4242 1 UNITED STATES OF AMERICA Before the 2 OFFICE OF THRIFT SUPERVISION DEPARTMENT OF THE TREASURY 3 In the Matter of: ) 4 ) UNITED SAVING 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 10-22-97 22 4243 1 A-P-P-E-A-R-A-N-C-E-S 2 ON BEHALF OF THE AGENCY: 3 KENNETH J. GUIDO, Esquire (Not present) Special Enforcement Counsel 4 BRUCE RINALDI, Esquire RICHARD STEARNS, Esquire 5 and BRYAN VEIS, Esquire (Not present) of: Office of Thrift Supervision 6 Department of the Treasury 1700 G Street, N.W. 7 Washington, D.C. 20552 (202) 906-7395 8 ON BEHALF OF RESPONDENT MAXXAM, INC.: 9 FRANK J. EISENHART, Esquire 10 of: Dechert, Price & Rhoads 1500 K Street, N.W. 11 Washington, D.C. 20005-1208 (202) 626-3306 16 12 DALE A. HEAD (in-house) 13 Managing Counsel MAXXAM, Inc. 14 5847 San Felipe, Suite 2600 Houston, Texas 77057 15 (713) 267-3668 16 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO. AND CHARLES HURWITZ: 17 RICHARD P. KEETON, Esquire 18 of: Mayor, Day, Caldwell & Keeton 1900 NationsBank Center, 700 Louisiana 19 Houston, Texas 77002 (713) 225-7013 20 21 22 4244 1 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO., CHARLES HURWITZ, AND MAXXAM, INC.: 2 JACKS C. NICKENS, Esquire (Not present) 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 4245 1 2 EXAMINATION INDEX 3 Page 4 JAMES WHATLEY 5 Examination (Cont'd) by Mr. Rinaldi..........4252 6 Redirect-Examination by Mr. Rinaldi..........4524 7 Recross-Examination by Mr. Villa.............4533 8 Further Redirect-Examination by Mr. Rinaldi..4535 9 Cross-Examination by Mr. Keeton..............4536 10 Cross-Examination by Mr. Blankenstein........4542 11 Further Redirect-Examination by Mr. Rinaldi..4544 12 ALLEN WAYNE DERMODY 13 Examination by Mr. Rinaldi...................4547 14 15 16 17 18 19 20 21 22 4246 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:00 a.m.) 3 THE COURT: Be seated, please. Good 4 morning. The hearing will come to order. Unless 5 there are preliminary matters, we'll continue. 6 MR. RINALDI: No. We can proceed 7 immediately, Your Honor. 8 MR. VILLA: Your Honor, I do have a 9 preliminary matter. This involves scheduling, but 10 it also affects the substance of the case. We saw 11 it with Mr. Williams, Gerald Williams, and we have 12 it again with Mr. Whatley. The OTS calls a 13 witness within a window of availability. They 14 have two or three days. And they wait a day or 15 two getting ready to testify and then they are put 16 on very close to the end of their window of 17 availability. The OTS completes their direct 18 examination and we are either compressed extremely 19 in our cross-examination or the cross is moved to 20 weeks later or we antagonize the witness by asking 21 them to stay longer. 22 Now, this affects our process because I 4247 1 think, from your standpoint, you ought to hear the 2 direct and cross at close to the same time. And 3 it affects me because I've got a lot at stake for 4 my clients and, consequently, to try to compress 5 my examination because of these reasons is not 6 fair. 7 Now, there is nothing to be done with 8 Mr. Whatley. I've spent the evening trying to 9 compress my examination so we can get him out on 10 time. But I would ask that in the future, that 11 the OTS schedule witnesses such that they give us 12 reasonable time for our cross-examination and we 13 don't have to either ask them to come back from 14 Ohio, in Mr. Williams' case, or Longview, Texas, 15 or wherever they are and we can complete them all 16 at one time. 17 There's nothing to be done in this 18 case, as I say, but I hope it doesn't happen 19 again. 20 Thank you, Your Honor. 21 THE COURT: Mr. Stearns. 22 MR. STEARNS: Your Honor, a brief 4248 1 response to Mr. Villa. We gave the schedule to 2 respondents last week of the witnesses that would 3 come on this week. We told him Mr. Whatley would 4 follow Ms. Orr. Because of the extensive 5 examination of Ms. Orr, she took longer than 6 anticipated. That couldn't be helped really. 7 Mr. Whatley was here and he came on immediately 8 after Ms. Orr. We fit the witnesses in and get 9 them on and off as quickly as possible to minimize 10 delay and minimize inconvenience to the witnesses 11 and we work with respondents' counsel to try and 12 ensure that as many witnesses as possible have 13 direct and cross-examination at the same time. 14 The only one that's been unable -- there have been 15 two so far that's been unable to do and that's 16 been in order to accommodate the witness' 17 schedule. This was not any intent by the OTS to 18 compress Mr. Villa's time whatsoever but, rather, 19 to get Mr. Whatley on as soon as possible. 20 Mr. Rinaldi has worked to compress his direct 21 examination just as Mr. Villa has. 22 Counsel are doing everything they can 4249 1 in order to move the case along and accommodate 2 the witnesses. I don't think it's fair to suggest 3 that we have held back Mr. Whatley so as to make 4 it impossible for Mr. Villa to put on an effective 5 cross-examination. 6 MR. VILLA: I'm not accusing the OTS. 7 I'm just simply saying in the scheduling of 8 witnesses if they would give us enough time to do 9 our cross so we didn't have to bring these people 10 back, it would help the process, Your Honor. 11 THE COURT: Well, of course, part of 12 that is the schedule of the witnesses. So, it's a 13 little difficult to accommodate everybody in these 14 matters. We do the best we can. 15 How long are you going to take on your 16 direct with Mr. Whatley? 17 MR. RINALDI: I'm going to try to 18 finish by 12:00 or 12:30. 19 THE COURT: Now, when does he have to 20 leave here? 21 MR. RINALDI: He says he can stay until 22 3:00. 4250 1 THE COURT: Till -- 2 MR. RINALDI: 3:00. 3 THE COURT: And you're going to take 4 till noon on your direct? 5 MR. RINALDI: Yes. 6 THE COURT: Well, then, he can't be 7 crossed today. Is that the assumption? 8 MR. RINALDI: Well, I was told by 9 Mr. Villa that he thought he had two hours of 10 cross and we were going to seek the Court's 11 indulgence and perhaps take an hour for lunch and 12 perhaps break early during the day if that would 13 be acceptable to the Court to try to accommodate 14 Mr. Whatley. 15 MR. VILLA: Your Honor, I was going to 16 try to limit my cross to two hours, although he's 17 an extremely important witness. The problem is, 18 of course, you can't anticipate all the issues 19 that come up in a direct examination. So, I was 20 hoping to do my cross in two hours. But, again, 21 if he goes till 12:30, he'll have about four and a 22 half hours of direct. 4251 1 THE COURT: In that case, we'll have to 2 finish by 12:00 and we'll take an hour's lunch and 3 then Mr. Villa will have two hours and we're 4 through. 5 MR. RINALDI: Well -- and again, 6 Mr. Villa's put me in the converse position of if 7 there is anything that I feel needs to be 8 redirected, I won't have the opportunity to 9 redirect. 10 So, it's kind of, as I believe 11 Mr. Keeton had said, what is sauce for the goose 12 is sauce for the gander type of thing. I 13 certainly didn't want to put myself in this 14 position and I didn't do so intentionally. I will 15 try to move as quickly as possible. 16 MR. KEETON: Your Honor, having been 17 mentioned, I want to mention something. 18 THE COURT: All right. 19 MR. KEETON: I've read this man's 20 deposition. It should have taken 30 or 45 21 minutes. It obviously took many hours. And 22 that's without any opposing counsel there. He had 4252 1 his own lawyer there. But if this examination 2 this morning is going to go anything like the 3 deposition, I would invite Your Honor to look at 4 how the proceedings are going. That's my concern 5 with this whole case. This is not "let's learn 6 how to try a case." This is "let's try a case." 7 THE COURT: All right. Let's proceed. 8 MR. RINALDI: Thank you. 9 10 EXAMINATION 11 12 Q. (BY MR. RINALDI) Mr. Whatley, at the 13 close -- during yesterday's testimony, you 14 indicated that the records would reflect when your 15 periods of service on the boards of UFG and USAT 16 had occurred. 17 Do you recall that? 18 A. Yes, sir. 19 Q. Okay. Were there any particular 20 records that you've seen recently that set forth 21 your periods of service? 22 A. No, sir. 4253 1 Q. Okay. I have here a document. It's 2 T8003. This is a document produced by 3 United Financial Group and by the respondents to 4 the OTS. And it purports to set forth the periods 5 of service of various individuals on the boards of 6 UFG and USAT. 7 MR. RINALDI: I'd move to admit, Your 8 Honor, T8003. 9 MR. VILLA: No objection. 10 THE COURT: Received. 11 Q. (BY MR. RINALDI) Mr. Whatley, does 12 that appear to accurately reflect your service as 13 a director on the USAT board on the first page of 14 8003? 15 A. It would so appear. 16 Q. Okay. And with respect to your service 17 on the United Financial Group board, does that 18 appear to accurately reflect when your service 19 began on that board? 20 A. Yes, sir. 21 Q. Okay. Now, sir, yesterday we had a 22 discussion very briefly on the record of how many 4254 1 board meetings you had attended. And I'm afraid I 2 may have perhaps inadvertently misled you. Let me 3 show you a document which is 8009. This purports 4 to be a schedule of the fees that you received as 5 a director of the board of USAT. 6 Do you recall -- 7 MR. RINALDI: I move to admit 800 -- 8 I'm sorry -- 8009, it looks like. 9 MR. VILLA: One moment, Your Honor. 10 MR. BLANKENSTEIN: Mr. Rinaldi, can you 11 identify the document so we can find it? 12 MR. RINALDI: Sure. It's a salary 13 schedule and it's for United Savings Association 14 of Texas and it appears to be for the period of 15 6-30-87 through 6-30-88. I would also hand the 16 witness at the same time, to expedite matters, 17 Document T8006. This is a memorandum to Patsy 18 Conklin -- from Patsy Conklin to the file dated 19 March 20th, 1989, which appears to set forth 20 certain fees paid to the various directors. And 21 I'll hand a copy to the witness. 