4585 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 10-23-97 22 4586 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 4587 1 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO., CHARLES HURWITZ, AND MAXXAM, INC.: 2 JACKS C. NICKENS, Esquire (Present PM only) 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 4588 1 2 EXAMINATION INDEX 3 Page 4 ALLEN DERMODY 5 Continued Examination by Mr. Rinaldi.....4589 6 Cross-Examination by Ms. Clark...........4734 7 Cross-Examination by Mr. Blankenstein....4853 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 4589 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:00 a.m.) 3 THE COURT: Be seated, please. The 4 hearing will come to order. 5 Mr. Rinaldi, you may continue with your 6 examination. 7 MR. RINALDI: Thank you, Your Honor. 8 9 EXAMINATION 10 11 12 Q. (BY MR. RINALDI) Mr. Dermody, as part 13 of your review of United Savings Association of 14 Texas and United Financial Group's compensation 15 practices, did you review the financial condition 16 of USAT and UFG? 17 A. Yes, I did. 18 Q. And in connection with that, did you 19 prepare a chart that's illustrative of the 20 condition of USAT? 21 A. Yes, I did. 22 MR. RINALDI: Your Honor, I'll hand the 4590 1 Court two copies of what's previously been marked 2 as T8165. Respondents have received copies 3 previously, but I'll give you another copy. 4 Q. (BY MR. RINALDI) Mr. Dermody, I'm 5 handing you a copy of what's been marked as T8165. 6 Do you recognize that chart? 7 A. Yes, I do. 8 Q. Okay. And is that a chart that you 9 prepared, sir? 10 A. Yes, it is. 11 Q. Okay. And has that chart been 12 reflected in a copy of the chart up here regarding 13 USAT's net worth levels? 14 A. Yes, it is. 15 Q. Okay. 16 MR. RINALDI: Can you see that, Your 17 Honor? 18 THE COURT: Yes. 19 MR. RINALDI: Can the people over there 20 see? 21 Q. (BY MR. RINALDI) Can you describe for 22 the Court what the chart depicts? 4591 1 A. Okay. If I may, you see a series of 2 bars over a period of time on a quarterly basis, 3 which is how often USAT reported. This is the net 4 worth figure that they reported on their thrift 5 financial reports every quarter over a period of 6 several years, from December of '85 through 7 September of 1988. It also has a series of events 8 depicted discussing what the required net worth 9 level was, what the institution and examiners' 10 understanding of that was, and a series of events 11 related to compensation issues that we're talking 12 about. 13 Q. Okay. Now, some of the bars are in 14 blue and others of the bars are in red. 15 What is the significance of the blue and 16 then the red? 17 A. Well, the blue bars, blue/green bars, 18 are simply the net worth when the institution has 19 positive net worth. They are a solvent 20 institution in the sense that their assets exceed 21 liabilities. 22 Starting in June of 1988, the 4592 1 institution reported insolvency. Their 2 liabilities exceeded net worth, and this just 3 reflects the absolute dollar amount of that 4 insolvency as they reported it. 5 Q. Okay. Now, you also report on there a 6 number of numbered items. What is the arrow that 7 points to No. 1 representing? 8 A. Arrow No. 1 is the calculation that had 9 been done by the association in 1986 reflecting 10 what their required net worth level was. Each 11 institution's required to do this. This was their 12 calculation at this point in time. 13 Q. And where did you extract the 14 information from that reflects the institution's 15 calculation of its net worth? 16 A. Well, for the beginning of No. 1, this 17 is information that the association discussed with 18 the examiners and it's disclosed in the exam 19 report. But starting in March of 1987, you'll see 20 it changes up and down. They were required at 21 that point in time to report this on their TFR. 22 So, it was integral part of their report. So, 4593 1 they would calculate this on a quarterly basis. 2 Q. Okay. And up until 9-'87, was it the 3 position of USAT that it was in compliance with 4 its minimum net worth requirements? 5 A. Yes, it was. 6 Q. Okay. Now, what is the significance of 7 Line No. 2? 8 A. Well, during the course of the 1986 9 examination, the examination staff looked at the 10 net worth level of the institution and performed 11 their own calculation and determined that they 12 felt USAT was in a failure status. 13 Now, the line is red right here for a 14 particular reason: To determine as of June of 15 1986 -- but they don't actually -- it was not 16 presented to the board of USAT until April of 17 1987. 18 So, the red line basically says "I don't 19 know that USAT was aware of this; but clearly at 20 this state, they were now notified "we believe" -- 21 "we" being the Federal Home Loan Bank -- "that you 22 are not meeting your net worth compliance level." 4594 1 Q. Now, what is the significance of the 2 fact that the black line which represents the 3 calculation by the examiners is above the blue 4 column that appears at 6-'87? 5 A. Significance is that as a required 6 level, the institution's net worth should meet or 7 exceed that line, that minimum level. This shows 8 that, on our calculations, the institution was not 9 meeting its minimum net worth requirement. 10 Q. Now, in conducting your review of the 11 financial condition of USAT, you indicated that 12 there had been an examination report provided to 13 the board? 14 A. That's correct. 15 Q. Okay. Would you take a look at what's 16 been previously marked as T8014? 17 MR. RINALDI: This has been previously 18 moved into evidence, Your Honor, but I have 19 another copy if it would be easier than shuffling 20 through documents to find it. 21 Your Honor, at this time, I would move 22 the chart into evidence. I believe the chart 4595 1 bears the Exhibit No. T8165. 2 MS. CLARK: No objection. 3 THE COURT: T8165 received. 4 Q. (BY MR. RINALDI) Now, directing your 5 attention, sir, to T8014, do you recognize that 6 document? 7 A. Yes, I do. 8 Q. Is it one that you reviewed in 9 formulating your opinions that you're about to 10 express here today? 11 A. Yes, it is. 12 Q. Okay. And can you tell the Court what 13 the significance of this document was from the 14 perspective of your opinions? 15 A. Well, it has two pieces of significance 16 to my opinion. First of all, it discloses to the 17 board of directors of USAT that the examination 18 staff believes that they are not in compliance 19 with their net worth requirement and gives -- 20 Q. Where does that appear, sir? 21 A. That appears on the next-to-the-last 22 paragraph of the page. It starts "As calculated 4596 1 by examiner Carlton, United failed to meet its net 2 worth requirement as of June 3rd, 1986, by $10 and 3 a half million." So, the board is now on notice 4 that the examiners believe there is a net worth 5 failure. 6 The second important part of it is on 7 the second page, first full paragraph, towards the 8 end of it, the letter says "This office is 9 concerned that United's true condition has not 10 been yet revealed. And as members of the board, 11 you have the responsibility to determine the true 12 condition of the association." The letter is 13 putting the board of directors on notice. "We 14 believe you are failing. You have the 15 responsibility of determining the true condition 16 of the institution," and continuing -- that's a 17 continuing obligation. 18 Q. Now, the chart has -- the next number 19 is Item 3, and I believe it refers to management 20 projects net worth failure, October 29th, 1987. 21 Can you describe for the Court what that 22 refers to? 4597 1 A. Well, in reviewing the documents, I ran 2 across an internal memo, internal financial 3 statement. First was a memo from Mr. Berner to 4 other executives stating that the institution was 5 in imminent failure of its net worth requirement. 6 I believe the memo was dated October 29th. And he 7 said, "We may fail by October 31st," two days 8 later. 9 Q. Okay. And I'm handing you a copy of 10 what's previously been marked and admitted into 11 evidence as T8022. And again, I would tender a 12 copy of this to the Court. 13 Do you recognize this document, sir? 14 A. Yes. 15 Q. Is this the document you were referring 16 to a moment ago? 17 A. It is. 18 Q. Okay. And can you describe for the 19 Court what significance this document played in 20 formulating your views? 21 A. Well, as I said, it says "Based on 22 current estimates, it appears United will fail its 4598 1 minimum regulatory net worth at October 31st." 2 This is not a financial officer. This is their 3 legal counsel telling other top executives of the 4 institution, "We think we're going to fail." 5 And he goes on to discuss "What happens 6 if we fail our net worth requirement? What can 7 the bank board do to us? What type of 8 restrictions, if any, can they place upon us?" 9 Q. Okay. And directing your attention to 10 Item 8 on that list, which is on the second page, 11 it says "Limit operational expenditures to 12 specific limits." 13 Do you see that? 14 A. Yes, I do. 15 Q. In your experience with the savings and 16 loan, what are the largest operational 17 expenditures that an operating savings and loan 18 will normally incur in connection with its 19 operation? 20 MR. EISENHART: Your Honor, I'm going 21 to object to this line of questioning. The 22 witness is here to testify on a specific subject. 4599 1 Mr. Rinaldi's initial question was a very proper 2 question, which is: How did you use this document 3 in the course of doing your work? However, all of 4 the witness' answers and now even counsel's 5 questions have been basically "What spin do you 6 put on this document?" 7 He's not here to tell us what documents 8 mean in his opinion. He's here to explain how he 9 used them in formulating his opinion, and the 10 questioning doesn't seem to be headed in that 11 direction. 12 THE COURT: Well, I believe it is. 13 Objection denied. 14 A. Would you repeat the question, please? 15 Q. (BY MR. RINALDI) Yeah. Item 8 there 16 talks about limiting operational expenditures to 17 specified limits. And I was just asking you, in 18 your experience as an examiner, what are the 19 largest expenditures that are typically incurred 20 by savings and loans in their operations? 21 A. The two largest -- two or three largest 22 expenditures are the cost of their deposits and 4600 1 borrowings; and the next largest expenditure is 2 basically the operating expense, the personnel 3 cost of running the institution. 4 Q. Okay. Now, after Mr. Berner had 5 advised other members of management that they were 6 facing non-compliance with their regulatory 7 capital requirement, did there come a time when 8 you determined that USAT, in fact, failed its 9 minimum regulatory capital requirements? 10 A. Yes. 11 Q. Okay. Before we get to that, in 12 reviewing the documentation, did you also consider 13 what's been previously marked as 8024, T8024? I'd 14 ask you to take a look at that. And can you 15 describe for the Court what this is? 16 A. Yes, I did review this. This is a 17 United Financial Group, Incorporated, consolidated 18 statement of operations as of October 31st, 1987. 19 The significance of this is that it reflects on 20 the very last page that as of that month, UFGI had 21 a negative or a deficit stockholders' equity, 22 insolvency in the layman's term. 4601 1 Q. And directing your attention to the 2 second full page of the document, does it also 3 include a net worth calculation as prepared by 4 the -- by the association? 5 A. Yes. Though it's a UFGI document, its 6 main subsidiary was USAT. It discusses USAT's 7 minimum net worth requirement showing that there 8 is an excess of 12 -- almost $13 million over the 9 requirement, but then footnoting showing that 10 there is clear -- it is discussed with the 11 examiners, who disagree with that and say that 12 there are additional things that will affect this. 13 The net is that there's, I believe, 14 about $30 million worth of adjustments that the 15 examiners are talking about and acknowledging "If 16 that's true, instead of being $13 million in 17 excess, we may be $20 million or more below the 18 requirement." 19 Q. And had the regulators been discussing 20 the question of adjustments to USAT's capital 21 computation for some period of time? 22 A. At this point, we're six months from 4602 1 the stage when the examination letter was sent to 2 the board telling them that the examiners felt 3 there was a deficiency. So, they have had six 4 months to look at this issue and know that we felt 5 they were not in compliance. 6 Q. Okay. Now, it indicates in Circle 7 No. 4 their net worth failure. And it's dated 8 December 31st, 1987. 9 How did you come to that determination 10 that there was a net worth failure on 11 December 31st, 1987? 12 A. Well, there were several things. One 13 important one was that UFG did an annual report. 14 And in their annual report, they disclosed that 15 management of the association believes that they 16 had been in net worth failure since September -- 17 both September and December of 1987. 18 So, here is the executives making an SEC 19 disclosure saying, "We failed." 20 Q. Okay. Let me hand you a copy of what's 21 been previously marked as T8033. This is the 1987 22 annual report of United Financial Group which was 4603 1 admitted yesterday. And was this a document that 2 you reviewed in connection with the preparation or 3 the formulation of your opinions you are going to 4 express here today? 5 A. Yes. 6 Q. Okay. And were there items enumerated 7 in this document that were of significance to your 8 analysis? 9 A. Yes. There were several. 10 Q. And can you describe what they were for 11 the Court? 12 A. Okay. I'm not -- well, looking at 13 Page 2, on a current condition -- 14 Q. Now, are you talking about Page 2 of 15 the full document or Page 2 of the text? 16 A. I'm sorry. Page 2 of the document 17 itself. Not the management letter, but the text 18 of the disclosure document. 19 Q. Okay. 20 A. Under "current conditions," the very 21 first paragraph says "As described elsewhere, USAT 22 is required to maintain a certain level. There 4604 1 was an examination." And it ends, "The 2 association believes it failed to meet its minimum 3 capital requirements as of September 30th and 4 December 31st, 1987." 5 So, here is a statement from the parties 6 saying, "We believe we have failed." 7 Q. And you were -- 8 MR. EISENHART: Your Honor, I object. 9 He misread the statement. The statement says 10 "However, as a result of preliminary discussions 11 between the association and the FHLB-Dallas field 12 examiners, the association believes it failed." 13 It's a very different sentence than the one he 14 just read. 15 Q. (BY MR. RINALDI) Mr. Dermody, just so 16 that we can facilitate the examination, rather 17 than trying to paraphrase, if there is something 18 you want to point to in the document, just read 19 from the document, if you like. And if counsel 20 believes that the portion you've read is 21 incomplete, then they can indicate so. 22 Was there anything else in this 4605 1 document that you found contributed to the 2 formulation of your opinions? 3 A. Yes. On the same page, there is the 4 last paragraph. It says "UFGI, in connection with 5 its becoming a holding company, agreed to maintain 6 USAT's capital above the minimum requirement level 7 established by the FSLIC. UFGI has not been 8 requested to provide additional capital but, if 9 requested, UFGI currently does not have sufficient 10 assets to contribute to maintain USAT above its 11 minimum capital requirement." 12 Here is an admission that UFGI has this 13 requirement. They are stating, "We have this 14 minimum capital requirement. We do not believe we 15 have the capability of meeting it." 16 Q. Now, at the point in time that we're 17 talking about, which is the date of this report 18 which is December 1987, what would have been, 19 based upon your chart, the capital deficiency of 20 USAT at that point in time? 21 A. Well, as you can see from my chart, 22 there is an approximately right at 4606 1 250-million-dollar net worth requirement. The 2 institution is around $60 million. So, it's 3 approximately a 190-million-dollar deficiency in 4 meeting their requirement. 5 Q. And was that a deficiency that would 6 have been the obligation of UFGI to -- to fill 7 under a net-worth maintenance obligation? 8 MR. BLANKENSTEIN: Objection, Your 9 Honor. Calls for a legal conclusion by the 10 witness. He's not offered as an expert on 11 net-worth maintenance obligations. 12 THE COURT: Denied. You may answer. 13 A. Yes. It would have been required to -- 14 if called upon, to meet the difference. 15 Q. Okay. 16 Q. (BY MR. RINALDI) Now, in the last -- 17 I mean the next-to-the-last paragraph on that 18 page, it makes reference to the association's 19 filing of an application for capital forbearance. 20 Do you see that? 21 A. Yes. 22 Q. And what is the significance of the 4607 1 filing of an application for capital forbearance? 2 A. An application for capital forbearance 3 was filed when the institution had failed its 4 minimum net worth requirement and was going to the 5 Federal Home Loan Bank Board -- through the 6 Federal Home Loan Bank saying, "We have failed our 7 requirement. We recognize that you can take a 8 number of actions against us, change our 9 operations. We are asking that you forbear or not 10 take any of these actions." Generally, an 11 institution would agree to take certain actions to 12 get that forbearance. 13 Q. Now, directing your attention to the 14 last -- or the next-to-the-last page, Page 68 of 15 the United Financial Group 1987 annual report at 16 Page 68, does it appear that the members of the 17 board of UFG, although by facsimile, signed this 18 document on behalf of the institution? 19 A. Yes. It states "Pursuant to the 20 requirements of the Securities and Exchange Act of 21 1934, this report has been signed below by the 22 following persons," and it lists the directors of 4608 1 UFGI. 2 Q. Okay. Now, all of those people weren't 3 directors. Can you identify which ones were? 4 A. Well, Mr. Jenard Gross was a director. 5 Michael Crow was a director. Barry Munitz was a 6 director. Paul Schwartz is listed as a director, 7 as is James Whatley. 8 Q. Okay. And did you mention Arthur 9 Berner? 10 A. Yes. I believe I did. If I didn't, I 11 should have. 12 Q. Okay. And now, would you take a look 13 at Page 39 of the report? 14 A. Yes. 15 Q. Okay. It makes reference to an 16 auditor's report. Was there -- was that something 17 that you considered in formulating your views with 18 respect to the financial condition of USAT and 19 UFG? 20 A. Yes, it was. 21 Q. Okay. And what was the significance 22 that you found in the auditor's report? 4609 1 A. Well, I found two things that were 2 significant to me. First, the auditors are 3 issuing a qualified opinion called a "going 4 concern opinion." 5 Let me paraphrase it in saying the 6 continued operation of the institution is 7 contingent upon you getting regulatory 8 forbearance. Essentially, you may not survive any 9 length of time if something doesn't happen. The 10 auditors are stating "you're in bad financial 11 condition," effectively. 12 The second one is -- it's dated 13 February 5th, 1988. This is not done in a vacuum. 14 When the auditors are doing a going concern 15 letter, I have never seen a situation where 16 management of the institution wasn't in constant 17 contact, probably daily or hourly contact with the 18 auditors about what was going to be said, 19 negotiating what will we say, how extensive will 20 it be? 21 So, to me, February 5th says this is 22 something management had known about at least as 4610 1 early as February 5th, almost certainly before 2 that, in their discussions with the auditors. 3 They were informed very quickly. Auditors simply 4 do not do something like this without informing 5 management as it happens. 6 Q. And was there concern expressed by the 7 auditors as to the ability of UFG to meet its 8 obligations to its shareholders, as well? 9 A. Yes. If I may read from it, "Company's 10 ability to continue as a going concern is also 11 dependent upon UFGI's ability to meet its 12 obligations to certain creditors and preferred 13 stockholders as described in a note, which may not 14 be possible if the company is required to 15 contribute capital to USAT." 16 So, that was something that I considered 17 in my analysis. 18 Q. Okay. Now, following the auditor's 19 report on February the 5th, 1988, did there come a 20 time when the regulators met with the board of 21 USAT to discuss the net worth failure? 22 A. Yes, there did. 4611 1 Q. And let me hand you what's been 2 previously marked as T8049, and this is the 3 minutes of the special meeting of the board of 4 directors of USAT dated March the 30th, 1988. And 5 would you take a look at that, Mr. Dermody? And 6 was this a document that you reviewed in the 7 preparation of your report in arriving at the 8 conclusions expressed therein? 9 A. It certainly was. 10 Q. Okay. And what was the significance of 11 this document for purposes of formulating your 12 views? 13 A. Well, in this document, we have a 14 number of staff, supervisory agents, a lot of the 15 examination staff coming to a special meeting of 16 the board of directors of USAT and making a 17 presentation, disclosing the examiners' 18 calculations of the net worth requirement of the 19 institution, and presenting them with an 20 attachment that shows the reconciliation of the 21 net worth requirement -- what the institution was 22 calculating the requirement at and what the 4612 1 examiners were calculating to show how much the 2 institution was failing to meet its requirement. 3 Q. Now, it indicates that Mr. Gross stated 4 that the purpose of the meeting was to hear the 5 final field examiners' results of the Federal Home 6 Loan Bank of Dallas' 1987 examination, and it also 7 makes reference to an agenda which was ultimately 8 attached. 9 Do you see that in the next paragraph? 10 It says "Ms. Carlton presented an agenda and 11 attachments which Mr. Gross ordered attached to 12 the minutes of the meeting." 13 A. Yes, I do. 14 Q. And if you take a look at the third 15 full page of that document, does that appear to be 16 the agenda and the attachments that Mr. Gross 17 asked to have attached? 18 A. Yes, it does. 19 Q. Okay. And did you review the agenda 20 and the attachments? 21 A. Yes, I did review them. 22 Q. Okay. And what was the significance of 4613 1 the information contained in the agenda and the 2 attachments? 3 A. Well, the very first item of discussion 4 was that the minimum capital requirement -- that 5 the institution was failing its requirement. 6 There was a deficit in meeting the requirement as 7 of September and as of December 31st, 1987. 8 Q. And turning your attention to the 9 second attachment, does it appear that the 10 institution acknowledged that it was failing its 11 net worth capital requirement as of December 31st, 12 1987? 13 A. Yes. It shows that the institution 14 calculated they were failing their minimum net 15 worth requirement by 53, almost $54 million, and 16 examiners calculated that deficiency to be over 17 $112 million at the same point in time. 18 Q. What was the date of this calculation? 19 A. As of December 31st, 1987. 20 Q. Okay. Now, did you also prepare a 21 chart regarding the condition of USAT, the holding 22 company of UFG? 4614 1 A. No. 2 MR. BLANKENSTEIN: I think Mr. Rinaldi 3 misspoke. I think he reversed -- I think he 4 reversed the companies. 5 THE WITNESS: He did. 6 Q. (BY MR. RINALDI) Did you also prepare 7 a chart regarding the financial condition of UFG, 8 the holding company for USAT? 9 A. Yes, I did. 10 Q. Okay. 11 MR. RINALDI: And, Your Honor, I 12 would -- this has been marked as T8164, and I'll 13 hand a copy to the witness. 14 Q. (BY MR. RINALDI) Now, Mr. Dermody, 15 can you explain for the Court what this chart 16 represents? 17 A. Well, this chart is similar to the one 18 for USAT we already looked at. Again, the bars, 19 the vertical bars, are the reported capital 20 levels, equity levels, of UFG. There is a little 21 difference. UFG reports basically annually, 22 although there may be SEC filings made during the 4615 1 period of a year that would change it. 2 So, as of December, they report this 3 figure and it doesn't change. It's just really 4 the same figure they reported. They don't do it 5 often than once a year by requirement. But it 6 shows their capital -- excuse me -- their equity 7 position of UFG from December of '85 through 8 December of '89. And as you can see, it clearly 9 shows a declining trend in 1987 to the point where 10 by the end of 1987, they have a deficit 11 stockholders' equity. This is as reported to the 12 SEC. 13 Q. And after 1987, did they continue 14 throughout 1988 to have a negative stockholders' 15 equity? 16 A. Yes, they did. 17 Q. Okay. Now, you also include on your 18 chart a number of numbers which are referenced in 19 the key. The first one I think we've probably 20 seen before. It talks about "examiners resent." 21 Is that supposed to be -- 22 A. Present. 4616 1 Q. "Present findings to USAT showing the 2 net worth failure," and that's the letter we 3 looked at previously regarding the 1986 exam 4 reports that were presented in April of 1987? 5 A. That's correct. 6 Q. Okay. And then the second one refers 7 to "USAT management projects net worth failure" 8 dated October 29th, 1987. 9 And is that making reference to the 10 exhibit that we just looked at? It's identified 11 as T8022, which is the memorandum from Arthur 12 Berner to members of management. 13 A. That is correct. 14 Q. Now, the third item there makes 15 reference to the report of the net worth failure 16 of UFG, and is that the December 31st report of 17 net worth failure that we've indicated was 18 reflected in the 1987 annual report? 19 A. That's correct. 20 Q. No. 4 makes reference to the 21 forbearance, and that's what you've talked about 22 earlier; is that correct? 4617 1 A. Yes. 2 Q. Okay. Now, during this period of time, 3 did it come to your attention that in addition to 4 the losses which were being projected -- well, let 5 me ask you this. 6 Taking a look at T8033 -- and this is 7 the annual report again. Can you tell what losses 8 UFG had sustained in the -- in 1986 and '87? 9 A. Yes. 10 Q. Where does that appear in the document? 11 A. On the inside cover of the document, 12 there is a financial highlights of the holding 13 company. And it shows 1986 and 1987 financial 14 results showing the revenues and at the top of the 15 paragraph of that it shows a net loss for the 16 year. 17 Q. Okay. And in 1986, they had reflected 18 a loss of how much? 19 A. 36 -- just over $36 million. 20 Q. And in 1987? 21 A. Barely under $118 million. 22 Q. And as a result of those losses, what 4618 1 was the common stockholders' equity position at 2 the end of 1987? 3 A. At the end of 1987, the deficit 4 stockholders' equity was $41.9 million, which is 5 reflected here on the chart. 6 Q. Now, did it come to your attention that 7 in addition to the 118-million-dollar losses which 8 are reflected in the -- or 117 plus which are 9 reflected in the 1987 annual report, that there 10 were also projections by management that UFG was 11 going to sustain -- and its subsidiary, USAT, were 12 going to sustain additional losses into the 13 future? 14 A. Yes. 15 Q. Okay. 16 MR. RINALDI: Your Honor, I would like 17 to at this time move the chart into evidence. 18 That's T8164. 19 MS. CLARK: No objection. 20 THE COURT: Received. 21 Q. (BY MR. RINALDI) And directing your 22 attention to what's been previously marked as 4619 1 T4476, this is a memo from Jenard Gross -- I mean 2 to Jenard Gross from Michael Crow dated February 3 the 4th, 1988. And is this a document that you 4 reviewed in preparing your opinion here today? 5 A. Yes, it was. 6 Q. Okay. And what about this document was 7 of particular significance in formulating your 8 views? 9 A. Well, there were two things. First, 10 Mr. Crow, the chief financial officer, says "We 11 are projecting a loss of 100 million plus for the 12 year." He also notes that it may be -- may not be 13 productive if they show the examiners that 14 projection in the meeting that they are going to 15 attend. 16 So, he is projecting a loss for the year 17 and also saying "maybe we shouldn't" -- I'll 18 paraphrase. "Maybe we shouldn't show this to the 19 examiners right now. We'll show it to them in the 20 forbearance agreement." 21 MS. CLARK: Objection. I think 22 Mr. Dermody is mischaracterizing the document. If 4620 1 he wants to read the document into the record, I 2 think that's not objectionable; but his 3 paraphrasing is quite misleading, I believe. 4 MR. RINALDI: Fine. If you want to 5 read the document into the record, that's fine, 6 Mr. Dermody. 7 A. Okay. Let me read a portion of the 8 document. 9 MR. RINALDI: Read the entire 10 paragraph. 11 A. "Since the examiners are going to be at 12 our board meeting on Thursday, February 11th, I 13 suggest we present the 1988 profit plan the night 14 before at the working meeting at the Remington 15 Hotel. I am afraid if we show the examiners we 16 are projecting a loss of 100 million plus for the 17 year, it may not be productive. I would rather 18 wait and show them our 1988 loss within the 19 context of the overall forbearance plan." It goes 20 on to say, "Please let me have your thoughts on 21 this." 22 Q. (BY MR. RINALDI) Now, following these 4621 1 projections that were made by Mr. Crow that are 2 contained within this memo, did UFG encounter 3 additional difficulties from a financial 4 perspective? 5 A. Yes, they did. 6 Q. Did there come a point in time when 7 they were unable to pay preferred shareholders and 8 obligations that they had to the preferred 9 shareholders? 10 A. Yes. I believe that UFG had an 11 obligation to pay a sinking fund payment for some 12 preferred stock; and that obligation was due, I 13 believe, around May of 1988 and they determined 14 that they would not pay this sinking fund 15 obligation. And, in fact, went on later to 16 compromise or pay off some of these debentures at 17 a substantially reduced price, about 25 cents on 18 the dollar. 19 Q. Now, why was it of significance to you 20 that they had failed to make the sinking fund 21 payment on the debentures? 22 A. Well, the sinking fund on the 4622 1 debentures was a relatively nominal amount of 2 money at the time. I believe it was around 3 $150,000. Yet at this time, as we are going to 4 discuss, I looked at the contracts that this 5 organization was entering into and it was offering 6 substantial salaries to these people and bonuses 7 in excess of the amount of money that they could 8 not pay on their sinking fund, that the directors 9 said "We will not pay this." 10 To me, it was significant that they 11 could agree not to pay $150,000 for a sinking fund 12 but agree to pay bonuses and enter into contracts 13 with individuals, executives 14 Q. Now, during this period of time, were 15 you able to determine whether there were concerns 16 expressed by the management of UFG and USAT as to 17 the viability of those entities as ongoing 18 concerns? 19 A. Yes, I did. 20 Q. Okay. And how did you ascertain that? 21 A. Well, in reviewing internal documents, 22 I ran across one, I believe, from Mr. Berner that 4623 1 discussed that there had been a series of meetings 2 and concerns expressed by executives about the 3 viability of both USAT and UFG. 4 Q. Okay. I'm handing you a copy of what's 5 been previously marked as T8054. And do you 6 recognize this document as something you reviewed 7 in the preparation of your report? 8 A. Yes, I do. 9 Q. Okay. And directing your attention, 10 then, to be the second full paragraph on the first 11 page, does it make reference there to the question 12 of the viability of the association? 13 MS. CLARK: Mr. Rinaldi, excuse me. I 14 don't seem to have a copy of that document. Could 15 you identify it for me. 16 MR. RINALDI: It's T8054. It's a 17 memorandum to the file, and you may have a copy. 18 A. Would you repeat the question, please? 19 Q. (BY MR. RINALDI) There's a reference 20 in the second sentence of the second paragraph to 21 ongoing viability of the association. 22 Is that the reference in the document 4624 1 that you're referring to? 2 A. One of several references, yes. 3 Q. Okay. And what was the significance of 4 the reference to the viability of the association 5 that's set out here in the second paragraph of the 6 first page? 7 A. Well, this is an internal document 8 where the executives are stating -- one of the 9 executives stating that a number of these top 10 officers have expressed a concern about the 11 ongoing viability of the institution. 12 Q. And turning your attention then to Page 13 3, they again express concern regarding the 14 viability of the institution. 15 Do you see that? 16 A. Yes, I do. 17 Q. And was that also something that you 18 took into consideration in formulating your views? 19 A. Yes, it was. 20 Q. And what is the significance of the 21 information that's contained in that second full 22 paragraph on the third page of the document which 4625 1 appears at Bates stamp OW035557? 2 A. Well, I think the easiest thing to do 3 is for me just to read a couple sentences because 4 these are the ones I say I considered important. 5 "It appeared" -- referring back to January '88. 6 "It appeared at that time as if the debts of UFGI 7 would not be repaid since it was possible UFGI 8 would have to put all of its equity into USAT. 9 Therefore, again, executives are admitting that 10 there is a net-worth maintenance requirement, in 11 all likelihood. Moreover, UFGI debts were in 12 excess of $55 million at a time when UFGI had 13 assets other than its ownership of USAT of 14 approximately $35 million in cash." 15 Here is an acknowledgement in layman's 16 terms that they are insolvent. Their obligations 17 exceed their liabilities by $20 million. This 18 does not even discuss the amount of the net-worth 19 maintenance requirement. That's never disclosed 20 here. But that's in addition to these $55 million 21 in obligations. 22 "Since USAT could not dividend 4626 1 additional cash to UFGI, it appeared as if over a 2 long period of time, unless there was a 3 significant change in circumstances, UFGI would 4 not be viable." So, here we have concerns about 5 UFGI's viability. 6 Q. Okay. And then finally, the 7 next-to-the-last page which has Bates stamp 8 OW03559, it again refers to the viability of the 9 institution in the second full paragraph. 10 Was that information that you took into 11 consideration in formulating your views? 12 A. Yes, it was, as well. 13 Q. Okay. And what in particular in that 14 paragraph was taken into account in formulating 15 these views? 16 A. Well, in discussing that possible 17 solutions were discussed, "It was also clear that 18 United Savings Association of Texas would have to 19 be receiving some form of supervisory agreement, 20 FSLIC assistance, or capital infusion. It was 21 also evident that UFGI, without the assistance, 22 might not a viable entity." And then it goes on. 4627 1 "Moreover, it was further clear that future 2 bonuses would not probably be available and that 3 salaries were insufficient to retain our top 4 employees." 5 So, they are talking about the viability 6 of USAT and the impact upon the viability of UFG 7 and ability to pay salaries and bonuses. 8 Q. Does it appear from the document that 9 there was concern at the management level that 10 USAT was not likely to survive unless it received 11 some form of assistance? 