24602 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 OCTOBER 5, 1998 22 24603 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 24604 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 . 24605 1 2 INDEX OF PROCEEDINGS 3 Page 4 NEIL TWOMEY 5 Examination by Mr. Eisenhart............24606 6 Examination by Mr. Keeton...............24729 7 Further Examination by Mr. Rinaldi......24734 8 . 9 . 10 . 11 . 12 . 13 . 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 24606 1 P-R-O-C-E-E-D-I-N-G-S 2 (10:00 a.m.) 3 THE COURT: Be seated, please. The 4 hearing will come to order. 5 I believe at the conclusion of the last 6 proceedings, we had completed with Mr. Villa with 7 cross and Mr. Eisenhart has some cross. Is that 8 correct? 9 MR. EISENHART: That's correct, Your 10 Honor. 11 THE COURT: You may proceed. 12 MR. EISENHART: Thank you, Your Honor. 13 14 EXAMINATION 15 16 Q. (BY MR. EISENHART) Good morning, 17 Mr. Twomey. 18 A. Good morning. 19 Q. My name is Frank Eisenhart, and I 20 represent MAXXAM in this proceeding. We've been 21 nodding back and forth, but I don't think we've 22 ever actually been introduced. 24607 1 Let me ask you at the outset: Other 2 than to travel here this morning to give your 3 testimony, have you done any additional work in 4 connection with this case since Friday a week ago? 5 A. No, sir. 6 Q. You haven't reviewed any documents? 7 A. No. 8 Q. You haven't reviewed your own prior 9 testimony, either deposition or trial? 10 A. No. 11 Q. Okay. And you haven't reviewed the 12 testimony of any other witnesses, either 13 deposition testimony or trial testimony? 14 A. No. 15 Q. Have you spoken at all with any of the 16 OTS enforcement lawyers on the case? 17 A. Just pleasantries, and I also faxed to 18 them an article that was in a week ago Saturday 19 from the business section of the Houston 20 Chronicle. 21 Q. Was that an article about your 22 testimony? 24608 1 A. About the Hurwitz case, yes. 2 Q. Okay. About your testimony in this 3 courtroom? 4 A. Referred to it, yes. 5 Q. And have you spoken with any lawyers 6 for the FDIC or any other agencies concerning this 7 case since Friday a week ago? 8 A. No. 9 Q. I'm going to ask you at the outset, 10 Mr. Twomey, some questions about topics we refer 11 to generally as the Drexel option and the MAXXAM 12 or MCO net worth maintenance case so you'll have a 13 little idea where we're going. 14 I'm going to ask you first of all to 15 take a look at Exhibit B954, which is at Tab 89. 16 This is the subordinated debt application. I 17 think actually, you had been referred to this 18 document earlier in your testimony. 19 And I'd like you to take a look 20 particularly at Pages 86 and 87. 21 A. Okay, sir. 22 Q. And I think you were shown these 24609 1 earlier; and on those pages, there is a reference 2 to the option agreement that MCO had with Drexel 3 Burnham Lambert. 4 Do you see that? 5 A. Yes, I do. 6 Q. Okay. And this was an -- this 7 subordinated debt application was submitted to the 8 Federal Home Loan Bank of Dallas in April of '86; 9 is that correct? 10 A. Yes. 11 Q. And I think you said that it was about 12 that time and perhaps from this document that you 13 learned some of the details of the Drexel option. 14 Is that your recollection? 15 A. I don't know the exact time, but 16 probably around that same period of time. 17 Q. Okay. I think maybe Mr. Rinaldi showed 18 you this document. I think you may have said in 19 answer to his question that it could have even 20 been this document that first gave you the 21 information about it. But it was about this time? 22 A. Approximately this time. 24610 1 Q. Now, on Pages 86 and 87, there is a 2 disclosure of the fact that in December 1985, 3 Drexel gave MCO an option for 300,000 shares, is 4 there not? 5 A. Yes, I see that. 6 Q. And it also discloses that the call 7 option that MCO had was exercisable during a 8 one-month period beginning July 1st, 1988. 9 Do you see that? 10 A. Yes. 11 Q. And then if that was not exercised, 12 Drexel had a put option which was exercisable 13 during the following month. 14 Do you see that? 15 A. Yes. 16 Q. Now, you testified, I believe, that 17 when you learned of this option, it was not a 18 matter of particular supervisory concern to you? 19 A. I don't recall. 20 Q. Do you have the transcript of your 21 prior testimony there? 22 A. No. 24611 1 Q. Maybe it's over in a binder right here. 2 And take a look at the transcript at Page 23563. 3 I believe this was the second day of your 4 testimony. 5 MR. RINALDI: Is that the 18th? 6 MR. EISENHART: Yes. It would be 7 Friday, the 18th. 8 A. 23563? 9 Q. (BY MR. EISENHART) Right. The 10 testimony actually starts back on the preceding 11 page. You're being referred to the subordinated 12 debt application, and you said, "Well, I know of 13 the put/call option and I know about the 300,000 14 shares probably starting with this," referring to 15 the subordinated debt application, "I would become 16 aware of that." 17 Do you see that? 18 A. Yes. 19 Q. Okay. And going down to the next page, 20 you were asked, "Well, was this of concern to you? 21 Did it raise any issues with you as the 22 supervisory agent at the time you learned it?" 24612 1 Your answer was, "I believe we were 2 more concerned with the amount of shares that 3 Drexel owned in UFG than any other issue at that 4 time." 5 Does that refresh your recollection 6 that this was not a matter of particular 7 supervisory concern when you learned about it? 8 A. As I stated in my prior testimony, I 9 think we were more concerned that Drexel had 10 ownership of more than 300,000 shares, actually 11 whatever it is, 400 -- 488,931 I guess at this 12 time. 13 Q. But the fact that this option agreement 14 had been given by Drexel to MCO was not a matter 15 of particular supervisory concern? 16 A. Other than the mere fact that once it's 17 exercised, the 300,000 would then push MAXXAM over 18 the 25 percent threshold, no. 19 Q. Mr. Rinaldi, after showing you this, 20 then had you compare -- well, he had you look at a 21 Ginger Baugh memo, which is B1739, Tab 1523. 22 MR. RINALDI: B? 24613 1 MR. EISENHART: B1739, Tab 1523. 2 A. Yes. 3 Q. (BY MR. EISENHART) Now, this document 4 is a memo that Ginger Baugh wrote to you on 5 September 3rd, 1987. And if you look about three 6 quarters of the way down the page, there is a 7 paragraph that begins "MCO Holdings, Inc." and 8 there is a description there of the option 9 agreement, is there not? 10 A. Yes. 11 Q. And Mr. Rinaldi showed you this 12 description, and he asked you to compare it to the 13 actual option agreement which was attached to an 14 MCO Schedule 13D. I'll give you that document. 15 It's A2074, Tab 36. 16 Do you recall being shown this Schedule 17 13D? 18 A. (Witness reviews the document.) Not 19 specifically but -- 20 Q. Well, that has the actual option 21 agreement attached to it, does it not? And I'll 22 refer you, if you wish, to the pages beginning 24614 1 OFD2633, about maybe halfway into the document. 2 A. Yes. Exhibit 4 to this document. 3 Q. Right. That is the actual stock option 4 agreement, isn't it? 5 A. It appears so. 6 Q. Now, Mr. Rinaldi showed you the 7 description of this in Ms. Baugh's memo and had 8 you compare that to the actual stock option 9 agreement. And then he led you to give certain 10 opinions. And one of those, I believe, was that 11 if you thought MCO actually controlled the 300,000 12 shares which were the subject of this option 13 agreement, you would have referred the matter to 14 Julie Williams of Federal Home Loan Bank Board's 15 legal staff for an opinion. 16 Do you recall giving that testimony? 17 A. Yes. 18 Q. And he also pointed you particularly to 19 the language in the option agreement concerning 20 the letter of credit. And in response to a 21 question by Mr. Rinaldi, you said that if you had 22 known about that letter of credit, that that would 24615 1 have led you to refer the matter to Ms. Williams 2 for a legal opinion. 3 Do you recall that? 4 A. Yes. 5 Q. He then led you to the section that 6 talked about indemnification, and you said that if 7 you had known about that indemnification, that 8 would also have led you to refer the matter to 9 Julie Williams for an opinion. 10 Do you recall that? 11 A. Yes. 12 Q. Let me ask you, Mr. Twomey, putting 13 aside your little colloquy with Mr. Rinaldi on 14 this subject, did you ever actually consider in 15 1985 or '86 or '87 or '88 whether the terms of 16 this option agreement were such that you ought to 17 refer this matter to Julie Williams or anyone else 18 in Washington for a legal opinion? 19 A. I can't recall. 20 Q. So, then, when you were responding to 21 Mr. Rinaldi's questions Friday -- I guess two 22 Fridays ago, whenever it was, you were really 24616 1 responding on a purely hypothetical basis as to 2 what you might have done in those years if certain 3 terms and conditions that were pointed out to you 4 by Mr. Rinaldi had been pointed out to you back in 5 those years? 6 A. Yes. 7 Q. And that's a hypothetical that you and 8 he had worked out in advance of your testimony, 9 correct? 10 A. No. 11 Q. He told you he was going to refer you 12 to those sections? 13 A. No. 14 Q. So, that was all spontaneous? You had 15 never been pointed to those sections before? 16 A. I have never seen those sections 17 before. 18 Q. Well, Mr. Twomey, might there be other 19 terms and conditions in the option agreement that 20 might also have caused you to seek a legal 21 opinion? 22 A. There might have been, yes. 24617 1 Q. Might there be other terms in that 2 option agreement that would -- might cause you to 3 conclude, in your words, that this transaction had 4 already occurred? 5 A. I don't know. 6 Q. You don't know? I'm sorry. I didn't 7 hear your answer. 8 A. There may be other sections in the 9 option agreement, but I don't know what I would 10 have been thinking of, you know, if I had reviewed 11 this or been aware of certain facts back over ten 12 years ago. 13 Q. Well, for example, might you want to 14 know what the strike price of the option was and 15 how that related to the price of UFG's stock at 16 the time? 17 A. I can't recall if the price would have 18 been at market or not at market. I'm not aware of 19 a structured price. 20 Q. But that might be information that you 21 would want to consider if you were debating 22 whether to send this off to get some sort of legal 24618 1 opinion, wouldn't it? 2 A. I guess my -- I would have thought on a 3 put or a call, the transaction would have been 4 done at market. 5 Q. Well, if you were debating whether to 6 get a legal opinion on this, you would want to 7 start with the basic information of knowing what 8 that strike price was, wouldn't you? 9 A. Well, if there was some type of set 10 price already in the document, I'd have to 11 consider it. But I don't recall one. To me, I 12 thought it was either a market transaction 13 possibly in '88. 14 Q. Well, might you also want to know how 15 much had been paid for the option agreement and 16 how that related to the sum that would ultimately 17 have to be paid to acquire the stock? 18 Would that be a factor that you would 19 want to consider? 20 A. Well, it's my understanding this was a 21 transaction between MAXXAM and, just on normal 22 puts and calls, I'm sure they must have paid a 24619 1 market price for entering into the agreement. 2 Q. Well, wouldn't you want to know if you 3 were trying to consider -- if you were trying to 4 figure out whether you needed to get a legal 5 opinion as to whether MAXXAM or MCO actually 6 controlled this option stock, wouldn't you want to 7 know how much had been paid already and how much 8 remained to be paid? 9 A. As far as I was concerned, Drexel owned 10 the stock. MAXXAM entered into the agreement. 11 And I -- I don't recall considering what the 12 payments might have been at that time. 13 Q. Would you have wanted to know who had 14 the power to vote the stock during the years that 15 it was being held subject to the option agreement? 16 A. I assumed Drexel had the power since 17 Drexel owned the stock. 18 Q. Well, you assumed that. But did you 19 know that? 20 A. I have nothing else to tell me contrary 21 to that. 22 Q. Would that have been an important thing 24620 1 for you to know one way or another if you were 2 trying to figure out who actually controlled this 3 stock or trying to decide whether you needed to 4 get a legal opinion on this subject? 5 A. Again, I assumed Drexel controlled the 6 stock, owned the stock, and they could vote the 7 stock. 8 Q. And what did you base that assumption 9 on? 10 A. Just based on the information I had at 11 the time. 12 Q. Well, if you'll look at Ms. Baugh's 13 memo of September 3, 1987, she says in there that 14 MCO has a call option for 300,000 shares. She 15 tells you when it can be exercised. And she says 16 if it's not exercised, then Drexel has a put. And 17 she tells you when that can be exercised. 18 A. Yes. 19 Q. Nothing in there about who has the 20 power to vote the stock, is there? 21 A. No. 22 Q. Nothing in there about the price of the 24621 1 stock, is there? 2 A. No. 3 Q. That leads you to conclude that you had 4 sources of information about this option agreement 5 beyond what Ms. Baugh had written in this memo? 6 A. No. 7 Q. In deciding whether MCO controlled this 8 stock and whether -- or whether you might want to 9 get a legal opinion on that subject, would you 10 want to know who had the right to receive the 11 dividends on the stock during the period of time 12 it was held under option? 13 A. Again, it was my recollection that 14 Drexel owned the stocks; so, Drexel was the 15 beneficial owner of the stock at that time. 16 Q. Well, is that based on some actual 17 information you had, or is that simply an 18 assumption that you're making? 19 A. I can't recall what information it 20 might have been based on, but it's basically my 21 recollection. 22 Q. Well, isn't it a fact, Mr. Twomey, that 24622 1 all of the subjects I've just talked to you about 2 would be important subjects to consider if you 3 were trying to determine, in your words, whether 4 this was a transaction that had already occurred? 5 You'd want to know all those things, 6 wouldn't you? 7 A. Well, based on what you've described 8 and questioned me on, I'd probably still have to 9 have some additional facts. But based on what I 10 remember at the time, our primary concern was 11 Drexel exceeding the 9.9 percent threshold and 12 becoming an affiliated party. When it came to the 13 put and call and it was simply a matter that it 14 could happen and it could happen in 1988. And 15 other than that, we didn't have any -- I don't 16 recall very much else, any more information on the 17 subject. 18 Q. Well, would you agree with me, 19 Mr. Twomey, that if, in fact, back in the years 20 you were supervisory agent, you had wanted to make 21 an actual assessment of whether the stock that was 22 subject to this option agreement was then 24623 1 controlled by MCO or would be controlled by MCO at 2 some point in the future, you would have needed to 3 see the agreement itself, wouldn't you? 4 A. Again, based on what I recall, this is 5 simply a put/call. And it was exercisable at a 6 set date in 1988, and Drexel -- as far as I was 7 concerned, Drexel controlled the stock until that 8 point, until either one party or the other 9 exercised a put or a call. 10 Q. Well, back when you were supervisory 11 agent, did you ever ask the people at USAT or UFG 12 to send you a copy of the option agreement so that 13 you could review it? 14 A. I can't recall. 15 Q. In fact, as you sit here today, are 16 you -- do you even know one way or another whether 17 you had a copy of that option agreement in your 18 supervisory files? 19 A. I can't recall it. 20 Q. It's perfectly possible you might have, 21 isn't it? 22 A. It's perfectly possible we didn't. 24624 1 Q. I'm sorry? 2 A. It's perfectly possible that I didn't. 3 Q. But you may have had it or you may not 4 have had it; and as you sit here today, you don't 5 really know? 6 A. I can't recall. 7 Q. If you had had the Drexel option in its 8 entirety available to you, would you have read it? 9 A. It's probably something I would have 10 referred to my analyst to review. 11 Q. So, you would probably have referred it 12 to Ginger Baugh and have her read it and get back 13 to you? 14 A. Probably. 15 Q. Let me ask you this. Did the Federal 16 Home Loan Bank of Dallas have the ability to 17 obtain documents filed with the Securities and 18 Exchange Commission? 19 A. Well, if we were aware of a particular 20 filing other than 10Ks and 10Qs, we could request 21 one. 22 Q. You knew how to do it? You knew how to 24625 1 get documents from the SEC if you wanted them? 2 A. Normally, we didn't request them from 3 the SEC. And I, in fact, can't remember one time 4 where we did. Normally, we would ask the member 5 institution or holding company to send us copies. 6 Q. But if you -- if a document was 7 publicly available at the SEC, you knew how to get 8 it if you needed it? 9 A. Well, I imagine back then there had to 10 be a way of requesting them. I'm too used to 11 using Bloomberg today of just dialing in and 12 having it printed for me. So, I don't think there 13 was a set procedure. We'd be just like anybody 14 else requesting a public document from them. And 15 now -- 16 Q. This SEC Form 13D that Mr. Rinaldi 17 showed you -- that's A2074, Tab 36 -- that has the 18 entire option agreement attached to it, that form 19 and its attachments are documents that are on file 20 at the SEC, aren't they? 21 A. Well, they should be. 22 Q. And those are publicly available. 24626 1 Anybody can get them? 2 A. Should be. 3 Q. And you can't tell me with any 4 certainty as you sit here today whether you or 5 Ginger Baugh might have had this 13D with the 6 option agreement attached to it; is that correct? 7 A. I can't recall. 8 Q. Let me ask you to take a look at 9 another document by Ms. Baugh. This is -- well, 10 let me -- it's Exhibit A11011, Tab 256. And let 11 me just give you my copy of it, Mr. Twomey, 12 because I'm only going to refer you to one line of 13 the document. 14 A. Okay. The highlighted line? 15 Q. Good guess. 16 MR. RINALDI: What page are we on? 17 MR. EISENHART: We are on the third 18 page of the document. Well, the third page of the 19 exhibit, which is the second page of the document. 20 Q. (BY MR. EISENHART) And in the last 21 paragraph on that page, there is a reference to 22 MCO's option for the 300,000 shares. 24627 1 Do you see that, Mr. Twomey? 2 A. Yes. 3 MR. RINALDI: This is Page 2 of -- 4 numbered Page 2? 5 MR. EISENHART: Page 2 of the 6 memorandum. Page 2 of the exhibit. Last 7 paragraph at the bottom. 8 Q. (BY MR. EISENHART) And it says, "MCO 9 also has a call option to acquire 300,000 shares 10 of UFG's common stock from an unaffiliated third 11 party on July 1, 1988." 12 Do you see that, Mr. Twomey? 13 A. Yes. 14 Q. Now, you were shown this document at 15 your deposition. And I think you testified there 16 that you knew that the unaffiliated third party 17 referred to there was Drexel. 18 Do you recall that? 19 A. Yes. 20 Q. Can you think of any particular reason 21 why Ms. Baugh, who I think we've identified is the 22 actual author of this memo, would have used the 24628 1 term "unaffiliated third party" to describe the 2 counter-party to the option when you and she knew 3 that unaffiliated third party was Drexel? 4 A. Again, it was -- from early on when we 5 saw the investment of Drexel in UFG, it was always 6 a concern of ours why that investment existed. 7 And again, we were always looking at Drexel as a 8 possible affiliated party if they went over 9 9.9 percent. And it's just the way we were 10 referring to Drexel at that time. 11 Q. So, you would agree with me, then, that 12 "unaffiliated third party" is really a term of art 13 as you use it in the regulatory sense then? It 14 has a very specific meaning? 15 A. Yes. If another party goes over 16 10 percent ownership, then it's considered an 17 affiliated party. And there are various reporting 18 requirements in any transaction done with that 19 affiliated party that would actually have to be 20 approved by the PSA ahead of time. 21 Q. And you had actually asked Ms. Baugh to 22 look at this question of Drexel's share ownership 24629 1 and whether Drexel was an affiliated third party, 2 did you not? 3 A. At different times, yes. 4 Q. And I think Ms. Carlton, when she 5 testified here, said that she had been asked by 6 supervision -- and I think she said it was either 7 you or Ms. Baugh -- to look specifically at that 8 in her examinations. 9 Do you recall that? 10 A. Not particularly, but it's reasonable. 11 Q. It's reasonable to assume you may have 12 made that request? 13 A. Yes. 14 Q. Now, in all of the scrutiny that was 15 given to this issue, was there ever any conclusion 16 that Drexel was an affiliated party? 17 A. No. They didn't exceed the 9.9 percent 18 threshold. 19 Q. So, as far as you were concerned, then, 20 during the time you were supervisory agent, this 21 description in this memo that it was an 22 unaffiliated third party was an accurate 24630 1 description? 2 A. That would be the way I would describe 3 it, I would assume. 4 Q. And that never changed during the time 5 you were supervisory agent, did it? 6 A. I don't know if Drexel bought more 7 shares. At one point, we thought they had 8 something like 6 percent, and I know it went up 9 above 9. But that's about all that really 10 changed. 11 Q. As you sit here today, you cannot 12 recall any instance while you were supervisory 13 agent that Drexel's shareholdings ever went as 14 high as 10 percent; is that correct? 15 A. I can't recall it. 16 Q. Now, I'm going to ask you to take a 17 look at a document which is in evidence at Tab 83, 18 and it's A2084. 19 MR. EISENHART: Your Honor, we may have 20 a document problem here. May I ask the Court what 21 the document is that it has in as 2085? 22 THE COURT: 2085 or 2084? 24631 1 MR. EISENHART: Well, we have -- at 2 Tab 83 apparently, we have A2085, which is marked 3 as the MCO 10K for the year ending December 31, 4 1986. 5 THE COURT: Well, we have A2085 as a 6 10Q, MCO Holdings. 7 MR. RINALDI: Yeah. That's what we 8 have, Your Honor. 9 THE COURT: May 27, 1992 is stamped on 10 it. For the quarter ended March 31. 11 MR. EISENHART: I'm sorry, Your Honor. 12 I think the correct exhibit is A2084, which is at 13 Tab 85. This is the MCO Form 10K for the year 14 ended December 31, 1985. 15 Q. (BY MR. EISENHART) Do you have that 16 document, Mr. Twomey? 17 A. Yes. 18 Q. Okay. Sorry for the confusion. 19 Will you turn to Page 14? You'll see a 20 heading "United Financial Group, Inc." 21 A. Yes. 22 Q. Do you see that? About the middle of 24632 1 the first paragraph, there is a description of the 2 option agreement, is there not? 3 A. Starting with "In December 1985"? 4 Q. Right. 5 A. Yes. 6 Q. It says, "The company entered into an 7 option agreement with" -- 8 MR. RINALDI: I'm having trouble. 9 Page 14 of A2084? 10 MR. EISENHART: Right. 11 MR. RINALDI: And there is a paragraph 12 that begins "June 29th, 1983"? 13 MR. EISENHART: No. There is a 14 paragraph that begins "United Financial Group, 15 Inc." 16 MR. RINALDI: I'm sorry. 17 Q. (BY MR. EISENHART) It says that "In 18 December 1985, the company entered into an option 19 agreement with an unaffiliated third party to 20 acquire 300,000 shares of common stock of UFG." 21 Do you see that, Mr. Twomey? 22 A. Yes. 24633 1 Q. Now, actually, except for the purchase 2 price, which was not included in Ms. Baugh's memo, 3 the description in her memo and the description in 4 this 10K are virtually identical, are they not? 5 A. Yes. 6 Q. And they both refer to the 7 counter-party to the option agreement as an 8 unaffiliated third party rather than Drexel? 9 A. Yes. 10 Q. Do you think it's possible that at the 11 time Ginger Baugh was writing the July 24th, 1986 12 memo, she may have had this MCO 10K in front of 13 her? 14 A. I don't know. 15 Q. The similarity of the descriptions, 16 though, would at least raise that possibility, 17 would they not? 18 A. There is a possibility. 19 Q. Would you turn to the back of that 20 document? It's Page 76. 21 Do you have that page? 22 A. Yes. 24634 1 Q. Now, that lists various exhibits to the 2 10K, does it not? 3 A. Yes. 4 Q. If you'll look about halfway down the 5 page at Exhibit No. 10.9, what is that exhibit? 