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 bonus 16 agreement dated April 25th, 1988, between Mr. Crow 17 and United Financial Group in which 18 United Financial Group agrees to pay Mr. Crow a 19 bonus to offset the interest payments on a note of 20 $72,500 that he owes to UFG. And this also is 21 signed by Mr. Whatley. 22 MR. VILLA: No objection. 4338 1 THE COURT: Received. 2 MR. RINALDI: 8061 is -- 3 THE COURT: That was 8061. Right? 4 MR. RINALDI: I'm sorry. That was 5 8060. 6 THE COURT: All right. 7 MR. RINALDI: 8061 is the 8 United Financial Group, Inc. summary results of 9 executive interviews dated April 26th, 1988. This 10 is a compilation of interviews prepared by 11 Mr. Gordon of Hewitt & Associates of interviews 12 that he had with officers and senior management at 13 USAT and UFG. 14 MR. VILLA: One moment, Your Honor. No 15 objection. 16 THE COURT: Received. 17 MR. RINALDI: 8062 is United Savings 18 Association of Texas Executive Bonus Plan. And 19 this is the executive bonus plan that was -- the 20 payments which were authorized on April 4th, 1988, 21 by Mr. Jenard Gross. 22 MR. BLANKENSTEIN: No objection. 4339 1 MR. VILLA: No objection. 2 THE COURT: Received. 3 MR. RINALDI: Exhibit T8063 are a 4 series of documents that were produced by Gordon & 5 Associates, and they contain reference to several 6 cases talking about compensation and when it's 7 allowed by the FDIC. And there is also included 8 in this a Houston Chronicle article dated 9 April 29th, 1988. 10 MR. VILLA: I'd like to reserve on that 11 one, Your Honor. It's a compilation of different 12 documents. It's not self-authenticating in any 13 sense. 14 MR. RINALDI: And T8065 is a -- the 15 letter that was previously admitted, May 5th, 16 1988, that he had identified. 17 T8067 is a letter from -- to Mr. Arthur 18 Berner from Mark Gordon with a copy to 19 Mr. Whatley, and it's in reference to the advice 20 given by Hewitt & Associates to UFG and USAT. 21 MR. VILLA: Does your copy have, 22 Mr. Rinaldi, the enclosed employment contract that 4340 1 was marked by Hewitt? 2 MR. RINALDI: No, it does not. 3 MR. VILLA: No objection. 4 THE COURT: Received. 5 MR. RINALDI: And Exhibit T8068 is -- 6 are the minutes of the board of directors of 7 United Savings Association of Texas dated 8 May 10th, 1988, attached to which is an affidavit 9 of Arthur S. Berner relating to those minutes. 10 MR. VILLA: Your Honor, I object. I 11 think this affidavit is unrelated to the -- the 12 affidavit is sworn to on the 10th day of 13 June 1991, and the minutes are dated May 10, 1988 14 so -- 15 MR. RINALDI: Paragraph 12 of the 16 affidavit states "I attended the USAT board 17 meeting on May 10th, 1988. A true and correct 18 copy of the minutes of that meeting is attached as 19 Exhibit 4 to Berner's and Munitz' memorandum. At 20 that meeting the board approved the actions of the 21 USAT compensation committee which on March 30th, 22 1988, had approved" -- 4341 1 THE COURT: Slower. 2 MR. RINALDI: -- "had approved the 3 creation of a plan and trust." 4 MR. VILLA: Your Honor, I can't agree 5 to that one. It wasn't on our prior list, and I 6 haven't had an opportunity to look at it. I have 7 no objection to the minutes of May 10, 1988, 8 coming in; but I don't understand all the things 9 that are attached to it. 10 MR. RINALDI: Well, the only way one 11 can understand the minutes, because they are so 12 terse and don't relate to what -- don't explain 13 what happened is to read Mr. Berner's affidavit in 14 which Mr. Berner avows to the Court under oath 15 before a notary that, in fact, at those minutes, 16 they approved the compensation practices. 17 MR. BLANKENSTEIN: That's not accurate, 18 Mr. Rinaldi. There are attachments to the minutes 19 which include compensation minutes that were 20 ratified at that meeting. 21 MR. RINALDI: That's correct. 22 MR. VILLA: Your Honor, I can't agree 4342 1 to it at this point. 2 THE COURT: All right. 3 MR. RINALDI: But you do agree that at 4 that meeting on May the 10th, the compensation 5 practices that were recommended by Mr. Whatley on 6 March the 30th were approved or ratified by the 7 board? 8 MR. VILLA: Your Honor, at the risk of 9 being called an obstructionist, maybe we should 10 just get the documents in evidence and then we'll 11 worry about the non-documentary aspects of the 12 case. 13 MR. RINALDI: The next document is 14 T8069. This has already been admitted. 15 THE COURT: Excuse me. Does that mean 16 you're with drawing your objection to 8068? 17 MR. VILLA: No, Your Honor. I'm not 18 withdrawing my objection. 19 THE COURT: All right. I'll receive 20 8069. 21 MR. RINALDI: 80869 has been admitted. 22 So has -- wait. I take that back. 8069 has not 4343 1 been admitted. It's a May 13th, 1988, letter to 2 Mr. Jenard Gross from Mr. Neil Twomey requesting 3 that Mr. Gross, on behalf of USAT and UFG, produce 4 all employment contracts between officers and 5 employees of the association and its subsidiaries. 6 MR. VILLA: No objection. 7 MR. BLANKENSTEIN: No objection. 8 THE COURT: Received. 9 MR. RINALDI: Exhibit 8070 has already 10 been admitted, I believe. This is the letter to 11 Mr. Twomey -- from Twomey to the board of 12 directors. Exhibit 8071 is a letter from 13 Mr. Arthur Berner to Neil Twomey in which -- dated 14 May 18th, 1988, in which Mr. Berner indicates that 15 United Savings Association of Texas has not 16 entered into any employment agreements with 17 officers and employees. 18 MR. VILLA: No objection. 19 THE COURT: Received. 20 MR. RINALDI: The 8072 is a June 1st, 21 1988, letter also from Mr. Berner to Mr. Twomey 22 regarding employment contracts. 4344 1 MR. VILLA: No objection. 2 THE COURT: Received. 3 MR. RINALDI: 807 -- T8074 is the 4 funding and securing non-qualified benefits report 5 prepared for United Financial Group, Inc. on 6 June 7th, 1988, by Hewitt & Associates. And the 7 document generally discusses manners in which you 8 can secure severance benefits through trusts, 9 letters of credit, and other mechanisms. 10 MR. VILLA: Mr. Rinaldi, can you tell 11 me whether on the last page of that document 12 that's the way it was produced or whether this 13 is -- 14 MR. RINALDI: You mean the writing? 15 MR. VILLA: Yes. 16 MR. RINALDI: Yes. That's how I got 17 it. It's got the Hewitt Bates stamp. 18 MR. VILLA: No objection. 19 THE COURT: Received. 20 MR. RINALDI: T8077 is a letter to 21 Mr. Whatley dated June 28th, 1988. It's from 22 Claude L. Kordus of Hewitt & Associates and it is 4345 1 a summary report of Hewitt & Associates' 2 conclusions regarding the levels of compensation 3 that USAT and UFG had approved in March of 1988 4 for its executive staff. 5 MR. VILLA: No objection. 6 THE COURT: Received. 7 MR. RINALDI: 8078 are the minutes of 8 the special board of directors meetings at United 9 Savings Association of Texas on June 28th, 1988. 10 At this meeting, the board -- 11 MR. VILLA: The date's okay. If you 12 just tell me the dates, I'm sure I have the same 13 document and I'll be happy -- 14 MR. RINALDI: The board approves 15 compensation contracts for executives of USAT. 16 These are the -- the next is -- 17 MR. VILLA: No objection to 8078. 18 THE COURT: Received. 19 MR. RINALDI: 8079 are the minutes of 20 the special board of directors of United Financial 21 Group, Inc. dated June 28th, 1988, at which UFG 22 approves contracts for a similar group of 4346 1 executive officers of UFG. 2 MR. VILLA: No objection. 3 THE COURT: Received. 4 MR. RINALDI: And 8082 is a 5 United Financial Group employment contract dated 6 June the 30th, 1988, between Arthur Berner and 7 United Financial Group. 8 MR. VILLA: No objection. 9 THE COURT: Received. 10 MR. RINALDI: And 8083 is an agreement 11 made the 30th day of June 1988 between 12 United Financial Group and Jenard Gross. 13 MR. BLANKENSTEIN: Mr. Rinaldi, can I 14 see a copy of that? 15 MR. VILLA: You can look at mine. 16 MR. BLANKENSTEIN: I notice that this 17 is not -- this is not a copy executed by 18 Mr. Gross. 19 MR. RINALDI: I understand. I've never 20 been provided with one, but the testimony is that 21 he, in fact, entered into such a contract. 22 MR. BLANKENSTEIN: Well, the testimony 4347 1 will be whatever the testimony is. No objection. 2 MR. RINALDI: Okay. 3 THE COURT: Received. 4 MR. RINALDI: T8058 is an employment 5 contract between United Savings Association of 6 Texas and Arthur Berner. 7 MR. VILLA: Excuse me. Could you 8 repeat that number, Mr. Rinaldi? 9 MR. RINALDI: 8085. And it's dated 10 July the 1st, 1988. 11 MR. VILLA: I have no objection. 12 THE COURT: Received. 13 MR. RINALDI: 8095 has been entered. 14 T8104 -- 15 MR. VILLA: Excuse me. You just 16 skipped over a large number. Right? 17 MR. RINALDI: Yes. 18 MR. VILLA: Okay. 809 -- what is the 19 next one? 20 MR. RINALDI: T8014 is an executive 21 employment contract escrow agreement. It's dated 22 September 28th, 1988, pursuant to which 4348 1 $6.6 million is placed in escrow for the payment 2 of severance benefits to employees of USAT. 3 MR. VILLA: And the number on that one 4 was again? 5 MR. RINALDI: T8104. 6 MR. VILLA: No objection. 7 MR. RINALDI: T8106 is an October 3rd 8 letter from Barry Munitz -- I mean from 9 Jenard Gross to Barry Munitz in which he describes 10 their inability to obtain a letter of credit to 11 secure severance benefits and that in lieu of 12 that, they are depositing $6.6 million in an 13 escrow account at First City National Bank. 14 MR. VILLA: May I ask you, is that the 15 only thing that's in that exhibit, sir? 16 MR. RINALDI: No. It has two 17 attachments that indicate -- 18 MR. VILLA: I object to the 19 attachments. They are not subsequently numbered. 20 They have different Bates stamps. Perhaps when 21 you give us the description, you can describe the 22 attachments to it. If you're going to just 4349 1 describe the letter, we may be misled. 2 MR. RINALDI: Fine. The attachments 3 are a computer-generated list of benefits that are 4 being paid or are the basis in the letter. The 5 letter says that the amount $6,612,980 has been 6 placed in an escrow account and the attached 7 computer-generated draft indicates how USAT 8 arrived at that number and who -- for whose 9 benefit the bonuses and other compensation was 10 being paid. And it bears the same number. 11 MR. VILLA: Objection. It doesn't bear 12 the same number. No objection to the letter, Your 13 Honor. The attachments are with a different Bates 14 stamp. The letter has a Bates stamp MUN00040. No 15 objection to that. 16 MR. RINALDI: I was not referring to 17 the Bates stamp. If you want, I'll submit this as 18 a separate exhibit. It has the exact same number 19 in total compensation. In other words, $6,612,980 20 is being placed in escrow, and the attachment 21 simply shows how they arrived at that number to 22 place into the escrow account. If you want, we 4350 1 can treat that as -- 2 MR. VILLA: I object to the attachment, 3 Your Honor. 4 MR. RINALDI: Fine. 5 MR. VILLA: And I'll agree to -- 6 THE COURT: That is No. 810 -- 7 MR. RINALDI: Your Honor, I would -- I 8 would suggest that we renumber the attachment 9 T8106A, and we will submit them both and they can 10 object to the attachment. 11 MR. VILLA: I object to the attachment, 12 Your Honor. 13 THE COURT: All right. 8106 is 14 received. 15 MR. VILLA: And the attachment will be 16 8106A as distinguished from 8106? Is that how you 17 identified the attachment? 18 MR. RINALDI: Yes. 19 MR. VILLA: And we object to 8106A. 20 MR. RINALDI: And it's two pages. One 21 is a blowup of the other, but they are otherwise 22 identical. These were produced by 4351 1 United Financial Group. 2 The next is a letter to Mr. Arthur 3 Berner from Kirkpatrick & Lockhart and Mr. Thomas 4 and Leahey dated October 3rd, 1988, in which he 5 discusses several legal issues related to the 6 compensation issues being addressed by the board. 7 MR. EISENHART: Is that the one we saw 8 a moment ago, Your Honor? 9 MR. RINALDI: But it's addressed to him 10 in his capacity as United Savings Association of 11 Texas general counsel as to -- 12 THE COURT: What number is that? 13 MR. RINALDI: That is T8107. Your 14 Honor, this is a legal opinion that was turned 15 over to us by United Savings Association of Texas 16 which went into receivership -- I mean, which was 17 addressed to United Savings Association of Texas. 18 There is no privilege. The successor to USAT is 19 the FDIC, and there is no privilege that can be 20 asserted with respect to this document. 21 MR. EISENHART: I haven't yet claimed 22 one, Your Honor. I'm looking at the document -- 4352 1 since we hadn't been notified that they intended 2 to use it, I'm now looking at it for the first 3 time. 4 MR. RINALDI: It was produced to you, I 5 think, several months ago. 6 MR. VILLA: Your Honor, just so it's 7 clear, Mr. Rinaldi gave me about 86 documents he 8 intended to use with Mr. Whatley, and I pulled all 9 those. I think he's now going through three books 10 of several hundred documents, many of which we 11 haven't -- didn't know were going to be coming up. 12 So, we have to read them and make the judgment on 13 the spot. And that's what's taking us the extra 14 moment. There is no objection to this document. 15 MR. EISENHART: I have no objection to 16 it. 17 THE COURT: 8107 is received. 18 MR. RINALDI: 8108 is the minutes of 19 the special joint meeting of the board of 20 directors of United Financial Group dated 21 October 4th, 1988, at which the company indicates 22 that -- 4353 1 MR. VILLA: No objection. 2 THE COURT: Received. 3 MR. RINALDI: The next is a document 4 dated October 27th, 1988, to the board of 5 directors. 6 MR. VILLA: Do you have a Bates stamp? 7 MR. RINALDI: It's T8111. It's from 8 Neil Twomey to the board of directors of USAT in 9 which he indicates that the employment contracts 10 entered by USAT are unsafe and unsound. 11 MR. BLANKENSTEIN: What's the date of 12 that, Mr. Rinaldi? 13 MR. RINALDI: October 27th, 1988. 14 MR. VILLA: No objection. 15 THE COURT: And that number is? 16 MR. RINALDI: T8111. 17 THE COURT: Received. 18 MR. RINALDI: Now, the next document is 19 T8113. These are the minutes of the special 20 meeting of the board of directors of 21 United Financial Group at which Mr. Gross read a 22 letter of resignation concerning his future 4354 1 employment with United Financial Group. 2 MR. BLANKENSTEIN: No objection. 3 MR. VILLA: No objection. 4 THE COURT: Received. 5 MR. RINALDI: The next is T8114, and 6 this is a letter from Mr. Gross to Mr. Berner 7 dated October 31st, 1988, discussing -- 8 MR. VILLA: No objection. 9 MR. RINALDI: -- employment contracts. 10 THE COURT: Received. 11 MR. RINALDI: The next is minutes -- 12 it's T8117. This is the meeting of the board of 13 directors of United Financial -- United Savings 14 Association of Texas dated November the 7th, 1988. 15 MR. VILLA: No objection. 16 THE COURT: Received. 17 MR. RINALDI: And the next is a consent 18 agreement dated T8119 entered into between United 19 Savings Association of Texas and the federal -- 20 United Savings Association of Texas and the 21 Federal Home Loan Bank Board. It's dated November 22 the 7th, 1988. 4355 1 MR. VILLA: No objection. 2 THE COURT: Received. 3 MR. RINALDI: And the next is a letter 4 dated November 7th, 1988, between -- from 5 Mr. Berner to Mr. Neil Twomey regarding the 6 payment of salaries between USAT and UFG. 7 MR. VILLA: Is that T8120? 8 MR. RINALDI: Yes. 9 MR. VILLA: No objection. 10 MR. EISENHART: Your Honor, my copy of 11 that appears to have a number of attachments. I'm 12 just not clear whether the exhibit includes the 13 attachments. 14 MR. VILLA: Right. 15 MR. EISENHART: The attachments headed 16 "Description of Employment Agreement with United 17 Savings." 18 MR. VILLA: That is the attachment, 19 Mr. Rinaldi? 20 MR. RINALDI: That is correct. 21 MR. VILLA: No objection to either the 22 letter or the attachments. 4356 1 THE COURT: All right. 8120 is 2 received. 3 MR. RINALDI: And then there is the 4 minutes of the special board of directors meeting 5 of United Financial Group dated November 15th, 6 1988. 7 MR. VILLA: What's the number? 8 MR. RINALDI: It's T8124 at which they 9 discuss Mr. Jenard Gross' severance. 10 MR. VILLA: No objection. 11 THE COURT: Received. 12 MR. RINALDI: T8127, this is a letter 13 to Arthur Berner from Neil Twomey regarding 14 employment contracts and the requirements of 15 Section 563.39 of the insurance regulation. It's 16 dated November 21st, 1988. 17 MR. VILLA: No objection. 18 THE COURT: Received. 19 MR. RINALDI: T8128 is the minutes of 20 the special joint meeting of the board of 21 directors of United Financial Group and United 22 Savings Association of Texas. Again, it's in 4357 1 relation to the severance agreements entered into 2 between USAT, UFG, and Mr. Gross. 3 MR. VILLA: Did you tell us what the 4 date of that was? 5 MR. RINALDI: November 21st, 1988. 6 MR. VILLA: No objection. 7 THE COURT: Received. 8 MR. RINALDI: T8129 is the separation 9 agreement that was entered into between Mr. Gross 10 and USAT and UFG. It's dated the 22nd of 11 November 1988. 12 MR. BLANKENSTEIN: Are you offering the 13 attachment, as well? 14 MR. RINALDI: Does it include an 15 attachment? If it's contiguous, it's Bates stamp 16 Nos. UFG-K2290 through 2301. 17 MR. VILLA: No objection. 18 MR. EISENHART: Your Honor -- 19 THE COURT: Received. 20 MR. EISENHART: Since I don't have a 21 lot of these documentsdocuments in front of me 22 since they are not on his pull list, I'm counting 4358 1 on Mr. Rinaldi to tell us if there are attachments 2 to these and I would like to condition my 3 non-objection to these -- to the documents being 4 as he describes them. If there is an attachment, 5 I'm assuming he's telling us there is an 6 attachment. 7 MR. RINALDI: The next document is 8 T8137. It's dated December 8th, 1988. 9 Actually -- 10 MR. VILLA: That's already in evidence. 11 MR. RINALDI: This has already been 12 entered. The next document is T8138, and it is a 13 letter to the board of directors from Neil Twomey. 14 It's regarding the executive bonus plan and 15 indicates that it's an unsafe and unsound 16 practice. 17 MR. VILLA: Can you give me the date of 18 this letter? 19 MR. RINALDI: It's December 15th, 1988. 20 MR. VILLA: No objection. 21 THE COURT: Received. 22 MR. RINALDI: And T8150 is a letter to 4359 1 Mr. Michael Crow. It's a receiver's notice of 2 termination terminating him as an employee of 3 USAT. 4 MR. VILLA: Is the date December 30, 5 1988? 6 MR. RINALDI: Yes. 7 MR. VILLA: No objection. 8 THE COURT: State the number again, 9 please. 10 MR. RINALDI: I'm sorry. What? 11 THE COURT: What was the last number? 12 MR. RINALDI: T8150. 13 THE COURT: Received. 14 MR. RINALDI: T8151 is a receiver's 15 notice of termination dated December 30th, 1988, 16 with respect to Mr. Arthur Berner. 17 MR. VILLA: No objection. Your Honor, 18 I thought -- 19 THE COURT: Received. 20 MR. VILLA: -- the purpose of this was 21 to try to get the documentsdocuments he was going 22 to try to put in through Mr. Whatley. We've now 4360 1 gone through almost every single compensation 2 document. Was this a substitute for Mr. Whatley 3 or just putting in the whole compensation case? 4 MR. RINALDI: Well, I was going to put 5 a lot of documents in through Mr. Whatley so that 6 there would be a predicate for the other 7 witnesses. 8 MR. VILLA: No objection, Your Honor. 9 MR. RINALDI: Thank you, John. 10 The next is a memo dated May the 3rd, 11 1989, from Mister -- I'm sorry. It's T8155 from 12 Mr. Berner to Mr. Ott. 13 MR. VILLA: Your Honor, I'd like to 14 reserve on this document. The copy we have 15 doesn't have a Bates stamp number on it. 16 MR. RINALDI: It was a document 17 produced by, I believe, Mr. Berner. But we can 18 move on. 19 T8156 is a memo from Mr. Berner to the 20 board of directors regarding a table setting forth 21 the employee amounts by which UFG compromised 22 various claims made against it by former 4361 1 employees. And attached to that is an agreement 2 and release signed by Mr. Crow. And that's T8156. 3 It's August 3rd, 1989. And the next -- 4 MR. VILLA: Was the agreement and 5 release supposed to be an exhibit to this 6 document? It doesn't appear to be from the face 7 of the memo. 8 MR. RINALDI: Well, it's a contiguous 9 document that was to reflect, I believe, the 10 release that was entered into by Mr. Crow 11 compromising his claims. 12 MR. VILLA: As two separate documents, 13 Your Honor, I don't object to them. The -- 14 there's a memo dated August 3, 1989, with a 15 one-page attachment which is a table. It carries 16 Bates stamp Nos. OW035758 through 59. No 17 objection to that. Separately is a six-page 18 agreement and release of Mr. Crow carrying Bates 19 stamp Nos. OW035760 through 66. No objection to 20 that. 21 THE COURT: All right. The entire 22 document is received as 8156. 4362 1 MR. RINALDI: T8157 is minutes of the 2 compensation committee of United Financial Group 3 dated October the 13th, 1988. Mr. Whatley acting 4 as chairman at which Mr. Berner approved a bonus 5 of $143,500. 6 MR. VILLA: No objection. 7 THE COURT: Received. 8 MR. RINALDI: T8158 is the minutes of 9 the compensation committee of United Financial 10 Group dated November 27th, 1989, at which 11 Mr. Whatley is present and -- 12 MR. VILLA: No objection. 13 MR. RINALDI: A bonus in the amount of 14 $98,000 is approved for Dr. Munitz. 15 THE COURT: Received. 16 MR. VILLA: Objection. I think he 17 misstated it. 18 MR. RINALDI: I'm sorry. I may have -- 19 I think -- 20 MR. VILLA: His description of the 21 document is not accurate. If he just gives me the 22 dates, I'll be happy to agree to them. The -- no 4363 1 objection to the November 27, 1989, minutes. 2 THE COURT: That's T8158? 3 MR. VILLA: Right. It was a settlement 4 of a claim. It wasn't a bonus. 5 MR. RINALDI: Okay. It was a 6 98,000-dollar payment. We would agree on that; is 7 that correct. 8 MR. VILLA: We'll agree to agree that 9 the document's in evidence. 10 MR. RINALDI: Okay. I will try to move 11 on with this examination if I can figure out -- 12 THE COURT: Well, you have about 35 13 minutes according to the schedule we discussed 14 this morning. 15 MR. RINALDI: Well, can -- well, 16 this -- 17 (11:34 a.m.) 18 Q. (BY MR. RINALDI) Mr. Whatley, I'm 19 handing you copies of what's been previously 20 marked as T8040 and T8041. And the first is a -- 21 that is, 8040 is a bonus agreement between 22 Mr. Jenard Gross and UFG. 4364 1 Do you recall that this bonus agreement 2 was approved by the board of UFG on or about 3 February 11th, 1988? 4 A. I don't recall that, but I'll accept it 5 if the records so reflect. 6 Q. And do you recall what the purpose of 7 this bonus agreement that was being entered with 8 Mr. Gross was? 9 A. I think the agreement says it was to 10 make payments with respect to a loan that had been 11 made to Mr. Gross. 12 Q. And that loan was for the amount of 13 $761,255; is that correct? 14 A. To buy common stock of the company, 15 that's correct. 16 Q. Yeah. And pursuant to the agreement, 17 if you take a look at Paragraph 1, the 18 agreement -- pursuant to the agreement, UFG agrees 19 to pay Mr. Gross a bonus of $76,000 -- $76,125 20 each year through January 1st, 1993, as a 21 mechanism for paying off that note obligation; is 22 that correct, sir? 4365 1 A. I think that was for payment of 2 interest, was it not? 3 Q. Yes. 4 A. Okay. 5 Q. And this was entered into on February 6 the 11th, 1988, at a point in time when UFG had 7 negative equity; isn't that correct, sir? 8 A. If that's what the records reflect, 9 I'll accept that. 10 Q. Okay. And a similar bonus agreement 11 was entered into which is reflected in 8041, and 12 that is the bonus agreement of Mr. Crow that also 13 would pay the interest on a loan which Mr. Crow 14 had with UFG to purchase stock? 15 A. Correct. 16 Q. And the face amount of the loan of 17 Mr. Crow was $72,500; is that correct? 18 A. Correct. 19 Q. And this also was entered into at a 20 point in time when UFG had negative equity; isn't 21 that correct? 22 A. My answer is the same as the previous 4366 1 answer. 2 Q. Okay. Now, would you take a look at 3 what's been marked as 8050? These are the minutes 4 of the board of directors meeting or the 5 compensation committee of March the 30th, 1988. 6 And would you read those to yourself for a second, 7 sir? 8 Have you had a chance to look at that, 9 sir? 10 A. Okay. 11 Q. Can you tell by looking at that 12 document what occurred at the meeting? 13 A. Yeah. 14 Q. Okay. It says "Mr. Berner reviewed in 15 detail the current status of employment contracts 16 and a proposed resolution of the problem." 17 Do you see that? 18 A. I do. 19 Q. What's that making reference to, sir? 20 A. I don't have the foggiest notion. 21 Q. Okay. And then it says "He presented a 22 proposal which was discussed with and approved by 4367 1 the committee." 2 Do you know what that proposal was? 3 A. No. 4 Q. Okay. You were the committee at this 5 point in time, were you not? 6 A. I don't know. I'll accept that if 7 that's what the records reflect. 8 Q. Okay. Well, earlier, we established 9 that the other members of the committee had 10 resigned in February and early March. So, by the 11 end of March, you were the sole member of the 12 compensation committee; is that correct? 13 A. I don't know; but if you say so, I'll 14 agree to it. 15 Q. Now, it says "The committee requested 16 that Dr. Munitz retain a compensation specialist 17 to pass on the fairness of the proposal." 18 Does that refresh your recollection as 19 to what the proposal was? 20 A. No. 21 Q. "Mr. Whatley noted, however, that the 22 company should proceed as quickly as possible on 4368 1 the proposal without waiting for the report of the 2 compensation specialist." 3 Does that refresh your recollection as 4 to what this is referring to? 5 A. Well, I believe that there had been 6 lengthy conversations with the specialist prior to 7 the issuance of their report and it was pretty 8 clear that this action, whatever it is -- and I 9 don't remember the specifics of it -- would be 10 affirmed by the outside specialist. 