very upset about these instructions that he was 15 receiving from time to time and asked you to put 16 them in writing? 17 Do you remember that? 18 A. Something similar to that, yes. 19 Q. Now, did this -- Mr. Berner recounted 20 that this was a matter of considerable irritation 21 to you because you did not want to put these 22 instructions to USAT in writing. 24324 1 Do you remember that occurring? 2 A. No. But I remember -- you know, I was 3 being requested to do that; and I believe I did 4 it. 5 Q. You believe you did it? 6 A. If there was some type of a letter that 7 they -- that the institution needed to do a sale, 8 I believe I would have done it. 9 Q. Didn't you tell them to write a letter 10 to you and ask -- make it appear as though the 11 request was coming from the institution? 12 A. Well, that's what's in the rear end of 13 this memo. Again, I just don't recall the 14 meeting. And if I said that at the meeting, then 15 I said that at the meeting. I don't recall saying 16 that, and I don't recall the meeting. 17 Q. Were you angry at Art Berner in 18 December of 1988 because he was not being 19 compliant with the wishes of the new owners as to 20 how to strip assets out of USAT in order to -- in 21 order to benefit Mr. Ranieri in the -- to benefit 22 Mr. Ranieri in the post-receivership era? 24325 1 Was there any anger that you felt 2 toward Mr. Berner? 3 A. Not that I recall. 4 Q. Was he an irritant in the process of 5 delivering the bank to Mr. Ranieri that warranted 6 special attention in the memos that were prepared 7 in December of 1988 justifying dismissal? 8 A. Not that I recall. 9 Q. So, if your memo justifying dismissal 10 of Mr. Berner, for example, accused him -- well, 11 let's look at it. It's your December 15, 1988 12 memo, T8145. 13 A. Is that the red book? 14 Q. It's in the green book, about the 15 fourth document. 16 A. Okay. 17 Q. The first mention I see of Mr. Berner 18 in this memo, your December 15, 1988 memo, is at 19 the bottom of Page 2. It says, quote, "The two 20 loans referenced in No. 8 above were originally 21 approved in 1986 by directors Arthur S. Berner and 22 Michael R. Crow who sit on the senior loan" -- and 24326 1 it carries over to "committee." 2 Do you see that? 3 A. Yes. 4 Q. If you look at No. 8 above, which is 5 about halfway up the page, and if you look at the 6 second paragraph under No. 8, it says "In two 7 cases, while management was negotiating the 8 modification of appraisals, et cetera, et cetera, 9 both loans are major products that total 10 $118 million." 11 Do you see that? 12 A. Yes. 13 Q. Now, we know because we've been living 14 in this courtroom for a long time that the two 15 loans at USAT that were approved in 1986 that 16 total $118 million were the Norwood loan and the 17 Park 410 loan. 18 Now, sir, you know that Mr. Berner 19 wasn't on the senior loan committee in 1986, don't 20 you? 21 A. I don't know that here today. If you 22 say he wasn't, I will accept it. 24327 1 Q. Well, why don't we just take a look at 2 the loan committee minutes. It's about six 3 documents in, Tab 7670, Tab 654. I'm sorry. 4 Exhibit T7670, Tab 654. 5 Do you see the loan committee approval 6 for the Park 410, the Loop 410 West? 7 A. Yes. 8 Q. Now, you told us that the testimony you 9 looked at in your -- prior to your deposition was 10 matters involving the loans. So, why don't you 11 look about four pages in. 12 Do you see the senior loan committee in 13 March of 1986 and who signed that? It has a Bates 14 stamp OW012908. 15 A. I see it. 16 Q. Art Berner's name isn't there, is it? 17 A. I don't see it. 18 Q. Why don't you look at the next one, 19 next document, T7020. And it's in evidence at 20 Tab 687. It's the June 2nd, 1986 approval of the 21 Norwood loan. 22 Do you have that before you, sir? 24328 1 A. Yes, I do. 2 Q. And do you want to turn to the last 3 page in that and see whether Mr. Berner's name 4 appears as the person who approved that loan? 5 A. I don't see it. 6 Q. The first reason you give in your memo 7 justifying the dismissal of Mr. Berner is that he 8 was on the committee that approved the Norwood and 9 Park 410 loans, and all it took you to do was look 10 at the loan approvals to see that he wasn't. 11 Right? 