4903 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 10-24-97 22 4904 1 A-P-P-E-A-R-A-N-C-E-S 2 ON BEHALF OF THE AGENCY: 3 KENNETH J. GUIDO, Esquire Special Enforcement Counsel 4 BRUCE RINALDI, Esquire RICHARD STEARNS, Esquire 5 and BRYAN VEIS, Esquire 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 CATHERINE BOTTICELLI, Esquire of: Dechert, Price & Rhoads 11 1500 K Street, N.W. Washington, D.C. 20005-1208 12 (202) 626-3306 16 13 DALE A. HEAD (in-house) Managing Counsel 14 MAXXAM, Inc. 5847 San Felipe, Suite 2600 15 Houston, Texas 77057 (713) 267-3668 16 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO. AND 17 CHARLES HURWITZ: 18 RICHARD P. KEETON, Esquire of: Mayor, Day, Caldwell & Keeton 19 1900 NationsBank Center, 700 Louisiana Houston, Texas 77002 20 (713) 225-7013 21 22 4905 1 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO., CHARLES HURWITZ, AND MAXXAM, INC.: 2 JACKS C. NICKENS, Esquire 3 of: Clements, O'Neill, Pierce & Nickens 1000 Louisiana Street, Suite 1800 4 Houston, Texas 77002 (713) 654-7608 5 ON BEHALF OF JENARD M. GROSS: 6 PAUL BLANKENSTEIN, Esquire 7 MARK A. PERRY, Esquire of: Gibson, Dunn & Crutcher 8 1050 Connecticut Avenue, N.W. Washington, D.C. 20036-5303 9 (202) 955-8500 10 ON BEHALF OF BERNER, CROW, MUNITZ AND HUEBSCH: 11 JOHN K. VILLA, Esquire MARY CLARK, Esquire 12 PAUL DUEFFERT, Esquire of: Williams & Connolly 13 725 Twelfth Street, N.W. Washington, D.C. 20005 14 (202) 434-5000 15 OTS COURT: 16 HONORABLE ARTHUR L. SHIPE Administrative Law Judge 17 Office of Financial Institutions Adjudication 1700 G Street, N.W., 6th Floor 18 Washington, D.C. 20552 Jerry Langdon, Judge Shipe's Clerk 19 REPORTED BY: 20 Ms. Marcy Clark, CSR 21 Ms. Shauna Foreman, CSR 22 4906 1 2 EXAMINATION INDEX 3 Page 4 ALLEN DERMODY 5 Cont'd Cross-Examination by Mr. Blankenstein..4908 6 Cross-Examination by Mr. Keeton...............4937 7 Redirect-Examination by Mr. Rinaldi...........4953 8 Recross-Examination by Ms. Clark..............4983 9 Recross-Examination by Mr. Blankenstein.......4994 10 Recross-Examination by Mr. Keeton.............5005 11 JOSEPH PHILLIPS 12 Examination by Mr. Guido......................5009 13 14 15 16 17 18 19 20 21 22 4907 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 Are there preliminary matters? 6 MR. BLANKENSTEIN: I believe there is a 7 preliminary matter. 8 MR. DUEFFERT: I'm Paul Dueffert from 9 Williams & Connolly. Last night, we learned that 10 Rex Cool is on the witness list for next, and 11 there is a pending motion to quash regarding the 12 deposition subpoena to Mr. Cool. I don't know if 13 that motion has been resolved or if the Court 14 would like to hear it this at this time. 15 THE COURT: I haven't issued anything 16 on it. I have reached a conclusion, and I am not 17 going to quash the subpoena. It just seems to me 18 that the state of an examiner is almost, by 19 definition, an expert; and I think he should be 20 deposed. 21 MR. BLANKENSTEIN: So, we will work 22 that out with OTS as far as a convenient time. 4908 1 Thank you, Your Honor. 2 THE COURT: Mr. Blankenstein, I believe 3 you had some more cross. 4 MR. BLANKENSTEIN: Yes, I did, Your 5 Honor. Thank you. 6 7 CONT'D CROSS-EXAMINATION 8 9 10 Q. (BY MR. BLANKENSTEIN) Mr. Dermody, 11 I'll try and complete my examination as quickly as 12 possible and turn you over to the tender mercies 13 of Mr. Keeton who, I believe, has some 14 cross-examination, as well. 15 Mr. Dermody, yesterday, we reviewed 16 the -- that the '87 bonuses were approved by the 17 USAT compensation committee and board of directors 18 on November 10th, 1987; is that right? 19 A. That's correct. 20 Q. The federal regulators conducted an 21 examination of USAT that began on November 16th, 22 1987; isn't that right? I think we looked at that 4909 1 document yesterday, as well. 2 A. I believe there is something about that 3 date. 4 Q. I believe you have it right there in 5 the folder. If you could just check if that's the 6 correct date. 7 A. Yes. 8 Q. In your experience as an examiner, was 9 a thorough review of the board and committee 10 minutes part of an examination conducted by the 11 Federal Home Loan Bank Board? 12 A. Yes. 13 Q. And that review would include the 14 minutes of the committee and board meetings up to 15 the date of the -- as of the date of the 16 examination? 17 A. Any minutes that were available, yes. 18 Q. So, the examiners would have reviewed 19 the compensation committee and board of directors 20 minutes approving the 1987 bonuses as a regular 21 part of the examination of USAT in 1987; is that 22 right? 4910 1 A. They would have reviewed the minutes of 2 the board meeting. Compensation committee meeting 3 would have been optional with them. 4 Q. The '87 report was presented to USAT in 5 July of 1988; is that right? 6 A. I believe that's correct. 7 Q. There was no mention in that report of 8 the bonus paid to Mr. Gross in 1987; isn't that 9 right? 10 A. I don't recall there being any mention 11 of the bonus. 12 Q. So, the regulators in the 1987 report 13 had no criticisms of USAT for increasing 14 Mr. Gross' compensation to reflect his added 15 duties as president of USAT in 1987; isn't that 16 right? 17 A. Repeat that question, please. 18 Q. There was no criticism in the 1987 19 report of the bonus paid to Mr. Gross; isn't that 20 right? 21 A. That's correct. 22 Q. The examiner in charge of the 1987 exam 4911 1 of USAT was Vivian Carlton; is that right? 2 A. I believe it was. 3 Q. Ms. Carlton was an experienced and 4 competent examiner? 5 A. To my knowledge, she was, yes. 6 Q. She was also aware of USAT's net worth 7 situation in 1987? 8 A. I think that's pretty clear since she's 9 the one that felt they were in a fatal position. 10 Q. But it didn't jump off the page to 11 Ms. Carlton, did it, that the bonus paid to 12 Mr. Gross in 1987 was an unsafe and unsound 13 practice; isn't that right? 14 A. Doesn't appear to have been something 15 that she concentrated on. 16 Q. Furthermore -- further, on what the 17 regulators didn't -- did or didn't say about the 18 compensation issues that are the subject of your 19 report, wasn't Mr. Berner in contact with 20 Mr. Twomey concerning Mr. Gross' departure from 21 USAT and UFG? 22 MR. STEARNS: Your Honor, I'm going to 4912 1 object. The witness has indicated he was not 2 personally involved in the examination of USAT at 3 this time. The question is: Was Mr. Berner in 4 touch with Mr. Twomey? It's not a question this 5 witness has indicated he has any personal 6 knowledge of. 7 THE COURT: Well, we'll find out. 8 Q. (BY MR. BLANKENSTEIN) In your review 9 of the documents, did you see any correspondence 10 between Mr. Berner and Mr. Twomey concerning 11 Mr. Gross' departure from USAT? 12 A. I recall there was some correspondence. 13 I don't remember the specific details at this 14 moment. 15 Q. I would like to show you what's already 16 been marked as T8120 and admitted into evidence. 17 It's a November 7th, 1988 letter from Art Berner 18 to Neil Twomey. 19 Can you take a look at this document, 20 sir? 21 A. Yes. If you'll give me a moment to 22 look at it, please. 4913 1 Q. Do you remember reviewing this in 2 your -- as part of your -- forming your opinions 3 about the compensation issues in this case? 4 A. Yes, I do. 5 Q. I'd like you to turn to Page -- the 6 second page, Item 4. Can you take -- can you read 7 for us Item No. 4? 8 A. Certainly. Item 4, "We are in 9 discussions with Mr. Jenard Gross for an 10 acceptable resolution to the issues you have 11 raised." 12 Q. As part of your review, did you also 13 learn that Mr. Berner sent Mr. Twomey a letter 14 forwarding to Mr. Twomey a copy of Mr. Gross' 15 separation agreement? 16 A. I don't recall that specifically. I 17 think I did review something, but I can't 18 recollect it at the moment. 19 Q. Let me show you what's been identified 20 as Exhibit B2552. Can you take a look at that 21 exhibit for a moment, Mr. Dermody? And let me 22 just state that's a November 23rd, 1988 letter 4914 1 from Art Berner to Neil Twomey. Attached to the 2 letter is a copy of Mr. Gross' separation 3 agreement. Is that correct, Mr. Dermody? 4 A. Yes, that is correct. 5 Q. Do you remember reviewing this letter 6 and the attachment as part of your review in 7 connection with your expert opinions in this case? 8 A. Yes. Upon seeing it, I recall it. 9 Q. Do you remember whether Mr. Twomey or 10 any other regulator at the time objected to the 11 loan forgiveness set forth in the separation 12 agreement as an unsafe and unsound practice? 13 A. I don't recall an objection being made 14 at this time. 15 Q. Mr. Twomey was -- Mr. Twomey was an 16 experienced examiner? 17 A. Mr. Twomey was -- yes, was experienced 18 and had an extremely large caseload, which meant 19 he had, in the vernacular, a very full plate of 20 work to do. 21 Q. Mr. Twomey was focusing on compensation 22 issues at this time, was he not? 4915 1 A. Well, I can't answer from direct 2 personal experience. I can tell you the 3 correspondence I saw indicated Mr. Twomey was 4 focusing on a large number of issues, compensation 5 being one of them, because of the correspondence 6 about some of the contracts. It's pretty clear to 7 me, though, with the volume of material that was 8 there, that this was not an exclusive -- you know, 9 exclusive use of Mr. Twomey's time. 10 Q. In your review of the record here, did 11 you determine whether or not Mr. Twomey, after he 12 received Mr. Berner's letter forwarding Mr. Gross' 13 separation agreement, corresponded with USAT about 14 compensation issues? 15 A. There was correspondence with USAT 16 about compensation issues. I don't recall exact 17 dates. I'd want to see them to be sure of the 18 exact sequence of dates. 19 Q. Let me show you what's been identified 20 as Exhibit B2604. Let me identify this as a 21 letter from Neil Twomey to the board of directors 22 of United Savings Association of Texas dated 4916 1 December 15th, 1988. 2 Do you remember reviewing this document? 3 A. Yes, I certainly do. 4 MR. BLANKENSTEIN: Your Honor, I would 5 move 2604 into evidence. 6 MR. RINALDI: No objection, Your Honor. 7 And if they haven't been moved into evidence, the 8 other documents, as well, I would agree to be 9 moved into evidence. 