6 A. It refers to a stock option dated 7 December 23rd, 1985. 8 Q. And that's the 300,000-share Drexel 9 option that we have been discussing, is it not? 10 A. It appears to be. 11 Q. The option agreement was actually an 12 exhibit to that 10K, correct? 13 A. To what was filed with the SEC, yes. 14 Q. And those exhibits, again, are publicly 15 available to anybody that wants them? 16 A. Yes. 17 Q. And that exhibit is specifically 18 referenced in this same document that contains the 19 description of the option agreement that is very 20 similar to the description Ms. Baugh used? 21 A. Yes. 22 Q. Do you have any doubt, Mr. Twomey, that 24635 1 if you had wanted to review the entire option 2 agreement or that if you had wanted to send it to 3 Julie Williams for legal review, that agreement 4 was available to you? 5 A. Well, it's on the 13D. It's on the 6 10K. If I had a reason to review it, I could 7 either request that the institution send it to me 8 or I could have gotten it from the SEC. 9 Q. You could have gone to the institution 10 or if for some reason you didn't even want them to 11 know about it, you could have gotten it from the 12 SEC? 13 MR. RINALDI: Could we have a 14 clarification of what you mean by "the 15 institution"? 16 MR. EISENHART: UFG or USAT. 17 A. Well, if I wanted the document, I 18 normally would have requested it from UFG. 19 Q. (BY MR. EISENHART) Well, as you sit 20 here today, Mr. Twomey, you don't really know what 21 Julie Williams' legal opinion about this option 22 agreement would have been if you had ever referred 24636 1 it to her, do you? 2 A. That's her opinion. 3 Q. Now, you offered in response to 4 Mr. Rinaldi's questions to you -- you offered the 5 response that you thought this option agreement 6 actually vested control of these shares in MCO, 7 didn't you? 8 A. Based on what Mr. Rinaldi asked me, 9 yes. 10 Q. But you don't really know whether 11 anybody at the Bank Board would have agreed with 12 that opinion, do you? 13 A. Well, since I didn't refer it to them, 14 the answer would have to be "no" at this time. 15 Q. Now, you knew from your dealings with 16 UFG and USAT that MCO and Federated had filed an 17 application to increase their ownership position 18 in UFG? 19 A. Yes. 20 Q. And they had actually gotten approval 21 from the board to own as much as 35 percent of the 22 stock of that company subject to certain 24637 1 conditions, correct? 2 A. Correct. 3 Q. And one of those conditions was that 4 they would have to undertake a net worth 5 maintenance obligation once they passed the 6 25 percent threshold, correct? 7 A. Yes. 8 Q. Now, based on your dealings, were you 9 of the view that MCO and Federated were determined 10 not to pass that 25 percent threshold until they 11 could work out the issue of the net worth 12 maintenance obligation? 13 A. From what I recall, yes. 14 Q. And I think you said that you weren't 15 really involved in those discussions, that they 16 were having those discussions with people in 17 Washington, correct? 18 A. Yes. 19 Q. I think you said that your only 20 involvement was to, from time to time, grant 21 extensions of the approval resolution to give them 22 more time to work on that? 24638 1 A. Yes. 2 Q. But during the whole time they were 3 trying to negotiate these -- this net worth 4 maintenance issue, was it your impression that 5 they were determined that they would not go over 6 the 25 percent? 7 A. I'd say so, yes, because if they went 8 over the 25, they were automatically a holding 9 company. It wouldn't matter what they were 10 negotiating. 11 Q. And with a company such as MCO that had 12 expressed so much concern about the net worth 13 maintenance obligation, it would have been very 14 foolish for them to do anything to take themselves 15 over the 25 percent until they could get that 16 worked out, wouldn't you agree? 17 MR. RINALDI: Your Honor, it calls for 18 him to speculate on what was in the minds of MCO, 19 I think. I don't know that he can -- 20 THE COURT: Well, I'm not sure that it 21 does. He's asking him, I guess, what a reasonable 22 expectation would be. 24639 1 THE WITNESS: Well, Your Honor, if 2 somehow they passed the 25 percent, we deem MCO as 3 the holding company. How that would affect their 4 net worth obligation would have been something 5 still Julie Williams and her staff would have to 6 work out. And I'm not sure what steps they would 7 take at that time. 8 Q. (BY MR. EISENHART) Well, you've said 9 that your only supervisory concern about this 10 300,000-share option agreement was whether this 11 would have taken them over the 25 percent, 12 correct? 13 A. No. I think I -- the way I recall it, 14 we were primarily concerned with the 300,000 15 because what it did to Drexel -- it was pushing 16 them close to the 10 percent for affiliated party 17 transactions. It's simple math. If you take that 18 300,000 and throw it on MCO, then they exceed 19 their 25 percent. 20 So, you know, at that time, we honestly 21 thought that we were looking at Drexel because of 22 a possible affiliated party threshold. 24640 1 And as far as MCO, that was again a 2 matter that they were negotiating the net worth 3 maintenance agreement. And if they accidentally 4 went above -- accidentally. If they actually 5 exceeded the 25 percent, then MCO would be the 6 holding company. 7 Now, how that affected their net worth 8 maintenance discussions, agreements, I'm not sure 9 because again, it would have been handled in 10 Washington and they would have hopefully informed 11 us. 12 Q. Well, let me put it this way, 13 Mr. Twomey. From your perspective as the 14 supervisory agent at USAT, if you had any thought 15 that this option agreement vested immediate 16 control of those 300,000 shares in MCO, you would 17 have referred that matter to Washington for an 18 opinion, would you not? 19 A. I think so. 20 Q. And you never did so? 21 A. Not that I can recall. 22 Q. And if you had had any reason in 1988 24641 1 to believe that MCO and Federated had passed that 2 25 percent threshold, would you have sent them a 3 demand to contribute to the capital of USAT 4 similar to the demand you sent to UFG? 5 A. Before I did, I would have discussed it 6 with Washington, particularly again Julie 7 Williams' department before I did something like 8 that. 9 Q. And that never happened? 10 A. No. 11 Q. Let me ask you now to take a look at a 12 document that actually has not been admitted yet. 13 It's Exhibit B2209. I'm not sure this was on our 14 pull list; so, I had copies made. 15 Mr. Twomey, B2209 is a memo from you 16 and Ginger Baugh to Jearlene Miller dated 17 May 20th, 1988, correct? 18 A. Yes. 19 MR. EISENHART: Your Honor, I move 20 B2209. 21 MR. RINALDI: No objection, Your Honor. 22 THE COURT: Received. 24642 1 Q. (BY MR. EISENHART) In the first line of 2 that document, the following statement appears: 3 "Mr. Charles Hurwitz is considered the driving 4 force behind United and UFGI." 5 Do you see that? 6 A. Yes. 7 Q. What did you base that information on, 8 or what was the basis for that statement? 9 A. I don't recall anything specific right 10 now, but it was probably our opinion at the time. 11 Q. "Driving force," I assume, is not a 12 particular term of art in the regulatory field. 13 That's just a descriptive term you use? 14 A. It probably just means he was a 15 controlling force. 16 Q. Take a look at another document. This 17 is -- this may be one we just looked at. It's 18 A111 -- it's A11160, which is Tab 1861. 19 MR. RINALDI: Is this on your pull 20 list? 21 MR. EISENHART: I don't know. It's 22 Tab 1861. 24643 1 MR. RINALDI: Do we have a tab number? 2 MR. NICKENS: 1861. 3 MR. RINALDI: Do we have an extra copy? 4 Q. (BY MR. EISENHART) Do you have the 5 document, Mr. Twomey? 6 A. Not yet. 7 Q. Nobody's given it to you yet? Okay. 8 There you are. 9 A. Thank you. 10 MR. EISENHART: Sorry, Your Honor. I 11 don't seem to be as organized as some of my 12 colleagues. 13 Q. (BY MR. EISENHART) The second page of 14 this document -- I'm sorry. On the third page of 15 the document, there appears a reference to 16 Mr. Hurwitz which I believe is highlighted on your 17 copy, is it not? It's in the last sentence. 18 Maybe it's not. 19 A. It's not. But the very last paragraph, 20 "The controlling shareholder of United, through 21 its holding company, is Charles' -- the C is 22 missing, but "Charles Hurwitz." 24644 1 Q. And he's described there as a 2 controlling shareholder; is that correct? 3 A. Yes. 4 Q. Now, what is that description based on? 5 A. I guess just our understanding -- I can 6 only assume it was just our understanding of who 7 Charles Hurwitz was as far as UFG and USAT at the 8 time. 9 Q. He was at this time chairman of UFG, 10 was he not? 11 A. I can't recall. I think he was. 12 Q. Well, were your descriptions of him as 13 controlling shareholder based on the fact that he 14 was the chairman of UFG's board of directors? 15 A. No. 16 Q. Are you familiar, Mr. Twomey, with a 17 procedure for determining whether someone is 18 exercising a controlling influence over an insured 19 depository institution? 20 A. Well, for stock institutions, it would 21 be the amount of stock they own. For a mutual 22 institution, it would be their direct involvement 24645 1 of the institution. 2 Q. Well, let me show you a copy -- this is 3 of a statute which was 12 US Code Section 1467A, 4 which I believe expired in 1989. Now, this is not 5 an exhibit. I don't really propose to mark it as 6 an exhibit. I'll just ask you if you're familiar 7 with this. 8 MR. RINALDI: Expired in 1989? 9 MR. EISENHART: Yes. 10 Q. (BY MR. EISENHART) This deals with the 11 issue of control. And it starts out by saying, 12 "For purposes of this section, a person shall be 13 deemed to have control of" -- then you have to 14 drop down to Section 2D where it picks up -- "a 15 savings association or any other company if the 16 director determines, after reasonable notice and 17 opportunity for hearing, that such person directly 18 or indirectly exercises a controlling influence 19 over the management or policies of such 20 association or other company." 21 Now, were you familiar with this 22 statute, Mr. Twomey? 24646 1 A. I can't recall it directly, but I 2 recall -- if you'll back up to Paragraph A where 3 we were talking about 25 percent and other 4 discussions, generally I recall something 5 regarding this. 6 What's the exact reg? 7 Q. Well, this is actually a statute. 8 A. Okay. Give me the statute then. I'm 9 just wondering. I'm just curious. 10 Q. I'm sorry. I don't understand you. 11 A. I'm just curious if it was also in our 12 insurance regulations for FSLIC. 13 Q. I can't tell you that. I suspect it 14 was. But in any event, let me just see if I can 15 frame the discussion. 16 Part A of this statute contains a 17 reference to the provision that we were referring 18 to during our discussion of the option; that is, 19 the 25 percent threshold, correct? 20 A. Yes. 21 Q. So -- and that says that if you own 22 more than 25 percent or control more than 24647 1 25 percent of the stock of the institution, you 2 become a holding company? 3 A. Right. 4 Q. And then Part B -- I'm sorry -- Part D 5 which we talked about seems to be an alternative 6 way of getting there, which is somebody making a 7 determination after a hearing that you are a 8 controlling influence; is that correct? 9 MR. RINALDI: Your Honor, the only 10 problem I have with this is it's a partial 11 statute, and he's really asking him to opine on a 12 statute. I don't know that he's legally 13 qualified. If he wants to ask him if he recalls 14 the statute or if he had occasion to apply it. 15 But the statute says what the statute says, and I 16 think he's now asking him to give a legal opinion. 17 MR. EISENHART: I'm not really asking 18 him for a legal opinion, Your Honor. I'm just 19 trying to determine if this was something that he 20 had familiarity with during the time he was 21 supervisory agent. They work with a great many 22 statutes and regulations. 24648 1 MR. RINALDI: Perhaps he should tell 2 him what the statute is -- there is not even a 3 statutory cite -- and ask him that question. He 4 can certainly answer. 5 THE COURT: You have the statutory 6 reference there. Right? You gave it earlier. 7 MR. EISENHART: Yes, sir. It's 12 US 8 Code Section 1467A, which I believe expired in 9 1989. 10 THE COURT: All right. The question 11 is: Were you familiar with this? 12 THE WITNESS: I don't particularly 13 recall this statute. I do recall the 25 percent 14 test that's referred to in Paragraph A. And I 15 think that's basically what we were applying at 16 that time. 17 Q. (BY MR. EISENHART) Well, let me ask you 18 this, Mr. Twomey. If, in the course of exercising 19 your duties as supervisory agent, you reached a 20 determination that a person was exercising a 21 controlling influence over the affairs of an 22 institution, even though that person didn't have 24649 1 the 25 percent stock ownership, did you understand 2 that you had the ability to refer that to the Bank 3 Board to see whether a hearing should take place? 4 A. No, I don't recall that. 5 Q. So, you're really not -- you don't have 6 any recollection of this particular statute then? 7 A. Other than the 25 percent test in here, 8 that's basically all I can recall. 9 Q. Well, let me ask you this. I suspect 10 I'll know what the answer is, but you can tell me. 11 Did the Federal Home Loan Bank of 12 Dallas ever make a determination that Mr. Hurwitz 13 was exercising controlling influence within the 14 meaning of this statute such that a hearing ought 15 to take place? 16 A. Well, you're asking three questions. 17 The way I can recall it is the Federal Home Loan 18 Bank of Dallas did think that Charles Hurwitz was 19 the controlling person. And the second part is no 20 and no. 21 Q. So, although you did think he was the 22 controlling person, you never made any 24650 1 recommendation that there be a controlling 2 influence hearing as set forth in this statute? 3 A. I can't recall it. 4 Q. Do you recall that subject ever being 5 considered or discussed? 6 A. No. 7 Q. Were the supervisory decisions that the 8 Federal Home Loan Bank of Dallas made with respect 9 to USAT made on the assumption or with the 10 understanding that Mr. Hurwitz was a controlling 11 shareholder as you have described him? 12 A. At that time, we didn't have him down 13 as exceeding the 25 percent; but we did look at 14 him as a controlling person in that he influenced 15 what happened at USAT and UFG. 16 Q. You actually described him in a memo as 17 a controlling shareholder? 18 A. That and probably controlling person. 19 Q. Uh-huh. And my question to you is: 20 Were those assumptions that underlay the 21 regulatory decisions that were made by the Dallas 22 Bank about USAT? 24651 1 A. They probably had an impact on it. 2 Q. Well, do you recall that such an 3 assumption ever influenced any supervisory 4 decisions made with respect to USAT? 5 A. Well, there probably were some 6 influence on some decisions regarding USAT; but it 7 was generally felt under this, that as far as we 8 were concerned, UFG was the holding company. MCO 9 was trying to become the holding company. There 10 was negotiations going in effect on that. 11 Other than that, we just looked at -- 12 nothing would happen at USAT without Charles 13 Hurwitz at least agreeing to it and that was about 14 the sum of it. 15 Q. And, in fact, you had been asked by I 16 think people in Washington to look very closely as 17 Mr. Hurwitz' position and influence within the 18 institution, did you not? 19 A. There were various questions, and some 20 were referred to in my earlier testimony. 21 Q. And you had scrutinized that very 22 closely, had you not? 24652 1 A. We looked into it and answered the 2 questions that were posed to us. 3 Q. Well, when you looked into it, the 4 information you obtained wasn't just information 5 you passed along. I mean, that stayed in your own 6 memories and in your own files, as well, did it 7 not? 8 A. As was brought up in my earlier 9 testimony, there were several questions asked by 10 different people in Washington; and we responded 11 to those questions and memos were sent back up in 12 response. And that was our understanding of the 13 situation at the time. 14 Q. But you would take that same 15 information, and you would use that in your 16 decision-making process as you made supervisory 17 decisions about the institution, would you not? 18 A. Possibly. 19 Q. Mr. Twomey, I'll ask you to take a look 20 at a document, which is Exhibit B4322. And it's 21 been admitted at Tab 1882. 22 MR. RINALDI: 4322 or -- 24653 1 MR. EISENHART: Yes. 4322. B4322, 2 Tab 18282. I believe it was not. I'm sorry. But 3 it should be in your binders. 4 MR. RINALDI: It should be in our 5 binders? 6 MR. NICKENS: This was a document I 7 asked him about. 8 MR. EISENHART: I believe this was a 9 document Mr. Nickens introduced. 10 MR. RINALDI: Do you have copies? 11 MR. NICKENS: Mine is not in my file 12 so -- 13 MR. RINALDI: Can we describe the 14 document? 15 MR. EISENHART: The document is a 16 memorandum from Michael Patriarca to Thomas Lykos 17 dated September 12th, 1988, subject, Pear IIB 18 package weekly update. 19 MR. RINALDI: Thanks. 20 Q. (BY MR. EISENHART) Do you have the 21 document, Mr. Twomey? 22 A. Yes. 24654 1 Q. You'll see at the bottom of the first 2 page, there is a reference there to conversations 3 that Kathleen McNulty had with you. I think 4 you're referred to as Bill Twomey; but it does 5 appear it was you she was talking to, does it not? 6 A. Well, I had several conversations with 7 Kathleen during that time frame. 8 Q. Well, she says that she talked to the 9 supervisory agent, who I assume is you, and that 10 the conversations disclosed the following. It 11 says, "United's proposed recapitalization cannot 12 include any involvement by Charles Hurwitz, its 13 current controlling shareholder." 14 Do you remember expressing such a view 15 to Ms. McNulty? 16 A. I can't recall it. 17 Q. Well, did you consider in September of 18 1988 Mr. Hurwitz to be the controlling shareholder 19 of United? 20 A. Again, I think for a long period of 21 time, from '86 on, that we considered Mr. Hurwitz 22 as the dominant and controlling person there. 24655 1 Q. So, if you gave advice or made the 2 statement to Ms. McNulty that is attributed to you 3 here, that would have been based on the belief 4 that Mr. Hurwitz was a controlling shareholder of 5 United, correct? 6 A. Again, for the entire period of time, 7 we considered Mr. Hurwitz as the controlling 8 person. 9 Q. Well, at some point, did you as the 10 supervisory agent advise the Bank Board or the 11 people running the Southwest Plan that MAXXAM 12 should not be an eligible acquirer under the 13 Southwest Plan? 14 A. I can't recall in writing that we 15 ever -- I think all the recommendation memos, up 16 to and including this point, had them as an 17 eligible party for the Southwest Plan. 18 Q. That's right. And I'm asking you: Did 19 there come a time when you advised either the 20 Federal Home Loan Bank Board or the people 21 responsible for the Southwest Plan that MAXXAM 22 should not be an eligible acquirer? 24656 1 A. There were several discussions on 2 December 30th. Again, most -- I don't know -- 3 mostly oral conference calls. And that view might 4 have been expressed or probably was expressed at 5 that time, but I -- I just don't recall any 6 specifics right now. But as far as up to that 7 point, up to December 30th, I don't think -- I 8 cannot recall that we sent something to the people 9 controlling the Southwest Plan saying that MAXXAM 10 was ineligible as an acquirer. 11 Q. So, you don't believe that you had 12 communicated that view in any fashion prior to 13 December 30th? Is that what you're telling us? 14 A. All I can say is I don't recall it from 15 my memory. Mr. Patriarca was negotiating with 16 MAXXAM beyond that, going up until early December. 17 Q. Well, let me ask the question to you 18 this way, Mr. Twomey. Would it be your 19 recollection that up until December 30th, based on 20 information flowing from the Federal Home Loan 21 Bank of Dallas to the Bank Board, that 22 Mr. Patriarca would have been of the view that 24657 1 Dallas approved MAXXAM as an eligible acquirer? 2 A. I don't think we passed on MAXXAM as an 3 acquirer as much as USAT, UFG could be part of the 4 Southwest Plan. 5 Q. Well, you had -- sorry. Go ahead. 6 A. I don't recall an opinion or memo 7 regarding MAXXAM itself that way. 8 Q. Well, I'm not limiting it to a writing, 9 Mr. Twomey. I'm asking if that view was expressed 10 in any way prior to December 30, 1988. 11 A. All I can recall is prior to 12 December 30th, the best I can recall right now is 13 no. And if anything was said about MAXXAM or 14 Mr. Hurwitz, it would have been sometime on 15 December 30th in response to questions that came 16 from the Bank Board directly. 17 Q. Let me see if I understand then. Prior 18 to December 30th, the view that you had expressed 19 to the Bank Board was that MAXXAM could be an 20 eligible acquirer but that Mr. Hurwitz shouldn't 21 be involved; is that correct? 22 A. No, I didn't say that. What I said is 24658 1 the memorandums I can remember regarding the 2 Southwest Plan regarded the -- regarded USAT as -- 3 they could participate in the Southwest Plan. I 4 don't think we had -- I don't recall if we had a 5 negative opinion on that, but I think they were 6 generally positive all the way up through. 7 I don't believe we passed on MAXXAM. I 8 don't think anybody directed us or asked us to 9 give them our views on MAXXAM in 1988. The only 10 time MAXXAM or Mr. Hurwitz' name might have come 11 up as far as potential acquirers of the USAT 12 package would have been on December 30th. 13 Q. Well -- 14 A. As best I can recall. 15 Q. Well, when that subject did come up on 16 December 30th, though, you expressed your views, 17 correct? 18 A. I don't recall exactly what they were, 19 but I did express my views. 20 Q. And those views were that MAXXAM should 21 not be an eligible acquirer; is that correct? 22 A. Again, I don't recall what I might have 24659 1 said on December 30th in those conference calls. 2 I don't recall pointedly saying MAXXAM was not -- 3 should not be an acquirer. We did talk about 4 USAT, UFG, and Mr. Hurwitz. 5 Q. Well, let's put it this way, 6 Mr. Twomey. To the extent there were references 7 to MAXXAM in those conference calls, would your 8 references be fairly characterized as negative? 9 A. Again, regarding MAXXAM, I can't recall 10 what my comments might have been. 11 Q. Well, how about your comments with 12 respect to Mr. Hurwitz? Would you characterize 13 those as negative? 14 A. As best I can recall, yes. 15 Q. And that was based on all of the 16 information that you had developed by looking at 17 him as supervisory agent? 18 A. Based on the information I had 19 available to me as the supervisory agent, yes. 20 Q. That was based on the information that 21 you had developed as a result of these inquiries 22 from Washington? 24660 1 A. No. It was primarily based on the 2 information we developed from the examination 3 process. 4 Q. And you considered that to be hard 5 data, objective data? 6 A. I considered that to be the information 7 I had at hand. 8 Q. Well, you wouldn't have -- you wouldn't 9 have passed that information along or acted on it 10 if you regarded it to be frivolous, would you? 11 A. No. 12 Q. You must have thought it had some 13 substance to it? 14 A. Yes, the exam did have substance to it. 15 Q. So, based on the information you had 16 developed then which you believed to be 17 substantial information, you expressed a negative 18 view of Mr. Hurwitz on December 30, 1988; is that 19 correct? 20 A. As best I can recall, yes. 21 MR. RINALDI: What is our next 22 document? 24661 1 MR. EISENHART: Our next document is 2 B2668, and it's at Tab 1788. 3 MR. RINALDI: Is this on your list? 4 MR. EISENHART: It may not have been, 5 and I'm sorry. But this will be the last one, I 6 think, that's not on the list. 7 THE COURT: We'll take a short recess. 8 9 (Whereupon, a short break was taken 10 from 11:11 a.m. to 11:35 a.m.) 11 12 THE COURT: Be seated, please. Back on 13 the record. 14 Mr. Eisenhart, you may continue with 15 your cross-examination. 16 MR. EISENHART: Thank you, Your Honor. 