2320 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 TRIAL PROCEEDINGS FOR 10-8-97 21 22 2321 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 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 2322 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 (Not present) 20 REPORTED BY: 21 Ms. Marcy Clark, CSR Ms. Erica Davis, CSR 22 Ms. Stacey Whitley, CSR 2323 1 2 INDEX OF EXAMINATION 3 4 Page 5 6 MR. GEORGE KOZMETSKY 7 8 Examination by Mr. Rinaldi..................2325 9 Examination by Mr. Villa....................2444 10 Examination by Mr. Keeton...................2473 11 Further Examination by Mr. Rinaldi..........2474 12 Further Examination by Mr. Keeton...........2482 13 14 15 MR. JACQUES "JACK" LAZARD 16 17 Examination by Mr. Veis.....................2484 18 Examination by Mr. Eisenhart................2572 19 Further Examination by Mr. Veis.............2582 20 21 22 2324 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:00 a.m.) 3 THE COURT: Good morning. The hearing will 4 come to order. 5 MR. RINALDI: If it please the Court, there 6 has been some discussion about the placement of the 7 podium. If you have no objection, I put it over 8 here. It makes it easier to collect the documents 9 and so forth. 10 MR. VILLA: No objection, Your Honor. 11 THE COURT: All right. Next item of 12 business. 13 MR. RINALDI: George Kozmetsky is the next 14 witness unless there is some other housekeeping 15 matter. 16 THE COURT: All right. Be seated, please. 17 18 19 GEORGE KOZMETSKY, 20 21 called as a witness and having been first duly sworn, 22 testified as follows: 2325 1 2 EXAMINATION 3 4 Q. (BY MR. RINALDI) Good morning, 5 Mr. Kozmetsky. 6 A. Good morning. 7 Q. Would you state your full name for the 8 record? 9 A. George Kozmetsky. 10 MR. RINALDI: Okay. Can everybody hear? 11 Q. (BY MR. RINALDI) Mr. Kozmetsky, can you 12 give us just a brief description of your educational 13 background? 14 A. My educational -- 15 Q. Yes. How are you educated? 16 A. You want me to start at high school in 17 Seattle? 18 Q. I think probably at the college level would 19 be fine. 20 A. All right. I did my undergraduate work at 21 the University of Washington. I got my MBA from 22 Harvard Business School, and I got my doctorate of 2326 1 commercial science at the Harvard Business School. 2 Q. And what year was that that you got your 3 MBA at Harvard? 4 A. I got my MBA in June of 1947, my doctorate 5 of commercial science in 1957. 6 Q. And what is a doctorate of commercial 7 science, sir? 8 A. The exact meaning of commercial science is 9 the degree that they were giving before World War II 10 started; and then shortly after, I got my degree. 11 They then went to DBA. 12 Q. And DBA stands for? 13 A. Doctorate of Business Administration. 14 Q. Okay. And after you got your doctorate of 15 business administration, can you give the Court a 16 brief description of the -- your employment 17 experience? 18 A. Well, there was a ten-year gap between my 19 MBA and my doctorate; and may I fill that for you? 20 Q. You certainly may, sir. 21 A. As soon as I got my MBA, I was appointed an 22 instructor at the Harvard Business School while I was 2327 1 working on my doctorate. In 1950, I was appointed 2 assistant professor at a new graduate school of 3 industrial administration at Carnegie Institute which 4 later the name got changed to Carnegie Melon. In 5 1951 January, I went to the Hughes Aircraft Company 6 in California where I was assistant controller for 7 analysis and planning. Also a member of the Advanced 8 Technology Electronics Laboratory. I was also on the 9 policy committee for digital computers, and they 10 allowed me to do mathematical modeling of 11 semiconductor production facilities. I stayed there 12 until 1953, I believe. 13 I went to Litten Industries as the 14 director of the digital computer division. I 15 subsequently became corporate vice president and with 16 Dr. Singleton, became co-directors of the Litten 17 Weapon Systems Laboratory. 1960, in August, 18 Dr. Singleton and I started a company called 19 Teledyne. I was executive president, vice president, 20 and he was the president. I was also on the board, 21 and I stayed there until August of 1966 when I came 22 to the University of Texas to occupy the following 2328 1 positions. I'm executive associate to this day for 2 economic affairs for the University of Texas system 3 which encompasses about 15 campuses including 4 6 million schools. I am also today a professor of 5 management, a professor of computer science, and at 6 the San Antonio Medical School, I'm adjunct professor 7 in biotechnology. Until two years ago, I was also 8 the director of a think and do tank called IC Squared 9 which stands for Invasion Creativity and Capital. I 10 think those will cover all the positions that I've 11 held. 12 Q. Now, you indicated that you and 13 Mr. Singleton in about 1960 started up a company 14 known as Teledyne? 15 A. Yes. 16 Q. What was the nature of the business of 17 Teledyne, sir? 18 A. The nature of the business of Teledyne was 19 to build a company in the communications and control 20 industry. 21 Q. And I believe you indicated that by 1966, 22 you left Teledyne? 2329 1 A. Yes, sir. 2 Q. Did you continue on as a member of the 3 board of directors of Teledyne? 4 A. Yes, I did. 5 Q. Okay. And how long did you remain on the 6 board of directors of Teledyne? 7 A. I believe I resigned from the Teledyne 8 board about two years ago. 9 Q. So, that would have been about 1995? 10 A. Yes, sir. About then. I can't remember 11 the exact date. 12 Q. Okay. And you indicated that then you went 13 onto the University of Texas and served in a number 14 of capacities. Did you also start a business school 15 or head the business school in Texas? 16 A. I forgot to tell you the most important 17 title. I resigned from in 1982 was being dean of the 18 college and graduate school of business, yes. 19 Q. And when did you begin your tenure as the 20 dean of the college? 21 A. 1966. 22 Q. Okay. So, that would have been your 2330 1 initial position? 2 A. Right. 3 Q. And so, you stayed there for several years? 4 A. I don't want to confuse you, but I want to 5 answer you accurately. 6 Q. Sure. 7 A. I have held a number of titles 8 simultaneously. 9 Q. I understand that. 10 A. And I've given them up one at a time. 11 Q. And -- but you now have the title of 12 professor of management? Is that it? 13 A. Professor of management, professor of 14 economics, professor of computer science at the 15 medical school adjunct, professor of biotechnology 16 and a new title. I'm an IC Squared fellow. 17 Q. I see. And do you continue to carry a full 18 load of -- with respect to your employment or are you 19 part time? 20 A. No. I'm full time. 21 Q. Okay. And in addition to serving on the 22 Teledyne board, did you have occasion to serve on any 2331 1 other boards in your professional career? 2 A. Yes. 3 Q. Okay. And what boards have you served on, 4 sir? 5 A. Let's see if I can remember the number of 6 them. Gulf Oil, Dale Corporation, La Quinta, Student 7 Loan Marketing or Selling, TIAFF. I'm sure there are 8 others. 9 Q. Okay. And in terms of the time frames, 10 what period of time were you serving on the Gulf Oil? 11 A. It was in the Seventies. 12 Q. And how about Dale Corporation? 13 A. I just -- I think I've been on that board 14 until May of this year. 15 Q. And how long? 16 A. For nine or ten years. 17 Q. And is that the same Dale that's the 18 computer company? 19 A. Yes, sir. 20 Q. And La Quinta, is that the group that runs 21 the motels? 22 A. Yes, sir. 2332 1 Q. Okay. And TIAFF, what is that? 2 A. It is the Teachers Insurance Annuity and 3 something. It basically handles the retirement funds 4 for teachers. 5 Q. For the State of Texas? 6 A. No, sir. For the nation. 7 Q. Okay. 8 A. It's a private organization, multi-billion 9 dollars are invested, and I was on the common stock 10 side of it. 11 Q. And when you say you were on the common 12 stock side of it, what does that mean? 13 A. They had us in groups. 14 Q. And you were overseeing their investments 15 in common stock? 16 A. Reviewing the policies and looking at how 17 well the investments were doing and making 18 recommendations. 19 Q. So, they would have had professional asset 20 managers that would be managing the stock portfolio? 21 A. Yes. 22 Q. And you would have been part of a group 2333 1 that would set policy for -- 2 A. Right. 3 Q. And what was the period of time that you 4 served on that board, sir? 5 A. I can't remember exact dates, but I think 6 it was three years. 7 Q. Would it have been recently or sometime in 8 the past? 9 A. It was shortly after I became dean. 10 Q. So, back -- 11 A. Sometime in the late Sixties, early 12 Seventies. 13 Q. Now, did there come a point in time when 14 you served on any boards associated or affiliated 15 with Charles Hurwitz? 16 A. Yes. I served object on a number of boards 17 affiliated with Mr. Hurwitz. 18 Q. Okay. And can you at least take us back 19 and identify when your association with Mr. Hurwitz 20 or any of his affiliates first began? 21 A. I first met Mr. Hurwitz through one of the 22 members of the college and graduate school of 2334 1 business advisory board members. His name was Louis 2 Kasurik, a partner of one of the regional investment 3 banking firms who was a partner in the San Antonio 4 office; and he came to me to tell me that Mr. Hurwitz 5 was very interested in starting a hedge fund and 6 would I please serve on his board. 7 He had a very distinguished board by 8 that time and one of the reasons I had come to 9 Texas -- two reasons I came. One, as the university 10 said, they wanted a graduate school that would keep a 11 brain power in Texas and the second one was I thought 12 that Texas was poised in about the same position that 13 I had lived through in California and watching the 14 so-called high-tech industry grow. And so, I wanted 15 to be involved in helping the industry grow so I 16 could be a better dean. 17 Q. And approximately what year would this have 18 been? Sometime -- 19 A. Sometime late Sixties, early Seventies. 20 Q. Okay. And as a result of your discussions 21 with Mr. Kasurik, did you ultimately become 22 affiliated with the hedge fund? 2335 1 A. That was the hedge fund. That start. 2 Q. And when you say the hedge fund, that was 3 the title of it? 4 A. That was the title of the company. 5 Q. Okay. And what was the nature of that 6 company's activities, sir? 7 A. It was to invest in hedges. 8 Q. Okay. When you say -- 9 A. Through hedge fund management. 10 Q. And when you say "invest in hedges," what 11 do you mean by that? 12 A. Well, I assume you're probably more 13 familiar with all of the policies that one has to do 14 in doing hedge. You're buying shares, saying they 15 are going to go down in value; and so, you're 16 watching the stock market and trying to select shares 17 that would go down. 18 Q. And what was your role with respect to the 19 hedge fund? 20 A. I was on the board. 21 Q. And did you have any positions on any 22 committees on that board? 2336 1 A. I don't believe -- to the best of my 2 recollection, I can't remember if I was or wasn't. 3 Q. And as a result of your becoming associated 4 with the hedge fund, did you become -- come to be -- 5 to know Charles Hurwitz? 6 A. Yes, sir. 7 Q. And after your service began with respect 8 to the hedge fund, did you have occasion to serve on 9 any other boards that were affiliated with 10 Mr. Hurwitz? 11 A. Well, the hedge fund was the primary one. 12 It was subsequently sold and I believe the company 13 was started which has initials. I can remember the 14 "S" and the "M"; but I can't remember the last two 15 that then led to another company, Federated. 16 Federated, that followed into McCullough. 17 McCullough's name got changed to MCO and then 18 subsequently, its current name. 19 Q. Okay. Let me see if I've got this 20 straight. So, who -- was it Mr. Hurwitz that asked 21 you ultimately to join the hedge fund? 22 A. Yes. He came with Mr. Kasurik. 2337 1 Q. I see. And was there a reason why he 2 wanted you on that be fund that he expressed to you? 3 A. Well, I really don't know what his reasons 4 were. I can tell you my reasons. 5 Q. Fine. What were your reasons? 6 A. Well, I was the dean of a new business 7 school that I was trying to grow into world class and 8 move it from a regional school to a world class 9 school and one of the new fields that was starting 10 up -- it had no digital computers when I came; so, I 11 made sure we got a digital computer. It was very 12 obvious our finance department was behind. And I 13 wanted to bring our finance work up into world class 14 so I not only got interested in the hedge fund to see 15 how computers could do in that area. I also was 16 asked by some other investment banking firms to join 17 two other types of funding not associated with 18 Mr. Hurwitz. So, I was on three boards which are 19 were on the cutting edge of what was how do you 20 invest people's funds; and I then started doing 21 graduate work in how do you manage funds. I said 22 funds, not portfolios. And so, I built computer 2338 1 models and personally taught them for six years and 2 probably turned out 2- to 500 students. 3 Q. Now, you indicated that after the hedge 4 fund, there was something called SM; and you didn't 5 remember the full name. Was that? 6 A. SMR something. 7 Q. Was that a successor to the hedge fund? 8 A. Yes. Well, it was a new company. 9 Q. What happened -- 10 A. Hedge fund was sold. 11 Q. Okay. And that was sold by Mr. Hurwitz? 12 A. It was sold -- well, I don't think 13 Mr. Hurwitz does the selling. He's got a 14 corporation. The corporation was sold to another 15 corporation and the board obviously was involved in 16 those decisions. So, I have a hard time saying he 17 sold it. 18 Q. Was he the -- 19 A. The board as a whole sold it. 20 Q. Was he the principal shareholder of the 21 hedge fund at that point? 22 A. I can't remember. I know -- I just can't 2339 1 remember if he was or not. 2 Q. Do you recall whether he controlled over 3 10 percent of the stock of the fund? 4 A. I can't remember. Sorry. 5 Q. Okay. And then the hedge fund then met 6 more -- strike that. The hedge fund then, after it 7 was sold, you became involved with this other entity, 8 SMR something? 9 A. Yes. 10 Q. And what was the nature of that company? 11 A. I'm trying to remember. I think we 12 eventually ended up in reinsurance. 13 Q. Okay. And when you say reinsurance, was 14 that Federated Reinsurance? 15 A. No. Prior to that. 16 Q. I see. And again, were both of these 17 companies entities that Mr. Hurwitz was involved 18 with? 19 A. Yeah. 20 Q. And did he ask you to serve on the SMR 21 board? 22 A. Yes, he did. 2340 1 Q. And then on the reinsurance board, did he 2 also then ask you to serve on that board? 3 A. Yes. 4 Q. Do you know, was he a principal or the 5 principal shareholder of the reinsurance entity? 6 A. I'm sure that he -- he was a shareholder. 7 And exact amounts that he owned, I'm awfully sorry. 8 I don't remember now. 9 Q. Okay. And after Federated -- I'm sorry. 10 After reinsurance, did the corporate structure then 11 change again? 12 A. Yes, to Federated. 13 Q. Okay. And Federated was a New York trust; 14 is that correct? 15 A. Yes. 16 Q. And so, what was your position with respect 17 to Federated? 18 A. I was on the board. 19 Q. Okay. And you would have been a trustee as 20 opposed to a member of the board of directors? 21 A. Right. 22 Q. In your mind, is there any real significant 2341 1 difference between serving as a trustee of a trust 2 such as Federated or a member of the board? 3 A. Let me just simply say any board or any 4 time I'm a trustee, I'm always very careful in how 5 other people's moneys are used. I'm also very 6 conscious of what I would call social responsibility 7 and ethics and more or less are extremely important 8 to me. 9 Q. And when approximately did you go on to the 10 Federated board? 11 A. I don't remember the date. 12 Q. Would it have been in the 1970s, 1980s? Do 13 you recall? 14 A. I'm awfully sorry. I can't remember 15 specific dates. 16 Q. Well, is it fair to say that after you 17 began to serve with the hedge fund in 1969, that you 18 were continually serving on one board or another of 19 an entity affiliated with Mr. Hurwitz? 20 A. I don't know if it started in '69 as I told 21 you earlier. 22 Q. Well, '69 or '70? 2342 1 A. But yes, as these moved on, I did serve on 2 these boards. 3 Q. Now, you indicated that you also served on 4 an entity named McCullough. Is that McCullough Oil? 5 A. Yes, sir. 6 Q. Okay. Now, was McCullough the same as 7 Federated or was it a subsidiary or a separate 8 corporate enterprise? Do you recall? 9 A. I always viewed it as a separate 10 corporation. I'm sure that Federated probably owned 11 a percentage of. 12 Q. Okay. And how was it that you came to be a 13 member of the McCullough Oil board? 14 A. I think the people, Mr. Hurwitz and the 15 other board members of Federated, asked me to serve 16 on that and it came at a very propitious position in 17 my life at the university. It was right at that time 18 our country was facing energy problems and I was 19 appointed head of research, all energy on the Austin 20 campus, a position which I held for about five, six, 21 seven years and became very important to me and for 22 the citizens of Texas in discharging my academic 2343 1 responsibilities to better understand the energy 2 problems at a firm level as well as a national policy 3 level. 4 Q. So, this -- your participation on the 5 McCullough Oil board would have started about the 6 time of the oil crisis? That would have been 1977? 7 A. It's blurred, but it's in that period 8 there. 9 Q. Well, I remember gas lines and I think they 10 were about in the '77, '78 period. Is that what 11 you're referring to? 12 A. Well, yeah. That's minor. I subsequently 13 had to serve on a federal commission on supplies and 14 shortages; and I know that report was delivered to 15 the president, Carter at that time, in December of 16 1979. So, having experience in all of this plus a 17 lot of theoretical work and a lot of technology was 18 quite important to me. 19 Q. And so, at about this point in time, you 20 would have been on the McCullough board? 21 A. Yes, sir. 22 Q. Now, did McCullough then subsequently 2344 1 change into another corporation? 2 A. The names were changed. If you look at the 3 original McCullough company, you'd had two major 4 lines of business. One of them which was exciting 5 and interesting to me was called "new cities." 6 Q. I'm sorry. It was called what? 7 A. New city. 8 Q. Okay. 9 A. Real estate. Not too many people have an 10 opportunity to look at starting new cities like 11 fountain hills, Lake Havasu, and I forget the names 12 of some of the other places. And at the same time, 13 they were also in oil and geothermal. 14 Q. And was new city then a subsidiary of 15 McCullough Oil? 16 A. Say again. 17 Q. Was new city -- 18 A. No. That's just my way of classifying it. 19 If you'd like to put quotes around it. 20 Q. I see. 21 A. Lots of people would say real estate, but 22 that doesn't really describe what it was there. They 2345 1 had been building new cities. 2 Q. Okay. So, this would be like planned 3 communities that would be developed? 4 A. Yeah. A lot of people have heard about the 5 London Bridge being moved from London and put out in 6 the Arizona desert. That's called lake Havasu; and 7 so, they built a whole new community there. So, it 8 was what was of great interest to me was how do you 9 build new communities? If you looked at government 10 regulations as I was interested in plus other things 11 and found that these were tax purposes, second homes, 12 leisures. They weren't just retirement communities. 13 People were trying to buy this for leisure. I was 14 very interested in the new communities because one of 15 the things that became obvious to me was how in the 16 world did you build jobs so there would be a 17 community so there would be work for people. 18 And ever since I've been off of 19 Mr. Hurwitz's board, I have gotten a world reputation 20 in being able to take technology and develop 21 communities. I've been able to put together how a 22 community works in this and just fairly simply it 2346 1 says in any community, Austin was my experiment as 2 the director of IC Squared, it says in Austin, if you 3 couldn't get the academic and the private and the 4 government sectors to work together, you weren't 5 going to get very far. And even after you got that, 6 them working together, then it says you needed a new 7 infrastructure if we were going to create wealth and 8 prosperity through the resources which I call 9 technology. And that required four things. 10 That was, first, you better have 11 talent including people that could -- mentors and 12 facilitators. You obviously needed technology. The 13 third thing you needed was capital. And then I 14 discovered there was something much more important 15 than those first three which I call very tangible and 16 I called it an intangible and that's know-how and so, 17 I found that all of this work I was doing to be a 18 better dean, a better -- academics helped me a great 19 deal so that if you look at this pattern, I'm very 20 glad I was on the boards and had to wrestle with real 21 problems like that. 22 Q. Now, did McCullough Oil then subsequently 2347 1 assume or become a different corporation or take on a 2 new title? 3 A. Oh, yes. 4 Q. Okay. And what was that title? 5 A. We called ourselves MCO. 6 Q. That's MCO Holdings or -- 7 A. Yeah. 8 Q. And did you then continue to serve in the 9 capacity as director for MCO Holdings? 10 A. Yes, I did. 11 Q. And were there any other Hurwitz affiliates 12 during this period of time whose boards you served on 13 that you recall? 14 A. I'm very sorry. I'm sure that there 15 must -- there could have been some; but once you say 16 MCO, that's the board I served on. If there were 17 subsidiaries and whatnot, I can't remember them now. 18 Q. Do you recall an entity named 19 Federated Reinsurance? 20 A. I remember reinsurance, yes. 21 Q. Okay. Was that a board that you also 22 served on? 2348 1 A. Yes, I did. 2 Q. But you remember it as reinsurance as 3 opposed to Federated Reinsurance? 4 A. Right now, I can't -- I don't know. I'm 5 confused. 6 Q. Okay. 7 A. And I'd rather refresh my memory because 8 reinsurance is quite important. 9 Q. Now, did there come a point in time when 10 you were serving on the boards of MCO and Federated 11 when a potential investment in an entity known as 12 United Financial Group, Inc., arose? 13 A. Yes. 14 Q. Okay. And what do you recall of that, sir? 15 A. Well, let's see. The first time 16 Mr. Hurwitz talked to me about a change in the 17 government regulations at the state level, I had the 18 opportunity to read them. 19 My first one was how difficult the 20 situation was going to be for the savings and loans, 21 especially with what was happening to interest rates. 22 Then a little later, I gave it some thought and said 2349 1 this was an important thing because the whole banking 2 community including S&Ls was extremely important to a 3 dean of a graduate school who was turning out 4 specialists and professionals as well as, hopefully, 5 managers of such institutions. And I thought this is 6 right at the very beginning of some change I could go 7 into, and that was a wise thing that I decided to 8 join with Mr. Hurwitz and the others to go into 9 United. 10 Q. Now, you -- 11 A. It proved very valuable because all the 12 work I've done not only on this; but if I look at the 13 regulations of the utilities, the telecommunication, 14 the trucking and the airline industry, this was very 15 valuable to have the experience if you're an academic 16 and trying to come up with better ways of educating 17 and teaching. 18 Q. Now, you indicated that you talked to 19 Mr. Hurwitz about changes in government regulations. 20 A. I did not say that. I said I read the 21 regulations that had the change. 22 Q. Okay. You indicated, though, that you had 2350 1 spoken to Mr. Hurwitz regarding the subject of 2 United Financial Group. What was the general nature 3 of the conversation you had with Mr. Hurwitz? 4 A. The general nature could be capsulized as 5 how does one manage assets and liabilities? And if 6 you looked at the savings, they had assets and 7 liabilities and the whole area of managing at that 8 time, people weren't talking about managing assets 9 and liabilities. They always managed assets and 10 United was a very interesting situation for a new 11 type of management of assets and liabilities and so, 12 I wanted to learn more and participate in it. 13 Q. What do you mean it was a very interesting 14 situation for management of assets and liabilities? 15 A. Well, you've got to remember that I'm a 16 fairly independent person. I don't have to live on a 17 dean's salary or a faculty salary. And I'm very 18 interested in paying back to society the benefits 19 which our American society has provided to me and my 20 family. I happen to be a first generation-born 21 American and I'm so glad that I have parents with 22 courage to leave Russia and say that I got born here 2351 1 and ever since I had the means, I have been wanting 2 to pay back to the American society and my way is 3 obviously to be -- to create not only a great 4 institution of turning out people but also advancing 5 the frontiers, the whole idea of managing assets and 6 liabilities is something that's come only since the 7 Seventies. Sixties was the first time we even had 8 any type of a mathematical model on how to manage a 9 portfolio. 10 Subsequent, people got a few Nobel 11 Prizes on that; but we're still struggling with that. 12 This is on the cutting edge of how do you manage 13 these things? How do you evaluate? And I provided 14 myself on being a fairly decent researcher so I 15 always like one foot in research and another foot in 16 the practical world so that I'm working on real 17 problems. So, the savings situation at that time, 18 when you change a regulation, gave you the 19 opportunity to look at real problems. 20 Q. Now, when you first spoke to Mr. Hurwitz 21 about United Financial Group, did you discuss the 22 question of managing of assets and liabilities of 2352 1 savings and loans? 2 A. When we discussed it, very much so. 3 Q. And what were Mr. Hurwitz's views regarding 4 the management of assets and liabilities of savings 5 and loans? 6 A. He saw opportunities. 7 Q. When you say that Mr. Hurwitz saw 8 opportunities, what do you mean by that? 9 A. I'm afraid you'll have to ask Mr. Hurwitz. 10 I'm sorry. I answer questions like an engineer 11 sometimes. 12 Q. So, he -- 13 A. You asked me what Mr. Hurwitz thought. I 14 told you he saw opportunities. There were many 15 things there that he may have seen that I can't speak 16 for him. But for myself, I told you my primary one. 17 Q. Did he indicate to you what he thought 18 those opportunities might be? 19 A. No, because at that time, it's kind of 20 impossible to take something and to have a crystal 21 ball and see where it's going. The first thing is 22 that you have to have an opportunity to work on those 2353 1 problems and that's what I think he saw. Certainly I 2 saw that. 3 Q. When he indicated to you that it presented 4 an opportunity, did he discuss with you any plans 5 that he might have with respect to UFGI? 6 A. No. The only discussions we had, if you 7 own the securities and the savings did well, your 8 security prices eventually would be recognized by the 9 market, by the public market and those were the 10 opportunities. 11 Q. So, if you owned shares of the 12 correspondence and the corporation does well, then 13 you as a shareholder do well and that's the 14 opportunity? 15 A. That's right. 16 Q. Okay. Now, you indicated had earlier 17 that -- you made a reference to interest rates and 18 what was happening with interest rates. Do you 19 recall making a statement to that effect? 20 A. Yes. 21 Q. What were you referring to? 22 A. Well, if you recall, we went through quite 2354 1 a period where interest rates -- I've never seen them 2 so high in my life. If you take a look at real 3 interest rates by the time I was growing up in the 4 early part of my career, they were something like 2 5 or 3 percent. I shall never forget when I came here 6 in 1966 and I looked at the University's Permanent 7 Fund, PUF, P-U-F, that the interest rates were 8 running 2 to 4 percent and then if you go to the 9 early period of president Reagan's administration, 10 they crashed through the Twenties. That's quite a 11 swing. And then if you have fixed mortgage rates, 12 that's a real challenge. 13 Q. And was that the interest rate issue that 14 you were referring to earlier that assets and 15 liabilities of thrifts were mismatched? 16 A. Right. 17 Q. And did you have a discussion with 18 Mr. Hurwitz regarding that mismatch at or about the 19 time you discussed -- 20 A. Very, very slight. There was a mismatch, 21 period. There was not much more to discuss. 22 Q. You need to just wait until I finish my 2355 1 question. 2 A. I beg your pardon. 3 Q. Otherwise, while you know what I'm asking, 4 the person that may be reading the transcript, or 5 something, may not fully understand the nature of 6 your response. You indicated, also, that there had 7 been -- you made a reference to government 8 regulations. Did you discuss changes in government 9 regulations with Mr. Hurwitz? 10 A. I don't remember discussing it very much. 11 Q. Okay. Do you recall that about this time, 12 there were changes in the government regulations of 13 savings and loans? 