11 Q. Okay. But at this point in time, 12 you're talking about hiring an outside specialist, 13 are you not? 14 A. But prior to that, we had a lot of 15 conversations with them, sir. 16 Q. When you say you had a conversation, it 17 says here "The committee requested that Dr. Munitz 18 retain a compensation specialist." 19 Are you testifying that prior to 20 March 30th, the specialist had given some opinion 21 to the board? 22 A. I don't recall, Mr. Rinaldi. But I 4369 1 will tell you that subsequently, all of the 2 compensation practices of the company -- prior, 3 current, and future -- were approved and 4 recommended by the outside specialist. 5 So, there's no sinister deal on any 6 compensation issue in this company and I do not 7 appreciate your insinuating that that's the case 8 because that is not true. 9 Q. Sir, I'm not insinuating that there was 10 anything sinister with respect to what was done. 11 What I'm trying to establish is that at the time 12 the compensation actions were taken, had you 13 retained a compensation specialist to give you an 14 opinion? 15 A. With the passing of ten years, I'm 16 sorry, Mr. Rinaldi. I can't put all of these 17 things in date order. 18 Q. Okay. Mr. Whatley, I'm not trying to 19 challenge you with anything improper. What I am 20 trying to do is establish for the Court what the 21 sequence of events was. And these are activities 22 that were not undertaken by you. They were 4370 1 undertaken by a full board of directors. You were 2 one outside director. 3 MR. VILLA: Objection, Your Honor. 4 Colloquies are unnecessary. Object to this. Ask 5 some questions. 6 MR. RINALDI: I would ask the witness 7 to take a look at what's been previously marked as 8 8052 and 8053. T8052 and T8053. 9 Q. (BY MR. RINALDI) Now, T8052 is a 10 memorandum which Mr. Berner transmitted to a James 11 Whatley, a Jenard Gross, and to a Barry Munitz on 12 March the 30th, 1988. 13 Do you see that? 14 A. Yes. 15 Q. And in the first sentence, it says "The 16 following are notes and suggestions to be 17 discussed with Jim Whatley at the compensation 18 committee meeting and reflect meetings of 19 March 28th and 29th, 1988, among Messrs. Gross, 20 Munitz, and Berner." 21 Does it appear that Messrs. Gross, 22 Munitz, and Berner had met and formulated some 4371 1 suggestions to present to you as the compensation 2 committee board member? 3 A. I have no idea. 4 Q. Now, in the second full paragraph 5 that's numbered, it says "We will change current 6 salaries to reflect market value of employee. 7 This would be the 1987 salary plus the bonus 8 received in '88 for 1987 work." 9 Does it a there that they were 10 suggesting to you in this memorandum that the 11 salaries of employees and executives of -- or 12 certain employees and executives of USAT be 13 changed and increased to reflect the 1987 salary 14 level plus the bonus that had been paid in '88? 15 MR. VILLA: Objection. Leading. 16 THE COURT: Denied. 17 A. This is some kind of memorandum of 18 things to be discussed. There is no indication 19 here they were ever discussed. I don't know 20 whether it was discussed or not. 21 Q. (BY MR. RINALDI) Okay. I'm asking 22 you: Does it appear that they are recommending to 4372 1 you that salaries be modified so that the new 2 salaries and levels be set at the 1987 salary 3 level plus the bonus received in '88? 4 A. And my answer is the same. I don't 5 know whether these were discussed or not. 6 Q. Now, in Paragraph 4, it says "We will 7 provide a one-time 1988 bonus to certain 8 individuals which would reflect recognition that 9 bonuses will not be available in the future even." 10 Do you see that? 11 MR. VILLA: I believe it says "probably 12 not be available in the future"; is that correct? 13 Q. (BY MR. RINALDI) And then below that, 14 it says "The special 1988 bonus would be equal to 15 the bonus received in 1988." 16 Does it appear that they are 17 recommending that a special bonus be paid in 1988 18 comparable to the one that had already been paid 19 that we discussed earlier at the beginning of 20 1988? 21 A. My answer is the same. This is a 22 memorandum. I don't know whether these matters 4373 1 were discussed or not. 2 Q. Okay. And finally, in Paragraph 6, it 3 says "We will provide for amended employment 4 contracts." 5 Does it appear that they are suggesting 6 that USAT should enter into or UFG should enter 7 into amended employment contracts? 8 A. Berner is putting things down on paper 9 in a memorandum. I don't know where that came 10 from. 11 Q. Okay. Then turn your attention then to 12 T8053, which is the next memorandum. And this -- 13 THE COURT: Do we have a copy of that? 14 MR. RINALDI: Yes. Didn't I pass it 15 up? I'm sorry. I apologize. I thought I had 16 passed it up. 17 Q. (BY MR. RINALDI) Now, perhaps -- now, 18 this memorandum is dated the following day. And 19 again, it's to -- from Arthur Berner to James 20 Whatley and Jenard Gross and Barry Munitz and it 21 appears to have a similar number of numbered 22 paragraphs. And it says "The following are notes 4374 1 and suggestions to be discussed with Jim Whatley 2 at the compensation committee on March 30th, 3 1988." 4 Do you see that? 5 A. I see that. 6 Q. Okay. And if you turn back and take a 7 look at the document I previously showed you which 8 was the compensation committee minutes of 9 March 30th, 1988, it, in fact, appears that on 10 March 30th, 1988, previous exhibit, that there was 11 a meeting of the board of directors of -- I mean, 12 meeting of the compensation committee; is that 13 correct? 14 A. Correct. 15 Q. And can you tell by looking at that 16 document who was present at that meeting? It 17 indicates, does it not, that Mr. Berner, 18 Mr. Gross, Mr. Munitz, and yourself were present? 19 A. Exactly. 20 Q. Okay. And then if we turn to -- back 21 to T8053, at the end of T8053, there is a 22 signature. It says "Agreed to by the compensation 4375 1 committee," and it's signed -- there is a written 2 signature over your name. 3 Does that appear to be your signature? 4 A. It is. 5 Q. Does it appear from looking at this 6 document that a meeting was held of the 7 compensation committee on March the 30th, 1988 -- 8 A. Yes. 9 Q. -- at which Mr. Gross, Munitz, and 10 Berner discussed the matters that are identified 11 in Exhibit T8053? 12 A. Well, the minutes don't so reflect; but 13 I'll accept that. 14 Q. Well -- but this does purport to be 15 actions that -- when I say "this," I mean T8053 -- 16 purports to be actions taken by the compensation 17 committee and it's dated March 31st, 1988, 18 following a meeting at which suggestions were 19 presented to you. 20 Do you see that? 21 A. Yeah. I also see that a compensation 22 study -- and I put a note on here -- will be 4376 1 conducted by outside independent consultants to 2 determine that United is in line with peer groups. 3 Q. And that was your idea, wasn't it? 4 A. I don't know whether -- 5 Q. Because you wanted to be sure that 6 whatever you were doing was appropriate. Right? 7 A. Well, of course. 8 MR. VILLA: Your Honor, I think he 9 interrupted his answer. 10 A. I don't know that it was my sole idea, 11 but I certainly concurred in that. 12 Q. (BY MR. RINALDI) Okay. Well, now, 13 directing your attention to Paragraph 2 of 14 Exhibit 8053, do you see that? 15 A. Uh-huh. 16 Q. It says "We will change current 17 salaries effective January 1st, 1988, to reflect 18 the true market value of certain employees equal 19 to the '87 salary plus bonus received in '88 for 20 1987 work." 21 Do you see that? 22 A. I do. 4377 1 Q. Does it appear that at this meeting of 2 the compensation committee, it was recommended to 3 you by Messrs. Gross, Munitz, and Berner that the 4 current salary levels be changed to reflect the 5 1987 salary level plus the 1987 bonus that was 6 received in 1988? 7 A. The memorandum was written by Berner 8 and addressed to Gross, Whatley, and Munitz. 9 Q. Yes. 10 THE COURT: I don't understand. You're 11 saying these are minutes of the compensation 12 committee and, yet, it's dated the 31st. And then 13 it says "are notes and suggestions to be discussed 14 with James -- Jim Whatley at the compensation 15 meetings on March 30th." It seems to me there is 16 some discrepancy in the dates there. 17 MR. RINALDI: Well, I agree with you, 18 Your Honor. And then the following page, it 19 appears that Mr. Whatley has signed off and it 20 indicates he agreed to by the compensation 21 committee. 22 So, my question is: Were these matters 4378 1 that were discussed at the compensation committee 2 on March the 30th and then did -- it would appear 3 that the following day, on March the 31st, he 4 signed off on this. But I'm just trying to figure 5 out what they are, too, Your Honor. 6 A. Well, I am here to tell you that any 7 and all of these matters were contingent upon 8 subsequent studies by outside consultants to be 9 certain that United was in line with peer group, 10 period. 11 Q. (BY MR. RINALDI) Was it your 12 understanding, then, that there would be no salary 13 increases until after the Hewitt & Associates -- 14 A. Not necessarily, but if they -- if 15 Hewitt & Associates and others said we were not in 16 line, then there would be appropriate adjustments 17 made. 18 Q. Was it your understanding, sir, that 19 there would be no salary adjustments until -- 20 A. No, that was not my understanding. 21 Q. Was it your understanding, sir, that 22 there would be no salary adjustments made by USAT 4379 1 and UFG until the board of directors of UFG and 2 USAT approved the salary adjustments? 3 A. That was common practice, and I assume 4 that would be the case. 5 Q. And you did not intend by signing this 6 document to approve the payment of salary 7 adjustments? 8 A. Of course not. 9 Q. These were only recommendations that 10 you made to the board? 11 A. That is correct. 12 Q. Okay. And as we go further down on the 13 letter, it indicates that -- in Paragraph 5 -- a 14 special bonus is going to be -- is discussed. 15 "And the special '88 bonus would be equal to the 16 bonus received for 1987 in 1988. This special 17 bonus would be paid 25 percent currently and 18 75 percent on January 1st, 1989, and will be 19 placed in trust for an independent trustee." 20 Do you see that? 21 A. I sure do. 22 Q. So that in Paragraph 2, they were going 4380 1 to take a bonus and increase the salary by the 2 amount of the 1988 bonus; is that correct? 3 A. You want to read the rest of that? 4 "Such unpaid bonus will be forfeited if the 5 employee leaves USAT prior to January 1, 1989." 6 That makes the paragraph make a little more sense. 7 Q. Okay. And bonuses were normally paid 8 at the end of the year anyway, weren't they? 9 A. Not necessarily, but I would -- 10 Q. Well, weren't the '87 bonuses -- 11 A. I don't know when they were paid. 12 Q. I'm sorry. We just went through -- 13 A. The records will reflect when they were 14 paid, and I'll accept that. 15 Q. Okay. So, in Paragraph 2, a bonus is 16 going to be -- the salary is going to be increased 17 by the size of the 1987 bonus paid in 1988. 18 Do you see that? 19 A. Mr. Rinaldi, you seem to be implying 20 that these people were overly compensated, and I 21 hate -- I have a different opinion of that. 22 Q. I know you have a different opinion of 4381 1 it and I'm not -- I'm simply trying to get the 2 facts out. And I'm not trying to badger you. I 3 just want to see if -- 4 MR. KEETON: Your Honor, if Mr. Rinaldi 5 wants to have a monologue or a soliloquy, let's 6 let him go outside. Just ask questions. 7 MR. RINALDI: Well, okay. If the 8 witness will just answer the questions, it would 9 be fine. 10 MR. KEETON: Your Honor, I object to 11 counsel's remark. The witness -- 12 THE COURT: All right. Let's have a 13 question here. 14 MR. RINALDI: Fine. 15 Q. (BY MR. RINALDI) And then at 16 Paragraph 6, it indicates "We will provide for 17 amended employment contracts (along the lines of 18 the draft attached) for those with contracts now 19 plus new contracts for Jenard Gross and Barry 20 Munitz." 21 Do you see that? It's at Paragraph 6. 22 A. I see that. 4382 1 Q. Okay. "The contracts will clarify the 2 board's previous intent that only a change of 3 control in a corporate sense, e.g., controlling 4 shareholders selling their stock" -- and it goes 5 on. 6 Now, when you -- you executed this 7 document -- and then when you executed this 8 document, you weren't approving the entry into 9 these employment contracts at this time, were you? 10 A. That is correct. 11 Q. Okay. When you executed this document, 12 were you approving the payment of the special 13 bonus? 14 A. No. 15 Q. Now, do you recall that subsequently, 16 as a consequence of this special bonus, 75 percent 17 of the bonus was placed into an escrow fund? 18 A. I recall that. 19 Q. Okay. And were you at this point 20 approving the payment of that 75 percent into the 21 escrow fund without the board of directors 22 approving that? 4383 1 A. No. 2 Q. Now, did it come to your attention, 3 sir, that within a period of less than a week, 4 these salary adjustments which are discussed in 5 Paragraph 2 and the special bonus which is 6 discussed in Paragraph 5 were actually implemented 7 by USAT? 8 A. I don't know. I'll accept that if 9 that's what the records reflect. 10 Q. Well, allow me to hand you a copy of 11 what's previously been introduced -- 12 A. You don't need to do that. If that's 13 what the records reflect, I'll accept it. 14 Q. Well, I just would like to show this to 15 you and just ask you. 16 Now, these purport to be salary 17 adjustments. And you'll see that -- 18 MR. VILLA: Excuse me, Mr. Rinaldi. 19 Can you give us the exhibit number? 20 MR. RINALDI: I'm sorry. It's T8055. 21 MR. VILLA: Thank you. 22 Q. (BY MR. RINALDI) And you'll see that 4384 1 in the first column, it talks about the original 2 salary. You see that? 3 A. Yes. 4 Q. And then it adds in the '87 bonus. 5 Then in the third column, it comes up with a new 6 base. 7 Do you see that? 8 A. I see that. 9 Q. And if you turn to the second page, it 10 has been executed, signed by -- do you recognize 11 that to be the signature of Jenard Gross? 12 A. No, I don't. 13 Q. Okay. And it's dated 4-5-88. Do you 14 see that? 15 A. Right. 16 Q. And then on the next -- 17 A. 4-4, mine says. Oh, his signature, 18 yeah. 4-5. 19 Q. Yes. And then the next page, it 20 indicates that the pro rata bonuses and -- for 21 Mr. Gross, it says he received a 1987 bonus of 22 $167,000. We've already seen that. And it 4385 1 indicates that -- well, his bonus, I think we 2 talked about, was slightly larger because there 3 was also an interest element that was paid in it. 4 But it indicates in the second column 25 percent 5 of the '87 bonus. 6 MR. VILLA: Excuse me. Which page are 7 you on, sir? 8 MR. RINALDI: I'm on Page UFG-D1982. 9 It's the pro rata -- 10 MR. VILLA: Thank you. 11 MR. RINALDI: -- bonuses. 12 Q. (BY MR. RINALDI) And if you turn to 13 the next page, it indicates that that, also, was 14 approved on 4-5-88. Do you see that? 15 A. Okay. 16 Q. Now, between March the 30th, 1988, when 17 the board of directors recommended this -- I mean 18 the compensation committee made its recommendation 19 which is reflected in the minutes that I've shown 20 you previously which are T8050 and the memorandum 21 which is dated March 31st, 1988, which is T8053, 22 did the board of directors, to your knowledge, 4386 1 approve the salary adjustments that are set out in 2 T8055? 3 A. I have no recollection. I think you'd 4 have to look at the minutes to determine that. 5 Q. Would you take a look at this document? 6 This has not been admitted. There is an 7 objection, at least, to the attachment to the 8 letter. But I'd like you to take a look at the 9 minutes of the board of directors by United 10 Savings Association dated May the 10th, 1988. 11 MR. VILLA: Can you give us the -- 12 MR. RINALDI: It's T8068. And I would 13 move to admit the minutes, which are the first 14 three pages of this, Your Honor. I can later 15 admit the remainder of it. But Mister -- 16 MR. VILLA: Just a minute. No 17 objection to the first three pages of 8068. 18 THE COURT: 8068, the three pages, are 19 received and the attached affidavit is not 20 received and that will have to be -- if you're 21 going to offer that at some other time, we'll have 22 to make it another exhibit. 4387 1 MR. RINALDI: All right. 2 Q. (BY MR. RINALDI) Now, directing your 3 attention to the second paragraph of the minutes, 4 it stated "Mr. Gross stated that the first item of 5 business was the approval of the board of 6 directors minutes dated February the 11th, 1988, 7 and the minutes of the special board of directors 8 meeting dated March the 30th, 1988. Such minutes 9 were unanimously approved." 10 Do you see that? 11 A. I do. 12 Q. Was it the practice of USAT to approve 13 the minutes of the previous board meeting as a 14 matter of business at the next subsequent board 15 meeting? 16 A. I believe it was. 17 Q. Okay. So, in looking at this document, 18 can you tell when the last previous board meeting 19 of the board of USAT was? 20 A. No. 21 Q. Is it fair to assume, sir, that the -- 22 that the last board meetings of USAT would have 4388 1 been on February 11th, 1988, and March 30th, 1988? 2 That's the special board of directors meetings 3 that we talked about when the regulators were 4 present? 5 A. I don't know that to be true. 6 Q. Do you have any reason to believe that 7 there was another board of directors meeting that 8 intervened between the May 10th meeting -- 9 A. No reason to believe. 10 Q. Okay. And it was the practice of the 11 board of directors of USAT at the next meeting to 12 approve the prior board's minutes; is that 13 correct? 14 A. I think that was normally the case. I 15 don't know that it was a hundred percent the case 16 but -- 17 Q. So, is it fair to assume, sir, that the 18 last board meeting of the full board would have 19 been on February 11th of USAT? 20 A. No. 21 MR. VILLA: Objection. It says 22 "special board of directors meeting dated 4389 1 March 30th." 2 Q. (BY MR. RINALDI) That the last board 3 meeting would have been at the special board of 4 directors meeting on March 30th that we showed 5 you? 6 A. I can speculate that to be the case, 7 but I don't know that for a fact. 8 Q. All right. Then would you take a look 9 at Mr. Berner's affidavit? 10 A. I've never seen that affidavit. I 11 don't know what it's all about. 12 Q. Okay. And take a look at the last 13 paragraph. Now, who was Mr. Berner? 14 MR. VILLA: Your Honor, we'd object to 15 this. I think it's inappropriate, unless this 16 document is in evidence, to have the witness 17 reading from it. 18 THE COURT: I'll sustain the objection. 19 MR. STEARNS: May I ask, Your Honor, is 20 there a question as to the authenticity of this 21 document? Is that the objection to the Berner 22 declaration? Because it was turned over to us 4390 1 during the production by Mr. Berner. And although 2 we can have Mr. Berner come on and authenticate 3 his signature, it doesn't seem to me to be 4 necessary to do so if there is not an objection as 5 to its authenticity. And it would allow pertinent 6 questions to be asked of this witness since 7 Mr. Berner isn't here today. 8 THE COURT: Well, it's an affidavit of 9 Mr. Berner. If there is an objection to it, I 10 can't see how this witness can authenticate it. 11 MR. RINALDI: I'm not asking its -- 12 MR. STEARNS: That's what I was asking, 13 Your Honor, whether or not the objection was as to 14 its authenticity, as to whether or not that is 15 Mr. Berner's declaration. 16 MR. VILLA: No, Your Honor, no. That 17 appears to be his signature. 18 MR. STEARNS: Then I would suggest, 19 Your Honor, if it is authentic and it is relevant, 20 it should be a document admitted in the case. And 21 we know that this witness has not seen it before, 22 but that still would allow questions to be asked 4391 1 of the witness concerning its contents. 2 THE COURT: What's the objection? 3 MR. VILLA: No, Your Honor. That's 4 fine. It can -- I have an objection to it in 5 connection with this document. I think at the 6 time, I would be prepared to agree that the 7 document could be entered into evidence. 8 THE COURT: All right. What's the 9 number? 10 MR. STEARNS: We can give it a separate 11 number if that makes it clearer in the record. 12 MR. RINALDI: Why don't we just call it 13 an A document and call it T8068A? 14 THE COURT: All right. 15 MR. STEARNS: Thank you, Your Honor. 16 THE COURT: T8068A is received. 17 Q. (BY MR. RINALDI) Now, directing your 18 attention to Paragraph 12 of Mr. Berner's 19 declaration, sir -- do you see that? It says "I 20 attended a USAT board meeting on May 10th, 1988. 21 A true and correct copy of the minutes of that 22 meeting is attached as Exhibit 4 to Berner and 4392 1 Munitz's memorandum." 2 And then it says "At that meeting, the 3 board approved the actions of the USAT 4 compensation committee which on March the 30th, 5 1988, had approved the creation of the plan and 6 trust." 7 Do you see that? 8 A. Sure. 9 Q. Okay. Now, does that refresh your 10 recollection that the actions of the compensation 11 committee which took place on March the 30th, 12 1988, were approved by the board of directors of 13 USAT on May the 10th, 1988? 14 MR. VILLA: Objection. I don't think 15 that was the question he asked him. He spent ten 16 minutes asking whether there was any intervening 17 meetings between March 30 and May 10. 18 Q. (BY MR. RINALDI) Does that refresh 19 your recollection, sir, or does that indicate that 20 the March 30th, 1988, compensation committee -- 21 actions of the USAT compensation committee on 22 March 30th, 1988, were approved by the USAT board 4393 1 on May 10th, 1988? 2 A. It would seem to be the case. 3 Q. Now, after you recommended to the board 4 that they implement the salary adjustments that 5 are reflected in 8055 and the pro rata bonuses 6 that are reflected in 8055, do you know if any 7 action was taken by the -- by USAT to implement 8 those bonuses and salary increases? 9 A. I do not. 10 Q. Okay. Now, I'm handing you what's 11 numbered T8062. And this is the United Savings 12 Association executive bonus plan? 13 THE COURT: Mr. Rinaldi, we're five 14 minutes past 12:00. How much more time are you 15 going to take with this witness? 16 MR. RINALDI: I have a fair amount of 17 questions left, Your Honor. I mean, I think it 18 will take an hour to finish examining the witness. 19 MR. VILLA: Your Honor, I was asked to 20 stipulate to all their evidence in the case so 21 they could finish by 12:00 o'clock and I would 22 have an opportunity to cross examine this witness 4394 1 for two hours, given the fact that he's had four. 2 And I object. If they can't plan their case, then 3 they ought to be able to put in the evidence 4 through other witnesses. So, I object to the 5 continued examination. There was an agreement on 6 the record. He was to finish at 12:00 o'clock. 7 And in order to accommodate that, after we reached 8 the agreement, I stipulated to the entry of 9 probably 120 exhibits that he couldn't even have 10 read to this witness in the intervening hour. And 11 now he tells me he wants another hour. 12 I object, Your Honor. 13 MR. RINALDI: Your Honor, none of this 14 is a situation of the OTS's making. All of this 15 arose from the fact that the previous witness went 16 much longer than anyone could ever possibly have 17 thought. I, in good faith, asked Mr. Whatley if 18 he would come here on Monday afternoon, thinking 19 that Mister -- Ms. Sandy Orr would be off the 20 stand on Monday and that Tuesday morning, we could 21 start with him early. And, of course, my plans 22 failed. I have made every good faith effort to 4395 1 try to get through these documents. But I have to 2 say there just is a lot of stuff to go through. 3 There was a lot of compensation practices taking 4 place. You know, I will try to finish this up. I 5 have asked Mr. Whatley if there is any mechanism 6 by which we could bring him back next week and 7 Mr. Villa then could finish his examination of 8 him. You know, I didn't want it to go this way. 9 I have made every effort to try to accommodate the 10 witness and, toward that end, have agreed with 11 Mr. Villa that we try to put the documents in. If 12 Mr. Villa wants to withdraw the documents, I will 13 agree to that process. 14 MR. VILLA: Agreed with Mr. Villa? He 15 asked me during the break in order to get done by 16 noon, and I said I'll be happy to do it to 17 accommodate you. Your Honor, it is commonplace in 18 litigation for a court to put a limit on a party's 19 ability to keep a witness. Many judges keep time 20 clocks like chest clocks. In this case, he's 21 twice agreed on the record he'd be finished at 22 noon so that I would not be put in a situation 4396 1 again where I couldn't cross examine their 2 witness. I ask the Court to simply abide by -- 3 make him abide by his agreements on the record. 4 MR. RINALDI: I did not agree to 5 anything. I said I would try, Mr. Villa, to 6 complete the examination of this witness. And the 7 suggestion that we made was -- and you agreed to 8 it -- that perhaps if we didn't have been to 9 authenticate all the documents, it would 10 accelerate the process. But to suggest that I 11 somehow am dragging my feet -- 12 MR. STEARNS: May we have just a 13 moment, Your Honor? 14 THE COURT: Yes. 15 16 (Discussion off the record.) 17 18 MR. STEARNS: Your Honor, a suggestion 19 that we concentrate the direct examination on just 20 one thing that hasn't been covered by the witness 21 in ten minutes and then be done with the direct 22 examination, if that's acceptable to the Court and 4397 1 Mr. Villa and to the witness. 2 MR. VILLA: No objection, Your Honor. 3 THE COURT: All right. 4 MR. STEARNS: Thank you. 5 Q. (BY MR. RINALDI) Do you have 8039, 6 sir? 7 A. 8039? 8 Q. Yes. Now, sir, I'm -- these are the 9 minutes of the -- I mean of the full board dated 10 February the 11th, 1988. 11 Do you see that? 12 A. Yes. 13 Q. And directing your attention to Page 27 14 of that document. Now, the first full paragraph 15 says "Mr. Berner discussed in detail the views of 16 the compensation committee concerning employment 17 contracts to be entered into between the company 18 and certain executive officers." And by "the 19 company," it's referring to USAT because this, 20 after all, is the board of USAT dated 21 February 11th, 1988. 