17 Q. (BY MR. EISENHART) Mr. Twomey, you've 18 had placed in front of you Exhibit B2668, which is 19 in evidence at Tab 1788. This is a memo by a 20 gentleman named Michael Solomon describing some of 21 the events that took place on December 30, 1988. 22 Have you had a chance to read the memo? 24662 1 A. I've looked through it, yes. 2 Q. Have you ever read this before? 3 A. No. 4 Q. Now, turn to the second page of the 5 memo. About the middle of the page, Mr. Solomon 6 makes reference to a recess taken in the 7 proceedings and some conversations during that 8 recess with George Barclay, Neil Twomey, and Bob 9 Rick. 10 Do you see that? 11 A. Yes. 12 Q. And he describes you as "all of those 13 involved in the supervisory determinations of 14 qualifications of bidders in this case." 15 Do you see that description? 16 A. Yes. 17 Q. I thought you had told me earlier you 18 don't remember having been involved in determining 19 the qualifications of bidders. 20 A. I think what I said was the only thing 21 in writing that I can recall is the memorandums 22 regarding USAT participating in the Southwest 24663 1 Plan. And I think I told you that there was a 2 conversation, not at the board meeting but a 3 conversation regarding the bids at that time. 4 There were two bids, the Ranieri bid and the 5 Hurwitz bid. 6 Q. But this was a conversation that took 7 place on December 30th? 8 A. On December 30th. 9 Q. During a recess in the board meeting? 10 A. During a recess in the board meeting. 11 Q. And that's the conversation that's 12 referred to in this paragraph? 13 A. I assume so. 14 Q. Well, except he describes the three of 15 you as "those who were involved in the supervisory 16 determinations of qualifications of bidders in 17 this case." 18 A. Uh-huh, yes. 19 Q. It sounds to me as though he's 20 describing a prior involvement. 21 A. Again, this is his memo, not mine. 22 Q. Well, it goes on to say, "Their goal 24664 1 was to ascertain if the disqualification was 2 reasonable." I believe the disqualification he's 3 talking to here is the disqualification of MAXXAM. 4 Do you recall having had discussions 5 during the recess about whether MAXXAM'S 6 disqualification was reasonable? 7 A. What I recall during a recess of the 8 board meeting is discussions regarding USAT and 9 UFG and what we had found in our examination 10 process regarding those two entities. And that's 11 just generally all I can recall about that 12 conversation. 13 Q. Do you recall a concern being expressed 14 by the Bank Board people that MAXXAM had been 15 treated as a qualified bidder but now needed to be 16 disqualified in some fashion? 17 A. I don't remember the exact language. 18 There was a concern raised at the board meeting 19 regarding Hurwitz/MAXXAM. I think it was Stuart 20 Root, I'm not sure, asked to have a discussion 21 with the supervisory staff. And that's what was a 22 phone call not on the board record. It was 24665 1 outside the board meeting. 2 Q. Right. And the concern was "We've got 3 this bidder whose bid is $100 million more 4 favorable to the government and we've got to come 5 up with a way to disqualify it." 6 That was the concern, wasn't it? 7 A. No. The concern, as best I can 8 remember it, is that we had a concern regarding 9 the way USAT and UFG had been run. And we looked 10 at Mr. Hurwitz as being the controlling party. 11 And that was the concern that was put to me. 12 Q. Well, was it clear to you that the Bank 13 Board people wanted information that would be 14 derogatory to Mr. Hurwitz and derogatory to MAXXAM 15 so that they could disqualify them as bidders? 16 A. All I can recall is that Mr. Barclay 17 asked me to review the findings of the past 18 examinations and the current examination with the 19 Washington staff, and I don't know who on the 20 Washington staff was on the other side. I can't 21 recall. 22 Q. So, you provided information then to 24666 1 the Bank Board people during this recess in the 2 meeting? Is that what you're telling me? 3 A. Yes. 4 Q. This was information about Mr. Hurwitz 5 and information about MAXXAM? 6 MR. RINALDI: I think -- 7 A. This was more information on USAT and 8 UFG, examination results, problems and 9 deficiencies noted in different examinations 10 primarily. 11 Q. (BY MR. EISENHART) Well, Mr. Solomon 12 goes on to say in his memo after recounting this 13 conversation, "I pointed out the continuing Getty 14 peril -- and Getty is simply a reference to a 15 legal case. "I.e., it appeared that we had the 16 same information all along." 17 Do you recall the Bank Board people 18 saying to you in this conversation that "you're 19 not telling us anything new? This is the same 20 information you've been telling us all along"? 21 A. No. 22 Q. That concern wasn't expressed to you? 24667 1 A. I can't recall -- I cannot recall 2 specifically everything that was in the 3 conversation. I only have a general recollection 4 of the event. 5 Q. And is it still your recollection, 6 Mr. Twomey, that you had not provided in advance 7 of this meeting any material aimed toward the 8 disqualification of MAXXAM? 9 A. As best as I recall, I cannot. If 10 there is, I just don't recall it. 11 Q. Well, turn back to the first page of 12 Mr. Salomon's memo. The next-to-last paragraph on 13 that page, he talks about something called the 14 R memorandum. 15 Do you know what that is? 16 A. Let me get the right page. I'm sorry. 17 The first page? 18 Q. First page, next-to-the-last paragraph. 19 A. I see it. (Witness reviews the 20 document.) 21 Q. Do you know what the R memorandum is? 22 A. No, I don't recall it. 24668 1 Q. He says that "In the final R memorandum 2 that went into the board package, everything Lykos 3 wanted about Hurwitz was contained if it was 4 verifiable and not merely rhetorical." 5 Do you see that? 6 A. Yes. 7 Q. Do you have any idea what the 8 information Mr. Lykos wanted about Mr. Hurwitz 9 refers to? 10 A. No. 11 Q. Did you provide information about 12 Mr. Hurwitz to Mr. Lykos in advance of 13 December 30, 1988? 14 A. I can't recall anything specifically. 15 Q. Well, how about generally? 16 A. Other than the memorandums that were 17 going out regarding USAT/UFG, I can't recall 18 anything else. There may have been inquiries. I 19 just don't recall them. 20 Q. Well, where would Mr. Lykos have been 21 getting information about Mr. Hurwitz and his 22 dealings at USAT if not from supervision at the 24669 1 Federal Home Loan Bank of Dallas? 2 A. He should primarily have been getting 3 it from us, but I don't know where his other 4 sources might have been. 5 Q. The memo says "Everything Lykos wanted 6 about Hurwitz was contained if it was verifiable 7 and not merely rhetorical." He goes on to observe 8 then, "Needless to say, that left little." 9 Was it a concern ever expressed to you 10 by the Southwest Plan people that the information 11 you were giving them was not verifiable but was 12 only rhetorical? 13 A. I don't recall that. 14 Q. The information that you gave the 15 Southwest Plan people on December 30, 1988, 16 concerning Mr. Hurwitz, was there anything new in 17 there, anything that you had not passed along to 18 them previously? 19 A. Well, my conversation on December 30th 20 I thought was to the -- primarily the general 21 counsel staff and maybe some FSLIC people. I 22 don't know if you'd call them Southwest Plan 24670 1 people. And what I believe we discussed was the 2 examination results, the best I can recall. 3 Q. And the information that you gave to 4 the general counsel people and the FSLIC people on 5 December 30, 1988, was the same information you 6 had been passing along from supervision and from 7 examination from months prior to that, wasn't it? 8 MR. RINALDI: Your Honor, can we get a 9 clarification as to which information he's talking 10 about? Because the witness originally said the 11 information he gave was exam information. And 12 then in one of the questions recently, 13 Mr. Eisenhart transformed that to say information 14 about Mr. Hurwitz. And what I don't understand is 15 are we talking about exam information or 16 information regarding Mr. Hurwitz? 17 MR. EISENHART: I'm talking about the 18 information he passed along during this sidebar 19 conference during the recess of the Bank Board 20 meeting on December 30, 1988, which he has 21 testified is the only information he gave to the 22 Southwest Plan people. 24671 1 MR. RINALDI: And that was information 2 he testified was information regarding the exam 3 results, I thought. But perhaps we can clarify it 4 for the record. 5 MR. EISENHART: Well, I'll repeat the 6 question, Your Honor, and maybe if I phrase it 7 differently, I'll satisfy Mr. Rinaldi's objection. 8 Q. (BY MR. EISENHART) Mr. Twomey, let's 9 focus in now on the conversation that you had with 10 the Southwest Plan people -- I think you've 11 described them as FSLIC people and Office of 12 General Counsel people -- during the recess of the 13 proceeding on December 30, 1988. 14 A. Yes. 15 Q. Are we focused? 16 A. Yes. 17 Q. Was the information that you gave them 18 in that conversation any different than the 19 information that you had been passing along 20 derived from your supervisory experience and from 21 the examinations? 22 A. The best I can recall, the information 24672 1 was primarily regarding the '86, the '87, and the 2 '88 exams. 3 Q. And this was information that you had 4 had for months or years and there was nothing new 5 in it. Right? 6 A. Well, with the exception of the '88 7 exam, which was still ongoing. I had the 8 information on the '86 and the '87 for some time. 9 Q. And that was information that you were 10 routinely passing along to these people as they 11 asked you for information, correct? 12 A. Yes. 13 Q. I want to move to another area, 14 Mr. Twomey, and I want to talk to you a little bit 15 about high-yield bonds. 16 I'll ask you first to take a look at a 17 document which is in evidence. It's B4001, 18 Tab 887. Mr. Twomey, this is a memo to the file 19 from Ginger Baugh dated June 2, 1986. And you saw 20 this earlier in your testimony, did you not? 21 A. Yes. 22 Q. And there is a statement attributed to 24673 1 you under the heading "issues discussed." And 2 you're talking about the purchase of high-yield 3 bonds, and the statement attributed to you is that 4 "They are relatively safe investments now. 5 However, if and when rates begin to go back up, 6 the same investments will be risky." 7 Do you see that? 8 A. Yes. 9 Q. Now, was that your view of the 10 high-yield bond investments in June of 1986? 11 A. As best as I can recall. 12 Q. And why did you think that they would 13 become risky if rates went up? 14 A. Well, at that period of time, rates had 15 had a dramatic falling off. And most of the 16 high-yield bonds had yields 12, 13, 14 percent as 17 best I can remember. Because they were relatively 18 high coupon, there was a good chance that the 19 issuers of those bonds would probably redeem them 20 and issue them at a different rate or simply 21 redeem them and issue another type of debt. 22 So, there is a strong possibility with 24674 1 lower rates, A, the company that is issuing them 2 should be stronger and it was just an overall view 3 that there was lesser chance of a default at that 4 time. 5 Q. I'm not sure I follow you. The 6 statement attributed to you here is "If and when 7 rates begin to go back up, the investments will be 8 risky." 9 A. Again, as I started off, I said rates 10 had dropped through that time, June of 1986. And 11 if rates started to go back up to the double 12 digits, the 10 percent, 11 and 12 percent range, 13 then there was probably more of a chance that you 14 might have a default with these type of 15 securities. Lower rates, they are more secure. 16 Higher rates, there's more chance and more risk. 17 Q. Well, a moment ago, you described the 18 risk as the risk of bonds being redeemed. I'm 19 wondering why you would view that as a risk when 20 rates go up. 21 A. When rates go down, there is a chance 22 that they will be redeemed, but that's not a risk. 24675 1 That's a benefit. 2 Q. Sure. Because when a bond's redeemed, 3 you get your money back? 4 A. You get your principal and you get your 5 interest up to that point. 6 Q. And you have the opportunity to 7 reinvest that money? 8 A. Right. I don't believe I said that was 9 a risk. I said as rates have come down, it's 10 easier for the companies that issued them to, you 11 know, borrow money at a lower rate and, therefore, 12 their operating expenses are low, so forth and so 13 on. They are healthier. Okay? 14 If rates start climbing up, market 15 rates start going up to the double digits which 16 they were shortly before that time, then they are 17 probably looked at as probably more risky because 18 there is more chance of a default. 19 Q. Let me ask you this, Mr. Twomey. I 20 think you said earlier in your testimony that USAT 21 was the first institution that you had had 22 significant experience with that had a high-yield 24676 1 bond portfolio; is that correct? 2 A. I don't recall that. I definitely 3 recall I said the most material investment in junk 4 bonds. 5 Q. Okay. So, they had the largest 6 portfolio you had to deal with up until that 7 point. 8 Is that what you're saying? 9 A. Probably. 10 Q. How much did you know about high-yield 11 bonds? Had you studied them? 12 A. I had looked at the basics behind 13 high-yield bonds because I was asked to, after the 14 Garn-St. Germain bill was passed in 1982, because 15 various institutions around the country started 16 making investments into it. And I was on one 17 particular exam where I monitored the high-yield 18 bonds of one particular institution on a weekly 19 basis in New England while I was still up there. 20 And it was also a subject that came up during 21 training sessions that I conducted during '83, 22 '84. 24677 1 Q. Apart from your experience with them in 2 the field, had you read any books or papers that 3 had been written about high-yield bonds? 4 A. I probably reviewed certain documents 5 at that time, but I'd be hard-pressed to remember 6 anything now. 7 Q. Well, would you describe yourself as 8 relatively sophisticated on the subject of 9 high-yield bonds? 10 A. No. 11 Q. I'm going to ask you to take a look at 12 a document which is A14063, Tab 1493. 13 MR. RINALDI: Could we have that number 14 again? 15 MR. EISENHART: Sure. A14063, 16 Tab 1493. 17 MR. RINALDI: And what's the tab? 18 MR. EISENHART: 1493. 19 Q. (BY MR. EISENHART) This document, 20 Mr. Twomey, is a letter that Roy Green wrote to 21 Mr. Jenard Gross on May 11, 1987. And I see at 22 the bottom where it has the initials under the 24678 1 signature line. It has RGG: GB. 2 Would that indicate that Ginger Baugh 3 played some role in the preparation of this 4 letter? 5 A. Yes. 6 Q. And, indeed, attached to it is a memo 7 also from you to Roy Green. So, would you take it 8 that both you and Ginger Baugh had some input into 9 this? 10 A. Yes. 11 Q. That memo refers to increase -- I'm 12 sorry. The cover letter, in the next-to-last 13 paragraph, refers to "increasing involvement in 14 high-risk investments." 15 Do you see that? 16 A. Yes. 17 Q. Does that refer to the high-yield 18 bonds? 19 A. I'm not going to guess. 20 Q. Well, did you view high-yield bonds in 21 May of 1987 as high-risk investments? 22 A. Well, junk bonds as they were called at 24679 1 that time do have more risk than a traditional 2 investment into a single-family -- a loan on a 3 single-family residence. That's why -- that's why 4 the underwriting of the investment is very 5 important, because you rely solely on the 6 corporation issuing the debt for repayment. 7 Q. Would it have been your view in May of 8 1987 that a high-yield bond was a riskier 9 investment than a single-family home loan in 10 Houston? 11 A. Even if they were both properly 12 underwritten, single-family loans should have been 13 safer. 14 Q. Now, did your view of high-yield bonds 15 as high-risk investments, was that a view that you 16 would describe as an institutional view at the 17 Federal Home Loan Bank of Dallas? 18 Do you think that was widely shared? 19 A. Well, I believe investments in junk 20 bonds was looked at as a higher-risk investment, 21 yes. 22 Q. Take a look at A14069, which is at 24680 1 Tab 1496. 2 MR. RINALDI: Tab 146? 3 MR. EISENHART: No. 1496. 4 MR. RINALDI: Oh, 1496. 5 Q. (BY MR. EISENHART) This is an interim 6 exam report by Vivian Carlton to you dated 7 January 15th, 1988, correct? 8 A. Yes. 9 Q. And on Page 5 of that exhibit she talks 10 about high-yield corporate bonds, does she not? 11 A. Yes. 12 Q. Those are what you just referred to as 13 junk bonds? 14 A. Yes. 15 Q. And in the last paragraph, she says, 16 "As shown above, the association's investment 17 securities represent a volatile and risky 18 practice." 19 Did you consider investing in 20 high-yield bonds in January '88 to be a volatile 21 and risky practice? 22 A. There was more risk with junk bonds 24681 1 than other traditional investments that an S&L 2 could make. But again, I looked at it if they had 3 the proper person running the portfolio who was 4 following the correct procedures and correctly 5 credit underwriting, the purchase of securities, 6 that they -- there was risk, but there was 7 acceptable risk in making the investment. 8 Q. And, in fact, the rate of return on the 9 bond was designed in part to compensate you for 10 that extra risk, wasn't it? 11 A. Yes. 12 Q. You'd take a higher risk, you'd get a 13 higher reward? 14 A. Yes. 15 MR. RINALDI: Mister -- the examiner 16 has failed to read the entire quote there, and I 17 think that probably puts the issue in context. It 18 makes reference to a rather large loss in the bond 19 portfolio. And I think in the past, we've allowed 20 the full paragraph to be read in rather than 21 selective portions. 22 MR. EISENHART: I don't mind doing 24682 1 that, Your Honor, if Mr. Rinaldi is invoking what 2 we call optional completion, I think. 3 It says, "Moreover, the recent 4 October 1987 stock market crash resulted in 5 substantial realized as well as unrealized losses. 6 Although the adverse impact of these losses have 7 not been fully measured to date, the association's 8 FHLBB monthly report for October 1987 disclosed a 9 monthly net income of $50,720,000." 10 Q. (BY MR. EISENHART) Is that the entire 11 paragraph, Mr. Twomey? 12 A. Yes. 13 Q. Now, in fact, high-yield bonds did take 14 a hit in the stock market crash of 1987, did they 15 not? 16 A. Yes. 17 Q. Ms. Carlton's reference there to a 18 negative net income of $50,720,000 doesn't refer 19 just to the high-yield bond portfolio, though, 20 does it? 21 A. Well, she has a valuation as of 22 November 30th, 1987, above that where she is 24683 1 showing -- if you look at book value versus market 2 value, she's showing a 55-million-dollar loss at 3 that time. 4 Q. Unrealized? 5 A. Unrealized. 6 Q. The negative net income of $50 million 7 would not refer simply to the high-yield bond 8 portfolio, though. 9 That's the institution as a whole, 10 isn't it? 11 A. I'm not sure, but I think generally, 12 what I can recall from that time, there was a -- 13 due to the stock market crash, there was at least 14 a 50-million-dollar negative impact on USAT as a 15 whole. 16 Q. Right. Now, Ms. Carlton is actually 17 writing this memo on -- in mid-January 1988, is 18 she not? 19 A. Yes. 20 Q. And, in fact, do you recall that 21 investments generally rebounded fairly quickly 22 after the October '87 market crash? 24684 1 A. A substantial amount of the equity 2 markets I know came back during December and 3 January -- December 1987 and January 1988. 4 I can't really recall about the bond 5 market, but I imagine they had a similar rebound. 6 Q. So, when she mentions there that there 7 were substantial unrealized market losses as a 8 result of the October crash, she hasn't addressed 9 the issue of how much of that loss has already 10 disappeared? 11 A. No. But she's doing her exam as of 12 November 1987, and she uses those dates to get a 13 picture of what the institution looked at at the 14 time of her exam. 15 Q. Well, take a look at A14073, which is 16 at Tab 1502. 17 Now, this is the complete report of the 18 1987 exam, is it not? 19 A. Yes. 20 Q. Take a look at Page 21 of that report. 21 Do you have Page 21? 22 A. Yes. 24685 1 Q. And at the top of the page in the first 2 full paragraph, she has that same sentence. "The 3 association's investment securities represent -- 4 represents a volatile and risky practice." 5 Do you see that? 6 A. Yes. 7 Q. And she again talks about the '87 8 market crash and the unrealized losses. The last 9 sentence, though, or last two sentences of the 10 paragraph, she says, "The association's junk bond 11 portfolio at November 30, 1987, had unrealized 12 losses totaling 55,495,000. However, this loss 13 has declined to 21,410,000 at March 1988." 14 Do you see that? 15 A. Yes. 16 Q. So, by March of 1988, the high-yield 17 bond market had already rebounded to the point of 18 more than 50 percent of the losses in the 19 October 87 crash had disappeared. 20 Is that what she's saying? 21 A. Yes. 22 Q. And I guess I go back to my earlier 24686 1 question. 2 Does this view or description of the 3 high-yield bonds as a volatile and risky practice, 4 is that something that was institutional within 5 the Federal Home Loan Bank of Dallas? Is that 6 what people were told to say about them? 7 A. Not that I recall. 8 Q. Now, did the Federal Home Loan Bank 9 Board itself from time to time study the riskiness 10 of certain types of investments? 11 A. Probably so. 12 Q. In fact, I think you testified, didn't 13 you, that I think in 1985, you were in Washington 14 and you did some special project for Chairman Gray 15 having to do with the riskiness of certain types 16 of investments? 17 A. I think it was in my deposition, yes. 18 Q. And those studies were done from time 19 to time? 20 A. Well, I worked on that study. I'm not 21 sure what other studies were done. 22 Q. My notes talk about your study being an 24687 1 alternative way to assess FSLIC insurance premiums 2 based on the risks presented by an institution due 3 to its makeup of assets and liabilities. 4 Is that consistent with your 5 recollection? 6 A. Yes. 7 Q. And would you agree with me, 8 Mr. Twomey, that when you talk about risk, any 9 real assessment of risk always has to be an 10 assessment of relative risk; that is, the 11 riskiness of this investment versus the riskiness 12 of alternative investments? 13 A. Yes. 14 Q. And while I'm not so sure that you'll 15 agree based on your earlier testimony, if you were 16 to look at the risk, for example, of single-family 17 home loans in Houston, say, in the '87-'88 time 18 period, would you agree that they had become 19 relatively more risky as compared to what they 20 were in earlier years? 21 A. You've got too many "depends." It 22 depends on what time the loan was made, what the 24688 1 rate was, what the relative loan-to-value ratio 2 might be, namely the value of the home versus the 3 amount of the loan. 4 Q. Well, take a look at a document -- it's 5 Exhibit A1418, and it's in evidence at Tab 349. 6 These are minutes of the investment committee of 7 UFG and USAT dated November 19, 1986. I'd like 8 you to turn to the eighth page of the exhibit. 9 It's a newspaper article. You can see in the 10 lower right-hand corner the stamp US3010337. 11 Do you see what I refer to? 12 A. Yes. 13 Q. Okay. The article is entitled "FHLBB: 14 Junk bonds no problem to thrifts." And it refers 15 to a report by Robert Sahadi, the director of the 16 Office of Policy and Economic Research. 17 Are you familiar with that report? 18 A. No. 19 Q. Do you recall any discussion of such a 20 report in or about November 1986? 21 A. No. 22 Q. Well, this article that's attached to 24689 1 the investment committee minutes which, of course, 2 is just a news summary of the report, starts by 3 saying "Junk bond holdings are no more dangerous 4 to thrift institutions than consumer or credit 5 card loans, an internal Federal Home Loan Bank 6 Board study has concluded." 7 Would that have been your view of 8 high-yield bonds in November 1986? 9 A. Not that I can recall. 10 Q. So, you would have thought that they 11 were riskier than alternative investments such as 12 consumer or credit card loans? 13 A. Again, it has to depend on the credit 14 underwriting. If you had credit card 15 receivables -- I had one thrift that had a 16 tremendous amount of those, and there was hardly 17 ever a default and it was because of the dual 18 makeup of the customer base. 19 On consumer lending, I just don't 20 recall. 