12 A. Yes. 13 Q. And you still -- your testimony still 14 is you didn't select Art Berner out for any 15 special harsh treatment. Right? 16 A. That's right. 17 Q. And true to my word, I'm skipping over 18 these mortgage-backed securities matters. I have 19 a couple of other issues to talk about in a 20 moment, sir. 21 One other matter. Let's go to your 22 December 15, 1988 memo again. And I think there 24329 1 is a reference to Dr. Barry Munitz. That's T8145, 2 I believe. 3 A. I still have the page open, yes. 4 Q. Do you see the reference to Dr. Barry 5 Munitz there? 6 A. Which page of the memo? 7 Q. Pardon? 8 A. Which page of the memo? 9 Q. I believe it's right at the end. It's 10 on the last page of the memo, and it's right above 11 "excessive compensation and self-interest of 12 executive management." 13 Do you see that? 14 A. Yes. 15 Q. It says, "It is apparent from the 16 activity reviewed that the investment committee is 17 now preoccupied with any transaction that will 18 make us money and not with how it fits into 19 United's overall objectives. The membership of 20 the committee currently consists of Barry A. 21 Munitz, Arthur S. Berner," and then it goes on. 22 Do you see that, sir? 24330 1 A. Yes. 2 Q. Now, did you know, sir, that Dr. Munitz 3 resigned from the investment committee a year and 4 a half before this? I'm sure you didn't. So, why 5 don't we look at Exhibit B1626, which is about ten 6 exhibits down into the document, into the green 7 book. 8 It is a memo -- 9 A. I found it. 10 Q. It's at Tab 1654. It's a memo dated 11 May 19, 1987, from Barry Munitz to Arthur Berner. 12 And it reads -- it's a short memo. I'll read it. 13 "I believe that when we originally established the 14 investment committee, I was given formal 15 membership in order to have a critical mass of 16 policy people shaping the framework of our 17 activities. Now that our high-yield bond person 18 is on board and we have people both in equity 19 arbitrage and the mortgage-backed securities 20 function, it seems far less vital to have my 21 official participation. In addition, I am 22 concerned that the Wednesday afternoon regular 24331 1 meeting often conflicts with other assignments for 2 me. Therefore, I would like you to remove me from 3 the formal membership, although as regularly as 4 possible, I will continue to attend." 5 Do you see that? 6 A. Yes, I do. 7 Q. Look at the next exhibit, A1443, 8 Tab 1315. And does that appear to be the May 20, 9 1987 investment committee minutes? 10 A. Yes, it does. 11 Q. And the second sentence says, quote, 12 "Mr. Gross stated that Dr. Barry Munitz was no 13 longer a member of the investment committee." 14 A. Yes, I see that. 15 Q. But we threw Dr. Munitz into the memo 16 on the grounds that he's currently a member of the 17 investment committee and responsible. Right? You 18 don't have to answer that question, sir. 19 Let's deal with the issue of excessive 20 compensation and self-interest. I believe that's 21 the last one I'll be dealing with you on here 22 today, unless Your Honor deems otherwise, in which 24332 1 case I'll do whatever the Court asks. 2 Let's look at T8145. 3 A. Okay. 4 Q. Now, on the issue of excessive 5 compensation -- T8145 is about the fourth document 6 in the green book, Tab 1685. And we're looking at 7 your December 15, 1988 memo under 8 "recommendations." No. I'm sorry. Under 9 "excessive compensation and self-interest of 10 executive management." 11 Do you see that? 12 A. Yes. 13 MR. RINALDI: I'm confused here. I 14 thought T8145 was a memo dated December 21st, 15 1988, that had the two attachments on it that 16 we've been looking at. 17 MR. VILLA: Yes, sir. It's the first 18 attachment. I misspoke. You're correct. It's 19 the first attachment to the cover memo on 20 dismissal. That's the one we've been talking 21 about. 22 MR. RINALDI: Right. And that's the 24333 1 one that you just were looking at that talked 2 about Barry Munitz on Page 4. So, we're on the 3 same document we've always been on? 4 MR. VILLA: Right. 5 MR. RINALDI: And what in that 6 document? 7 MR. VILLA: We're on the last page of 8 that memo under E, "excessive compensation and 9 self-interest of management." 10 MR. RINALDI: Thank you. 11 Q. (BY MR. VILLA) Now, first of all, you 12 describe Mr. Berner as the person who drafted the 13 employment contracts. Right? 