10026 1 UNITED STATES OF AMERICA Before the 2 OFFICE OF THRIFT SUPERVISION DEPARTMENT OF THE TREASURY 3 In the Matter of: ) 4 ) UNITED SAVINGS ASSOCIATION OF ) 5 TEXAS, Houston, Texas, and ) ) 6 UNITED FINANCIAL GROUP, INC., ) Houston, Texas, a Savings ) 7 and Loan Holding Company ) ) OTS Order 8 MAXXAM, INC., Houston, Texas, ) No. AP 95-40 a Diversified Savings and ) Date: 9 Loan Holding Company ) Dec. 26, 1995 ) 10 FEDERATED DEVELOPMENT CO., ) a New York Business Trust, ) 11 ) CHARLES E. HURWITZ, ) 12 Institution-Affiliated Party ) and Present and Former Director ) 13 of United Savings Association ) of Texas, United Financial Group,) 14 and/or MAXXAM, Inc.; and ) ) 15 BARRY A. MUNITZ, JENARD M. GROSS,) ARTHUR S. BERNER, RONALD HUEBSCH,) 16 and MICHAEL CROW, Present and ) Former Directors and/or Officers ) 17 of United Savings Association of ) Texas, United Financial Group, ) 18 and/or MAXXAM, Inc., ) ) 19 Respondents. ) 20 21 TRIAL PROCEEDINGS FOR 12-11-97 22 10027 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 PAUL LEIMAN, Esquire SCOTT SCHWARTZ, Esquire 5 BRUCE RINALDI, Esquire RICHARD STEARNS, Esquire (Not present) 6 and BRYAN VEIS, Esquire (Not Present) of: Office of Thrift Supervision 7 Department of the Treasury 1700 G Street, N.W. 8 Washington, D.C. 20552 (202) 906-7395 9 ON BEHALF OF RESPONDENT MAXXAM, INC.: 10 FRANK J. EISENHART, Esquire 11 of: Dechert, Price & Rhoads 1500 K Street, N.W. 12 Washington, D.C. 20005-1208 (202) 626-3306 16 13 DALE A. HEAD (in-house) 14 Managing Counsel MAXXAM, Inc. 15 5847 San Felipe, Suite 2600 Houston, Texas 77057 16 (713) 267-3668 17 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO. AND CHARLES HURWITZ: 18 RICHARD P. KEETON, Esquire 19 KATHLEEN KOPP, Esquire of: Mayor, Day, Caldwell & Keeton 20 1900 NationsBank Center, 700 Louisiana Houston, Texas 77002 21 (713) 225-7013 22 10028 1 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO., CHARLES HURWITZ, AND MAXXAM, INC.: 2 JACKS C. NICKENS, Esquire 3 of: Clements, O'Neill, Pierce & Nickens 1000 Louisiana Street, Suite 1800 4 Houston, Texas 77002 (713) 654-7608 5 ON BEHALF OF JENARD M. GROSS: 6 PAUL BLANKENSTEIN, Esquire 7 MARK A. PERRY, Esquire of: Gibson, Dunn & Crutcher 8 1050 Connecticut Avenue, N.W. Washington, D.C. 20036-5303 9 (202) 955-8500 10 ON BEHALF OF BERNER, CROW, MUNITZ AND HUEBSCH: 11 JOHN K. VILLA, Esquire MARY CLARK, Esquire 12 PAUL DUEFFERT, Esquire of: Williams & Connolly 13 725 Twelfth Street, N.W. Washington, D.C. 20005 14 (202) 434-5000 15 OTS COURT: 16 HONORABLE ARTHUR L. SHIPE Administrative Law Judge 17 Office of Financial Institutions Adjudication 1700 G Street, N.W., 6th Floor 18 Washington, D.C. 20552 Jerry Langdon, Judge Shipe's Clerk 19 REPORTED BY: 20 Ms. Marcy Clark, CSR 21 Ms. Shauna Foreman, CSR 22 10029 1 2 EXAMINATION INDEX 3 Page 4 REX COOL 5 Continued Cross-Examination by Mr. Villa10030 6 Cross-Examination by Mr. Blankenstein...10118 7 Cross-Examination by Mr. Eisenhart......10139 8 Redirect-Examination by Mr. Schwartz....10152 9 Recross-Examination by Mr. Villa........10201 10 Recross-Examination by Mr. Blankenstein.10214 11 Recross-Examination by Mr. Keeton.......10222 12 Redirect-Examination by Mr. Schwartz....10227 13 JAMES MILLINOR 14 Examination by Mr. Guido................10232 15 16 17 18 19 20 21 22 10030 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:00 a.m.) 3 THE COURT: Be seated, please. The 4 hearing will come to order. 5 I've received the letter from Mr. Villa 6 about future scheduling of the case. Is the 7 enforcement going to respond? I'd like to have a 8 written response. 9 MR. RINALDI: My understanding is 10 that -- I spoke to Mr. Stearns yesterday -- he was 11 in the process of preparing that. I would expect 12 that I would receive a fax this morning. 13 THE COURT: All right. Mr. Villa, you 14 may proceed. 15 MR. VILLA: Thank you, Your Honor. 16 17 CONTINUED CROSS-EXAMINATION 18 19 20 Q. (BY MR. VILLA) Good morning, 21 Mr. Cool. 22 A. Good morning. 10031 1 Q. Have you talked to anybody about your 2 testimony last night or since we completed our 3 examination? 4 A. No, no one at all. 5 Q. No one at all. Mr. Cool, you were 6 talking to us a little bit about the examination 7 process and what your state examiners do when they 8 get to the association. 9 Do you recall that? 10 A. Yes, sir. 11 Q. Now, is part of the examination process 12 to review the minutes of the board of directors? 13 A. That's correct. 14 Q. And is part of the examination process 15 to review the minutes of the various committees 16 such as the loan committee, the real estate 17 investment committee, committees like that? 18 A. Generally, yes. 19 Q. And in an association where you are 20 looking at the major loans, you would expect that 21 that would be -- that would be performed by your 22 examiners; is that right? 10032 1 A. I would assume so, yes. 2 Q. Do you have any reason to believe that 3 it wasn't done in this case? 4 A. No. I really have no recollection of 5 it at this point in time, but I would agree that 6 it should have been reviewed. 7 Q. And the procedure would have been to 8 review the committee minutes since the completion 9 of the last Texas state examination; is that 10 right? 11 A. Yes, that's correct. 12 Q. Now, Mr. Cool, you told us you were on 13 site with, I believe, three assistant examiners 14 who -- one of whom was assigned to look at all 15 major loans -- 16 A. That is correct. 17 Q. -- and real estate investments. Right? 18 A. Yes. 19 Q. And that was Jeff Nunn? 20 A. That is correct. 21 Q. Now, you didn't know what the cutoff 22 was, but you initially thought it was 1 million 10033 1 but it might have been as high as $5 million. 2 Right? 3 A. Yes. At this point in time, I don't 4 recall the -- you know, the minimum amount that 5 was set. 6 Q. Now, you said in response to 7 Mr. Schwartz' questions and to my questions that 8 you believe that the federal examiners came on the 9 site two to three months after you arrived. 10 Do you remember that? 11 A. Yes. 12 Q. And I believe you said that there were 13 four to five federal examiners; is that right? 14 A. As I recall, yes. 15 Q. That's your recollection? 16 A. (Witness nods head affirmatively.) 17 Q. Now, you initially testified in 18 response to Mr. Schwartz' questions that you 19 thought that the federal examiners did not go back 20 and review a loan file unless the write-up was 21 incomplete or they wanted more knowledge. 22 Do you remember having said that to 10034 1 him, sir? 2 A. Yes. 3 Q. Then in response to my questions, 4 cross-examination, you testified that you really 5 didn't know whether the federal examiners had done 6 their own independent analysis or not. 7 You remember that, too. Right? 8 A. Yes. 9 Q. Now, I've gone back, Mr. Cool, and 10 looked at the federal examination work papers 11 produced to us by the Office of Thrift Supervision 12 here. I'm going to provide you with a copy of 13 Exhibits B4162 and 4161 to see whether they will 14 help refresh your recollection about the 15 examination team and what they were doing at the 16 time. 17 Now, sir, would you take a look at 18 these two exhibits? 19 A. Yes. 20 Q. They were produced to us by the Office 21 of Thrift Supervision. Is this in a format that's 22 similar to the format that you have seen as a 10035 1 federal examiner? 2 A. Yes. 3 Q. And do you recognize Vivian Carlton's 4 name on this? 5 A. Yes, I do. 6 MR. VILLA: Your Honor, we move 4161 7 and 4162 into evidence. 8 MR. SCHWARTZ: No objection, Your 9 Honor. 10 THE COURT: Received. 11 Q. (BY MR. VILLA) Now, let me direct 12 your attention to 4161. This is the list of 13 examiners who worked on the United Savings 14 Association of Texas examination. And this list 15 stops at 17. 16 Does that refresh your recollection as 17 to the size of the federal examination team at 18 USAT during the time period? 19 A. Yes, it does. But I would like to add 20 that some of those are not examiners. 21 Q. Some of these people are not examiners? 22 A. That's correct. 10036 1 Q. And what are they? 2 A. They are CPAs. 3 Q. Oh, they are CPAs that assist the 4 examiners in the examination process? 5 A. Yes, sir. As I recall, the federal 6 crew in the region were very short-handed. And at 7 that period of time, they called in help from 8 other regions as well as auditing firms. And so, 9 in this instance, probably the first four names 10 are the ones that I recall as being examiners. 11 The rest, I think, were CPAs. 12 Q. I see. So, it was a team of four 13 federal examiners assisted by 13 certified public 14 accountants that you recall conducting this 15 examination? 16 A. Yes, sir. 17 Q. All right, sir. Were there any other 18 people besides the federal examiners and the team 19 of certified public accountants that did the 20 examination on the federal side? 21 A. Not to my knowledge. 22 Q. Now, B4161, if you look at it again, 10037 1 shows that the work began on May 27. 2 Do you see that? 3 A. Yes, I see that. 4 Q. And then in the right-hand side, it 5 says "examination date" -- it's about two lines 6 down -- "May 24, 1986." 7 Do you see that, as well, sir? 8 A. Yes, I do. 9 Q. And does that refresh your recollection 10 that the examiners -- the federal examination of 11 United actually began about three and a half weeks 12 after your examination began, not two to three 13 months? 14 A. I can see that. 15 Q. You don't have any quarrel with that. 16 Right? 17 A. I have no problem with it. After 11 or 18 12 years, it's hard to recall dates. 19 Q. Right. I have no doubt about that, 20 sir. That's why I'd like to bring it to your 21 attention, to help you see if you can remember 22 these things. 10038 1 Now -- so, essentially then, the two 2 examinations were running almost parallel, one 3 starting three and a half weeks before the other; 4 is that right? 5 A. It appears so, yes. 6 Q. And the federal examination team, 7 consisting of both examiners and certified public 8 accountants, was about four to five times the size 9 of your team. Right? 10 A. Yes, sir, that's correct. 11 Q. Now, let's look at Page 4162, which is 12 the examiner's assignment and schedule and time 13 schedule. 14 Do you see that? 15 A. Yes, I do. 16 Q. Now, the third line down on the 17 left-hand side under the examination phase says, 18 "LO underwriting." Unfortunately, the way I think 19 these documents are kept, that they have put two 20 hole punches in it and it knocked out the rest of 21 that word after "LO underwriting." 22 Do you see that? 10039 1 A. Yes, I do. 2 Q. Do you believe that to be loan 3 underwriting? 4 A. It appears that that's, yes, what it 5 would be. 6 Q. Now, sir, under "loan underwriting," I 7 see the examination team, according to this OTS 8 document, devoted 2,805 hours. 9 Do you see that, sir? 10 A. I do. 11 Q. Would you regard that as a substantial 12 period of time to devote to loan underwriting? 13 A. I certainly would. 14 Q. Now, sir, let me ask you: Based upon 15 your experience as a state and federal examiner, 16 if a federal examination team devoted 2,805 hours 17 to the review of loan underwriting, do you believe 18 that they would have looked at, as one of the 19 loans they looked at, the single largest loan in 20 the association? 21 MR. SCHWARTZ: Objection, Your Honor. 22 Calls for speculation. 10040 1 THE COURT: Denied. You may answer. 2 A. I have no idea. 3 Q. (BY MR. VILLA) They spent 2,805 hours 4 on loan underwriting and you have no idea whether 5 they would -- whether they would look at the 6 single largest loan in the association? 7 A. To my knowledge, I don't recall them 8 looking at any major loans. This would -- 9 Q. You don't recall whether they looked at 10 any major loans or not; is that right? 11 A. That is correct. 12 Q. Now, if there were major loans written 13 up in their examination report that hadn't been 14 covered in your examination report, would you come 15 to the conclusion that, in fact, they were looking 16 at major loans and you simply didn't know about 17 it? 18 A. Yes, sir. 19 Q. Isn't it a fact, sir, that examiners 20 typically look at the largest loans in an 21 association because they present the greatest risk 22 to the association? 10041 1 A. I would agree. 2 Q. And it's still your belief, based upon 3 your experience as an examiner, that if this team 4 spent 2,805 hours looking at loan underwriting, 5 you don't know whether they would have looked at 6 the single largest loan in the association? 7 A. I have no idea. I did not have any 8 response from them as to whether or not they went 9 and reviewed or re-reviewed the loan files that we 10 looked at. 11 Q. Oh, I see. You're not understanding my 12 question. I'm not asking you, sir, as a matter of 13 fact whether you know whether they looked at it. 14 I'm asking you, sir: Based upon all of 15 your experience as an examiner and examination 16 procedures in both the federal and state 17 examination system whether, in fact, examiners, 18 when presented with a 5-billion-dollar 19 association, spending 2,805 hours on loan 20 underwriting, whether the procedures that they 21 would ordinarily follow would include looking at 22 the single largest loan in the association? 10042 1 A. Yes, I would imagine it would. 2 Q. Now, sir, we talked a little bit 3 yesterday about MACRO ratings. 4 Do you remember that? 5 A. Yes, I do. 6 Q. And MACRO ratings -- MACRO is an 7 acronym. Right? They stand for five different 8 words: Management, assets, capital, risk 9 management, and operating results; isn't that 10 right? 11 A. That's correct. 12 Q. Now, let's start with management here. 13 In this case, you rated management a 4; is that 14 right? 15 A. Yes. As I recall, that's correct. 16 Q. And the procedure that you were 17 following at the time is that management -- the 18 management rating could not be any better than the 19 composite of the other ratings; isn't that right? 20 A. Yes. 21 Q. So, you'd look at the other four 22 ratings -- assets, capital, risk management, and 10043 1 operating results -- determining what the 2 composite of those four were. Right? And then 3 you would use that and say "management can't be 4 any better than that"; isn't that right? 5 A. I would agree. 6 Q. Let's turn to A. That stands for 7 assets, right, in the MACRO rating? 8 A. Yes. 9 Q. And you found asset quality problems. 10 Isn't that also right? 11 A. Yes. 12 Q. Let's look at the first page of your 13 examination report, which is T7502. I believe -- 14 A. I don't have that in front of me. 15 Q. I'm sorry, sir. 16 A. It was here yesterday. 17 18 (Whereupon the witness was 19 handed the exhibit.) 20 21 Q. (BY MR. VILLA) And particularly, I'd 22 like to direct your attention to Texas S&L 10044 1 Page 143, which is about the fourth page back. 2 A. I have it. 3 Q. Now, that's your report summary. And 4 we then go from your report summary in the 5 beginning to the assets on paragraph -- on 6 Page 9A, which is Texas S&L Page 164. 7 Do you see that, sir? 8 A. Yes, I do. 9 Q. And I believe you told us yesterday 10 that you saw a great deal of substandard assets at 11 this association. Right? 12 A. Yes, sir. 13 Q. And that's what drove your rating of 14 this association as a 4 rating for assets. Right? 15 A. That's correct. That was part of it. 16 Q. Well, isn't the existence of 17 substandard assets what the asset evaluation is 18 intended to address? 19 A. Yes. 20 Q. I see $658 million in substandard 21 assets. 22 Do you see that, sir? 10045 1 A. Yes, I do. 2 Q. Do you know how many of these were put 3 on the books by the respondents in this case? 4 That is to say, how many of these assets were the 5 result of decisions of the respondents in this 6 case? 7 A. I have no idea. 8 Q. Do you know whether United inherited a 9 large loan portfolio of single-family home loans 10 that were defaulting during the period -- 11 mid-period of 1985, 1986? 12 A. I don't recall it. 13 Q. Do you recall 2,000 -- 14 A. I remember the loans that they had 15 purchased from Couch Mortgage, if that's what 16 you're referring to. 17 Q. No, sir. I'm talking about the 2,000 18 pieces of -- parcels of REO that you were talking 19 about yesterday. Those 2,000 parcels of REO were 20 home mortgages, weren't they? They weren't 21 200-million-dollar construction projects, were 22 they, sir? 10046 1 A. Many of them, yes, were -- 2 Q. Many of them were home mortgages? 3 A. Yes. 4 Q. So, sir, my question to you is: Do you 5 know, sir, whether the delinquent mortgages that 6 show up on this substandard asset list were 7 mortgage loans that the respondents in this case 8 made or whether they were mortgage loans that they 9 inherited from the merger of two associations that 10 were primarily home lenders in the early 1980s? 11 A. I don't recall, no. I'm sorry. 12 Q. You don't know one way or the other? 13 A. (Witness shakes head negatively.) 14 Q. Now, the first three lines address the 15 issue of mortgage -- I'm sorry. The second, 16 third, and fourth -- let's see if I've got this 17 right. 18 The second, third, and fourth line 19 address mortgage loans with four or more payments 20 in arrears. Do you see that? That's 94 million. 21 A. Yes, I see it. 22 Q. Mortgage loans modified while 10047 1 contractually delinquent, 25 million. 2 Do you see that? 3 A. Yes, I do. 4 Q. And then down three more lines, real 5 estate owned, 126 million. 6 Do you see that? 7 A. I do. 8 Q. And you remember that a great deal of 9 the real estate owned were these 2,000 parcels 10 that had come back to United. Right? 11 A. Yes. 12 Q. Now, as I add that up, that's about 13 $250 million. 14 Does that seem about right to you? 15 A. Yes. That's approximate. 16 Q. Now, we talked a little bit about the 17 Couch Mortgage situation yesterday. Right? 18 A. Yes, sir. 19 Q. Why don't you take a look at the line 20 under "real estate owned." "Loans purchased in 21 exchange for sales of real estate owned, 22 $140,202,979." 10048 1 Do you see that? 2 A. Yes, I do. 3 Q. Does that appear to you to be the Couch 4 Mortgage loans? 5 A. I believe so at this point in time. 6 Q. So far out of the $658 million of 7 substandard assets, we have identified 390 million 8 or almost 60 percent that are accounted for by 9 these four lines we've just talked about; isn't 10 that right, sir? 11 A. That's correct. 12 Q. And there is no indication -- you have 13 no basis for saying that the respondents in this 14 case put those assets on the books. Right? 15 A. I would have no idea. 16 Q. Now, let's look at the top line, "Major 17 loans containing elements of questionability." 18 That's $176 million. Right? 19 A. Yes. 20 Q. And you don't know which of the 21 respondents, if any, actually approved those 22 loans. Right? 10049 1 A. At this point in time, I could not say. 2 Q. Now, in reaching your judgments as to 3 how you classified -- strike that. 4 In reaching your judgments as to how 5 you rated assets here, whether you rated 1, 2, 3, 6 4, 5, it didn't matter to you, sir, when the 7 assets had been put on the books. Right? 8 A. That's correct. 9 Q. You're just doing a snapshot to see 10 what the assets look like on the day you walk in. 11 Right? 12 A. That was my examination objective. 13 Q. And that's the examination objective of 14 all the examiners. Right? 15 A. Yes, sir. 16 Q. So, I should not necessarily, in 17 looking at these assets, assume that all of these 18 assets you're laying at the feet of the 19 respondents in this case. Right? 20 A. No. You can -- no. That is correct. 21 It could be a combination of all of the 22 institutions that were merged. 10050 1 Q. Now, let's turn to capital. "C" is for 2 capital. Right? 3 A. Yes. 4 Q. And you concluded that USAT's capital 5 was below its minimum regulatory; is that right? 6 A. That's correct. 7 Q. And did you analyze precisely which 8 components of the capital calculation contributed 9 to that failure to meet minimum regulatory capital 10 limits? 11 A. I don't remember now. 12 Q. Well, we can do that now. Let's turn 13 to Page 152, Texas S&L Page 152, which is a 14 statement of condition. 15 Do you see that, sir? 16 A. Yes, I do. 17 Q. Now, would you agree with me that the 18 basic principle of net worth is assets minus 19 liabilities? 20 A. Yes. 21 Q. And you have the assets at the top of 22 the page and the liabilities in the middle of the 10051 1 page and the net worth at the bottom. Right? 2 A. That's correct. 3 Q. Let's take a look at the asset line 4 about ten lines from the top that says "goodwill." 5 Do you see that, sir? 6 A. Yes, I do. 7 Q. Take a look all the way over on the 8 right. From 12-31-84 to 4-30-86, am I reading 9 this correctly in your report that goodwill went 10 down as an asset 258 million to $245 million; is 11 that right? 12 A. Yes, that's the way it's reported. 13 Q. So, it's going down -- in a 14-month 14 period, it goes down about $13 million. Right? 15 A. Yes, that's correct. 16 Q. As I -- kind of a rough guess -- so, 17 the goodwill seems to be going down as an asset 18 about $10 million a year. Right? 19 A. Yes. 20 Q. So, if we would extend it back one more 21 year to pick up the whole year 1984, we could see 22 that the impact of goodwill would have been 10052 1 $23 million. There is 13 here and another 10 2 would be 23. Right? 3 MR. SCHWARTZ: Objection, Your Honor. 4 I'm not sure I understand. Are you talking about 5 1983? 6 MR. VILLA: I'm talking about 12-31-83. 7 Q. (BY MR. VILLA) Every calendar year 8 counts for 10 years of goodwill -- $10 million of 9 goodwill. Right? That's what we've just figured 10 out from your schedule. 11 A. Yes. 12 Q. So, we've got $13 million of goodwill 13 for this 16-month period. Right? 14 A. Uh-huh, yes. 15 Q. On your schedule. And if $10 million 16 of goodwill is amortized every year -- let's move 17 it back one more year. That will make $23 million 18 of goodwill if we look at the time period 12-31-83 19 to the date of your examination. 20 Would you agree with that? 21 A. I can only assume that that would be 22 correct, if it would go at that rate. 10053 1 Q. It's a linear projection. Right? 2 A. Yes. 3 Q. So, if I were to analyze the capital of 4 this association and taking into account your view 5 that it was -- which you testified to Mr. Schwartz 6 yesterday -- that it was $23 million below its 7 minimum regulatory capital limits, I could tell 8 from these schedules that all of the -- all of the 9 shortfall in minimum capital could be accounted 10 for by the amortization of goodwill over a two and 11 a half year period; isn't that right, sir? 12 MR. SCHWARTZ: Objection, Your Honor. 13 I totally do not understand the question at all. 14 MR. VILLA: I'll be happy to rephrase 15 the question because I want to make sure that 16 everybody understands this question. 17 MR. SCHWARTZ: This is an issue 18 involving the entire financial statement. You're 19 asking him to -- whether one particular item is 20 accountable for the entire -- for the entire net 21 worth failure? 22 MR. VILLA: Well, that's a very good 10054 1 question, Mr. Schwartz. If you'll have a seat, 2 I'll ask him that. 3 Q. (BY MR. VILLA) Now, sir, assuming the 4 linear projection that you and I have just 5 performed is accurate and that over a 6 two-and-a-half-year period goodwill went down 7 $23 million -- can you assume that, sir? 8 A. I'll assume that. 9 Q. Add that $23 million back into net 10 worth and tell me, sir, would USAT, using your 11 calculations, have been above or below its minimum 12 regulatory capital limits? 13 A. It would appear they would have been 14 above. 15 Q. So, in answer to Mr. Schwartz' 16 question, the entire shortfall can be accounted 17 for by the amortization of goodwill over a 18 two-and-a-half-year period; isn't that right, sir? 19 A. I don't believe I agree with that. 20 Q. Well, the numbers speak for themselves, 21 sir. 22 So, let's ask you: Do you know, sir, 10055 1 whether the goodwill was the result of the 2 decisions of any of the respondents in this case? 3 A. I have no idea, no. 4 Q. You know that goodwill on the books and 5 records of a financial institution is the result 6 of mergers. Right? 7 A. Yes. 8 Q. And it's amortized over a period of 9 time as a result of those mergers. Right? 10 A. I believe that's the way it occurs. 11 Q. And you don't know, sir, whether any of 12 the respondents in this case were responsible for 13 the merger that put $250 million of goodwill on 14 United's books. Right? 15 A. I do not. 16 Q. And it didn't make any difference to 17 you because you were taking a snapshot of the 18 capital. You weren't trying to evaluate who was 19 responsible for each line. Right? 20 A. That's correct. 21 Q. Now, sir, "R" stands for risk 22 management. Right? 