22 MR. EISENHART: Your Honor, neither of 4255 1 these two documents appear to be on the pull list 2 that OTS gave us. I wonder if they could furnish 3 us with copies. 4 Q. (BY MR. RINALDI) Sir, have you had an 5 opportunity to take a look at 8009? 6 A. Yes. 7 Q. Okay. And do you recall that -- what 8 the fees you were paid as -- for attending a board 9 meeting of USAT? 10 A. No, I really don't. I think it was 11 about a thousand dollars a meeting. 12 Q. Okay. And if you -- if I direct your 13 attention to the third page of 8009, it indicates 14 Mr. James Whatley, that during the period of 15 6-30-87 to 6-30-88, that you received $12,000 16 in -- for fees for board of directors meetings. 17 Do you see that? 18 A. Yes. 19 Q. Okay. Would that indicate then that 20 you probably did attend approximately 12 meetings 21 at least during the period of nineteen -- 22 June 30th, '87, through June 30th, '88? 4256 1 A. Well, I'm not sure. I don't know 2 whether those fees were contingent on attendance 3 or not. 4 Q. You mean you believe you may have been 5 paid for not attending? 6 A. That's possible. 7 Q. Okay. Now, it indicates there that 8 there is a special fee for the compensation 9 committee. 10 Were you paid a special -- additional 11 retainer or fee for serving on the compensation 12 committee? 13 A. I was because I spent endless hours 14 with outside experts, Hewitt & Associates and 15 others, on analyzing the total compensation 16 package to be sure that United was in line with 17 peer groups. 18 Q. Okay. And then below that, it talks 19 about a retainer fee. Were you paid a standard 20 retainer fee for appearing on the board? 21 A. I guess I was, yes. 22 Q. Okay. You have no independent 4257 1 recollection of it? 2 A. No. 3 Q. And then it also indicates that you 4 were paid for attending various committee 5 meetings. 6 Do you see that? 7 A. Yes. 8 Q. Okay. Does -- do you have any reason 9 to dispute that you received those fees during 10 that period of time? 11 A. None whatsoever. 12 Q. And would you agree then that you 13 probably did attend more than four meetings during 14 that period of time? 15 A. I'll accept that. 16 Q. Okay. 17 A. The minutes will reflect that. 18 Q. All right. Now, if you take a look at 19 what's been marked as T8006, you'll see that it 20 also includes some fees for UFG, as well. 21 Did you also receive fees for attending 22 the board meetings of UFG on a similar schedule -- 4258 1 A. Yes. 2 Q. -- by USAT? And it appears here that 3 then at least for the period of 1988, you would 4 have received approximately $29,000 for UFG and 5 13,700 for USAT. 6 Do you see that? 7 A. Yes. 8 Q. Okay. Does that -- is that consistent 9 with your recollection, sir? 10 A. I don't recall, but I'll accept it. 11 Q. Okay. 12 A. I should add that during the past six 13 years, I've received zero fees from UFG. 14 Q. No. I understand that. I was trying 15 to -- 16 A. Okay. 17 Q. You had previously said you had only 18 been -- you weren't sure how many board meetings 19 you were at, and I was trying to clarify if there 20 were more board meetings you had attended. 21 Now -- 22 THE COURT: Are you moving these 4259 1 exhibits? 2 MR. RINALDI: Yes. I thought I had 3 moved them both into evidence and that there was 4 no objection. 5 MR. VILLA: No objection, Your Honor. 6 THE COURT: Received. 7 Q. (BY MR. RINALDI) Now, yesterday, I 8 showed you a document that's 8012, T8012, and 9 these are the ethics and conflicts of interest 10 provisions, 8012. And I'd like to just direct 11 your attention to the fourth full page of that 12 document, sir. 13 A. What was the heading of that? 14 Q. I'm sorry. The fifth page. 15 A. What is the heading of that page? 16 Q. It's 3.3. It talks about employment 17 contracts. Do you see that? 18 A. Okay. 19 Q. And it says there that "The association 20 shall not enter into employment contracts -- any 21 employment contracts, the terms of which could 22 lead to material financial loss or damage to the 4260 1 association." 2 And then as you go further down under 3 C, it says "All employment contracts of persons 4 assuming the title of senior vice president or 5 higher of the association shall be approved by the 6 association's board of directors." 7 Do you see that? 8 A. Yes. 9 Q. And do you recall yesterday we talked 10 about what authority you as just a member of the 11 compensation committee would have? Was it your 12 understanding then that based upon the ethics 13 policies, that you specifically did not have the 14 authority to approve employment contracts without 15 the board's approval? 16 A. Correct. 17 MR. RINALDI: If that document has not 18 been previously admitted -- I think it has -- I 19 would move its admission. 20 Has it been admitted? 21 MR. EISENHART: Yes. 22 Q. (BY MR. RINALDI) Now, taking a look 4261 1 at what's been previously marked at T8013, these 2 are the minutes of February 19th, 1987. 3 Do those appear to be the minutes of 4 United Savings Association of Texas for 5 February 19th, 1987? 6 A. Yes. 7 MR. RINALDI: We would move the 8 admission of T8013, Your Honor. 9 MR. VILLA: No objection. 10 THE COURT: Received. 11 Q. (BY MR. RINALDI) Now, it indicates in 12 this document on Page 2 of 25, it talks about the 13 compensation committee. 14 Do you see that? 15 A. Yes. 16 Q. And it says "Whereas it is the 17 intention of the board of directors of the 18 association to have certain matters relating to 19 compensation of the association employees and the 20 employees of its subsidiaries which would come 21 before the entire board of directors be brought 22 before a lesser number of directors constituting a 4262 1 committee with the same effect as if acted on by 2 the entire board resolved at a compensation 3 committee of three directors as appointed." 4 Do you see that? 5 A. I do. 6 Q. And then it appoints yourself, 7 Mr. Duckett, and Mr. LeMaistre. Now, in that 8 first full paragraph, it talks about certain 9 matters relating to compensation of employees 10 would be brought before the compensation committee 11 as if they had been brought before the board. 12 Do you see that? 13 A. Yes. 14 Q. What did you -- what was your 15 understanding of what those certain matters might 16 be? Would they include, for example, executive 17 bonuses or executive salary increases? 18 A. As I testified yesterday, I 19 unilaterally would not approve any salary 20 increases of the executive officers. It would go 21 to the entire board. 22 Q. Thank you. Now, yesterday, when we 4263 1 broke for the day, we were discussing the 2 financial condition of United Financial Group and 3 USAT and I believe at the close of business, I had 4 shown you a document which is dated October 29th, 5 1987, in which Mr. Berner wrote to a number of 6 members of the management of USAT and UFG 7 indicating that he was projecting a net worth 8 failure by the end of October. 9 Do you recall that document? 10 A. Yes. 11 Q. And subsequent to the -- to that date, 12 did there come a time when you ascertained that, 13 in fact, United Financial -- USAT had failed its 14 net-worth requirements? 15 A. I don't recall. 16 Q. You have no recollection that UFG -- 17 USAT ultimately did fail its minimum net-worth 18 capital requirements? 19 A. The regulators apparently concluded 20 that was the case. 21 Q. I'm handing you a copy of what is 22 marked as T8033. This is the United Financial 4264 1 Group 1987 annual report. And I'd ask you to turn 2 to the last page of that document to begin with 3 and just ask you: Does it appear that you are 4 listed as a signatory of that document on Page 68? 5 You see on the front page there? 6 A. Yes. 7 Q. Okay. And as a director of UFG, would 8 you have reviewed this document prior to its 9 having been disseminated to the public? 10 A. Yes. 11 Q. Now, directing your attention back to 12 Page -- the first full page of the document, what 13 does it indicate on the first page regarding the 14 financial condition or the losses that UFG 15 incurred in 1987? If you look on the inside page, 16 it indicates that for 1987, UFG had lost 17 $117,000,980; is that correct? 18 A. Correct. 19 Q. And it further indicates that in 1986, 20 it had lost $36,000,250? 21 A. Correct. 22 Q. And for those periods, that 4265 1 represented, in 1987, a 14-dollar-and-53-cent 2 decline in common share and a 4-dollar-and-55-cent 3 net loss per common share in 1986. 4 Do you see that? 5 A. Yes. 6 Q. Okay. And -- now, at this point in 7 time, it indicates that the common stockholder 8 equity at the bottom of the page had become 9 negative. 10 Do you see that? 11 A. Yes. 12 Q. Okay. Now, as an accountant, sir, what 13 is the significance of the fact that common 14 stockholder equity had reached a deficit point of 15 $41.9 million? 16 A. It indicates that the company is 17 insolvent. 18 Q. Okay. And is it fair to assume that at 19 or about the time of this document, you were aware 20 that UFG was insolvent? 21 A. Yes. I read this document. 22 Q. Okay. Now, directing your attention to 4266 1 Page 2 of the -- what is called the Form 10K 2 that's contained within this document, I just had 3 a couple of questions I wanted to ask you about 4 some of the things that are on that page. 5 If you look the first paragraph under 6 "current conditions," and the last sentence of 7 that first paragraph reads -- do you see "current 8 conditions"? 9 A. Yes. 10 Q. And it says "However, as a result of 11 preliminary discussions between the association 12 and the Federal Home Loan Bank of Dallas field 13 examiners, the association believes it failed to 14 meet its minimum capital requirement as of 15 September 30th and December 31st, 1987." 16 Does that indicate that by the time 17 that this document was filed, that management as 18 well as the board of directors of UFG and USAT 19 were in agreement with the examiners that USAT had 20 failed its net-worth requirement? 