14 A. Yes. 15 Q. Do you know that -- the role that 16 Hewitt had in drafting the employment contracts? 17 Hewitt Associates, a consulting firm? 18 A. I knew they were consultants, yes. 19 Q. Do you know, sir, whether they were 20 involved in the drafting of the employment 21 contracts? 22 A. No. 24334 1 Q. Well, let's look at the June 1, 1988 2 letter that Art Berner sent you, T8072, about 3 halfway through the pack. This is the line that 4 you and I had spent some time talking about 5 before. 6 Do you have a June 1, 1988 letter, 7 T8072? Do you have that before you, sir? 8 A. I'm looking. Found it. June 1st, 9 1988. 10 Q. In the middle of the second paragraph, 11 it says, quote, "As a result, United Savings has 12 retained a compensation consultant to review the 13 agreements and to make recommendations for 14 improvement of the current contracts." 15 Do you see that? 16 A. Yes, I do. 17 Q. So, you knew on June 2nd, 1982 (sic), 18 when you received this by Federal Express that, in 19 fact, a compensation consultant had been hired to 20 look at the contracts. Right? 21 A. Yes. 22 Q. You just didn't know the name Hewitt. 24335 1 Right? 2 A. That's right. 3 Q. And if you look at the next document in 4 your book, A11030, Tab 466, that's the -- it's 5 been identified in this case as the Hewitt report. 6 A. Okay. 7 Q. And if you look at Page 2 of what they 8 have been asked to do, it's the second page of the 9 exhibit. It reads, quote, "structure and" -- must 10 be "structure and draft provisions of individual 11 employment contracts." It does say "structure and 12 provisions of individual employment contracts." 13 Do you see that, sir? 14 A. Yes, I do. 15 Q. So, you know now that one of the 16 reasons you gave for firing Mr. Berner with 17 respect to the employment contracts failed to 18 point out to the recipient of the memo that the 19 contracts had, in fact, been reviewed by an 20 independent consultant. Right? You didn't know 21 that at the time you wrote this memo, your 22 December 15 memo, did you, sir? 24336 1 A. No. What I believe we knew at the time 2 is the -- Mr. Berner had prepared the contracts 3 with the modifications. As legal counsel, he 4 would have reviewed them and then sent them on to 5 us. 6 Q. Wouldn't it be a mitigating factor in 7 your view if he had -- if the compensation 8 committee, Mr. Whatley, had hired an independent 9 compensation consultant who had worked on and 10 recommended those contracts, wouldn't that be a 11 mitigating factor on the question of whether you 12 should have Art Berner fired? 13 A. Are you telling me that Mr. Berner 14 never looked at the contracts before they were 15 sent to us? 16 Q. You probably didn't understand my 17 question. 18 My question is: Is it a mitigating 19 factor in your judgment on the question of whether 20 Art Berner ought to be fired the fact that 21 Mr. Berner received contracts that had been 22 examined by an independent compensation 24337 1 consultant, Hewitt, which has been recognized by 2 the OTS experts as one of the finest compensation 3 firms in America and that the first issue that 4 they looked at was the structure of the 5 agreements? 6 A. If I -- if I had known they were 7 looking at -- I also have the same opinion of 8 Hewitt. I've known them over the years. I don't 9 have any problem normally with their work that I'm 10 aware of, but it would be an additional factor, 11 not a mitigating factor, if they had prepared the 12 contracts. So, they prepared the contracts, John? 13 Q. (BY MR. VILLA) Well, we can just see 14 what they say. "Structure" -- and then it goes 15 on -- "provision of individual employment 16 contracts." Your testimony in this case goes on 17 for a while about the passing of the contracts 18 back and forth between Hewitt and the board and 19 the compensation committee of United. But it 20 would be fair to say that Hewitt had been hired by 21 the compensation committee of United, not by 22 Mr. Berner? 