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