22 Do you see that? 4398 1 A. Yes. 2 Q. And it was noted that these contracts 3 were identical to contracts entered into by UFGI 4 and would be effective if UFGI could not perform 5 under such contracts. 6 Do you see that? 7 A. I do. 8 MR. VILLA: I believe it says "would 9 only be effective." 10 Q. (BY MR. RINALDI) Now, did the board 11 then consider entering into those contracts and to 12 approve them? Can you tell me? 13 A. You mean the USAT contracts? 14 Q. Yes. 15 A. Of course they did. 16 Q. Okay. And it says below, "Now, 17 therefore, it is hereby resolved that the board of 18 directors, upon the recommendation of the 19 compensation committee, approves the entering into 20 of employment contracts." 21 And as a result of that, was an 22 employment contract entered into with various 4399 1 individuals who are listed in the -- by the 2 compensation committee in the minutes of their 3 meeting which is T8038? 4 A. I believe that to be true. 5 Q. And would you take a look at T8038? 6 That will be on the front of this document. Can 7 you tell by that which individuals entered into 8 contracts with USAT? 9 A. No, I cannot. 10 Q. Are those the individuals that are 11 listed there in the middle of the page? 12 A. I assume that to be true. 13 Q. Okay. And would you take a look at 14 T8043? I believe this has already been passed up 15 to you. 16 MR. RINALDI: Do you have T8043, Your 17 Honor? 18 THE COURT: Yes. 19 Q. (BY MR. RINALDI) Oh, here it is. I'm 20 sorry. Would you take a look at that document? 21 A. Okay. 22 Q. Okay. And does that appear to be a 4400 1 contract between Mr. Arthur Berner and USAT? 2 A. We've already covered this, but it 3 does. 4 Q. And that was entered into on February 5 the 11th, 1988, by Mr. Berner. 6 Do you see that? 7 A. That would appear to be the case. 8 Q. Okay. Now, I'm handing you a copy of a 9 letter from Mr. Neil Twomey to the board -- to 10 Jenard Gross dated March the 13th, 1988. 11 MR. VILLA: What's the exhibit number? 12 MR. RINALDI: It's Exhibit No. T8069. 13 MR. BLANKENSTEIN: Did you say March 14 the 13th or May the 13th? 15 MR. RINALDI: May the 13th. I'm sorry. 16 Q. (BY MR. RINALDI) Now, it says "In 17 order to complete our records, please submit a 18 copy of all employment contracts between officers 19 or employees and the association or any of its 20 subsidiaries." 21 Do you see that? 22 A. I do. 4401 1 Q. And Mr. Twomey was the supervisory 2 agent for United Savings Association of Texas; is 3 that correct? 4 A. Correct. 5 Q. And he was requesting that all 6 compensation contracts between employees of USAT 7 and the employees be turned over to the Federal 8 Home Loan Bank of Dallas. 9 Do you see that? 10 A. Yes. 11 Q. Okay. Do you know whether USAT 12 complied with that request? 13 A. I do not know. 14 Q. Would you take a look at what's been 15 previously marked as T8071? And this is a letter 16 from Mr. Berner back to Mr. Twomey. And in the 17 letter, Mr. Berner makes reference to receiving a 18 letter dated May 13th, 1988, concerning employment 19 contracts between the association and any of its 20 subsidiaries or officers or employees thereof. 21 Do you see that? 22 A. Yes. 4402 1 Q. And then in the next sentence, "Please 2 be advised that the association has not entered 3 into employment agreements with such officers or 4 employees." 5 Do you see that? 6 A. I do. 7 Q. Now, did you consider Mr. Berner to be 8 either an officer or an employee of the 9 association, United Savings Association of Texas? 10 A. Both. 11 Q. And had Mr. Berner entered into a 12 contract with United Savings Association of Texas 13 on February the 11th, 1988? 14 A. Had he? Are you asking me? 15 Q. Yes. 16 A. There is a copy of an employment 17 contract by that date here. 18 Q. Okay. And does it appear to have been 19 executed by Mister -- Mr. Berner? 20 A. I believe so, yes. Would you want to 21 direct this question to Mr. Berner since I'm not 22 involved in any way? 4403 1 Q. I understand that. My only question to 2 you as a member of the compensation committee is: 3 Does it appear that Mr. Berner failed to disclose 4 the February 11th, 1988, contracts to Mr. Twomey? 5 A. I can't answer that. I think you'll 6 have to ask him that question. 7 Q. Well, does he disclose the fact that on 8 February 11th, 1988, contracts were entered into 9 by USAT with executive officers of USAT? 10 A. I don't know from the dates of these 11 things. I can't answer that question. I'm sorry. 12 Q. Well, I'm just -- and just so I 13 understand your testimony, you do agree that on 14 February 11th, 1988, the compensation committee of 15 USAT, of which you were a member, recommended that 16 USAT enter into compensation -- into employment 17 contracts with various executives, including 18 Mr. Berner? 19 A. I have testified to that previously, 20 and I agree. 21 Q. Okay. And subsequent to that, the 22 board acted on your recommendation and approved 4404 1 the entry into those contracts; is that correct? 2 A. That is correct. 3 Q. And subsequent to that, contracts were 4 entered into with Mr. Berner at least. I've 5 showed you Mr. Berner. I can show you Mr. Crow's. 6 But it's your understanding, is it not, 7 that contracts were entered into with a number of 8 executives of USAT; is that correct? 9 A. Yes. 10 Q. Okay. And on May the 13th, Mr. Twomey 11 writes a letter and asks Mr. Gross to -- "In order 12 to complete our records, please submit a copy of 13 all employment contracts between officers or 14 employees of the association and any of its 15 subsidiaries." And that's Exhibit T8069. 16 Do you see that? 17 A. Yeah. 18 Q. And five days later, Mr. Berner writes 19 back to Mr. Twomey and tells him no such contracts 20 exist; isn't that correct? 21 A. That's what this letter says. Again, 22 why don't ask you him? I don't know. 4405 1 Q. Okay. Would you agree with me, sir, 2 that the T8071 failed to disclose the existence of 3 contracts that had been entered into -- 4 A. I don't know whether or not they 5 existed on that date; so, I cannot testify on this 6 matter. You must ask Mr. Berner. 7 Q. Did you not just testify, sir, that on 8 February 11th, 1988 -- 9 A. Maybe it was rescinded between those 10 dates. I don't know. I can't answer that 11 question. You'll have to talk to Mr. Berner. I'm 12 sorry. I'm trying to be cooperative, Counsel, but 13 I can't testify to things I have no knowledge of. 14 Q. Okay. As a member of the compensation 15 committee, do you have any recollection of any 16 meetings between February the 11th, 1988, and 17 March 13th, 1988? 18 A. Do you realize how long ago that was 19 and do you realize how many documents that I've 20 looked at and how many have -- there are thousands 21 and hundreds of thousands. And if you think that 22 I can remember things like that, I'm sorry. I've 4406 1 got early stages of Alzheimer's and I can't 2 remember that. I'm sorry. 3 Q. All right. I just have one final set 4 of inquiries. 5 A. I will say that the compensation 6 practices were in line with peer groups. Nothing 7 sinister. There were no under-the-table payments. 8 There was nothing that -- do you realize how hard 9 it is to attract and keep good people under these 10 circumstances? 11 THE COURT: Do you have any more 12 questions, Mr. Rinaldi? 13 MR. RINALDI: Yes. I just have one 14 final -- a couple of questions here. 15 Q. (BY MR. RINALDI) Directing your 16 attention back to T8053, and that's the March 30th 17 or 31st memo that you put the handwritten writing 18 on. 19 A. Okay. 20 Q. And I'll -- there it is. Okay. Now, 21 to the best of your knowledge, sir, were the 22 employment or the salary increases that are 4407 1 identified in Paragraph 2 ultimately effectuated 2 by USAT? 3 A. I do not know. 4 Q. And -- but if the record reflects that 5 they were, you would have no reason to dispute 6 that? 7 A. I have no reason to dispute it. 8 Q. Okay. And do you know whether the 9 special bonus which -- that's referred to in 10 Paragraph 5 was ultimately effectuated? 11 A. I do not know. 12 Q. And do you know whether employment 13 contracts were ultimately entered into between 14 USAT and UFG? 15 A. I assume that to be the case. You just 16 presented one. 17 Q. Well, no. I'm asking about a new set 18 that they are referring to because it talks about 19 amended employment contracts. 20 A. I do not know. 21 Q. Okay. 22 MR. RINALDI: I don't have any further 4408 1 questions for the witness, Your Honor. 2 THE COURT: All right. We'll adjourn 3 until 1:30. 4 5 (Luncheon recess taken at 12:23 p.m.) 6 7 THE COURT: Be seated, please. We'll 8 be back on the record. I believe we're ready for 9 the cross-examination of Mr. Whatley. 10 MR. STEARNS: Before we begin, Your 11 Honor, the documents that were identified admitted 12 this morning, I'd like to pass up two copies for 13 the Court. 14 THE COURT: Okay. Thank you. 15 MR. STEARNS: Thank you. 16 MR. VILLA: Your Honor, in an effort to 17 speed up the examination, I have placed in 18 notebooks what I had originally anticipated to be 19 all of the documents that are going to be used so 20 we won't have to walk back and forth each time. 21 I'm probably going to skip over some of them, but 22 I'm going to give one copy to you, one copy to Mr. 4409 1 Langdon, and one copy to the witness. And we will 2 hand you copies as each document comes out. 3 (1:33 p.m.) 4 Q. (BY MR. VILLA) Good afternoon, 5 Mr. Whatley. I'm John Villa. I represent 6 Mike Crow, Art Berner, Ron Heubsch, and Barry 7 Munitz and I'll be asking you questions for the 8 next two hours or thereabouts. 9 Mr. Whatley, do you hold a master's 10 degree in accounting? 11 A. Yes. 12 Q. And you are a certified public 13 accountant? 14 A. Yes, sir. 15 Q. Have you worked for a major accounting 16 firm in your life? 17 A. Yes. 18 Q. Which one? 19 A. Peat Marwick Mitchell & Company. 20 Q. For how many years? 21 A. Five of years. 22 Q. You were at various points president, 4410 1 chairman, and CEO of Kaneb Services; is that 2 right, sir? 3 A. That is correct. 4 Q. Tell us a little bit about Kaneb 5 Services. What is it? 6 A. It's an energy company engaged 7 principally in pipelines, oil and gas production, 8 coal production, and various other minor 9 subsidiaries as I testified yesterday. I had a 10 small group of companies of financial services 11 group and then acquired United at a point in time. 12 Q. What years were you employed by Kaneb 13 Services? 14 A. 1955 until 1982, and then I came back 15 for -- as CEO for about the better part of a year 16 in the mid-Eighties. 17 Q. So, you retired in 1982 as chairman and 18 CEO and then were asked to come back by the board 19 for a period of time; is that right? 20 A. I remained chairman after '82, but I 21 was no longer active day-to-day in the company. 22 Q. I see. Can you explain to us again the 4411 1 relationship between Kaneb Services and USAT? 2 A. In the late Seventies, Kaneb merged 3 USAT into Kaneb as a subsidiary company. 4 Q. And at some point, Kaneb spun off USAT 5 to Kaneb shareholders? 6 A. That is correct. 7 Q. So, the -- many of the shareholders of 8 USAT or probably at that point all of the 9 shareholders of USAT were also shareholders of 10 Kaneb? 11 A. That is correct. 12 Q. When you left Kaneb Services for the 13 second time in 1986, did you retire from full time 14 employment? 15 A. Yes. 16 Q. So, you didn't take any other full-time 17 position after that? 18 A. No. 19 Q. Over the years, you've been invited to 20 join a number of boards of directors; isn't that 21 right, sir? 22 A. Correct. 4412 1 Q. Have you been on the board of 2 Dorchester Oil & Gas? 3 A. Yes. 4 Q. Is that a New York Stock Exchange 5 company? 6 A. Yes, it is. 7 Q. Daniel Industries? 8 A. Yes, it is. 9 Q. Is that a New York Stock Exchange 10 company? 11 A. Yes, it is. 12 Q. Kaneb, of course, is a New York Stock 13 Exchange company? 14 A. Yes. 15 Q. First City Bank here in Houston? 16 A. Yes. 17 Q. And that's a New York Stock Exchange 18 company? 19 A. Yes. 20 Q. It was the largest bank in Houston at 21 the time you were on the board; isn't that right, 22 sir? 4413 1 A. That is correct. 2 Q. And a number of smaller banks 3 throughout Texas. Isn't that also right? 4 A. Yes. 5 Q. Chimney Rock Bank? 6 A. Yes. 7 Q. Regional Bank in northeast Texas? 8 A. Yes. First Service Bank. 9 Q. And possibly others that you can't 10 recall; isn't that right? Any other banks, any 11 other subsidiaries of banks? 12 A. Possibly. I don't recall any offhand. 13 Q. Have you been on the compensation 14 committee of one or more of these companies? 15 A. Yes. 16 Q. You've been on the compensation 17 committee of Daniel Industries? 18 A. I believe so. 19 Q. How about Dorchester? 20 A. I'm not sure. 21 Q. Dorchester Oil & Gas. Have you been on 22 the compensation committee of some of these banks? 4414 1 A. Yes. 2 Q. Have you ever been the chairman of the 3 compensation committee of one or more of these 4 banks? 5 A. Yes. 6 Q. Now, as chairman and CEO of Kaneb, were 7 you also involved in compensation decisions on 8 senior executives even though you weren't on the 9 compensation committee? 10 A. Yes. 11 Q. And why was that? 12 A. The -- typically, the outside 13 directors, members of the compensation committee, 14 would ask management for their recommendations 15 with respect to compensation. 16 Q. So, at least initially, you would 17 participate in making recommendations as to the 18 appropriate level of compensation for the senior 19 executives; is that right? 20 A. Yes. 21 Q. And that was customary in the 22 relationship between management and a compensation 4415 1 committee? 2 A. Correct. 3 Q. You were familiar in general with the 4 compensation practices in Texas in the mid-1980s? 5 A. Yes. 6 Q. Would that be fair, sir? Let me ask 7 you a few questions about your understanding of 8 your duties as a director. Prior to directors 9 meetings, did you receive and review the board 10 packets? 11 A. Yes. 12 Q. And at the meetings themselves, at the 13 board meetings, did you ask questions of 14 management? 15 A. Yes. 16 Q. Do you recall, sir, the first contact 17 you had with Charles Hurwitz? 18 A. I do not recall. It was sometime after 19 the spinoff to Kaneb shareholders. I'd never met 20 Mr. Hurwitz prior to that, and I can't tell you 21 exactly what period of time following that. 22 Q. So, is it fair to say the first time 4416 1 you met Mr. Hurwitz was in connection with United 2 Savings Association of Texas? 3 A. That's correct. 4 Q. He's not a business associate of 5 yours -- 6 A. No. 7 Q. -- is he, sir? He's not a friend of 8 yours? 9 A. No. 10 Q. You don't have any business ties with 11 him; is that right? 12 A. No. 13 Q. And you never have? 14 A. No. 15 Q. Did you have any business ties with any 16 other members of the management team of United 17 during the time period 1983 to 1988? 18 A. No. 19 Q. Now, you, sir, as a result of the 20 spinoff of the stock of USAT from Kaneb owned what 21 was, for you, a significant amount of stock in 22 UFG; is that right? 4417 1 A. Correct. 2 Q. Do you recall approximately how much 3 stock you held? 4 A. 30-odd thousand shares. 5 Q. And do you recall, sir, roughly what 6 your basis was in that stock? 7 A. Not precisely, but I think my cost 8 basis was on the order of magnitude about $8 or 9 so. 10 Q. About $8 or so a share? 11 A. Something like that. 8 or 9, yeah. 12 Q. So, at 30,000 shares, it would have 13 been in excess of $200,000; is that right? 14 A. Yes. 15 Q. And at the time in the mid-1980s, was 16 that a significant investment for you, sir? 17 A. It was. 18 Q. In the time period 1983 to 1988 when 19 you were making decisions about the future 20 strategy of United as a member of the board of 21 directors, whose money did you believe you were 22 putting at risk? 4418 1 A. The -- twofold. First, the 2 shareholders' and, secondly, the depositors of the 3 association. 4 Q. And when talking about the 5 shareholders, you include yourself in that group, 6 don't you, sir? 7 A. Yes. 8 Q. Now, after United Financial Group -- 9 after the thrift -- let's just call it United for 10 the time being -- was spun off from Kaneb, you 11 stayed on the board; is that right? 12 A. That is correct. 13 Q. Why did you stay on the board? 14 A. Because I felt that the majority of the 15 shareholders were also Kaneb shareholders, and I 16 thought they should have some representation on 17 the board of United. 18 Q. So, it was out of loyalty to the Kaneb 19 shareholders that you stayed on the board of 20 United; is that right? 21 A. That is correct. 22 Q. While you were on the board of 4419 1 United -- and I'm talking about the entire period 2 from 1983 to 1988. Well, it's longer than that 3 actually; but the time period that we're looking 4 at, 1983 through 1988, did you take any action 5 other than what you believed was in the best 6 interest of United? 7 A. Absolutely not. 8 Q. Did you take or approve any action for 9 the benefit of Drexel Burnham Lambert, MAXXAM, or 10 Charles Hurwitz? 11 A. No. 12 Q. Now, would it be fair to say that 13 today, you have trouble distinguishing between the 14 UFG and USAT committees with respect to the 15 actions of particular committees? 16 A. That is correct. 17 Q. Many of the actions we're talking about 18 in this trial took place over a decade ago; isn't 19 that right, sir? 20 A. That is correct. 21 Q. And where there are board minutes 22 object a subject, would you accept that the 4420 1 minutes are more accurate than your recollection? 2 A. Oh, of course. 3 Q. Would it be fair to say, sir, that 4 although you can't recall the specific actions 5 taken in many cases, you do recall the general 6 reasons for the decisions you reached? 7 A. I think so. 8 Q. And at the time that you were on the 9 board and on the compensation committee, you took 10 the time to understand the details of the 11 transactions you were involved in; isn't that 12 right? 13 A. Yes. 14 Q. You knew and paid attention to the 15 level of compensation of the senior executives? 16 A. Yes. 17 Q. You've attended a lot of committee 18 meetings since then, haven't you, sir? 19 A. Yes. 20 Q. And the details of the United meetings 21 are sometimes difficult to recall, aren't they? 22 A. Yes. 4421 1 Q. Now, let me ask you, sir, when you were 2 at First City Bank, did you know Jerry Williams or 3 Mike Crow? 4 A. Yes. 5 Q. And in what capacity did you know them? 6 A. They normally were invited to attend 7 board meetings. 8 Q. So, as a director of First City, you 9 had occasion to meet Mr. Crow and Mr. Williams, 10 Jerry Williams, because they were officers of 11 First City; is that right? 12 A. That's correct. 13 Q. In the course of your role as a 14 director of First City, did you form an opinion as 15 to their performance? 16 A. I did. 17 Q. And what is that opinion? 18 A. I thought they were very competent 19 people. 20 Q. Were you pleased that they joined 21 United? 22 A. Yes. And let me add, I had nothing to 4422 1 do with their joining United; but I was pleased 2 that they were there. 3 Q. Now, you've been the chairman and CEO 4 of a large company; isn't that right? 5 A. Yes. 6 Q. And you've been on the board of a 7 number of New York Stock Exchange companies, 8 including a major commercial bank? 9 A. Correct. 10 Q. Do you believe that you have some basis 11 for evaluating the competence of a management 12 team? 13 A. Yes. 14 Q. For the period 1983 through 1988, I 15 would like you to tell us what your evaluation of 16 the United management team and, specifically, one 17 by one, Art Berner. 18 A. I thought Art was a very able attorney. 19 Q. Michael Crow? 20 A. Thought Michael was a very competent 21 financial officer, chief financial officer. 22 Q. Mr. Jenard Gross? 4423 1 A. Didn't know as much about Jenard, but I 2 admired his history and what he had accomplished 3 and had no reason to think he was anything but 4 competent. 5 Q. And Mr. Jerry Williams? 6 A. Yes. I knew Jerry from the First City 7 days. I thought he was a very able guy. 8 Q. Now, you had less contact with Ron 9 Heubsch, Barry Munitz, and Charles Hurwitz than 10 the former people we've talked about; isn't that 11 true? 12 A. That's correct. 13 Q. Did you ever see anything that Mr. 14 Huebsch, Mr. Munitz, or Mr. Hurwitz do that you 15 thought was wrong or reckless in connection with 16 United? 17 A. No. 18 Q. Now, did there come a time when you 19 went on the executive committee of United? 20 A. Yes. 21 Q. Do you recall exactly when that 22 occurred? 4424 1 A. No, I don't. 2 Q. You'd accept what the minutes say on 3 that point? 4 A. Yes. 5 Q. Do you recall any instances in which 6 the -- in which an action was approved by the 7 executive committee of United based upon a split 8 vote in which Mr. Hurwitz and Mr. Munitz were in 9 the majority and you were in the minority? 10 A. No. 11 Q. Did you ever see any instance in the 12 operation of the executive committee in which 13 Mr. Hurwitz and Mr. Munitz along -- alone or with 14 others tried to force a decision on the executive 15 committee by outvoting the minority? 16 A. No. 17 Q. Were there any executive committee 18 decisions that you recall were reached other than 19 through discussion which led to a consensus? 20 A. Not to my knowledge. 21 Q. Was there anything unusual or improper 22 that you recall about the manner in which the 4425 1 United executive committee operated? 2 A. No. 3 Q. Did you ever have the feeling that the 4 executive committee was being used to avoid 5 presenting important issues to the full board of 6 directors? 7 A. No. 8 Q. Now, prior to 1983, USAT was a 9 traditional thrift primarily making single-family 10 home loans; isn't that right? 11 A. Correct. 12 Q. By 1983 and 1984, did you think that it 13 was possible for USAT to produce any bottom-line 14 profit if it continued operating in that manner? 15 A. It, in my opinion, would have been 16 impossible. We had about 130 bankruptcies a week 17 and about 150 defaults where people would simply 18 drop by the office and leave their house key or 19 mail it in. And at the same -- while all of this 20 was going on, this is during the oil crisis in the 21 Eighties in Houston. And while all of this was 22 going on, the cost of funds approached double 4426 1 digit and a typical mortgage in the portfolio was 2 perhaps 7 percent. So, you had a negative spread 3 of 300 basis points, which tells me you're going 4 nowhere fast. 5 Q. What would you expect to have happened 6 to United if it had continued operating in the 7 manner that it had in the past? 8 A. It would have lost more money. 9 Q. Do you think it would have survived? 10 A. No. 11 Q. Did you think changes were necessary in 12 order to give United an opportunity to survive? 13 A. Changes were mandatory if you had a 14 chance to survive. 15 Q. Do you recall generally that United was 16 moving into new operations like mortgage-backed 17 securities, junk bonds, and equity arbitrage? 18 A. I recall that they moved in those 19 directions. 20 Q. Did United obtain advice from 21 professionals as to these new lines? 22 A. Many professionals. Principally 4427 1 investment bankers, Wall Street types, 2 consultants. 3 Q. Do you also recall that United sold a 4 number of its branches and redeployed the capital 5 into other activities? 6 A. That is correct. 7 Q. Do you know whether the regulators had 8 to approve this type of transaction? 9 A. I'm not certain. I believe they did. 10 Q. But you believe these changes were 11 necessary for United to survive; isn't that right, 12 sir? 13 A. That is correct. 14 Q. Did you personally support the 15 decisions to make these changes? 16 A. Yes. 17 Q. Did anybody force you or any other 18 board member to adopt this strategy? 19 A. No. 20 Q. Now, you were a member of the 21 compensation committee of the board of directors; 22 isn't that right, sir? 4428 1 A. Right. 2 Q. Do you know when you became a member of 3 the compensation committee? 4 A. No, I don't. 5 Q. You'd accept whatever the minutes say 6 on that point? 7 A. Correct. 8 Q. And you've been a member of the 9 compensation committee of a number of other 10 companies as we've just heard; isn't that right, 11 sir? 12 A. That's correct. 13 Q. Was there anything unusual about the 14 manner in which United's compensation committee 15 operated? 16 A. No. 17 Q. Was there ever any attempt by United's 18 management to coerce or pressure the compensation 19 committee? 20 A. Never. 21 Q. You started telling us a little bit 22 about the economy of Texas in the mid-1980s. Can 4429 1 you tell the Court a little bit about what the 2 economy of Houston was like in 1987? 3 A. It was typical, although possibly worse 4 than other areas of the state because of the high 5 dependence at that time on the oil industry in 6 Houston. 7 Q. Do you recall whether the 1986 tax 8 reform act had an impact on real estate markets in 9 Texas? 10 A. I don't recall that specifically. 11 Q. In general, do you recall how Texas 12 financial institutions were doing in the year 13 1987? 14 A. They were all going broke. 15 Q. Did the Texas economy also impact 16 United's financial condition in 1987? 17 A. Absolutely. 18 Q. Did United's financial condition in the 19 mid-1987 time period have any effect on United's 20 ability to hire new officers? 21 A. Yes. 22 Q. Do you recall, sir, whether the new 4430 1 hires in the 1986 and 1987 time period were 2 demanding employment contracts? 3 A. If you could find them, they would be 4 demanding quite a bit. 5 Q. That is to say, if you could find new 6 hires that were willing to work in the thrift, 7 they were demanding quite a bit; is that right? 8 A. That's correct. 9 Q. Because many people were unwilling to 10 work at a thrift at that time period; is that 11 right? 12 A. That's correct. 13 Q. And that was because of the bleak 14 outlook in general for Texas thrifts? 15 A. That's correct. 16 Q. Do you recall, sir, that United had a 17 significant mortgage-backed securities portfolio? 18 A. I recall that they did. I was not in 19 any way involved in that activity, but I know they 20 had a portfolio. 