10056 1 A. Yes. 2 Q. Would you agree that one of the primary 3 components of risk management is interest rate 4 risk? 5 A. Yes. 6 Q. And one of the -- and that's sometimes 7 referred to in financial institution terms as the 8 gap. Right? Interest rate gap? 9 A. Yes. 10 Q. Now, in fact, for financial 11 institutions during the 1980s, the interest rate 12 risk and the interest rate gap were one of their 13 most serious risks; isn't that right, sir? 14 A. Yes. 15 Q. Do you know, sir, whether this group of 16 respondents who is being called to answer here 17 today inherited a financial institution that had a 18 negative 1.65-billion-dollar one-year interest 19 rate gap when they started working at United? 20 A. I have no idea. 21 Q. And it didn't make any difference to 22 your evaluation of risk management because you 10057 1 were looking at it as a snapshot. Right? 2 A. Yes, sir. 3 Q. Finally, let's turn to "O." "O" is 4 operating results. Right? 5 A. Yes. 6 Q. Now, sir, on -- and you talked to us a 7 little bit about operating results. Another way 8 of talking about that is operating income. Right? 9 A. That is correct. 10 Q. Did you break down United's financials 11 to determine the components of this weakness in 12 operating results? I won't make this a quiz. Why 13 don't we turn to Texas S&L Page 156 through 157. 14 Do you see that, sir? 15 A. Yes, I do. 16 Q. Now, let's take a look at net operating 17 income, which is what Mr. Schwartz directed your 18 attention to. It shows in the left-hand column 19 for the current period negative $37,564,047. 20 Right? 21 A. Yes. 22 Q. Now, sir, flip over the page and take a 10058 1 look at operating income from the sale of 2 securities at the top left-hand corner of the next 3 page, which is Texas S&L Page 157. 4 Do you see that? 5 A. I see that. 6 Q. And what is that, sir? 7 A. $30,539,405. 8 Q. So, as I read this, their negative 9 operating income from normal operations was a 10 37-million-dollar loss and they made up for a 11 substantial portion of that by sale of securities; 12 isn't that right? 13 A. It would appear that way, yes. 14 Q. Do you know whether the respondents in 15 this case are the people who implemented the 16 securities portfolios that resulted in that 17 $30 million of revenue? 18 A. I have no idea. 19 Q. Now, sir, let me direct your attention 20 to Page 238 of your -- Texas S&L Page 000238. 21 MR. SCHWARTZ: Sorry, Counsel. What 22 page? 10059 1 MR. VILLA: Texas S&L Page 000238. 2 Q. (BY MR. VILLA) Under "operations." 3 Do you see that, sir? 4 A. Yes, I do. 5 Q. And you wrote that, didn't you? 6 A. I believe so. 7 Q. It says -- let me read it. Quote, "Due 8 to a slowdown in the Houston economy, the 9 association was placed in the position of meeting 10 alternative sources of funds as well as 11 investments for those funds. Since the preceding 12 examination, 10-31-84, management has implemented 13 certain strategies to reduce the association's 14 sensitivity to interest rate fluctuation and 15 enhance earnings." 16 Do you see that, sir? 17 A. Yes, I do. 18 Q. Would that refresh your recollection 19 that this management team was the one who was 20 trying to address the problems of earnings and 21 interest rate fluctuations that are reflected in 22 your examination report? 10060 1 A. It would appear so. 2 Q. Now, sir, as I recall these examination 3 reports, they are sent to the association. And 4 after the association receives them, they prepare 5 a response and they send it back to the Texas S&L 6 Commission. Right? 7 A. That's correct. 8 Q. Now, I'm going to hand you what's been 9 marked as A12165. It's a letter dated January 9, 10 1987, from United Savings Association to Mr. L.L. 11 Bowman, commissioner of the Texas Savings and Loan 12 Department. 13 Do you see that, sir? 14 A. Yes, sir. 15 Q. And it says it's in response to the 16 report of examination that was sent to them by 17 Mr. Richard Von Minden on November 1986. 18 Do you see that, as well, in the second 19 paragraph? 20 A. Yes, I do. 21 Q. And that was your report of 22 examination, the one you had worked on; is that 10061 1 right? 2 A. That's correct. 3 Q. So, these would have been the responses 4 to the criticisms in this examination report. 5 Right? 6 A. Yes. 7 Q. Let me direct your attention now to 8 Page 4 of this document. 9 Do you have it in front of you now? 10 A. Yes, I do. 11 Q. Bates stamp No. OW150894 and under 12 "operations," let me read it to you and see 13 whether you agree with this characterization of 14 the problems of United. Quote, "The board, as 15 well as United senior management, share the 16 concern about the depressed condition of operating 17 earnings. However, the association believes it is 18 important to continue to attempt to maintain 19 profitability through whatever prudent means 20 exist. The association is aware that 21 non-operating income in the form of sales of 22 securities and other sales have been sufficient to 10062 1 maintain the association at a profitable level and 2 United will continue to utilize these activities 3 to enhance the investment of its stockholders and 4 the security of its depositors. However, it is 5 recognized that in the long term, the return to a 6 more vigorous level of operating earnings is 7 essential. As the department is certainly aware, 8 the fundamental problem with operating earnings at 9 the current time is the large amount of 10 non-interest earning assets on United's books. 11 These assets resulted from the increased levels of 12 foreclosed homes resulting from the depressed 13 Houston and Texas economy, as well as the reduced 14 sales activity in the association's real estate 15 investment portfolio." 16 Do you see that, sir? 17 A. Yes, I do. 18 Q. And is that an accurate 19 characterization, sir, of the fundamental problem 20 with operating earnings as we've just seen here? 21 MR. SCHWARTZ: Objection, Your Honor. 22 What Mr. Villa is reading to the witness is a 10063 1 conglomeration of both existing conditions as well 2 as opinions of the board. I don't know that 3 Mr. Cool can comment on what the opinions of the 4 board were and whether they -- whether he would 5 agree with what they reflect. 6 THE COURT: Well, he can state whether 7 he does or not. 8 A. I have no idea, but it would -- it 9 would seem that it presents some of the problems. 10 Q. (BY MR. VILLA) Thank you, sir. 11 MR. VILLA: Your Honor, I move A12165 12 into evidence. 13 MR. SCHWARTZ: Objection, Your Honor. 14 The witness has not indicated that he ever 15 received a copy of this or ever even saw it 16 before this very moment. He certainly didn't 17 author it. 18 MR. VILLA: Your Honor, there can be no 19 doubt about its authenticity. It's certainly 20 relevant and it responds to the criticisms in the 21 report of examination that they have introduced 22 here. It was sent to his superiors, and it 10064 1 addresses the precise question. 2 THE COURT: Received. 3 Q. (BY MR. VILLA) Now, sir, we've talked 4 about assets, capital, risk management, and 5 operating results. Right? 6 A. Yes. 7 Q. And all four of those were rated 4, 8 correct? 9 A. Yes. 10 Q. And we've talked about the reasons they 11 were rated 4, haven't we? 12 A. Yes. 13 Q. And under the procedures that were then 14 in effect for you, you could rate management no 15 higher than 4. Right? 16 A. Yes, I believe so. 17 Q. You talked to us a little bit about the 18 question of ADC loans versus investments. Now, 19 there is a -- do you remember that, sir, in 20 your -- 21 A. Yes, I do. 22 Q. Let's turn to Page 23 of your exam 10065 1 report, which is Texas Savings and Loan Page 240. 2 And in the middle of that page -- do you have it 3 in front of you, sir? 4 A. Yes, I do. 5 Q. The middle of that page is the line 6 that we're talking about. It starts off by 7 talking about the accounting policy that was 8 implemented by the board of -- by the Federal Home 9 Loan Bank Board. And then about ten lines down 10 into the loans versus investments/joint ventures, 11 it reads as follows: Quote, "However, as set 12 forth in the following presentation styled 'major 13 loans,' certain loans reviewed during the 14 examination appear to contain the characteristics 15 of investment." Right? 16 A. Yes. 17 Q. So, in your examination report, you 18 describe them as appearing to contain the 19 characteristics of an investment; is that right, 20 sir? 21 A. That's correct. 22 Q. Now, let me show you, sir, what has 10066 1 been marked as Exhibit A11140. It's a letter 2 dated November 19, 1986, from Mr. Richard Von 3 Minden to the board of directors of USAT. 4 Do you have that in front of you, sir? 5 A. Yes, I have it. 6 Q. Now, this is the letter -- can you tell 7 from the text of this letter, sir, that this was 8 the letter that would have transmitted the 9 examination report to the board of directors of 10 USAT? 11 A. Yes. 12 Q. And, in fact, on the last page of the 13 letter, it indicates you were copied on it. 14 Right? 15 A. That is correct. 16 Q. Would you ordinarily have been involved 17 at any point in reviewing or editing or writing 18 some portion of this letter? 19 A. No, sir. 20 Q. But you would have seen it. Right? 21 A. Only after it was sent out, yes, I 22 would have received a copy. 10067 1 Q. Now, sir, let's turn to the section -- 2 MR. VILLA: Your Honor, I move A11140 3 into evidence. 4 MR. SCHWARTZ: No objection, Your 5 Honor. 6 THE COURT: Received. 7 Q. (BY MR. VILLA) Now, look at Pages 2 8 to 3 of this examination report -- I'm sorry -- of 9 this letter. 10 Do you see that in front of you, where 11 it says "lending"? Now, let's read that together. 12 A. Which page are you on? 13 Q. I'm sorry. The Bates stamp number is 14 OW123420? 15 A. Beginning with "net worth" at the top 16 of the page? 17 Q. Yes, sir. And I'm going to the bottom 18 of the page where it says "lending." 19 A. Oh, okay. I see. I'm sorry. 20 Q. Do you see that, sir? 21 A. Yes. 22 Q. Let's read that together. Quote, 10068 1 "Several loans reviewed had the characteristics of 2 joint ventures/investments. Therefore, the 3 association's auditors should review loans for 4 classification as investment versus loans pursuant 5 to generally-accepted accounting principles." 6 Do you see that? 7 A. Yes, I do. 8 Q. And that also refers to the 9 misclassification -- possible misclassification 10 issue that you talked about earlier, doesn't it, 11 sir? 12 A. Yes. 13 Q. Now, Mr. Cool, you don't have a degree 14 in accounting, do you? 15 A. No, I do not. 16 Q. And you're not a certified public 17 accountant? 18 A. No, sir. 19 Q. And between the time that this -- 20 between March or -- March 1985 when 12CFR571.17 21 which is the -- which is the policy statement on 22 loans versus investments was promulgated and the 10069 1 date of your examination, had you taken any 2 special courses in the accounting for real estate 3 loans versus investments? 4 A. No. 5 Q. Would you agree with me that this is a 6 complicated area in trying to determine what's a 7 loan and what's an investment? 8 A. Yes, I would. 9 Q. And isn't it true, Mr. Cool, that the 10 comment in your examination report and in this 11 letter merely raised the issue and did not reach a 12 conclusion as to whether or not the transaction 13 should be classified as a loan or investment? 14 Isn't that right? 15 A. Yes, I would agree. It was a federal 16 regulation, and I could only cite it and go no 17 further. 18 Q. You could cite it and -- well, you've 19 cited other federal regulations as having being 20 violated in this examination report. Right? 21 A. That's true. But I had no 22 responsibility, nor did I have any cause or -- 10070 1 excuse me. That's an improper word. I had no way 2 of changing or supervising on those particular 3 type regulations. Only on state regulations. 4 Q. Sir, your examination report, if I 5 recall seeing it, cites probably several dozen 6 federal regulations. 7 Was that a mistake to have put them in 8 there? 9 A. No. 10 Q. If you found violations of federal 11 regulations, it was your practice to put them in 12 the report, wasn't it, sir, if those regulations 13 applied to this association? 14 A. It was my practice to do it. It wasn't 15 a general practice. 16 Q. Now, sir, isn't it true that you didn't 17 reach a conclusion as to whether or not this 18 should be classified as a loan or investment. You 19 simply raised the issue; isn't that right? 20 A. Yes, sir, that's correct. 21 Q. And you talked to us yesterday about 22 the fact that you and your examination team worked 10071 1 in close association with the federal examiners. 2 Do you remember that? 3 A. Yes. 4 Q. And that they told you their findings 5 and you told them your findings. 6 Do you remember that, sir? 7 A. Yes. 8 Q. And I believe you said in your 9 deposition that you're sure you would have 10 discussed this issue with the federal examiners. 11 A. If that's what I said. I assume that I 12 would have. 13 Q. I can show you your deposition, but let 14 me ask you, sir: Do you believe that you would 15 have discussed with the federal examiners the 16 issue of a loan versus investment? 17 A. Yes, I think it would have -- that 18 issue would have been brought up. 19 Q. And you would have discussed it with 20 the federal examiners? 21 A. Yes. 22 Q. Let me show you the federal examination 10072 1 report, which is A11042. Would you turn to the 2 fourth page of A11042? 3 Do you see that, sir, where it says 4 "Examination as of date May 27, 1986"? 5 A. Yes. 6 Q. And that would have been the 7 examination we previously talked about that was 8 roughly parallel to your exam; is that right? 9 A. That would have been the date of their 10 entry, I believe. 11 Q. Okay. 12 MR. VILLA: Your Honor, we move A11042 13 into evidence. 14 MR. SCHWARTZ: Mr. Villa, is this the 15 complete report of examination? 16 MR. VILLA: It was presented and 17 identified by Mr. Twomey during his deposition as 18 such. I don't know whether -- 19 MR. SCHWARTZ: No objection. Based on 20 Mr. Villa's representation and the testimony of 21 Mr. Twomey, I'll offer no objection at this time. 22 MR. VILLA: Well, let's -- 10073 1 THE COURT: Received. 2 MR. VILLA: Your Honor, the Office of 3 Thrift Supervision certainly knows the key 4 examination report in this case. They don't have 5 to rely upon my representation. I'll simply say 6 that Mr. Twomey identified it as the examination 7 report; and if they want to take time to satisfy 8 themselves, I'll be willing to wait. 9 THE COURT: I received the document. 10 MR. VILLA: Thank you, Your Honor. 11 Q. (BY MR. VILLA) Now, sir, I want you 12 to have the examination report before you because 13 I'm going to ask you to assume, sir, that the 14 federal examiners did not reach the conclusion -- 15 strike that. 16 The federal examiners did not make any 17 comments as to whether or not loans that were 18 involved in this case were loans -- strike that. 19 I'm going to ask you to assume that the 20 federal examiners did not make any comment that 21 the transactions involved in this case were 22 possibly investments rather than loans. And if 10074 1 you want -- if you doubt my word, you have the 2 report in front of you. 3 MR. SCHWARTZ: Which transaction are 4 you referring to, Mr. Villa? 5 MR. VILLA: Well, I always wonder which 6 transactions are involved in this case; but right 7 now it's Park 410 and Norwood/United. 8 MR. SCHWARTZ: Also, regarding Exhibit 9 A11042, I notice that there is a page missing. It 10 is incomplete. It goes from Page 23 to Page 25, 11 for example. 12 MR. VILLA: I believe the custom -- 13 first of all -- 14 MR. BLANKENSTEIN: I have Page 24 in my 15 version. So, I can give it to Mr. Schwartz so he 16 can have a complete copy. 17 MR. EISENHART: Your Honor, I think if 18 he looks, they may be slightly out of order. 19 MR. VILLA: Page 23 and 24 are in 20 reverse order. The OTS produced these documents 21 to us, and they flipped Pages 23 and 24. 22 MR. SCHWARTZ: Your Honor -- 10075 1 THE COURT: All right. Let's move on. 2 If 23 and 24 becomes an issue, we'll take care of 3 it. 4 MR. VILLA: They are both in there. 5 They are simply in reverse order. Bates stamp 6 order, they are correct. 7 THE COURT: I see. 8 Q. (BY MR. VILLA) Now, sir -- 9 MR. RINALDI: Can I get another copy 10 from you? 11 MR. VILLA: Now, sir -- 12 MR. RINALDI: Can I get a copy of the 13 exam? It would be helpful to me if I could -- 14 MR. BLANKENSTEIN: Mr. Schwartz now has 15 two copies. I imagine you could have one of his. 16 MR. SCHWARTZ: I do not have two 17 copies. 18 MR. BLANKENSTEIN: Well, I gave you a 19 copy. That was my copy. 20 THE COURT: Mr. Rinaldi, do you have a 21 copy now? 22 MR. RINALDI: I do, sir. 10076 1 THE COURT: Okay. 2 Q. (BY MR. VILLA) Sir, did the -- in 3 this discussion back and forth with the federal 4 examiners, did they explain to you why they did 5 not raise any comment about whether or not these 6 loans should be classified as investments under 7 571.17? 8 MR. SCHWARTZ: Objection, Your Honor. 9 This is mischaracterizing the witness' testimony. 10 Mr. Cool has testified that these conversations 11 were general and that he had discussions with them 12 every day. He's not testified about any of the 13 specifics of any of those -- of any such 14 conversations or whether they even occurred. He's 15 making assumptions that these -- that these 16 occurred based on his practice. 17 THE COURT: I believe the question was 18 whether he did or not. 19 MR. SCHWARTZ: If I may, Your Honor, I 20 believe the question was whether the conversations 21 dealt with -- if I could have the question read 22 back, I think it would be more clear. 10077 1 MR. VILLA: Your Honor, I would be 2 happy to read the answer from his prior questions. 3 On Page 9877 in, I believe, response to questions 4 by -- 5 THE COURT: Do you have his deposition? 6 MR. VILLA: No. This is his trial 7 testimony. Page 9877 in response to his trial 8 testimony. I do not know if I have additional 9 copies. I'll be happy to read it. 10 MR. SCHWARTZ: I have a copy. 11 MR. VILLA: 9876, it starts, question, 12 "Did you communicate with each other?" This is 13 referring to the federal examiners. 14 Answer, "Oh, yes, on a daily basis." 15 Question, "Did you communicate with 16 each other concerning the findings that you had in 17 your examination?" 18 Answer, "It was my experience that 19 during examination, I tried to provide every piece 20 of material that we examined or, in this instance, 21 if we would write up a loan, a particular loan -- 22 and I meant 'write-up' by it sets out the terms 10078 1 and conditions the borrower's names and all of the 2 existing documents that are in the loan file." 3 Question, "Did the federal examiners 4 also communicate their findings with you?" 5 Answer, "Yes, they did." 6 Now, my question to him is: Did the 7 federal examiners communicate to you in these 8 findings that you have talked about in your direct 9 examination their reasons for not classifying 10 these loans or raising the question about the 11 classification of these loans as investments 12 rather than loans? 13 A. I don't remember, but it's been so long 14 ago. I am assuming that we did not. That's all I 15 can tell you. 16 THE COURT: You're assuming you did not 17 discuss these loans? 18 THE WITNESS: Well, we discussed the 19 loans, Your Honor. But I don't believe that we 20 got into technicalities involving whether it was a 21 loan or it was an investment. 22 THE COURT: All right. Thank you. 10079 1 Q. (BY MR. VILLA) In your deposition, 2 you testified that you're sure you would have 3 discussed this issue with the examiners. 4 Do you recall that? 5 A. Yes. 6 Q. In fact, it is a very difficult issue. 7 And that's the reason Mr. Von Minden's letter asks 8 United to have its accountants look at the issue. 9 Right? 10 MR. SCHWARTZ: Objection, Your Honor. 11 A. Yes. 12 MR. SCHWARTZ: Calls for speculation as 13 to Mr. Von Minden's reasons for writing whatever 14 he wrote. 15 THE COURT: Denied. 16 Q. (BY MR. VILLA) Now, sir, I'm going to 17 ask you to see if I can refresh your recollection 18 as to whether or not the auditors followed up on 19 your -- the request made by United -- strike 20 that -- followed up on the request made by the 21 Texas Savings and Loan Commission regarding 22 whether or not the Park 410 loan should be 10080 1 characterized as a loan versus an investment. 2 I'm going to show you what's been 3 marked here as Exhibit B1377. 4 MR. VILLA: Your Honor, we've produced 5 this document to the -- as an exhibit to the OTS. 6 So, they have had it now for four months. It's an 7 excerpt from the work papers of Peat Marwick. 8 Q. (BY MR. VILLA) I'm going to ask you, 9 Mr. Cool, to turn to Bates stamp No. CN190460. 10 Do you see that? It's about halfway 11 through. 12 A. Which number is that, please? 13 Q. In the lower right-hand corner, it says 14 CN190460. 15 A. Yes, I have it. 16 Q. And do you see an ADC loan review 17 worksheet -- 18 A. Yes. 19 Q. -- on the Park 410 West Joint Venture? 20 A. I do. 21 Q. And this would have been following 22 up -- this is what was requested in the Von Minden 10081 1 letter, that the auditors look at the question of 2 whether or not the loan in question here, the 3 Park 410 -- 4 MR. SCHWARTZ: I'm sorry. What page, 5 Counsel? Where are you? 6 MR. VILLA: 190460. 7 Q. (BY MR. VILLA) First of all, do you 8 see the Park 410 loan, Park 410 West Joint Venture 9 up at the top? 10 Do you see that, sir? 11 A. Yes, I do. 12 Q. Now, let's flip to the third page where 13 it says "evaluation." 14 Do you see that, sir? 15 A. Yes. 16 Q. Let me read it. Quote, "The valuation. 17 Does this loan qualify as a loan or a real estate 18 investment?" 19 Do you see that? 20 A. Yes, I do. 21 Q. And the text, as I read it, says, 22 "Although this loan has certain characteristics of 10082 1 an investment in real estate, funded fees and 2 interest carry and the loan as well as 25 percent 3 equity kicker, this loan is properly classified as 4 a loan due to, one, the excess appraisal value 5 and, two, the $10 million worth of letters of 6 credit pledged by the borrowers." And then there 7 is a little line underneath it and it says, quote, 8 "and because equity kicker is less than 9 50 percent." 10 Do you see that, sir? 11 A. I do. 12 Q. Now, is the analysis of this 13 association -- of this investment by United's 14 outside auditors exactly what was requested by 15 Mr. Von Minden in his letter? 16 MR. SCHWARTZ: Objection, Your Honor. 17 Again, calls for speculation as to what Mr. Von 18 Minden -- this is exactly the purpose of my 19 objection earlier with regard to what Mr. Von 20 Minden wrote in his letter. Mr. Cool was -- has 21 no way of knowing what Mr. Von Minden meant and 22 whether or not this is responsive to what 10083 1 Mr. Von Minden had in mind when he was asking for 2 it. 3 THE COURT: Well, I think this witness 4 should be able to tell whether this complies with 5 the request that was made. Denied. 6 Q. (BY MR. VILLA) Does it appear to you, 7 sir, to comply with the request that 8 Mr. Von Minden made? 9 A. Well, his statement is that the 10 association's auditors should review loans for 11 classification as investments versus loans 12 pursuant to generally-accepted accounting 13 principles. This appears to meet that fact or 14 that request. 15 Q. All right. 16 MR. VILLA: Your Honor, I move this 17 into evidence, B1377. 18 MR. SCHWARTZ: No objection, Your 19 Honor. 20 THE COURT: Received. 21 Q. (BY MR. VILLA) Now, sir, do you have 22 any basis for -- of your own knowledge for 10084 1 disputing the analysis by Peat Marwick on the loan 2 versus investment issue that we've just read? 3 A. No. They supposedly were versed in 4 GAAP, and it was the accounting principles that 5 was involved. So, I have no way of disputing 6 that. 7 Q. Now, sir, Mr. Cool, you testified 8 yesterday or I thought I heard you say 9 yesterday -- strike that. 10 I believe the substance of your 11 testimony yesterday was that Park 410 may have 12 been a substandard asset? 13 A. Yes, sir. 14 Q. You believe it was a substandard asset? 15 A. We felt that it was substandard because 16 of the risk involved. 17 Q. Now, is a substandard loan a scheduled 18 item? 19 A. No, it is not. 20 Q. Why don't you look at page -- let's go 21 back to your examination report, TX147. 22 Do you see "scheduled items" down at 10085 1 the bottom of that page? 2 A. Yes. 3 Q. And under the listing of scheduled 4 items, does it have substandard loans? Do you see 5 that, sir? 6 A. I see the substandard loans. I don't 7 know what that refers to. 8 Q. I understand. We'll figure out what it 9 refers to. But the question I had for you, sir, 10 is: Substandard loans are scheduled items as used 11 in this examination report. Right? 12 A. Apparently so. 13 Q. Now, let's look at the portion of your 14 examination report, Pages 243 through 246, which 15 is the Texas Savings and Loan Pages 243 to 246. 