21 A. It would so appear. 22 Q. And then if you drop down to the 4267 1 paragraph beginning with the word "the 2 association" -- I'm sorry -- to the last full 3 paragraph, it talks about "UFGI, in connection 4 with becoming a holding company, agreed to 5 maintain USAT's capital above the minimum 6 requirement level established by FSLIC. UFGI has 7 not been requested to provide additional capital 8 to USAT but, if requested UFG currently does not 9 have sufficient assets to contribute to maintain 10 USAT above its minimum capital requirements." 11 Do you see that? 12 A. Yes. 13 Q. Did you understand at this point in 14 time that UFG had an obligation to infuse capital 15 into USAT to help maintain its net capital 16 requirement? 17 A. There seemed to be some difference of 18 opinion about that. 19 Q. Well, but in the 10K, there doesn't 20 seem to be any difference of opinion -- 21 A. No. 22 Q. -- in what's been reported to the 4268 1 public, is there? 2 A. No. 3 Q. Okay. And above that, it says "The 4 association has filed an application for capital 5 forbearance with the Federal Home Loan Bank 6 Board." 7 Do you see that? 8 A. Where is that? I'm sorry. 9 Q. It's in the paragraph directly above it 10 that starts with the word "the association." 11 A. Okay. I've got it. 12 Q. Did you understand that by filing a 13 capital forbearance application with the Federal 14 Home Loan Bank Board, that the association, USAT, 15 was in effect acknowledging that it had failed its 16 net-worth requirements and was requesting that the 17 Federal Home Loan Bank of Dallas forbear from 18 taking any action against them as a result of that 19 capital failure? 20 A. Correct. 21 Q. And what was your understanding at that 22 point in time as to what could be done by the 4269 1 Federal Home Loan Bank Board if a forbearance 2 application were not granted? 3 A. I believe they had the power to seize 4 the association. 5 Q. Did they have the power, also, to limit 6 certain types of activity with respect to the 7 association? 8 A. Yes. 9 Q. And do you recall, for example -- did 10 they have the authority to limit their ability to 11 engage in mortgage-backed security trading on a 12 leverage basis? 13 A. I don't recall. 14 Q. Do you recall whether they could limit 15 their ability to invest in high-yield bonds? 16 A. I don't recall. 17 Q. Now, I'd like you to turn to the back 18 of this document; and I believe that there is an 19 auditor's report attached. And I thought maybe 20 since you are a CPA you could help me with some of 21 the terminology in the auditor's report. 22 Now, you indicated -- before we get 4270 1 into the auditor's report -- that you were on the 2 audit committee at some point in time. 3 Do you recall that? 4 A. Yes, briefly. 5 Q. Okay. And if you turn to the last page 6 of this document where it's Bates stamped H0731, I 7 think it's the next-to-the-last page, next to your 8 name, there appears to be a number of symbols, a 9 triangle, a circle, a square, a black triangle, 10 and a black circle. And it indicates that the 11 square is an audit committee member. 12 Do you see that? 13 A. Yes. 14 Q. Does this reflect then that at or about 15 this point in time when the proxy statement was 16 filed with the Securities and Exchange Commission, 17 that you were a member of the audit committee? 18 A. Yes. 19 Q. Now, as a member of the audit 20 committee, would it have included among your 21 responsibilities a review of the auditor's report 22 that appears on Page 39 of this exhibit? 4271 1 A. Committee typically met with the 2 external auditors. 3 Q. Okay. And how would that process work? 4 Would they wait until they had completed their 5 audit report to just drop it on your desk, or 6 would they advise you in advance of actually 7 issuing the audit of what they thought the results 8 of the audit would be? 9 A. They normally would meet with the 10 committee on some interim basis to outline their 11 planning for the general audit. 12 Q. And after they outlined their planning, 13 if they came across a problem or they thought 14 there was going to be a problem or they weren't 15 going to be able to give a clean audit report, 16 would they advise you in advance of that 17 circumstance or would they simply wait until they 18 issued the report? 19 A. I don't recall. 20 Q. Okay. Now, it indicates here that USAT 21 is -- well, the third full paragraph down, the 22 second sentence starts "USAT's ability to continue 4272 1 as a going concern is dependent upon regulatory 2 forbearance and achieving a profitable level of 3 operation." I'm sorry. On Page 39. 4 MR. BLANKENSTEIN: Excuse me? 5 THE WITNESS: Okay. 6 MR. RINALDI: Page 39 of the proxy 7 statement, which is the first page of the 8 auditor's report. 9 MR. VILLA: Proxies? 10 MR. RINALDI: I'm sorry. Of the 10K, 11 which is T8033. This is the document we've been 12 looking at. 13 Q. (BY MR. RINALDI) Now, are there 14 different kinds of auditor's reports or -- I 15 mean -- 16 A. Are there different kinds? Yes. 17 Q. Well, are some of them qualified? 18 A. Yes. 19 Q. How would you characterize this 20 auditor's report? 21 A. Qualified. 22 Q. Okay. And when you say "qualified," 4273 1 what does that mean? 2 A. They do not express an opinion except 3 as it may be qualified in the report. 4 Q. Okay. An opinion as to what? 5 A. As to whether or not the financial 6 statements in their opinion are fairly stated in 7 all material respects. 8 Q. Okay. And why is it that they 9 qualified the report in this instance? 10 A. Well, I think it's self-evident if you 11 read the report and you see. 12 Q. Okay. Well, what is your understanding 13 of the reason why they qualified it, sir? 14 A. Well, they clearly point out that 15 absent the forbearance agreement, the company 16 would normally be unable to continue as a going 17 concern. 18 Q. And was there also some concern about 19 their ability to meet UFG's obligation to its 20 creditors and preferred stockholders? 21 A. Yes. 22 Q. And did the members of the board of 4274 1 UFG -- what was their reaction, if you recall, to 2 having received a qualified auditor's report of 3 this nature? 4 A. It was accepted. 5 Q. Was there concern expressed by the 6 remaining members of the board? 7 A. Well, of course. 8 Q. Did some of the members of the board 9 ultimately resign following the -- their learning 10 of the nature of the audit report and what was 11 going to be reported in the annual report for 12 1987? 13 A. I don't recall. The records will 14 reflect that. 15 Q. Now, were you concerned at this point 16 about the viability of UFG as a continuing entity? 17 A. Yes. 18 Q. And to your knowledge, was that concern 19 also shared by management? 20 A. I believe it was. 21 Q. And let me show you a document which 22 has been previously marked as T8054. This is a 4275 1 memorandum to the file written by Arthur Berner. 2 Do you see that? 3 MR. RINALDI: And let me at this point 4 move into evidence 8033, and I would also move 5 into evidence -- 8033, of course, is the annual 6 report. And I would move into evidence T8054, 7 which is Mr. Berner's memorandum that I've just 8 handed up. 9 MR. VILLA: Your Honor, we don't object 10 to the annual report being introduced. My copy 11 has at least seven handwritten notes which appear 12 to be placed on there in connection with this 13 case. So, I would ask that the OTS supply us with 14 a clean copy of it and substitute it for the one 15 currently offered. 16 MR. RINALDI: As I understand, Your 17 Honor, those handwritten notes were placed on 18 there by the compensation expert that was hired by 19 UFG. And I'm not sure that we have a clean copy, 20 but if there is one in the record in the A record 21 of documents, we can certainly substitute that. 22 Q. (BY MR. RINALDI) Sir, have you had a 4276 1 moment to look at the document -- 2 THE COURT: All right. 8033 is 3 received subject to the substitution. How about 4 8054? 5 MR. VILLA: We're trying to find that 6 right now. 7 Q. (BY MR. RINALDI) This is a memorandum 8 to Arthur Berner regarding the employment contract 9 situation. While you're trying to find that, I 10 will move on to another document. 11 THE COURT: Well, let's just hold it 12 till we find that. 13 MR. VILLA: No objection to 8054. 14 THE COURT: Received. 15 MR. RINALDI: We have copies of these. 16 I thought yesterday you had copies of everything 17 so I wasn't handing them to you. 18 Q. (BY MR. RINALDI) Sir, 8054 is a 19 memorandum with -- from Mr. Berner to the file. 20 And I direct your attention to the first -- or the 21 second full paragraph of that memorandum on the 22 first page. It says "The question of employment 4277 1 contracts first arose when a number of senior 2 executive employees were concerned with the future 3 of UFG and the association. In a number of 4 meetings with Barry Munitz and Jenard Gross, these 5 executives -- Messers. Crow, Jackson, Berner, 6 Wolfe, and Williams -- discussed their concern to 7 the ongoing viability of the association." 8 Do you see that? 9 A. Yes. 10 Q. Was it your -- was it your 11 understanding that management was concerned about 12 the ongoing viability of this institution? 13 A. Yes. 14 Q. And was that expressed to you by 15 Mr. Berner? 16 A. I believe it was. 17 Q. And then if you turn to the third page 18 of that document, the second full paragraph, it 19 says "In January 1988, the senior executive 20 officers became concerned over UFG's viability. 21 It appeared at the time as if the debts of UFGI 22 would not be repaid since it was impossible for -- 4278 1 it was possible UFG would have to put all of its 2 equity into USAT." 3 Do you see that? 4 A. Yes. 5 Q. Do you know what the reference by 6 Mr. Berner in that memo is to UFGI putting all of 7 its equity into USAT? 8 A. No. 9 Q. Does that appear to be a reference to 10 UFGI's obligation to maintain the net worth of 11 USAT by infusing capital into USAT? 12 A. It would so appear. 