12 A. Yes. And in fact, in the last 13 sentence, they talk about the proposed Southwest 14 Plan and other alternatives that might be 15 available. They felt some type of solution might 16 be found, but every solution they talked about -- 17 Southwest Plan, capital forbearance, financial 18 assistance, capital infusion -- was an 19 externally-generated one. The institution was not 20 able to do it on its own. They would need help. 21 MR. BLANKENSTEIN: Your Honor, he's 22 paraphrasing that sentence for the record. He 4628 1 left out a significant portion of it. 2 MR. RINALDI: Your Honor, these 3 individuals certainly will have the opportunity to 4 cross examine him on all of this stuff. What he's 5 doing is indicating what his understanding and the 6 importance of the document was from his point of 7 view. And that's what I asked him for, if that 8 was a factor he took into consideration in 9 formulating his views. If they want to read the 10 whole thing into the record, I think that's fine. 11 But that's not what I'm asking. 12 MR. BLANKENSTEIN: Without trying -- 13 hoping not to abuse the rule of completeness, I'd 14 just like to read that last sentence into the 15 record. 16 THE COURT: All right. 17 MR. BLANKENSTEIN: "Since it was still 18 the desire to retain the executive employees (it 19 being felt that that was the only way for the 20 association to work with the regulators in 21 connection with the proposed Southwest Plan, 22 capital forbearance, financial assistance, capital 4629 1 infusion, et cetera), it was felt that a 2 resolution had to be found." 3 Q. (BY MR. RINALDI) Now, Mr. Dermody, 4 from the -- on the backdrop of this financial 5 condition of USAT and UFG that you have just 6 portrayed, did you determine that USAT and/or UFG 7 entered into various compensation practices 8 beginning at or about the beginning of 1988? 9 A. Yes, I did. 10 Q. Okay. And directing your attention to 11 what's been marked as T8165, which is the chart, 12 it makes reference to Item No. 5. 13 Do you see that? 14 A. Yes. 15 Q. And what is Item No. 5 on the chart? 16 A. Well, Item No. 5 highlights the date 17 that bonuses for 1987 were actually paid. Paid 18 just right after the first of the year, 19 January 1988. 20 Q. Okay. And did you review some 21 documents in connection with the determination by 22 USAT to pay those bonuses? 4630 1 A. Yes, I did. 2 Q. Okay. And can you describe for the 3 Court generally what those documents were? 4 A. Well, there were some internal 5 memorandum, I believe, between Messrs. Crow and 6 Berner. And some document was apparently sent to 7 Messrs. Gross and Munitz. And also the 8 compensation committee minutes and I believe also 9 the minutes of the board of directors of USAT/UFG 10 that dealt with the compensation bonus and salary 11 issues. 12 Q. Okay. Now, I'm handing you a copy of 13 what's been marked as T8023. Does that appear to 14 be a copy of the memorandum between Mr. Berner and 15 Mr. Crow that you mentioned a moment ago? 16 MR. RINALDI: Your Honor, this has been 17 previously admitted into evidence yesterday 18 pursuant to the stipulation of Mr. Villa. 19 A. Yes, it is the document I was 20 discussing. 21 Q. (BY MR. RINALDI) And is this 22 something that you took into consideration in 4631 1 formulating your opinions regarding the safety and 2 soundness of the bonus paid by USAT? 3 A. Yes, it is. 4 Q. Okay. And what was the significance of 5 this document? 6 A. Well, the draft memo that's attached 7 says, in the second paragraph, "We believe that a 8 salary increase for the senior people at this time 9 is inappropriate." On the cover memo, Mr. Berner 10 is saying to Mr. Crow, asking for his comments, 11 thoughts on the memo. 12 In response, it appears to be Mr. Crow's 13 signature saying "My opinion is that we should do 14 nothing and wait until June 30th, 1988. If at 15 that time things look bleak, we pass out raises; 16 but if they don't, we get" -- excuse me. "If they 17 don't, we get raises." 18 So, they are discussing the possibility 19 of raises at this time and delaying those raises. 20 Q. And did you think that that was an 21 inappropriate thing for them to do at this time, 22 or did you share Mr. Berner's views? 4632 1 A. No. I thought Mr. Berner and Mr. Crow 2 had an appropriate view of the situation. They 3 are saying, "We are in trouble. We should delay 4 these things at this time, see what happens 5 later." 6 Q. Okay. And as a result, did the board 7 or the compensation committee of USAT subsequently 8 consider the question of whether to pass on salary 9 increases? 10 A. Yes, they did. 11 Q. And what decision did they come to? Do 12 you recall? 13 A. I believe in November, just within a 14 couple weeks of this memorandum, November 10th, I 15 believe, the compensation committee reviewed this 16 proposal and decided that they would, in fact, 17 defer or delay the payment of any salary increases 18 until the middle of the following year. 19 Q. Okay. And how did you come to that 20 conclusion, sir? 21 A. Well, it stated explicitly that that 22 was how they would treat the salaries in the 4633 1 minutes. 2 Q. And you derived that information from a 3 review of the minutes of the compensation 4 committee meeting? 5 A. That's correct. 6 Q. As well as the minutes of the board of 7 directors? 8 A. Yes. The board of directors meeting 9 was held subsequently. 10 Q. Okay. And let me show you a copy of 11 what's been previously marked as T8027 and T8028 12 and ask you if those are the minutes of the 13 compensation committee and the board of USAT, 14 respectively, that you reviewed? 15 A. Yes, they are. 16 Q. Okay. And does the compensation 17 committee minutes -- from reviewing those minutes, 18 does it appear that they adopted the suggestion of 19 Mr. Crow and Mr. Berner? 20 A. Yes. Mr. Berner presented the proposal 21 and the committee unanimously adopted the 22 proposal, according to the minutes. 4634 1 MS. CLARK: I object. That is not what 2 the record reflects. I think you need to have him 3 look at the documents and recite what's in the 4 document. That is an interpretation that's in 5 dispute in this case. 6 Q. (BY MR. RINALDI) Is that your 7 understanding of what -- 8 A. It is my understanding. 9 Q. Okay. Now -- 10 A. It is consistent with the memos I've 11 just discussed. 12 Q. Okay. Now, at about the same point in 13 time, did USAT consider the question of whether to 14 grant bonuses for 1987 that would be payable in 15 the beginning of 1988? 16 A. Yes, they did. 17 Q. And what did you determine that the 18 compensation committee concluded with respect to 19 the question of bonuses? 20 A. Well, the bonuses were reviewed by the 21 committee. There was some discussion about the 22 financial condition of the institution and talk 4635 1 about the need to retain employees and the amount 2 of work being done. But let me read what they say 3 here. 4 MR. BLANKENSTEIN: Excuse me, 5 Mr. Rinaldi. Are you referring to the 6 compensation committee minutes? 7 MR. RINALDI: Yes. 8027. 8 A. 8027, the bottom paragraph. I don't 9 want to read the whole thing just in the interest 10 of time, but they talk about the institution as 11 having an operating loss in view of the fact key 12 employees were now doing extra work and other 13 employees were terminated so-called bonuses were 14 an attempt to achieve market base compensation. 15 They discuss that issue. And costly to get 16 replacements. It -- they approved -- "The 17 committee unanimously approved the bonus schedule. 18 It was noted that such bonuses would not be paid 19 until January 1988 and, therefore, no announcement 20 would be made of the bonuses so that in the event 21 there were intervening circumstances, they could 22 be taken into consideration at a future meeting." 4636 1 Q. Okay. And what did you conclude was 2 the significance of that statement from the point 3 of view of your examination of the institution? 4 A. Well, first, I viewed that even though 5 they have talked about the institution having an 6 operating loss, there is a complete failure to 7 discuss the potential net worth failure that they 8 just talked about within two weeks where 9 Mr. Berner and Mr. Crow's memos had shown either 10 net worth failure or pending net worth failure. 11 There is no recognition of this, only the 12 operating loss, plus other issues about retaining 13 staff. 14 They did at least say "We will not make 15 an announcement" and left it open, I presume, to 16 make some type of adjustment, if necessary, 17 depending on what happened before the end of the 18 year. But clearly, they ignore what I think is a 19 critical factor, the net worth failure of the 20 institution 21 Q. Okay. 22 A. Or they did not discuss the net worth 4637 1 failure. 2 Q. And at the subsequent meeting of the 3 board of directors, did -- of USAT, did they grant 4 the bonuses? 5 A. Yes. There is less detail in the 6 minutes of the board of directors meeting, but 7 they did approve the actions taken by the 8 compensation committee. 9 Q. Okay. And were you able to determine 10 what the amount of the bonuses was? 11 A. According to the minutes of the board 12 of directors meeting, the bonus would be less than 13 $2 million. I believe it was about $1.9 million, 14 based on some schedules I saw. 15 Q. Okay. And let me hand you a copy of 16 what's been marked as 8206. This has also 17 previously been admitted into evidence. 18 Is this a document that you reviewed in 19 formulating your opinions? 20 A. Yes. I believe it's Document 8026 and, 21 yes, it was one I reviewed. 22 Q. Thank you for correcting me, sir. And 4638 1 what was the significance of this document in 2 formulating your opinion? 3 A. Well, this document showed the proposed 4 salary range -- excuse me -- the proposed bonus 5 rake and showed the recipients and the total 6 amount. 7 What I found interesting was that the 8 respondents -- Messrs. Gross, Crow, Berner, and 9 Munitz -- were getting increases of 65 to 8 -- 10 excuse me -- bonuses of 65 to 80 percent. 11 Q. And what was the significance of that 12 from the perspective of the financial condition of 13 the institution? 14 A. Well, the institution in November, 15 these same executives that were dealing with this, 16 were aware that there was an imminent net worth 17 failure. We've already discussed that. And that 18 given that kind of condition, there may be a need 19 to delay these payments. They had already done 20 that for the salaries, yet they were not 21 considering that net worth condition as part of 22 their determination on the bonuses. 4639 1 Q. Okay. Now, with respect to Mr. Gross, 2 it indicates an 80 percent payment. And then in 3 the next column, it indicates that he received a 4 bonus in total of $235,000. And then in the next 5 column over, it indicates "includes loan interest 6 (68K)." 7 Did you determine what the "includes 8 loan interest (68K)" refers to? 9 A. Well, in my report, one of the things I 10 discussed was a bonus plan that was entered into 11 with Mr. Gross and Mr. Crow where they had 12 acquired stock of UFGI and had obligation to repay 13 the loans they received when they acquired the 14 stock. This is the interest on those loans to 15 repay that debt. 16 Q. So, as part of the bonus, Mr. Gross was 17 giving -- being provided an additional 18 68,000-dollar bonus to repay his loan? 19 A. That is correct. As Mr. Crow was, as 20 well, although his was certainly much smaller, 21 only $6,000. 22 Q. And were you able to determine 4640 1 whether -- after the compensation committee 2 approved these bonuses or after the compensation 3 committee recommended these bonuses to the board 4 and the board approved them, whether they were 5 actually paid to the recipients? 6 A. Yes, I was. 7 Q. Okay. And how were you able to do 8 that? 9 A. Well, I saw some records from the 10 institution that were actually checks from the 11 compensation account of United Savings Association 12 and checks and the stubs that matched the amounts 13 shown here on this schedule. 14 Q. Now -- 15 A. In 8026. 16 Q. At the top of 8026, it indicates 17 proposed UFG/USAT bonus ranges. 18 Do you see that? 19 A. Yes. 20 Q. Were you able to determine which entity 21 actually paid the bonuses to -- or provided the 22 checks that represented the bonuses to Mr. Gross, 4641 1 Mr. Crow, Mr. Berner, and Mr. Munitz? 2 A. There were only checks drawn on USAT's 3 account. I saw nothing from UFGI. 4 Q. And what did you conclude from that? 5 A. I concluded that USAT paid the entire 6 amount of these bonuses whether or not the bonuses 7 were purportedly due from USAT or UFG. 8 Q. Now, do you know whether that included 9 the portion of the bonus that related to 10 Mr. Gross' interest payment? 11 A. Yes. Mr. Gross did receive a check for 12 $235,000 minus the tax and other deductions. 13 Q. Okay. Now, as a result of your review 14 of these bonus practices, you set forth -- you 15 reach some conclusions that were set forth in your 16 report. 17 Can you state for the Court what your 18 conclusions were with respect to the safety and 19 soundness of the payment of these bonuses in 20 January of 1988 at a time when USAT was failing 21 its net worth? 22 A. Okay. Yes, I can. My opinion was and 4642 1 is that at a time when the institution was failing 2 its net worth requirement, management was well 3 aware of the failure, had been informed by 4 examination staff that we felt they were in 5 failure status and that they themselves were aware 6 of this. The institution was in a situation where 7 it -- these people were in a position of fiduciary 8 responsibility. They had a responsibility to not 9 only the stockholders of the institution to 10 preserve their assets of the institution, but also 11 eventually to the insurance corporation as the 12 body that's going to be the major creditor if 13 anything happens. 14 In preserving this institution to 15 maintain a net worth requirement, it's an unsafe 16 and unsound management practice to be paying 17 substantial bonuses to people at a time when the 18 institution is failing its net worth. It's both 19 an unsafe and unsound management practice. It's 20 also an unsafe and unsound compensation practice 21 because this is, in fact, reducing the 22 association's ability to maintain its net worth 4643 1 requirement. 2 Q. Now, did you also make -- reach some 3 conclusion regarding the safety and soundness of 4 this transaction with respect to the question of 5 conflicts of interest? 6 A. Yes, I did. In reviewing this 7 transaction at this point in time, some but not 8 all of the respondents were board members who were 9 approving their own pay or their own -- excuse 10 me -- their own bonuses. So, here are individuals 11 who have an inherent conflict of interest. If 12 you'll look at the schedule, 8026, Mr. Gross, I 13 believe, has the very largest bonus. Mr. Hurwitz, 14 the second, and Mr. Berner is the third largest. 15 Here are two of these individuals who are 16 receiving a substantial portion of money and they 17 are, in fact, approving it for themselves. They 18 are directly benefiting from the actions they 19 take. That's an inherent conflict of interest in 20 this situation. I saw no indication that they 21 were addressing that issue and, in fact, it 22 violated their own policy and the board's 4644 1 regulation, as we discussed earlier on the 2 conflict of interest, that says you will avoid 3 conflicts of interest because they are inherently 4 unsafe and unsound. Yet, they do this. 5 MR. KEETON: Your Honor, maybe my ear 6 was wrong, but I think he said "Hurwitz" when he 7 probably meant Munitz. 8 MR. RINALDI: I think your ear was 9 wrong. 10 A. If I -- I'm sorry. 11 MR. KEETON: Others over here heard 12 "Hurwitz," also. 13 A. I'm sorry. Hurwitz does appear on this 14 as receiving 200,000 -- proposed amount of 15 $200,000. I'm not discussing Hurwitz. I'm just 16 simply pointing out the dollar amount. I'm 17 concentrating on Gross, Berner, Crow, and Munitz. 18 Q. (BY MR. RINALDI) Okay. Now, at that 19 point in time, however, was it your understanding 20 that Mr. Gross and Mr. Munitz were on the board of 21 USAT? 22 A. Yes, it is. 4645 1 Q. At that point in time, Mr. Crow and 2 Mr. Berner were not members of the board of USAT? 3 A. No, they were not. 4 Q. Okay. So, you're not suggesting that 5 either Mr. Crow or Mr. Berner had any conflict of 6 interest with respect to the bonus? 7 A. Not for these transactions, no. 8 Q. Thank you. Now, following the 9 consideration of the bonuses and the salary 10 increases on November 10th, 1987, by the board of 11 USAT, did the board of USAT have occasion to 12 consider again the question of executive salary 13 increases? 14 A. Yes, they did. 15 Q. Okay. And do you recall, was that 16 after the June -- the July 1st date which they 17 said they were going to wait until before 18 reconsidering executive bonuses? 19 A. No. As a matter of fact, it was 20 several months prior to the July 1st or June 30th 21 date. 22 Q. Okay. And can you describe for the 4646 1 Court what occurred? 2 A. I reviewed a series of internal 3 memorandum from -- basically drafted by Mr. Berner 4 but memorializing conversations he had with other 5 chief executives of the institution discussing a 6 proposal to have salary increases and bonuses, all 7 of which occurred around the end of March -- 8 march 29th I believe, through March 31st, 1988 -- 9 with subsequent review. This was reviewed with 10 Mr. Whatley who at that time was the sole -- I 11 believe sole member of the compensation committee. 12 And then subsequently, there was action. And only 13 after the action was taken and was agreed to was 14 there approval by the board of directors but still 15 far in advance of the July date that had been 16 decided upon in November. 17 Q. Okay. Now, directing your attention to 18 what's been previously marked as T8052, this is a 19 memorandum dated March the 30th, 1988, from Arthur 20 Berner to James Whatley, Jenard Gross, and Barry 21 Munitz. And then I'm also going to hand you a 22 copy of what's T8052. I'm sorry. I misspoke. A 4647 1 copy of T8053 and this purports to be a memorandum 2 dated March 31st, 1988, again from Mr. Berner to 3 the same group of people regarding the 4 compensation committee. 5 Are these the memos that you referred to 6 a moment ago when you said you had reviewed some 7 memos relating to compensation committee actions? 8 A. Yes, they are. 9 Q. Okay. And are these -- did you take 10 these into consideration in formulating your views 11 regarding the compensation practices that were 12 engaged in by USAT in 1988? 13 A. I certainly did. 14 Q. Okay. And can you explain for the 15 Court what the significance of these memos was 16 from the point of view of your opinions? 17 A. Well, the memo talks about some reasons 18 for -- 19 Q. Okay. Now, when you say "the memo," 20 can you identify which memo? 21 A. Well, March 30th and March -- well, in 22 fact, let's go back to the March 30th memo. 4648 1 Discusses some reasons for instituting a salary 2 change and bonuses and some contracts. At no 3 point during this memorandum do I see any 4 discussion of what we've -- I mentioned several 5 times -- the failing or failed net worth 6 compliance condition of the institution. There is 7 never a discussion of that situation. 8 Q. Now, in the first sentence there, it 9 says "The following are notes and suggestions to 10 be discussed with Jim Whatley at the compensation 11 committee meeting and reflect meetings on 12 March 28th and 29th, 1988, among Messrs. Gross, 13 Munitz, and Berner." 14 Do you see that? 15 A. Yes. 16 Q. Now, were there any suggestions made by 17 this group of individuals in the memo regarding 18 the change of current salaries? 19 A. Yes. 20 Q. And where does that discussion appear? 21 A. On the March 30th memo, it appears at 22 Point No. 2. 4649 1 Q. Okay. And what was your understanding 2 of what was being suggested in Paragraph 2 by this 3 suggestion? 4 A. Well, my understanding of what was 5 being suggested was that the 1988 salaries were to 6 be adjusted upwards and it would be the 1987 7 salary increased by the amount of the 1987 bonus, 8 the amount that was paid in January of 1988. 9 MR. BLANKENSTEIN: Again, Your Honor, 10 Mr. Dermody's characterizing the document and 11 leaving out critical portions of the statement. 12 THE COURT: I think we'll leave that 13 for cross. 14 Q. (BY MR. RINALDI) Okay. And 15 Mr. Dermody, do you recall -- if you'll take a 16 look at T8026, which is the list of bonuses that 17 were paid in 1988 for 1987. 18 A. Yes. 19 Q. By including the 1987 bonus in the 1987 20 salary, would that have the effect of increasing 21 the salary by the percentage amount of the bonus? 22 A. Yes, it would. 4650 1 Q. So that in the case of Mr. Crow, it 2 would have increased his salary by 67 percent? 3 A. That is correct. 4 Q. And with respect to Mr. Berner, 5 67 percent? 6 A. Yes. 7 Q. Now, were you able to determine whether 8 the full amount of Mr. Gross' bonus of 235,000 was 9 actually included in the salary increase? 10 A. Yes, I was. 11 Q. Okay. And did they include all of it 12 or just the portion that related to the bonus 13 exclusive of the loan interest payments? 14 A. No. They include all of it. 15 Q. They did? Are you sure of that? 16 A. Well, reviewing the checks that were 17 issued, they were for an amount -- it was called 18 retro, which is a retroactive paper. It was 19 one-quarter of the bonus amount and then there 20 also was an executive bonus which we'll discuss, 21 I'm sure, in a minute which was for the same 22 amount. So, the checks covered both amounts. 4651 1 Q. Okay. All right. Then as a result 2 of -- I mean, in addition, there are several other 3 suggestions on the page. Directing your attention 4 to Suggestion No. 5, what was your understanding 5 of what is being suggested in Paragraph 5 6 regarding a special 1988 bonus? 7 A. Well, this simply discusses the special 8 '88 bonus would be equal to the bonus received in 9 '88, which my understanding was that would be the 10 1987 bonus that was paid in January of 1988. 11 Q. Okay. And then Paragraph 6, there is 12 also a discussion of employment contracts. 13 Do you see that? 14 A. Yes, I do. 15 Q. Now, in the next memo, which is T8052, 16 are these same three subjects also discussed or 17 reflected in the memorandum, T8053? 18 A. Yes, they are. I'd like to point out 19 that this memo is a little bit confusing. It's 20 dated March 31st, yet the first paragraph is very 21 similar. These are notes to be discussed with 22 Mr. Whatley on March 30th. There's clearly a 4652 1 conflict between the dates. Best I can make of it 2 was potentially Mr. Berner had simply taken 3 something in his word processors and not changed 4 something. I viewed this as clearly -- it seems 5 to be saying "we will change salaries and so 6 forth." It's hoping it's something that they have 7 agreed to, particularly since it's not even signed 8 by Mr. Whatley at the end. 9 Q. Okay. Now, directing your attention to 10 the second page, you indicated there is a 11 signature of Mr. Whatley. 12 Is it your understanding that as a 13 result of discussions by Mr. Berner, Munitz, and 14 Gross with Mr. Whatley that the suggestions that 15 were being made were, in fact, adopted by 16 Mr. Whatley? 17 A. Well, Mr. Whatley's signature is under 18 the line that says "Agreed to by the compensation 19 committee by James Whatley." 20 At that point in time, he was the 21 compensation committee. 22 Q. Okay. And what did you understand was 4653 1 being agreed to in Paragraph 2 of Exhibit T8053? 2 A. Well, without discussing the rationale 3 for it, because there was rationale given for this 4 reason, they were giving a 1988 salary increase 5 that would be equal to the '87 salary plus the 6 bonus that was paid in early 1988 for 1987. 7 Q. And that's the same suggestion that was 8 talked about in the previous memo we looked at 9 which is T8052 that was suggested to Mr. Whatley 10 by Mr. Berner in T8052? 11 A. Correct. 12 Q. Okay. And then with respect to 13 Paragraph 5, it now makes reference again to what 14 appears to be a, quote, special 1988 bonus. But 15 there is some additional text there. 16 What was your understanding of what 17 Mr. Whatley was recommending be adopted with 18 respect to the special 1988 bonus? 19 A. Well, the special 1988 bonus would, 20 again, be the same as the 1987 bonus paid in 21 January of '88; but rather than pay it all at 22 once, there would be a payment of 25 percent 4654 1 initially and the rest were to be placed in trust 2 with a trustee to be paid at the end of the year 3 unless an employee left prior to that point, in 4 which case they would forfeit their interest. 5 So, it's an establishment of trust 6 account to give a substantial amount of money to 7 these people. 8 Q. And does it appear from this that 9 the -- Mr. Whatley was approving the -- 10 effectively the payment of two bonuses to 11 executive persons at USAT in 1988? 12 A. Yes. He was increasing the salaries by 13 the amount of the 1987 bonus and then paying them 14 an additional bonus that prospectively would 15 double that increase in salary. 16 Q. But they would have to stay at the 17 institution until January 1st, 1989, in order to 18 qualify for the last 75 percent of the bonus? 19 A. That's correct. 20 Q. Okay. And directing your attention to 21 Paragraph 6, in that paragraph do they also talk 22 about employment contracts? 4655 1 A. Yes, they do. 2 Q. And what was your understanding of what 3 was going -- what Mr. Whatley had approved 4 regarding employment contracts? 5 A. Well, the discussion goes through 6 saying "we will clarify our position about the 7 change of control." Early in the memo, they talk 8 about the potential triggering of prior contracts 9 and that we will change this so that there is no 10 triggering of these. And also, make sure of what 11 would not be a triggering event and ends by 12 saying -- telling these people in the contracts 13 that there is no possibility that the contracts -- 14 there is a possibility -- I misspoke. "There is a 15 possibility that the contracts will be cancelled 16 if there is FSLIC assistance." 17 So, it appears that Mr. Whatley is 18 approving an amendment of these contracts to 19 clarify a change of control and clarify the 20 potential action of FSLIC and how it would impact 21 these individuals. 22 Q. Okay. Now, there is some handwriting 4656 1 at the bottom of the page. 2 Do you see that? 3 A. Yes, I do. 4 Q. And what was your understanding of what 5 that handwriting was or whose it was? 6 A. My understanding was that it was Mr. 7 Whatley's writing. 8 Q. Okay. And what was the -- does the 9 handwriting say? Can you tell? 10 A. Yes. If I may read it, "Compensation 11 study will be conducted by outside, independent 12 consultants to determine that United is in line 13 with peer group." And it has an arrow that 14 appears to point up to the salary increases that 15 are discussed in Item 2. 16 Q. Okay. Now, you made -- following the 17 presentation of these suggestions to the 18 compensation committee, were you able to ascertain 19 whether minutes were created for the compensation 20 committee at which these employment practices that 21 were being suggested to Mr. Whatley were 22 considered? 4657 1 A. Yes, I was. 2 Q. Okay. Let me show you a copy of what's 3 been previously marked as T8050. These are the 4 minutes of the compensation committee for 5 United Financial Group, Inc. dated March the 30th, 6 1988. 7 MR. RINALDI: This has previously been 8 admitted into evidence, Your Honor. 9 Q. (BY MR. RINALDI) Would you take a 10 look at that document? Was it your conclusion 11 that this was the minutes that memorialized what 12 had occurred at the meeting that's discussed at 13 T8053? 14 A. Yes. The document is not detailed. It 15 simply discusses the fact that a proposal had been 16 discussed, but I could find nothing else that -- 17 other than this that would indicate the 18 consideration of what we've discussed in the prior 19 documents. 20 Q. Well, it goes -- 21 A. As far as compensation committee. 22 Q. Okay. Does it talk about the current 4658 1 salaries being adjusted? 2 A. No, it does not. It talks about -- 3 Q. Well, does it -- 4 A. I'm sorry. Let me read it very quickly 5 again. It does not specifically state that there 6 is a salary adjustment. It talks about the 7 employment contracts and a resolution of the 8 problem. Proposal discussed by the committee and 9 a compensation specialist to pass on the fairness 10 of the proposal. Does not say "salary," but it is 11 very consistent with this prior document where 12 Mr. Whatley has apparently approved it and said 13 "we want a compensation agreement." 14 Q. Okay. And were you able to determine 15 whether thereafter USAT and UFG contacted a 16 compensation specialist to review the salary 17 levels that were being paid at USAT? 18 A. Yes. 19 Q. Okay. And whom did they contact? 20 A. I recall reviewing reports from Hyatt, 21 H-y-a-t-t, and also another one, I believe. What 22 was it? Wyatt. 4659 1 Q. I think it's Hewitt. 2 A. Hewitt. I'm sorry. I've got the hotel 3 in my mind. Hewitt & Associates, and then Wyatt 4 was another company. 5 Q. Okay. And following the board minutes 6 on March the 30th or the -- the -- strike that. 7 Following the compensation committee's 8 meeting as reflected in T8053 and the minutes 9 which is T8050, were you able to ascertain whether 10 USAT, in fact, implemented salary increases 11 thereafter? 12 A. Yes, I was; and they did. 13 Q. Okay. And when were those salary 14 increases implemented? 15 A. Well, the compensation committee 16 approved them or agreed to them on March 30th. 17 And the actual payment, I think, is on the chart 18 here. April 4th, 1988. There were checks cut 19 from the USAT compensation account to the 20 individuals that were consistent with the amounts 21 we've discussed. 22 Q. Okay. And did you see any internal 4660 1 documentation indicating the salary adjustments 2 that were being undertaken? 3 A. Yes, I did. 4 Q. Okay. Would you take a look at what's 5 been previously marked as T8055? And I'd ask you 6 if you recognize that document. This has 7 previously been entered into evidence. At the 8 top, it appears to state or it states "Salary 9 adjustments, April 4th, 1988." 10 A. Yes, I recognize it. 11 Q. Okay. Now, this is a four-page 12 document, sir. And the first two pages appear to 13 relate to salary adjustments and the second two 14 pages relate to something called pro rata bonuses. 15 Do you see that? 16 A. Yes, I do. 17 Q. Okay. And was -- did you determine 18 whether these salary adjustments had been approved 19 by someone at USAT? 20 A. Yes. There is a signature on the 21 second page of both the two schedules. It looks 22 like it's Jenard Gross' signature. 4661 1 Q. Okay. And how much were the salary 2 adjustments that were approved on April the 4th, 3 1988, by Mr. Gross? 4 A. Well, the salary adjustments were the 5 ones we had talked about. I believe they are -- 6 will you rephrase that question? 7 Q. Well, if you take a look at the salary 8 adjustments, it indicates original base, then '87 9 bonus, and then new base. 10 Can you describe for the Court what your 11 understanding is of how -- what those columns 12 refer to? 13 A. Well, they are consistent with the 14 discussions that we reviewed in the March 30th 15 minutes and the compensation committee minutes. 16 The original base was the 1987 salary that had 17 been paid in '87 and was still continuing up to 18 this stage in '88. Second column was the amount 19 of the bonus that was paid to these individuals 20 January 4th of '88. And the new base was simply 21 the addition of the two to come up with a new 22 salary. 4662 1 Q. Okay. Now, Mr. Gross, you may recall, 2 had a bonus in 1987 of $235,000. 3 Did they include the entire bonus in 4 Mr. Gross' new base? 5 A. They did not. 6 Q. Okay. So that his original salary in 7 1987 was $291,656 and his new base salary in 1988 8 went up to $458,656. 9 Do you see that? 10 A. Yes, I do. 11 Q. Okay. And the same occurred with 12 respect to Mr. Crow and Mr. Berner and Mr. Munitz, 13 did it not? 14 A. That's correct. 15 Q. And were you able to ascertain whether 16 the salary adjustments were solely prospective, or 17 were they retroactive? 18 A. I saw documents that reflected that 19 they were retroactive to the beginning of 1988. 20 Q. Okay. And if you take a look at T8053, 21 it indicates at Paragraph 2 that the suggestion 22 that was made to Mr. Whatley which he went along 4663 1 with is that we will change current salaries 2 effective January 1, 1988. 3 Do you see that? 4 A. Yes, I do. 5 Q. So, they made them retroactive in the 6 beginning of the year? 7 A. Yes, they did. 8 Q. Now, in addition to increasing the 9 salaries at this point in time, did they also -- 10 or did Mister -- did USAT also award the special 11 1988 bonus that is reflected in Paragraph 5 of 12 T8053? 13 A. Yes. The third and fourth pages of 14 T8055 reflects the amount of the 1987 bonus that 15 had been paid January of '88 for these individuals 16 and showed a 25 -- figure of 25 percent of that, 17 which is consistent with the records I saw that 18 show that the amount of money that was paid to 19 these individuals as on April 4th. 20 Q. Okay. So that in the case of Mr. Gross 21 again, his '87 bonus was $167,000 and $41,750, or 22 25 percent of it, would have been paid to him 4664 1 immediately; is that correct? 2 A. That's correct. 3 Q. And did you see documentation that 4 reflected that he, in fact, received a check or 5 received payments of that bonus at or about 6 April 5th, 1988? 7 A. Yes. I saw a document that showed he 8 received one check that combined the retroactive 9 salary increase and the bonus in one payment. 10 Q. Okay. Now -- and the same was true 11 with respect to Mr. Crow and Mr. Berner and 12 Mr. Munitz? 13 A. Yes. 14 Q. Okay. Now, the special 1988 bonus 15 indicates that there would be an additional 16 75 percent paid on January 1st, 1989. And that 17 would be placed in a trust with an independent 18 trustee. 19 Were you able to determine whether that 20 trust was, in fact, created and funded by USAT? 21 A. Yes, I was. 22 Q. Okay. And did you review a copy of the 4665 1 trust? 2 A. Yes. I saw the trust agreement. 3 Q. Let me hand you a copy of what's been 4 marked as T8062. I'm handing up to the Court two 5 copies of T8062 which has been previously marked 6 into evidence. 7 Do you recognize this document as 8 something you reviewed in carrying out your review 9 of the compensation practices? 10 A. Yes, I do. 11 Q. Okay. And what is this document? Can 12 you describe it to the Court? 13 A. The document is titled "United Savings 14 Association of Texas 1988 Executive Bonus Plan." 15 Q. Okay. And on what date does it appear 16 to have been executed or -- 17 A. Well, on Page 16, the employer and 18 trustee execute this the 25th of April 1988. 19 Q. And then as you turn to the last full 20 page, does it indicate the total amount of money 21 that was placed into the escrow account for 22 purposes of funding the -- this special 1988 bonus 4666 1 plan? 2 A. Yes. It shows that $879,000 was 3 transferred into this account. 