16 Do you see that, sir? 17 A. Yes. 18 Q. Now, I know you read it yesterday when 19 Mr. Schwartz handed it to you. And I suspect that 20 you read it once or twice in preparation for your 21 testimony, haven't you, sir? 22 A. That's correct. 10086 1 Q. Do the words -- this is the description 2 of the Park 410 West Joint Venture. Right? 3 A. Yes, it is. 4 Q. Do you see the words "substandard 5 asset" or "scheduled item" anyplace in the 6 write-up of the Park 410 West Joint Venture? 7 A. I don't recall seeing it, no. 8 Q. Let's turn back to Page 164, Texas 9 Savings and Loan Page 164. 10 Do you see that? 11 A. Yes. 12 Q. And that's substandard assets. Do you 13 see that? 14 A. Yes, I do. 15 Q. Let's read the second sentence, which I 16 believe Mr. Schwartz read with you yesterday. It 17 reads, quote, "These assets are composed of loans 18 with appraisal reports which do not meet the 19 requirements of Memorandum R-41B and" -- and -- 20 "for which the security value is questionable." 21 Do you see that, sir? 22 A. I do. 10087 1 Q. I read the word "and" twice just so you 2 understand. 3 Now, let's now go back to -- under the 4 definition used here, which is consistent with the 5 definition that you're familiar with for 6 substandard assets -- right? 7 A. Yes. 8 Q. -- it has to have problems in the 9 documentation and security value being 10 questionable. Right? 11 A. Yes. 12 Q. Now, let's turn to your write-up again 13 of the Park 410 loan, 243 to 246. 14 Do you see any place in that write-up, 15 sir, where it says that the security value is 16 questionable? 17 A. I don't see that exact statement, no. 18 Q. You don't? Let me direct your 19 attention -- let's go to the next loan just to see 20 a comparison, which is the Willowbrook West loan 21 that starts on Texas S&L Page 246. 22 Do you see that? 10088 1 A. Yes. 2 Q. Let's look at Willowbrook West and go 3 to Page 248, which is the conclusion on the 4 Willowbrook West loan. And I will take about 5 4 inches down from the top of the page. 6 Do you see the paragraph that starts 7 with "this loan"? 8 A. Yes. 9 Q. I'll read it. "This loan is classified 10 as a scheduled item due to being refinanced while 11 matured/delinquent. Also, the value of the 12 subject property was not adequately supported by 13 an appraisal." 14 Do you see that, sir? 15 A. Yes. 16 Q. In the write-up of the Willowbrook West 17 loan, there are criticisms of the underwriting and 18 it determines that the security value was not 19 supported by an appraisal. Right? 20 A. Yes. 21 Q. And it's identified as a scheduled 22 item. Right? 10089 1 A. That's correct. 2 Q. And none of those appear in the Park 3 410 West write-up, do they, sir? 4 A. No. 5 Q. Now, sir, if you had classified the 6 Park 410 West loan as substandard in your 7 examination report and it had not been paid off 8 during the course of the examination, based upon 9 your experience as an examiner, would you expect 10 that this loan would show up in the next Texas 11 Savings and Loan examination report? 12 A. I have no idea. 13 Q. You have no idea? Well, there are a 14 couple of possibilities. First of all, if you had 15 put it in there and it didn't show up on the next 16 report as substandard, either, A, the other 17 examiner disagreed with your analysis of the loan 18 or, B, the loan got a lot better before the next 19 exam. 20 You can't think of any other 21 possibility, can you? 22 A. That's very possible. 10090 1 Q. Let me show you the next examination 2 report, sir. I've handed you what's been marked 3 as A11141. It's the Texas Savings and Loan 4 examination report as of August 31st, 1987, that 5 was shown to you in your deposition. 6 Do you have that before you? 7 A. Yes, I do. 8 MR. VILLA: Your Honor, we move A11141 9 into evidence. 10 MR. SCHWARTZ: Again, Your Honor, 11 assuming its completeness, no objection. 12 THE COURT: Received. 13 Q. (BY MR. VILLA) Sir, I put a tab -- 14 because the pagination from this is pretty poor -- 15 under the summary of substandard assets. 16 Have you got that tabbed page? 17 A. Yes. I have it before me. 18 Q. And for the record, it's also Page 9A 19 of that report, but it's hard to see. Let me ask 20 you to look at the summary of substandard assets. 21 Do you see the Park 410 loan there, 22 sir? 10091 1 A. I don't believe it's there. 2 Q. You see Chapel Creek, for example. 3 That's one of the ones that's in your write-up. 4 Right? 5 A. Yes. I see that. 6 Q. Now, sir, we talked about the two 7 possibilities -- strike that. 8 We talked about the fact that if the 9 Park 410 West Joint Venture loan didn't show up as 10 a substandard asset in the next Texas Savings and 11 Loan report, there are a couple of reasons why it 12 might not have. 13 One reason that it might not have is 14 that the loan had improved dramatically in value 15 and, consequently, the next examiner looking at it 16 would have come to a different conclusion than you 17 did. Right? 18 A. Yes. 19 Q. Based upon your knowledge of the Texas 20 economy between April of 1986 and August of 1987, 21 did the Texas economy improve dramatically? 22 A. As I recall, it was improving. 10092 1 Q. So, it's possible that you classified 2 it as substandard, although we don't see it in 3 your examination report anyplace, and by the time 4 of the August 1987 exam, it had improved to the 5 point where it was no longer substandard; is that 6 right? 7 MR. SCHWARTZ: Your Honor, there is no 8 indication that the state examiners even looked at 9 the Park 410 loan in their examination the 10 following year. Mr. Cool has indicated that he 11 didn't speak to them. He had no connection with 12 the institution following its -- following the 13 completion of his examination. He just doesn't 14 know. Mr. Villa is filling the witness' mouth 15 with words and asking him to agree to things 16 that -- it's just complete speculation. 17 THE COURT: Well, it's pretty clear 18 from the state examination that it was not rated 19 substandard in that examination; isn't that true? 20 MR. SCHWARTZ: In which examination, 21 Your Honor? 22 THE COURT: '87. 10093 1 MR. SCHWARTZ: We don't know whether 2 they even looked at it in the '87 examination. 3 That's the point. There is no indication whether 4 they even looked at it, and this witness doesn't 5 know. 6 MR. VILLA: Your Honor, they presented 7 him as an expert. Mr. Schwartz spent an hour and 8 a half of our time telling us about his knowledge 9 of examination procedures. And about 25 minutes 10 ago, I asked him whether, in his experience, 11 examiners who looked at an association like this 12 would look at the biggest loan in the association. 13 And he answered "yes." 14 So, I think it's a fair inference that 15 they looked at it in the 1987 examination report 16 and didn't conclude it was substandard. 17 Q. (BY MR. VILLA) Isn't that the 18 inference you draw based upon all your years of 19 experience as an examiner, sir? 20 MR. SCHWARTZ: To the contrary, Your 21 Honor -- 22 MR. VILLA: Could I have an answer from 10094 1 the witness instead of having these arguments from 2 counsel? 3 MR. SCHWARTZ: Well, I think that we're 4 in the middle of an objection. And so, I'm 5 responding to Your Honor's question as well as 6 Mr. Villa's response to the objection. And 7 concerning that, the witness has testified he 8 doesn't know -- he doesn't know whether they 9 looked at anything beyond his involvement with the 10 institution or not. Furthermore, we have not 11 provided him as an expert witness. We stated that 12 in our motion to quash the subpoena that was 13 served for his deposition. And we've stated it, 14 as well, in letters to counsel in leading up to 15 that -- in leading up to that subpoena. 16 MR. VILLA: Your Honor, they asked him 17 questions all day yesterday about "based upon your 18 experience as an examiner this. Based upon your 19 experience as an examiner that." 20 I'm asking this man not based upon what 21 he knows -- because I know he didn't get involved 22 in the 1987 examination. But based upon his 10095 1 experience as an examiner, using words from 2 Mr. Schwartz' lexicon, don't you believe that the 3 1987 state examiners looked at the Park 410 loan? 4 THE COURT: All right. I'm going to 5 allow an answer to that, Mr. Schwartz. Your 6 objection is denied. 7 Can you answer it? 8 THE WITNESS: Yes, sir. I can answer 9 that. 10 A. The only way it would have been 11 rereviewed would be if it was delinquent, past 12 due, matured, in this nature. The examination 13 procedures at that time included examinations of 14 loans that were made from one examination to the 15 next. After the -- my examination, this loan 16 would not have been re-reviewed, to my knowledge, 17 unless there was a problem of being delinquent, 18 past due, or anything in that nature. 19 Q. (BY MR. VILLA) Well, we saw the 20 Chapel Creek that showed up in your examination 21 showed up in this examination, too, didn't we? 22 A. Yes, sir. But it showed up as a 10096 1 scheduled item, I believe. 2 Q. Substandard asset. Right? It's right 3 in front of you, sir. Right? 4 A. Yes. 5 Q. Okay. 6 MR. VILLA: Your Honor, this next 7 portion of my questioning is going to take about 8 15 minutes. I'd be happy to do it now, or I'd be 9 happy to take a break now. It's going to be a 10 long continuous set of questions. 11 THE COURT: Let's proceed. 12 MR. RINALDI: Excuse me. I'm sorry. I 13 thought we were breaking. 14 Q. (BY MR. VILLA) You told us yesterday 15 that Mr. Graham's memo didn't persuade you to 16 change any of Jeff Nunn's conclusions in the 17 appraisal; is that right? 18 A. Yes. 19 Q. Mr. Graham's memo did persuade you to 20 change some of the conclusions about the land 21 flip. Is that also right? 22 A. That is correct. 10097 1 Q. And you don't recall making any other 2 changes based upon David Graham's memo, do you, 3 sir? 4 A. Not offhand. 5 Q. I'd like to focus you on some of the 6 changes that deal with the issue of value in the 7 appraisal. I want you to take a look at 8 Mr. Nunn's original write-up, which is 7501. 9 Do you have that? 10 A. I don't believe so. Wait a minute. I 11 do have it. I'm sorry. It was on the bottom of 12 this pile here. 13 Q. I'd like you to now turn to 7502, which 14 is your examination report, and Texas Savings and 15 Loan Page 243. 16 Have you got them both there for me? 17 A. Yes. 18 Q. Now, I'm going to compare these two 19 documents line by line as they relate to the 20 appraisal and the appraisal discussion. And what 21 I've done is I have marked that as a new exhibit, 22 which is B4164, and I'll give you and the Court a 10098 1 copy. 2 4164 is another copy of Mr. Nunn's 3 write-up on the Park 410 West Joint Venture, isn't 4 it? 5 A. Yes. 6 Q. And it's got the Exhibit No. T7501 7 struck through it. Right? 8 A. That's correct. 9 Q. Now, what I've done on 4164 is if you 10 turn to about the sixth page, I have marked in 11 black certain deletions from the appraisal 12 analysis that Mr. Nunn did. And I'm going to ask 13 you certain portions, actually, in Mr. Nunn's 14 appraisal write-up. And I'm going to ask you, 15 sir, whether these portions that I've marked in 16 black of Mr. Nunn's write-up on the appraisal made 17 it into the final report. 18 MR. RINALDI: Excuse me, Mr. Villa. 19 Since this is a modified document that we've never 20 been given before, could you provide me with a 21 copy, as well? I can't fish this out of any 22 existing file we have, that I'm aware of. 10099 1 MR. VILLA: Please give Mr. Rinaldi a 2 copy of the document. 3 4 (Whereupon Mr. Rinaldi was 5 handed a copy of the exhibit.) 6 7 MR. RINALDI: What page were you 8 directing his attention to? 9 MR. VILLA: Let's take a look at 10 Page 1564277. 11 Q. (BY MR. VILLA) Do you see that in 12 Mr. Nunn's write-up on your right? It starts with 13 a review of the 2-17-86 appraisal prepared by 14 Edward Schulz. And I'd like you to compare it to 15 Page -- Texas Savings and Loan Page 246. And 16 about 1 inch down on that page -- 17 A. I'm sorry. I can't get to the correct 18 pages here. 19 Q. I'll get it for you, sir. You got it? 20 A. Yeah. Thank you. 21 Q. Now, I'd like you to take a look at the 22 information that I have put in a box on 10100 1 Page 156427 of Mr. Nunn's write-up -- that's 2 Exhibit B4164. And starting with the word 3 "furthermore, the appraiser states" -- do you see 4 that? 5 A. Yes, I see it. 6 Q. It reads "Furthermore, the appraiser 7 states his purpose is estimating the fair market 8 value of the proposed development as if sold to 9 one purchaser which, again, suggests the need for 10 using the income approach." 11 Do you see those words, sir? 12 A. I do. 13 Q. And can you look and see whether they 14 appear in Mister -- in the final examination 15 write-up? 16 A. I don't believe it's there. 17 Q. Okay. So, I've accurately marked that 18 box. Right? 19 A. Yes, sir. 20 Q. Let's turn to the next page of 21 Mr. Nunn's report, 156428. Now, I put in a box 22 the word "the appraiser appears to have used poor 10101 1 comparables in that." 2 Do you see those words in the box? 3 A. Yes. 4 Q. Do you see any statement that says, 5 quote, "the appraiser appears to have used poor 6 comparables in that"? Do you see those words 7 appear in the final write-up? 8 A. I don't believe so. 9 Q. They have been stricken, haven't they, 10 sir? 11 A. Yes. 12 Q. Now, the third box that I have marked 13 is -- reads, quote, "This has caused distortion 14 when subjecting the subject property to the 15 assumptions. The aggregate present value of the 16 33 tracts may, therefore, be overstated which, 17 when discounted for marketing expense and holding 18 time, may indicate an overvaluation of the 19 undeveloped property." 20 Do you see that, sir? 21 A. Yes, I do. 22 Q. And do those words show up anyplace in 10102 1 the final examination report? 2 A. No, I don't believe so. 3 Q. Now, flip the page to Bates stamp 4 No. 156429 on Exhibit B4164. There is one more 5 paragraph. It reads, quote, "In this case, the 6 examiners feel that the quality of the appraisal 7 and possibly its conclusions is the primary 8 weakness of the loan. To ensure a sound value for 9 the undeveloped property, notwithstanding the fact 10 that the loan has land flip characteristics, 11 another appraisal may become necessary (to be 12 submitted)." 13 Do you see that, sir? 14 A. Yes, I do. 15 Q. Do you see those words in the final 16 write-up? 17 A. No. 18 Q. So, I've accurately marked, at least in 19 the appraisal portion of this -- I didn't go 20 through and edit the entire examination. But in 21 the appraisal portion of this, I've accurately 22 marked those portions that appear in Mr. Nunn's 10103 1 write-up that don't make it into the final 2 examination report. Right? 3 A. Yes. 4 MR. VILLA: Your Honor, I move B4164 5 into evidence. 6 MR. SCHWARTZ: No objection, Your 7 Honor. 8 THE COURT: Received. 9 Q. (BY MR. VILLA) Now, someone, sir, 10 deleted from Mr. Nunn's write-up the statements 11 regarding the question -- strike that. 12 Someone deleted from Mr. Nunn's 13 write-up the portion in which he suggested that 14 the value of the property was in question; isn't 15 that right, sir? 16 A. Yes. 17 Q. We've just seen that. Somebody also 18 deleted from his write-up the statement that the 19 appraiser appeared to have used poor comparables. 20 Right? 21 A. Yes. 22 Q. Do you have a recollection of having 10104 1 deleted those references from his write-up, sir? 2 A. I have no recollection, no. 3 Q. You recounted to us yesterday in detail 4 your discussions with Mr. Nunn as he came in and 5 reviewed things, and you recalled those pretty 6 well. Right? 7 A. Yes, to a point. 8 Q. Now, sir, isn't it true that you 9 wouldn't have the appraisal expertise, personally, 10 to make a judgment on whether or not Mr. Nunn's 11 statement about the value of the collateral was 12 right or wrong? 13 A. I'd have to agree with that. 14 Q. Now, you told us yesterday that there 15 are only two places after Mr. Nunn gets done with 16 his examination, his write-up of a loan, that it 17 can be changed. One, you could change it. And 18 two, it could be changed back in the office. 19 Right? 20 A. That's correct. 21 Q. So, if the procedures that you 22 described yesterday were followed, the deletion of 10105 1 this appraisal, these provisions from the 2 appraisal, and particularly the ones that deal 3 with the value of the security, were done back in 4 the office of the Texas Savings and Loan 5 Commission; isn't that right? 6 A. I would assume that, yes. 7 Q. There would be no other explanation for 8 it; isn't that right, sir? 9 A. Yes. At this time, that would be. 10 Q. And that would mean that your superiors 11 in this case would need to gather enough 12 information about the appraisal to make a judgment 13 about value; isn't that right? 14 A. I would assume so. 15 Q. And one way they could do that is 16 through an appraisal review process like the one 17 you talked to us about yesterday. Do you remember 18 the appraisal review process yesterday? 19 A. Yes. 20 Q. Do you recall, sir, whether an 21 appraisal review was performed on the Park 410 22 loan? 10106 1 A. I have no idea. 2 Q. You have no idea. Why don't you turn 3 to your examination report, Page 24 -- Texas 4 Savings and Loan No. 000241. 5 Do you see that, sir? 6 A. Yes. 7 Q. You have it in front of you? 8 A. I'm at 241. 9 Q. About a half an inch above Chapel Creek 10 Ranch Joint Venture -- do you see that? 11 A. Yes. 12 Q. The words appear, quote, "Two projects 13 ($120 million in loans) have been recommended for 14 appraisal review," close quote. 15 Do you see that, sir? 16 A. Yes. 17 Q. Does that refresh your recollection 18 that the Park 410 loan was sent for appraisal 19 review? 20 A. It does now, but at the point -- at 21 that time when I had finished my examination, I 22 had no idea whether or not they were going to send 10107 1 in these for reappraisal or for review. 2 Q. And if you take a look at Mr. Nunn's 3 write-up, the last words he's got there is "to be 4 submitted." 5 Do you remember that? 6 A. Yes, sir. 7 Q. And that confirms your belief that the 8 Park 410 loan was submitted for appraisal review. 9 Right? 10 A. That notation refers to our 11 determination that we should submit it to the 12 office for their determination. 13 Q. I see. 14 THE COURT: Where it states -- excuse 15 me, Mr. Villa. Where it states here that these 16 loans have been recommended for appraisal review, 17 who was making that recommendation? 18 THE WITNESS: Your Honor, to my 19 knowledge, that would have been made by the 20 supervision division in Austin. 21 THE COURT: And who are they 22 recommending it to? 10108 1 THE WITNESS: As I recall, at that 2 point in time, our recommendations were sent on to 3 the Federal Home Loan Bank and then they again 4 made their reviews and decided if they were going 5 to reappraise the property or not. 6 THE COURT: I'm still not clear. 7 Who -- whose recommendation is this stated in the 8 examination report? 9 THE WITNESS: The wording that's in 10 this examination on Page 241 is not, to my 11 knowledge, my writing. I can then only assume 12 that it was added in the office under review. 13 THE COURT: So, your review examiners 14 are making this recommendation? 15 THE WITNESS: Yes, sir. 16 THE COURT: And who are they making it 17 to? 18 THE WITNESS: As I recall, we did not 19 do reevaluations of properties through the State 20 of Texas, the Savings and Loan Department. They 21 were made by the Federal Home Loan Bank. 22 THE COURT: Okay. Excuse me, 10109 1 Mr. Villa. 2 MR. VILLA: Thank you, Your Honor. 3 Q. (BY MR. VILLA) So, as I understand 4 it -- and this is consistent with the procedure 5 you said yesterday -- appraisers -- I'm sorry -- 6 appraisals were from time to time submitted for 7 appraisal review and they went back to the Federal 8 Home Loan Bank of Dallas for their review. Right? 9 A. Yes, sir. 10 Q. Now, sir, we have seen that Mr. Nunn's 11 description of the value of the security property 12 was deleted and that it was deleted sometime after 13 you finished your examination but before the 14 examination was transmitted to the association in 15 November of 1986. Right? 16 A. Right. 17 Q. Isn't it clear to you that the deletion 18 was done in the office of the supervision -- of 19 the Texas Savings and Loan Commission as the 20 result of the appraisal review which you have just 21 described? 22 MR. SCHWARTZ: Objection, Your Honor. 10110 1 I think that calls for speculation. Again, this 2 is -- he's talking about things that -- he's 3 making assumptions based on experience but not -- 4 nothing to do with this particular transaction. 5 This is just rank speculation that he's asking 6 for. 7 MR. VILLA: Your Honor, he's identified 8 a procedure which he says he follows. And there 9 is no way that this could have been changed -- 10 I'll ask the witness the question. 11 Q. (BY MR. VILLA) You can't think of any 12 other basis, can you, sir, that the senior 13 supervisors would have a view about the value of 14 the security other than another review of the 15 appraisal. Right? 16 MR. SCHWARTZ: Objection. Calls for 17 speculation, Your Honor, as to what the senior 18 supervisors had in mind. He testified that he 19 does not know what happened once this -- once this 20 report left his hands on September 12th. He 21 testified several times he does not know what 22 happened to it after it went back up to Austin. 10111 1 THE COURT: Well, the question was 2 whether he could think of another explanation. I 3 think you can answer that. 4 THE WITNESS: No. 5 Q. (BY MR. VILLA) Now, sir, when the -- 6 let me ask you to pull out Mr. Von Minden's letter 7 again. That's Exhibit A11140. Mr. Von Minden's 8 letter of November 19, 1986. 9 Do you see that, sir? 10 A. Yes. 11 Q. And this is the letter that would have 12 transmitted the report to the association. Right? 13 A. That's correct. 14 Q. And you finished your work 15 September 12, 1986; so, it would have been two 16 months and a week after you finished your report 17 that it was being reviewed in the offices in 18 Austin. Is that where the Texas Savings and Loan 19 Commission is? 20 A. Yes, that's correct. 21 Q. Before it's sent out. Right? 22 A. That's correct. 10112 1 Q. Now, let's turn to the section about 2 the four loans on Page 3. That's Bates stamp 3 No. 123421. 4 Do you see that, sir? 5 A. Yes. 6 Q. And under "Chapel Creek Joint 7 Venture" -- do you see that now? 8 A. I do. 9 Q. It says, quote, "We have become" -- I'm 10 not going to read it all. I'm just going to read 11 portions of it. "We have become concerned about 12 your investment in this project. The as-is 13 appraised value is indicated to be $33 million 14 which, in our opinion, appears to be currently too 15 high," close quote. 16 Do you see that? 17 A. Yes. 18 Q. So, they express a view on the 19 appraisal here, Mr. Von Minden does. Right? 20 A. I see that, yes. 21 Q. Let's jump to the Willowbrook West, 22 Ltd. 10113 1 Do you see that, sir? 2 A. Yes. 3 Q. It says, quote, "It appears that the 4 appraisal report was defective due to excluding 5 certain assumptions relative to development. We 6 wish to be informed about whether or not this 7 project is currently being developed. If not, an 8 updated appraisal should be obtained to determine 9 the current value of the land," close quote. 10 Do you see that? 11 A. Yes. 12 Q. And Remington Partners. It says, 13 quote, "Because the examiner's comments relative 14 to this loan, we think it would be a good idea to 15 have this property (Remington Hotel) reappraised," 16 close quote. 17 Do you see that, sir? 18 A. I do. 19 Q. Now, sir, what does it say about Park 20 410 West Joint Venture? 21 A. It doesn't mention the appraisal -- 22 Q. Doesn't mention the appraisal? 10114 1 A. -- if that's what you're asking. 2 Q. The biggest loan that United ever made, 3 Mr. Von Minden writes a letter about four loans. 4 On three of them he raises specific appraisal 5 questions and on Park 410 he doesn't, does he, 6 sir? 7 A. No. 8 Q. Now, sir, you told us yesterday -- and 9 you told Judge Shipe again today -- that appraisal 10 reviews for the Texas Savings and Loan Commission 11 were carried out by the Federal Home Loan Bank 12 Board in Dallas. Right? 13 A. As I recall, that was the procedure, 14 yes. 15 Q. And so, federal regulators could also 16 benefit from it. Right? 17 A. Right. 18 Q. Based upon your experience, sir, based 19 upon your experience, if an appraisal had been 20 reviewed by the Federal Home Loan Bank of Dallas 21 and the review had resulted in no weaknesses that 22 were material to the value of the property, would 10115 1 you expect an appraisal criticism in the federal 2 examination report? 3 MR. SCHWARTZ: Objection, Your Honor. 4 Calls for speculation. 5 THE COURT: Denied. You may answer. 6 A. I would assume it wouldn't if they 7 found that it was not deficient to the point where 8 it required a comment or a reappraisal. 