21 Q. Do you recall the names Ms. Sandy 22 Laurenson as a woman from Salomon Brothers who 4431 1 joined United? 2 A. I've heard the name. 3 Q. And do you recall, also, that she 4 ultimately became the manager of that 5 mortgage-backed securities portfolio? 6 A. I was told that that was the case. 7 Q. Do you recall whether, because of 8 United's financial condition, Ms. Laurenson 9 demanded an employment contract? 10 A. I don't recall that. 11 Q. If you'll look at the book that's in 12 front of you, sir, the second tab has the number 13 A11028. It's got the date 9-19-86. 14 Do you see that? 15 A. Yes. 16 Q. It's previously been introduced into 17 evidence. This is the contract of Ms. Sandra 18 Laurenson. 19 A. Okay. 20 Q. Does this refresh your recollection, 21 sir? 22 A. I've never seen this document. 4432 1 Q. Never seen this document before? 2 A. No, not to my knowledge. 3 Q. As the chairman of the compensation 4 committee, would you be told about long-term 5 contracts that senior officers entered into? 6 A. Yes. 7 Q. But looking at this document, it 8 doesn't refresh your recollection about the terms 9 of Ms. Laurenson's employment; is that right? 10 A. That's correct. 11 Q. Would it surprise you that she received 12 a multi-year contract with guaranteed payments and 13 the right to demand the institution guarantee its 14 obligations, given the financial circumstances? 15 A. That would not surprise me, no. 16 Q. Do you recall United also had a 17 high-yield bond portfolio? 18 A. Yes. 19 Q. Does the name Gene Stodart or Eugene 20 Stodart ring any bells as the manager of the 21 high-yield bond portfolio? 22 A. The name rings a bell. I remember the 4433 1 name. 2 Q. Let me direct your attention to the 3 next tab in the book before you, which is 4 Exhibit B1570. It's a letter dated April 16, 5 1987, from Michael Crow to Eugene Stodart. Take a 6 moment to review that document. 7 A. Okay. 8 Q. Now, it's signed by Mr. Crow for 9 United; is that right? 10 A. Yes. 11 Q. And copies were sent to Mr. Gross and 12 Mr. Munitz? 13 A. Yes. 14 Q. Do you see that? 15 MR. VILLA: I move B1570 into evidence. 16 MR. RINALDI: No objection, Your Honor. 17 THE COURT: Received. 18 Q. (BY MR. VILLA) By looking at this 19 document, sir, does it refresh your recollection 20 that Mr. Stodart also requested and obtained a 21 contract with a term of more than a year, 22 guaranteed minimums, and security through a letter 4434 1 of credit for salary and bonus? 2 A. I believe I was told that. 3 Q. Again, this doesn't surprise you, does 4 it, sir? 5 A. No. 6 Q. Do you recall at or about this time 7 Mister -- well, it's actually a little earlier -- 8 at the beginning of 1987, that Jerry Williams left 9 United? 10 A. I'm not sure of the time period, but I 11 know he left. 12 Q. You do know he left. In the minutes of 13 January 8, 1987, I think, that Mr. Rinaldi showed 14 you, there is a discussion of his resignation and 15 settlement. We'll skip that, showing you that 16 exhibit in the interest of time, sir. 17 Let me direct your attention to the 18 first tab in the book that you have in front of 19 you, which is the 1987 -- March 31, 1987, proxy 20 statement for United Financial Group. And this is 21 A3014 already in evidence. 22 A. Okay. 4435 1 Q. Let me direct your attention to Page 10 2 of that document. Can you turn to that for me? 3 Directing you to the top of Page 10 4 which bears Bates stamp number, on mine, UFG03743, 5 let me read a couple of sentences so we know we're 6 on the same page. Under "employment contracts," 7 "On September 1, 1983, USAT, the principal 8 subsidiary of the company, entered into an 9 employment agreement with Gerard R. Williams for a 10 term of three years providing for a base salary of 11 $200,000. The agreement included a provision 12 requiring USAT to make a lump sum payment in the 13 amount owed under the agreement during the 14 remaining term thereof in the event of a 15 termination of Mr. Williams' employment or a 16 change of his responsibilities. Mr. Williams' 17 contract was extended for one year in 1984, and 18 the termination provisions in the contract were 19 amended to permit termination and acceleration by 20 Mr. Williams in the event of a change of control 21 of the company. Effective September 1, 1985, the 22 contract was extended for an additional year and 4436 1 the base salary was increased to $242,000. In 2 January 1987, Mr. Williams resigned as an officer 3 and director of the company and all of its 4 subsidiaries. As a result of his resignation, 5 Mr. Williams received $404,437 pursuant to the 6 terms of his employment agreement." 7 Do you see that, sir? 8 A. Yes. 9 MR. RINALDI: You didn't finish reading 10 the rest of the sentence. 11 MR. VILLA: I believe I finished the 12 sentence, Counsel. 13 MR. RINALDI: You didn't read the rest 14 of the paragraph. Well, I mean, we've done this 15 in the past. It is germane to the issue. 16 MR. VILLA: You may rise and read it. 17 MR. RINALDI: Thank you. "At the same 18 time, Mr. Williams repaid to the company 100,000 19 on a note in the principal amount of $181,250. 20 The additional amount of the note is payable on 21 December 31st, 1989. The note is fully secured 22 and bears interest at prime lending rate of a 4437 1 specified bank with interest only being due on 2 December 31st, 1987 and 1988." 3 Q. (BY MR. VILLA) Do you see that, sir? 4 A. Yes. 5 Q. Mr. Jerry Williams is a substantial 6 shareholder in the company, too; isn't that right? 7 A. I don't know. 8 Q. You don't know? But in terms of the 9 first portion of it that I read to you, does that 10 refresh your recollection that Mr. Williams had a 11 three-year contract and, when he resigned, 12 received almost two years of severance? 13 A. I have no specific recollection, but I 14 accept this. 15 Q. Do you recall that when he resigned, he 16 had a multi-year contract? 17 A. No. 18 Q. But the proxy statements like these are 19 documents that you would have reviewed at the 20 time? 21 A. Yes. 22 Q. Do you ever recall United being 4438 1 criticized by the federal regulators for the 2 employment contracts of Gerald Williams, Sandy 3 Laurenson, or Gene Stodart? 4 A. No. 5 Q. Did there come a time in mid-1987 that 6 the compensation committee concluded that it would 7 be prudent for United to enter into employment 8 contracts with a number of its current senior 9 executives? 10 A. Yes. 11 Q. Why did you and other members of the 12 compensation committee conclude that it would be 13 prudent to enter into such contracts? 14 A. Because it would have been disastrous 15 to lose those people. 16 Q. Why was it important to retain those 17 people at United? 18 A. Because they had the knowledge and 19 background and the expertise to run the operation. 20 Q. Did you have confidence in those 21 people? 22 A. I did. 4439 1 Q. In making the decision to offer them 2 employment contracts, were you looking out for the 3 best interest of United? 4 A. Yes. 5 Q. From the standpoint of United -- and 6 I'm not talking about the interest of the 7 employees and officers. Just from the standpoint 8 of United, did it make sense to give employment 9 contracts only to those officers who were openly 10 threatening to leave? 11 A. No. 12 Q. And why not? 13 A. Because you don't conduct business in 14 that manner. You treat people fairly -- or try 15 to -- and treat them equally. And I don't -- I -- 16 personally, I'm not one to be threatened. 17 Q. Do you think offering employment 18 contracts only to those who openly threaten to 19 leave would adversely impact morale? 20 A. Of course. 21 Q. Now, did the fact that United's 22 financial condition was deteriorating mean that 4440 1 employment contracts should not be offered to the 2 key executives? 3 A. Absolutely not. Quite the contrary. 4 Q. And why do you say that? 5 A. Because, as I've testified earlier, 6 it's imperative to keep quality, able people to 7 manage the affairs of the entity. 8 Q. And isn't it also harder to attract 9 quality, able people when the institution is in 10 trouble? 11 A. Of course. 12 Q. In general, did you have a sense as to 13 how most large Texas savings and loans were doing 14 financially in the 1987 and 1988 time period? 15 A. Yes. They were doing very poorly. 16 Q. And as a director of a Texas savings 17 and loan during that time period, does the fact 18 that United was losing money, is that a reason why 19 you should not retain the key senior management? 20 A. Is that a reason why you should not? 21 Q. Right. 22 A. It's a reason you should. 4441 1 Q. And why is that? 2 A. To preserve the assets of the entity to 3 the maximum possible extent. 4 Q. Do you believe, sir, that you could 5 judge the performance of United's management 6 solely by the performance of how a Texas thrift 7 was doing during that time period? 8 A. No. 9 Q. And that's because they were all doing 10 poorly; isn't that right? 11 A. That's correct. 12 Q. Now, you've been asked a number of 13 questions by Mr. Rinaldi about the bonuses that 14 were paid at the beginning of 1988 as a result of 15 the end of the year 1987. 16 I'm going to ask you, sir: Does the 17 fact that United was not making money, does that 18 fact mean that you should not give a bonus to the 19 employees? 20 A. No. Quite the contrary. 21 Q. Have you ever heard it said that 22 sometimes people work a lot harder when they are 4442 1 losing money than they ever did when they are 2 making money? 3 A. Of course. 4 Q. Did you find that out in your own 5 experience at Kaneb? 6 A. Of course. 7 Q. Let me direct your attention to the 8 November 10, 1987, minutes of the compensation 9 committee, T8027. These have previously been 10 identified by Mister -- and I believe put into 11 evidence by Mr. Rinaldi. 12 Mr. Rinaldi asked you a number of 13 questions about the reasons for bonuses at the 14 year end. I'd like to direct your attention to 15 the last full paragraph on the first page and read 16 you a sentence or two and ask you whether this 17 refreshes your recollection as to other reasons. 18 The third sentence down, "However, it 19 was decided that in view of the fact that many of 20 the key employees were now doing extra work, since 21 other executives had been terminated during the 22 year, and that the so-called bonuses were really 4443 1 an attempt to achieve market compensation to allow 2 these people to receive their market value and, 3 further, in view of the fact that it would be not 4 only costly but time-consuming to deal with the 5 replacements, the compensation committee 6 unanimously approved the bonus schedule." 7 Do you see that? 8 A. Yes. 9 Q. Now, sir, does that refresh your 10 recollection -- 11 MR. RINALDI: Excuse me, Mr. Villa. 12 Can you stop? It goes on and says "It was noted 13 that such bonuses would not be paid until 14 January 1988 and, therefore, no announcement would 15 be made of the bonuses so that in the event there 16 were intervening circumstances, they could be 17 taken into consideration at a further meeting." 18 MR. VILLA: The rule of completeness 19 can be abused, and I would hope that it's not 20 being abused on this occasion. I take it that the 21 sentences are at the bottom and you certainly can 22 read them at the appropriate time. 4444 1 Q. (BY MR. VILLA) Now, sir, does this 2 refresh your recollection that many of the 3 employees were receiving bonuses because they had 4 taken on additional duties? 5 A. Everyone -- my impression was everyone 6 at United during this period was working extremely 7 hard and long hours. 8 Q. And was that one of the reasons why the 9 bonuses were declared at the end of the year 1987, 10 pointed out as Mr. Rinaldi has, to be paid in 11 early 1988? 12 A. I believe that was one of the reasons, 13 yes. 14 Q. Let me show you what has been 15 already -- if you'll flip to the next tab to A1141 16 dated February 11, 1988. And these are the 17 minutes of the United Savings Association of Texas 18 board of directors. And they are already in 19 evidence as Tab 99. 20 Do you have that before you, sir? 21 A. A1141? 22 Q. Yes. It's dated up in the right-hand 4445 1 corner. Now, you were on the board of United 2 Savings Association of Texas in February of 1988, 3 weren't you, sir? 4 A. Yes. 5 Q. And you're not shown as being absent at 6 this meeting; is that correct? 7 A. Correct. 8 Q. Now, I'd like to direct your attention 9 to Page 1 and the first full paragraph of these 10 minutes and particularly to the second sentence -- 11 the third sentence of the first full paragraph 12 where it says, quote, "Also present were 13 Mr. Michael Crow and Jack Hughes and, representing 14 the Federal Home Loan Bank of Dallas, Ms. Vivian 15 Carlton and Mr. Jack -- Mr. John Cottingham." 16 Do you see that? 17 A. Yes. 18 Q. Now, do you recall, sir, that from time 19 to time, particularly in the last year of United's 20 existence of the thrift's existence that the 21 examiners would sit in on board meetings? 22 A. Yes. 4446 1 Q. This was not at all unusual, was it? 2 A. No. 3 Q. When the board took up matters of 4 employment contracts of senior management, did it 5 consider that to be a serious matter? 6 A. Yes. 7 Q. And when the employment contract 8 matters came before the board, there was a 9 detailed discussion of that; is that right? 10 A. I believe that's correct. 11 Q. And during this time period, you were 12 on the compensation committee so you took a 13 particular interest in making sure that such 14 matters were discussed? 15 A. Yes. 16 Q. Let me direct your attention to Page 27 17 of the minutes. It bears Bates stamp 18 No. US3002787. 19 Do you have that in front of you? 20 A. Yes. 21 Q. I'm going to read you the second full 22 paragraph. "Mr. Berner discussed in detail the 4447 1 views of the compensation committee concerning 2 employment contracts to be entered into between 3 the company and certain executive officers. It 4 was noted that these contracts were identical to 5 contracts entered into by UFGI and would only be 6 effective if UFGI could not perform under such 7 contracts. He stated that the compensation 8 committee had unanimously approved the entering 9 into of these employment contracts subject to the 10 board of directors' approval. He noted the 11 contracts were, one, necessary to retain the top 12 executives of the company, two, the company's 13 compensation was competitive after taking into 14 account these minimum bonuses and, three, that it 15 was important that the directors preserve the 16 company's assets and minimize losses and that it 17 was critical that these key employees be retained 18 in order to continue on the program of preserving 19 capital and assets." 20 Do you see that, sir? 21 A. Yes. 22 Q. And then it goes on for more than a 4448 1 full page on compensation matters and carries over 2 to the next page. 3 Do you see that? 4 A. Yes. 5 Q. Take a moment to look at that. 6 A. Okay. 7 Q. Is this the kind of detailed discussion 8 that you were previously referring to that would 9 occur at board meetings involving compensation 10 contracts? 11 A. Yes. 12 Q. And this occurred at the February 11, 13 1988, board meeting; is that right? 14 A. Correct. 15 Q. According to these minutes, Ms. Vivian 16 Carlton and Mr. John Cottingham from the Federal 17 Home Loan Bank of Dallas were present at the 18 meeting? 19 A. Correct. 20 Q. Do you have any reason to believe that 21 Ms. Carlton and Mr. Cottingham did not hear the 22 discussion of the employment contracts which were 4449 1 discussed in detail at the meeting of 2 February 11th, which was the minutes we just read? 3 A. No. 4 Q. So, did they hear, as far as you know, 5 as you did that USAT had entered into contracts 6 with certain senior executives which would be 7 identical to the prior UFGI contracts and would 8 only become effective if UFGI could not perform on 9 its contracts? 10 A. Correct. 11 Q. Now, do you also recall that as a 12 matter of securities disclosure, employment 13 contracts are also discussed from time to time in 14 a company's public filings? 15 A. Yes. 16 Q. Let me show you what has been -- this 17 will be United Financial Group's 10K for the year 18 ending December 31, 1987, which is Exhibit A3023. 19 MR. VILLA: This one is different than 20 some of the others we've used, Your Honor, because 21 this includes all of the exhibits to the 10K. I 22 move A3023 into evidence. 4450 1 THE COURT: This has not been 2 previously entered? 3 MR. VILLA: I believe that it has been 4 moved into evidence without the exhibits. So, 5 this is the same document with the exhibits. If 6 the Court please, I'll mark it A3023.1 to 7 distinguish it from the one without the exhibits. 8 MR. RINALDI: I have no objection, Your 9 Honor. I'm sorry. 10 THE COURT: Received. 11 Q. (BY MR. VILLA) I'd like you to turn 12 to Page 68 of this document. There might be a 13 little tab at the top to help you find that page. 14 A. All right. 15 Q. And is that a signature page, sir? 16 A. Yes, it is. 17 Q. Is there a facsimile of your signature 18 there? 19 A. Yes. 20 Q. So, as a director of United Financial 21 Group, in March of 1988, you would have seen this 22 document, United's 10K; is that right? 4451 1 A. That's correct. 2 Q. I'd like you to turn back to Page 64 of 3 the 10K, which is also indicated by a little tab. 4 Do you see that, sir? 5 A. Yes. 6 Q. Particularly the entry which is Item 7 11, executive compensation. And it reads, quote, 8 "The information called for by Item 11 is 9 incorporated by reference from the 1988 proxy 10 statement under the caption 'compensation of 11 executive officers,' Pages 8 through 16." 12 Do you see that? 13 A. Yes. 14 Q. It's not unusual in a 10K to 15 incorporate by reference the terms of a proxy, is 16 it, sir? 17 A. I believe that's correct. 18 MR. RINALDI: I'm sorry. Where were 19 you reading from? Page 64 -- Page 11? 20 MR. VILLA: Page 64, Item 11. 21 Q. (BY MR. VILLA) So, we've established 22 that the 10K incorporates by reference the proxy. 4452 1 Let me ask you, sir, now -- let me direct your 2 attention to A3015 in the other book. It's the 3 December -- I'm sorry -- the March 30, 1988, proxy 4 statement. 5 A. Right. 6 Q. Do you have that in front of you? 7 A. Yes. 8 Q. This has already been introduced into 9 evidence as A3015, and it's Tab 94. Let me direct 10 your attention to Page 9 of the March 1988 proxy. 11 Do you have that in front of you, sir? 12 A. Yes. 13 Q. Does it say employment agreements at 14 the top? 15 A. Yes. 16 Q. I'm going to read to you the first 17 paragraph on the employment agreements. "On 18 September 9, 1987, Messrs. Berner and Crow, 19 together with certain other senior executive 20 officers (the employees) of the company and USAT 21 entered into employment agreements (the 22 agreements) which expire on December 31, 1988, 4453 1 subject to extension upon the agreement of the 2 company and the particular employee. Pursuant to 3 such agreement, the company is required to 4 maintain employment of the employee through 5 December 31, 1988, and to pay each employee a 6 minimum remuneration equal to no less than each 7 employee's 1987 bonus salary. The company has 8 also agreed to maintain in full force and effect 9 certain benefits enjoyed by the employees. Upon 10 termination for good reason as defined in the -- 11 as defined in the agreement (which includes a 12 change in control of the company), an employee's 13 entitled to receive two times his annual salary on 14 the date of termination plus two times the minimum 15 bonus described in the agreement. In addition, 16 the employee's entitled to receive a minimum 17 payment under the performance plan as well as the 18 immediate acceleration of options granted pursuant 19 to the company's stock option plans. In 1988, 20 each of the employees entered into a substantially 21 similar agreement with USAT which becomes 22 effective only in the event that the company is 4454 1 unable to satisfy its obligations under the 2 agreements." 3 Do you see that, sir? 4 A. Yes. 5 Q. Now, does that refresh your 6 recollection, sir, that United's public filings 7 disclosed that there were UFG and USAT contracts 8 entered into? 9 A. Yes. 10 Q. And that the public filings also 11 expressly identified them as substantially 12 similar; isn't that right? 13 A. Yes. 14 Q. Now, I hate to do this to you but I'm 15 going to ask you to go back to that 10K, that big 16 document that's in front of you, again. And turn 17 to Page 67 indicated by a tab. 18 Do you find that, sir? 19 A. Yes. 20 Q. I'd like you to look down -- check my 21 reading under Exhibit 10.16. Do you see that? 22 A. Yes. 4455 1 Q. 10.16. And if you'll check my reading, 2 it says, quote, "Form of employment agreements 3 entered into by and between United Financial 4 Group, Inc. and certain executive employees filed 5 herewith." 6 Do you see that? 7 A. Yes. 8 Q. And if you go back into your document, 9 you look at the blue tabs on the back, under 10 Exhibit 10.16 which is also, for Mr. Rinaldi's 11 benefit, Bates stamp No. UFG2028814. 12 A. You said the blue tab? 13 Q. Right here. I'm sorry. You've got 14 orange tabs, sir. 15 A. Okay. 16 Q. Do you have that? 17 A. Okay. Now, does that -- would you look 18 at that for a moment, sir? Now, do you see, sir, 19 that the employment contract, the actual form of 20 the employment contract, is attached as an exhibit 21 to United's 10K? Do you see that in front of you? 22 A. Yes. 4456 1 MR. RINALDI: That's the UFG contract; 2 is that correct, John? 3 Q. (BY MR. VILLA) Now, sir, it says that 4 they are substantially similar, the UFG and the 5 USAT contracts. 6 Do you remember we read that? 7 A. Yes. 8 Q. So, yes, it's the UFG contracts; but it 9 says it's substantially similar. 10 Q. (BY MR. VILLA) So, the form of the 11 UFG and USAT contracts which are described as 12 substantially similar are actually attached to 13 United's public filings; isn't that right? 14 A. Correct. 15 Q. And anyone receiving the March 30, 16 1988, public filings of United could see that UFG 17 and USAT had entered into substantially similar 18 contracts. Right? 19 A. Correct. 20 Q. And that the USAT contract would only 21 become effective if UFG could not perform. Isn't 22 that also right? 4457 1 A. Correct. 2 Q. And they would actually have the form 3 of the contract in their hands because it's an 4 exhibit to the document. Isn't that also right? 5 A. Correct. 6 Q. Let's go to -- back to Page 67 of the 7 10K. And that's the description of exhibits. 8 Do you see that, sir 9 A. That's back -- 10 Q. Back a little bit. 11 A. Okay. 12 Q. I'd like you to look at Exhibit ten -- 13 the description of Exhibit 10.18. Do you see 14 that? 15 A. 10.18? 16 Q. Yes. 17 A. Yes. 18 Q. It says, quote, "Agreement entered into 19 between the company and Messrs. Crow and Gross 20 relating to guaranteed minimum bonus to repay debt 21 to the company filed herewith." 22 Do you see that? 4458 1 A. Yes. 2 Q. And if you'll go back to the exhibits 3 in the 10K which are indicated by a tab -- and for 4 Mr. Rinaldi's benefit, it's UFG2028965. 5 A. Okay. 6 Q. Do you see that, sir? 7 A. Yes. 8 Q. Exhibit 10.18, that is the -- I believe 9 out of order perhaps when it was copied -- but the 10 bonus agreement between United and Mr. Crow and 11 Mr. Gross; is that right? 12 A. I don't know. Exhibit 10.18 and then 13 it starts with Paragraph 9. 14 Q. I see. Have to go back a few pages. 15 If you'll bear with me, it looks like in the 16 copying process, these documents were a bit 17 scrambled. 18 MR. RINALDI: Actually, the Bates 19 stamps indicate -- 20 Q. (BY MR. VILLA) If you look at 21 UFG2028975, you can see it's the bonus agreement 22 of Mr. Crow. 4459 1 Do you see that 2 A. No. Okay. 3 MR. RINALDI: They just appear to be in 4 reverse order, John. 5 MR. VILLA: The pages were copied in 6 reverse order. 7 Q. (BY MR. VILLA) And here is the 8 agreement with Mr. Gross, is it not? 9 A. Okay. 10 Q. So, the bonus agreements for both 11 Mr. Crow and Mr. Gross were also attached to the 12 public filings of United; is that right? 13 A. Right. 14 Q. Now, sir, there was no attempt, was 15 there, to hide the existence of these contracts 16 between United and these executives, was there? 17 MR. RINALDI: I'm going to object to 18 the form of the question. 19 A. None. 20 MR. RINALDI: Just a second. These 21 aren't contracts between United Savings 22 Association of Texas. They are United Financial 4460 1 Group. 2 Q. (BY MR. VILLA) Sir, we just read the 3 line that says, quote, "In 1988, each of the 4 employees entered into a substantially similar 5 agreement with USAT which becomes effective only 6 in the event the company is unable to satisfy its 7 obligations under the agreements." Remember, we 8 read that in the proxy statement? 9 MR. RINALDI: John, I was only making 10 reference to the -- 11 MR. VILLA: Your Honor, I've got two 12 hours. I really am not going to engage in 13 colloquy with Mr. Rinaldi. 14 Q. (BY MR. VILLA) Sir, you saw -- 15 A. Yes. 16 Q. And anybody reading it could tell that 17 United Savings Association of Texas had entered 18 into contracts with these executive officers; 19 isn't that right? 20 A. Yes. 21 Q. There was no attempt to hide the 22 existence of contracts between United Savings 4461 1 Association of Texas and its executive officers 2 from anybody, was there, sir? 3 A. No. 4 Q. In fact, anybody who got their public 5 filings could find it. Right? 6 A. Correct. 7 Q. And they could not only find it. They 8 would have a copy of the contract in their hand; 9 is that right? 10 A. Correct. 11 Q. And the examiners were sitting in the 12 meeting when the contract was discussed and 13 adopted. Isn't that also right? 14 A. That's correct. 15 Q. Now, let's go back, sir, to the 1988 16 proxy which was -- I think we are done with that 17 large 10K. 18 A. Done with this one? 19 Q. Yes, sir. The 1988 -- March 1988 proxy 20 is A3015. Think you can find that, sir? 21 A. Yes. 22 Q. Let me direct your attention to Page 9 4462 1 of that proxy again. The second full paragraph 2 under employment contracts, and I'll read it. 3 Quote, "Pursuant to an agreement entered into on 4 September 19, 1986, Ms. Laurenson was entitled to 5 a base salary of $100,000 per year for the period 6 beginning January 1, 1986, and ending December 31, 7 1988. In addition, Ms. Laurenson was guaranteed a 8 minimum remuneration during this period of 9 $600,000. In February 1988, Ms. Laurenson 10 resigned from the company. Pursuant to the terms 11 of a severance agreement entered into between the 12 company and Ms. Laurenson, Ms. Laurenson will 13 receive $300,000 during 1988. The company's 14 obligation to pay the required remuneration is 15 guaranteed by irrevocable letter of credit." 