4 Q. And as you look at the first four or 5 five names that appear at the top of the first 6 column, did Mr. Gross and Mr. Berner and Mr. Crow 7 and Mr. Munitz all participate in that plan? 8 A. Yes, they did. 9 Q. Okay. And were they the highest 10 compensated members under the plan? 11 A. Yes. 12 Q. Okay. Now, were you able to determine 13 whether the board of USAT had actually approved 14 either of the compensation practices we've just 15 discussed? That is, the salary adjustments that 16 increased the salaries by approximately 60 percent 17 and the implementation of this 1988 executive 18 bonus plan? 19 A. Yes, I was. 20 Q. Okay. And did the board of directors 21 of USAT approve either the executive bonus plan or 22 the salary adjustments prior to their being 4667 1 effectuated by management? 2 A. The only evidence I saw of them 3 approving this was dated May 10th, 1988, which you 4 can see is a month after the actual payment of the 5 moneys for the salary and the bonus and several 6 weeks after the establishment of the trust. 7 Q. Okay. Let me hand you a copy of what's 8 been previously marked as T8068. These are the 9 minutes of the board of directors of United 10 Savings Association of Texas. These were admitted 11 yesterday. And directing your attention to the 12 next-to-the-last paragraph, it says "Mr. Gross 13 stated that the next item of business was approval 14 of committee actions since the last board 15 meeting." 16 Do you see that? 17 A. Yes, I do. 18 Q. "After reviewing, such actions were 19 unanimously approved, adopted, and ratified." 20 Do you see that? 21 A. Yes, I do. 22 Q. Okay. And is it your understanding 4668 1 that the committee actions which were being 2 approved, adopted, and ratified by the full board 3 of United Savings Association of Texas included 4 the actions recommended by the compensation 5 committee on March the 30th, 1988? 6 A. Yes. 7 Q. And among the actions that were 8 included that were recommended by the compensation 9 committee at that time were the salary adjustments 10 and the executive bonus plan? 11 A. That is correct. 12 Q. And did you then reach some conclusion 13 in your written opinion which was submitted into 14 evidence yesterday regarding the safety and 15 soundness of USAT's entry into these salary 16 increases at a point in time when it was failing 17 its net worth requirements? 18 A. I did. 19 Q. And can you explain to the Court what 20 your conclusions were in that regard? 21 A. Well, without repeating everything I've 22 said before, we go back to the situation where an 4669 1 institution is failing its net worth requirement, 2 management is fully aware of this, has been 3 informed. What I didn't discuss was there was 4 also a meeting on March 30th of 1988 -- well, we 5 did discuss it. I'm sorry. A presentation. They 6 are taking actions at a time when they are being 7 told they are in failure. They have known this 8 for some time. Yet, they are engaging in 9 transactions that take a substantial amount of 10 money from the institution and pay them to the 11 senior officers, including the respondents. 12 I said this was an unsafe and unsound 13 management practice given the condition of the 14 institution, an unsafe and unsound compensation 15 practice because it subjected the association to 16 loss. Certainly, it was a conflict of interest 17 because the people at this time who were approving 18 these transactions were basically the majority of 19 the board of directors. So, they are saying, 20 "I'll approve these salaries. We'll all approve 21 each other's salaries." 22 They had an inherent conflict of 4670 1 interest in this situation. That discussion which 2 includes, you know, the safety and soundness of 3 the management policy to make payments of any kind 4 of this nature when their net worth deficiency, 5 the compensation, the conflict of interest applies 6 equally to both the salary payment and to the 7 executive bonus payment. 8 MR. RINALDI: Your Honor, this would be 9 a logical place to break his testimony if you'd 10 like to take a break for the morning. I'm 11 perfectly happy to go on further. 12 THE COURT: We'll take a short recess. 13 14 (A short break was taken 15 at 10:29 a.m.) 16 17 THE COURT: Be seated, please. We'll 18 be back on the record. 19 (10:53 a.m.) 20 Q. (BY MR. RINALDI) Now, Mr. Dermody, 21 we've just finished talking about Item No. 4 on 22 your chart, 1987 bonuses, and then Item No. 7 4671 1 which are the salary increases and executive 2 bonuses are approved on April 4th. Now, Item 3 No. 8 indicates employment contracts revised 4 July 1, 1988. 5 What does that refer to, sir? 6 A. Well, this is the contracts, I believe, 7 that were discussed on the March 30th discussions 8 of the compensation committee. These are 9 contracts with executives of the association where 10 there were some changes made to contracts that I 11 thought were important. 12 Q. Okay. Now, let me show you a copy 13 which we've previously marked as T8085. This is a 14 contract between United Savings Association of 15 Texas and Arthur Berner dated July the 1st, 1988. 16 Now, were you able to determine whether 17 these contracts were approved by the board of 18 directors of USAT? 19 A. Yes, I was. 20 Q. And was this contract or -- executed by 21 Mr. Berner? 22 A. Yes. This one is executed by 4672 1 Mr. Berner, I believe. 2 Q. And did you determine whether other 3 executives at USAT executed similar contracts to 4 that executed by Mr. Berner? 5 A. Yes. 6 Q. And that would be reflected in the 7 minutes? 8 A. Yes. 9 Q. And do you recall the date of those 10 minutes? 11 A. I believe the minutes of the board of 12 directors meeting for both USAT and UFG was 13 June 28th, 1988. 14 Q. Okay. Now, can you describe for the 15 Court -- were there elements of this contract 16 which were of interest to you from the point of 17 view of formulating your views regarding safety 18 and soundness? 19 A. Yes, there were. 20 Q. Okay. And can you describe for the 21 Court what those elements were? 22 A. Okay. There were several elements. 4673 1 The contracts extended the term for these 2 executives. Previously, their contracts had been 3 through December 31st, 1988. This extended it 4 through December 1991. It increased the salary as 5 part of the contract to the amount that had been 6 approved and actually paid as of April 4th, 1988. 7 So, now the institution is obligated to pay these 8 higher salaries and continue these levels. There 9 was discussion of a minimum bonus. 10 But the one thing that I found 11 particularly interesting and paid attention to was 12 upon termination of these executives, there was a 13 termination payment of two times their annualized 14 compensation. To make sure these individuals paid 15 this, there was a requirement that USAT establish 16 a letter of credit to ensure the payment of these 17 termination provisions. 18 Q. Okay. Now, directing your attention to 19 Paragraph 18E of that document. It appears on 20 Page 29 at -- toward the end of the document. I 21 think it's the next-to-the-last page. And it 22 reads as follows: "The terms and conditions of 4674 1 this agreement shall become effective if, but only 2 if, UFGI shall be unable to comply with all of its 3 obligations and make all of its payments as set 4 forth in and under the UFG agreement." 5 Do you see that? 6 A. Yes, I do. 7 Q. Okay. Had UFG also entered into an 8 employment contract with each of the executives 9 who entered into employment contracts with USAT? 10 A. Yes, they had. 11 Q. Okay. And what -- can you describe 12 what the nature of those UFG contracts were? 13 A. Well, the UFG contracts were -- 14 paralleled the USAT contracts. Of course, they 15 didn't have this Paragraph 18E that -- so, they 16 depended upon UFGI being able to comply. But in 17 the other provisions, they had the salary. They 18 had the letter of credit requirement and 19 everything else. So, they were virtually parallel 20 documents. 21 Q. Okay. And were you able to determine 22 as between the UFG contract and the USAT contract 4675 1 which entity USAT was responsible for paying the 2 salaries of the individuals under these employment 3 contracts? 4 A. Well, the contract says -- the USAT 5 contracts, the terms of this agreement, as you 6 quoted, shall become effective if but only if UFG 7 couldn't apply it. So, this implies that UFG is 8 responsible for these payments. 9 Q. And did you have occasion to review 10 checks, payroll checks of UFG? 11 A. Yes, I did. 12 Q. And did they indicate that -- at least 13 that the salary of the individuals -- Mr. Gross, 14 Mr. Berner, Mr. Crow -- were paid by USAT? 15 A. Yes. The checks I reviewed indicated 16 that all of the payments to the four respondents 17 were made by USAT from USAT's payroll account. 18 Q. And did you see any correspondence 19 between the regulators and USAT regarding which 20 entity was responsible for paying the salaries of 21 these individuals? 22 A. Yes. As a matter of fact, I did. 4676 1 Q. Let me direct your attention to what's 2 been marked as T8120. I'm handing two copies to 3 the Court. This is a letter to Neil Twomey dated 4 November 7th, 1988. 5 Was this a document that you reviewed in 6 formulating your opinions, sir? 7 A. Yes, it was. 8 Q. Okay. And what was the -- of 9 significance to you in this document with respect 10 to the compensation practices? 11 A. Well, with respect to the compensation 12 practices, the first page has Paragraph No. 2 13 which talks about the executive bonus -- salary 14 and executive bonus. And it goes on to point out 15 that a percentage of their key executive personnel 16 time is being allocated to UFGI and it discusses 17 the percentage that basically is allocated to 18 UFGI. "USAT will receive credit for any 19 expenditures paid by it to such executives during 20 1988." 21 So, the four respondents there times 22 from 10 to -- actually, not the respondents but 4677 1 between 10 and 25 percent of the individual's time 2 is to be credited to USAT. In other words, UFGI 3 would be responsible for it. 4 Q. Okay. And so, the majority, then, of 5 the salaries that these individuals would receive 6 were going to be paid by USAT under these 7 contracts; is that correct? 8 A. That's correct. 9 Q. And you indicated that there was going 10 to be the creation of a letter of credit that 11 would secure these contracts or some other similar 12 arrangement. 13 Do you recall that? 14 A. Yes, I do. 15 Q. Okay. And would you turn to Page 5 of 16 the attachment to the November 7th, 1988, letter? 17 And I'd ask you to take a look the first full 18 paragraph there and ask you if that reflects your 19 understanding of the mechanism that was used to 20 fund the severance benefits? 21 A. Yes. It matches my understanding. 22 Q. Okay. And was it your understanding 4678 1 that UFGI was unable to obtain letters of credit? 2 A. Yes, that is correct. 3 Q. And thereafter, was an alternative 4 mechanism employed by the respondents to fund 5 the -- or to guarantee the severance benefits? 6 A. Yes. The funds were placed into an 7 escrow account. 8 Q. And funds of UFGI, or were these funds 9 of USAT? 10 A. Mr. Berner seems to be very clear that 11 these are funds of USAT moneys because UFGI was 12 unable to get the letter of credit. 13 Q. And do you recall the amount of the 14 assets of USAT that were paid -- placed into the 15 escrow account at or about this time? 16 A. While the letter discusses $6 million, 17 I believe it was $6.6 million that was placed into 18 the escrow account. 19 Q. Now, do you recall how the USAT 20 contracts were approved at the board meeting? 21 A. Yes, I do. 22 Q. Okay. And can you -- let me hand you a 4679 1 copy of the board meeting of USAT. It's T8078. 2 I'm handing two copies to the Court. This is the 3 special board of directors meeting of United 4 Savings Association of Texas dated June the 28th, 5 1988. It's 8078. 6 And does this appear to be the minutes 7 of the board of directors meeting at which the 8 USAT employment contracts were approved by the 9 board of USAT? 10 A. That's correct. It does. 11 Q. And is this a document that you 12 reviewed in connection with your formulation of 13 your opinion? 14 A. It is. 15 Q. And directing your attention to the 16 next-to-the-last paragraph there, does it reflect 17 the manner in which the contracts were approved by 18 the members of the board of USAT? 19 A. Yes, it does. 20 Q. And what -- can you describe for the 21 Court your understanding of how the contracts were 22 approved? 4680 1 A. Well, it states that they were 2 discussed, unanimously approved by the directors, 3 with the parenthetical comment that (as a contract 4 related to any member of the board, that member 5 abstain from the discussion and the vote.) 6 So that, for instance, if Mr. Gross' 7 contract came up, he would not vote on his 8 contract, but he would vote on all the rest of 9 them. I view that as effectively "You scratch my 10 back, I'll scratch yours" because every one of 11 them are voting on each other's contracts. 12 So, the form of what they have done is 13 to try and resolve a conflict of interest but, in 14 effect, they have a conflict situation where they 15 are just doing it for each other. 16 Q. Now, how many members of the board were 17 there on the USAT board at this time? 18 A. I believe that there were five members, 19 and Mr. Schwartz is not shown here. I'm trying to 20 think. I don't believe that Mr. Crow was a member 21 of the board. So it would be five members total 22 with four present at the meeting. 4681 1 Q. Okay. And the ones present at the 2 meeting then would have been Mr. Berner? 3 A. Yes. Mr. Berner, Mr. Munitz, 4 Mr. Gross, and Mr. Whatley. 5 Q. Okay. And is it your understanding 6 that, for example, when they approved Mr. Munitz's 7 contract, he would abstain and Mr. Gross and 8 Mr. Berner and Mr. Whatley would then vote? 9 A. That's correct. 10 Q. And then with respect to the other two, 11 the same would occur? The two inside directors 12 would vote on the third inside director's contract 13 that abstained? Is that your understanding? 14 A. That's correct. There would be three 15 votes for approval of these things but four 16 directors present for every one of the contracts. 17 Q. Now, did you also review the minutes of 18 the United Financial Group board meeting at which 19 United Financial Group contracts were approved? 20 A. Yes, I did. 21 Q. And did that occur on about the same 22 day as the USAT special board meeting? 4682 1 A. Yes. I believe it was the same day. 2 Q. And were the contracts approved in the 3 same fashion as you've just described with respect 4 to the contracts for USAT? 5 A. Yes. I believe that the wording was 6 virtually identical as to how they were approved. 7 Q. Now, did you review these minutes to 8 determine whether the boards of either -- of USAT 9 considered USAT's net worth deficiency at the 10 point in time when they approved these contractual 11 arrangements? 12 A. I found no specific discussion of the 13 net worth condition of the institution. There 14 were discussions of the Southwest Plan and 15 forbearance application, but there was no 16 discussion of these contracts in relationship to 17 the net worth position of the institution. 18 Q. Okay. And as a result of your review 19 of the contracts and the process by which the 20 contracts of both UFG and USAT were entered into 21 with respect to these executives, did reach some 22 conclusion as to the safety and soundness of those 4683 1 practices? 2 A. Yes, I did. 3 Q. And could you state for the Court what 4 those conclusions are with respect to the USAT 5 employment contracts that were approved by the 6 USAT board? 7 A. Well, USAT, first of all, in approving 8 these contracts, undertook an unsafe and unsound 9 management practice. They were approving 10 contracts for extended periods of time, building 11 in these salary pay increases at a time when they 12 could ill afford it. They had a net worth 13 deficiency and, in fact, within, what, three days 14 of this, reported insolvency. They also 15 instituted this escrow plan which was supposed to 16 be a letter of credit but ended up being an escrow 17 plan where they took $6.6 million of the 18 institution's money and effectively authorized 19 that money be set aside for these individuals at a 20 time when they were insolvent, needing to be 21 maintaining their net worth level. 22 So, I said that this was clearly a 4684 1 conflict of interest; but I said this is an unsafe 2 and unsound management practice and, again, unsafe 3 and unsound compensation practice and it violated 4 the contract -- I'm sorry -- the regulation 563.39 5 which says you will not engage in -- enter into a 6 contract which subjects the institution to 7 material loss. $6.6 million was walking out their 8 front door and the association, the way it was set 9 up, may never be able to recover this at a time 10 when they are insolvent net worth deficiency. 11 So, I said, yes, this whole series of 12 transactions were unsafe and unsound, should not 13 have been engaged in. 14 Q. Now, in your opinion, you also make 15 reference to a holding company regulation 584.3. 16 Do you recall that? 17 A. Yes. 18 Q. And what was that in reference to? 19 A. Well, as I said earlier, I think we 20 discussed this. The contracts ostensibly were 21 UFGI contracts initially and then USAT contracts 22 which said "we only operate if we have a situation 4685 1 where UFGI cannot pay." 2 These individuals entered into these 3 contracts at a date when UFGI was itself 4 insolvent, was not meeting its own obligations, 5 had to make a reduced payment on debt to try and 6 resolve a debt, incapable of doing this, incapable 7 of getting these letters of credit. 8 So, here we have a situation where these 9 people knew that UFGI was incapable of making 10 these payments, yet they went ahead and obligated 11 USAT to this. USAT is effectively guaranteeing 12 the obligation of its parent. It's effectively -- 13 by guaranteeing the debt, it's saying "We're 14 lending you the money to pay these people and the 15 only place we can get repayment is from the parent 16 holding company." 17 So, your contract with these 18 individuals, our contract -- so, it's an unsafe 19 and unsound transaction to guarantee the debt or 20 the obligation of the parent holding company. 21 Q. Now, in addition to that, did you also 22 reach some conclusions regarding the safety and 4686 1 soundness of the parallel UFG employment 2 contracts? 3 A. Yes, I did. 4 Q. And can you explain to the Court what 5 your conclusions in that regard were? 6 A. Well, without saying everything I've 7 said, we have the situation where the parent 8 holding company is insolvent. It has its net 9 worth obligation of, at this point, 250 million 10 plus about -- from the chart, about a 11 20-million-dollar insolvency. So, they have to 12 come up with a 270-million-dollar net-worth 13 maintenance requirement. They are themselves 14 insolvent. Yet, they are committing to make these 15 obligations to these individuals that they can ill 16 afford and should not be doing because of the 17 insolvency of the institution and the parent 18 holding company's ability to pay this. 19 I also looked at this and said these 20 individuals -- while the USAT may be making the 21 payment, UFG may not be -- I said, may not be able 22 to pay this. I look at this and say, "If there is 4687 1 going to be some payment, what they have done is 2 they have guaranteed that one or another of these 3 organizations are going to pay these individuals." 4 If USAT pays it, it's guaranteeing the obligation 5 of its parent. If UFG effectively pays these 6 things, the critical thing that they would be 7 paying would be the severance benefits. 8 Now, the institution cannot pay a 9 severance benefit after it's taken over. That 10 would chop it off completely at that date of 11 insolvency. But by having the contract with UFG, 12 UFG is now obligated -- even if the association 13 goes into insolvency, UFG is obligated to make 14 this severance payment or have some kind of a 15 settlement with it that they should never have 16 done. 17 So, they are effectively bypassing the 18 regulations and, in fact, they did later make 19 payments. They did exactly that. They bypassed 20 regulations and made payments to these individuals 21 which should not have been made. 22 Q. And was that money that you felt should 4688 1 have been infused into USAT under UFG's net-worth 2 maintenance obligation? 3 A. Yes. Now, I believe you also indicated 4 that there were some employment practices at UFG 5 that you found had violated safety and soundness 6 concerns. And we've talked about now the 7 employment contracts that you just expounded upon. 8 Did you also formulate a view with 9 respect to bonuses entered into between UFG and 10 Mr. Crow and Mr. Gross? 11 A. Yes, I did. 12 Q. And can you explain to the Court what 13 those bonuses were? 14 A. Well, the bonuses took place initially 15 in February of 1988 and then were modified in 16 April of 1988. I discussed earlier that when 17 Messrs. Gross and Crow acquired stock of the 18 institution, UFGI loaned them the money to buy the 19 stock and they had this debt to repay. 20 In February of 1988, UFGI entered into 21 contracts with them. Now, remember, UFGI is now 22 insolvent, has its net-worth maintenance 4689 1 obligation. But they have entered contracts with 2 these individuals saying "We will give you a bonus 3 over the next several years equal to the amount of 4 debt that you have to pay us for this stock," 5 effectively relieving these individuals of any 6 need to make payments. 7 To compound that situation, in April of 8 1988, they modified the contracts and said, "Oh, 9 yes. By the way, if you're terminated without 10 cause, the debt goes away. You basically do not 11 have to repay this debt." 12 So, at a time when the holding company 13 has a maintenance requirement, it's short on cash, 14 could use this money from these individuals, and 15 owes money to the institution or has an obligation 16 to pay that, they are saying, "Well, we'll give 17 you this bonus so you don't have to pay us the 18 money that is due to us and, if anything happens, 19 you'll never owe us the money." 20 I viewed that as an unsafe and unsound 21 series of transactions because it was preventing 22 them from having the money available for the 4690 1 net-worth maintenance requirement. 2 Q. Now, a moment ago when you were talking 3 about the lack of safety and soundness associated 4 with USAT entering into its employment agreements, 5 were you aware or did you determine in the course 6 of your review of the record that the supervisory 7 agent, Neil Twomey, had also raised concerns in 8 about October of 1988 regarding the USAT 9 employment contracts and the severance benefits? 10 A. Yes. 11 Q. Okay. And did Mr. Twomey, do you 12 recall, send a letter to the board of directors 13 regarding those contractual arrangements? 14 A. In fact, he did. 15 Q. Okay. And can you just generally 16 describe for the Court what Mr. Twomey -- well, 17 let me just show you a copy of what's been 18 previously marked as T8111. 19 Does that appear to be the letter that 20 you're referring to? 21 A. Yes, it does. 22 Q. Okay. And what is your recollection as 4691 1 to what Mr. Twomey advised them regarding the 2 safety and soundness of USAT's contractual 3 arrangement? 4 A. Mr. Twomey is -- was essentially making 5 the same argument that I am, making the same 6 statement. "They provided for excessive 7 compensation and severance payments at a time when 8 USAT was approaching or had actually reported 9 insolvency and that that was an unsafe and unsound 10 practice by the board and management of United 11 Savings." I think that is almost a direct 12 parallel of exactly what I have said. 13 Q. Okay. Thank you. And then did there 14 come a time when UFG entered into a debt 15 forgiveness with both Mr. Crow and Mr. Gross? 16 A. Yes, there did. 17 Q. Okay. And are those reflected on your 18 chart there? 19 A. Yes, they are. They show up as No. 7 20 for Mr. Gross, and Mr. Crow shows up as No. 8. 21 Actually, I am slightly off on the date for 22 Mr. Crow. I show it a couple months later than it 4692 1 actually happened. But there was a forgiveness of 2 this debt related to the acquisition of stock of 3 UFG. 4 Q. Okay. And can you describe briefly for 5 the Court how Mr. Gross' debt came to be forgiven? 6 A. Mr. Gross resigned in, I believe, the 7 fourth quarter of 1988. I don't have the document 8 in front of me, but I think it was approximately 9 October. In November of 1988, he signed an 10 agreement with both USAT and UFG stating that he 11 was severing his relationship and as part of that 12 arrangement, they were basically forgiving the 13 debt on this acquisition of the stock of UFG. So, 14 he no longer had responsibility to pay that debt 15 back. 16 Q. And do you recall what the 17 consideration was for forgiving that debt? 18 A. He released his claims against them for 19 these contracts that had been entered into. 20 Q. And did you reach some conclusion 21 regarding that debt forgiveness? 22 A. Yes, I did. 4693 1 Q. And would you state for the Court what 2 your conclusions were from a safety and soundness 3 standpoint? 4 A. Well, again, we have the holding 5 company agreeing to forgive in Mr. Gross' case I 6 think $835,000 in obligations to it at a time when 7 it needed to have a net-worth maintenance 8 agreement. In exchange for a contract which 9 should never have been entered into in the first 10 place. It was entered into at a time when UFG 11 should not have done it and it was not capable of 12 funding it. So, to use this contract as a basis 13 for entering into the settlement agreement strikes 14 me as -- they have made a serious mistake. Should 15 not have done it in the first place and are simply 16 compounding it. It's not a solution. It's a 17 continuation of the same unsafe and unsound series 18 of events. 19 Q. And was it your view that the 20 forgiveness of the debt impeded the ability of UFG 21 to make good on its net-worth maintenance 22 obligation? 4694 1 A. Yes. Just like the other payments that 2 UFG made or obligations they had, it prevented 3 them from meeting net-worth maintenance 4 obligation. 5 Q. Now, was the severance agreement 6 between UFG and Mr. Gross, or did USAT also 7 participate in that agreement? 8 A. No. I believe I said that it was a 9 three-party agreement. Mr. Gross signed the 10 contract with USAT and UFG as parties. 11 Q. And did you reach any conclusions 12 regarding the safety and soundness of directors of 13 USAT approving a severance or the debt 14 forgiveness? 15 A. Yes, I did. 16 Q. And what were your conclusions in that 17 regard? 18 A. Well, the directors of USAT had an 19 obligation to preserve the net worth of the 20 institution. Here they were acting as directors 21 of USAT. They treated it as one organization, 22 obviously, but they were taking action as UFG 4695 1 directors which they could hardly separate from 2 their USAT responsibilities that prevented UFG 3 from having the money that they could infuse to 4 meet the net worth obligation. 5 So, that was an unsafe and unsound 6 practice on their part to participate in that. 7 Q. Now, we have at this point gone through 8 all of the opinions which were set out in your 9 written opinion which has been entered into 10 evidence as A11048. 11 After drafting the opinion, did you have 12 occasion to formulate any additional opinions 13 regarding the compensation practices of USAT? 14 A. Yes, I did. 15 Q. Okay. And what was that in reference 16 to? 17 A. Well, certainly one of the items was 18 the employment contracts entered into by USAT in 19 February of 1988. 20 Q. And when you first drafted your expert 21 report, was there a reason why you did not express 22 an opinion regarding the employment agreements 4696 1 that were entered into between USAT and executives 2 on February the 11th, 1988? 3 A. Yes. 4 MR. BLANKENSTEIN: I'm going to object 5 to this. As I understand it, Mr. Dermody is now 6 supplementing his report on the stand his expert 7 report that was due under this Court's schedule 8 many months ago. 9 MR. RINALDI: Your Honor, I think it 10 will become apparent that he's not going to 11 supplement his report. The evidence will show 12 that he was under the -- that he was under the 13 impression that the -- that that particular 14 transaction had not been entered into for good and 15 sufficient reason that he will explain to the 16 Court. And it's for that reason that he could not 17 formulate his opinion. When it was brought to his 18 attention at his deposition, at that point in 19 time, he indicated to respondents what his opinion 20 was in that regard. Rather than ask him what his 21 opinion is, I will simply ask him why it is he 22 hadn't put on his -- he hadn't formulated an 4697 1 opinion sooner. And then if the Court is 2 satisfied that that's a satisfactory reason for 3 not having formulated it on an earlier date, then 4 I will ask him to identify what his opinion is in 5 that regard. 6 MR. BLANKENSTEIN: We're deprived of 7 having discovery of his opinions by having him now 8 tell us on the stand as to why he wasn't able to 9 formulate his opinion at an earlier time. 10 MR. RINALDI: Paul, if you had attended 11 his deposition, you would know that he put on his 12 testimony at that time and he explained -- 13 THE COURT: All right. I'll deny the 14 objection. Let's hear it. 15 Q. (BY MR. RINALDI) Mr. Dermody, why did 16 you -- hadn't you formulated an opinion with 17 respect to the February 11th, 1988, contracts 18 between USAT and its executive officers? 19 A. Well, when I started to look at these 20 contracts, there was a board approval of these 21 contracts, yet I found no signed documents. And 22 in some subsequent correspondence between the 4698 1 Federal Home Loan Bank and the association, there 2 was an unequivocal statement that these documents 3 did not exist. I just felt it was a waste of my 4 time to try and analyze a document that the 5 institution said didn't exist and I did not -- had 6 not ever seen. 7 MR. RINALDI: Okay. And I'm handing 8 the Court a copy of what's been marked as T8069. 9 This is a letter to Jenard Gross from Neil Twomey 10 dated May 13th, 1988, regarding employment 11 contracts. I'm also handing the Court a copy of 12 T8071, which is a letter dated May 18th, 1988, 13 from Arthur Berner to Neil Twomey. I'll pass a 14 copy of these two letters to the witness. 15 Q. (BY MR. RINALDI) Sir, if you'll take 16 a look at these two letters and tell me if you 17 recognize them. 18 A. Yes, I do. 19 Q. Are these the letters you referred to a 20 moment ago? 21 A. Yes. 22 Q. Okay. And first, with respect to 4699 1 T8069, was it your understanding that at or about 2 May 13th, 1988, Mr. Twomey had made inquiries to 3 the United Savings Association regarding its 4 employment contracts? 5 A. That is correct. 6 Q. Okay. And what information was 7 Mr. Twomey seeking? 8 A. Mr. Twomey requested a copy of all 9 employment contracts between officers or employees 10 of the association and any subsidiaries. 11 Q. Okay. And subsequent to that, did you 12 determine that Mr. Berner responded to 13 Mr. Twomey's request in a letter dated May 18th, 14 1988? 15 A. Yes, I did. 16 Q. And does T8071 appear to be 17 Mr. Berner's response? 18 A. Yes, it does. 19 Q. Okay. And can you describe for the 20 Court what it is in that letter that caused you to 21 believe that there were no employment agreements 22 entered into between USAT and its executives in 4700 1 February of 1988? 2 A. Well, it identifies in response to 3 Mr. Twomey's letter. Second full paragraph, let 4 me read this first sentence. "Please be advised 5 that the association has not entered into 6 employment agreements with such officers or 7 employees." 8 I view that as a rather unequivocal 9 statement that these do not exist, and that's why 10 I decided not to proceed further. 11 Q. And as a result of your review of the 12 record, was it your belief that the contracts 13 which were reflected in the minutes of USAT as of 14 February 11th, 1988, were, in fact, never 15 executed? 16 A. That is correct. 17 Q. Now, did you have occasion during your 18 review of the record to see an executed copy of 19 the document -- of an employment agreement between 20 any of the executives of USAT and USAT itself that 21 were executed at or about February 11, 1988? 22 A. Yes. During my deposition, I believe 4701 1 during cross, counsel presented me with an 2 executed copy of one of those February 11th 3 contracts. 4 Q. Was that the first time that you had 5 seen a copy of the February 11th, 1988, contract 6 in an executed form? 7 A. Yes, it was. 8 Q. And is that the reason then why you had 9 not previously formulated an opinion regarding the 10 safety and soundness of that contract? 11 A. That is correct. 12 Q. And then following your discovery of 13 the fact that there, in fact, was a February 11th, 14 1988 contract, were you questioned at your 15 deposition regarding your views and opinions 16 regarding the safety and soundness of that 17 February 11th, 1988 contract? 18 A. Yes, I was. 19 Q. Okay. 20 MR. RINALDI: And with that, Your 21 Honor, I would request leave of the Court to allow 22 him to testify as to the conclusions which he 4702 1 formulated regarding that contract which were 2 provided to the respondents in oral form at his 3 deposition. 4 THE COURT: All right. Proceed. 5 Q. (BY MR. RINALDI) Can you describe the 6 contract, sir? 7 A. The contract was between USAT and the 8 respondents -- contracts, excuse me. Set the term 9 of the contract. The terms were, again, December 10 of 1988. Set salaries. The salaries were the 11 1987 salaries, not the new, higher increased ones 12 that showed up about two months later. I believe 13 it talked about bonus, and it talked about 14 severance provisions. Again, if there was 15 termination, there was two times the annual 16 compensation as a severance benefit. And again, 17 it ended by saying "this contract is only 18 effective" -- to paraphrase -- "if UFGI is unable 19 to meet its obligations." 20 Q. And I am sorry. I may have missed 21 this. 22 Do you recall whether the contract 4703 1 contained a bonus provision? 2 A. Yes. I believe the contract did 3 contain a bonus provision. I think it set a 4 bonus, and the bonuses would then be rolled in 5 later as a -- 6 Q. Take a look at -- 7 A. -- guaranteed salary, bonus. 8 Q. Let's see. Page 3 of 18 of 8043. 9 A. Do I already have 8043? 10 Q. I'm sorry. Did I not give you a copy 11 of the contract? 12 A. I don't believe so, unless you did it 13 earlier. 14 Q. Didn't I just put a -- 15 MR. RINALDI: I'm sorry, Your Honor. I 16 thought I had just handed this up. Let the record 17 reflect I'm handing a copy of 8043 which is the 18 contract between Arthur Berner, I believe, and 19 USAT dated February 11th, 1988. 20 Q. (BY MR. RINALDI) And would you take a 21 look at the third full page of that document? Do 22 you see where it says "bonuses"? 4704 1 A. Yes, that's correct. 2 Q. And does that refresh your recollection 3 that it provided for a bonus? 4 A. Yes. It provided for a bonus equal -- 5 well, a minimum bonus of $70,000. So, there was a 6 guarantee of $70,000 per year under this contract 7 for bonuses. 8 Q. And by providing for a guaranteed 9 bonus, did that have the effect of increasing the 10 salary by the amount of the bonus? 11 A. That's correct. 12 Q. Okay. Now, you indicated that it was 13 only to become effective in the event that UFG was 14 unable to perform. In fact, you testified earlier 15 that you determined that the base pay on the 16 contracts with respect to Mr. Munitz and Berner 17 and Crow -- you determined were being paid by 18 USAT. 19 Do you recall that? 20 A. Yes, I do. 21 Q. Now, how did you make that 22 determination, sir? 4705 1 A. Determination was a review of some of 2 the compensation checks that were given to these 3 individuals. 