9 Q. (BY MR. VILLA) Do you know, sir, 10 whether the parallel Federal Home Loan Bank Board 11 examination report on the Park -- strike that. 12 Do you know, sir, whether the parallel 13 Federal Home Loan Bank of Dallas examination 14 report, A11042, contains a criticism of the 15 Park 410 appraisal? 16 A. I don't recall seeing it. 17 Q. It's not in there, is it, sir? 18 A. No. 19 Q. Finally, sir, as I recall from your 20 deposition, you seem to recall clearly dealing 21 with only two individuals at United in connection 22 with the examination: Jenard Gross and Jim 10116 1 Pledger. Right? 2 A. That is correct. 3 Q. And you said that again today. I'm 4 sorry. Again yesterday. Right? 5 A. Yesterday, yes. 6 Q. You said you had a great deal of 7 contact with Mr. Gross. Right? 8 A. Yes, sir. 9 Q. And you've described Mr. Gross as 10 concerned, wanted to do what was right, and very 11 cooperative. 12 Do you remember that, sir? 13 A. I do. 14 Q. As to Mr. Pledger, you said you 15 submitted all requests through him; is that right? 16 A. Yes. 17 Q. And you told us, I think, in your 18 deposition that while you were dealing with him 19 with respect to requests, USAT may have been 20 trying to hide some delinquency reports on the 21 Couch loans that you had requested from USAT. 22 Do you remember that, sir? 10117 1 A. I don't recall the wording as "hide." 2 I don't -- as I remember, it was a delinquency 3 report that I didn't receive. 4 Q. Weren't you critical of the fact that 5 you didn't receive it? 6 A. Yes. 7 Q. So, as I see it, the OTS has sued 8 Mr. Gross in this lawsuit for many millions of 9 dollars; isn't that right, sir? 10 MR. SCHWARTZ: Objection. 11 A. I have no idea. 12 Q. (BY MR. VILLA) And Mr. Pledger's been 13 made the Texas Savings and Loan Commissioner; 14 isn't that right, sir? 15 A. That is correct. 16 MR. VILLA: I don't have any further 17 questions for this witness. Thank you. 18 THE COURT: We'll take a short recess. 19 20 (A short break was taken 21 at 10:30 a.m.) 22 10118 1 THE COURT: Be seated, please. We'll 2 be back on the record. 3 Mr. Blankenstein, you have some 4 cross-examination? 5 MR. BLANKENSTEIN: I do, Your Honor. 6 7 CROSS-EXAMINATION 8 9 (10:57 a.m.) 10 Q. (BY MR. BLANKENSTEIN) Good morning, 11 Mr. Cool. My name is Paul Blankenstein, and I 12 represent Jenard Gross in this proceeding. 13 You testified yesterday that you met on 14 a regular basis with Mr. Gross during the course 15 of the examination on a weekly basis; is that 16 right? 17 A. As I recall, it was either a weekly or 18 a bi-weekly. 19 Q. And I think you told Mr. Villa today 20 you came away from those meetings with Mr. Gross 21 with the general impression that Mr. Gross was 22 concerned, he wanted to do the right thing, and he 10119 1 was very cooperative in connection with the 2 examination; is that right? 3 A. That's correct. 4 Q. You discussed during the course of 5 those meetings various issues that came up during 6 the course of the examination; is that right? 7 A. Yes. 8 Q. You discussed real estate matters 9 during the course of that examination -- those 10 meetings? 11 A. Yes. 12 Q. Did you find Mr. Gross to be 13 knowledgeable about real estate matters that you 14 discussed? 15 A. I don't actually remember. 16 Q. Did you know -- do you remember what 17 Mr. Gross' background was? 18 A. No. I had no idea what his background 19 was. 20 Q. If you could pick up Exhibit T7501, 21 which is Mr. Nunn's handwritten notes or draft 22 examination report. 10120 1 Do you have it there? 2 A. This one? 3 Q. No. T7501. 4 A. Which one is it here? The one that's 5 crossed out? This one? Oh, okay. 6 Q. If you would, turn to the last page of 7 that exhibit. 8 A. Yes. 9 Q. And do you see the statement, 10 "Management feels that the borrowers have brought 11 strength to the transactions, both financially as 12 well as by reputation"? 13 A. I see it. 14 Q. And I think yesterday, you attributed 15 that statement to Mr. Gross; is that right? 16 A. As I recall, that was for Mr. Gross. 17 Q. And I think you said you weren't sure 18 what support Mr. Gross had offered in connection 19 with that statement; is that right? 20 A. I believe so. 21 Q. And isn't the support set forth later 22 on on that very page with a list of the borrowers 10121 1 and their respective financial condition? 2 A. Yes. It appears on this page. 3 Q. And it shows a combined net worth of 4 the borrowers on the Park 410 loan of $82 million? 5 A. It does. 6 Q. And of that $21 million in cash? 7 A. Yes. 8 Q. Would you agree that the chart provides 9 support for Mr. Gross' statement that the 10 borrowers on the Park 410 loan brought financial 11 strength to the transaction? 12 A. I'd have to agree with that. 13 Q. If I remember correctly yesterday, you 14 said you were living in San Antonio in 1986; is 15 that right? 16 A. That is correct. 17 Q. Were you aware that Stanley Rosenberg, 18 who's one of the borrowers on the Park 410 19 transaction -- were you aware that he was well 20 known in the San Antonio real estate community and 21 was involved in many real estate projects? Were 22 you aware of that fact? 10122 1 A. No, not to that extent. 2 Q. Were you aware that he was a well-known 3 attorney in San Antonio during the time? 4 A. Yes. 5 Q. Were you aware that he was involved in 6 real estate transactions? 7 A. Not really. 8 Q. Were you aware of Mr. John Grieshaber? 9 A. Only by name. 10 Q. And were you aware that he was one of 11 the named principals in the brokerage firm of 12 Grieshaber and Roberts? 13 A. I don't remember that I knew that at 14 that time until, of course, during the 15 examination. 16 Q. Do you know that now? 17 A. Yes. 18 Q. And does the brokerage firm of 19 Grieshaber and Roberts have a good reputation in 20 the San Antonio real estate community? 21 A. I have no idea. 22 Q. But you would have no reason to dispute 10123 1 Mr. Gross' statement, would you, that they brought 2 strength to the transaction by their reputation in 3 the real estate community in San Antonio; is that 4 right? 5 A. No. I have nothing to -- that would go 6 against that statement. 7 Q. If you could turn to Exhibit 7500, 8 which was admitted into evidence yesterday. It is 9 the major loan review form that Mr. Nunn -- 10 A. Yes, I have it. I'm sorry. 11 Q. Do you have that, sir? 12 A. Too many items here. 13 Q. Okay. We'll try and keep this as 14 simple as possible. 15 I believe you testified yesterday that 16 the absence of a check box in the left-hand column 17 next to line item "attorney's opinion or title 18 policy" indicated the absence of any title 19 insurance policy or that Mr. Nunn was unable to 20 find any such policy in the files of USAT when he 21 filled out this form; is that right? 22 A. Yes. But I believe I also added the 10124 1 fact that if, at a later date, that information 2 was found, he could have failed to make a notation 3 on this review sheet. 4 Q. And he found such information; isn't 5 that right? 6 A. Apparently so. 7 Q. And why don't you take a look at your 8 report, 7502, which is the examination report. 9 And if you turn to Texas Savings and Loan 244, 10 which is the Bates stamp number, you'll see in the 11 middle of the page the paragraph that begins "the 12 title company's receipt"? 13 A. Yes. 14 Q. So, that shows that Mr. Nunn did locate 15 title policies; is that right? 16 A. Apparently so, yes, sir. 17 Q. Isn't it true, Mr. Cool, that there 18 were many title policies in connection with the 19 Park 410 loan? 20 A. I honestly don't remember at this point 21 in time. 22 Q. Okay. Why don't we take a look at 10125 1 what's been previously marked as Exhibit B3844 and 2 admitted into evidence, which is under Tab 775A. 3 Now, that version is the version that appeared in 4 USAT's files of the closing binder of -- for the 5 Park 410 loan. 6 There doesn't appear to be a copy of 7 that in the exhibits in front of you. So, we're 8 using the equivalent, with Mr. Schwartz' 9 permission, which is 7130, which is another 10 version of that closing binder. 11 MR. BLANKENSTEIN: Is that okay with 12 you, Mr. Schwartz? 13 MR. SCHWARTZ: Yes, it is, with the 14 understanding that we have the opportunity to go 15 back and look at the tabbed version, which we 16 don't have here, of the -- was it an "A" exhibit? 17 MR. BLANKENSTEIN: It is B3844. 18 MR. SCHWARTZ: Okay. And -- 19 MR. BLANKENSTEIN: This was introduced 20 into evidence during Mr. Graham's testimony. And 21 at that time, OTS made the same request. 22 Apparently, they have not yet reviewed that 10126 1 exhibit to determine its completeness. But with 2 that understanding, Mr. Schwartz -- 3 MR. SCHWARTZ: You're welcome to use 4 7130 for whatever purpose you want on 5 cross-examination, Mr. Blankenstein. 6 MR. RINALDI: What is the tab number? 7 THE COURT: Which exhibit are we 8 talking about? Are we talking about B3844 or -- 9 MR. BLANKENSTEIN: Yes, Your Honor. 10 THE COURT: All right. 11 MR. BLANKENSTEIN: There was not 12 another copy in the courtroom for the witness, 13 however. The exact same closing binder with the 14 information is set forth in Exhibit 7130. So, 15 simply for the purposes of my pointing the witness 16 to certain documents in that exhibit, we're going 17 to use 7130 for the witness. But I will be 18 referring to 3844. 19 THE COURT: That's the one I have 20 before me? 21 MR. BLANKENSTEIN: Yes, Your Honor. 22 Q. (BY MR. BLANKENSTEIN) And I think you 10127 1 have the first volume in front of you. If you'd 2 take a look at Tabs 3 through 7, can you verify 3 that those -- in those tabs are different title 4 policies? Tab 3 is the First American Insurance 5 Company title policy; is that right? 6 A. Yes. 7 Q. And in Tab 4 is one from Safeco Title 8 Company? 9 A. Safeco. 10 Q. And Tab 5 from Commonwealth Title? 11 A. Yes, sir. 12 Q. Tab 6 from Tycor Title? 13 A. Yes. 14 Q. Tab 7 from Stewart Title? 15 A. I find those. 16 Q. Would you agree with me, Mr. Cool, 17 there was an abundance -- a virtual cornucopia of 18 title insurance in this transaction? 19 A. Yes, sir. 20 Q. Mr. Cool, you said yesterday, I 21 believe, that had you been aware that USAT had a 22 50 percent interest in Mr. Rosenberg's 50 percent 10128 1 interest in Park 410, you would have made note of 2 that in the exam report; is that right? 3 A. I believe I would have, yes, if I had 4 known any of the details. 5 Q. You weren't suggesting, were you, 6 Mr. Cool, that information in that regard was not 7 available to you during your examination of USAT 8 in 1986, are you? 9 A. Not -- no, it wasn't made available. 10 But I have no -- at this point in time, I have no 11 reason to believe that it was hidden. 12 Q. And, in fact, it was made available to 13 you, wasn't it? 14 A. I don't remember. 15 Q. I believe you told Mr. Villa that as a 16 regular part of the examination process, the 17 examiners would go back and review the various 18 reports and minutes of committees of USAT, 19 including the real estate investment committee; is 20 that right? 21 A. That was part of our procedure, yes. 22 Q. And you would have reviewed those 10129 1 committee -- those minutes and reports from the 2 time of the last examination up until April 30th, 3 1986; is that right? 4 A. Yes. 5 Q. I'd like to point you to Exhibit A1643, 6 which is at Tab 159. 7 A. All right. 8 MR. BLANKENSTEIN: And Your Honor, this 9 is already in evidence. 10 Q. (BY MR. BLANKENSTEIN) This is the 11 report of the March -- the March 18th, 1985 report 12 of the USAT real estate investment committee 13 dealing with the Park 410 property. 14 Mr. Cool, could you read the first 15 sentence of the first paragraph on the first page 16 of that report under "proposal" out loud into the 17 record, please? 18 A. "To enter into a partnership with 19 Stanley Rosenberg and this partnership shall then 20 become a venturer in Park 410 West Joint Venture." 21 Q. So, this is a report that Mr. Nunn 22 would have read in connection with his normal 10130 1 review of the minutes and reports of the real 2 estate investment committee of USAT; isn't that 3 right? 4 A. I can only assume at this time that he 5 should have. 6 Q. Let me also point you, if you would -- 7 I'm going to show you in the binders that we have 8 in front of you -- point you to Tab 75 of 9 Exhibit 3844. 10 A. All right. 11 Q. And that's entitled "termination 12 agreement," is it not? 13 A. Yes, it is. 14 Q. And it purports to terminate an 15 agreement between USAT and Mr. Rosenberg, correct? 16 A. Yes. 17 Q. And that is a joint venture agreement 18 in connection with the Park 410 property; is that 19 right? 20 A. That's what it appears to be. 21 Q. And in the second "whereas" clause, it 22 says that "Whereas pursuant to the agreement, 10131 1 United advanced certain sums and incurred certain 2 expenses in connection with the predevelopment 3 work for the property." 4 Do you see that? 5 A. Yes, sir. 6 Q. And then it goes on to say in the next 7 "whereas" clause that "Rosenberg and United 8 desired to terminate all of the terms and 9 provisions of the agreement and any relationship 10 between Rosenberg and United formed thereby to 11 provide for the reimbursement to United of 12 expenses incurred by United in connection with or 13 pursuant to the agreement." 14 Isn't that right? 15 A. That's what it says, yes. 16 Q. And if we turn the page to US5836, we 17 see the next document in the tab is a nineteen -- 18 March 28th, 1985 letter agreement between 19 Rosenberg and USAT establishing a joint investment 20 in Park 410; is that right? 21 A. Yes. 22 Q. Now, Mr. Nunn, during the course of his 10132 1 examination of the Park 410 loan, would have 2 reviewed the closing binder that was prepared in 3 connection with that; is that right? 4 A. I would think so. 5 Q. So, he would have learned during the 6 course of that review of this relationship -- 7 isn't that right -- between Mr. Rosenberg and 8 USAT? 9 A. If he, in fact, did review it. 10 Q. So, this information was available to 11 you; isn't that right? 12 A. Yes, sir. 13 Q. Now, let's go back to your state 14 examination report for a moment, sir. 15 A. Are we going to return to this part of 16 the -- 17 Q. We might. You might want to just close 18 the book, but just hold it in front of you. And 19 if we can turn to Page 244 of the Texas -- it's 20 TXS&L 244. 21 A. Yes, I have it. 22 Q. And on the bottom part of the page, it 10133 1 sets forth the disbursements that had been made 2 with regard to the loan. 3 A. Yes, sir. 4 Q. And there is -- it says on the last 5 item on the list of -- on the list is an escrow; 6 is that right? 7 A. Yes. 8 Q. Of $1.3 million; is that right? 9 A. That's correct. 10 Q. And there is a footnote; is that right? 11 A. There is. 12 Q. And it says, "actual purpose not 13 determined"? 14 A. Yes. 15 Q. Let's see if we can solve the mystery. 16 If you turn to Tab 44 of the exhibit -- of the big 17 binder, the closing binder. Do you have Tab 44, 18 Mr. Cool? 19 A. Yes. 20 Q. And if you can turn to -- 21 A. Is that titled "collateral agreement"? 22 Is this the right tab? 10134 1 Q. Let's make sure. Yes. I'm sorry. You 2 were at the right place. I apologize. You need 3 to turn in a few pages to what would be Bates 4 stamp 5194. 5 MR. BLANKENSTEIN: Mr. Perry, if you 6 could point him to the right place. It's -- the 7 document is entitled "Platting Fee Escrow 8 Agreement." 9 Q. (BY MR. BLANKENSTEIN) Do you see 10 that? 11 A. Yes, I do. 12 Q. And if you look down in the third full 13 paragraph, you'll see the amount of the escrow. 14 Is it $300,000? Is that right? 15 A. I see it. 16 Q. And if you turn to the next document in 17 the file, which is 5197 Bates stamp, it's entitled 18 "FEMA escrow agreement." 19 Do you see that? 20 MR. SCHWARTZ: I believe the witness' 21 version does not contain a Bates stamp -- does not 22 contain the Bates stamp that you're referring to. 10135 1 A. Yes, I have it. 2 Q. (BY MR. BLANKENSTEIN) Do you see a 3 document entitled "FEMA escrow agreement"? 4 A. I do. 5 Q. And if you look in the third paragraph, 6 can you tell us what the amount of that escrow is? 7 A. This states $1 million. 8 Q. And if I'm right, my math is right, 9 300,000 plus 1 million is $1.3 million? 10 A. Yes, sir. 11 Q. Have we solved the mystery of the 12 undetermined escrow on the disbursement? 13 A. Apparently so. 14 Q. I'm going to ask you to turn back to 15 your report, which is 7502. If we look again 16 under the description of disbursements, I think 17 yesterday you testified in connection with some 18 questions posed to you by Mr. Schwartz that 19 payments to Mr. Rosenberg to Grieshaber Roberts 20 and to Gulf Management might have raised some 21 questions because they were borrowers under the 22 loan; is that right? 10136 1 A. Yes, sir. 2 Q. But the report doesn't contain any 3 criticisms of those payments; is that right? 4 A. That's correct. 5 Q. Is that because perhaps Mr. Nunn was 6 able to find in the files of USAT the reasons for 7 why those payments were made to Gulf Management, 8 Mr. Rosenberg, and Grieshaber and Roberts? 9 MR. SCHWARTZ: Objection. Calls for 10 speculation. 11 THE COURT: Denied. 12 Q. (BY MR. BLANKENSTEIN) Would that be 13 your conclusion, sir? 14 A. That's possible. 15 Q. Why don't we take a look at Tab 59 of 16 the exhibit you have before you, which is the 17 closing binder. 18 A. All right. I have it. 19 Q. And this is -- it's entitled "Amended 20 and restated Park 410 West Joint Venture"; is that 21 right? 22 A. That's correct. 10137 1 Q. And if you turn to the sixth page of 2 the agreement, which is Bates stamp 5484 -- I 3 don't think you have Bates stamps, but if you can 4 turn to Page 6 of the agreement. 5 Do you have that Page 6? 6 A. Yes, sir. 7 Q. And the section there is Section 2.06 8 which provides compensation of the managing 9 venturer and manager; is that right? 10 A. Yes. 11 Q. And it makes reference to payments to 12 be made to Gulf; is that right? 13 A. Yes, it does. 14 Q. And if you look at the last paragraph 15 of that section, does it make reference to 16 payments to be made to Mr. Rosenberg? 17 A. It refers to continuing management 18 fees. Is this the paragraph that you -- 19 Q. The last paragraph of Section 2.06. 20 A. I beg your pardon. Yes. "In 21 addition"? 22 Q. Yes. It makes reference to payments to 10138 1 be made to Mr. Rosenberg? 2 A. Yes. I see it. 3 Q. And if we now look at Section 2.07, 4 which begins on that page and follows onto the 5 next page, it makes reference to payments to 6 Grieshaber and Roberts in connection with their 7 activities as a broker, does it not? 8 A. Yes. 9 Q. And does that indicate to you that 10 Mr. Nunn would have reviewed this document as part 11 of his review of the loan file and concluded that 12 the payments were justified or that there was no 13 cause for complaint with regard to payments made 14 to those parties? 15 MR. SCHWARTZ: Objection, Your Honor. 16 Calls for speculation as to Mr. Nunn's conclusion. 17 THE COURT: Denied. 18 A. At this point, I can only assume, yes, 19 that he reviewed that and made that determination. 20 MR. BLANKENSTEIN: I have no further 21 questions of this witness. Thank you, Mr. Cool. 22 THE WITNESS: Yes, sir. Thank you. 10139 1 THE COURT: Mr. Eisenhart, do you have 2 some questions? 3 MR. EISENHART: I do, Your Honor. I 4 have just a few. 5 6 CROSS-EXAMINATION 7 8 (11:20 a.m.) 9 Q. (BY MR. EISENHART) Good morning, 10 Mr. Cool. 11 A. Good morning. 12 Q. My name is Frank Eisenhart, and I 13 represent MAXXAM, Inc., which is a respondent in 14 this case. 15 I believe you testified in response to 16 Mr. Villa's questions that you have met on several 17 occasion with his the OTS lawyers in connection 18 with your testimony in this matter; is that 19 correct? 20 A. Yes. 21 Q. I think you said you met with them for 22 a day back in September when they first contacted 10140 1 you? 2 A. I believe it was September when I flew 3 to Washington. 4 Q. All right. Then your deposition was 5 taken in the case in November, was it not? Early 6 November? 7 A. Yes. 8 Q. And did you meet with them again prior 9 to your deposition? 10 A. Only when I flew up there and went over 11 to the OTS building and we went from there to the 12 deposition. 13 Q. Okay. And then you met with them again 14 prior to your testimony here in the courtroom -- 15 A. Yes. 16 Q. -- did you not? And was this generally 17 with Mr. Schwartz and Mr. Leiman? Were they the 18 people you met with as a rule? 19 A. Yes. 20 Q. Now, in the course of your meetings 21 with Mr. Schwartz and Mr. Leiman, did they show 22 you copies of the notice of charges in this case? 10141 1 A. Yes, sir. 2 Q. And did they explain to you the various 3 theories that the OTS is advancing in this case 4 against different parties and different 5 respondents? 6 A. I don't recall that. 7 Q. They didn't give you any kind of an 8 overview as to what the case is about? 9 A. Perhaps in a general form; but to be 10 honest about it, it probably passed over my head 11 there was so much involved. 12 Q. They did give you copies of the notice 13 of charges or sections of the notice of charges 14 for you to read? 15 A. Yes, sir. 16 Q. And that's part of the preparation you 17 did for your testimony here? 18 A. And I reviewed it briefly. 19 Q. Now, back in 1986 when you were doing 20 your examination of United Savings Association of 21 Texas, were you familiar with the ownership of 22 that institution? 10142 1 A. I'm not really sure that at that time 2 we got into the ownership all the way into holding 3 companies and thereafter. 4 Q. Well, were you aware that USAT was 5 owned by a holding company called United Financial 6 Group? 7 A. I believe I was. 8 Q. And did you pay any attention in the 9 course of your examination to the ownership of 10 United Financial Group, the holding company? 11 A. Not particularly, no. 12 Q. So, that wasn't really something you 13 got into? 14 A. No, sir. At that point in time, I 15 believe the State of Texas was not doing 16 examinations of holding companies and the other 17 entities. 18 Q. So, in the course of your examination 19 then, you would have made no determinations as to 20 who owned or who might have controlled 21 United Financial Group? 22 A. I don't recall doing that, no, sir. 10143 1 Q. Now, during the course of your 2 testimony yesterday, you were asked by 3 Mr. Schwartz if you were aware that Stanley 4 Rosenberg was a director of a company called MCO 5 Holdings, Inc. 6 Do you remember that? 7 A. Yes. 8 Q. Is MCO Holdings, Inc. a company you 9 were familiar with back in 1986? 10 A. I suppose. 11 Q. Well, how did you become aware that 12 Stanley Rosenberg was a director of MCO Holdings? 13 A. I would imagine that it was in part due 14 to items and documents that we received through 15 questionnaires and this. 16 Q. Might this have been something that the 17 OTS lawyers mentioned to you or brought up during 18 the conversations you had with them in the course 19 of your work on this case? 20 A. It may have, yes. 21 Q. Now, you also said in your testimony 22 yesterday -- and I'll read you your exact words. 10144 1 Well, the question was: "If you had known that 2 Mr. Rosenberg was on the board of directors of MCO 3 Holdings, would that have been significant to you 4 in your report of examination?" 5 And you answered, "I believe, yes, it 6 would have been. It would have been something 7 that should have been included in the write-up of 8 the loan, as well as on one of the 9 questionnaires." 10 Do you remember giving that testimony 11 yesterday? 12 A. Yes. 13 Q. Did you ever look into the background 14 of the various people who were involved in the 15 Park 410 loan to see what their backgrounds were? 16 A. Not that I'm aware. 17 Q. Are you aware of whether your 18 assistant -- Mr. Nunn, was it, who did the loans? 19 A. Yes. He was the one that reviewed the 20 loans. 21 Q. Do you know whether he made a practice 22 of looking at the background information, the 10145 1 financial reports, credit histories, things of 2 that sort to see what information was available on 3 the borrowers? 4 A. I can only assume that if it was 5 available, he would have reviewed it. 6 Q. Now, you said that Mr. Rosenberg's 7 directorship in MCO should have been disclosed on 8 the management questionnaire; is that correct? 9 A. Yes, I believe so. 10 Q. Okay. Would you turn to Exhibit T7502, 11 which is your Texas S&L report? And I'll refer 12 you particularly to the page which is in the lower 13 right-hand corner Texas S&L 000169. 14 A. I have it. 15 Q. Now, is that the management 16 questionnaire that you referred to in your 17 testimony yesterday? 18 A. Yes, sir. 19 Q. Tell me which of the questions on that 20 report you believe calls for the fact that 21 Mr. Rosenberg was a director of MCO Holdings. 