14 A. On savings and loans, yes. 15 Q. And what is your recollection of that, sir? 16 A. I don't remember them. 17 Q. Do you remember the impact or the effect 18 that they had on savings and loans? 19 A. The potential impact, yes. 20 Q. Okay. And what was that potential impact? 21 A. Potential impact is if interest rates ran 22 wild, any S&L with fixed interest rates was in 2356 1 trouble. 2 Q. And do you recall that there were changes 3 in regulations which permitted savings and loans to 4 become involved in different kinds of invest wants? 5 A. That was the change in the regulations, 6 yes. 7 Q. And was this at or about the time that you 8 spoke to Mr. Hurwitz about United Financial Group? 9 A. It was that time. 10 Q. Now, did there come a point in time when 11 any of the -- or one of the Hurwitz affiliated 12 entities made a determination to invest in 13 United Financial Group? 14 A. I'm sure there was, but I don't recall the 15 specifics. 16 Q. And with respect to the initial investment, 17 how was it that United Financial Group came to your 18 attention, UFGI? 19 A. I believe the first time it came to my 20 attention is when Mr. Hurwitz mentioned it to me. 21 Q. Okay. Did Mr. Hurwitz indicate to you at 22 that time that he thought this might be a good 2357 1 opportunity or a good investment for Federated or one 2 of the Hurwitz affiliated entities? 3 A. I don't remember that. 4 Q. Do you recall that in about the beginning 5 of 1982, a decision was made by Federated Reinsurance 6 to purchase up to 10 percent of UFGI shares? 7 A. The Eighties are kind of murky in my mind. 8 I don't remember the date. 9 MR. RINALDI: Let me hand you a copy of 10 what's previously been marked as A2062. I'll hand a 11 copy up to the Court. This has previously been 12 admitted, Your Honor. It's a 13G -- D. I'm sorry -- 13 that was filed. It's A2062. 14 Q. (BY MR. RINALDI) Now, if you'll take a 15 look at the second page, it indicates on that page at 16 the bottom that Federated Reinsurance Corporation had 17 acquired 57,675 shares of United Financial Group 18 which represented 9.6 -- 9.68 percent of the 19 corporate common stock. Do you see that? 20 A. I see Federated Reinsurance, and I see the 21 stock. 22 Q. And then at the bottom of the page, it 2358 1 indicates three lines? 2 A. I see that number, yes. 3 Q. Okay. Do you recall, were you serving on 4 the board of Federated Reinsurance at the time that 5 the initial investment by Federated in 6 United Financial Group occurred? 7 A. I was. 8 Q. Okay. Now, directing your attention to 9 pages 4 and 5 of Exhibit 2062 that you have before 10 you and specifically to page 5, the first full 11 paragraph, do you see that? 12 A. Yes, I do. 13 Q. Okay. It says by letter dated 14 February 19th, 1982, a copy of which is attached 15 hereto as Exhibit I, counsel to FedRe notified the 16 office of the secretary, I can't tell, of the Federal 17 Home Loan Bank Board, Washington, D.C., that FedRe 18 was considering increasing its investment in the 19 company. That would be United Financial Group -- to 20 between 10 and 20 percent of the shares. Do you see 21 that? 22 A. I read that, yes. 2359 1 Q. Okay. Do you recall why it is that FedRe 2 decided that they wanted to acquire between 10 and 3 20 percent of the outstanding common shares of 4 United Financial Group? 5 A. I imagine because they thought it was a 6 good opportunity at the time. 7 Q. And do you recall having any -- did you 8 discuss that opportunity with Mr. Hurwitz at this 9 point in time? 10 A. I think it's important to tell you if -- I 11 don't remember discussing it with Mr. Hurwitz. But I 12 can tell you I'm a very responsible board member and 13 this sort of thing would come up at a board and it's 14 important that the board was involved. 15 Q. Now, in the next paragraph down, it says 16 FedRe does not have any present intention to seek to 17 acquire power to direct the company's managements or 18 policies or to exercise control of the company or any 19 of its subsidiaries or affiliates. Do you see that? 20 A. I read that. 21 Q. And did you have any discussions with 22 Mr. Hurwitz regarding FedRe's involvement in 2360 1 United Financial Group? 2 A. No, I didn't have discussions with 3 Mr. Hurwitz. 4 Q. Did you have discussions with other members 5 of the board at the board meeting? 6 A. We had discussions as a board. 7 Q. And -- 8 A. May I? 9 Q. Sure. 10 A. See if I can get clear here. I have never 11 been on any of these boards with Mr. Hurwitz where 12 there was a discussion between himself and myself and 13 decisions were made. Decisions to me were always 14 important. They had to be made by boards. That 15 belongs to -- those are the responsibilities of the 16 board. You'll have to excuse me. I take those 17 things extremely seriously so... 18 Q. And in connection with the board meetings 19 and the presentation at the board, did you have 20 occasion to discuss FedRe's acquisition of 21 20 percent -- up to 20 percent of the assets of 22 United Financial Group? 2361 1 A. Yes, we did. 2 Q. And at the board meeting, do you recall 3 whether Mr. Hurwitz indicated to the other members of 4 the board the reasons why -- well, was it his view 5 that FedRe should acquire the shares of 6 United Financial Group? 7 A. The board decided. 8 Q. I understand that. But did he -- 9 A. I can't remember -- I don't -- I would 10 never say Charles forced the board to do anything. 11 Q. Well, I'm not asking you to say that 12 Charles forced the board. 13 A. But I don't understand. I don't know how 14 to answer you except to say I don't remember. 15 Q. Do you recall whether Mr. Hurwitz made a 16 presentation to the board regarding UFGI? 17 A. I don't recall. 18 Q. Okay. Do you recall whether Charles was a 19 proponent of the FedRe acquiring shares of UFGI? 20 A. I would say he was in favor of it. 21 Q. Okay. And do you recall any discussions of 22 the board regarding FedRe's exercise of control over 2362 1 UFGI? 2 A. I don't recall, but surely this sentence is 3 right. 4 Q. Now, there's been testimony previously that 5 one of the reasons that the FedRe board wanted to 6 acquire UFGI was that there had been announced that a 7 Mr. Ludwig was going to purchase United financial -- 8 or -- that is, that United Financial Group was going 9 to sell United Savings Association of Texas to 10 Mr. Daniel K. Ludwig? 11 MR. KEETON: Your Honor, I object to the 12 form of the question. Counsel refers to -- there's 13 been testimony. If he wants to ask a question, 14 that's fine; but it's improper to repeat testimony of 15 one witness assuming there actually has been to 16 another witness. I object therefore to the form. 17 THE COURT: All right. Why don't ask you 18 him his knowledge of this proposal? 19 MR. RINALDI: I don't even think there is a 20 question before the witness. 21 Q. (BY MR. RINALDI) Directing your 22 attention to Page 13 -- 2363 1 MR. KEETON: That was exactly my point, 2 Your Honor, the sidebar comments are not proper in 3 this kind of examination. 4 MR. RINALDI: Richard, I was simply trying 5 to help the witness so that he would not be -- 6 THE COURT: All right. Let's go on with 7 the next question. 8 Q. (BY MR. RINALDI) Directing your 9 attention to page 13 then, it makes -- this is a 10 document which was previously presented in evidence. 11 And in the first paragraph, in the body, it says 12 United Financial Group said its board has approved 13 the sale of a savings and loan association and two 14 other subsidiaries to investor Daniel K. Ludwig for a 15 cash payment of $47 million. 16 A. Yes. 17 Q. Do you recall any discussions at the 18 Federated or FedRe board regarding Mr. Ludwig's 19 purchase of a savings and loan from United Financial 20 Group? 21 A. I'm sorry. I don't remember the date. 22 Q. When FedRe first decided to become involved 2364 1 in the purchase of UFG shares, was there some due 2 diligence conducted of that potential investment? 3 A. I can't remember the details; but I can 4 assure you that any board, especially on FedRe, due 5 diligence was always done. 6 Q. Okay. And who would have done the due 7 diligence on the FedRe board? 8 A. Staff. 9 Q. Okay. And would they have then have made a 10 recommendation to the board? 11 A. I don't recall, but we certainly would have 12 reports to look at and ask questions. 13 Q. And who would have presented those reports 14 to the board, sir? 15 A. They are always part of the package, almost 16 every board I've served on, I insist that the board's 17 books be prepared and passed out a week ahead of time 18 so that we have a chance to examine them and be 19 prepared to ask questions. 20 Q. Now, did there come a time after the 21 initial 9.8 percent or 9 -- let's see what the actual 22 percentage is so that we don't get Mr. Keeton too 2365 1 upset. 9.68 percent? 2 MR. KEETON: Your Honor, I didn't say 3 anything when he addressed me directly a minute ago; 4 but could you ask Counsel to just ask questions? 5 THE COURT: Well, I don't think that kind 6 of a comment is helpful. 7 Q. (BY MR. RINALDI) It says -- a moment 8 ago, we looked at what was Exhibit A2062 and it 9 indicated that FedRe had acquired 9.68 percent. Do 10 you recall that of UFGI? 11 A. It's on this page, yes. 12 Q. Okay. Now, did there come a time when 13 FedRe decided that they wanted to go acquire a larger 14 interest in United Financial Group? 15 A. Yes, there was. They acquired a larger 16 group. 17 Q. Okay. And -- 18 A. Or a larger share. I'm sorry. 19 Q. Let me show you a copy of what's been 20 previously marked as T1004. 21 MR. RINALDI: And this also has been 22 previously admitted into evidence, Your Honor. 2366 1 Q. (BY MR. RINALDI) And if you'll take a 2 moment just to look at that. And specifically, what 3 I'd like to direct your attention to -- and take as 4 much time as you need. But on the first full 5 paragraph of the first page, it indicates that FedRe 6 is contemplating increasing its investments of UFGI 7 to 24.9 percent of the outstanding shares. Do you 8 see that? 9 A. That's what the sentence says. 10 Q. Okay. Do you recall why it was Federated 11 decided that they wanted to contemplate increasing 12 their investment to 24.9 percent of the outstanding 13 shares of UFGI? 14 A. I don't remember the details. 15 Q. Now, at or about this time, did you view 16 UFGI to be a good investment opportunity for FedRe? 17 A. I have a very hard time putting myself into 18 1982. 19 Q. Well, do you recall that -- whether, as a 20 personal investor, you made the determination that 21 you would also like to acquire an interest in 22 United Financial Group, Inc.? 2367 1 A. Yes, I did. 2 Q. Okay. And did you subsequently obtain a 3 position or -- in United Financial Group, Inc.? 4 A. Yes, I did. 5 Q. Okay. And how did that come about, sir? 6 A. Two reasons. One, if you go back to that 7 time, you will find there was a great deal of 8 discussion about board members having financial 9 interests. That was one. 10 Secondly, I also did what my wife has 11 always told me to do, that if you're going to serve 12 on a board, put your money. Put it at risk along 13 with the others. 14 Q. But you were serving on the Federated 15 board, and you were serving on the MCO board. And 16 I'm making reference to purchases of United Financial 17 Group. 18 A. And that was all disclosed to the boards 19 before we did it. 20 Q. I understand that. My question to you is 21 do you recall that you acquired shares of UFGI? 22 A. The answer to that is yes. 2368 1 Q. Okay. And what was your purpose for 2 acquiring those shares, sir? 3 A. One, to be a responsible board member. And 4 two, to make sure that I get just along with the 5 other share holders also grow in value. 6 Q. Now, when you say to be a responsible board 7 member, what did you mean by that? 8 A. That -- responsible board members at that 9 particular period of time were to have some ownership 10 stake. 11 Q. At the time you have some ownership stake, 12 you mean in the corporation on whose board you sat? 13 A. That's right. 14 Q. Okay. So, at the time you acquired the 15 UFGI shares, did you anticipate that you were going 16 to go on that board? 17 A. I can't recall the sequence. 18 Q. I understand that. But you said you wanted 19 to be a responsible citizen or a responsible 20 director. 21 A. All I'm telling you, I don't remember the 22 times. I was a director. I was a responsible 2369 1 director. Yes, I did own shares as a director. 2 Q. All right. Do you recall that in 3 connection with your acquisition of shares of UFGI, 4 that you were required to file -- it was necessary 5 that a 13D be filed? 6 A. Yes. I know there was a 13D filed. 7 Q. All right. Let me hand you a copy of 8 what's been previously marked as A2075. 9 MR. RINALDI: This has been also previously 10 admitted, Your Honor. I believe it was in 11 connection -- it was a group exhibit or part of a 12 group exhibit that Ezra Levin identified and was put 13 into evidence at that time. 14 MR. RINALDI: I'm sorry. Let's see. Let 15 me also hand you what has been marked as 2065. 16 Again, this is also a 13D and this is Amendment No. 4 17 and it is, again, a document that was identified by 18 Mr. Ezra Levin. And directing your attention to the 19 A2065 document. Now, do you recall how large a 20 position you obtained with respect to UFGI initially? 21 A. The answer is no. 22 Q. Okay. If you'll look at the third and 2370 1 fourth pages, it -- I'm sorry. The fourth and fifth 2 pages, it makes reference to a George Kozmetsky and 3 then a Ronya Kozmetsky whom I assume is your wife? 4 A. Yes. Ronya's my wife. 5 Q. Okay. And does that refresh your 6 recollection that at or about the date of this 13D 7 which I believe is August 26th, 1982, you acquired 8 some 90,941 shares of UFGI? 9 A. Yes. 10 Q. And that represented one and a half percent 11 of the outstanding shares of the company? 12 A. Yes. 13 Q. Now, if you turn to the last page of that 14 document at page 12, did you acquire these shares in 15 conjunction with Federated, sir? 16 A. I don't recall timing. 17 Q. If you turn to Page 12 of the document 18 which is I guess two or three pages in from the 19 end -- yeah. That would be the page, sir. Do you 20 see there is a chart up there? Do you recall 21 purchasing shares of UFGI in conjunction with 22 Federated? 2371 1 MR. VILLA: Objection. I don't understand 2 the word "in conjunction with." 3 MR. RINALDI: If he doesn't understand the 4 question, I can rephrase it. 5 Q. (BY MR. RINALDI) Do you understand the 6 question, sir? 7 A. No. Would you explain it, please? 8 Q. Well, if you look at the chart, it says 9 that there is a trade date of 8/26/82. And Federated 10 purchased 43,423 shares of UFG stock at $2.75. And 11 then below, it says Dr. and Mrs. Kozmetsky on the 12 same date with the same settlement date purchased the 13 identical number of shares for the identical price. 14 Do you see that? 15 A. I see that. 16 Q. And then if you look on the next line down, 17 it says on 8/31/82, there was a purchase of 35,750 18 shares at 250 a share; and the next set of numbers 19 below indicates that an identical purchase was made 20 by Dr. and Mrs. Kozmetsky as tenants in common. And 21 the same is also true on 8/31/82. Do you see that? 22 A. Yes, I do. 2372 1 Q. Okay. Do you recall that you and Federated 2 were purchasing, at or about the same time, shares of 3 UFGI? 4 A. I don't recall that. 5 Q. Do you recall whether you discussed those 6 purchases with Mr. Hurwitz? 7 A. I don't recall that. 8 Q. Do you recall whether you discussed with 9 Mr. Hurwitz the potential -- your potential 10 investment personally in UFGI? 11 A. I don't recall discussions like that. 12 Q. And it would be fair to say, though, 13 wouldn't it, sir, that before you would have made any 14 of these purchases, you would have disclosed your 15 intention to the Federated board? 16 A. Oh, yes. 17 Q. And -- now, there are a number of 18 representations in this document regarding the 19 intentions of the parties as to the purposes for 20 acquiring the shares. Now, directing your attention 21 to pages 8 and 9, it states at the bottom of page 8, 22 by virtue of Dr. Kozmetsky's position as trustees of 2373 1 Federated, Doctor and Mrs. Kozmetsky may be deemed to 2 acquire beneficial ownership for purposes of section 3 13A and 13G of the act of the shares beneficially 4 owned by Federated. Do you see that? 5 A. I read that. 6 Q. Okay. And it says, however, 7 Mr. and Mrs. Kozmetsky expressly disclaim the 8 disclaimer that they are members of a group as 9 defined by 13D-5(b)1 as they are not parties to any 10 agreement with Federated or FedRe for the purposes of 11 acquiring holding, voting, or disposing of the 12 shares. Do you see that? 13 A. I read that. 14 Q. Okay. Do you recall how it was that you 15 came to purchase the shares of Federated at the exact 16 same time that Federated made its own purchases? 17 A. I don't recall that. It might help the 18 Judge. I don't buy or sell shares. My family has a 19 staff that does that, and I don't get involved with 20 them. 21 Q. Now, you indicated that you don't buy or 22 sell shares. Is there a trust that handles the 2374 1 assets? 2 A. No. We have a staff. 3 Q. Okay. And so, the staff works then 4 directly for you? 5 A. For my wife, yes. 6 Q. I see. So, is it your wife then that would 7 be supervising the purchase of shares of this nature? 8 A. That's right. 9 Q. Do you recall having any discussion with 10 your wife regarding the acquisition of shares of 11 UFGI? 12 A. Yes. 13 Q. Okay. And what were those discussions? 14 A. Those discussions were I thought I was 15 joining this -- going to be on the board and that I 16 thought this was an investment we ought to make. 17 Q. So that -- I'm sorry. 18 A. I'm sorry. 19 Q. I didn't mean to interrupt you. 20 A. You didn't. Thank you. 21 Q. Okay. 22 A. You're very nice. Thanks. 2375 1 Q. So that in August of 1982 when you acquired 2 your shares of UFGI, it was your belief that you 3 would become a member of the board of UFGI? 4 A. I don't recall something like that at all. 5 Q. Well, I understand that. But -- 6 A. I don't recall when I was even suggested to 7 be a member of the board. All right? 8 Q. Well -- 9 A. That wasn't the important thing for me. 10 Q. Well, I understand that. But what I'm just 11 trying to understand is when I asked you earlier what 12 your motivation for acquiring the UFG shares was, you 13 said that one of the motives was you wanted to be 14 kind of a good corporate citizen and own shares of 15 the corporation on whose board you'd sit. 16 A. The simplest way I can express my opinion 17 to you now, as I told you, I have no -- my opinion is 18 I have no objections of being on United's board. And 19 as you see if you complete all those sentences there, 20 I had no agreement with anyone to vote my 21 independence at all. 22 Q. No. And I certainly wasn't suggesting 2376 1 that. I was trying to -- 2 A. I'm so glad you didn't. 3 Q. What I was trying to do is refine or expand 4 a little on your answer as to the reasons why you 5 purchased the shares. Now, in the last paragraph, in 6 paragraph 9, did you discuss with Mr. Hurwitz or 7 other members of the board of FedRe the exercise of 8 control over UFGI? 9 A. No. 10 Q. Now, did there come a time when you 11 acquired additional shares of UFGI? Do you recall? 12 A. I'm sure there was. I don't know when. 13 Q. Okay. Do you recall anything of the 14 circumstances? 15 A. Not at all. 16 Q. Okay. Now, how long -- did you continue to 17 hold shares of UFGI for some period of time? 18 A. Personally? 19 Q. Yes. 20 A. No. We donated it to our family foundation 21 eventually. Don't ask me when. If it's important, 22 I'll get the date for you. 2377 1 Q. Would that have been before or after -- 2 A. Oh, I'm sorry. I'm not sure if I did 3 donate it or not. I can't tell you. 4 Q. But you never sold it? 5 A. My memory is bad as you saw. 6 Q. But to your recollection, you never sold 7 it? 8 A. I have no idea. 9 Q. Okay. Now, on page 2 of Exhibit 2065, it 10 indicates that FedRe owned 701,000 shares or 11 12 percent of UFGI. 12 A. What page are you on, please? 13 Q. I believe it's on page 2 of Exhibit 2065. 14 A2065, do you see that? 15 A. Yes. 16 Q. And that represented according at least to 17 this document, 12 percent of the then outstanding 18 shares of UFGI. Do you recall that shortly 19 thereafter, Federated borrowed money from MCO and 20 acquired additional shares of UFGI with the funds 21 loaned to it by MCO? 22 A. I don't remember that. 2378 1 THE COURT: Mr. Rinaldi, I don't have 2065 2 and 2075 as having been previously received. 3 MR. RINALDI: Your Honor, I believe that we 4 offered them as a group exhibit through Mr. Levin and 5 he identified them all and they were put in a binder. 6 But I will offer both 2065 and 2075 at this time just 7 to -- 8 THE COURT: All right. Received. 9 MR. RINALDI: -- to make sure that the 10 record's straight. 11 MR. NICKENS: Our records indicate, Your 12 Honor, that they were offered and received; but we 13 have no objection in any event. 14 THE COURT: All right. For purposes of my 15 records, I'll receive them again. 16 Q. (BY MR. RINALDI) Mr. Kozmetsky, I'm 17 handing you yet another one of these 13Ds. This is 18 A2076. And it is Amendment No. 15. And I believe it 19 was previously offered as the group exhibit. 20 MR. RINALDI: But I would offer it at this 21 time just to be -- out of an abundance of caution. 22 MR. NICKENS: No objection. 2379 1 THE COURT: Received. 2 Q. (BY MR. RINALDI) And this is a fairly 3 voluminous document; but if you look at the bottom -- 4 MR. RINALDI: Your Honor, to speed things 5 up, I think I'll just skip over to the next one. 6 This will make things easier, sir. This is A2066, 7 and I think it will facilitate matters. Let me 8 hand -- I believe these have been offered. And 9 again, this is a 13D. 10 Q. (BY MR. RINALDI) I had a moment ago 11 asked you if you recall that loans had been made from 12 MCO to Federated and that Federated had used the 13 proceeds of those loans to purchase additional shares 14 of UFGI. Directing your attention to Exhibit 2066 15 which I have just handed to you, it indicates that at 16 page 24, that on October 1st, a loan agreement was 17 entered into between MCO Holdings and Federated 18 Development Corporation and a copy of that loan 19 agreement is attached. Do you see that? 20 A. I see that, yes. 21 Q. Now, you served on the boards of both MCO 22 and Federated at about this point in time; is that 2380 1 correct? 2 A. Yes. 3 Q. Do you recall what the purpose was for the 4 loan arrangement between Federated and MCO at this 5 time? 6 A. Sitting here today, I can't recall. 7 Q. Okay. Do you recall that Federated was 8 going to use the funds to purchase additional shares 9 of UFGI? 10 A. As I told you, I have no recollection. 11 Q. Okay. After the initial discussions on the 12 Federated or FedRe boards to acquire shares of UFGI, 13 do you recall any other discussions either at the MCO 14 board or the Federated board regarding the 15 acquisition of additional UFGI shares? 16 A. No, I don't. 17 Q. Do you recall as a member of the MCO board, 18 whether Mr. Hurwitz was a proponent of MCO acquiring 19 shares of UFGI? 20 A. I don't have the recollection of those 21 meetings. 22 Q. Let me show you what's been previously 2381 1 marked as Exhibit T1032. 2 THE COURT: Could we receive 2066? Did you 3 offer that. 4 MR. RINALDI: Well, I would offer it into 5 evidence since it's only been offered as a group 6 exhibit and I would offer it individually at this 7 time. 8 MR. NICKENS: No objection. 9 MR. RINALDI: Thank you. 10 THE COURT: Received. 11 Q. (BY MR. RINALDI) This is a set of 12 minutes of the board of directors of MCO Holdings. 13 It's dated December 15th, 1982, and I'd ask you to 14 take a moment to look at that. And you'll see that 15 most of the board activities or a substantial portion 16 has been redacted and the only portion I wanted to 17 direct your attention to is the unredacted paragraph 18 that appears on page 3 and if you just take a moment 19 to look at that. 20 A. Where it says "resolved"? 21 Q. Yeah. Above that, there is a long 22 paragraph that starts with the words "the chairman 2382 1 next reported." 2 A. Oh. That's my first page. 3 Q. Now, you've had a moment to look at the 4 minutes of the board of MCO for December 15th, 1982. 5 Do you recall whether you attended this board 6 meeting, or can you tell by looking at the minutes 7 whether you attended? 8 A. I can't tell. 9 Q. Was there -- I notice that on the last 10 page, it indicates that the minutes were approved and 11 your signature or a signature appears above your 12 name. If you approved the minutes, would you have 13 attended the board meeting? 14 A. I don't know. Normally. 15 Q. I'm really trying to ask you about -- 16 A. I don't recall, but that is my signature. 17 Q. Okay. Well, I guess my question is -- 18 A. And I normally would not sign any minutes 19 if I had not been there. 20 Q. Okay. So, would you conclude from the fact 21 that you signed off on the minutes approving them 22 that you attended this board meeting? 2383 1 A. That makes logical sense. 2 Q. Okay. Thank you. Now, it indicates here 3 that the chairman had reported that the corporation 4 had an opportunity to purchase 603,448 shares 5 amounting to approximately 2.2 percent -- 6 20.2 percent of the outstanding common stock of First 7 American Financial of Texas. Do you recall that 8 Mr. Hurwitz reported to the board that a merger was 9 going to occur between -- 10 A. I don't have any recollection of that. 11 Q. And after reading this paragraph of the 12 minutes, it does not refresh your recollection in any 13 way? 14 A. Some very great board members came on 15 United from that. That's my recollection. 16 Q. Okay. 17 A. Very good. Very solid. 18 Q. Is it fair to say, sir, if you signed off 19 and approved the minutes, that the minutes of the 20 board meeting would accurately reflect what occurred 21 at the board meeting? 22 A. Yes, sir. 2384 1 Q. Okay. Now, it makes reference in this 2 several times to the fact that UFGI -- I mean MCO was 3 going -- and Federated were going to acquire up to 4 but less than 24.9 percent of the outstanding shares 5 of UFGI. Do you recall why it is that Federated and 6 MCO did not -- or wanted to acquire up to but less 7 than 24.9 percent of the outstanding shares? 8 A. All I can tell you that I remember, there 9 must be some regulation. 10 Q. But you have no recollection of the precise 11 reason? 12 A. No. 13 Q. Now, when you were first approached with 14 the subject of possibly becoming -- Federated or MCO 15 becoming involved in a savings and loan -- and I'm 16 going back to the original conversations that you had 17 or conversation you had with Mr. Hurwitz, what was 18 your reaction to that? Were you -- 19 A. You have a tendency to ask questions that 20 are difficult to answer. I don't know how you 21 interpret the word "initial discussions." 22 Q. Okay. When the subject was first raised, 2385 1 were you wholeheartedly in support of it? Did you 2 have reservation as soon as were you neutral? 3 A. I just don't shoot from the hip. I've 4 obviously spent a great deal of time thinking about 5 it, looking up things. Okay? 6 Q. Okay. And when you say -- 7 A. And after I had done -- I guess a nice 8 phrase would be due diligence personally, then I 9 decided yes, it would be good. 10 Q. Now when you say "due diligence," was 11 this -- 12 A. I'm sorry. I should never use that word. 13 Q. But I mean were you making reference to a 14 general investment in the savings and loan industry 15 or were you making reference to a specific investment 16 in -- 17 A. Specific investment. In other words, I 18 would look at it as an investment, what are the risks 19 and what are the opportunities, make a sound 20 judgment. 21 Q. And that would have been your practice? 22 A. Yeah. It's not just have a discussion with 2386 1 somebody who says that, you know, this is going to be 2 a good deal and go and invest in it. I don't do 3 things like that. That's not me. 4 Q. And you indicated that you would have done 5 some due diligence. As you sit here today, do you 6 recall what it is that you had -- you did in terms of 7 conducting due diligence with respect to UFGI? 8 A. Yeah. This was an opportunity to do some 9 things which are cutting edge and new that would help 10 not only the S&L but perhaps contribute to the whole 11 industry. 12 Q. Now, when you say it was an opportunity to 13 be do some new things with cutting edge, what did you 14 mean by that? 15 A. By "cutting edge," what I mean is you are 16 looking at other ways of doing things which fit -- 17 which would make a sound company and a profitable 18 company. 19 Q. And when you say you were looking at other 20 ways of doing things, did you -- 21 A. If I said I was looking, I was thinking. 22 Q. Okay. Well, thinking of other ways of 2387 1 doing things? 2 A. Yeah. 3 Q. Was it your view that you might be able to 4 improve on the way that thrifts had been managed in 5 the past? 6 A. I was hopeful, yes. 7 Q. And was it your view that in a period of -- 8 you used the term "deregulation." Do you remember 9 that earlier with respect to airlines, I think, and 10 communications, did you view this as a period of 11 deregulation for thrifts as well? 12 A. Not in -- I was using it more loosely. All 13 right? Because the regulations or change is what I 14 meant by deregulation. All right? I don't think we 15 ever -- all right? So, I was looking, as you stated 16 earlier when you were asking me your question, that 17 would allow us to invest in other things. 