21 Q. Okay. Well, take a look at 22 Exhibit B3819, which is in evidence at Tab 590. 24690 1 B3819 is a memo from Mr. Sahadi to Chairman Edward 2 Gray, member Donald Hovde, and senior executive 3 staff of the Federal Home Loan Bank Board. And 4 it's dated October 21, 1986. And I believe this 5 constitutes, in fact, the report that was 6 referenced in that news article. 7 Have you ever seen this before? 8 A. Not that I recall. 9 Q. The report states on the first page, 10 "The best statistical evidence says that 11 non-takeover junk bonds when broadly diversified 12 and actively managed significantly outperform 13 comparable portfolios of treasury issues even 14 after taking defaults into consideration." 15 Was that consistent with your views of 16 high-yield bonds in October 1986? 17 A. Well, I know the junk bonds are paying 18 a lot more than treasuries. And if you did the 19 proper credit underwriting, you should mitigate 20 the default risk. Again, it depends on your 21 policy and procedures at the institution. 22 But generally, a portfolio of junk 24691 1 bonds would have a higher yield than a portfolio 2 of just U.S. Treasuries, even accounting for some 3 default risk. 4 Q. Well, would you agree with me that the 5 author of this report does not seem to be 6 describing investing in high-yield bonds as a 7 volatile and risky practice? 8 A. Again, I don't recall seeing this 9 report. But the general take of things, he's 10 looking at junk bonds very positively. 11 Q. Actually, if you'll turn to 14, Page 14 12 of the report -- 13 MR. RINALDI: What was the last page 14 you were on? 15 MR. EISENHART: I was on Page 1 before. 16 I'm now on Page 14. 17 Q. (BY MR. EISENHART) He says, "Limiting 18 an investment that has no sufficient data to 19 support the proposition that it poses excessive 20 economic risks and threatens the safety and 21 soundness of insured institutions may raise policy 22 implications and potential legal difficulties." 24692 1 Would you agree with that? 2 A. Again, I don't know the purpose, why he 3 prepared the memo. So, I'd only be guessing. At 4 that time, we had certain regulations that did 5 allow investments in different securities. So, I 6 don't want to guess what he might be referring to. 7 Q. Well, would you agree with me, 8 Mr. Twomey, that the conclusion that the author of 9 this report is reaching is that there is nothing 10 about high-yield bonds in and of themselves which 11 makes them excessively risky? 12 A. I mean, the tone of his report seems to 13 be pro junk bonds; but I haven't read this report 14 in detail and I may disagree with him on certain 15 areas. I just don't know. 16 Q. Well, if he were to conclude in this 17 report that it was possible for an association to 18 manage a high-yield bond portfolio, paying 19 appropriate attention to credit risk, 20 underwriting, and diversity, and have that 21 portfolio be no more risky than other types of 22 assets, would you agree with that conclusion? 24693 1 A. I think generally, there is -- a junk 2 bond portfolio could outperform as far as 3 return -- again, even U.S. Treasuries. However, 4 there is a risk of them in a very short time 5 reacting negatively to some change in markets, 6 some change in interest rates. And to use your 7 own example earlier where you showed that in the 8 stock market crash of '87, as of November 30th, 9 the junk bond portfolio at United was negative to 10 market by 55 million, I believe. And then as 11 interest rates rebounded and as the market came 12 back, I think you showed as of March -- sometime 13 in 1988 -- that had significantly improved to 14 only, like, a 21-million-dollar market loss. But, 15 you know, it just shows the volatility of an 16 investment like that. 17 Q. In fact, wasn't the perception in the 18 1986-'87 time period that high-yield bonds were 19 risky because there was a great likelihood of 20 default? That's why they called them junk bonds? 21 A. Well, they are called junk bonds 22 because of their poor ratings. And it's a term 24694 1 that was really applied much earlier on than the 2 Milken/Drexel corporate takeover junk bond era 3 started. It was a tag always assigned to 4 lesser-quality corporate securities, as best as I 5 can recall. And it stayed with the junk bonds 6 when they became so prevalent during the 1980s. 7 Q. But, in fact, if you looked at a 8 typical high-yield bond portfolio in 1986 and '87, 9 these would hardly be junk companies by and large, 10 would they? 11 A. No. Many of the best-known companies 12 in the United States because of corporate 13 takeovers and other reasons had issued so-called 14 junk bonds. Again, junk bonds are nothing more 15 than a subordinated business loan. It's the 16 amount of money unsecured that the company can 17 raise on the market. But if something happens to 18 that company, it's the first to suffer normally. 19 Q. Well -- and if you were an institution 20 that was operating in an economic environment 21 where there were very few opportunities to make 22 good business loans, might not high-yield bonds be 24695 1 a reasonable alternative for you to consider? 2 A. Junk bonds are -- at that time, was one 3 sort of investment that you might want to make. 4 You may also decide that instead of continuing to 5 make loans, invest in corporate securities, you 6 may just want to get out of that market and shrink 7 down. It's basically up to the board of directors 8 and what they think is a proper business plan. 9 Q. But my question to you was: If you 10 were operating in an economic environment in a 11 part of the country where it was very difficult to 12 make good, quality commercial loans, high-yield 13 bonds might be a reasonable alternative for such 14 an institution to consider? 15 A. Well, junk bonds are always an option. 16 But it also depends on having the proper staff and 17 the proper systems to do the credit underwriting 18 on the purchases because you just don't call up 19 Drexel and buy $100 million in junk on their word 20 alone. 21 Q. Would you turn to Page 9 of 22 Mr. Sahadi's report. He refers at the bottom of 24696 1 that page and the top of Page 10 to a recent study 2 on junk bonds that appeared in The Wall Street 3 Journal. And it addressed the issue of default 4 rates. He reports there that "The 3.4 percent 5 default rate found for these bonds is much less 6 than the interest rate premiums that these bonds 7 enjoy over gilt-edge issues." 8 Do you see that? 9 A. Yes. 10 Q. Was that consistent with your views at 11 the time? 12 A. I don't recall what my views at the 13 time were, but -- 14 Q. That would suggest, would it not, that 15 the default issue or the default fear associated 16 with these bonds might have been somewhat 17 overstated? 18 A. Well, it would basically refer back to 19 what I said before. Interest rates had 20 significantly declined from '82 to 1986 and '87. 21 And the more the decline in the interest rates, 22 the better it was for the earlier issued junk 24697 1 bonds that had anywhere -- coupons from 12, 13, 2 14 percent. 3 Q. In fact, the study goes on to say 4 "Somewhat surprisingly, Drexel Burnham has 5 underwritten over half the junk bonds in this 6 period and the default on these issues is only 7 1.9 percent." 8 That would suggest, would it not, that 9 Drexel's issues were of a somewhat higher quality 10 than the market as a whole? 11 A. Not to me. 12 Q. So, that would not have been consistent 13 with your views? You would have been surprised to 14 learn that the Drexel issues had a lower default 15 rate? 16 A. I'd be surprised if it wasn't lower. 17 Q. So, the fact that this study found 18 Drexel to have a lower default rate would not have 19 been a surprise to you? 20 A. Wouldn't surprise me anything Drexel 21 said. 22 Q. Well, do you attribute that comment as 24698 1 this information comes from Drexel? 2 A. I think Drexel managed its junk bond 3 portfolio and its market. I just viewed Drexel as 4 the maker of the market at the time. 5 Q. Well, would you have found it 6 surprising if independent statistics showed that 7 Drexel bonds had a lower default rate than the 8 market as a whole? 9 A. Well, I said I don't -- I'm not 10 surprised at anything Drexel said or independent 11 of Drexel regarding its portfolio of junk bonds. 12 Q. Well, assuming that those statistics 13 are accurate, Mr. Twomey, that the Drexel bonds 14 had a lower default rate than the market as a 15 whole, would you agree with me that if a portfolio 16 manager were deliberately avoiding Drexel issues 17 in his portfolio, he would have an excessively 18 risky portfolio? 19 A. Again, most of the institutions I had 20 that we were supervising that had junk bonds were 21 dealing with Drexel as the primary conduit for 22 them to acquire junk bonds. And most of my 24699 1 experience was, as I saw it, that Drexel was the 2 primary mover of the junk bonds at that time. 3 Q. Well, would you -- if those statistics 4 are right and if the Drexel junk bonds had lower 5 default rates, would you believe it would be a 6 safe and sound practice for a portfolio manager to 7 deliberately avoid Drexel issues? 8 A. As if you were making a single-family 9 loan, when you're purchasing a junk bond issue, 10 you have to do some credit underwriting. And if 11 it comes from Salomon Brothers or Merrill-Lynch or 12 somebody else or Drexel, you have to independently 13 look at that issue, look at the strengths and 14 weaknesses of the company, and evaluate your risk. 15 And that's basically what you should do on any 16 purchase of junk bonds. 17 Now, whether they come from Drexel or 18 somebody else, I don't have an opinion. 19 Q. I'm going to ask you to take a look at 20 Exhibit T8142, which is at Tab 1450. 21 MR. RINALDI: Tab what? 22 MR. EISENHART: 1450. 24700 1 Q. (BY MR. EISENHART) Now, this is the 2 document that has earlier been described as the 3 S memorandum, is it not? 4 A. Yes. 5 Q. And this -- to refresh everyone's 6 recollection, this was a memorandum that was 7 prepared by supervision and circulated at a time 8 when the institution is being placed in 9 receivership, correct? 10 A. Yes. 11 Q. And this explains from supervision's 12 standpoint the reasons why it is recommending a 13 receivership for that institution, correct? 14 A. Yes. 15 Q. Now, on the first page of the S memo, 16 it notes -- and I think this is at the very bottom 17 of the page -- that as of September 30, 1988, USAT 18 had $607 million in junk bonds which represented 19 28 percent of its total securities and 13 percent 20 of its assets; is that correct? 21 A. Yes. 22 Q. And on Page 4 of the memo, it refers to 24701 1 the agreement in 1987 to have an independent 2 third-party review of the high-yield bond 3 portfolio, correct? 4 A. Yes. 5 Q. And it also refers to the review that 6 was conducted by Prudential Bache and the fact 7 that there were no adverse findings in that 8 report, correct? 9 A. Yes. 10 Q. Finally, on Page 7, it says that USAT's 11 junk bond investments exceeded $600 million and 12 that USAT intended to set up and maintain a 13 2 percent reserve for possible losses. 14 Do you see that? 15 A. Is that the very bottom paragraph? 16 Q. Yes, it is. I'm sorry. It's at the 17 very bottom of Page 7. I think the loss figure 18 goes over to the next page. 19 A. Yes. 20 Q. Now, a moment ago, we saw in the Sahadi 21 report a reference to a study that had concluded 22 that default rates on high-yield bonds were 24702 1 averaging about 3.4 percent and that for Drexel 2 bonds, they were about 1.9 percent. 3 Do you recall those numbers? 4 A. Yes. 5 Q. So, a 2 percent reserve set up on the 6 USAT portfolio would be very consistent with those 7 statistics, would it not? 8 A. I think any reserve by USAT was 9 something that their management had determined 10 would be reasonable. 11 Q. But I mean a 2 percent reserve, given 12 the statistics we saw in that report, would not 13 seem at all to be out of line with what one would 14 expect. Right? 15 A. Again, I think the general reserve was 16 probably something its internal management had set 17 up. We didn't find an exception with it. We 18 weren't using this prior report as a basis. 19 Q. Okay. Now, on Page 7 of the report -- 20 I'm sorry. It was in the paragraph we looked at 21 just a moment ago where there is a reference to 22 the size of the portfolio and the establishing of 24703 1 reserves. It again refers to these as high-risk 2 securities. 3 Do you see that? 4 A. Yes. 5 MR. RINALDI: Is this the last 6 paragraph? 7 MR. EISENHART: Yes, it is. 8 Q. (BY MR. EISENHART) Would you agree in 9 light of the conclusions reached in the Sahadi 10 report, though, that it would not really be 11 appropriate to talk about high-yield bonds as 12 high-risk securities unless there was some 13 particular reason to do so in the context of this 14 portfolio? 15 A. I believe that we always looked at the 16 junk bond portfolio as being a higher risk than 17 traditional assets that could be invested in by a 18 thrift. 19 Q. So, you still consider high-yield bonds 20 in and of themselves to be high-risk securities no 21 matter how the portfolio is structured and 22 managed? 24704 1 Is that what you're telling me? 2 A. There is a higher risk to junk bonds 3 than there are other traditional thrift assets, 4 yes. 5 Q. Let me put it another way, Mr. Twomey. 6 If there was anything about the USAT 7 portfolio that made that portfolio particularly 8 high risk, you would have put it in this memo, 9 wouldn't you? 10 A. Yes. 11 Q. I'd like to have you turn for a moment 12 to Exhibit B2699, which is in at Tab 1863. And 13 this is the Southwest Plan examination report. 14 Now, this is a collection of memos 15 under a cover memo dated January 19th, 1989; is 16 that correct, Mr. Twomey? 17 A. Yes. 18 Q. And this is sent from Brenda Bese to 19 you and it constitutes the final report of the 20 Southwest Plan exam, correct? 21 A. Yes. 22 Q. This was actually received by you after 24705 1 the institution had already been placed in 2 receivership? 3 A. Yes. 4 Q. I had gone through this report looking 5 for the section on high-yield bonds. And frankly, 6 I couldn't find anything. 7 Is there a high-yield bond section 8 somewhere in this report? 9 A. Well, I can't -- haven't gone through 10 every page recently, but I don't remember a 11 particular section. There's probably references 12 to junk bond portfolio, but I don't know if there 13 is an analysis of junk bonds. 14 Q. Well, if you'd turn to page -- and 15 you'll have to look at the imaging number under 16 the bar code at the bottom. It's OW154268. It's 17 in about the middle of the document. 18 Do you have it? 19 A. Yes. 20 Q. It references there to investment 21 securities. And it says, "A review of the 22 investment securities was not performed because of 24706 1 the change in management during the course of the 2 examination." 3 Might that explain why there is no 4 section for high-yield bonds in this document? 5 A. Yes. 6 Q. Is it your recollection that, in fact, 7 the high-yield bonds were not looked at during the 8 Southwest Plan examination? 9 A. I can't recall what discussions we 10 might have had regarding the junk bond portfolio. 11 All that really happened was once the institution 12 had been sold, the examiners wound up what they 13 had and, you know, basically Brenda Bese 14 summarized it and sent it to me. And this is the 15 report I received. It didn't make any sense to 16 continue an exam in place that had already been 17 placed in receivership. 18 Q. So, if this report says "a review of 19 investment securities was not performed," do you 20 think it's true that a review of the high-yield 21 bond portfolio was not performed? 22 A. Well, I know one wasn't completed. I 24707 1 don't know if they had started or got to any point 2 in time. 3 Q. Well, let me ask you the question in a 4 very straightforward fashion then, Mr. Twomey. 5 Was a review of the high-yield bond 6 portfolio performed during the Southwest Plan 7 exam? 8 A. Well, one wasn't completed to the best 9 of my knowledge. 10 Q. That wasn't my question. I asked, was 11 one performed? 12 A. I don't know. Based on what I see 13 here, I would say based on what's written in the 14 exam report -- 15 Q. Well, high-yield bonds are part of the 16 investments -- 17 A. It says, "A review of the investment 18 securities was not performed because of the change 19 in management." So, I assume that one was not 20 performed. 21 Q. And that doesn't even use the word 22 "completed." It says "performed"? 24708 1 A. Right. 2 Q. And that's what this report was saying, 3 correct? 4 A. Yes. 5 Q. That's the representation that was 6 being made? 7 Well, look at Page 154268 of that 8 report. 9 MR. GUIDO: 26 what? 10 MR. EISENHART: 268. I'm sorry. 11 That's the page we were just looking at. Excuse 12 me. 13 Q. (BY MR. EISENHART) Take a look at 14 Exhibit A11165. That's at Tab 1858. This is your 15 letter to Mr. Herb Held of the Federal Home Loan 16 Bank Board in Washington dated November 16, 1988, 17 correct? 18 A. Yes. 19 Q. At the bottom of the first page, you 20 say that the Southwest Plan examination began on 21 September 7th and that it's a full-scope exam, 22 correct? 24709 1 A. Yes. 2 Q. And the emphasis is going to be placed 3 on securities transactions, particularly related 4 to United's equity arbitrage and junk bond 5 investment programs. 6 Do you see that? 7 A. Yes. 8 Q. Wouldn't that indicate, Mr. Twomey, 9 that, in fact, the junk bonds were one of the 10 particular focuses of the Southwest Plan exam? 11 A. Well, it's definitely part of the scope 12 of the examination, yes. 13 Q. Well, then why wasn't it performed? 14 A. I believe because the institution was 15 sold and they hadn't started in that area of the 16 exam yet. 17 Q. The institution wasn't sold in 18 September '88, was it? It wasn't sold until the 19 end of December. 20 A. That's true. 21 Q. Was there some reason that you can 22 recall between September and December why no 24710 1 review of the high-yield bond portfolio was 2 performed? 3 A. There were different examiners being 4 brought in from across the country to do certain 5 things at Southwest Plan exams. I don't recall 6 when the people that were coming in to look at 7 maybe the junk bond or the equity arbitrage or 8 other investment portfolios were scheduled to 9 arrive. 10 Q. Well, take a look at a document which 11 has been marked and previously received as B3774. 12 It's at Tab 284. 13 Do you recognize this document, 14 Mr. Twomey, as examination work papers? 15 A. No. 16 Q. Do you recognize the document at all? 17 A. No. 18 Q. Let's look at it together then. It's 19 headed "Securities Trading-Interim Program." And 20 written under that is "High-yield (junk bond) 21 Program Only." 22 Do you see that? 24711 1 A. Yes. 2 Q. And it has a series of examination 3 objectives and examination procedures. 4 Do you see that? 5 A. Yes. 6 Q. And if you turn to the last page of the 7 document, it has something headed "examiner's 8 findings." And under that, there is a line for 9 examiner's signature and date. 10 Do you see that? 11 A. Yes. 12 Q. Did that indicate to you that these 13 are, in fact, work papers of an examiner? 14 A. I believe so. 15 Q. Look at the front of the document. Do 16 you see a date at the top? 17 A. There is a penciled-in date, 9/6/88. 18 Q. All right. And some initials 19 understand that, JPJ? 20 A. Yes. 21 Q. And then something under that, ON or 22 DN4430? Do you see that? Do you know what that 24712 1 means, refers to? 2 A. Well, it probably means District 3 No. 4430, which I believe was the docket number 4 for USAT. 5 Q. Would this appear to be work papers of 6 an examiner looking at USAT's high-yield bond 7 portfolio in September 1988? 8 A. Well, somebody was using this as -- to 9 give them some type of guidance regarding 10 high-yield junk bonds. By the number, this had to 11 come out of some handbook available at the time. 12 Q. Indeed, it looks to be a checklist that 13 an examiner would follow when examining the 14 high-yield bond program, doesn't it? 15 A. Yes. 16 Q. And if you turn to the second page, 17 look at Item 14. It says, "Determine whether the 18 institution is attempting to overstate income or 19 understate profit by recognizing income too 20 rapidly or by deferring losses over too long a 21 period." And the words "not noted" are written in 22 there, correct? 24713 1 A. Yes. 2 Q. And if you drop down to No. 16, it 3 says, "Evaluate the effects of any losses, 4 realized and potential, on the institution's 5 operations and financial conditions." 6 And what's written in there? 7 A. "Only gains to date," I believe. 8 Q. Turn to the third page of the document. 9 Do you see a reference there in about the middle 10 of the page to "expanded scope"? 11 A. (Witness reviews the document.) Yes. 12 Q. Does that appear to be a place where 13 the examiner can write in any additional work that 14 he or she is going to do in excess of the normal 15 exam procedures? 16 A. Yes. 17 Q. And what has the examiner written in 18 there? 19 A. "Extensive review of history, 20 personnel, bonus programs," I believe, 21 "profitability to date, exposure." 22 Q. Then under that are a series of 24714 1 findings that the examiner can make, correct? The 2 first of which is "Are the institution's 3 investments financially sound?" What has he 4 checked off? 5 A. "Yes." 6 Q. "Are securities transactions consistent 7 with the institution's cash flow needs and optimum 8 yield?" 9 What's he checked off? 10 A. "Yes." 11 Q. "Does the institution avoid speculation 12 in junk bonds?" 13 What's he checked off? 14 A. "Yes." 15 Q. "Does management appear qualified to 16 engage in these types of transactions?" 17 What's he checked off? 18 A. It says "very" and "yes." 19 Q. Very qualified. "Are the institution's 20 policies and plans adequate to monitor financial 21 transaction activity?" 22 What's he checked off? 24715 1 A. It has "yes," but -- I can see "good," 2 but I can't read the rest of it. 3 Q. Might that say "good controls"? 4 A. Possibly. 5 Q. No. 6, "Are the institution's internal 6 controls adequate in this area?" 7 What's he checked off? 8 A. "Yes." 9 Q. "Does the institution avoid interest 10 rate risk exposure?" 11 What's he checked off? 12 A. "Yes." 13 Q. Has he signed the report? 14 A. Looks like a John Janitor, 11/1/88. 15 Q. So, we have a review of the high-yield 16 bond portfolio by an examiner signed off on with 17 nothing but positive findings on November 1, 1988. 18 Is that correct, Mr. Twomey? 19 A. Yes. 20 Q. Why was there no mention of this in 21 Exhibit B2699, the final report of the Southwest 22 Plan exam? 24716 1 A. I don't know. 2 Q. Might it be because the purpose of that 3 report was to come up with negative findings that 4 would support the receivership and support the 5 award of the institution to Mr. Ranieri and 6 nothing positive could be put in there? 7 A. No. 8 Q. Would you have any other explanation 9 for why that report would state affirmatively a 10 review of the investment securities was not 11 performed when we have just looked at such a 12 review of the high-yield bond portfolio? 13 A. The person responsible for the report 14 is the examiner-in-charge. And the 15 examiner-in-charge has to be assured herself that 16 the particular section or whatever has been 17 reviewed properly because it's her responsibility 18 to put the report together. So, the only person 19 you can ask that question of is Brenda Bese, who 20 was the examiner-in-charge. 21 Q. Uh-huh. And you can't help us at all? 22 A. This is Brenda Bese's report. 24717 1 Q. You're not aware of any plan to exclude 2 positive information from that report? 3 A. Not that I can recall. 4 Q. Take a look at B3775, which is in 5 evidence at Tab 285. 6 THE COURT: Mr. Eisenhart, we'll 7 adjourn until 2:00 o'clock. 8 MR. NICKENS: Your Honor, I assume your 9 instructions concerning communications with the 10 witness remain in effect? 11 THE COURT: Yes. 12 MR. NICKENS: Thank you. 13 14 (Whereupon, a lunch break was taken 15 from 12:40 p.m. to 2:05 p.m.) 16 17 THE COURT: Be seated, please. We'll 18 be back on the record. 19 Mr. Eisenhart, you may continue. 20 MR. EISENHART: Thank you, Your Honor. 21 Q. (BY MR. EISENHART) Mr. Twomey, as we 22 broke for lunch, I believe I had just put in front 24718 1 of you Exhibit B3775 in evidence at Tab 285. 