10 THE COURT: Are you talking about 11 B2552? 12 MR. BLANKENSTEIN: Yes. I was going to 13 move that. 14 THE WITNESS: Is 2526 already in? 15 THE COURT: Received. 16 Q. (BY MR. BLANKENSTEIN) Now, is the 17 subject matter of this letter the compensation 18 practices of USAT in 1988? 19 A. The subject matter of this letter is 20 specifically the executive bonus plan and the 21 payment of these -- the remainder of the executive 22 bonus plan to the named executives. 4917 1 Q. Those are compensation issues, correct? 2 A. That is part of the compensation issue, 3 yes. 4 Q. And there is no mention in that letter 5 dated December 15th, 1988, of Mr. Gross' 6 separation agreement as an unsafe and unsound 7 practice; is that right? 8 A. That is correct. There is no mention. 9 Q. Turning to Mr. Gross' 1988 10 compensation. I believe you testified yesterday 11 that they were not relevant to your review because 12 both reports did not take into account USAT's 13 financial condition at the time, which is in 1988; 14 is that right? 15 A. Did not take into consideration their 16 net worth failure position. I believe it did, at 17 least in the Hewitt report, list their losses. 18 Q. So, they didn't take into account the 19 solvency of UFG or USAT; is that right? 20 A. Well, I said net worth deficiency 21 status. They may still be solvent but in a net 22 worth deficiency status. So, solvency is going a 4918 1 little bit further than I went. 2 Q. Are you aware, Mr. Dermody, that OTS 3 has retained its own compensation expert in this 4 case? 5 A. Yes, I am. 6 Q. And do you know who that is? 7 A. I believe it's Graef Crystal. 8 Q. Have you reviewed Mr. Crystal's report? 9 A. I had it and I think I flipped through 10 it very, very quickly and I just do not recall it. 11 Q. Have you reviewed his deposition 12 testimony? 13 A. No, I have not reviewed his deposition 14 testimony. 15 Q. Do you remember whether Mr. Crystal 16 expressed an opinion as to what reasonable 17 compensation would have been for Mr. Gross in 18 1988? 19 A. No, I do not recall. 20 Q. If Mr. Crystal expressed the opinion 21 that Mr. Gross' reasonable compensation in 1988 22 was $500,000 taking into account -- and he took 4919 1 into account, in reaching that figure, USAT's and 2 UFG's financial condition, including their 3 insolvency, would that be relevant to your 4 opinion? 5 A. That would be a factor I would want to 6 consider, but one thing you have neglected to 7 mention is whether or not he considered the safety 8 and soundness of the way in which the contract was 9 entered into. 10 Q. I just asked you whether -- if he 11 issued an opinion taking into account the 12 financial condition of both USAT and UFG, you -- 13 that would be relevant to your opinion. 14 A. Yes, I would -- well, I would consider 15 it. 16 Q. Did you consider it at all? 17 A. Well, I said I reviewed Mr. Graef's 18 (sic) opinion. I believe the vast majority of all 19 my work I did for my analysis was prior to the 20 time of seeing much of anything of Mr. Crystal's 21 work. I did discuss it. I did look at it. So -- 22 and I did incorporate whatever I knew about 4920 1 Mr. Crystal's review in my analysis. 2 Q. But you don't -- as you sit here today, 3 you don't remember whether Mr. Crystal determined 4 a reasonable compensation figure for Mr. Gross in 5 1988? 6 A. No, I do not remember if he determined 7 a reasonable compensation figure for 1988. 8 Q. I want you to assume that Mr. Crystal 9 did, in fact, reach the conclusion that reasonable 10 compensation for Mr. Gross in 1988 would have been 11 $500,000 and that Mr. Crystal also took into 12 account the financial condition of USAT and UFG in 13 reaching that conclusion. 14 Would you still conclude that the 15 compensation paid to Mr. Gross in 1988 was the 16 result of an unsafe and unsound practice? 17 MR. STEARNS: Objection. The question 18 assumes facts that are not in evidence, Your 19 Honor. 20 MR. BLANKENSTEIN: He's an expert. 21 I've asked him to assume that to be the case. 22 THE COURT: Denied. 4921 1 A. I'm sorry. Repeat the question again 2 then, please. 3 Q. (BY MR. BLANKENSTEIN) I want you to 4 assume that Mr. Crystal, in fact, reached the 5 conclusion that Mr. Gross' reasonable compensation 6 for 1988 was $500,000 and I want you to further 7 assume that in this case, in making -- reaching 8 that conclusion, he took into account the 9 financial condition of USAT and UFG. 10 Would that change your opinion that 11 Mr. Gross' compensation in 1988 was the product of 12 an unsafe and unsound practice? 13 A. Well, I would certainly consider his 14 opinion; but I don't -- it would not change my 15 conclusion because I was looking at the safety and 16 soundness issues. And as you've described, 17 Mr. Crystal's looking at something a little bit 18 narrower. So, I don't think that would change my 19 opinion. 20 Q. And if I remember right, your opinion 21 is based upon what you called the process of 22 reaching the decision; is that correct? 4922 1 A. Well, I've said here "process"; and I 2 also recall saying in my deposition, I think, a 3 more inclusive term. I looked at the totality of 4 the circumstances, the condition of the 5 institution, the net worth compliance situation, 6 how these contracts were entered into, and what 7 types of decisions were entered. So, I don't want 8 it to seem as though I focused on any one 9 particular factor. It's the whole series of 10 factors and how they interrelate that I made the 11 decision. 12 Q. Are you adding to your testimony of 13 yesterday in connection with what you found to be 14 the process faults of USAT in reaching a decision 15 with regard to Mr. Gross' compensation in 1988? 16 A. No, not that I'm aware of. 17 Q. So, in your view, even if the $500,000 18 was a reasonable amount of compensation 19 commensurate with Mr. Gross' duties in 1988, you 20 would find the faults in the process made the 21 payment of that amount to Mr. Gross to be 22 excessive; is that right? 4923 1 A. Let -- let me -- 2 Q. Is that correct? 3 A. I can't answer that "yes" or "no." And 4 let me explain why. I've talked about the Hewitt 5 and the Wyatt reviews, and I said they said these 6 salaries were reasonable. And I pointed out that 7 there were issues dealing with safety and 8 soundness. What you've proposed to me is that if 9 Mr. Crystal again does this and says it's 10 reasonable, he's not talking about safety and 11 soundness. 12 So, given that I am concentrating on 13 safety and soundness, I think pretty consistent 14 with what I've said all along is whether or not 15 this, in a corporate setting, would be a 16 reasonable salary. I'm saying that the safety and 17 soundness issues here overtake the normal 18 corporate reasonableness test, and it's these 19 safety and soundness issues that predominate. 20 So, I think that's why the answer is 21 yes. Even if the specialist says it's a 22 reasonable salary, I'm saying it still is an 4924 1 unsafe and unsound action. 2 Q. And your opinion is based on the 3 process by which those decisions were reached; is 4 that correct? 5 A. I've said the totality of the situation 6 and the process. Yesterday, I said the process. 7 But by "process," I obviously mean what the 8 circumstances were and how it came about. 9 Q. So, your opinion is based on the 10 process and not the substance of the decision; 11 isn't that right? 12 A. Yes, I believe so. 13 Q. Let me ask you a few questions about 14 the forgiveness of Mr. Gross' note by UFG. If I 15 understand your testimony yesterday -- and correct 16 me if I'm wrong -- the USAT and UFG directors had 17 an obligation to reduce the net worth deficiency 18 of USAT by using all available assets of UFG to 19 that end; is that correct? 20 A. I'm saying that UFG had an obligation 21 to maintain a net worth and that the directors of 22 USAT, who were also directors of USAT, had this 4925 1 obligation -- I'm sorry -- directors of both 2 corporations -- had the obligation to do 3 everything that they are capable of doing to 4 maintain a net worth requirement. 5 Q. Did you review the process by which the 6 directors of USAT and UFG decided to enter into 7 the separation agreement with Mr. Gross? 8 A. You've gone through the whole series of 9 documents. I reviewed what I had available in the 10 record and documents; so, if there was more to the 11 process, I'm not aware of it. 12 Q. All right. Let's take a look quickly 13 at what the process was. Let me show you what has 14 been marked and is in evidence as T8114. 15 MR. BLANKENSTEIN: For the record, Your 16 Honor, let me just state it's an October 31st, 17 1988 letter from Jenard Gross to Art Berner. 18 THE COURT: That's in evidence? 19 MR. BLANKENSTEIN: That's in evidence, 20 I understand it, as T8114. And in our system, 21 it's at Tab 446. 22 THE COURT: Thank you. 4926 1 Q. (BY MR. BLANKENSTEIN) Mr. Dermody, 2 did you review this letter in connection with your 3 report and your testimony here yesterday and 4 today? 5 A. Yes, I did. 6 Q. And in this letter, Mr. Gross is 7 proposing a settlement of his claim of the note -- 8 excuse me -- settlement of his obligation to UFG 9 under the note he executed in 1985. And he's 10 identifying his employment claims against UFG and 11 USAT; is that right? 12 A. Yes. He's identifying those issues. 13 Q. And he's proposing that they cancel 14 those claims; is that right? 15 A. Let me reread that. Yes, he is 16 proposing that they cancel the contracts. 17 Q. And Mr. Gross identifies that his 18 claims are worth approximately -- more than 19 $1 million; is that right? 20 A. That is correct. 21 Q. And he says that his obligation to UFG 22 is about $761,000; isn't that right? 4927 1 A. Correct. 2 Q. So, he's offering to relinquish his 3 larger claim if USAT -- if UFG will forego the 4 loan; is that right? 5 A. The smaller claim, correct. 6 Q. Did USAT -- did UFG consider Mr. Gross' 7 proposal? 8 A. Apparently, they did. They reached a 9 severance agreement with him. 10 Q. And did you look at the board minutes 11 of November 7th, 1988, in connection with your 12 report and testimony? 13 A. Yes, I did. 14 MR. BLANKENSTEIN: Your Honor, I would 15 move the UFG board minutes of November 7th, 1988, 16 Exhibit A1164, into evidence. 17 MR. RINALDI: No objection, Your Honor. 