18 Q. And -- 19 A. That's what I meant by that. 20 Q. You mean other non-traditional thrift 21 investments? 22 A. Non-traditional. You've got to remember 2388 1 that I come from a period when all of this was 2 started not only in school but one of my best 3 classmate's father was head of home loan. And so, I 4 met his father and I followed. This was a change 5 that came out of the depression. Long ways from it. 6 Q. And when you say it was a change, do you 7 recall that there had been legislation sometimes 8 referred to as the Garn-St. Germain? 9 A. No, I don't remember that name. 10 Q. Okay. Who was Barry Munitz? 11 A. Barry Munitz? Dr. Munitz -- 12 Q. That is correct. 13 A. -- is the one who is -- Dr. Barry Munitz 14 has just been recently appointed to be the executive 15 director of the Getty Museum. 16 Q. Now, when did you first become acquainted 17 with Mr. Munitz? 18 A. I got acquainted with him when he was the 19 chancellor of the University of Houston. 20 Q. And would you at that point in time still 21 have been affiliated with the University of Texas? 22 A. Yes, sir. 2389 1 Q. So, you held somewhat similar positions at 2 the same point in time? 3 A. No. I'm sorry. Barry always had a higher 4 position than I ever had. He was chancellor. 5 Q. Okay. And in connection with your academic 6 sort of affiliations, did you come to know Barry at 7 some point in time? 8 A. Yes, I did. 9 Q. What would have been the time frame that 10 you met Mr. -- 11 A. I don't. 12 Q. -- Munitz? 13 A. It was early in his tenure as a chancellor. 14 Q. And did there come a time when Mr. Munitz 15 became affiliated with Mr. Hurwitz or any of his 16 affiliated corporate enterprises? 17 A. Yes. 18 Q. And do you recall approximately when that 19 would have been? 20 A. I'm sorry. On dates, I have a hard time. 21 Q. Now, do you recall, did Mr. Munitz serve on 22 the board of Federated? 2390 1 A. Yes. 2 Q. Did he also serve on the board of MCO? 3 A. Yes. 4 Q. And prior to his service on the board, did 5 Mr. Munitz discuss with you his going to work with 6 Federated and MCO? 7 A. Yes. 8 Q. Now, I just used a term that assumed a fact 9 that wasn't in evidence. Was it your understanding 10 that Mr. Munitz in addition to serving on the boards 11 of those entities also had some management position 12 with respect to MCO? 13 A. I want to apologize to you. I'm now 14 confused. You asked a series of questions and there 15 was some times in there. So, could you repeat the 16 question so I can straighten myself out? 17 Q. Sure. You indicated that you recall that 18 Mr. Munitz went on the board of Federated and went on 19 the board of MCO. 20 A. The answer is yes. 21 Q. Do you recall whether Mr. Munitz served in 22 any other capacity with respect to either of those 2391 1 entities? 2 A. I can't remember. 3 Q. Okay. Now, before he went on the board, 4 did you discuss with him his service as a director of 5 MCO or Federated? 6 A. Yes. 7 Q. Okay. And can you describe for us that 8 conversation? 9 A. Yes, I can. 10 Q. Okay. 11 A. Barry Munitz and his wife came out to our 12 ranch in Austin to discuss career moves. He had been 13 a very successful academician, both at the University 14 of Illinois and at the University of Houston. And I 15 believe Mr. Hurwitz had asked him to accept some 16 position so he came to spend time talking to me about 17 Mr. Hurwitz's character. 18 THE COURT: We'll take a short break. 19 . 20 (A break was taken at 10:44 a.m.) 21 . 22 THE COURT: We'll be back on the record. 2392 1 Mr. Rinaldi, you may continue with your examination 2 of the witness. 3 Q. (BY MR. RINALDI) Yeah. Mr. Kozmetsky, 4 when we broke, we were discussing your conversation 5 with Mr. Munitz regarding his becoming associated 6 with Federated and MCO. Do you recall that? 7 A. Yes, I do. 8 Q. Okay. And what was your discussion with 9 Mr. Munitz? 10 A. The discussion was first, what are the 11 strengths and weaknesses of an academic leaving 12 academia going into business and I'd happen to have a 13 career much like that and so, we discussed that a 14 great deal and obviously, I was for that and tried to 15 tell Barry the strength, the pitfalls, the difference 16 between a culture and the social structure of when 17 you're in the corporate world versus the academic, 18 the academic obviously has a much more built cultural 19 society than the private sector. You have to go 20 build some of that yourself and be conscious of it. 21 You don't have to -- things like that that may not 22 bore you too much. 2393 1 The second thing was he wanted to 2 discuss Charles Hurwitz. During the course of the 3 year that I had known Mr. Hurwitz, I've had several 4 people ask the same questions that Barry asked that 5 Dr. Munitz asked of me. First, a simple way of 6 putting it, Charles' image I usually say makes you 7 think of a used car salesman, mainly the dress, the 8 way his hair is combed, divided, and you have to know 9 the man for a while. He's not an outgoing person. 10 He's a nice person, but he's not out going. He also 11 is self-contained. I then told him of my experience 12 with Charles in terms of business relationships was 13 outstanding. Never once did he ask me to rubber 14 stamp anything, go along with anything. If he did, I 15 would have resigned. I'm sure he knew that. At 16 least I told him. And that you could have a 17 meaningful relationship and you could make 18 contributions with somebody like Charles. And that 19 was the gist of the conversations. 20 Q. Now, as a result of -- following your 21 discussions with Mr. Munitz, he went on the board of 22 MCO and Federated; is that correct? 2394 1 A. That's correct. 2 Q. And did Mr. Munitz also go on the board of 3 United Financial Group? 4 A. Yes, he did. 5 Q. Do you know how Mr. Munitz came to go on 6 the board of UFGI? 7 A. No, I don't. 8 Q. Was that a subject that was discussed by 9 the UFGI board? 10 A. I don't have any memory of that. 11 Q. Okay. Now, there came a point when you 12 were placed on the board of UFGI; is that correct? 13 A. Yes. 14 Q. Okay. Do you recall how it is that you 15 came to be made a member of the board of UFGI? 16 A. I don't remember the specific steps but I 17 can remember Dr. LeMaistre who was already on that 18 board telling me how pleased he was that I had joined 19 the board because he felt from knowing me through my 20 university work, we both came to the University of 21 Texas system at the same time in 1966 where he was 22 advice chancellor for medical affairs and he 2395 1 subsequently was president of the M.D. Anderson 2 research and hospital facilities for the university 3 here in Houston. And so, he was -- he welcomed me 4 and told me they needed somebody like me. Now, what 5 he meant by that, I still don't know. 6 Q. Do you recall that MCO and Federated had 7 requested that that they be allowed to place members 8 of their group on the UFGI board? 9 A. I don't remember that. 10 Q. Let -- let me show you a copy of what's 11 been previously marked as A2066. This is a copy of 12 the 13D that was filed as Amendment No. 5. 13 MR. RINALDI: The second copy, Your Honor. 14 Q. (BY MR. RINALDI) Directing your 15 attention specifically to page 13 of that document. 16 MR. RINALDI: Your Honor, if I might borrow 17 one of those copies for a moment. Thank you. 18 Q. (BY MR. RINALDI) And on page 13 of that 19 document, I believe it says in early December 1982, 20 Barry Munitz, a director of the company, vice 21 chairman of the board of MCO and president and 22 trustee of Federated, requested that the members of 2396 1 the group be given additional representation on the 2 board of directors of the company as a means of 3 protecting and monitoring their investment in the 4 company. Do you see that? 5 A. Yes, I do. 6 Q. Do you recall that there came a time when 7 MCO and Federated requested that they be given 8 additional memberships on the board of UFGI to -- 9 A. I have no recollection about the specifics. 10 Q. Was it your understanding that when you 11 went on the board, that one of the purposes of your 12 being on the board was to monitor what was going on 13 an at UFGI and to protect the interests of Federated 14 and MCO? 15 A. No. No. When I went on the board, I was a 16 board member and if I were to represent their 17 interests in other boards I've been on, I would have 18 asked them to pass another resolution that would 19 cover any suits or harms that came. And I've done 20 that on other boards when I had to represent them and 21 I did not have any such understanding. 22 Q. Okay. Did you discuss going on the board 2397 1 with Mr. Hurwitz prior to becoming a member of the 2 UFGI board? 3 A. I don't recall. 4 Q. Did anyone from MCO or Federated go on the 5 board of UFGI along with yourself? 6 A. I can't remember. 7 Q. Do you recall whether at or about the time 8 you joined the board -- 9 A. I'm trying to think. Barry was there 10 already. I remember joining. I don't recall anybody 11 else. 12 Q. Do you recall that at or about the time you 13 went on the board, that also Mr. Hurwitz became a 14 member of the board? 15 A. Yes. Some things in there. He's on the 16 board of the holding company, chairman. 17 Q. I'll give you a copy of what's been 18 previously marked as A1078. They are the minutes of 19 the board of USAT. I have an extra copy, Your Honor, 20 for you if you'd like. Unfortunately, it's 21 highlighted; and I don't know how that occurred. 22 Would you prefer not to have the highlighted version? 2398 1 THE COURT: No, I'd rather not. 2 MR. RINALDI: I apologize. 3 Q. (BY MR. RINALDI) And in that first full 4 paragraph, it indicates that you joined the board of 5 UFGI on May the 26th, 1983. Do you see that? 6 A. Yes, I do. 7 Q. And do you recall now that that was the 8 same time Mr. Hurwitz joined the board? 9 A. I see his name there, yes. 10 Q. And it indicates, though, that a number of 11 other people joined the board as a result of the 12 merger with American -- First American Financial. Do 13 you see that? 14 A. Yes, I do. 15 Q. Do you recall anything regarding the merger 16 with First American Financial? 17 A. No, I don't. 18 Q. Okay. Do you recall that there came a time 19 when MCO and Federated filed an application with the 20 Federal Home Loan Bank Board to become a savings and 21 loan holding company? 22 A. I have faint recollections that such a 2399 1 filing was made but no recollection of details. 2 Q. Well, take a look at the document I first 3 handed you which is Exhibit T4040. I'm going to see 4 if I can help you find it. It should have been the 5 first document that I gave you. I'm sorry. Maybe I 6 haven't given it to you. I apologize. I thought I 7 had given it to you. 8 Well, this is T4040. Maybe I took it 9 back. This is a copy of what's known as an H(e)-1 10 application -- I mean a cover letter and attached to 11 it is an H(e)-1 application filed with the Federal 12 Home Loan Bank Board. If you'd just take a moment to 13 look at that. And in particular, I would draw your 14 attention to the first page, the cover letter. And 15 in the second full paragraph on the first page, it 16 indicates that MCO and Federated at the time owned 17 approximately 22.3 percent of the outstanding shares 18 of UFGI were contemplating increasing their 19 ownership. Do you see that? 20 A. Yes, I do. 21 Q. And it says that they were contemplating 22 that MCO will own approximately 25 percent of the 2400 1 outstanding shares and Federated will own 2 approximately 10 percent of the outstanding shares. 3 Do you recall that MCO and Federated came to a 4 decision that they were contemplating acquiring up to 5 35 percent of the outstanding shares of UFGI? 6 A. I recall a filing made for that, yes. 7 Q. Okay. And prior to that filing, was 8 there -- was that the kind of filing or application 9 that would have required the approval of the board of 10 directors of MCO and Federated? 11 A. I can't recall. 12 Q. Do you recall any discussions by the 13 boards -- 14 A. No, I don't. 15 Q. Do you know why it was MCO or Federated 16 wanted to acquire 35 percent of the shares of UFGI? 17 A. I can't remember. 18 Q. Okay. Do you recall that ultimately, the 19 application was approved by the Federal Home Loan 20 Bank Board? 21 A. No, I don't. 22 Q. Do you recall that the Federal Home Loan 2401 1 Bank Board imposed a net-worth maintenance condition 2 as a condition of its approval of the application to 3 become a holding company? 4 A. Generally, but I don't recall even going -- 5 that there was anything happening as a result. 6 Q. Okay. Well, let me show you what's been 7 previously marked as Exhibit T1059. 8 MR. RINALDI: This also has been previously 9 admitted. 10 Q. (BY MR. RINALDI) And what I'd ask you to 11 do is look at the third page of the document or the 12 second page of the resolution at numbered paragraph 13 4. 14 MR. RINALDI: There's two copies for Your 15 Honor. 16 Q. (BY MR. RINALDI) Yes. It would be right 17 here. And I'd just ask you to take a moment to read 18 that paragraph and then see if that refreshes your 19 recollection in any way. 20 A. I've read it. 21 Q. Does that refresh your recollection that 22 the Federal Home Loan Bank Board had conditioned MCO 2402 1 and Federated's acquisition of over 25 percent of the 2 outstanding shares of UFGI upon their agreeing or 3 upon their -- 4 A. No, it doesn't refresh my recollection. 5 Q. And you don't recall anything of the 6 condition that's discussed in paragraph 4? 7 A. No. No. I'd have to comment on what I see 8 now, but that's not your question. 9 Q. That's correct. And you have no 10 recollection of that subject being discussed to 11 either the MCO or the Federated boards? 12 A. Not as specific as that. 13 Q. But do you have any general recollection 14 of -- 15 A. My general recollection was that we were 16 always looking at alternative sources of raising 17 capital. That's all I remember. 18 Q. Okay. 19 A. This certainly is onerous. 20 Q. Now, do you recall in about 1985 what the 21 condition of UFGI was? 22 A. I'm sorry. '85 has been a long time. 2403 1 Q. Okay. When you first acquired an interest 2 in UFGI, you had indicated there was an interest rate 3 circumstance relating to mismatches of assets and 4 liabilities. And I don't want to put words in your 5 mouth. Do you remember there was a general 6 discussion on that? 7 A. Just general. 8 Q. Yeah. And in your estimation, had that 9 created a problem for the S&L industry? 10 A. The industry as a whole, yes. 11 Q. And? 12 A. A challenge is a better way of putting it. 13 Q. Okay. And do you recall whether it had 14 created a, quote, "challenge" for UFGI in particular? 15 A. No question. 16 Q. Okay. And after you acquired your initial 17 position in UFGI and MCO, and Federated acquired a 18 position, did the condition of UFGI as you recall it 19 continue to deteriorate? 20 A. I don't -- the word "deteriorate," I think, 21 is an exaggeration. But I can tell you what I do 22 remember. 2404 1 Q. Okay. That's what I really wanted to get 2 at. 3 A. As a responsible board member, the first 4 thing I was interested in is what was really 5 happening. At that time, I was very pleased that we 6 had very competent people on the board who understood 7 the regulations. And that's one way of doing it. I 8 also happened to be a certified public accountant 9 until two years ago, held my license in the State of 10 Washington. So, I started to look at it from 11 generally accepted accounting principles point of 12 view as well. I learned a long time ago, you've got 13 to look at both. So, the first shock I got was that 14 there was no budget. There was no plan. I don't 15 like serving on any board where they at least don't 16 have a budget for a year because I've learned a long 17 time ago it isn't a strategy that gets you out -- 18 that makes for success. It's what you do 19 operationally each time. You can have a great 20 strategy but that strategy better be translated down, 21 what you're going to do, what I call operationally 22 which for a short period of one year -- I quickly 2405 1 reached the conclusion that it was very difficult 2 with the management we had there that were running 3 the bank were going to give us a budget that was 4 meaningful, something that you could rely on. So, 5 after several board meetings, you can imagine I may 6 be small in stature but I was extremely vocal and 7 insisting that we get some better management and know 8 what we were doing. No sense guessing. 9 Q. And subsequent to that, did the management 10 of -- did UFGI and its subsidiary, USAT, acquire new 11 management? 12 A. I always thought of Jerry Williams as the 13 beginning of the new management. 14 Q. Okay. And -- 15 A. There were a whole series of problems. 16 Jerry had a good background, an outstanding 17 background. He understood how you make a budget. He 18 also understood how you would set up an MIS system so 19 that you could get all the information you needed 20 when you needed it and then as time went on, we began 21 strengthening the management as we began to 22 understand it. And I was very pleased with the new 2406 1 additions that were made. 2 Q. What is an MIS system, sir? 3 A. Management information system. I'm sorry. 4 Q. Okay. And when you arrived -- first began 5 serving on the board, do you recall who was the chief 6 executive officer of USAT? 7 A. Those people who know me intimately know 8 what one of my weaknesses, all my life regardless of 9 my age, is remembering people's names. 10 Q. Well, do you recall Mr. Coles? 11 A. I was going to tell you it started with a 12 "C." Yes, I remember Mr. Coles very well. I had 13 expected with his marvelous background and especially 14 when I looked at his resume as I was early on the 15 board that he just had a terrific resume. But when I 16 looked at what was going on under him, certainly I 17 questioned his managerial capacities. 18 Q. And was Mr. Coles' principal area of 19 experience in the operation of traditional savings 20 and loans? 21 A. He was the president. 22 Q. And do you recall -- 2407 1 A. That means yes, he was -- he was running 2 it. The president, he was a chief operating officer; 3 and you looked to him on operations. 4 Q. And do you recall, did he have substantial 5 background in the area of operating a traditional 6 savings and loan? 7 A. Oh, he had lots of experience in 8 traditional. 9 Q. Okay. 10 A. But you can imagine me being surprised if 11 this was true of all traditional S&Ls as we had at 12 United to not have a budget for one year was just 13 shocking to me. 14 Q. As a director, was it your view that UFGI 15 was going to move away from the traditional -- 16 A. No. 17 Q. -- savings and loan? 18 A. No. That -- all those things -- may I use 19 the phrase anything to discuss cutting edge strategy, 20 new strategies. When I got on the board, I said we 21 have to have -- we have to understand the operations. 22 They better get under managerial control. We better 2408 1 know what we're doing. And that's the first order of 2 business. 3 Q. Now -- 4 A. I used the "I" as a pronoun. I don't 5 mean -- the board, I can tell you, was united on 6 that. 7 Q. Now, do you recall that there came a time 8 when UFGI decided or issued C preferred shares, a new 9 class of preferred shares to be subscribed to by 10 existing shareholders? 11 A. I don't recall. 12 Q. Okay. Do you recall that MCO and Federated 13 acquired a substantial portion of the C preferred 14 shares? 15 A. I'm sorry. I don't remember. 16 Q. Okay. Do you recall any discussions at the 17 MCO or Federated board meetings on that subject? 18 A. I'm sure we were very pleased that we got 19 some new capital. 20 Q. You mean as a board member of UFGI? 21 A. Yeah. 22 Q. Okay. Do you recall any discussions at the 2409 1 Federated or MCO level of infusing capital into UFGI 2 through the Mr.Chairman of preferred? 3 A. Many board meetings, there was discussions 4 on that but the specifically, no. But I do know it 5 was brought up at our board meetings. 6 Q. And when you say "at our board meetings," 7 are you referring to UFGI or MCO? 8 A. UFGI, yeah. 9 Q. Okay. Was it your -- 10 A. I'm sorry. You may be overlapping both of 11 them now. 12 Q. Was it your understanding or recollection 13 at this time that UFGI was in need of additional 14 capital? 15 A. I think -- I always followed both sides and 16 watched the reports that we had to file for 17 regulations because that was extremely important to 18 me as a new board member. I wanted to make sure I 19 understood it. As a matter of fact, I got myself a 20 doctoral student to bring some new mathematical 21 techniques and how do you take regulations and make 22 them as constraints and could we find methodology to 2410 1 early call forecast before you ran into trouble and 2 all that sort of stuff. So, I knew we weren't -- we 3 were still within the regulations. As I looked over 4 at the more general accounting accepted practices, we 5 were not sinking. We were not near bankruptcy. 6 Q. Do you recall how the subject of issuing 7 the C preferred first came up? 8 A. I don't remember now. 9 Q. Okay. Now, did there come a point in time 10 when you were asked to consider the acquisition of an 11 option to acquire -- an option between MCO and Drexel 12 Burnham Lambert to acquire additional shares of UFGI? 13 A. I don't recall that at all. 14 Q. Okay. Let me show you what's been 15 previously marked as T1085. This is the minutes of 16 the board of directors meeting of MCO Holdings dated 17 December 17th, 1985. And specifically, I draw your 18 attention to the text. Most of it's redacted but the 19 text that appears on the fourth page of those 20 minutes. 21 MR. RINALDI: And I'm handing two copies up 22 to the Court. Thank you, Your Honor. This has been 2411 1 previously admitted. 2 THE COURT: Well, maybe it has. I don't 3 have it received. Is there any objection to it? 4 MR. NICKENS: No, sir. No objection. 5 THE COURT: Received. And while we're at 6 it, A1078, how about that? Was that previously 7 received? 8 MR. NICKENS: Your Honor, we have no 9 objection although we would ask to be able to 10 substitute a complete version of these board minutes 11 which I believe are available. 12 MR. RINALDI: You mean the unredacted 13 version? 14 MR. NICKENS: Sure. I think they are 15 already part of the record but in any event, we have 16 no objection, but we would like for the record to 17 reflect the entire minutes. 18 MR. RINALDI: Right. These were part of 19 the A exhibits and they were provided to us by the 20 respondents and so, I simply used this version 21 because it was the -- 22 THE COURT: All right. 1078 is received. 2412 1 Q. (BY MR. RINALDI) It's -- 2 A. You want me to read the resolves, too? 3 Q. Yeah. Sure. If you like, just so you know 4 what action was taken. 5 A. I've briefly reviewed it. 6 Q. Okay. And then attached to it is a 7 document -- attached to the minutes is a document 8 that's a copy of the stock option agreement that's 9 discussed in -- at page 4. And I believe we've 10 previously had testimony that Paul Schwartz had 11 executed on behalf of MCO Holdings and Mr. Madigan on 12 behalf of Drexel Burnham Lambert. 13 A. You want me to go to any page? 14 Q. Well, no. I have just a general question. 15 Do you remember the subject of UFGI shares or -- I'm 16 sorry -- of MCO acquiring an option from Drexel 17 Burnham Lambert to acquire UFGI shares? 18 A. I don't remember as of today. 19 Q. As a member of the board of UFGI, did there 20 come a time when you learned that Drexel Burnham 21 Lambert had a substantial position in the shares of 22 UFGI? 2413 1 A. I don't recall. 2 Q. Do you know how -- it indicates on the 3 first page of the stock option agreement -- 4 A. Say again. 5 Q. The first page of the stock option 6 agreement which is attached to the minutes, it 7 indicates that Drexel Burnham Lambert is the owner of 8 300,000 shares of common stock of United Financial 9 Group. Do you know how Drexel Burnham Lambert came 10 to acquire those shares? 11 A. I have no idea. 12 Q. Do you recall any discussions with members 13 of the board regarding -- 14 A. No, I don't. 15 Q. -- their acquisition of those? 16 A. I have no recollection of a discussion. 17 Q. Now, this transaction if you look at the 18 stock option arrangement here, it starts out on page 19 1 and it grants MCO -- I'm sorry. I'm talking about 20 the attachment now. It grants to MCO a call option 21 and do you see that on Item No. 1 there? It says DBL 22 hereby irrevocably grants to MCO an option to 2414 1 purchase from DBL all the shares. Do you see that? 2 A. Yes. 3 Q. And then if you turn to the fifth page, 4 there is a grant of the DBL option. Do you see on 5 the fifth page? 6 A. Fifth page? Page 5? 7 Q. Yes, of the option agreement. 8 A. Where am I to look, please? 9 Q. It should be paragraph 3, and you'll see 10 some interlineation there. And I believe what it 11 says is that in the event that the MCO option expires 12 unexercised, then at that time, MCO agrees to grant 13 to DBL an option to sell to MCO all but not less than 14 all of the shares at a purchase price and so on. 15 A. Sure. 16 Q. Okay. So, this is set up so that there is 17 a call option in favor of MCO and a put option in 18 favor of DBL? 19 A. Uh-huh. 20 Q. Do you have any recollection of that put 21 call option being discussed by the board? 22 A. I don't recall the specifics of that. 2415 1 Q. In your experience as a business person, do 2 you recall having seen this type of transaction 3 before; that is, a call backed up by a put? 4 A. That's exactly how Teledyne got started. 5 Q. Okay. 6 A. With a put and call. 7 Q. Okay. Now, in this instance, the call is 8 not exercisable by MCO until two and a half years 9 into the future. And the put then is exercisable in 10 the event the call is not exercised for a period of 11 one month after that. Now, what is your 12 understanding of the purpose of having that kind of 13 put call arrangement? 14 A. I don't know. I can't recall this one; so, 15 may I answer it just -- 16 Q. Yes. Your general understanding. 17 A. -- of why it was so important for us at 18 Teledyne as I recall. We probably invented the put 19 and call. The reason for it was so we could meet 20 generally accepted accounting principles and not have 21 a large liability on the balance sheet. It was fine 22 to have it as a note and disclosed but not to have it 2416 1 on the balance sheet because it takes so much to 2 explain to people. 3 Q. Okay. When you say not to have what on the 4 balance sheet? 5 A. A debt. 6 Q. And the debt being the amount of the call? 7 A. That's right. 8 Q. Okay. 9 A. You've got a put and a call. Goes both 10 ways. 11 Q. And what effect did the put and call have 12 on Teledyne's access to the underlying shares? 13 A. It made it easier -- say that again, 14 please. 15 Q. What was the purpose of the put and call in 16 terms of the underlying shares? 17 MR. EISENHART: Your Honor, I have to 18 object to the relevance of this. We're now getting 19 into a transaction involving Teledyne. I don't see 20 what use that has in this case. 21 MR. RINALDI: I'm just asking him about his 22 understanding of why companies use -- 2417 1 THE COURT: I'll deny the objection. I 2 realize that you're not involved -- we're not 3 involved with Teledyne but nevertheless, it may have 4 some explanatory basis here. 5 A. Your question again, please? 6 Q. (BY MR. RINALDI) Yeah. What was the 7 purpose of the put call -- 8 A. Well, first, we didn't have enough cash. 9 Q. Enough cash to purchase the underlying 10 shares? 11 A. To purchase the underlying assets. 12 THE COURT: Excuse me. 13 THE WITNESS: Shares. Yeah. Shares. We 14 didn't have enough shares -- the name of the company 15 is Amelco. Teledyne didn't have enough assets so buy 16 the shares of the owner of Amelco; so, we had a put 17 and a call for five years on those shares. And as 18 time went on and Teledyne became successful, we 19 called it and paid them, but we had a firm price. 20 Q. (BY MR. RINALDI) And are you saying that 21 the put call arrangement is simply a financing 22 technique for acquiring shares? 2418 1 A. Accounting, yeah. 2 Q. And does it then serve as a substitute -- 3 A. I don't remember this but the paragraphs 4 you asked me to look at, the cash they put up front 5 was very small relative to the total amount. That 6 was a good financing deal. 7 Q. So, was it then a purchase subject to a 8 debt? 9 A. Pardon? 10 Q. Was a purchase of the shares subject to a 11 debt? 12 MR. EISENHART: Your Honor, I don't 13 understand. We're now talking about the put call and 14 Teledyne when we were talking about the Drexel 15 option, or what? He's just jumping back and forth 16 between the two. 17 MR. RINALDI: I think I was just talking 18 about put call options and why they did it in the 19 Teledyne case. 20 MR. EISENHART: That was not at all 21 apparent from the question since he had referred back 22 to the exhibits. 2419 1 THE COURT: Let's go with that question. 2 MR. RINALDI: I don't think I referred back 3 to an exhibit, Frank. 4 Q. (BY MR. RINALDI) Was it a substitute for 5 a purchase subject to a debt? 6 MR. NICKENS: Now, which one are we talking 7 about, Your Honor? 8 MR. RINALDI: The Teledyne. I just said 9 that. 10 A. Yeah. We had a put and a call of buying 11 shares of Amelco. All right? And Amelco owners 12 could put it to us and we could -- or could call it 13 and we could put it to them. All right? And as time 14 went on, we called it. 15 Q. (BY MR. RINALDI) Okay. If the value of 16 those shares had declined, who had the borne risk of 17 loss with respect to the shares? 