2 Do you have that? 3 A. Yes. 4 Q. These are a series of work papers, and 5 you'll notice that's there's a deposition exhibit 6 sticker on them. They were marked as Exhibit 37 7 at Brenda Bese Crouser's deposition, and these 8 have been identified as work papers from the 9 Southwest Plan examination in 1988. 10 If you would take a look at the work 11 papers, they appear to involve exclusively the 12 high-yield or junk bond program, do they not? 13 A. (Witness reviews the document.) On the 14 second page, it does reference high-yield -- it 15 has a start-off there of "junk bond portfolio." 16 Q. In fact, would this document appear to 17 you to be the draft of an examination report on 18 the high-yield bond portfolio? 19 A. (Witness reviews the document.) Well, 20 it does look like some type of summary or a review 21 of junk bonds. 22 Q. Now, when the examiners conduct an 24719 1 examination of an area of business such as the 2 high-yield bond portfolio, it would be typical for 3 them when they were completed to write up a report 4 of that, would it not? 5 A. To write up a summary, yes. 6 Q. And, in fact, the document that we've 7 identified as the final report of the 8 Southwest Plan exam, which is Exhibit B2699, is a 9 collection of those kinds of memos, is it not? 10 A. Well, it's definitely some type of 11 summary regarding their junk bond portfolio at 12 USAT. 13 Q. Okay. And that's the -- 14 THE COURT: I don't believe you heard 15 the last question. 16 Q. (BY MR. EISENHART) Is that the kind of 17 summary that you would normally expect to get 18 written up and included in B2699, which is the 19 final report? 20 A. (Witness reviews the document.) Well, 21 this appears to be more of a work paper summary. 22 But from this, you could extrapolate something 24720 1 possibly for an examination report. But again, 2 that would be Brenda Bese's call about what she 3 should use and what she shouldn't use. 4 Q. I'm simply asking you as somebody who 5 is familiar with these reports and how they are 6 used and how they were prepared, would it be 7 normal that these notes would be somehow distilled 8 into a report that would be included within the 9 final exam report? 10 Would that be the normal practice? 11 A. If this was the completed junk bond 12 review, yes. 13 Q. Okay. Would you turn to -- this is in 14 Exhibit B3775 -- a page that has the imaging 15 number OW156341? 16 A. Okay. 17 MR. EISENHART: 156341. 18 Q. (BY MR. EISENHART) Now, what's written 19 on that page reads as follows: "The program has 20 been financially successful thus far. In the 45 21 months this program has been operational, it has 22 generated over an assigned cost of money a net 24721 1 interest spread of $36,607,000 on an average 2 portfolio of $469,088,000 and has achieved 3 $38,172,000 of net profits on sales and 4 redemptions of securities. Deducting from the 5 $11,162,000 of mark-to-market losses indicated as 6 of September 30, 1988, and the budgeted $600,000 7 annual operating expenses estimated by the 8 association's accounting department would leave 9 the association with realized cash net income of 10 $61,367,000 on its junk bond program over this 11 45-month period." 12 Did I read that correctly? 13 A. Yes. 14 Q. And is that consistent with your 15 recollection of the results of the USAT high-yield 16 bond portfolio as disclosed in the 1988 17 examination? 18 A. Well, the 1988 exam doesn't contain a 19 reference to the junk bond portfolio. 20 Q. Well, is that consistent, then, with 21 your recollection of the results of the high-yield 22 bond portfolio? 24722 1 A. From '86, '87, '88, yes. 2 Q. And none of that information was 3 reported in the exam report? 4 A. It wasn't there. 5 Q. Even though that was a full-scope exam 6 that you had represented to Washington was going 7 to include an examination of the high-yield bond 8 portfolio? 9 A. With the exception that the exam 10 stopped at the time of the receivership. 11 Q. Well, would it be your testimony, 12 Mr. Twomey, that we would have to go to Ms. Bese 13 and ask her why this information was omitted from 14 the final report? 15 A. Sir, she was the examiner-in-charge; 16 and she has the ultimate responsibility of putting 17 the examination report together. 18 Q. So, what you're telling us is you can't 19 tell me why this was omitted. We would have to 20 ask her? 21 A. Yes. 22 Q. Now, Mr. Twomey, in the course of your 24723 1 supervision of USAT, were you interested in 2 obtaining information about the volume of business 3 that USAT was doing with Drexel in its high-yield 4 bond portfolio? 5 A. I would say yes. 6 Q. You were interested in obtaining 7 accurate information on that subject? 8 A. Yes. 9 Q. And was the purpose of your interest in 10 that -- was the purpose of your obtaining that 11 information so that you could make a judgment as 12 to whether Drexel was obtaining any improper 13 benefit from the USAT high-yield bond portfolio? 14 A. Well, of course I would be interested 15 in getting accurate information regarding its 16 trades with Drexel, USAT's trades with Drexel of 17 high-yield bonds. If something was to come up to 18 show that Drexel was doing something improper, 19 then of course that would be of interest to us. 20 Q. Was one of the things you were 21 interested in finding out was whether USAT was 22 throwing an excessive amount of its high-yield 24724 1 bond business to Drexel? 2 A. I guess it was my opinion at the time 3 that they were dealing primarily with Drexel for 4 its high-yield bonds. 5 Q. Well, you testified when Mr. Rinaldi 6 was questioning you -- I think it was Friday, the 7 18th when you were on the stand -- that you 8 believed that 90 percent of the USAT high-yield 9 bonds were bought from Drexel. 10 Do you recall that? 11 A. Yes. 12 Q. What was that 90 percent figure based 13 on? 14 A. My recollection. 15 Q. Okay. Do you have any documentation to 16 substantiate that number? 17 A. No. 18 Q. Did you ever have any actual study done 19 of the high-yield bond portfolio at USAT to see 20 what its volume of purchases from Drexel was? 21 A. Not that I can recall. 22 Q. It wouldn't have been that hard to do, 24725 1 would it? 2 A. No. 3 Q. You would want to, what, look at the 4 volume of purchases from Drexel and then compare 5 that to Drexel's market share? 6 A. I think it's much more simple than 7 that. You simply go down the list of the 8 securities at the time and find out who they 9 purchased them from. 10 Q. Let me show you a document which was 11 put in evidence earlier as B1770, and it's 12 Tab 1615. 13 MR. GUIDO: Which tab number? 14 MR. EISENHART: 1615. 15 MR. RINALDI: I'm sorry. The document 16 number was B -- 17 MR. EISENHART: B1770. 18 MR. RINALDI: This is on your pull 19 list? 20 MR. EISENHART: (Nods head 21 affirmatively.) 22 Q. (BY MR. EISENHART) Have you ever seen 24726 1 this document before, Mr. Twomey? 2 A. No. 3 Q. It's a memo from Gene Stodart to Art 4 Berner dated September 29th, 1987, concerning 5 USAT's high-yield securities activities. 6 Would this appear to be the kind of 7 data that would have been relatively easy to 8 prepare concerning the volume of purchases from 9 Drexel? 10 A. Well, of course, this lists the 11 underwriter of these particular -- I'm going to 12 assume these are junk bonds all, and it does list 13 the underwriter of each of these different issues. 14 Q. It breaks it down by year; and it talks 15 about the amount in that year underwritten by 16 Drexel versus Drexel's market share, does it not? 17 A. Yeah. 18 Q. And the report concludes, as a matter 19 of fact, that in no year was USAT's volume of 20 purchases of Drexel high-yield bonds even equal to 21 Drexel's market share; isn't that correct? 22 A. I see that. 24727 1 Q. And nowhere does it substantiate your 2 recollection that 90 percent of USAT's purchases 3 were of Drexel bonds, does it? 4 A. That's correct. 5 Q. Was this the kind of hard data, 6 accurate data, that you would like to have before 7 reaching a conclusion about their volume of 8 purchases with Drexel? 9 A. I told you my recollection is what I 10 know today or can remember from today. What I was 11 actually thinking of during the exam period might 12 have been different. 13 Q. Mr. Twomey, you were asked in your 14 direct testimony by Mr. Rinaldi how you regarded 15 Joe Phillips as a manager of the high-yield bond 16 portfolio. And my notes say that you described 17 him as very competent and a highly competent 18 individual. 19 Is that accurate? 20 A. Yes. 21 Q. That was your view of Mr. Phillips? 22 A. Yes. 24728 1 Q. Did you have a chance to reach any 2 assessment of his successor, Gene Stodart? 3 A. Basically, the same. 4 Q. In fact, Mr. Stodart was kept on by new 5 management after the institution was sold, was he 6 not? 7 A. For some period of time, yes. 8 Q. Basically until the high-yield bond 9 portfolio was phased out? 10 A. Well, the Congress forbad savings and 11 loans with FIREA to hold high-yield junk and 12 forced them to sell them. 13 Q. So, it reached a point in time when 14 somebody like Mr. Stodart who was a high-yield 15 bond portfolio manager really wouldn't have a job 16 anymore at any financial institution or any thrift 17 institution? 18 A. Yeah, because thrifts were forbidden to 19 hold junk. 20 Q. But the regulators and new management 21 of USAT thought sufficiently highly of him that 22 they kept him on for a period of time after the 24729 1 receivership? 2 A. Well, for him staying on at Bank 3 United, that was simply a Bank United 4 determination. 5 Q. But you as the supervisory agent had a 6 high regard for him? 7 A. Yes, I did. 8 Q. So, you thought that both of the 9 managers of the high-yield bond portfolio at USAT 10 were competent individuals and did a good job? 11 A. Yes. 12 MR. EISENHART: Thank you, Mr. Twomey. 13 I don't have anything else for you. 14 THE COURT: Mr. Keeton, you have some 15 questions? 16 MR. KEETON: Very few, Your Honor. 17 18 EXAMINATION 19 20 Q. (BY MR. KEETON) Mr. Twomey, beginning 21 at least in September of 1987, your office was 22 asked to forward material to Congress or 24730 1 Representative Dingell concerning Charles Hurwitz 2 and MAXXAM; isn't that correct? 3 A. I'm not sure of the date, but staff 4 members from Mr. Dingell's committee contacted us 5 from time to time with inquiries. 6 Q. Did they contact you? 7 A. Eventually, yes. 8 Q. And they contacted you or other members 9 of your staff on several occasions? 10 A. Well, I can remember them contacting 11 me. I don't know about anybody else. I can't 12 recall about other people on the staff. 13 Q. Did you respond when they asked you for 14 information? 15 A. They would make an inquiry, and we 16 would do some research and then get back to them. 17 Q. Did any of your research ever indicate 18 anything negative about MAXXAM or Mr. Hurwitz? 19 A. No. 20 Q. And you so informed the people from 21 Washington? 22 A. Yeah. 24731 1 Q. And, indeed, we've seen a memorandum 2 that Mr. Berner wrote, November of 1987 -- I think 3 it was used in your examination -- where 4 Mr. Berner quotes you -- and this is Exhibit -- if 5 we have to look at it and I hope we don't to speed 6 this along. It's Exhibit B1855, which is Tab 1682 7 for anybody's interest. 8 But he quotes you as saying this. This 9 is Mr. Berner writing. "He" -- and that's you, 10 Mr. Twomey -- "noted it would have been nice and 11 would continue to make his life easier if Charles 12 Hurwitz had never heard of redwood trees but that 13 basically the Dallas bank considered Charles to be 14 a, quote, 'smart businessman,' close quote, and 15 that it was important to have smart business 16 people running Texas thrifts at this time." This 17 is November 18, 1987. 18 That was your opinion, wasn't it, sir? 19 A. Well, I remember the exhibit during my 20 testimony; and I don't recall exactly saying that 21 that way. But generally, that would have been our 22 opinion. 24732 1 Q. And then we have seen Senator Byrd 2 making inquiry in the spring, maybe early summer 3 of '88, Congressman Dingell continuing to ask 4 questions, possibly other politicians asking 5 questions. And by the end of '88 -- according to 6 you, December 30, 1988 at least, you had concluded 7 Mr. Hurwitz should in no fashion be involved in 8 this repurchase or the purchase under the 9 Southwest Plan. Right? 10 A. Well, as I said in prior testimony, 11 what I recall is a conversation that took place 12 while a board meeting was going on. And we talked 13 about the examination results at USAT. 14 Q. And you said Mr. Hurwitz and his 15 company, MAXXAM, should not be involved in 16 purchasing? 17 A. I don't know if it was said exactly 18 that way or how it was said. 19 Q. It was said close to that, wasn't it? 20 A. I don't recall. 21 Q. You don't recall what you said? 22 A. Let's see. A conversation almost ten 24733 1 years ago on a telephone conference call and I 2 didn't keep any notes and I don't know if anybody 3 else did, no, I don't recall. 4 Q. If I told you everyone else has 5 recorded that you recommended against MAXXAM and 6 Mr. Hurwitz being involved, would your 7 recollection be different than that? 8 A. I only can recall what I can recall. 9 If somebody else kept notes, then I would have to 10 look at the notes; and hopefully, it might prompt 11 my memory. 12 Q. I'm asking you right now if I tell you 13 what they said. Did that prompt your memory any? 14 A. No. 15 Q. Finally, do you recall that one of your 16 points was that MAXXAM had issued debt in 17 conjunction with its acquisition of Kaiser 18 Aluminum and other debt in conjunction with 19 Pacific Lumber and so, therefore, it was a shaky 20 company to be acquiring a savings and loan 21 institution under the Southwest Plan? 22 A. No. 24734 1 Q. Have you ever checked to see if all 2 that debt got paid off in full without any 3 problems? 4 A. No. 5 MR. KEETON: That's all I have, 6 Mr. Twomey. 7 MR. BLANKENSTEIN: No questions, 8 Your Honor. 9 THE COURT: All right. Mr. Rinaldi, do 10 you have redirect? 11 MR. RINALDI: Uh-huh. 12 13 FURTHER EXAMINATION 14 15 Q. (BY MR. RINALDI) Good afternoon, 16 Mr. Twomey. I know it's been a long, arduous 17 process for you; and I will not try to prolong it 18 too much longer. 19 I would like to start off by going back 20 to the beginning in reference to a number of 21 comments that Mr. Villa made and a number of 22 questions he asked you on cross-examination 24735 1 regarding questions that he asked you at your 2 deposition and your recollection then and your 3 recollection now. 4 Do you recall that at your deposition, 5 you had said that your first recollection of what 6 had occurred at United was dated back to the 7 period of about May of 1986? 8 A. Yes. 9 Q. And in connection with preparing for 10 your deposition, what documents were provided to 11 you by the Bank Board or by the OTS? 12 A. Primarily loan classification write-ups 13 regarding certain large loans in San Antonio, 14 Austin was the primary ones. 15 Q. Did you also look at the work papers 16 for the 1986 examination? 17 A. Pertaining to loan classifications, 18 yes. 19 Q. And do you recall when the 1986 20 examination began? 21 A. Approximately May of 1986. 22 Q. And is that the reason why your 24736 1 recollection at the time of your deposition dated 2 back to about May of 1986? 3 A. Yes. 4 Q. So that the only documents you had 5 reviewed prior to your deposition that pertained 6 to USAT would have been ones from 1986 forward, 7 May of 1986 forward? 8 A. Yes. 9 Q. Now, prior to the deposition, did you 10 have an opportunity to review supervisory 11 correspondence or any supervisory files that might 12 have been maintained by your analyst, Ms. Baugh? 13 A. No. 14 Q. Now, since -- after your deposition was 15 taken, did you make any requests to me regarding 16 the deposition, that you recall? 17 A. I requested a copy of my deposition and 18 the exhibits that went along with it. 19 Q. Why did you request the deposition and 20 the exhibits that went along with it? 21 A. I just wanted to review it. 22 Q. Were you curious about the exhibits 24737 1 which related to something you hadn't thought 2 about for over 10 years? 3 A. No. I was just -- if an exhibit is 4 being referenced in the deposition, if I had a 5 question, I wanted to go back and take a look at 6 it. 7 Q. And after you requested the depositions 8 and the exhibits, did I send you a copy? 9 A. Yes. 10 Q. And after that, did you have occasion 11 then to review the exhibits that Mr. Villa had 12 shown you? 13 A. Not all of them. I primarily just 14 reviewed the deposition. 15 Q. Okay. Now, in preparation for your 16 testimony here in the last week, did you have 17 occasion to review a number of the documents that 18 were shown to you during the course of that 19 deposition? 20 A. Not particularly. 21 Q. Do you recall that I put together a 22 number of binders of documents and sent them to 24738 1 you for your review? 2 A. Yes. 3 Q. And in connection with that, did you 4 review a number of applications that related to 5 USAT at or about the time you became the 6 supervisory agent? 7 A. I believe they were in the binders. 8 Q. Okay. Do you recall looking at 9 materials related to something called the 10 liability growth application? 11 A. Yes. 12 Q. Okay. And what was that again, the 13 liability growth? Do you recall? 14 A. The old Bank Board had put a 15 restriction in that institutions couldn't grow in 16 a calendar year more than 25 percent from the 17 beginning of the year to the end of the year 18 without expressed approval by the PSA. 19 Q. And in connection with that regulation, 20 an application had been made to exceed the 21 liability growth limitations by USAT, had it not? 22 A. Yes. 24739 1 Q. Now, do you recall, did the liability 2 growth application then contain information 3 regarding the business strategy of USAT? 4 A. There was a business plan attached. 5 Q. Okay. And did you also then look at an 6 application regarding the direct investment limits 7 and a request by USAT to exceed the direct 8 investment limitation? 9 A. Yes. 10 Q. And do you recall that that was one 11 that, in fact, you and Ms. Baugh were involved in 12 making recommendations, I believe, to your 13 superiors regarding whether it should be granted 14 or not? 15 A. Yes. 16 Q. And in addition to that, I think we 17 also talked about a subordinated debt application. 18 Do you recall having reviewed documents 19 with respect to that, as well? 20 A. Yes. 21 Q. Would you take a look at the first 22 document in your book? 24740 1 A. Book 1? 2 Q. Yes. It's Exhibit B642. It's 3 Tab 1871. 4 A. Okay. 5 Q. Do you recognize this document as one 6 that you would have reviewed in preparation for 7 your testimony last week? 8 A. At some point, yes. 9 Q. And if you would turn to Page No. 5 -- 10 it's OW152418 or O52417 -- it discusses the 11 business plan of USAT, does it not? 12 A. Yes. 13 Q. Then it goes on on the next page and 14 talks about investments in mortgage-backed 15 securities and describes their corporate and 16 mortgage-backed security strategy. 17 Do you see that? 18 A. Yes. 19 Q. And is this one of the documents that 20 you used to refresh your recollection of what was 21 going on at USAT at or about the time that you 22 became the supervisory agent? 24741 1 A. Yes. 2 Q. Now, directing your attention to the 3 next document in your book, it's T1118; and it's 4 Tab 1643. This is a memorandum that's written by 5 Mr. Arthur Berner, and I believe I showed you this 6 on direct-examination. And it relates to a 7 conversation about the sub debt application. 8 Is this another document that you 9 reviewed in connection with your preparation for 10 your testimony here in court over the last week? 11 A. I might have it in the binder. I just 12 don't recall. 13 Q. Well, it talks about the subordinated 14 debt application. 15 Do you see that? 16 A. Yes. 17 Q. And it talks about some discussions 18 that you had apparently with Mr. Berner in which 19 Mr. Berner suggests that MCO and Federated would 20 be willing to subscribe to $10 million in equity 21 of USAT in order to obtain a waiver of the net 22 worth requirement? 24742 1 A. Yes. 2 Q. When I examined you last week, we 3 talked about how that had been one of the 4 conditions that MCO had specified in connection 5 with the sub debt application. 6 Do you recall that? 7 A. Yes. 8 Q. Take a look at the next document in 9 your book. It's B954. It should be a fairly 10 substantial document. 11 MR. VILLA: Could you give us the 12 number again, sir? 13 MR. RINALDI: B954. It's Tab 89. 14 Q. (BY MR. RINALDI) This is the 15 application for approval to issue subordinated 16 debt securities and -- 17 A. Mr. Rinaldi, I have an empty -- 18 Q. Oh, I'm sorry. I'm sorry. This was 19 such a large document, I just took it out of the 20 book to make it easier to look at. We may come 21 back to this on several occasions. 22 Directing your -- is this a document 24743 1 that you received as the SA of USAT at or about 2 May of 1986? 3 A. Yes. 4 Q. Now, would you have reviewed the 5 contents of this document with respect to 6 considering the question of whether approval 7 should be given to USAT regarding the sub debt 8 application? 9 A. Yes. 10 Q. Now, what was the normal process that 11 you followed in terms of your receipt of documents 12 like this? 13 A. Normally, the supervisory analyst would 14 be given the document; and then she would -- in 15 this case, Ginger Baugh -- she would review the 16 document. And we have to determine whether it 17 could be deemed complete before we actually start 18 processing it. If there was additional 19 information, then we would send a request out to 20 the institution for additional information if we 21 thought it was necessary. 22 Q. Now, if you'd turn to about Page -- 24744 1 well, let's do the CN numbers -- CN152324 through 2 CN152329. Make that CN152331. Would you just 3 look for a moment at that range of about seven or 4 eight pages? 5 A. (Witness reviews the document.) 6 Q. Are you at -- 7 A. This is actually Page 13 on the bottom? 8 Q. That is correct. 9 Now, this starts off by talking about 10 the investments that USAT was involved in. Do you 11 see that in the middle of the page? 12 A. Yes. 13 Q. And it talks about the marketable 14 equity securities and corporate debt instruments. 15 Are those the same investment programs that you 16 testified about on direct-examination that you 17 became to understand USAT was involved in? 18 A. Yes. 19 Q. And then below that, it talks about a 20 structured arbitrage activity. 21 What is that making reference to? 22 A. Regarding their mortgage-backed 24745 1 securities and, again, their so-called structured 2 arbitrage program relating to mortgage-backed 3 securities. 4 Q. And then this document goes on and 5 talks about, on Page 16, their management 6 strategy. And on Page 18, it talks about their 7 equity arbitrage at the top of the page. 8 Do you see that? 9 A. Yes. 10 Q. And then finally, if you look at 11 Page 19, there's a long explanation that covers 12 the bottom of the page and the top of the next 13 page that talks about structured arbitrage 14 program. 15 Do you see that? 16 A. Yes. 17 Q. Is this a document that you reviewed 18 prior to your testimony here over the last week? 19 A. I believe so. 20 Q. Now, in addition to reviewing the 21 documents that I provided to you -- strike that. 22 In addition to reviewing documents 24746 1 related to the applications that USAT had filed 2 regarding the sub debt application and the other 3 applications that were just referenced a moment 4 ago, did you have an opportunity to review 5 supervisory correspondence and internal memos that 6 had been prepared by Ms. Baugh? 7 A. Yes. 8 Q. And those were supplied to you by the 9 OTS as part of your preparation for your testimony 10 today? 11 A. Yes. 12 Q. And do you recall also reviewing the 13 1986 business plan that had been submitted to USAT 14 or had been submitted by USAT? I believe I showed 15 it to you on direct-examination, but -- 16 A. I remember the business plans from that 17 period of time, yes. 18 Q. Did you also -- there were a lot of 19 questions asked by Mr. Villa that related to the 20 question of employment contracts and Mr. Larry 21 Connell's retention by USAT. 22 Do you recall those questions? 24747 1 A. Yes. 2 Q. In connection with that -- those 3 issues, did you have occasion to review documents 4 that related to the employment contracts and 5 Mr. Connell's involvement at USAT? 6 A. Yes. 7 Q. And generally, what did you review? 