18 THE COURT: Received. 19 Q. (BY MR. BLANKENSTEIN) Mr. Dermody, if 20 you could look the first paragraph. Can you tell 21 us who was present at the meeting? 22 A. Well, let me just quote from it. I 4928 1 think that would be easier. "Present at the 2 meeting were all members of the board. Also 3 present were Messrs. Robert Ott and Tom Seawell, 4 S-e-a-w-e-l-l, partners in a law firm of Arnold & 5 Porter, special counsel to the board." 6 Q. If you look down towards the -- on that 7 first page of the exhibit to the first paragraph 8 that begins with "after," do you see that? 9 A. Yes, I do. 10 Q. It shows that Mr. Gross recused -- left 11 the meeting because they were going to discuss his 12 proposal; is that right? 13 A. Yes. 14 Q. And so, he absented himself from the 15 meeting so he wouldn't vote or be part of any 16 discussion in connection with the proposal that he 17 made to UFG to resolve his loan; is that right? 18 A. That's correct. 19 Q. And that's what you said was 20 appropriate practice and wouldn't raise a safety 21 and soundness violation; is that right? 22 A. That was an appropriate practice for 4929 1 him to enter into. I've talked about the safety 2 and soundness of these transactions, and I think 3 I've said before that you cannot isolate his 4 activity at this point in time from the activities 5 he and others engaged in at an earlier stage in 6 time. 7 Q. But if I remember your testimony 8 yesterday, one of the process issues you 9 identified was that Mr. Gross was present at an 10 earlier meeting when the 1987 bonuses were 11 awarded; is that right? 12 A. That's correct. 13 Q. And he's no longer here so you don't 14 have that -- he's absented himself from this 15 meeting. So, that's not a concern? 16 A. We do not have the situation where 17 Mr. Gross is participating in this particular 18 decision. 19 Q. And if you look at the next paragraph, 20 it indicates that the board members didn't 21 immediately adopt Mr. Gross' proposal but 22 submitted it for further study; isn't that right? 4930 1 A. That's correct. 2 Q. Let's take a look at the November 15th, 3 1988 minutes of the board of United Financial 4 Group. 5 MR. BLANKENSTEIN: Your Honor, this is 6 already in evidence as T8124. 7 Q. (BY MR. BLANKENSTEIN) Did you review 8 these minutes in connection with your report and 9 testimony, Mr. Dermody? 10 A. Yes, I did. 11 Q. Were -- was this a special meeting held 12 to determine -- to decide on Mr. Gross' proposal 13 and his separation from USAT and UFG? 14 A. Well, it was a special meeting. And if 15 I recall correctly, they -- that that's 16 probably -- I think that's about the only item 17 that they did discuss. 18 Q. And Mr. Robert Ott, who was special 19 counsel to the board of directors, was present at 20 the meeting; isn't that correct? 21 A. That is correct. 22 Q. And if you look in the third paragraph 4931 1 on the first page of the exhibit, Mr. Berner again 2 reviewed for the members of the board what the 3 bidding was; isn't that right? 4 A. I'm sorry. What the bidding -- 5 Q. He reviewed the circumstances for the 6 members of the board once again? 7 A. Yes. 8 Q. What Mr. Gross' claims against the 9 institutions might be and what the claims 10 Mr. Gross might -- what the claims UFG might have 11 against Mr. Gross; is that right? 12 A. Yes, that is correct. 13 Q. And does Mr. Berner also talk about his 14 discussion with Mr. Whatley? 15 A. Yes. 16 Q. Mr. Whatley wasn't present at the 17 meeting; is that right? 18 A. No, Mr. Whatley was not present at this 19 telephone conference. 20 Q. Now, Mr. Whatley was an outside 21 independent director; isn't that right? 22 A. That's correct. 4932 1 Q. Could you read for us what Mr. Berner 2 says about his discussions with Mr. Whatley? 3 A. Yes. "Mr. Berner stated he had 4 discussed this matter at length with Mr. Whatley 5 and that Mr. Whatley was supportive of the view to 6 release Mr. Gross from his note obligation upon 7 Gross' release of the company of all further 8 obligation." 9 Q. Now, if you turn to the second page of 10 the exhibit, the first paragraph, does that speak 11 to the urgency of getting this issue resolved and 12 provide some further explanation as to why there 13 was a special meeting held on November 15th, 1988? 14 A. It talks about discussions with the 15 Federal Home Loan Bank about the Southwest Plan. 16 Q. Why don't I read it. "The Board 17 further noted that pursuant to discussions with 18 representatives of the FHLB-Dallas, until the 19 compensation and authority issues at USAT were 20 satisfactorily resolved, further participation in 21 a Southwest Plan transaction would be delayed. 22 The board believed this delay would cause 4933 1 potentially significant economic detriment to the 2 possibility of receiving additional value for 3 creditors and shareholders of the company." 4 That's an appropriate consideration for 5 the USAT and UFG directors; isn't that right? 6 A. That is an appropriate factor to 7 consider, yes. 8 Q. Now, if we go to the third paragraph, 9 Mr. Berner describes in some detail, does he not, 10 his assessment of the litigation risks involved if 11 UFG sought to enforce its claim against Mr. Gross; 12 isn't that right? 13 A. He discussed the claims and the amounts 14 of the claims. I don't believe he discussed the 15 risk or the -- how -- what was the likelihood of 16 prevailing. 17 Q. Well, let's read what he said. 18 "Mr. Berner noted that Mr. Gross would have 19 significant litigation claims against the company 20 if his economic obligations were honored. He also 21 noted that" -- 22 THE COURT: You left out "not." 4934 1 MR. BLANKENSTEIN: Excuse me. "Were 2 not honored." Pardon me, Your Honor. 3 Q. (BY MR. BLANKENSTEIN) "He noted that 4 on Mr. Gross' bonus arrangements, a termination 5 without cause would accelerate his note, would 6 also provide for a full bonus payment in an equal 7 amount. At the same time, Mr. Gross could claim 8 that he was entitled to full severance benefits 9 which could amount to over $1.2 million. In 10 addition, the cost of litigation would be 11 significant and, if the company did not prevail, 12 it was also possible that they would have to bear 13 the litigation cost of Mr. Gross. There was also 14 possible offset claims of Mr. Gross. It was noted 15 that in view of the company's current financial 16 position which appeared to negate any current need 17 to consider a bankruptcy filing, it was probable 18 that Mr. Gross would be in a position to realize 19 on any obligations which were held." 20 Isn't that right? 21 A. That is a quote from the document, yes. 22 Q. And I believe you were shown an exhibit 4935 1 yesterday. I believe T8157 -- 2 MR. BLANKENSTEIN: Is that in evidence? 3 Q. (BY MR. BLANKENSTEIN) Let me show 4 you, if I might -- 5 MR. BLANKENSTEIN: Your Honor -- this 6 is a -- the minutes of an October 13th, 1989 7 compensation committee meeting of United Financial 8 Group, Inc. 9 Q. (BY MR. BLANKENSTEIN) Did you review 10 those minutes in connection with your expert 11 report and testimony? 12 A. Yes, I did. 13 Q. And in those minutes, Mr. Robert Ott, 14 who was special counsel for the board, issues an 15 opinion that if Mr. Berner -- Mr. Berner's 16 employment claims under his contract -- if he 17 litigated them, he would be entitled to receive 18 the full amount; isn't that right? 19 A. Yes. 20 Q. And Mr. Berner's contract was identical 21 to Mr. Gross' contract; isn't that right? 22 A. No. Salaries were different. 4936 1 Q. Other than that? 2 A. Yes. I don't want to be facetious, but 3 I believe the provisions were virtually identical. 4 Q. Would you agree that in light of 5 Judge Hughes' subsequent opinion in the Texas 6 Commerce Bank case, Mr. Ott's analysis was 7 precedent? 8 A. Not in relation to the respondents that 9 I've been talking about. Certainly he predicted 10 how the result would end up for the other 11 employees. 12 Q. By the way, Mr. Dermody, when we 13 discussed Judge Hughes' opinion yesterday, I 14 believe that you said that you discounted his 15 opinion because you didn't find any reference in 16 his opinion to the fact that the moneys under the 17 executive bonus plan were disbursed prior to the 18 May 10th, 1988 meeting. 19 Did I remember that right? 20 A. I pointed out there were several 21 factors. I did not say it discounted it. I just 22 said I did not believe there were factors that 4937 1 were brought out in the record that I saw. 2 Q. Well, let's take a look at Page 850 of 3 the opinion. Why don't you take a look at the 4 left-hand column, the first full paragraph, 5 next-to-the-last sentence. Why don't you please 6 read that into the record? 7 A. "Before April 30, 1988, United paid 8 each employee 25 percent of the promised 9 additional compensation." 10 MR. BLANKENSTEIN: I have no further 11 questions. 12 THE COURT: Mr. Keeton, you have some 13 questions? 14 MR. KEETON: I do, Your Honor. I'll do 15 it from here if it's okay. I don't have that 16 much. 17 18 CROSS-EXAMINATION 19 20 21 Q. (BY MR. KEETON) Mr. Dermody, am I 22 correct that you have a law degree? 4938 1 A. You are correct. I have a law degree. 2 Q. From where? 3 A. Texas Wesleyan University, Fort Worth. 4 Q. Fort Worth? 5 A. Texas, that's correct. 6 Q. Are you a member of the Texas Bar? 7 A. Yes, I am. 8 Q. Have you ever practiced law? 9 A. No, I have not. Just got my JD 10 license. 11 Q. How recently? 12 A. Well, I passed the Bar for February. 13 So, the license was issued in early May. 14 Q. All right. I want to stick with the 15 same opinion that you just had of Judge Hughes. 16 To make it absolutely clear, yesterday, 17 you told us you did not agree with Judge Hughes 18 because you did not think Judge Hughes realized 19 when the plan was put in, when the money was put 20 in, and how it related to when the board approved 21 it. 22 Do you recall that testimony? 4939 1 A. Yes, I do. And I think it 2 mischaracterizes what I said. 3 Q. Well, we'll let the record decide that. 4 I want you to look at the opinion for now. 5 MR. STEARNS: Your Honor, I think it's 6 unfair of Mr. Keeton to phrase a question that the 7 witness says mischaracterizes his testimony and 8 then not let him answer. 9 MR. KEETON: I took it back. 10 THE COURT: Let's hear the answer. 