13 Q. It goes on and says "Moreover, the UFGI 14 debts were in excess of $55 million at a time when 15 UFGI had assets (other than its ownership of USAT) 16 of approximately $35 million in cash." 17 Do you see that? 18 A. Yes. 19 Q. And did that indicate to you that at 20 this point in time, UFG was insolvent? 21 A. Not necessarily. 22 Q. And then if you turn to the 4279 1 next-to-the-last page of the document, it's not 2 paginated, and it says in the middle paragraph, 3 the second sentence, it starts out -- it says "We 4 discussed a number of possible solutions. At the 5 time these solutions were being discussed, it was 6 clear that United Savings Association of Texas 7 would have to be receiving some form of 8 supervisory agreement, FSLIC assistance, or 9 capital infusion." 10 Do you see that? 11 A. Yes. 12 Q. And then it goes on and it says "It was 13 also evident that UFGI, without the assistance, 14 might not be a viable entity." 15 Did you share that assessment of USAT's 16 future prospects? 17 A. Yes. 18 Q. And did you share that assessment of 19 UFGI's future prospects? 20 A. Yes. 21 Q. Okay. Now, from time to time, were 22 projections made as to the future earnings or the 4280 1 future financial condition of UFG and conveyed to 2 members of the board? 3 A. I don't specifically recall, but I 4 suspect there were. 5 Q. Now, I'm handing you a copy of T4476 to 6 you. This is a memo from Jenard Gross -- from 7 Mr. Crow to Jenard Gross dated February the 4th, 8 1988. 9 MR. RINALDI: Your Honor, I would move 10 to admit T4476. 11 MR. VILLA: Mr. Rinaldi, is that a one- 12 or two-page memo? 13 MR. RINALDI: It's a one-page memo. 14 MR. VILLA: Our T4476 shows you have a 15 second memo attached to it. It's unrelated. No 16 objection to the one page. 17 THE COURT: Received. 18 Q. (BY MR. RINALDI) Have you had a 19 moment to look at that, sir? 20 A. Yes. 21 Q. Now, it indicates in the first 22 paragraph that there is going to be a meeting on 4281 1 February 11th with the federal regulators and it 2 says "Since the examiners are going to be at our 3 board meeting on Thursday, February 11th, I 4 suggest we present the 1988 profit plan the night 5 before at the working meeting at the Remington 6 Hotel. I'm afraid if we show the examiner we're 7 projecting a loss of 100 million plus for the 8 year, it may not be productive." 9 Do you recall that in about 10 February 4th of 1988, at or about the time the 11 auditor's report which we've just discussed 12 recently was given to UFG, that management was 13 projecting an additional 100-million-dollar loss 14 by UFG? 15 MR. VILLA: Objection. 16 A. I do not recall that. 17 MR. VILLA: Objection. I don't believe 18 he's testified that that was the date that the 19 auditor's report was given to him. 20 MR. RINALDI: I said "at or about." 21 Q. (BY MR. RINALDI) In any event, this 22 would have followed on the heels of a 117 or 4282 1 118-million-dollar loss that was reported in the 2 annual report for 1987; is that correct? 3 A. Correct. 4 Q. Now, it indicates here that Mr. Crow 5 was suggesting that the profit plan be submitted 6 the night before at the working meeting at the 7 Remington Hotel. 8 What was the reference to the working 9 meeting at the Remington Hotel? Was that 10 something you as a board member would have 11 participated in? 12 A. I don't recall attending that meeting. 13 Q. Okay. I know it's been a long time, 14 but was it typically the practice of the board of 15 directors to have a pre-meeting meeting before the 16 board of directors meeting? 17 A. No. 18 Q. Would management get together and have 19 a meeting before the board of directors meeting, 20 that you're aware of? 21 A. I don't know. 22 Q. Okay. To your knowledge, did USAT or 4283 1 UFG make it a practice to withhold from the 2 examiners information that was germane to their 3 financial condition? 4 A. Not in my opinion. 5 Q. And does it appear from this document 6 that Mr. Crow is suggesting to Mr. Gross that the 7 financial projections by management not be 8 disclosed to the regulators at the February 11th 9 meeting? 10 MR. VILLA: Objection, Your Honor. In 11 view of the rule of completeness, I would like to 12 read the last -- the next sentence to the witness 13 before he answers that question. "I would rather 14 wait and show them our 1988 loss within the 15 context of the overall forbearance plan." 16 Q. (BY MR. RINALDI) Do you recall what 17 my question was, sir? 18 A. Could you repeat it, sir? 19 Q. Does it appear to you that Mr. Crow was 20 suggesting to Mr. Gross that management not 21 disclose the fact that they are projecting a 22 100-million-dollar loss for the year until -- 4284 1 A. I've never seen this document to my 2 knowledge, but I think it speaks for itself. 3 Q. Okay. Now -- and did there come a time 4 when the regulators asked to have a meeting with 5 the board of directors of UFG for purposes of 6 advising UFG and USAT of the fact that they had -- 7 that USAT was failing its net-worth requirement? 8 A. I don't have specific recollection, but 9 I assume that was true. 10 Q. Okay. I'm handing you a copy of what's 11 been marked as T8049. These are the minutes of 12 the special meeting of the board of directors of 13 United Savings Association of Texas. They are 14 dated March the 30th, 1989. I'm sorry. '88. 15 Now, can you tell by looking at that 16 document, sir, whether you were in attendance at 17 the meeting? 18 A. It says all members of the board were 19 present; so, I assume I was. 20 Q. And for some reason I'm having trouble 21 finding my copy. There it is. Okay. 22 And it was attended, also, by several 4285 1 members of the Federal Home Loan Bank of Dallas. 2 Do you recall who Mr. Neil Twomey was? 3 A. He was with the bank in Dallas. I'm 4 not certain of his position. 5 Q. Did you have occasion to meet him on 6 more than one opportunity? 7 A. I believe so. 8 Q. And would that have been in your 9 capacity as a director or as a member of the audit 10 committee or -- 11 A. I think as a director. 12 Q. Okay. And Ginger Baugh, do you recall 13 who she was? 14 A. No. 15 Q. And how about Vivian Carlton? 16 A. No. 17 Q. Now, it says in the fourth full 18 paragraph down that "Vivian Carlton presented an 19 agenda and attachments which Mr. Gross ordered 20 attached to the minutes of the meeting." 21 And then it indicates that -- that 22 after reviewing the exam, members of the board 4286 1 questioned Ms. Carlton and other members of the 2 Federal Home Loan Bank Board of Dallas in great 3 detail. Do you see that? 4 Now, if you turn your attention to the 5 third full document which purports to be the 6 agenda that Mr. Gross asked be attached to the 7 minutes, in that first document which bears the 8 Bates stamp OWO54325, it indicates that 9 "deficit" -- have you -- 10 A. Where are we now? 11 Q. It would be this page right here. 12 A. Okay. 13 Q. And it indicates that "The deficit 14 capital regulatory requirement" -- or "deficit 15 capital requirement on September 30th, 1987, was 16 14,432 -- $432,000." 17 Do you see that? 18 A. Yes. 19 Q. And then below that, it says that on -- 20 "By December 31st, 1987, the deficit regulatory 21 capital requirement had grown to a deficit of 22 $112,000,551." 4287 1 Do you see that? 2 A. Right. 3 Q. Okay. Is that consistent with your 4 recollection of the capital position of USAT at or 5 about this point in time? That is, in the 6 beginning, the spring or the -- or March 30th, 7 1988? 8 A. This was the regulators' calculation. 9 As I testified earlier, there was some 10 disagreement with respect to these numbers. 11 Q. Well, I understand there was some 12 disagreement; but I thought a moment ago we 13 discussed that even management was agreeing at 14 this point in time that they agreed that there was 15 a net-worth failure -- 16 A. Correct. 17 Q. -- as of the end of the year. And, in 18 fact, I -- now, following this report on March the 19 30th by the regulators, did UFG have occasion to 20 fail to pay certain sinking fund payments and 21 dividends on certain of its preferred shares? 22 A. Yes. 4288 1 Q. Can you describe for me -- one moment. 2 MR. RINALDI: I move to admit 8049. 3 MR. VILLA: No objection. 4 THE COURT: Received. 5 Q. (BY MR. RINALDI) And what do you 6 recall of that, sir? 7 A. The -- what I recall is that the UFG 8 didn't have the money to pay it. 9 Q. And by paying "it," you mean the 10 sinking fund payment and the dividend? 11 A. Correct. 12 Q. Okay. Now, take a look at what's been 13 previously marked -- oh -- as T8065. This is a 14 letter to George Barclay from Arthur Berner. And 15 it says "As Jenard Gross and I explained, we have 16 the ability to pay this debt off at an extremely 17 large discount, but we are not sure how long this 18 opportunity will be available." 19 Do you see that? 20 A. Yes. 21 Q. Do you know what Mr. Berner was 22 referring to when he talked about paying off a 4289 1 debt? 2 A. Well, all of the obligations of UFG, 3 there was an effort to pay as much as could be 4 paid provided there was a very deep discount 5 involved. 6 Q. And if you turn to the first full page 7 of that document or the attached memorandum, in 8 the second full paragraph, it indicates that UFG 9 has approximately $54 million in outstanding debt. 10 Do you see that? 11 A. Yes. 12 Q. And that it has approximately 13 34 million in cash. And then when you turn to the 14 third page of the document, it talks about 15 avoidance of default. 16 Do you see that? 17 A. I see "effects of default." 18 Q. And then if you turn to the third page, 19 it talks about the avoidance of default. 20 Do you see that? 21 A. Okay. 22 Q. And it says "To avoid the difficulties 4290 1 created by a financial crisis at UFG, UFG's 2 management has proposed a debt restructuring of 3 its creditors." 