25640 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 9, 1998 22 25641 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 25642 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 25643 1 INDEX OF PROCEEDINGS 2 Page 3 EUGENE STODART 4 Examination by Mr. Guido................25644 5 Examination by Mr. Eisenhart............25713 6 Further Examination by Mr. Guido........25769 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 25644 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:00 a.m.) 3 THE COURT: Be seated, please. The 4 hearing will come to order. 5 Mr. Guido, do you have a witness? 6 MR. GUIDO: Yes, Your Honor. At this 7 time, the OTS would like to call Mr. Gene Stodart. 8 9 EUGENE STODART, 10 11 called as a witness and having been first duly 12 sworn, testified as follows: 13 14 THE COURT: Be seated, please. 15 16 EXAMINATION 17 18 Q. (BY MR. GUIDO) Mr. Stodart, we're 19 going to give you a glass of water so you have 20 that. 21 A. Thank you. 22 Q. Would you please state your full name 25645 1 for the record? 2 A. Eugene R. Stodart. 3 Q. Okay. Where are you presently 4 employed? 5 A. I am presently employed by Nesbitt Burn 6 Securities. 7 Q. And what does that firm do? 8 A. It is a securities firm specializing in 9 fixed income and equity products. I actually work 10 in the fixed income department. 11 THE COURT: Would you keep your voice 12 up, please? Speak a little louder. 13 THE WITNESS: Yes, sir. 14 Q. (BY MR. GUIDO) Some people have 15 trouble hearing us who speak under our voices, 16 Mr. Stodart. 17 A. Okay. 18 Q. I've been asked to speak up. So, if 19 you can't hear me, as well, just let me know. 20 The -- in terms of the fixed income 21 securities, does that include high-yield bonds? 22 A. Yes. 25646 1 Q. Is it primarily high-yield bonds? 2 A. Yes. My specialty is high-yield bonds. 3 Q. Now, prior to joining USAT, where were 4 you employed? 5 A. Prior to joining USAT, I was employed 6 by Westinghouse Credit in Pittsburgh. 7 Q. And what were your responsibilities 8 there? 9 A. I was in charge of the high-yield bond 10 department. 11 Q. And how did you end up getting from 12 Westinghouse Credit to USAT? 13 A. An employment agency sourced me and 14 came and asked me if I would be interested in 15 speaking with them. And I came down and spoke 16 with them a few times. And they made me an offer. 17 Q. At Westinghouse Credit, what was the 18 reason that you decided to leave there? 19 A. Various reasons. One was changing 20 organizational structure. Two was compensation. 21 Q. Was Westinghouse Credit phasing out the 22 high-yield bond portfolio that you were managing? 25647 1 A. No. 2 Q. Was there a turnover there that you 3 decided to leave? 4 A. No. 5 Q. Now, when you were interviewed by USAT, 6 who did you first speak with? 7 A. Mike Crow. 8 Q. And who else did you interview with? 9 A. Ron Huebsch, Bruce Williams, 10 Jenard Gross, and Charles Hurwitz. 11 Q. Did you interview with Barry Munitz? 12 A. Yes, I did. I'm sorry. I did 13 interview with Barry. 14 Q. Now, what did they tell you about the 15 portfolio at the time you interviewed with them? 16 A. Nothing. They gave me a copy of it. 17 Q. They gave you just a copy of the 18 portfolio? 19 A. Uh-huh. (Witness nods head 20 affirmatively.) 21 Q. Did they indicate to you who the 22 previous management had been of the portfolio? 25648 1 A. No. 2 Q. Did you subsequently learn who the 3 predecessor managers were of the portfolio? 4 A. Yes. 5 Q. And who were those people? 6 A. It was being run, prior to me coming, 7 by I think on an interim basis by a gentleman 8 named Terry Dorsey. And Joe Phillips had been the 9 manager for some time. 10 Q. Had Ron Huebsch been a manager of that 11 portfolio? 12 A. I didn't -- I couldn't confirm that 13 definitely. I mean, my understanding was Ron did 14 have some input into it at some point prior to me 15 arriving. 16 Q. Now, what was the size of the portfolio 17 when you arrived? 18 A. It's been a long time ago, but I can 19 give you a guess. I mean, five to 600 million. 20 Q. Now, who did you report to at the time 21 that you were there? 22 A. My understanding was I reported to 25649 1 Mike Crow. 2 Q. And did you also report to an 3 investment committee? 4 A. Yes. 5 Q. And did you sit on the investment 6 committee? 7 A. I did. 8 Q. Okay. Who were the members of the 9 committee when you were there? 10 MR. EISENHART: Your Honor, there have 11 been a lot of references by Mr. Guido in his 12 questions to "at that time." I'm not sure we have 13 ever established what that time was. 14 MR. GUIDO: Pardon me. I think 15 Mr. Eisenhart has a very good point. 16 Q. (BY MR. GUIDO) When did you arrive -- 17 I'm sorry -- at USAT? 18 A. I believe I started there in April of 19 '87. 20 Q. Now, at the time you arrived and you 21 became a member of the investment committee, who 22 were the other members of the committee? 25650 1 A. To the best of my knowledge, Mike Crow 2 was on it, Art Berner, members of the investment 3 department which would include myself, Ron 4 Huebsch, Sandy Laurenson. I believe Jim Wolfe was 5 a member. Jenard Gross. I think that's all. 6 Q. Did Barry Munitz sit in on any of the 7 meetings? 8 A. Barry Munitz occasionally sat in on the 9 meetings. I do not know whether he was an 10 official member, though. 11 Q. What about Charles Hurwitz? 12 A. He occasionally sat in, too. 13 Q. Okay. Now, what was the role of the 14 investment committee regarding your activities as 15 the manager of the high-yield bond portfolio? 16 A. My understanding of their role was to 17 review and advise. 18 Q. Did they approve the investments that 19 were made by the -- by you as the portfolio 20 manager prior to -- 21 A. Yes. 22 Q. -- them being made? 25651 1 A. Yes. They did have review authority 2 and approval authority over any decisions I made. 3 Q. So that you were not authorized to 4 initiate a transaction without their prior 5 approval? 6 A. Yes and no. 7 Q. Okay. And why do you say yes and no? 8 A. I had some guidelines that I worked 9 within that I could do things. I could -- if I 10 felt there was an opportunity in the market for a 11 transaction, either to buy or sell, I could put 12 together a subcommittee and have approval through 13 that. I mean, it was more than -- plus I had 14 guidelines within certain parameters on certain 15 names where I could add and subtract based on 16 percentage holdings. So, I mean, I had guidelines 17 that I did operate under. I didn't have to take 18 each and every decision at that moment to them. 19 Q. So, in other words, are you saying that 20 with regard to a particular high-yield bond 21 investment, you had discretion in terms of the 22 size of the purchase? Is that what you're saying? 25652 1 A. Uh-huh. (Witness nods head 2 affirmatively.) 3 Q. Now, did anyone else have authority to 4 manage the high-yield bond portfolio at USAT 5 during the period of time you were employed there? 6 A. I believe there was a list of names 7 that had approval -- trading approval for the 8 investment department. So, technically, any of 9 them could have traded any of the securities that 10 were on that list. 11 Q. Did any persons outside of USAT have 12 the authority to trade high-yield bonds? 13 A. I wouldn't know that. 14 Q. Have you ever heard the name Caywood 15 Christian? 16 A. Yes. 17 Q. And did Caywood Christian have the 18 authority to manage a portion of USAT's high-yield 19 bond portfolio? 20 A. They were given -- they did manage some 21 amount of high-yield bonds, yes. 22 Q. And was that a discretionary account on 25653 1 their part? 2 A. Yes. I mean, they were given the 3 money; and they had discretion to manage it. 4 Q. Do you know who the principals were in 5 Caywood Christian? 6 A. Jim Caywood and Mickey Christian. 7 Q. Okay. And can you tell us a little bit 8 about their backgrounds? 9 A. I wouldn't say by any stretch I would 10 have been any expert in either one of their 11 backgrounds. I knew they were both Houston-based 12 at one time. 13 Q. And how were they compensated? 14 A. On a fee basis. 15 Q. Pardon? 16 A. On a fee basis. 17 Q. And how was the fee determined? 18 A. I didn't negotiate that; so, I'm not 19 really qualified to comment on it. 20 Q. Was their -- was their portfolio a 21 yield portfolio or a total return portfolio? 22 A. In whose viewpoint? 25654 1 Q. In yours. 2 A. Do you mean how did we account for it? 3 Q. Uh-huh. 4 A. How did the institution account for it? 5 Q. Yeah. How did the institution account 6 for it? 7 A. The institution accounted for it the 8 same way as they accounted for the in-house 9 portfolio. 10 Q. And how was that? 11 A. As an investment portfolio. 12 Q. And was the -- how was the performance? 13 Did you evaluate at any time the Caywood Christian 14 performance in this portfolio? 15 A. I did review it. I'm not sure I 16 evaluated it. I reviewed it. 17 Q. And did you make any comments to the 18 investment committee with regard to how the 19 performance was evaluated in that portfolio? 20 A. You mean how I evaluated it or how the 21 institution evaluated it? 22 Q. How the institution evaluated it. 25655 1 A. I couldn't comment for the institution. 2 I could tell you what my comments are. 3 Q. Okay. What were your comments in terms 4 of the methodology for evaluating the performance 5 of that portfolio? 6 A. The portfolio was managed by an outside 7 money manager who was a total return manager. 8 Q. And what do you mean by "total return"? 9 A. By definition, the investments are 10 mark-to-market and they -- your return is a 11 combination of appreciation or depreciation of the 12 security plus the income stream generated. 13 Q. Was that the way the institution 14 accounted for the portfolio? 15 A. No. 16 Q. But that's the way the performance was 17 measured by Caywood Christian? 18 A. I assume that's the way it was. I 19 can't comment because Caywood was making that 20 measurement, not me; but that was generally the 21 way an outside manager manages a portfolio. 22 Q. When was Caywood Christian retained? 25656 1 A. I don't know. Prior to me coming. 2 Q. Do you know who was it that introduced 3 them to USAT? 4 A. No. 5 Q. Now, let me show you a series of 6 documents starting with Tab 633 at B1023 which is 7 dated 6/2/86. It's a memorandum by Ginger Baugh. 8 The second is 232, which is B1042. It's dated 9 June 12th, 1986. It's a memorandum by Jonathan 10 Scott. The third is Tab 566, which is A1417 dated 11 November 12th, 1986. It's investment committee 12 minutes. And the last one is Tab 568, A10690. 13 The first one, A1517 at Tab 566, are 14 investment committee minutes -- 15 THE COURT: What document are you on? 16 A. I don't have that document. 17 MR. GUIDO: Oh, I'm sorry, Your Honor. 18 MR. NICKENS: You said it was 1417. 19 MR. GUIDO: A1417, Tab 566? 20 MR. NICKENS: That's what you said the 21 first time. 22 MR. GUIDO: Pardon? 25657 1 MR. NICKENS: That's what you said the 2 first time. 3 MR. GUIDO: I'm sorry. 4 MR. NICKENS: And that's not right. 5 MR. GUIDO: No? 6 MR. NICKENS: A1417, 348. Tab 348. 7 MR. GUIDO: I'm sorry, Your Honor. 8 Q. (BY MR. GUIDO) This is the minutes of 9 the investment committee of November 12th, 1986. 10 THE COURT: We're now on A1417? 11 MR. GUIDO: A1417, Your Honor. I'm 12 sorry. 13 THE COURT: Thank you. 14 Q. (BY MR. GUIDO) I want to direct your 15 attention to the paragraph that starts at the 16 bottom of that page. See where it says, "Mr. Crow 17 then presented a resolution setting forth the 18 policy of the association" -- 19 A. Uh-huh. 20 Q. -- "concerning the acquisition of 21 corporate debt securities"? I'd like you to read 22 that resolution to yourself, please. 25658 1 A. (Witness reviews the document.) Okay. 2 Q. Then I'd like to direct your attention 3 to B1042, the exhibit number that's in front of 4 which you is a memorandum from Jonathan Scott to 5 Neil Twomey dated June 12th, 1986. And I'll 6 direct your attention to the second paragraph in 7 that document. 8 A. (Witness reviews the document.) 9 Q. Have you had an opportunity to review 10 that, those two documents? 11 A. (Witness nods head affirmatively.) 12 Q. Now, after having read those, I have 13 some questions for you. 14 You stated that the portfolio at USAT 15 was an investment portfolio in the high-yield 16 bonds? 17 A. Yes. 18 Q. What do you mean by that? 19 A. The idea was to buy securities. The 20 securities were actually treated as loan 21 transactions. And you purchased the security, 22 usually duration matched, against a pool of 25659 1 liabilities and earned the income. 2 Q. Was the -- was the purpose to earn a 3 spread income over time in that portfolio? 4 A. Yes. You basically were running a 5 credit arbitrage. 6 Q. Now, did USAT at any point in time 7 during the period of time you were the portfolio 8 manager have a trading portfolio for high-yield 9 bonds? 10 A. Yes. 11 Q. And how large was that portfolio? 12 A. It was not significant. I'm not sure I 13 recall the exact size. 14 Q. Now, what was the -- what were the 15 purposes of the trading portfolio that you've just 16 testified to? 17 A. The purposes were to take advantage of 18 opportunities or inconsistencies that the market 19 presented. 20 Q. Now, were either of those portfolios 21 managed to take advantage of interest rate shifts? 22 A. Obviously, a trading portfolio would be 25660 1 one that is reacting to interest rate shifts. An 2 investment portfolio would be managed to take 3 advantage of interest rate shifts as they affect 4 the quality of the underlying portfolio. 5 Q. And what do you mean in terms of "as 6 they affect the quality of the underlying 7 portfolio"? 8 A. If I bought an energy credit in 1982 9 when oil prices were projected to be $100 a barrel 10 and energy prices were $12 a barrel as they are 11 today, which are affected by interest rates in the 12 total economic outlook, there obviously is a 13 significant difference in the quality of that 14 credit because of the price of the underlying 15 commodity. 16 Q. Do you mean that the quality of the 17 credit is less because of the shift in interest 18 rates? 19 A. I'm saying that interest rates affect 20 the prices of commodities and also the global 21 economy. Therefore, there is some change in the 22 underlying credit quality. 25661 1 Q. Now, let me direct your attention to a 2 series of letters that were sent to the Texas 3 Savings and Loan Commission. There's three 4 documents that I'd like you to look at. One is 5 Tab 274, B1906. The second is Tab 275, B2021. 6 The third is Tab 276, B2030. 7 Looking at the first two letters, 8 B1906, Tab 274, and B2020 (sic) that is at Tab -- 9 I'm sorry -- B2021 which is at Tab 275, do you see 10 the paragraph that makes reference to the activity 11 during the months that are referred to there? 12 A. (Witness reviews the document.) I'm 13 not sure I'm following your train of thought here. 14 Q. Look at the first paragraph on B1906. 15 I'm sorry. 16 A. Okay. 17 Q. And then take a look at -- 18 THE COURT: Let's give him time to look 19 at that. 20 MR. GUIDO: I'm sorry, Your Honor. 