16 Do you see that? 17 A. Yes. 18 Q. And does that refresh your 19 recollection, sir, that in United's public 20 filings, Ms. Laurenson's contract was described? 21 A. It's clearly set out here. 22 Q. It's a multi-year contract, isn't it? 4463 1 A. Yes. 2 Q. Now, it has a guaranteed minimum 3 payment of $600,000. Right? 4 A. That's what it says, yes. 5 Q. And her rights may be -- her rights are 6 guaranteed by irrevocable letter of credit. 7 Do you see that, the last sentence? 8 A. Yes. 9 Q. Do you receive -- do you recall 10 receiving any criticism from the federal 11 regulators regarding the terms of Ms. Laurenson's 12 contract after it was disclosed in United's public 13 filings? 14 A. No. 15 Q. Do you recall that Mr. Rinaldi showed 16 you a number of documents indicating that many of 17 the directors had resigned in late 1987 and early 18 1988? 19 A. Yes. 20 Q. Do you recall, sir, that as a result of 21 those resignations, some senior executive officers 22 were claiming that director turnover had caused a 4464 1 change of control? Remember anything about that? 2 A. I don't specifically recall that, no. 3 Q. Will you turn to the next tab, which is 4 A2082? It's a letter from Jeff Gray to 5 United Financial Group, Inc. dated March 16, 1988. 6 Take a moment and review that. 7 A. Okay. 8 Q. Would the resignation of a senior 9 executive officer of United have been something 10 that you would have been notified about in the 11 spring of 1988? 12 A. Most likely. 13 MR. VILLA: I move B2082 into evidence. 14 MR. RINALDI: No objection. 15 THE COURT: Received. 16 Q. (BY MR. VILLA) Does this refresh your 17 recollection, Mr. Whatley, that in the spring of 18 1988, senior executive officers of 19 United Financial Group were taking the position 20 that a change of control had occurred and 21 demanding their severance benefits? Do you 22 remember that now? 4465 1 A. I recall some conversation to that 2 effect, yes. 3 Q. And do you recall -- I think you were 4 shown by Mr. Rinaldi -- 5 MR. RINALDI: Just a second, John. I 6 think it's a bit confusing when you refer to 7 United. Are you referring to United Financial 8 Group when you refer to United or United Savings 9 Association of Texas? 10 Q. (BY MR. VILLA) Mr. Whatley, do you 11 have trouble distinguishing sometimes between 12 United Financial Group and United Savings 13 Association of Texas? 14 A. It's impossible. 15 Q. Would you prefer if I used the word 16 United to speak about them as a group? 17 A. Yes. You can't distinguish between 18 those two. 19 Q. Thank you. 20 MR. RINALDI: But this letter is 21 addressed to United Financial Group, and it 22 pertains to a contract entered into with 4466 1 United Financial Group. We have not made any 2 allegations regarding -- 3 MR. VILLA: Your Honor, I really -- if 4 I'm being put on a clock, I really am not going to 5 engage in colloquies with Mr. Rinaldi. 6 MR. RINALDI: With all due respect, 7 Your Honor, if he is going to ask a question 8 regarding an entity, he needs to ask the question 9 with respect to the specific entity because there 10 is a very real difference between a holding 11 company and its savings and loan subsidiary. And 12 if he's -- 13 THE COURT: All right. Your point is 14 made. Let's move on, and I think we should make 15 the distinction where possible. 16 Q. (BY MR. VILLA) Do you recall, sir -- 17 by the way, I believe my question did make the 18 distinction but I'll ask you again. 19 Do you recall, sir, that executives of 20 United Financial Group were taking the position 21 that there was a change of control of the company 22 as a result of the resignation of a large number 4467 1 of directors 2 A. I don't recall that very many of them 3 were. 4 Q. Now, let me direct your attention to 5 B2106, which is the March 31 memo. It's the next 6 tab you've got there. It's already been 7 introduced into evidence as T8053 by Mr. Rinaldi 8 this morning. 9 Do you see that, sir? 10 A. Yes. 11 Q. And that's the March 31 memo that 12 Mr. Rinaldi asked you about this morning for some 13 time. Remember that, sir? 14 A. Yes. 15 Q. It bears your signature? 16 A. Yes. 17 Q. And it also bears your handwriting and 18 that interlineation that you read for Mr. Rinaldi. 19 Right? 20 A. Correct. 21 Q. At Paragraph 1, let me read Paragraph 1 22 to you. Quote, "The board of directors of UFGI 4468 1 and USAT will take the position that there has 2 been no change of control which triggered certain 3 executives' employment contracts. We will make 4 clear that an attempt to enforce the employment 5 contracts at this time will be resisted," close 6 quote. 7 Do you see that? 8 A. Yes. 9 Q. Does that refresh your recollection 10 that Art Berner was taking the position that UFG 11 and USAT will resist a claim that there was a 12 change of control? 13 A. Yes. 14 Q. Do you recall, sir, whether the need to 15 amend these contracts to respond to the change of 16 control claims and the threat of further 17 departures is what caused the compensation 18 committee to reexamine United's employment 19 contracts at the end of March 1988? 20 MR. RINALDI: Once again, Your Honor, I 21 don't know what United is. I don't know -- 22 THE COURT: I think that question was 4469 1 clear. Can you answer the question? 2 THE WITNESS: I don't recall that that 3 was the motivation, no. 4 Q. (BY MR. VILLA) Do you recall that the 5 departures, the concern about further departures 6 was one of the reasons that the compensation 7 committee was reexamining United -- and by that I 8 mean UFG and USAT's employment contracts in March 9 of 1988? 10 A. I believe that's true. 11 Q. And by signing this agreement, this 12 document -- not agreement -- this document, you 13 indicated on the last page your agreement on 14 behalf of the compensation committee to its terms. 15 Right? 16 A. Correct. 17 Q. And one of the things -- one of the 18 steps that was going to be taken as laid out in 19 this memorandum and, as identified in Paragraph 20 No. 6, is for amended employment contracts. 21 Do you see that? Take a look at 22 Paragraph No. 6. 4470 1 A. Yes. 2 Q. Mr. Rinaldi read that to you or at 3 least part of it to you. Let me read it. Quote, 4 "We will provide for amended employment contracts 5 along the lines of the draft attached for those 6 with contracts now, plus new contracts for 7 Jenard Gross and Barry Munitz. The contracts will 8 clarify the board's previous intent that only a 9 change of control in a corporate sense, e.g., 10 controlling stockholders selling their stock, a 11 creditor taking control of the company, or an 12 actual termination will trigger benefits. We will 13 make clear that FSLIC forbearance, assistance, or 14 receivership in and of itself is not a change of 15 control (although such activity could give rise to 16 a trigger event). We will also tell those people 17 with contracts that there is a possibility that 18 the contracts will be cancelled if there is FSLIC 19 assistance." 20 Do you see that? 21 A. Yes. 22 Q. And does that indicate to you, sir, 4471 1 that United -- and that's UFGI and USAT -- was 2 reexamining its contracts and intending to redraft 3 them to take account of the problem with the 4 change of control? 5 A. Yes. 6 Q. And by agreeing to that on behalf of 7 the compensation committee, you were taking at 8 least one step along that line; isn't that right? 9 A. That's correct. 10 Q. Now, do you recall that in your 11 examination by Mr. Rinaldi, he asked you whether 12 USAT officers had entered into employment 13 contracts in February of 1988. Remember, he asked 14 you those questions, sir? 15 A. Yes. 16 Q. And, of course, we have seen that they 17 did and, in fact, that the examiners were present. 18 Do you remember that? 19 A. Yes. 20 Q. And he also asked you why Mr. Berner 21 might have responded to Neil Twomey that no such 22 contracts had been entered into when Mr. Berner 4472 1 wrote him a letter in May of 1988. 2 Do you remember that question? 3 A. Yes. 4 Q. And your answer, as I recall, was 5 essentially, first he ought to ask Mr. Berner and, 6 secondly, the contracts may have been rescinded 7 between February of 1988 and May of 1988. 8 Remember that, sir? 9 A. That's correct. 10 Q. And, in fact, by looking at this memo 11 that we have just looked at, you can tell that the 12 contracts were, in fact, being rewritten between 13 February of 1988 and May of 1988; isn't that 14 right? 15 A. That would appear to be the case. 16 Q. Now, the Paragraph 6 we just read also 17 includes the last sentence of it which says, 18 quote, "We will also tell those people with 19 contracts that there is a possibility that the 20 contracts will be cancelled if there is FSLIC 21 assistance," close quote. 22 Do you see that? 4473 1 A. Yes. 2 Q. Do you know of anybody besides 3 Mr. Berner who would have discussed with you the 4 possibility that the contracts with senior 5 executives might be cancelled if there is FSLIC 6 assistance? 7 A. No. 8 Q. Do you recall, sir, Mr. Berner 9 discussing with you the subject of whether or not 10 the contracts that were going to be entered into 11 might be cancelled if there were FSLIC assistance? 12 A. I do not recall. 13 Q. Now, the board -- strike that. 14 The compensation committee was going to 15 take a number of steps as laid out in this -- 16 strike that. 17 The compensation committee agreed to a 18 number of steps as set forth in this memorandum; 19 is that right? 20 A. Yes. 21 Q. And one of those steps was the special 22 bonuses indicated in Paragraph 5; is that right? 4474 1 You see the special bonus there? 2 A. Yes. 3 Q. And one of those steps was changing 4 current salaries as indicated in Paragraph 2 and 5 as qualified by your handwritten note. Is that 6 also right? 7 A. Correct. 8 Q. So, you understood that there were to 9 be salary increases, but there was going to be a 10 compensation study performed; isn't that right? 11 A. That's correct. 12 Q. And the compensation study was to be -- 13 was to determine whether or not United was in line 14 with its peer group. Right? 15 A. Right. 16 Q. And you personally made the addition on 17 here; isn't that right? 18 A. I did. 19 Q. Now, let me ask you to turn to the next 20 tab, which is A11029 which is the March 30, 1988 21 compensation committee minutes. You see that, 22 sir? 4475 1 A. Yes. 2 Q. Let me direct your attention to the 3 third paragraph. Just read that to yourself, if 4 you will. 5 A. Okay. 6 Q. Now, did that fairly reflect the action 7 of the compensation committee on March 30, 1988, 8 as best you recall? 9 A. Yes, although I do not remember what 10 the proposal was that's referred to here. 11 Q. Without looking at the documents, you 12 wouldn't be able to recall precisely what the 13 proposal was; is that right? 14 A. No, no. 15 Q. Were you a director of United Financial 16 Group in April of 1992, sir? 17 A. A member of -- 18 Q. A director of United Financial Group, 19 UFG, in -- 20 A. In 1992? 21 Q. Yes, sir. 22 A. Yes. 4476 1 Q. And do you recall, sir, that there was 2 litigation over whether or not the bonus plan and 3 the salary increases had been properly approved by 4 the board of directors? 5 MR. RINALDI: I'm going to object to 6 the characterization. I don't believe that 7 litigation involved in any way, shape, or form 8 the -- 9 THE COURT: Let's get the answer from 10 the witness. 11 A. I don't remember such litigation. 12 Q. (BY MR. VILLA) Let me direct your 13 attention to the next document in there, which is 14 B3808 which is an opinion of the United States 15 District Court for the Southern District of Texas 16 in Texas Commerce Bank versus United Savings 17 Association of Texas. 18 A. Okay. 19 Q. And Page 851, which is about the third 20 page of that document, I believe -- fourth page. 21 A. Okay. 22 Q. Sir, at the bottom of the page, it 4477 1 reads, quote, "The evidence clearly demonstrates 2 that not only were they discussed and ratified 3 with respect to the plan and the trust, but the 4 discussions took place in front of the FHLBB 5 members. On March 30, 1988, the United 6 compensation committee approved the plan. The 7 board of directors ratified the committee's 8 actions in May of 1988. Both the plan and trust 9 were effective." 10 Do you see that? 11 A. No. Where are you reading from? 12 Q. I'm sorry, sir. Right here. Just that 13 paragraph and up to there. 14 A. Okay. All right. 15 Q. Do you recall, sir, that the specific 16 question of whether or not the plan and trust were 17 properly adopted by United Savings Association of 18 Texas was, in fact, litigated in 1992? 19 A. I do not recall that. 20 Q. And this doesn't refresh your 21 recollection? 22 A. No. 4478 1 Q. Do you recall, sir, from the questions 2 that Mr. Rinaldi asked you that executive 3 compensation specialists were hired by United in 4 the spring of 1988? Do you remember answering 5 some questions along those lines? 6 A. Yes. 7 Q. And that was Hewitt & Company; is that 8 right? 9 A. That was one of two firms. 10 Q. Do you recall that Hewitt examined the 11 reasonableness of the compensation? 12 A. Yes. 13 Q. And do you also recall that Hewitt 14 examined the actual form of the employment 15 agreements? 16 A. Yes. 17 Q. Let me ask you to turn to the next 18 document, which is B2136, a memo from Arthur 19 Berner to Jim Whatley dated April 7, 1988, with 20 attachments. 21 Do you see that in front of you, sir? 22 A. Yes. 4479 1 MR. VILLA: Move B2136 into evidence. 2 MR. RINALDI: No objection, Your Honor. 3 THE COURT: Received. 4 Q. (BY MR. VILLA) And this memorandum 5 was part of the back and forth involving the 6 redrafting of the employment agreements with 7 Hewitt's input, wasn't it, sir? 8 A. Correct. 9 Q. Let me direct your attention to the 10 next document, which is B2191 which is a letter 11 dated May 13, 1988, from Neil Twomey to the board 12 of directors of United Savings Association of 13 Texas. 14 MR. VILLA: Your Honor, I don't show 15 that this is in evidence. 16 Q. (BY MR. VILLA) Let me ask you a few 17 questions, sir. You were a member of the board of 18 the United Savings Association of Texas in May of 19 1988, weren't you, sir? 20 A. Yes. 21 Q. And you would have ordinarily received 22 a copy of this document? 4480 1 A. Yes. 2 MR. VILLA: Move B2191 into evidence. 3 MR. RINALDI: No objection, Your Honor. 4 THE COURT: Received. 5 Q. (BY MR. VILLA) Now, do you see that 6 in May of 1988, Mr. Twomey wrote a letter 7 regarding the regulatory restrictions that could 8 be imposed on United for failure to meet its 9 minimum regulatory net worth? Do you see that? 10 A. Yes. 11 Q. As chairman of the compensation 12 committee, you would be interested in knowing 13 whether any of these restrictions limited 14 employment contracts, bonuses, severance 15 arrangements, and the like, wouldn't you, sir? 16 A. Yes. 17 Q. And you would have looked at such a 18 letter to see whether there is any such 19 restriction. Right? 20 A. Yes. 21 Q. Would you agree with me, sir, by 22 looking at Mr. Twomey's letter of May 13, 1988, 4481 1 there is no mention of the employment contracts, 2 bonuses, or severance agreements? 3 A. That is correct. 4 Q. There is no prohibition in this letter 5 of such agreements, is there, sir? 6 A. None. 7 Q. Would you take comfort from the fact 8 that when Mr. Twomey wrote a letter to the board 9 of directors expressing what limitations could be 10 imposed on United, he did not say anything about 11 employment contracts? 12 A. That wouldn't give me any comfort one 13 way or another. 14 Q. Because regulators can always change 15 their mind? 16 A. Of course. 17 Q. And you've seen that happen, haven't 18 you, sir? 19 A. Yes. 20 Q. Now, in May of 1988, did you believe 21 that proceeding with amending these employment 22 agreements that Hewitt was working on with United 4482 1 Savings Association of Texas and United Financial 2 Group was violating any federal regulation? 3 A. No. 4 Q. Did you believe that this amendment of 5 the employment contracts was inconsistent with any 6 direction that you had received from any federal 7 regulator? 8 A. No. 9 Q. Let me ask you to turn to the next 10 document, which is the June 7, 1988, minutes of 11 the compensation committee of United Financial 12 Group. It bears -- it's Exhibit A1558. 13 Mr. Whatley, you were the -- you were a 14 member of the compensation committee in June of 15 1988, weren't you, sir? 16 A. Yes. 17 MR. VILLA: I move A1558 into evidence. 18 MR. RINALDI: No objection, Your Honor. 19 THE COURT: Received. 20 Q. (BY MR. VILLA) Let's go through the 21 compensation committee minutes of June 7, 1988. 22 Let's go down to the second paragraph. First of 4483 1 all, at the beginning, you can see that you were 2 in attendance because you were a member of the 3 committee, as well as Mr. Munitz, Berner, and Mark 4 Gordon of Hewitt & Associates. 5 Do you see that, sir? 6 A. Yes. 7 Q. Do you remember Mr. Gordon of 8 Hewitt & Associates? 9 A. Yes. 10 Q. Directing your attention to the first 11 full paragraph, it reads, quote, "Mr. Whatley 12 acted as chairman of the meeting and Mr. Berner 13 noted the minutes. Mr. Whatley stated that the 14 meeting was called in order to review the 15 executive compensation packages appropriate to the 16 senior executives at United Financial Group, Inc. 17 and United Savings Association of Texas and to 18 prepare the outline for the contract requested by 19 a new USAT senior executive. He noted that 20 Hewitt & Associates had been retained to review 21 this compensation package, to pass on its 22 fairness, and to assist with the new contract 4484 1 negotiations." 2 Do you see that, sir? 3 A. Yes. 4 Q. And was that what you recall the 5 assignment given to Hewitt & Associates? 6 A. Yes. 7 Q. Let me direct your attention to the 8 second paragraph. "Mr. Gordon reviewed in detail 9 the compensation received by the senior executive 10 officers and referred to competitive institutions 11 across the country and stated that in view of 12 their positions, job descriptions, experience, et 13 cetera, Hewitt & Associates believed that the 14 strategy followed and the compensation received 15 were fair and nationally competitive." 16 Do you see that? 17 A. Yes, I do. 18 Q. And is that consistent with what you 19 recall Mr. Gordon expressed at that meeting? 20 A. Yes. 21 Q. Let me direct you to the third 22 paragraph. It reads, "Mr. Gordon noted that 4485 1 certain executive officers such as Dr. Munitz and 2 Mr. Berner had responsibilities that were not 3 fully described by their job title. Mr. Gordon 4 noted that Hewitt & Associates had reviewed many 5 of the public savings and loan holding companies 6 as well as certain private companies. He noted, 7 however that, not all of the private companies' 8 information was public. He also noted that many 9 of the public companies are located outside of the 10 state of Texas." 11 Do you see that? 12 A. Yes. 13 Q. Do you recall him expressing the view 14 that Dr. Munitz and Mr. Berner's responsibilities 15 were not fully described in their job 16 descriptions, their job titles? 17 A. After reading this, I have some 18 recollection of that. 19 Q. And do you also recall from your own 20 personal involvement that Mr. Berner and 21 Dr. Munitz' responsibilities exceeded their job 22 titles? 4486 1 A. I think that's fair. 2 Q. Turning to the next paragraph, it reads 3 "Mr. Whatley stated that in his opinion, after 4 reviewing the compensation levels and the report 5 of Hewitt & Associates, the compensation committee 6 believed the compensation package received by the 7 senior executive officers was fair and he expected 8 a formal letter of comfort from the consultants to 9 that effect." 10 Do you see that? 11 A. Yes. 12 Q. Was that your opinion, sir? 13 A. Yes, it was. 14 Q. And did you make the request for a 15 formal letter of comfort? 16 A. I believe I did. 17 Q. We'll skip the next paragraph and go on 18 to the following paragraph that reads, quote, 19 "Mr. Whatley also stated that in view of the 20 association's and the regulators' desire to find 21 an additional senior executive officer, it would 22 be necessary to prepare an acceptable employment 4487 1 contract and to present its basic components to 2 the appropriate regulators." 3 Do you see that? 4 A. Yes. 5 Q. And do you recall, sir, saying that 6 United Savings Association of Texas should send 7 the contract to the regulators for their review? 8 A. Yes, because they -- that was one of 9 the things that they had discussed with us, that 10 they wanted a new CEO in place because the former 11 one had resigned and it was obvious we needed a 12 strong CEO. 13 Q. And do you also recall the importance 14 of sending the contract to the regulators for 15 their review for a new CEO? 16 A. I don't specifically recall that. 17 Q. Let me direct your attention to the 18 next exhibit, which is A11030. Let me ask you, 19 sir, to look over at the -- flip over to the first 20 page because I think this copy doesn't have a 21 title to indicate the company involved. If you 22 turn over to the first page and look at the top, 4488 1 do you see the reference to Hewitt and -- to 2 Hewitt & Associates? 3 A. Yes. 4 Q. Can you take a quick look at this 5 document and confirm, sir, that this is the report 6 that Hewitt provided after their meetings with the 7 compensation committee? 8 A. Yes. 9 MR. VILLA: Your Honor, we move A11030 10 into evidence. 11 MR. RINALDI: No objection, Your Honor. 12 THE COURT: Received. 13 Q. (BY MR. VILLA) Now, based upon 14 Hewitt's study and your own conclusions, did you 15 ultimately recommend to the boards of UFG and USAT 16 that they enter into a new set of contracts with 17 the senior executives? 18 A. I believe I did. 19 Q. Let me ask you to turn to the next tab, 20 which is A1152, the minutes of the board of 21 directors of United Financial Group dated 22 June 28th, 1988. And I believe it's in evidence. 4489 1 It also bears the number T8079. 2 Let me direct your attention to Page 3 3 of this document. You would have been -- just to 4 make sure, you were a director of United Financial 5 Group in June of 1988. Right, sir? 6 A. Yes. 7 Q. Go to the top of Page 3 of this 8 document. Let me read to you the first paragraph. 9 "Dr. Munitz stated that it was appropriate to 10 review the proposed employment contracts to be 11 entered into between the company and various key 12 employees. He noted that the compensation 13 committee had retained Hewitt & Associates to 14 review the contracts as well as the current levels 15 of compensation. Mr. Munitz discussed the 16 activities of Hewitt in reviewing such contracts 17 and presented a draft report which 18 Hewitt & Associates have prepared relating to 19 officer compensation. He noted that the final 20 report would be forthcoming shortly and would be 21 retained by the secretary of the company." 22 Do you recall, sir, Dr. Munitz making a 4490 1 presentation with respect to the employment 2 contracts? 3 A. No. 4 Q. Let me direct your attention to the 5 second and third paragraphs on that page. 6 "Mr. Whatley reviewed the proposed new employment 7 contracts to be entered into with the company and 8 the following employees: Jenard Gross, Barry 9 Munitz, Arthur Berner, Mike Crow, James Jackson, 10 Jeff Gray, Bruce Williams, James Wolfe, and Eugene 11 Stodart. Each contract was reviewed in detail. 12 Mr. Whatley explained why the compensation 13 committee had determined it was important to enter 14 into these employment contracts. He discussed his 15 review of the employment contracts with 16 Hewitt & Associates and the significant amendments 17 made in the previously-entered-into employment 18 contracts. He noted that Hewitt & Associates had 19 reviewed drafts prepared by the company and 20 substantially redrafted the contracts and had 21 presented their views in numerous meetings with 22 the compensation committee and other members of 4491 1 the board. Mr. Whatley stated that he found the 2 contracts to be reasonable and proper and 3 recommended their approval." 4 Do you see that, sir? 5 A. I do. 6 Q. And were those your views expressed to 7 the board of directors? 8 A. I believe that's correct. 9 Q. And that's consistent with your 10 recollection of what you told the board? 11 A. Yes. 12 Q. Now, turn to the next document, which 13 is A1151, which is the minutes of the board of 14 directors of United Savings Association of Texas 15 dated June 29, 1988. It was introduced and 16 accepted by the Court this morning as T8078. 17 Do you see that in front of you, sir? 18 A. Yes, I do. 19 Q. And these are the minutes of a special 20 board of directors meeting of United Savings 21 Association of Texas on June 28, 1988; isn't that 22 right? 4492 1 A. Correct. 2 Q. I'm not going to take you through it in 3 its entirety. But do you see on the first page 4 that there is a similar description of the 5 contract -- employment contract issue in the USAT 6 board minutes? 7 A. Correct. 8 Q. Let me direct your attention to the 9 second page of the USAT board minutes down where 10 it says "further resolved." You see that, the 11 second-to-the-last -- third-to-the-last paragraph? 12 A. Okay. 13 Q. It says, quote, "Further resolved that 14 an ad hoc committee consisting of Messrs. Gross, 15 Munitz, and Berner be and that they hereby are 16 authorized to enter into negotiations for the 17 employment of Mr. Connell and to prepare an 18 employment contract reflecting those negotiations 19 substantially in the form of the employment 20 contracts entered into by the association with its 21 other senior executive key employees and upon the 22 terms discussed at this meeting." 