18 A. Well, if we went bankrupt, they did and if 19 we didn't go bankrupt, there was no -- as a matter of 20 fact, that was a redundant question in the case of 21 Teledyne. It all worked out. 22 Q. Well, I understand that. But if the shares 2420 1 had not gone up in value, who would have had the -- 2 A. There is no public market for them anyway. 3 Q. So, they would have been put back to 4 Teledyne or -- 5 A. Yeah. We... 6 Q. And so, Teledyne then would have borne the 7 risk of the decline in value of the shares? 8 A. Oh, yes, it went both ways. 9 Q. Now, in the case of Teledyne, why did they 10 structure the option to trigger five years into the 11 future? 12 A. To give us time. 13 Q. It was -- 14 A. Time to evolve Teledyne. 15 Q. Okay. And then it allowed you to acquire 16 the shares after Teledyne had evolved at a fixed 17 price? 18 A. Right. 19 Q. Okay. 20 A. You understand why. If the shares were a 21 dollar and we made them worth a hundred dollars, it 22 says we worked for those old shareholders. 2421 1 Q. Uh-huh. And -- now, after you and 2 Mr. Hurwitz joined the board of UFG which, I believe, 3 the minutes reflected was on May 26th, 1983, did 4 Mr. Hurwitz assume a position as an officer of UFG 5 that you recall? 6 A. I don't recall. 7 Q. Let me hand you a copy of what's been 8 previously marked as T4067. 9 MR. RINALDI: J.C., this is another one of 10 those things that has handwriting -- was given to us 11 with some handwriting. If there is a clean copy, I'd 12 be happy to substitute it. I believe this is a new 13 document. It is the minutes of the board of 14 directors of United Financial Group dated 15 August 29th, 1984. 16 MR. NICKENS: Your Honor, I noted that and 17 I brought a clean copy and copies for everybody and 18 it's Exhibit A10544 which is a complete and clean 19 copy of the minutes of UFG of that date and also 20 A10545 which is a complete and clean copy of the 21 minutes of the board of directors of United Savings 22 of that date. 2422 1 Q. (BY MR. RINALDI) And, sir, why don't I 2 give you a copy of this document which is a clean 3 one. 4 A. Thank you. 5 Q. And this is -- 45 is a complete set of 6 United Savings Association minutes that were 7 attached; is that right? 8 MR. NICKENS: Yes. The original document 9 had two pages of the UFG minutes and then attached 10 only the first page of the USAT minutes. And so, I 11 brought both exhibits so that they were complete. 12 MR. RINALDI: I'll hand up to the Court two 13 copies of A10544. That's the UFG minutes dated 14 August 29th, 1984, and two copies of A10545. That's 15 the USAT minutes dated -- 16 THE COURT: Are you withdrawing T1067 then? 17 MR. RINALDI: Yes. That's fine, Your 18 Honor. 19 Q. (BY MR. RINALDI) Now, directing your 20 attention to the smaller of the two documents, or 21 that is A10544, United Financial Group minutes. And 22 in particular, the last full paragraph on that page 2423 1 makes reference to a discussion regarding the 2 relationship between Federated and MCO Holdings. 3 Take a moment to read that paragraph, would you? 4 Now, does that refresh your 5 recollection that there came a time when Mr. Hurwitz 6 was elected president of UFGI? 7 A. Yes, sir. 8 Q. Okay. And there is also a discussion there 9 about his becoming chief executive officer of the 10 company. Do you recall whether he became chief 11 executive officer at that time? 12 A. I believe this was voted in. 13 Q. I'm sorry. What? 14 A. I believe it was approved. 15 Q. Okay. And do you recall -- it indicates 16 here that all directors were present except a number 17 of individuals were not present. Does it appear from 18 the minutes that you were present at this meeting? 19 A. That's the way I read it. 20 Q. Okay. 21 MR. RINALDI: I would -- 22 THE WITNESS: It doesn't say "yes" or "no" 2424 1 and most minutes would say if you were there or not. 2 But it's obvious I made a motion, so I must have been 3 there. 4 Q. (BY MR. RINALDI) Actually, you're 5 absolutely correct. 6 MR. RINALDI: I would move the admission of 7 A10544. 8 MR. NICKENS: No objection. 9 THE COURT: Received. 10 MR. RINALDI: And I'd also move for the 11 admission of A10545 which is the attached or the USAT 12 board minutes. 13 MR. NICKENS: No objection. 14 Q. (BY MR. RINALDI) Now, after -- 15 THE COURT: Okay. 45 received, also. 16 Q. (BY MR. RINALDI) Now, after Mr. Hurwitz 17 became elected president of UFGI, did he take on a 18 more active role in the management of UFGI? 19 A. I imagine he did. 20 Q. Well, as a director, do you recall whether 21 he took on greater duties? 22 A. You're asking me to contrast two things. 2425 1 Let me think for a moment how to answer you. 2 Q. Well, it indicates here -- and I guess what 3 I was driving at is that Mr. Bentley who had 4 previously been the president was going to continue 5 on as the chief executive officer but that he was not 6 going to be -- it says Bentley now plans to devote 7 more time to investor relations and concentration on 8 the company's regulatory relations. Do you see that? 9 A. Yes. 10 Q. And at that point in time then, did 11 Mr. Hurwitz take on the role that had previously been 12 served by Mr. Bentley as president? 13 A. Well, if I look at Mr. Bentley and his 14 role, I saw Mr. Coles doing more work, the operating 15 part, and Mr. Bentley really doing the regulations, 16 shareholder investor relationships, going around to 17 the branches and things like that. Okay? And 18 obviously, I didn't see Mr. Hurwitz do that. And I 19 would say yes, if he took on those responsibilities, 20 he did take on those responsibilities; he did take on 21 the operations. 22 Q. Now, do you recall that after Mr. Hurwitz 2426 1 went on the board, that a meeting at which Mr. 2 Hurwitz briefed the board on a planning meeting that 3 he had had with an entity known as Bane & Company? 4 A. I don't remember the specifics of that. 5 Q. Do you recall the name Bane & Company? 6 A. I do know Bane & Company. 7 Q. Okay. And what is your recollection of 8 Bane & Company as you sit here today? 9 A. Oh, Bane & Company is a very unusual 10 management consulting firm that does the unusual 11 things. It just doesn't make recommendations and 12 gives you reports that will lead to more work for 13 them to do. They are ones that stay with you and 14 make sure that what they have recommended gets 15 implemented. I have high regard for Bane & Company. 16 Q. And do you recall whether USAT or UFG had 17 contacted Bane & Company regarding the future 18 operations of USAT? 19 A. I don't, sitting here today. 20 Q. Okay. Let me hand you a copy of what's 21 been previously marked as A1104, and I'll hand two 22 copies up to the Court. 2427 1 MR. RINALDI: I'm not sure whether this has 2 been admitted previously. It has? Yes. Okay. It 3 has been admitted previously. 4 Q. (BY MR. RINALDI) And in particular, I'd 5 like to direct your attention to the sixth of seven 6 pages of the document at which Mr. Hurwitz briefs the 7 board on a recent planning meeting with Bane & 8 Company. And I'd like you to read that -- those two 9 paragraphs. 10 A. What page are you at? 11 Q. It's the sixth of seven pages. It'll say 12 up in the corner. Sixth of seven. And just the 13 section where it starts with Mr. Hurwitz briefing the 14 corporation or the board. 15 A. I've read the paragraph. 16 Q. Okay. And if you turn to the next page, 17 sir, in the third paragraph down, there is a 18 reference as to your recommendation. 19 A. I don't remember that, but it reads well. 20 Q. Do you recall attending a meeting of the 21 board of United Savings Association of Texas at which 22 the -- a planning meeting was held regarding the 2428 1 recommendations of Bane & Company? 2 A. I don't remember a Bane meeting. 3 Q. Do you remember generally that there was a 4 meeting at about this point in time where the future 5 changes to the operation of USAT that would be 6 required in order to restore profitability were 7 discussed? 8 A. I remember the outcome, but I don't 9 remember the meeting. 10 Q. When you say you remember the outcome, what 11 do you mean by that? 12 A. We did sell branches. 13 Q. Okay. And that's just one of a number of 14 different subjects that are covered here, correct? 15 A. You know better than I. I only read a few 16 paragraphs in here. 17 Q. There is a discussion, for example, in here 18 that -- regarding the investment department which was 19 initiated a few months ago is earning approximately 20 $10 million a year and the preferred stock to be 21 issued by our finance subsidiary should earn 22 approximately a million a year. Do you see that? 2429 1 A. Yes, I do see that. 2 Q. Okay. Do you know what it's referring to 3 when it talks about the investment department which 4 was initiated a few months ago? 5 A. I assume that we're talking about the 6 investment operations of the bank. 7 Q. And do you know how that came to be 8 initiated? 9 A. Yes. We had to find sources of income. 10 Q. Okay. And was this a matter -- 11 A. As a way of acquiring funds and getting 12 income coming in to make the bank better. 13 Q. Okay. And what was it that the investment 14 department did? 15 A. We set up securities with various 16 portfolios to be examined carefully before we started 17 going into the business. Mortgage held bonds, junk 18 bonds, some other things. 19 Q. And was that something that had been done 20 pursuant to the recommendation of Mr. Hurwitz? 21 A. No. I don't see it that way. You've 22 already illustrated that we seldom did anything as a 2430 1 board without having the best people we could find 2 come in and brief us as well as give us reports to 3 evaluate. So, then the other thing that I always 4 insisted on, I wanted to know the people who were 5 going to be doing the work, clients by themselves are 6 only as good as the people you have. 7 Q. And who was going to be doing the work with 8 respect to the investment department as you recall? 9 A. We had staff there. 10 Q. Okay. And I guess -- 11 A. Each was evaluated -- I recall we evaluated 12 each of them very carefully. 13 Q. Now -- and I guess my question earlier had 14 been not whether Mr. Hurwitz made the decision. 15 Often, it was one made by the board. My question 16 was: Was this a subject to be -- was this a 17 recommendation that had been made by Mr. Hurwitz to 18 the board as president? 19 A. I don't think -- it isn't a single person 20 as I recall that ever came and said do this. It 21 may -- they may be the ones that brought it forth but 22 there was always a staff that had done the staff work 2431 1 and prepared everything and evaluated and that's an 2 answer to our questions and as you know, you had -- 3 the one you had me read, we on many occasions asked 4 them to go back and do some more work. 5 Q. Now, it says -- 6 A. It was done very responsibly. It was not a 7 light thing. 8 Q. Was Mr. Hurwitz a proponent of this 9 investment department? 10 A. I'm sure that you'll find a unanimous vote 11 some place in the minutes; or those who didn't vote 12 for it, there would be a note of it. 13 Q. And at the bottom of the paragraph, it says 14 the conclusion of the Bane meeting was that the 15 optimal structure of the association would be to have 16 a major money center in Fort Worth, Austin, 17 San Antonio, Dallas, and several other such branch 18 operations in the Houston area. Do you see that? 19 A. Yeah. 20 Q. And was that ultimately carried out by the 21 board? 22 A. I'd have to refresh my memory as to exactly 2432 1 how it went. 2 Q. Well, at the -- on the next page of the 3 minutes, it indicates that Dr. Kozmetsky recommended 4 and the board agreed that no action should be taken. 5 Do you see that? 6 A. Yeah. I saw that. 7 Q. Was there subsequently a plan of operation 8 that was established detailing the method of -- 9 A. I don't remember but I'd have to refresh my 10 memory with details and subsequent minutes or 11 materials. I'm sorry. I don't carry that past 12 data -- this is 1985. 13 Q. Okay. 14 A. -- in my mind. 15 Q. Now, as a result of the meeting with the 16 Bane & Company and the plans to restore USAT to 17 profitability, were -- was the board successful in 18 returning UFGI and USAT to profitability? 19 A. I don't know how to answer you. It's so 20 general. Be more specific, please. 21 Q. Well, there is -- Mr. Hurwitz briefed the 22 board on the planning meeting regarding the 2433 1 profitability of the association and there were a 2 number of changes with respect to the operations that 3 were recommended or discussed at least with the board 4 on May the 16th, 1985. 5 A. Yeah. 6 Q. And to your recollection, were most of 7 these changes or were these changes implemented by 8 the board? 9 A. Well, your word "these" -- 10 Q. Well, the ones that are described here. 11 A. This is an instant of time and you're 12 trying to make that everything was done at this 13 particular moment of time and I don't -- my 14 recollection isn't that simple. 15 Q. Well -- 16 A. I do know because we moved on time, yes, we 17 did go into investments. Yes, we made money on them. 18 Yes, there were periods where there wasn't some money 19 made but if you look at all the time that I was on 20 the board, of those, I don't recall any heavy losses 21 at all. 22 Q. Okay. What were the nature of the 2434 1 investments that you -- that went into that you 2 recall as a board member of UFGI? 3 A. I'd have to refresh my memory and get the 4 exact names and look at the statement. Give me a 5 board book that has all of them in there. I used to 6 look at those and I'd check with it, go back and 7 forth. I'd drop by and had questions. I'd ask them. 8 I wanted more details. I got them. 9 Q. Do you recall there came a time when USAT 10 embarked upon the acquisition of additional 11 mortgage-backed securities that were purchased with 12 the assistance of what are known as reverse repos? 13 A. That detail is not in my memory. 14 Q. Okay. Do you recall that USAT embarked 15 upon a strategy of acquiring high-yield bonds as an 16 investment vehicle? 17 A. Yes, I did. 18 Q. Okay. Do you recall any other investments 19 that UFGI -- I mean USAT embarked upon? 20 A. Not sitting here now. I'd have to refresh 21 my memory, go back to it. 22 Q. Were those investments an effort to take 2435 1 advantage of the change in regulations that had 2 occurred in the savings and loan industry? 3 A. Yes. 4 Q. And to try to return USAT to a higher level 5 of profitability? 6 A. The word "return" I would edit out. 7 Sustained, maintain. 8 Q. Now, MCO and a trustee of Federated 9 received periodic reports on the condition of UFGI or 10 its financial progress? 11 A. Yes. 12 Q. Okay. And do you recall that at the end of 13 1987, it was reported to the board of UFGI -- I mean 14 reported to the board of MAXXAM that UFGI had been 15 adversely affected by the downturn in the securities 16 market on UFGIs -- or UFG's marketable securities 17 portfolio? 18 A. I don't think I -- I see it here in print. 19 I don't remember. 20 Q. Okay. Does the last page of that document 21 indicate you were still on the board of -- 22 A. Yeah. 2436 1 Q. -- of MCO at that time? 2 A. Yes, it does. 3 Q. Would it have been shortly after this that 4 you resigned from the MCO board? 5 A. Yes. 6 Q. Okay. And did you resign from the MCO 7 board and the board of trustees of Federated and UFGI 8 all at the same time? 9 A. No. Federated was 1985, I think. 10 Q. So, you had withdrawn from the Federated 11 board earlier? 12 A. Uh-huh. 13 Q. Did you withdraw from the MCO board and the 14 UFGI boards at the same time? 15 A. At the same time, yes. 16 Q. What was your reason for withdrawing from 17 those two boards at that time, sir? 18 A. Exactly as I stated in my letter of 19 resignation, that the work that I was doing at the 20 university had increased. This is just the period 21 where I'm starting to find out how to commercialize 22 defense R and D. 2437 1 THE COURT: Excuse me. 2 THE WITNESS: Defense R and D. I've done a 3 great deal of work on that. I was also asked to 4 serve on some federal commissions. And so, I was 5 just getting overloaded and I had to decide what was 6 more important. I decided that it was more important 7 for me to do the IC Squared work on the 8 commercialization of science and technology and 9 continue doing research on how does one create 10 wealth; and at the same time, I thought as a citizen 11 I should discharge my responsibility to the office of 12 technology assessment which is reviewing the 13 strategic plans of the defense department. 14 Q. (BY MR. RINALDI) Sir, did a number of 15 other members of the board of directors of UFGI 16 resign at or about the same time you did? 17 A. I don't recall at all. 18 Q. Do you recall any discussions with other 19 members of the boards as to their potential 20 resignation at or about that time? 21 A. No. Your Honor, I would move into evidence 22 A1104 if it's not been admitted. I think it has. 2438 1 That's the minutes of the USAT board dated May 16th, 2 1985, and the October 28th, 1987, MCO board meeting 3 minutes which is A2023. 4 MR. NICKENS: No objection. 5 THE COURT: Received. 6 Restate the first one. What was the 7 first one? 8 MR. RINALDI: It would have been A1104, but 9 I think it may have been previously admitted. 10 MR. NICKENS: I believe it has been. But 11 no objection. Isn't that the one that I indicated 12 that we would prefer to have a more complete version? 13 MR. RINALDI: I think not. 14 MR. NICKENS: Well, in any event, Your 15 Honor, no objection. 16 Q. (BY MR. RINALDI) Mr. Kozmetsky -- 17 THE COURT: You just handed up A11 -- 18 MR. RINALDI: -- 04. That's the minutes 19 dated May 16th, 1985, and it is a seven-page document 20 that contains a discussion on page 6 relating to 21 Hurwitz's briefing of the board on recent planning 22 meeting with Bane & Company. 2439 1 THE COURT: Okay. 2 MR. NICKENS: No objection, Your Honor. 3 Our records indicate that it has been previously 4 offered and received and is at Tab 130 of our 5 records. 6 MR. RINALDI: Fine. I just was being 7 overly cautious, this is Exhibit 3012, A3012. And 8 specifically, I'd like to direct your attention to -- 9 and you were on the board of UFG at this time; is 10 that correct. 11 A. Uh-huh. (Witness nods head affirmatively.) 12 Q. And directing your attention to -- 13 A. Yes. 14 Q. -- page 4, the bottom of page 4, and then 15 it trails over to page 5 and 6 and there is a 16 discussion there of -- on page 5 of super majority 17 voting provisions. Do you see that? 18 A. Where am I? At the bottom of the page? 19 Q. Starts at the bottom of 4 and then the 20 super majority voting provisions, it goes over to 21 page 5. 22 A. How far do you want me to read? 2440 1 Q. I just wanted you to read the section on 2 the super majority provisions. I just had a couple 3 of questions regarding -- 4 A. May I read it, please? 5 Q. You'll note that on page 4, the second -- 6 that talks about current provisions of certificate of 7 incorporation and bylaws and it starts out by 8 stating: The company does not believe that its 9 certificate of incorporation and bylaws as presently 10 constituted contain any provisions which are intended 11 to have an anti-takeover effect. Do you see that? 12 A. Uh-huh. (Witness nods head affirmatively.) 13 Q. Do you recall that a concern arose at 14 UFGI -- 15 A. I don't remember as of this -- at this 16 time. 17 Q. Okay. Now, on the next page, it talks 18 about the company's proposed amendments and this is 19 the proposed amendments to its certificate of 20 incorporation and bylaws and it provides for a super 21 voting provision. Do you see that? 22 A. Yes, I do. 2441 1 Q. And I believe the provision would require a 2 two-thirds majority vote of the shareholders for 3 certain kinds of actions. Do you see that? 4 A. Yes, I do. 5 Q. Do you recall why it is that UFGI was 6 proposing that the super voting majority provisions 7 be put in place? 8 A. I don't remember now. 9 Q. Was there a concern that someone may 10 take -- make an effort to take over UFGI? 11 A. I have great difficulty answering you 12 because almost every board I've been on, we've gotten 13 into this and I'm having a hard time relating it just 14 at this -- 15 Q. Do you recall when you went on the board or 16 shortly after going on the board of McCullough Oil 17 that a similar super voting majority provision was 18 put in place? 19 A. I don't remember as of today. 20 Q. Do you recall in your service on other 21 Hurwitz affiliated boards that similar provisions 22 have been put into place? 2442 1 A. No, I don't. 2 Q. What is your understanding of the purpose 3 of super majority voting provisions? 4 A. I don't understand. 5 Q. Okay. If you'll just give me a moment, 6 Your Honor, I think that probably concludes what I 7 have. 8 MR. RINALDI: I'd like to move into 9 evidence A3012. 10 MR. NICKENS: No objection. 11 THE COURT: Received. Do you have another 12 copy of that? 13 MR. RINALDI: I believe we do, do we not? 14 THE COURT: Excuse me. That's fine. 15 Q. (BY MR. RINALDI) Mr. Kozmetsky, thank you 16 for your indulgence. That at least concludes my part 17 of the examination. But I appreciate your being such 18 a cooperative witness. 19 THE WITNESS: Thank you very much. I 20 appreciated being questioned by you. 21 THE COURT: We'll adjourn until 1:30. 22 . 2443 1 (Luncheon recess) 2 . 3 THE COURT: We'll be back on the record. I 4 believe, prior to recess, direct examination of 5 Dr. Kozmetsky was complete. Mr. Villa, are you 6 cross-examining? 7 MR. VILLA: I am, Your Honor. 8 9 10 EXAMINATION 11 12 Q. (BY MR. VILLA) Good afternoon, 13 Dr. Kozmetsky. How are you? 14 A. Fine. Thank you. 15 Q. Are you a doctor of commercial science? 16 A. Yes. 17 Q. You hold a Ph.D, do you? 18 A. Yes, I do. 19 Q. You don't mind if I address you as 20 Dr. Kozmetsky? 21 A. Any way you please. 22 Q. Do you hold any honorary degrees besides 2444 1 the MBA and the Ph.D that you told us about? 2 A. I have an honorary degree from the Edwards 3 University. 4 Q. Now, you've told us in your direct 5 examination by Mr. Rinaldi of a number of public 6 companies on whose boards you sat. Let me ask you, 7 sir: Did you also sit on the board of Data Point and 8 M Dall? 9 A. Yes, I did. 10 Q. Heiser? 11 A. Yes, I did. 12 Q. Rather Corporation? 13 A. Yes, I did. 14 Q. And a number of others; isn't that right? 15 A. Yes, I did. 16 Q. And are you one of the founders of 17 Teledyne? 18 A. Yes, I am. 19 Q. Can you tell us how Teledyne ranks in the 20 Fortune 500 companies? 21 A. Before it got merged with Algraney Ludland 22 last year, it would rank in the top 100. 2445 1 Q. Besides Harvard Business School and the 2 University of Texas School, are you also at Carnegie 3 Mellon? 4 A. Assistant professor. 5 Q. Have you also taught at Radcliffe? 6 A. Yes. I did teach on the faculty. 7 Q. At the University of Washington? 8 A. Yes. I was instructor at -- graduate 9 assistant there. 10 Q. St. Martin's College? 11 A. Yes. I was -- I forget my title, but I did 12 teach all the business accounting courses. And 13 unfortunately, they had me teach business law. 14 Q. And you hold -- or you at one point were a 15 certified public accountant as well as your other 16 positions; isn't that right? 17 A. Well, as of a year or two ago when I 18 stopped paying my fees. 19 Q. Have you taught business courses, sir? 20 A. Yes, I have. 21 Q. Can you give us an example of some of the 22 business courses you have taught? 2446 1 A. I taught quantitative methods. I taught 2 finance. I taught marketing and almost any economics 3 course you want to name. 4 Q. And these are at the University of Texas 5 Business School? 6 A. At all the colleges and universities that I 7 had the pleasure of serving. 8 Q. What is the name -- does the University of 9 Texas Business School have a name? Does it carry 10 your name, sir? 11 A. The facilities that make up the business 12 school complex bear my name. There are three 13 buildings named for me. 14 Q. Have you published any articles, books, or 15 treatises, sir? 16 A. On which system? 17 Q. Have you published any articles or books or 18 treatises? 19 A. Yes. 20 Q. Can you give us -- 21 A. Innumerable ones. 22 Q. Can you give us some examples of those that 2447 1 might be relevant to the topics here, for example, on 2 corporate governance management finance? 3 A. Corporate governance I had published in the 4 book I had, "Transformation National Management." I 5 also published a monograph on funds management. 6 Q. Over the course of your career, how many 7 articles, books, and treatises do you believe you 8 have contributed to or drafted? 9 A. Well, if I just go to reverie journals 10 only, several hundred. I certainly have published at 11 least ten books or co-authored. 12 Q. Have you worked on any special committees? 13 For example, Gulf Oil? 14 A. Say what? 15 Q. Special committees. Have you worked on any 16 support committees? 17 A. Yes. I'd have to break them down for the 18 Federal government. There were at least six, I 19 think, I did. I was on a committee for -- a national 20 committee for President Johnson on databases. I was 21 on the Air Force committee. I was on an Army 22 committee looking at their commuters. I was on a 2448 1 NASA committee to reorganize NASA. I was on a 2 presidential committee on supplies and shortages. 3 And then I spent two years for the office of 4 technology assessment evaluating strategic plans for 5 defense. Then in addition to that, I've been on six 6 State of Texas committees dealing with economic 7 development, oceanography, marine resources. And 8 currently, I'm serving on the governor's science and 9 technology council which was formed at the beginning 10 of the year. I'm also on Alaska Science and 11 Technology Foundation board. And I'm sure there are 12 four or five others. I'm sorry. 13 Q. That's okay. 14 A. I'm much of a Texan these days because we 15 constantly -- we Texans have a culture that says, 16 "What have you done lately?" I'm awfully sorry. I 17 haven't gotten an award since 1995. 18 Q. And what award was that, sir? 19 A. Well, I have a series of awards. There is 20 an award -- it's a Golden Plate Society that each 21 year picks 25 outstanding professional people across 22 the broad span of professions. The year that I was 2449 1 given the Golden Plate Award, one of my heroes, 2 Yeager, who made the first space flight, was also 3 given an award that year. Also, I have the first MIT 4 award for outstanding entrepreneurship. In addition 5 to that, I was awarded the Dow Jones award to 6 managerial education. I also have the Thomas 7 Jefferson Award for technology transfer. And my 8 biggest honor is President Clinton bestowed upon me 9 the National medal for technology. 10 Q. When was that, sir? 11 A. That is for making -- well, my particular 12 award was for helping to found at least 100 13 technology-based companies that employed over 40,000 14 people and had exports of over a billion dollars. 15 Q. Have you been asked to advise any 16 governmental bodies apart from those that we 17 discussed? For example, any Federal -- I'm sorry -- 18 any foreign companies? 19 A. Well, you asked two questions. 20 Q. Right. I did ask two questions. 21 A. On Federal, I was on two off-the-record 22 workshops, one which led to Symetek. In other words, 2450 1 we were falling behind in the semiconductor industry. 2 I promised never to publish anything. So, IC Squared 3 did that, I think. I just got a call from DOE this 4 week, Department of Energy, that told me the idea 5 that I promulgated was, rather than write 6 legislation, let's try an experiment and then see 7 what legislation we should write. And the one that I 8 pushed very hard was: What do you do at the end of 9 the life of a PC? It costs just as much to dispose 10 of it as to buy it, and they're all in warehouses. 11 And there's an awful lot of money tied up for the 12 government -- I'm going too long. 13 On foreign governments, I'm an adviser 14 to the Beijing government and science technology. I 15 have, also, on numerous occasions, been a consultant 16 to the Japanese government, particularly on global 17 infrastructures. I am also on a board that took all 18 of the old Soviet nations then we formed a science 19 park and technology ink battery. I'm on that board 20 which is advising that. Then, also, 21 Humboldt University, Cambridge University, and the 22 technology -- Humboldt, Germany, Cambridge grant and 2451 1 the Technology University in Portland. There are 2 more, but I can't remember them all. 3 A. That's okay. 4 Q. Are you and your family engaged in any 5 philanthropic activities? 6 A. Yes, we are. 7 Q. What are those, sir? 8 A. In 1966, we started a family foundation. 9 Q. Is that RGK? 10 A. It's called the RGK Foundation. 11 Q. And what are the activities of the RGK 12 Corporation -- Foundation? 13 A. It is dedicated to supporting three areas: 14 education, medicine, and community. 15 Q. And do you make contributions to RGK? 16 A. Yes, I do. 17 Q. And do you work for RGK? 18 A. No. I don't work for RGK, but I'm a 19 trustee. 20 Q. Trustee of RGK. What did you currently 21 devote most of your time to? 22 A. To the University of Texas. 2452 1 Q. And you got an active teaching load there, 2 sir? 3 A. I have a teaching load. But I have other 4 things which I'm on the cutting edge of developing, 5 science and technology resources, converting them 6 into -- well, so, I do an awful lot of work -- 7 Q. Would it be fair to say, sir, that your 8 focus in your career as well as with respect to 9 United was on the process of management as opposed to 10 recalling each individual decision? 11 A. Yes. 12 Q. And when you came to United in 1983, do you 13 recall what your reaction was to the quality or the 14 lack of quality of United's management? 