21 A. (Witness reviews the document.) Okay. 22 The first paragraph is the one you're referring 25662 1 to? 2 Q. (BY MR. GUIDO) Yes. Take a look at 3 the attachments to that document. 4 A. Okay. 5 Q. Do those include high-yield bonds? 6 A. Yes. 7 Q. Do they also include equity securities 8 stock? 9 A. They do include stock. 10 Q. Now, who was the manager of the stock 11 portfolio at USAT? 12 A. Ron Huebsch. 13 Q. Why were you reporting to the Texas 14 Savings and Loan Commissioner on the stock 15 activity in the portfolio? 16 A. I wrote the letter and signed the 17 letter. It had to do with all the securities. 18 Q. Pardon? 19 A. It had to do with all the securities in 20 the portfolio. It could have been signed by Ron 21 Huebsch or myself. 22 Q. Well, take a look at the phrase "market 25663 1 conditions during the month presented 2 opportunities to realize gains." 3 Do you see that? 4 A. Uh-huh. (Witness nods head 5 affirmatively.) 6 Q. Is that referring to high-yield bonds 7 or corporate equity security stock? 8 A. I don't know. I don't know what the 9 trading activity for that month was. 10 Q. Okay. Were sales made out of the 11 high-yield bond portfolio during the period of 12 time you managed the portfolio to generate gains 13 to bolster quarterly profits? 14 A. No. 15 Q. And is this sentence making any 16 reference to such activity? 17 A. Is this sentence making any reference 18 to such activity? I managed the portfolio and had 19 a fiduciary responsibility not only to increase 20 capital but to preserve capital. And if I 21 believed that conditions of the underlying 22 investment were changing, be it for credit reasons 25664 1 or interest rate reasons or the accompanying 2 liability stream that was attached to it that 3 changed the credit arbitrage, I would have been 4 reluctant in my fiduciary responsibility if I did 5 not take advantage of the opportunity that 6 presented itself. 7 Q. But in all times, you were looking at 8 the quality of the investment in making that 9 assessment? 10 A. I was looking at the quality of the 11 investment. The investments were treated as 12 loans. They were a credit arbitrage with a cost 13 of funds associated with it. If I believed that 14 the cost of funds was rising to a point where the 15 investment was no longer profitable to the 16 institution and the institution would have lost 17 money, it was my fiduciary responsibility to take 18 the appropriate action. 19 Q. Now, I'd like to direct your attention 20 to the third document in that stack. And that is 21 Exhibit B2030, Tab 276. This is a February 23rd, 22 1988 letter. 25665 1 Do you see that? 2 A. Uh-huh. (Witness nods head 3 affirmatively.) 4 Q. Now, with regard to that letter, the 5 language of the previous two letters are language 6 that we have seen in this proceeding over a series 7 of letters that were filed going back, I think, at 8 least as early as 1986 with the Texas Savings and 9 Loan Commissioner. And I noticed that in this 10 letter, the language has changed. 11 Was there any reason for the change in 12 the language of the letter? 13 A. It appears that this letter is more 14 informative than the other one. 15 Q. Were the other ones basically a form 16 letter that had existed prior to your arrival? 17 A. As I recall, they were. 18 Q. Now -- and at some point in time, did 19 you decide to change the letter so that it would 20 be less generic and more specific in terms of the 21 information it provided to the Texas Savings and 22 Loan Commission? 25666 1 A. I changed a lot of the wording and the 2 presentation of things to the regulatory bodies; 3 so, they were much more explanatory and made the 4 day-to-day management of the portfolio easier. 5 Q. Now, I'd like to direct your attention 6 to two documents that have not been admitted into 7 the record as yet. One is B2365, and the second 8 is B2366. 9 A. (Witness reviews the documents.) 10 MR. GUIDO: I'd like to move the 11 admission of B2365, which is a memorandum from Art 12 Berner to Jenard Gross, Larry Connell, Mike Crow, 13 and Gene Stodart dated August 5th, 1988, Your 14 Honor. 15 MR. EISENHART: No objection, Your 16 Honor. 17 MR. GUIDO: I'd also like to move the 18 admission of B2366, which is a letter from Gene 19 Stodart to Jonathan Scott dated August 9th, 1988. 20 MR. EISENHART: No objection. 21 THE COURT: Both documents are 22 received. I don't have 2365, however. 25667 1 MR. GUIDO: I'm sorry. 2 THE COURT: I think you gave us another 3 copy of 2366. 4 MR. GUIDO: Pardon, Your Honor? 5 THE COURT: We're still awaiting a copy 6 of 2365. 7 MR. GUIDO: Oh, I'm sorry. 8 THE WITNESS: Mr. Guido, I don't have 9 one either. 10 MR. GUIDO: Sorry. 11 Q. (BY MR. GUIDO) Now, did there come a 12 time when the Federal Home Loan Bank of Dallas 13 raised questions about the bonds that were in 14 USAT's high-yield bond portfolio? 15 A. You mean specific bonds? 16 Q. Pardon? 17 A. Specific bonds? 18 Q. Yes. Particular -- 19 A. By name? 20 Q. Uh-huh. 21 A. Can you give me an example of a name? 22 Q. No. Did they raise any questions that 25668 1 they wanted -- did they request information 2 regarding the high-yield bond portfolio during the 3 period of time that you managed the portfolio? 4 A. It was an ongoing thing. It was an 5 ongoing educational process for the regulatory 6 bodies. They did not have a high-yield expert 7 person. 8 Q. And did they ask you to provide them 9 with information on the bonds that were held in 10 the portfolio at any point in time? 11 A. In aggregate or you mean specific, 12 individual -- 13 Q. A list of the portfolios. 14 A. -- write-ups on each bond? You mean a 15 specific credit write-up on each bond and when we 16 purchased it? 17 Q. No. I'm asking you, did they ask you 18 for a listing of the bonds that were held in the 19 high-yield bond portfolio? 20 A. It was an ongoing process to provide 21 them with all our holdings. 22 Q. And is that what these two documents 25669 1 reflect? 2 A. I'm not sure what the Art Berner 3 document reflects. That is a request for triple 4 Bs. There would have not have been a credit 5 arbitrage available between the institution's cost 6 of fund and an investment-grade security to the 7 extent that the institution was not investment 8 grade itself. 9 Q. All right. Now -- 10 A. So, anything purchased in the 11 investment-grade security would have been a lost 12 leader. So, no, I was not an active participant 13 in that side. 14 Q. Okay. So, with regard to the -- to 15 that specific request -- take a look at the letter 16 dated August 9th, 1988. That includes a 17 description of the high-yield bond portfolio that 18 was held by USAT. Okay? 19 Do you know -- who requested you to 20 provide this letter? 21 A. I don't recall. I mean, it was -- from 22 the time I was there, it was an ongoing process to 25670 1 provide the regulators with information regarding 2 the bond portfolio on a continuous basis and 3 answering questions that arose. This was not an 4 unusual thing, to provide them information. 5 Q. All right. So, you provided them with 6 this information pursuant to a request that they 7 had made? 8 A. I don't recall. 9 Q. But you provided the information on a 10 monthly basis as indicated in that letter? 11 A. In a lot of instances, it was probably 12 more than a monthly basis. This was a monthly 13 report; but, also, they visited quite often and 14 asked for additional information which we provided 15 which may not have come under letterhead. I was 16 accessible to them on a continuous basis for phone 17 calls, meetings, conversations, whatever they 18 needed. 19 Q. Now, when you arrived -- I want to ask 20 you some questions about the nature of the 21 portfolio that you found when you were there. 22 A. Uh-huh. (Witness nods head 25671 1 affirmatively.) 2 Q. The portfolio, I think your testimony, 3 was in the 500- to 600-million-dollar range? 4 A. I said I thought. The best of my 5 knowledge, it was in that range. I can't 6 specifically say that was the dollar amount. It's 7 been quite an amount of time. But I think if you 8 pulled out a document, we could probably verify 9 that number. 10 Q. Well, let's take a look at B1623, which 11 is a new document that hasn't been admitted into 12 the record as yet. It is a memorandum 13 regarding -- B1623 is at Tab 1807. 14 That memorandum is dated what date, 15 Mr. Stodart? 16 A. May 15th, 1987. 17 Q. Now, does that indicate that you had 18 the authority to take the high-yield bond 19 portfolio to $700 million as of that date? 20 A. It appears that that's what it 21 indicates. 22 Q. Now, the portfolio that you found when 25672 1 you arrived at USAT, was it a sizable portfolio in 2 your view? 3 A. Yes. 4 Q. How did it compare with the portfolio 5 managed at Westinghouse Credit? 6 A. Similarities and differences. 7 Q. In terms of -- 8 A. There were some similar names. There 9 were some names that were very different. 10 Q. In terms of the size. 11 A. It was smaller. 12 Q. It was smaller? 13 So, you had managed a larger portfolio 14 previously to joining USAT? 15 A. Uh-huh. (Witness nods head 16 affirmatively.) 17 THE COURT: Could you speak up, sir, so 18 we can -- 19 THE WITNESS: I'm sorry. 20 A. If I may clarify, the Westinghouse 21 Credit portfolio, when I took it over, was zero. 22 When I left, it was 750 million. 25673 1 Q. (BY MR. GUIDO) Thank you. 2 Now, did the high-yield bonds in USAT's 3 portfolio include warrants attached to those 4 bonds? 5 A. In some instances. 6 Q. And how frequently was that? 7 A. Whenever the availability was there. 8 How frequently? I mean statistically, I couldn't 9 even say. I mean, I'd be guessing. 10 Q. Was it typical that the high-yield 11 bonds issued during the period of time prior to 12 your arrival at USAT contained warrants attached 13 to them? 14 A. Depended on the industry and the market 15 conditions. 16 Q. So, you don't -- you don't know whether 17 the -- 18 A. If you can tell me what the bond is, I 19 could tell you what the likelihood is. But I 20 mean, I won't say it's typical. It wasn't rare 21 either. It happened. But for me to try to put 22 that in the context of all the issuance of 25674 1 high-yield bonds at the time is impossible. 2 Q. Okay. Was -- but there were bonds in 3 the portfolio that had warrants attached to them? 4 A. Yes. 5 Q. And what is a warrant? 6 A. An option. 7 Q. An option to do what? 8 A. Could be to buy additional bonds. 9 Could be to buy equity. You'd have to look at the 10 individual instrument. 11 Q. What does it provide the purchaser of 12 the high-yield bond with? 13 A. Potential additional return on their 14 investment. 15 Q. Would you refer to that as capital 16 appreciation? 17 A. No. I would refer to that as potential 18 additional return. It could be capital 19 appreciation. It could be worth zero, much like 20 an equity or a stock. When you purchase it, the 21 intent is for it to increase in value. 22 Q. So, it has a potential capital 25675 1 appreciation? 2 A. It does exist. 3 Q. Okay. Now, I'd like to show you a 4 document that is already admitted in the record. 5 It's at Tab 1303. It's A1433A. It's investment 6 committee minutes of March 11th, 1987, just prior 7 to your arrival at USAT. 8 And I want to direct your attention to 9 the page that's OW0 -- Image No. OW052171 and 10 particularly, the reference to a resolution dated 11 April 25th, 1986. 12 MR. NICKENS: '86? 13 Q. (BY MR. GUIDO) Do you see that 14 reference to the three objectives -- 15 MR. EISENHART: Your Honor, may we have 16 the page reference again? We were trying to find 17 the document since it wasn't on the pull list. 18 MR. GUIDO: I'm sorry. It's OW052172. 19 THE COURT: I thought it was 171, 20 Mr. Guido. 21 MR. GUIDO: I'm sorry, Your Honor. It 22 is 52171. 25676 1 Q. (BY MR. GUIDO) Do you see the 2 reference to a resolution dated April 25th, 1986, 3 on that page? 4 A. It says "operating guidelines" -- 5 Q. Where it has the three -- where it has 6 the three references to objectives of the 7 high-yield bond portfolio? 8 A. The page you're talking about, you're 9 referring to Section No. 2? 10 Q. I'm sorry. I don't have a copy. 11 A. April 25th of 1986? 12 Q. That's right. You see those three 13 items there? 14 A. Yes. 15 Q. Could you read them into the record, 16 please? 17 A. First, capital preservation. Second, 18 management of yield spread. Third, capital 19 appreciation. 20 Q. Okay. Now, what is your understanding 21 of the reference to capital appreciation in those 22 policies? 25677 1 A. My understanding would be as a 2 fiduciary for the institution's funds, I should 3 try to increase the value of the holding. 4 Q. Did that include making sales out of 5 the portfolio to generate gains to bolster 6 quarterly profits? 7 A. That has nothing to do with that. The 8 two are not related. This has to do with me 9 selecting securities that would go up in value. 10 The other part is a separate question. 11 Q. Now, if your objective is to select 12 securities that would go up in value, how was USAT 13 to realize the benefit of that increase in value? 14 A. I think that's a question you should 15 ask to the board of directors of USAT. My job was 16 to select a security that would increase in value. 17 That's what I tried to do. 18 Q. Well, did you ever take any action to 19 realize that increase in value during the period 20 of time that you managed the portfolio at USAT? 21 A. Do you mean -- are you asking the 22 question, did I ever sell a security for a higher 25678 1 value than I paid for it? 2 Q. For the purpose of generating profits. 3 A. That's two questions. Did I ever sell 4 a security for a higher price than I purchased it? 5 The answer is yes. 6 Q. Okay. Now, did you ever do it for the 7 purpose of generating a profit? 8 A. Did I ever do it for the purpose of 9 generating a profit? 10 MR. EISENHART: Your Honor, I'm going 11 to object to the question as phrased. It's 12 ambiguous. Does he mean for the sole purpose or 13 simply as a purpose? 14 Q. (BY MR. GUIDO) For the sole purpose. 15 A. So, I selected a security and sold it 16 just to take a profit with no other consideration? 17 Q. That's right. 18 THE COURT: Would you speak up, please? 19 A. I'm sorry. I said did I select a 20 security for the only purpose, no other 21 consideration, of just selling it to generate a 22 profit? No. 25679 1 Q. (BY MR. GUIDO) Okay. What -- 2 A. I would have had significant amount of 3 securities with profits in, and I would not just 4 sell one just to sell it. 5 Q. For the sole purpose of generating a 6 profit? 7 A. I would have managed the portfolio not 8 on an individual security basis. I managed it as 9 a portfolio. It had many different parts to that. 10 There would have been some I would have sold for 11 credit reasons, for interest rate reasons. But to 12 say I walked in the door and sold a security 13 without any other consideration but profitability, 14 no. 15 Q. Now, did you, when you joined USAT as 16 its high-yield bond portfolio manager, do an 17 evaluation of the credit quality in its portfolio? 18 A. I reviewed all the parts of that 19 portfolio. 