4493 1 Do you see that? 2 A. I do. 3 Q. Now, sir, does this refresh your 4 recollection that the employment contracts that 5 United Savings Association of Texas was entering 6 into with Mr. Connell were substantially similar 7 to the ones that it was going to enter into with 8 all of its other senior key employees? 9 A. I don't have any specific recollection 10 of this resolution, but I accept it as being fair. 11 Q. It's in no way inconsistent with what 12 your recollection is, is it, sir? 13 A. No. 14 Q. Do you recall -- we looked a little 15 earlier at your -- at the meeting minutes in which 16 you said that the employment contract for 17 Mr. Connell should be sent to the federal 18 regulators. 19 Do you remember we just looked at that a 20 minute ago? 21 A. Yes, correct. 22 Q. Let me direct your attention to the 4494 1 next document, which is A11031. It's a letter 2 dated June 30, 1988, from Mr. Arthur Berner to 3 Neil Twomey. 4 Would you look at that for a moment, 5 sir? 6 A. Yes, I see it. 7 Q. Now, does this appear to you, sir, to 8 be Mr. Berner carrying out the directions of the 9 compensation committee to send Mr. Connell's 10 contract to the regulators? 11 A. Yes. 12 MR. VILLA: I move A11031 into 13 evidence. 14 MR. RINALDI: No objection, Your Honor. 15 THE COURT: Received. 16 Q. (BY MR. VILLA) And do you recall, 17 sir, that Mr. Connell's contract was sent to the 18 regulators for their comments? 19 A. I believe it was, yes. 20 Q. Now, was this consistent with what your 21 approach was as the head of the compensation 22 committee to try to inform the federal regulators 4495 1 of significant compensation issues? 2 A. We certainly did -- absolutely never 3 did anything to try to withhold any information 4 from them, and the general idea was that we were 5 going to keep them informed because we were trying 6 to do everything we could to save the association 7 and we needed their cooperation. 8 Q. Do you recall, sir, receiving any 9 criticism from the federal regulators of 10 Mr. Connell's contract or the similar contracts 11 entered into with the other senior key executives 12 prior to late October 1988? 13 A. No, sir. 14 Q. So, as far as you knew, in July of 15 1988, United was not doing anything on 16 compensation that the federal regulators 17 disapproved of. Is that fair? 18 A. That is correct. 19 Q. And as far as you knew, in July of 20 1988, United was not doing anything on 21 compensation that was a violation of any law or 22 regulation; is that right, sir? 4496 1 A. That is correct. 2 MR. RINALDI: Your Honor, just once 3 again, I keep on getting confused by "United." 4 MR. VILLA: I'll be happy to clarify 5 that. 6 Q. (BY MR. VILLA) You didn't believe 7 that either United Savings Association of Texas or 8 United Financial Group was doing anything that 9 violated any law or regulation, did you, sir? 10 A. That is correct. 11 Q. Thank you, Mr. Whatley. 12 Now, we have previously seen the fact 13 that Vivian Carlton and Mr. Cottingham, federal 14 examiners, were at a meeting of the United board 15 of directors in February of 1988. Do you remember 16 seeing that? 17 A. Yes. 18 Q. And that was the meeting where the USAT 19 contracts were approved. Remember that, sir? 20 A. Yes. 21 Q. Do you recall that when the results of 22 examinations were sent to the board of directors, 4497 1 that they were accompanied by a supervisory letter 2 by the principal supervisory agent? Remember 3 that, sir? 4 A. Not specifically, no. 5 Q. Do you recall, sir, that Mr. Rinaldi 6 showed you one of those, I believe it was 7 yesterday, an April of 1987 letter? Do you 8 remember that, sir? 9 A. No, I don't. 10 Q. Okay. Let me ask you to turn to 11 Exhibit A6022, which is a letter dated July 28th, 12 1988, with the attached examination report of 13 United Savings Association of Texas by the Federal 14 Home Loan Bank of Dallas. It's addressed to the 15 board of directors of United Savings Association 16 of Texas. 17 Do you see that? 18 A. Yes. 19 Q. Now, you would have been on the board 20 at that time; is that right? 21 A. Yes, correct. 22 Q. And you would have received a copy of 4498 1 this letter -- 2 A. Yes. 3 Q. -- is that right? 4 MR. VILLA: I move A6022 into evidence. 5 MR. RINALDI: No objection, Your Honor. 6 THE COURT: Received. 7 Q. (BY MR. VILLA) Let me direct your 8 attention to the second full paragraph on A6022, 9 and I'll read it. Quote, "The examiners have 10 noted in the report the continuing turnover in 11 management and directors since the last federal 12 examination as of May 27, 1986. Moreover, the 13 report and previous correspondence from this bank 14 has expressed our concern with a lack of savings 15 and loan operations and lending experience evident 16 in the roster of senior management at United. We 17 were advised of the employment of Mr. Lawrence 18 Connell as president and chief executive officer 19 effective as of July 1, 1988. It is acknowledged 20 that he evidences the industry experience which 21 has been lacking at United." 22 Do you see that, sir? 4499 1 A. Yes. 2 Q. Does this refresh your recollection 3 that at the top of the list of the supervisory 4 concerns in the letter sent to you by the 5 supervisory agent of United Savings Association of 6 Texas was continuing turnover in management and 7 directors? 8 Do you remember that? 9 A. Yes. 10 Q. And were the employment contracts that 11 were approved by the association an attempt to 12 reduce management turnover? 13 A. That is correct. 14 Q. Did they reduce management turnover, 15 sir? 16 A. I have no way to know. 17 Q. You don't recall? Was the hiring of 18 Larry Connell an attempt to address the criticism 19 of a lack of a financial CEO? 20 A. Absolutely. 21 Q. Did the regulators seem pleased with 22 Mr. Connell? 4500 1 A. Absolutely. 2 Q. So, as of the fall of 1988, did you 3 still think that United had a reasonable chance to 4 survive? 5 A. The fall of '88? 6 Q. Fall of '88, at this time after you had 7 gotten Mr. Connell on board and the contracts had 8 been redone. 9 A. Not really. 10 Q. You thought it was still going to have 11 a tough time? 12 A. Yeah. 13 Q. Did you believe that United had done 14 what the regulators wanted on management issues? 15 A. Yes. 16 Q. Do you recall, sir, that it was several 17 months before -- strike that. 18 Do you recall, sir, several months 19 before United failed -- United failed -- you don't 20 actually recall when United failed, as I recall, 21 from discussions with Mr. Rinaldi. So, I'll tell 22 you it failed on December 30, 1988. Does that 4501 1 sound about right? 2 A. Okay. 3 Q. At the end of the year? 4 A. Fair enough. 5 Q. Do you recall, sir, that several months 6 before United failed, it received a letter from 7 Mr. Twomey criticizing some of its employment 8 practices? 9 A. Yeah. I think we saw some of that 10 yesterday. 11 Q. Yes, sir. You did. 12 A. Or this morning. 13 Q. Let me show you -- if you just turn to 14 the next tab, it's document, in my mark, as B2487. 15 It's a letter dated October 27, 1988, from Neil 16 Twomey to the board of directors of United Savings 17 Association of Texas. And that's already in 18 evidence as Tab 98. 19 You see that, sir? 20 A. Yes, I do. 21 Q. And do you recall receiving a criticism 22 from the regulators in late October of 1988? 4502 1 A. I'm sure I received this letter. I 2 don't have any specific recollection. 3 Q. Based on your firsthand involvement in 4 compensation matters, did you expect in late 1988 5 that the federal regulators would be criticizing 6 United's compensation practices? 7 A. No, because they never had before and 8 never had indicated any problems with it. 9 Q. The examiners had been present at board 10 meetings when contracts had been approved; isn't 11 that right? 12 A. That's correct. 13 Q. Contracts were described in your public 14 filings, isn't that also correct? 15 A. That's correct. 16 Q. So, did this letter come as a surprise 17 to you when you received it? 18 A. It did. It appears to be 20/20 vision 19 after the fact. 20 Q. Do you recall, sir, that shortly after 21 United received -- United Savings Association of 22 Texas received this October 27, 1988 letter, that 4503 1 the board adopted a number of steps to respond to 2 Mr. Twomey's concerns? 3 A. I do not specifically remember that, 4 no. 5 Q. Let me direct your attention to 6 Exhibit A1163, which is the next tab. It's the 7 minutes of the USAT board of directors dated 8 November 7, 1988. And it's already been admitted 9 earlier as T8117. 10 MR. VILLA: Sorry, Your Honor. I was 11 unable -- given the number of documents that came, 12 I was unable to make the transition between 13 morning and afternoon. 14 Q. (BY MR. VILLA) This document's 15 already in evidence, sir. Let me direct your 16 attention to the first full paragraph about six 17 lines down. It says "Messrs. Twomey, Donna 18 Guthrie, and Besse representing the Federal Home 19 Loan Bank of Dallas and others were in 20 attendance." 21 Do you see that? 22 A. Yes. 4504 1 Q. And as we previously noted, that's not 2 unusual. Right? They were in attendance at many 3 of your meetings in 1988? 4 A. I believe that's correct. 5 Q. Now, I'd like to direct your attention 6 to the bottom of Page 3 to the middle of Page 4 7 and ask you to read it to yourself. We're running 8 a little short on time. So, otherwise, I'd read 9 it aloud but I'm going to try to get you out of 10 here on time, sir. 11 MR. RINALDI: Where did you want him to 12 read from, John? 13 MR. VILLA: Bottom of Page 2 where it 14 says "Mr. Berner," all of Page 3, and Page 4 into 15 the middle. 16 A. Okay. 17 Q. (BY MR. VILLA) Does that refresh your 18 recollection, Mr. Whatley, that ten days after the 19 date of Mr. Twomey's letter criticizing 20 compensation, the board of directors of USAT 21 agreed to comply with his criticisms? 22 A. Yes. 4505 1 Q. They agreed to amend the employment 2 contracts. Right? 3 A. I believe that's correct. 4 Q. They agreed to get the money back from 5 escrow; is that right? 6 A. I believe that's correct. 7 Q. And they agreed to hire the Wyatt 8 Company to reexamine compensation levels, as well; 9 isn't that also right? 10 A. I believe that's correct. 11 Q. If you want to check, it's the bottom 12 of Page 3, the second-to-the-last paragraph. Do 13 you see that? 14 A. Yes. 15 Q. In your judgment, sir, was the board 16 trying to do what it believed the federal 17 regulators wanted it to do? 18 A. At all times. 19 Q. Let me direct your attention to the 20 next document, which is the November 7th -- which 21 is the letter dated November 7, 1988, from Art 22 Berner to Neil Twomey which shows as 4506 1 Exhibit B2502. And it's already in evidence as 2 T8120. 3 Do you see that, sir? 4 A. Yes. 5 Q. And do you recall, sir, that 6 immediately after the board meeting, United 7 responded to the regulators by telling them the 8 steps that they are prepared to take? 9 A. I don't recall that, but I'll accept 10 this. 11 Q. Is that what you would have expected 12 after the board entered the resolutions you saw in 13 the November 7 board meeting? 14 A. Yes. 15 Q. Now, sir, let me ask you to turn to the 16 next document, which is B2529. It's a letter 17 dated November 9, 1988, from Arthur Berner to 18 First City Bank in Houston. 19 A. Okay. 20 Q. Do you see that, sir? 21 A. Yes. 22 Q. Do you recall, sir, that we just saw in 4507 1 the board of directors meeting minutes that the 2 board directed that the moneys be recovered -- the 3 moneys that had been placed in escrow and/or trust 4 be recovered from the various banks? 5 A. Yes. 6 Q. Remember we just saw that? 7 A. Yes. 8 Q. And would you expect Mr. Berner to take 9 action to recover that money? 10 A. Yes. 11 Q. And does this appear to be such action? 12 A. Yes. 13 MR. VILLA: I move B2529 into evidence. 14 MR. RINALDI: No objection, Your Honor. 15 THE COURT: Received. 16 Q. (BY MR. VILLA) And directing your 17 attention to the third full paragraph, it says, 18 quote, "The board desires that the determination 19 of the escrow agreement and the return of funds to 20 the association be handled as expeditiously as 21 possible." 22 Do you see that? 4508 1 2 A. Yes. 3 Q. Probably means "termination" and not 4 "determination." But is that consistent with what 5 you understood United Savings Association of 6 Texas' approach was to responding to the 7 regulators? 8 A. Yes. 9 Q. Let me direct your attention to the 10 next tab you've got in there, which is 11 Exhibit B2532. It's a letter dated November 9, 12 1988, from Arthur Berner to Texas Commerce Bank. 13 A. Yes. 14 Q. Do you see that? And is this an 15 attempt, Mr. Whatley, to get back the money that 16 had been deposited in Texas Commerce Bank? 17 A. I believe it was. 18 MR. VILLA: I move B2532 into evidence. 19 MR. RINALDI: No objection, Your Honor. 20 THE COURT: Received. 21 Q. (BY MR. VILLA) Now, do you recall, 22 sir, that from looking at the board minutes of 4509 1 November 7, 1988, that the board of directors of 2 UFG -- the board of directors of USAT had decided 3 to hire the Wyatt Company -- 4 A. Yes. 5 Q. -- to examine the compensation 6 practices. Right? 7 A. Correct. 8 Q. Let me direct your attention to the 9 next tab, which is Exhibit B2495. Do you see 10 that, sir? 11 A. Yes. 12 Q. And can you recognize that as the audit 13 of executive compensation practices that was 14 performed by the Wyatt Company and sent to United 15 Savings Association of Texas pursuant to that 16 board authorization? 17 A. I believe that's correct. 18 MR. VILLA: I move B2495 into evidence. 19 MR. RINALDI: No objection. 20 THE COURT: Received. 21 Q. (BY MR. VILLA) Now, I'd like you to 22 turn to the second page of this document, 2495, 4510 1 and halfway down the left column under the heading 2 "The Wyatt Company Dallas office Compensation 3 Consulting Clients." Do you see the heading at 4 the top? 5 A. Yes. 6 Q. Halfway down the left column, it says 7 "Federal Home Loan Bank of Dallas" -- "Federal 8 Home Loan Bank Dallas, Texas." You see that? 9 A. Yes. 10 Q. Do you recall, sir, whether one of the 11 reasons that the Wyatt Company was hired to do 12 this compensation study was that they were -- that 13 one of their clients was the Federal Home Loan 14 Bank of Dallas? 15 A. I don't specifically recall that, but 16 they were recognized as among the experts in the 17 country. 18 Q. I'm not going to go through the Wyatt 19 report with you, sir. But would it be fair to say 20 that your recollection of the Wyatt report's 21 conclusions was that they supported the 22 compensation practices of United Savings 4511 1 Association of Texas? 2 A. Yes. 3 MR. VILLA: Your Honor, I've got about 4 10, maybe 15 more minutes and then I'll be done. 5 Just wanted to keep the Court informed. 6 THE COURT: All right. 7 Q. (BY MR. VILLA) Now, let me direct 8 your attention, Mr. Whatley, to the next exhibit, 9 which is A1165, which is the minutes of the 10 special board of directors meeting of 11 United Financial Group dated November 15, 1988. 12 And it's already in evidence as T8124. 13 Do you see that, sir? 14 A. Yes. 15 Q. I'll pass that one. Mr. Whatley, let 16 me direct your attention to the next document, 17 which is B2542. It's a letter dated November 18, 18 1988, from Arthur Berner to Texas Commerce Bank. 19 Do you see that? 20 A. Yes. 21 Q. Do you recall, sir, that United was 22 having considerable difficulty getting back from 4512 1 Texas Commerce Bank the money that had been 2 deposited there? 3 A. I do recall that, yes. 4 Q. And do you recall that the association 5 went so far as to offer to hold Texas Commerce 6 Bank harmless for any action that might be taken 7 against TCB if it returned the money? 8 A. No, I do not recall that. 9 MR. VILLA: I move into evidence B2542. 10 MR. RINALDI: I have no objection. 11 THE COURT: Received. 12 Q. (BY MR. VILLA) Looking at this 13 document, does that refresh your recollection that 14 USAT actually offered to hold Texas Commerce Bank 15 harmless if TCB would give back the money that was 16 being held by it? 17 A. No. 18 Q. But it is your recollection that United 19 was taking steps to try to get that money back? 20 A. Yes. 21 Q. And that it was having difficulty with 22 Texas Commerce Bank getting it back; isn't that 4513 1 right? 2 A. Yes, that's correct. 3 Q. Let me direct your attention to the 4 next exhibit, which is a memorandum dated 5 December 18, 1988, from Arthur Berner to a number 6 of senior officers. And it has -- bears Bates 7 stamp No. -- strike that. It has Exhibit No. 8 B2609. 9 Do you have that in front of you? 10 A. Yes, I do. 11 Q. Now, do you recall, Mr. Whatley, that 12 the board of directors offered -- that the board 13 of directors resolved that it would amend the 14 employment contracts to comply with the criticisms 15 of the federal regulators? Do you recall that, 16 sir? 17 A. I believe that's correct. 18 Q. And looking at B2609, does this appear 19 to you to be an effort by Mr. Berner to obtain 20 those amendments from all of the senior officers? 21 A. Yes. 22 MR. VILLA: I move B2609 into evidence. 4514 1 It's already in. Right? It's not? 2 MR. RINALDI: I don't think this is in. 3 MR. VILLA: Move B2609 into evidence. 4 MR. RINALDI: No objection. 5 THE COURT: Received. 6 Q. (BY MR. VILLA) Let me direct your 7 attention, sir, to the next document which is 8 Exhibit B2635. It's a letter dated December 23, 9 1988, from Arthur Berner to Neil Twomey. 10 Do you see that, sir? 11 A. Yes. 12 Q. Now, the final step in amending the 13 employment contracts would be to send them to the 14 regulators. Would you agree with me? 15 A. Yes. 16 Q. Does this appear to you to be 17 Mr. Berner sending the amended employment 18 contracts to the regulators pursuant to the board 19 authorization? 20 A. Yes. 21 MR. VILLA: Move B2635 into evidence. 22 THE COURT: Received. 4515 1 Q. (BY MR. VILLA) Now, sir, you had been 2 on the board of a number of other banks during the 3 time period nineteen -- during the 1980s, hadn't 4 you, sir? 5 A. Yes. 6 Q. And at the time you were familiar with 7 what other financial institutions were paying 8 their top management; isn't that right? 9 A. Yes. 10 Q. You had looked at proxy statements of 11 other companies. Right? 12 A. Yes. 13 Q. Do you believe that the salaries or 14 bonus levels paid to United's -- either USAT or 15 UFG's executives were unreasonable or out of line 16 for a 5- to 7 billion-dollar institution? 17 A. I did not and do not. 18 Q. And did you confirm your belief by 19 hiring outside consultants? 20 A. Yes. 21 Q. And that would include 22 Hewitt & Associates and the Wyatt Company. Right? 4516 1 A. That's correct. 2 Q. During the year 1988, sir, you received 3 a special 10,000-dollar fee in connection with the 4 additional duties that you undertook as a member 5 of the compensation committee. Remember that? 6 A. Yes. 7 Q. Did that fee affect your decisions on 8 compensation matters, sir? 9 A. Of course not. 10 Q. What would you say to anyone who might 11 suggest that you would allow that fee to change -- 12 cause you to abandon your principles as a 13 director? 14 A. I would ask them to step outside. 15 Q. By the way, you haven't taken any fees 16 from United Financial Group in the last six years, 17 have you, sir? 18 A. That's correct. 19 Q. And by staying on the United board, 20 after all of the other board members had left, you 21 were exposing yourself to the threat of a suit, 22 weren't you, sir? 4517 1 A. That is correct and, you know, I -- 2 maybe I'm different, but I don't believe in 3 abandoning the ship when it's in trouble. I think 4 you have an obligation to hang in there and do 5 whatever you can to try to save it. 6 Q. And you were doing what you could to 7 try to save it by keeping these executives 8 employed, weren't you, sir? 9 A. That is correct. 10 Q. Now, after the association closed, did 11 UFG settle with a number of its former executives 12 on their compensation claims? 13 A. Yes, it does. 14 Q. And did that include Mr. Crow, 15 Mr. Berner, and Dr. Munitz? 16 A. I believe that's correct. 17 Q. Do you recall roughly how much UFG paid 18 on the dollar on those compensation claims? 19 A. My recollection is 25 cents on the 20 dollar. 21 Q. And did you approve -- not in the sense 22 of approve morally, but did you approve in your 4518 1 corporate sense of the decisions to settle with 2 these directors? 3 A. Yes, because we were advised by outside 4 counsel that in their opinion, these were valid 5 claims and that they should be settled if at all 6 possible. And I thought 25 cents on the dollar 7 was a very favorable settlement to the 8 institution. 9 Q. I said -- I said directors. I meant 10 officers. But your answer would be the same; is 11 that right? 12 A. It would be the same. 13 Q. And we're talking -- this would include 14 Mr. Crow, Mr. Berner, and Dr. Munitz; isn't that 15 right? 16 A. Right. 17 Q. In reaching the decision to settle with 18 Mr. Crow, you were not influenced in any way by 19 something that Mr. Crow did; is that right? I 20 mean, he wasn't -- he wasn't giving you advice on 21 his settlement? 22 A. Of course not. 4519 1 Q. And would the same thing be true of 2 Mr. Berner? When you settled with Mr. Berner, 3 Mr. Berner had no input, no influence on you as to 4 what to settle with him? 5 A. No. 6 Q. And would the same thing be true of 7 Dr. Munitz? 8 A. True. 9 Q. Let me ask you to turn to the next 10 document. 11 MR. VILLA: Might I inquire, 12 Mr. Rinaldi, would you do me the courtesy of 13 agreeing that I can introduce the board minutes of 14 the UFG board of July 31, 1989, October 13, 1989, 15 and November 27, 1989, approving these settlements 16 so that I can get Mr. Whatley out of here a little 17 quicker? 18 MR. RINALDI: Sure. I thought we 19 entered into something similar. 20 THE COURT: All right. Moving those 21 documents into evidence? 22 MR. VILLA: I am, Your Honor. 4520 1 THE COURT: Received. 2 MR. RINALDI: These are the minutes 3 that approved the -- of the compensation 4 committee. 5 MR. VILLA: Board of directors of 6 United Financial Group is the first one. The 7 second one is the compensation committee of 8 United Financial Group dated October 13, 1989, 9 which bears -- which is T8157. 10 THE COURT: Received. 11 MR. VILLA: And the third one is the 12 minutes of the compensation committee of 13 United Financial Group dated November 27, 1989, 14 which is T8158. 15 THE COURT: Received. 16 MR. RINALDI: I believe those have 17 already been admitted. 18 MR. VILLA: I think they had been, too, 19 but I couldn't confirm that. 20 Q. (BY MR. VILLA) In all the time that 21 you were associated with United Savings 22 Association and United Financial Group, sir, did 4521 1 you ever see any act by any of the respondents 2 which you believed was not taken in the best 3 interest of the companies? 4 A. No. 5 Q. In all the time that you were 6 associated with United Financial Group or USAT, 7 did you ever see any act by the respondents that 8 you believed was reckless? 9 A. No. 10 Q. In all the time that you were 11 associated with United Financial Group and United 12 Savings, did you ever see any act by any of the 13 respondents that you believed was an unsafe and 14 unsound practice? 15 A. No. 16 Q. In all of the time that you were 17 associated with United Financial Group and USAT, 18 did you ever see any act by the respondents which 19 you believed to be a violation of law or 20 regulations? 21 A. No. 22 Q. Apart from their employment 4522 1 compensation, do you know of any personal benefit, 2 kickback, stipend, or other thing that any of 3 these respondents received in connection with 4 United or United Savings Association other than 5 the employment compensation? 6 A. None to my knowledge, no. 7 Q. And the employment compensation for 8 these respondents was approved by you and other 9 members of the compensation committee; isn't that 10 right? 11 A. Correct. 12 Q. And you were a stockholder of UFG 13 throughout this time period. Right? 14 A. Correct. 15 Q. And in approving these compensation 16 packages, you realized that some of the money that 17 was being paid could be yours because of your 18 position as a stockholder. Right? 19 A. Conceivably. 20 Q. Did you believe that the compensation 21 paid to the respondents was fair? 22 A. Yes. 4523 1 Q. And based upon your observation of the 2 respondents, do you believe they were doing their 3 best -- the best they could to see that UFG and 4 USAT would survive? 5 A. Yes. 6 Q. You can't recall all the details of the 7 compensation issues for United as you sit here 8 today, can you? 9 A. No. 10 Q. But you do recall the reasons for your 11 major decisions. Right? 12 A. Yes. 13 Q. And you've told us those reasons to the 14 best of your abilities? 15 A. Yes. 16 Q. And to the extent that your 17 recollection is different from the actions set 18 forth in the board and committee minutes, you 19 would accept the minutes as correct. Right? 20 A. I would. 21 MR. VILLA: Thank you, Mr. Whatley. 22 It's been a pleasure. 4524 1 THE WITNESS: Thank you. 2 THE COURT: Mr. Rinaldi, are you going 3 to have redirect? 4 MR. RINALDI: Well, I do; but I think 5 that Mr. Whatley has expressed a desire to get out 6 of here. And in the interest of getting him out, 7 perhaps I should just ask one or two questions; 8 and then I will let him go. 9 10 REDIRECT-EXAMINATION 11 12 (3:36 p.m.) 13 Q. (BY MR. RINALDI) Mr. Whatley, 14 Mr. Villa made reference to a Sandy Laurenson 15 contract that had been entered into with 16 Ms. Laurenson that provided some severance 17 benefits. 18 Do you recall that? 19 A. Yes. 20 Q. Do you recall whether United -- United 21 Savings Association of Texas had a -- was failing 22 its net-worth requirements at the time that that 4525 1 contract was entered into in 1986 with 2 Ms. Laurenson? 3 A. I do not. 4 Q. Okay. And he also indicated that 5 Mr. Williams, in 1983, entered into a contract 6 which ultimately had some severance benefits that 7 were paid in 1986. 8 Do you recall whether, at the time the 9 contract was either entered into or at the time 10 that the benefits were paid out, whether United 11 Savings Association of Texas was failing its 12 net-worth requirements? 