11 Q. (BY MR. KEETON) All right. What 12 answer do you want to give? 13 A. Well, you state that I said 14 Mr. Hughes -- well, would you repeat what his -- 15 Q. I'll state it again for you. 16 A. Would you restate it? 17 Q. You said that Judge Hughes was not 18 aware, apparently, of the process that the plan 19 and the money was paid prior to the board 20 approving it and that was why you didn't agree 21 with Judge Hughes' finding? 22 A. You've just restated the question 4940 1 differently than you said the first time. 2 Q. Well, let's take it that way. Isn't 3 that what you said yesterday? 4 A. I said I didn't believe that the facts 5 were before the Court that I had reviewed in my 6 analysis. 7 Q. Well, let's look at -- and you didn't 8 bother to read the opinion or any of the record, 9 even though this opinion deals with unsafe and 10 unsound salaries, prior to your opinion. Right? 11 A. Are you asking me if I read it, or are 12 you telling me I didn't read it? I don't 13 understand what you're asking. 14 Q. Did you, before you issued your report? 15 A. Did I read Judge Hughes' opinion? Yes, 16 I did. 17 Q. Did you consider it in issuing your 18 report? 19 A. Yes, I considered it in issuing my 20 report. 21 Q. All right. Now, let's look at Page 850 22 a minute. Left-hand column, first full paragraph. 4941 1 It shows that Judge Hughes was very clearly aware 2 that, in March, the plan and trust was put into 3 effect. Right? 4 A. Aware that there was a plan -- he 5 states "United established a plan and trust in 6 March." It does not distinguish the fact that the 7 compensation committee approved it and that the 8 board did not approve it until May. 9 Q. Stay with me a minute. This is not a 10 debate. 11 A. I understand that. 12 Q. All right. Let me ask my questions, 13 and you can answer them. Drop down a little bit. 14 It's very clear in the same paragraph 15 that sometime before April 30th, the money was 16 actually deposited in the bank with the trust. 17 Right? 18 A. Correct. 19 Q. Turn over to the next page, 851, first 20 full paragraph. Judge Hughes writes "United did 21 not conceal the transfer. Members of the FHLB 22 were present at the board meeting when the 4942 1 managers discussed and ratified the plan and 2 trust. Upon United's full disclosure, the FHLB 3 did not object." 4 Now, we know that board meeting wasn't 5 until May. Right? 6 A. The board meeting where they approved 7 it was May, correct. That's correct. 8 Q. Okay. So, the judge knew all of these 9 things and, yet, when you go down further, he 10 finds under "unsafe and unsound" -- that's a 11 heading. 12 Do you see that? 13 A. Yes, I do. 14 Q. The last three sentences of that 15 paragraph say "The plan rewarded the beneficiaries 16 for standing watch as the ship slowly sank. It 17 did not reward them for running the ship onto the 18 rocks. As a legitimate business decision, the 19 trust and plan were not, quote, 'unsafe or 20 unsound,' close quote, for purposes of the federal 21 regulation. Mere allegations, however insulting, 22 will not create issues of fact." 4943 1 Now, that's what he found as a federal 2 judge. Right? 3 A. That is correct. 4 Q. Did you study the theory of collateral 5 estoppel or res judicata when you were in law 6 school? 7 A. Yes, I did. 8 Q. You think this might have some 9 application here? 10 MR. STEARNS: Objection, Your Honor. 11 Calls for a legal conclusion. 12 MR. KEETON: This man is testifying as 13 an expert. 14 MR. STEARNS: He's not testifying -- 15 excuse me. He's not testifying as a legal expert, 16 Your Honor. That's for the province of this 17 tribunal. 18 THE COURT: I'll sustain it. 19 Q. (BY MR. KEETON) One other question. 20 You said this decided it as to some employees but 21 not the upper employees. In fact, this was all 22 the employees that he was dealing with in this 4944 1 opinion, wasn't it? 2 A. If I recall correctly, some of these 3 employees were no longer involved with this 4 account. 5 Q. Well, let me try to refresh your 6 recollection. You can read it again tonight. 7 Some of them had released their claims; but, in 8 this case, they made a claim that they were 9 released under duress. So, he first had to decide 10 whether their plan was proper as to them and then 11 decide the question of duress. Right? 12 A. I believe so, yes. 13 Q. So, that means he covered all of the 14 people when he made this first finding, correct? 15 A. He covered the plan -- yes, he was 16 covering all the people. 17 Q. All right. Now, let me get some of the 18 factors that you didn't consider and be certain 19 that I'm clear. 20 You did not really challenge or consider 21 the level of the dollars involved; isn't that 22 correct? 4945 1 A. I did not address the level, that's 2 correct. 3 Q. Okay. You did not address how these 4 people's salaries compared to their peers', 5 correct? 6 A. That is correct. 7 Q. You did not address the factor that 8 possibly they had taken on significant additional 9 duties? 10 A. We have discussed that, yes. That's 11 something I didn't -- 12 Q. Did not consider? 13 A. Did not -- did not affect my safety and 14 soundness decision. 15 Q. You did not consider the individual 16 performance of each of these people to see how 17 well each or any had performed, correct? 18 A. Correct. We've already discussed that. 19 Q. You did not discuss or consider the 20 quality of these people in both their past or 21 current history since you have the ability to look 22 back at them? 4946 1 A. I did not discuss -- I did not review 2 that. 3 Q. You only say the process in '87 was 4 defective. And yesterday, you only said two 5 reasons. Let's be clear. Because Mr. Gross voted 6 for his or the other one voted for his and because 7 the net worth situation was not considered by the 8 board? 9 MR. STEARNS: Your Honor, I'll object. 10 That's a mischaracterization of an entire day's 11 worth of testimony that dealt with bonuses, 12 salary, compensation. The record will speak for 13 itself. 14 MR. KEETON: I'm talking about 15 November '87, Your Honor; and the record will -- 16 but I'm going to try to get a clear answer out of 17 this man. 18 MR. STEARNS: Your Honor, Mr. Keeton 19 can ask questions with a non-pejorative comment, 20 I'm sure. 21 MR. KEETON: I just did until you stood 22 up. 4947 1 THE COURT: Well, restate your 2 question. 3 Q. (BY MR. KEETON) Mr. Dermody, isn't it 4 true that yesterday, you said the November 1987 5 process was flawed because interested parties 6 voted on the contract and because the board didn't 7 consider the net worth situation of the 8 institution at the time they were voting? That 9 was the two bases on which the process was 10 defective? 11 A. I think that slightly mischaracterizes 12 my answer. Yes, I did say the conflict of 13 interest situation existed; but I also said it was 14 a net worth position -- a net worth failure 15 position, not just straight net worth. 16 Q. Okay. Net worth failure position. 17 They didn't consider that. Right? 18 A. I said that they did not appear to have 19 considered that, that's correct. 20 Q. And you jumped from that to saying what 21 they did was unsafe and unsound in your, quote, 22 "expert," unquote, opinion? 4948 1 A. Are you asking me? 2 Q. Yeah. Isn't that correct? 3 A. I don't think I jumped. I did an 4 analysis of the circumstances, reviewed what 5 happened, how it happened, and came to an opinion 6 that this was unsafe and unsound. 7 Q. And didn't consider any of these other 8 factors I just listed? 9 A. I said I was aware of those factors. I 10 said that they were not applicable to the safety 11 and soundness situation. 12 Q. Okay. Now, you remember how you said 13 Mr. Connell's contract was okay because they 14 needed him? 15 A. I said words to that effect. 16 Q. You've lived in Dallas, what, 14 years? 17 A. Yes, I have. 18 Q. Are you a football fan? 19 A. Not particularly. 20 Q. Follow the Dallas Cowboys at all? 21 A. As little as possible. 22 Q. Did you ever hear of a man named Jay 4949 1 Novacek? 2 A. Yes, I have. 3 Q. All-pro tight end? 4 A. I don't pay attention, as I said. I've 5 heard the name. 6 Q. He's retired. You know that, don't 7 you? 8 A. Heard something to that effect, yes. 9 Q. Dallas trying to replace him. Right? 10 A. I have to presume so. 11 Q. What do you think would happen to Emmet 12 Smith, Troy Aikman, Michael Irvin, Deion Sanders 13 if they brought a new tight end in, paid him 14 significantly more than they were making, but 15 said, "But you-all aren't winning this year; so, 16 we're going to pay him a whole lot more than you"? 17 A. You're asking my opinion of that 18 situation. I don't really care about that 19 situation. I've been discussing a financial 20 institution where people have fiduciary 21 responsibilities. I don't see the parallel in a 22 financial institution with fiduciary 4950 1 responsibilities to a baseball team -- excuse 2 me -- a football team, which is entertainment, and 3 they have no fiduciary responsibilities. 4 Q. Let's talk about a financial 5 institution. What do you think about these 6 Messrs. Gross, Munitz, Berner, Crow? How are they 7 going to feel? 8 Let's analogize. You've got to run the 9 whole institution -- Mr. Connell cannot run the 10 whole institution by himself, can he? 11 A. I don't expect him to run it by 12 himself. 13 Q. All right. And it's the board of 14 directors who's got to make those decisions to 15 balance employees who have been loyal and stayed 16 there and carried out their fiduciary duties and 17 going to continue to try to do that versus when 18 they bring in a new person. Right? 19 A. Well, it's their responsibility to make 20 these decisions. 21 Q. Exactly. Between '83 and '88, did you 22 get raises? 4951 1 A. I got a few. 2 Q. Did you ever check to see what the 3 federal deficit was doing between those years? 4 A. Not specifically. Usually rising. Has 5 it ever not? 6 Q. Pretty big, wasn't it? 7 A. Yes, it is. 8 Q. How about the institutions that you-all 9 were supposed to be regulating and evaluating? 10 How were they doing? 11 A. That's a rather broad question. Do you 12 want to specify the time period? You want to 13 specify where -- 14 Q. I'm saying '83 to '88. How were they 15 doing? 