20 Q. I'd like you to take a look now at 21 A1447, which is at Tab 1319. 22 A. (Witness reviews the document.) 25680 1 Q. I'd like to direct your attention to 2 the first page where -- the next-to-the-last 3 paragraph. It says, "The committee then discussed 4 in detail the bond portfolio, and Mr. Stodart was 5 requested to review which bonds might have to be 6 sold in the near future in order to enhance the 7 credit position of the portfolio." 8 Do you see that? 9 A. Uh-huh. (Witness nods head 10 affirmatively.) 11 Q. What is the reference to "credit 12 position of the portfolio"? 13 A. As I stated earlier, this was a credit 14 arbitrage portfolio; and there was obviously 15 things that were changing. Oil prices were 16 changing, which affected energy credits and 17 industrial credits. Interest rates were changing, 18 which affected homebuilders. The cost of funds 19 for the institution was changing, which affected 20 market spreads over what we could earn and what we 21 had to pay out. All these considerations were 22 made when I looked at the portfolio. 25681 1 As we had stated earlier, I could have 2 easily bought triple B credits and greatly reduced 3 the investment risk. Unfortunately, we would have 4 just increased the loss because the cost of funds 5 was higher. 6 Q. Now, with regard to the -- your 7 analysis of the credit position of the portfolio, 8 were sales made as a consequence of your review of 9 the credit position of the high-yield bond 10 portfolio? 11 A. Yes. 12 Q. And did you also -- I think you 13 mentioned that you looked at the match between the 14 high-yield bonds and the liabilities that were 15 funding those as part of your analysis of the 16 credit position of the portfolio? 17 A. As we stated earlier, one of the 18 objectives was spread maintenance. Yes, I did do 19 that. 20 Q. Now, was that one of the first things 21 that you did when you arrived at USAT, to do an 22 asset/liability match? 25682 1 A. To -- no. One of the first things -- 2 the first thing I did was to review the assets 3 that I managed. 4 Q. Okay. Did you review them shortly 5 after your arrival to ascertain whether or not 6 there was an asset/liability mismatch? 7 A. I reviewed both the assets, the 8 quality, the perceived risk to the capital as far 9 as preservation of that capital. I reviewed the 10 interest rates and the levels the securities were 11 purchased at so I knew what they were earning. I 12 reviewed where I felt the credits were going and 13 where my expertise was and the comfort therein. I 14 reviewed what the market was going to common and 15 what impact it would have on the value of my 16 securities, and I also looked at how it was 17 funded. 18 Q. Now, did you do any -- did you make any 19 effort to refine the asset/liability matches to 20 ascertain whether or not the credit position of 21 the association was enhanced or impaired by 22 particular investments? 25683 1 A. I reviewed them -- when you say the 2 institution was enhanced, obviously, I didn't have 3 control of the other -- the rest of the 4 institution and how they were funded. I knew what 5 my pool of liabilities were, and I knew how I 6 wanted them set up so that the assets that were 7 matched off against my pool were matched as close, 8 both on a duration basis, a maturity basis, a 9 short-term floating rate basis, and whether it was 10 cash pay or non-cash pay so that I could match the 11 assets to maximize the return to the institution. 12 Q. In doing that, did you break down the 13 liability stream and match it to particular 14 assets? 15 A. Yes, I did. 16 Q. And was the match based on a duration 17 match? 18 A. Not totally. 19 Q. Okay. What was it based upon? 20 A. That was one of the considerations. 21 Q. Okay. What were the other 22 considerations? 25684 1 A. There was more than one. It was based 2 on, obviously, duration. It was based on the type 3 of liability and could I match off a corresponding 4 asset to it. 5 Q. Anything else? 6 A. Interest rate forecast. 7 Q. Now, what do you mean by "type of 8 liability"? 9 A. The pool of liabilities that my assets 10 were matched off were both cash pay and non-cash 11 pay. 12 Q. You mean zeros and non-zeros? Is that 13 what you mean? 14 A. (Witness nods head affirmatively.) 15 Q. So, what you tried to do is match up 16 the zero high-yield bonds with zero liability 17 fundings? 18 A. And also, there was floating rate or 19 shorter liabilities in my pool. And as we 20 referred to earlier, the increasing rate notes 21 were attempted to be matched up against that pool. 22 Q. All right. So, when you broke down 25685 1 these liability streams and matched them to the 2 assets, did you find that some of them had 3 negative spreads? 4 A. You mean on an individual security 5 basis? 6 Q. Or on a pool basis. 7 A. On an individual security, I'm sure 8 there was some negative spread. 9 Q. Now, what did you do after you had 10 broken down or refined the asset/liability match 11 to the portfolio to correct for any mismatches? 12 A. It's an ongoing process. It changes 13 daily, just like any financial market. I 14 attempted to reconfigure the portfolio where I 15 thought it would maximize the performance and 16 where I had the greatest comfort level. 17 Q. And that was toward the goal of 18 obtaining some sort of a spread? 19 A. That was toward the goal of the 20 aforementioned three objectives. 21 Q. What was the -- what was the typical 22 spread on high-yield bonds during the period of 25686 1 time that you were at USAT? 2 A. Over what? 3 Q. Over the cost of funds. What was the 4 basic target, the typical target a manager of the 5 portfolio of high-yield bonds would attempt to 6 achieve in light of the risks inherent with 7 high-yield bonds in order to have an appropriate 8 return, given the nature of the risk? What were 9 the -- 10 A. In one of your aforementioned memos, it 11 says 200 basis points. 12 Q. Is that the objective that you had? 13 A. That was not my objective. 14 Q. Okay. What was -- what was your 15 objective? 16 A. You mean that the institution gave me 17 or that I set? 18 Q. That you set for yourself. 19 A. At least 300 minimum. 20 Q. Okay. And why was that? 21 A. Because I felt that was an appropriate 22 risk reward. 25687 1 Q. In light of what? 2 A. In light of the risk you took in the 3 investment, that was an appropriate reward in 4 relationship to other securities in the financial 5 markets. 6 Q. Now, what was the spread in the 7 portfolio when you arrived? 8 A. I don't recall exactly, but it was not 9 anywhere near that. I think it was sub 200. 10 Q. You think it was sub 200? 11 A. Yeah, I believe. I don't really recall 12 the exact number. It's been a long time. 13 Q. I'd like to show you a document that's 14 marked as A1493. It's the February 24th, 1988 15 investment committee minutes. Tab 1218. 16 These are the minutes of the investment 17 committee of February 24th, 1988. And it shows 18 the members of the committee present, and it 19 includes you. And I want to direct your attention 20 to the second page of the document. 21 Do you see the third paragraph down? 22 It talks about the spread in the high-yield bond 25688 1 portfolio. 2 A. (Witness reviews the document.) 3 Uh-huh. (Witness nods head affirmatively.) 4 Q. Does that refresh your recollection of 5 what the spread was when you arrived at USAT? 6 A. Well, I mean, it's been a long time; 7 and I don't exactly recall. But I have to assume 8 that based on the way it's written there, it was 9 89 basis points and has improved to in excess of 10 300. 11 Q. Okay. So, as of May of 1987, a month 12 after you arrived, it was 89 basis points? 13 A. In May of '87? Is that what that says? 14 Q. In May of 1987. It was a month after 15 you arrived. 16 A. Okay. 17 Q. Wasn't it, in actuality, 65 basis 18 points when you first arrived? 19 A. I don't know. I don't recall. 20 Q. Now, I'd like to show you a memorandum 21 which is A12169. That's a letter dated 22 February 11th, 1987, at Tab 1879. I'm sorry. 25689 1 1876. A12169. 2 This is a letter that predates your 3 arrival by a few months. I have some questions 4 for you about it. 5 A. Okay. 6 Q. Particularly, I have questions for you. 7 Go to the second paragraph on the third page. It 8 says, "Thus at a time when the Texas economy 9 offers two areas of profitability." 10 Would you read that paragraph to 11 yourself, please? 12 A. (Witness reviews the document.) 13 Uh-huh. (Witness nods head affirmatively.) 14 Q. Did you have any -- did you ever make 15 an effort to go back and ascertain what the spread 16 was prior to May of 1987? 17 A. You mean on the portfolio or -- 18 Q. On the portfolio of high-yield bonds, 19 yeah. 20 A. No, I didn't review my predecessor's 21 performance, if that's what you're asking. 22 Q. So, you didn't attempt to ascertain 25690 1 when you arrived what the historical spread had 2 been in that portfolio? 3 A. No. I knew what I had to do. What my 4 predecessor did didn't really matter. I couldn't 5 change that anyhow. 6 Q. Do you know -- so, you don't know why, 7 in February of '87, Mr. Berner's reporting that 8 the portfolio has a spread of 3.46 or 346 basis 9 points and in May of 1987, you're showing it 10 having an 89 basis point spread? 11 A. If you'd like, I'll speculate for you. 12 But no, I can't comment on why Mr. Berner wrote 13 something prior to me getting there. 14 Q. We're not asking you to speculate. I 15 just asked you whether or not you knew. 16 A. No, I do not. 17 Q. Now, do you know whether or not the 18 reason for the 89 basis point spread was due to 19 sales being made out of the high-yield bond 20 portfolio prior to your arrival for the sole 21 purpose of generating profits? 22 A. I can't comment on any activity prior 25691 1 to me being there because I wasn't there. 2 Q. Did you ever make an effort to go back 3 and review investment committee minutes at USAT? 4 A. It wouldn't have changed my way of 5 operating going forward; so, I saw no purpose in 6 it. 7 Q. Did you ever go back and look at 8 previous investment committee minutes of USAT to 9 ascertain whether there had been proposals made to 10 the committee that had been turned down by the 11 committee? 12 A. No. 13 Q. Had you ever done an analysis to 14 ascertain whether or not investments that were 15 proposed -- high-yield bond investments that were 16 proposed to the investment committee had been 17 turned down? 18 A. No. 19 Q. Now, I'd like to show you a document 20 that's marked as 566, which is T4302. It's a 21 one-page document dated November 13th, 1986. 22 A. (Witness reviews the document.) 25692 1 Q. Have you had an opportunity to review 2 the document? 3 A. Uh-huh. (Witness nods head 4 affirmatively.) 5 THE COURT: Would you speak up, please? 6 A. Yes. 7 Q. (BY MR. GUIDO) Now, this says that 8 there was a discussion in the investment committee 9 well before your arrival of selling junk bonds for 10 profits for purposes of quarterly earnings. 11 Did you ever have any discussions with 12 Michael Crow or Bruce Williams where they 13 indicated that sales had been made out of the 14 high-yield bond portfolio to generate gains to 15 bolster quarterly profits? 16 A. I didn't know this memo existed; so, 17 no. 18 Q. No? 19 A. I mean, did I have discussions with my 20 superiors on the asset value of my portfolio and 21 with the regulators? On a continuing basis. 22 Q. Did you ever have any discussions with 25693 1 Michael Crow or Bruce Williams where they told you 2 that sales had been made out of the high-yield 3 bond portfolio to generate gains to bolster 4 profits? 5 A. Prior to me getting there? No. 6 Q. Did they tell you when you were there 7 that prior to your arrival, that sales had been 8 made out of the high-yield bond portfolio to 9 generate gains to bolster profits? 10 A. No. 11 Q. Now, I'd like to direct your attention 12 to another document, which is A1488, which is 13 investment committee minutes of January 27th, 14 1988. Tab 1213. 15 A. (Witness reviews the document.) 16 Q. Now, I'd like to direct your attention 17 to the document that is part of those investment 18 committee minutes at US3012476. 19 A. (Witness reviews the document.) 20 Q. It's a memorandum from you to Michael 21 Crow entitled "The effects of profit gains on 22 portfolio" dated January 22nd, 1988. 25694 1 THE COURT: Mr. Guido, what exhibit is 2 that? 3 MR. GUIDO: This is A1488, Your Honor. 4 It's investment committee minutes of January 27th, 5 1988. I'm sorry. 6 THE COURT: Thank you. 7 MR. GUIDO: And I'm told it's at 8 Tab 1213. I believe it's -- 9 Q. (BY MR. GUIDO) Have you had an 10 opportunity to review that memorandum, 11 Mr. Stodart? 12 A. Just the memo? 13 Q. Just the memo. 14 A. Yes. 15 Q. Why did you write the memorandum? 16 A. My guess is because I was asked to 17 review this, what the gains were in the portfolio. 18 Q. Well, this is talking about the effects 19 of the sale of high-yield bonds. 20 Were you asked to review what the 21 impact would be of making sales out of the 22 portfolio to generate gains? 25695 1 A. I was asked to review the values of the 2 portfolio on a continuing basis. I reported to 3 both the Texas regulatory and the federal 4 regulators on the market value of securities 5 continuously on a monthly basis and probably more 6 often than that. 7 If senior management came to me and 8 asked me to review the portfolio and what the 9 profitability of it was, I wouldn't have thought 10 that would have been abnormal to do that. That 11 was a process that was done in my prior employment 12 and in this one, and it is done on a regular 13 basis. I would have not thought this was an 14 unusual request. 15 Q. Well, this is asking you to review the 16 effects, as you say, of the sale of the high-yield 17 securities. Right? 18 A. No. I think it's asking me to review 19 the effects if I sold the high-yield securities, 20 not on the sale because I don't believe they were 21 sold. 22 Q. I'm sorry. I don't understand the 25696 1 distinction. Could you please explain that? 2 A. You're assuming that I did this. 3 Q. No, I'm not assuming that you did that. 4 I asked you whether or not you -- 5 A. The way you stated the question was "on 6 the sale." There was no sale. 7 Q. Well, were you asked to review the 8 high-yield bond portfolio to ascertain whether or 9 not there were unrealized profits that could be 10 realized in order to generate gains? 11 A. I was asked to review the portfolio 12 based on this document to be if gains were 13 realized, what would be the impact on the 14 portfolio. 15 Q. Now, I'd like to direct -- ask you some 16 questions about the portfolio itself and the 17 underwriters. 18 Did you ever do an analysis to 19 ascertain what share of the high-yield bond 20 portfolio was underwritten by Drexel? 21 A. Yes. 22 Q. Were you asked to do an analysis to 25697 1 ascertain what the -- or how USAT compared with 2 other thrifts in terms of the size of its 3 portfolio? 4 A. I don't recall that, though it would 5 not have surprised me if that arose. 6 Q. Let me show you T4484, which is a 7 document that has not been admitted into the 8 record. 