4 Do you see that? 5 A. Yes. 6 Q. Do you recall that there came a time 7 when they were making a proposal to pay-down some 8 debt and restructure the debt of UFG? 9 A. Yes. 10 Q. And can you describe for the Court what 11 they did? 12 A. I'm afraid I can't except that, as I 13 testified earlier, all obligations of UFG were -- 14 there was an effort made to retire as much debt as 15 possible on the most favorable terms to the 16 company. 17 Q. Okay. And then in the first sentence 18 there of -- under "avoidance of default," the 19 second paragraph, it says "UFG's major creditor 20 has agreed on a preliminary basis to take a 21 75 percent discount on its debt." 22 Do you see that? 4291 1 A. Yes. 2 Q. Does that indicate then that UFG's 3 major creditor was going to accept 25 cents on the 4 dollar for the debt that was owed them? 5 A. Yes. 6 Q. And ultimately, was UFG successful in 7 restructuring that debt? 8 A. I believe it was. 9 Q. And what was the reason that they were 10 required to restructure the debt? 11 A. We -- on advice of counsel, all of 12 these settlement things were approved or 13 recommended that they be entered into. 14 Q. Okay. But I was really trying to get 15 at something slightly different. Why was it that 16 they were restructuring the debt in this fashion? 17 A. I'm sure that the company could have 18 been -- a default could have triggered insolvency. 19 Q. And they restructured the debt because 20 they were unable to pay the full amount that was 21 owed to their creditors? 22 A. That is correct. 4292 1 Q. Okay. And one of the creditors was a 2 Series B preferred shares, was it not? It's 3 listed at the bottom of the page there. 4 A. Okay. 5 Q. Do you see that? 6 A. Yes. 7 Q. And there is a little asterisk and 8 below that, it says "The UFG board has determined 9 not to make the May 1st scheduled dividend of 10 sinking fund payments on this preferred share." 11 Do you see that? 12 A. Yes. 13 Q. So, they just decided that they would 14 default on their obligation to make the sinking 15 fund payment rather than pay; is that correct? 16 MR. VILLA: Objection. It misstates 17 the document. Calls for a legal conclusion from 18 the witness as to default. 19 MR. RINALDI: I'm not asking for a 20 legal conclusion. I'm only asking him what his 21 understanding is, what they decided to do. 22 A. Can you repeat that, the question? 4293 1 Q. (BY MR. RINALDI) Did they decide then 2 not to make a payment that was -- to the sinking 3 fund payment that was required to the preferred 4 stock Series B? 5 A. Yes. 6 Q. And earlier, I think we saw in the 7 auditor's report that it indicated that its 8 ability to continue -- that is, UFG's ability to 9 continue as a going concern was dependent upon its 10 ability to make payments to its preferred 11 shareholders, correct? 12 A. I don't recall that specifically, but 13 I'll accept it if that was in the opinion. 14 Q. Now, was USAT also continuing to -- its 15 financial circumstances continuing to decline at 16 the same time, sir? 17 A. May of '88, I assume that to be the 18 case; but I don't specifically recall. 19 Q. Did there come a point in time when UFG 20 no longer had any capital and had a negative 21 capital position that you recall? 22 A. Yes. 4294 1 Q. Okay. And do you recall at 2 approximately what point in time that would have 3 occurred? 4 A. No. I assume it was probably somewhere 5 in this time frame. 6 MR. RINALDI: Before I move on to the 7 next issue, I'd like to move into evidence what is 8 T8010. And this is in response to -- this is T -- 9 and I would also move into evidence 8065. 10 MR. VILLA: 8065 is already in 11 evidence -- 12 MR. RINALDI: Okay. 13 MR. VILLA: -- as T2012 put in by the 14 OTS. 15 THE COURT: Would you state that number 16 again? 17 MR. RINALDI: Okay. 18 MR. VILLA: T2012. T2012 put in by the 19 OTS with Mr. Schwartz on September 29th. 20 Q. (BY MR. RINALDI) Now, I just handed 21 you a copy of what's been marked as T8010. Does 22 this appear to be a set of minutes for the board 4295 1 meeting of United Financial Group dated 2 April 27th, 1983? 3 A. Yes. 4 THE COURT: That document has been 5 offered. Any objection to its receipt? 6 MR. VILLA: No, Your Honor. 7 THE COURT: Received. 8 Q. (BY MR. RINALDI) Okay. And directing 9 your attention just very quickly to Page -- the 10 seventh page of that document. I think there are 11 handwritten notations in the corner. 12 Does this appear to be the 13 United Financial Group board meeting at which they 14 resolved to issue the Series B preferred stock? 15 Do you see the "resolved" at the bottom of Page 7? 16 A. Yes. 17 Q. Okay. And that's the same stock then 18 that was subsequently -- that UFG subsequently 19 failed to make the sinking fund payments on in May 20 of 1988; is that correct? 21 A. I believe that's true. 22 Q. Okay. Now, I talked a moment ago or 4296 1 asked you a moment ago, did there come a point in 2 time when UFG and USAT's net worth or its capital 3 position went to zero and then became negative. 4 Let me show you a copy of what's been 5 marked as T8095. And I'd ask you to take a look 6 at that document. 7 Do you recognize that document, sir? 8 A. No, not specifically. 9 Q. Well, can you describe generally what 10 the document is? 11 A. It's a memo to the board from 12 Mike Crow. 13 Q. And the memo talks about "second 14 quarter 1988 performance, United Financial Group, 15 Inc." 16 Did Mr. Crow make it his practice to 17 provide the board with this kind of information on 18 a periodic basis? 19 A. I don't recall. 20 Q. Okay. And you were on the board of 21 directors at this time. Would you assume then 22 that you received a copy of this document as a 4297 1 member of the board? 2 A. I would. 3 Q. Okay. And directing your attention to 4 the last page of the document, it's talking about 5 regulatory compliance. 6 A. The last page that I have is a 7 financial statement. 8 Q. I'm sorry. I'm talking about the last 9 page of the text which has the Bates stamp 10 UFGJ2613. Do you see that? 11 A. Okay. 12 Q. Okay. And it indicates there that in 13 the second full paragraph, the last two sentences, 14 "USAT's regulatory capital as of July 31st, 1988, 15 was negative 8.6 million." 16 Do you see that? 17 A. Yes. 18 Q. So that as of the end of July, UFG had 19 no capital left; is that correct? 20 A. It would so appear. 21 Q. Okay. Now -- 22 MR. VILLA: Did you say UFG or USAT? 4298 1 MR. RINALDI: I'm sorry. If I said 2 UFG, I meant USAT. 3 MR. VILLA: USAT. 4 MR. RINALDI: Yes. 5 Q. (BY MR. RINALDI) And after USAT's 6 capital went to negative, did it subsequently 7 then -- was it subsequently placed into 8 receivership, sir? 9 A. It was. 10 Q. And that would have occurred about the 11 end of 1988? 12 A. I'll accept that. I don't recall the 13 date. 14 Q. Okay. Did there come a time when the 15 regulators approached the directors of USAT and 16 demanded that they make good on the net-worth 17 maintenance obligation of UFG? 18 A. I don't recall that. 19 MR. RINALDI: Let me move T8095, Your 20 Honor, into evidence. That's the -- let me hand 21 you two documents. One is T8137. 22 MR. VILLA: No objection to 8095. 4299 1 THE COURT: Received. 2 MR. RINALDI: And T8070, sir. And take 3 a look at, first, T8070. 4 MR. VILLA: Excuse me. What was the 5 second document? 6 MR. RINALDI: 8137. 7 MR. VILLA: Thank you. 8 Q. (BY MR. RINALDI) Now, have you had a 9 chance to look at that, sir? 10 MR. RINALDI: And while I'm at it, I 11 will also hand you up 8149 -- T8149. This is a 12 letter dated December 28th, 1988, to the board of 13 directors from Neil Twomey. And I would -- they 14 go in that order. T8070 is a letter dated 15 May 13th, 1988, from Neil Twomey to the board of 16 directors. T8137 is a letter dated December the 17 8th, 1988, from Neil Twomey to the board of 18 directors. And T8149 is the December 28th, 1988, 19 letter. 20 I would move to have those three 21 documents moved into evidence. 22 MR. VILLA: No objection. I believe -- 4300 1 two of them are already in evidence. We're trying 2 to get the tabs now, Your Honor. 3 Q. (BY MR. RINALDI) Does that refresh 4 your recollection, sir, that at or -- 5 THE COURT: Let's get these documents 6 straightened out first. Is 8070, T8070, already 7 in evidence? 8 MR. LANGDON: As T2013. 9 MR. BLANKENSTEIN: Which is the 10 December 28th, 1988, letter has been admitted as 11 T2021. We're trying to get the May 13th -- 12 correct. 13 MR. LANGDON: T2013. 14 MR. BLANKENSTEIN: That's right. 2013. 15 Q. (BY MR. RINALDI) Directing your 16 attention to the May 13th, 1988, letter, does that 17 refresh your recollection that at or about 18 May 1988, Mr. Twomey wrote to the board and 19 advised them that they were failing their 20 net-worth condition and they should advise them as 21 to the steps they were going to take to infuse 22 capital into USAT? 4301 1 A. I'll accept the fact that I probably 2 received this letter. 3 Q. Okay. And what action, if any, did the 4 board take to comply with Mr. Twomey's request? 5 A. I think the management, on the 6 direction of the board, explored any and every 7 avenue to raise capital. 8 Q. Did they infuse any capital of their 9 own into USAT? 10 A. I don't recall. 11 Q. And then directing your attention then 12 to the December 8th, 1988, request, he again 13 writes to the board. This time, he directs the 14 board to infuse capital. 15 At this point in time, do you recall 16 that the board infused capital into USAT? 17 A. I don't recall. I don't believe so. 18 Q. And then again on December 28th, 1988, 19 he again demands that UFG infuse capital. And did 20 UFG again not infuse capital into USAT? 21 A. I believe that is the case. 22 Q. And then is it fair to say that several 4302 1 days following that, USAT was placed into 2 receivership? 3 A. As I testified earlier, I don't recall 4 a date; but I suspect it was about that period of 5 time. 6 Q. Okay. Now -- 7 THE COURT: Which one of these 8 documents is not in evidence? 9 MR. RINALDI: I believe the third 10 document is not in evidence, Your Honor. 11 THE COURT: T8149? 