13 A. I have no specific recollection, but I 14 don't believe that it was. 15 Q. Okay. And during the time that you 16 were considering the question of entering into new 17 contracts, did Mr. Berner or Mr. Crow or 18 Mr. Munitz approach you and indicate to you that 19 they were going to leave United Savings 20 Association of Texas if they didn't receive an 21 increase in salary? 22 A. They did not. 4526 1 Q. Did anyone else approach you and 2 indicate to you that -- 3 A. No. 4 Q. -- if they did not receive an increase 5 in salary, they would leave? 6 A. No one. If they had approached me, 7 maybe they knew better but they wouldn't have 8 gotten anywhere. 9 Q. Did anyone approach you and tell you 10 that if they didn't receive a bonus -- 11 A. No. 12 Q. -- in 1988, that they were going to 13 leave? 14 A. No. Same answer as before. 15 Q. And did anyone approach you and tell 16 you that if they didn't receive an employment 17 contract from USAT that had severance benefits 18 that were guaranteed with some kind of letter of 19 credit or an escrow arrangement or a trust 20 agreement that they were going to leave USAT? 21 A. Same answer. No. 22 Q. Now, Mr. Villa indicated to you in 4527 1 Exhibit A6022 and that's the -- if you can look in 2 your book -- is the Federal Home Loan Bank Board 3 cover letter that was sent along with the 1988 4 exam, and let me just read to you a portion of the 5 paragraph that he read. 6 It says "Examiners have noted in the 7 report continuing turnover in management and the 8 directors since the last federal examination as of 9 May 27, 1986. Moreover, the report and previous 10 correspondence from the bank has expressed our 11 concern with the lack of savings and loan 12 operations and lending experience evident in the 13 roster of senior management at United. 14 Do you recall being concerned about the 15 level of experience in savings and loan operations 16 and lending experience evident in the senior 17 management at United? 18 A. It had never been expressed before, no. 19 Q. But it was expressed to you during the 20 1988 exam -- 21 A. Apparently. 22 Q. -- isn't that correct? 4528 1 A. Apparently, it was. 2 Q. And then it goes on and says "We were 3 advised of the employment of Mr. Lawrence -- 4 "advised of the employment of Mr. Lawrence Connell 5 as president and chief executive officer effective 6 as of July 1, 1988." 7 And in order to get him to come into a 8 situation, you had to agree to enter into an 9 employment contract with him that provided some 10 guarantees regarding his severance in the event 11 United Savings Association failed. 12 Do you remember that? 13 A. I assume that to be the case. 14 Q. Okay. And United Savings Association 15 of Texas entered into a contract with Mr. Connell, 16 didn't they? 17 A. I assume they did. 18 Q. Okay. Now, you have seen some 19 documentation here indicating that the board sent 20 a copy of Mr. Connell's contract to the Federal 21 Home Loan Bank Board for their review. 22 Do you recall that? 4529 1 A. Yes. 2 Q. Okay. Now, Mr. Connell's contract was 3 approved by the board of USAT at or about the same 4 time that the contracts for Mr. Berner, 5 Mr. Munitz, and Mr. Crow were also approved by the 6 board; isn't that correct? 7 A. If you say so, I'll accept it. 8 Q. Okay. Is there a reason why you sent 9 the copy of Mr. Connell's contract to the Federal 10 Home Loan Bank Board for their review but you 11 didn't send the copies of the contracts for 12 Mr. Berner and Mr. Crow and Mr. Munitz and 13 Mr. Williams and Mr. Jackson? 14 A. I think that's been covered amply, 15 Counsel, that all of that was public knowledge. 16 There were no secrets. The regulators had it. 17 Q. Well, there was an indication here that 18 in February 11th, 1988, a contract was entered 19 into by USAT but subsequently, that contract was 20 amended. 21 Do you recall that? 22 A. I do. 4530 1 Q. Okay. And that amendment occurred 2 sometime in -- and at about that time, isn't it 3 true that the copy or the copies of the contracts 4 of -- that USAT had entered into with Mr. Berner 5 and Mr. Munitz and Mr. Crow and Mr. Gross were 6 never sent to the Federal Home Loan Bank Board in 7 the same fashion that Mr. Connell's contract was 8 sent to the bank board? 9 A. I don't know. I don't know that. 10 Q. Now, you've been shown a copy of the 11 Hewitt study which indicates that -- I believe the 12 record will reflect that it was a draft of it, the 13 initial draft was obtained -- was presented to you 14 on June the 28th prior to the board meetings of 15 USAT and UFG at which the new or amended 16 employment contracts were entered into. 17 Do you recall that? 18 A. No. 19 Q. Well, do you recall having been given a 20 copy today of what's been marked as A11030 which 21 is the Hewitt report? 22 A. I know that I saw it. At what time, I 4531 1 don't know. Yes, I saw it. 2 Q. Okay. Now, it's dated September 7, 3 1988. In other words, the final contract or the 4 final report didn't come out until several months 5 after the employment contracts had been entered 6 into and until several months after the initial 7 draft was given to you on June 28th. And it was 8 also some -- well, it was originally requested on 9 March 30th. So, it would have been a number of 10 months after it was originally requested in March? 11 A. There were two different studies. 12 Q. Well, one was by Wyatt and one was by 13 Hewitt? 14 A. That's correct. 15 Q. But the Hewitt contract was the one you 16 referred to in your March 30th, 1988, memorandum 17 in which you put in the handwritten note and said 18 you wanted a compensation review; isn't that 19 correct? 20 A. That's correct. 21 Q. Is there a reason why the board went 22 ahead and granted salary increases and granted the 4532 1 special executive bonus prior to ever receiving a 2 copy of the Hewitt report? 3 A. You bet. 4 Q. Okay. What was that reason? 5 A. The reason is that we needed all the 6 talent we could get and if those items were not 7 addressed immediately, you were faced with losing 8 some valuable people. 9 Q. And as you recall and as you sit here 10 today, no person at UFG or executive -- executive 11 of USAT had approached you during that period of 12 time and advised you that if they didn't receive a 13 salary increase, that they were going to leave the 14 institution? 15 A. They did not. It was just apparent on 16 the surface that we had to be sure that we were in 17 line compensation wise. 18 Q. And no one approached you again and 19 told you that if they didn't receive a bonus -- 20 A. No. 21 Q. -- that they were going to leave? 22 A. That does not work with me, Counsel. 4533 1 Q. Well I understand. 2 THE COURT: We've covered that. Do you 3 have another question? 4 MR. RINALDI: I think that's all I 5 have. 6 MR. VILLA: Your Honor, two quick 7 questions. 8 9 RECROSS-EXAMINATION 10 11 (3:47 p.m.) 12 Q. (BY MR. VILLA) Mr. Whatley, did -- 13 I'm not going to ask you to do it, but if the 14 record would show that Mr. Connell's contract was 15 substantially similar to the contracts of 16 Mr. Berner, Mr. Crow, and others, do you see any 17 reason why Mr. Berner would have to send five, 18 six, seven copies of a substantially similar 19 contract to Neil Twomey? 20 A. No. 21 Q. Mr. Rinaldi asked you the question as 22 to whether or not a number of people had 4534 1 approached you and asked -- and said that they 2 were about to leave. 3 Do you remember that question? 4 A. Yes. 5 Q. Let me ask you to turn to that 6 examination report 6022. You were just looking at 7 it. It's about halfway through your stack. 8 A. Okay. 9 Q. I'd like you to turn to Bates stamp 10 number page -- it's Page 3 of the exam report. 11 It's about five pages back. Where it says 12 "management changes." 13 Do you see that at the top? 14 A. Yes. 15 Q. Let me just read the first sentence. 16 "USAT has experienced a turnover of 13 key 17 personnel despite efforts to maintain a high level 18 of experienced and qualified staff. Seven of the 19 13 senior employees were terminated and six 20 resigned." 21 Sir, nobody had to come and tell you 22 that they were about to leave. In fact, they were 4535 1 leaving, weren't they? 2 A. That's correct. 3 Q. And the examiners noted that for you, 4 didn't they, sir? 5 A. Yes. 6 MR. VILLA: No further questions. 7 MR. RINALDI: I have just one further 8 question. 9 10 FURTHER REDIRECT-EXAMINATION 11 12 13 Q. (BY MR. RINALDI) If you were so 14 concerned about losing key personnel, why were 15 seven of the 13 people terminated? 16 A. I have no idea. I did not terminate 17 them. 18 MR. RINALDI: Thank you. I have no 19 further questions. 20 MR. KEETON: Your Honor, I actually 21 have, Mr. Whatley, five minutes' worth of 22 questions on a totally unrelated subject. 4536 1 Can you sit there five? 2 THE WITNESS: Okay. 3 MR. KEETON: All right. This is going 4 to be a little informal, Your Honor, because it's 5 my charts. But I don't have time to set these 6 things up. 7 8 9 CROSS-EXAMINATION 10 11 12 Q. (BY MR. KEETON) Mr. Whatley, I had 13 intended to get these things admitted into 14 evidence based on the fact that T8003 came in this 15 morning through Mr. Rinaldi which has all the 16 directors and their types of service. 17 MR. KEETON: You will recall, Your 18 Honor, there was some complaints that some of 19 these people started and stopped a little earlier 20 when I used this chart for demonstrative purposes 21 in my opening. We've corrected that. Overnight, 22 Mr. Rinaldi can check this and I'll put these in 4537 1 tomorrow and not hold Mr. Whatley. 2 Q. (BY MR. KEETON) But what I want to 3 ask you, Mr. Whatley, is this. I'm going to skip 4 all the persons who we've had testimony about, 5 although I'd like to hear you on them. But 6 Mr. Bentley has been here and he's talked about 7 Mr. Coles. We've heard you on Mr. Williams, and 8 Mr. Williams has been here. 9 Do you recall Mr. Duckett? 10 A. I do. 11 Q. Tell me about who Mr. Duckett is in a 12 general way and your opinion of Mr. Duckett as a 13 board member. 14 A. Mr. Duckett was chief executive officer 15 of the savings and loan headquartered in El Campo, 16 Texas, that was acquired by United. 17 Q. And as a board member, how did you find 18 Mr. Duckett? 19 A. First-rate. 20 Q. Is he also a prominent lawyer in that 21 area? 22 A. I believe that's correct. 4538 1 Q. All right. How about Mr. Edgar 2 Keltner? Do you know him? 3 A. Yes. Mr. Keltner was an attorney with 4 a prominent firm in Fort Worth and was a director 5 of a former association in Fort Worth that was 6 acquired by United. 7 Q. And how did you find Mr. Keltner as a 8 director of UFG? 9 A. Excellent. 10 Q. Charles LeMaistre? 11 A. Dr. LeMaistre was head of M.D. Anderson 12 Hospital in Houston. Prior to that, I think he 13 had been chancellor to the University of Texas. 14 Q. And how was he as a director? 15 A. Extremely fine individual. 16 Q. Mr. Putegnat? 17 A. Putegnat. 18 Q. Putegnat? 19 A. I did not know Mr. Putegnat until he 20 came on the board. I know nothing about his 21 history, and I don't have anything certainly 22 adverse about him. 4539 1 Q. How about when he was on the board? 2 Did you observe anything that would cause you to 3 believe he did not try to function as a proper 4 director? 5 A. No. 6 Q. We'll skip -- let's see. I said 7 Williams, Munitz. 8 How about Burton Borman? 9 A. They were former stockholders, I think, 10 in the association that United acquired. 11 Q. Houston First? 12 A. Houston First. They were based in 13 California. I really don't -- I really don't or 14 did not know much about Mr. Borman. I saw him in 15 meetings. 16 Q. How did he seem to you in meetings? 17 A. He seemed to be fine. 18 Q. By the way, the reason for the red, 19 those are people who were on the board prior to 20 any purchasing by Mr. Hurwitz or MAXXAM or 21 Federated. The yellow are persons who were 22 associated with PennCorp that come out of that 4540 1 other organization. 2 A. That came out of First. 3 Q. Right. There's no significance to the 4 other colors. 5 A. Right. 6 Q. How about Mr. Campbell? 7 A. Mr. Campbell was from west Texas. He 8 had been a long-time director of United or some of 9 its affiliates. 10 Q. And how -- what was your opinion of him 11 as a director? 12 A. Very fine. 13 Q. Mr. Holt? 14 A. I don't remember him. 15 Q. All right. We'll skip Hurwitz. We'll 16 skip Kozmetsky. He's been here. Mr. Silverman? 17 A. Okay. Silverman and Sterling were both 18 California-based, and they came on board from the 19 First Federal or whatever it was, Houston First. 20 And I -- their actions on the board were fine. I 21 just didn't know them very well. 22 Q. And then Mr. Winters? 4541 1 A. He was formerly CEO of Houston First 2 Federal. 3 Q. And how was he as a board member? 4 A. He was fine. 5 Q. Now, you've been on a number of boards, 6 as Mr. Villa proved up. How would you 7 characterize the quality and the strength of this 8 board versus these other boards you've been on? 9 A. Equal or better. 10 MR. KEETON: I have no other questions, 11 Your Honor. 12 MR. RINALDI: We have no other 13 questions, Your Honor. Thank you, Mr. Whatley. I 14 sincerely apologize. 15 THE COURT: Thank you, Mr. Whatley. 16 You may step down. 17 THE WITNESS: Thank you, Your Honor. I 18 appreciate being able to get out of here. 19 MR. BLANKENSTEIN: Your Honor, I hate 20 to impose on Mr. Whatley, but I have two questions 21 to ask him, two brief questions. 22 THE COURT: All right. Can you resume 4542 1 the seat? We will hear from Mr. Blankenstein. 2 MR. BLANKENSTEIN: Thank you, Your 3 Honor. 4 Q. (BY MR. BLANKENSTEIN) Your Honor, I'm 5 showing him T8128, which I believe is already in 6 evidence. 7 8 9 CROSS-EXAMINATION 10 11 (3:54 p.m.) 12 Q. (BY MR. BLANKENSTEIN) Mr. Whatley, 13 I'm going to focus your attention on the third 14 paragraph on the first page. 15 A. Okay. 16 Q. And the third paragraph on the second 17 page. If you could just quickly review those. 18 A. Okay. 19 Q. Do you remember that Jenard Gross 20 resigned in approximately November of 1988 his 21 relationship with USAT and UFG? 22 A. Yes. 4543 1 Q. And do you remember there was a 2 separation agreement with Mr. Gross -- 3 A. Yes. 4 Q. -- in connection with that? And that 5 there was a -- Mr. Gross released UFG and USAT 6 from all claims under all of his contracts -- 7 A. Correct. 8 Q. -- in exchange for forgiveness of 9 Mr. Gross' outstanding loan from UFG in connection 10 with his purchase of stock back in 1985? 11 A. Yes. 12 Q. Did Mr. Berner consult with you in 13 connection with the resolution of that matter? 14 A. He did. And also, we consulted with 15 our outside counsel. 16 Q. And did you -- was it your view that 17 that was a fair and just resolution of those 18 claims? 19 A. It was. The outside counsel advised us 20 in their opinion that Mr. Gross had valid claims 21 against the company and that this would be a 22 reasonable settlement. 4544 1 Q. Thank you, Mr. Whatley. 2 3 FURTHER REDIRECT-EXAMINATION 4 5 (3:56 p.m.) 6 Q. (BY MR. RINALDI) Did outside counsel 7 advise you that the entry into the employment 8 contracts with Mr. Gross of July of 1988 were 9 consistent with Federal Home Loan Bank Board 10 regulations? 11 A. No. 12 Q. Did you seek the advice of outside 13 counsel before USAT entered into those contracts? 14 A. I don't think so. 15 Q. Had Hewitt & Associates advised you 16 that you should seek the advice of outside counsel 17 before entering into those contracts? 18 A. I don't recall that. 19 Q. If the record reflects that that is the 20 advice that you were given by Hewitt & Associates, 21 as you sit here today, do you know why you would 22 have disregarded that information? 4545 1 A. If they recommended that and that's in 2 their report, then I am not going to tell you that 3 I did not seek outside counsel because I normally 4 tried to follow a reasonable approach. So, maybe 5 we did. But I can't remember every conversation 6 in the last 20 years. 7 MR. RINALDI: Okay. No further 8 questions. 9 THE WITNESS: Thank you. 10 THE COURT: If there is no other 11 matters to consider this evening. 12 MR. RINALDI: Well -- 13 MR. STEARNS: If it's Your Honor's 14 pleasure, we have another witness who is 15 available. 16 THE COURT: We'll take a short recess. 17 18 (A short break was taken 19 at 3:57 p.m.) 20 21 THE COURT: We'll be back on the 22 record. OTS has another witness? 4546 1 MR. RINALDI: We do, Your Honor, 2 although Mr. Stearns points out to me that, you 3 know, it's the judge's preference. If you want, 4 we can start the witness now and proceed for a 5 while or -- 6 THE COURT: How long is he going to 7 take? 8 MR. RINALDI: He will probably take 9 well into tomorrow, and I suspect there is some 10 substantial cross-examination. So -- 11 THE COURT: Well, it was my 12 understanding this morning that when we finished 13 with Mr. Whatley, that that was it for the day. 14 But I think since we're back and on the record, we 15 might as well go ahead. 16 MR. RINALDI: Okay. Fine. Do you have 17 a preference as to when you'd like to quit? 18 THE COURT: 5:00 o'clock. 19 MR. RINALDI: Okay. Fine. 20 21 22 4547 1 2 ALLEN WAYNE DERMODY, 3 4 called as a witness and having been first duly 5 sworn, testified as follows: 6 7 THE COURT: Be seated, please. 8 9 EXAMINATION 10 11 12 Q. (BY MR. RINALDI) Will you state your 13 full name for the record, sir? 14 A. My name is Allen Wayne Dermody. 15 Q. And how are you presently employed, 16 sir? 17 A. I'm employed as an examiner for the 18 Office of Thrift Supervision. 19 Q. Okay. And can you tell the Court what 20 your educational background is? 21 A. Well, I have a degree in business 22 administration from the University of Washington, 4548 1 Seattle; and I now have a JD degree from Texas 2 Wesleyan University now located in Fort Worth, 3 Texas. 4 Q. And when did you graduate from the 5 University of Washington? 6 A. 1971. 7 Q. Okay. And can you just trace for the 8 Court the work experience that you've had since 9 your graduation from the University of Washington? 10 A. Certainly. I started in 1971 as an 11 examiner for the Federal Home Loan Bank Board in 12 Chicago, Illinois. Examined through 1976. Then 13 went to the Federal Home Loan Bank of Chicago that 14 year. 1977, I became assistant vice president 15 supervisory agent for the bank and for the Federal 16 Home Loan Bank Board. 17 In 1983, I relocated and went to work 18 for the Federal Home Loan Bank of Little Rock, 19 Arkansas, which moved three months later to become 20 the Federal Home Loan Bank of Dallas. There, I 21 was vice president, head of industry development, 22 and corporate affairs, basically in charge of the 4549 1 application process. 2 1985, we reorganized. I became head of 3 administration for the supervisory function at the 4 Federal Home Loan Bank. 5 1988, I basically created and initiated 6 a new function -- a liaison function dealing with 7 basically external agencies to the Federal Home 8 Loan Bank Board such as Congressional committees, 9 GAO, Treasury Department, anybody that wanted to 10 come and take a look at what we were doing. As I 11 said, I started in 1983. And then in 1992, I went 12 back to be an examiner. 13 Q. Okay. Now, you've given us a lot of 14 titles there. But can you just generally describe 15 what the nature of the duties were after you -- 16 when you -- after you initially went to work for 17 the Federal Home Loan Bank of Chicago? 18 A. Federal Home Loan Bank of Chicago, as I 19 said after the first year, I became assistant vice 20 president, supervisory agent. "Supervisory agent" 21 is a term of art for the Federal Home Loan Bank 22 system. It meant that while I was an employee of 4550 1 the Federal Home Loan Bank, I represented the 2 Federal Home Loan Bank Board in dealing with 3 supervisory matters involving savings and loans in 4 the district in which we were located. So, I had 5 responsibility for taking examination reports from 6 examination staff and determining how we would 7 supervise those institutions, whether we'd take 8 any type of supervisory action, determine what it 9 was, and, in fact, carry it out, implement it. 10 Q. As an examiner and a supervisory 11 analyst, were you responsible from time to time 12 for reviewing the compensation practices of 13 savings and loan associations? 14 A. Review of compensation was an integral 15 part of the examination of an association and, 16 also, a part of the supervisory process. I don't 17 want to overemphasize it, but we did look at it -- 18 every examination, for the longest time, had 19 compensation figures in it; and we reviewed those 20 and did look at them. 21 Q. And then after you served as a 22 supervisory agent, you indicated that you became 4551 1 an assistant vice president. I'm sorry. You went 2 to the Federal Home Loan Bank Board in Little 3 Rock? 4 A. Yes. Brief history, the Federal Home 5 Loan Bank of Little Rock was relocating from 6 Little Rock to Dallas. Most of the staff stayed. 7 I was recruited, came down to work there, promoted 8 to vice president and, again, supervisory agent 9 where I was responsible for the entire department 10 that handled any and all applications filed by a 11 savings and loan in a five-state area. So, I was 12 responsible for the entire process. 13 Q. And what five states are we talking 14 about here? 15 A. Five states: Arkansas, Louisiana, 16 Mississippi, New Mexico, and Texas. 17 Q. Okay. And in connection with that, 18 were you familiar with the policies of the Federal 19 Home Loan Bank of Little Rock as it related to 20 compensation matters? 21 A. Well, yes. I might add, the policies 22 of the Federal Home Loan Bank of Little Rock were 4552 1 the policies of the Federal Home Loan Bank Board. 2 The bank board set the policy. We followed their 3 policies. 4 Q. And after you were -- your service at 5 the Federal Home Loan Bank of Little Rock, you 6 then went to, in 1985, the Federal Home Loan Bank 7 supervisory department? Is that what you said? 8 A. No. In '85, we were expanding rapidly; 9 and I became head of the administration section 10 for the supervisory staff in Little Rock or -- 11 excuse me -- in Dallas. 12 Q. And when did you move from Little Rock 13 to Dallas? 14 A. Labor Day weekend 1983. 15 Q. Okay. And you say you were expanding 16 rapidly. What did you mean by that? 17 A. The supervisory staff in Little Rock, 18 when the move over Labor Day took place in 1983, 19 was approximately 15 employees down from about 40 20 before. That includes supervision side and the 21 application side I was responsible for. We were 22 up to 90, I think, a year, year and a half later. 4553 1 Soon were up to a couple hundred. We then had the 2 examination staff join us. By the time 1988 3 rolled around, our staff was at an authorized 4 level of around 440 people. 5 Q. And what occasioned the dramatic rise 6 in the number of persons in the Federal Home Loan 7 Bank of Dallas? 8 A. Well, one basic source. Let me give 9 you a minor one. The Federal Home Loan Bank Board 10 transferred all -- effectively transferred all of 11 their examination staff, about 110, 115 people, I 12 believe, from the bank board payroll to the 13 Federal Home Loan Bank. So, that accounted for a 14 small portion of it. 15 The rest of the expansion was because 16 of the difficulties the thrift industry was 17 experiencing. We needed more people to go out and 18 examine and supervise in the entire range of 19 functions we performed. We needed more people to 20 do this. There was a tremendous workload. 21 Q. Okay. And in 1985, what was the nature 22 of your duties with the Federal Home Loan Bank? 4554 1 A. Well, at the end of 1985, as head of 2 administration, I was responsible for a lot of, if 3 you will, the back office functions, 4 administration of budget, dealing with personnel 5 issues, also dealing with some of the supervisory 6 issues. For instance, in the beginning of the 7 period, we had a committee that was formed that 8 dealt with supervisory issues. I was secretary of 9 that committee and maintained all the records. I 10 did not have direct supervisory responsibility; 11 but I handled a lot of the information that came 12 through, was responsible for monitoring it for 13 consistency. And as it turned out, because I had 14 more experience than most people, I ended up being 15 a source of information for a lot of people, for a 16 lot of the staff. 17 Q. Okay. And after that job, you 18 indicated that you coordinated responses of 19 inquiries to the Federal Home Loan Bank? 20 A. Yes. By 1988, Congress was extremely 21 concerned about the savings and loan industry, the 22 crisis. Texas alone was considered to be one of 4555 1 the worst in the country, had the most severe 2 problems in some people's minds or at least the 3 whole southern tier of the country, really. We 4 were having continual investigations or reviews, 5 whatever you want to call them. People call them 6 various things, but we had the GAO. We had the 7 Senate banking committee, House banking committee, 8 and at least one other Congressional committee 9 down interviewing people, looking at what's going 10 on. They were concerned about what was happening 11 and wanted to have a better understanding to 12 develop legislation. 13 It got to the point where we had to have 14 someone who was familiar with the system, knew how 15 the system operated and knew how to find things, 16 how to get them quickly, coordinate this. And I 17 was asked if I would start this process and be in 18 charge of all this coordination so that GAO was 19 down there. I was responsible for all the 20 liaison, making sure that they saw the people they 21 needed, got the records they needed, and help them 22 explain what it was in a lot of cases. Same thing 4556 1 with the other committees 2 Q. And in that capacity, did you become 3 familiar with the regulations and policies of the 4 Federal Home Loan Bank as they applied to 5 compensation practices at the savings and loans? 6 A. Well, I didn't become specifically 7 knowledgeable then. I had been dealing with them 8 over the years ever since I started as an 9 examiner. Obviously, I sometimes had to refresh 10 myself when the committees came in and started 11 asking questions and I had to continue maintaining 12 my knowledge of these issues when they were down 13 there so I could help explain what all of this 14 was, what it meant, and what we were doing. 