9 A. (Witness reviews the document.) 10 Q. I'm sorry. I only intended to give you 11 one copy of this document. 12 I'd also like for you to take a look at 13 B1770 at Tab 18 -- 14 MR. NICKENS: 1615. 15 Q. (BY MR. GUIDO) At Tab 1615. Now, 16 B1770 is a memo from you to Art Berner dated 17 September 29th, 1987. 18 A. Okay. 19 Q. Do you know why you were asked to 20 prepare that information? 21 A. No. I mean, I can speculate; but at 22 the time, I could have speculated, too. But no, I 25698 1 was not given the specific reason I was asked to 2 write the memo. 3 Q. Were you given any general reason? 4 A. I'm sure that they were reviewing the 5 activity with Drexel at the time. 6 Q. Who was reviewing the activity with 7 Drexel? 8 A. The regulatory bodies. 9 Q. So that this was drafted to provide 10 information to regulatory bodies of some sort that 11 were reviewing the activities of Drexel? 12 A. I don't know that. You asked me to 13 speculate, and I did. This was drafted because 14 Art Berner requested it. 15 Q. I'm sorry. So -- 16 A. You asked me to speculate on who may be 17 asking Art Berner. Art Berner asked me. I 18 provided the report. I could speculate on who 19 asked Art Berner. 20 Q. Let me come back to that. Let me 21 direct your attention to the second sentence. It 22 says, "In addition, I have attached a list of the 25699 1 credits that were not approved in investment 2 committee." 3 A. Okay. 4 Q. Do you see that? 5 A. Yes. 6 Q. Look at the last page. It says 7 "investments turned down." 8 A. Okay. 9 Q. Do you remember I asked you whether or 10 not you had ever done an analysis of which 11 proposals to the investment committee had been 12 turned down? 13 A. Uh-huh. (Witness nods head 14 affirmatively.) 15 Q. And do you recall what your answer was? 16 A. I recall that I told you I was not 17 aware of -- I did not review any of the 18 investments that were turned down prior to me 19 arriving. If you look at the list, there was only 20 one that was turned down after I arrived. 21 Q. Well, just so that the record is clear, 22 you did do an analysis, then, of investments that 25700 1 had been turned down by the investment committee? 2 A. Well, so the record's clear, I guess if 3 I put this together and went through the old 4 minutes, I may have done that. I don't recall. 5 But you asked me if I did an analysis of -- to my 6 knowledge, you asked me when I got there, did I do 7 an analysis of everything that was turned down. 8 When I got there, I did not do an 9 analysis. 10 Q. Okay. 11 A. This was done later on. 12 Q. Now, I'd like to ask you some questions 13 about the document itself, the information on the 14 document. 15 A. Okay. 16 Q. Starting with the year 1985. Do you 17 see that? The first page in terms of the 18 information that you're providing to Art Berner 19 dated September 29th, 1987. 20 A. Okay. And the year you're talking 21 about is 1985? 22 Q. 1985. 25701 1 A. Okay. 2 Q. Now, had there been high-yield bonds 3 that were purchased by USAT prior to 1985? 4 A. I don't know. I wasn't there. 5 Q. Well, did Mr. Berner only ask you to 6 provide the information from '85 forward? 7 A. I don't recall. 8 Q. It says, "Per our conversation, please 9 find attached a breakdown of the purchase activity 10 in the high-yield bond portfolio." 11 Do you see that? 12 A. Uh-huh. (Witness nods head 13 affirmatively.) 14 Q. Did Art Berner set out for you what 15 information he wanted to obtain in your report to 16 him on the purchase activity in the high-yield 17 bond portfolio? 18 A. I assume he did, but I don't recall. 19 Q. Now, let's take a look at the year 20 1985. 21 A. Uh-huh. (Witness nods head 22 affirmatively.) 25702 1 Q. It talks about "The U.S. dollar 2 purchases in 1985 have been 761 million." 3 Do you see that? 4 A. Uh-huh. (Witness nods head 5 affirmatively.) 6 Q. And then let's go to the -- down. If 7 you look at the columns, it has the underwriter, 8 the amount. 9 A. Uh-huh. (Witness nods head 10 affirmatively.) 11 Q. Now, is the amount the face amount or 12 the invested amount? 13 A. Well, I don't recall exactly; but I 14 would assume that in putting a report together 15 like that, you would do the invested amount. 16 Q. Okay. And then it has percent that 17 were USAT's purchases. Right? 18 A. Uh-huh. (Witness nods head 19 affirmatively.) 20 Q. And then where would you -- where did 21 you get that information? 22 A. My understanding of the report -- and, 25703 1 obviously, I'm not there -- but that would be the 2 dollar amount spent with each underwriter over the 3 total dollar amount spent. 4 Q. Well, I mean, did you do that 5 calculation, or did you have it done? 6 A. I don't recall that. 7 Q. Okay. Then it has the underwriter's 8 percentage of total high-yield debt market. 9 Do you see that? 10 A. Uh-huh. (Witness nods head 11 affirmatively.) 12 Q. What's the source of that information? 13 A. I'm sure it was the annual fixed income 14 underwriting sources. 15 Q. Pardon? 16 A. The market publishes an annual fixed 17 income ranking for underwriters in each category 18 of security. 19 Q. Now -- 20 A. It's not footnoted; so, I don't know 21 that to be a fact. But that would be the logical 22 and the easiest place to get the information. 25704 1 Q. Okay. Now, what were the typical fees 2 earned by underwriters on issuances of high-yield 3 bonds in 1985? 4 A. I didn't really concern myself with it; 5 so, it was -- it's like counting someone else's 6 money. It was not a significant factor. It 7 didn't impact me one way or the other. 8 Q. So, you don't know? 9 A. I'm sure I saw the underwriting 10 discount on numerous, and they were different. 11 And I'm sure some were better than others. 12 Q. Well, do you have any idea what 13 generally the range was in 1985? 14 A. 2 to 5 percent. 15 Q. What about 1986? 16 A. Probably the same. 17 Q. 1987? 18 A. I would use the same number. 19 Q. Now, I'd like to ask you -- take a look 20 at the 1985 -- the dollar purchases are around 21 $761 million. In 1986, they are somewhere around 22 $1.1 billion. In 1987 through September, they are 25705 1 $250 million. 2 Was there a substantial turnover in the 3 high-yield bond portfolio in 1985 and '86 as 4 compared to 1987? 5 A. I wasn't there. I can't comment on 6 that. 7 Q. But the portfolio, you think, was 8 somewhere in the five to 600-million-dollar range 9 when you arrived at USAT? 10 A. I believe I said I don't exactly 11 recall. But if you ask me to give an educated 12 guess, that's the number I'd use. 13 Q. Now, in 1988, were you asked to analyze 14 the reserves that had been posted for the 15 high-yield bond portfolio to ascertain whether or 16 not those were adequate to -- for the regulatory 17 and accounting purposes of USAT? 18 A. I'm sure that there was, on an ongoing 19 basis, a valuation of reserves. Some I would have 20 been part of the meetings, and some I would not 21 have. 22 Q. Did Mr. Connell direct you to phase in 25706 1 an increase in the reserves to get them to the 2 2 to 3 percent range? 3 A. No. Mr. Connell would not have 4 directed me to do anything with the reserves. The 5 reserve calculation was not made by a portfolio 6 manager. 7 Q. Okay. Who -- 8 A. You would have to ask Mr. Connell who 9 would do it. 10 Q. Did you ever have any discussions with 11 any examiners regarding Mr. Connell's wishes that 12 the reserves be increased? 13 A. I don't think the regulatory bodies 14 would discuss with me Mr. Connell's reserves. If 15 they had a question regarding reserve levels with 16 Mr. Connell, I'm sure they had that discussion. 17 If they had a question regarding a viability of a 18 specific investment and the likelihood for loss on 19 that investment, they may have had that discussion 20 with me. And whether they came up with an opinion 21 that the reserve was adequate or inadequate, they 22 would have had that with, I'm sure, Mr. Connell or 25707 1 the appropriate asset/liability people and the 2 accounting people to make the appropriate 3 adjustment. But I would not have been part of 4 that other than to discuss what I perceived to be 5 the value of the security and the inherent risk 6 therein. 7 Q. I'd like to direct your attention to a 8 document that is at B2439. It is an October 3rd, 9 1988 memo from Mike Gil to the investment 10 committee distribution regarding high-yield bond 11 sales. 12 A. (Witness reviews the document.) 13 Q. Have you had an opportunity to review 14 that document? 15 A. (Witness reviews the document.) Okay. 16 THE COURT: Could we identify who 17 Michael Gil is? 18 THE WITNESS: Michael Gil was a credit 19 analyst who worked for me. 20 THE COURT: Thank you. 21 MR. GUIDO: I'd like to move the 22 admission of B2439. 25708 1 MR. EISENHART: No objection, Your 2 Honor. 3 THE COURT: Received. 4 Q. (BY MR. GUIDO) This makes reference 5 to a sales program. And I think at one point, it 6 refers to it as the Autumn sales program. 7 Do you see that? 8 A. That's Michael Gil's comment. That's 9 how he names it in the memo. 10 Q. Do you recall the sales that are 11 referred to in here? 12 A. I do recall sales of some of these 13 securities, yes. 14 Q. Do you recall the sales program that 15 he's referring to? 16 A. I don't know whether I recall it as an 17 Autumn sale program. I was unaware that Michael 18 had written this memo. Of course, back then, he 19 may have and I may have been very aware of it. 20 But there was some downsizing of the portfolio in 21 '88. 22 Q. At whose direction? 25709 1 A. Obviously, the memo says -- I'm 2 sorry -- Michael Gil says in the memo at Mike 3 Crow's request. 4 Q. My question was: Do you know at whose 5 direction it was done? 6 A. I don't recall. 7 Q. Do you recall why it was requested to 8 be done? 9 A. No, I don't recall why. I knew that 10 there was some capital constraints, and there was 11 some downsizing of assets. And all asset classes 12 were reviewed. 13 Q. Well, this seems to indicate that the 14 stated goal was to bring the mark-to-market 15 gain/loss to a break-even level. 16 Do you see that? 17 A. You would have to ask Michael Gil about 18 that. He wrote the memo. 19 Q. Okay. You don't recall anything about 20 the memorandum? 21 A. I do not because I was not part of 22 this. This is between Michael Gil and Mike Crow. 25710 1 I mean, if I would have wrote the memo, I 2 obviously don't understand why Michael Gil wrote 3 the memo. 4 Q. Well, did Michael Gil report to you? 5 A. Yes, he did. 6 Q. Okay. Was he -- somebody circumventing 7 you here? 8 A. I don't know. I mean, you're asking me 9 to read a memo after nine years and saying did 10 someone circumvent me nine years ago? It's 11 possible. I don't know. This memo is between 12 Michael Gil and Michael Crow. 13 Q. No. It says -- 14 A. My name is not here. 15 Q. It says investment committee 16 distribution. I mean, you were on the investment 17 committee, weren't you? 18 A. Yes, I was. 19 Q. So, you're not saying that this was an 20 effort to circumvent -- 21 A. I don't know what it was. I'm not 22 saying anything. 25711 1 Q. Do you recall that there were requests 2 in the fall of 1988 to adjust the portfolio for 3 mark-to-market losses? 4 A. There was -- on a continuing basis, the 5 market value of the portfolio was evaluated, both 6 from the earlier memo that you showed with gains 7 and also with any adjustments or deficiencies over 8 the cost of fund. Because it was an investment 9 portfolio, the market values were adjusted 10 continuously. They were looked at. 11 As the portfolio manager, I not only 12 looked at the asset values. At that point in 13 time, the cost of funds for Texas institutions was 14 also rising. So, an investment that was made in 15 '87 at a very profitable spread may no longer be 16 profitable in '88 because of a rising cost of 17 funds, the difference in interest rates, the 18 difference in perceived risk for Texas savings 19 institutions. And I would have adjusted the 20 portfolio appropriately. It was a continuing 21 process. It was not static. It moved with the 22 markets on both the asset and liability side and 25712 1 the creditworthiness of the underlying credit on a 2 daily basis. 3 Q. Well, if it was done on a regular 4 basis, why did Mike Crow have to request it to be 5 done? 6 A. I suggest you ask Mike Crow. 7 MR. GUIDO: No further questions, Your 8 Honor. 9 THE COURT: Okay. We'll take a short 10 recess. 11 12 (Whereupon, a short break was taken 13 from 10:37 a.m to 10:55 a.m.) 14 15 THE COURT: Be seated, please. We'll 16 be back on the record. 17 I believe at the recess, the OTS was 18 through with their direct-examination. 19 MR. GUIDO: Yes, Your Honor. There's 20 just one thing I failed to do and that was move 21 the admission of T4484. 22 MR. EISENHART: We have no objection to 25713 1 that, Your Honor. 2 THE COURT: All right. Received. 3 Mr. Eisenhart, do you have some 4 cross-examination? 5 MR. EISENHART: I do. Thank you, Your 6 Honor. 7 8 EXAMINATION 9 10 Q. (BY MR. EISENHART) Good morning, 11 Mr. Stodart. 12 A. Good morning. 13 Q. Mr. Guido had brought out the fact that 14 you worked at Westinghouse Credit Corporation 15 prior to coming to USAT. 16 How long had you worked at 17 Westinghouse? 18 A. Roughly eight years. 19 Q. And had you been the high-yield bond 20 portfolio manager there for that entire time? 21 A. The entire time they had it. I was not 22 there for -- I mean, I worked in other areas. I 25714 1 did private placements, and I worked in the 2 treasury department. But I started the high-yield 3 bonds at Westinghouse. 4 Q. You started the high-yield bond 5 portfolio and built it up to -- 6 A. 750 million. 7 Q. And you have worked in the fixed income 8 security field since then and I understand with a 9 specialty in high-yield bonds? 10 A. Yes. 11 Q. So, that's been your career, then, for, 12 what, about 20 something years? 13 A. Yes, sir. 14 Q. Now, when you interviewed at -- for 15 your position at USAT, you gave Mr. Guido the list 16 of people that you had talked to, correct? 17 A. Yes. 18 Q. And one of the people you had talked to 19 was Mr. Hurwitz? 20 A. Yes, sir. 21 Q. Did you ever get the impression during 22 the interview process that his was the only -- his 25715 1 was the only opinion that mattered? 2 A. No. 3 Q. I want to ask you a couple of questions 4 about Mr. Hurwitz and his role in the institution 5 as it pertained to your high-yield bond 6 activities. 7 Did Mr. Hurwitz directly oversee or 8 supervise you in your role as high-yield bond 9 manager? 10 A. No. 11 Q. Did he ever direct you to purchase a 12 particular security? 13 A. No. 14 Q. Did he ever make suggestions to you 15 from time to time? 16 A. No. 17 Q. Did you ever bounce ideas off of him? 18 A. Yes. 19 Q. And would you say you used him as a 20 resource, in effect, using his expertise? 21 A. Yes. 22 Q. Was he the only resource that you had 25716 1 available to you? 2 A. No. 3 Q. So, he would have been one of any 4 number of resources you could use? 5 A. He would have been one of many. And 6 also, he had extensive contacts in various 7 industries and on the street. And the resources 8 that were available to me helped enhance my 9 performance. 