16 A. In Texas, a lot of them were doing very 17 poorly. In other parts of the country -- Ohio, 18 Indiana, some of the rural areas -- they were 19 doing exceptionally well. 20 Q. You were in Texas, weren't you? 21 A. I was in Texas. 22 Q. Do you think your raises were justified 4952 1 nonetheless? 2 A. I was working for an organization that 3 was a regulatory institution -- well, 4 quasi-governmental institution, regulatory, which 5 was profitable, making money, and had a 6 responsibility to regulate these institutions. 7 Q. Well, they were going downhill and out 8 of business; and the federal deficit was going 9 down. You were working for me as a taxpayer, 10 weren't you? 11 A. No, I was not. 12 Q. You weren't? 13 A. No, I was not. 14 Q. You don't think the taxpayer needed to 15 get his dollars? 16 A. Taxpayers -- well, to answer your 17 question without seeming like I'm trying to be 18 facetious about it, taxpayers were paying none of 19 the salary of the Federal Home Loan Bank 20 employees. Never did. 21 Now, as a treasury employee, yes, it's 22 tax dollars that fund the agency, although we 4953 1 still are fee based in our -- the agency's income 2 comes from the institutions. So, again, taxpayers 3 do not -- have not paid my salary during the time 4 period we're talking about. 5 Q. Even though the institutions during 6 that period of time were going downhill fast, 7 maybe over the cliff fast? 8 A. There were a lot -- 9 Q. You didn't think your raise was 10 unjustified, did you? 11 A. I did not think my raise was 12 unjustified, correct. 13 MR. KEETON: Thank you. 14 THE COURT: Redirect? 15 MR. RINALDI: Sure. Thank you, Your 16 Honor. 17 18 REDIRECT-EXAMINATION 19 20 21 Q. (BY MR. RINALDI) Mr. Dermody, I 22 believe you have in front of you Judge Hughes' 4954 1 opinion. And since you were recently questioned 2 on this and it's still fresh in your mind, would 3 you take a look at Pages 84 -- 849 over to 850 4 where he talks about the background? And tell me 5 if it appears anywhere -- well, let me just read 6 to you at the beginning the background. The 7 second sentence says "On December 30th, 1988, the 8 Federal Home Loan Bank Board declared United 9 insolvent. By a series of resolutions, it 10 terminated all employment contracts." 11 Now, it notes that United went insolvent 12 at the end of '88. Is there any indication in 13 this opinion as to the date that United went into 14 capital failure? 15 A. No, there is not. 16 Q. Okay. And when you formulated your 17 opinion -- and just so we understand it, going 18 back to the charts, just so I understand, the 19 matter which -- or the single most important 20 element in your analysis as reflected on the chart 21 is Item No. 4, that there is a net worth failure. 22 And that would have occurred one year prior to 4955 1 UFG -- I mean USAT being placed in receivership; 2 is that correct? 3 A. Well, in fact, it goes beyond that. 4 No. 4 is when the institution reported it. But 5 they are aware of it eight months earlier, that 6 the examiners are saying it. So, they become 7 aware of it here. It becomes clear -- they admit 8 it and announce it to the world through the proxy 9 statements of UFG and, also, through the reports 10 to us. 11 Q. And as an examiner, it was your view 12 that once they had achieved this net worth 13 deficiency, that it would have been inappropriate 14 to make large bonus payments such as those that 15 were received by Mr. Berner, Mr. Crow, Mr. Munitz, 16 and Mr. Gross? 17 A. That -- 18 Q. Now, in your -- is that correct, sir? 19 A. Yes, that is correct. 20 Q. Now, in your calculation, Mr. Keeton 21 asked you if you knew what -- well, let's take, 22 for example -- there was a list of people who 4956 1 received bonuses from the institution that were at 2 a lower level. 3 Directing your attention to T8026, which 4 is the list of bonuses, and then going over to 5 T8055, which are the salary adjustments -- 6 A. I believe -- is that the November 7 bonuses and the April salary adjustments? April 8 1988 salary adjustments? 9 Q. Yes. Now, the only four people that we 10 have been dealing with here were Mr. Gross, 11 Mr. Crow, Mr. Berner, and Mr. Munitz; is that 12 correct? 13 A. That is correct. 14 Q. And you did not consider, for example, 15 M. Jenkins who got an '87 bonus of $2,000, did 16 you? 17 A. I reviewed that. I did not consider 18 that one of the ones where I was criticizing. 19 Q. Okay. And it was your view that once 20 the institution had gone into a net worth 21 deficiency, it was inappropriate to have given a 22 bonus to Mr. Gross of $235,000; isn't that 4957 1 correct? 2 A. That is correct. 3 Q. Now, Mr. Blankenstein suggested to you 4 that one of the reasons Mr. Gross should have 5 received a bonus of that size was that he was 6 taking on all these added responsibilities. 7 Do you remember that? 8 A. Yes, I do. 9 Q. And he said that he had been appointed 10 president of USAT on January 8th of 1987? Do you 11 recall that? 12 A. Yes, I recall that. 13 Q. And that on that date, he took on many 14 more responsibilities? 15 A. Yes. 16 Q. Okay. When you reviewed the 17 supervisory record, were you able to determine -- 18 or supervisory record, the record in this case -- 19 did you determine whether Mr. Gross received any 20 additional compensation at or about the time that 21 he took on his new duties at USAT? 22 A. Yes, I did. Let me use one of the 4958 1 defendant's charts here of Mr. Gross. I thought 2 it was very appropriate it was here. The question 3 for Mr. Blankenstein was Mr. Gross -- the line of 4 questioning, I believe, was Mr. Gross was being 5 paid this bonus in compensation for him being 6 president for the year because he had no 7 compensation. Reviewing the record, he became, 8 according to the proxy statement, president 9 January 8th, 1987. '86, his salary is 250. 10 January 8th, 1987, at a board meeting, Mr. Gross' 11 salary was increased by 16 percent. It talks 12 about the resignation of the prior president. 13 Maybe I'm making an assumption that he was being 14 paid for being president, but he received a 15 16 percent pay increase the exact same day he 16 became president. So, unless I'm wrong, he's 17 being compensated for his additional duties; and 18 his bonus is, you know, as I said before, a 19 performance-based one -- a discretionary one, 20 excuse me -- a discretionary bonus. And I think 21 he already did get benefit of additional salary 22 for his additional duties. 4959 1 Q. And just so it's clear in the record, 2 would you take a look at Item No. T8011, I 3 believe? And if you'd turn to Page 2 at the 4 bottom, is that -- I believe the other ones are 5 the minutes. Is that T8011? 6 Are those the minutes of 7 January the 8th, 1987? 8 A. They are the minutes of UFG -- excuse 9 me -- categorized as minutes of UFG; but it says 10 it's a joint meeting of UFG and USAT on 11 January 8th, 1987. 12 Q. And would you turn to the second full 13 page and look at the bottom of the page and read 14 into the record what appears there? 15 A. Yes. Second full page, last paragraph. 16 "Mr. Whatley reported for the compensation 17 committee on the compensation committee meetings. 18 He stated that the committee was recommending the 19 adjustment of Jenard Gross' salary by 20 approximately 16 percent. After full discussion, 21 such recommendation was unanimously approved." 22 Q. So, Mr. Gross was given a 41,000-dollar 4960 1 raise -- 2 A. Yes. 3 Q. -- on -- 4 A. I'd like to add one more sentence 5 because this is what I discussed. "Mr. Whatley 6 also discussed the status of the resignation of 7 Gerald Williams as executive vice president of the 8 company and president and chief operating officer 9 of United Savings Association of Texas." 10 That is where I'm having the implication 11 that he was -- when he becomes president, he's 12 replacing Gerald in his duties and given the 13 salary. 14 Q. Now, Ms. Clark yesterday pointed out to 15 you that Vivian Carlton, in the course of her 1987 16 examination, had reviewed the September 9th, 1987 17 contracts between UFG and UFG's executive 18 officers. And I believe you testified that you 19 did not raise any concerns with respect to those 20 contracts when you reviewed them? 21 A. That is correct. 22 Q. Did it surprise you that Vivian Carlton 4961 1 didn't raise any concerns either? 2 A. No, it did not. 3 Q. Okay. And using this exhibit on the 4 net worth levels -- I mean -- I'm sorry -- the net 5 worth levels and UFG's reported equity, can you 6 explain to the Court why it is that it did not 7 raise a concern for you? 8 A. Well, we discussed the fact that in 9 April, the examiner said there was a net worth 10 deficiency. But the net worth deficiency I 11 discussed yesterday was, at maximum, $30 million; 12 and it was -- it was under, you know, vigorous 13 discussions whether it was even that large an 14 amount. 15 Q. In fact, I believe the institution 16 itself claimed that they had a positive net worth? 17 A. Yeah. They had a net worth excess for 18 their calculation. At September, which is when 19 the contracts were made, in fact -- I'm sorry. 20 What was the date of those? 21 Q. September 9th. 22 A. September 9th when this was done, they 4962 1 had not yet gotten the results yet. UFG still was 2 reporting a substantial amount of equity. USAT 3 did not have a net worth deficiency. USAT had -- 4 even if they had to come up with the difference -- 5 had over $40 million at the end of September. So, 6 even if there had been a deficiency at USAT, UFG 7 had the apparent ability to do this. 8 Given those circumstances that there 9 were, as we discussed, those safety and soundness 10 regulations specifically dealing with a holding 11 company or any compensation regulations of the 12 holding company, it was a normal business 13 transaction. I would see no reason to deal with 14 it at this point while they are still seemingly 15 quite solvent and capable of meeting any 16 obligations that we were discussing. 17 Q. Okay. And in addition, I believe 18 Ms. Clark pointed out to you that those pernicious 19 contracts contained two times annual compensation 20 as a severance benefit. 21 Do you recall that? 22 A. Yes, I do. 4963 1 Q. Now, do the regulations that you cited, 2 563.39, that pertain to employment contracts with 3 respect to insured depository institutions -- do 4 those regulations also apply to holding companies? 