12 MR. RINALDI: I would have to defer 13 to -- 14 MR. STEARNS: Yes. 15 THE COURT: No objection to -- 16 MR. VILLA: No objection. 17 THE COURT: All right. Received. 18 Q. (BY MR. RINALDI) Now, at about the 19 end of 1987, this is the period in October of '87 20 when Mr. Berner had -- was projecting that there 21 would be a net-worth failure by USAT. 22 Do you recall we discussed that 4303 1 earlier? 2 A. Yes. 3 Q. Do you recall having discussions with 4 members of management regarding increasing the 5 salaries of management and other persons at USAT 6 and UFG? 7 A. I don't specifically recall that, but 8 it was imperative that with $6 billion in assets, 9 that management and proper officers be retained. 10 Q. And I'm going to hand you a copy of 11 what's marked as T8023 and ask you to take a look 12 at this document. It's a draft -- I mean a cover 13 memorandum and then -- from Mr. Berner to Mr. Crow 14 dated October 30th. And he attaches a draft 15 memorandum which he is proposing to send to 16 Jenard Gross and to Barry Munitz over the names of 17 Mr. Crow and Mr. Berner. And then attached is a 18 memo that -- relating to senior officers' salary 19 increases. Take a moment to look at that. 20 MR. RINALDI: I would offer this into 21 evidence. It's T8023. 22 MR. VILLA: No objection. 4304 1 THE COURT: Received. 2 Q. (BY MR. RINALDI) Now, Mr. Berner in 3 his draft memo which he submits to Mr. Crow for 4 his review states as follows: "In connection with 5 the discussions had by a number of the senior 6 management, it was decided that we would recommend 7 that no person with the title first vice president 8 or above receive any salary increases at this 9 time. This would be in connection with the 10 proposed delay of salary review for persons making 11 above $35,000 so that beginning July 1st, '88, all 12 such persons will be reviewed at the same time." 13 Do you see that? 14 A. I do. 15 Q. And then, Mr. Berner goes on to state 16 in the draft "We believe that a salary increase 17 for the senior people at this time is 18 inappropriate." 19 Do you see that? 20 A. I do. 21 Q. Did you share Mr. Berner's views that 22 it would have been inappropriate at or about 4305 1 October 30th, 1987, for the senior people to 2 receive salary increases? 3 A. I don't recall that, but normally those 4 were considered on an anniversary date. 5 Q. Okay. And was it your understanding 6 that he was talking about a salary increase prior 7 to the anniversary date? 8 A. I assume that to be the case, yes. 9 Q. And wouldn't the anniversary date be 10 coming up at the end of the year? 11 MR. VILLA: Objection. 12 A. I don't recall. 13 Q. (BY MR. RINALDI) And he's suggesting 14 here that all salaries then not be increased until 15 the following -- until July 1st, 1988, is he not? 16 A. It appears that's what he's 17 recommending. 18 Q. Okay. And then on the next page -- 19 that is, the front page -- Mr. Crow says "Art, my 20 opinion is that we should do nothing and wait 21 until 6-30-88. If at that time, things look 22 bleak, we pass on raises." 4306 1 Do you see that? 2 A. Uh-huh. (Witness nods head 3 affirmatively.) 4 Q. "But if they don't, we get raises." 5 Did you share Mr. Crow's assessment 6 that if the financial condition of the institution 7 continued to look bleak in June of 1988 that they 8 should pass on raises? 9 A. No. 10 Q. Now, as a result of the communications 11 initiated at this point in time, did the board of 12 directors take some action in the latter part of 13 1987 regarding raises for members of the staff and 14 as senior executives of UFG and USAT? 15 A. I don't recall. 16 Q. Let me show you a copy of what's been 17 previously marked as T8027. These are the minutes 18 of the compensation committee dated November the 19 10th, 1987. And does it appear there, sir, that 20 in the fourth full paragraph down, that the 21 compensation committee, in fact, recommended -- I 22 mean adopted the recommendation that Mr. Crow and 4307 1 Mr. Berner had been talking about? 2 MR. VILLA: Objection. 3 Q. (BY MR. RINALDI) It states 4 "Mr. Berner then" -- 5 THE COURT: We have an objection. 6 What's your objection? 7 MR. VILLA: He's misstating the 8 document. 9 MR. RINALDI: Then I'll read the 10 document into the record and ask the question. 11 Q. (BY MR. RINALDI) In the fourth full 12 paragraph down, it says "Mr. Berner then reviewed 13 the proposal to defer salary increases for all 14 persons earning 35,000 and above until July 1st, 15 1988." 16 Do you see that? 17 A. I do. 18 Q. "It was noted that this would allow for 19 the same day to be used for reviewing all 20 highly-compensated persons. The committee 21 unanimously adopted the proposal." 22 Do you see that? 4308 1 A. Yes. 2 Q. And did you agree with the proposal 3 that Mr. Berner had made that it would have been 4 inappropriate to grant salary increases at this 5 time and that they should wait until July the 1st, 6 1988, to review salary increases? 7 A. The minutes indicated -- 8 MR. VILLA: Objection. 9 A. -- that it was unanimous. 10 Q. (BY MR. RINALDI) And do you recall 11 that -- do you recall whether the board at the 12 meeting of the full board adopted the resolution 13 of the compensation committee to that effect? 14 A. I do not recall. 15 Q. Now, if you'd direct your attention 16 further down on the Document 8027, the committee 17 also reviewed all of the other recommended 18 bonuses. 19 Do you see that? 20 A. I do. 21 Q. And it indicates there that they 22 considered the operations of United and the fact 4309 1 that the association is having an operating loss. 2 "However, it was decided that in view of the fact 3 that many of the key employees were now doing 4 extra work since other executives had been 5 terminated during the year and that the so-called 6 bonuses were really an attempt to achieve market 7 base compensation to allow these people to receive 8 their market value. And, further, in view of the 9 fact that it would be not only costly but time 10 consuming to deal with replacements, the 11 compensation committee unanimously approved the 12 bonus schedule. It was noted that such bonuses 13 would not be paid until January 1988 and, 14 therefore, no announcement would be made of the 15 bonuses so that in the event there were 16 intervening circumstances, they could be taken 17 into consideration at a further meeting." 18 Do you see that? 19 A. I do. 20 Q. So, is it fair to say that after the 21 compensation committee decided to recommend that 22 there be no salary increases, the compensation 4310 1 committee then decided to recommend that bonuses 2 be paid beginning in 1988? 3 A. Correct. 4 Q. Okay. Now, how were bonuses fixed at 5 UFG, sir? 6 A. I don't recall. I'd have to go back 7 and look at the records to determine that. 8 Q. Now, can you tell by looking at this 9 document which committee is meeting? 10 A. Which committee is what? 11 Q. Well, is it the compensation committee 12 of USAT or the compensation committee of UFG or do 13 you just have to guess? 14 A. I don't remember this specific 15 document; so, I can't say. 16 Q. Well, at the top, doesn't it -- 17 normally will say the minutes of the USAT 18 compensation committee, audit committee. There is 19 no indication here as to whether this was USAT or 20 UFG? 21 A. Apparently, this was just an omission 22 in the minutes. 4311 1 Q. Okay. And do you know who was 2 responsible for making the salary adjustments 3 that -- that the committee declined to recommend? 4 Would it have been USAT or UFG? 5 A. I don't have any idea. 6 Q. Okay. And with -- 7 A. I had great difficulty in 8 distinguishing between the two. 9 Q. And why is that, sir? 10 A. Because they were all operated under 11 same management. 12 Q. But you had different meetings, didn't 13 you? I mean, UFG had its meeting and -- 14 A. That's correct. 15 Q. And can you -- do you know whether it 16 was USAT that was responsible for paying the 17 bonuses that are referred to in the last paragraph 18 on Page T8027, or would that have been the 19 obligation of UFG? 20 A. I do not know. 21 Q. Okay. Now, I'm handing you a copy of 22 what's been marked as T8026 and I'd ask you to 4312 1 take a look at this and directing your attention 2 to the first and second pages -- 3 MR. VILLA: Your Honor, has he offered 4 8027? 5 MR. RINALDI: Yeah. I'm offering 8027 6 into evidence. I'll offer 8026 into evidence, as 7 well. 8 MR. VILLA: No objection to 8027. 9 THE COURT: Received. 10 Q. (BY MR. RINALDI) Now, I'm really only 11 interested in the first two pages of this 12 document, but -- 13 THE COURT: Excuse me, Mr. Rinaldi. Do 14 you have an objection to 8026? 15 MR. VILLA: I was trying to find it, 16 Your Honor. Mr. Rinaldi, how many pages do you 17 have in your 8026? 18 MR. RINALDI: Actually, the front page 19 is a copy of what becomes the second page. And 20 these were put together in a deposition; so, these 21 are actually a copy of two -- the front page is 22 then the second, more complete document. You'll 4313 1 note that the Bates stamps are continuous. And I 2 was going to ask him about what the difference 3 between the two documents were. Perhaps they 4 should have been identified as separate documents. 5 MR. VILLA: How many pages do you have? 6 MR. RINALDI: One, two, three, four, 7 five. 8 MR. VILLA: Okay. We object to 9 Pages 3, 4, and 5 because they appear to be 10 unrelated to Pages 1 and 2. 11 MR. RINALDI: I believe that they are 12 continuous Bates stamp numbers, are they not? 13 This was how they were produced to us, Your Honor, 14 in a continuous series of Bates stamps; but if you 15 object, I will be happy to withdraw that portion 16 of the document. I have no interest in examining 17 the witness as to the matters contained therein. 18 THE COURT: All right. The first two 19 pages of 8026 are received. 20 Q. (BY MR. RINALDI) Now, these are two 21 different copies of a document entitled "Proposed 22 UFG/USAT Bonus Ranges." 