22 A. In this officer's questionnaire it, in 10146 1 part, asks for information concerning loans. I 2 believe it would be Question 15. 3 Q. Question 15 -- 4 A. But I'm not exactly sure how we treated 5 this questionnaire then. 6 Q. Now, Question 15 says, "List all loans 7 granted to officers or directors or to 8 stockholders owning 10 percent or more of the 9 stock of other financial institutions." 10 A. I beg your pardon. That's the wrong 11 number. There should be another one. 12 Q. Okay. 13 A. I would -- it appears to indicate that 14 12 or 13 would have something to do with the 15 substance of the question. 16 Q. Okay. So, No. 12 says, "Has any 17 officer, director, principal stockholder, 18 attorney, or employee received any fees or 19 commissions with respect to the granting of loans? 20 If so, explain in detail." 21 Now, I assume that that refers to 22 officers, directors, principal stockholders, 10147 1 attorneys, or employees of the institution. Would 2 I be correct? 3 A. I believe that's correct. 4 Q. Would Mr. Rosenberg have fallen into 5 any of those categories? 6 A. I don't believe so. 7 Q. Okay. Now, you've made reference to 8 No. 13, as well. No. 13 says, "Has the 9 association granted loans to any of its officers, 10 directors, controlling stockholders, attorneys, or 11 employees?" 12 Mr. Rosenberg wouldn't fall into any of 13 those categories, would he? 14 A. No, he wouldn't. 15 Q. So, it would appear that his 16 relationship as a director of MCO Holdings would 17 not have been called for by either No. 12 or 18 No. 13. 19 Would you agree with that? 20 A. You are correct. 21 Q. Is there any other question in that 22 questionnaire that you can point me to that would 10148 1 have called for disclosure of that information? 2 A. Offhand, no. 3 Q. Now, you were also asked by 4 Mr. Schwartz yesterday whether you knew what MCO 5 Holdings, Incorporated was. The exact question 6 is: "Do you know what MCO Holdings, Incorporated 7 is?" 8 Your answer was, "It's the corporation 9 that controlled the institution." 10 Do you remember saying that? 11 A. I believe so. 12 Q. Did you ever make any investigation 13 into the relationship between MCO Holdings and 14 either United Savings or United Financial Group? 15 A. Not that I recall. 16 Q. What was your basis for saying that you 17 believed it's the corporation that controlled the 18 institution? 19 A. I believe there is a page of the report 20 that lists affiliates, and it would have -- should 21 have been listed there, I think. Without looking, 22 I couldn't definitely say. 10149 1 Q. Well, "control" is a term of art within 2 the S&L regulatory field, is it not, Mr. Cool? 3 A. Yes. 4 Q. And you're familiar with the statutes 5 and regulations that deal with the issues of 6 control, are you not? 7 A. Not as much as I was 10 years ago. 8 Q. Well, let me ask you this: When you 9 gave that answer yesterday, were you saying, based 10 on any kind of an analysis of statutes or 11 regulations, that MCO controlled this institution? 12 A. I don't believe so, other than the fact 13 that it would have been in one of the 14 questionnaires or we would have received some 15 information to which it would go into the 16 examination report. 17 Q. Let me ask you this, Mr. Cool: Might 18 this suggestion that MCO controlled the 19 institution, might that have been some of the 20 information or some of the suggestions given to 21 you by the OTS lawyers during your meetings with 22 them? 10150 1 A. I don't believe so. Generally 2 speaking, if you have a control group, it controls 3 the institution and subsidiaries thereof. 4 Q. And what is your -- what is your basis 5 for saying that MCO either was part of a control 6 group or controlled the institution? Where did 7 you get that information? 8 A. I have no idea. It's something that I 9 may have addressed looking through the examination 10 report or some of the paperwork. I'll be honest. 11 I don't remember. 12 Q. Well, do I take from that then that 13 your use of the word "control" yesterday was a 14 loose use of that term? 15 A. Without verifying, yes, any specifics. 16 Q. Okay. Thank you. 17 MR. EISENHART: I have no further 18 questions, Mr. Cool. 19 THE WITNESS: Thank you. 20 THE COURT: Are there any other 21 questions from the respondents? 22 MR. KEETON: No, Your Honor. 10151 1 MR. DUEFFERT: No, Your Honor. 2 THE COURT: Do you have some redirect, 3 Mr. Schwartz? 4 MR. SCHWARTZ: I do, Your Honor. 5 THE COURT: All right. Proceed. 6 MR. SCHWARTZ: I see that the hour is 7 11:30 now. I would appreciate it if I could have 8 a few moments to gather my notes. There has been 9 extensive cross-examination both yesterday and 10 today. Perhaps if we could break early for lunch 11 and come back at 1:00 o'clock so that I could have 12 a moment -- so that I could have time to do that. 13 Otherwise, I would request a short break now so 14 that I can -- 15 THE COURT: All right. We'll adjourn 16 until 1:00 o'clock. 17 MR. SCHWARTZ: Thank you, Your Honor. 18 19 (Luncheon recess taken at 11:33 a.m.) 20 21 THE COURT: Be seated, please. 22 We'll be back on the record. I believe 10152 1 we're going to have redirect by Mr. Schwartz. 2 MR. SCHWARTZ: Correct, Your Honor. 3 4 REDIRECT-EXAMINATION 5 6 (1:05 p.m.) 7 Q. (BY MR. SCHWARTZ) Mr. Cool, in the 12 8 years' experience that you had working for the 9 Federal Home Loan Bank Board from 1968 to 1980, in 10 addition to your experience prior to the USAT 11 examination in 1986 with the Texas State Savings 12 and Loan Department, had you had opportunity to 13 review appraisals? 14 A. Yes. 15 Q. Did you review a lot of appraisals? 16 A. Yes. Normally, we appraised -- looked 17 at appraisals during every examination, whether 18 they be single-family or commercial. 19 Q. So, over the course of your experience 20 prior to the USAT examination, how many appraisals 21 would you say that you had had an opportunity to 22 review? 10153 1 A. A great many. 2 Q. I'm sorry? 3 A. Over -- 4 Q. A thousand perhaps? 5 A. Perhaps. 6 Q. Despite the fact, Mr. Villa pointed 7 out, that you don't have a designation of MAI -- I 8 think it's member of the Appraisal Institute -- 9 would you know a bad appraisal if you saw one? 10 MR. VILLA: Objection. "Bad 11 appraisal"? Could you be a little more specific 12 in the case, Your Honor? 13 MR. SCHWARTZ: I think the question is 14 fairly straightforward, Your Honor. 15 MR. VILLA: Your Honor, it isn't 16 straightforward. There are two issues here: The 17 question of conformity to R-41B and the question 18 of whether or not the value of the security is 19 presented. Those questions have been displayed 20 very carefully in the examination -- in my 21 cross-examination, and I object to the question. 22 MR. SCHWARTZ: I think Mr. Villa raises 10154 1 a very good question that I will ask. 2 Q. (BY MR. SCHWARTZ) In your experience, 3 would you recognize an appraisal that failed to 4 conform with R-41B? 5 A. Yes. 6 Q. I realize that 1997 is 11 years or even 7 more after the time that you were working on the 8 1986 examination of USAT. However, in 1986, would 9 you have been aware of who the directors and 10 officers of United Savings were? 11 A. Yes. 12 Q. And would you also have been aware of 13 who Mr. Graham was and what his role was at the 14 institution? 15 A. I'm sure I would have. 16 Q. Also, I believe you testified that -- I 17 don't know if this was a misstatement or not -- 18 that you had not -- that you had not done safety 19 and soundness exams for more than 10 years or 20 better than 10 years? 21 A. That is correct. 22 Q. When was the last -- when did you last 10155 1 do safety and soundness examinations. Let me ask 2 you this: When did you start doing compliance 3 examinations? 4 A. In November of 1989. 5 Q. So, is it since then that you have not 6 done safety and soundness examinations? 7 A. That is correct. 8 Q. So, it's less than 10 years? 9 A. Approximately 10 years, yes. 10 Q. Well -- 11 A. Eight. 12 Q. Eight years. Okay. So, it was not 13 immediately following the United Savings 14 Association examination that you suddenly switched 15 to doing some other type of examination? 16 A. No. 17 Q. Okay. Mr. Villa asked you some 18 questions about whether the failures and 19 deficiencies of USAT's books and records were 20 caused by the flood of homeowner defaults in the 21 mid-1980s. 22 Do you recall that? 10156 1 A. Yes. 2 Q. I think he asked you several questions 3 about that. 4 Do you recall? 5 A. I remember that. 6 Q. And I think your answer was "I don't 7 know that I would agree with that." 8 Do you remember saying that, that the 9 failures of USAT's books and records were caused 10 by the flood of homeowner defaults in the 11 mid-Eighties? 12 A. I believe, at that time, we were 13 talking about the real estate owned parcels. 14 Q. Okay. Why did you disagree with 15 Mr. Villa when he suggested that the only reason 16 that the -- that the books and records were 17 deficient at USAT was because of a flood of 18 homeowner defaults in the mid-1980s? 19 A. Well, although there was an abundance 20 of foreclosures and acquisitions of real estate, I 21 would expect an institution to at least keep their 22 records up to date. 10157 1 Q. And in addition to the books and 2 records regarding home ownership defaults, were 3 the books and records of the institution 4 concerning other areas other than homeowner 5 defaults in good order? 6 A. I really don't remember. 7 Q. Let me ask you this: Is a flood of 8 homeowner defaults -- and I'm using Mr. Villa's 9 word -- a flood of homeowner defaults an 10 indication of any kind of general economic trend 11 in your opinion? 12 A. Yes, it's possible. 13 Q. Why do you say that? 14 A. If we are speaking of that particular 15 year, then the economies were bad. And 16 particularly in Houston. 17 Q. Were you -- would you also say -- I 18 recognize that this is 11 years later. Were you 19 more familiar in 1986 with the federal safety and 20 soundness regulations than you are today? 21 A. Oh, definitely. 22 Q. Mr. Villa showed you Exhibit B4161. If 10158 1 you could pull that out. Do you have that in 2 front of you? 3 A. Yes, I do. 4 Q. That's B4161? 5 A. That's correct. 6 Q. This is a list of the federal examiners 7 that worked on the federal examination; is that 8 right? 9 A. As well as the independent auditors 10 that assisted them. 11 Q. I notice that there are some empty 12 boxes next to some of the names after the fourth 13 name -- 5, 6, 7, 8, 9 and continuing on to the 14 next page, 10 through 17. 15 What do those empty boxes indicate? 16 A. They indicate to me that that 17 particular person was not on the examination at 18 that particular date. 19 Q. So, did the -- so, the first four -- 20 you said that there were four examiners that 21 started the examination. 22 Were these additional people that were 10159 1 brought in later to help the examiners, the CPAs? 2 A. I don't recall if they came in -- 3 apparently, they did not come in the same date 4 because they have no time on the sheet. So, I 5 would assume that the federal examiners, as 6 indicated on this sheet, were the only ones that 7 appeared on the premises. 8 Q. And would you look on the second page, 9 Nos. 12 -- or excuse me -- 13, 14, 15, 16, and 17. 10 The total hours for this period is zero; is that 11 right? 12 A. Yes. 13 Q. What does that indicate? 14 A. That those people did not appear or 15 that there was no charge for their time. I have 16 no idea. 17 Q. Okay. Well, let me ask you this: Does 18 this -- Mr. Villa used this exhibit to suggest 19 that there were 17 federal examiners and CPAs on 20 the examination at this point in time. 21 Do you reach the same conclusion. 22 MR. VILLA: Excuse me. Which point in 10160 1 time are you directing him to? 2 MR. SCHWARTZ: Well, the period that's 3 covered by the exhibit, which is May 27th through 4 June 25th. 5 MR. VILLA: Thank you. 6 A. Well, as indicated by this time sheet, 7 there were periods where only partial appearance 8 was made. And then there are several names where 9 no hours were charged at all. 10 Q. (BY MR. SCHWARTZ) So, there weren't 11 17 people? 12 A. Apparently not. 13 Q. Mr. Villa also referred you to your 14 report of examination, Exhibit 7502. And on the 15 last page of that examination -- I believe it was 16 Page 293, TXS&L 293. 17 A. Yes. 18 Q. He asked you some questions concerning 19 the rating composites for each overall category. 20 Do you recall that? 21 A. Yes. 22 Q. And then with regard to the "M" rating 10161 1 or management rating, Mr. Villa asked you 2 specifically questions -- if certain records of 3 the institution were provided or created by old 4 management, suggesting management prior to the 5 respondents' control of the institution as opposed 6 to the current management -- strike that. 7 The composite rating that you provided 8 for the "M" category, management category, was 9 that based solely on books and records of the 10 institution, or were there other factors that 11 entered into that, as well? 12 A. This overall factor is from 13 observations as well as books and records and 14 reviews of various loans and whatever. 15 Q. It's an overall -- 16 A. Yes. 17 Q. -- opinion? 18 A. That's correct. 19 Q. Is it based solely on books and records 20 that may have been created by management prior to 21 the respondents taking over the institution? 22 A. No. This rating is -- or represents 10162 1 what I -- was my opinion the rating was at that 2 particular time when I made the examination. 3 Q. Based on everything that you saw? 4 A. Yes. 5 Q. And for the "A" category, the asset 6 quality category, Mr. Villa pointed out 7 specifically the issue regarding goodwill. 8 Do you recall that? 9 A. Yes, I do. 10 MR. VILLA: Objection. Misstates the 11 testimony. My questions had to do with -- 12 MR. SCHWARTZ: I didn't mean to 13 misstate your testimony. 14 MR. VILLA: -- had to do with capital. 15 Goodwill was discussed with Mr. Cool in connection 16 with capital, but don't let me interfere with your 17 examination too much. 18 Q. (BY MR. SCHWARTZ) Concerning the 19 capital section of the examination, do you recall 20 him asking you questions concerning goodwill? 21 A. Yes, I do. 22 Q. And what did you rate goodwill? Excuse 10163 1 me. What did you rate the capital portion of your 2 MACRO? 3 A. A 4. 4 Q. Was goodwill the only factor that you 5 considered in making that determination that USAT 6 was -- deserved a 4 rating? 7 A. Actually, the capital adequacy in the 8 trend, the net worth compliance and whatever, has 9 to do with the total that's on their books. We 10 did actually -- as I recall, did not take into 11 consideration goodwill. 12 Q. So, goodwill had nothing to do with the 13 capital rating that you gave it? 14 A. Not to my knowledge. 15 Q. It was based on other things? 16 A. Yes, sir. 17 Q. And regarding the "risk" section of 18 your MACRO overall rating, I believe he asked you 19 some questions concerning interest rate risk. 20 A. Yes. 21 Q. Was interest rate risk the only factor 22 that went into your rating the institution a 4 for 10164 1 the risk category? 2 A. No. 3 Q. Also, Mr. Eisenhart asked you some 4 questions concerning what you meant by "control" 5 of the institution, a term of art from the 6 regulations. And I believe you said you couldn't 7 recall where you might have read about MCO's 8 control of the institution. You testified that 9 you read the notice of charges. 10 Is it possible that that's where you 11 saw the reference to the institution's control? 12 A. Yes, it is possible. 13 Q. Mr. Villa also showed you 14 Exhibit B1377, which if you pull that out, it's 15 the accountants' -- some accountants' worksheets. 16 MR. SCHWARTZ: May I approach the 17 witness, Your Honor? 18 THE COURT: Yes, you may. 19 THE WITNESS: Yes. Here it is. 20 Q. (BY MR. SCHWARTZ) Mr. Villa 21 specifically pointed you to Page CN190460 through 22 462. 10165 1 Do you have those pages? 2 A. Yes. 460 -- 3 Q. -- 0 through 462. 4 A. Yes. I have them. 5 Q. And he read a portion of that into the 6 record on Page 462. Well, first of all, did you 7 participate in the auditor's review that -- from 8 which these were compiled? 9 A. Of course not. 10 Q. Do you know if this was the auditor's 11 final conclusion regarding whether the Park 410 12 should be booked as a loan versus an investment? 13 A. The only thing I can say, that's what 14 it appears to be in this review. However, this is 15 my first time seeing it. 16 Q. Okay. Would you turn to the pages 17 Bates marked CN190456, which is towards the end of 18 the document actually, through 459? It's the -- 19 five pages from the back of the document. 20 A. Now I have it. 21 Q. Okay. Would you take a look at those 22 pages? Is that your write-up of the Park 410 loan 10166 1 taken out of the Texas Savings and Loan Department 2 examination? 3 A. It appears to be that, yes. 4 Q. Would you turn to Page CN190459, which 5 is the last page of that write-up? And do you see 6 some handwriting that's written next to the 7 discussion where you say "The review also 8 disclosed that USAT retained a 25 percent profit 9 participation in the loan. The profit 10 participation, along with the following items, 11 indicate that this loan has the characteristics of 12 real estate investment and/or joint venture." And 13 then there is some handwriting next to the three 14 items. 15 A. Yes, I see that. 16 Q. Okay. Does that appear to you to say 17 "agree"? 18 A. It appears to say "agree." 19 Q. Thank you. 20 A. And then it references some page. 21 MR. VILLA: I'd like to have the 22 witness read the entire thing, if he can. 10167 1 THE WITNESS: "See," I believe, 2 "conclusion on 2-" -- there is another 2, and it 3 looks like a "-5." 4 MR. VILLA: Looks like "249-3." 5 MR. SCHWARTZ: I don't read it that 6 way. It appears to be "24," perhaps "5-3," 7 Mr. Villa. Suffice it to say, it's illegible. 8 THE WITNESS: This copy here doesn't 9 show the 4 clearly. 10 Q. (BY MR. SCHWARTZ) Suffice it to say 11 that the number is illegible? 12 A. Yes. I can see the 2 and possibly the 13 5, but the number in between I can't make out for 14 sure. 15 Q. Do you know what conclusion the 16 auditors reached? 17 A. Only the one that I read previously. 18 Q. That's the one that you testified that 19 you didn't know if it was the final conclusion? 20 A. No. That's the one that Mr. Villa and 21 I spoke about on Page CN190462 on evaluation. 22 Q. Right. My question -- I'm sorry. I 10168 1 may not have asked it clearly -- is -- I think you 2 said that this is the first time you've seen this 3 document? 4 A. Yes. 5 Q. Do you know from the auditor's work 6 papers whether this is the final decision of an 7 auditor -- 8 A. I have no idea. 9 Q. Mr. Villa also pulled out the 1987, I 10 believe it was, State of Texas Savings and Loan 11 Department examination. 12 A. Yes. 13 Q. When was the first time you ever saw 14 this? 15 A. I saw it, I believe, at my deposition, 16 if memory serves me correctly. 17 Q. So, that was in 1997, September? 18 A. Yes. 19 Q. Or excuse me -- November? 20 A. November. 21 MR. VILLA: November 1997. 22 Q. (BY MR. SCHWARTZ) And Mr. Villa 10169 1 tabbed a page for you to look at concerning some 2 substandard assets. You don't need to pull it 3 out. 4 I took an opportunity during lunch to 5 look for where there were any discussions of any 6 loan reviews in this, and I didn't find any. 7 Are there different scope of 8 examinations that are performed for savings and 9 loans by the Texas State Department or were there 10 some exams different from others? 11 A. Generally speaking, the exam would be 12 or would include all areas. 13 Q. Okay. Would you -- then go ahead and 14 pull that out and take a moment to flip through it 15 and tell me if you can find any discussion of any 16 reviews of major loans or write-ups. 17 A. (Witness reviews the document.) A 18 quick review, there does not appear to be any 19 write-ups on -- concerning loans or reviews of 20 loans. 21 Q. So, do you know if the -- in 1987 -- 22 the examiners made any review of the loans -- of 10170 1 the major loans or the loans that you had reviewed 2 in the previous examination? 3 A. I have no idea. 4 Q. Concerning your -- one of the items in 5 the MACRO -- excuse me -- one of the factors in 6 the MACRO management category was books and 7 records. There has been some discussion 8 concerning books and records. I want to talk to 9 you about that for a minute. 10 Your general impression was that the 11 institution got a 4 rating? 12 A. That's correct. 13 Q. What was it about the books and records 14 of the institution specifically that you can 15 recall that led you to that conclusion to rate the 16 institution a 4 in that factor? 17 A. Generally, that would be the absence of 18 records. 19 Q. What do you mean? 20 A. Well, it could refer to several 21 different areas. The accounting records, real 22 estate owned, anything that was reviewed, this 10171 1 would -- this is or was my opinion of how their 2 books and records appeared. 3 Q. And Mr. Blankenstein, during his 4 examination, showed you Exhibit A1643. Would you 5 pull that out, sir? It's the March -- it's a 6 document dated March 18th, 1995, real estate 7 investment committee memorandum. 8 A. Would you repeat that number again? 9 Q. A1643. 10 MR. SCHWARTZ: May I approach him, Your 11 Honor? 12 THE COURT: Yes. 13 THE WITNESS: I have it here. 14 Q. (BY MR. SCHWARTZ) Okay. Would you 15 turn to the last page of that exhibit? 16 A. I have it. 17 Q. Okay. Who on the real estate 18 investment committee signed that document? 19 A. David Graham. 20 Q. Is this document dated? 21 A. No. 22 Q. Other than what appears on the -- 10172 1 what's typed in? 2 A. I see only "1985" on that page. 3 Q. Would seeing a -- 4 MR. BLANKENSTEIN: Excuse me, Your 5 Honor. My copy of the exhibit -- and I believe 6 this is the one in evidence -- shows March 28th, 7 1985. 8 MR. SCHWARTZ: I don't believe this is 9 the one in evidence. 10 THE COURT: My copy has March 18th on 11 the last page -- March 28th. Excuse me. 12 MR. SCHWARTZ: Okay. The copy I was 13 handed by Mr. Villa during Mister -- Your Honor? 14 THE COURT: Pardon? 15 MR. SCHWARTZ: The copy that I was 16 handed by Mr. Villa during the cross-examination 17 has only one signature on it. 18 THE COURT: Well, there was a 19 substituted copy offered on the 29th October, 20 according to our dates, and that is dated 21 March 28th, 1985 and has Mr. Gross, Childress, 22 Graham, and Williams signed. 10173 1 MR. SCHWARTZ: Okay. If that's the one 2 in evidence, Your Honor, that's fine. 3 MR. VILLA: For what it's worth, I 4 didn't give it to you. It might have been 5 Mr. Blankenstein. I didn't examine him on this 6 issue. 7 MR. SCHWARTZ: Okay. Nevertheless, the 8 signed version is what's been received. 9 Q. (BY MR. SCHWARTZ) Do you know, sir, 10 if -- you testified about the books and records of 11 the institution and the missing documents. 12 Do you know if this approval was in the 13 books -- the minutes of the institution that 14 Mr. Nunn would have reviewed, this document, 15 Exhibit A1643? 16 A. I have no idea at this time. 17 Q. Based on your experience, would the 18 books and records of the institution -- strike 19 that. 20 Mr. Blankenstein also pulled out from 21 those binders, Volumes 1, 2, and 3 of 22 Exhibit 7130, corresponding to Exhibit -- 10174 1 MR. BLANKENSTEIN: 34 -- 2 MR. SCHWARTZ: B3844. Thank you, 3 Mr. Langdon. 4 Q. (BY MR. SCHWARTZ) Do you know if the 5 loan file that Mr. Nunn reviewed contained the 6 70 some odd tabbed documents that are contained in 7 those three binders, the closing binders? 8 A. I have no idea. 9 Q. So, when Mr. Blankenstein showed you 10 the receipts and disbursement statement and 11 suggested that it was there for Mr. Nunn's -- for 12 Mr. Nunn to see, do you know whether, in fact, it 13 was there? 14 A. No, I do not know as a fact. 15 Q. And Mr. Blankenstein also showed you 16 several title policies, and I believe they were at 17 Tabs 4, 5, and 6 of the binders. 18 Do you know if those were in the loan 19 file that Mr. Nunn reviewed? 20 A. I do not know. 21 Q. Mr. Blankenstein also pointed out at 22 Tab -- I believe it was Tab 59 -- a termination 10175 1 agreement. 2 Do you recall that? 3 A. Yes. 4 MR. BLANKENSTEIN: I believe that was 5 at Tab 79, the termination agreement. 75. Excuse 6 me. 7 MR. SCHWARTZ: 75. Thank you, 8 Mr. Blankenstein. 9 Q. (BY MR. SCHWARTZ) Do you know if that 10 was in the binders that Mr. Nunn had an 11 opportunity to review when he reviewed the loan 12 files on the Park 410 loan? 13 A. I have no idea. 14 Q. Do you have any reason to know when any 15 of this information would have been placed into 16 the loan file? 17 A. No. 18 Q. In your experience working -- in 19 reviewing the books and records of United Savings 20 Association of Texas in 1986, you had done many 21 examinations before that as examiner in charge. I 22 think you said 50 to 100? 