4 MR. RINALDI: Your Honor, I'm going to 5 move for admission Document T8034. I don't 6 believe this was one that was offered as a group 7 exhibit yesterday. This is a letter dated August 8 the 18th, 1997. It's from Mr. Villa to me. It 9 bears Bates stamps at the bottom numbering 1 10 through 68 -- 69. And it contains a number of 11 documents relating to what Mr. Villa represents on 12 his letter appears to be from the association -- 13 that is, USAT originally -- and that relate to 14 their employment practices. 15 I'd move for admission of the document. 16 MS. CLARK: Your Honor, we provided 17 this to OTS enforcement. We are unable to vouch 18 for its chain of custody. We cannot determine 19 where we got it. It was provided to us at a time 20 when the documents were not being Bates stamped. 21 But in reviewing the documents, it appears from 22 looking at them that they must come from the files 4706 1 of USAT. And so, we have no objection to their 2 admission for whatever evidentiary value they 3 have. 4 THE COURT: Received. 5 Q. (BY MR. RINALDI) Mr. Dermody, I would 6 ask you to turn to Page 10 of that document. That 7 is, Bates stamp 10. And can you describe for me 8 what -- was that a document you reviewed in 9 connection with formulating your views? 10 A. Yes. I believe this is a payroll 11 account -- payroll check from USAT to Mr. Berner. 12 We earlier discussed his bonus that he received, 13 his 1987 bonus he received January 4th, 1988. 14 This is a check, states that -- stub states it's 15 for a bonus and, of course, after the appropriate 16 deductions, it shows that he received this check. 17 Q. And do you recall that on November the 18 9th, 1987, in fact, bonuses were awarded or -- 19 strike that. That bonuses were -- that there 20 exists in T8026 a list of proposed bonuses to be 21 paid for 1987 in 1988? 22 A. Yes. 4707 1 Q. And for Mr. Berner, do you recall -- 2 did you determine that the amount of the bonus for 3 Mr. Berner listed in T8026 is the amount of the 4 bonus that is reflected in -- on Page 10 of T8034? 5 A. Yes. We looked at that document 6 earlier this morning, and that is consistent with 7 the amount reflected on this check. 8 Q. And would you turn now to Page 11 and 9 Page 17? And on Page 11, there are checks to 10 Jenard Gross, Barry Munitz, and Arthur Berner. 11 Do you see that? 12 A. Yes, I do. 13 Q. And then on 17, there appear to be 14 check stubs that indicate the purpose of the 15 check. 16 Do you see that? 17 A. Yes, I do. 18 Q. And what did you determine were the 19 purpose of these three checks? 20 A. These three checks were to make these 21 bonus payments, the 1987 bonuses that were paid on 22 January 4th, 1988. These were the amounts of 4708 1 those payments. 2 Q. Okay. And those are the amounts that 3 were reflected in the proposed bonuses in the 4 document dated November 9th, 1987? 5 A. That is correct. 6 Q. And does the stub indicate the purpose 7 of these payments? 8 A. Each of the stubs has, under the 9 purpose section, "for bonus." 10 Q. And can you tell by looking at the 11 checks themselves which entity made the payment? 12 A. Yes. It's very clear on the top. 13 United Savings Association of Texas, USAT payroll 14 account. 15 Q. And then turning your attention to 16 Pages 25 and 27, are those documents which you 17 reviewed in connection with your preparation of 18 your opinion here today? 19 A. Yes, they are. 20 Q. Okay. And it makes reference to a 21 bonus and a retro, and they are paid on 4-5-1988. 22 Do you see that? 4709 1 A. Yes. 2 Q. And what is your understanding of what 3 those checks pertain to? 4 A. Well, earlier, we discussed the 5 March 30th approval of these payments and the fact 6 that on April 4th, 1988, there were payments for 7 the retroactive salary increase plus the 8 25 percent executive bonus payment. Those two 9 amounts were identical. Here we have listed on 10 each of these individuals "bonus" and "retro," and 11 those are the amounts that were shown in the prior 12 schedule that we reviewed that said how much these 13 individuals would get. So, this exactly matches 14 those schedules. 15 Q. And what did you conclude from that, 16 sir? 17 A. I concluded that, again, the entire 18 amount of these payments were made from United 19 Savings' payroll account. 20 Q. And just for our purposes, what was the 21 financial condition of USAT at or about April the 22 5th, 1988? 4710 1 A. Well, USAT, as you can see from our 2 earlier chart, at that time had barely any 3 positive net worth. They were in a substantial 4 failure of their net worth requirement and 5 deteriorating rapidly. 6 Q. And directing your attention then to 7 Pages 26 and 27, do those also appear to be 8 similar payments for a bonus and retroactive pay 9 on March the 5th, 1988, to Michael Crow and 10 Jenard Gross? 11 A. Yes, for April 5th, 1988, for Mr. Crow 12 and Mr. Gross. 13 Q. And the stubs with respect to those 14 checks then appear on the next page; is that 15 correct? 16 A. That is correct. 17 Q. Okay. Now, we heard yesterday -- and I 18 believe you testified during your testimony 19 today -- that USAT on about March the 30th, 1988, 20 at a compensation committee meeting had determined 21 that they wanted to explore entering into 22 employment contracts. 4711 1 Do you recall that? 2 A. Yes, I do. 3 Q. And at that time, Mr. Whatley had 4 penciled in in a handwritten note that he wanted 5 to seek the assistance of a compensation expert to 6 review the proposed employment contracts. 7 Do you recall that? 8 A. Yes, I do. 9 Q. Did USAT ultimately seek the advice of 10 employment consultants? 11 A. Yes. They sought the advice, and I saw 12 the actual results that were given to the 13 institution as a result of those reviews. 14 Q. Okay. And that was Hewitt & Associates 15 that provided the first report? 16 A. That's correct. 17 Q. Okay. And did Hewitt conclude that UFG 18 and USAT's employment contracts were reasonable? 19 A. Yes, they did. 20 Q. Okay. And in reaching that conclusion, 21 did Hewitt & Associates take into consideration 22 the fact that USAT was failing its net worth 4712 1 requirements at the time they were contemplating 2 entering into those contracts? 3 A. I saw nothing that indicated that was a 4 consideration. There was one provision talked to 5 the regulators about safety and soundness issues, 6 but there was no discussion of a net worth 7 failure. 8 Q. Did you agree with the conclusion that 9 was reached by Hewitt regarding the reasonableness 10 of the contracts entered into by USAT with its 11 executive officers? 12 A. I don't think agree or disagree is the 13 appropriate term. I did not accept it. I felt 14 that there were some difficulties with the way the 15 methodology that was used and it was not of any 16 benefit to me at all in my analysis. 17 Q. Did Hewitt & Associates consider 18 whether it was safe and sound for the respondents 19 or for USAT to enter into employment contracts at 20 a point in time when it was failing its net worth 21 requirements? 22 MS. CLARK: Objection. Your Honor, I 4713 1 don't believe he knows what they considered and 2 what they didn't consider. If he has a question 3 about the record that he reviewed, it might be 4 appropriate. 5 Q. (BY MR. RINALDI) Did you review the 6 entire record of the Hewitt documents that were 7 produced to us by Mr. Hewitt? I mean by 8 Hewitt & Associates. 9 A. I reviewed every document that I was 10 able to obtain on the Hewitt review. 11 Q. And in connection with that review, 12 were you able to ascertain whether Hewitt had made 13 the determination as to whether these contracts 14 were consistent with the principles of safety and 15 soundness? 16 A. Yes, I did. They made no determination 17 based on safety and soundness that I could find. 18 In fact, at one point, they recommended to USAT 19 that they contact outside counsel to get a 20 determination of the safety and soundness issues. 21 Q. Okay. Would you take a look at what's 22 been previously marked as T8074? And I'm handing 4714 1 a copy to the witness. This is a document 2 entitled "Funding and Securing Non-qualified 3 Benefits, United Financial Group, Inc., June 7th, 4 1988." And this is a document that's dated three 5 weeks prior to -- approximately -- USAT entering 6 into its employment contracts with its executives. 7 And while this isn't a good copy, there is, I will 8 tell you, a Hewitt logo on this. And if you look 9 in the lower right-hand corner, it bears the Bates 10 stamp H0181? 11 MR. BLANKENSTEIN: Mr. Rinaldi, can you 12 give us the exhibit number again? 13 MR. RINALDI: Yes. T8074. 14 Q. (BY MR. RINALDI) Now, is this a 15 document that you reviewed in formulating your 16 opinion here today, sir? 17 A. Yes, it is. 18 Q. Okay. And can you describe generally 19 what this document discusses? 20 A. It's discussing the possible approaches 21 to fund and, as they say, secure executive 22 severance agreements. As we discussed, the 4715 1 contracts provided for two times compensation 2 termination agreement. This is talking about how 3 to, in effect, make sure these people get the 4 money. How do we get it to them? 5 Q. And among the things they were 6 discussing at Page 7 was a letter of credit; is 7 that correct? 8 A. Yes, that's correct. 9 Q. And then on Pages 9 and 11, they are 10 discussing various types of trusts as a mechanism 11 for securing the benefits. 12 Do you see that? 13 A. Yes, that is correct. 14 Q. Now, directing your attention to the 15 second page of the document, the second full 16 paragraph, would you read that paragraph into the 17 record? 18 A. Glad to. "Before acting on any of 19 these approaches, Hewitt Associates suggests that 20 UFG check with outside legal counsel to make sure 21 any funded arrangements do not violate federal or 22 state banking laws regarding, quote, 'unsafe or 4716 1 unsound practices,'" end quote. 2 Q. Okay. And in connection with your 3 review of the Hewitt document, did you see in the 4 course of the correspondence other letters in 5 which Hewitt had advised the respondents that they 6 were not attorneys and that they should seek 7 advice of their outside counsel? 8 A. Yes. I recall something to that 9 effect. 10 Q. Okay. Now, as a result of your review 11 of the record in this case, did you determine 12 whether, in fact, USAT sought the advice of 13 outside counsel with respect to the employment 14 contracts they were proposing to enter into? 15 A. Yes. 16 MR. RINALDI: Okay. And I'm handing up 17 to the Court a document which bears the Bates 18 stamp -- I mean the Exhibit No. T8048. This is a 19 memorandum dated March the 25th, 1988. It's to 20 Arthur Berner, the executive vice president and 21 general counsel from Thomas M. Leahey of the law 22 firm of Kirkpatrick & Lockhart. And the subject 4717 1 of this memorandum is employment contracts. Now, 2 I'll hand a copy up to the witness, as well. 3 Q. (BY MR. RINALDI) Did you have 4 occasion to review this document, sir? 5 A. Yes, I did. 6 Q. Okay. And in formulating your opinion, 7 were you able to determine whether the respondents 8 had received advice regarding the safety and 9 soundness implications of entering into employment 10 contracts at a point in time when USAT was failing 11 its net worth requirements? 12 A. Yes. 13 Q. Okay. And what did you find 14 significant in this document, sir? 15 A. Well, it's addressed to Mr. Berner; so, 16 obviously, the institution is receiving this 17 information. Starting on Page 3 and going to Page 18 4, there is a caption entitled "FSLIC Recovery of 19 Termination Payments" in which Mr. Leahey is 20 talking about termination benefits received 21 shortly before FSLIC intervention. 22 Now, without reading a rather long 4718 1 section, he goes into a case, FSLIC versus Bass, a 2 case from the Chicago area which I was familiar 3 with. I was in Chicago as this case was 4 unfolding. I knew some of the people who were 5 actively pursuing this 6 Q. And can you describe for the Court what 7 had taken place in the Bass case? 8 MR. BLANKENSTEIN: Objection, Your 9 Honor. The Bass case speaks for itself. 10 Mr. Dermody is providing extra-record comments on 11 what happened in the Bass case. The Bass case 12 speaks for itself. 13 MR. RINALDI: I'll withdraw the 14 question. 15 Q. (BY MR. RINALDI) Based on 16 Mr. Leahey's memo, does it indicate that in the 17 FSLIC versus Bass case that the entity in 18 question, which I think is Unity Savings of 19 Chicago, had entered into a similar severance 20 arrangement funded in a manner similar to that 21 which USAT entered into on July 1st, 1988? 22 A. That's correct. Mr. Leahey points out 4719 1 that the contracts in the Bass case with Unity 2 Savings had been adopted less than four months 3 before FSLIC was appointed receiver at a time when 4 its net worth was -- said amount was losing money 5 and also provided for payment of termination 6 bonuses in the event that the officers resigned 7 after a request from FSLIC or if a sue 8 receivership or supervisory merger occurred. 9 What I found interesting was in the 10 next paragraph. Mr. Leahey -- and let me quote 11 him. "Thus, the holding in the Bass case that the 12 contracts were invalid turned solely on the 13 condition of the institution when the contracts 14 were adopted rather than merely on the 15 enforceability of the contract terms in proximity 16 to FSLIC intervention." 17 That is what I am saying, is that the 18 contracts we have discussed all along are 19 critical, when they were entered, what the 20 condition of the institution. Here we have 21 counsel -- very similar advice to them. 22 Q. And can you tell from the document what 4720 1 the date of the FSLIC versus Bass case was? 2 A. FSLIC versus Bass was 1983 case. 3 Q. Okay. And the date of this memorandum 4 or the date that it was prepared by Mr. Leahey is 5 March the 25th; is that correct? 6 A. March 25th, 1988, correct. 7 Q. Okay. And that was several months 8 before USAT entered into the contracts on 9 July 1st, 1988, with severance benefits secured by 10 a letter of credit? 11 A. That's correct. But still at a time -- 12 even at this point in time, USAT was deteriorating 13 rapidly. 14 Q. And just so the record does not reflect 15 that I have misspoke, I said a moment ago it was 16 secured by a letter of credit. In fact, it was -- 17 they were unable to obtain the letter of credit 18 and it was secured by an escrow arrangement. 19 Is that an accurate statement? 20 A. Yes, that's correct. 21 Q. Now, did there come a time when 22 ultimately, the regulators learned of what USAT 4721 1 had done in terms of depositing the $6.6 million 2 into an escrow account? 3 A. Yes. 4 Q. And what actions were taken at that 5 point in time, sir? 6 A. Rather strongly-worded letter, I think, 7 my characterization, to the institution stating 8 that this had been an unsafe and unsound practice 9 and that they should not make payment provisions. 10 They should notify the people that the contracts 11 expired at the end of 1988 rather than 1991 and 12 not to make any payments on these executive bonus 13 plans. 14 Q. And was the FSLIC successful in 15 recovering the $6.6 million for the benefit of 16 USAT? 17 A. To the greatest extent, no. 18 Q. I don't want to mislead you. I'm 19 talking about the escrow arrangement with respect 20 to the severance benefits. 21 A. I'm sorry. Yes. 22 Q. They recovered the 6.6 million. Is 4722 1 that your understanding? 2 A. Yes. 3 Q. Was another escrow arrangement or a 4 trust arrangement we have discussed set up with 5 respect to the -- what is known as the executive 6 bonus plan? That's the plan that paid 25 percent 7 on April the 5th, 1988, and 75 percent was placed 8 into a trust. And I think I showed you the plan 9 and trust agreement. 10 A. Yes. I'm sorry. I was confusing the 11 two trusts. The one for the 6.6 million was 12 recovered; but the one for the executive bonus 13 plan was, to a great extent, not recovered by 14 FSLIC. 15 Q. Okay. And following the receivership 16 of USAT, were a series of claims made by several 17 former officers pursuant to the UFG and USAT 18 contract provisions made against UFG? 19 A. Yes. The minutes of UFG reflect that 20 there were claims being made against it. 21 Q. I'm going to offer you a copy of what's 22 been previously marked as T8166. This is a chart 4723 1 that was produced to the respondents several days 2 ago. And I'd like you to take a look at it and 3 tell me if you recognize that document. 4 A. Yes. I created it. 5 (Discussion off the record.) 6 7 Q. (BY MR. RINALDI) Now, Mr. Dermody, 8 would you take a look at 8166? Did you prepare 9 this document? 10 A. Yes, I did. 11 Q. Okay. And can you explain to the Court 12 what it depicts? 13 A. Well, it depicts two things. Let's 14 start with the top. I'm showing what I -- my 15 opinion are excess of payments made to the four 16 respondents. I go on to the forgiveness of debt 17 and then ultimately end up discussing what I 18 consider to be excess compensation that these 19 respondents are responsible for other employees 20 receiving. 21 Q. Okay. Now, starting with the first 22 section, it talks about excess compensation and 4724 1 then under that, it says "excess direct individual 2 compensation." And starting with Mr. Gross, it 3 indicates "salary in 1987." 4 What is that referring to? 5 A. Well, that's probably slightly 6 misleading. That's salary 1987 and the salary 7 that he actually began 1988 with. So, 8 January 1st, 1988, that was still his salary. It 9 was not -- as we discussed, it was not changed 10 until sometime later. That is the salary that he 11 was making and had been approved to receive at a 12 time when the institution was still meeting its 13 net worth requirement. The following column shows 14 the amount of compensation he received during the 15 year of 1988 while he was an employee. 16 Q. And what does that include? 17 A. That includes the January payment of 18 the 1987 bonus. It includes the April retroactive 19 pay increase and bumped his salary up for the 20 entire year. Includes the executive bonus that 21 was paid. 22 Q. Now, there was a portion of that 4725 1 executive bonus that he didn't receive; is that 2 correct? 3 A. Yes. It reflects only the portion that 4 he received. 5 Q. Okay. And then the next column over 6 under 1988 indicates "excess" and it states 7 $400,500. 8 Do you see that? 9 A. Yes, I do. 10 Q. How did you reach that number, sir? 11 A. Well, I think what I've I tried to say 12 all along is that at a point when the institution 13 is failing its net worth requirement, these 14 compensation practices of bonuses, salary 15 increases, and more bonuses were inappropriate, 16 unsafe, and unsound. But it does not say that his 17 entire bonus is unsafe and unsound. It's only the 18 additional moneys he paid. 19 So, what I've done is taken his 20 beginning-of-the-year salary, said anything 21 additionally he received, the $400,000, were the 22 unsafe and unsound transaction. Clearly I'm not 4726 1 trying to say "Don't pay him at all for the year. 2 Just don't pay him these additional funds. 3 Q. Now, did you prepare a similar 4 calculation with respect to Mr. Munitz? 5 A. I did. 6 Q. Okay. And it says "and severance 7 payments"? 8 A. It does. 9 Q. What is that referring to? 10 A. Well, I did the calculation again for 11 1988 showing what his beginning-of-the-year salary 12 was, what his additional payments were. But in 13 1989, as a result of these contracts with UFG and 14 USAT, Mr. Munitz had a claim against UFG saying 15 "I've been terminated. I have benefits." UFG 16 settled with him and paid him, I believe, $98,000. 17 I'm saying these contracts that led to 18 this settlement agreement were inappropriate, 19 unsafe, and unsound. The payment was unsafe and 20 unsound and it prevented UFG from having money for 21 the net worth maintenance. So, I have included 22 that settlement, the amount that he's apparently 4727 1 received as part of the excess compensation for 2 him. 3 Q. So, according to your chart, on 4 January 1, 1988, Mr. Munitz' beginning salary 5 would have been $240,000? 6 A. That is correct. 7 Q. And at that point in time, that's the 8 amount that he -- his salary had been set during 9 the previous year in 1987? 10 A. Correct. 11 Q. And during the period of 1988, he 12 received actually $591,000 in all forms of 13 compensation and bonuses? 14 A. Yes. 15 Q. And the difference between those two, 16 the excess is the 351,000 that appears in the 17 third column of numbers there? 18 A. That is correct. 19 Q. And then the fourth column of numbers 20 represents the severance payment that you 21 indicated he received the following year? 22 A. Yes. I'm sorry. I did not have a 4728 1 chance to label it. 2 Q. Okay. And then you -- you did the same 3 calculation with Mr. Crow, the same with 4 Mr. Berner, and you then summed up the columns. 5 What was the total amount of excess 6 compensation that you concluded that these four 7 respondents received in 1988? 8 A. My analysis was that the four 9 respondents received $1,259,500 in excess 10 compensation in 1988. 11 Q. And what was the total amount in excess 12 that they received as a result of settlements in 13 1989? 14 A. $383,000. 15 Q. And what was the total amount that you 16 concluded was the excess direct individual 17 compensation that these individuals received as a 18 result of the unsafe and unsound practices entered 19 into by USAT with respect to their employment 20 practices? 21 A. For these four individuals, $1,642,500. 22 Q. Now, the next segment down on the page 4729 1 talks about forgiveness of debt and interest. 2 Do you see that? 3 A. Yes. 4 Q. And in the -- opposite Mr. Gross' name, 5 it indicates that he received a forgiveness of 6 debt of $835,000. 7 Do you see that? 8 A. Yes. 9 Q. If he only owed $761,250 as reflected 10 opposite his name, why was the forgiveness for the 11 additional amount? 12 A. The forgiveness was a figure in, I 13 believe, a proxy statement of UFG. I used that, 14 presuming that they would have the most accurate 15 determination of the amount. Best I could 16 determine, the amount of the debt itself was 17 $761,000 plus. I have to assume that there was 18 some interest payments that were due or some other 19 small amounts that I could not determine. I used 20 UFG's forgiveness of debt figure that they 21 provided. 22 Q. And there was also a forgiveness of 4730 1 debt for Mr. Crow, as well? 2 A. That is correct. 3 Q. And when you include the forgiveness of 4 debt, what is the total amount of excess 5 compensation and forgiveness of debt payments that 6 these individuals received that are attributable 7 to the compensation practices which you concluded 8 were unsafe and unsound? 9 A. Again, for these four individuals, 10 $2,550,000. 11 Q. And can you very briefly explain to the 12 Court what the final computation is there at the 13 bottom of the page? 14 A. Well, there were other individuals that 15 received contracts. I looked at those contracts 16 and said, "They are also unsafe and unsound. They 17 were done at the same time as these individuals. 18 They didn't have control, but clearly, USAT and 19 UFG were not in a position to enter into these 20 contracts because of the financial condition of 21 both corporations." 22 I did the computations in basically the 4731 1 same manner. These officers, only the ones with 2 contracts, received just over a quarter of a 3 million dollars in bonuses at the beginning of 4 1988 for '87. 5 Q. And that's reflected in the first line 6 there? 7 A. The very first line. The second line, 8 I just took their salaries of those individuals at 9 the very beginning of the year, how much 10 compensation they received for the year, and 11 again, the difference which appropriately was the 12 amount of the bonus. That's what it should have 13 been and was. 14 At the third line, I took the executive 15 bonus, the 25 percent bonus that they were paid at 16 the beginning of the year, and said, of course, 17 that was an unsafe and unsound transaction. 18 Finally, according to the minutes of 19 UFG, these officers settled with UFG after the 20 closure and takeover of USAT for just over 21 $450,000. Because these contracts were unsafe and 22 unsound when they started, the whole process was 4732 1 tainted and their settlements were something that 2 were unsafe and unsound because they prevented UFG 3 from having these moneys available for USAT's 4 net-worth maintenance. 5 Q. And did you then on the next following 6 page reach a total with respect to these 7 employees? 8 A. Yes. Unfortunately, when I faxed this, 9 it changed the page layout. But for those other 10 employees with contracts, similar contracts, the 11 compensation and payments, settlements made with 12 those individuals, totaled $1,027,406. 13 Q. And -- 14 A. Again, all of which I say were unsafe 15 and unsound payments. 16 Q. And one final question. With respect 17 to Mr. Gross, he resigned, did he not, in November 18 of 1988? 19 A. That's correct. 20 Q. Did you use the figure for his full 21 year of employment, or did you pro rate that to 22 reflect the fact that Mr. Gross did not work the 4733 1 entire year? 2 A. I prorated it for 11 months, as close 3 as I could come. And based on the information 4 provided in his deposition, I believe this is a 5 reasonably accurate -- as close as I could get 6 with the numbers I had available. It did, yes, in 7 fact, reflect the pro rata share of his approved 8 salary for the year. 9 Q. And, in fact, he didn't actually resign 10 until November the 20th; isn't that correct? 11 A. He didn't sign his severance agreement 12 until November 22nd, 1988. 13 MR. RINALDI: Your Honor, with that, I 14 would conclude the direct attention of 15 Mr. Dermody. And I would move into evidence T8166 16 and I would also move into evidence -- did we move 17 into evidence the large packet of -- 18 MR. STEARNS: Yes. 19 MR. RINALDI: Then I believe the 20 housekeeping is complete and with that, I would 21 conclude the examination of Mr. Dermody. Thank 22 you. 4734 1 MS. CLARK: No objection, Your Honor. 2 THE COURT: All right. T8166 is 3 received. We'll adjourn until 1:30. 4 5 (Luncheon recess taken at 12:00 p.m.) 6 7 THE COURT: Be seated, please. We'll 8 be back on the record. 9 I believe that when we recessed, the 10 direct examination of Mr. Dermody was complete and 11 the respondents are going to cross? 12 MS. CLARK: Yes, Your Honor. 13 THE COURT: Proceed. 14 15 CROSS-EXAMINATION 16 17 (1:35 p.m.) 18 Q. (BY MS. CLARK) Good afternoon, 19 Mr. Dermody. 20 A. Good afternoon, Ms. Clark. 21 Q. I represent three of the individual 22 respondents on the compensation claim: 4735 1 Mr. Berner, Mr. Crow and Dr. Munitz. 2 I think it's clear from your testimony, 3 Mr. Dermody, that you're not a compensation 4 expert. Is that fair? 5 A. That's correct. 6 Q. You've never worked as a compensation 7 consultant? 8 A. That's correct. I have not. 9 Q. You haven't worked for 10 Hewitt & Associates or the Wyatt Company or Towers 11 Perrin or any of the other consulting companies 12 that provide executive compensation consulting 13 services to companies; is that correct? 14 A. That is correct. 15 Q. You've never published anything on the 16 subject of executive compensation? 17 A. No, I have not. 18 Q. And you're not here to offer an opinion 19 on what amount of compensation the management of 20 USAT should have been paid in 1987 or '88. That's 21 not the expertise you're bringing to this case, is 22 it? 4736 1 A. That is correct. It is not. 2 Q. So, you can't offer an opinion about 3 whether it would have been appropriate to offer 4 smaller bonuses to a different group of people or 5 what the total amount of salary and compensation 6 should have been in 1988 at USAT; is that right? 7 A. That's correct. 8 Q. That was not part of the assignment 9 that you were given by OTS enforcement, correct? 10 A. Correct. 11 Q. And, in fact, those questions would be 12 outside the area of your expertise; is that 13 correct? 14 A. Yes. 15 Q. Let's talk about what information you 16 relied on in preparing your opinion in this case. 17 You were working at the Federal Home Loan Bank of 18 Dallas during the 1987, '88 period when these 19 events that you're addressing took place, were you 20 not? 21 A. That is correct. 22 Q. But you weren't the examiner 4737 1 responsible for USAT at that time, were you? 2 A. No. If it hasn't been asked, I have 3 made it clear that I was not personally involved 4 with this situation. 5 Q. And, in fact, during this time period, 6 you were in charge of what I think you described 7 yesterday as the back office functions of the 8 supervisory department with no direct supervisory 9 responsibility; is that correct? 10 A. I describe it as administration, which 11 had some of the back office functions. And, yes, 12 I did not have direct supervisory responsibilities 13 at that time. 14 Q. So, as far as what was going on at USAT 15 during this time period, you weren't there. 16 Right? 17 A. I was not involved in anything having 18 to do with USAT. 19 Q. And you're not an expert on the facts 20 of this case, are you? 21 A. I only looked at the compensation 22 issues from a safety and soundness point of view; 4738 1 so, I can only answer questions in that area. I 2 have no expertise in the others. I did not even 3 review it. 4 Q. Now, you told the Court yesterday what 5 process you went through when you were preparing 6 your opinion. As I understand it, when you got 7 this assignment, you did not go out and conduct 8 any kind of study of what salaries and bonuses 9 were being paid by thrifts in the 1987, '88 10 period; is that correct? 11 A. That is correct. 12 Q. And, in fact, that's not even the kind 13 of thing you would know how to do. That's not 14 what you're trained to be do. Right? 15 A. Well, that's not what I'm trained to 16 do. That's not what I have expertise in. 17 Q. In fact, the only information like that 18 that you considered in the course of this 19 assignment was the information in the studies that 20 were prepared by the Hewitt & Associates and the 21 Wyatt Company consulting firms, correct? 22 A. Yes. 4739 1 Q. And you didn't do anything to try to 2 test the accuracy of the information in their 3 reports or their analysis of that information, 4 correct? 5 A. No, I did not test the accuracy of 6 their information. 7 Q. Today, you talked a bit about the 8 Hewitt report before lunch. 9 Do you recall that? 10 A. Yes, I do. 11 Q. As I understand it, you were basically 12 criticizing the report as -- not criticizing the 13 accuracy of the report but saying it was sort of 14 irrelevant to the assignment that you had in this 15 case. Would that be fair? 16 A. I said that it did not address what I 17 considered to be the key issues, and some portions 18 that I looked at I believe did not address some of 19 the things I thought should be addressed for an 20 institution of this size. 21 Q. And I think the one thing you mentioned 22 was the -- what you said was that they didn't 4740 1 properly take into account, in your opinion, the 2 net worth deficiency that USAT was suffering from 3 at the time; is that right? 4 A. I believe I said that I found nothing 5 in their analysis that showed they had considered 6 the net worth deficiency in reaching their 7 conclusion. It was discussed as a safety and 8 soundness issue that the institution had to 9 address. They did not, to my knowledge. 10 Q. So, the analysis they did -- I think 11 you used the word "accept." You didn't accept 12 their analysis because they didn't adopt your view 13 about the significance of a net worth deficiency. 14 Would that be fair? 15 A. Well, I think it goes a little bit 16 beyond what I said. I was unwilling to accept it 17 as being relevant for my purposes because it did 18 not address the issue of a net worth deficiency. 19 Q. But in fact, the Hewitt report did talk 20 about USAT's very, very difficult financial 21 situation, did it not? 22 A. Yes, it did. 4741 1 Q. So, it's not that they didn't discuss 2 it. It's not that they weren't aware of. It's 3 just that they didn't accord it the same 4 significance that you would in your analysis. Is 5 that fair? 6 A. They certainly failed to discuss the 7 net worth deficiency directly. In reviewing it, I 8 saw nothing to indicate that that was a factor in 9 their consideration. 10 Q. But they were aware of it. Right? I 11 mean, that's discussed in their report; is that 12 right? 13 A. I believe it was mentioned once in the 14 report. 15 Q. So, they just didn't accord it the same 16 significance that you did. Is that your 17 criticism? 18 A. My criticism is that it is a major 19 factor. They did not discuss it in terms of how 20 they arrived at their analysis. It was more a 21 historical background, here is the situation. It 22 was not part of their analysis that I could 4742 1 determine. 2 So, in the sense, yes, they did not 3 discuss what I considered to be a critical issue. 4 Q. You wouldn't be able to say, would you, 5 based on your work on this case and your expertise 6 that their report was inadequate with respect to 7 what the generally prevailing practices were in 8 the industry? That's not your criticism. Right? 9 A. Any -- I did not review it from that 10 point of view. That was not my criticism. My 11 criticism was that the peer group they presented 12 was -- except for one instance, was larger 13 institutions and, except for two of the 14 associations, were all profitable in what I 15 thought was a key factor of the net worth 16 compliance status of all of the other ones was 17 completely left out. 18 So, that was one of the things I noted 19 that they had failed to bring into consideration 20 or at least present as part of their presentation. 21 Q. And they factored those variables in in 22 the way -- in accordance with their approach to 4743 1 the problem. Right? And not your approach? 2 A. I can only presume they factored some 3 of those things in. I only know what I saw them 4 discussing. 5 Q. You told the Court yesterday what 6 documents you reviewed in the course of preparing 7 your opinion. And you didn't include in those 8 documents the examination work papers from the 9 examinations of USAT during this period; is that 10 correct? 11 A. That's correct. 12 Q. I think you also testified yesterday 13 that the review of compensation was an integral 14 part of the examination of the thrift and that 15 examiners would look at the compensation 16 arrangements in every examination; is that 17 correct? 18 A. Yes. 19 Q. But you didn't ask to see the 20 examination work papers on USAT to find out 21 whether the examiners looked at the compensation 22 arrangements at the time, did you? 4744 1 A. I did not specifically ask if there 2 were any connection with this one. What would 3 have triggered that would have been if there were 4 a comment in an examination report specifically 5 directing us to that. I don't recall seeing 6 anything that discussed that issue. 7 Q. So, you didn't see anything in the 8 examination reports that criticized the 9 compensation practices that you're criticizing in 10 your testimony in this court? 11 A. That's correct. Well, let me point 12 out, the 1987 examination report pre-dates these 13 practices. So, I would not have expected to see 14 anything discussing the 1987 bonus, the 1988 15 salaries, the executive bonus, or the contracts 16 that were entered into. You know, if it's as of 17 somewhere in 1986, I don't see how they can be 18 reading the future. 