5 A. No, they do not. 6 Q. And was UFG an insured depository 7 institution? 8 A. No. It owned one, but it was not 9 covered under that regulation. 10 Q. Did it surprise you, then, that 11 Ms. Carlton did not comment upon those severance 12 provisions? 13 A. Yes. Excuse me. No, it did not 14 surprise me. 15 Q. Okay. Now, Ms. Carlton also pointed 16 out to you that at the November 10th -- in 17 connection with your review of the November 10th, 18 1987 board minutes -- those are the board minutes, 19 again, where the bonuses were approved by USAT 20 or -- I'm sorry -- were considered by the 21 compensation committee and then later approved by 22 the board, and those are the bonuses that later 4964 1 get paid on January the 4th -- that at your 2 deposition, you stated that you felt that -- 3 MR. KEETON: Your Honor, what is this? 4 Is this Mr. Rinaldi testifying? This is his 5 expert. When he starts reading from several texts 6 and then is going to pose a question, that is not 7 direct examination. 8 THE COURT: We will hear the question. 9 Q. (BY MR. RINALDI) Do you recall, sir, 10 that she asked you whether you had used the term 11 "window dressing" or "lip service"? 12 A. Yes, I do. 13 Q. And do you recall that, during your 14 deposition, you did use those terms? 15 A. Yes, I do. 16 Q. Can you explain for the Court why you 17 used those expressions in connection with the 18 issue of the November 10th, 1987 consideration of 19 the bonuses? 20 A. Okay. Let me try and do that. I used 21 the term "window dressing" or "lip service" in 22 particular discussing the consideration. If I 4965 1 recall, they were talking about the need to have 2 market-based compensation for their executives. 3 And there has been a lot of discussion as to, 4 "Well, isn't that appropriate?" 5 In looking, however, I saw nothing in 6 the compensation committee review or any of the 7 documents that dealt with that that said what the 8 market was. In fact, Mr. Whatley later the 9 following year says, you know, "Let's get a 10 compensation specialist to tell us whether we're 11 meeting the market." 12 So, at November, I see nothing that 13 tells me what is the market. How do they know 14 what the market is? There is nothing there to 15 support this bold statement, "We want to have a 16 market-based compensation." No backup whatsoever 17 of that that I could find. 18 The other portion was talking about, I 19 believe, the cost of replacing employees. They 20 said it will be very expensive to bring new 21 employees in as we lose these people. That's one 22 of the statements that people make; but I think 4966 1 that there needs to be some consideration. What 2 does it really cost us? You have to understand, 3 the institution at this time had been a wholesale 4 operation. Right about this time, we're having a 5 planning conference and they are saying, "There 6 are internal records saying -- well, you know, 7 we've been a wholesale bank. We need to change." 8 They just got through selling a lot of branches. 9 In other words, what's happened is they are 10 changing their organization. They may need to 11 lose people anyway, get rid of people. 12 The question is: What is the cost of 13 doing this? You're complaining that it's going to 14 be very expensive. There is nothing that says it 15 costs us so much per person or it's going to take 16 this much time to find people. You can't 17 quantitize and say, "We couldn't find something 18 for two weeks and it cost us this much." But 19 there is a cost of training and how much time is 20 going to be lost in this. No discussion 21 whatsoever of that. 22 So, to me, just making a bold statement 4967 1 that it's going to cost us a lot of money without 2 any kind of description of what, when, why, or how 3 seemed to be, as I said, lip service/window 4 dressing. 5 Q. And do you recall that in response to 6 Exhibit 8027, which I believe were the minutes of 7 the compensation committee of November 10th, 1987, 8 at which the bonuses were considered, that one of 9 the counsel pointed out to you that it was 10 considered in that meeting that United had 11 suffered operating losses at or about the time 12 they were considering giving the bonuses? Do you 13 see that? Do you recall that? 14 A. Yes, I recall that. 15 Q. Okay. Is there a difference between an 16 operating loss and a net worth deficiency? 17 A. Yes, there is. 18 Q. And can you explain to the Court why 19 consideration of a loss might be different than 20 consideration of a net worth deficiency? 21 A. Let me try. Let me just use this chart 22 to illustrate -- for illustrative purposes. And I 4968 1 want to use the association's determination of the 2 net worth requirement as an example. At this 3 point, the association is making money. They lose 4 money this quarter. They have an operating loss; 5 yet, by their calculation, they still exceed the 6 requirement. This quarter, they have a loss; yet, 7 they still exceed the requirement. 8 So, to me, if an institution is in 9 excess of its net worth requirement and they 10 report to the board, yes, we have an operating 11 loss, if -- and as we're talking about in here, if 12 the operating loss is something where they still 13 believe they are in excess of the net worth 14 requirement, that doesn't necessarily trigger the 15 problem of the safety and soundness issue of 16 whether or not it's appropriate to do this. 17 Operating loss may very well lead to net worth 18 deficiency, but it is not synonymous at the same 19 point in time. 20 Q. And at the point in time when these 21 bonuses were approved, was it your understanding 22 that the board had been advised that they were 4969 1 likely to fail their net worth requirement? 2 A. Certainly the members of the board 3 were. The examination staff had told them that 4 they already were in a failure position of the net 5 worth requirement. So, yes, I believe the board 6 had notice of that. 7 Q. Now, you indicated that USAT was 8 changing its business. Do you recall that? 9 A. Yes. 10 Q. And do you recall that in the beginning 11 of 1988, a decision was made by USAT to bring on 12 Mr. Larry Connell and that, ultimately, in about 13 June or July of 1988, Mr. Connell was brought on? 14 A. Yes. I recall there was a process to 15 bring him to the institution. 16 Q. And can you tell the Court what the 17 reasons were for bringing Mr. Connell back on or 18 bringing him on? 19 A. Let me try. At the time -- well, there 20 were several discussions. And I recall, for 21 instance, Mister -- as counsel has discussed, the 22 institution was concerned about their financial 4970 1 condition. I know Mr. Berner was having 2 discussions with Mr. Twomey who, I believe, on at 3 least one occasion told him that the Federal Home 4 Loan Bank staff was concerned about the operation 5 of the institution, was concerned that they needed 6 a traditional thrift operator at the institution. 7 I think Mr. Berner reported that they were 8 comfortable with the management but they felt that 9 there needed to be another operations -- 10 traditional thrift operator between Mr. Gross and 11 the rest of the management. 12 So, there was some push from the 13 regulators; and, obviously, the institution being 14 concerned about the Southwest Plan, I think as 15 we've discussed, would presumably be taken as a 16 clue to try to get somebody in there. And 17 Mr. Connell seemed to be that individual. 18 Q. Okay. And do you recall ultimately 19 whether Mr. Connell assumed duties of any other 20 individuals at the -- at the institution? 21 A. Yes. I recall that Mr. Connell 22 apparently assumed some of the duties of 4971 1 Mr. Gross. 2 Q. And then shortly thereafter, Mr. Gross 3 resigns and Mr. Connell remains on as the 4 president of the institution; isn't that correct? 5 A. I believe that's correct, yes. 6 Q. Now, there was some point raised about 7 the length of time it took Mr. Twomey to respond 8 to Mr. Berner with respect to comments on 9 Mr. Connell's contract. 10 Do you recall that? 11 A. Yes. 12 Q. Did it surprise you that it wasn't 13 until sometime in October that -- I believe 14 October -- that Mr. Twomey got back to Mr. Berner 15 and the board of directors regarding that 16 contract? 17 A. Not particularly -- no, it did not 18 really surprise me. 19 Q. Did you have occasion to review part -- 20 the record of the supervision of USAT at or about 21 that time? 22 A. Yes, I did. 4972 1 Q. And did that reveal anything about the 2 process by which USAT -- I mean the examiners 3 reviewed the compensation practices at USAT? 4 A. Yes. 5 Q. And can you explain to the Court what 6 you recall of that? 7 A. Well, I believe I recall when 8 Mr. Connell's contract was first sent in, somebody 9 reviewed it and, of course, had some criticisms of 10 it. And one of the things very clearly said was: 11 "There are policy issues here and they should go 12 to the regulatory review committee," which meant 13 that Neil would have to then present it up the 14 line of management of the organization. 15 There also was an interim exam report 16 that came in, I think, around October that had the 17 discussion of all of the contracts, not just 18 Mr. Connell's, and raised a series of concerns 19 about those contracts. If I remember correctly, I 20 think within about 10 or 15 days of that interim 21 report where there were these substantial 22 criticisms, Mr. Twomey then, in fact -- and in a 4973 1 letter we saw yesterday -- went back to the 2 institution and raised some issues about safety 3 and soundness on the contracts. 4 Q. Now, in your review of the record, were 5 you able to determine whether -- well, first of 6 all, did Mr. Berner send a copy of the Connell 7 contract to the bank board? 8 A. Yes. Mr. Berner did send Mr. Connell's 9 contract. 10 Q. And that was a contract between USAT 11 and Mr. Connell? 12 A. Yes, that is correct. 13 Q. Do you know whether Mr. Connell also 14 had a contract with UFG? 15 A. I didn't find a contract with UFG. 16 Q. Okay. And when Mr. Berner sent 17 Mr. Connell's contract in, did you find any 18 evidence that he also submitted to the bank board 19 the additional contracts that were entered into 20 with the executives of USAT on July the 1st, 1988? 