15 Q. And you indicated then in 1992 -- or 16 you remained in that position until 1992; is that 17 correct? 18 A. Correct. 19 Q. And then in 1992, you went back to 20 being an examiner? 21 A. Yes. As I said, we were up to about 22 400-some people in 1988, '89. Our district is now 4557 1 less than 200 people. So, we reduced -- in fact, 2 our region was five states with 400 people. Now 3 it's 14 states with around 200 people. We had a 4 large shrinkage. We didn't need the liaison 5 function anymore and I was moved back to being an 6 examiner. 7 Q. Okay. And have you then served as an 8 examiner -- in the capacity of an examiner since 9 1992? 10 A. That's correct. 11 Q. Now, are you familiar as a result of 12 your work experience at the Federal Home Loan Bank 13 as you've just described with the concept of 14 safety and soundness? 15 A. Yes, I am. 16 Q. Okay. And what is your understanding 17 of the concept of safety and soundness? 18 A. Well, safety and soundness deals with 19 really either an action or, in fact, an omission 20 where that action is contravention or violates 21 what I guess you can call generally-accepted 22 standards of practice where that -- either that 4558 1 action or that failure to act has a high 2 likelihood or -- not just high likelihood -- an 3 unusually high likelihood that action or omission 4 will result in substantial loss or material loss 5 to the institution, its stockholders, or the 6 insurance corporation, whichever, the FSLIC, now 7 the FDIC. 8 Q. And are you also familiar with the 9 regulations that are -- were in place in about 10 1988 promulgated by the Federal Home Loan Bank as 11 they applied to compensation practices at savings 12 and loans? 13 A. Yes. 14 Q. Okay. Now, did you prepare a report in 15 connection with the compensation practices that 16 were engaged in by United Savings Association of 17 Texas and the -- and United Financial Group in 18 about 1988? 19 A. Yes, I did. 20 Q. Okay. 21 MR. RINALDI: Your Honor, I'm handing 22 up a copy of what's been previously marked as 4559 1 Exhibit 2. 2 Q. (BY MR. RINALDI) Would you take a 3 look at that document, sir? Does that appear to 4 be the report that you prepared? 5 A. Yes, it does. 6 Q. Okay. Now, can you explain for the 7 Court what the scope of your assignment was in 8 preparing this report? 9 A. Well, the scope of my assignment was to 10 review a series of practices at -- both at 11 organizations during this time period, '87 12 approximately through '88, '89, which entailed the 13 review of the financial regulatory reports filed 14 by those organizations, their internal minutes, 15 some internal memorandum, material from our 16 agency, the Federal Home Loan Bank Board and 17 Federal Home Loan Bank, various contracts or other 18 documents related to those transactions. 19 Q. And were you -- 20 MR. BLANKENSTEIN: Your Honor, if you 21 remember, we had filed a motion in limine at the 22 initiation of the case to preclude any evidence 4560 1 with regard to the 1987 bonus arrangements to be 2 introduced by the OTS in this case on the grounds 3 that there was no reference in the notice of 4 charges to the 1987 bonuses that were paid. 5 Your Honor denied that motion, but I 6 believe that -- I'd like to renew the objection 7 here, have a continuing objection to any testimony 8 in that regard. 9 The introduction of any evidence on the 10 1987 bonus arrangement which Mr. Dermody said he 11 will testify about would prejudice the respondents 12 in that there was no reference in the notice of 13 charges to any such transactions. Effectively, 14 OTS has made an amendment to the notice of charges 15 in an untimely fashion. The 1987 transaction is 16 an entirely separate matter from the compensation 17 claims that they are challenging in 1988 and in no 18 circumstances could there be a relation back with 19 the relation back doctrine applied to bring that 20 transaction within the scope of the charges that 21 they did, in fact, file in their notice of 22 charges. 4561 1 I understand Your Honor's ruling. I'm 2 just making that objection for the record. 3 MS. CLARK: Your Honor, we join that 4 objection on behalf Plaintiff Berner and 5 Mr. Munitz and Mr. Crow. 6 THE COURT: All right. Well, the 7 objection is noted. I'll stand on my prior 8 ruling. 9 MR. BLANKENSTEIN: Your Honor, may I 10 have a continuing objection to the introduction of 11 that testimony? 12 THE COURT: Yes. 13 MR. BLANKENSTEIN: Thank you. 14 Q. (BY MR. RINALDI) Now, can you 15 describe for the Court just sort of generally how 16 you went about preparing your report? 17 A. Well, when I got the request, I 18 reviewed it and went through a series of documents 19 that were sent to me to look at just to determine 20 whether I felt I would be capable of doing this 21 and whether there was sufficient time to do it. 22 After getting permission to do that locally, I 4562 1 then responded and said, yes, I'd be willing to do 2 this and went up to Washington to review a large 3 number of documents that were headquartered in 4 Washington at OTS. And then reviewed all of these 5 documents and, after I did that, after my review 6 over a period of several days of documents, got 7 copies of the ones I wanted, took them back with 8 me. And then while I was in the field, took those 9 documents and requested anything I needed and then 10 prepared the report for a period of weeks. 11 Q. Okay. And in connection with the 12 preparation of the report, were you limited in any 13 way in what you could or couldn't include in the 14 report? 15 A. No. Our discussion about the report 16 was "These are the things we would like you to 17 focus on. This is the topics we're interested 18 in." But it was very clear that "If you see 19 something else that you want to add or you feel is 20 appropriate or if you just can't deal with this 21 issue, let us know." But there was no restriction 22 or saying "you may only deal with certain issues." 4563 1 Q. Okay. 2 MR. RINALDI: Your Honor, I'd like to 3 move at this time Exhibit 2 into evidence which is 4 Mr. Dermody's report from his deposition entitled 5 Dermody No. 2. 6 MS. CLARK: No objection, Your Honor. 7 MR. BLANKENSTEIN: No objection. 8 MR. RINALDI: Now -- 9 THE COURT: Wait a minute. I have 10 another Exhibit 2. 11 MR. RINALDI: Well, this is Dermody 2 12 because it was from the Dermody deposition. I 13 think that may be what's confusing. I believe 14 the -- and Mr. Guido isn't here. Perhaps 15 Mr. Stearns can clarify this. I believe the 16 agreement was that we would put in the exhibits as 17 they related to the administrative depositions and 18 identify them by the numbers in the administrative 19 depositions. 20 MR. STEARNS: Yes. To offer those 21 documents that were exhibits to depositions by the 22 name of the deponent and the number that was used 4564 1 at the deposition so that they would be clear in 2 the record that it is the same document that was 3 used in the deposition. 4 MR. EISENHART: I think what's been 5 done, if I'm not mistaken, Your Honor, I think 6 Mr. Guido has been renumbering them so that -- to 7 eliminate this. 8 MR. BLANKENSTEIN: Yes. I've been 9 informed that when Mr. Guido wants to put in a 10 deposition exhibit, he uses an A11000 series 11 number for it. And it's been entered in that 12 fashion. 13 MR. STEARNS: Okay. We can do that. 14 Do you know what the last 11000 series number was? 15 We will just get the next number. Maybe we can 16 come back to that, Your Honor, and get a number by 17 the end of the day. 18 MR. RINALDI: And we'll just -- 19 THE COURT: We have about four or five 20 series of numbers, and I'm reluctant to start 21 numbering them by witness. 22 MR. RINALDI: Your Honor -- 4565 1 MR. BLANKENSTEIN: I think the -- that 2 would be the next number, Terry? I think the next 3 number would be 11041. 4 MR. STEARNS: Thank you. A11041. 5 MR. BLANKENSTEIN: Change that to 6 11048. 7 MR. STEARNS: Thank you very much. 8 THE COURT: All right. That's A11048? 9 MR. STEARNS: Correct. 10 THE COURT: Received. 11 Q. (BY MR. RINALDI) Now, you indicated, 12 Mr. Dermody, that you had reviewed a number of 13 documents. 14 Can you describe for the Court what the 15 documents were that you reviewed? 16 A. Well, I believe I reviewed a series of 17 minutes of board of directors of both USAT, United 18 Savings Association, and UFG or United Financial 19 Group internal memorandum that were generated by 20 staff there, internal memorandum generated by 21 staff at the Federal Home Loan Bank, examination 22 reports, financial reports filed by USAT with the 4566 1 Federal Home Loan Bank Board, annual reports, 2 proxy states, and I believe maybe some 10Ks by 3 UFG, anything involving USAT in those. 4 Q. Now, are the financial reports that you 5 made reference to, are those what are commonly 6 referred to as thrift financial reports or TFRs? 7 A. Yes, although I was also discussing, as 8 I said, the annual reports of the holding company. 9 But specifically for United Savings Association, 10 it was the thrift financial reports, TFRs. Also, 11 I may call them quarterly reports because they 12 were submitted every three months. 13 Q. And these were all documents that 14 related in one way or another to the compensation 15 practices engaged in by UFG and USAT in about the 16 end of 1987 and throughout 1988? 17 A. It related to either the compensation 18 directly or the issue of safety and soundness. 19 Q. Now, in formulating your opinions, did 20 you consider any applicable regulations that 21 related to compensation practices with respect to 22 savings and loans other than just to safety and 4567 1 soundness? 2 A. Well, there were a couple safety and 3 soundness regulations and, yes, there was at 4 least -- there was one specific -- well, two 5 regulations that dealt with compensation. 6 Q. Let me hand you a copy -- 7 MR. RINALDI: Your Honor, these are 8 copies of some of the regulations which I believe 9 he considered. I'm not going to offer them as an 10 exhibit. But I'd ask that the Court simply take 11 judicial notice of them. I was going to ask him 12 if he just generally recognizes that these are the 13 regulations that he reviewed in connection with 14 his preparation for the -- for his report. 15 Q. (BY MR. RINALDI) I've handed you a 16 set of regulations. What were the specific 17 regulations that you had occasion to take into 18 consideration in preparing your report? 19 A. Well, let me take them -- some of them 20 in numerical order. I'm going to site them as a 21 Regulation 563 or whatever. That's prefaced 22 always with 12CFR, which is where they are found; 4568 1 but I don't think I need to say that every time. 2 563.17 is regulation on management 3 financial policies. There were two portions of 4 that. Section A says that an institution shall 5 have safe and sound management of the institution. 6 B talks about compensation which says that shall 7 not be excessive, be in excess of that which is 8 reasonable. Again, they are both in the 9 management portion of the regulation. 10 Next one is Section 563.39, which deals 11 with employment contracts. And specifically, I'm 12 talking about the portion that says "Institutions 13 shall not enter into an employment contract if it 14 would constitute an unsafe and unsound practice," 15 and then it gives some examples. For instance, -- 16 well, unsafe and unsound would lead to material 17 financial loss or damage to the institution. 18 So, that defines there that a contract 19 may be unsafe and unsound under certain 20 circumstances. 21 Q. Okay. And in addition to that, did you 22 look at 12CFR Section 571.7? 4569 1 A. Oh, yes. I'm not through. 12CFR 571.7 2 is board regulation on conflict of interest. It's 3 a policy statement and it basically says conflicts 4 of interest are inherently unsafe and unsound and 5 we will take action on unsafe and unsound 6 transactions. That refers you back to the 563.17 7 which says you'll have safe and sound management. 8 That's the regulation -- the conflict 9 of interest policy statement says any conflict is 10 inherently unsafe and unsound. I also looked at 11 the holding company regulations. Section 584.3 12 and down at A4 talks about an institution not 13 making a loan discount or extension of credit to 14 an affiliate which in this case would be the 15 parent holding company. I looked at that and 16 we've considered this consistently, to my 17 knowledge, that guaranteeing the debt of the 18 parent holding company is the same as making a 19 loan to them. And that is specifically prohibited 20 under public company regulations. So, I did 21 consider that. 22 Q. I'm sorry. What was the code federal 4570 1 regulation section you just referred to? 2 A. Section 584.3(a)(4), and then there's a 3 couple subsections of that, but that is the 4 particular one there. 5 Q. And -- 6 A. And then finally, I looked at a section 7 of a banking code rather than a specific 8 regulation. It's 12USC 1730(a)(c)(1)(A). To 9 summarize, that says that a savings and loan 10 holding company or any other subsidiary can't 11 engage in an activity that effectively 12 accomplishes something that the savings and loan 13 itself could not do. In other words, you can't 14 circumvent the savings and loan regulations by 15 going around -- through the parent and 16 accomplishing the same task. And I also utilized 17 that in my analysis. 18 Q. Okay. And now, as a result of your 19 review of the documents and your consideration of 20 the applicable regulations and considerations of 21 safety and soundness, did you come to a conclusion 22 as to whether there had been unsafe and unsound 4571 1 activity and regulatory violations in connection 2 with certain compensation practices engaged in by 3 USAT and UFG in about the period of 1987, '88? 4 A. Yes, I did. 5 Q. And can you summarize briefly for the 6 Court your conclusions with respect to the safety 7 and soundness violations and regulatory violations 8 you found with respect to United Savings 9 Association of Texas in that time frame? 10 A. Okay. I eventually came to seven 11 conclusions. Four of them -- the first four dealt 12 with specifically United Savings Association. Of 13 course, the first one I talk about is the blanket 14 bonuses that were paid at the beginning of 1988 15 for 1987 which counsel just discussed a few 16 minutes ago. I concluded -- and here I believe I 17 have a mis-cite of the regulation. Being out of 18 the office and on the road, a typo. I cite 19 563.17(b) and it should be .17(a). 20 Q. Now, you're making reference here to 21 Page 3 of your report? 22 A. Page 3 and Page 5. 4572 1 Q. Okay. And at Page 3 in Paragraph A? 2 A. Paragraph A. 3 Q. Is it your testimony that the citation 4 563.17(b) should actually be (a)? 5 A. Yes, that's correct. 6 Q. And then you said again on Page 5 -- 7 A. Page 5. And that is the first full 8 paragraph of the page. I cite 563.17(b) and I 9 even cite the regulation and it should be 10 563.17(a). 11 Q. Okay. You mean you cite to the text of 12 the regulation? 13 A. I cite the text of the regulation and, 14 of course, I cite the one I was talking about and 15 immediately list the wrong one. 16 Q. Okay. 17 A. Which is only a paragraph away. Back 18 to my analysis, I said that the bonuses were paid 19 at a time when the institution was failing its 20 minimum net worth, had been sustaining substantial 21 losses. Management was aware of this and that the 22 conditions that existed, the condition of the 4573 1 institution, the awareness of the board, both of 2 which are important, was such that it was an 3 unsafe and unsound practice to pay bonuses under 4 those specific conditions. 5 My second conclusion dealt with blanket 6 salary increases that were granted to officers of 7 USAT in April of 1988. I said, again, the 8 institution is failing its net-worth requirement, 9 was on the verge of reporting insolvency. In 10 fact, did in June of 1988. Large pay increases, 11 40 to 67 percent, based on their '87 salaries, we 12 had unsafe and unsound action because of the 13 financial condition of the institution, the 14 payment of these. Plus, at this time, the people 15 who were making these approvals, the board of 16 USAT, were people who stood to benefit the most. 17 I say they had a conflict of interest 18 because they basically are paying themselves 19 substantial sums of money. They got the biggest 20 benefit out of this pay raise. And they were 21 approving their own pay raise, an inherent 22 conflict of interest when they are the only people 4574 1 approving this basically, with one exception, and 2 under the circumstances of which it occurred. 3 So, again, I said it was an unsafe and 4 unsound practice. It violated the conflict of 5 interest regulation and violated the safe and 6 sound management regulation dealing with the 7 institution and also violated the portion that 8 said that -- 563.17(b) talking about compensation 9 should be reasonable. 10 Third, at the time they did the salary 11 increases in April, USAT also established an 12 escrow for an executive bonus plan. It was 13 approved or was established prior to approval, 14 formal approval by the board of directors at a 15 time when the institution was failing, nearly 16 insolvent. And again, it affected the most 17 highly-compensated individuals. So, I'm pointing 18 out that there is a conflict of interest, the most 19 highly-compensated individuals get it. It's at a 20 time when the institution is failing, virtually on 21 the verge of insolvency and they know it. They 22 have been informed of this. And it's an unsafe 4575 1 and unsound management practice to do this. And 2 an unsafe and unsound compensation practice to 3 make these kind of payments at this particular 4 time, the financial condition that the institution 5 was in at that time. That's 3. 6 No. 4 that I talked about was the 7 employment agreements, July of 1988, entered into 8 between USAT and several senior executives. These 9 employment agreements obligated United Savings to 10 longer term contracts and required them to 11 establish -- required them to establish severance 12 benefits for all of these individuals in the event 13 of United Savings' insolvency. These accounts 14 were created and I'm -- my conclusion was that 15 establishing these escrow accounts for this 16 substantial sum of money when the institution 17 has -- is now reporting insolvency as of that date 18 is an unsafe and unsound transaction. And not 19 only that, because these contracts were supposedly 20 backups for contracts signed the day before by the 21 parent holding company and were supposedly only to 22 take effect if the parent holding company could 4576 1 not pay them. They were, in effect, guaranteeing 2 the obligation of the parent holding company, 3 which the institution cannot do. So, here we have 4 a violation of the holding company regulations and 5 we have unsafe and unsound compensation practices. 6 I believe we've covered the four 7 conclusions about United Savings' activities. 8 Q. Then you also reached three other 9 conclusions as they pertain to United Financial 10 Group and certain activities that they were 11 engaged in relating to compensation as to that 12 entity? 13 A. Yes, that's correct. I did. 14 Q. And can you describe for the Court the 15 conclusions you reached there? 16 A. Okay. I discuss several transactions. 17 I said three. The first one was a -- was a group 18 of two bonus contracts entered into by UFG with 19 Messrs. Gross and Crow originated February 11th, 20 1988, and amended on April 25th. 21 These contracts were to -- were 22 involving a situation that was already in 4577 1 existence. Messrs. Crow and Gross had acquired 2 some stock of the parent holding company. To do 3 that, they obtained loans from the parent holding 4 company. Basically, I exchange a note for the 5 stock. They owed the parent holding company on 6 these notes. These bonus arrangements in 1988 7 said the parent holding company will give a bonus 8 to these individuals every year effectively equal 9 to the payment that they were supposed to make on 10 these notes. And that effect is they don't have 11 to pay anything. The parent holding company is 12 essentially giving them the money to make the 13 payment to them every year. 14 Subsequently, when the contracts were 15 modified in April of '88, they added the interest. 16 So, not only did they get the payments free, they 17 get any interest that's due on the payments. And 18 it said, by the way, if the institution or if you 19 get fired because of insolvency of the 20 institution, you don't have to pay this back. So, 21 building a situation where if anything happens to 22 their employment, they no longer have to pay this 4578 1 debt back. 2 I said that this was at a time when UFG 3 was reporting financial insolvency, had a negative 4 net worth, had an obligation to pay money or to 5 infuse money into United Savings. Let me digress 6 a little bit. A holding company, when it acquires 7 a savings and loan to guarantee that if the 8 institution fails its net-worth requirement, the 9 holding company will give it enough equity, cash 10 capital, to make sure that they no longer fail the 11 net-worth requirement. 12 At the time these contracts were 13 entered into, United Savings Association was 14 failing, admittedly was failing its net-worth 15 requirements. UFG had the obligation to make them 16 whole as far as the net-worth requirement. 17 MR. EISENHART: Your Honor, I object 18 and move to strike this testimony. This witness 19 has not been offered as an expert on net-worth 20 maintenance obligations and, indeed, he has just 21 substantially misstated the law applicable to 22 net-worth maintenance obligations. This is 4579 1 totally outside the field for which he's being 2 offered. 3 THE COURT: Well, it relates to his 4 testimony. Denied. 5 Q. (BY MR. RINALDI) And as a consequence 6 of that fact that there was a net-worth 7 maintenance obligation, did you conclude that 8 there had been unsafe and unsound conduct by 9 virtue of their payment of the bonuses? 10 A. Yes. It reduced UFG's ability to 11 infuse capital in USAT and had an adverse 12 financial impact upon the association itself. 13 Q. And what were the final two conclusions 14 you reached with respect to UFG? 15 A. Well, the final two conclusions dealt 16 with the employment contracts that were granted in 17 June 30th of 1988 to officers. And again, we have 18 a situation where, first of all, it prevents UFG 19 from infusing capital -- the capital at least was 20 being paid for this -- into USAT. In a sense, 21 if -- well, not in a sense. If USAT became 22 insolvent and they had employment contracts, 4580 1 USAT's employment contracts could be aggregated 2 cut off by the FSLIC when it was put into 3 receivership. UFG having this contract was in a 4 position effectively saying, if we hadn't come up 5 with the money, "We've got these contracts. We 6 can make sure that you get your money." They are 7 circumventing what FSLIC would prevent from 8 happening. These people would get money in event 9 of termination of their contracts from insolvency 10 of the institution, the control. 11 I said that at a time when UFG was 12 insolvent, they need to infuse the capital and 13 this attempt to circumvent the regulation was 14 unsafe and unsound transactions, had a direct 15 impact upon UFG's ability to infuse capital. 16 Q. And your final conclusion then was -- 17 A. My final conclusion dealt with the debt 18 that Messrs. Crow and Gross owed to UFG. When 19 Mr. Gross left the employment of USAT, UFG, the 20 holding company and USAT both entered into a 21 severance agreement with him that forgave all debt 22 that he owed to the holding company, the 4581 1 institution. I believe it was about 800 plus 2 thousand dollars that he owed them. They said 3 they are wiping it out, you no longer any 4 obligation and you release claims. They did the 5 same thing with Mr. Crow. They released him from 6 obligation on the debt. 7 And I'm saying that, again, these are 8 unsafe and unsound transactions because they 9 reduced the ability to infuse capital into the 10 institution and, effectively, was an insider group 11 doing this for the benefit of some of the 12 insiders. 13 Q. Okay. 14 MR. RINALDI: Your Honor, I notice it's 15 almost 5:00 o'clock. This is probably a 16 reasonable breaking point in the context of his 17 examination. I suggest we break at this point. 18 THE COURT: We'll adjourn till 19 9:00 o'clock in the morning. 20 21 (Whereupon at 4:57 p.m. 22 the proceedings were recessed.) 4582 1 STATE OF TEXAS COUNTY OF HARRIS 2 REPORTER'S CERTIFICATION 3 TO THE TRIAL PROCEEDINGS 4 I, Marcy Clark, the undersigned Certified 5 Shorthand Reporter in and for the State of Texas, 6 certify that the facts stated in the foregoing 7 pages are true and correct to the best of my ability. 8 I further certify that I am neither 9 attorney nor counsel for, related to nor employed 10 by, any of the parties to the action in which this 11 testimony was taken and, further, I am not a 12 relative or employee of any counsel employed by 13 the parties hereto, or financially interested in 14 the action. 15 SUBSCRIBED AND SWORN TO under my hand 16 and seal of office on this the 22nd day of 17 October, 1997. 18 ____________________________ MARCY CLARK, CSR 19 Certified Shorthand Reporter In and for the State of Texas 20 Certification No. 4935 Expiration Date: 12-31-97 21 22 4583 1 STATE OF TEXAS COUNTY OF HARRIS 2 REPORTER'S CERTIFICATION 3 TO THE TRIAL PROCEEDINGS 4 I, Shauna Foreman, the undersigned 5 Certified Shorthand Reporter in and for the 6 State of Texas, certify that the facts stated 7 in the foregoing pages are true and correct 8 to the best of my ability. 9 I further certify that I am neither 10 attorney nor counsel for, related to nor employed 11 by, any of the parties to the action in which this 12 testimony was taken and, further, I am not a 13 relative or employee of any counsel employed by 14 the parties hereto, or financially interested in 15 the action. 16 SUBSCRIBED AND SWORN TO under my hand 17 and seal of office on this the 22nd day of 18 October, 1997. 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