19 Q. Uh-huh. 20 A. Tell me how to do that. 21 Q. No. You can't read the future, can 22 you? 4745 1 A. No. 2 Q. When did the 1987 examination report 3 get delivered to USAT? 4 A. Was it the 1987 report? '86 report was 5 delivered in April of 1987, and there was 6 discussion of the examination results on 7 March 30th of 1988. I don't recall specifically 8 when the examination report was delivered. 9 Q. You don't recall that it was delivered 10 in July of 1988? 11 A. As I said, I didn't recall a specific 12 date. 13 Q. But in any event, you didn't ask to see 14 the work papers for either of those two exams; is 15 that correct? 16 A. That's correct. I didn't ask to see 17 the work papers. 18 Q. So, basically, in forming the opinions 19 that you're offering to the Court, what you did 20 was you looked at the record of the case that was 21 presented by enforcement and you reacted to it? 22 You looked at the record and gave your reaction? 4746 1 A. I think that understates what I did. I 2 looked at the record, asked for additional 3 information, a number of things, made a judgment 4 as to whether or not there was anything I saw that 5 indicated the need to review the examination 6 report. Saw nothing and decided not to ask for 7 it. 8 Q. But you didn't go out and read any 9 scholarly articles. Right? 10 A. No, I did not read any scholarly 11 articles. 12 Q. Now, you've summarized your opinions 13 for us today. One of the opinions that you're 14 offering here is that USAT's compensation 15 practices violated Section 563.17(b) which says 16 that compensation should not be in excess of what 17 is reasonable and commensurate with the duties and 18 responsibilities of the individuals involved; is 19 that correct? 20 A. That is correct. 21 Q. Let's take the last part of that test 22 first. In your opinion, you haven't addressed 4747 1 what the individuals' duties and responsibilities 2 were, have you? 3 A. No, I did not address that in my 4 report. 5 Q. So, you weren't looking at whether 6 their compensation was commensurate with their 7 duties and responsibilities. Right? 8 A. I didn't address it in that fashion, 9 that is correct. 10 Q. And you didn't make any effort to 11 determine whether the duties and responsibilities 12 of the officers involved might have changed in 13 ways that would justify a change in their 14 compensation. That wasn't part of what you looked 15 at in forming your opinion, correct? 16 A. No. That's a misstatement. There were 17 discussions in the documents that described the 18 responsibilities and duties of these officers, and 19 I believe there were probably a couple different 20 sets where they did this. So I made sure, paid 21 attention to that to see if there was anything 22 that I considered to be major changes in what was 4748 1 happening with their responsibilities. So, 2 certainly it was there. I wanted to see it, but I 3 did not go out looking for a massive amount of new 4 documentation. 5 Q. In the course of your work, you didn't 6 make a study of each of the 70-some people's job 7 descriptions and what the scope of the duties of 8 each was. Right? 9 A. No, I did not. 10 Q. And you also did not base your opinion 11 on how well any of these officers was performing 12 his or her duties and responsibilities, correct? 13 A. I was not looking at this to make a 14 determination of that nature. I formed some 15 opinions in some cases about how well the 16 responsibilities were performed, but I was not 17 making that assessment as part of my assignment 18 nor did I feel it was necessary to do so. 19 Q. And you didn't factor in individual 20 performance into your evaluation of the 21 compensation practices. Right? 22 A. I did not specifically address the 4749 1 performance of individuals in my evaluation. 2 Q. Well, you didn't address it at all, 3 though. Isn't that fair? 4 A. My report does not address it, that's 5 correct. But you asked me if I considered it. I 6 believe you asked me if I considered it, and I'm 7 saying I did not address it. Certainly, if I saw 8 something that indicated about people's 9 performance, I considered that. 10 Q. In what way did you consider it? 11 A. Mr. Berner performed as general counsel 12 and drafted a number of these contracts. My view 13 of the contracts, for instance, in one of our 14 charts we show that the contract which we 15 discussed just before lunch, February of 1988 16 contract. At the time that contract was drafted, 17 it had a provision for the termination and it said 18 that there could be considered termination if 19 there was a change of control. At the time that 20 contract was signed and drafted by Mr. Berner -- I 21 believe you have a chart down here in front that 22 shows the terms of the boards board of directors. 4750 1 I think either at the time it was signed or within 2 a month or less, the contract provisions were 3 triggered on what appeared to be the face of the 4 contract. 5 If that speaks to the performance of him 6 as counsel for the institution in a number of 7 these cases, then, yes, I would consider that as 8 evidence of their performance. And, also, I might 9 add, his comments to Mr. Twomey we discussed where 10 he specifically told Mr. Twomey "there are no 11 contracts with officers and employees of United 12 Savings Association" at a time when he personally 13 had signed one of those contracts. 14 Q. Okay. 15 A. In February. 16 Q. I think you didn't listen to my 17 question. 18 A. I'm sorry. 19 Q. I asked you -- 20 A. Repeat it. 21 Q. How did you factor in individual 22 performance into forming your opinion? That was 4751 1 my question. Now, you've given me some discussion 2 about your views on performance. 3 My question is: Did you factor 4 individual performance into your evaluation of the 5 compensation practices? Is that what you 6 considered in forming your opinion 7 A. I did not have something with a 8 checklist that said I must consider performance. 9 It was a review of the entire circumstances and it 10 was something I was aware of. I can't say that it 11 had a certain weight, but I did consider those 12 types of things I was aware of. But I did not 13 specifically say, "This has to be a factor in the 14 performance." 15 Q. You didn't give it any weight, did you? 16 A. I don't think I can say that. I've 17 just discussed my view of Mr. Berner's 18 performance. Certainly, I couldn't just ignore my 19 view of that stuff; but I did not intentionally 20 start out saying, "I will give a certain amount of 21 weight to the performance." 22 Q. Do you recall being deposed in this 4752 1 case? 2 A. Yes, I recall being deposed. 3 Q. You giving your deposition and do you 4 recall discussing the question of individual 5 performance during the course of your deposition? 6 A. I don't specifically recall that 7 discussion. 8 Q. I'm going to ask you to look at your 9 transcript of your deposition. 10 A. Is there a specific page you'd like me 11 to start with? 12 Q. Yes, sir. Would you turn to Page 441, 13 Line 6, if you would, please? 14 A. Yes. Page 441, line 6. 15 Q. Do you see where you were asked the 16 following question, "Your testimony, or your 17 report and your testimony on the compensation 18 practice as being unsafe and unsound is not in any 19 way founded on an opinion about the past 20 performance of the management at USAT?" 21 Do you see that question? 22 A. I see that question. 4753 1 Q. And what was your answer? 2 A. "That is correct." 3 Q. Okay. Let's go back to the first of 4 the two tests in that regulation that you say was 5 violated, the part of the test that talks about 6 reasonableness. We've already talked about the 7 fact that you are not here to offer an opinion on 8 what the dollar amounts of compensation should 9 have been, what would have been reasonable for 10 each of the officers. Right? 11 A. That is correct. 12 Q. Now, isn't it true that your opinion 13 really has nothing to do with whether the 14 individual levels of salary and bonus were 15 reasonable, given the individual's duties and 16 responsibilities? 17 A. Let me answer that I was not discussing 18 the individual salaries as whether or not -- what 19 level was appropriate. I was discussing the 20 reasonableness of an action by an institution 21 under the circumstances, which was the net worth 22 failure. That is how I was viewing this as to the 4754 1 reasonableness. 2 So, you are correct in saying I was not 3 discussing individual reasonableness of any one 4 particular salary. 5 Q. So, it's just not part of your opinion, 6 whether the salaries that these people got were 7 reasonable or not? Reasonable in amount. 8 A. I was talking about was it reasonable 9 to be paying compensation in this manner in which 10 it was done. I'm talking about the circumstances 11 in which they had net worth failure. They were 12 aware of it, and they continued to make these 13 payments. So, was this a series of reasonable 14 transactions was what I was addressing. I was not 15 addressing, I think as you're asking, was it 16 reasonable to pay X/Y dollars to any one 17 individual? I was not addressing that. 18 Q. So, basically, your position is that 19 whatever the level was, whatever the dollar amount 20 was when USAT fell below its net worth 21 requirement, any increase over that amount was 22 unreasonable. Isn't that your position? 4755 1 A. My position is the manner in which any 2 changes were accomplished was unreasonable. I 3 didn't address whether it was reasonable to make 4 any changes. I said the process, the way in which 5 it was accomplished under the circumstances, was 6 unreasonable. 7 Q. Well, haven't you testified that the 8 basic -- the basic problem was that they had a net 9 worth deficiency and, given that, it was not 10 reasonable to increase the salaries or provide 11 bonuses for the officers and the association? 12 Isn't that your testimony? 13 A. Yes. I believe that is saying the same 14 thing. 15 Q. And that's exactly what your chart 16 shows. Let's look at your chart. 17 A. Which one would you like to -- 18 Q. T8166. 19 A. Yes. 20 Q. Let's look first at the top part that 21 deals with the compensation of the four 22 respondents. 4756 1 Now, as I understand the chart, what 2 you're doing here is you're saying USAT fell below 3 its net worth or was told it fell below its net 4 worth in mid-1987. And so, we're going to take 5 the entire dollar amount of any increase over the 6 '87 salary and call that excessive. That's what 7 you've done here, isn't it? 8 A. I think what I -- when I discussed 9 this, I said it may be misleading to say "salary 10 in '87." I was discussing the salary at the 11 beginning of '88, which was their authorized 12 salary level. 13 So, I'm saying the process of which they 14 went from this salary level to get all this 15 additional compensation was the unsafe and unsound 16 practices. 17 Q. But the salary in '87 is also the 18 salary that they received in '87, if I understand 19 it? 20 A. That's correct. 21 Q. It was also the applicable level when 22 they started in 1988; but it was the amount 4757 1 received in '87, correct? 2 A. That is correct. 3 Q. And if you just wanted to do the 4 arithmetic on this, it's pretty simple. You take 5 the salary for '87 and subtract it from the salary 6 and bonus in '88? 7 A. Yes. 8 Q. Right? 9 A. That's what I've discussed before the 10 break. 11 Q. And then anything that they got in '89, 12 that's what you call unreasonable? 13 A. That's what I call excessive. 14 Q. Excessive. Sorry. 15 A. The process was an unsafe and unsound 16 process getting there. 17 Q. And there's nothing in here that 18 reflects any judgment about what responsibilities 19 the individuals were fulfilling or how well they 20 were performing on their job. That's just not in 21 here, is it? 22 A. No. There is no assessment of that in 4758 1 there. 2 Q. It's a very, very simple calculation? 3 A. Yes. 4 Q. Anything they got in '88 that was over 5 what they got in '87, that's excessive? 6 A. Because of the process engaged in to 7 get there, that's excessive. 8 Q. I'm just trying to understand your 9 chart now. 10 Now, how did you decide which payments 11 to include in these two columns, '87 and '88? 12 A. Well, '87 was actually the beginning 13 salary for 1988. That was the salary that they 14 had had in 1987 and continued in 1988. If you 15 recall, November of '87, they said "We will defer 16 any salary increases until the middle of '89." 17 So it was very easy to determine what 18 their initial salary was. It should not -- nor 19 did I find any evidence that it ever changed up 20 until April of '88 as far as salary goes. So, 21 that was the genesis of those figures for the 22 salary. 4759 1 Q. Okay. Now, the '87 column is salary. 2 Right? 3 A. Yes. 4 Q. And the '88 column is salary plus 5 bonus? 6 A. Salary plus bonus including the -- the 7 salary, the bonus that was paid in 1988, the 8 increase in salary including the retroactive 9 increased salary, plus the executive bonus. All 10 of those additional moneys that were disbursed in 11 1988. 12 Q. Now, the '88 column includes bonuses 13 that were actually supposed to compensate for work 14 done in '87; isn't that right? 15 A. Looking at what they did for their 16 compensation program, the bonuses that USAT had 17 from what I could tell were discretionary. They 18 were not performance based. And I think even 19 Hewitt said they were discretionary bonus. So, I 20 saw nothing to say this was based on specific 21 performance. This was a bonus that was 22 discretionary with management, and that's how they 4760 1 treated it. And looking at that, I said this is 2 discretionary bonus. They have the ability to say 3 "pay" or "no pay" given the circumstances of their 4 capital position. They should have handled this 5 differently. 6 Q. Okay. 7 A. And it was unsafe and unsound to get 8 there. 9 Q. I understand that you think this was 10 all done improperly. I'm just trying to figure 11 out what columns things are in. 12 A. If I go on too much, I'm sorry. 13 Q. That's fine, but I'll try to speed up a 14 little bit. The '87 column does not include the 15 '87 bonus. The '87 bonus was awarded in '87. It 16 was paid on January 4th, '88, but it was 17 considered the '87 bonus. Right? 18 A. It was called the '87 bonus. As I 19 said, it was discretionary and, of course, at the 20 time, it was authorized. There was discussion of 21 the ability to -- sorry -- not to announce it and 22 see if anything happened. As I said, the 4761 1 implication was maybe we can modify it or do 2 something with it if we get more information, 3 which they had. 4 Q. But there is nothing particularly 5 unusual about a company paying its bonus at the 6 end of the year or even the first few days of the 7 next year. Right? 8 A. No. I'm not trying to imply that there 9 was. 10 Q. Now, I've rearranged your numbers. 11 I've made a chart and rearranged your numbers a 12 little bit, and I'd like to show it to you. I've 13 marked it as Exhibit B3812. And I've blown my 14 chart up, too. 15 Now, I believe you've had a chance to 16 review this chart last night, correct? 17 A. Yes, I did. 18 Q. Now, all I've done -- I believe all 19 I've done is to rearrange the numbers so that you 20 put the 1987 bonus to the left of the '87 total 21 and then included that in the '87 total instead of 22 including the '87 bonus in the '88 total. 4762 1 Otherwise, I believe my numbers are consistent 2 with the numbers that you've been working with. 3 A. Yeah. The only difference I could find 4 with numbers is that you apparently gave Mr. Gross 5 credit for the full year of salary, and I said I 6 don't think he got paid for 12 months. 7 Q. I put too much on. Now, you can see 8 that if you put the 1987 bonus in 1987 instead of 9 1988, Mr. Gross' numbers change quite a lot, don't 10 they? 11 A. Yes. 12 Q. You've got him going from $291,656 13 compensation in '87 to 692,166 -- sorry -- in '87 14 and 692,166 in '88. But if you put the '88 bonus 15 in '87, his compensation actually goes from 16 526,656 to 500,406. 17 Do you see that? 18 A. Yes, I do. 19 Q. Okay. And similarly, if you looked at 20 Dr. Munitz, his '87 compensation, if you include 21 his '87 bonus, 396,000. And his '87 was 396 and 22 his '88 compensation was 435. 4763 1 Do you see that? 2 A. Yes, I do. 3 Q. And they are a similar sort of 4 magnitude for Mr. Crow and Mr. Berner. As far as 5 you can tell, does my chart accurately reflect the 6 amounts that these four individuals received for 7 work done each of these years if you put the '87 8 bonus in '87 instead of '88? 9 A. I believe when I reviewed that, the 10 only difference I had was the pro rata salary for 11 Mr. Gross. I believe all the numbers are 12 consistent with mine. 13 Q. And my chart shows a much less dramatic 14 increase in salary or, I should say, in total 15 compensation between '87 and '88 than yours does, 16 doesn't it? 17 A. Yes, it does. 18 Q. We have another little chart that 19 illustrates that. That is marked as 20 Exhibit B3811. And we've put the salary in bright 21 yellow and the bonus amounts in light blue. It's 22 a bar chart. And it illustrates the change in 4764 1 total compensation for each of these two 2 individuals during the period that you're focusing 3 on, which is '87 and '88. 4 Can you tell whether that accurately 5 reflects the compensation that each of these 6 individuals received in the two years? 7 A. I believe -- 8 Q. For the two years, I should say. 9 A. I believe it accurately portrays those 10 two amounts, the amounts that we've been 11 discussing. 12 Q. Okay. 13 MS. CLARK: I would move the admission 14 of Exhibit B3812 and B3811. 15 MR. RINALDI: I have no objection to 16 the charts. 17 MS. CLARK: Okay. 18 THE COURT: Received. 19 Q. (BY MS. CLARK) Now, the difference 20 between the way we did it is that I put the bonus 21 in the year to which it related and you put it in 22 the year received, correct? 4765 1 A. That is correct. 2 Q. Now, once you decided to put the 1987 3 bonus in the 1988 column, shouldn't you have 4 included the 1986 bonus in the 1987 column in 5 order to present the trends accurately, 6 Mr. Dermody? 7 A. I don't believe so. 8 Q. Okay. Well, let me just illustrate, if 9 I can. I have a chart that shows what difference 10 it makes if you put the '86 bonus in the '87 11 column the way you put the '87 bonus in the '88 12 column. And that is Exhibit B3810. 13 Now, you see, if you put the '86 bonus 14 in the year received, which is '87, then you're 15 really comparing apples and apples, aren't you? 16 That is, you're comparing the amount received in 17 each year with the amount received in all the 18 other years; isn't that right? 19 A. Well, let me make a comment about these 20 charts that you're doing. The '86 bonus, the '86 21 salary takes place at a time when there is no 22 evidence this institution knew they were failing. 4766 1 I'm picking '87 showing these amounts segregated 2 by the year they were received because, as I said, 3 these bonuses were discretionary. They didn't 4 have to give them. They could rescind them at any 5 point in time up to the last minute. 6 At the time they are authorizing this 7 bonus, they know that they have a failing 8 financial condition of the institution. They know 9 10 days before they approve this that the 10 institution is either -- as Mr. Berner says said, 11 "we're two days away from net worth failure" or 12 imminently thereafter. They approve it for the 13 first year. 14 At the time they approve it -- and 15 particularly at the time they pay these bonuses 16 and all these other compensation benefits -- they 17 knew what their financial condition was. That is 18 the key critical difference. As you point out, 19 I'm not saying anything about what this 20 performance of these payments related to, issues 21 of performance. I'm saying -- well, it's 22 discretionary. They have a financial condition 4767 1 that says you should not be dissipating the assets 2 of the institution. You should be maintaining 3 your net worth. These are funds that could be 4 used for that. And because it took place at a 5 point where we knew -- "we" being USAT and UFG's 6 boards -- where we knew we were in trouble, we or 7 actually they -- those boards should not have paid 8 those funds. For that reason. And even though it 9 may be related to performance, as you say, the 10 fact of the matter is they didn't have to pay it 11 and it relates to the financial condition. 12 That is what I've tried to maintain all 13 along. I think I've tried to make it clear. The 14 financial condition of the institution is of 15 paramount importance in that. 16 Q. So, your criticism is not that they 17 increased compensation between this year and that 18 year. That's not what you're talking about. Your 19 criticism is that they paid any discretionary 20 amount whatsoever after they reached the point 21 where they had been told they had a net worth 22 failure. Right? 4768 1 A. Not just that they had been told, but 2 by their own internal determinations that they are 3 on the verge of net worth failure or have reached 4 net worth failure. That is correct. 5 Q. So, in your opinion, what should have 6 happened here was they should have gone from that 7 amount to that amount because the institution was 8 having financial problems and had a net worth 9 deficiency. Is that your view? 10 A. I'm saying that any of these 11 transactions or these increases were improper -- 12 MR. KEETON: Your Honor, it's easy 13 sometimes to see what "this" and "that" and "this" 14 and "that" -- but the record is not going to tell 15 me anything. And, from this distance, I don't 16 know which year either one of them are pointing 17 to. 18 THE WITNESS: I will try and rephrase 19 that. 20 A. Talking about this 1987 bonus -- well, 21 let's go back to your question again to make sure. 22 Q. (BY MS. CLARK) Yeah. Let me see if I 4769 1 can ask the question again. 2 Your opinion is that the awarding of 3 any -- what you call discretionary compensation 4 after the time that the institution was aware of a 5 net worth failure was improper. And the 6 consequence of that would be that you would go 7 from -- on this chart which we've marked as an 8 exhibit, from $450,000 in Mr. Gross' case in 1986 9 to $291,000 in 1987. That's your position, 10 correct? 11 A. No, not quite my position. I'm not 12 stating definitely that it had to be here. What 13 I'm saying is that this payment of this 14 235,000-dollar bonus for 1987 was paid in 1988 and 15 the salary increases and everything else, the 16 executive bonuses that show up, were unsafe and 17 unsound actions. 18 I'm not saying they should have paid 19 nothing. I'm saying the transactions that took 20 place at this institution, the way they were 21 handled were improper. I have not said, I don't 22 believe, that they should never do anything. That 4770 1 may be an complication you're drawing, but I'm not 2 saying they should never do anything. I'm simply 3 saying what they did was inappropriate and how 4 they did it and I'm not applying -- as you said, 5 I'm not a compensation expert. I'm not saying 6 whether it should have been some other level. I'm 7 just simply saying, "Take a look at what they did 8 and how they did it," and that is how it helped me 9 determine what they shouldn't have done. 10 Q. So, you're not giving an opinion about 11 what might have been an appropriate level of 12 compensation. You're simply saying that what you 13 see, you don't like? 14 A. I'm saying more than that. I'm saying 15 in my opinion, what I saw was an improper process, 16 improper approvals, improper transactions. And 17 you're correct. I am not opining as to what any 18 alternatives were. It was not asked, nor did I 19 attempt to. 20 Q. Okay. Now, if you look at what they 21 actually received over this time period and if you 22 do apples and apples and oranges and oranges, the 4771 1 change in compensation -- the change in total 2 compensation is significantly less dramatic than 3 the way you've portrayed it in the way you've put 4 your chart together. 5 Would you agree with that? 6 A. I certainly will agree as to how you 7 characterize the payments, show them on a chart or 8 whatever. Makes an obvious difference as to what 9 it looks like the compensation was from year to 10 year. 11 Q. Okay. 12 MS. CLARK: Move the admission of 13 B3810. 14 MR. RINALDI: No objection, Your Honor. 15 THE COURT: Received. 16 Q. (BY MS. CLARK) The final column on 17 the top right part of your chart which is 8166 18 shows what you consider to be excess compensation 19 received by the respondents in 1989; is that 20 correct? 21 A. That is correct. Compensation may be a 22 bit of a broad term, but it was the severance 4772 1 packages for those three individuals. 2 Q. Well, in fact, those numbers reflect 3 settlements that were negotiated with UFG after 4 the association was put in receivership; is that 5 correct? 6 A. That's correct. That's what I stated 7 earlier. 8 Q. And they were a compromise on the 9 severance packages that the contracts provided; is 10 that right? 11 A. Yes. But, recall, I said that those 12 contracts were unsafe and unsound at their 13 inception, should not have been entered into. 14 Therefore, they put themselves additionally where 15 they had to compromise these when they should 16 never have been there in the first place. 17 Q. Mr. Dermody, I'm going to give you lots 18 of opportunities to express your opinions. I'm 19 just trying to get you to answer my questions. 20 Okay? 21 Were those payments a compromise of the 22 severance provisions of their contracts and other 4773 1 contractual rights? 2 A. Yes. As I said earlier, they were 3 characterized as compromise. 4 Q. And those amounts were paid by UFG, 5 correct? 6 A. That is correct. 7 Q. Now, your position is that those 8 settlements were excessive and that the 9 respondents in this case should be liable for 10 them; is that right? 11 A. Yes, I believe so. Yes. I am saying 12 that. 13 Q. And who made the decision to enter into 14 these settlements? 15 A. Well, certainly Mr. Gross didn't have 16 anything to do with the settlements at this later 17 time. It was the board of directors of UFG at the 18 time. And I believe Mr. Munitz was still a 19 director then. I have to go back and look very 20 quickly and see if Mr. Berner was. I know 21 Mr. Crow, I think, I believe had resigned by that 22 time. 4774 1 Q. And if Judge Shipe should find that the 2 decision to enter into these settlements was 3 supported by Mr. Whatley, Mr. James Whatley, and 4 was made on the basis of advice received by 5 corporate counsel, Mr. Ott, Robert Ott, would you 6 say that, for example, Mike Crow should be liable 7 as a result of the settlement payment that he 8 received? 9 MR. STEARNS: Your Honor, I object. To 10 phrase the question in terms of liability and ask 11 this witness to stand in the place of this court, 12 I think, is an improper question. 13 THE COURT: I'll sustain the objection. 14 Q. (BY MS. CLARK) Well, let me phrase it 15 a different way. 16 Is it your view that if the Court were 17 to find that the decision to settle these 18 contracts resulted in the severance payment that 19 you show in your column for excess payments in 20 1989 was made in the process supported by 21 Mr. Whatley on the recommendation of Mr. Ott, 22 would you believe that Mr. Crow did something 4775 1 improper in negotiating and accepting the 2 settlement 3 A. Your question was did Mr. Crow do 4 something unacceptable in negotiating -- in 5 accepting the settlement. The best I can answer 6 that is that he was looking out for his own 7 personal interest at the time. My criticism is at 8 the inception of these contracts that led to this 9 situation. 10 Q. So, you're not saying that anybody did 11 anything improper in 1989 when these were -- these 12 payments were negotiated. You're saying that they 13 were the result of improper action at some time 14 prior to the receivership. Is that your 15 testimony? 16 A. Yes, I believe -- yes. I testified 17 that -- just before lunch -- that these 18 transactions were unsafe and unsound when they 19 were entered into and to do this, they were a 20 continuation of that same unsafe and unsound 21 transaction. And as far as I'm concerned, they 22 really are all part and parcel of the same 4776 1 transaction. 2 Q. Okay. But I'm trying to find out 3 whether you're saying that Mike Crow did something 4 improper when he negotiated and accepted this 5 settlement after the receivership. 6 A. I think that it is impossible to 7 separate Mr. Crow's actions in 1989 from that very 8 same person's actions in 1988 when he was a 9 director and he was a chief executive of these 10 institutions and he was engaged in setting these 11 transactions up. I can't say -- I don't believe 12 that you can say a person does a transaction 13 that's improper at one point in time and you can 14 divorce his attempt to resolve that transaction. 15 He's responsible for it and say, "Well, he didn't 16 have any blame for trying to get out of it. He 17 had a blame for getting into it." And, as I said 18 before, that taints the entire transaction. 19 So, to answer your question, no. 20 Mr. Crow -- I would not say he's blameless at the 21 time that he's trying to negotiate the settlement. 22 I would say that -- as I mentioned earlier -- it's 4777 1 the inception of these contracts that creates the 2 problem and his participation in the inception. 3 Q. So, your opinion that this compensation 4 listed on your right-hand column as excess 5 compensation is based on decisions that were taken 6 by people prior to the receivership when these 7 contracts were entered into; is that right? 8 A. Taken by people, including Mr. Crow, 9 prior to the receivership. 10 Q. All right. The next part of the chart, 11 moving down on T8166, pertains to the forgiveness 12 of debt and interest, correct? 13 A. Yes. 14 Q. Let me ask you a similar question about 15 that. Let me ask you to consider whether you 16 would find Mr. Crow to have engaged in improper 17 conduct if the Court were to find that his loan 18 forgiveness was negotiated at arm's length after 19 he had been separated from the institution. 20 Would you still consider that receipt of 21 the loan forgiveness was improper conduct by 22 Mr. Crow 4778 1 A. I think it's a parallel situation here. 2 We have contracts created in February and April -- 3 created in February, modified in April of 1988, 4 where the respondents were participating in the 5 development and creation of these contracts. So, 6 you cannot separate his subsequent negotiation of 7 the settlement or the forgiveness of debt from the 8 initial creation of this obligation. 9 Q. But your opinion that that's excess 10 compensation is based on the inception of the 11 obligation from which the later settlement or 12 forgiveness flowed, not from the later action in 13 negotiating a settlement of those loans. Right? 14 A. It clearly is based upon the inception. 15 I've obviously stated that it's an unsafe and 16 unsound transaction to take funds that should 17 rightly be paid to the USAT by UFG that would 18 rightly belong to it to help the net-worth 19 maintenance. So, I say that you cannot separate 20 the two. They are already one transaction, just 21 different parts of the same transaction. 22 Q. But you're not saying it was improper 4779 1 for Mike Crow to negotiate at arm's length, after 2 he was separated from the institution, forgiveness 3 of the loan as part of the settlement of his 4 contract rights, are you? 5 A. Well, I'm saying that Mike Crow's 6 negotiation of this separation agreement can't be 7 separated even though he was no longer there in an 8 arm's length transaction. It was not an arm's 9 length transaction when it was originally 10 negotiated. So, he was obviously taking advantage 11 of his ability to negotiate out. It should not 12 have been entered in the first place. Should not 13 have had that obligation, should not have been -- 14 UFG should not have been in the position where 15 they had to face these settlement claims and have 16 to negotiate a settlement with Mr. Crow and 17 Mr. Gross. So, I don't think you can separate his 18 actions in 1989 from his actions in '88 when they 19 were setting these up. 20 Q. So, is it your opinion when Mr. Crow 21 negotiated and settled his claims with UFG, he 22 should have declined to take what he could bargain 4780 1 for, that it was improper for him to accept what 2 he was able to negotiate through outside counsel 3 on his claims? Is that your position? I'm just 4 trying to find out what you're criticizing here. 5 If you're just criticizing the inception, I can 6 understand that and we'll talk about that. 7 A. Well, yes, I am criticizing the 8 inception. But I'm also criticizing the fact that 9 because the inception of this contract should 10 never have been -- they should never have been 11 faced with this situation. I don't argue that 12 someone like Mike Crow or anyone would try and 13 negotiate their way out. In a sense, I don't 14 blame somebody for doing that. But he was part 15 and parcel of the reason they were there. 16 So, yes, I'm saying that this is an 17 improper transaction, should not have taken place. 18 And to me, because it's tainted at the inception, 19 the whole thing is tainted, the whole process, 20 particularly since it's the people who created it. 21 Q. Let me -- 22 A. Or getting the benefit of it. 4781 1 Q. Let me ask you a hypothetical that 2 might be able to sort of parse these questions for 3 you a little bit. Let me ask you to assume that 4 instead of the UFG board with the assistance of 5 outside counsel, that Mike Crow's settlement was 6 negotiated by a committee made up of Mr. Stearns, 7 Mr. Rinaldi, and Mr. Guido. 8 Now, would you still think that Mike 9 Crow's action in negotiating and accepting his 10 settlement was improper? 11 MR. STEARNS: Your Honor, I'll object 12 unless there is just a clarification. All other 13 facts relating to the underlying transaction are 14 part of the hypothetical; is that correct? 15 MS. CLARK: Yes, sir. 16 MR. STEARNS: Thank you. 17 A. Okay. I'm not criticizing Mike Crow 18 for the act of trying to negotiate this. But what 19 I am saying is the whole transaction was tainted 20 from the very beginning. If Messrs. Rinaldi, et 21 al, had to come in later, not having been a part 22 of it, having to negotiate this, they are in the 4782 1 position where they have to make the best of what 2 they have got. But negotiation with somebody who 3 helped create this situation I think places him in 4 a situation -- places Mr. Crow in a position that 5 he should not have allowed this to happen, should 6 not have participated in making it happen, and his 7 negotiation has been tainted from that 8 participation from the very beginning. 9 Q. Well, let's -- let's move on. The 10 bottom of your chart pertains to what you call the 11 excess compensation to other employees. And 12 again, it's pretty much set up like the top part 13 of the chart. And it appears that, again, what 14 you've done here basically is you've added up all 15 of the amounts paid to the various officers in 16 1988, whatever form -- salary, bonus, whatever -- 17 and all the amounts that they received in 1989, 18 and then you've just subtracted their salary only, 19 salary only for 1987, and that's the amount that 20 you've called excess compensation; is that right? 21 Is that how the math works? 22 A. It is -- yes. That is how the math 4783 1 works. It is the same process we discussed for 2 the four respondents. 3 Q. Now, the chart basically illustrates, I 4 think, the position that once the institution fell 5 below net worth, from that point forward, all 6 compensation that was -- all raises and all 7 bonuses and all severance claim settlements were 8 excess and unreasonable. 