8 A. Correspondence relating to the 9 contracts going back and forth from my office, 10 from USAT and UFG coming to me, and some internal 11 memorandums regarding the legal review of those 12 contracts when our legal division looked at them. 13 Q. Did you also review the interim exam 14 reports that pertained to those contracts? 15 A. Yes. 16 Q. Did you have occasion, also, to review 17 a number of memoranda that had been prepared by 18 Mr. Berner that related to that time frame, as 19 well? 20 A. I don't recall that right now. 21 Q. Okay. Did you also, in preparation for 22 your testimony, review something referred to as 24748 1 the S memo? 2 A. Yes. 3 Q. And finally, did you also review the 4 examination reports for 1986, '87, and '88? 5 A. Yes. 6 Q. And you've made -- well, as a result of 7 your review of the examination reports and the 8 various materials we've described, did it refresh 9 your recollection regarding the supervision of 10 USAT between the periods of 1986 and 1988? 11 A. Yes. 12 Q. Now, in preparation for your testimony, 13 you and I spoke on a number of occasions, did we 14 not? 15 A. Yes. 16 Q. Did I ever ask you during that period 17 of time to testify in a particular way in order to 18 support a claim asserted by OTS? 19 A. No. 20 Q. Did I ever ask you to shade your 21 testimony in any way so as to assist the OTS with 22 respect to the present litigation? 24749 1 A. No. 2 Q. And over the past six days, have you -- 3 well, that you've been on the stand -- maybe it's 4 more than six days. I've lost track. I think 5 it's been six and a half. Have you tried to 6 respond to all of the questions of all counsel as 7 truthfully and as completely as possible? 8 A. Yes. 9 Q. Are there some things that you've been 10 unable to respond to because of the passage of 11 time? 12 A. Yes. 13 Q. Now, there's also been a lot of 14 questions raised about the manner in which you 15 conducted supervision over USAT and how you kept 16 track of what was going on there. 17 As a supervisory agent, of all the 18 documents that you relied upon, what was the most 19 important tool that you would use in terms of 20 trying to keep track of what was going on in the 21 institution? 22 A. The TFRs. 24750 1 Q. And in connection with preparing -- 2 your preparation for testimony here today, did you 3 have an opportunity to review the TFRs; or do you 4 recall that I sent you a copy of the TFRs? 5 A. I can't recall that. 6 Q. Okay. And why is it that the TFRs are 7 so important to you as a supervisory agent? 8 A. Well, USAT had been submitting monthly 9 and quarterly TFRs. And there's numerous points 10 of information contained on each one. And besides 11 just visually reviewing it, they were also fed 12 into our systems; and exceptions or changes in 13 growth can pop up which helps us to go back and 14 review for trends and weaknesses in a system. 15 Q. When you say they are fed into your 16 system, is the information extracted and fed into 17 your system and you compare certain ratios or 18 something? 19 A. Yes. 20 Q. And is the incidence of non-operating 21 gains something that's important to you as a 22 supervisory agent? 24751 1 A. Yes. 2 Q. And with respect to USAT, did that 3 become a subject of concern to you throughout the 4 period of time you were the supervisory agent? 5 A. Yes. 6 Q. And can you explain to the Court why 7 that was? 8 A. Simply put, that in many periods of 9 time, the institution's operating income and 10 operating expenses, if it hadn't have been for the 11 non-operating gains reported on the TFR, would 12 have had negative income periods at times. 13 Q. And why was that a concern to you? 14 A. Well, you would like to see an 15 institution on an operating basis generating 16 positive income before you even get to the 17 non-operating items. 18 Q. Now, Mr. Twomey, would you turn to the 19 next document in your book, which is T8142; and 20 it's -- I think it's Tab 1450 or 450. I'm not 21 sure if I've left a "1" off of here. 22 This should be the S memo. 24752 1 A. It is. 2 MR. RINALDI: I believe it's 1450. 3 Q. (BY MR. RINALDI) Sir, why is an S memo 4 prepared in the first place? 5 A. It's to provide the Federal Home Loan 6 Bank Board with the supervisory history of the 7 institution; and in the case of recommending 8 receivership, what the grounds for receivership of 9 the institution are. 10 Q. In terms of recommending receivership, 11 is the information related to the grounds for 12 receivership an important part of the memo? 13 A. Yes. 14 Q. Now, Mr. Villa pointed out a number 15 of -- I shouldn't say a number, but pointed to 16 several facts in the S memo that he felt were not 17 completely accurate. 18 Do you recall that? 19 A. Yes. 20 MR. VILLA: Objection. I believe I 21 thought they were accurate. 22 Q. (BY MR. RINALDI) Well, do you recall 24753 1 that Mr. Villa pointed out several things and 2 questioned you as to whether they were accurate or 3 not? 4 A. Yes. 5 Q. Now, was the information that appears 6 on the first and second pages of the document 7 relating for the -- relating to the question of 8 the grounds for appointment of a receiver 9 accurate? This is the information that talks 10 about USAT having negative regulatory capital of 11 $272 million on October 31st, 1988. 12 Do you see that on Page 1? 13 A. Yes. 14 Q. That was accurate, wasn't it? 15 A. Yes. 16 Q. And that was an appropriate basis for 17 USAT to be placed into receivership, wasn't it? 18 A. Yes. 19 Q. And, in fact, if you have negative 20 capital, you not only are below zero, you are even 21 further below your minimum capital requirement, 22 aren't you? 24754 1 A. Yes. 2 Q. So, in this case, if there was a 3 minimum capital requirement of 100 or 4 $200 million, they would have been that much more 5 below their minimum capital requirement, wouldn't 6 they? 7 A. Yes. 8 Q. Is that a serious matter with respect 9 to a savings and loan? 10 A. Yes. 11 Q. Is that why they were placed into 12 receivership? 13 A. Yes. 14 Q. Now, Mister -- in response to one of 15 Mr. Villa's questions, you pointed out to 16 Mr. Villa that you thought that there was a 17 mistake in the S memo. And I believe that the 18 mistake or the error that we were talking about 19 pertained to Page 12. If you would take a look at 20 that under Item 3, it talks about employment 21 contracts. 22 Do you see that? 24755 1 A. Yes. 2 Q. And the first full sentence says, "On 3 June 2nd, 1988, the supervisory agent received, 4 after requesting copies of employment agreements 5 dated February 11, 1988, from the board on the 6 following individuals" and then it goes on. And I 7 think you indicated that you believe that the 8 February 11th, 1988 contracts were USAT contracts. 9 Do you recall that? 10 A. Yes. 11 Q. Now, why did you think that statement 12 was inaccurate, sir? 13 A. Because the way I recall it, we 14 originally asked for USAT contracts; and then we 15 were informed there were only UFG contracts. And 16 then we requested from UFG copies of those 17 contracts, and I believe the contracts we received 18 were just UFG contracts. 19 Q. Okay. Now, take a look at the next 20 document in the book, which is 8072. It's 21 Tab 431. This is a letter dated June the 1st, 22 1988; and it's to you from Mr. Berner. We've seen 24756 1 this one before. 2 But in the first sentence, it says, 3 "Pursuant to your request dated March" -- I'm 4 sorry -- "May the 23rd addressed to the board of 5 directors of UFG, I am enclosing a copy of 6 executed employment agreements entered into 7 between UFG and the following persons." 8 Do you see that? 9 A. Yes. 10 Q. And then at the bottom of the page, it 11 says "enclosures." 12 Do you see that? 13 A. Yes. 14 Q. Is this the transmittal letter by which 15 Mr. Berner transmitted to you the UFG contracts? 16 A. Yes. 17 Q. And it appears that they were sent by 18 Mr. Berner on June the 1st. 19 Do you see that? 20 A. Yes. 21 Q. Now, if you would turn back to Page 12 22 of the S memo, do you see it says that on June the 24757 1 2nd, contracts were received? 2 A. Yes. 3 Q. Does it appear that the contracts 4 received on June the 2nd were the ones that were 5 transmitted by Mr. Berner on June the 1st pursuant 6 to his transmittal letter, T8072? 7 A. It appears so, yes. 8 Q. And so, those were UFG contracts, were 9 they not? 10 A. Yes. 11 Q. So that on June the 1st, you did not 12 learn of the existence of any USAT contracts, did 13 you? 14 A. Or on June the 2nd, no. 15 Q. And, in fact, if you turn to the next 16 document in your book -- that's T8071, and it's 17 Tab 430. 18 A. Yes. 19 Q. This is a letter from Mr. Berner 20 approximately two weeks earlier, correct? 21 A. Yes. 22 Q. And he says in the first sentence of 24758 1 the document, "United Savings Association has just 2 received your letter dated May 13th, 1988, 3 concerning employment contracts between the 4 association and any of its subsidiaries or 5 officers and employees thereof." 6 Do you see that? 7 A. Yes. 8 Q. And this -- so that you had written at 9 the beginning of May -- and I showed you that 10 document the last time -- and requested the 11 contracts. 12 In response, Mr. Berner told you, 13 "Please be advised that the association has not 14 entered into any employment contracts." 15 Do you see that? 16 A. Yes. 17 Q. That was your understanding at the end 18 of May, correct? 19 A. Yes. 20 Q. After June 1st or 2nd when you received 21 the UFG contracts, did you have a different 22 understanding regarding whether there were USAT 24759 1 contracts? 2 A. No. 3 Q. Is that why you told Mr. Villa that you 4 thought that the date that appears on Page 12 5 regarding the receipt of the February 11th, 1988 6 contracts was in error? 7 A. Yes. 8 Q. Who was it that would have made the 9 first cut or the draft of the December 20, 1988 10 S memo? 11 A. Marc Dunn. 12 Q. Who was Mr. Dunn? 13 A. He was the supervisory analyst for USAT 14 at that time. 15 Q. How long had Mr. Dunn been serving as 16 the supervisory analyst? 17 A. Three or four months. 18 Q. So, he didn't arrive at the Federal 19 Home Loan Bank of Dallas until after these 20 communications had gone back and forth between you 21 and Mr. Berner? 22 A. Mr. Dunn was already at the Federal 24760 1 Home Loan Bank of Dallas, but he didn't have 2 responsibility for USAT until Ginger left. 3 Q. And Ginger left sometime after June, 4 correct? 5 A. Yes. 6 Q. So, the events related in the memo by 7 Mr. Dunn were not events that had occurred while 8 he was the analyst for USAT, were they? 9 A. That's correct. 10 Q. Now, I'm troubled by something else on 11 this same page because it looks like Mr. Dunn was 12 misinformed on yet another fact, and I want to see 13 if we can't square it away. 14 The last sentence on that page says -- 15 first of all, let's look at the first sentence in 16 the last paragraph. "On October 27th, 1988, the 17 supervisory agent notified the board that each and 18 every employment contract had been found to be in 19 violation of Section 563.39." 20 Are you there? 21 A. Hold on. 22 MR. VILLA: Excuse me, sir. Which 24761 1 page? 2 MR. RINALDI: I'm on Page 12, and this 3 is Exhibit T8142, Tab 1450. 4 A. Bottom of Page 12? 5 Q. (BY MR. RINALDI) Uh-huh. At the 6 beginning of that paragraph, the last paragraph, 7 it talks about an October 27th letter that you 8 sent to the board notifying them that each and 9 every employment contract had been found to be in 10 violation of Section 563.39? 11 A. Yes. 12 Q. And that was the directive that we 13 looked at the last time when you told them that 14 you felt that the contracts that they had entered 15 into had violated the regulations that are cited 16 here as well as that they had been an unsafe and 17 unsound practice because they had been entered 18 into at a time when USAT was at or approaching 19 insolvency. 20 Do you recall that? 21 A. Yes. 22 Q. So, if that directive was dated 24762 1 October 27th, you had to have been aware of the 2 USAT contracts prior to October 27th, correct? 3 A. Yes. 4 Q. And yet, if we look down at the bottom 5 of the page -- and we're talking now about the 6 July 1st, 1988 contracts that were entered into 7 between USAT and the executives of USAT. 8 If we look at the last sentence of that 9 page, do you see what it says? 10 A. Yes. 11 Q. It says, "Shortly after the directive 12 was received by the board, it was discovered an 13 entirely new set of contracts for these same 14 individuals had been executed on July 1, 1988." 15 Do you see that? 16 A. Yes. 17 Q. Now, if the directive was in reference 18 to those July 1 contracts, how could you have sent 19 the directive before you received the contracts? 20 A. Well, obviously the -- 21 MR. VILLA: I object to the question. 22 There's no evidence the directive related to the 24763 1 July 1 contracts. 2 MR. RINALDI: Well, then let's skip 3 ahead a document and see if the directive relates 4 to the July 1 contracts. 5 Q. (BY MR. RINALDI) Mr. Twomey, skip ahead 6 two documents to Exhibit 1863; and it's B2699. 7 Do you recognize this document? 8 A. Yes. It's the 1988 examination report. 9 Q. Okay. I'll give people a moment to get 10 the report. 11 Now, directing your attention, 12 Mr. Twomey, to Enclosure 2 within the report, it's 13 Page OW154209. 14 Are you there? 15 A. Yes. 16 Q. Now, it indicates here in the first 17 sentence the following: "United entered into 18 employment contracts with eight senior executives, 19 the chairman of the board, and the chairman of the 20 executive committee of the board of directors on 21 July 1st, 1988." 22 Do you see that? 24764 1 A. Yes. 2 Q. Okay. And the date of this enclosure 3 is October 17th, 1988? 4 A. Yes. 5 Q. This was Ms. Bese's second interim 6 report? 7 A. That's correct. 8 Q. And after you received this report and 9 learned of the July 1st, 1988 contracts, do you 10 recall that you testified that you wrote a 11 directive to the board? 12 A. Yes. 13 Q. And what was the substance of your 14 directive? 15 A. Basically, for them to amend the 16 contracts and the two sets of money -- the 17 2 million or 800,000, to retrieve those and bring 18 them back under the control of USAT. 19 Q. And the directive that you're talking 20 about is the October 27th, 1988 directive that's 21 referred to on Page 12 of the S memo, is it not? 22 A. Yes. 24765 1 Q. So, is it fair to say that Ms. Bese had 2 obtained the July 1st, 1988 contracts sometime 3 before October 17th, 1988? 4 A. Yes. 5 Q. And she had communicated to you 6 regarding those contracts on at least 7 October 17th, 1988? 8 A. Yes. 9 Q. So that Mr. Dunn's statement in the 10 S memo that sometime after October 27th, 1988, you 11 received the July 1st contracts would be 12 erroneous, would it not? 13 A. Well, I believe what's in the S memo, 14 it says something about February 1988 contracts; 15 and the contracts I recall is what was referenced 16 in Ms. Bese's Interim Report No. 2. 17 Q. I'm talking about the -- we've talked 18 about the February 11th ones earlier. At the 19 bottom of the page -- I know it's been a long 20 day -- he talks about how the July 1st, '88 21 contracts didn't arrive until sometime after 22 October 27th, 1988. It's Page 12. 24766 1 A. (Witness reviews the document.) 2 Q. Do you see my point? 3 A. Yes. 4 Q. In other words, you clearly did have 5 the July 1st, 1988 contracts before you sent your 6 directive or you couldn't have sent the directive; 7 isn't that right? 8 A. Yes. 9 Q. So, would it appear Mr. Dunn simply 10 made a mistake when he was writing the S memo? 11 A. Yes. 12 Q. Was time pretty much compressed at this 13 period or this juncture in the history of USAT? 14 Were you hurried in terms of trying to prepare the 15 S memo? 16 A. Yes. 17 MR. VILLA: Objection, Your Honor. 18 It's still his witness. He ought not to lead him. 19 THE COURT: Sustained. 20 Q. (BY MR. RINALDI) Were you under any 21 time pressures at this point in time, sir? 22 A. Many. 24767 1 Q. Can you describe them for the Court? 2 A. During this time, we had several other 3 major exams going on at other large institutions. 4 One particular was San Jacinto Savings and its 5 parent, Southmark. At the same time, there were 6 maybe -- probably three of these Southwest Plan 7 deals that were going down that I had some type of 8 involvement with where either institutions that I 9 had under my caseload were being put in 10 receivership and three instances probably where we 11 were also negotiating with the potential acquirer 12 or the acquirer that we were led to believe 13 regarding operating agreements. 14 So, during that period, in December of 15 1988, it was very labor-intensive, time-consuming 16 period with a lot of things, with deadlines and 17 time tables that had to be met. It was just a 18 very tough period of time. 19 Q. Now, I notice -- if you turn to the 20 15th page of the S memo, there's a long list of 21 people to whom these were sent; and they include 22 all the way up to -- they include all the way up 24768 1 to Danny Wall, who was the chairman of the Federal 2 Home Loan Bank Board and Lawrence Whyte and Roger 3 Martin who were also board members. Right? 4 A. Right. 5 Q. This was being broadly disseminated, 6 was it not? 7 A. Yes. 8 Q. Did you make every effort to attempt to 9 render the facts as faithfully and truthfully as 10 possible as you knew them in the S memo? 11 A. Yes. 12 Q. Now, Mr. Villa has suggested that 13 somehow the S memo was shaded to try to put 14 existing management of USAT in a bad light. 15 Did you receive any instructions from 16 anyone to try to write the memo so as to put 17 existing management in a bad light? 18 A. No. 19 Q. Did you attempt to be as objective as 20 possible in preparing the memo? 21 A. Yes. 22 Q. Now, I would like to just very quickly 24769 1 finish up the sequence as you recall it of the 2 employment contracts. 3 Now, you said that you had requested 4 them, you believe, around the beginning of May. 5 And then you received the letter that I showed you 6 which is T8071 from Mr. Berner on May the 18th, 7 1988; and he informed you there were no USAT 8 contracts? 9 A. Right. 10 Q. And then I believe on June the 1st, he 11 sent you a letter with the UFG contracts? 12 A. Correct. 13 Q. And we just looked at T8072 in that 14 regard. And we've also seen that about a month 15 later, on July the 1st, USAT entered into new 16 contracts on July 1st. 17 Do you recall that? 18 A. Yes. 19 Q. Now -- and then the Southwest exam 20 began sometime in early September, did it not? 21 A. Yes. 22 Q. And you learned of the contracts 24770 1 sometime in October after the exam began? 2 A. Yes. 3 Q. And then on October 27th, you sent a 4 letter to the board telling them that you thought 5 that they had violated applicable regulations and 6 were unsafe and unsound? 7 A. Yes. 8 Q. Okay. Now, prior to the commencement 9 of the examination by Ms. Bese, were you unaware 10 of the fact that on July 1st, 1988, USAT had 11 contracted with senior management to enter into 12 new employment agreements? 13 A. Yes. 14 Q. Now, Mr. Villa went into a lot of 15 questions regarding a supervisory exception for 16 the Larry Connell contract. 17 Do you remember all those questions? 18 A. Yes. 19 Q. Did the Federal Home Loan Bank Board 20 have to approve Mr. Connell's contract, or was it 21 up to the board to draft an appropriate contract? 22 A. It was up to USAT's board. 24771 1 Q. And do you recall that when the 2 question of Mr. Connell's contract came up in the 3 latter part of June, that you informed Mr. Berner 4 of that fact, that you didn't have to approve the 5 contract? 6 A. No, I don't recall what I might have 7 said to Mr. Berner at that time. 8 Q. Take a look at Exhibit T8081, which is 9 Tab 1377. 10 A. I have the page. 11 Q. And if you look in the third sentence 12 in the first paragraph, Mr. Berner reports, "Neil 13 said that the approval was not required but that 14 he would strongly suggest that I forward a copy to 15 him so that he could review it." 16 Do you see that? 17 A. Yes. 18 Q. And then if you turn to the next page, 19 which is Exhibit T8089 -- 20 MR. VILLA: Your Honor, I would request 21 that the next sentence be read. "If he saw a 22 major problem, he would let me know. And if he 24772 1 did not, he would brief George Barclay on the 2 contents." 3 THE COURT: Thank you. 4 Q. (BY MR. RINALDI) And then if you turn 5 to the next page in your book -- 6 THE COURT: You mean the next exhibit? 7 MR. RINALDI: Yes. T8089. 8 A. Yes. 9 Q. (BY MR. RINALDI) It says T1380. 10 A. Yes. 11 Q. The second paragraph says, "Jenard 12 Gross began the meeting by explaining that we had 13 made an offer to Mr. Larry Connell. We have 14 forwarded a contract to him and had indicated that 15 he would sign it and return it to us within the 16 next day or so." Then it says, "Mr. Barclay asked 17 whether or not the Dallas bank needed to approve 18 the contract, and he was told by Mr. Twomey and by 19 Mr. Thomas that they did not have to approve it." 20 Do you see that? 21 A. Yes. 22 Q. Was it the practice of the Bank Board 24773 1 at this point in time to approve contracts of 2 executive officers of savings and loan 3 institutions? 4 A. No. 5 Q. And in Mr. Barclay's presence, you had 6 advised Mr. Gross and Mr. Berner that no such 7 approval was necessary, correct? 8 A. Right. 9 Q. Now, Mr. Berner, though, did send you a 10 copy of the contract, did he not? 11 A. Yes. 12 Q. And I believe you had testified that in 13 retrospect, it probably would have been a good 14 idea if you had written back to Mr. Berner 15 regarding the contract. 16 Do you recall that testimony? 17 A. Yes. 18 Q. When you didn't write back to 19 Mr. Berner, did Mr. Berner ever contact you and 20 say, "Neil, I haven't heard from you. What do you 21 think about the Connell contract?" 22 A. Not that I recall. 24774 1 Q. But you were in contact with Mr. Berner 2 on almost a daily basis at this point in time, 3 weren't you? 4 A. Pretty much. 5 Q. And he was constantly discussing the 6 question of whether USAT would be a participant in 7 the Southwest Plan? 8 A. Yes. 9 Q. And there was an ongoing dialogue 10 between you and Mr. Berner? 11 A. Yes. 12 Q. And yet, Mr. Berner to your 13 recollection never once asked you, "Neil, is the 14 Connell contract okay?" 15 A. Not that I can recall. 16 Q. Did he ever tell you, "Neil, we're 17 going to enter into eight more just like it so let 18 me know if it's okay"? 19 A. Not that I can recall. 20 Q. Turn to the next document, which is 21 Exhibit B2320, and it's Tab 1702. This is a memo 22 from Mr. Berner to Mr. Hurwitz and Mr. Munitz and 24775 1 Mr. Gross and Mr. Connell and Mr. Crow. And it 2 talks about a meeting that he had with you and 3 Robert Brick and Ginger Baugh and Dave Freimuth. 4 Do you see that? 5 A. Yes. 6 Q. And does Mr. Berner indicate -- now, 7 this is just two weeks after submitting the 8 contract to you, isn't it? 9 A. Yes. 10 Q. And does Mr. Berner anywhere in this 11 document indicate or ask you, "What's going on 12 with the contracts?" 13 A. No, I don't see it. 14 Q. Now, would you turn to Exhibit B2377? 15 And it's Tab 1775. Do you see in the second 16 paragraph it talks about a Mr. Dunn? 17 A. (Witness reviews the document.) Yes. 18 Q. Does that -- is that consistent with 19 your recollection of about the time Mr. Dunn 20 assumed his responsibilities? 21 A. Yes. 22 Q. And this reflects yet another meeting 24776 1 with Mr. Berner on August the 23rd, 1988, this 2 time? 3 A. A conversation, yes. 4 Q. And in that conversation, again, he 5 does not make any inquiry regarding the Connell 6 contract, does he? 7 A. No. 8 Q. Now, Mr. Berner -- I mean Mr. Villa 9 asked you a number of questions about a 10 supervisory exception. 11 Is the term "supervisory exception" a 12 term of art, or is that something that Mr. Villa 13 coined? 14 A. I cannot recall. I don't think it's a 15 standard term, regulatory term. 16 Q. I mean, there wasn't a regulation that 17 said you had to make an exception for 18 Mr. Connell's contract, was there? 19 A. No. 20 Q. Well, let me ask you this: You simply 21 took it upon yourself as the supervisory agent to 22 allow the contract to go forward; is that correct? 24777 1 MR. VILLA: Objection. Leading. 2 THE COURT: Denied. 3 A. Yes. 4 Q. (BY MR. RINALDI) And why was that? 5 A. Because in my view, there was an 6 absolute need of somebody with Larry Connell's 7 background for USAT in their management team. 8 Q. But weren't you concerned that the 9 compensation was excessive? 