15 A. My first reaction was that we didn't have 16 what I would consider a standard corporate management 17 process. I referred -- I always want three things. 18 I want to know what your schedule for the year is. 19 When are you going to do what, what's the budget, and 20 can I get a monthly report so that we can track it? 21 And that was missing. The other thing was -- that 22 surprised me was that the computerized system had to 2453 1 be fixed. 2 Q. Now, when you came, was Mr. Coles the chief 3 operating officer of United? Jim Coles? 4 A. Yes. 5 Q. And what view did you have of his 6 capabilities as a manager based upon what you've told 7 us? 8 A. Well, after a number of board meetings or 9 sessions, I've got at least my own mind made up that 10 he had great difficulties in just doing ordinary 11 operational managements which you'd expect with 12 someone with his experience and background; and it 13 was just lacking. 14 Q. Were you supportive of the idea of 15 replacing him with a more competent manager? 16 A. Oh, yes. 17 Q. I believe you said in response to 18 Mr. Rinaldi's questions you were, quote, "very 19 pleased with the team we got." Do you recall him 20 asking you questions about that? 21 A. Yes. 22 Q. And did that team include 2454 1 Mr. Jerry Williams? 2 A. Yes. 3 Q. Did it include Mike Crow? 4 A. Yes. 5 Q. Did it include Art Berner? 6 A. Yes. 7 Q. Did it include Barry Munitz? 8 A. Yes. 9 Q. Did it also include Mr. Jenard Gross? 10 A. Of course there were others. 11 Q. Right. There were a number of new people 12 who came in? 13 A. Right. The whole team at two or three 14 levels of management were strengthened. 15 Q. And did you consider that a substantial 16 upgrade in the quality of managers, many, from the 17 time you arrived at United? 18 A. Yes, I did. 19 Q. Do you recall, sir, whether the financial 20 condition of United when you arrived in 1983 was what 21 you would call a strong financial institution? 22 A. Well, my first answer is I have trouble 2455 1 recalling all the financial statements over that 2 period of time; but I don't think it was ever strong. 3 Q. And were the problems the result -- of 4 United's portfolio the result of -- at least part of 5 United's portfolio -- single-family fixed rate 6 mortgages? 7 A. That was part of it. 8 Q. In the first couple of years that you were 9 there, particularly the first year that you were 10 there, did the board of directors consider various 11 different business directions for United? 12 A. Yes, we did. 13 Q. When you told Mr. Rinaldi that you wanted 14 to take some time to understand the applications, is 15 that what you were talking about? 16 A. That's what I was talking about. 17 Q. Assuming you arrived there in 1983, would 18 it be fair to say you and the board spent at least a 19 year examining the different options? 20 A. If not a little longer. 21 Q. And after that examination, did you believe 22 that United should consider all active business 2456 1 directions to making loans primarily in single-family 2 home lending? 3 A. It had no choice from where I sat. 4 Q. Because if it continued to do that, it was 5 bound for even deeper trouble; isn't that right? 6 A. That's right. 7 Q. Did you express your views at board of 8 directors meetings? 9 A. Of course. 10 Q. Did the other board members also express 11 similar views? 12 A. Yes. I would say -- classify this board as 13 competent, independent, and very responsible. 14 Q. Now, we talked a little bit in 15 Mr. Rinaldi's examination about high-yield bonds. 16 What was your view about investing in high-yield 17 bonds? 18 A. High-yield bonds, I thought, was a wise 19 investment at that time because they had the 20 potential of getting a yield. May I just add a 21 little? 22 It was the early days. And so, it was 2457 1 one of those occasions as a board member that I 2 thought that it was important for me not only to 3 understand it but to get it tied down and one of the 4 most critical -- I think I made, I thought it was 5 extremely important that you had to read each 6 mortgage, so to speak. Know the fine print and the 7 criterions that I put in was -- "I put in" meaning I 8 tried to persuade the operating people and they 9 subsequently bought it. What would happen if you had 10 to foreclose? Because many of the companies if you 11 foreclosed, you could look at them and turn them 12 around. One of the things that I did in building 13 Teledyne, I had the occasion to turn around at least 14 20 companies that were in trouble and I thought that 15 was important for anyone who had such mortgage-backed 16 securities and they did hire one of my MBA students, 17 about the fourth level -- he's not the top guy -- put 18 him to work there and then I remember distinctly one 19 occasion checking with them and talking about some of 20 this and detailed raising questions we got in there. 21 And later I found out we sold off some of that, did 22 not make a loss, and we got better bonds -- I feel 2458 1 proud that they took it and used it. 2 Q. So, you were a supporter in high-yield 3 bonds, in high-yield bonds if adequate due diligence 4 was done, right? 5 A. Yes. 6 Q. Was your high-yield bonds affected in any 7 way that Drexel Burnham Lambert was an underwriter of 8 high-yield bonds? 9 A. No. That was of no consideration. 10 Q. You were aware that United invested in 11 significant amounts of mortgage backed securities? 12 A. Yes. 13 Q. Do you recall whether studies were provided 14 to the board of directors of United before it began 15 investing in mortgage-backed securities? 16 A. Oh, yes. We've had some experts come down 17 from New York, and I forget their names. They 18 presented it, and I remember saying we need to have 19 somebody with experience and capacity to do that. 20 Q. Did you personally review and analyze those 21 studies? 22 A. I certainly did. 2459 1 Q. When you characterize your approach toward 2 being a director, it's as an activist director, sir? 3 A. I'm going -- us first generation Americans 4 always define words by Webster's Dictionary so 5 activist these days has a negative connotation. I 6 would say I was a very responsible director. I did 7 not come to rubber stamp or have a good time or have 8 a great lunch or worry about where we were going to 9 hold the board meeting once a year at a resort area. 10 I prided myself on homework. I prided myself that I 11 got into the detail. If something wasn't there, I 12 asked for it. I would even drop by early or stay 13 later so that I could understand it. And then as I 14 told you, these were cutting edge things for our time 15 and it was important that I understood them well 16 enough so that I could see what should be transferred 17 to our graduate school and give me the capacity to 18 evaluate faculty so that we were making and spreading 19 the knowledge and providing professionals. 20 Q. Were you satisfied after reviewing these 21 studies that it was a good decision for United to 22 invest in mortgage-backed securities? 2460 1 A. Yes. 2 Q. Now, you told Mr. Rinaldi that you recall 3 that you evaluated the staff very carefully. Do you 4 recall the testimony on that? 5 A. Yes, I do. 6 Q. Is that a reference to the investment 7 department of United? 8 A. Yes. 9 Q. And do you recall monitoring the investment 10 department of United by, for example, reviewing the 11 minutes of the investment committee? 12 A. Yes. 13 Q. Would it be fair to say, sir, that given 14 your background and your academic interest that you 15 have a particular interest in the investment side of 16 the institution? 17 A. Yes, I do. I'm also the founder of the 18 first society for modeling with things like that 19 called Institute of Management Sciences. I was one 20 of the early -- present one of my expertise to model 21 these things. 22 Q. If, in your judgment, the investment 2461 1 committee was taking action that you thought was 2 imprudent, would you express your views to the 3 committee? 4 A. Always. 5 Q. Do you recall ever having done that? 6 A. Yes. 7 Q. And did they respond? 8 A. They went to work and I went to work and 9 we -- well, when you have new things and -- time is a 10 variable that most social scientists don't pay any 11 attention to. It's a physical science that optimized 12 around not only a quantity but a time too. And so, 13 if you looked at people who came out of business 14 schools, they're more onto social science and they 15 ignore time too much and here I am pushing away on 16 time and so on. The early stages, the first set we 17 had, as I recall, was good for a year and a half but 18 when I started extending my simulation models out 19 two, three years, I found things out we hadn't 20 anticipated. So, we found them very early and went 21 to work on them. 22 Q. Have you ever lectured on the duties of 2462 1 corporate directors? 2 A. Numerous times, and I also established four 3 courses at the taught graduate school of business at 4 the University of Texas at Austin in that area. 5 Q. And you've written on the duties of 6 corporate directors? 7 A. I have. 8 Q. You've been a member of a number of boards 9 of directors. You've counted probably, at least, 12 10 so far. There's probably more; is that right? 11 A. Right. 12 Q. I'd like you to compare United's board of 13 directors with the others you've been on with respect 14 to the issue of the independence of the directors. 15 A. Well, first if I used a bad standard called 16 Teledyne, there were insiders at Teledyne. I don't 17 think we ever had, for a long time, one or two 18 outsiders; and if I look at United significantly, 19 over half were independent board members who 20 exercised their rights. 21 Q. I'd like you to compare United's board to 22 the others that you've been on with respect to the 2463 1 diligence of the directors? 2 A. Oh, I would say it's in the top two or 3 three. 4 Q. And that's in terms of doing their homework 5 before they came to meetings? 6 A. Doing their homework, asking good 7 questions, staying, getting at the facts, making sure 8 they not only understood, also made sure, like, when 9 I was on the audit committee, it got carried to the 10 rest of the board. 11 Q. Now, you were a member of the audit 12 committee from 1980 -- you don't recall dates that 13 well, but you were a member of the audit committee 14 for a number of years; isn't that right, sir? 15 A. Yes, sir. 16 Q. And one of your responsibilities as a 17 member of the audit committee was to meet with the 18 independent auditors, right? 19 A. Right. 20 Q. And you received the reports of the 21 independent auditors? 22 A. Yes, sir. 2464 1 Q. And do you recall that Peat Marwick was the 2 independent auditor? 3 A. Right. 4 Q. Did you discuss the results, the audit from 5 time to time with Peat Marwick and the partners when 6 they came in? 7 A. Yes. Every time they came in, we asked any 8 insiders to leave the room so that we could talk with 9 them and get their frank opinions. As I mentioned 10 early, one of the problems was I used the -- let me 11 call it management information system. And we wanted 12 to make sure that that was being improved and would 13 meet standards. And that also we were very concerned 14 about the quality of the people and we asked about 15 that we also asked them their opinions on various 16 things and frank ones? 17 Q. So, the reason you'd exclude the officers 18 of United was to get a candid assessment of the 19 officers? 20 A. Yes. And I would say an honest, too. 21 Q. An honest assessment by Peat Marwick? 22 A. Yes. 2465 1 Q. Uninhibited by the fact that the officers 2 may be present? 3 A. My service of the boards I've served on, 4 that is a very important function of the audit, 5 they're independent. 6 Q. Do you recall any Peat Marwick auditor ever 7 saying that they had been restricted in their access 8 of the files and documents of United? 9 A. No. I don't recall. 10 Q. Do you recall in any of those meetings 11 Peat Marwick ever saying that they were being misled 12 by United? 13 A. Never. 14 Q. Do you believe that if that had occurred, 15 you would remember that? 16 A. No question. 17 Q. Would you have permitted that, too? 18 A. No way -- sorry. I didn't let you ask the 19 rest of that question. 20 Q. That's okay. I knew the answer. 21 You resigned from Federated in 1985; 22 is that right, sir? 2466 1 A. Yes, best of my recollection. 2 Q. And you resigned from United in November of 3 1987? 4 A. Yes. 5 Q. Why did you resign from the boards of 6 United Financial Group which is the parent to United 7 Savings Association, which is the thrift, in November 8 of 1987? 9 A. Well, as I said earlier, the things that we 10 were doing at IC Squared got so important to me and 11 the things that I felt needed to be done. So, let's 12 see if I can't take a half a minute. 13 Most people think us academics have a 14 think tank. All we do is search and think. But I 15 had set up a unique one and it's been recognized 16 worldwide now. We're not only a think tank but we're 17 a do tank; and the time had come and the fellows -- I 18 have 125 IC Squared fellows in most states of the 19 United States and northern countries and we review 20 every April and they review what we're doing and a 21 suggestion came up in '87: Why don't you stop 22 holding research meetings, publishing research work? 2467 1 Why don't you go and do something? Why don't you 2 show it works? And so, at that, I got very tied up 3 with that because I was going to set up an experiment 4 in a community to show that our research work really 5 worked. It was just research that would pass the 6 criteria of being published in reveried journals or 7 by a private press. That took a great deal of work. 8 It was a time when we were all family, Texas. We had 9 the S&L crisis, buildings were empty in Austin, 20 10 percent of all the commercial buildings in Austin 11 were empty. I wanted to start showing that we could 12 take the technology and the science that was on the 13 university campus at MCC. That's terrible for you. 14 Microtronic Computer Corporation and that Symetek and 15 other research divisions of major companies that we 16 could set up a laboratory for every college on our 17 campus for internship and at the same time, start new 18 companies; and that in a ten-year period when they 19 graduated, and they had to graduate in three years or 20 less that they would fill half the empty commercial 21 space in Austin. That was quite a responsibility. I 22 simply say that we just finished our sixth year. The 2468 1 third year was a complete success. My criterions are 2 simple. The Federal government spends 42,000 per 3 direct job. We did it for $2,000. We have filled 4 just about 800,000 square feet. We have helped 5 companies in the incubator raise 180- to $200 6 million. The sales tax from the sales of the 7 graduates for Austin is already over 5 million and 8 they invested less than 200,000. And we have been 9 asked to duplicate this for NASA and Silicon Valley, 10 clearly for DEO in East Tennessee, by NOA in 11 South Carolina, and we get about 500 visitors a 12 month. That was a lot of work. And you can see I 13 had a staff of three. There was no time for me. I 14 not only resigned off those boards but some others as 15 well. 16 Q. Your resignation didn't have anything to do 17 with concern whether the manager or director was 18 acting unethically, did it, sir? 19 A. No way. You don't solve those problems as 20 a responsible board member by resigning, in my 21 opinion. 22 Q. And you had no concern at that time that 2469 1 the manager or dictator was breaching its fiduciary 2 duties at United. That isn't why you resigned, is 3 it, sir? 4 A. No, sir. 5 Q. Or the board of regulators was breaching 6 its management either? 7 A. No, sir. 8 Q. Dr. Kozmetsky, were you asked by the 9 Federal Deposit Insurance Corporation to sign a 10 tolling agreement in connection with USAT? 11 A. Yes, I was. 12 Q. Did the F.D.I.C. threaten to sue you in 13 connection with your director of USAT? 14 A. Yes, they did. 15 Q. Did they make accusations to you and 16 suggest to your lawyers that you pay a settlement in 17 order to get a release? 18 MR. RINALDI: Your Honor, I'm going to 19 object to this whole line of questioning. I don't 20 know what it has to do with any of the issues before 21 this tribunal. 22 Q. (BY MR. VILLA) Three more questions, 2470 1 Your Honor, and we'll find out. 2 MR. RINALDI: It's totally -- I don't 3 understand the scope of anything he asked him about. 4 THE COURT: All right. I'll allow it. 5 Q. (BY MR. VILLA) What was your response, 6 sir? 7 A. You didn't pay him anything? Didn't pay 8 him anything. 9 Q. Was your futile move by a financial impact 10 a settlement on you? 11 A. No. I would say we had given over 12 $50 million to our family foundation in the last few 13 years. Our family foundation's assets at this point 14 are at least 115 million and I wouldn't be surprised 15 if our personal giving has been substantially over 16 $5 million in the 1990's. 17 Q. So, the reason you refused -- 18 A. So, it wasn't money. 19 Q. So, the reason you refused to settle was 20 not because of the financing impact. Why is it that 21 you refused to settle with the F.D.I.C? 22 A. I couldn't find what I was doing wrong. 2471 1 Q. To your knowledge, sir, did any director or 2 officer of United take any action while you were 3 there that you believe was a breach of duty to 4 United? 5 A. No, sir. 6 Q. To your knowledge, sir, did the director or 7 officer of United take any actions that you believe 8 was intended to harm United? 9 A. Never. 10 Q. And that would include Mr. Art Berner? 11 A. Yes. 12 Q. That would include Mike Crow? 13 A. Yes. 14 Q. That would include Ron Heubsch? 15 A. Yes. 16 Q. That would include Barry Munitz? 17 A. Yes. 18 Q. That would include Jenard Gross? 19 A. Yes. 20 Q. And that would also include Charles 21 Hurwitz? 22 A. Yes, sir. 2472 1 MR. VILLA: Thank you. No more questions, 2 Mr. Kozmetsky. 3 THE COURT: Do any of the other respondents 4 have questions? 5 MR. NICKENS: No questions, Your Honor. 6 MR. BLANKENSTEIN: No questions, Your 7 Honor. 8 MR. KEETON: I have one, Your Honor. 9 10 11 CROSS-EXAMINATION 12 13 14 Q. (BY MR. KEETON) Dr. Kozmetsky, during 15 the time you were on the board of UFG and USAT, did 16 you ever see anything done by either of those 17 companies that you thought was being done purely to 18 benefit MCO or Mr. Hurwitz or Federated in some other 19 fashion? 20 A. Absolutely not. 21 MR. KEETON: Thank you, sir. 22 THE COURT: Is there any redirect? 2473 1 MR. RINALDI: I just have a few. May I 2 just stand here? I'll sit if the Court has no 3 objection. 4 5 6 FURTHER EXAMINATION 7 8 9 Q. (BY MR. RINALDI) Mr. Kozmetsky, I just 10 have several questions for you. You indicated -- 11 made reference to doing cutting-edge things for our 12 time. What were you making reference to when you 13 responded to Mr. Villa in that regard? 14 A. Let's see if I can find a way of telling 15 you. So, let me just start. All right? One of the 16 things I'm on the very cutting edge of, which is 17 simple to talk about, I keep up with 80 different 18 scientific areas and technologies. I help to see 19 that they are transferred into and commercialized. I 20 work with the whole series of different states and 21 communities. For example, if you are going to try to 22 promote science and technology in higher education 2474 1 and you don't want to tax for it or rely on Federal 2 government to give the money, the State of Alaska 3 followed one of my suggestions. If the State of 4 Alaska -- our foundation there has a 5 100-million-dollar endowment, and the only income is 6 used to transfer -- transform Alaska from a 7 resource-based economy to a technology-based economy. 8 I spent a great deal of time in how do you establish, 9 in an underdeveloped country, the same types of 10 things. For example, in China, they had given me 11 probably more credit than I deserve to help start the 12 torch program. The torch program is that area which 13 they have started to invest in in their own 14 scientific work that will create products and 15 services for global trade. And I've been given 16 credit for helping start 6,000 such companies, the 17 minister of science and technology. And I 18 co-sponsored this spring the first sign of US Venture 19 Fair. Things like that in addition -- I'm sorry. 20 You asked -- 21 Q. No. No. Continue. 22 A. In addition, for example, I've been asked 2475 1 at the end of this month to lay out the future plans 2 for research in quantitative methods. For example, I 3 was asked to come up with how do we get a new 4 management curriculum. I don't think management is 5 taught in business schools. They only teach you how 6 to handle business functions. And management is a 7 field that we don't have many coming out. I'm also 8 laying out what I call -- in the Seventies, I laid 9 out what later got information technology -- a whole 10 road map for 25 years including government 11 regulations, including academics, including what's to 12 be done in the private sector. And now I'm working 13 on what do we do for the 21st Century. This 14 generation doesn't have a road map. So, I'm doing 15 one for groups of people in North America, another 16 one in Europe, and another one in Asia. And that's 17 the sort of thing... 18 Q. I thought you had used the word "cutting 19 edge" in reference to the strategy that had been 20 developed by United Finance Group to come out of its 21 circumstance that you founded in 1983. 22 A. Well, let me now come back at you, if I 2476 1 may, and explain cutting edge and strategy. 2 Q. Let me just ask you my question: Did you 3 consider UFG's strategy that it was adopted to come 4 out of UFG's circumstance to cutting edge? 5 A. The thing that I discovered -- and in 6 answering your questions, I was fairly precise in my 7 terms. I said you don't get to any strategy except 8 through operations. I then indicated that we had 9 problems on the very fundamentals that you need in an 10 organization. You didn't even have time to get to 11 what I would call cutting-edge strategy. So, we were 12 all constantly -- at the time I was on the board 13 involved in operations, we brought in new operations. 14 The strategy from where I sat as a scholar if -- 15 strategy, we never got to. So, let me complete this. 16 In my opinion, you cannot have a strategy in today's 17 society that's longer than two years. 18 Q. Thank you. Now, you had indicated that you 19 started an ink battery -- ink battery project in 20 Austin after you left United Financial Group. Was 21 there a hiatus between the time you left, or did you 22 start into that process immediately? 2477 1 A. There was no hiatus. 2 Q. So, then, you started into the ink battery 3 project in the latter part of 1987? 4 A. Yes. I had the research ongoing. Now, let 5 me call that being creative. All right? Now, I had 6 to be innovative. Innovative means to successfully 7 accomplish. So, we went to the invasion phase. 8 Q. And you also discussed the fact that 9 20 percent of the commercial buildings in Austin were 10 empty at the time. Was that the situation at the 11 time you left UFG and went into the ink battery 12 project? 13 A. That describes Texas. 14 Q. Okay. And had it been in that circumstance 15 for some time? 16 A. No. 17 Q. How long did that situation occur in 18 Austin? 19 A. I would assume it would have been, at 20 maximum, two years. 21 Q. You indicated in response to one of 22 Mr. Villa's questions that insiders on a board are a 2478 1 problem. Do you remember that? 2 A. I didn't say that. 3 Q. I thought you indicated something about 4 insiders could be a problem, and you talked about 5 Teledyne having -- 6 A. No. If you take a look at the literature 7 on boards and governments and if you go to the stock 8 exchanges, you will find that they all have finally 9 implemented that the majority of the board should be 10 independent and not insiders. 11 Q. And in your opinion, when insiders dominate 12 a board, does that create a problem? 13 A. It has the appearance of doing it. All the 14 boards I've served on -- and that includes 15 Teledyne -- I never found that they dominated in the 16 sense... 17 Q. But in your opinion, it's preferable to 18 have an independent board that's dominated by 19 outsiders? 20 A. Yeah. Let me just answer you. I use a 21 phrase -- I'm muddling that now. If you read the 22 literature and you read the recommendation and 2479 1 whatnot in this field, they are now saying they even 2 want to go as far as to have an outside chairman of 3 the board. When I was at MCO, I assumed such a 4 position to see could I be an independent chairman of 5 the board and confine myself to strategies. 6 Q. And why is -- 7 A. And I find that's a tough one. 8 Q. And why is there concern with respect to 9 insiders on a board? 10 A. In my experience, I never had any concerns 11 with any insiders, so... 12 Q. But you talked about in the literature, 13 there is a concern? 14 A. The literature is full of it. Stories are 15 full of it. Movies are full of it, but I've never 16 experienced those things. 17 Q. But in your opinion, why is there such a 18 concern over insiders on the board? 19 A. I'd imagine at a time -- I wish I had my 20 book. I'd read it to you. It has all the 21 experiences for you; and if you've got experiences, 22 you've got problems. Pretty soon people are spending 2480 1 more time on that, and you're not devoting your 2 energies to what's best for the shareholders and the 3 other stockholders. 4 Q. Does it, on occasion, give rise to abuse by 5 insiders? 6 A. Oh, I imagine that's theoretical in some 7 practices. I've never had the pleasure or misfortune 8 of being a part of -- that's the only way I know how 9 to answer that. I want to assure you that one of the 10 nice things America has done for George, it's left me 11 independent enough to exercise the principles I want 12 to live by. And I want to assure you I do not do 13 anything because -- that would besmirch a reputation 14 for my students because I am a role model, and I 15 don't want to be associated with anything that would 16 cause it. And I don't ask anybody to accept all the 17 principles that I stand for, but I do live it. 18 MR. RINALDI: Let me thank you, then, for 19 taking your time to come down here and perform the 20 civic function of giving us the benefit of your 21 testimony. I have no other questions unless 22 Mr. Villa has something on redirect. Otherwise, I 2481 1 think you're probably free to go. 2 MR. KEETON: I have a question. 3 THE COURT: Mr. Keeton. 4 5 6 EXAMINATION 7 8 9 Q. (BY MR. KEETON) One of Mr. Rinaldi's 10 questions was: There was concern having insiders on 11 the board. That's not an accurate statement, is it? 12 A. I assumed when he asked that question in 13 the general field, we were not at United. I had 14 already stated quite emphatically that United -- we 15 had caused that barrier from the very time I joined 16 that board -- 17 MR. RINALDI: And if there was some 18 misunderstanding, it was certainly my opinion to ask 19 him what concerns concerning insider activities -- 20 Q. (BY MR. KEETON) And, again, 21 Dr. Kozmetsky, the concern is when the majority is 22 inside the board as opposed to having the majority 2482 1 outside or be independent? 2 A. Yes. 3 THE WITNESS: May I thank you from 4 San Carlos? It's kind of nice to see a San Carlos -- 5 and I want to thank you -- that you allowed 6 Mr. Litton to become a millionaire for the first 7 time. 8 MR. RINALDI: Thank you. 9 THE WITNESS: Thank you, Your Honor. 10 11 (A break was taken.) 12 13 THE COURT: Be seated, please. We'll be 14 back on the record. 15 MR. VEIS: Your Honor, OTS calls 16 Jack Lazard. 17 THE COURT: Mr. Veis. 18 19 20 21 22 2483 1 2 JACQUES "JACK" LAZARD, 3 4 called as a witness and having been first duly sworn, 5 testified as follows: 6 7 EXAMINATION 8 9 Q. (BY MR. VEIS) Good afternoon, 10 Mr. Lazard. We met briefly in the hallway. My name 11 is Bryan Veis. I represent the Office of Thrift 12 Supervision. Could you state your name for the 13 record, please? 14 A. My name is Jack C. Lazard. 15 Q. What is your business address? 16 A. My business address is 51 West Third 17 Street, Tempe, Arizona. 18 Q. What is your position, sir? 19 A. I'm the vice president of and treasurer of 20 America West Airlines. 21 Q. Could you state your background, please, 22 sir? 2484 1 A. I have a bachelor's of science with a major 2 in accounting. 3 Q. Would you please describe your employment 4 history? 5 A. My career started in 1984 with a subsidiary 6 of MAXXAM. I spent approximately 20 years with 7 MAXXAM. I left there in 1994 to become the chief 8 financial officer of UDC Homes which is located in 9 Phoenix, Arizona, and left UDC Homes in the summer of 10 1996 to become the vice president and treasurer of 11 America West Airlines. 12 Q. During the time you were employed with 13 MAXXAM or its subsidiaries or what was formerly known 14 as MCO Holdings, would you please describe your 15 positions and the times that you held them? 16 A. My initial career was in various accounting 17 functions progressing to the comptroller of MCO 18 Properties which is the wholly-owned real estate 19 subsidiary of MCO Holdings, now MAXXAM. And January 20 of 1982, I became the corporate comptroller of MCO 21 Holdings. I held that position until I left the 22 company in 1994. 2485 1 Q. What were your duties as comptroller of MCO 2 Holdings? 3 A. Prime financial management, financial 4 accounting, financial reporting requirements of the 5 company. 6 Q. And did you have those responsibilities for 7 the subsidiaries of MCO Holdings as well? 8 A. Yes. I would have had that for 9 wholly-owned subsidiaries of the company. 