9 Is that your position? 10 A. No. I think I've stated a few minutes 11 ago that after we reached the net worth failure, 12 of course, the insolvency, the process that was 13 used to get -- to get these compensation 14 increases, bonuses to the individuals, was a 15 flawed one. It was unsafe and unsound. I am 16 commenting about the process, how -- I'm talking 17 about what actually happened rather than whether 18 some alternatives -- this is the process they went 19 through. That process is flawed and unsafe and 20 unsound, not commenting about -- anything about 21 whether there was an alternative or anything like 22 that. Just what was done. 4784 1 Q. So, there is no rule that you could 2 find that says that once an institution is failing 3 its net worth requirement, it can't award raises 4 or bonuses. 5 There is no such rule. Right 6 A. There is no rule that says that you 7 cannot do these transactions. There is, as we 8 talked about earlier, the net worth requirement 9 that says if an institution fails it, that the 10 Federal Home Loan Bank Board can impose 11 restrictions on the operations, a whole series of 12 things. And, in fact, that was the vehicle by 13 which some of these things were accomplished, 14 these types of transactions, or that institutions 15 did, in fact, modify their behavior. 16 Q. Okay. So, it was within the power -- 17 it was within the legal power of the regulators to 18 impose restrictions once it was determined that 19 there was a net worth failure; is that correct? 20 A. That's correct. 21 Q. But there is no rule that says in the 22 absence of some action by the regulators in the 4785 1 form of an order or directive, there is no rule 2 that says that once you're in net worth failure, 3 net worth deficiency, I guess I should say, that 4 you can't award raises or bonuses. 5 You'd agree with that. Right? 6 A. Well, there is not a rule that says you 7 cannot do that, yes. 8 Q. Okay. 9 A. Does not say that there is a situation 10 where they have fiduciary responsibility and they 11 must consider these issues and consider their 12 actions in light of that responsibility and 13 condition of the institution. That clearly is 14 what I am addressing as to how they approached 15 this. 16 Q. The other regulation that you have 17 referred to in your testimony and in your expert 18 report is 563.39(a) and (b), and that's the 19 regulation that talks about safety and soundness. 20 Right? 21 A. No. 563.39 talks about employment 22 contracts and it says -- 4786 1 Q. I'm sorry. That's right. That's the 2 regulation that says that thrifts are not supposed 3 to enter into employment contracts that would 4 constitute unsafe and unsound practices, correct? 5 A. Yes. And it goes on to say it would be 6 unsafe or unsound if a contract could lead to 7 material financial loss or damage to the 8 institution and other things. 9 Q. Now, you've given us your view of the 10 safety and soundness of all these practices, all 11 these compensation practices, haven't you? 12 A. I believe I have. 13 Q. Okay. And yesterday, you told the 14 Court what your understanding of safety and 15 soundness is. 16 Do you remember that? 17 A. Yes, I do. 18 Q. At the risk of paraphrasing, let me try 19 to just sum it up based on the transcript. As I 20 understood it, your -- what you said yesterday 21 about safety and soundness was that safety and 22 soundness deals with an action or an omission that 4787 1 violates generally-accepted standards of practice 2 where the action or failure to act has an 3 unusually high likelihood that it will result in 4 substantial loss or material loss to the 5 institution, the stockholders, or the insurance 6 corporation. I tried to eliminate some of the 7 parentheticals, but is that basically what you 8 said yesterday? Do you recall? 9 A. Yes. Understand that when I said that, 10 I was giving an examiner's point of view of this. 11 We could easily go and find the legal definition. 12 But I was trying to say, "This is how an examiner 13 views this" and even, if you will, an insight as 14 to how -- what we might say. We're saying the 15 same thing as a legal definition basically, but 16 this is how we phrase it frequently. 17 Q. That's your understanding of safety and 18 soundness as a former examiner -- as a current 19 examiner, I should say? 20 A. Current examiner. 21 Q. And that's the standard that you 22 applied in reaching your opinions in this case? 4788 1 A. Yes. 2 Q. Do you recall that when we asked you 3 what you understood by safety and soundness at 4 your deposition, you gave a different definition? 5 A. There was a little bit of difference in 6 definition, yes. 7 Q. Do you recall that when you defined it 8 during your deposition, you simply said that an 9 unsafe and unsound practice is an action or 10 practice by the institution that tends to increase 11 the risk of loss? That was your definition at the 12 deposition. 13 A. Well, I would like to see -- we had a 14 large -- I'm sorry. We had a series of 15 discussions of this. I don't believe it was just 16 one time. If you could point me to where it says 17 that and other instances where we talked about it. 18 Q. Do you still have your deposition 19 there? Take a look at 89 and 90. I'll direct 20 your attention to the bottom of Page 89 of your 21 deposition. The question was asked: "Can you 22 give me what your definition of unsafe and unsound 4789 1 practice is? 2 And your answer is: "Okay. Let me try 3 and make it as short as possible. An unsafe or 4 unsound practice is an action or practice taken by 5 the institution that tends to increase the risk of 6 loss to the institution, stockholders, or the 7 insurance corporation. In this case, FSLIC. 8 Today, FDIC." 9 Do you recall giving that definition of 10 unsafe and unsound during your deposition? 11 A. Yes. I recall that we -- that I gave 12 that. 13 Q. And later or further down on Page 90 at 14 Line 17, you said that -- you referred to the 15 practice of -- "basically it just accelerated by 16 some finite amount the speed at which the 17 institution failed." 18 Do you see that? 19 A. Yes. I see that. That is not 20 discussing, necessarily, safety and soundness. 21 That is discussing a response to a question about 22 the bonuses increasing the risk of loss. 4790 1 Q. Now, at that point, there was nothing 2 about concepts of generally-accepted standards or 3 unusually high likelihood of loss in your 4 definition of unsafe and unsound, was there? 5 A. I said at that point in time, "Let me 6 try and make it as short as possible." And so, I 7 did perhaps shorten it too much, but I gave you a 8 very, very short brief description. 9 Q. Do you remember that after you got back 10 from lunch, you reported that you had had a 11 discussion with Mr. Rinaldi and talked about 12 safety and soundness and you made another try as 13 defining safety and soundness? 14 Do you recall that? 15 A. Seemingly chewing my tongue when I was 16 doing it speaking. Yes, I remember we did discuss 17 it -- discuss the topic again. 18 Q. Okay. And take a look at 122, and 19 let's see what you said when you came back. 20 Page 122, Line 11. This time, you say safety and 21 soundness is "an action that does not follow 22 prudent practice that will have an impact upon the 4791 1 financial condition of the institution or 2 stockholders or insurance corporation." 3 Do you see that? 4 A. Yes, I do. 5 Q. Do you recall giving that definition of 6 safety and soundness during your deposition? 7 A. Yes, I do. 8 Q. Okay. And still, on the second try, 9 there's still nothing about generally-accepted 10 standards and there's nothing about an unusual 11 likelihood of loss in your definition of safety 12 and soundness; is that right? 13 A. Well, I said "follow prudent practice." 14 I was talking about the generally-accepted 15 standards of practice, stated poorly perhaps, but 16 that is what I was trying to refer to. And I have 17 said earlier that there was the unusual chance of 18 loss. So, I guess to answer your question 19 directly, no, it does not include those things in 20 this portion of my deposition. 21 Q. Now, which definition did you actually 22 apply when you formed your opinions in this case? 4792 1 A. I applied the one we've been talking 2 about today, the one I discussed earlier, which is 3 the generally-accepted standards of practice with, 4 I think, frequently you see the term "abnormal 5 risk of loss to the institution." Although I 6 defined it as unusually high, I'm talking about 7 something that is not in the normal course of 8 business you would expect in the chance of loss. 9 Q. So, when you were asked about twice 10 during your deposition, you just forgot the idea 11 of abnormal risk of loss, just overlooked it? 12 A. I would say that I just didn't state 13 it. It's unfortunate that I didn't, but I did 14 not -- well, I may have forgotten at that point in 15 time, just didn't realize that I was missing that 16 portion. But anyhow, I think the record stands 17 for itself as to what I said and I have discussed 18 it now, I think, with a little better description 19 of what I was using for a standard. 20 Q. Would you agree -- I believe you would 21 agree, Mr. Dermody, that there are no objective 22 rules -- no objective rules or standards for 4793 1 safety and soundness. 2 Would you agree with that? 3 A. I think it's pretty clear that the 4 standards are intended to rely upon the experience 5 and judgment of an examiner. So, yes, there are 6 no explicit objective standards necessarily. 7 There are obviously -- there's guidance from the 8 agency that talks about things that are acceptable 9 or unacceptable. But I don't recall seeing 10 something that said "Here is the definition of 11 safety and soundness and these are the specific 12 objective standards." It's a whole series of 13 things that we deal with that go into reaching 14 that decision. 15 Q. But you would agree that there are no 16 objective standards in saying that this is safe 17 and sound and this is not safe and sound? 18 A. Well, I think that reflection misstates 19 a little bit because we're asking an examiner to 20 rely upon his judgment, but that judgment is based 21 on both experience and, also, knowledge of what 22 the standard practices are and knowledge of 4794 1 boards' policies, which in some cases clearly 2 define what is acceptable and what is 3 unacceptable, performance activities by the 4 institution. 5 So, in that sense, there are some 6 portions of it that are objective in the 7 institution should be doing this, should not do 8 this types of thing. There was guidance in that 9 sense. So, it is not entirely objective, but 10 there are -- I believe there are objective facets 11 to it. So, I cannot agree with you saying it is 12 completely subjective. 13 Q. Well, I didn't say it was completely 14 subjective. I asked whether you would agree that 15 there are no objective standards to say what is 16 safe and sound and what is not safe and sound. 17 A. I would disagree. 18 Q. Okay. Let me ask you to turn to 19 Page 196 of your deposition. Would you look to 20 the last line, Line 22, on Page 196? Do you see 21 there that you testified, "Well, certainly, there 22 are no objective standards in saying this is safe 4795 1 and sound and this isn't"? 2 Now, do you recall testifying -- 3 A. Yes. And let's look at some of the 4 language around this. I may have misstated this 5 because I'm saying there are no objective 6 standards, but I then go on to say before that and 7 after that that there are, in fact, conflict of 8 interest regulations and some guidance from the 9 agency, but it doesn't always cover this. Does 10 not always give you an objective. And I think 11 I've tried to say that it's not all objective. 12 Certainly, criminal activity, I think that's an 13 objective. If it's criminal activity or it's 14 reported as criminal activity, that can be -- 15 that's unsafe and unsound. I don't think we have 16 to say that's a subjective decision on my part. 17 So, that's -- that's an objective answer. If 18 somebody is indicted convicted of criminal 19 activity, it's unsafe and unsound. 20 MR. RINALDI: Your Honor, I would 21 request that the entire answer that he gave to 22 that question be read into the record because I 4796 1 think it's misleading to just put in, "Well, 2 certainly there are no objective standards" when 3 there is an entire paragraph that continues that. 4 THE COURT: All right. Why don't you 5 read it? 6 A. Okay. Starting on the bottom of 7 Page 196, I will read my answer. 8 MR. RINALDI: Perhaps you should read 9 the question so that -- 10 A. I'm sorry. Read the question and then 11 the answer. Question: "But you would look at all 12 of the circumstances, and there wouldn't be 13 necessarily objective criteria you could look at. 14 You'd really have to look at the whole picture and 15 see whether or not given all the context whether 16 or not this was a good idea?" 17 Answer: "Well, certainly, there are 18 objective standards in saying" -- "certainly there 19 are no objective standards in saying this is safe 20 and sound and this isn't or" -- "that this is safe 21 and sound and this isn't. The agency for a long 22 time has recognized, for instance, in the conflict 4797 1 of interest regulations, we can't always give you 2 a definitive answer as what's safe and sound. We 3 can tell you the types of things, the direction 4 we'd go, what is prudent, what is standard of how 5 you deal with these things. And if you're not 6 doing that and exposes the institution to risk, we 7 have an unsafe and unsound practice. So, that 8 means, of course, you do consider the 9 circumstances that involve the institution, but 10 you have to look and say what's important. What's 11 important here is they're failing. They are going 12 down the tubes in a very big hurry." 13 Q. Thank you. It's also your view, isn't 14 it, Mr. Dermody, that only an experienced examiner 15 would be in a position to make the judgment call 16 about what is safe and sound and what is not? 17 A. Would you repeat that question again? 18 Q. Yes. It is your view, is it not, that 19 only an experienced examiner would be in the 20 position to make the judgment call about what is 21 safe and sound and what is not? 22 A. The experience of an examiner is 4798 1 certainly -- there is a certain minimum level of 2 experience for an examiner to be able to make 3 safety and soundness judgments. I can't define 4 for you and say that this level of experience or 5 this level is appropriate or another level of 6 experience is inappropriate. An entry-level 7 examiner, I don't believe, is going to have much 8 experience and ability to make a safety and 9 soundness judgment unless there is some specific 10 guidance from the agency on an issue that 11 discusses the specific facts that exactly match 12 the situation. 13 So, I think that on some issues that 14 call for judgment, it's going to require someone 15 with some experience to get there 16 Q. Okay. Now, recognizing that safety and 17 soundness is a matter of individual judgment from 18 the examiner, oftentimes an experienced examiner, 19 if in this case that we're dealing with, if 20 Judge Shipe were to find that USAT's examiners 21 reviewed the material terms of the compensation 22 arrangements that were put into place in 1987 and 4799 1 '88 and did not reach a conclusion that they were 2 unsafe and unsound, would that make any difference 3 to your opinion on safety and soundness? 4 A. Well, there is evidence in the record 5 that I reviewed that there was at least -- 6 Q. Mr. Dermody, I don't want to interrupt 7 you, but I do want -- I'd like to just clarify the 8 question for you so that we don't waste time 9 having you answer a question that I didn't ask. 10 I'm not asking you to comment on the facts here. 11 You're an expert. Okay? You understand 12 hypothetical questions. I'm asking you a 13 hypothetical question. 14 I would like to know, if Judge Shipe 15 were to find as a matter of fact that USAT's 16 examiners reviewed the compensation practices at 17 issue here and did not find them to be unsafe and 18 unsound, would that make any difference to your 19 opinion about safety and soundness 20 A. Given the facts that I have at my 21 command, assuming the same type of background and 22 facts we have, no, it would not make any 4800 1 difference as to my judgment of safety and 2 soundness. 3 Q. Thank you. 4 MS. CLARK: This would be a logical 5 place to take a break, if you would like. 6 THE COURT: All right. We'll take a 7 short recess. 8 9 (A short break was taken 10 at 2:47 p.m.) 11 12 THE COURT: Be seated, please. We'll 13 be back on the record. 14 MR. NICKENS: Your Honor, Mr. Stearns 15 and I have a scheduling issue we wanted to raise 16 with you. The next witness is Mr. Phillips. 17 Mr. Phillips is from New Jersey and he's been here 18 since last night. We are discussing an agreement 19 to make sure that he could finish tomorrow and to 20 divide the time in such a way that that could 21 happen. But we wanted to be sure that we were 22 aware of your schedule so that we didn't plan 4801 1 something that didn't fit what your plans were. 2 THE COURT: I'll be here all day. So, 3 you can plan on a complete day's hearing tomorrow. 4 MR. STEARNS: Until 5:00, Your Honor? 5 THE COURT: Yes. 6 MR. STEARNS: Thank you. 7 MR. NICKENS: Thank you, Your Honor. 8 THE COURT: Ms. Clark. 9 (3:17 p.m.) 10 Q. (BY MS. CLARK) Mr. Dermody, in your 11 expert report and in your testimony in this court, 12 you have identified seven different transactions 13 that you felt were unsafe or unsound or in 14 violation of regulations; is that correct? 15 A. Yes, I believe -- 16 Q. If you look at Exhibit A11048 which was 17 admitted yesterday -- that's your expert report. 18 I think if you look at Page 3 and 4 of the report, 19 the transactions are listed with the letters A 20 through G. I think that's seven. 21 A. Yes. I think yesterday we pointed out 22 that I had four involving USAT and three involving 4802 1 UFGI. 2 Q. And then during your deposition and 3 again in your testimony, you have expressed an 4 opinion on one other set of employment contracts 5 that you have found to be unsafe and unsound, 6 correct? 7 A. Yes. 8 Q. And those were the contracts that were 9 entered into by USAT in February 1988 as a backup 10 to the UFG contracts from September of 1987; is 11 that right? 12 A. Yes. 13 Q. You also reviewed in the course of your 14 work in this case the September 1987 contracts, 15 didn't you? 16 A. Yes. I had occasion to look at them. 17 Q. But you have testified that you didn't 18 form an opinion about the safety and soundness of 19 those contracts. Right? 20 A. Correct. 21 Q. The September '87 contracts were 22 contracts that were entered into, obviously, after 4803 1 April 1987, which is the -- which is one of the 2 events on your chart. I believe it's Event No. 2 3 on your USAT chart. That's the time when USAT was 4 informed by the examiners that it was failing its 5 net worth requirements; is that correct? 6 A. That's correct. 7 Q. Now, when you reviewed the contracts, 8 even though you weren't reviewing them 9 specifically for the purpose of forming an opinion 10 about safety and soundness, in fact, there was 11 nothing that you saw that caused you to conclude 12 that those contracts were unsafe and unsound; is 13 that correct? 14 A. Yes, I believe that's correct. 15 Q. Do you recall that the September 1987 16 contracts included a guaranteed bonus? 17 A. I recall that there was a provision to 18 that effect. I don't have it in front of me; so, 19 I don't recall the specific details. 20 Q. So, that provision meant that on top of 21 the salary would be added a bonus that would be a 22 minimum bonus without regard to performance 4804 1 criteria. 2 Was that your understanding? 3 A. Yes. I believe that's consistent with 4 the contracts I reviewed. 5 Q. And that guaranteed bonus didn't jump 6 out at you as an unsafe or unsound practice, did 7 it? 8 A. Well, that transaction was with UFGI 9 and not with USAT. And, of course, at the time, 10 it was -- USAT had nothing to do with these 11 things. It was subsequent events that I felt 12 there was a very close connection as to what was 13 going on with the compensation and the net worth 14 requirement. 15 Rephrase your question again. I'll just 16 give you a "yes" or "no." 17 Q. You didn't find the guaranteed bonus to 18 be an unsafe and unsound practice when you saw it 19 in the September 1987 contracts. Right? 20 A. No, I did not. 21 Q. And do you recall that the 22 September '87 contracts also included a provision 4805 1 for severance pay in an amount equal to twice the 2 annual salary and bonus? 3 A. That's correct. They did. 4 Q. And you didn't consider that to be an 5 unsafe and unsound practice when you reviewed the 6 September '87 contracts; is that correct? 7 A. I expressed no opinion about safety and 8 soundness and so on. I did not address that as 9 unsafe and unsound. 10 Q. But it didn't jump out at you as an 11 unsafe and unsound practice as you went through 12 the contract. Right? 13 A. A lot of the practices that I looked at 14 did not immediately jump out at you to say they 15 were unsafe and unsound; but looking at the 16 circumstances, I did not feel that I was prepared 17 to call them unsafe and unsound. 18 Q. You testified, I believe, that you did 19 look at the exam reports for USAT. 20 Did you find any criticism in the exam 21 reports about the September 1987 contracts? 22 A. I don't recall seeing any. 4806 1 Q. And did anyone ever tell you whether 2 there was any discussion of these contracts in the 3 exam work papers? 4 A. No. 5 Q. So, you are unaware of whether the 6 examiners had any analysis or review of the 1987 7 contracts in their work papers? 8 A. That's correct. 9 Q. I'd like to hand you what we have 10 marked as Exhibit A11032. This packet of 11 materials is a section of the work papers from the 12 Federal Home Loan Bank of Dallas 1987 examination 13 of USAT. It includes all of the employment 14 contracts -- copies of all the employment 15 contracts from September 1987 and some additional 16 handwritten analyses and schedules pertaining to 17 the compensation. It was produced to us by the 18 Federal Home Loan Bank of Dallas, and there is a 19 stipulation as to the source of this document. 20 MS. CLARK: I move the admission of 21 A11032. 22 MR. RINALDI: With the stipulation that 4807 1 this comes from the Federal Home Loan Bank Board 2 exam, if that, in fact, is true, I have no 3 objection to the admission of the document. 4 THE COURT: Received. 5 Q. (BY MS. CLARK) Do you know Vivian 6 Carlton? 7 A. Yes, I do. 8 Q. You're aware that she was the examiner 9 in charge of the 1986 and 1987 exams of USAT? 10 A. Yes, I am. 11 Q. Have you ever worked with Ms. Carlton? 12 A. I have not observed her in the 13 examination process of an institution. 14 Q. Do you know what she's doing now? 15 A. Yes, I do. 16 Q. What is she doing? 17 A. She is a field manager. 18 Q. And does that mean that she supervises 19 the work of examiners in her district or region? 20 A. She supervises the work of examiners 21 for a caseload of institutions. 22 Q. And is she working in the same office 4808 1 where you are currently working as an examiner? 2 A. Yes, she is. 3 Q. Look at Page 128391. Do you see that? 4 It's a copy of the September 9, 1987 employment 5 agreement with Art Berner. 6 A. Yes. 7 Q. And if you go through the package, it 8 includes copies of the employment agreements with 9 the other five officers who received employment 10 agreements at that time. 11 A. I will take your word for it, or do you 12 want me to review and -- 13 Q. That's okay. Let's just look at 14 Mr. Berner's contract for a moment at Page 128393. 15 A. Yes. 16 Q. In the paragraph with the -- subtitled 17 "bonus," that's Paragraph B, do you see that 18 Mr. Berner's contract provided for an annual bonus 19 that would be an amount no less than $70,000 20 described as a minimum bonus? 21 A. Yes, I do. 22 Q. And look at Page 128399. This is 4809 1 actually part of the change of control provision. 2 You're familiar with the change of 3 control provision in the 1987 contracts? 4 A. I'm familiar with -- that there was a 5 provision for that. 6 Q. And you see on the very bottom of the 7 page in the paragraph with two little "Is" that 8 "the company shall pay as severance pay to the 9 executive an amount equal to (a) the product of 10 the executive's annual salary rate in effect as of 11 the date of termination, multiplied by the number 12 2." And then flipping over to the end, "Plus, 13 (b), the minimum bonus multiplied by the number 14 2"? 15 A. Yes, I do. 16 Q. Now, you see no indication in any of 17 the records you've seen in this case, have you, 18 Mr. Dermody, that Vivian Carlton and her 19 examination team thought awarding minimum or 20 guaranteed bonuses was an unsafe and unsound 21 practice when they reviewed these contracts in 22 early 1988; is that correct? 4810 1 A. I have seen nothing to that effect, 2 that is correct. 3 Q. And the same is true for a severance 4 provision that calls for two times annual salary 5 and bonus? 6 A. Yes, that is correct. 7 Q. Now, for the purpose of your own 8 opinion, you skipped over these September 1987 9 contracts and began your review with a 10 November 1987 bonus, correct? 11 A. Yes. 12 Q. You discuss those on Pages 4 and 5 of 13 your report where you criticize the size of the 14 bonus at 50 to 80 percent for some members of 15 senior management. 16 Do you recall that? 17 A. Yes, I do. 18 Q. You also criticize the fact that they 19 were awarding any bonus at all, given that they 20 were failing their regulatory net worth 21 requirement; is that right? 22 A. That's correct. 4811 1 Q. Now, you've reviewed the compensation 2 committee and board meetings where these bonuses 3 were approved on November 10th, 1987. Right? 4 A. Yes. 5 Q. Let's look at A1553. I believe this 6 has previously been received in evidence as 7 Exhibit T8027 at Tab 409. Now, these are the 8 minutes of the meeting where they discussed and 9 then approved the November '87 bonus that you 10 criticize; isn't that right? 11 A. I believe it is, yes. 12 Q. And at the bottom of the page, on the 13 first page of A1553, it describes that "The 14 committee considered the operations of United and 15 the fact that the association is having an 16 operating loss." 17 Do you see that? 18 A. Yes, I do. 19 Q. And then it goes on to give several 20 reasons why, despite that fact, they believed it 21 was appropriate to award bonuses to certain key 22 employees. 4812 1 Do you see that? 2 A. Yes. 3 Q. And you see that the same reasons are 4 given in the minutes of the board meeting on the 5 same day? Let me ask you to look at A1136, which 6 is also T8028, which you probably have in front of 7 you, I believe. 8 A. I think I have it in my stack over 9 here. 10 Q. You were testifying about it earlier. 11 Now, essentially the same reasons that 12 were outlined in the compensation committee 13 minutes are also described on the second page of 14 the board minutes of the November 10, 1987 15 meeting, are they not? 16 A. Yes, that is correct. 17 Q. The minutes reflect that Mr. Crow 18 reviewed the financial statements of the 19 association. 20 You see that on the first page? 21 A. Yes, I do. 22 Q. That's before they begin talking about 4813 1 the compensation issues. The second page, they 2 turn to the compensation issues. And do you see 3 that Mr. Silverman said that the bonuses were an 4 attempt to achieve market-based compensation and 5 that the executives who would be receiving them 6 had taken on more duties over the last year or so? 7 Do you see that? 8 A. Yes, I do. 9 Q. He also pointed out that it would cost 10 United significant amounts of money to replace 11 these people. 12 Do you see that? 13 A. Yes, I do. 14 Q. Now, in your view, the reasons that are 15 stated in these minutes are nothing more than 16 window dressing; is that right? 17 A. I stated that they certainly miss one 18 of the critical points for United Savings 19 Association at that time which was that they were 20 failing their net worth requirement, projected by 21 management to fail, and, in fact, did about this 22 time. I feel that at the very least, these 4814 1 comments do not address that very important issue. 2 And they discuss other issues, no question about 3 that; but they fail to address, I think, the 4 critical one. 5 Q. Let me ask you to look back at your 6 deposition again at Page 105, please. 7 A. Certainly. 8 MR. RINALDI: What page? 9 MS. CLARK: Page 105. 10 Q. (BY MS. CLARK) And I'll ask you to 11 look at the bottom of the page beginning at 12 Line 19. You're asked a question about the 13 reference in the minutes to the fact that the 14 committee had committed -- sorry -- that the 15 committee had considered United's operating loss. 16 And what you answer is, quote, "I reviewed the 17 material of the executives at the time that this 18 was done, as well as this, and concluded that 19 while they made a statement about this, it appears 20 to be window dressing to me." 21 Do you remember testifying that what 22 was reflected in the minutes appeared to be window 4815 1 dressing to you? 2 A. Upon reading it, yes, I do. 3 MR. RINALDI: Can we read the rest of 4 his answer? 5 MS. CLARK: Your Honor, I think that 6 Mr. Rinaldi's going to have a chance to conduct 7 redirect examination. I believe this is a fair -- 8 THE COURT: Let's move on. 9 MS. CLARK: -- sample. 10 Q. (BY MS. CLARK) And do you recall that 11 you also believed that the minutes were paying lip 12 service to the concern about the financial 13 condition of the association? 14 A. Yes, I recall making a statement, 15 either directly of those words or something 16 virtually identical to that. 17 Q. Now, you call it window dressing. You 18 call it lip service. But you weren't there at 19 USAT at that time, were you? 20 A. No. 21 Q. And you haven't talked to the people 22 who were there to find out whether the reasons 4816 1 that they were stating in those minutes were the 2 real reasons why they took that action. You 3 haven't talked to them to ask them, have you? 4 A. No, I have not. 5 Q. And you haven't talked to them about 6 why they were concerned about people leaving the 7 association, have you? 8 A. No, I have not talked to them about 9 that. 10 Q. Do you know how many officers had left 11 United in the months prior to the November board 12 meeting when they decided to award these bonuses? 13 A. I recall seeing something about 13 14 individuals leaving, seven of whom were terminated 15 by the institution. I believe, if I remember 16 correctly, this was about at that time period 17 we're discussing. 18 Q. So, you conclude from that that six 19 officers had left the association who had not been 20 terminated? 21 A. That would certainly be my 22 understanding. 4817 1 Q. And do you know how many of them left 2 for better-paying jobs? 3 A. I do not. 4 Q. Do you know how many of them left 5 because they saw no future in the thrift industry? 6 A. No, I do not. 7 Q. You do know, however, that USAT was 8 suffering severe financial difficulties in 9 November of 1987. You've testified about that? 10 A. That's correct. 11 Q. In your experience, Mr. Dermody, when a 12 company is in serious financial trouble, do people 13 begin to think about their alternatives? 14 A. Yes. 15 Q. If you think you might have to be 16 looking for a new job, you would ordinarily want 17 to do it before you lose your old job, don't you? 18 A. I hope so. But not being facetious, I 19 think the answer is -- my answer is, yes, you 20 normally -- my experience is people try to find 21 something before they have to go. 22 Q. And you wouldn't necessarily expect 4818 1 people to go to their company and tell them that 2 they are looking for a job until they have already 3 got a job lined up, would you? 4 A. That depends on the individuals, in my 5 experience. I don't think I can make a blanket 6 statement about that. 7 Q. So, would you agree that even if nobody 8 had announced that he was going to leave the 9 association if he didn't get a bigger bonus, that 10 it was certainly reasonable for the compensation 11 committee to be concerned about how they were 12 going to retain good people at this time? 13 A. Yes. It would -- on the assumption 14 that people were leaving, it would be reasonable 15 for any compensation committee to be concerned 16 about the retention of executives. 17 Q. Okay. Let's talk about the second 18 reason that they discussed, and that's bringing 19 compensation up to market levels. 20 Now, you're not here as an expert on 21 what the market levels of compensation were at the 22 time, are you 4819 1 A. No. We've made that clear several 2 times. 3 Q. So, if Judge Shipe were to find as a 4 fact that their compensation levels were below 5 market, would you still conclude that it was an 6 unsafe and unsound practice for the company to 7 award bonuses to bring people's compensation up to 8 market levels? 9 A. My opinion is based -- well, let's talk 10 about this hypothetical you're proposing to me. 11 Are we to assume that we have all the information 12 that I have currently about how this process was 13 done and everything else? May I assume that? 14 Q. Yes. We're talking about the decision 15 to award additional compensation in these 16 circumstances, and I'm asking you a hypothetical, 17 which is: Assume that we find -- it is found as a 18 matter of fact that the compensation levels were 19 below market. 20 Would that affect your opinion on the 21 safety and soundness of the decision to award 22 these bonuses? 4820 1 A. The level of them being below market 2 does not have an impact upon my opinion. 3 Q. So, that would not be significant to 4 you? 5 A. That would not change my opinion. I'm 6 willing to acknowledge that may very well be the 7 case, but that would not change my opinion. 8 Q. How about the last reason given, which 9 was that additional duties were being shouldered 10 by management? 11 Let me ask you to assume that the 12 compensation committee had concluded, in their 13 judgment, that bonuses were appropriate in part 14 because the members of management were shouldering 15 significantly greater duties under the 16 circumstances. You would still not think it was 17 appropriate for them to decide to award bonuses in 18 light of those additional duties? Is that your 19 opinion? 20 A. I think my prior statements are pretty 21 clear that it was the process they went through, 22 and I'm not discussing the level of performance or 4821 1 the level of the salaries. 2 So, again, I don't -- my opinion would 3 not change -- did not change because of different 4 amount of work to be done nor, in your 5 hypothetical, would my opinion change either 6 Q. Who was on the board that approved the 7 November 1987 bonuses? 8 A. Well, I don't remember the specific 9 details of all of them. There were a large number 10 of individuals who left the board of USAT right 11 around this time or right afterwards. I don't 12 remember all the individuals who were on the board 13 specifically at this point in time. But clearly, 14 there were more individuals at this stage than 15 there were just a few months later. 16 Q. Do you know whether there was a 17 majority of outside directors on the board at that 18 time? 19 A. I think that -- well, I only recall 20 offhand that -- I recall that there were only a 21 few insiders and that they did not make up the 22 majority of the board. So, the answer to your 4822 1 question is, yes, it appeared to be made up of a 2 majority of outsiders. 