10 A. I felt the need was of paramount 11 priority for an institution that size which had 12 for some time had been requesting them to put in a 13 senior savings and loan executive who could take 14 charge and oversee the management of the 15 institution. 16 Q. Now, when you sent your directive to 17 USAT and you said, "Look. These contracts don't 18 comply with 563.39," did you direct them to 19 terminate or give notification to Mr. Connell that 20 his contract would be terminated? 21 A. No. 22 Q. And if you'll take a look at the next 24778 1 document in your book, it's T8111. 2 MR. VILLA: Do you have a tab number, 3 sir? 4 MR. RINALDI: Tab 444. This is the -- 5 I'm sorry. Yes, that's correct. 6 Q. (BY MR. RINALDI) And I notice in the 7 first paragraph, it talks about that the board of 8 directors has directed -- I'm talking about the 9 first numbered paragraph -- to immediately provide 10 60-day notice to Arthur Berner and Mr. Crow and 11 Gray and the other executives of USAT that had 12 received contracts that their contracts would not 13 be extended beyond December 31, 1988? 14 Do you see that? 15 A. Yes. 16 Q. Did you direct that the board advise 17 Mr. Connell that his contract would not be 18 extended? 19 A. No. 20 Q. And why was that? 21 A. The same as before. There was an 22 overriding reason to have Mr. Connell in there 24779 1 because of his background and expertise and the 2 absolute need for somebody like that at USAT at 3 that time. 4 Q. Okay. Now, would you take a look at 5 the next document in your book, which is T8115? 6 And I believe that this is a new exhibit; so, 7 we'll have to hand it up to the Court. 8 MR. RINALDI: We'll pass on this, I 9 guess. 10 THE COURT: How much more do you have, 11 Mr. Rinaldi? 12 MR. RINALDI: For this witness, I have 13 probably another hour and a half, two hours. 14 THE COURT: All right. We'll take a 15 short recess. 16 17 (Whereupon, a short break was taken 18 from 3:22 p.m. to 3:45 p.m.) 19 20 THE COURT: Be seated, please. We'll 21 be back on the record. 22 Mr. Rinaldi, you may continue. 24780 1 MR. RINALDI: I have handed up to the 2 Court two copies of T8115. 3 Q. (BY MR. RINALDI) Mr. Twomey, did there 4 come a time in the latter part of 1988 when you 5 learned that the officers and directors of USAT 6 had increased their salaries rather substantially? 7 Do you recall that? 8 A. Yes. 9 Q. And would you take a look at 10 Exhibit T8115 and tell me if you recognize that 11 document? 12 A. (Witness reviews the document.) 13 Q. It should be in your book, I think. 14 This has not been previously admitted. 15 A. 8115? 16 Q. Yes. 17 A. I have it. 18 Q. Okay. And can you describe for the 19 Court what this is? 20 A. Basically, it's an internal memo from 21 our legal staff regarding the USAT contracts. 22 It's dated November 4th, 1988. 24781 1 Q. And the first full sentence says, "This 2 replies to your memorandum of September 29th, 3 1988, to Beverly Isaiah-Bermudez regarding 4 employment contracts pertaining to United." 5 Do you see that? 6 A. Yes. 7 Q. Had you submitted the United contracts 8 to the legal department for their review? 9 A. Yes. After we received them, we did. 10 Q. Is this their response back to you? 11 A. Yes. 12 Q. So, there was a long hiatus, 13 apparently, between the time you actually 14 submitted them on November 29th and November 4th 15 when you received your analysis. 16 Do you see that? 17 A. Yes. 18 MR. RINALDI: Your Honor, I would move 19 the admission of T8115. 20 MR. VILLA: No objection. 21 THE COURT: Received. 22 Q. (BY MR. RINALDI) Now, in the last 24782 1 paragraph on the page, about the third sentence 2 down in that paragraph, it says, "It appears to us 3 that the new contracts of July 1st, 1988, for the 4 most part include the base salaries, both the 5 prior base salaries and the bonuses declared. 6 Consequently, new bonuses declared under the 7 current contract would be in addition to the 8 bonuses paid under the old contract." 9 Do you see that? 10 A. Yes. 11 Q. Was this the first time that you 12 learned that, in fact, the USAT July 1st, 1988 13 contracts had increased the salaries of the 14 officers by including the bonus as a base salary? 15 A. Well, it would be at this time or the 16 time we got the interim report, I believe. 17 Q. Well, look at the next document, which 18 is Ms. Bese's interim report that's No. 3; and 19 this is Exhibit B2699. It's Tab 1863. And if you 20 look at Page OW154215 -- 21 A. Interim report dated November 9th, 22 1988? 24783 1 Q. That's the one. And this is four days 2 after Ms. Bermudez writes her memo discussing the 3 new salary levels. 4 Do you see that? 5 A. Well, it's probably actually Dave Dixon 6 and Donna Guthrie's memo. 7 Q. I'm sorry. But this is five days 8 later, is it not? 9 A. Yes. 10 Q. And Ms. Bese then starts off in the 11 first sentence by saying, "The salaries for senior 12 executives and mid-management personnel were 13 increased as of July 1, 1988, by combining the 14 employee's 1987 base salary, minimum bonus, and 15 merit bonus." 16 Do you see that? 17 A. Yes. 18 Q. So, prior to receiving these two 19 documents, one from the legal department and the 20 second one from Ms. Bese, had you been aware that 21 USAT had -- in addition to simply entering into 22 employment contracts, had increased the salaries 24784 1 of their senior executives that had employment 2 contracts? 3 A. Probably shortly prior to this, I 4 wasn't aware of it. 5 Q. Shortly prior to this date meaning 6 November of 1988? 7 A. Yes. 8 Q. Do you recall whether you were ever 9 advised that in March -- on March 30th, 1988, USAT 10 had increased the salaries of its senior executive 11 staff? 12 A. I can't recall when I became aware of 13 that. I think it was much later in the year. 14 Q. And take a look at the next document, 15 which is T8053. This is Tab 421. This is a memo 16 from Mr. Berner to Mr. Whatley and Mr. Gross and 17 Mr. Munitz. And in the second paragraph, it 18 indicates, "We will change current salaries 19 effective January 1st, 1988, to reflect the true 20 market value of certain employees equal to the 21 1987 salary plus the bonus ceased in 1988 for 22 1987." 24785 1 Do you see that? 2 A. Yes. 3 Q. And then on the next page, it's 4 approved by Mr. Whatley. 5 Between March 31st, 1988, and November 6 of '88, did Mr. Berner ever tell you that there 7 had been salary increases for the senior executive 8 staff that are described in Paragraph 2 here? 9 A. Not that I recall. 10 Q. And if you look at the next document, 11 which is T8055, you'll see that -- this is a list 12 of salary increases that were actually -- 13 MR. VILLA: Do you have a tab number 14 for that, sir? 15 MR. RINALDI: T8055. It's Tab 422. 16 Q. (BY MR. RINALDI) These are salary 17 increases that were approved by Jenard Gross on 18 April 5, 1988. 19 Do you see that? 20 A. Yes. 21 Q. Let's just take the top one. It 22 appears that Mr. Gross' salary went from $291,000 24786 1 to $458,000. 2 Do you see that? 3 A. Yes. 4 Q. I think if you do the arithmetic, 5 that's something like a 55 percent increase. 6 Did Mr. Berner ever tell you that they 7 had increased the salaries of the executives by 8 over 50 percent in March of 1988? 9 A. No. 10 Q. Given what you recall of the condition 11 of USAT at this point in time, do you have a view 12 as to whether it was appropriate for USAT to have 13 increased the salaries of its senior executive 14 staff by over 50 percent in April of 1988? 15 A. No, I don't think it was appropriate. 16 Q. Now, you have testified previously that 17 you had continuous conversations with Mister -- 18 strike that. You had a number of conversations 19 with Mr. Berner throughout 1988 regarding the 20 operations of USAT. 21 Given your relationship with 22 Mr. Berner, would you have expected Mr. Berner to 24787 1 have advised you that USAT was giving salary 2 increases to its executive officers of over 3 50 percent? 4 A. Yes. 5 Q. And you have no recollection that he 6 ever told you that? 7 A. That's right. 8 Q. Now, Mr. Villa asked you a number of 9 questions about a letter or an inquiry that was 10 sent by Senator Byrd; and I wanted to follow up on 11 that. 12 If you'll turn to the next document in 13 the book, it's B2156, Tab 1892. These are 14 questions for the record from Senator Robert C. 15 Byrd. 16 Do you see that? 17 A. Yes. 18 Q. Now, after this -- these questions were 19 received by the Federal Home Loan Bank Board, did 20 you as the supervisory agent take any special 21 action with respect to USAT as a result of the 22 receipt of this letter from Senator Byrd? 24788 1 A. I don't recall any special action. 2 There was a letter sent to UFG regarding the net 3 worth maintenance agreement about that time that I 4 now recall. 5 Q. Okay. Did you feel that Senator Byrd 6 was trying to pressure you to act in a particular 7 way regarding USAT by propounding these questions? 8 A. No. 9 Q. Did anyone in Washington or the Federal 10 Home Loan Bank of Dallas instruct or direct you to 11 take any particular action regarding USAT as a 12 result of the Byrd letter? 13 A. No. 14 Q. Now, one of the issues that's raised by 15 Senator Byrd was whether it would assist Charles 16 Hurwitz in his takeover activities if the Federal 17 Home Loan Bank of Dallas granted forbearance from 18 USAT complying with various regulatory provisions. 19 Do you see that? It's on the first 20 page at OW077431. And if you turn to the next 21 page, in the middle of the page, it talks about if 22 the Bank Board grants forbearance. 24789 1 A. Yes, I see it. 2 Q. And in specific, it makes reference to 3 brokered deposit requirements. 4 Do you see that? 5 A. Yes. 6 Q. Now, what is that referring to, the 7 brokered deposit requirements? 8 A. There was a concern among a lot of 9 people at the time regarding the percent of 10 brokered deposits at any one institution being 11 excessively large because basically it was another 12 form of borrowed money that happens to be insured 13 deposits. 14 Q. And Mr. Byrd or Senator Byrd was 15 expressly inquiring as to what the Bank Board was 16 going to do regarding an application for 17 forbearance on brokered deposits, wasn't he? 18 A. Well, I think the application was on 19 capital forbearance; but, again, a number of 20 institutions had used brokered deposits to fuel 21 their growth. And he was concerned about that, I 22 assume. 24790 1 Q. Well, if you look at the front page of 2 the document, the second full paragraph, it says, 3 "USAT has applied for capital forbearance with the 4 Federal Home Loan Bank of Dallas requesting that 5 USAT not be required to comply with federal 6 regulations relating to..." 7 Then it says "the level of USAT's 8 capital." That would make reference to its 9 minimum capital requirement. Right? 10 A. Yes. 11 Q. Then it says "the levels of brokered 12 deposits"? 13 A. Yes. 14 Q. That would be a request for a waiver of 15 brokered deposits. Right? 16 A. Yes. 17 Q. And then, finally, it says "a waiver of 18 loan-to-one borrower"? 19 A. The institution at that time would have 20 been restricted to make loans to one borrower 21 limited by its capital or 10 percent of the 22 deposit base, whichever was lower. 24791 1 Q. Okay. Now, Mr. Villa, when he 2 questioned you, implied that somehow by the 3 receipt of this letter, it had caused you to deny 4 the request for forbearance that had been filed by 5 USAT. 6 Do you recall those questions? 7 A. Yes. 8 Q. In fact, Mr. Twomey, do you recall 9 whether the Bank Board granted the request for 10 forbearance on the brokered deposit request? 11 A. No, I don't recall. 12 Q. Well, why don't you take a look at 13 Exhibit 1450. It's T8142, and it's the S memo. I 14 believe it's the fourth document in your first 15 book, if I'm not mistaken. 16 And in particular, I direct your 17 attention to Page 5; and there's a Paragraph E at 18 the bottom. 19 A. Yes, I see it. 20 Q. Okay. And it discusses the brokered 21 deposits limitation, does it not? 22 A. Yes. 24792 1 Q. And what action was taken by the 2 Federal Home Loan Bank of Dallas with respect to 3 the request for the forbearance on the level of 4 brokered deposits that had been requested by USAT? 5 A. The PSA granted a waiver on 6 September 20th, 1988, good for one year. 7 Q. And that was done even though 8 Senator Byrd had sent his questions, wasn't it? 9 A. Yes. 10 Q. Does it appear from this that the 11 Federal Home Loan Bank Board was influenced by 12 Senator Byrd's inquiry? 13 A. No. 14 Q. Now, during this period of time, didn't 15 the Federal Home Loan Bank Board also grant other 16 exemptions and applications by USAT that were -- 17 or by UFG that were beneficial to UFG and its 18 shareholders? 19 A. I believe so. 20 Q. Do you recall that Mr. Villa showed you 21 some documents relating to a request by UFG to 22 restructure its debt? 24793 1 A. Yes. 2 Q. And the request for debt restructure 3 was granted, wasn't it? 4 A. Yes. 5 Q. And if that request for restructuring 6 the debt had not been granted, I believe Mr. Villa 7 painted a parade of horribles, didn't he? 8 A. Yes. 9 Q. In fact, one of them was that UFG was 10 going to implode and would no longer exist because 11 all of its cross-defaulted debt was going to go 12 into default and they would have lost the entire 13 investment that they had in USAT. 14 Do you recall that? 15 A. Yes. 16 Q. But the Bank Board granted the 17 application, didn't they, and allowed them to 18 restructure their debt? 19 A. Yes. 20 Q. And what effect did that have on the 21 shareholders of UFG? Was it beneficial to them? 22 A. I believe so. 24794 1 Q. In what way? 2 A. Well, if we hadn't done it, UFG based 3 on what we knew at the time would have, as you 4 said, defaulted; and that would have been negative 5 for the holding company. 6 Q. And the debt restructuring was done in 7 May and June of 1988, wasn't it? 8 A. Yes. 9 Q. And that would have been approximately 10 a month or two months after Senator Byrd wrote his 11 letter? 12 A. Yes. 13 Q. Does it appear that the Federal Home 14 Loan Bank of Dallas was influenced by Senator 15 Byrd's letter? 16 A. No. 17 Q. Now, Mr. Villa talked about some CEBA 18 legislation enacted in August of 1987. 19 Do you remember those questions? 20 A. Yes. 21 Q. He also indicated that USAT had never 22 availed itself of the arbitration procedure under 24795 1 CEBA. 2 Do you recall that? 3 A. Yes. 4 Q. Notwithstanding the fact that they 5 didn't avail themselves of the arbitration, USAT 6 fiercely contested, I believe it was stated in the 7 S memo, the examiner's classification of assets. 8 Do you recall that? 9 A. Yes. 10 Q. And do you recall that -- well, can you 11 describe that, what you meant by "fiercely 12 contested"? 13 A. They disagreed with the asset 14 classification that occurred during the '86 15 examination, and they disagreed with the valuation 16 reserves that the examiner recommended based on 17 that examination. 18 Q. Is it unusual to put into an S memo 19 words like "fiercely"? 20 A. Yes. 21 Q. And why did you use that term? 22 A. Because normally when we -- in the 24796 1 transmission letter when we send a letter to the 2 board of directors and we recommend or we direct 3 them to establish certain reserves, they 4 99.9 percent of the time would agree to do that. 5 And then if they had an argument, they would come 6 back later; and we would have a discussion on it. 7 In the case of USAT, they just did not want to 8 book their reserves at all. 9 Q. Did you have any other institutions in 10 your portfolio that you supervised that reacted in 11 the way USAT had with respect to the asset 12 classifications? 13 A. In that period up to 1988 -- the end of 14 1988, no. 15 Q. Now, if USAT had accepted the 16 classifications that Vivian Carlton had requested 17 in the 1986 exam, how would it have affected 18 USAT's capital? 19 A. If they had booked the reserves? 20 Q. Yeah. 21 A. They would have failed their minimum 22 capital requirements. 24797 1 Q. If they had failed their minimum 2 capital requirements at the conclusion of the 1986 3 examination, would that have impacted the manner 4 in which they conducted their business? 5 A. Yes, because most likely they would be 6 asked to sign a supervisory agreement because of 7 their failure to meet the minimum net worth; and 8 those agreements normally have operating 9 restrictions. 10 Q. What would be the kinds of operating 11 restrictions that would be included in that kind 12 of agreement? 13 A. Well, normally, those types of 14 agreements are tailored to the institution's 15 activities; but it limits the size of loans that 16 they can grant without SA approval, probably limit 17 their investment activities. 18 Q. Okay. And you've described several 19 different investment activities they are involved 20 in. 21 Would it have impacted in any way their 22 direct investments in high-yield bonds? 24798 1 A. Yes. 2 Q. How would it have impacted it? 3 A. Well, again, there's a probability that 4 they would be -- after review by the RRC, there 5 would be a restriction on new purchases of junk 6 bonds. 7 Q. So, in other words, it was critical if 8 UFG was going to continue to operate in the 9 fashion it had in the past for it to resist the 10 classifications that Vivian had recommended? 11 MR. VILLA: Objection. Leading. 12 THE COURT: Sustained. 13 Q. (BY MR. RINALDI) I would like to show 14 you a document that's not in your book. This is 15 Exhibit A11153, and it's at Tab 1870. This is -- 16 I'm sorry. I gave you the wrong document. I 17 meant to give you Tab 1909, and it's A111093 18 (sic). Now, this is a document Mr. Villa showed 19 you and you testified about extensively; and I 20 wanted to clarify some of Mr. Villa's comments. 21 MR. EISENHART: Your Honor, I think 22 Mr. Rinaldi may have put one too many 1s in there. 24799 1 I think it's 11093. 2 MR. RINALDI: Oh, thank you. You are 3 correct. 4 Q. (BY MR. RINALDI) Now, I believe 5 Mr. Villa directed you to a section at the 6 beginning of the memorandum that talks about REO 7 as reflected in the March 9th -- I mean, the REO 8 in this March 9th, 1988 memorandum. It's the 9 first two sentences. 10 Do you see that? 11 A. Yes. 12 Q. And Mr. Villa read the following to 13 you: "United has historically been a residential 14 lender. The decline in the economy in Houston in 15 recent years has caused problem loans and REO to 16 increase significantly from 1.3 percent of assets 17 at the July 23rd examination to 10.6 assets at the 18 May 26, 1987 examination." 19 Now, this memorandum that Mr. Villa 20 read to you from dealt specifically with REO in 21 USAT's portfolio as of the May 26, 1986 22 examination; isn't that correct? 24800 1 A. Yes. 2 Q. In fact, if you look at the top of the 3 document, it even makes reference to examination 4 information. 5 Can you tell me which examination it's 6 referring to there? 7 A. Well, even though it's kind of left out 8 here, it probably is the May 27th, 1986 exam. 9 Q. Okay. Then in the first full 10 paragraph, it talks about the May 27th, 1986 exam. 11 If you look in the second paragraph, it again 12 talks about the May 27, 1986 exam. If you look on 13 the top of the next page, it talks about the 14 May 27, 1986 exam. 15 Do you see that? 16 A. Yes. 17 Q. Then the first full paragraph of the 18 next page, it again talks about the May 27, 1986 19 exam. 20 Do you see that? 21 A. Yes. 22 Q. Now, this was a recommendation -- first 24801 1 of all, this is a memo relating to the application 2 for forbearance that was prepared by someone at 3 the Federal Home Loan Bank? 4 A. Yes. 5 Q. Now, as you look at the memo, do you 6 know who prepared the document? 7 A. Ginger Baugh. 8 Q. Does her signature appear on it? Do 9 you know whether she was, in fact, the one that 10 prepared it? 11 A. Well, I don't see her signature; but at 12 that time frame, she was the -- one of the 13 analysts that would have been working on it. 14 Q. Okay. And what would have been the 15 source of the information that is contained in 16 that first paragraph there that talks about the 17 REO in the 1986 exam? 18 A. It would be the information that came 19 from the May 1986 examination report. 20 Q. Now, if it was based on the 1986 21 examination report, would those comments have 22 pertained to underwriting deficiencies that were 24802 1 later noted in the 1987 and '88 exams, the results 2 of which weren't available to the writer on 3 March 9th, 1988? 4 A. Yes. 5 Q. It would have pertained to those? 6 A. Well, I think there were comments in 7 both exams about loan underwriting deficiencies, 8 lack of appraisals. 9 Q. Well, right here, we're talking about 10 REO to increase significantly. 11 A. This only pertains to the 1986 exam, 12 this information. 13 Q. If it -- if the REO they are talking 14 about is the REO that existed at the time of the 15 1986 exam, would it include any real estate loans 16 or investments that had not become REO as of May 17 the 27th, 1986? 18 A. No. 19 Q. Now, there are two loans in this 20 particular litigation that have been of concern. 21 One is the Park 410, and the other is the Norwood 22 real estate transactions. And they are the 24803 1 subject of the Notice of Charges in this action. 2 But they were not REO on May 27th, 3 1986. 4 A. Okay. 5 Q. Given that fact, would the comments in 6 this memorandum that Mr. Villa asked you about 7 have had anything to do with the underwriting of 8 those properties if they weren't REO on May 27th, 9 1986? 10 A. I'm not sure when Vivian -- whether it 11 was the '86 exam or the '87 exam that she 12 classified them. If they weren't REO in 1986 as 13 of the exam date, then they are not in this 14 10.6 percent number. 15 Q. Now, if you'd turn to the second page 16 at the bottom, Mr. Villa pointed you to the last 17 sentence. And I guess I have a couple of 18 questions. It says, "In addition, we have no 19 indication that United's problem assets are 20 attributable to underwriting deficiencies or 21 imprudent operating practices." 22 Do you remember he pointed that out to 24804 1 you the other day? 2 A. Yes. 3 Q. Let me ask you this: Does that quote 4 regarding the lack of underwriting deficiencies at 5 USAT accurately summarize the 1986 examination 6 results on the subject of underwriting that you 7 recall? 8 A. I know there were some loan 9 underwriting deficiencies noted, missing 10 appraisals; but I just don't recall if there was 11 something specific in the 1986 exam. 12 Q. Well, what about the Couch mortgages? 13 Weren't they a significant asset problem? 14 A. Yes, they were. 15 Q. Did those problems relate in any way to 16 USAT's underwriting deficiencies? 17 A. Yes. 18 Q. Does it appear that this statement that 19 appears at the bottom of OW153063 doesn't fully 20 reflect the true results of the 1986 examination 21 with respect to underwriting questions? 22 A. Yes. 24805 1 Q. It does, or it does not? 2 A. The best I can recall right now, 3 because of Couch and what I can recall from the 4 exam, there were appraisal deficiencies and other 5 things that were noted from that examination 6 report that were basically loan underwriting, 7 credit underwriting problems. 8 Q. Now, Mr. Villa, I believe, had asked 9 you some questions about the Pru-Bache -- maybe 10 I'm confused in who asked you this question. 11 You were asked some questions about a 12 document that's been admitted into evidence as 13 Exhibit 4331, and it's Tab 1896. I believe 14 Mr. Villa showed you this and said isn't it, in 15 fact, true that Merrill Lynch you were told wasn't 16 qualified to conduct a review of USAT's securities 17 transactions because they have been expensive when 18 they did it in the past with, I think, 19 San Jacinto? 20 Do you recall that discussion? 21 A. Yes. 22 Q. Now, this is a memo that appears to be 24806 1 addressed to you. 2 Do you know who sent it to you? 3 A. (Witness reviews the document.) No. 4 Q. But whoever sent it to you, after they 5 sent it to you, you then passed it along to Ginger 6 Baugh? 7 A. Yes. 8 Q. And that's your handwriting at the 9 bottom? 10 A. Yes. 11 Q. Okay. Now, what I'm interested in is 12 the last sentence in the memo. Now, you 13 testified, did you not, that Pru-Bache never 14 reviewed the USAT high-yield bond portfolio in its 15 review of the -- never reviewed the trading in the 16 high-yield bond portfolio. 17 Do you recall that? 18 A. Yes. 19 Q. Why was it that you had originally 20 requested as part of the scope of Pru-Bache's 21 review that they look at the actual trades? 