21 A. No. And I looked -- tried to look for 22 it. Mr. Berner had earlier stated that there 4974 1 was -- I think when he sent the contract of 2 Mr. Connell, he talked about any contracts that 3 were done/entered into would be in compliance with 4 the regulations. I don't know if that implied he 5 was sending anything, but I looked -- I still 6 can't find anything where he sent any of the other 7 contracts. The first notice I see is when the 8 examiners say, "Here's all these contracts." 9 Q. And do you recall approximately when 10 the examiners first began to talk about the USAT 11 contracts? 12 A. I think I said just a minute ago that 13 there was an interim report around the middle of 14 October where there was a discussion of all these 15 contracts of the individuals, including 16 Mr. Connell, but also expanding it to all of the 17 other contract holders. 18 Q. And on October 20th, Mr. Twomey then 19 writes his letter to the board expressing his 20 views as to the lack of safety and soundness and 21 regulatory implications of those contracts, 22 doesn't he? 4975 1 A. Yes. I believe it was before the end 2 of October that he wrote his letter. 3 Q. Okay. To your knowledge, did 4 Mr. Twomey or anyone at the bank board approve the 5 July 1st, 1988 contracts between USAT and the 6 executives? 7 A. I have no direct personal knowledge, 8 and the record I saw indicates -- does not show an 9 approval by Mr. Twomey or anybody else of the 10 contract. 11 Q. To your knowledge, did anyone at the 12 bank board approve the contracts entered into 13 between USAT and the executives of USAT on 14 February 11th, 1988? 15 A. No. 16 Q. And, in fact, Mr. Berner had told 17 Mr. Twomey that those contracts didn't exist? 18 A. That's correct. 19 Q. Now, Mr. Blankenstein asked you a 20 number of questions regarding the safety and 21 soundness of the compromise of Mr. Gross' debt to 22 UFG. 4976 1 Do you recall that? 2 A. Yes. 3 Q. And you indicated that you had looked 4 at the totality of the circumstances surrounding 5 that. 6 Can you explain to the Court what you 7 meant or what factors you considered in looking at 8 the totality of the circumstances? 9 A. Okay. This chart might help a little 10 bit because it does show Mr. Gross' separation 11 agreement. I talked about the totality and was 12 discussing, of course, the net worth failure at 13 this point, the insolvency of the institution at 14 this point. I find it kind of interesting when I 15 was looking at Mr. Gross' contracts that I just 16 don't recall ever seeing Mr. Gross having a 17 contract in September when these people had 18 contracts. He didn't have one in February. It's 19 only in June -- June 28th with UFGI and July 1st 20 with USAT when the institution itself is now 21 reporting insolvency -- and I think everybody 22 there knew they were insolvent -- that he finally 4977 1 gets a contract. He's never had one before this. 2 He's had this compensation which we've discussed; 3 but he now gets a contract which, of course, 4 establishes his salary at this higher level 5 whereas before, it had been at the board's 6 discretion. He has a contract. He resigns four 7 months later, and it is finally accepted and 8 finalized in November. 9 So, here we have Mr. Gross in a 10 situation where he serves out -- enters into a 11 contract at the last minute where everything is 12 already falling down around their ears in a 13 sense -- falling down around their ears in a sense 14 that United Savings is insolvent. UFGI has been 15 reporting that it is insolvent since the end of 16 1987. It has had to compromise its debt. It is 17 showing little ability to pay its obligations. 18 They have entered into this contract; and now, 19 just a few months later, he's saying, "Well, 20 you-all owe me this money," as Mr. Blankenstein 21 said, a million plus dollars they owe him and, you 22 know, "I owe you 600,000. Let's compromise and 4978 1 settle this." 2 That contract only lasted five months. 3 It seems, you know -- it just struck me, as the 4 circumstances were, that this was done at the last 5 minute; and it was too late in the game to be 6 doing this. They already were in the net worth 7 situation. Their responsibility was to protect 8 the assets of UFG and USAT to avoid this net worth 9 deficiency. They are in a severely restricted 10 situation because they are in actual equity 11 failure here; and, yet, they are entering into a 12 contract and then settling it later. It just 13 struck me that -- well, not struck me. 14 My analysis was that this was an unsafe 15 and unsound process to do this in this type of 16 timetable. 17 Q. Now, you indicated that on June the -- 18 June of 1988, when Mr. Gross entered into his 19 contract, that the institution was -- had negative 20 net worth. 21 On the day that they considered 22 Mr. Gross' contract, do you recall whether they 4979 1 also considered Mr. Connell's contract? 2 A. I believe -- yeah. I believe it was 3 the same date that they considered all of these 4 contracts. 5 Q. And Mr. Connell was going to assume 6 some of the duties of Mr. Gross? 7 A. That's correct. As I just said a few 8 minutes ago, he assumed some of the 9 responsibilities of Mr. Gross and retained those 10 responsibilities when Mr. Gross left. 11 Q. And reviewing the record, you 12 indicated -- what were the reasons why Mr. Gross 13 was going to step aside and allow -- and they were 14 going to bring on Mr. Connell? 15 MR. EISENHART: Your Honor, I don't 16 want to unduly truncate Mr. Rinaldi's redirect; 17 but an awful lot of this is highly repetitive. It 18 really has very little to do with the 19 cross-examination. This witness has been on the 20 stand for quite a while. There is another witness 21 who OTS plans to put on and get off the stand 22 today who has already been waiting around for a 4980 1 day to get on. I really wonder how much longer 2 this is going to go on and if we can't eliminate 3 some of the repetitiveness here and move it along. 4 MR. STEARNS: Your Honor, I think it's 5 directly responsive to the questions asked by 6 Mr. Blankenstein concerning his client, Mr. Gross, 7 and by Mr. Keeton; and it seems to me Mr. Rinaldi 8 is moving along as rapidly as possible in these 9 areas. 10 MR. KEETON: Your Honor, I think 11 Mr. Rinaldi can protect himself. He sure doesn't 12 need Mr. Stearns -- 13 THE COURT: All right. I think we have 14 enough on that. 15 Mr. Rinaldi, how much more do you have 16 on your redirect? 17 MR. RINALDI: Perhaps two more 18 questions, Your Honor. 19 THE COURT: All right. Proceed. 20 MR. RINALDI: I'll have to make them 21 good, though, if I only have two. 22 Q. (BY MR. RINALDI) Would you take a 4981 1 look at your expert opinion? And directing your 2 attention to the last full sentence -- 3 A. Mr. Rinaldi, I don't have a copy here. 4 You didn't leave one up here. 5 Q. It should be A11048. 6 THE COURT: Mr. Rinaldi, somebody 7 should hand these documents to the witness rather 8 than have the witness go fishing through boxes to 9 find it. 10 MR. RINALDI: I'm sorry, Your Honor. I 11 apologize. I thought that he had been given a 12 copy of his opinion at the beginning of yesterday 13 and that it would have been right there. 14 Q. (BY MR. RINALDI) Yeah. Would you 15 take a look at the last sentence of Part F. 16 A. Part F summary or Part F -- 17 Q. On Page 8. 18 A. Okay. Yes. 19 Q. It is commenting on the fact that 20 Mr. Gross, Mr. Berner, and Mr. Munitz all had 21 their claims compromised. 22 Do you see that? 4982 1 A. Yes. 2 Q. And the last sentence reads "As a 3 consequence of UFG's entering into these unsafe 4 and unsound employment agreements, UFG ultimately 5 dissipated substantial assets that otherwise 6 should have been used to maintain the net worth of 7 USAT under UFG's net-worth maintenance 8 obligation." 9 Do you see that? 10 A. Yes, I do. 11 Q. Is it your opinion that the same would 12 be true with respect to Mr. Gross' employment 13 agreements and a compromise thereof? 14 A. Yes. I think -- I tried to make it 15 very clear when I was discussing the methodology 16 of his contract, and that is exactly what I'm 17 trying to say. 18 Q. Okay. And, to your knowledge, is Graef 19 Crystal a safety and soundness expert? 20 A. Not to my knowledge. 21 Q. And is safety and soundness the 22 principal basis upon which you base your opinions 4983 1 here today? 2 A. That's correct. 3 MR. RINALDI: I have no further 4 questions, Your Honor. 5 THE COURT: Ms. Clark, you have some 6 recross? 7 MS. CLARK: Yes, I do, Your Honor. 8 THE COURT: Proceed. 9 10 RECROSS-EXAMINATION 11 12 13 Q. (BY MS. CLARK) Mr. Dermody, did you 14 testify that the reason you didn't form an opinion 15 regarding the safety and soundness of the 16 September 1987 contracts was that they were UFG 17 contracts and, at the time they were entered into, 18 UFG had sufficient net worth to cover any 19 deficiency in USAT's net worth requirement? 20 Was that your testimony this morning? 21 A. Yes. My testimony was the information 22 that appeared to be available at that time was 4984 1 that -- 2 Q. I'm sorry. Do you recall that there 3 was considerable discussion at your deposition 4 about the reason why you did not form an opinion 5 on the safety and soundness of the September 1987 6 contracts and you did not give that explanation at 7 that time? 8 A. Yes, I recall. At the time we were 9 discussing the deposition, I believe the questions 10 were: "You didn't review it?" 11 No, I hadn't been asked to review it. 12 Subsequently, my discussion today is I went back 13 and looked. And would I be interested in it? No. 14 And these are the reasons why I would not be 15 interested. 16 Q. In fact, you had reviewed the 17 September 1987 contracts prior to the time of your 18 deposition; isn't that true? 19 A. I had looked at them, yes. 20 Q. And you had formed no opinion that they 21 were unsafe and unsound, correct? 22 A. That's correct. I still have not 4985 1 formed that opinion that they are unsafe and 2 unsound. 3 Q. And when you were asked why you didn't 4 form an opinion that they were unsafe and unsound 5 at your deposition, your testimony was, in 6 substance, that the story in your view started 7 later. The story began with USAT's net worth 8 deficiency which you dated to October of 1987 at 9 that time, correct? 