3 Q. So, these bonuses were approved by a 4 committee of three outside directors, the 5 compensation committee, recommended to the board, 6 voted on by a board that was made up of a majority 7 of outside directors. 8 Is that your understanding? 9 A. Yes. Subject to reviewing the 10 composition of the board, but that's my 11 understanding. 12 Q. So, the decision to award these bonuses 13 was, in fact, not made by the respondents, was it? 14 A. Certainly not solely by the 15 respondents. I believe Mr. Gross was involved in 16 the decision. But since Mr. Berner and Crow were 17 not on the board at this point in time, there is 18 no way that they could have been involved in 19 actually voting in the decision. I believe 20 Mr. Munitz and Gross were involved in the 21 decision, though. 22 Q. Okay. And their involvement was to 4823 1 join a unanimous resolution adopting the 2 recommendation of the three independent, outside 3 directors sitting as the compensation committee? 4 Is that your understanding? 5 A. Yes. It was a unanimous adoption by 6 the board. 7 Q. Now, your conflict of interest theory 8 doesn't really work on this transaction, does it? 9 A. Well, you have individuals who are 10 voting on their compensation. I think it's clear 11 that Messrs. Munitz and Gross should at least be 12 disclosing this and should be abstaining from 13 voting on their own salaries. Since it's a 14 unanimous decision, unanimous adoption, I see no 15 evidence that they, in fact, took those steps. 16 I'm not trying to imply that all of the other 17 directors should have done something. They didn't 18 get the money. But those two individuals did, in 19 fact, receive it. And there is no evidence that 20 they had any awareness in the way they acted about 21 a potential conflict in their position. 22 Q. So, with respect to them, the conflict 4824 1 of interest theory is that they didn't abstain 2 from a unanimous resolution of the board adopting 3 the compensation committee's recommendation. 4 Is that your theory? 5 A. They did not -- they did not both 6 abstain or apparently refrain from a discussion of 7 this. The minutes are vague enough. It doesn't 8 tell me how sensitive the discussion was, but 9 certainly they did not abstain from the voting. 10 Q. You have no idea whether they 11 participated in the discussion or not, do you? 12 A. That's right. I just said the record 13 does not tell me what happened. 14 Q. Certainly with respect to Mr. Berner 15 and Mr. Crow, there is no conflict of interest 16 theory that works here. Right? 17 A. I don't believe I'm trying to allege 18 that Messrs. Crow and Berner were involved in a 19 conflict in this. 20 Q. And is it still your opinion that 21 Mr. Berner and Crow committed an unsafe and 22 unsound practice with respect to the November 1987 4825 1 bonuses? 2 A. Well, Mr. Berner presents a proposal to 3 defer the salaries, which I said earlier was an 4 appropriate one, and then we get into the bonuses 5 for the individuals. And I said before, the 6 process where they decided to grant them, approve 7 them, but then not announce them and -- with the 8 potential for some change, Mr. Berner, I presume 9 is making a recommendation, as he seems to be the 10 one who's presenting this and discussing this. 11 They were not directly involved in the voting. 12 So, in a sense, the conflict of interest 13 does -- is not going to have an impact on their 14 participation. They weren't in a position where 15 they were voting on it. 16 Q. Let me make sure I understand your 17 criticism of Mr. Crow here. Your criticism is 18 that he recommended deferring salary reviews and 19 then the independent directors who constituted the 20 compensation committee decided to go ahead and 21 award a bonus. And that's what you're criticizing 22 him for? 4826 1 A. I'm not criticizing Mr. Crow for the 2 compensation committee -- 3 Q. Did I say Mr. Crow? I'm sorry. I 4 misspoke. I meant Mr. Berner. I thought I said 5 Berner. 6 A. Again, Mr. Berner was not on the 7 compensation committee and he was not voting. So, 8 I don't see a conflict -- I don't believe that 9 there is a conflict here for Mr. Berner in that 10 particular vote. 11 Q. Now, if the evidence showed that the 12 examiners who were examining the association 13 during this time period reviewed the board minutes 14 and saw that the bonuses were being awarded in 15 November 1987 despite their belief that USAT was 16 not meeting its regulatory net worth requirement 17 and if they didn't find the bonuses to be an 18 unsafe and unsound practice, would that change 19 your opinion about these bonuses? 20 A. Well, I would think I need some more 21 information as to how much information they knew 22 about this, what the entire process was. You 4827 1 posit that the examiners reviewed this. I don't 2 know how extensively we're saying that they 3 reviewed this, how complete their knowledge was of 4 it. It would be difficult for me to answer on 5 that basis not knowing how extensively they are 6 supposed to know about this. 7 Are you talking about full disclosure, 8 knowing all of the details, everything that we 9 know now? 10 Q. Mr. Dermody, let me make it simple. 11 Let me give you a very simple hypothetical. Let 12 me ask you to assume that they reviewed the board 13 minutes which reflected the decisions that were 14 made and who participated and how and did not find 15 the bonuses to be an unsafe and unsound practice. 16 Would that affect your opinion? 17 A. Let me think for a second about this. 18 They review it. They know who did the 19 transactions, how the transactions came about, and 20 what the transactions were. But they see 21 basically what I see here in the minutes? 22 Q. They see what you see? 4828 1 A. Okay. Given that -- let's see. How do 2 you phrase this? It does not tell me the amounts 3 of the bonuses. It does not tell me that they are 4 going to do it and that there's a -- let's see. 5 I'm looking for the phraseology. "Bonus not be 6 paid, no announcement be made, and under any 7 circumstances be taken into effect." 8 Given what they see here, if they felt 9 there was no conflict of interest, I would take 10 that into consideration. But I think the facts 11 here aren't enough for them to make a judgment 12 that this was -- complete judgment that this was 13 unsafe and unsound without any information that 14 was here. 15 Q. Now, in your experience as an examiner, 16 Mr. Dermody, when you see something that raises a 17 potential safety and soundness issue, would you 18 expect to gather whatever information you felt you 19 needed in order to reach a judgment on whether it 20 was, indeed, unsafe and unsound or not? 21 A. Well, yes. 22 Q. Okay. Let's go on to the next 4829 1 transaction, the April 1988 -- what you call the 2 salary increases in April 1988. Those are 3 discussed at 5 and 6 of your report. Again, you 4 criticize the amount. You said it was from 40 to 5 67 percent salary increase. In fact, what they 6 were doing was, as you testified earlier, they 7 combined the salary with the bonus for the 8 previous year; is that right? 9 A. That's correct. 10 Q. And that's how it was discussed in the 11 proposal that was agreed to at the compensation 12 committee meeting in March, the end of March 1988? 13 A. Yes. 14 Q. And we've already talked about the fact 15 that if you consider total compensation, whether 16 you call it salary or guaranteed bonus or whether 17 you lump it together -- all together as salary, 18 that there was nothing like a 40 to 67 percent 19 increase in total compensation between 1987 and 20 1988. 21 You would agree with that. Right? 22 A. Well, no. We are talking about -- I 4830 1 don't believe we discussed that point at all. We 2 discussed that you have a different way of 3 attributing these payments, but I don't think we 4 ever made any statement about you couldn't come up 5 with a 40 percent figure. 6 Q. Well, let me just phrase it a different 7 way. Now, when you were discussing the package of 8 compensation arrangements that were put into place 9 pursuant to that March 30, 1988 compensation 10 committee proposal, you barely mentioned the event 11 that triggered that reconsideration of the 12 compensation package in your testimony. 13 Would you agree 14 A. What event were you just -- 15 Q. There is a reference in the March 30 16 minutes which are at T8050. I believe you have 17 that from Mr. Rinaldi's examination. 18 A. Okay. Yes. I'm sorry. I have 8040. 19 Q. There is a reference in the March 30 20 minutes of the compensation committee to a problem 21 that the new contracts were meant to address. 22 Right? 4831 1 A. Yes. 2 Q. And you know what that problem was, 3 don't you? 4 A. There is discussion later that the 5 problem is the triggering of the change of control 6 provision of the contract. 7 Q. And the change of control provision was 8 one of the provisions that we reviewed from the 9 exam work papers. Right? The copy of the 1987 10 contracts that Vivian Carlton had put into her 11 work papers of her exam. Right? 12 A. Yes. The 1987 UFG contracts, correct. 13 Q. And the problem was that there had been 14 enough people who had resigned from the board 15 that, under the terms of the contract, there was 16 deemed to be a change of control which triggered 17 the severance benefits that we talked about 18 before; is that right? 19 A. Yes, I believe that's correct. 20 Q. And members of management were, in 21 fact, threatening to make a claim under that 22 provision and to leave the association. Right? 4832 1 A. Yes. 2 Q. Okay. In fact, one of the officers 3 actually submitted a letter making that demand. 4 Are you aware of that? 5 A. Yes. I believe there is a discussion 6 of that at one point in time. 7 Q. Let me ask you to look at B2082. And 8 it's already been admitted in evidence and can be 9 found at Tab 463. This is a letter from Jeff Gray 10 dated March 16, 1988, which he describes as a 11 notice of termination. And he demands to receive 12 the amount of the benefits under his contract. 13 Right? 14 A. Correct. 15 Q. Now, at this point, Mr. Whatley was the 16 only remaining member of the compensation 17 committee. Is that your understanding? 18 A. Yes, it is. 19 Q. And management presented a plan to him 20 or proposal to him how to deal with this problem 21 of the triggering of the contracts, correct? 22 A. Yes, that is correct. 4833 1 Q. One of the parts of that program was 2 the new employment contracts that you criticized, 3 correct? 4 A. That is correct. 5 Q. And one of the main things that you 6 criticize about those new employment contracts is 7 the fact that the severance provisions in the new 8 contracts provide for a securitization of the 9 funds necessary to ensure that the benefits would 10 be available; is that right? 11 A. Yes. 12 Q. The amount of the severance doesn't 13 change from the previous contracts. Right? 14 A. No, it does not. 15 Q. The only change there is the security 16 provisions. Right? 17 A. Yes. 18 Q. Now, this was not the first time that 19 USAT had agreed to secure benefits under 20 employment contracts, was it? 21 A. No, it was not. 22 Q. And, in fact, the people who had been 4834 1 recruited to come to USAT in 1986, '87 had been 2 demanding that their compensation be securitized; 3 is that right? 4 A. Yes, that is correct. 5 Q. Okay. And have you reviewed the 6 contract of Dominic Bruno, for example, dated 7 January 12, 1988? 8 A. I do not recall reviewing Mr. Bruno's 9 contract specifically. 10 Q. Let me take -- ask you to take a look 11 again at the fat document, the set of work papers, 12 exhibit -- I think it's 11032. One of the first 13 documents in those work papers in Vivian Carlton's 14 work papers is Mr. Bruno's contract. I think 15 you'll find it at Page 128381. 16 Do you see it? 17 A. Well, sorry. 381 is a letter 18 discussing Mr. Bruno. It's not the contract 19 itself, I don't believe. 20 Q. Isn't that a letter agreement? 21 A. It is -- yeah. It says -- I'm sorry. 22 It is a letter that is agreed to and signed by 4835 1 Mr. Bruno. 2 Q. Okay. Now, do you see on the second 3 page that in Mr. Bruno's letter agreement, 4 employment agreement, it says "It is also 5 understood that at your option, United will 6 securitize the assured salary and bonus amounts by 7 a letter of credit." 8 Do you see that? 9 A. Yes, I do. 10 Q. Do you see the initials VC on the 11 bottom of the first page? 12 A. Yes, I do. 13 Q. Okay. Do you recall seeing anything in 14 the records of this case to indicate that Vivian 15 Carlton found that arrangement of securitizing the 16 benefits under the contract in January 1988 to be 17 an unsafe and unsound practice? 18 A. No, I did not. 19 Q. During this time when USAT was 20 suffering severe financial pressure, it was very 21 important that USAT be able to retain a good 22 management team, was it not? 4836 1 A. Yes. 2 Q. And, in fact, one of the primary 3 concerns of the regulators during this time was 4 the problem of management and board turnover; is 5 that correct? 6 A. Well, I believe concern was expressed 7 several ways. Management board turnover was 8 discussed in examination report. There was also 9 expression of concern that they have a chief 10 executive to help manage the institution through 11 their problems, help get them out. 12 Q. But you recall that on several 13 occasions during this time when the compensation 14 committee, in the form of Mr. Whatley, was 15 struggling with the issue of how to deal with the 16 problem of the triggering of the old contracts and 17 the problem of turnover, do you recall that 18 several times the regulators raised the issue of 19 management turnover with USAT? 20 A. Yes, I do. 21 Q. And you remember that it was, in fact, 22 the lead issue in Ms. Carlton's examination report 4837 1 that was delivered in July of 1988, correct? 2 A. Yes. 3 Q. Now, you've testified a number of times 4 about the conflict of interest problem that was 5 caused when UFG and USAT lost almost all of their 6 outside directors, correct? 7 A. Yes. 8 Q. Okay. And do you recall suggesting 9 that one solution would be to have the 10 compensation decisions regarding senior 11 management, at least, reviewed by the regulators? 12 A. I recall discussing that as a possible 13 alternative, I believe. 14 Q. Do you recall seeing in the record that 15 on June 1st, United actually sent the 16 September 1987 contracts to Neil Twomey and said 17 that they were planning to redo those contracts in 18 connection with the hiring of a new executive to 19 help them get into the Southwest Plan? 20 A. Yes, I do. 21 Q. And these were the same September '87 22 UFG contracts that Vivian Carlton had reviewed 4838 1 without comment in her examination, correct? 2 A. I'm not sure which contract -- I don't 3 remember which contracts they were. 4 Q. Okay. Well -- 5 A. You said the letter was dated when? 6 Q. The letter was dated June 1st, 1988. 7 And it -- 8 A. Okay. 9 Q. -- enclosed the executed employment 10 agreements entered into between United Financial 11 Group, Inc. and Mike Crow, Jeff Gray, Jim Jackson, 12 Jim Wolfe, Bruce Williams, and myself. 13 A. Thank you. I wanted to be sure I was 14 remembering the proper contracts. 15 Q. Have you seen any indication that Neil 16 Twomey ever communicated any criticisms of the 17 terms of the September '87 contracts to the people 18 at United after he received those contracts in 19 June of 1988? 20 A. No, I don't recall seeing any 21 criticism. 22 Q. I'm going to ask you to look at 4839 1 Exhibit B2218, please. I believe this is already 2 in evidence. This is a letter from Art Berner to 3 Neil Twomey dated June 1, 1988. And if it's not 4 in evidence, I would offer it at this time. 5 MR. RINALDI: No objection, Your Honor. 6 THE COURT: Received. 7 Q. (BY MS. CLARK) Do you see the 8 second-to-the-last paragraph, Mr. Berner said he 9 was also enclosing copies of the special bonus 10 arrangements entered into between United Financial 11 Group and Messrs. Gross and Crow relating to a 12 note from each of them? 13 A. Yes, I do. 14 Q. And is it your understanding that those 15 special bonus arrangements are the bonus 16 arrangements that you are criticizing in this case 17 relating to the forgiveness of interest on the 18 promissory note for the stock purchase that each 19 of them had with UFG? 20 A. Yes. I believe that he was enclosing 21 some information about those contracts, yes. 22 Q. The letter says it's enclosing copies 4840 1 of the special bonus arrangements. Do you -- 2 A. I don't know what he sent. There were 3 actually four contracts. I don't know if he sent 4 all four or just two of them or what. 5 Q. Have you seen any indication in the 6 record that you have reviewed that Mr. Twomey ever 7 got back to United with any criticism or concern 8 about this special bonus arrangement? 9 A. I don't recall seeing Mr. Twomey 10 criticizing this particular bonus arrangement. 11 Q. Now, you're aware that about four weeks 12 after this letter, Mr. Berner sent Mr. Twomey a 13 copy of a contract that USAT was entering into 14 with its new senior executive officer, Larry 15 Connell, correct? 16 A. Yes. 17 Q. And that Mr. Berner asked Mr. Twomey to 18 review the agreement and let him know if 19 Mr. Twomey saw any problems, major problems? 20 A. Yes. 21 Q. Now, in your opinion, was Mr. Berner's 22 letter a sort of casual request for advice; or was 4841 1 it really a request for approval of that contract? 2 A. I consider Mr. Berner's request -- his 3 presenting the contract to the regulators a chance 4 to object to the contract if they wanted and 5 effectively the same thing as asking for approval. 6 Q. Now, did you see in the record that you 7 reviewed any indication that Mr. Twomey got back 8 to USAT with any concerns about the Connell 9 contract in the weeks after he received the 10 contract in June or July? 11 A. I don't recall Mr. Twomey criticizing 12 the contract. He had other criticisms of other 13 contracts, but I don't recall him criticizing that 14 one at all. 15 Q. He didn't criticize the Connell 16 contract? 17 A. The Connell contract specifically, I do 18 not recall him criticizing. 19 Q. He didn't get back to him, did he? 20 A. I don't recall seeing anything where he 21 responded to him. 22 Q. So, in your view, that would constitute 4842 1 basically a consent to the contract. Right? 2 MR. STEARNS: Objection, Your Honor. 3 That calls for a legal conclusion. There is no 4 evidence in the record whatsoever as to whether or 5 not there was an actual consent, and she's asking 6 for an implication which draws a legal conclusion. 7 THE COURT: All right. Without 8 expressing a legal conclusion, what is your 9 general opinion? 10 THE WITNESS: I saw no evidence that 11 Mr. Twomey ever objected to it. Either there is 12 some omission in the record or Mr. Twomey just did 13 not act. The association, in that situation, 14 would probably presume that he had, in fact, 15 acquiesced to the contract. 16 Q. (BY MS. CLARK) Now, even though he 17 didn't get back to USAT, did Mr. Twomey ask for a 18 legal review of the contract shortly after he 19 received it? 20 A. I believe he did, yes. 21 Q. And let me ask you to look at 22 Exhibit B2313, which I believe has previously been 4843 1 admitted in evidence as T8090. 2 Mr. Dermody, do you recall reviewing 3 this document in the course of your work on the -- 4 on this case? 5 A. Yes. I recall that I reviewed it. 6 Q. And is this the legal review that 7 Mr. Twomey requested of the Connell contract? 8 A. I don't recall any other legal review. 9 I have to assume this was the response to him. It 10 is addressed to him from one of the attorneys; so, 11 given that there's nothing else, I presume this is 12 it. 13 Q. Now, you saw when you reviewed this 14 document, did you not, that the legal review did 15 raise some questions about the contract but it did 16 not conclude that the contract was unsafe and 17 unsound? 18 A. That's correct. 19 Q. Do you recall that? That's correct. 20 A. All right. I don't recall -- without 21 having reading it again, I don't recall having any 22 conclusion it was unsafe and unsound. 4844 1 MS. CLARK: I'm not sure if this 2 document is in evidence, Your Honor. So, let me 3 offer it at this time. Exhibit B2313. 4 THE COURT: Received. 5 Q. (BY MS. CLARK) Now, there is nothing 6 in this legal review that indicates that it is, 7 per se, unsafe and unsound to offer severance 8 benefits of two times annual salary and bonus at a 9 time when the institution is failing its net worth 10 requirement, is there? 11 MR. STEARNS: Your Honor, I'll object. 12 The document will speak for itself. He's 13 indicated he has not read it recently, and she's 14 asked what the contents of the document are. 15 THE COURT: I'll sustain the objection. 16 Q. (BY MS. CLARK) Was it your 17 understanding when you reviewed this document, 18 Exhibit B2313, Mr. Dermody, that the regulators 19 had formed the opinion that the provision of two 20 times annual salary and bonus was an unsafe and 21 unsound practice? 22 A. Would you repeat the question again? I 4845 1 want to make sure I -- 2 Q. Did you understand this legal review 3 when you reviewed it yourself to have concluded 4 that the provision of severance in an amount equal 5 to two times the annual salary and bonus was an 6 unsafe and unsound practice? 7 A. Without reviewing it right now, I do 8 not recall any conclusion to that effect. 9 Q. And the same would be true for the 10 arrangement whereby the severance benefits would 11 be securitized. Is that true? 12 A. That is correct. 13 Q. Now, you are aware, are you not, that 14 Mr. Connell's contract was in the same form that 15 was offered to the other key executives at USAT 16 which you've also reviewed; is that correct? 17 A. Yes, that's correct. 18 Q. Did you include Mr. Connell's contract 19 in your chart over there? 20 A. No. And there is a key reason why I 21 didn't include his contract and some others. 22 May -- I think to answer that, the contract of 4846 1 Mr. Connell and some of these other individuals 2 we're talking about in prior periods were 3 specialists being brought in -- outsiders being 4 brought into the institution that they needed. 5 The regulators were telling United Savings, "You 6 need a strong executive manager to help you get 7 out of your situation. There's a question whether 8 or not you have it internally." Some of these 9 other people are key people they have to buy -- 10 well, maybe that's not the right term. Key people 11 they have to hire to perform critical functions of 12 the institution. They are outsiders coming into 13 the institution. That is a key critical 14 difference. 15 In the case of Mr. Connell, the 16 regulators looked at this and apparently took no 17 objection to the contract. Yes, it has certainly 18 the same form, a lot of the same provisions. The 19 key feature is they needed them. They went 20 through the process -- which they knew how to do, 21 obviously, since they did it with Mr. Connell -- 22 of getting these contracts reviewed and at least 4847 1 to the point of not getting an objection. 2 The contracts I've criticized were 3 insiders, and it's in a situation -- same 4 circumstances where they should have been having 5 some type of review and a different type of 6 analysis performed and they didn't do it. 7 What I'm saying is it was not unsafe and 8 unsound to have a contract like Mr. Connell's 9 because they needed him. The regulators were 10 telling them to do it; and the regulators 11 basically said -- they didn't say, "We like it," 12 they didn't tell them "no," and they are willing 13 to accept it because of the need of the 14 institution. 15 Well, I won't say what their conclusion 16 was, but they did accept it. 17 Q. So, it's your -- it's your 18 understanding that Mr. Connell's contract was 19 subjected to sort of a different standard because 20 it had been submitted to the regulators and 21 because he was an outsider who was coming in. 22 Is that your understanding? 4848 1 A. I don't know if it was a different 2 standard. The review was looking at the situation 3 saying we have an institution. It's in serious 4 financial difficulties and needs management. In 5 the interest of the insurance corporation, because 6 it's highly likely that the FSLIC will have to pay 7 the cost of a failure, is this in the FSLIC's best 8 interest even though it may be -- as Mr. Munitz 9 points out, there may be some other provisions 10 there that would normally be objectionable. 11 So, on that basis, I think it's clear 12 from her review she did look at some of these. 13 And these are the concerns we would normally 14 raise, but do we have an issue that the insurance 15 corporation might be better off with this 16 contract. And I think the decision was to let 17 this contract stand with Mr. Connell. Obviously, 18 he was employed and he worked there for some 19 period of time. 20 Q. So, for those reasons, Mr. Connell's 21 contract was subjected to different standards than 22 would be applicable to the -- substantially the 4849 1 same form contracts that were offered to the other 2 USAT officers at the same time; is that right? 3 A. I'm not sure "different standard." 4 Certainly analyzed and reviewed, but analyzed in 5 light of some other factors that the agency felt 6 were important and a decision -- the analysis 7 rested on some other factors besides just the 8 standard of what we wanted in the contract. 9 So, I think it's a misstatement to say 10 it was an entirely different standard. 11 Q. And you believe that's what 12 Mr. Twomey -- that's the reason why Mr. Twomey 13 didn't get back to USAT with an objection to the 14 contract? 15 A. I don't know. As we said earlier, I 16 wasn't there. I wasn't a party to this 17 transaction. But based on my experience of how 18 the system operated and what we were doing, what 19 we were looking for here, I'd say that's a 20 reasonable assumption. 21 Q. So, we treated the Connell contract 22 differently from all the others for the reasons 4850 1 you've described? 2 A. He would have -- the result would have 3 been different because of the reasons I described. 4 The review should have at least -- and I believe 5 did cover some of the same bases that I covered. 6 Q. Now, in fact, when Mr. Twomey did get 7 around to communicating some criticism to USAT of 8 its employment or his compensation practices, he 9 did not leave out the Connell contract from his 10 criticism, did he? 11 A. As I said, I don't recall if he had any 12 criticism of the Connell contract. If you want to 13 show me a letter that includes Connell, I'm 14 willing to admit that if he did, in fact, 15 criticize Connell. I just don't remember that he 16 did. 17 Q. Take a look, if you would, at 18 Exhibit T8111 which was received in evidence this 19 morning. It's the October 27 letter to the board 20 of directors from Mr. Neil Twomey. Look the first 21 paragraph if you will, please. And see if you can 22 determine whether Mr. Connell's contract was 4851 1 treated any differently from all the other 2 contracts that were entered into with the USAT 3 officers that you are criticizing in this case 4 now. 5 A. Well, Mr. Connell's contract is 6 mentioned -- if I may quote and leave a few names 7 out that don't seem to be necessary here -- "We 8 have reviewed the employment contracts entered 9 into with various members of the senior management 10 including Jenard Gross, Lawrence Connell, Berner, 11 Crow, Gray, Jackson," and so forth. 12 And he says "Each and every one is found 13 to be in violation of 563.39." Okay. Excessive 14 compensation, severance payments, execution at a 15 time when United was approaching or had actually 16 reported insolvency. 17 It goes on further in Paragraph 1 to say 18 "immediate 65-day notice" to the whole series of 19 individuals, but Mr. Connell is not included in 20 that notice. 21 So, while they are saying it's unsafe 22 and unsound in these things, he's not included in 4852 1 this notice. And to say make no more -- contract 2 cannot be extended beyond this date. 3 Q. But he's not singled out for special 4 treatment when it comes to unsafe and unsound, is 5 he? 6 A. No. He's included in the list of 7 people whose contracts are unsafe and unsound. 8 Q. So, as far as Mr. Twomey was concerned, 9 at the time, he didn't think the Connell contract 10 was subject to any different safety and soundness 11 rule, did he? 12 A. Well, included in his list of ones that 13 were unsafe and unsound. 14 MS. CLARK: Thank you, Mr. Dermody. 15 MR. BLANKENSTEIN: Your Honor, I have 16 some cross-examination. 17 THE COURT: All right. 18 Mr. Blankenstein, you may cross. We'll be off the 19 record. 20 21 (Discussion off the record.) 22 4853 1 THE COURT: We'll be back on the 2 record. 3 4 CROSS-EXAMINATION 5 6 (4:21 p.m.) 7 Q. (BY MR. BLANKENSTEIN) Good afternoon, 8 Mr. Dermody. My name is Paul Blankenstein, and I 9 represent Jenard Gross. I'd like to ask you a few 10 questions relating to Mr. Gross and your opinion 11 that you have provided here with regard to 12 Mr. Gross. A few preliminary questions, if I 13 could. 14 You are an OTS employee; is that 15 correct? 16 A. That is correct. 17 Q. And you are paid by OTS? 18 A. Yes, I am. 19 Q. And you've testified in the past as an 20 expert on behalf of OTS? 21 A. Testified as an expert at the request 22 of the Justice Department, obviously representing 4854 1 the OTS. So, in a sense, it's both of the 2 agencies wanted me to testify. 3 Q. Approximately how many times have you 4 testified? 5 A. Well, quickly, testified, I believe, in 6 '84 on a change of control case. Testified in two 7 trials as basically a fact witness. I've -- 8 Q. As an expert, how many times have you 9 testified? 10 A. I'm trying to think -- get through 11 that. An expert witness in a criminal trial in 12 '83. I'm scheduled to go back for the second 13 trial on Monday as an expert witness. I've been 14 asked to be prepared to testify but I don't recall 15 testifying in a couple other trials as an expert 16 witness. 17 Q. Excuse me? 18 A. I was asked to be prepared to 19 testify -- and I was to the point of actually 20 appearing, but I don't recall testifying -- at at 21 least two other trials. 22 Q. Have you ever testified or been 4855 1 qualified as an expert on issues of safety and 2 soundness? 3 A. Not specifically safety and soundness, 4 those issues, no. 5 MR. BLANKENSTEIN: Your Honor, I'm 6 going to ask Mister -- begin asking Mr. Dermody 7 some questions about the 1987 bonus agreement -- 8 excuse me -- bonus payment. In that connection, 9 we had an objection. I don't want my questioning 10 of Mr. Dermody to be -- constitute a waiver of 11 that objection or some implied consent that any 12 issues in regard to the 1987 bonus are being tried 13 in this case without our objection. 14 THE COURT: All right. 15 MR. BLANKENSTEIN: Thank you. 16 Q. (BY MR. BLANKENSTEIN) If I understand 17 your testimony correctly, Mr. Dermody, it's not 18 that Mr. Gross' bonus, which was $235,000 in 19 nineteen -- for work done in 1987; is that right? 20 A. I'm sorry. 21 Q. It was $235,000; is that right? 22 A. Yes. That's my understanding. 4856 1 Q. You're not testifying that that was an 2 unreasonable bonus; is that correct? 3 A. I think I've tried to make it pretty 4 clear. I'm not testifying about whether or not an 5 amount was reasonable. Simply that the process 6 was unreasonable and unsafe and unsound. 7 Q. And the process that you criticized was 8 two components, as I understand it. One, that 9 there was not sufficient recognition of the net 10 worth deficiency of USAT; is that correct? 11 A. Correct. 12 Q. And the other was that Mr. Gross voted 13 on his own bonus payment; is that right? 14 A. Correct. 15 Q. Now, we've established, I think through 16 Mister -- Ms. Clark's questioning, that USAT at 17 the time of the 1987 bonuses, when they were 18 awarded, was composed of six directors; is that 19 right? 20 A. We didn't establish the number, but it 21 was certainly more than the ones I've discussed in 22 the past. 4857 1 MR. BLANKENSTEIN: Why don't we take a 2 look at T8003, which is already in evidence, Your 3 Honor. 4 Q. (BY MR. BLANKENSTEIN) Have you ever 5 reviewed this document before, Mr. Dermody? 6 A. Yes, I have. 7 Q. And it lists the directors of United 8 Savings Association of Texas; is that correct? 9 A. Yes, the first page. The second page 10 lists the directors of United Financial Group. 11 Q. Focusing on United Savings Association 12 of Texas, it lists the names of the directors; is 13 that correct? 14 A. Correct. Names of directors and 15 basically their tenure. 16 Q. The date they were first elected? 17 A. The year they were first elected and 18 the date they resigned. 19 Q. Okay. And if you can look -- let's 20 look at the directors who were serving as of 21 November 1987. Mr. Keltner was serving as a 22 director; is that right? 4858 1 A. Yes. Mr. Keltner was serving as a 2 director. 3 Q. He was an outside director, correct? 4 A. To my knowledge, he was, yes. 5 Q. Mr. Kozmetsky was serving as a director 6 in November 1987; is that right? 7 A. Yes, he was. Well, yes. I'm sorry. 8 He was. November 1987 with a resignation sometime 9 in the next two months. 10 Q. Now, Mr. Silverman was serving as a 11 director in November of 1987? 12 A. Yes, he was. 13 Q. And Mr. Kozmetsky and Mr. Silverman are 14 outside directors; is that right? 15 A. To my knowledge, they were, yes. 16 Q. And Mr. Whatley was serving as a 17 director of USAT in November 1987? 18 A. Yes, he was. 19 Q. And he's an outside director? 20 A. Yes. 21 Q. Mr. Jenard Gross was serving as a 22 director of USAT in 1987; isn't that right? 4859 1 A. Yes, he was. 2 Q. And he's an inside director? 3 A. Correct. 4 Q. And Mr. Barry Munitz was serving as a 5 director of USAT in 1987 and he's an inside 6 director; is that right? 7 A. Correct. 8 Q. So, the lineup was four outside 9 directors and two inside directors; isn't that 10 right? 11 A. Well, I'm counting seven directors. 12 Let's go over it again. Whatley -- 13 Q. Keltner, Kozmetsky, Silverman, Whatley, 14 Gross, and Munitz. 15 Do you see any others? 16 A. Well, I had Sterling, who resigned in 17 November of '87. 18 Q. No. He resigned according to -- 19 November 10th, 1987, the date of the meeting. So, 20 I'm not including him in -- 21 A. Okay. 22 Q. But if he was included, he would be an 4860 1 outside director; isn't that right? 2 A. Yes. 3 Q. So, it's either four or five outside 4 directors and two inside directors? 5 A. Correct. 6 Q. If Mr. Gross and Munitz had absented 7 themselves from the meeting of November 10th, 8 1987, when their bonuses were voted, there would 9 have been no change in the outcome -- isn't that 10 right -- because the agreement of the directors 11 was unanimous to the compensation committee's 12 recommendation; is that right? 13 A. Yes. 14 Q. So, it would have effected absolutely 15 no change. The fact that they voted effected 16 absolutely no change in the outcome; is that 17 right? 18 A. Had they not voted, the vote still 19 would have been sufficient to pass it. 20 Q. And the four outside directors who 21 voted in favor of the bonus, you have no evidence 22 that they were not sufficiently independent, that 4861 1 they didn't exercise their independent judgment in 2 deciding to award the bonuses that were granted on 3 November 10th, 1987; isn't that right? 4 A. That's correct. 