10176 1 A. Yes. 2 Q. In that time, had you ever experienced 3 an institution with books and records in the 4 condition that United's were in? 5 A. Not that I recall. 6 Q. Have you ever seen books and records in 7 the condition that United's were in since? 8 A. I don't believe so. 9 Q. Would you turn to the -- to your report 10 at Page 156? This is TXS&L 156 of Exhibit 7502. 11 A. All right. 12 Q. Mr. Villa, I believe, asked you some 13 questions concerning the loan origination fees. 14 And he pointed to the "other operating income" 15 section. 16 A. Yes. 17 Q. How much was the Park 410 loan for? 18 A. $80 million. 19 Q. And if there is a loan fee of 3 percent 20 on that $80 million, my calculation is that that 21 would come to a loan fee of $2.4 million. Is 22 that -- 10177 1 A. That sound reasonable. 2 Q. Does that sound right? 3 percent of 3 $80 million? 4 A. Yes. 5 Q. So, if you were to back out that loan 6 fee from the other operating income of the 7 institution, how much in loan origination fees 8 would the institution have generated? 9 A. $484,056. 10 Q. So, what effect would that have on the 11 total operating income of the institution? 12 A. It would decrease the operating income. 13 Q. To some -- to approximately 14 $39.9 million? 15 A. Yes. The net operating income that you 16 referred to would be nearly a 40-million-dollar 17 deficit. 18 Q. Would you turn to TXS&L 164? 19 A. All right. 20 Q. Mr. Villa read a sentence from 21 substandard assets there. He said, "These assets 22 are composed of loans with appraisal reports which 10178 1 do not meet the requirements of Memorandum 2 R-41B" -- and I think he said "and" three times. 3 MR. VILLA: Twice. 4 Q. (BY MR. SCHWARTZ) -- "for which the 5 security value is questionable." 6 Do you recall that? 7 A. Yes, sir. 8 Q. And then he referred you to the 9 Park 410 discussion and asked you if you saw 10 anything in that -- if you saw the words "security 11 value is questionable" in the -- in that write-up. 12 Do you recall that? 13 A. I do. 14 Q. I think you testified that you didn't 15 see those words in there? 16 A. I don't recall seeing them in there, 17 no. 18 Q. What was the primary source of 19 repayment for the Park 410 loan? 20 A. The security property. 21 Q. Did you have questions raised -- that 22 are raised in the report of examination concerning 10179 1 the appraisal of that property? 2 A. Yes. 3 Q. Does that amount in your mind, at least 4 from what you wrote, as to whether or not that 5 means that the security value is questionable? 6 MR. VILLA: Objection. Leading. 7 THE COURT: Denied. You may answer. 8 A. I would agree that that would make a 9 determination as to whether or not the security 10 value was what it appeared as, and it would be 11 questionable. 12 Q. (BY MR. SCHWARTZ) When you say the 13 security -- when you're referring to "it," you're 14 meaning the appraisal? 15 A. Yes. 16 Q. Moving into the description categories, 17 Mr. Villa read to you certain line items. "Major 18 loans containing various elements of 19 questionability, $176 million," does that -- 20 looking at that line in conjunction with what we 21 just determined about the second sentence of the 22 substandard assets discussion above, in the 10180 1 paragraph above, does that include the Park 410 2 80-million-dollar loan? 3 A. I believe it does. 4 Q. And -- 5 THE COURT: Which line is that? Excuse 6 me. 7 THE WITNESS: Yes, Judge. It's the 8 very first one that's labeled or styled "major 9 loans containing various elements of 10 questionability." 11 THE COURT: So, you think the 12 80-million-dollar loan is in that? 13 THE WITNESS: Yes, sir. 14 Q. (BY MR. SCHWARTZ) Also, if you 15 recall, on direct examination I asked you some 16 questions about the Norwood property. 17 A. Yes. 18 Q. And I think -- whether or not that was 19 in any way contractually delinquent. I think in 20 your subsequent events section, you indicated that 21 it was four months past due. 22 MR. VILLA: Objection. Beyond the 10181 1 scope of cross. He's cross-examining the witness 2 on his own direct-examination. 3 MR. SCHWARTZ: Except, Your Honor -- 4 THE COURT: Denied. Let's move on. 5 Q. (BY MR. SCHWARTZ) Do you recall that 6 discussion? 7 A. Yes. 8 Q. The third line of this description, 9 "Mortgage loans modified while contractually 10 delinquent, 25,479,000," would that have included 11 the delinquencies on the Norwood loan up to that 12 point in the report? 13 A. I believe so, yes. 14 Q. Would you turn to Pages 243 through 15 246, which is the write-up concerning the Park 410 16 loan? And on Page 244, there is the title 17 company's receipts and disbursements statement 18 discussion. 19 Do you see that? 20 A. Yes, I see it. 21 Q. I believe Mr. Blankenstein asked you 22 some questions concerning whether that indicated 10182 1 to you that, indeed, the title policy was in the 2 loan file. Is the disbursement statement the same 3 thing as a title policy? 4 A. No. 5 Q. So, does this in any way refresh your 6 recollection that there was or there was not a 7 title policy in the loan file? 8 A. This particular write-up in this area 9 would not indicate whether or not there was a 10 title company policy in the loan file or not. 11 Q. And, indeed, Mr. Blankenstein asked you 12 some questions concerning the 400,000-dollar 13 payment to Mr. Rosenberg and pointed to the 14 binders again to -- I think he used the phrase 15 "solve the mystery," at least with regard to the 16 $1.3 million that's discussed in the escrow actual 17 purpose not determined. 18 Do you know if that information was 19 available to Mr. Nunn at the time that he did his 20 review of the institution -- excuse me -- of the 21 loan? 22 A. To my knowledge, it was not. 10183 1 Q. And that's with regard to both the loan 2 fee to Mr. Rosenberg and the escrow amounts; is 3 that right? 4 A. To my knowledge, this was added 5 subsequent to the review of the loan. 6 Q. What was added? 7 A. This particular part of the write-up. 8 And I don't know at what point it was added. 9 Q. My question is: With regard to this 10 write-up -- there may have been a title company 11 receipt and disbursement statement in the file 12 from which these numbers came. What I'm asking 13 is -- why don't we do it this way? 14 Would you pull out Tab 59? Now you're 15 looking at Exhibit 7130, Volume 2, which 16 corresponds to 3844? 17 MR. BLANKENSTEIN: Yes. 18 MR. SCHWARTZ: B3844. 19 THE WITNESS: Excuse me. You said tab 20 what? 21 Q. (BY MR. SCHWARTZ) Tab 59. 22 A. This is an amended and restated -- 10184 1 Q. Park 410 West Joint Venture, that's 2 correct. 3 A. I'm sorry. 4 Q. Do you remember looking at this 5 document with Mr. Blankenstein? 6 A. Yes. 7 Q. And earlier, you said that you didn't 8 recall whether Mr. Nunn had this information 9 available to him at the time that he reviewed the 10 loan. 11 I want you to turn to the sixth page, 12 where Mr. Blankenstein pointed you, and the 13 discussion of compensation of the managing 14 venturer and manager. And the last paragraph of 15 that write-up down at the bottom with regard to 16 Mr. Rosenberg's 400,000-dollar payment, does that 17 specifically identify the services that were 18 rendered by Mr. Rosenberg? 19 A. All it says is "as compensation for 20 services rendered in connection with obtaining the 21 loan." 22 Q. Does that indicate whether it was a 10185 1 loan fee as opposed to, say, legal services? 2 A. No. 3 Q. And if you would, turn to Tab 44 in 4 Volume 1 of Exhibit 7130. 5 A. All right. I have it. 6 Q. Okay. And if you turn in to the eighth 7 page in, it says "platting fee escrow agreement." 8 A. Yes, I see it. 9 Q. Mr. Blankenstein, I believe, referred 10 you to a 300,000-dollar amount that's in the third 11 paragraph on the first page. 12 A. That's correct. 13 Q. Do you know if -- first of all, do you 14 know if Mr. Nunn had this document available to 15 him when he reviewed the books and records 16 concerning the Park 410 loan? 17 A. I have no idea. 18 Q. And if you turn in three more pages to 19 the FEMA escrow agreement and the discussion in 20 the third paragraph there concerning the 21 $1 million -- 22 A. Yes. 10186 1 Q. Do you know if Mr. Nunn had the FEMA 2 escrow agreement available to him at the time that 3 he reviewed the books and records -- United's 4 books and records regarding the Park 410 loan? 5 A. I have no idea if he had it or not. 6 Q. Let me ask you this: Based on your 7 experience working with Mr. Nunn, was Mr. Nunn a 8 thorough examiner? 9 A. Yes. 10 Q. Is it your belief that Mr. Nunn, based 11 on your experience working with him, would have 12 done a thorough job of reviewing the records that 13 were available to him from United concerning the 14 Park 410 loan? 15 A. I believe so. 16 Q. Concerning Mr. Nunn's write-up of the 17 Park 410 loan, which is Exhibit 7501, and if you 18 would also -- why don't we use Mr. Villa's 19 exhibit, which was A -- 20 MR. VILLA: B4164. 21 MR. SCHWARTZ: B4164. 22 MR. VILLA: Yes, sir. 10187 1 Q. (BY MR. SCHWARTZ) There were 2 certain -- do you have that, sir? 3 MR. SCHWARTZ: May I approach? 4 THE COURT: Yes, you may. 5 THE WITNESS: I have this one, yes. 6 Okay. 7 Q. (BY MR. SCHWARTZ) There were certain 8 items that Mr. Villa pointed out that were removed 9 from that version of the write-up that were 10 subsequently put into the final version that was 11 put into the typed version of Exhibit 7502. 12 Do you recall that testimony? 13 A. Yes. 14 Q. Was this the final write-up, Exhibit 15 7501 corresponding to B4164? 16 MR. VILLA: 4164. 17 Q. (BY MR. SCHWARTZ) Was this the final 18 write-up of the loan? 19 A. As far as I know. 20 Q. Was this the final -- 21 MR. VILLA: Objection. 22 A. The final would have been what appeared 10188 1 in the examination report. 2 Q. (BY MR. SCHWARTZ) Would you pull out 3 Exhibit 7089, which is the August 21st, 1986 -- 4 Mr. Cool, we're through with those binders. 5 THE COURT: What is that exhibit, 6 Mr. Schwartz? 7 MR. SCHWARTZ: It's the August 21, 1986 8 memorandum to Jeff Nunn from Mr. David Graham. 9 THE COURT: Thank you. 10 Q. (BY MR. SCHWARTZ) Looking at 11 Exhibit B4164, the write-up, do you know how those 12 blacked-out portions in that exhibit were deleted 13 to reach the final version that was in the typed 14 report of examination? 15 A. No. 16 Q. Exhibit 7089 suggests that Mr. Nunn 17 spoke to Mr. Graham or had some communications 18 with Mr. Graham concerning the Park 410 write-up. 19 Right? 20 A. That's correct. 21 Q. Do you know if -- do you know which 22 document came first? 10189 1 A. At this time, no. I don't have any way 2 of knowing, I don't believe, unless I -- 3 Q. Well, let me ask you this. Why don't 4 you take a look at the third page of Exhibit 7089? 5 Mr. Cool, if you'll excuse me. Please 6 let me start this line over again. 7 Mr. Villa discussed with you a letter 8 from Mr. Von Minden, which is Exhibit A11140. 9 Do you recall that? 10 A. Yes. 11 Q. And he pointed out several discussions 12 of loans -- Chapel Creek Ranch, Willowbrook, and 13 Remington Partners -- that had specific 14 discussions of appraisals or requests for 15 reappraisals of property. 16 A. That's correct. 17 Q. And then he zeroed you in on the 18 Park 410 portion and it had no such request? 19 A. That's correct. 20 Q. Do you know whether, if the version of 21 the Park 410 write-up that's contained in 22 Exhibit 7501 or B4164 had been the final version 10190 1 that went into the typed report of examination, do 2 you know if that would have caused the supervisors 3 in Austin to request a reappraisal of the Park 410 4 loan? And specifically look at the portions that 5 are in the boxes that Mr. Villa drew. 6 A. Yes, I have them. 7 Q. Okay. If you read those portions that 8 are boxed in, if that version had been the final 9 version of the report of examination, do you know 10 if that would have caused the supervisors -- those 11 boxed in portions and the language contained in 12 them -- would have caused the supervisors in 13 Austin to have requested a reappraisal of the 14 Park 410 property? 15 A. I have no idea. 16 Q. Your final report of examination, 17 Exhibit 7502, removed some of the criticisms that 18 were originally made regarding the appraisal that 19 were raised by Mr. Nunn's write-up; is that right? 20 A. That's correct. 21 Q. We looked at Exhibit 7089, which is the 22 memo from Mr. Graham to Mr. Nunn. And I'd like 10191 1 you to look at the -- there was a discussion there 2 regarding "appraisal" on the third page. 3 Is one of the reasons that certain 4 sections of the handwritten write-up were removed 5 based on Mr. Graham's comments? Would those have 6 been part of the consideration? 7 MR. VILLA: Objection. Asked and 8 answered in both his direct and my cross. He's 9 already answered this question twice. 10 THE COURT: All right. Denied. You 11 may answer it again. 12 Q. (BY MR. SCHWARTZ) Was this part of 13 the consideration for what was removed from 14 Mr. Nunn's and placed into the final? 15 A. I don't remember. I don't recall if 16 this would have changed the comment. 17 Q. Well, let me ask you: Would you and 18 the supervisors in Austin have considered 19 Mr. Graham's comments? 20 A. Yes. 21 Q. Would you look at the third paragraph 22 of Mr. Graham's -- of Section 4 of Mr. Graham's 10192 1 report on the third page? Excuse me. The 2 paragraph that begins "Mr. Schulz." 3 Do you see that? 4 A. Yes, I see it. 5 Q. It says, "Mr. Schulz did not prepare a 6 cost approach as he felt in his judgment it would 7 not be applicable. But if you feel it is 8 necessary, he can prepare one. However, it will 9 exceed the present appraised value of $88 million. 10 So, it will not affect the final value." 11 Do you see that? 12 A. I see it. 13 Q. Did you or Mr. Nunn or the supervisors 14 in Austin have any reason to think that Mr. Graham 15 would have lied to Mr. Nunn in this memorandum? 16 MR. VILLA: Objection, Your Honor. 17 First of all, there is no evidence that this ever 18 went to the, quote, "supervisors in Austin." And 19 second, "you or Mr. Graham." I object on the 20 grounds of that question, as well. 21 MR. SCHWARTZ: "You or Mr. Nunn," I 22 said. 10193 1 MR. VILLA: I understand what your 2 question is. You can ask him what he thinks. 3 Objection. 4 THE COURT: Restate your question, 5 please. 6 Q. (BY MR. SCHWARTZ) Did you have any 7 reason to think that Mr. Graham would have lied to 8 Mr. Nunn concerning that issue? 9 A. No. 10 Q. Do you have any reason to think that 11 Mr. Graham -- that Mr. Graham would have lied in 12 his comments in this memorandum? 13 A. I have no reason to think that he would 14 have. 15 Q. Or to misstate a fact? 16 A. No. 17 Q. Mr. Villa asked you some questions 18 about USAT's operating income reflected on 19 Page 152 of the report of examination. 20 A. Yes. 21 Q. I think you said that income would have 22 been reduced at April 30, '86, if USAT hadn't 10194 1 booked -- had not booked the $2.4 million in fees 2 on Park 410? 3 A. Yes. 4 Q. Is that right? 5 MR. VILLA: No. I don't believe I 6 asked him anything to that effect. You can ask 7 him the question, but don't characterize my 8 questions because I didn't. 9 Q. (BY MR. SCHWARTZ) Mr. Villa asked you 10 questions concerning the operating income. 11 Do you recall that? 12 A. I recall that. 13 Q. Okay. I asked you some questions 14 concerning whether the income would have been 15 increased or reduced at April 30, 1986, if USAT 16 had not booked the $2.4 million in fees on 17 Park 410. 18 Do you recall that? 19 A. Yes. 20 Q. If USAT had not booked the $2.4 million 21 in loan fees, would it also have affected USAT's 22 net worth? 10195 1 A. Yes. 2 Q. Would it increase or decrease USAT's 3 net worth? 4 A. It would have decreased the net worth 5 by taking out that amount out of operations. 6 Q. So, the one hundred and -- on Page 152 7 of the report, the $191,353,100 would have 8 decreased? 9 A. Yes. 10 Q. And would the net worth deficiency 11 reported by USAT set out on Page 2A under 12 "financial" have been greater than $21 million? 13 A. Yes. 14 Q. We talked earlier about the books and 15 records or the general condition of the books and 16 record of the institution. 17 Is it a violation of regulations to 18 have substantial deficiencies in the books and 19 records and gaps in the books and records? 20 MR. VILLA: Objection. I'd at least 21 ask him to cite the regulation. It's a big book. 22 MR. SCHWARTZ: Your Honor, it's based 10196 1 on the witness' experience. He testified that he 2 was more familiar back in 1986. I'm not going to 3 ask him to look for a pagination site or section 4 site of something that he may not have seen in 11 5 years. 6 THE COURT: Well, can we stipulate that 7 an institution should keep its books and records 8 straight? 9 MR. SCHWARTZ: Can we stipulate to 10 that? 11 MR. VILLA: We can stipulate that an 12 institution is supposed to do what is set -- 13 provided by law, Your Honor. 14 THE COURT: Next question. 15 Q. (BY MR. SCHWARTZ) With respect to the 16 books and records of the institution, was that a 17 factor in the management component of your rating 18 on Page 293 of your report of examination in the 19 MACRO rating? 20 A. Yes. 21 Q. And I'd ask you the same question with 22 regard to regulatory violations. Were the 10197 1 institution's regulatory violations a factor that 2 went into the 4 rating for management? 3 A. Yes. 4 Q. Were the -- who is responsible for 5 maintaining the books and records of the 6 institution? 7 A. The chief financial officer. 8 Q. Is that management? 9 A. Yes. 10 Q. Does the president of the institution 11 play a role in keeping good books and records? 12 A. In an overview basis, I guess you would 13 call it. 14 Q. Is it part of audit controls? 15 A. Yes. 16 Q. Does the president play a role in that? 17 A. Not directly. 18 Q. Indirectly? 19 A. Indirectly. 20 Q. Does the -- does management create 21 standards for maintaining books and records? 22 A. I believe the board of directors and 10198 1 management are responsible that sufficient and 2 adequate books and records are maintained. 3 Q. And the books -- in adequate detail to 4 allow an audit trail? 5 A. Yes. 6 Q. Was your MACRO rating concerning 7 management expressed on Page 293 reflective of 8 your opinion of the conditions of the books and 9 records as maintained by the current management of 10 USAT? 11 A. Yes. 12 Q. And I'll ask you the same question 13 concerning compliance with laws and regulations. 14 A. Yes. 15 Q. That's reflective of current 16 management? 17 A. That's correct. 18 Q. Would you pull out Exhibit A111042, 19 which is the cover letter and copy of the report 20 of examination from the Federal Home Loan Bank of 21 Dallas? 22 A. I have it. 10199 1 Q. Would you turn to the second page of 2 that document? 3 A. All right. 4 Q. This is a letter from Daniel A. Thomas, 5 senior supervisory agent of the Federal Home Loan 6 Bank of Dallas? 7 A. Correct. 8 Q. The first full paragraph on the second 9 page reads, "We also note that the amount of net 10 worth reported as of June 30, 1986, has 11 subsequently been revised to increase reported net 12 worth by $13.2 million. However, we are aware of 13 at least five amendments to the June 30, 1986 14 quarterly report. The directorate is advised that 15 frequent and/or routine amendments are, at best, 16 viewed unfavorably and, at worst, give the 17 impression of adjusting the line items to reflect 18 a predetermined position. As members of the 19 board, you have the responsibility to determine 20 the true condition of the association. This 21 office is very concerned that United's true 22 condition has not yet been revealed. Exacerbating 10200 1 our concern is the questionable state of United's 2 books, records, and systems as noted in the report 3 on Pages 24 and 25. Of further note is United's 4 history of net operating losses and its dependence 5 on non-operating income to produce profits." 6 Is Mr. Thomas' conclusions or notes 7 there consistent with what you found during your 8 examination? 9 A. Yes. I believe you could say that. 10 Q. Do you agree with his comments, based 11 on what you saw during your examination of United? 12 A. I believe so, yes. 13 Q. The letter goes on, "The examiner has 14 additionally noted loan and appraisal 15 deficiencies, missing loan files, currency 16 transaction reporting deficiencies, criticisms 17 regarding letters of credit, and unsafe and 18 unsound loan underwriting. You should respond to 19 the examiner's comment and document the steps 20 taken to effect correction of the deficiencies in 21 each area." 22 Is that -- do you agree with what 10201 1 Mr. Thomas writes there, based on your examination 2 of United? 3 A. Yes. 4 Q. Did you reach the same conclusions that 5 Mr. Thomas reached during your -- from your 6 examination? 7 A. Yes. 8 MR. SCHWARTZ: I have no further 9 questions, Your Honor. 10 MR. VILLA: I have about five minutes. 11 THE COURT: Is there any recross? 12 MR. VILLA: About five minutes, Your 13 Honor. 14 15 RECROSS-EXAMINATION 16 17 (2:07 p.m.) 18 Q. (BY MR. VILLA) Let me start off with 19 the last one first. A11042. You were just read a 20 long section of Mr. Thomas' letter. 21 Do you remember that, sir? 22 A. Yes, sir. 10202 1 Q. And one part of it is "The examiner has 2 additionally noted loan and appraisal 3 deficiencies." 4 Do you remember that, sir? 5 A. Yes. 6 Q. But we've already determined that the 7 examiner's notation of loan and appraisal 8 deficiencies didn't apply to Park 410, didn't we, 9 sir, because that's not written up in the 10 examination report? 11 MR. SCHWARTZ: Objection, Your Honor. 12 That's completely inconsistent with the testimony. 13 THE COURT: All right. Let's get his 14 testimony then. 15 Q. (BY MR. VILLA) Sir, there is nothing 16 in the federal examination report, is there, that 17 writes up an appraisal deficiency on Park 410, is 18 there? 19 A. I don't believe so. 20 Q. So, when Mr. Thomas was writing a 21 letter here referring to the federal examination 22 report and the conclusions in the federal 10203 1 examination report about appraisal deficiencies, 2 he could not have been talking about the Park 410 3 loan. 4 Would you agree with that? 5 A. Yes. 6 Q. Sir, do you know whether as a result of 7 the questions about the books and records of 8 United, whether the Federal Home Loan Bank of 9 Dallas had Grant Thornton examine those books and 10 records and come back with an independent report 11 on them? 12 A. I have no idea. 13 Q. You have no idea? You haven't been 14 shown by the OTS a copy of the Grant Thornton 15 examination or Grant Thornton report on the books 16 and records of United Savings Association of 17 Texas? 18 A. Not that I remember. 19 Q. Sir, would you pull out Exhibit B1377, 20 which is the work papers of Peat Marwick that we 21 previously reviewed? Would you like a little help 22 there? 10204 1 A. I believe I've covered them up 2 somewhere. Here we are. 3 Q. Now, would you turn back to the little 4 line that Mr. Schwartz directed your attention to 5 on Page CN190459, which is the second-to-the-last 6 page of the document? 7 A. I have it. 8 Q. Now, in your last paragraph, you 9 observe that the joint -- that the loan has the 10 characteristics of a real estate investment or 11 joint venture. Right? 12 A. Yes, sir. 13 Q. And then somebody writes down next to 14 it "agreed." And let me see if I can read it any 15 better than you can. "See conclusion on II, 16 249-3." 17 Let me ask you, sir -- let's turn back 18 to the three pages that I directed your attention 19 to in the middle of the document. 20 A. Okay. 21 Q. You got it now? 22 A. Is that -- 10205 1 Q. The ADC loan write-up. 2 A. -- the evaluation? 3 Q. Yes. 4 A. Yes, I have it. 5 Q. Now, in your experience, sir, would a 6 designation like Roman II-249 be a work paper 7 reference? Does that appear to you what it is? 8 A. I would think so, yes. 9 Q. Look up at the top right-hand corner of 10 the ADC USAT review worksheet that I took you 11 through earlier, the first page. Right there. 12 Look at the first page of it, upper right-hand 13 corner. 14 A. Yes. 15 Q. Does that appear to you to be Roman 16 numeral II-249-1? 17 A. Yes, it does. 18 Q. Let's go to -- what's the next one? 19 Slash 2? 20 A. It is. 21 Q. And what's the next one? 22 A. Slash 3. 10206 1 Q. Slash 3. So, does it appear to you 2 that the reference that Mr. Schwartz directed your 3 attention to through you back into this 4 conclusion, this very conclusion that I read to 5 you in the work paper. Right? 6 A. Yes. It's referenced in that 7 direction. 8 Q. Yes, sir. Now, sir, do you know 9 whether -- strike that. 10 The size of the Park 410 loan was 11 $80 million. Right? 12 A. That's correct. 13 Q. Would you regard that as material to 14 USAT? Material? You under the concept of 15 materiality? 