10 Q. Were you responsible for maintaining the 11 books and records of MCO Holdings? 12 A. Yes, I was. 13 Q. Would that include the books and records of 14 MCO Holdings' bank accounts? 15 A. Yes, I did. 16 Q. Were you responsible for the preparation 17 for financial statements of MCO Holdings? 18 A. Yes, I was. 19 Q. Were you responsible for the preparation of 20 financial statements of the subsidiaries of MCO 21 Holdings? 22 A. Again, wholly-owned subsidiaries, yes, I 2486 1 would be. 2 Q. Were financial statements for MCO Holdings 3 as to which you were responsible included in filings 4 with the Securities and Exchange Commission? 5 A. Yes. 6 Q. And were such financial statements included 7 in annual reports of MCO Holdings? 8 A. Yes. 9 Q. And were such financial statements included 10 in specific activities for security issues by MCO 11 Holdings or its wholly-owned subsidiaries? 12 A. MCO Holdings? Yes. 13 Q. What are its subsidiaries? 14 A. There would be certain nonwholly-owned. 15 There are situations in the case of nonwholly-owned 16 subsidiaries that would have issued registration 17 statements that would not include the financial 18 statements of MCO Holdings. 19 Q. But they would have included financial 20 statements for the issuer; is that correct? 21 A. That's correct. 22 Q. And was it your responsibility to ensure 2487 1 that the financial statements prepared under your 2 supervision were prepared in order with generally 3 accepted accounting principles? 4 A. I did consider that my responsibility. 5 Q. And did you attempt to carry that 6 responsibility out to the best of your ability? 7 A. Yes. 8 MR. VEIS: May the record reflect that I'm 9 handing Mr. Lazard a document that's been previously 10 admitted. It is Lazard Deposition Exhibit No. 1. 11 Q. (BY MR. VEIS) Mr. Lazard, do you 12 recognize that document? 13 A. Yes, I do. 14 Q. What is it? 15 A. It is a note agreement for zero coupon 16 notes that were issued in July of 1982. 17 Q. And would you direct your attention, 18 please, to Page 1 of the document. It's beyond the 19 cover page in -- and the table of contents. It's 20 Bates No. DM011966. 21 A. Yes. I see the page. 22 Q. Now, to whom is that document addressed? 2488 1 A. Drexel Burnham Lambert, Inc. 2 Q. Does that indicate that Drexel Burnham 3 Lambert was to be the purchaser of the notes at 4 issue? 5 A. I'd have to read it to be sure. I don't 6 know. 7 Q. Directing your attention to the following 8 page, DM011967. You see Section 2.01, sale and 9 purchase of notes? 10 A. Yes. 11 Q. Would you read that paragraph to yourself, 12 please? 13 A. Okay. 14 Q. Does that indicate that Drexel Burnham 15 Lambert is to be the purchaser of the notes? 16 A. Yes. 17 Q. What's the purchase price for that series 18 of notes? 19 A. $3,496,620.11. 20 Q. Was there an original issue discount other 21 than this note issuance? 22 A. Yes, there was. 2489 1 Q. Do you know what the effective interest 2 rate was? 3 A. My recollection, it was 8-16, 1982. I 4 guess July 26th, 1992. 5 Q. But there was a limit on when it could be 6 closed? 7 A. Right. 8 Q. And what date was that? 9 A. August 16th, 1982. 10 Q. Do you know whether this transaction 11 actually did close? 12 A. Yes, it did. 13 Q. Do you know what date? 14 A. My recollection was that it was the July 15 date. I'm not sure. 16 Q. I'd like to direct your attention to 17 Page 17 of the document. It bears the Bates 18 No. DM011982. 19 A. Yes. 20 Q. Do you have that page, sir? 21 A. Yes, I do. 22 Q. Would you look at Section 4.05 which has 2490 1 the heading "use of proceeds"? 2 A. Okay. 3 Q. Have you read it? 4 A. No. 5 Q. Would you please do so? 6 A. Okay. 7 Q. What was the intended use of the proceeds 8 of the sale of the 260-million-dollar zero coupon 9 note? 10 A. Proceeds were added to the working capital 11 of the company. 12 Q. And what were they to be used for? 13 A. General working capital purposes. 14 Q. Just to be precise, it says general 15 corporate purposes in the document, does it not? 16 A. Yes, it does. 17 Q. Were the proceeds, in fact, added to 18 general capital and general corporate purposes? 19 A. That's my recollection. 20 Q. Do you have any reason to believe that they 21 weren't? 22 A. No. 2491 1 MR. VEIS: May the record reflect that I'm 2 handing Mr. Lazard a copy of a document that's been 3 previously marked as Lazard Exhibit 14. It purports 4 to be a Form 10-K for MCO Holdings, Inc., for the 5 fiscal year ended December, 1981. I have two copies 6 here. 7 Q. (BY MR. VEIS) Mr. Lazard, if you would 8 take a moment, would you please examine Exhibit 14. 9 I recognize it's voluminous. I don't think everyone 10 in the courtroom expects you to read every page, but 11 I will ask if you recognize it. 12 A. Yes, I do. 13 Q. And is this a filing with the Securities 14 and Exchange Commission which would include financial 15 statements for which you were responsible? 16 A. Yes, it was. I had actually just started 17 with the company as the corporate comptroller in 18 January of 1982, and we were in the process of 19 finalizing this document for filing with the S.E.C. 20 Q. I notice on the front page, there was an 21 entry for common shares outstanding for March 1982. 22 Do you see that? 2492 1 A. Yes, I do. 2 Q. What is that entry? 3 A. That is intended to represent the common 4 shares of MCO Holdings on the date of March 25th, 5 1982. 6 Q. Directing your attention, if you would, 7 please, to Page 43 of the document, Exhibit 14. 8 There's a Bates No. 0MX05965. 9 A. Yes. 10 Q. Do you see a heading "liquidity and capital 11 resources"? 12 A. Yes. 13 Q. And below that, a company excluding 14 resources? 15 A. Yes. 16 Q. Would you read the paragraph immediately 17 following that, please? 18 A. Yes. Okay. 19 Q. Does that indicate what the working capital 20 of the company excluding resources was at December 3, 21 1981? 22 A. Yes, it does. 2493 1 Q. What was that? 2 A. That's the $7 million that's disclosed. 3 Q. It indicates in the following sentence that 4 there was some sort of reduction of working capital. 5 Do you see that? 6 A. Yes, I do. 7 Q. Would you please explain that to the Court? 8 A. It's a computation of the working capital 9 of the company excluding its subsidiary MCO Resources 10 at December 1, 1980, comparing that to the working 11 capital of the company excluding the resources at 12 December 31, 1982. And it's the difference of the 13 working capital balances in those two points in time. 14 Q. Does it explain the reasons for the 15 difference? 16 A. It's close, or to explain the primary 17 reasons for the difference, yes. 18 Q. What are those? 19 A. As it states, the acquisition of common 20 stock for cash -- and it goes on to talk about the 21 need for funds, capital for land development 22 operations, and the fact that some of those funds are 2494 1 received through receivable collections from the land 2 development operations. 3 Q. When you discuss acquisition of common 4 stock for cash, does that indicate that MCO Holdings 5 was buying back its own shares? 6 A. Yes. 7 Q. What was the disposition of those shares as 8 a general matter, if you recall? 9 A. They were treasury shares and ultimately 10 required. 11 Q. So, at this point in the year 1981 at 12 least, MCO was ruling the number of outstanding 13 shares; is that correct? 14 A. That's my recollection, yes. 15 Q. Thank you. If you would turn, please, to 16 Page 48 of this 10-K, it bears the Bates 17 No. 0MX05970. 18 A. Okay. 19 Q. Does that page indicate the total assets of 20 the company as of -- the total consolidated assets of 21 MCO Holdings as of December 31, 1981? 22 A. Yes, it does. 2495 1 Q. What are those? 2 A. It looks like $351,875,000. 3 Q. Can you tell me what the total 4 stockholders' equity was on that date? 5 A. Yes. Again, I believe the number is 6 52,767,000. 7 Q. Directing your attention to Page 86 of 8 Exhibit 14, that bears the Bates No. 0MX060086. Do 9 you find that document? 10 A. Yes, I do. 11 Q. What is this page? 12 A. This page is the parent's only financial 13 statements. So, it is the financial statements of 14 just the parent company as opposed to the 15 consolidated financial statements. 16 Q. So, that's what it means when it says 17 "balance sheet unconsolidated"? 18 A. That's correct. 19 Q. And is there an entry there of cash and 20 cash equivalents as of December 1981? 21 A. Yes, it is. 22 Q. And what is that entry? 2496 1 A. 496,000. 2 Q. And going down into the stockholders' 3 equity section of the balance sheet, is there an 4 entry for the common stock of the company? 5 A. There's a description of the common stock 6 in the stockholders' equity section which refers to 7 14,482,966 shares outstanding that would include 8 5,244,905 treasury shares. So, the net amount 9 outstanding is the difference between those two 10 numbers, roughly 9,200,000, if my math is correct. 11 Q. And that would be approximately the same 12 number that's reflected on the cover on the document 13 10-K? 14 A. Yes, sir. The difference would be the same 15 number that's on the 10-K. 16 Q. I'm sorry. I believe you said 1998. 17 A. I'm sorry. 1981. Thank you. 18 MR. VEIS: Your Honor, I move the admission 19 of Lazard Exhibit 14. 20 MR. EISENHART: No objection, Your Honor. 21 THE COURT: Received. 22 MR. VEIS: Let the record reflect that I'm 2497 1 handing Mr. Lazard previous documents marked for the 2 fiscal year ending 1982. 3 Q. (BY MR. VEIS) Mr. Lazard, do you recognize 4 that document? 5 A. Yes, I do. 6 Q. What is it? 7 A. It is the MCO Holdings, Inc., Form 10-K for 8 the fiscal year ending December 31, 1982, that's 9 filed with the S.E.C. 10 Q. Have you had a chance to review it 11 sufficiently so that you're satisfied it is, indeed, 12 in its entirety such a document? 13 A. I certainly haven't reviewed it in its 14 entirety; but judging by the thickness, it seems to 15 be most of it. 16 Q. Let me direct your attention to the first 17 page on the cover of Exhibit 12. 18 A. Yes, sir. 19 Q. On the common shares of stock outstanding, 20 do you see that? 21 A. Yes, I do. 22 Q. What were the common shares outstanding? 2498 1 A. 7,662,000. I think that's 241,000. Again, 2 that's a difficult number to read. 3 Q. This exhibit would include financial 4 statements that were prepared under your supervision; 5 is that correct? 6 A. Yes. That's correct. 7 Q. Now, it appears that the number of 8 outstanding shares is some 1.6 million or 1.5 million 9 less than it was the previous year; is that correct? 10 A. I agree the number is somewhere between 11 1 and a half million and 1.6 million. 12 Q. Do you know the reason for that? 13 A. My recollection would be that the company 14 would have, again, purchased shares -- purchased its 15 own common shares in adding to its treasury. 16 Q. Let me direct your attention to Page 54 of 17 the document; and by the page number, I'm referring 18 to the small page number that is printed in the same 19 type as the document itself. There is another page 20 number. It appears that it was stamped for filing so 21 that the cover page would be Page 1. But I'm 22 referring to actually the Page 54 in smaller type. 2499 1 Do you see that? 2 A. Yes, sir. 3 Q. And is there a -- directing your attention 4 to Note 13, stockholders' equity. 5 A. Yes. 6 Q. Does that -- if you would review that 7 briefly. My question is: Does that reflect 8 additional purchases of shares by MCO during the year 9 1982? 10 A. Yes, it does. 11 Q. And does it, in addition, reflect certain 12 share purchases in 1983? 13 A. In the footnote following the table, it 14 describes the purchase of shares in 1983 up to the 15 date that the document was filed with the S.E.C. 16 Q. Now, directing your attention to Page 36 of 17 Exhibit 12 -- 18 A. Yes, sir. 19 Q. -- is there an entry -- first off, what is 20 on Page 36? 21 A. Page 36 is the consolidated balance sheet 22 of MCO Holdings for the year December 31, 1982, and 2500 1 the comparative December 31, 1981, balance sheet. 2 Q. And what were the total assets of 3 MCO Holdings on December 31, 1982? 4 A. Looks like it was 484,346,000. 5 Q. Now, directing your attention back to 6 Page 69 -- 7 A. Yes, sir. 8 Q. -- what is that page? 9 A. This is the unconsolidated balance sheet of 10 MCO Holdings or the balance sheet of the parent 11 company only. 12 Q. And does that have an entry reflecting the 13 cash and cash equivalents of the parent company of 14 1982? 15 A. There is a line item balance reflecting 16 cash, and that amount shows zero of that date in 17 1982. 18 Q. As of that date, the parent company had no 19 cash or cash equivalent on its books? 20 MR. VEIS: Now, let the record reflect I'm 21 handing the witness an exhibit, A26230. I'm afraid 22 the exhibit is hard to read because of the copying 2501 1 problems. Maybe the respondents may be able to find 2 a cover page that shows it better, Your Honor. 3 Before I move on, Your Honor, I move the admission of 4 Lazard Exhibit 12 into evidence. 5 MR. EISENHART: No objection, Your Honor. 6 THE COURT: Received. 7 Q. (BY MR. VEIS) Directing your attention 8 to A2060, do you recognize that document? What is 9 it? 10 A. It looks like the annual report of MAXXAM, 11 Inc., for the year of December 31, 1988. 12 Q. Does it contain financial statements that 13 were prepared under your supervision? 14 A. Yes, it does. 15 Q. Directing your attention to page -- well 16 unfortunately -- well, there is a page number in the 17 center of the left margin on some of the pages. I 18 direct your attention to Page 4 of the document. It 19 begins with the words "to our shareholders." 20 A. Yes. I found the page. 21 Q. And would you look at the first sentence on 22 that page, please. 2502 1 A. I've read the sentence. 2 Q. And what -- does that indicate what the 3 assets of MAXXAM, the successor to MCO Holdings, were 4 at December 31, 1988? 5 A. Yes, it does. 6 Q. What were those assets? 7 A. 3.6 million. 8 MR. VEIS: Your Honor, I move the admission 9 of A2060 into evidence. 10 MR. EISENHART: No objection, Your Honor. 11 THE COURT: Received. 12 MR. VEIS: May the record reflect I'm 13 handing Mr. Lazard an exhibit that's been marked 14 A2003. It purports to be minutes of a board of 15 directors meeting of MCO Holdings, Inc., dated 16 December 16, 1982. 17 Q. (BY MR. VEIS) Mr. Lazard, have you ever 18 seen that document before? 19 A. I don't recall ever seeing it. 20 Q. Did you, in the course of your duties, 21 receive minutes of the board of directors meetings of 22 MCO Holdings? 2503 1 A. Not typically, no. 2 Q. Now, Mr. Lazard, let me direct your 3 attention to Page 6 of this document and ask you as 4 it bears the Bates No. DE001076. 5 A. Okay. 6 Q. Would you read that, please, to yourself 7 and the carryover paragraphs on the following page? 8 A. Okay. I've read the document. 9 Q. Mr. Lazard, do you have a recollection of a 10 loan agreement between Federated Development and 11 MCO Holdings with respect to shares of United 12 Financial Group, Inc.? 13 A. It's been a long time. I have a vague 14 recollection, yes. 15 Q. Do you have a recollection of any call 16 option with respect to that loan agreement? 17 A. I don't recall the specifics of the loan 18 agreement. 19 MR. VEIS: May the record reflect I'm 20 handing Mr. Lazard a copy of Exhibit A2066 which has 21 been previously admitted into evidence. It's an 22 Amendment 5 to the Schedule 13-D filed with respect 2504 1 to the stock of United Financial Group, Inc., on 2 December 10, 1982. Your Honor, I have a copy if you 3 care to use that. 4 THE COURT: Thank you. 5 Q. (BY MR. VEIS) Mr. Lazard, do you 6 recognize that document? 7 A. Again, I may have seen this document 8 before. I'm not sure. 9 Q. I'm sorry? 10 A. It's been a long time. I'm not sure 11 whether or not I've seen this document. This would 12 have been a United Financial Group document, and I 13 didn't have responsibility for the accounting records 14 of United Financial Group. 15 Q. Let me direct your attention to page -- 16 Pages 19 and 20 of the document. They bear two Bates 17 numbers. There's one, 0FD2463 and 2464. Do you see 18 those pages? 19 A. 0FD2463 and 2464? 20 Q. Yes. 21 A. Yes. 22 Q. Okay. Do those indicate that this is 2505 1 signed by individuals purportedly on behalf of 2 Federated Development -- Federated Insurance and 3 MCO Holdings? 4 A. Yes. 5 Q. This is not a UFG document. 6 A. I see. 7 Q. Do you recall acquisition of shares of 8 United Financial Group by Federated Development, 9 Federated Reinsurance, MCO Holdings? 10 A. I recall that Federated acquired shares, 11 but I don't recall specifically how they were 12 acquired by the Federated entities. 13 Q. Drawing your attention to Page 9, there is 14 an item entry at the top of that page, Item 3, source 15 of amount of funds and other consideration. I'm not 16 asking you to read that at the time, but I'm asking: 17 Is this a type of information that would be within 18 your responsibility as comptroller to provide to 19 anyone filing a document on behalf of MCO Holdings? 20 A. Yes. My responsibility would be to account 21 for the investment and/or the loan, and I would have 22 provided to the preparer of this report the financial 2506 1 information. 2 Q. Do you have any recollection of the 3 financial information that's reflected on this page? 4 A. Very vague recollection. 5 Q. Do you have any reason to believe it would 6 be incorrect? 7 A. No, I don't. 8 Q. Do you see the entry which indicates 9 that -- under Item Roman III that indicates that 10 1,462,312.50 was obtained by Federated pursuant to a 11 loan agreement dated October 1st, 1982? 12 A. Yes. 13 Q. Do you have any reason to believe that 14 would be incorrect? 15 A. No, I don't. 16 MR. VEIS: May the record reflect that I'm 17 handing Mr. Lazard a document that's been previously 18 marked as Lazard Exhibit 13. It purports to be a 19 Form 10-K for MCO Holdings, Inc., for the fiscal year 20 ending December 31, 1983. 21 Q. (BY MR. VEIS) Mr. Lazard, do you 22 recognize that document? 2507 1 A. Yes, I do. 2 Q. What is it? 3 A. It is the Form 10-K for MCO Holdings, Inc., 4 for the year ended 1983 filed with the Securities and 5 Exchange Commission. 6 MR. VEIS: I move for admission of this 7 document. 8 MR. NICKENS: It is marked as 9 Exhibit A11005 in our records. 10 Q. (BY MR. VEIS) Mr. Lazard, referring you 11 to the cover page of -- do you see the common shares 12 outstanding? 13 A. Yes, I do. The number is 6,040,095. 14 Again, I'm having a little trouble reading exactly 15 what it says. 16 Q. Is it the number between the four and the 17 zero that is giving you difficulty? 18 A. Yes, it is. 19 Q. Does that indicate that there has been 20 additional shares purchased by the company for 21 acquiring of treasury? 22 A. As I recall the previous exhibit, I think 2508 1 it does reflect a reduction in the previous number of 2 shares -- yes, it does reflect a reduction of 3 approximately 1,200,000 shares. 4 Q. Now, directing your attention to Page 65 -- 5 and that would be the smaller Page No. 65. 6 A. Yes. 7 Q. Please go to Page 64. I believe the 8 paragraph starts there. 9 A. Okay. 10 Q. Do you see Note C under Schedule 2? 11 A. Yes, I do. 12 Q. Would you please read that -- actually, 13 just read C, D, and -- 14 A. Okay. I've read the paragraphs. 15 Q. Now, does that indicate that MCO had 16 entered into a loan agreement with Federated 17 Development Company to advance funds for the purchase 18 of shares of United Financial Group? 19 A. Yes. Footnote C describes that 20 arrangement. 21 Q. And this would be a part of the financial 22 statements for which you were responsible? 2509 1 A. This was a schedule to the financial 2 statements that's a required schedule of an S.E.C. 3 filing. 4 Q. So, MCO would attempt to make sure that 5 that description was as accurate as possible; is that 6 correct? 7 A. That's correct. 8 Q. Does that indicate that the loans were 9 noninterest-bearing? 10 A. Yes, it does. 11 Q. And does it indicate that there was a call 12 option with respect to the stock purchased? 13 A. Yes, it does. 14 Q. Does it indicate that MCO exercised its 15 call? 16 A. I don't recall reading that. Let's see. 17 Maybe you can point me to the place if it does. 18 Q. If you could turn to Page 65 and look at 19 the final sentence of Note C. 20 A. Yes. I see this. 21 Q. Now, directing your attention to -- I'm 22 sorry. And that indicates that, ultimately, MCO 2510 1 called the shares and became the owner, does it not? 2 A. Yes, it does. 3 Q. Directing your attention to Note D. You've 4 read that, didn't you? 5 A. Yes, I did. 6 Q. Does that indicate that MCO had entered 7 into another loan agreement with Federated? 8 A. Yes, sir. It describes that loan 9 arrangement. 10 Q. What does that describe? 11 A. If I could read it again more carefully. 12 Q. Please do. 13 A. It describes an arrangement where the 14 company loaned money to Federated to purchase shares 15 of Simplicity Patterns Company and then describes an 16 arrangement where then the company purchased those 17 shares from Federated. The Simplicity Patterns 18 Company purchased those from Federated. 19 Q. And that was, also, a noninterest-bearing 20 loan; is that correct? 21 A. That's what the description says, yes. 22 Q. And the purchase was consummated by the 2511 1 cancellation of the promissory note; is that correct? 2 A. Yes. 3 Q. Directing your attention to Paragraph E, 4 does that describe a loan agreement as well? 5 A. Yes, it does. 6 Q. What is that loan agreement? 7 A. Again, I'll have to look at it more 8 carefully. 9 Q. Please do. 10 MR. EISENHART: Your Honor, I'm going to 11 have to interpose this line of questioning. This 12 person was brought in from Phoenix to give the Court 13 his knowledge relevant to the lawsuit. All he's done 14 so far is read into evidence or acknowledge the fact 15 that the material set forth from the financial 16 statements -- that it fully disclosed what the 17 statement says it does. It doesn't seem to be 18 productive of the witness's time or -- 19 MR. VEIS: I think it's something that we 20 need to get into the record, and I'll be as quick as 21 I can. 22 THE COURT: Objection denied. 2512 1 Q. (BY MR. VEIS) It describes a loan 2 arrangement where Simplicity enters an agreement with 3 the company for funds to purchase shares by a company 4 by the name of Twin Fair and Amstar and describes the 5 purchase agreement whereby same placement acquires 6 those shares. And that loan is noninterest-bearing; 7 is that correct? 8 A. Yes, sir. That's what the document says. 9 Q. And that purchase was consummated by 10 cancelling the promissory notes; is that right? 11 A. Yes. 12 Q. Now, directing your attention to Page 66, 13 can you tell me what that is, please? 14 A. Page 66 reflects the parent only financial 15 statements or the unconsolidated balance sheet of 16 MCO Holdings as of December 31, 1983, with 17 comparative information for 1982. 18 Q. And is there an entry there for cash and 19 cash equivalents as of December 31, 1983? 20 A. Yes. The line item cash equivalents 21 reflects the 2,640,000 of cash at that time. 22 Q. Directing your attention to Page 68 -- 2513 1 A. Yes, sir. 2 Q. -- can you tell me what that page 3 represents? 4 A. This is another parent only financial 5 statement. This is a statement of changes in 6 financial position for the three years ended 7 December 31, 1983. 8 Q. And is there any entry there that would 9 indicate there were acquisitions of treasury stock 10 during that year? 11 A. Yes. There is a line item under the 12 application of funds which is almost the exact middle 13 of the financial statement showing acquisition of 14 treasury stock. 15 Q. And how many -- does that indicate the 16 number of shares or the dollar amounts spent? 17 A. This schedule does not indicate the number 18 of shares, and it does indicate the dollar amount. I 19 don't think I can read that with my glasses on or 20 off. 21 Q. If you would give it your best try, I would 22 appreciate it. 2514 1 A. I think it's 24,000,506. 2 Q. $24,000,506? 3 A. Right. That's a guess. 4 Q. Directing your attention back to Page 50 -- 5 MR. EISENHART: 50 or 15? 6 MR. VEIS: 50, 5-0. 7 Q. (BY MR. VEIS) Under the item 8 stockholders' equity, do you see an item reflecting 9 acquisition of treasury stock? 10 A. Yes, I do. 11 Q. And does that indicate how many shares were 12 purchased and what price in aggregate was paid? 13 A. Well, what it indicates are the number of 14 shares purchased in each of the three years -- 15 December 31, 1981, through 1983 -- and the aggregate 16 purchase price -- purchase price of the shares in 17 those three years. 18 Q. And the aggregate purchase price was what? 19 A. Again, this copy is very difficult to read; 20 but it looks like 67 million 815, something like 21 that. 22 Q. Now, directing your attention to Page 40, 2515 1 do you see an entry for investments in unconsolidated 2 subsidiaries? 3 A. I see the paragraph, the footnote 4 describing that. 5 Q. Would you read the first paragraph, please. 6 A. I have read that paragraph. 7 Q. Well, does that indicate that -- I'm sorry. 8 Does that indicate that unconsolidated subsidiaries 9 are accounted for on the equity method of accounting? 10 A. This paragraph describes two subsidiaries 11 that were accounted for under the equity method of 12 accounting. 13 Q. Which subsidiaries were they? 14 A. Simplicity Pattern Company and United 15 Financial Group. 16 Q. What was the percentage investment of stock 17 of United Financial Group of MCO Holdings at that 18 time? 19 A. The 13.6 percent that's reflected in the 20 paragraph. 21 Q. Could you please -- what is entailed by the 22 equity method of accounting? 2516 1 A. It's a method of accounting for investments 2 in the common stock of companies, and the equity 3 method is utilized generally when there's more than 4 20 percent of the company that's owned by the 5 acquiring company. It's a method that reflects the 6 initial investment at cost, and that cost is then 7 adjusted by the company's proportionate share of the 8 earnings of the investee over time. 9 Q. So, does that mean, then, that based on 10 this 13.6 percent figure in the paragraph, that 11 MCO Holdings would recognize as income or loss, as 12 the case may be, 13.6 percent of the income or loss 13 of United Financial Group, Inc.? 14 A. Yes. There are some adjustments that have 15 to be made to interlineate intercompany transactions, 16 but the general concept would be to pick up a 17 proportionate share of its earnings or losses based 18 on a percentage of ownership. 19 Q. So, you looked -- in your capacity as a 20 comptroller, you would look at the financial 21 statements of United Financial Group, Inc., to 22 determine what that company's income had been. Then 2517 1 take 13.6 percent of that amount and report it as 2 income of MCO Holdings? 3 A. That's the concept of equity accounting, 4 yes. 5 Q. Thank you. 6 MR. VEIS: May the record reflect I'm 7 handing Mr. Lazard a copy of a document that's 8 previously been marked as Lazard Exhibit 6. 9 Q. (BY MR. VEIS) Mr. Lazard, do you 10 recognize that document? And I should say that it's 11 really a group of documents, and we'll get through 12 that. 13 A. I recognize the schedules. 14 Q. And what are they? 15 A. These are reports that were prepared by the 16 accounting department of MCO Holdings to keep track 17 of MCO Holdings' investments. And I'd have to look 18 at this one more carefully to see which investment 19 this schedule was monitoring. But it was our 20 practice to keep track of all of the investments we 21 made on similar schedules to this. 22 Q. Who is F.A. Latronica? 2518 1 A. His name was Frank Latronica, and he was 2 the assistant comptroller of MCO Holdings at the time 3 these schedules were prepared. 4 Q. I take it, then, he reported to you? 5 A. Yes, he did. 6 Q. Now, I see there's some carbon copies 7 indicated on the documents -- 8 MR. VEIS: Well, first, let me move the 9 admission of this document into evidence, Your Honor. 10 MR. EISENHART: Your Honor, I have no 11 objection to Lazard Deposition 6 as far as it goes. 12 But this is actually a compilation of documents put 13 together by MCO as it goes, and one appears to be 14 incomplete. But we do not object as far as they go 15 but with the understanding that we make no objection 16 to the completeness or to the accuracy of the 17 documents. 18 THE COURT: Received. 19 MR. VEIS: Thank you, Your Honor. 20 Q. (BY MR. VEIS) I'd like to direct your 21 attention to Bates No. DM012373. 22 A. Yes. 2519 1 Q. And that's the second page of this 2 collection of documents that comprise Lazard 3 Exhibit 6. And I notice a number of carbon copies 4 indicated there. Do you see that? 5 A. I do. 6 Q. Who are those individuals? 7 A. James CLV Iaco, Jr. Jim was the financing 8 officer of the company at the time, and that's who I 9 reported to. Howard J. Bressler was the accounting 10 manager of the company, and Mike Lawocki is the 11 accounting manager in the accounting department. 12 Q. And this handwriting -- it's very hard to 13 read. Do you see the handwriting below the typed 14 matter on that page? 15 A. I see the handwriting. 16 Q. Can you read it, or do you know whose it 17 is? 18 A. Looks like Mr. Latronica's; but, again, 19 because it's so hard to read, I'm not sure. 20 Q. Let's move to the next page which bears the 21 Bates No. DM012374. 22 A. Yes. 2520 1 Q. Again, there's handwriting there. Do you 2 see that? 3 A. I do. 4 Q. Going back to the previous page, it looks 5 like one word behind the year 1983 is revised. Do 6 you see that? 7 A. I would agree that's what it looks like. 8 Q. Based on -- if you would look at the 9 following three pages, one of which has been redacted 10 so there's nothing there. But of the following two 11 pages, there's some handwritten material there. Does 12 that indicate that this was a working copy for 13 revision? 