4314 1 Do you see that? 2 A. I do. 3 Q. And is that your signature that appears 4 at the bottom of the page? 5 A. It is. 6 Q. Okay. Now, what was the mechanism by 7 which the bonuses -- well, let me just ask you: 8 In the third column in, does that appear to be the 9 bonuses that UFG/USAT are proposing to pay to its 10 high-level employees? 11 A. I really don't know. I assume that to 12 be the case. 13 Q. Well, it says "bonus ranges" at the top 14 and then it says "proposed dollar amount." You 15 see that in the third column? And then the second 16 column appears to be "proposed percentage bonus." 17 Do you see that? 18 A. Okay. 19 Q. Okay. Now, how were the bonuses at UFG 20 established? 21 A. After the passing of 10 years, I'm 22 afraid I can't respond to that. 4315 1 Q. Were they based upon the performance of 2 the corporation, sir? 3 A. They were based on a performance of the 4 individuals, as I recall. 5 Q. Did they take into account the 6 financial condition of the corporation and its 7 ability to make bonus payments given the financial 8 condition? 9 A. From the point of view of retaining 10 competent management, it was very definitely 11 considered in the best interest of the corporation 12 and its financial well-being that bonuses be paid 13 to retain these people. And I should add that 14 detailed studies were made by two separate 15 nationally-known, recognized independent 16 compensation experts and all of these matters were 17 submitted to them and the committee followed their 18 recommendations. So, we were not out in left 19 field, sir. 20 Q. I'm not suggesting you were out in left 21 field. Were the nationally -- these entities that 22 you hired, were they the Hewitt & Associates and 4316 1 Wyatt & Company? 2 A. That is correct. 3 Q. Okay. Now, these bonuses were ones 4 that are granted in November of 1987. Do you 5 recall that Hewitt & Associates weren't hired 6 until the spring of 1988 and didn't provide their 7 report to you until June of -- June 28th, 1988? 8 A. I don't specifically recall those 9 dates, no. 10 Q. Okay. Well, if the record does reflect 11 that, had you contacted anyone else at this point 12 in time, in November of 1987, to determine whether 13 the bonuses that were being paid here were 14 reasonable or not? 15 A. Not that I recall. 16 Q. Okay. Now, directing your attention to 17 Mr. Gross, who is No. 7 down there, it indicates 18 that he's receiving an 80 percent bonus. 19 Do you see that? 20 A. I see that. 21 Q. Okay. Do you know how it was 22 determined that Mr. Gross would receive an 4317 1 80 percent bonus? 2 A. I do not recall. 3 Q. Okay. Now, it indicates that it 4 includes loan interest 68K. Do you see that? 5 A. Yes. 6 Q. Do you know what that makes reference 7 to? 8 A. I believe Mr. Gross had, as I recall, 9 had a loan from the association or from UFG. 10 Q. And as part of the bonus, USAT or UFG 11 were agreeing to pay-down the interest payment on 12 the note? 13 A. I believe, as I recall, his loan was to 14 purchase stock in the association. 15 Q. Okay. And was it your understanding 16 then as part of his bonus, the interest on the 17 note was being repaid by the association or UFG? 18 A. Yes. 19 MR. RINALDI: I would move -- has T8026 20 been moved in? 21 THE COURT: Yes. 22 MR. RINALDI: Okay. I would move that 4318 1 into evidence. 2 Q. (BY MR. RINALDI) So, by signing this 3 document at the bottom as the chairman, were 4 you -- just to be perfectly clear, it says 5 "approved." 6 When it says "approved," you mean you 7 were simply recommending that to the board; is 8 that correct? 9 A. That's correct. 10 Q. Okay. And subsequently, the board, to 11 the best of your knowledge, approved these 12 bonuses? 13 MR. VILLA: Objection. Leading. 14 THE COURT: Denied. 15 A. I don't recall. 16 Q. (BY MR. RINALDI) Okay. Now, when you 17 were at Kaneb & Associates, how were bonuses 18 computed there? 19 A. At Kaneb Services? 20 Q. Yes. 21 A. They were computed based on the 22 individual's performance rated, and bonuses were 4319 1 paid pursuant to return on shareholder's equity 2 and increases thereon with payments divided into 3 three annual payments contingent on that 4 individual staying with the company for that 5 period of time. 6 Q. Okay. Now, you indicated that they 7 were paid -- or one of the criteria was return on 8 equity. 9 What were you referring to there, sir? 10 A. Well, I think that's a widely-known 11 terminology. It's increase in earnings per share. 12 Q. So, if the shares of Kaneb had gone up 13 in value or it had earnings for a quarter or for a 14 year, then the bonus would be based upon some 15 formula associated with the return on equity? 16 A. That was one factor. Not the only 17 factor. 18 Q. Okay. Now, did there come a time when 19 USAT entered into employment contracts with 20 certain of its highly-compensated executives? 21 A. I believe that's true. 22 Q. Okay. Now, let me show you what's been 4320 1 previously marked as Exhibit T8038. These are the 2 minutes of February the 11th, 1988. And I'll ask 3 you to take a look at that. 4 MR. RINALDI: I'd move the admission of 5 these minutes, Your Honor. 6 MR. VILLA: One second, Your Honor. We 7 were given over 80 documents which takes me some 8 time. 9 MR. RINALDI: Yeah. This is the 10 compensation committee -- 11 MR. VILLA: I have no objection. 12 THE COURT: Received. 13 MR. RINALDI: Your Honor, I believe 14 this is a double document. For reasons I don't 15 quite understand, there's the compensation 16 committee, which is T8038, and then there is the 17 board of directors meeting which is the third 18 document -- a third page in at T8039. 19 Since I'm going to ask him questions 20 about both documents, I suggest that we simply 21 move the admission of both documents. And if the 22 parties wish, they can separate the documents. 4321 1 Okay? 2 Q. (BY MR. RINALDI) Directing your 3 attention -- 4 MR. VILLA: No objection, Your Honor. 5 THE COURT: Received. 6 Q. (BY MR. RINALDI) Directing your 7 attention then to the second -- 8 MR. VILLA: Excuse me, Mr. Rinaldi. 9 Are these two separate exhibits now or one? 10 THE COURT: They are so numbered. 11 MR. RINALDI: They didn't have a space 12 in them and when they were copied, they got copied 13 together. 14 MR. VILLA: You offered both? 15 MR. RINALDI: Yes. I have offered 16 both. 17 MR. VILLA: Thank you. No objection. 18 Q. (BY MR. RINALDI) Now, directing your 19 attention to the compensation committee minutes 20 which are the first two pages of that document -- 21 do you see that? They are T8038. 22 A. Correct. 4322 1 Q. The first item of business it says in 2 the second paragraph to come before the committee 3 was a discussion of UFGI employment contracts. 4 "It was noted that in view of the economic 5 situation of United Financial Group, Inc., and the 6 necessity of retaining senior executives of USAT, 7 it was appropriate for the employment contracts 8 previously entered into by employees with UFGI to 9 have a corollary at United Savings Association of 10 Texas." 11 Do you see that? 12 A. I do. 13 Q. Okay. And what was that making 14 reference to, sir? 15 A. Employment contracts. 16 Q. Okay. But I mean, what does the 17 reference to a corollary employment contract refer 18 to? 19 A. Just what it says. 20 Q. Okay. Had UFGI at some previous point 21 in time entered into employment contracts with 22 executive management? 4323 1 A. This would indicate that that was the 2 case, yes. 3 Q. Okay. And now, because of UFGI's 4 economic situation, it was decided that employment 5 contracts should be entered into between USAT and 6 the same executives who had entered into 7 employment contracts with UFGI? 8 A. That is not true. The reason for 9 these, you're dealing with all of the -- 10 essentially all of the assets in USAT. It was 11 vitally important that these people be retained to 12 manage those $6 billion in assets, and that's why 13 they were entered into. 14 Q. Okay. Now, these new contracts that 15 you were proposing to enter into with UFGI, do you 16 recall what the duration of them was? 17 A. No. 18 MR. VILLA: Did you mean USAT, 19 Mr. Rinaldi? 20 MR. RINALDI: I meant USAT. I'm sorry. 21 A. I do not. 22 Q. (BY MR. RINALDI) Okay. Would you 4324 1 take a look at what's been previously marked as 2 8043. 3 A. 8043 or 8034? 4 Q. Yeah. I'm going to hand you a copy of 5 it right now. Now, this is a copy of a contract. 6 It's T8043. And it's dated February 11th, 1988, 7 which is the same date as the minutes which are 8 the compensation committee of T8038. 9 Do you see that? 10 A. I do. 11 Q. Okay. And do you recall that as a 12 result of the recommendation that these corollary 13 contracts be entered into that, in fact, such 14 contracts were entered into with the individuals 15 who are identified on T8038? 16 A. I assume that to be true. 17 Q. Okay. And those individuals were 18 Arthur Berner, Michael Crow, Jeff Gray, James 19 Jackson, Bruce Williams, and Jim Wolfe. 20 Do you see that? 21 A. I do. 22 Q. And I've handed you now a copy of 4325 1 what's been marked as T8042. And T8042, is that 2 the contract that was entered into between USAT 3 and Mister -- 4 THE COURT: Excuse me. 5 MR. RINALDI: I'm sorry. 8043. Yes? 6 THE COURT: That was what I was going 7 to ask. 8 Q. (BY MR. RINALDI) Is that the contract 9 that was entered into with Mr. Arthur Berner? 10 A. I'll accept that. I have no idea. 11 Q. Well, I think his name appears on the 12 first paragraph at the beginning of the document, 13 does it not? 14 A. Okay. 15 Q. Okay? 16 A. I don't know whether he -- I guess it 17 was -- it appears that it was executed, yeah. 18 Okay. 19 Q. So, this is an executed copy of that 20 document. 21 Now, if these individuals already had 22 employment agreements with UFG, why was it 4326 1 necessary for them to enter into parallel 2 agreements or corollary agreements with USAT, sir? 3 A. I previously testified the reason for 4 that. 5 Q. Was there concern on the part of the 6 board -- I mean, was there concern on your part as 7 a member of the compensation committee that UFGI 8 would be unable to perform under the UFGI 9 contracts because of its precarious financial 10 condition? 