16 A. Yes. 17 Q. Do you regard it as material? 18 A. Certainly. 19 Q. Now, if United Savings Association of 20 Texas booked this as a loan and in its audit 21 report of February 6th, 1987, Tab 719, 22 Peat Marwick & Mitchell and Co. found that United 10207 1 kept its books and records, quote, "in conformity 2 with generally-accepted accounting principles 3 applied on a consistent basis," close quote, would 4 you come to the conclusion that, in fact, 5 Peat Marwick had approved United's accounting of 6 the Park 410 transaction? 7 A. Perhaps, or there was perhaps a change 8 in regulation. 9 Q. Okay. Well, we'll figure out whether 10 it was a change in regulation. But eliminating 11 the possibility that the regulations changed in 12 that three- or four-month time period, would you 13 agree with me, sir? 14 A. Yes. 15 Q. It appears that Peat Marwick did 16 approve United's handling of the Park 410 loan? 17 A. Apparently so. 18 Q. By the way, sir, Mr. Schwartz asked you 19 a number of questions about the responsibility of 20 the president of United Savings Association of 21 Texas for maintaining its books and records. 22 Do you remember that? 10208 1 A. Yes. 2 Q. Now, Gerald Williams, you testified 3 here, was the president of United Savings 4 Association of Texas. 5 You remember we talked about Gerald 6 Williams. Right? 7 A. Yes. 8 Q. He's not a respondent here. You 9 haven't seen his name. Right? 10 A. That's correct. 11 Q. Do you have any criticism of 12 Mr. Williams in connection with this case? 13 A. No. 14 Q. Mr. Schwartz asked you some questions 15 as to whether or not you believed, after examining 16 the Park 410 write-up by Mr. Nunn, that the 17 security value was questionable. 18 Do you remember that? 19 A. Yes, sir. 20 Q. And you said you thought -- I don't 21 want to characterize your testimony, but I think 22 you generally agreed with his question. 10209 1 Do you remember that, sir? 2 A. Yes. 3 Q. And that's why -- strike that. 4 But the fact is that the reference to 5 the security value being questionable was stricken 6 from the -- or taken out from the Park 410 7 write-up; isn't that right? 8 A. I believe it was. 9 Q. So, somebody who was your superior or 10 who got to the examination report after you did, 11 who reviewed the examination report after you did, 12 apparently disagreed with you on that point. 13 Wouldn't you agree? 14 A. Yes. 15 Q. Mr. Schwartz asked you some questions 16 about whether the Norwood loan would have been 17 reflected in the substandard assets section of 18 the -- of your examination report which, I 19 believe, is Page 9A. 20 Do you remember those questions, sir? 21 A. I recall, yes. 22 Q. He said, well, would Norwood have 10210 1 been -- would Norwood have shown up in the 2 $25 million of mortgage loans modified while 3 contractually delinquent, and you said you thought 4 it would. Right? 5 A. If I did, I must have made a 6 misstatement because it wasn't made until after my 7 examination date. 8 Q. Right. So, it wouldn't have shown up 9 here. Right? 10 A. Not -- no. 11 Q. Now, if we take a look at the Norwood 12 write-up and if you'll take a look at it with me, 13 Texas S&L 000148, that's your write-up in your 14 exam report. 15 The last line of that and the first 16 full paragraph on Norwood says "Therefore, the 17 loan is subject to classification as a scheduled 18 item." Right? 19 A. Yes, sir. 20 Q. But as we've already seen, the Park 410 21 write-up doesn't include any such statement, does 22 it, sir? 10211 1 A. No, it does not. 2 Q. Sir, you were asked some questions 3 about what you took into consideration in 4 evaluating United's regulatory capital. I'm 5 sorry. 6 Sir, you were asked some questions 7 about what you took into consideration in 8 evaluating United's rating for capital. 9 Do you remember those questions, sir? 10 A. Yes. 11 Q. And you said that you wouldn't just 12 look at goodwill. Right? 13 A. Yes. 14 Q. You'd look at other things, as well. 15 Isn't the most important single factor in rating 16 the capital of the association whether or not it 17 meets minimum regulatory capital requirements? 18 A. That's one of them, yes. 19 Q. And, sir, we just went through the 20 analysis to demonstrate that if the goodwill was 21 added back into United's capital, it would have 22 met minimum regulatory capital requirements at the 10212 1 time of your examination. 2 Do you remember that? 3 A. I recall that. 4 Q. Now, Mr. Schwartz asked you a number of 5 questions about the loan fees on the Park 410 6 loan. 7 Do you remember that, sir? 8 A. Yes. 9 Q. And somebody might read in -- somebody 10 might read into those questions the implication 11 that United was motivated to make the loan in 12 order to earn loan fees. 13 I want to ask you, sir: Do you recall 14 that in your examination of United, that United 15 had, in fact, taken a position that resulted in a 16 25-million-dollar deferral of income which 17 subsequently had to be reversed and then they 18 recognized the income? Do you remember that? 19 A. I don't remember that. 20 Q. Let's take a look at Texas S&L 000144 21 under the entry "financial." 22 Do you see that? 10213 1 A. Yes. 2 Q. The third sentence, "The increase in 3 net worth since the 4-30-86 examination of 4 $37,660,000 is attributable to income from 5 interest rate swaps ($25,161,000), which was 6 improperly booked to deferred income," and then it 7 goes on. That's the portion of it that I'm 8 directing your attention to. 9 A. Okay. I'm sorry. Yes. 10 Q. And you worked on the financial aspect 11 of this; isn't that right? 12 A. Yes. 13 Q. Now, does that refresh your 14 recollection, sir, that during the period under 15 examination United had, in fact, taken an 16 accounting position which resulted in not the 17 recognition of income but, in fact, the deferral 18 of $25 million in income. 19 Do you remember that now, sir? 20 A. Only as it appears here, yes. 21 Q. And as I read your words here, it 22 indicates that United's position had to be 10214 1 reversed and the income thrown back into United. 2 Isn't that what it says? 3 A. That's what it says. 4 Q. Now, is that consistent or 5 inconsistent, in your judgment, with an 6 institution that is trying to make loans in order 7 to earn $2 million in loan fees? 8 A. Not necessarily, no. 9 MR. VILLA: I have no further 10 questions. Thank you, sir. 11 THE COURT: Mr. Blankenstein, do you 12 have recross? 13 MR. BLANKENSTEIN: I have a few, Your 14 Honor. 15 16 RECROSS-EXAMINATION 17 18 (2:23 p.m.) 19 Q. (BY MR. BLANKENSTEIN) Mr. Cool, is it 20 common to have closing binders on commercial real 21 estate loans? 22 A. Common, no. I don't believe so. 10215 1 Q. Have you seen closing binders on 2 commercial real estate loans? 3 A. I probably have. 4 Q. Would you have expected a closing 5 binder with respect to a loan of $80 million of 6 which you said was the largest loan I think you 7 had the opportunity to examine at that time? 8 A. You would expect one, yes. 9 Q. Can you take a look again, please, at 10 Exhibit 7502? And if you can turn to TXS&L 244. 11 A. All right. 12 Q. In the middle of the page, it talks 13 about the title company's receipt and disbursement 14 statement, doesn't it? 15 A. Yes. 16 Q. Would that suggest to you that there 17 was a title company involved in the transaction? 18 A. Certainly. 19 Q. And do title companies usually get 20 involved in transactions when they issue title 21 insurance policies? 22 A. It's been my experience they have, yes. 10216 1 Q. So, Mr. Nunn -- we know Mr. Nunn at 2 least looked at a title -- the title insurance 3 disbursement statement, correct? 4 A. Yes. 5 Q. Okay. I'd like you to turn to the 6 first tab of Exhibit 7130, which is also B3844. 7 Is that a disbursement statement from a title 8 insurance company? 9 A. Tab 3 has -- 10 Q. Tab 1. I'm sorry. If I misspoke, I 11 meant Tab 1. 12 A. Yes, it does. 13 Q. Okay. Thank you, sir. Let me show you 14 what's marked as B1012. If you can focus on the 15 first page, it's entitled "Construction Loan 16 Checklist." 17 A. Yes. 18 Q. And the borrower is Park 410 West Joint 19 Venture? 20 A. That's correct. 21 Q. And it was signed by -- if we can look 22 at the last page -- Karen Wynans? 10217 1 A. Yes. 2 Q. On 5-30-86; is that right? 3 A. That's correct. 4 Q. And let me show you what's -- if you 5 can take a look at -- this is the -- this is 6 Exhibit A1111, which is the February 13th, 1986 7 minutes of the -- it's the board report for 8 February 13th, 1986, of both UFG and United 9 Savings Association of Texas. 10 If you could take a look at what has 11 been Bates stamped as K0004633. It's towards the 12 end, sir. 13 A. Yes, I have it. 14 Q. And if I can ask you to turn just one 15 page ahead. All right? And if we look at the 16 bottom of the page, it's entitled "lending"; is 17 that right? 18 A. Yes. 19 Q. And it goes onto the next page. 20 MR. SCHWARTZ: I'm sorry. Looking at 21 4634? 22 MR. BLANKENSTEIN: Take a look at 4631. 10218 1 MR. SCHWARTZ: 31? 2 MR. BLANKENSTEIN: Right. I'm sorry. 3 32. I'm sorry. 32. And look at the bottom of 4 the page that says "lending." 5 Q. (BY MR. BLANKENSTEIN) This is a list 6 of the employees of the lending department of 7 USAT. 8 Do you see that? And over on the next 9 page, the name is Karen Wynans. 10 Do you see that? It's about -- 11 A. Yes. I've found it. 12 Q. Now, is this the type of information 13 you would have regularly received -- the 14 information I'm talking now about is 15 Exhibit B1012. We can go back to that. 16 Is this information -- if we go back to 17 this exhibit, B1012 -- 18 A. All right. 19 Q. -- is this the information you would 20 have regularly received from USAT during the 21 course of your examination of the Park 410 loan? 22 MR. SCHWARTZ: I'm sorry. Are you 10219 1 referring to this document? 2 MR. BLANKENSTEIN: This document. 3 A. Not necessarily. 4 Q. (BY MR. BLANKENSTEIN) Did you request 5 USAT to provide you with information with regard 6 to the Park 410 loan as it might have been 7 prepared? 8 A. Yes. 9 Q. So, in the normal course, this would 10 have been provided for you; is that right? 11 A. Hopefully. 12 Q. Okay. Now, if we can take a look at 13 the last page of the exhibit. It sets out a list, 14 you can see, of various affidavits or documents 15 associated with the loan. 16 A. I see those. 17 Q. Do you see towards the middle, there is 18 a check next to whether there is an original in 19 the file; is that right? 20 A. Yes. 21 Q. If you look towards the middle of that 22 list, do you see "termination agreement"? 10220 1 A. Yes, I do. 2 Q. And did you look at the termination 3 agreement earlier this morning? 4 A. I did. 5 Q. And that was the termination agreement 6 with respect to the joint investment between USAT 7 and Stanley Rosenberg; isn't that right? 8 A. Yes, I believe so. 9 Q. And if this information had been 10 provided in the ordinary course to Mr. Nunn, you 11 would have expected him to review each and every 12 one of these documents in connection with his 13 review of the Park 410 loan? 14 A. Yes. 15 Q. So, he would have seen the termination 16 agreement, correct, in the normal course; isn't 17 that right? 18 A. Yes, if that was provided. 19 Q. Okay. Thank you very much. 20 MR. BLANKENSTEIN: No further 21 questions. Your Honor, I'd like to move B1012 22 into evidence. 10221 1 MR. SCHWARTZ: Your Honor, I do object 2 to the document. The witness has indicated that 3 he has no idea whether this document was -- this 4 handwritten document was part of what he looked at 5 when the institution was -- when the review of 6 Park 410 was performed or whether this was part of 7 the files that Mr. Nunn even saw. I do object to 8 the document. 9 MR. BLANKENSTEIN: There is no question 10 as to its authenticity. The witness has testified 11 that this is the type -- he requested information 12 from USAT as they might have prepared that 13 information with regard to the Park 410 loan. 14 MR. SCHWARTZ: I am sorry, Your Honor. 15 I strongly disagree. There is question as to the 16 authenticity. The basis for authenticity, 17 Mr. Blankenstein has established that Karen 18 Wynan's name appears on -- in a -- in a list of 19 employees of the institution. That's the basis 20 for authenticity. We don't know that this was 21 prepared by -- we don't know that this was 22 prepared by her or whether this is her signature 10222 1 or whether she wrote this or what these 2 representations that are on this document mean. 3 And we've -- but there is one thing that we do 4 know, and that's that Mr. Cool has indicated that 5 he's never seen it other than the one time that 6 Mr. Blankenstein put it in front of him. 7 THE COURT: All right. I'll sustain 8 the objection. 9 MR. KEETON: Your Honor, I have a 10 couple of questions, if I may. 11 THE COURT: Mr. Keeton. 12 13 RECROSS-EXAMINATION 14 15 (2:33 p.m.) 16 Q. (BY MR. KEETON) Mr. Cool, when did 17 you join the Texas Savings and Loan Association 18 or -- 19 A. The department? 20 Q. -- Department? 21 A. April 1st, 1985. 22 Q. The year before this event? 10223 1 A. That's correct. 2 Q. And for the five plus years before 3 that, what had you done? 4 A. It was a non-affiliated with savings 5 and loan type venture. 6 Q. I understand. What had you done? What 7 had you done? 8 A. I worked for a Ford dealership as a 9 warranty manager. 10 Q. And what else? 11 A. And prior to that, I had tried to go 12 into business for myself and the deal that I had 13 set didn't go through. 14 Q. What do you mean? 15 A. Well, I was to take over ownership of a 16 business; and the guy backed out. 17 Q. How long did you spend at that 18 endeavor? 19 A. Well, I didn't get it. It went into 20 some type of a court case. 21 Q. So, you worked for the Ford dealership 22 for five years? 10224 1 A. About three and a half. Someplace in 2 that area. I don't know the exact dates. 3 MR. SCHWARTZ: Your Honor, I'm going to 4 object to this line of questioning. This is well 5 beyond the scope of cross-examination or redirect 6 and certainly bears little relevance to what we've 7 talked about during those examinations. 8 MR. KEETON: You haven't heard my 9 questions yet. 10 MR. SCHWARTZ: I know that we didn't 11 talk about Ford dealerships or his private sector 12 business during my cross-examination or during -- 13 I mean during Mr. Villa's cross-examination, 14 Mr. Blankenstein's cross-examination, 15 Mr. Eisenhart's cross-examination, or my redirect. 16 MR. KEETON: I suspect I could have 17 asked my questions in the time you've been 18 objecting. 19 THE COURT: All right. Denied. Let's 20 hear it. 21 Q. (BY MR. KEETON) And then straight out 22 of high school, you went to work for an S&L as a 10225 1 teller? 2 A. Actually, no. I went to college for 3 about two years. Then I went into the Air Force, 4 the Security Service for four years. Then in 5 1960, I went to work for a savings and loan and 6 stayed there until 1968. 7 Q. How old are you? 8 A. I'm not going to tell you. 62. 9 Q. You're a little older than me. Not 10 much. Then you worked for 12 years as an examiner 11 with the Federal Home Loan Bank. Right? 12 A. Yes, sir. 13 Q. I assume you were not the agent in 14 charge or the supervising agent on audits or 15 examinations for that entire period, were you? 16 A. No, sir, I was not. I was a field 17 examiner. 18 Q. During that whole time. Right? 19 A. That's correct. 20 Q. Well, there was a question that asked 21 you whether you had been as an examiner in charge 22 50 to 100 before this in deciding that these books 10226 1 and records were the worst you had ever seen. 2 Now, did you do 50 or 100 as an 3 examiner in charge at the Texas Savings and Loan 4 Department in the year before this April 1986? 5 A. No, sir. That was -- 6 Q. Thank you. 7 A. -- during my tenure with the Federal 8 Home Loan Bank Board. 9 Q. But you were only a field agent then. 10 Right? 11 A. I was a field examiner, but I was also 12 in charge of examinations. 13 MR. KEETON: Thank you very much. 14 THE WITNESS: Thank you. 15 THE COURT: Mr. Schwartz. 16 MR. SCHWARTZ: Yes, Your Honor. I have 17 some additional questions. 18 THE COURT: Based on what Mr. Keeton 19 said? 20 MR. SCHWARTZ: Well, not really on what 21 Mr. Keeton had to say but on Mr. Villa's 22 questioning. 10227 1 THE COURT: All right. 2 3 REDIRECT-EXAMINATION 4 5 (2:37 p.m.) 6 Q. (BY MR. SCHWARTZ) With regard to 7 Exhibit A11042, which is the Federal Home Loan 8 Bank of Dallas cover letter and -- you don't have 9 to pull it out, sir -- cover letter and report of 10 examination, Mr. Villa read you the portion 11 regarding the examiner, had additionally noted 12 loan and appraisal deficiencies and asked you some 13 additional questions concerning what I had read. 14 A. Yes. 15 Q. Do you know if this was an overall 16 impression that Mr. Thomas had reached or if this 17 was solely -- that comment regarding appraisal 18 deficiencies was based solely on what eventually 19 was written into the report of examination? 20 A. I have no idea. 21 Q. And do you know if the Norwood property 22 was specifically written into the -- to the 10228 1 federal examination? 2 A. I can only assume that it was since it 3 was in my "subsequent events" comment. 4 Q. Okay. Mr. Villa also asked you some 5 questions concerning the page in your report of 6 examination regarding loans that were 7 contractually delinquent. 8 Do you recall that? 9 A. Yes. 10 Q. And he asked you about the date that 11 your examination started, and you indicated that 12 you might have made a mistake? 13 A. That's correct. 14 Q. Because the loan was after April 30th? 15 A. Yes. We spoke of a June 30th 16 determination for -- 17 Q. Of a loan? 18 A. For the loans that were refinanced. 19 Q. Okay. The loans that were refinanced, 20 were those on the books already at the 21 institution? 22 A. At my examination date, yes. 10229 1 Q. And were those loans -- were those 2 loans delinquent? 3 A. Not to my knowledge. At least, not 4 contractually. 5 Q. What -- 6 A. By regulation. 7 Q. Okay. Mr. Villa also asked you some 8 questions concerning whether the $2.4 million 9 would have been booked for the fees that they 10 would generate. 11 Do you recall that? 12 A. Yes. 13 Q. He pointed out some kind of deferral 14 that the institution took. 15 Do you recall that? 16 A. Yes. 17 Q. Do you know if the institution booked 18 the $2.4 million -- excuse me -- made an 19 80-million-dollar loan in order to generate 20 $2.4 million of fees? 21 A. No. 22 MR. SCHWARTZ: Thank you. No further 10230 1 questions. 2 MR. VILLA: Nothing, Your Honor. 3 THE COURT: Well, let me ask you: Do 4 you think there is a doubt or do you -- of whether 5 or not there was title insurance on this property? 6 THE WITNESS: Your Honor, I have no 7 idea at this point. But from what I've seen 8 during testimony, apparently there was. Now, 9 why -- 10 THE COURT: Was what? 11 THE WITNESS: There was title policies 12 in some of the other documentation that I've been 13 shown. Why I didn't find a notation on a work 14 paper, I don't have any idea. 15 THE COURT: Would you take a look at 16 Tab 1 there at that -- which is the borrower's 17 statement. Isn't there -- by Stanley Rosenberg, 18 isn't there a reference there to fees for title in 19 the middle? 20 THE WITNESS: Yes. There is a survey, 21 attorneys' fees. Yes, they are there. 22 THE COURT: Fees to First American 10231 1 Title Company. Do you see that? If you look at 2 the figures 2.4, 400,000, then the next figure is 3 63. 4 Do you know how that was derived if you 5 look to the left there? 6 THE WITNESS: Oh, yes. I see it, sir. 7 I'm sorry. 8 THE COURT: What do you make out of 9 that? 10 THE WITNESS: Apparently, it was a fee 11 for a title policy. There is a notation asterisk 12 there, "Based on 49-million-dollar initial 13 liability and premium installment paying 14 procedure." 15 THE COURT: All right. Thank you. 16 THE WITNESS: Yes, sir. You may step 17 down. 18 THE WITNESS: Thank you, sir. 19 THE COURT: We'll take a short recess. 20 21 (A short break was taken 22 at 2:42 p.m.) 10232 1 THE COURT: Be seated, please. 2 We'll be back on the record. 3 Mr. Guido. 4 MR. GUIDO: Yes, Your Honor. At this 5 point in time, we'd like to call Mr. Millinor. 6 7 8 JAMES MILLINOR, 9 10 called as a witness and having been first duly 11 sworn, testified as follows: 12 13 THE COURT: Be seated, please. 14 15 EXAMINATION 16 17 (3:08 p.m.) 18 Q. (BY MR. GUIDO) Good afternoon, 19 Mr. Millinor. 20 A. Good afternoon. 21 Q. Would you state your full name for the 22 record, please? 10233 1 A. James Patrick Millinor, Jr. 2 Q. And can you tell us a little bit of 3 your background starting with your educational 4 background and college, please? 5 A. I went to school at Florida State 6 University. Had a BS and an MBS out of Florida 7 State in 1968. I joined Peat Marwick in Raleigh, 8 North Carolina, in 1968. I stayed there for 10 9 years, transferred to the Houston, Texas, office 10 of Peat Marwick then. Stayed there for eight 11 years. Joined Commonwealth Savings here in town. 12 Stayed there for four years, and have been in a 13 venture group since then in various businesses: 14 Airline, biotech, consolidations. 15 Q. During the period of time that you were 16 with Peat Marwick not in Houston, what positions 17 did you hold? 18 A. I went through the typical run in 19 Raleigh. I think I remember the names they 20 assigned to us: Assistant senior accountant, 21 supervisor, manager, and then partner. 22 Q. And were you partner all of the time 10234 1 that you were at the Peat Marwick offices in 2 Houston? 3 A. No. I transferred here in the fall of 4 '78 and made partner in June of '79. 5 Q. Okay. And prior to that, you were a 6 manager? 7 A. Yes. 8 Q. And can you tell us what your 9 responsibilities were as a manager? 10 A. In Houston or in North Carolina? 11 Q. In Houston. 12 A. In Houston, almost all of my clients 13 were either savings and loan associations or 14 mortgage banks, and I had audit responsibilities 15 for those clients. 16 Q. And when you were a manager in Raleigh, 17 did you also have responsibility for savings and 18 loan audits? 19 A. Yes. That and more different things. 20 In a smaller office like that, you have to do more 21 things than that. 22 Q. During all the time period that you 10235 1 were a manager in the Houston office, were the 2 audits that you did for savings and loans and 3 mortgage banks primarily? 4 A. Primarily. 5 Q. And when you were a partner -- when did 6 you become partner? 7 A. I think it was in June of '79. 8 Q. Okay. And were you primarily 9 responsible for audits of savings and loans and 10 mortgage banks? 11 A. Yes. 12 Q. Now, prior to USAT, had you been an 13 engagement partner on audits of savings and loans? 14 A. Yes. 15 Q. And had you been a concurring partner? 16 A. I don't know what the term means. 17 Q. Okay. Was there someone at 18 Peat Marwick at the time that you were an 19 engagement partner that would review the audited 20 financial statements or your opinion on the 21 audited financial statements prior to their 22 issuance? 10236 1 A. Yes. 2 Q. And what was that person called? 3 A. I called him a pre-issuance review 4 partner. 5 Q. All right. And did you ever serve in 6 the position of pre-issuance review partner? 7 A. I'm sure I must have, but I don't have 8 any specific recollection of it. 9 Q. Okay. Now, when did you first become 10 the engagement partner for the USAT audit? 11 A. I don't remember precisely the year we 12 got that engagement, but I think it was in '80 or 13 '81. I was the first engagement partner on the 14 job. 15 Q. Okay. And were you the engagement 16 partner on that job for all subsequent audits 17 until you left in the fall of 1986? 18 A. Yes. 19 Q. And who was the pre-issuance review 20 partner during that time period? 21 A. If I remember correctly, it was Jerry 22 Claiborne for all of those years. 10237 1 Q. And who was the manager in charge of 2 the audit? 3 A. I think I had at least two during that 4 time period. The first one, I believe, was Jim 5 Wolfe, who subsequently joined United. And the 6 second, I think, was Joe Parsons. I don't 7 remember if anyone else had that role. 8 Q. Now, what were the responsibilities of 9 the manager for audits of savings and loans at 10 Peat Marwick at the time that you were the 11 engagement partner on the USAT assignments? 12 A. A manager typically had several audits 13 going at one time in the field. It was their 14 primary responsibility to make sure those audits 15 were conducted properly. They supervised the 16 seniors in the field who were actually there on 17 the job all the time. 18 Q. And what was the role of the engagement 19 partner at the time? 20 A. From the engagement standpoint, it's 21 similar. It's just another level of review above 22 the managers. Typically, the partners had 10238 1 fewer -- or had more engagements to look at and 2 spent less of their time on them than the managers 3 did. 4 Q. And what was the role of the 5 pre-issuance review partner? 