5 Q. Why don't you take a look, if you 6 would, first at the compensation committee meeting 7 minutes of November 10th. 8 MR. BLANKENSTEIN: And, Your Honor, I 9 believe that's in evidence as T8027. I think you 10 should have a copy of it before you. 11 A. With this large stack -- 12 Q. (BY MR. BLANKENSTEIN) We'll supply 13 you with a copy of it, Mr. Dermody. 14 A. Thank you. 15 Q. Now, if we focus on the last paragraph 16 on the first page, it describes the reasons that 17 the directors -- excuse me -- that the members of 18 the compensation committee decided to recommend 19 the approval of the bonuses that were award that 20 had day; is that right? 21 A. That's correct. 22 Q. And among those reasons was that many 4862 1 of the key employees who were receiving bonuses 2 had been doing extra work because other executives 3 had terminated their employment or had otherwise 4 left the institution; is that right? 5 A. Yes. Yes, that is part -- 6 Q. And they wanted to bring up the 7 compensation of the executives to market levels; 8 is that right? 9 A. Yes. 10 Q. And if you take a look at the minutes 11 of the November 10th board of directors meeting, I 12 think you reviewed those with Ms. Clark. 13 A. Yes. I believe I did. 14 Q. They recite the same reasons. 15 MR. BLANKENSTEIN: Your Honor, this is 16 in evidence as T8028. 17 Q. (BY MR. BLANKENSTEIN) Why don't I 18 just provide with you a copy? 19 A. Would you, please? Thank you. 20 Q. And if you look on the second page -- 21 MR. RINALDI: What document is this? 22 MR. BLANKENSTEIN: T8028. 4863 1 Q. (BY MR. BLANKENSTEIN) It's the board 2 of directors meeting of USAT on November 10th, 3 1987. Now, if you look on the second page, 4 Mr. Silverman, who is a member of the compensation 5 committee, wasn't he? 6 A. Yes, that's correct. 7 Q. And he recites the very same reasons 8 again; isn't that right? 9 A. Yes. 10 Q. Now, were you aware that Mr. Gross took 11 on substantial duties starting in 1987 in addition 12 to his duties as chairman and CEO of United 13 Savings Association of Texas? 14 A. I'm aware that there was an increase in 15 duties, yes. 16 Q. And he became president of the 17 association starting January 7th, 1987; isn't that 18 correct? 19 A. I don't recall exact date. I know he 20 did have a change in title. 21 Q. It was in the early part of January, 22 was it not? 4864 1 A. As I said, I do not recall the date. 2 Q. Why don't we take a look at the 1987 3 proxy statement which has been admitted into 4 evidence as A3014. Why don't you take a look on 5 Page 6. See the paragraph that begins "Mr. Gross 6 was elected --" 7 A. Yes, I do. 8 Q. -- "president and chief executive 9 officer of the company on November 14th, 1985." 10 A. Yes. 11 Q. "Has been chairman of the board of 12 United Savings Association of Texas since 13 February 1985 and president of USAT since 14 January 8th, 1987." 15 A. Yes. I see that. 16 Q. Does that refresh your recollection 17 that Mr. Gross began -- assumed these additional 18 duties in the early part of January 1987? 19 A. Yes. 20 Q. Do you remember who Mr. Gross succeeded 21 as the president of USAT? 22 A. I don't remember. I don't remember the 4865 1 specific individual's name. There were a couple 2 names, and I don't remember which one was which. 3 Q. Why don't you take a look at Page 9. 4 You see under the list of officers there, 5 Mr. Gerald R. Williams? 6 A. Yes. 7 Q. Does it indicate that Mr. Williams had 8 been president of United Savings Association of 9 Texas? 10 A. Well, on that line, they list him as 11 executive vice president. 12 Q. And president of USAT? 13 A. I'm sorry, yes. Executive VP of the 14 company. President of USAT. 15 Q. And the company being referenced there 16 is UFG, not USAT. Right? 17 A. Correct. 18 Q. Now, how much was Mr. Williams earning? 19 What was his total cash compensation -- 20 A. Well -- 21 Q. -- as president of USAT for the 22 calendar year 1986? 4866 1 A. This part on the same page we are 2 discussing shows him as exec VP and president -- 3 exec VP of UFG and president of USAT, showed him 4 making $389,000 plus. 5 Q. And do you know whether he was -- where 6 the bulk of that compensation was provided? Was 7 it provided by USAT or by UFG? 8 A. I don't know. 9 Q. Do you know what Mr. Williams' base 10 salary was? 11 A. No, I don't recall. 12 Q. Take a look on Page 10, please. Do you 13 see that Mr. Williams' base salary was $242,000? 14 A. I'm sorry. It started out at $200,000 15 and -- I'm sorry. Yes. I see where it was 16 increased to 242,000. 17 MR. RINALDI: Is this 800 -- which 18 document are you reading from? 19 MR. BLANKENSTEIN: This is A3014, the 20 1987 proxy statement of UFG. 21 MR. RINALDI: I'm sorry. I had the 22 wrong one. 4867 1 MR. BLANKENSTEIN: It's also T8001. 2 MR. RINALDI: Yes. I had 02. 3 Q. (BY MR. BLANKENSTEIN) Mr. Gross 4 carried out duties of president in addition to 5 his -- the duties of chairman of USAT and chief 6 executive officer throughout 1987; isn't that 7 correct? 8 A. I believe so, yes. 9 Q. Is it your opinion that the safety and 10 soundness rules would preclude USAT from 11 compensating Mr. Gross for the additional 12 substantial duties he assumed as president of the 13 association? 14 A. I think I've tried to be pretty clear 15 that I'm not -- have not discussed specific 16 individuals' compensation. I've been discussing 17 the process and how this whole thing was derived 18 at. So, I'm not saying there was or was not a 19 possibility of Mr. Gross receiving his money. 20 Simply, this whole process was defective and 21 unsafe and unsound. Not opining about what the 22 level of pay should have been for an individual. 4868 1 Q. I'm not asking about the level of pay. 2 I'm asking you: Was it unsafe and unsound, given 3 the net worth condition of USAT in November of 4 1987, for the board of directors, the outside 5 directors of USAT, to compensate Mr. Gross for his 6 performance as president of USAT for the period -- 7 for the year 1987 in any amount -- 8 A. Well -- 9 Q. -- or were they required simply to pay 10 him $291,656? 11 A. They were paying him -- to make a 12 judgment about -- in November of '87 when they 13 were having the net worth deficiency, failing net 14 worth of the institution, at this stage of the 15 game, this point in time, because of the 16 institution's condition, the payment of these 17 additional funds is what I'm saying is unsafe and 18 unsound. 19 So, in answer to your question, had they 20 done something in January, I would not be 21 objecting to increased salary to Mr. Gross. But 22 doing it at the time they did in November is 4869 1 what's caused me concern. 2 Q. So, your testimony would be if they 3 increased his salary to $291,657, that would be an 4 unsafe and unsound condition -- is that right -- 5 given the circumstances at the time? 6 A. That's carrying it to a bit of an 7 extreme but -- 8 Q. Is that your position? 9 A. My position is that the process in 10 which they entered into these changes was unsafe 11 and unsound. 12 Q. So, it was -- 13 A. I don't want to argue about a dollar, 14 something like that; but that's an unsafe and 15 unsound process. 16 Q. So, it was improper for the outside 17 directors to recognize Mr. Gross' performance and 18 his additional duties throughout 1987; is that 19 right? 20 A. I'm saying at this stage and time, it 21 was inappropriate to undertake the compensation 22 changes that they did: The bonus and later the 4870 1 salary increases. So, yes, it was improper to do 2 it. 3 Q. And you had two reasons. One, that 4 Mr. Gross had voted on his own bonus; is that 5 right? 6 A. I said that Mr. Gross had a conflict of 7 interest in voting his own bonus. 8 Q. But you've already testified that even 9 had Mr. Gross absented himself from the process, 10 he would have gotten the same bonus in 1987; isn't 11 that right? 12 A. I'm saying all else being equal, had he 13 absented himself, it's clear that if these people 14 voted the same, he would have gotten the same 15 amount, correct. 16 Q. And the other concern that you had, if 17 I remember right, was that it was an insufficient 18 recognition by the directors of USAT of the net 19 worth condition in the November 10th, 1987, board 20 of directors meeting when they approved the 21 bonuses recommended by the compensation committee? 22 A. I'm saying it was insufficient 4871 1 recognition of a net worth condition. They at 2 least said there was some possibility for 3 adjustment or whatever whenever it was time to be 4 paid. At that time, there was then no further 5 analysis that I could determine about the net 6 worth condition or what impact it would have on 7 the institution. So, it was an improper process 8 then and even at the time it was paid, as well. 9 Q. Well, take a look at the November 10th 10 meeting. Take a look at the fourth paragraph. 11 A. Which meeting? 12 Q. November 10th, 1987 meeting of the 13 board of directors. 14 A. Thank you. 15 Q. Take a look at the fourth paragraph. 16 It says that Mr. Crow reviewed the financial 17 statements of the association; is that right? 18 A. Yes, it does. 19 Q. And did you determine which financial 20 statements Mr. Crow presented to the board of 21 directors at the time? 22 A. Well, I believe Mr. Crow, in his 4872 1 deposition, stated that he presented the net worth 2 position to the board and the board requested 3 that. I don't recall exactly what time; but I 4 believe during this time period, this was 5 something they were requesting be reported to 6 them. 7 Q. Take a look at what has been marked as 8 T8024. I think it was admitted into evidence 9 yesterday. 10 Do you have a copy of it? 11 A. No. If it was yesterday, I don't have 12 it with me here. 13 Q. This is the statement that you 14 testified to yesterday that demonstrated to you 15 the net worth condition of the institution? 16 A. The net worth -- the equity position of 17 UFG and a discussion of the net worth -- the 18 meeting or failing to meet the net worth 19 requirement of USAT. 20 Q. And you testified yesterday that this 21 showed to you that there was a serious net worth 22 problem? 4873 1 A. It showed me there was a serious 2 difference of opinion and that if the examiners 3 are correct -- which they later, I believe, prove 4 to be -- that there was a net worth deficiency at 5 this stage in time. 6 Q. So, the directors of USAT on 7 November 10th, 1987, had that very information; 8 isn't that right? 9 A. I don't know if they got this 10 information. This is UFG information. I don't 11 know what Mr. Crow gave to them. I do know that 12 he said he gave them some information about the 13 net worth. So, I don't want to argue; but I'm 14 just saying I don't know that this was it. I'm 15 assuming that he did give them some information. 16 Q. Did you have an opportunity to review 17 the minutes, including all of the exhibits 18 attached to those minutes, of the November 10th, 19 1987, board of directors meeting? 20 A. I don't recall reviewing a whole series 21 of attachments that were specifically identified 22 as being part of that meeting. 4874 1 MR. BLANKENSTEIN: Well, I have here 2 the board book for the November 10th, 1987 3 meeting. It's a massive document. To protect the 4 record which is already voluminous, I don't intend 5 to move it into evidence. But I'd just like to 6 show Mr. Dermody an attachment to that -- to the 7 minutes of that meeting and see if he can -- if we 8 can agree that the -- what is now in evidence as 9 T8024 was an attachment to that board meeting. 10 A. Yes. In fact, it appears to be 11 certainly a better copy than I've ever had; but it 12 does appear to be the same document. 13 Q. (BY MR. BLANKENSTEIN) So, the board 14 of directors of USAT -- 15 MR. BLANKENSTEIN: Let me identify that 16 as A1142 for the record, Your Honor. 17 Q. (BY MR. BLANKENSTEIN) So, the board 18 of directors at the November 10th meeting had that 19 very information about the net worth condition of 20 USAT; isn't that right? 21 A. If that's the board package, yes, they 22 had that information available to them. 4875 1 Q. And they made a decision that the 2 institution needed the continuity of management; 3 isn't that right? 4 A. They discuss the need for the 5 continuity of management. 6 Q. And that continuity -- I'm sorry. 7 A. I'm sorry. Yes. They used that as a 8 rationale and said that "this is what we need to 9 do." 10 Q. And that was -- and they needed that in 11 order to deal with the very problem of the net 12 worth deficiency that was presented them at that 13 meeting; isn't that right? 14 A. Well, I don't recall them saying that 15 that was the reason. They had other reasons about 16 maintaining management and everything else. They 17 did not address specifically that point, but they 18 did address the other ones. 19 Q. Well, did you see that point made 20 elsewhere? I'm sorry. Go ahead. 21 A. Go ahead. 22 Q. No. You were going to say something? 4876 1 A. They just didn't say that they were 2 doing this because they needed to address the net 3 worth failure. 4 Q. But you would agree, would you not, 5 that the need to have a stable management was 6 important in difficult times that USAT was facing? 7 A. The need to have competent management 8 and to have some stability of management was 9 something that was necessary. 10 Q. And you made no assessment of the 11 competency of any of the managers of USAT? 12 A. I think we've discussed this already. 13 Q. And -- 14 A. Correct. I did not. 15 Q. And the board of directors made a 16 judgment with respect to the capability and the 17 performance of the managers of USAT at that 18 November 10th, 1987, meeting, didn't they? 19 A. From the record, I have to assume that 20 that's some of what they did. 21 Q. And with regard to Mr. Gross, they 22 decided that he was entitled to a bonus of 4877 1 $235,000; isn't that right? 2 A. They, yes, determined that his bonus 3 should be 235,000. 4 Q. And some of that was to reward him for 5 the substantial additional duties he had assumed 6 as president of USAT in 1987; isn't that right? 7 A. I don't recall. What we've discussed 8 has identified Mr. Crow as being the one that was 9 the cause of that -- the base of that rationale. 10 But certainly -- 11 MR. RINALDI: Do you mean Mr. Gross? 12 A. Mr. Gross. I'm sorry. I don't recall 13 that they specifically said "We're addressing this 14 for Mr. Gross because of that reason." But 15 certainly there is an implication there of that. 16 I'm willing to say it said the executives had 17 taken on new duties. Certainly, Mr. Gross had 18 taken on new duties. So, I just presume that 19 applies to him. 20 Q. (BY MR. BLANKENSTEIN) Okay. Now, you 21 still believe that Mister -- that it was an unsafe 22 and unsound practice for the outside directors to 4878 1 award Mr. Gross a bonus of $235,000? 2 A. Yes. 3 Q. It's not because the process was 4 tainted by the vote of the inside directors being 5 determinative of the award of that bonus; isn't 6 that right? 7 A. Certainly that Mr. Gross' vote did not 8 make the determination of this. I'm saying it is 9 an issue that is there, but it is not this 10 positive one that makes or breaks this safe and 11 sound. 12 Q. And on the issue you identified, which 13 is that they didn't have sufficient information 14 with regard to the net worth circumstance of the 15 institution in November of 1985, we've shown that 16 they had the very information that you testified 17 to that you relied upon to show what the condition 18 of the institution was; isn't that right? 19 A. I think I said that they did not 20 address the issue of the net worth. What we've 21 just discussed here is that they had the 22 information. But did they specifically discuss 4879 1 the net worth as a basis for using it in 2 determining their decision? So, I think there is 3 a little bit of a distinction. They had the 4 information available, but did they use it as a 5 basis for their decision -- 6 Q. The information -- 7 A. -- specifically. 8 Q. -- was presented to them? 9 A. Yes. 10 Q. They spoke about, I think, the 11 operations of -- in light of the operations of the 12 company and the operating loss, and you don't 13 believe that's a reference to the financial 14 condition of the company? 15 MR. STEARNS: Your Honor, we seem to be 16 beating this topic quite a bit. This question has 17 been asked at least four times by 18 Mr. Blankenstein. 19 THE COURT: Well, we'll have one more 20 time. 21 A. Okay. Please repeat it again, 22 Mr. Blankenstein. 4880 1 MR. BLANKENSTEIN: I'll move on, Your 2 Honor. 3 Q. (BY MR. BLANKENSTEIN) If, instead of 4 assigning the duties to Mr. Gross as president in 5 1987, the end of 1987, USAT would have hired an 6 outsider to assume those duties and paid him 7 $235,000 that year, you would have -- you would 8 have found no problem with that decision; is that 9 right? 10 A. Well, I did not evaluate that 11 particular situation; but in the light of all the 12 circumstances, if they needed that particular 13 individual and, by the end of the following year, 14 they did have someone like Mr. Connell at which 15 point Mr. Gross left, that if they needed that 16 individual, that position filled, then I evaluate 17 it on the basis as I have done as I've discussed 18 recently about Mr. Connell's contract and others. 19 Q. So, the answer is that if they had 20 hired an individual in January of 1987 to serve as 21 president, they may have properly paid him 22 $235,000; isn't that correct? 4881 1 A. I'm sorry. You added, I think, January 2 of 1987. Yes. 3 Q. There were no differences in the 4 financial circumstances of the institution; isn't 5 that right? 6 A. That's correct. You said there was no 7 differences when? 8 Q. In the financial circumstances of the 9 institution at year end 1987. 10 MR. STEARNS: Excuse me. I think your 11 earlier question was January of 1987. Is that 12 what you meant? 13 Q. (BY MR. BLANKENSTEIN) Had they hired 14 a different individual, an outsider, in January of 15 1987 and paid him $235,000 for that year, the 16 financial situation of the institution at year end 17 1987 would have been identical. Right? 18 A. No. They didn't pay the $235,000 till 19 1988. 20 Q. Well, if they would have delayed that 21 and paid that individual a lump sum payment on 22 January 4th, 1988, the financial circumstances 4882 1 would have been identical; isn't that right? 2 A. That is correct. 3 Q. But you have no problem with that? 4 A. I just said that I would evaluate that 5 on the basis of how it was arrived at, but 6 certainly -- I'm sorry. If he was hired in 7 January of 1987, I would have no problem with 8 that. 9 Q. But they paid him nothing during that 10 year and they paid him all in January of 1988 11 after the net worth deficiency occurred, would you 12 have a problem with that? Would that be unsafe 13 and unsound condition? 14 A. I will have to assume that they had 15 some kind of an arrangement with him that that was 16 part of the arrangement when he was hired they 17 were doing that. And if I can posit that, then 18 yes, I would have no problems with the payment on 19 that basis. 20 Q. But you would have a problem if they 21 paid Mr. Gross that amount of money for the work 22 he did during that same period of time? 4883 1 A. I have a problem for paying Mr. Gross 2 in the manner in which they arrived at it. 3 Q. And so, if they arrived at it in 4 January, it would have been okay. If they arrived 5 at it in November, it's not okay? 6 A. The circumstances of the institution 7 were substantially different from the point of 8 view of the directors in January of '87 versus 9 November of '87. So, yes, if they had done it in 10 January, I would not have had an objection to it. 11 Q. Let's talk about 1988 compensation that 12 Mr. Gross received. Now, the chart that you have 13 in front of you overstates Mr. Gross' compensation 14 by one month, doesn't it? 15 A. I'm sorry. For 1988? 16 Q. For 1988. 17 A. Yes. I believe it's one month. I 18 don't have accurate enough figures to say one 19 month, but approximately one month. 20 Q. About $458,000 is what he received? 21 A. No. I think 458,000 would make it 22 about $40 some thousand a month. So, if he only 4884 1 received 11 months, he would have received about 2 410, something like that. I'm sorry. No. 12 -- 3 that's almost $40,000 a month at the 458. So, if 4 I may round it up to $40,000, it would have been 5 closer to 410 or 415. 6 Q. $460,000 would have been his total 7 compensation? 8 A. I've not done the math, but that's 9 approximate. 10 Q. About $10,000 more than he received in 11 1986? 12 A. Yes. 13 Q. And part of Mr. Gross' compensation 14 for -- 15 A. Excuse me. 1986? This was not paid in 16 1986. This was received -- 17 Q. For work done in 1986. 18 A. The way you are to determine this, yes, 19 it's reflecting 1987 bonus. 20 Q. Is the '86 bonus -- 21 A. I'm sorry. 1986 bonus but, as we said, 22 it's a discretionary bonus. 4885 1 Q. $41,750 of Mr. Gross' compensation in 2 1988 was in addition to his base salary; is that 3 correct? 4 A. Yes. That was the executive bonus. 5 Q. And you've concluded that the executive 6 bonus -- the payment of the executive bonus 7 constituted an unsafe and unsound condition? 8 A. An unsafe and unsound practice, yes. 9 Q. Are you aware of any other opinions on 10 that very issue? 11 A. It's late in the day. I don't recall 12 anything right now. 13 Q. Are you familiar with the Texas 14 Commerce Bank case? 15 A. Refresh my memory what that is. 16 Q. It's a decision by a federal district 17 court judge who, I think, is housed in this 18 building. 19 A. Are we talking about the decision 20 regarding the -- one of the compensation group 21 packages for the employees? 22 Q. Yes. 4886 1 A. This is where the FDIC was going after 2 it. 3 Q. In fact, the very compensation program 4 that you've concluded constitutes an unsafe and 5 unsound practice; is that right? 6 A. Yes. But I think I also made some 7 comments earlier. If I didn't -- 8 Q. Is that right? 9 A. Yes. That is the same plan. 10 Q. And did -- did you review -- in 11 arriving at your decision, did you review 12 Judge Hughes' opinion? 13 A. Yes, I did. 14 Q. And did Judge Hughes find that it was 15 not an unsafe and unsound practice? 16 A. Yes. That was Judge Hughes' finding. 17 Q. And did you take that into 18 consideration? 19 A. Yes, I did. 20 Q. And did you dismiss it? 21 A. I did not dismiss it. I felt that 22 Judge Hughes, from the record I was able to see, 4887 1 was not aware of a number of things. He was not 2 aware of the fact that these -- there were 3 several -- 1987 bonus was made, the salary was 4 increased by the amount of the 1987 bonus to 5 increase this. They had had -- with the 6 retroactive and that these funds were paid prior 7 to the approval by the board of directors. 8 Mr. Gross, I think from the documents we've seen, 9 signed the approval after the compensation 10 committee discussed it but before the May 10th 11 approval of the board of directors. 12 Q. And is that what you remember? 13 A. That's what I recall about the judge -- 14 about that case, yes. 15 Q. Wasn't the issue presented to 16 Judge Hughes exactly that issue? Wasn't that 17 issue presented to Judge Hughes? 18 MR. STEARNS: All these questions have 19 to do with what he remembers from reading an 20 opinion which Mr. Blankenstein has which we can 21 read which speaks for itself. Now, this is just 22 asking him his memory of the contents of a 4888 1 document. 2 MR. BLANKENSTEIN: I'm asking him what 3 formed his opinion. He said he did review this. 4 He testified that Judge Hughes didn't have certain 5 facts in front of him. Apparently, that informed 6 his opinion not to -- not to give Judge Hughes' 7 opinion some weight. I'm just bringing to his 8 attention that Judge Hughes did have, in fact, the 9 very argument that Mr. Dermody is now presented, 10 that there was something wrong with the way the 11 1988 bonus plan was administered. 12 MR. STEARNS: Your Honor, that wasn't 13 the question. The predicate of the question had 14 to do with not the precise things that he's been 15 asking Mr. Dermody but other things that were in 16 front of Judge Hughes. But if he is asking -- 17 THE COURT: I'm not sure what the 18 question is right now. 19 MR. STEARNS: If he asks him what his 20 opinion is, that's fine. 21 THE COURT: Let's have a question. 22 Q. (BY MR. BLANKENSTEIN) Did you have an 4889 1 opportunity to review -- when you examined the 2 Texas Commerce Bank opinion, did you notice that 3 the issue of the ratification by the board of 4 directors on May 10th, 1988, of the bonus plan was 5 presented to Judge Hughes as one of the concerns 6 about safety and soundness? 7 A. Yes. And I read what Judge Hughes 8 stated about the facts. If I may quote, "FDIC 9 also asserts that, even if lawful, the plan and 10 trust never became effective because they were not 11 ratified by the board of directors. Again, the 12 FDIC provides no factual basis for this claim and 13 ignores the evidence in the record. The evidence 14 clearly demonstrates that, not only were they 15 discussed and ratified, but the discussions took 16 place" and so on so forth. 17 It does not discuss the fact that they 18 were disbursed prior to that approval. I mean, he 19 discusses, yes, they were approved on March 30th 20 and they were -- I'm sorry -- they were 21 recommended and the compensation committee 22 approved the plan on March 30th and the board of 4890 1 directors acted in May. But I think a critical 2 factor is there is the actual disbursement, 3 April 4th, of the funds. And then there is also 4 the April 25th trust agreement, all prior to the 5 board approval which does not appear here. And 6 that is what I'm saying. I think there was 7 evidence that was not included in here. From the 8 record I see here -- 9 Q. And the FDIC didn't present that to 10 Judge Hughes; is that right? 11 A. I don't know. All I have is what 12 Judge Hughes discusses in his opinion. 13 Q. And you didn't bother to review the 14 record to determine what issues had been presented 15 to Judge Hughes by the FDIC in 1991 and 1992 when 16 this case was litigated? 17 A. I reviewed his decision and looked at 18 the information that Judge Hughes discussed and 19 what his statements were as to what was in the 20 record and what was not. 21 Q. You said that Mr. Gross -- the payment 22 to Mr. Gross or -- strike that. 4891 1 The forgiveness of Mr. Gross' loan was 2 an unsafe and unsound practice; is that right? 3 A. That's correct. 4 Q. The loan was between Mr. Gross and UFG; 5 is that right? 6 A. That's correct. 7 Q. And am I right there are no -- the 8 safety and soundness regulations do not directly 9 apply to holding companies like UFG? 10 A. That is correct. There is nothing that 11 deals with that type of situation. 12 Q. So, if UFG determined simply to forgive 13 Mr. Gross the loan, that wouldn't constitute an 14 unsafe and unsound condition; isn't that right? 15 A. In a circumstance where the holding 16 company is not insolvent or has negative 17 stockholders' equity in its subsidiary which it 18 owes money to for a net-worth maintenance 19 agreement, if an institution needs $200 plus 20 million, if those did not exist, then yes, it 21 would be entirely appropriate for a savings and 22 loan holding company or entirely -- I would not 4892 1 say that it's unsafe and unsound if they did that 2 type of forgiveness of debt. 3 Q. The safety and soundness regulations 4 don't apply, am I right, to holding companies? 5 A. Safety and soundness regulations do not 6 directly apply to the holding company. 7 Q. They apply to the holding companies 8 only indirectly through 1730(a); is that right? 9 A. They certainly apply through 1730(a). 10 I'm not prepared right now to say any other ways 11 that they apply to it. 12 Q. But that's the only one you identified 13 in your report; isn't that right? 14 A. That's correct. Also, I did identify 15 584.3 which talks about the institution dealing 16 with the parent holding company, the other side of 17 a transaction. 18 Q. But you didn't identify anything in 19 583.4 in connection with the forgiveness of 20 Mr. Gross' loan; isn't that right? 21 A. That's correct. 22 Q. So, the only thing you identified for 4893 1 Mr. Gross was 1730(a); is that right? 2 A. Yes. But I also identified the 3 individuals who are making the decision to give 4 this were also the individuals of USAT acting -- 5 these individuals were directors of USAT and UFG. 6 They had a duty and responsibility, and they were 7 at USAT. They could not separate that 8 responsibility. And, so, their actions acting 9 through UFG were an unsafe and unsound action. 10 Q. Mr. Gross had no obligation when he was 11 engaged in arm's length negotiation with regard to 12 the forgiveness of his loan; isn't that right? 13 A. I don't believe that I tried to imply 14 that Mr. Gross was doing an unsafe and unsound act 15 in trying to negotiate this. I did, however, say 16 that the modification agreements for the 17 forgiveness of debt, given the condition of UFG, 18 was an unsafe and unsound act; and Mr. Gross did 19 participate in that. 20 Q. I'm sorry. I didn't hear your answer. 21 A. Okay. I'm sorry. I did not say that 22 Mr. Gross' negotiation of the severance agreement 4894 1 was unsafe and unsound, his part. I did say that 2 when these bonus agreements were modified in April 3 of 1988, that was an unsafe and unsound act 4 because of the -- again, the net worth -- 5 continuing net worth obligation and the condition 6 of the parent holding company. And Mr. Gross was 7 involved in, I believe, the approval of those 8 transactions. 9 And so, that was where the unsafe and 10 unsound transaction was preventing the holding 11 company from having funds available to use for the 12 net-worth maintenance agreement of its subsidiary 13 thrift. 14 Q. Preventing the unsafe and unsound 15 condition is preventing the holding company from 16 having sufficient funds to pay down to the thrift 17 under the net-worth maintenance obligation? Is 18 that this unsafe and unsound condition? 19 A. That may be poorly phrased. A 20 transaction where the holding company obligated 21 itself to forgive this debt at a time when it 22 already acknowledged that it had this net-worth 4895 1 maintenance agreement was an unsafe and unsound 2 transaction. 3 Q. USAT wasn't a creditor of Mr. Gross. 4 Right? It had no relationship to the transaction? 5 A. Yes. USAT, to my knowledge, had no 6 relationship in the creditor -- as a creditor 7 involving the stock. They did, however, 8 participate as a signatory to the severance 9 package to the settlement. 10 Q. There was nothing that was evaded by 11 the forgiveness by UFG of the debt owed to it, 12 nothing -- let me start that again. 13 1730(a) deals with actions of the 14 holding company that somehow evade or avoid 15 limitations or obligations of the thrift; is that 16 right? 17 A. That's correct. Well, I don't recall 18 stating that these bonus agreements were covered 19 under 1730(a). I recall my -- 20 Q. We're talking -- not talking about 21 bonus agreements. Talking about Mr. Gross' -- 22 forgiveness of Mr. Gross' loan. 4896 1 A. Yeah. And that -- 1730(a) relates to 2 the employment contracts. 3 Q. So, 1730(a) doesn't relate to the 4 forgiveness of Mr. Gross' loan; is that right? 5 A. Yes. That's correct. I used 1730(a) 6 to deal with UFG's entering into these contracts 7 which had the severance provisions, but the 8 forgiveness of the debt was not something I 9 covered under that specific provision. 10 Q. So, if I understand it right, the 11 safety and soundness regulations don't apply to 12 holding companies and 1730(a) doesn't apply to the 13 transaction between Mr. Gross and UFG where UFG 14 forgave his debt; isn't that right? 15 A. No. 16 Q. Isn't that what you just testified to? 17 A. No. I said that the safety and 18 soundness did apply to the action of UFG because 19 of the individuals involved who made these 20 decisions because they were jointly on the board 21 of USAT and UFG and they had an obligation, both 22 those organizations, as USAT directors to prevent 4897 1 these types of transactions that were detrimental 2 to the institution. UFG directors had an 3 obligation to do these things. So, that 4 relationship, those people involved, made it 5 unsafe and unsound. 6 I'm sorry. If I said that 1730(a) 7 applied to the bonus agreements, I don't -- wasn't 8 intending to say that. It applied to the 9 contracts themselves. 10 Q. So, what's unsafe and unsound is the 11 fact that UFG and USAT had common directors; is 12 that right? 13 A. What's unsafe and unsound is the common 14 directors entering into a series of transactions 15 that had the impact of -- detrimental impact to 16 the ability of UFG and USAT to meet USAT's net 17 worth requirements. 18 Q. So, they -- if I understand your 19 position, the directors of -- the common directors 20 of USAT and UFG had an obligation to maximize the 21 assets of UFG in order to pay down the net-worth 22 maintenance agreement; is that right? Is that 4898 1 their duty? 2 A. I think that's a little bit of a 3 mischaracterization. What I'm saying is they had 4 the obligation to maintain a net worth level of 5 USAT. If maximization of UFG meant that that 6 money immediately was used to -- or was earmarked 7 for the net-worth maintenance agreement, yes, I 8 agree with you. But I can't say just maximization 9 of UFG. It all depends on getting down to meet 10 the net-worth maintenance requirement for USAT. 11 So, I think it misstates it to say you 12 had to maximize UFG's assets. You had to give UFG 13 the ability to help them meet that, which meant 14 their assets might go up and down as they transfer 15 funds down. 16 Q. Their obligation was to maximize UFG's 17 assets then? 18 A. No. I just said "no." 19 Q. Then what was the unsafe and unsound 20 condition that they caused when they approved the 21 forgiveness of Mr. Gross' loan? 22 A. This was money that was owed to UFG, 4899 1 maximized on that particular transaction; but that 2 was money that then should be used to immediately 3 transfer to USAT to meet the net worth 4 requirement. So, if you will, instantaneously 5 maximize their assets to be able to transfer them 6 down. 7 What was unsafe and unsound was that 8 they had this obligation to pay the money to USAT 9 to meet the minimum net worth requirement. They 10 basically -- well the forgiveness of debt, they 11 said, "We don't need this money." This is money 12 that should have been coming in. He had an 13 obligation to pay that that they could then use 14 for -- 15 Q. That money would have come into UFG; is 16 that right? 17 A. That is correct. 18 Q. And then UFG would have made a decision 19 as to which of their creditors they would have 20 paid; isn't that right? 21 A. Well, I'm sure they would have 22 considered that. Obviously, if, as I say, you 4900 1 consider their net worth obligation, net worth 2 maintenance obligation as a creditor, that was 3 $200 million. That was the very largest creditor. 4 Q. They had other creditors, as well; 5 isn't that right? 6 A. Yes, they did. 7 THE COURT: Mr. Blankenstein, how much 8 more? 9 MR. BLANKENSTEIN: About ten minutes. 10 THE COURT: How much do you have, 11 Mr. Keeton? 12 MR. KEETON: I have about ten minutes 13 or so, Your Honor. 14 THE COURT: I think we'll adjourn till 15 tomorrow. Adjourn till tomorrow. 16 17 (Whereupon at 5:10 p.m. 18 the proceedings were recessed.) 19 20 21 22 4901 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 23rd 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 4902 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 23rd 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