10 A. That's correct. 11 Q. But, in fact, your date for the net 12 worth deficiency is September of 1987 on your 13 chart. It's No. 2 on your chart, correct? 14 A. No. My Chart No. 2 says the 15 examination staff informed them in April there was 16 a deficiency. And I've said that -- what I was 17 talking about is at the time of September, they 18 didn't know about this deficiency. I mean, they 19 knew the examiners were saying this; but they 20 weren't aware of it. It's only after December 21 that they retroactively seem to admit that there 22 is a September 30th and December 31st deficiency. 4986 1 So, you know, I don't see that there 2 was any knowledge -- other than the examiners, 3 which they were contesting strenuously, that there 4 was any deficiency -- knowledge of any deficiency 5 other than that examiners' criticism and 6 discussion at the time of these contracts. 7 Q. So, in your view, if the examiners had 8 advised USAT of the net worth deficiency but they 9 themselves did not agree with it, they were free 10 to go ahead and increase salaries and award 11 bonuses without violating any safety and soundness 12 rules; isn't that correct? 13 A. I think that with the examiners putting 14 them on notice, they should have been seriously 15 concerned about this. They were contesting this 16 very clearly; and I want to give them the benefit 17 of the doubt in saying if they were right, at that 18 point in time, then it would be an appropriate 19 action to take to give these bonuses and salaries. 20 And I'm not saying it was unsafe and unsound at 21 the time in September when they did it. 22 Q. Okay. And how about November? On 4987 1 November 10th, which is prior to the time that 2 you've just testified they admitted their net 3 worth deficiency. 4 A. November 10th is different because 5 there we have No. 3 where management themselves -- 6 not just the examiners saying "you failed" and 7 there is an argument. 8 Management itself is saying, "By golly, 9 in two days, we may fail." October 29th, 10 Mr. Berner's memo: "Two days, we may fail" or a 11 strong implication that if it's not then, it's 12 going to happen right afterwards. 13 So, by November 10th, it's no longer the 14 examiners telling us we're going to disagree. We 15 know that we're really on the verge and we're 16 right there and probably past that point. 17 Q. So, there is a possibility at that 18 time; and that's the important thing for you? 19 A. Not just a possibility. It's the 20 knowledge. Their own internal projection is that 21 they are there. No longer just a possibility. 22 Q. Is there any doubt in your mind from 4988 1 reviewing the documents that Vivian Carlton had 2 formed a conclusion that there was a net worth 3 deficiency by the time she reviewed the 4 September 1987 contracts? 5 A. No, there is no doubt that she had 6 formed the conclusion of a net worth deficiency. 7 Q. Now, I think you testified that it 8 didn't surprise you that she did not detect a 9 safety and soundness problem with the UFG 10 contracts that she reviewed, the September 1987, 11 UFG contracts, because Section 563.39 does not 12 apply to holding company contracts. 13 Was that the reason why you did not 14 consider it significant that she review those 15 contracts and did not cite them for safety and 16 soundness problems? 17 A. Yes. 18 Q. Now, do you recall that the examination 19 work papers that we reviewed yesterday at, I 20 believe, Exhibit A11032 also contained a copy of a 21 contract with Dominic Bruno? 22 A. Yes, I recall that there was a copy of 4989 1 Mr. Bruno's contract. 2 Q. And do you recall with which company 3 that contract was entered into? 4 A. I believe it was USAT. 5 Q. And do you recall that it had a 6 provision for the securing of the compensation 7 arrangements under that contract? 8 A. Yes, I do. 9 Q. And that Vivian Carlton did not cite 10 that USAT contract for safety and soundness 11 problems even though it appears that she had no 12 doubt in her mind that USAT was failing its net 13 worth requirement at that time? 14 A. Correct. And I think there is a very 15 good reason, which I've already discussed. That 16 is, in their announcement of Mr. Bruno's hiring at 17 the institution, they are talking about a 18 substantial portfolio they have that he's going to 19 manage. He's going to be the man to come in and 20 manage this. They are already talking about how 21 we're having problems with how we're running the 22 institution. They are bringing in a man from the 4990 1 outside, and this is a key difference between him 2 and the insiders I've talked about. He is an 3 outsider, as is Larry Connell, who's brought in. 4 They are going to have to pay the going rate in 5 the sense to get an outsider coming in. The only 6 way they can get somebody to come in -- an 7 important distinction. And yes, they may have had 8 to pay that. And from a safety and soundness 9 point of view, you may argue it has the same 10 features; but the distinction is who is involved 11 in doing this, where the person comes from. 12 Again, the totality of the circumstances. 13 Q. And do you see any indication 14 whatsoever in the examination records that you 15 have reviewed that Vivian Carlton made that 16 distinction in her mind when she did not cite the 17 Bruno contract and the Laurenson contract and the 18 other contracts for safety and soundness problems? 19 A. I saw nothing that tells why. I'm 20 describing to you why I would -- why I did not -- 21 was not surprised. 22 Q. So, you're just speculating about that 4991 1 subject, correct? 2 A. I'm answering a question -- 3 MR. STEARNS: Your Honor, the question 4 asks for speculation because it asks what is in 5 Ms. Carlton's mind, and he's testified frequently 6 he was not a participant in the supervision of the 7 institution at that time. I think we're far 8 beyond the scope of redirect at this point. 9 THE COURT: I believe the question was 10 did he see anything that indicated that 11 Ms. Carlton had considered the distinction. 12 MR. STEARNS: I believe that was the 13 prior question, but her final question was: 14 "You're just speculating, aren't you?" 15 THE COURT: Well -- 16 MS. CLARK: I'll move on, Your Honor. 17 I think the answer to that question is obvious. 18 Q. (BY MS. CLARK) Do you recall 19 reviewing the minutes of the February 11th, 1988 20 board meeting attended by Vivian Carlton where the 21 February '88 USAT contracts were approved? 22 A. Yes, I do. 4992 1 Q. And those were contracts with USAT; 2 isn't that correct? 3 A. The question was the USAT -- pardon me. 4 They were USAT contracts, correct. 5 Q. And do you recall that the minutes 6 state that "Mr. Berner discussed in detail the 7 views of the compensation committee concerning 8 employment contracts to be entered into between 9 the company and certain executive officers." Went 10 on to say "It was noted that these contracts were 11 identical to contracts entered into by UFGI and 12 would be effective -- only be effective if UFGI 13 could not perform under such contracts." And then 14 went on to discuss the reasons why the 15 compensation committee had decided to enter into 16 these contracts. I'm reading from Exhibit A1141 17 which has already been admitted in evidence. 18 A. I'm sorry. It was a long question. 19 Would you repeat the part you're asking? Do I 20 recall -- 21 Q. Do you recall that the minutes 22 described the discussion at the February board 4993 1 meeting? 2 A. Yes. From what you've read, yes, I 3 recall a discussion like that. 4 Q. And again, you saw no indication in the 5 record that you have reviewed in the case that 6 Vivian Carlton ever raised any questions 7 concerning the safety and soundness of the 8 February contracts with USAT which were described 9 at the meeting as identical to the UFGI contracts 10 that she had previously reviewed? Is that -- 11 A. Yes. 12 Q. My question is: Have you seen anything 13 in the record to indicate that she raised a 14 problem with those contracts? 15 A. My answer is: No, I did not see 16 anything. 17 MS. CLARK: Thank you. 18 THE COURT: Mr. Blankenstein? 19 MR. BLANKENSTEIN: Just a few quick 20 questions, Your Honor. 21 22 4994 1 2 RECROSS-EXAMINATION 3 4 5 Q. (BY MR. BLANKENSTEIN) Didn't 6 Mr. Gross have a contract in February of 1988 7 which gave him severance rights should he be 8 terminated for less than cause? 9 A. I just said I don't recall -- when up 10 here, I said I don't recall him having that 11 February '88 contract. 12 Q. Isn't that February '88 contract one of 13 the contracts that you, in your report, determined 14 was unsafe and unsound and now you don't remember 15 the terms of that contract? Is that your 16 testimony, sir? 17 A. We've been through a lot of contracts 18 today. My testimony was the February contracts 19 were unsafe and unsound, that's correct. 20 Q. You testified -- I think in connection 21 with Mr. Rinaldi's questions -- that Mr. Gross' 22 salary increase from $250,000 in 1986 base salary 4995 1 to $291,656 in 1987 base salary was to reflect the 2 fact that he became the president of USAT in 3 January of '87; is that right? 4 A. I said that that -- from the view of 5 the record, that appears to be what it was for. 6 Q. That was an assumption you made; is 7 that right? 8 A. I said that. 9 Q. And did you go back to look to see 10 whether Mr. Gross' base salary had been regularly 11 increased before he assumed the duties of 12 president? 13 A. I had looked at his compensation, and I 14 believe his compensation had been increased from 15 1985. 16 Q. From 1985 -- his base salary had been 17 increased from 1985? 18 A. 1985 to 1986, that is correct. 19 Q. And he didn't assume any new duties in 20 that regard, did he? 21 A. I wasn't aware of any duties. 22 Q. Why don't you take a look at what's 4996 1 been marked as A3013 which is -- 2 MR. BLANKENSTEIN: I believe it's 3 already in evidence, Your Honor. 4 A. This is the -- 5 Q. (BY MR. BLANKENSTEIN) 1986 proxy 6 statement. 7 A. Uh-huh. 8 Q. What does it state for Mr. Gross' total 9 cash compensation? 10 A. Mr. Jenard Gross' total cash 11 compensation: $266,846. 12 Q. I'd like you to look at Footnote No. 1 13 which talks about directors' fees; is that right? 14 A. Yes.