14 A. Well, again, I don't recall. I mean -- if 15 it notes on here -- looks like they're correcting 16 notes. Whether it was the previous day's report that 17 was being updated with more accurate information, 18 it's hard to say. 19 Q. Did Mr. Latronica have a practice updating 20 his reports to give you the most accurate 21 information? 22 A. Yes, he would. 2521 1 Q. Directing your attention to DM30123077 -- 2 A. Yes, sir. 3 Q. -- do you see that it appears the date 4 January 25 is struck through and another date is 5 written above it? 6 A. Yes. 7 Q. And it appears there's another date written 8 at the bottom in the typed material. The date 9 January 25th has been struck through? 10 A. Yes. 11 Q. Going to the following page, DM012378 -- 12 A. Yes. 13 Q. -- there's an entry there for -- I'm sorry. 14 There's a handwritten note at the bottom. Do you see 15 that? 16 A. Right. 17 Q. And the following Page DM012379 -- 18 A. Yes. 19 Q. -- several handwritten matters there. Do 20 you see that? 21 A. I do. 22 Q. Would that be consistent with 2522 1 Mr. Latronica's practice of updating information to 2 make it current? 3 A. Right. It looks like the current day's 4 report that hasn't been through typing yet. So, I'm 5 getting a penciled copy. That would then be revised 6 as the information that is typed is actually a formal 7 issue. 8 Q. Directing your attention to DN012381 and 9 the following three pages, does that also appear to 10 be a report directed from Mr. Latronica concerning 11 purchase of stock as was his practice? 12 A. Yes, it does. 13 Q. Now, directing your attention to 14 Page DM012386 -- 15 A. Yes. 16 Q. -- I'll note there appears to be no cover 17 memorandum but only the form that we've discussed, 18 the following two pages. Do those appear to be, 19 again, another attempt to update the information to 20 make it current? 21 A. I assume that's what it is. I don't see 22 any dates on here but -- 2523 1 Q. Well, I see there's a handwritten notation 2 on DM012386 at the bottom. Do you see that? 3 A. Yes. 4 Q. Can you read the date on that? 5 A. Looks like February 15th, 1983, as the 6 transaction date. 7 Q. And this -- if you go to the preceding 8 document, the preceding form, the cover memo 9 DM012831, that indicates a date of February 9th, does 10 it not? 11 A. Yes. 12 Q. So, then, I take it, it appears that 13 DM12386 is a later version of this report; is that 14 correct? 15 A. Right. 16 Q. Directing your attention to DM012389 and 17 the following three pages -- 18 A. Yes. 19 Q. -- does that appear to be yet another 20 updating of the form? 21 A. Yes, it is. 22 Q. DM012393? 2524 1 A. Yes. 2 Q. And looking at DM012397 and the following 3 three pages, is that another update? 4 A. Yes. It appears that it is. 5 Q. And that's dated March 15 but the 15 is 6 struck through and it appears to be something else? 7 A. Looks like a 17 is replacing the 15. 8 Q. Now, the document as it was numbered is 9 somewhat out of order. So, let me direct your 10 attention to DM012410 which is near the end of 11 Exhibit 6. It bears the date March 4th, 1983. 12 A. I'm sorry. What's the -- 13 Q. DM012410. 14 A. Tell me again where I'm to find that. 15 Q. That will be close to the end. 16 A. DM012410? 17 Q. Yes. That is, again, another update? 18 A. It looks like an update as of March 4, 19 1983. 20 Q. Directing your attention to the next page, 21 DM012411, do you see the checkmarks? 22 A. Yes. 2525 1 Q. Do you know what those indicate? 2 A. I have no idea, and following this segment 3 DM012413 -- yes. 4 Q. Does that appear to be yet another update 5 to the record information? 6 A. It looks like the update as of March 4th, 7 yes, sir. 8 Q. Now, let me direct you back to DM012407. 9 A. Could you repeat the number? 10 Q. The last three digits are 407. 11 A. Yes, sir. 12 Q. Is that yet another update as of April 4th? 13 A. That's what it appears to be, yes. 14 Q. It bears the handwritten notations on the 15 following two pages, does it not? 16 A. Yes, it does. 17 Q. Now, let me direct you forward again to 18 DM012401. 19 A. Yes. 20 Q. Is that another update of the form that we 21 have been talking about? 22 A. If I'm looking at the right page, it's the 2526 1 July 7th, 1983, report. 2 Q. Now, directing your attention to the second 3 page of that document, I'd like to go through the 4 form itself, if I might. You indicated that this was 5 a standard format that MCO Holdings adopted with 6 respect to shares it purchased? 7 MR. EISENHART: Your Honor, when he says 8 the second page of the DM012402 -- 9 A. I'm sorry. If there was a question pending 10 I missed it. 11 Q. (BY MR. VEIS) It indicated that this was 12 a standard format that MCO Holdings used with respect 13 to shares it was acquiring with respect to other 14 companies? 15 A. Yes, it is. 16 Q. Was it standard form to indicate the broker 17 from whom the purchases were made? 18 A. Yes. 19 Q. And Mr. Latronica would have attempted to 20 make those entries under the broker accurate; is that 21 correct? 22 A. Yes. 2527 1 Q. And it's Bates stamped to indicate the 2 transaction then; is that correct? 3 A. Yes. 4 Q. And, again, Mr. Latronica would have 5 reflected the information as accurately as he could? 6 A. As accurately as he possibly could. 7 Q. Does that indicate information under 8 "settlement date"? 9 A. Yes. 10 Q. Number of shares? 11 A. Yes. 12 Q. Purchase price for shares? 13 A. Yes. 14 Q. Amount? 15 A. That's correct. 16 Q. Cumulative balance? 17 A. That is accurate, yes. 18 Q. And is that all the case with respect to 19 the number of shares? 20 A. That's correct. 21 Q. And percentage of shares? 22 A. Yeah. It was attempting to track the 2528 1 percentage of shares. 2 Q. Mr. Lazard, are you familiar with an 3 issuance of Series C convertible preferred stock of 4 United Financial Group, Inc.? 5 A. Long time ago, but I do have a vague 6 recollection, yes. 7 Q. Do you have a recollection that 8 MCO Holdings and Federated Development were awarded 9 or had rights as a result of their ownership of 10 shares of United Financial Group's rights to purchase 11 Series C convertible stock? 12 A. I don't remember specifically. I remember 13 a subscription agreement to buy Federated stock. I 14 don't remember if Federated -- I do remember MCO's 15 right to buy that stock. 16 MR. VEIS: May the record reflect I'm 17 handing Mr. Lazard what has been previously marked as 18 Lazard Deposition 8. 19 Q. (BY MR. VEIS) Mr. Lazard, do you 20 recognize that document? 21 A. Yes, I do. 22 Q. What is it? 2529 1 A. May I take a moment to read it? 2 Q. Absolutely. Please do. 3 A. It's a memo from me to Mr. Iaco, the chief 4 financial officer, Mr. Bressler, the chief examiner, 5 of subscribing a recent offering of rights to 6 purchase 755,000 shares of the United Financial Group 7 Inc., Series C convertible preferred stock. It 8 describes that MCO Holdings acquired 688,824 shares 9 at a cost of 9,643,536. And then it lists several 10 documents, supporting documents, that appear to be 11 part of that tax. And would you look at the next 12 page, DM012364? 13 A. Yes, sir. 14 Q. Do you recognize the signature at the 15 bottom of the page? 16 A. I do. 17 Q. Whose is it? 18 A. It's Howard Bressler's. 19 Q. And do you recognize the document? 20 A. I'm sure I've seen this document before but 21 not in a long time. 22 Q. But directing your attention back to the 2530 1 first page, DM3012363, see under the list of 2 enclosures, "subscription cover letter"? 3 A. Yes. 4 Q. And the second page, would it be the 5 subscription cover letter described on the first page 6 of this exhibit? 7 A. It appears so. I'm not sure. 8 Q. Now, directing your attention to the 9 following page, DM012365 -- 10 A. Yes. 11 Q. -- do you recognize -- it appears there are 12 three smaller forms that are Xeroxed onto one page. 13 Do you recognize that document? 14 A. I've seen these forms, again, a very long 15 time ago. 16 Q. Do you have any reason to believe they're 17 the subscription forms for Series C preferred stock 18 for United Financial Group, Inc.? 19 A. I have no reason to believe it's not. 20 Q. Is the signature at the bottom 21 Mr. Bressler's? 22 A. Yes. The signature at the very bottom 2531 1 appears to be Mr. Bressler's. 2 Q. Directing your attention to the next page 3 DM012366 -- 4 A. Yes, sir. 5 Q. -- do you know what this document is? 6 A. I'd have to refer back to the cover page. 7 Q. Please do. 8 MR. EISENHART: Your Honor, we have no 9 objection to the admissibility; and we will stipulate 10 that it says what it says and it is what it is. 11 MR. VEIS: I'm trying to find out what it 12 is. The front page of the document says what each of 13 the attachments is, and we take no issue with it. 14 THE COURT: I'm not sure what we accomplish 15 by going through all this. 16 MR. VEIS: Thank you, Your Honor. I'll 17 just move for the admission of this document. 18 MR. EISENHART: No objection, Your Honor. 19 THE COURT: Received. 20 MR. VEIS: May the record reflect that I'm 21 handing Mr. Lazard a document that's been marked 22 T4017. It appears to be with respect to securities 2532 1 offered by MCO Holdings, Inc. 2 Q. (BY MR. VEIS) Do you recognize that 3 document, sir? 4 A. I do. 5 Q. What is it? 6 A. It is the prospectus that was used by 7 MCO Holdings to sell $35 million of its 8 14 and a quarter percent senior subordinated notes 9 due August 1, 1992. 10 Q. And does this prospectus contain financial 11 statements that were prepared under your supervision? 12 A. Yes, it does. 13 MR. VEIS: Your Honor, I move the 14 administration of T0417. 15 MR. EISENHART: No objection, Your Honor. 16 I believe it has been received. 17 THE COURT: I didn't have it marked as 18 received. It was identified. It's received now. 19 MR. VEIS: Thank you, Your Honor. 20 Q. (BY MR. VEIS) Does it indicate who the 21 underwriter of this note was? 22 A. Yes. It indicates that Drexel Burnham 2533 1 Lambert, Inc., was the underwriter. 2 Q. Directing your attention to Page 8 -- 3 unfortunately, the bar code number has been cut off 4 on my copy. Can you find Page 8? 5 A. I have found it. 6 Q. And where it says "use of proceeds" -- 7 A. Yes, sir. 8 Q. -- would you please read the first 9 paragraph to yourself? I have a question about that. 10 A. I have read it. 11 Q. Now, does it indicate what the net proceeds 12 would be on this securities issuance? 13 A. Yes, it does. 14 Q. What are they? 15 A. That's $33,333,000. 16 Q. Does it indicate what those proceeds will 17 be used for? 18 A. It does describe in that first paragraph 19 what the proceeds might be used for. 20 Q. Does it say that they will be added to 21 working capital for general corporate purposes? 22 A. Right. 2534 1 Q. And that they may be used for acquisitions 2 and investments in other business? 3 A. It does. 4 Q. And what's the date of this prospectus? 5 A. July 31, 1985. 6 MR. VEIS: May the record reflect I'm 7 handing Mr. Lazard a document that's been marked 8 T4140. It appears to be a warrant agreement between 9 MAXXAM and Drexel Burnham Lambert, Incorporated. 10 MR. EISENHART: This is not on his exhibit 11 list. Can we have a copy? 12 13 (A break was taken.) 14 15 Q. (BY MR. VEIS) Mr. Lazard, do you recognize 16 Exhibit T4140? 17 A. Yes, I do. 18 Q. What is it? 19 A. It's a warrant agreement with MAXXAM Group 20 and Drexel. 21 MR. VEIS: Your Honor, I move the admission 22 of T4140. 2535 1 MR. EISENHART: No objection, Your Honor. 2 THE COURT: Received. 3 Q. (BY MR. VEIS) Mr. Lazard, would you look 4 at the second page that's Bates stamped DM01146? 5 A. Yes. 6 Q. Would you look at the second paragraph, 7 please? 8 A. Yes. 9 Q. Does that reflect a proposal to issue to 10 Drexel Burnham Lambert warrants to purchase up to an 11 aggregate of 250,000 shares of MAXXAM Group, Inc. 12 common stock? 13 A. Yes. 14 Q. And would you look at Section 1, please? 15 A. Yes. 16 Q. Does that indicate that the warrants are 17 going -- issued as part of the compensation economics 18 to Drexel's services registered in relation to debt 19 securities? 20 A. That is what it says. 21 MR. VEIS: May the record reflect I'm 22 handing for Mr. Lazard a series of exhibits that he's 2536 1 previously reviewed on the break. Your Honor, I'll 2 describe them for the record momentarily. There's 3 two sets. What I've handed to Mr. Lazard is several 4 exhibits: Exhibit T11099, Exhibit T11093, 5 Exhibit T1103, Exhibit T1092, Exhibit T1102, and 6 Exhibit T1094; and that's the entire package. 7 Q. (BY MR. VEIS) Mr. Lazard, do you 8 recognize the exhibit numbers that I've just recited 9 for the record? 10 A. Yes, I do. 11 Q. Directing your attention to 12 Exhibit T1099 -- 13 A. Yes. 14 Q. -- what is that? 15 A. This is a memorandum that I wrote 16 describing documents that I was distributing for 17 recordkeeping purposes with respect to Drexel-UFG 18 stock option agreements. 19 Q. And that Document T1099 reflects that there 20 were enclosures to that memorandum? 21 A. Yes, it does. 22 Q. Directing your attention to T1093 -- 2537 1 A. Yes, sir. 2 MR. EISENHART: Your Honor, we had looked 3 at all these during the break. I thought we had an 4 agreement that Mr. Lazard had acknowledged that 5 these, in fact, were enclosures that were described 6 on T1099, that we were not going to go through each 7 one to establish that. 8 MR. VEIS: If that is it -- I didn't 9 realize that we had gotten to that agreement; but 10 with that, Your Honor, I'll move for admission -- 11 THE COURT: I have some of them received 12 and some not. 1099, I would not have -- 13 MR. VEIS: We will move the admission of 14 T1099. 15 MR. EISENHART: No objection. 16 THE COURT: 1100, I have identified but 17 not -- and 1092 previously received. 1093 previously 18 received. 1092 received. 1102 received. 1094 19 received. 20 MR. VEIS: May the record reflect that I'm 21 handing Mr. Lazard a document that's been marked as 22 Exhibit #T1119. 2538 1 Q. (BY MR. VEIS) Mr. Lazard, do you 2 recognize that? 3 A. Yes, I do. 4 Q. What is that? 5 A. It's a broker confirmation with respect to 6 the 300,000 option shares of United Financial Group 7 stock? 8 MR. VEIS: Your Honor, I move the admission 9 of Exhibit T1119. 10 MR. EISENHART: No objection, Your Honor. 11 THE COURT: Received. 12 MR. VEIS: May the record reflect that I'm 13 handing Mr. Lazard two exhibits marked T1143 and 14 T1146. 15 Q. (BY MR. VEIS) Mr. Lazard, do you 16 recognize T1143? 17 A. Yes, I do. 18 Q. What is it? 19 A. It's a memorandum from me to John Loepprich 20 describing the extension of the letter of credit 21 related to the 300,000 share option agreement. 22 MR. VEIS: Your Honor, I move the admission 2539 1 of T1143. 2 MR. EISENHART: No objection, Your Honor. 3 Q. (BY MR. VEIS) Do you also have a T1144 4 and T1146? 5 MR. NICKENS: Our records indicate, Your 6 Honor, that T1144 and 1146 were received at Tabs 49 7 and 70 respectively. 8 Q. (BY MR. VEIS) Mr. Lazard, would you look 9 at Exhibit T1146? 10 A. Yes. 11 Q. Turn to the third page. It bears the bar 12 code No. 0W009853. 13 A. Yes. I see that. 14 Q. And at the bottom of the page, is that your 15 signature? 16 A. Yes, it is. 17 Q. Were you involved in the negotiation of the 18 extension of the option agreement or the amendment of 19 the option agreement reflected in Exhibit T1146? 20 A. I was not involved in the negotiation. My 21 role would have been to record the transaction. 22 Q. Did you have any discussions with anyone at 2540 1 MCO concerning the negotiation of the amendment? 2 A. An awful long time ago. I signed it. I 3 would have had some discussions with people about 4 whether or not it was appropriate to sign. 5 Q. Did you have any discussions with anyone 6 involved in the negotiation of the second amendment 7 concerning the nature of those negotiations? 8 A. I don't recall. 9 MR. VEIS: May the record reflect I'm 10 handing Mr. Lazard a document that's been marked 11 CT1070. 12 Q. (BY MR. VEIS) Mr. Lazard, do you 13 recognize that document? 14 A. I do recognize the document. 15 Q. What is it? 16 A. I haven't seen it in a long time, but it's 17 a memo from Mark Wilson who worked for me describing 18 the accounting for potential guarantee of the net 19 worth of United Savings Association of Texas. 20 Q. Directing your attention to the -- 21 MR. VEIS: Well, let me move the admission 22 of Exhibit CT1070, Your Honor. I believe it was 2541 1 probably in as one of Mr. Lazard's deposition 2 exhibits. 3 MR. EISENHART: I believe it's either 9 or 4 10. I have no objection. 5 Q. (BY MR. VEIS) Directing your attention 6 to CT1070, second page of -- there's the Bates 7 number, bar code No. OW07990. Do you see that? 8 A. Yes, sir. 9 Q. Would you read the conclusion perhaps to 10 yourself. I have a question about those. 11 A. I've read the paragraph. 12 Q. What was the -- what would the effect have 13 been if MCO were to guarantee all or a portion of the 14 amount necessary for USAT to maintain its regulatory 15 net worth? 16 MR. EISENHART: I object to the question as 17 phrased. I'm not sure what he means by "the effect." 18 The effect of what? 19 Q. (BY MR. VEIS) What would have been the 20 effect on the financial statements of MCO? 21 A. As this paragraph describes, if there would 22 have been a guarantee, then that would be a 2542 1 disclosure in the financial statements but would not 2 have been recorded in the books and/or records as an 3 accounting entry. 4 Q. Thank you. 5 MR. VEIS: May the record reflect I'm 6 handing Mr. Lazard a set of four exhibits that are 7 annual reports of MCO Holdings for the years 1986, 8 '85, '86, and '87. 9 Q. (BY MR. VEIS) Mr. Lazard, have you had 10 an opportunity during the break to review those 11 documents. Do you recognize them? 12 A. Yes, I do. 13 Q. Let me first go to Exhibit A2056. Is that 14 the MCO Holdings, Inc., annual report for 1984? 15 A. Yes. 16 MR. VEIS: I move the admission of 17 Exhibit A2056. 18 MR. EISENHART: No objection, Your Honor. 19 Q. (BY MR. VEIS) Turn to Exhibit A2057. Is 20 that the annual report for the year 1985? 21 A. Yes, it is. 22 Q. Would you turn to Exhibit A2058? 2543 1 A. I have that. 2 Q. Is that the annual report for MCO Holdings, 3 Incorporated, for the year 1986? 4 A. That's correct. 5 MR. VEIS: Your Honor, I move for the 6 admission of A2058. 7 MR. EISENHART: No objection. 8 THE COURT: Received. 9 Q. (BY MR. VEIS) And would you please turn 10 to 59? 11 A. Yes. 12 Q. Is that the annual report for the year 13 1987? 14 A. Yes, it is. 15 MR. VEIS: I move for the admission of 16 A2059. 17 MR. EISENHART: No objection. 18 THE COURT: Received. 19 Q. (BY MR. VEIS) If you would, turn back to 20 A2056, please. That's the 1985 annual record? 21 A. Yes, it is. 22 Q. Do you see an entry under "investment and 2544 1 unconsolidated subsidiaries"? 2 A. I see that Footnote No. 3, yes. 3 Q. Does that footnote indicate that United 4 Financial Group was accounted for under the equity 5 method of accounting for the year December 1984? 6 A. Yes, it does. 7 Q. And if you turn to Page Roman II which is 8 the third page of Exhibit A2056 and contains a letter 9 entitled, "Dear stockholder." 10 A. Yes. I see the page. 11 Q. Directing your attention to the third 12 paragraph from the bottom of the third column of Page 13 Roman II -- 14 A. Yes, sir. 15 Q. -- does that paragraph indicate the 16 particular impact of United Financial Group, Inc.'s 17 income on the financial statements of MCO Holdings 18 for the year 1984? 19 A. It does describe in that paragraph a gain 20 resulting from the sale of branches and MCO's 21 proportionate share of that. 22 Q. Which was how much, sir? 2545 1 A. It says MCO's after-tax equity earnings was 2 4.9 million. 3 Q. And that would be the equity after its 4 proportionate share of the earnings; is that correct? 5 A. It would represent MCO's portion of the 6 earnings for United Financial Group. 7 Q. I'm sorry. I misheard your answer. Would 8 you turn to Exhibit A2057. Directing your attention 9 to Page 36, Exhibit A2057 -- 10 A. Page 36? 11 Q. Yes, sir. Directing your attention to the 12 item of investment and unconsolidated subsidiaries. 13 A. I see the footnote. 14 Q. And that indicates the year end of 15 December 31, 1985, MCO Holdings, Inc., accounted for 16 its investment on the United Financial accounting 17 method? 18 A. Yes, it does. 19 Q. Directing your attention to the third page 20 of Exhibit A2057, which bears the Bates 21 No. DE005313 -- 22 A. Yes. 2546 1 Q. -- does -- directing your attention to the 2 third paragraph from the end, in Column 3 -- 3 A. Okay. 4 Q. -- does that paragraph -- well, would you 5 take a moment to read it, if you can. 6 A. I've read it best I can. 7 Q. All right. Does that indicate the impact 8 of the earnings or losses of United Financial Group 9 on the income statement of MCO Holdings, Inc.? 10 A. Yes, it does. 11 Q. I'd like to direct your attention to 12 Exhibit 2058. 13 A. Okay. 14 Q. That's the 1986 annual report? 15 A. Yes, it is. 16 Q. Directing your attention to Page 36. 17 A. Yes, sir. 18 Q. Now, does that -- under item "investment in 19 unconsolidated subsidiaries," does that entry 20 indicate year ended December 31, 1986, MCO Holdings 21 accounted for its investment of United Financial 22 Group on the equity method? 2547 1 A. Yes, it does. 2 Q. Directing your attention to Page 3 Roman II -- 4 MR. VEIS: Well, on second thought, I guess 5 Page Roman II doesn't appear to be legible. So, is 6 it possible to get a better copy? 7 MR. NICKENS: I don't know which one. 8 Which exhibit? 9 MR. VEIS: No. 2. Oh, yours is much better 10 than mine. 11 MR. NICKENS: Yes, it is possible. 12 MR. VEIS: Thanks to Mr. Nickens' courtesy, 13 I have a better copy of the document. 14 Q. (BY MR. VEIS) And I would ask you, 15 Mr. Lazard, to look at -- I believe it's the second 16 paragraph from the bottom in the second column. It 17 starts out "Holdings also owns" -- do you see that? 18 Are you able to see that? 19 A. I'm sorry. The second paragraph from 20 the -- 21 Q. From the bottom of the signature block. 22 A. In the third column. I'm with you. Okay. 2548 1 Q. Oh, no. This is the wrong one. Excuse me. 2 I'm sorry. I'm on 2058. 3 MR. VEIS: I'll withdraw the question on 4 that page. It's not legible. If we can arrange for 5 a better copy, we will obtain one, Your Honor. 6 Q. (BY MR. VEIS) Directing your attention 7 to Exhibit A2059. 8 A. Yes, sir. 9 Q. Please turn to Page 5. 10 A. Okay. 11 Q. Under the item "pro forma condensed 12 statement of income" -- do you see that? 13 A. Yes, I do. 14 Q. Is there an entry for loss from investments 15 in unconsolidated subsidiaries? 16 A. Entitled "loss from investments and 17 unconsolidated subsidiaries" reflecting a 18 12.4-million-dollar loss. 19 Q. Would that include losses from UFG? 20 A. I would have to check the footnote real 21 quickly. Yes, it would. 22 Q. And, sir, where are you looking? 2549 1 A. I looked at the footnote to see if UFG was 2 accounting for the equity accounting method for that 3 year. 4 Q. And you would look at Page 19? 5 A. Yes, sir. 6 Q. There's an item there for income principal, 7 loss principal investments, and unconsolidated 8 subsidiaries? 9 A. Yes. 10 Q. And that indicates that there was a net 11 loss of UFG? 12 A. Right. It describes an increase in net 13 loss of UFG. 14 Q. Can you tell me where in this financial 15 statement that one could find the particular line 16 entry for the amount of that net loss? 17 A. On Page 25 in Footnote 3, the condensed 18 financial statements of UFG are reflected; and that 19 shows a loss in 1987 of 117,980,000. I don't know 20 whether the company's proportionate share of that is 21 disclosed or not. 22 Q. Presumably, that would be the 13.6 percent 2550 1 that had been previously applied; is that correct? 2 A. Yes, although the company -- once it had 3 written down the investment to zero, it would have 4 stopped writing it down. So, with a loss of that 5 size, it would have completely eliminated its 6 investment. 7 MR. VEIS: Let the record reflect I'm 8 handing Mr. Lazard a document that's been marked as 9 Lazard Exhibit No. 10. I'm sorry. I only have one 10 copy of this. I don't have another one. 11 Q. (BY MR. VEIS) Mr. Lazard, do you 12 recognize this? 13 A. I'm familiar with the document, yes, sir. 14 MR. VEIS: Mr. Nickens has handed me a copy 15 that indicates in the respondents' list as A1004 a 16 second copy, Your Honor. 17 Q. (BY MR. VEIS) I'm sorry. Did you say 18 you recognized the document? 19 A. I'm familiar with it, yes. 20 Q. And what is it? 21 A. It's a memo to me prepared by a person in 22 the accounting department, Mark Wilson, who worked 2551 1 for me describing various accounting considerations 2 with respect to United Financial Group -- the 3 company's investment into United Financial Group. 4 MR. VEIS: I move Lazard Exhibit 10. 5 MR. EISENHART: I have no objection to it, 6 Your Honor. I believe this is a draft of a document 7 that may already be in. 8 THE COURT: Received. 9 Q. (BY MR. VEIS) And I notice that this was 10 marked with "exposure draft for review and comments 11 only." Do you see that? 12 A. Yes, I do. 13 Q. Did you do this draft? 14 A. Yes. The handwriting that you see, I 15 think, is my handwriting. 16 Q. Going through the entire document, are all 17 of the handwritten entries yours? 18 A. I think so. 19 MR. VEIS: May the record reflect that I'm 20 handing Mr. Lazard a copy of a document that's been 21 previously marked as Lazard Deposition Exhibit No. 9. 22 Q. (BY MR. VEIS) Mr. Lazard, do you 2552 1 recognize that document? 2 A. I do. 3 Q. What is it? 4 A. It looks like the final version of the same 5 memorandum that we just discussed. 6 Q. So, this is Mr. Wilson's revision 7 incorporating your revisions into the draft? 8 A. I presume that it is. It appears to be the 9 same document. 10 MR. VEIS: Your Honor, I move the admission 11 of Lazard Exhibit 9. 12 MR. EISENHART: No objection, Your Honor. 13 THE COURT: Received. 14 Q. (BY MR. VEIS) Directing your attention, 15 Mr. Lazard, to Exhibit 10, would you please review on 16 Page 0MX19533 and 0MX19534, the three paragraphs that 17 are headed "criteria for applying the equity method," 18 and the following paragraph, "applying the equity 19 method." There's a paragraph under each heading. 20 A. I've read the paragraphs. 21 Q. Now, would you turn to Exhibit 9 and turn 22 to Pages OMX19053 and OMX19054. Now, would you read 2553 1 those paragraphs and compare them to the similarly 2 headed paragraphs in the draft. 3 A. They appear to be the same. 4 Q. So, it appears that there were no changes 5 between these paragraphs to these paragraphs between 6 the draft and the final version; is that correct? 7 A. None come to my attention right now. 8 MR. KEETON: Your Honor, isn't there a 9 limit to this kind of tedium? There's a lot of 10 lawyers in this courtroom. Your Honor has to take 11 his time. This witness is taking his time. I don't 12 know where counsel is going or what point he's 13 making, but he sure isn't making it. I would like to 14 ask Your Honor to try and speed him up. 15 MR. VEIS: Your Honor, I'll be done in just 16 a minute. 17 Q. (BY MR. VEIS) So, you concurred with 18 Mr. Wilson; and you didn't direct him to change 19 anything in those paragraphs. Is that true? 20 A. I don't know that I concurred. I didn't 21 see anything that was inaccurate that concerned me. 22 Q. Let's go to Exhibit 9, Page OMX19053, under 2554 1 "criteria for applying the equity method." 2 A. Yes, sir. 3 Q. Do you see where it says, "Generally, 4 investments of less than 20 percent of the voting 5 stock of any investee are not accounted for under the 6 equity method as there is the presumption that the 7 investor does not have the ability to exercise 8 significant influence over an investee"? 9 A. Yes. 10 Q. Now, is that, in fact, a statement of 11 generally accepted accounting principles? 12 A. I think it's an excerpt of AP18. What 13 we're -- the point is here between Federated's 14 ownership and MAXXAM's ownership. The company did 15 have over 20 percent, and that's why we're describing 16 the equity method of accounting which is what we 17 used. 18 Q. Well, now, what are the criteria for 19 applying the equity method of accounting? 20 A. The best I can do, from memory, the initial 21 test is the 20 percent threshold; and so, if there's 22 over 20 percent ownership of stock, there's a 2555 1 presumption of control. And in the case where 2 they're generally -- you're over 20 percent, you 3 would use the equity method of accounting. 4 Q. Now, is that a presumption that is 5 rebuttable? 6 A. I'm sure it could be. 7 MR. VEIS: May the record reflect I'm 8 handing Mr. Lazard a document that's been marked 9 Exhibit T2111. 10 Q. (BY MR. VEIS) Mr. Lazard, do you 11 recognize this document? 12 A. I have seen this page, yes. 13 Q. Before you answer any more questions, let 14 me explain that it is my understanding that the 15 shading in the text of this document is -- bears some 16 significance. 17 MR. VEIS: Because of copying problems, I 18 went through each of the documents, the one I handed 19 to the witness, the one I handed to Your Honor, and 20 the ones I handed to counsel, and outlined in red 21 each place where the text was shaded. I have -- this 22 is from the June 1, 1993, edition of the original 2556 1 accounting pronouncements; and I will be happy to 2 make that available for counsel's inspection if 3 there's any question of where the red outlining is to 4 be found. 