10 Q. Would you have interacted with 11 Mr. Hurwitz in this fashion on a daily basis? 12 A. No. 13 Q. Were you ever directed in any way to 14 give preference to Drexel Burnham Lambert in your 15 dealings as high-yield bond manager? 16 A. No. 17 Q. Drexel was a fairly big name in the 18 high-yield bond field at that time, was it not? 19 A. The biggest. 20 Q. But you were never told that you were 21 supposed to prefer them or give them any 22 preference in the business you were doing? 25717 1 A. Not one time. 2 Q. Did you have a Drexel sales contact 3 that you used in your work at USAT? 4 A. Yes. 5 Q. Was this somebody that had been in 6 place as a sales contact at USAT, or was this 7 somebody you knew before? 8 A. No. The salesman who covered USAT 9 prior to me going there, the salesman that I had I 10 changed when I got there. I used the same 11 salesman that I had at Westinghouse. 12 Q. And nobody ever told you to do 13 otherwise? 14 A. As far as sales contacts, that was 15 entirely up to me. It was not uncommon where the 16 relationship had been built with a particular 17 salesman at any securities firm. And when I went 18 to USAT, I generally changed to that salesman. 19 Q. And so, you didn't do it any 20 differently at USAT than you had really at other 21 firms? 22 A. No. 25718 1 Q. Mr. Guido asked you a couple questions 2 about the portion of the USAT portfolio that was 3 with Caywood Christian. 4 How large an amount was that? Do you 5 recall? 6 A. I think it was roughly 20 million. 7 Q. 20 million out of a portfolio that, 8 what, was about $600 million at various times? 9 A. Yes. 10 Q. So, it was a relatively small amount? 11 A. It was a relatively small amount, and 12 it provided a benefit over and above their 13 management skills, if you will, to the extent that 14 I also had access to all their analysts and all 15 their credit information that they wrote. 16 Q. And that was very useful to you? 17 A. Yes. 18 Q. Now, Mr. Guido showed you one or more 19 letters to the Texas Securities Commission, 20 generally Mr. Anderson, I think. 21 A. Uh-huh. (Witness nods head 22 affirmatively.) 25719 1 Q. Those were sent on a monthly basis, 2 were they not? 3 A. Yes. 4 Q. And they reported not only the contents 5 of the high-yield bond portfolio but they reported 6 all the purchases and sales during the prior 7 month, did they not? 8 A. Yes. 9 Q. And during the time you were at USAT, 10 did copies of those also go to Ginger Baugh at the 11 Federal Home Loan Bank of Dallas? 12 A. I don't recall specifically, but I 13 believe Ginger was the one who got them. 14 Q. And Mr. Guido showed you several 15 documents where you were sending a list of the 16 contents of the portfolio to Mr. Jonathan Scott at 17 the Federal Home Loan Bank of Dallas. 18 You recall those? 19 A. Yes. 20 Q. And to the extent that was simply a 21 listing of what was in the portfolio, would that 22 have duplicated what you were already sending each 25720 1 month to the Texas S&L people and to Ms. Baugh? 2 A. The information would have been 3 identical. The formatting could have been 4 slightly different. 5 Q. I want to talk a little bit about the 6 operation of the high-yield bond portfolio during 7 the time that you managed it. 8 You considered this to be an investment 9 portfolio, did you not? 10 A. I did. 11 Q. And you understand the distinction 12 between an investment portfolio and a trading 13 portfolio? 14 A. From an accounting standpoint, very 15 well. 16 Q. And how would you describe, from that 17 standpoint, a trading portfolio? What would be 18 the characteristics of that, as you understood it? 19 A. I would -- I mean, I think that -- I'd 20 like to at least clarify one point here. It's 21 that there is an investment portfolio. There is a 22 total return portfolio, which is more of a 25721 1 mark-to-market portfolio, which is, I think, where 2 you're going. 3 A trading portfolio can be day traded, 4 week traded, month traded. Its opportunities or 5 inconsistencies in spread where you go in and out 6 of the securities on a regular basis. It does not 7 have to be credit-driven. It can be 8 market-driven, timing-driven. 9 As such, a total return portfolio 10 allows you to capture the gains and losses on a 11 daily basis in the portfolio where the investment 12 portfolio, the three objectives that Mr. Guido 13 referred to -- capital preservation, spread over a 14 particular cost of funds, and capital 15 appreciation -- was really what I was trying to 16 attempt to do. 17 Q. Now, in an investment portfolio, you 18 don't expect that nothing will ever be sold, do 19 you? 20 A. No. I mean, by nature, in a static 21 world where nothing changes, you would buy a 22 security and it would mature. Unfortunately, that 25722 1 is not the real world; and there is things that 2 change such as the cost of funds, the 3 creditworthiness of the borrower. And as such, 4 you do not let an accounting guideline get in your 5 way of preserving the institution's capital. 6 Q. So, you have to manage the portfolio? 7 A. Yes. 8 Q. And that's the way you ran the 9 portfolio at USAT? 10 A. Yes, it is. 11 Q. Now, I want to talk a little bit about 12 your interaction with the regulators. 13 When you arrived at USAT, did you take 14 on, as part of your duties, interacting with or 15 informing the regulators about the high-yield bond 16 activities at USAT? 17 A. Yes. And it went further because their 18 understanding of junk bonds, per se, and what 19 exactly they were was somewhat limited. 20 Q. Did you consider that to be an 21 important part of your duties; that is, the 22 process of dealing with the regulators? 25723 1 A. Absolutely. It allowed me to make 2 decisions regarding the portfolio and where they 3 were going so that there was not always a 4 continuous barrage of questions, if they sort of 5 understood what the objectives were and how we 6 were attempting to meet those objectives. 7 Q. And do you think that you achieved your 8 objective of getting the regulators to understand 9 better what you were doing in the high-yield bond 10 field? 11 A. It was my understanding, based on the 12 regulatory reports that were issued, that the 13 comments from the regulatory bodies improved 14 significantly once I got there. 15 Q. And was Mr. Twomey one of the 16 regulators that you -- that you dealt with and 17 tried to go through this educational process with? 18 A. Yes. 19 Q. How did you get along with him? 20 A. Fine. 21 Q. And did he seem receptive to what you 22 were telling him and what you were showing him 25724 1 about the high-yield bond operations? 2 A. He seemed receptive. 3 Q. And he seemed to understand what you 4 were saying? 5 A. I thought so. 6 Q. Now, how would you describe the role of 7 the investment committee in terms of your 8 high-yield bond operations? I think with 9 Mr. Guido, you said their role was to review and 10 advise. 11 A. Obviously, I looked at the investment 12 committee in a couple of ways. I mean, on an 13 individual basis, they overviewed individual 14 credits or investments that I made. They also 15 brought expertise or a different way of looking at 16 credits so that there may have been things that I 17 did not think of. I don't pretend to know all the 18 answers to everything. But it also -- the 19 investment committee provided us, based on the 20 membership, with an open dialogue and discussion 21 on what was going on in the government market, the 22 mortgage market, the equity market, in the branch 25725 1 system with the cost of funds, in the regulatory 2 environment. We had a regular economist that 3 spoke out. So, the interaction was to cover 4 various fields, sort of to broaden your horizon 5 when you were making an individual investment. 6 Q. Now, when you would propose an 7 investment to the investment committee, you would 8 have, prior to that time, done a credit analysis 9 of the bond, would you not? 10 A. Yes. And in 90 percent of the cases, 11 we also spoke with the management in person. 12 Q. And would you typically write something 13 up to present to the committee? 14 A. Yes. 15 Q. And that would be presented to them, 16 what, prior to the meeting? At the meeting? 17 A. We tried to always present it prior to 18 so they had some time to review it prior and to 19 ask any questions or any thoughts. And in a lot 20 of instances, because you were presenting a credit 21 and really didn't know the rate because the 22 security was not priced, they were making an 25726 1 opinion on the creditworthiness of the investment; 2 and I had to make a decision on the risk reward. 3 Q. Were your recommendations passively 4 accepted by the committee, or could you expect to 5 be questioned and cross-examined on them? 6 A. I could expect to be questioned and 7 cross-examined. 8 Q. I think you pointed out in the list 9 that Mr. Guido showed you that there was only one 10 recommendation that you made, at least as of that 11 time, that the committee had turned down. 12 So, I gather you had a pretty good 13 success rate of getting your recommendations 14 approved? 15 A. Yes. 16 Q. And did you consider that was because 17 you had done this work beforehand? 18 A. I think it was a combination of we had 19 done our work very well beforehand, we had met 20 with the management team, we sourced industry 21 people that we knew, we talked to -- if it was an 22 energy company, we talked to other people in the 25727 1 energy field. We talked -- I mean, we obviously 2 had the availability of the Caywood resource, if 3 we needed it. We tried to get a feel for the 4 market, where things were going, prior to doing 5 it. 6 Be it right, wrong, or indifferent, we 7 probably were much more knowledgeable about each 8 individual credit than the committee because we 9 had done all the work. 10 Q. How would you compare the -- the work 11 you would do in advance to what would typically be 12 done, say, in the underwriting of a commercial 13 loan? 14 A. We did at least as much, if not more. 15 Q. Now, did -- were there times when 16 people from the Federal Home Loan Bank of Dallas 17 attended investment committee meetings? 18 A. Yes. 19 Q. I want to show you one particular set 20 of minutes. This is Exhibit A1530, and it's at 21 Tab 287. 22 These are the minutes of the investment 25728 1 committee for September 20, 1988, Mr. Stodart. 2 And you were in attendance on that date, were you 3 not? 4 A. Uh-huh. (Witness nods head 5 affirmatively.) 6 Q. And it says that also in attendance 7 were the association's principal supervisory 8 agent, Neil Twomey, senior vice president of the 9 Federal Home Loan Bank -- Federal Home Loan Dallas 10 Bank, Jonathan Scott, and other members of their 11 staff. 12 Do you recall Jonathan Scott? 13 A. Yes. 14 Q. You met with him from time to time? 15 A. Yes. 16 Q. And I think Mr. Guido showed you that 17 at some time, you were sending reports to him? 18 A. Yes. 19 Q. Now, going down to the third paragraph, 20 actually it says that Mr. Scott described his role 21 in the development of a new section of the Dallas 22 Bank and he was explaining his new 25729 1 responsibilities to you. 2 Do you see that? 3 A. Uh-huh. (Witness nods head 4 affirmatively.) 5 Q. Going on down to the last paragraph on 6 that page, it states, "Mr. Gene Stodart then 7 reported on activity for the high-yield corporate 8 securities. He noted that during the week, 9 $3 million par value of a Tonka 16 and a quarter 10 percent coupon securities had been sold." You 11 described the remaining position. You went on to 12 describe the reasons for that sale, which were 13 concerns with the toy industry and the economic 14 and political environment in the Far East. 15 Were those typical reasons for which 16 you might sell a particular security? 17 A. It was a reason where you might reduce 18 exposure because of uncertainty in some sector of 19 the economy. As I stated earlier, in looking at 20 an investment, you had to look at all factors. 21 And that was the determining factor on what you 22 did. 25730 1 Q. As I think you put it earlier, in this 2 particular case, something had changed so that 3 that security was now looked at in a different 4 light from the way it was looked at when you 5 acquired it? 6 A. Yes. 7 Q. Now, do you recall whether Mister -- 8 whether Jonathan Scott or Neil Twomey seemed 9 surprised to hear you report that this security 10 had been sold? 11 A. I don't really recall, but I mean, 12 there's no comments in the report. 13 Q. You don't remember either of them 14 jumping up in alarm and saying, "My God. You're 15 selling securities out of the portfolio"? 16 A. No. 17 Q. In fact, the Federal Home Loan Bank of 18 Dallas got on a monthly basis a report from you 19 that listed all the sales out of the portfolio, 20 did they not? 21 A. They did . 22 Q. I want to show you a document which is 25731 1 Exhibit B1956. This is a document not previously 2 admitted. 3 Now, Mr. Stodart, this is a memorandum 4 from Mike Crow to yourself, Ron Huebsch, Jim 5 Jackson, and Sandy Laurenson dated January 12th, 6 1988. 7 A. Uh-huh. (Witness nods head 8 affirmatively.) 9 MR. EISENHART: Your Honor, I'd like to 10 move the admission of Exhibit B1956. 11 MR. GUIDO: No objection, Your Honor. 12 THE COURT: Received. 13 Q. (BY MR. EISENHART) In the memorandum, 14 Mr. Crow is talking about liquidity for the first 15 quarter of 1988, is he not? 16 A. He is. 17 Q. And he says in here that because of 18 liquidity concerns, i.e., the need to raise cash, 19 the association is going to have to do a number of 20 things, one of which is reduce the size of the 21 high-yield bond portfolio by $100 million, 22 correct? 25732 1 A. Uh-huh. (Witness nods head 2 affirmatively.) 3 Q. Did that actually occur? Do you 4 remember? 5 A. There was some reduction because there 6 was a branch sale. 7 Q. And in this case, the reduction had 8 nothing to do with taking profits or bolstering 9 capital, did it? 10 A. No. 11 Q. This was simply a concern that the 12 association had to maintain a certain level of 13 liquidity, and this was how management had decided 14 to do it. 15 Is that a fair statement? 16 A. They had to fund the branch sales. 17 Therefore, they had to raise liquidity. So, a 18 decision was made above the portfolio management 19 level; and I had to abide. 20 Q. And was this typical of the kinds of 21 things that happen from time to time in any 22 corporation; that is, the company has particular 25733 1 needs and management decides to take steps to meet 2 them? 3 A. Yes. 4 Q. Was this an unusual situation in any 5 regard? 6 A. No. It happened all the time, even at 7 Westinghouse. 8 Q. So, you had faced this at other times 9 during your career as a portfolio manager? 10 A. There was times when the portfolio 11 would grow and be reduced based on other 12 opportunities in other sectors or some factor that 13 I didn't control directly. 