24338 1 MR. RINALDI: Your Honor, at this 2 point, I'm going to object because I think that 3 this is a misrepresentation of what Hewitt 4 actually did. Now, I don't want to make a 5 speaking objection. I don't want to clue anything 6 in to the witness. But I think that we all know 7 that we went into a lot of material about the 8 recommendations Hewitt gave to Mr. Berner and, you 9 know, they are not consistent with what Mr. Villa 10 is saying, and I don't want to go further in the 11 presence of a witness because I don't want to in 12 any way affect his testimony. But I think 13 Mr. Villa is skating real close to the edge here. 14 MR. VILLA: Well, Your Honor, I fell 15 into one trap. When the witness started asking me 16 a question, I started answering. I won't let that 17 happen again. 18 Q. (BY MR. VILLA) Let's go on to the 19 other issue. The other issue is not the structure 20 of the agreement but the compensation level. 21 Now, T8145 again, if you'll turn back 22 to that. That's the fourth document in the green 24339 1 book. And that's your December memo. 2 A. And I'm on the fourth page of the 3 second memo? 4 Q. Right. 5 A. Yes. 6 MR. RINALDI: T8145? 7 MR. VILLA: 8145. 8 MR. RINALDI: I thought you said 4185. 9 MR. VILLA: Everybody's getting tired. 10 My mistake. 11 Q. (BY MR. VILLA) Now, it says, quote, 12 "It should be noted that in late November, the 13 supervisory agent conducted an informal survey of 14 compensation accorded executive management at 9th 15 district-insured institutions with assets greater 16 than $1 billion. In each category with the 17 exception of one position, executive management at 18 United" -- and I don't -- I can't see what the 19 word is -- something "the recipients of 20 significantly" -- "probably were the recipients of 21 significantly higher compensation than their 22 peers. Indeed, in some instances, the levels of 24340 1 compensation were more than double the amounts 2 paid to individuals performing comparable duties 3 at similarly-sized institutions." 4 Do you see that, sir? 5 A. Yes. 6 Q. Now, when you answered Mr. Rinaldi's 7 questions about this, you said that you looked at 8 a dozen -- two dozen associations and you selected 9 six comparables, I think, and you then did the 10 comparison, something like that. I don't want to 11 characterize your testimony. You did give us some 12 specifics about exactly how this compensation 13 study was conducted? 14 MR. RINALDI: Why don't you just ask 15 him what he said because I must confess, I don't 16 have a recollection of the facts you just -- 17 THE COURT: I think we're getting 18 there, Mr. Rinaldi. 19 You may proceed, Mr. Villa. 20 Q. (BY MR. VILLA) Now, sir, you gave us 21 a detailed recollection of exactly how you 22 conducted the study, who you called, and all of 24341 1 this information coming back to you. 2 Do you remember that? 3 A. Yes. 4 Q. Now, how is it -- and then I think 5 Mr. Rinaldi asked you to look at this and then 6 said, you know, "does that indicate" and then you 7 came out with this fulsome description. 8 Where did you get the number of 9 associations and the size of the associations and 10 their financial condition from what I just read? 11 A. It's just what I recalled generally 12 that was done at the time. 13 Q. Now, I started asking you about it, but 14 I haven't gone into any detail. 15 Have you seen any record of this study? 16 A. Not in anything that's been given to 17 me. No, I haven't. 18 Q. Has anybody talked to you about this 19 study? 20 A. No. 21 Q. In all these meetings with the OTS 22 lawyers, they never talked to you about the 24342 1 question of the study that they called you here to 2 testify about? Is that your testimony? 3 A. Not that I recall, no. 4 Q. Now, at the time you prepared this 5 particular memo, you knew about the results of 6 both the Hewitt and the Wyatt studies. Right? 7 A. I don't recall what I might have 8 remembered or thought of or had in front of me 9 regarding those two studies at the time that we 10 put them together, put this memo together. 11 Q. Well, Wyatt had been trying to call you 12 and you wouldn't take their calls. 13 Do you remember that? 14 A. No, I don't recall that. 15 Q. You don't? 16 Let's take a look at the Wyatt study, 17 Exhibit B2495. It's at Tab 471. 18 And it's about eight from the end of 19 the green book. If you'll look at Imaging 20 Page OW154784, the second line down, second bullet 21 point, quote, "Several attempts to reach Mr. Neil 22 Twomey of the Dallas Federal Home Loan Bank Board 24343 1 by telephone were made." 2 Do you see that? 3 A. I'm sorry, John. Can you -- I see the 4 letter November 11th. That's what you're 5 referring to? 6 Q. It's Exhibit B2495. It's a Wyatt study 7 dated November 1988. 