11 A. No. 12 Q. Well, in the first sentence of the 13 compensation committee, it says that -- or at the 14 second sentence, it noted that "in view of the 15 economic situation of United Financial Group." 16 Do you see that? 17 A. Okay. 18 Q. What was the -- the economic situation 19 at United Financial Group that made it desirable 20 for USAT to enter into these contracts? 21 A. As I testified before, the reason for 22 these contracts -- forget about names of 4327 1 companies -- was to see that these people were 2 retained to manage the affairs of the association 3 as well as -- there was no real activity in UFGI, 4 Counsel. It was all in the S&L. 5 Q. But these people had employment 6 contracts under which UFGI -- 7 A. They didn't have an employment contract 8 with USAT. That's where the assets were. 9 Q. So that the employment contracts were 10 entered into with USAT because USAT had the assets 11 which would be able to pay them; is that correct? 12 A. No. Because, as responsible officers 13 and directors, our responsibility was to try to 14 preserve the assets of the association. 15 Q. Okay. And you felt that the best way 16 to preserve the assets was to enter into these 17 employment contracts? 18 A. Absolutely. 19 Q. Okay. Now, with respect to 20 Mr. Berner's contract, let's just take a look at 21 that. It indicates on Page 2, it provides for a 22 term of the contract. And the term was to be 4328 1 through the end of 1988; is that correct? 2 A. Yes. 3 Q. Okay. And in addition to that, it 4 guarantees him a salary of $171,656 to Mr. Berner 5 through the end of 1988, an annual salary. 6 Do you see that on Page 3, Paragraph 5? 7 A. Yes. 8 Q. Was that an increase over what he had 9 been earning previously at USAT? 10 A. I don't recall. 11 Q. Okay. Would you take a look at what's 12 been previously marked as -- well, in an effort to 13 move this along, let's just pass that by. 14 And finally, it indicates that -- in B 15 down below, that "During the period of the 16 executive's employment hereunder, the company 17 shall pay to the executive an annual bonus to be 18 paid in January each year of $62,000." 19 Do you see that under 5B on Page 3? 20 A. I don't see the 50,000. 21 Q. 63,000. 22 MR. VILLA: Can you give us the Bates 4329 1 stamp number of the page you're looking at? 2 MR. RINALDI: It's W401371, and it says 3 an annual bonus -- I'm sorry -- of 70,000. 4 A. Okay. I'll accept that. 5 Q. (BY MR. RINALDI) Okay. Why did 6 you -- 7 THE COURT: We'll take a short recess. 8 9 (A short break was taken 10 at 10:35 a.m.) 11 12 THE COURT: Be seated, please. 13 MR. RINALDI: Your Honor, in order 14 to -- 15 THE COURT: We're back on the record. 16 MR. RINALDI: In order to expedite the 17 proceeding and to hopefully get through this and 18 not to have to require Mr. Whatley to come back, 19 Mr. Villa and I have agreed that I will read into 20 the record all of the documents that I wanted on 21 to authenticate through this witness. If 22 Mr. Villa has no objection, he will so indicate, 4330 1 and all of those documents then can come in. And 2 they will then be part of the record and then I 3 will complete the examination of the witness and 4 hopefully save some time. 5 Mr. Villa, I would start with 6 Exhibit T8038, which is the minutes of 7 February 11th -- I'm sorry. It's already been 8 admitted. T8039 are the minutes. And then after 9 that, I would indicate 8040. This is a bonus 10 agreement, February 11th, 1988, entered into 11 between Jenard Gross and United Financial Group. 12 Then 804 -- Exhibit 8040. 8041 -- 13 MR. VILLA: 8040, no objection, Your 14 Honor. 15 THE COURT: Received. 16 MR. RINALDI: 8041 is a bonus agreement 17 entered into between Mr. Crow and United Financial 18 Group for the payment of certain interest on a 19 note owed by Mr. Crow. 20 MR. VILLA: No objection. 21 THE COURT: Received. 22 MR. RINALDI: 8042 is an employment 4331 1 agreement entered into on February the 11th, 1988, 2 between Mr. Crow and United Savings Association of 3 Texas. 4 MR. VILLA: No objection. 5 THE COURT: Received. 6 MR. RINALDI: 8043 is an employment 7 agreement entered into between Arthur S. Berner 8 and United Savings Association on February the 9 11th, 1988. 10 MR. VILLA: I think you've already 11 identified that with the witness, but it hasn't 12 been received. 13 MR. RINALDI: Sorry. 14 MR. VILLA: No objection. 15 THE COURT: Received. 16 MR. RINALDI: 8048 is a memorandum to 17 Arthur Berner from Thomas Leahey of Kirkpatrick & 18 Lockhart regarding employment contracts. 19 MR. EISENHART: Your Honor, I have -- 20 that document was not on their pull list, and I 21 don't have it in front of me. 22 Your Honor, it would appear from the 4332 1 stamp on the document that this is a UFG document 2 or a document produced by UFG. I believe there 3 was an objection to this at Mr. Whatley's 4 deposition on the ground that it was privileged. 5 MR. RINALDI: Your Honor, this was 6 turned over to us by UFG. It makes reference to 7 United Savings Association of Texas' employment 8 contracts. There's no indication that this was 9 undertaken with respect to UFG, other than the 10 fact that it was in the possession of UFG and 11 turned over to us. I submit to the Court that 12 having turned it over, they waived any privilege. 13 MR. EISENHART: Well, I can't speak to 14 the circumstances of its production, Your Honor. 15 But I would suggest that on the face, the document 16 does appear to be privileged and I would therefore 17 object to its admission on that ground. 18 THE COURT: Well, if it's been turned 19 over, I think it's waived. Received. 20 MR. RINALDI: The next document would 21 be the -- I'm sorry. This is the special meeting 22 which is 8049. It's already been admitted. 4333 1 Then there is the March 30th, 1988, 2 meeting of the compensation committee of 3 United Financial Group and United Savings 4 Association. These minutes are also dated 5 March 30th, 1988. It is Exhibit 8050. 6 MR. VILLA: I have no objection. 7 THE COURT: Received. 8 MR. RINALDI: Okay. Then 8051 is a 9 memorandum from Arthur Berner to Barry Munitz 10 dated March 29th, 1988, proposing certain 11 compensation practices be recommended to 12 Mr. Whatley. 13 THE COURT: That's 8051? 14 MR. RINALDI: 8051. 15 MR. VILLA: No objection, Your Honor. 16 THE COURT: Received. 17 MR. RINALDI: And 805 -- I'm sorry? 18 THE COURT: Received. 19 MR. RINALDI: T8052 is a memorandum 20 from Mr. Berner to Mr. Whatley to Mr. Gross and 21 Mr. Munitz dated March the 30th, 1988, in which 22 Mr. Berner recommends that certain salary or 4334 1 compensation practices be presented to Mr. Whatley 2 for approval by the compensation committee. 3 MR. VILLA: No objection. 4 THE COURT: Received. 5 MR. RINALDI: 8053 -- T8053 is a 6 memorandum from Mr. Berner to Mr. Whatley, 7 Mr. Gross, and Mr. Munitz dated March the 31st, 8 1988, again recommending various employment 9 practices or compensation practices be undertaken 10 by Mr. Whatley as a member of the compensation 11 committee. And on the last page, it is agreed to 12 by Mr. Whatley and executed by him. 13 MR. VILLA: No objection. 14 THE COURT: Received. 15 MR. RINALDI: T8054, I believe, has 16 been admitted. T8055 is a list of salary 17 adjustments that were undertaken on April the 4th, 18 1988, by Jenard Gross and authorized by Mr. Gross 19 and then pro rata bonuses which were also 20 authorized by Mr. Gross on April the 4th, 1988. 21 MR. BLANKENSTEIN: No objection, Your 22 Honor. 4335 1 MR. VILLA: No objection. 2 THE COURT: Received. 3 MR. RINALDI: T8056 is a letter from 4 Michael Crow to a Mr. George M. Smith which has 5 attached to it a list of $879,000 in bonus moneys 6 that are to be placed in an escrow account, and 7 it's dated April 5th, 1988. 8 MR. VILLA: No objection. 9 THE COURT: Received. 10 MR. RINALDI: T8057 are handwritten 11 notes that were produced by Mr. Gordon of 12 Hewitt & Associates and they do not have a date, 13 although they appear to be notes, interviews with 14 the various people at UFG and USAT, including 15 Mr. Whatley, that would have occurred in about 16 April of 1988. 17 MR. VILLA: We object to this, Your 18 Honor. We have a substantive objection as to the 19 way the document was put together, and I'm 20 prepared to argue it. I've got transcript 21 references and our objections. So, this document 22 will be objected to. 4336 1 MR. RINALDI: Well, let's skip over 2 that. We can deal with it later. 3 The next is T8059. This is a bonus 4 agreement entered into on April 25th, 1988. And 5 this is also between Mr. Gross and 6 United Financial Group in which United Financial 7 Group agrees to pay Mr. Gross a minimum bonus of 8 $76,125 as -- to pay the interest on the note. 9 MR. BLANKENSTEIN: I don't have a copy 10 of that agreement, Your Honor. 11 MR. VILLA: May I ask, Mr. Rinaldi, are 12 you just giving me the documents you have pulled 13 for today or are you going through all three books 14 of your compensation -- 15 MR. RINALDI: This was a document that 16 was signed by Mr. Whatley, executed by 17 Mr. Whatley. 18 MR. BLANKENSTEIN: Mr. Rinaldi, can I 19 see a copy of that April 25th agreement? 20 MR. RINALDI: Here. I've got it up 21 here. I was about to put it in. 22 THE COURT: The one that was objected 4337 1 to, that was T8057? 2 MR. VILLA: That's correct, Your Honor. 3 THE COURT: What happened to 8058? Is 4 that -- 5 MR. RINALDI: These are not contiguous, 6 Your Honor. I have -- 7 THE COURT: Well, they have been so 8 far. 9 MR. RINALDI: Well, I've left out a lot 10 of documents in trying to cut this down. 11 THE COURT: Okay. 12 MR. BLANKENSTEIN: Your Honor, no 13 objection to 8059. 14 THE COURT: Received. 15 MR. RINALDI: And T8060 is a bonu