14 Q. So, if we were simply to look at the 15 records of the high-yield bond portfolio and we 16 were to see that somewhere in the first quarter of 17 1988, $100 million worth of high-yield bonds were 18 sold, and if we were to see that that produced a 19 gain of some sort, that wouldn't automatically 20 indicate that that was done for purposes of taking 21 profits, would it? 22 A. No, it would not. 25734 1 Q. I want to show you the investment 2 committee minutes for July 27th, 1988. This is 3 Exhibit A1522, and it's at Tab 1247. 4 Now, I'm interested in an attachment to 5 those minutes; and I'm hoping that the imaging 6 numbers on yours, which are the numbers by the 7 little bar code, are the same as mine. 8 The page I'm interested in has the 9 imaging number as OW049447, probably about 10 two-thirds of the way back. 11 A. Okay. The financial statement? 12 Q. Right. 13 A. Okay. 14 Q. Now, does that show the financial 15 results of the high-yield bond portfolio for the 16 first half of 1988? 17 A. Yes. 18 Q. And help me just kind of track through 19 this. There's a line that says "total interest 20 income." 21 Do you see what I refer to about 22 halfway down the page? 25735 1 A. Uh-huh. (Witness nods head 2 affirmatively.) 3 Q. And if you go over to the far 4 right-hand column -- I know this is a little hard 5 to read -- but it appears to be 40,323,000. 6 Is that how you would read that? 7 A. Yes. 8 Q. And does that represent the total 9 interest income generated by the portfolio for the 10 first half of 1983? 11 A. Yes. 12 Q. I'm sorry. '88. Excuse me. 13 And that would represent the income 14 generated by the portfolio less the funding costs 15 or that's simply the income generated by the 16 portfolio? 17 A. That is the gross income generated by 18 the portfolio. 19 Q. Okay. Then you drop down to the next 20 subtotal, and there you have your funding cost, 21 correct? 22 A. Yes. 25736 1 Q. And that consists of retail CDs which 2 are fixed rate, retail CDs which are zero coupon, 3 and other funding. Right? 4 A. Right. 5 Q. And your funding cost for that 6 six-month period are indicated as $31,792,000? 7 A. Yes. 8 Q. And if you net those out, your net 9 interest income is $8,530,000? 10 A. Right. 11 Q. And then there's also a provision down 12 there for non-interest income. 13 Do you see that? 14 A. Uh-huh. (Witness nods head 15 affirmatively.) 16 Q. What would that typically represent? 17 A. Could have been gains on sales. Could 18 have been call away of warnings or equity kickers. 19 Anything else would have fallen in that basket. 20 Q. So, adding that in and subtracting 21 provisions for loss, you come up with net interest 22 income before operating expenses of, like, 25737 1 $10,095,000? 2 A. Yes. 3 Q. Now, what were the operating expenses 4 for this particular operation like? What was the 5 order of magnitude? 6 A. The department consisted of four 7 people. 8 Q. So, the operating expenses were not 9 significant? 10 A. No. 11 Q. Then at the very bottom of the page, 12 they have some percentages. And it has net 13 interest spread, and it looks like -- very hard to 14 read. It looks like maybe 2.74 percent. 15 A. Uh-huh. (Witness nods head 16 affirmatively.) 17 Q. And then it has a return on investment 18 of 13.37 percent? 19 A. Right. 20 Q. Did USAT have many categories of 21 investments in those days where it was getting a 22 13.37 percent return on investment? 25738 1 A. No. 2 Q. So, the high-yield bond portfolio was 3 doing very well for the institution in 1988, would 4 you say? 5 A. Yes. 6 Q. Let me show you another document, which 7 is B2362. And this is a new document. 8 This is a memo from Mike Crow to Larry 9 Connell dated August 5th, 1988. 10 Do you believe you played any part in 11 the preparation of this document? 12 A. I'm sure I did. 13 Q. Do you believe, in fact, that you may 14 have been the one who prepared it or at least 15 provided the information? 16 A. I probably at least -- I mean, the 17 accounting department would have had the actual 18 hard numbers, but I'm sure that we had some 19 discussions on it, yes. 20 MR. EISENHART: Your Honor, I move the 21 admission of B2362. 22 MR. GUIDO: No objection, Your Honor. 25739 1 THE COURT: Received. 2 Q. (BY MR. EISENHART) In the memo, it 3 outlines the historical returns on high-yield 4 bonds and equity arbitrage. And this is really 5 the same kind of data we saw in the report I just 6 showed you, only for a longer period of time, 7 correct? 8 A. Yes. 9 Q. And that shows that for the high-yield 10 bond portfolio, for the years 1985, 1986, 1987, 11 and the first six months of 1988, the income 12 before operating expenses totaled $83,614,000? 13 A. Yes. 14 Q. And that shows a total return on 15 investment for all of those years of 5.2 percent? 16 A. Yes. 17 Q. It says in the memo that "The 18 high-yield bonds have been an extremely profitable 19 area for United, producing 83.6 million of income 20 after cost of carry and allowances for chargeoff." 21 It says, "It also should be noted that this 22 activity is one of our lowest overhead items as 25740 1 the annual operating expenses amount to only 2 approximately $600,000 a year." 3 Is that consistent with your 4 recollection of the order of magnitude of the 5 operating expenses? 6 A. It would be in that range. I don't 7 remember the exact dollar amount. 8 Q. It goes on to say, "Management's intent 9 is to hold this portfolio until maturity or call. 10 Therefore, mark-to-market is not a primary 11 objective." 12 Is that consistent with your 13 recollection? 14 A. Yes. 15 Q. But it says, "As you know, we view a 16 mark-to-market analysis each week to ensure 17 continuing monitoring of the portfolio." 18 And you did that? 19 A. Yes, I did. 20 Q. It concludes that "Currently, the 21 portfolio has a mark-to-market net loss of 8.8 22 million. And if that loss were deducted from the 25741 1 net returns to date on a total mark-to-market 2 basis, the portfolio would have produced a 3 74.8-million-dollar return or a net return on 4 investment of 4.65 percent." 5 Is that consistent with your 6 recollection? 7 A. That's -- yeah. I think that would be 8 fair? 9 Q. And that -- this particular report 10 would address not only your stewardship of the 11 portfolio but, really, the stewardship of that 12 portfolio by your predecessors, would it not? 13 A. The time frames would also reflect my 14 predecessors, yes. 15 Q. I'd like to show you a document which 16 was previously marked as B2610. This is at 17 Tab 1283. 18 This is a memo from Mike Crow to Art 19 Berner concerning a meeting with the Federal Home 20 Loan Bank Board on December 16, 1988. And it says 21 that at about 10:30 a.m. that day, a meeting was 22 held with Larry Connell, Dominick Bruno, Gene 25742 1 Stodart, and myself -- "myself" being Mr. Crow. 2 And the subject of the meeting was the rolldown or 3 disposition of the high-yield bond portfolio. 4 Do you recall such a meeting? 5 A. I remember we had a meeting, yes. 6 Q. Well, do you remember that by this 7 time -- "this time" being mid-December 1988 -- 8 USAT was under a supervisory agreement? 9 A. There was a consent agreement. 10 Q. And was one of the things that was 11 required by that supervisory agreement the -- a 12 reduction in the size of the high-yield bond 13 portfolio? 14 A. Uh-huh. (Witness nods head 15 affirmatively.) 16 Q. This was the -- 17 THE COURT: Would you speak up, please? 18 A. Yes. Yes. I'm sorry. 19 Q. (BY MR. EISENHART) Don't put that 20 document away, but let me just put it in some 21 perspective. Let me have you look at a second 22 document. This is -- oh, here it is. It's B2607. 25743 1 This is a new document, as well. 2 Now, B2607, Mr. Stodart, was a memo by 3 you to Mike Crow on December 16th, 1988, that same 4 day, presenting a plan for the orderly liquidation 5 of the high-yield securities portfolio. 6 Do you recall preparing this memo? 7 A. Yeah. 8 MR. EISENHART: Your Honor, I'd offer 9 B2607. 10 MR. GUIDO: No objection, Your Honor. 11 THE COURT: Received. 12 Q. (BY MR. EISENHART) Now, the -- this 13 planned liquidation of the high-yield securities 14 portfolio was in response to the requirements of 15 the supervisory agreement, was it not? 16 A. Yes. 17 Q. And in your memo, you say, "An orderly 18 liquidation would best be conducted over a maximum 19 period of time to prevent a dislocation in the 20 market and to achieve maximum value." 21 Why did you feel that this ought to be 22 done over a period of time? 25744 1 A. I think the easiest way to explain it 2 is if I said to you, "What's your house worth?" 3 And you tell me half a million dollars. 4 And I say, "Can you sell it for that?" 5 And you say, "Yes." 6 And I say, "Can you sell it for that 7 tomorrow?" 8 You're not going to get a half a 9 million dollars if you have to sell it tomorrow. 10 If you conduct a fire sale on any asset, the value 11 is reduced. 12 Q. Well, backing up for a second, 13 Mr. Stodart, we just saw reports that indicated 14 that the high-yield bonds had been an extremely 15 profitable area for USAT over a period of a number 16 of years, correct? 17 A. Uh-huh. (Witness nods head 18 affirmatively.) Yes. 19 Q. And in spite of that, the regulators 20 were insisting that this portfolio be liquidated, 21 correct? 22 A. Yes. 25745 1 Q. What was the reason that was given for 2 that? Why did they want to wind down this area 3 that had been so profitable? 4 A. It had been generally concluded by the 5 regulatory bodies that you should not be investing 6 in, quote, "junk bonds" with federally-insured 7 money. 8 Q. So, this was a policy decision that had 9 been made by the regulatory bodies? 10 A. Yes. 11 Q. And this wasn't any reflection 12 necessarily on the management of this particular 13 activity at USAT? 14 A. Not to my knowledge. 15 Q. Now, was it common knowledge in the 16 financial markets that this policy decision had 17 been made and that financial institutions or 18 thrifts were going to be required to divest their 19 high-yield bonds? 20 A. Yes. 21 Q. And how was that impacting the market 22 and the potential for realizing good returns? 25746 1 A. The obvious value of the securities 2 fell. I cite my example before. 3 Q. And I guess to use your example of a 4 moment ago, if I had to sell my house tomorrow and 5 the whole world knew I had to sell my house 6 tomorrow, that would be an additional problem I 7 would have, would it not? 8 A. It would. 9 Q. I wouldn't be likely to get the best 10 price for it under those circumstances, would I? 11 A. That is true. 12 Q. And that was the situation that USAT 13 faced in December of 1988? 14 A. Yes. 15 Q. Now, the orderly liquidation that you 16 were proposing would have taken place over, what, 17 a period of some months? 18 A. I would think so. I mean, obviously, 19 the market conditions would have dictated that. 20 But I did not believe that the institution could 21 recognize value in a fire sale method. 22 Q. Now, let me go back for a moment, then, 25747 1 to a document we looked at before: B2610, which 2 is this memo from Mike Crow about the meeting that 3 took place on December 16th, 1988. 4 The subject of that meeting was the 5 liquidation of the high-yield bond portfolio, was 6 it not? 7 A. Yes. 8 Q. And did you learn at that meeting what 9 was being proposed to be done in order to 10 liquidate that portfolio? 11 A. No. 12 Q. So, you simply had a meeting with 13 others from USAT. At that meeting, did you talk 14 about your proposal for orderly liquidation? 15 A. We talked about liquidating the 16 portfolio and what I thought would be the best 17 method to do it. I did not know that that was 18 what was being proposed. 19 Q. Now, Mr. Crow's memo goes on to state 20 that following the meeting at which you attended, 21 he, Larry Connell, and Scott Shea, who was a 22 partner with Ranieri Wilson, flew to Dallas and 25748 1 immediately went to the offices of Merrill-Lynch. 2 You were not involved in that meeting, 3 correct? 4 A. No. 5 Q. Do you know who Scott Shea was? 6 A. Yes. 7 Q. Was he one of Mr. Ranieri's people? 8 A. He was one of the Ranieri partners. 9 Q. And I think somebody earlier in this 10 proceeding described him as a fairly key person in 11 the transition of this institution into 12 Mr. Ranieri's hands. 13 Was that your impression? 14 A. He was one of the front men was my 15 impression. 16 Q. Now, was Mr. Shea present at the 17 meeting that you had attended at USAT? 18 Do you recall? 19 A. Not to my knowledge. 20 Q. Mr. Crow's memo then goes on to 21 explain -- to record in some detail this meeting 22 that they had at Merrill-Lynch. And then it goes 25749 1 on to record in some detail a subsequent meeting 2 at the Federal Home Loan Bank of Dallas. 3 And you didn't participate in either of 4 those, correct? 5 A. Not that I recall. 6 Q. I want to refer you to another 7 document. This is Exhibit A1168. This is a 8 document that has not been admitted. 9 Now, this is the minutes of a special 10 board of directors meeting of United Savings 11 Association of Texas that took place on 12 December 17th, 1988, which is the day after the 13 meeting we have just been referring to. And it 14 says that all members of the board were present 15 and in voice communication, and it says also 16 present by voice communication was Messrs. Michael 17 Crow and Eugene Stodart. 18 Do you see that? 19 A. Yes. 20 Q. And do you recall a meeting that took 21 place apparently by conference call on Saturday, 22 December 17th -- 25750 1 A. Yes. 2 Q. -- 1988? And you were on that 3 conference call for at least part of the time? 4 A. I was on the call for the part that 5 pertained to high-yield bonds. 6 Q. Okay. 7 MR. EISENHART: Your Honor, I move 8 Exhibit A1168. 9 MR. GUIDO: No objection, Your Honor. 10 THE COURT: Received. 11 Q. (BY MR. EISENHART) Now, I'd like to 12 talk a little bit about this meeting, Mr. Stodart. 13 And I've actually -- so that everybody can kind of 14 follow along, I've actually kind of blown up the 15 exhibit so that we can all track along with it. 16 It says that Mr. Connell acted as the 17 chairman of the meeting. And he was at that point 18 chairman of the board of USAT, was he not? 19 A. That's -- yes, the memo says that. 20 Q. Okay. It says he "began by reviewing 21 the status of the Ranieri Wilson bid on the 22 capitalization of United Savings." It says that 25751 1 Ranieri Wilson had signed a confidentiality 2 agreement. They were presenting a bid and that 3 part of their bid involved liquidating a portion 4 of the high-yield bond portfolio which would 5 eliminate the underwater securities. 6 Do you recall that? 7 A. I was not part of the meeting, no. 8 Q. Okay. So, that took place, then, 9 before you got on the call? 10 A. Right. 11 Q. It says, "Mr. Connell then reviewed the 12 discussion that was had at a meeting held on 13 December 16th, 1988, which was the day before, at 14 the Federal Home Loan Bank of Dallas' request to 15 discuss these matters. He noted that in addition 16 to he and Mr. Crow, representatives of 17 Merrill-Lynch and representatives of Ranieri 18 Wilson were present at that meeting." 19 Now, was that part of the discussion 20 that you were involved with? 21 A. No. I was brought in only to discuss 22 the impact on the high-yield bonds. 