8 A. I have that study in front of me, yes. 9 Q. Go to imaging page -- it's about six 10 pages in -- OW154784, and it has the No. 3 at the 11 top. 12 A. I'm on that page now. 13 Q. Then the second bullet point, "Several 14 attempts to reach Neil Twomey of the Dallas 15 Federal Home Loan Bank Board by telephone were 16 made." 17 Do you see that? 18 A. Yes. 19 Q. Do you remember that Wyatt tried to 20 reach you to discuss the issue of executive 21 compensation with you? 22 A. No. 24344 1 Q. And you don't recall talking to them, 2 do you, sir? 3 A. No. 4 Q. You were busy in December 1988. Right? 5 A. I just don't remember talking to 6 representatives of Wyatt at that time. 7 Q. With all the work that these people 8 were doing in December of 1988, did you have 9 difficulty getting all the supervisory analysts 10 and agents to do an informal study for you of 11 compensation? 12 A. Not that I recall. 13 Q. I am mistaken. The Wyatt report is 14 November of 1988, not December. I misspoke. 15 Now, sir, your December 15 memo 16 reflects that the survey involved institutions 17 over $1 billion. 18 Do you recall, sir, what USAT's size 19 was at about that time? And let's pick a time at 20 the time that the contracts were entered into, 21 June 30, 1988. 22 A. 4 to 6 billion. 24345 1 Q. A little over $6 billion? 2 A. Yeah. 3 Q. We looked at -- I won't take you 4 through because we'll try to move out of here -- 5 but the second quarter 10Q will show -- and it's 6 A3043 and we put it in today -- will show that UFG 7 and USAT on a consolidated basis were over 8 $6 billion. And if you take out what was left of 9 UFG's assets, it would be right at 6 billion. 10 Now, sir, you said "In some instances, 11 the level of compensation were more than double 12 the amounts paid to individuals performing 13 comparable duties at similar-sized institutions." 14 Let me ask you, how many institutions 15 were there in Texas at $6 billion or over? 16 A. Above 6 billion? There were -- First 17 Texas/Gibraltar which we looked at as a combined 18 institution was approximately 10 billion, that I 19 can recall. And San Jacinto Savings was 20 approximately 4 to 6 billion, that I can recall. 21 There may have been other institutions, but 22 there's probably only one or two at that time that 24346 1 were -- say, the 5-billion-dollar level, above the 2 4-billion-dollar level. 3 Q. You recognize Sheshunoff as a means by 4 which bankers and bank regulators, thrift 5 officials, and thrift regulators are able to 6 follow trends, financial trends in the industry. 7 Right? 8 A. Yes, I do. 9 Q. And we have the Sheshunoff book here 10 for the reference, but I thought I would ask you 11 to take a look at what's been marked as 12 Exhibit B4334, which is an excerpt from the 13 Sheshunoff balance sheet and income statement 14 analysis for the last reporting period prior to 15 this informal survey that you conducted. 16 Do you have it before you, sir? 17 A. Yes, I do. 18 MR. VILLA: Your Honor, I move B4334 19 into evidence. 20 MR. RINALDI: No objection, Your Honor. 21 THE COURT: Received. 22 Q. (BY MR. VILLA) Now, can you tell from 24347 1 that, sir, how many institutions are over 2 $6 billion in the State of Texas? 3 A. According to this, it would be 4 Gibraltar Savings Association at 6 billion 1. 5 Q. And I think -- what did you think 6 San Jacinto was? 7 A. I thought San Jacinto was 4 to 6, I 8 believe I said. 9 Q. And it's 2.84 billion. Right? 10 A. Yes. 11 Q. So, there's one association in the 12 State of Texas that's $6 billion or over. Right? 13 A. Yes, based on this report. 14 Q. In fact, if you take a look at -- if 15 you were trying to choose a peer group, it would 16 probably be a peer group of one, wouldn't you say? 17 A. Of? 18 Q. If you're trying to choose a peer group 19 by size, it would be one. There's only one other 20 association whose assets are within 10 percent of 21 USAT's. Right? 22 A. Except on -- the reality is First Texas 24348 1 and Gibraltar really were one combined 2 institution. They operated that way. 3 Q. It's still one. 4 A. Still one above it. 5 Q. So, these 24 associations you looked at 6 and selected six comparables, you must have had to 7 reach pretty deep down into the size to get a 8 comparable. Down to, what, San Jacinto? 