5 Q. (BY MR. VEIS) If you would look through 6 the document, does this appear to you to be, in fact, 7 accounting principles, Board Opinion No. 18? 8 A. Yes, it does. 9 Q. And is that an authoritative statement of 10 general accounting principles with respect to the 11 application of the equity method of accounting? 12 A. Yes, it is. 13 Q. I direct your attention to paragraph -- 14 MR. VEIS: I'm sorry, Your Honor. I move 15 the admission of Exhibit T1211. 16 MR. EISENHART: Your Honor, I have no 17 objection. This is a 1993 version. I assume that 18 counsel's going to represent that this was the 19 version that was in effect at the time we're talking 20 about which would have been 1985. 21 MR. VEIS: I will represent it with respect 22 to the document -- or if it would be simpler, I'll 2557 1 introduce a copy of financial accounting standards, 2 Statement 94, which amended it and was responsible 3 for most, if not all, of the shading in the 4 paragraph. I'm going to question Mr. Lazard about -- 5 MR. EISENHART: Your Honor, I'm confused. 6 I'm not sure which is supposed to be the version that 7 Mr. Lazard would have had before him in 1985. 8 MR. VEIS: I will explain that. 9 MR. EISENHART: I would like to withhold 10 any statement on the exhibit until he explains it. 11 Q. (BY MR. VEIS) Mr. Lazard, do you 12 recognize Exhibit T1212? 13 A. I don't know whether during my career I've 14 looked at this particular version of this statement 15 or not, but I'm familiar with the material that is 16 included in it. 17 Q. Now, let me direct your attention to the 18 date. It's issued in October 1987 and purports to 19 amend APB18, Paragraphs 116, 17, 19, 19(a), and 20 20(d). Do you see that under the word "affects"? 21 A. I do. 22 Q. Now, directing your attention to the third 2558 1 page of the document under Paragraph 15, do you see 2 Item F? 3 A. I'm sorry. I'm still searching for 15. 4 MR. EISENHART: Your Honor, if we could try 5 and cut through this. Is counsel representing that 6 the 1987 amendments or the shaded portions in 1211 7 are the portions that he's outlined in red? 8 MR. VEIS: That is my understanding of the 9 manner in which the document is published by the 10 accounting profession. And the point is that under 11 Item F, it indicates that the last sentence of 12 Paragraph 17 is deleted in the copy that I have. The 13 last sentence of Paragraph 18 is shaded, and I was 14 given to understand that the shaded portions indicate 15 parts of the original pronouncements which have been 16 deleted through subsequent action by some 17 authoritative accounting board. 18 MR. EISENHART: Well, if I understand what 19 he's saying, Your Honor, he's prepared to prove that 20 T1211 minus the material outlined in red is what 21 would have been in effect in 1985. Is that the 22 representation? 2559 1 MR. VEIS: That's my representation. If 2 it's necessary to bring an accountant in to do this, 3 we will do so; but that's my representation. 4 MR. EISENHART: Well, Your Honor, I'm not 5 prepared to say whether it's necessary to approve 6 this until I see where he goes with it. I don't 7 think it may be all that significant, but I think we 8 now understand where he's going with this. 9 THE COURT: Is there any objection to 1211 10 and 12? 11 MR. EISENHART: I would object to it on the 12 grounds of authenticity. Unless we get the chance to 13 verify that this is what happened in 1985, I'm 14 willing to accept counsel's representation of 15 questioning the witness this afternoon; and we can 16 deal with the admissibility at some other point. 17 MR. KEETON: Your Honor, I would object out 18 of relevance. These are out of -- time periods out 19 of documents he's examining from. So, why would we 20 take our time for things that may not have been out 21 of existence? 22 THE COURT: Well, we don't know whether 2560 1 they were in effect or not. 2 MR. KEETON: That's why I object. 3 MR. VEIS: The first page of T1211 4 indicates that it was issued March of '71. It states 5 in the following that it was amended by an accounting 6 principles Bulletin 30, and I don't intend to ask 7 questions about Paragraph 19(d) which amended it. I 8 intend to ask Mr. Lazard questions about 9 Paragraph 17. The indication in the 1993, June 1st 10 edition of APB18 indicates that it was, in fact, 11 amended by financial accounting standards 12 statement 94 which has been marked as Exhibit 1211 13 that came out in 1987. And on the first page of 14 that, it indicates it is effective for fiscal years 15 ending after December 15, 1988. Now, as it indicates 16 that, the final sentence of Paragraph 17 is 17 eliminated. And as I have indicated, that sentence 18 is shaded; and I've outlined it. And I have 19 indicated to counsel that I'm happy to provide for 20 inspection of the document from which I copied this. 21 THE COURT: It was eliminated in 1988. It 22 was eliminated in the pronouncement that was sent out 2561 1 that was promulgated in 1987 with respect to fiscal 2 years ending after December 15, 1988. I submit that 3 Paragraph 17 of Exhibit 1211 minus the sentence 4 deleted by statement of financial accounting 5 standards 94 is the governing authoritative 6 accounting literature for the method of equity 7 accounting during the period in question which is 8 1983 through 1987 which is -- and part of 1988. But 9 I don't intend to ask him about that. 10 MR. EISENHART: Your Honor, I'm going to 11 withdraw my prior statement because now I think what 12 we have here are accounting standards that are being 13 offered for independent relevance in effect in this 14 case. I think this is something -- if he's going to 15 try to prove this -- that he needs to prove through 16 an expert accounting witness. I don't think we can 17 simply have Mr. Veis stand up here and read 18 accounting standards into the case and accept them as 19 true and relevant and standing for the interpretation 20 he gives them. I think this is something he would 21 need to prove through an expert. 22 MR. VEIS: Your Honor, Mr. Lazard is an 2562 1 accountant who was comptroller for a significant 2 number of years. He indicated that he had reviewed 3 Mr. Wilson's memo, and he indicated that he's 4 generally familiar with the equity method of 5 accounting. I submit he's absolutely an individual 6 who can be asked these questions. 7 MR. EISENHART: Your Honor, I have no 8 objection of him asking Mr. Lazard questions about 9 what he recalls of what he and Mr. Wilson talked 10 about in 1985. That's a perfectly fair question. 11 But for him to try to cross-examine Mr. Lazard with a 12 document that is clearly out of time and reapportion 13 a document into evidence as having significance is 14 trying to put in expert testimony simply through the 15 reading of the document. 16 THE COURT: Let's see what the witness 17 knows about these documents. 18 Q. (BY MR. VEIS) Mr. Lazard, are you 19 familiar with APB18? 20 A. Yes, I am. 21 Q. Are you familiar with the standards for 22 applying the equity method of accounting to 2563 1 investments in common stock? 2 A. I'm familiar with the general concepts, the 3 purpose of the pronouncement. 4 Q. Directing your attention to the second page 5 of Exhibit -- Lazard Exhibit 9, do you see that 6 document? 7 A. I have that document. 8 Q. Okay. Under the heading "applying the 9 equity method" -- 10 A. I'm sorry. This is Exhibit 9. 11 Q. Right. It would be OMX19054. 12 A. Yes, sir. 13 Q. Now, was it your understanding through the 14 period during which you were comptroller of 15 MCO Holdings and/or its subsidiaries -- particularly, 16 was it your understanding in the years 1983 through 17 1988 that an investment in common stock of an 18 investee that was previously accounted for by other 19 than the equity method may become qualified for the 20 use of the equity method by an increase in the level 21 of ownership; i.e., through the acquisition of 22 additional voting stock through the common investor? 2564 1 A. I am familiar with that. 2 Q. Was it your understanding that the investor 3 purchasing two or more blocks of stock of the 4 investee at various dates and eventually gains the 5 ability to exercise significant influence over the 6 investee, the date upon which such influence is 7 deemed exercisable, may vary? 8 A. Again, I'm familiar with that. Mr. Wilson 9 was excerpting facts in the opinion, and that's what 10 he wrote in the memo. 11 Q. Was it your understanding that equity 12 accounting was to be applied when the investor gained 13 the ability to exercise significant influence over 14 the investee? 15 A. The standard was if it was over 20 16 percent -- when the company and Federated had a 17 combined interest over 20 percent -- and we were 18 aware of that -- we had members of the board of 19 directors -- we thought that that was the most 20 conservative accounting treatment to take. And 21 that's the accounting treatment that we applied in 22 this case, and our auditors reviewed that and 2565 1 concurred with that analysis. 2 Q. Do you understand that the use of the 3 equity accounting for an investment of 20 percent or 4 more of voting stock of an investee should be 5 accounted for on the equity method was a presumption 6 and not an absolute rule? 7 A. Yes, we do. 8 Q. And do you know what that presumption was 9 based upon? 10 A. There were factors such as representation 11 on the board that were considered and -- 12 Q. What other factors? 13 A. I'd have to look at the pronouncement to 14 see the other factors. 15 Q. Well, was participation and policy-making 16 processes a factor? 17 A. That sounds familiar. 18 Q. Was interchange of managerial personnel a 19 factor? 20 A. Yes. 21 Q. Was the extent of ownership by an investor 22 in relation to the concentration of other 2566 1 shareholders another factor? 2 A. I assume you're reading from criteria. 3 That sounds familiar to me as the types of criteria 4 that one would consider. 5 Q. Now, do you recall that an investment of 6 20 percent or more of the voting stock of an investee 7 should lead to a presumption that, in the absence of 8 evidence to the contrary, an investor has the ability 9 to exercise significant influence over the investee? 10 MR. EISENHART: Your Honor, counsel is now 11 reading to him from a statement we cannot obtain. I 12 think we are now getting -- well, I don't understand 13 asking Mr. Lazard what he and Mr. Wilson considered 14 in 1985. He's not cross-examining him on the 15 hypothetical expert opinion that he's trying to put 16 in through the finance standard. 17 THE COURT: I think he's legitimately 18 testing the knowledge of the witness on these 19 matters. Go on. 20 THE WITNESS: If there's a question 21 pending, would you repeat it? 22 MR. VEIS: I'm not sure I can. 2567 1 (The record was read by the court 2 reporter, as requested.) 3 4 A. I have a recollection that that was a 5 criteria in APB18 that one would have to overcome if 6 they were going to take an accounting treatment other 7 than the equity method of accounting. 8 Q. (BY MR. VEIS) No. In other words -- 9 strike that. 10 But in order to do so, did you have to 11 conclude that there was no evidence to the contrary? 12 A. In this case, we knew that there was more 13 than 20 percent ownership. We knew that we had 14 directors. We thought the equity method was the most 15 conservative method. Our accountants agreed with it, 16 and I don't recall ever trying to argue that it 17 wasn't. We thought it was the appropriate accounting 18 treatment, and there was no reason to try and come up 19 with a less conservative approach to accounting. 20 Q. But, in fact, MCO Holdings didn't own over 21 20 percent, did it? 22 A. Not MCO Holdings. But the combination of 2568 1 Federated which controlled MCO's discussions with our 2 auditors whether or not that was the appropriate way 3 to view the 20 percent threshold. 4 Q. Who are the auditors? 5 A. Arthur Andersen & Company. 6 Q. Did the auditors advise you that it should 7 be done only in the absence of evidence to the 8 contrary, that you had the ability to exercise 9 significant influence over United Financial Group? 10 A. I don't recall ever taking a position. 11 That wasn't what we felt was the most conservative 12 accounting treatment, and our auditors concurred with 13 this. I thought it was our recommendation, and they 14 agreed with that recommendation. 15 MR. VEIS: Nothing further, Your Honor. 16 THE COURT: You have direct examination? 17 MR. EISENHART: I do, Your Honor. 18 THE COURT: Is it extensive? 19 MR. EISENHART: I believe I could probably 20 finish it inside of 15 minutes -- 15 to 20 minutes, 21 Your Honor. 22 THE COURT: All right. Let's try it. I 2569 1 should state that tomorrow, we will adjourn at 4:00. 2 MR. NICKENS: Your Honor, it is my 3 expectation that tomorrow will make a short day 4 because of the unexpected, that Mr. Williams may have 5 to leave. My understanding is that there is one 6 witness to have -- arranged for tomorrow not likely 7 to last until 4:00 o'clock. 8 MR. RINALDI: As I understand it, we had 9 originally thought that we would go with Williams and 10 through Kozmetsky when Mr. Kozmetsky ended early. We 11 had already told the individual from San Francisco 12 who we thought otherwise would have been available 13 tomorrow not to come. So, it was our expectation we 14 were not going to need him. And then when 15 Mr. Kozmetsky ended early, it was too late to get him 16 to reschedule to come back out; and that means there 17 is only one witness that is available tomorrow. We 18 think that he will take the morning, but I don't 19 think it's likely he'll go much into the afternoon. 20 So, we would beg the Court's indulgence on this one 21 and seek to adjourn early. 22 THE COURT: Well, that's fine. If we 2570 1 finish early, that's fine. I was setting 2 4:00 o'clock as a cutoff. I'm shutting down. Is 3 there a point in going ahead now, or do we want to 4 bring this witness back or -- 5 MR. EISENHART: Your Honor, Mr. Lazard has 6 been here once and didn't get on. He's an officer of 7 OMS. Their board of directors meetings are tomorrow 8 and Friday, and he has serious responsibilities 9 tomorrow. I promised him that I would try the get 10 him out tonight if I could. 11 THE COURT: That's fine with me. 12 MR. NICKENS: Your Honor, I would like -- 13 if you recall, I asked for a continuing objection to 14 these issues about controlling influence. I would 15 like to, once again for the record, lodge that 16 objection. We're not trying this issue by consent. 17 Furthermore, for the record, I would 18 object to the relevancy of this entire line of 19 questions. Even if this issue were in the case, it 20 would have to do with banking regulations. We're not 21 here trying some accounting malpractice issue or the 22 appropriateness of the accounting issues, and I would 2571 1 suggest that those standards are irrelevant to the 2 banking regulations you were asked to enforce. I do 3 that for the record. 4 THE COURT: Well, that's an argument you 5 have made. 6 MR. NICKENS: Yes, Your Honor. I'm just 7 doing it for the record. It has been some days since 8 I made that objection. I will try to avoid being 9 disruptive about that, but we want to make sure that 10 our position is clear. 11 THE COURT: It's still in effect in the 12 interest of getting Mr. Lazard off. 13 MR. RINALDI: We decline to respond. 14 15 16 EXAMINATION 17 18 19 Q. (BY MR. EISENHART) Mr. Lazard, you 20 started with the company that became MAXXAM in 1984; 21 is that right? 22 A. That's correct. 2572 1 Q. And it was known as McCullough Oil, and a 2 division of that became McCullough -- 3 A. That's correct. 4 Q. McCullough split its oil and gas operations 5 from its real estate operation; is that correct? 6 A. In 1976, McCullough Oil, the parent 7 company, made the decision to sell its real estate 8 operations and actually sold 51 percent -- I think it 9 was in 1977 -- to a former salesman of the company in 10 1978. Once Mr. Hurwitz became involved in the 11 company, the company acquired that real estate 12 operation. 13 Q. Mr. Hurwitz actually put the two units back 14 together again? 15 A. That's right. 16 Q. Did you assist him in any way in evaluating 17 the real estate side of that company? 18 A. Yes. That's actually how I got to know 19 Mr. Hurwitz. I was the comptroller of the real 20 estate company, and I was -- I helped -- was 21 instrumental in helping him a year in real estate. 22 Q. Now, you were asked about some 2573 1 conversations earlier about the zero coupon note that 2 MCO issued on July 26, 1982. Do you recall that? 3 A. Yes. 4 Q. And do you recall that particular 5 transaction? 6 A. Yes, I do. 7 Q. Would it be fair to say that that was a 8 tax-driven transaction? 9 A. Yes, very much so. 10 Q. In what respect was that so? 11 A. At the time, the company had the ability to 12 deduct from its income tax return interest on a 13 straight-line basis. So, it gave the company the 14 ability to deduct something in the neighborhood of 15 $10 million a year as a deduction even though there 16 wasn't a cash payment until much later in time. 17 Q. And was that $10 million in tax deductions 18 per year of particular benefit to the company at that 19 point in time? 20 A. It was. The company had sold in late 1982, 21 I believe, its oil and gas operations and had that -- 22 or at least the Manly-McGinn Oil Properties had the 2574 1 California crude and was going to have a significant 2 gain. It was recognized as -- statements were made 3 on the note, and it gave the company some abilities 4 to shelter on that income. 5 Q. So, it was going to have a significant 6 amount of income flowing in each year; and this 7 $10 million would offset that note? 8 A. That's correct. 9 Q. We have heard of the proceeds of that note. 10 That is the amount the company actually received in 11 July of 1982 which was about $23.9 million. Do you 12 recall that? 13 A. That's correct. 14 Q. How was that number arrived at or 15 determined? 16 A. That's the discounted value discounting the 17 200 over the life of the note discounting at the 18 18 percent rate. So, that was the number that's the 19 discounted value of that stream of -- 20 Q. So, you didn't start with the 21 3.5-million-dollar proceeds and work it out to the 22 260 million? In fact, it went the other way? 2575 1 A. Right. I wasn't involved in the 2 negotiation of the note, but I think it had more to 3 do with the amount of the tax deduction than it did 4 with the actual note itself. 5 Q. In fact, the proceeds came out to be 6 $3.496 million is simply the way the note worked out? 7 A. Correct. 8 Q. When you received $3.496 million, I think 9 the note itself said it was to be used for general 10 corporate purposes? 11 A. Yes. I believe that's correct. 12 Q. And I think you said it was added to the 13 working capital of the company? 14 A. Yes. 15 Q. As the person who was in charge of the 16 company's banking operations, when you get a piece of 17 cash like that that's to be used for general 18 corporate purposes, does it go into a particular fund 19 or bank account? 20 A. Typically, it would have gone into the -- 21 Q. Is that an account that other revenues flow 22 into, as well? 2576 1 A. Generally, I don't remember the exact 2 accounts. Receipts of funds would incorporate -- the 3 parents would have gone into a depository account as 4 a general practice. 5 Q. Now, did MCO maintain a specific depository 6 account at that particular time? 7 A. It does have a depository account. 8 Q. And who was that with? 9 A. United California Bank or its successor, 10 First Interstate Bank. 11 Q. And when the funds are going to be used for 12 a specific purpose, are they then transferred out of 13 that account to other accounts? 14 A. Yes, if bills were paid or amounts 15 disbursed. It would generally be an accounts payable 16 account which would be a different account. 17 Q. Were you ever asked to segregate the 18 proceeds of the zero coupon note in any particular 19 account for any particular purpose? 20 A. I don't think so. 21 Q. Were those funds ever earmarked in any way 22 in the books and records of the company for the 2577 1 purpose of the United Financial Group stock? 2 A. I don't think so. 3 Q. I'd like you to take a look for a moment at 4 an exhibit that should be in front of you; and rather 5 than have you paw through it, why don't I give you my 6 copy. This is Exhibit A11006. I believe it was 7 marked Exhibit 14 at your deposition. It's the 10-K 8 form for MCO for the year ended December 31, 1981. 9 And I'll ask you to turn to Page 48 of that document. 10 I think there's a Post-it note on your copy. 11 A. Yes, sir. 12 Q. That shows the balance sheet of 13 MCO Holdings at the end of 1981, does it not? 14 A. It does. 15 Q. And what was the cash available to the 16 company at the end of 1981? 17 A. $19,690,000. 18 Q. That's cash that would have been available 19 for general corporate purposes -- 20 A. Yes. 21 Q. -- such as the purchase of United Financial 22 Group stock? 2578 1 A. It would have been available for any use. 2 Q. And the 2.5 million that would have been 3 received from this zero coupon note would have simply 4 been added to that amount? 5 A. Yes. 6 Q. Thank you. You were also asked about a 7 35-million-dollar financing. I'm trying to remember 8 what year that it was, a 35-million-dollar note. I 9 think I have it here. Here it is. 10 A. 1985. 11 Q. Right. The exhibit is attached at Tab 77, 12 and this was in 1985? 13 A. Yes. 14 Q. And you were referred to, I think, Page 8 15 of that which records the amount actually received 16 under that; is that correct? 17 A. Yes. 18 Q. And the amount actually received was 19 $33,230,000? 20 A. Yes, sir. 21 Q. Now, what was actually done with that when 22 it was received? 2579 1 A. In round numbers, 8 million was used to pay 2 down one revolving line of credit and annual reports 3 in which there were references to the net-worth 4 maintenance condition -- oh, I'm sorry, references -- 5 try this again. 6 Q. He showed you the 10-K -- 7 MR. EISENHART: Give me just a second, Your 8 Honor. 9 Q. (BY MR. EISENHART) I want to show you a 10 document which Mr. Veis showed you. It's CT10730; 11 and this is a memo dated 10/6, 1985, from Mr. Wilson 12 to you. Do you recall that document? 13 A. Yes. 14 Q. And in that document, he talks about how 15 MCO would have to treat the net-worth maintenance 16 condition on its books should it -- should it enter 17 into such an arrangement; is that correct? 18 A. Yes. 19 Q. And in that -- in that document, he says, 20 does he not, that the condition, if it was agreed to, 21 would have to be disclosed in the footnotes to the 22 financial statements? 2580 1 A. Yes. 2 Q. Now, based on your knowledge of accounting, 3 is there a difference between disclosing a contingent 4 liability in the footnotes of the financial 5 statements and mentioning such a contingent liability 6 elsewhere in the annual record report? 7 A. No. I think there are two separate issues. 8 If there's a contingency, it has to be disclosed in 9 the footnotes. There may be other reasons to 10 describe it in the annual report. 11 Q. So, in an annual report, there may be 12 references made to the reference maintenance 13 condition or to a potential reference maintenance 14 condition that would not be the same as disclosing it 15 in your footnotes? 16 A. No. 17 Q. And it was the latter that was described? 18 A. He was describing it in the treatment of 19 the finance statements. 20 Q. Was it your belief at the time you read 21 that memorandum that the net worth needed to be 22 disclosed in the footnotes only if MCO had agreed to 2581 1 that final addendum? 2 A. Only if it had been agreed to, it would 3 have to, yes. 4 MR. EISENHART: Your Honor, may I have one 5 moment? 6 THE COURT: Yes, you may. 7 MR. EISENHART: Your Honor, I have no 8 further questions. Thank you. 9 THE COURT: Mr. Veis, do you have a 10 redirect? 11 MR. VEIS: Yes, Your Honor, but very brief. 12 13 14 FURTHER EXAMINATION 15 16 17 Q. (BY MR. VEIS) Mr. Lazard, Mr. Eisenhart 18 had asked you questions about the treatment of the 19 proceeds of the 260-million-dollar zero coupon bond. 20 Do you recall that? 21 A. I do recall. 22 Q. And do I understand from your answer that 2582 1 the proceeds where commingled from other proceeds of 2 funds of MCO Holdings into a bank account? 3 A. I don't recall specifically, but the 4 proceeds would have been deposited into the corporate 5 account of the company with the other corporate funds 6 of the company. 7 Q. Now, directing your attention to 8 Exhibit 14 -- Mr. Eisenhart, the cash that he asked 9 you about, the $19,490,000, reflects the total cash 10 of the company's subsidiaries. The questions that 11 you were asked earlier about the statement showed 12 that MCO was a holding company, that it doesn't have 13 very much cash as you pointed out, and the cash that 14 he used came from its wholly-owned subsidiaries to 15 obtain cash? 16 A. In order to obtain cash, MCO would have to 17 go to its subsidiaries. 18 Q. For example, was the $35 million a direct 19 issuance of debt by the company? So, the 20 unconsolidated of 496,000, I believe it was -- is 21 just MCO's cash? 22 A. I'll take your word for that number. 2583 1 Q. It's in the record. It's a much smaller 2 number. The 19 million reflects all of the 3 subsidiaries? 4 A. Yes. 5 Q. Now, you said that the 260-million zero 6 coupon bond was primarily transaction driven; is that 7 right? 8 A. Yes, it was. 9 Q. Could you explain that, please? 10 A. Again, the company was able to deduct in 11 its tax return depreciation of interest in a 12 straight-line basis. So, a note that had proceeds of 13 approximately 2 and-a-half million would grow to 14 $260 million. Allow me the liberty of rounding, say, 15 a 250-million-dollar difference over a 25-year time 16 frame would allow that company to deduct that even 17 though that interest would be made at the end of the 18 zero coupon period. 19 Q. Now, Mr. Eisenhart asked you a question. 20 Forgive me if I misstate it. I believe he was 21 talking about the discounting from the 22 260-million-dollar ending period from the actual 2584 1 proceeds of the note, $3.3 million. 2 A. I think it was just under $3.5 million. 3 Q. And he said that -- I believe you told him 4 that the $303 million was derived by discounting the 5 260-million-dollar ending figure; is that correct? 6 A. That's correct. 7 Q. How did it come about that MCO Holdings 8 chose to issue a 260-million-dollar note as opposed 9 to a 300-million-dollar note or a 100-million-dollar 10 note? 11 A. I wasn't involved in the negotiation. My 12 indirect knowledge was that we recognized that there 13 was an opportunity from a tax perspective to be able 14 to enter into a transaction to get the straight-line 15 deduction that I just described, that the 16 10-million-dollar a year deduction was optimal from a 17 tax-planning standpoint for the company. 18 Q. So, someone at MCO decided the company 19 needed a 10-million-dollar deduction and constructed 20 a transaction that would allow that deduction to be 21 taken on a straight-line basis for 25 years; is that 22 correct? 2585 1 A. I don't know who brought the transaction to 2 the company, but the company's tax -- internal tax 3 people along with external tax advisers would have 4 analyzed that and been a significant part of the 5 decision as to whether to do the transaction or not. 6 Q. Well, Drexel or some other investment 7 banker would be unlikely to come and say, "Here's a 8 260-million-dollar zero coupon deal. Let's talk," 9 wouldn't they? 10 A. I don't know. 11 Q. Was it driven by what the company needs or 12 perceives it needs for deductions? 13 A. The company can take that and analyze it 14 and determine what size of the transaction it would 15 do. 16 Q. So, the company reviews the transaction, 17 determines internally, optimally, it needs a 18 10-million-dollar deduction, and then constructs a 19 260-million-dollar zero coupon note transaction with 20 Drexler; is that correct? 21 A. I think that's correct. 22 MR. EISENHART: I have nothing further. 2586 1 THE COURT: All right. Thank you. 2 Mr. Lazard, you can step down. We'll adjourn until 3 9:00 o'clock tomorrow. 4 5 (Whereupon at 5:18 p.m. 6 the proceedings were recessed.) 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 2587 1 STATE OF TEXAS COUNTY OF HARRIS 2 REPORTER'S CERTIFICATION 3 TO THE TRIAL PROCEEDINGS 4 I, Erica Davis, 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 by, 10 any of the parties to the action in which this 11 testimony was taken and, further, I am not a relative 12 or employee of any counsel employed by the parties 13 hereto, or financially interested in the action. 14 SUBSCRIBED AND SWORN TO under my hand 15 and seal of office on this the 29th day of September, 16 1997. 17 ____________________________ ERICA DAVIS, CSR 18 MARCY LABYER,CSR STACEY WHITLEY,CSR 19 Certified Shorthand Reporter In and for the State of Texas 20 Certification No. 6479 Expiration Date: 12-31-98 21 22 2588 1 STATE OF TEXAS COUNTY OF HARRIS 2 REPORTER'S CERTIFICATION 3 TO THE TRIAL PROCEEDINGS 4 I, Erica Davis, 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 by, 10 any of the parties to the action in which this 11 testimony was taken and, further, I am not a relative 12 or employee of any counsel employed by the parties 13 hereto, or financially interested in the action. 14 SUBSCRIBED AND SWORN TO under my hand 15 and seal of office on this the 29th day of September, 16 1997. 17 _____________________________ ERICA DAVIS, CSR 18 MARCY LABYER,CSR STACEY WHITLEY,CSR 19 Certified Shorthand Reporter In and for the State of Texas 20 Certification No. 6479 Expiration Date: 12-31-98 21 22