25752 1 Q. Okay. Well, then there's a discussion 2 concerning Merrill-Lynch and whether they had a 3 conflict. And then there's some more discussion 4 by Mr. Connell -- just trying to get to the point 5 at which you came in. There's some additional 6 discussion of Mr. Connell having been told by the 7 Ranieri Wilson people that these transactions had 8 to be completed before -- in order to make their 9 bid economically satisfactory. And there's some 10 discussions about the need for the Federal Home 11 Loan Bank of Dallas to direct the board of 12 directors to enter into these transactions. 13 Now, were you party to any of those? 14 A. I don't recall, but I don't believe I 15 was. 16 Q. Okay. Toward the bottom of the first 17 page, it says, "Mr. Connell stated that the 18 Federal Home Loan Bank -- that at the Federal Home 19 Loan Bank meeting, Mr. Shea, the representative of 20 Ranieri Wilson, reviewed why it was important for 21 these transactions to be completed and for these 22 assets to be liquidated prior to the completion of 25753 1 Ranieri Wilson's Southwest Plan transaction. The 2 representatives of Merrill-Lynch at the 3 December 16th meeting then reviewed why they 4 believed it was beneficial for them to have an 5 exclusive opportunity to sell all of these 6 securities." 7 Were you part of that discussion? 8 A. No. 9 Q. It must be at about that point that you 10 came in, then, because it says, "Mr. Stodart, 11 answering a question from the USAT board at this 12 Saturday meeting, stated that he believed the 13 granting of an exclusive to any one broker was an 14 extremely bad business practice." 15 Do you recall expressing that opinion? 16 A. Yes. 17 Q. And it says, "He stated that since 18 these brokers would then have to resell the 19 securities into the market, they would be 20 acquiring the securities and paying the 21 association a significantly lower price than if 22 the securities were offered for competitive bid." 25754 1 Did you express that view? 2 A. Yes. 3 Q. You did, I gather, think that this idea 4 of giving Merrill-Lynch an exclusive arrangement 5 to sell these bonds would be a bad idea? 6 A. I did. Merrill-Lynch would have to pay 7 a price below what someone else would pay for the 8 securities build the inherent risk of the 9 liquidation into that without anyone providing a 10 competitive bid or even a competitive quote to say 11 what the real market value was. Merrill would 12 have had the total ability to come in and say, 13 "Well, I know the bond is quoted at 80, 85. We 14 think it's worth 60." And there was no one to 15 question it. And that's not the way the 16 securities business works. 17 Q. Okay. It goes on to say, "The board 18 then requested information as to who had suggested 19 that Merrill-Lynch have an exclusive but 20 Mr. Connell did not have an answer. Mr. Berner 21 noted that it was not the USAT board's desire to 22 give exclusive arrangements and that that had been 25755 1 a major negotiated item when USAT had selected a 2 financial advisor in September." 3 Do you see where I'm referring to? It 4 says then that "Mr. Crow stated that in reviewing 5 which high-yield bond securities would be sold, 6 Ranieri Wilson had taken the United portfolio and 7 given it to Merrill-Lynch for their review." 8 Were you aware that are that had been 9 done? 10 A. No. 11 Q. Going down to the next paragraph, 12 "Mr. Crow reviewed the effect of the proposed 13 liquidation transactions." It talks about 14 mortgages -- mortgage-backs and swaps. He says, 15 "Losses from the sale of the high-yield bonds 16 would approximate $6 million." 17 In the next paragraph, it says, "It was 18 also noted that the incremental losses from the 19 rapid disposition of these products would be 20 extreme. This would be especially true if these 21 securities needed to be sold in a one-week as 22 opposed to over a two-week period and was 25756 1 exacerbated by giving Merrill-Lynch an exclusive 2 on the sale." 3 Were you present for that part of the 4 discussion? 5 A. No. I added my part at the beginning, 6 and then they took me off the call. 7 Q. Okay. So, you came on. You expressed 8 the view that the exclusive was not a good 9 arrangement. 10 Did you express any view about the 11 notion of selling these bonds within a one- to 12 two-week period? 13 A. Not that I recall. 14 Q. But you would not have thought that was 15 a good idea, I assume? 16 A. No. I obviously not would have thought 17 that was a good idea. 18 Q. Okay. It actually appears you stayed 19 around for a little longer because we get down to 20 the next-to-last paragraph on the second page. It 21 says, "Mr. Stodart also noted that Wall Street was 22 aware that United Savings and other large S&Ls had 25757 1 signed consent agreements and might have to 2 dispose of their mortgage-backed securities and 3 high-yield bond positions rapidly." 4 Do you see that? 5 A. Uh-huh. (Witness nods head 6 affirmatively.) 7 Q. Do you recall expressing that view? 8 A. I expressed that view. Now, I can't 9 tell you -- this document was written by, I 10 believe, Mr. Berner -- that this is in exact order 11 the way the discussions went. I was part of the 12 discussions as it pertained to high-yield bonds, 13 and then was asked to get off the call. 14 Q. Fair enough. So, this -- this memo or 15 these minutes may not track exactly the sequence 16 of the discussions as they occurred? 17 A. Exactly. 18 Q. It goes on to say, "He stated" -- and I 19 think this is still quoting you or still referring 20 to you -- "As a result, the prices would be 21 extremely low at this time and that the timing 22 could not be worse to call these cash flow bonds 25758 1 and sell the securities in this rising interest 2 rate environment." 3 Were those viewpoints that you had 4 expressed? 5 A. Yes. 6 Q. There's then a discussion about getting 7 authorization from the Federal Home Loan Bank of 8 Dallas. 9 I gather you were not part of that? 10 A. I was not. 11 Q. Okay. There's some discussions about 12 when the negotiations would begin. And 13 "Mr. Connell was unanimously directed to contact 14 Mr. Twomey to get a directive so that they could 15 begin doing these things." 16 And you were not part of that? 17 A. No, I was not. 18 Q. There's a paragraph right toward the 19 end where it says, "Dr. Munitz noted that 20 Mr. Connell had been told by Mr. Ranieri that all 21 employees would be retained, their contracts 22 adopted, and their bonuses paid. He observed that 25759 1 the USAT board was convinced that this was a very 2 positive step and one which would eliminate many 3 of the anxieties of the employees. Mr. Connell 4 again confirmed that such a commitment had been 5 made." 6 Were you on the phone when that 7 discussion took place? 8 A. No. 9 Q. Was there at this time some buzz within 10 the halls at USAT or some concern on the part of 11 the employees as to what would happen to them 12 after this -- after the institution was sold? 13 A. Very much so. 14 Q. And that was a point of real concern to 15 you and to others? 16 A. It was a point of concern for me and to 17 others, and it made operating on a day-to-day 18 basis very difficult because people were more 19 concerned with their own ability to keep the job. 20 And we did lose people in that time frame 21 immediately thereafter. 22 Q. But really, focusing on the part of the 25760 1 meeting that you were really a part of, it was 2 your view that it was a bad idea to give 3 Merrill-Lynch an exclusive and a bad idea to 4 liquidate the high-yield bonds on an accelerated 5 basis? 6 A. Yes. 7 Q. And this was directly contrary to the 8 approach that you had outlined in your memo the 9 day before? 10 A. Yes. 11 Q. Now, you actually were kept on at USAT 12 after the receivership, were you not? 13 A. I was. 14 Q. And how long did you stay after the 15 receivership? 16 A. Around 12 to 16 months. 17 Q. Now, at the time of the receivership, 18 the high-yield bond portfolio had been 19 substantially reduced, had it not? 20 A. It had. 21 Q. And did it become further reduced after 22 the receivership? 25761 1 A. Yes, because -- obviously, it was 2 reduced by the consent agreement; but in the 3 following year, in '89, there was legislation that 4 changed the law regarding thrifts' ability to hold 5 junk bonds. 6 So, at one point, you were in a 7 liquidation in '88. But in '89, by law, you could 8 no longer purchase them either. So, they knew you 9 were on any one side of the transaction. 10 Q. So, at that point, anything you sold 11 could not be replaced? 12 A. Any call you made to a broker, they 13 knew you were a seller because by law, you 14 couldn't buy. So, if you sold a security, you 15 could not replace it. 16 Q. And I would guess, knowing that FIREA 17 was coming and knowing that the thrifts were under 18 pressure to sell these bonds, that you were not, 19 on your sales, getting very good prices in that 20 time period? 21 A. You would not. And if you look at the 22 total return indices for high-yield securities, 25762 1 probably the two worst years ever were '89 and 2 '90. 3 Q. Now, I want to take just a few more 4 minutes, Mr. Stodart, and hopefully we're going to 5 be done. I just want to talk to you about some of 6 the things that have been alleged in this case 7 with respect to the high-yield bond portfolio and 8 get your views on this. 9 It has been suggested -- indeed, it has 10 even been stated that the evidence in this case is 11 going to show that USAT, at Charles Hurwitz' and 12 Ron Heubsch's direction, purchased junk bonds from 13 a number of companies, including a sizable portion 14 of that portfolio that was underwritten by Drexel. 15 Do you recall Mr. Hurwitz or 16 Mr. Huebsch ever directing you to purchase a 17 high-yield bond just because it was underwritten 18 by Drexel? 19 A. No. 20 Q. You think you would remember that if it 21 ever happened? 22 A. I believe I would. 25763 1 Q. And so, it never happened? 2 A. It never happened. 3 Q. It has been suggested that, referring 4 to purchases of Drexel underwritten high-yield 5 bonds, the respondents never sought approval for 6 that, those affiliated party transactions. 7 Did you -- during the period of time 8 you were running the high-yield bond portfolio, 9 did you ever believe or have reason to believe 10 that Drexel was an affiliated party of USAT? 11 A. I did not. 12 Q. Did you ever believe that you needed to 13 get permission or approval from federal regulators 14 to buy a Drexel underwritten bond? 15 A. I did not. 16 Q. Given your reporting arrangements, 17 though, with the Texas S&L department and the 18 Federal Home Loan Bank of Dallas, if somebody had 19 told you that you needed to get approval for 20 purchases of these bonds from the regulators, 21 would you have had any hesitation about doing 22 that? 25764 1 A. No, because if you notice from the 2 reporting requirements and the minutes of all the 3 regulatory reviews, a substantial amount of time 4 and effort was spent keeping the regulators 5 informed of exactly what we were doing. 6 Q. And you were telling them on a monthly 7 basis exactly what you were buying and what you 8 were selling, correct? 9 A. Yes. I was sending a report, and it 10 was probably more often than that. 11 Q. Did you consider Drexel-underwritten 12 bonds to be riskier than issues underwritten by 13 others? 14 A. No. 15 Q. Did USAT pay higher prices for 16 Drexel-underwritten issues; that is, prices higher 17 than it paid for issues underwritten by others? 18 A. No. And in -- I believe, in fact, 19 because Drexel was such a prominent issuer of the 20 market and the other participants wanted a piece 21 of that, they probably did a little bit riskier 22 deals and had to pay a little bit higher rates. 25765 1 Q. That is, the non-Drexel -- 2 A. To get the business, the non-Drexel. 3 Q. The non-Drexel people? 4 A. To buy their market share. That said, 5 I mean, Drexel still had a significant amount of 6 the market. And our purchases nowhere exceeded 7 the percentage of the market that Drexel had. 8 Q. Did you have any reason to believe that 9 the terms on which USAT bought Drexel-underwritten 10 bonds were in any way less advantageous to USAT 11 than the terms on which you bought securities 12 underwritten by others? 13 A. I didn't set the terms on the 14 Drexel-underwritten bonds. The marketplace did, 15 which was comprised of all the buyers. I was just 16 given the opportunity to participate in the 17 securities under those terms, but those terms were 18 a function of the negotiations between the issuer, 19 the underwriter, and probably 25 different buyers. 20 Q. It's been said that Charles Hurwitz and 21 Ron Huebsch directed that the portfolio be 22 cherry-picked for profits periodically to bolster 25766 1 the capital of USAT and to forestall regulatory 2 take over. 3 Did that ever happen while you were 4 there? 5 A. Not while I was there. 6 Q. It's been said that that portfolio, 7 meaning the high-yield bond portfolio, was not 8 managed as a consistent entire portfolio. That 9 portfolio was managed as specific assets to be 10 used and sold to bolster USAT's capital to 11 forestall regulatory control. 12 Was that true during any of the time 13 you were in charge of the portfolio? 14 A. If you look at the financial statements 15 that I prepared for the investment committee on a 16 monthly basis, that would be false. 17 Q. Did you manage this portfolio as a 18 series -- a collection of individual assets, or 19 did you manage it as a portfolio? 20 A. I managed it as a portfolio, but I 21 micro managed it, too, on -- we managed each 22 individual credit. The decisions were made based 25767 1 on what was best for the overall portfolio 2 performance. 3 Q. And is that consistent with your 4 experience and view of portfolio management? 5 A. Yes. 6 Q. That's the way you had done it at 7 Westinghouse? 8 A. Yes. 9 Q. It's also been suggested that the facts 10 will demonstrate that the respondents acted in 11 reckless disregard of the requirements of law when 12 they initiated the junk bond portfolio with Drexel 13 and they failed to obtain requisite regulatory 14 approval and they did so because they did not want 15 the regulators to review those purchases in light 16 of Drexel's underwriting of junk bond purchases 17 for MCO. 18 Do you have any reason to think that 19 any of that is true? 20 A. No. 21 Q. Did anybody at Drexel ever suggest to 22 you that you ought to buy bonds from them because 25768 1 Drexel was doing business with MCO or MAXXAM? 2 A. It was never even brought up that -- I 3 ran the portfolio, and Charles wasn't an issue. 4 The two factors, as far as our relationship with 5 Drexel, were not related. 6 MR. EISENHART: Thank you, Mr. Stodart. 7 Those are all the questions I have. 8 THE COURT: Ms. Clark? 9 MS. CLARK: No questions for me. 10 MR. KEETON: No questions. 11 THE COURT: Mr. Nickens? 12 MR. NICKENS: No, Your Honor. 13 THE COURT: Are you going to have some 14 redirect? 15 MR. GUIDO: I am, Your Honor. 