9 A. I don't recall. 10 Q. Now, you don't have the results of your 11 examination; so -- and unfortunately, Sheshunoff 12 doesn't break out officer and employee 13 compensation expense on a person-by-person basis. 14 It only does it as a percentage of total operating 15 expenses. So, I thought you might take a look at 16 the line that I've marked in blue on your exhibit. 17 Do you have that, sir? 18 A. Yes, I do. 19 Q. And I looked at the first 60 savings 20 and loans -- the largest 60 savings and loans in 21 Texas by asset size, and they are all in this 22 exhibit. 24349 1 Do you see them in front of you? 2 A. Yes. 3 Q. And of those 60 savings and loans, USAT 4 has a lower percentage of officer and employee 5 compensation than all but two. Right? See if you 6 see any under 5.1. 7 A. (Witness reviews the document.) 8 There's one at 3.0, Montfort Federal Savings. 9 There's one at 354. We won't even talk about that 10 one. 788. 11 Q. I miscounted. All but three. 12 A. We had San Jacinto Savings on the first 13 page, but that's okay. There were a couple and 14 there's a couple that are absolutely unbelievable, 15 but that's the nature of the business in Texas at 16 the time. 17 Q. So, when you were looking -- we can't 18 reconstruct what you were looking at at this 19 point; but compared to its peer group, if we want 20 to look at its peer group, say the five largest 21 S&Ls in Texas, USAT's officer and employee 22 compensation was 5.1 and the next closest one is 24350 1 7.2 percent. Right? On the first page. 2 A. On the first page, you've got 4.2 at 3 the bottom but -- if you look at the top grouping 4 of five, you do -- USAT is the lowest. 5 Q. And under the top 60, it's the fourth 6 lowest. Right? 7 A. Yes. 8 Q. Now, did you look at that at any point 9 when you were trying to consider whether USAT's 10 compensation expense was excessive during your 11 informal survey of compensation? Did you consider 12 the information that's set forth in the Sheshunoff 13 reported information about officer and employee 14 compensation expense? 15 A. Did we look at this ratio? No. 16 Q. Finally, you know Jonathan Heffron. 17 Right? 18 A. Yes, I do. 19 Q. And he's currently employed by 20 United -- no -- Bank United as the general counsel 21 and executive vice president and chief operating 22 officer. Right? 24351 1 A. I believe so. 2 Q. Does the -- does the OTS guidelines on 3 excessive compensation, do they still exist? 4 A. I don't know what exists today. 5 Q. Now, sir, since you've expressed an 6 opinion, supervisory opinion as to the salary 7 levels for Mr. Berner being excessive -- I think 8 they are in the neighborhood -- and I'm sure 9 Mr. Rinaldi will correct me if I'm wrong -- 10 neighborhood of $400,000, do you have an opinion 11 as to whether the fact that Mr. Heffron was paid 12 $2,566,976 in the last reporting period that I've 13 seen, calendar year 1996, do you have an opinion 14 as to whether that's excessive compensation? 15 A. I don't have an opinion about -- 16 regarding that because I'm not involved in the 17 regulation of Bank United. 18 Q. Do you know John Heffron personally? 19 A. To speak to, yes. He's been on the 20 board of directors of the Federal Home Loan Bank 21 about three years ago, and I knew him about the 22 time he went to work at Bank United. I was still 24352 1 the supervisory agent when he went to work down 2 there. It had to be early 1990. I'm not sure of 3 the exact date. 4 Q. So, he was on the Federal Home Loan 5 Bank of Dallas, the board of the Federal Home Loan 6 Bank of Dallas in the last five years? 7 A. Definitely in the last five years. 8 Q. And as far as you know, no actions have 9 been taken against him for excessive compensation? 10 No enforcement action. Right? 11 A. I'm not aware of anything. 12 MR. VILLA: Your Honor, is this a good 13 time to break? 14 THE COURT: We'll adjourn until 15 9:00 o'clock tomorrow. 16 17 (Whereupon at 4:44 p.m. 18 the proceedings were recessed.) 19 20 21 22 24353 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 24th 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 24354 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 24th 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