22 Do you recall? 24807 1 A. Yes. I just thought it was appropriate 2 to do so. 3 Q. And appropriate for what purpose? 4 A. Testing that they -- the policies and 5 procedures that they were following were being 6 followed and no exceptions were being made. 7 Q. And, ultimately, you testified that 8 that was the one thing that Pru-Bache didn't do, 9 correct? 10 A. Yes. 11 Q. Now, previously, you had had Jonathan 12 Scott look at the portfolio, had you not? 13 A. Yes. 14 Q. And had he looked at the specific 15 trades? 16 A. No, I can't recall that he looked at 17 the particular trades. There's a memo from him a 18 year before this, but -- 19 Q. And the memo would reflect what it is 20 he did, would it not? 21 A. Yes. 22 Q. Okay. Now, the last sentence in this 24808 1 memo says -- it's a query; and it says, "Are there 2 examiners in the Federal Home Loan Bank system who 3 are sufficiently knowledgeable of securities 4 investments to look at United's bond trading 5 activities objectively? Maybe someone from the 6 New York district?" 7 Do you see that? 8 A. Yes. 9 Q. Were there any examiners in the Federal 10 Home Loan Bank of Dallas who you felt were 11 sufficiently knowledgeable on securities 12 investments to look at United's bond trading 13 activities? 14 A. At or about this time, we had formed a 15 capital markets group; and the people in there 16 headed up by John Scott would probably have those 17 type of skills. 18 Q. Okay. Were they examiners? 19 A. Some were. 20 Q. Okay. And did they ever look at this 21 portfolio? 22 A. No. 24809 1 Q. And do you know why they were 2 requesting whether there was someone in the 3 New York district that could look at the 4 portfolio? 5 A. I believe just because New York was the 6 center for capital, they felt somebody might 7 have -- from that district might have more 8 knowledge about junk bonds. 9 Q. Did you feel that Vivian Carlton had 10 the expertise to analyze a high-yield bond 11 portfolio such as -- the trading in a high-yield 12 bond portfolio such as USAT was operating? 13 A. I believe, you know, Vivian was 14 capable. But the high level of sophistication 15 needed to do this, she would have probably asked 16 for help. 17 Q. In connection with the '86 or '87 exam, 18 she did not study the trading in the high-yield 19 bond portfolio, did she? 20 A. Not that I recall. 21 Q. Now, Mr. Villa asked you a number of 22 questions and spent a lot of time on the subject 24810 1 of your recommendation that Mr. Crow and 2 Mr. Berner and Mr. Munitz should be dismissed at 3 the time of the receivership. 4 Do you recall that line of questioning? 5 A. Yes. 6 Q. I would like to go back over a couple 7 of points with you. 8 Now, take a look at Exhibit T8119. 9 It's Tab 448. This is the consent agreement that 10 was entered into on November 7th, 1988. 11 Do you see that? 12 A. Yes. 13 Q. Now, on Paragraph 8 of the consent 14 agreement, it talks about changes in directors and 15 management. 16 Do you see that? 17 A. Yes. 18 Q. Would you read that to yourself? 19 A. (Witness reviews the document.) Okay. 20 Q. Now, what was the purpose of that 21 provision in the consent agreement? Yeah, the 22 consent agreement. 24811 1 A. Basically so the supervisory agent or 2 FSLIC could make changes in the directors or the 3 management, officers and employees of the 4 institution. 5 Q. And was this an unusual provision to 6 put into a consent agreement? 7 A. No. It was standard. 8 Q. And why was that? 9 A. From time to time, we would direct an 10 institution operating under such a consent 11 agreement to terminate an employee or officer or 12 director. 13 Q. So that Mr. Crow and Mr. Berner weren't 14 the only two people at an institution that had 15 gone into receivership who were terminated? 16 A. No. 17 Q. Were there a number of others that you 18 recall? 19 A. I can recall one other institution 20 about the same time where we terminated some of 21 the officers at the time of the receivership. 22 Q. So, it wasn't unusual to make the kind 24812 1 of recommendation that you made with respect to 2 Mr. Berner and Mr. Crow? 3 A. No. 4 Q. Now, take a look at the next document 5 in your book, which is T8107; and this is Tab 442. 6 Strike that. 7 Let's go on to the next document, which 8 is Tab 417; and it's T8048. 9 A. March 25th, 1988? 10 Q. Yes, that's correct. Now, this is a 11 memorandum to Mr. Berner from Thomas Leahey. And 12 Mr. Leahey, I will tell you, is their savings and 13 loan regulatory counsel. And this is a memo that 14 he was provided -- that Mr. Leahey provided to 15 Mr. Berner shortly before the employment contracts 16 were -- I'm sorry -- shortly before the salaries 17 of the executives were increased. 18 But what I'm interested in is the 19 paragraph that starts on Page 1 where it talks 20 about termination in the context of assistance. 21 If you would read that paragraph and then over 22 onto the next page. 24813 1 A. (Witness reviews the document.) 2 Q. And at the -- in the last sentence of 3 that paragraph, it says, "Thus, termination of 4 employment contracts has been consistent with the 5 general FSLIC position, that it will not provide 6 assistance to an institution that is still managed 7 by those persons responsible for the condition 8 giving rise to the need for assistance." 9 Do you see that? 10 A. Yes. 11 Q. Now, did you have some understanding at 12 this point in time as to whether FSLIC had a 13 policy regarding the provision of assistance to an 14 institution that is still managed by persons 15 responsible for the condition of the institution? 16 A. Well, I believe generally regarding 17 employment contracts, generally those employment 18 arrangements would be terminated at the time of a 19 receivership. 20 Q. Well -- but this goes farther and is 21 more broadly stated. It says that "FSLIC will not 22 provide assistance to an institution that is still 24814 1 managed by those persons responsible for the 2 condition giving rise to the need for assistance." 3 Do you see that? 4 A. Yes. 5 Q. Did you understand that that was the 6 position that FSLIC took with respect to providing 7 assistance to a failed institution? 8 A. Generally, I was aware that if open 9 bank assistance was being offered, usually they 10 would call for a change in management because of 11 the FSLIC money going into the institution. 12 Q. So that if an institution which 13 required assistance from FSLIC -- well, when you 14 say "open bank assistance," what are you referring 15 to? 16 A. Well, generally, even though you might 17 have just -- an institution might have just 18 brought in a brand new team of management, there's 19 generally the policy that all the top managers 20 would be terminated even if they had just come 21 onto the scene or had been curing the problem. 22 It was generally that those officers 24815 1 would be terminated and a new management team 2 would be brought in because of the FSLIC money 3 involved. 4 Q. Okay. And what if an institution, say, 5 such as USAT were placed into receivership and a 6 new institution was ultimately created such as 7 occurred with respect to USAT? Did you have any 8 understanding as to whether FSLIC had a policy as 9 to whether they would permit existing management 10 to stay on at the new institution if that 11 management had been responsible for the condition 12 that led to the receivership? 13 A. No. I think generally the FSLIC would 14 terminate the employment. 15 Q. And that's what Mr. Leahey is informing 16 Mr. Berner of, is it not? 17 A. Yes. 18 Q. So, Mr. Berner and the board of USAT 19 were aware as early as March of 1988 that when 20 USAT went into receivership, there was a 21 probability that they would be terminated? 22 A. Yes. 24816 1 Q. Now, let's take a look at your 2 recommendation that Mr. Berner and Mr. Crow not be 3 retained. And that's Exhibit T8145, and it 4 appears at Tab 1865. 5 Now, the consent agreement already said 6 they could be terminated at will, didn't it? 7 A. Yes. 8 Q. Were you required to give any 9 rationalization or justification as to why you 10 would terminate an individual? 11 A. No. 12 Q. So, you didn't even have to write this 13 memo? 14 A. No. 15 Q. You could have summarily dismissed both 16 Mr. Munitz and Mr. Crow? 17 A. Yes. 18 Q. Now, when you wrote this memo, did you 19 ever anticipate that 10 years hence someone would 20 be fly-specking it for every comma and period 21 being in place? 22 A. No. 24817 1 Q. This was, again, a fairly compressed 2 period of time, was it not? 3 A. Yes. 4 Q. Did you believe in good faith at the 5 time that you wrote T8145 that there was an 6 adequate factual basis to justify the 7 recommendation that Mr. Berner and Mr. Crow be 8 dismissed? 9 A. Yes. 10 Q. And are the reasons for your making 11 that recommendation set out in T8145 and the three 12 attachments thereto? 13 A. Yes. 14 Q. Now, on Page OW028473, it states in the 15 second full paragraph, "As indicated in the 16 attached management assessment report, under the 17 leadership of these individuals, United has 18 engaged in unsafe and unsound practices which have 19 lead to the deterioration of United's financial 20 condition." 21 Do you believe that that was an 22 accurate statement at the time you wrote it? 24818 1 A. Yes. 2 Q. Do you still believe that that's an 3 accurate statement today? 4 A. Yes. 5 Q. Did you believe at the time that that 6 was an appropriate justification for dismissing 7 Mr. Crow and Mr. Berner? 8 A. Yes. 9 Q. Now, do you recall whether Ms. Bese or 10 anyone else shared your views regarding Mr. Berner 11 and Mr. Crow? 12 A. No, I don't recall today. 13 Q. Well, let's take a look at 14 Exhibit B2699. It's Tab 1863. This is again the 15 interim exam report. 16 This time I would like you to take a 17 look at OW0154220. Now, Enclosure No. 5 is dated 18 December the 19th, 1988, actually two days prior 19 to your making your recommendation regarding the 20 dismissal of Mr. Crow and Mr. Berner. 21 Do you see that? 22 A. Yes. 24819 1 MR. VILLA: Again, it misstates the 2 record. The memo recommending dismissal is dated 3 December 15, 1988. 4 MR. RINALDI: We're going to get to 5 that. 6 Q. (BY MR. RINALDI) Now, attached to your 7 cover memo, which is T8145, is an update or 8 management assessment. 9 Do you see that? 10 A. Dated December 15th? 11 Q. Yes. 12 A. Yes. 13 Q. And if you turn to the last page, you 14 have indicated at Paragraph -- Point No. 1, 15 "termination of above-cited employment contracts 16 at a time of receivership" and then it says 17 "immediate dismissal of Michael Crow, Bruce 18 Williams, and Arthur Berner." 19 Do you see that? 20 A. Yes. 21 Q. Now, prior to your receiving the 22 December 19th, 1988 examination report, what was 24820 1 your practice regarding communications with 2 Ms. Bese and the results of her examination? 3 A. We had oral communications, telephone 4 calls. And then, of course, every few weeks, an 5 interim report would be -- she would come in and 6 present it to the Southwest Plan staff and to my 7 staff. 8 Q. So, you didn't just send her out and 9 every week or two, she would send back an interim 10 report and you would learn what was going on when 11 you got the written report? 12 A. No. 13 Q. Now, on December 15th, 1988, when you 14 made your recommendation, is that the kind of 15 recommendation you would have made in a vacuum 16 without checking with the examiner? 17 A. No. 18 Q. Do you recall as you sit here today 19 whether you discussed with Ms. Bese the question 20 of whether Mr. Crow or Mr. Williams or Mr. Berner 21 should be dismissed at the time of the 22 receivership? 24821 1 A. I probably did, but I don't know the 2 exact time frames. 3 Q. Now, take a look at Enclosure No. 5. 4 This is written by Ms. Bese. Does it appear from 5 the recommendations that appear in Paragraphs 2 6 and 3 that Ms. Bese shared your views regarding 7 the dismissal of Mr. Berner and Mr. Crow? I mean, 8 do you see the two paragraphs I'm referring to? 9 A. Under "management evaluation"? 10 Q. Yes. 11 A. Okay. (Witness reviews the document.) 12 Q. Now, we're looking at OW154220. And in 13 the second paragraph, she concludes, "Their 14 decisions have had a significant negative impact 15 on the viability of the association." 16 Do you see that? 17 A. Yes. 18 Q. And you shared that concern, did you 19 not? 20 A. Yes. 21 Q. And then in the next paragraph, she 22 says, "Jenard Gross has already resigned from his 24822 1 position with United Savings." Then it goes on 2 and says, "Serious consideration should be given 3 as to whether Michael Crow and Arthur Berner 4 should continue employment at United Savings." 5 Do you see that? 6 A. Yes. 7 Q. Does it appear that Ms. Bese shared 8 your views that these persons, Mr. Berner and 9 Mr. Crow, should be dismissed? 10 A. Yes. 11 Q. Now, let's talk about Ms. Bese. She 12 didn't get there until September the 7th, 1988, 13 did she? 14 A. That's right. 15 Q. Had you ever seen her before? 16 A. No. 17 Q. Did you know who she was? 18 A. No. 19 Q. Where did she come from? 20 A. The Federal Home Loan Bank of Seattle. 21 Q. And after she got there, did you tell 22 Ms. Bese or did anyone instruct Ms. Bese that the 24823 1 Federal Home Loan Bank Board wanted to get rid of 2 Mr. Crow and Mr. Berner? 3 A. No. 4 Q. And did Ms. Bese make an independent 5 determination as to whether Mr. Crow and 6 Mr. Berner were suitable individuals to continue 7 to serve with USAT or its successor entity? 8 MR. VILLA: Objection, Your Honor. You 9 know, they don't want to bring Ms. Bese in; and 10 when this witness is asked questions about why 11 Ms. Bese left out all the information, his 12 testimony is you have to ask Ms. Bese, who they 13 are not bringing. 14 Under the circumstances, for them to 15 ask him what Ms. Bese's determination is seems to 16 be far beyond the pale of what this witness can 17 testify to. 18 MR. RINALDI: Fine. I'll rephrase the 19 question. 20 Q. (BY MR. RINALDI) Did you tell Ms. Bese 21 that you wanted her to recommend in her report 22 that serious consideration be given to the 24824 1 termination of Mr. Berner and Mr. Crow? 2 A. No. 3 Q. Did anyone on your staff tell her that? 4 A. Not to my knowledge. 5 Q. Did you consider Ms. Bese to be a 6 competent examiner? 7 A. Very. 8 Q. Now, Mr. Villa suggested that perhaps 9 the real reason that you made the recommendation 10 in Exhibit T8145 and the three attachments that 11 Mr. Crow and Mr. Berner be dismissed was that you 12 had some personal animus towards Mr. Berner and 13 Mr. Crow because of the way that they had reacted 14 when you requested that certain assets be disposed 15 of by USAT. 16 Do you recall those questions? 17 A. Yes. 18 Q. Now, were you angry at Mr. Berner or 19 Mr. Crow because of their reaction to the request 20 to dispose of assets? 21 A. No. 22 Q. Did you recommend their dismissal 24825 1 because they raised questions regarding the 2 dismissal of those assets? 3 A. No. 4 Q. Now, how was the decision arrived at as 5 to whether USAT should sell certain assets that 6 you directed USAT to dispose of? 7 A. Primarily from FSLIC. 8 Q. Okay. But were you involved in that 9 process? 10 A. If I was, it was just as an 11 intermediary, passing on a word, getting direction 12 from either Mike Patriarca or somebody at FSLIC. 13 Q. So, you were just the messenger? 14 A. At best. 15 Q. Now, Mr. Villa and Mr. Nickens have a 16 clever little phrase called "deliver the bank." 17 Remember that one? 18 A. Yes. 19 Q. Now, there was a suggestion that 20 somehow if you were going to deliver the bank to 21 Mr. Ranieri, you had to get rid of existing 22 management. 24826 1 Do you recall the questions in that 2 regard? 3 A. Yes. 4 Q. Now, did you recommend that Mr. Crow 5 and Mr. Berner be dismissed in order to facilitate 6 delivering the bank to Mr. Ranieri? 7 A. No. 8 Q. Now, by the time you made your 9 recommendation which was the 15th or the 21st, 10 take your pick -- and I'm referring to the fact 11 that there's one memo, T8145, which is a cover 12 memo dated December 21st and then after that, 13 there is another memo to Mr. Brick dated 14 December 15th, 1988. 15 But at least by December 15th, had a 16 decision been made as to whether Mr. Ranieri was 17 going to get USAT after the receivership? 18 A. Earlier on, there was some type of 19 meeting in which the different packages and who 20 was the primary person negotiating for those 21 packages was held. And at that time, they 22 assigned responsibility for certain -- you know, 24827 1 certain people to negotiate the operating 2 agreement, et cetera, et cetera. 3 You know, it was probably my 4 understanding at that time that the only ones they 5 were negotiating with was the Ranieri group for 6 USAT. 7 Q. And that would have been well before 8 December 15th when you wrote your memo to dismiss 9 Mr. Crow and Mr. Berner, correct? 10 A. It would have been earlier than that, 11 yes. 12 Q. Now -- so, in other words, the 13 decision -- or at least so far as you know, a 14 decision as to whether the institution should go 15 to Ranieri or not had occurred sometime prior to 16 December 15th? 17 A. Yes. 18 Q. Now, if the FSLIC had followed through 19 on that determination and delivered or given the 20 thrift to Mr. Ranieri, did Mr. Ranieri, in light 21 of the consent agreement, have the ability to 22 terminate Mr. Berner and Mr. Crow? 24828 1 A. Well, I believe Mr. Ranieri or his 2 group could terminate any employee at the time 3 they took over the institution; but not -- I don't 4 think he could terminate employees with the 5 consent agreement. 6 Q. Okay. I'm sorry. I put in the consent 7 agreement. 8 But once Mr. Ranieri received the 9 institution or obtained it after the receivership, 10 it was his prerogative to dismiss employees that 11 he didn't feel comfortable with, correct? 12 A. Yes. 13 Q. So, given that fact, was it necessary 14 for you to dismiss Mr. Crow and Mr. Berner in 15 order for Mr. Ranieri to get the bank? 16 A. No. 17 Q. Now, can you explain -- you testified 18 on direct-examination or -- strike that -- I 19 believe it was on cross-examination in the 20 transcript at Page 24226 as follows: Quote, "I 21 couldn't trust them, and that's the conclusion I 22 reached." 24829 1 Do you remember giving that testimony? 2 A. Yes. 3 Q. Can you explain to the Court what you 4 meant by that? 5 A. Your Honor, I just -- for a long period 6 of time, they had told me they were going to have 7 close communications with me, keep me informed of 8 everything that was going on. Particularly during 9 the time that the FSLIC negotiations were going on 10 between -- involving USAT, I felt that they had 11 been talking back and forth to me as far as where 12 they stood with the negotiations, what was going 13 on, what their understandings were. And we, of 14 course, would keep them informed of what we were 15 hearing at the same time. So, I thought we had an 16 open communication going back and forth. 17 I was -- when the -- these employment 18 agreements came to light during the '88 exam, it 19 was a surprise to me; and I felt that it was 20 inappropriate for them to enter into such 21 contracts at a time when the institution was in 22 trouble. 24830 1 Q. And you felt as a result of that that 2 you couldn't trust them? 3 A. Yes. 4 Q. And were you then going to be the 5 supervisory agent of the successor institution? 6 A. I'm not sure when that was decided, but 7 I ended up being the supervisory agent for the new 8 Bank United. 9 Q. And was it because of that lack of 10 trust that you recommended the dismissal? 11 A. Yes. 12 Q. Now, Mr. Villa has on several occasions 13 made reference to the fact that Mr. Crow was 14 prevented from participating in the savings and 15 loan industry and suggested that he was somehow 16 prevented from ever again serving as an employee 17 of a savings and loan. 18 Was a cease and desist order or 19 prohibition ever entered against Mr. Crow that 20 you're aware of? 21 A. Not that I can recall. 22 Q. Did you ever take any steps after the 24831 1 receivership of USAT to prevent Mr. Crow from 2 getting back into the savings and loan industry? 3 A. Not that I recall. 4 Q. Did you ever tell anyone that they 5 shouldn't hire Mr. Crow or that he was a bad 6 person? 7 A. Not that I recall. 8 Q. Did the Bank Board have a list of 9 persons that it would not permit to work for S&Ls? 10 A. Well, the Bank Board could remove and 11 prohibit somebody from participating; but 12 that's -- again, it's a consent removal 13 prohibition order; or after a hearing, the Bank 14 Board could go ahead and enforce a removal 15 prohibition order. But that's the only list that 16 I know of. 17 Q. After Mr. Crow -- I mean after USAT was 18 placed in receivership, was there anything that 19 you're aware of that prevented Mr. Crow from 20 seeking employment with another savings and loan 21 or in the banking industry? 22 A. No. 24832 1 Q. Now, I would like to move on to another 2 subject; and it has to do with the net worth 3 maintenance demand that was made upon UFG. 4 Do you recall that Mr. Villa suggested 5 that your demand for UFG to take steps to honor 6 its net worth maintenance obligations were, I 7 think in his words, futile gestures? 8 A. I don't recall Mr. Villa's exact words. 9 Q. Well, do you recall that he suggested 10 that your request that UFG maintain its net worth 11 commitment to USAT was motivated by political 12 pressure from members of Congress? 13 A. Yes. 14 Q. Did you believe in 1988 that UFG had an 15 enforceable obligation to maintain the capital of 16 USAT? 17 A. Yes. 18 Q. Now -- and do you know, did the 19 attorneys at the Federal Home Loan Bank of Dallas 20 and the attorneys at the Federal Home Loan Bank 21 Board in Washington, were they of the opinion that 22 the net worth maintenance obligation was an 24833 1 enforceable one? 2 MR. VILLA: Objection. I don't know 3 what basis he would have for giving legal opinions 4 of people who are not witnesses or parties. 5 MR. RINALDI: Well, let's take a look 6 at the legal opinion of Mr. Solomon who Mr. Villa 7 relies upon for other matters. This is 8 Exhibit A1411. This has not been admitted in 9 evidence before; so, we will hand a copy to the 10 Court. 11 Q. (BY MR. RINALDI) Take a moment to 12 review the letter, if you will. 13 A. (Witness reviews the document.) 14 THE COURT: This seems to be a 15 memorandum to Mr. Solomon. I thought we were 16 going to have his opinion. 17 MR. RINALDI: I'm sorry. This is from 18 Ms. Donna Guthrie, and Ms. Guthrie is the Federal 19 Home Loan Bank of Dallas' -- an attorney at the 20 Federal Home Loan Bank of Dallas. 21 A. Yes. 22 Q. (BY MR. RINALDI) Who is Ms. Guthrie? 24834 1 A. She's one of the staff attorneys on 2 regulatory matters at the Federal Home Loan Bank 3 of Dallas at that time. 4 Q. And do you recall that Ms. Guthrie was 5 concerned that UFG would dissipate its assets and 6 that it would be unable to make good on its net 7 worth obligation and was suggesting that a 8 temporary restraining order be obtained? 9 A. Well, I do remember something now but 10 not until I looked at this memo. 11 MR. RINALDI: Okay. Your Honor, I 12 would move the admission of A1411 (sic). 13 MR. VILLA: I believe it's A14111. 14 MR. RINALDI: That's correct. I'm 15 sorry. 16 MR. VILLA: No objection, Your Honor. 17 THE COURT: Received. 18 Q. (BY MR. RINALDI) Sir, were you aware 19 that in 1995, the OTS sought to enforce UFG's net 20 worth maintenance obligation through the use of 21 its enforcement powers? 22 A. Can you give me that year again? 24835 1 Q. 1995. 2 A. '95? 3 Q. Yes. 4 A. Unless it -- no, I honestly don't 5 recall in 1995 hearing about it. 6 Q. Okay. Well, take a look at the next 7 two documents. They are A14112 and A14113. 8 THE COURT: Mr. Rinaldi, we'll adjourn 9 until 9:00 tomorrow. 10 MR. RINALDI: Thank you, Your Honor. 11 12 (Whereupon at 4:55 p.m. 13 the proceedings were recessed.) 14 . 15 . 16 . 17 . 18 . 19 . 20 . 21 . 22 . 24836 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 5th day of October, 17 1998. 18 ____________________________ MARCY CLARK, CSR 19 Certified Shorthand Reporter In and for the State of Texas 20 Certification No. 4935 Expiration Date: 12-31-99 21 . 22 . 24837 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 5th day of October, 18 1998. 19 _____________________________ SHAUNA FOREMAN, CSR 20 Certified Shorthand Reporter In and for the State of Texas 21 Certification No. 3786 Expiration Date: 12-31-98 22