16 THE COURT: How long will it take? 17 MR. GUIDO: I'm not so sure it will be 18 very long at all, Your Honor. 19 THE COURT: You want to finish before 20 lunch? 21 MR. GUIDO: I think I'll finish 22 probably at least before 12:30, Your Honor. 25769 1 THE COURT: All right. Proceed. 2 3 FURTHER EXAMINATION 4 5 Q. (BY MR. GUIDO) Mr. Eisenhart asked 6 you some questions at the end regarding what he 7 said were allegations regarding the high-yield 8 bond portfolio. I'd like to go through a few of 9 those with you just to probe your level of 10 knowledge. 11 A. Okay. 12 Q. You indicated that you didn't take the 13 view that Drexel Burnham Lambert was an affiliated 14 party with USAT. 15 Do you recall that? 16 THE COURT: Would you speak up, please? 17 A. That was not my understanding. I did 18 not believe that Drexel was an affiliated party 19 with USAT. 20 Q. (BY MR. GUIDO) Did you go back and 21 review the relationship between Drexel Burnham 22 Lambert and Federated or MAXXAM prior to making 25770 1 that statement in this proceeding? 2 A. You mean did I do it today or this 3 week? 4 Q. Have you done it at any time? 5 A. Was I aware that Drexel had issued 6 bonds for them? For MAXXAM or Simplicity Pattern? 7 Q. Did you go back and review the factual 8 basis of the relationship between Drexel Burnham 9 Lambert and MAXXAM and/or Federated? 10 A. The only factual basis was, I 11 believe -- and I'm recalling from ten years ago -- 12 that Drexel did have some equity ownership in one 13 of the holding companies. 14 Q. And that's one fact that you did know. 15 Do you know what the percentage was? 16 A. It was not significant. They did not 17 have controlling interest. 18 Q. Do you know what Drexel's role was in 19 financing -- providing financing to MAXXAM or 20 Federated that was used to purchase UFG stock? 21 A. I knew that Drexel was an underwriter 22 for MAXXAM, but the use of funds I would not have 25771 1 known. 2 Q. Did you know anything about Drexel's 3 role in assisting USAT in acquiring stock of 4 United Financial Group? 5 A. That would have been well prior to me 6 being there, and there would be no reason I would 7 know that. 8 Q. Did you know anything about Drexel's 9 ownership of stock in USAT? 10 A. I don't believe Drexel owned any stock 11 in USAT. 12 Q. I'm sorry. UFG. Excuse me. 13 A. I said previously I knew that Drexel 14 had some equity ownership in one of the holding 15 companies. 16 Q. But do you know which of the holding 17 companies? 18 A. I believe it was either USAT or UFG. I 19 don't recall. It's been probably ten years since 20 I looked at their statements. 21 Q. Do you know anything about Drexel's 22 ownership of stock in Federated or in MAXXAM? 25772 1 A. At that time, Federated and MAXXAM were 2 both private companies. There would have been no 3 way for me to know that. 4 Q. And I think I asked you did you know 5 anything about Drexel's role in assisting the 6 acquisition of stock of UFG. You said you didn't 7 know. 8 A. You asked that question. I knew that 9 Drexel was the underwriter for some of the Hurwitz 10 transactions. 11 Q. That's all that you knew? 12 A. The use of proceeds in a private 13 company, there would be no way I would know that. 14 Q. Now, you were asked some questions 15 about the -- some of the reports. And I think 16 that one of them was A1522, which is at Tab 17 -- 17 1247. It's -- you were asked about, you know, 18 what your understanding was of non-operating 19 income when it came to the question of the 20 financial reports that were provided to the board 21 of directors of USAT regarding the performance of 22 the portfolio. 25773 1 And you recall that you testified that 2 there is operating income segregated out and then 3 there's non-operating income segregated out in 4 these reports. 5 Do you recall that? 6 A. I do. 7 Q. And with regard to high-yield bonds, 8 what was it that would comprise non-operating 9 income? 10 A. It would have been commitment fees, 11 increasing rate notes, any premium on a call, 12 would have been sell of securities, or a call of 13 the options or warrants you had referred to 14 earlier. 15 Q. Now, when you talk about the premium on 16 a call, what are you talking about? 17 A. If I owned a bond at par and it was 18 called at 109, I would make 9 points. 19 Q. Okay. And -- 20 A. It would have been booked as a gain. 21 Q. Okay. And you also said it was the 22 calls on warrants. 25774 1 Can you explain to the Court what that 2 refers to? 3 A. Warrants were issued with bonds. They 4 were sold as units. And if the company did 5 extremely well, it may go public at some time in 6 the future; and they would purchase your warrants 7 back or you could put your warrants out and be 8 registered in the public market. 9 Q. Okay. 10 A. But usually, they called them back. 11 Q. Now, could it also include gains on 12 sales of the high-yield bonds? 13 A. I had said that. There would obviously 14 be -- any gains would be in that category. 15 Q. And you testified that some of the 16 reasons for the gains could be because there's a 17 credit issue that would arise with regard to that 18 portfolio? 19 A. Yes. 20 Q. And you also testified that you 21 could -- one of the reasons that sales could be 22 made is because of the need for liquidity. Right? 25775 1 A. I did. 2 Q. Now, I'd like to move on to -- well, 3 before I do that -- so that when there is a phrase 4 "non-operating income" and there is an income 5 figure on these reports that were shown to you 6 today, that doesn't necessarily mean those sales 7 were made for the purposes of generating gains to 8 bolster profits, does it? 9 A. I can only comment on this one. This 10 is the one I looked at. 11 Q. Fine. 12 A. But on this one, my operating income 13 was interest income. That was what I did. And 14 non-operating would have had to have been 15 something extraordinary. 16 Q. Okay. Which included the categories 17 that we've just gone through in terms of your 18 explanation of the types -- 19 A. Anything that was not interest income 20 would have fallen in that category. 21 Q. Now, you were asked about -- some 22 questions about a board meeting and events around 25776 1 December 16th of 1988 with regard to the 2 disposition of the high-yield bond portfolio. 3 Do you recall those questions? 4 A. Yes. 5 Q. And one of the things you were asked 6 about was the liquidation of a portion of the 7 high-yield bond portfolio to eliminate underwater 8 securities. 9 Do you recall that? 10 A. I was -- the memo states that. 11 Q. Okay. Now, we discussed earlier a 12 memorandum in which Michael Crow -- I think 13 Mr. Gil says that Michael Crow in October it was, 14 I think, directed that securities that had 15 mark-to-market losses be disposed of. 16 Do you recall that? 17 A. I recall you referring to the memo that 18 Michael Gil wrote to Michael Crow. 19 Q. Okay. And that was in October of 1988. 20 Right? 21 A. Uh-huh. (Witness nods head 22 affirmatively.) 25777 1 Q. Do you know whether or not that 2 memorandum was discussing the same securities that 3 were discussed at the December 17th, 1988 meeting? 4 A. I don't know. You'd have to ask 5 Michael Gil. He wrote the memo. 6 Q. Okay. So, you don't know whether or 7 not those two -- the December 17th, 1988 minutes 8 and the October memorandum written by Michael Gil 9 are addressing the same subject matter? 10 A. I could speculate for you. 11 Q. Do you know? 12 A. No. 13 Q. Do you have any basis for providing us 14 with any information about that? 15 A. We were under a consent agreement. 16 Q. But that's all that you know? 17 A. At that point in time, we were under a 18 consent agreement. Based on the information I 19 have seen here today, it's a possibility. But are 20 you asking me do I know? I don't. 21 Q. Now, with regard to the high-yield 22 bonds and the underwater securities that are 25778 1 referred to on December 16th, it says "The losses 2 from the sales on high-yield bonds would 3 approximate $6 million" on the second page. 4 Do you recall that? 5 A. Uh-huh. (Witness nods head 6 affirmatively.) 7 Q. Now, what was the liquidation proposal 8 that you were making for underwater securities at 9 that time? 10 A. An orderly sale. 11 Q. Pardon? 12 A. An orderly sale. 13 Q. Now, how does that differ from what was 14 being proposed -- was your understanding of what 15 was being proposed on December 17th? 16 A. Well, I will cite the example I cited 17 before. If you had to sell your house and it's 18 worth a half a million dollars and I give you a 19 year to sell it, you can probably realize that 20 value. 21 If you have to sell your house and I 22 know you have to sell it and you have to do it 25779 1 tomorrow, no one is going to pay you a half a 2 million dollars. 3 Q. So -- now, were those securities sold 4 that are referred to in this December 17th, 1988 5 memorandum? 6 A. I don't recall whether they were sold. 7 I'm sure I could go back and recreate the records 8 and answer the question. 9 Q. So, you don't know whether or not the 10 sales that are addressed -- the proposed sales in 11 this December 17th, 1988 investment committee 12 minutes at A1168 were actually made or not made? 13 A. The portfolio was downsized. 14 Q. Pardon? 15 A. The portfolio was downsized prior to 16 the Ranieri group purchasing it. 17 Q. And do you know which securities were 18 sold? 19 A. No. I don't recall. 20 Q. Do you know whether or not there were 21 gains or losses on the securities? 22 A. I don't recall. 25780 1 Q. At the time of this meeting, 2 December 17th, 1988, of the board of directors, 3 who were the members of the board? 4 A. I was not there, and that would not 5 have been something -- I was called in to comment 6 on one section of it, and that's what I did. 7 Q. So, you don't know who the board 8 members were at the time? 9 A. I knew the significant members that I 10 was aware of, and I was called in to comment on 11 one specific section, which is what I did. 12 Q. Was one of the members Mr. Connell? 13 A. (Witness nods head affirmatively.) 14 Q. Was one of the members Art Berner? 15 A. Yes. 16 Q. Was one of the members Barry Munitz? 17 A. At that time, I couldn't tell you. 18 Q. Was one of the members Michael Crow? 19 A. I believe Michael Crow was a member; 20 but with the consent agreement going on, there had 21 been some changes and I was not aware of what the 22 changes or the consistency of the board was at 25781 1 that time. 2 Q. Was one of the members Mr. Paul 3 Schwartz? 4 A. I could not tell you because we were 5 not privy as an employee to what was the contents 6 of the consent agreement and how the changes had 7 been made. I could have told you prior to that. 8 I could have told you after the annual report was 9 issued. But during the period of the consent 10 agreement, it was not common knowledge to tell the 11 employees any of this information. 12 Q. Now, the other thing that Mr. Eisenhart 13 asked you about is whether or not it was a bad 14 idea to give an exclusive to one broker. 15 A. Uh-huh. (Witness nods head 16 affirmatively.) 17 Q. What is your understanding of what an 18 exclusive was? 19 A. They have the right to sell all the 20 securities. 21 Q. So, they have the right to broker the 22 sales of all of the securities. 25782 1 Is that what you're saying? 2 A. They have the right to buy them, to 3 price them, to tell you what price they are going 4 to be sold at. You don't have the right to check 5 away. They have an exclusive. 6 Q. Do they have any obligations, fiduciary 7 obligations, to the person that they are operating 8 for in making sales of those securities? 9 A. I don't know. I didn't see the 10 exclusive agreement that was about to be signed; 11 so, it's hard for me to comment on an agreement I 12 never had reviewed. 13 Q. So, you don't know whether or not the 14 exclusive agreement that you're addressing here 15 had obligations imposed upon the broker -- in this 16 case, Merrill-Lynch -- to take certain actions to 17 ensure that it got the best price for the 18 securities? 19 A. I know that it is common practice in 20 the securities business to be in an openly 21 competitive situation, both in the primary market 22 for business with other brokers and the secondary 25783 1 market to buy and sell securities. Anything that 2 changes that competitive situation is not to the 3 benefit of one of the parties. 4 Q. So, are you saying that USAT should 5 have engaged in its own bidding process with 6 various brokers for these securities? 7 A. I'm not saying anything. I'm saying 8 that that is generally-accepted securities 9 practices, to be in a competitive situation. 10 Q. Well -- 11 A. I was not privy to the exact wording of 12 the Merrill-Lynch agreement, whether we had to get 13 third-party quotes. I was asked what I thought 14 was the best posture, and I thought the best 15 posture was a long, orderly liquidation using the 16 brokerage community that we had used in the past. 17 If Merrill-Lynch was the highest bidder, they 18 would have got the transaction. 19 Q. So, what you're saying is that from 20 your perspective, USAT should have put this 21 portfolio out for bid to various brokers. 22 Is that what you're saying? 25784 1 A. No. I'm saying it should have been 2 liquidated in an orderly manner. I'm not saying I 3 should have said, "We're having a fire sale. What 4 do you want to buy? Call in." 5 I'm saying that there would have been 6 opportunities based on the marketplace. When 7 there was flow of funds into the mutual funds, 8 there would have been a better buy. You would 9 have realized a higher price. There could have 10 been change in the interest rates. Interest rates 11 could have dropped down. You could have 12 recognized a higher price because of the inverse 13 relationship between price and rate. 14 I'm saying that in an orderly 15 liquidation, you have a portfolio manager that 16 picks the timing and has -- and puts people in 17 competition to realize the highest price. 18 Q. Do you know whether or not the 19 agreement with Merrill-Lynch required it to put 20 the securities out to bid? 21 A. I did not see the agreement. 22 Q. Do you know whether or not it required 25785 1 them -- that they had a fiduciary duty under that 2 agreement to get the highest and best price for 3 the securities? 4 A. I did not see the agreement. 5 MR. GUIDO: No further questions, Your 6 Honor. 7 MR. EISENHART: I have no further 8 questions, Your Honor. 9 THE COURT: All right. Thank you, 10 Mr. Stodart. You may step down. 11 Are there any matters we need to 12 consider before -- 13 MR. GUIDO: Your Honor, I think that we 14 have covered all matters for this week. 15 THE COURT: So, you have no more 16 witnesses for this week? 17 MR. GUIDO: Not for this week, Your 18 Honor. 19 THE COURT: All right. We'll adjourn 20 until 9:00 o'clock on Tuesday. 21 (Whereupon at 12:14 p.m. 22 the proceedings were recessed.) 25786 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 9th 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 25787 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 9th 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