6 A. Usually, that partner got a draft set 7 of financial statements in the later stages of an 8 audit when the engagement was close to done. At 9 some point before I left Peat, they also reviewed 10 certain of the work papers, I believe. But 11 typically, it was to look at the financial 12 statements, ask questions, make sure we had 13 disclosed things properly. 14 Q. Was the primary role of the 15 pre-issuance review partner to make sure that all 16 of the audit steps that were in the Peat Marwick 17 audit plan had been followed by the engagement 18 partner and the manager? 19 A. I don't remember specifically whether 20 it was their charge to go through the audit 21 program and make sure every step had been signed 22 off or not. I don't know that. 10239 1 Q. Was it their responsibility to concur 2 in significant audit interpretations? 3 A. Yes. 4 Q. And was -- what was the role of the 5 engagement partner with regard to assuring that 6 all steps in the audit program at Peat Marwick had 7 been followed? 8 A. It was their responsibility to make 9 sure that that had happened. 10 Q. And what was the engagement partner's 11 responsibility with regard to ascertaining whether 12 or not GAAP had been properly applied to 13 significant accounting issues? 14 A. It was their responsibility to make 15 sure that had happened. 16 Q. Whose responsibility was it to review 17 and supervise the field work that was being done 18 by the seniors and the people that worked for 19 them? 20 A. Primarily the engagement manager. 21 Q. And what was the engagement partner's 22 responsibility with regard to reviewing the work 10240 1 of the seniors to ensure that they had properly 2 applied the field work standards? 3 A. The engagement partners generally 4 reviewed the work papers after the manager had 5 done so. 6 Q. Did the manager ever have the 7 responsibility to go back into the files of the 8 institution to double check the facts that were 9 recorded in the work papers of the audit? 10 A. I would imagine that they would do that 11 if they felt like it was necessary. But 12 typically, no. 13 Q. So, who was it that had the primary 14 responsibility for lifting the facts from the 15 books and records of the institution and 16 summarizing those in the work papers? 17 A. The senior and his field crew. 18 Q. Who was it that designed the work plan 19 for the seniors and their work crew in terms of 20 which books and records they should look to? 21 A. Well, most engagements, I would think 22 it would be the seniors' and managers' job to do 10241 1 that with some collaboration with the partner if 2 it was necessary. 3 Q. Was it customary to collaborate with 4 the partner on that issue at Peat at the time you 5 were there? 6 A. I think we did it in the case of 7 complicated situations or large engagements, yes. 8 Q. Now, had you, prior to supervising the 9 audit or being the engagement partner on the 10 audits of USAT, ever encountered accounting issues 11 related to mortgage-backed securities 12 risk-controlled arbitrage programs? 13 A. Not that I recall. 14 Q. Had anyone involved in the engagement 15 as part of the audit team been involved in 16 accounting issues regarding mortgage-backed 17 securities risk-controlled arbitrage programs 18 prior to encountering them at USAT? 19 A. Not that I recall. 20 Q. Had anyone -- or had you ever 21 encountered the use of swaps as hedging 22 instruments for mortgage-backed securities on any 10242 1 previous audit engagements? 2 A. Not that I recall. 3 Q. Had anyone on the team, the audit team, 4 encountered swaps used as part of hedging 5 instruments for mortgage-backed securities prior 6 to USAT, to your knowledge? 7 A. Not to my knowledge. 8 Q. Had you ever encountered the practice 9 of rebalancing a mortgage-backed security 10 portfolio in order to more closely match the 11 durations of mortgage-backed securities with 12 hedging instruments or liabilities prior to 13 encountering that activity at USAT? 14 A. Not that I recall. 15 Q. Was the first situation where you 16 encountered rebalancing of a mortgage-backed 17 security portfolio the purported roll-down at the 18 beginning of 1986 at USAT? 19 A. I do not know. 20 Q. Now, in some of the literature we're 21 going to talk about, there's made reference to two 22 entities. One is a thing called FASB, F-A-S-B. 10243 1 Can you tell us what that is? 2 A. If I remember correctly, the Financial 3 Accounting Standards Board was the primary body 4 that set rules for accounting principles. 5 Q. And there's also an entity called -- 6 that's referred to as EITF. Can you tell us what 7 that refers to? 8 A. Again, if I recall, the Emerging Issues 9 Task Force was just components of FASB, if I'm not 10 mistaken. I think it was. But they generally 11 attacked quick-moving issues and came out with 12 statements defining the accounting rules that 13 somebody should follow. 14 Q. Okay. Now -- and I know it's a long 15 time since you've been involved in public 16 accounting. 17 What is your present position now? Are 18 you a CFO of a company? 19 A. I'm chief executive officer. 20 Q. Chief executive officer? 21 A. Uh-huh. (Witness nods head 22 affirmatively.) 10244 1 Q. So, how long has it been since you sort 2 of practiced accounting? 3 A. It's been pretty much since I left Peat 4 in '86. So, it's been a while. 5 Q. So, we're going to be asking you some 6 questions about some general principles and I know 7 that we're asking you to recall things from the 8 past. To the best you can, we appreciate your 9 answers. 10 One of the questions I have for you is: 11 Basically, whose responsibility is it for the 12 preparation and the development of financial 13 statements that are issued by a company that's 14 regulated by the Securities and Exchange 15 Commission? 16 A. It's the client's responsibility. 17 Q. Now, what is the role of the auditor in 18 relationship to the client's responsibility? 19 A. To do enough work to issue an opinion 20 that those financial statements present fairly. 21 Q. Now, what does the term "fairly" refer 22 to when it's the auditor's responsibility to 10245 1 ascertain whether or not those statements are 2 reported fairly? 3 A. Well, I'm not sure I know how to answer 4 that in any kind of definitive way. 5 Q. Is it the responsibility of the auditor 6 to certify total accuracy? 7 A. No, it is not. 8 Q. Is it the responsibility of the auditor 9 to uncover all defalcations, if they exist? 10 A. I don't think that it is, no. 11 Q. Now, in terms of the field work that 12 the seniors were doing and supervising people, 13 what sort of documents would they look to and be 14 justified in relying upon in doing their work to 15 generate the facts for Peat Marwick to ascertain 16 whether or not the financial statements had been 17 presented fairly in accordance with GAAP? 18 A. I think there's a laundry list of the 19 kinds of evidence within the accounting literature 20 somewhere that is more reliable and less reliable 21 in a descending order. But generally, it's 22 something generated by a third party or gotten 10246 1 from a third party by the auditor that's thought 2 of as being more reliable than something that's 3 found internally. 4 Q. Now, what -- to what extent is the 5 auditor justified in relying upon representations 6 of the client about the client's intentions? 7 A. Typically, that would be one of those 8 areas that would be the least reliable source of 9 evidence. But there are certain cases where 10 that's about all you've got when it comes to 11 matters of intent. 12 Q. Now, when representations are the only 13 source that you have as an auditor, do you require 14 those to be in writing or -- 15 A. If you're relying on them, yes, they 16 need to be in writing. 17 Q. And that's your understanding of what 18 the literature required at the time? 19 A. It's my understanding, yes. 20 Q. And are you allowed to rely upon 21 written representations that are made to third 22 parties, or do they have to be made to the 10247 1 auditor -- the auditing entity itself? 2 A. I don't know that I recall any 3 representations made to third parties being used 4 with much reliance placed on them, unless there 5 was some other corroborating evidence to go along 6 with it. 7 Q. Now, with regard to work papers -- 8 we've seen the use of Peat Marwick's work papers 9 in this litigation, and we'll see more of them as 10 we move forward. 11 Can you tell us what the work papers 12 are and what they are supposed to consist of? 13 A. In a general sense, they are the 14 documentation for the audit that we did. 15 Q. The -- is it the purpose of work papers 16 to provide a contemporaneous description of the 17 events so that, looking back, you have a record 18 that was generated close to the time in which the 19 events occurred? 20 A. I'm not sure I understand the question. 21 Q. Well, is one of the reasons for the 22 work papers so that you have a written record of 10248 1 what occurred approximately at about the time the 2 events occurred that are recorded in the work 3 papers? 4 A. I would assume that's true. 5 Q. And at Peat Marwick, were there other 6 files of clients, in addition to work paper files, 7 that would refer to accounting issues that came 8 up? 9 A. You mean other than the audit work 10 papers? 11 Q. Other than the audit work papers. 12 A. If I remember correctly, yes, there 13 were. 14 Q. Okay. Can you tell us what some of 15 those files were? 16 A. There were certainly tax files, if it 17 was a tax client, that might not be part of the 18 audit process. There might have been 19 correspondence files that weren't part of the 20 audit process. Those are the only two that come 21 to mind right now. 22 Q. Was there ever any reference to a file 10249 1 called the permanent files? 2 A. Uh-huh. (Witness nods head 3 affirmatively.) 4 Q. Was that part of the audit work papers, 5 or were they kept separate? 6 A. I consider them part of the work 7 papers. 8 Q. Okay. And what about the 9 correspondence files? Were they part of the work 10 papers? 11 A. I didn't consider them as such. 12 Q. All right. And what about the tax 13 files? 14 A. I didn't consider them as such unless 15 it had something to do with the tax accrual. 16 Q. Now, what sort of documents would be 17 included in the correspondence file? 18 A. Typically, just general correspondence 19 between the client. If you're having meetings or 20 if you're -- somebody's having a seminar somewhere 21 that they want to invite you to, just things like 22 that that are extraneous and don't have anything 10250 1 to do with audit procedures. 2 Q. Did the correspondence files -- or did 3 they also contain discussions of various 4 accounting issues that would come up not during 5 the time of the audit? 6 A. I'm sure something like that could find 7 its way to the correspondence files; but if it had 8 anything to do with the audit, then it should be 9 in the audit work papers, as well. 10 Q. If it had anything to do with the 11 application of generally-accepted accounting 12 principles, the facts that were facts of events of 13 the client, did those find their way into the work 14 papers? 15 A. I would think they would. 16 Q. Now, we have talked about two documents 17 in the course of discussing matters with witnesses 18 here that are called management letters, I think. 19 Can you tell us what management letters 20 are and what their purposes were at Peat Marwick? 21 A. Typically, it's a letter written to the 22 management of the client subsequent to an audit 10251 1 being performed delineating any changes we feel 2 like they should make in their internal controls 3 or in their procedures that we found during the 4 audit. 5 Q. And was it customary to provide a 6 management letter to a client every time an audit 7 was issued? 8 A. Yes. 9 Q. And I'd like to direct your attention 10 now to Exhibit A7004, which is the management 11 letter of February 19th, 1985. It's at Tab 815. 12 THE COURT: Could we have a copy, 13 Mr. Guido? 14 MR. GUIDO: I'm sorry, Your Honor. 15 16 (Discussion off the record.) 17 18 MR. NICKENS: Your Honor, I think I've 19 misled Mr. Guido. We tried to get the tab numbers 20 before and we looked at T7004, which is at Tab 21 815. Is A7004 in the record? 22 MR. GUIDO: Your Honor, I move the 10252 1 admission of A7004. 2 MR. NICKENS: No objection. 3 THE COURT: Received. 4 Q. (BY MR. GUIDO) I'd like to direct 5 your attention to the last page of the document. 6 It talks about -- Exhibit II. It says, "As part 7 of an examination of financial statements, we 8 perform a study and evaluation of an association's 9 system of internal accounting control to the 10 extent we consider necessary to evaluate the 11 system as required by generally-accepted auditing 12 standards. The purpose of our study and 13 evaluation is to determine the nature, timing, and 14 extent of the auditing procedures necessary for 15 expressing an opinion on an association's 16 financial statements. Our study and evaluation is 17 more limited than would be necessary to express an 18 opinion on the system of internal accounting 19 controls taken as a whole." 20 Do you see that paragraph? 21 A. Yes. 22 Q. Is that the reference to what you were 10253 1 describing the purpose is of the management letter 2 for the clients? 3 A. The purpose of a management letter? 4 Could you restate that? I'm not sure -- 5 Q. Is this essentially the purpose of a 6 management letter that you've described? 7 A. To do what? 8 Q. To provide information on the internal 9 controls that you considered necessary to evaluate 10 the system required by generally-accepted auditing 11 standards. 12 A. Yes. 13 Q. So, it's no special study. It's just a 14 study in the course of an audit in which you find 15 that may raise questions about the systems of 16 internal controls? 17 A. That's correct. 18 Q. But it's not a special -- 19 A. That's correct. 20 Q. -- piece of work? Now, I'd like to 21 direct your attention to Page 2 of Exhibit I, 22 which is Imaging No. OW120474. Do you see the 10254 1 section that says "loss reserves"? 2 A. Yes. 3 Q. It says "In previous years, 4 documentation of loss reserve calculations has not 5 required a major effort by the association due to 6 a relatively few troubled properties and generally 7 stable or appreciating real estate values. In the 8 last half of 1984, however, the association 9 encountered a rapidly escalating trend of loan 10 delinquencies and related foreclosures. This 11 trend, coupled with decreasing values in certain 12 real estate markets, resulted in a higher level of 13 loss reserves being applied to loans and real 14 estate. Formal procedures for documenting loss 15 reserves of this magnitude had not been 16 established and the review of such investments was 17 not precisely documented. We recommend that the 18 review procedures be analyzed and formal 19 documentation procedures be established." 20 Do you see that paragraph? 21 A. Yes. 22 Q. What does it mean when you say, the 10255 1 second-to-last sentence, "formal procedures for 2 documenting loss reserves of this magnitude had 3 not been established and the review of such 4 investments was not precisely documented"? 5 A. I don't know what this means in this 6 particular case. I don't remember. 7 Q. The -- but it does indicate that for 8 some reason, you think that there is a lack of 9 appropriate procedures in place? 10 A. I don't know if it says the procedures 11 don't exist. It says they weren't documented very 12 well. 13 Q. Okay. I'd like to show you now 14 Exhibit A7006, which is the next year's management 15 letter. And it's dated January 31, 1986. 16 MR. GUIDO: And I'd like to move the 17 admission of A7006, Your Honor. 18 MR. NICKENS: No objection, Your Honor. 19 THE COURT: Received. 20 Q. (BY MR. GUIDO) Now, I'd like to 21 direct -- well, before I do that, take a look the 22 first page of the letter -- at A7006. It says, 10256 1 "Very truly yours, Peat Marwick Mitchell 2 & Company." 3 Is that your handwriting? 4 A. Yes, it is. 5 Q. Now, why was it signed as Peat Marwick 6 Mitchell & Company? 7 A. I don't know. I really don't remember 8 why we had the firm's name on management letters. 9 Q. I mean, the opinions that are attached 10 to financial statements have historically always 11 included the firm's name, have they not? 12 A. That's correct. 13 Q. But you don't remember why the 14 management letters were done the same way? 15 A. I assume it's for the same reason: 16 That it's not my letter, it's the firm's letter. 17 Q. Okay. Now, I'd like to direct your 18 attention to the second page of the document, 19 which is the first page of Exhibit I. 20 Do you see where it says "appraisals" 21 at the bottom there? 22 A. Yes, uh-huh. 10257 1 Q. It says, "The review of loans 2 receivable on real estate acquired for development 3 or sale reveals certain deficiencies related to 4 appraisals. We understand that the association 5 has initiated a review of existing appraisals to 6 determine compliance with the applicable rules and 7 regulations and establish procedures to determine 8 compliance for future appraisal reports." 9 Do you see that? 10 A. Yes. 11 Q. Now, I have two questions about that 12 paragraph. Do you know what it's referring to 13 when it's talking about certain deficiencies 14 related to appraisals? 15 A. I certainly don't remember the specific 16 ones here, no, I don't. 17 Q. Okay. And then it says, "We understand 18 that the association has initiated a review of 19 existing appraisals to determine compliance with 20 the applicable rules and regulations and establish 21 procedures to determine compliance with future 22 appraisal reports." 10258 1 Why, if the client was already doing 2 this, was this pointed out in a management letter 3 to the client? 4 A. It was our procedure to do that. By 5 the time we had found it and they had started 6 working on it, it didn't mean that it would come 7 out of the letter. So, typically, we would make 8 this comment, even if it had been fully corrected 9 by the time we issued the letter. 10 Q. Was one of the practices of 11 Peat Marwick -- and it will come up later on when 12 I talk about another management letter. Was it a 13 practice to send a draft so that the client -- 14 which set out what the potential deficiencies were 15 so that the client could respond and inform 16 Peat Marwick of what it intended to do in response 17 to the criticism so that that could be included in 18 the letter? 19 A. Yes. 20 Q. Now -- and that could be the reason for 21 the second sentence of this paragraph? 22 A. Very well could be. 10259 1 Q. I'd like to show you Exhibit T7793 now, 2 if I may, which is a document -- looks like it's 3 dated 12-31-86. It is -- it looks like it's work 4 paper T-62, which we've obtained from the 5 Peat Marwick work papers. 6 Do you recognize the initials in the 7 right-hand corner at the top? 8 A. No, I don't. 9 Q. This says "Memo regarding large loans," 10 and it's Loan No. 14-132756. Loan name: Park 410 11 West. Appraiser: Edward B. Schulz, March 19th, 12 1986. Appraised value: 88 million. USAT 13 balance: $52,533,899, and a commitment of 14 $80,000. 15 MR. GUIDO: I move the admission of 16 T7793. 17 MR. NICKENS: I have no objection to 18 the document, Your Honor, although I will point 19 out that it appears that it was authored several 20 months after Mr. Millinor left Peat Marwick. 21 THE COURT: All right. Received. 22 Q. (BY MR. GUIDO) It says, "Comments. 10260 1 The appraiser assumes continued growth in the 2 San Antonio area despite obvious competitive 3 pressures in the area. Accordingly, he assumes 4 appreciation rates of 5 percent during the third 5 and fourth semi-annual periods, 10 percent for the 6 fifth and sixth semi-annual periods, 5 percent for 7 the seventh and eighth semi-annual periods, and 8 5 percent for the ninth semi-annual period. Based 9 upon our knowledge of the San Antonio real estate 10 market, we question the propriety of such 11 appreciation assumptions." 12 Do you see that paragraph? 13 A. Yes. 14 Q. Was it customary in auditing the 15 financial statements of savings and loans, real 16 estate loans, to attempt to ascertain the 17 reasonableness of the assumptions that underlie 18 the appraisals that were used as the basis for 19 making loans? 20 A. Yes. 21 Q. And in the course of doing so, did 22 Peat Marwick maintain files of market conditions 10261 1 in various locales in which its clients were doing 2 business to ascertain the reasonableness of the 3 assumptions underlying the appraisals that the 4 client had relied upon? 5 A. I don't know whether "files" is the 6 right word. We had certain kinds of information 7 that was available to us. Sometimes we had 8 correspondence or conversations with Peat Marwick 9 offices in those areas, if it wasn't local. We 10 did the best we could to find that kind of 11 information. 12 Q. Did you have a group of people within 13 Peat Marwick whose responsibilities were to 14 monitor market conditions for real estate in 15 various locales? 16 A. Not that I recall. 17 Q. Did Peat Marwick have access to 18 entities that did maintain such information? 19 A. To the extent anybody would have access 20 to those kinds of folks, I assume we would, yes. 21 Q. Now -- then it says, "Final estimated 22 value and primary emphasis for the appraisal 10262 1 report is placed on the discounted sell out 2 calculation. As the appraiser used semi-annual 3 sell out periods starting at the date of the 4 appraisal, the project should be complete for 5 Period 1 and into Period 2. The appraisal report 6 assumes $11 million in presales and an additional 7 11 million of sales in the first period, or a 8 minimum of 22 million of sales was expected by 9 December 31, 1986. Our understanding indicates 10 that there have been no sales to date. Deferring 11 the sales for an additional semi-annual period 12 would cause a significant change in the discount 13 amount." 14 Do you see that paragraph? 15 A. Yes. 16 Q. I know it's been a long time since 17 you've done any of this; but if you can, can you 18 tell us what the last sentence is referring to 19 when it says "deferring the sales for an 20 additional semi-annual period would cause a 21 significant change in the discount amount"? 22 A. I don't know about this specific case, 10263 1 but I assume what that means is when you postpone 2 the cash flows coming off of any project out into 3 the future and discount them back, then you get a 4 lower number. 5 Q. Because it's a longer time period that 6 you're discounting it back for; is that correct? 7 A. I assume that's what it means, yes. 8 Q. Now, in the last paragraph, it says "In 9 light of the current soft real estate market in 10 San Antonio and the discrepancies between the 11 actual sales performance and the expected sales 12 for the appraisal report, we would recommend that 13 United perform an NRV on the project using 14 reasonable appreciation assumptions and sellout 15 periods." 16 Do you see that? 17 A. Yes. 18 Q. What is an NRV? 19 A. Net realizable value. 20 Q. And why was that significant to be 21 applied in this circumstance? Do you know? 22 A. You mean to calculate net realizable 10264 1 value? 2 Q. Yes. 3 A. Well, that implies a discounted cash 4 flow stream. So, if I remember correctly at the 5 time, Peat Marwick had elected not to have 6 in-house appraisers. We did not want to be 7 appraisers. We didn't think that was our role in 8 life. Our job was to evaluate the appraisals that 9 were in files and, if we thought they were 10 deficient, to challenge the client to come up with 11 something that was a little bit more believable. 12 Q. And now I'd like to direct your 13 attention back to Exhibit A7006, that paragraph on 14 appraisals. 15 A. Uh-huh. 16 Q. And is it this sort of concern that is 17 expressed in T7793 that was addressed in the 18 appraisal section of A7006? 19 MR. NICKENS: Your Honor, I don't know 20 what "this sort of concern" is when the document 21 7793 is 12 months after -- or 11 months after 22 A7006. 10265 1 MR. GUIDO: I'll rephrase the question, 2 Your Honor. 3 Q. (BY MR. GUIDO) It says that -- under 4 "appraisals" on A7006, it says, "The review of 5 loans receivable in real estate acquired for 6 development or sale revealed certain deficiencies 7 related to appraisals." 8 Can one of the deficiencies that had 9 been referred to there have been the failure for 10 the appraisal to have reasonable assumptions about 11 the market conditions? 12 A. I couldn't say. 13 Q. I'd like to move to the top of that 14 page that we're looking at on A7006 that talks 15 about investment securities and securities 16 trading. It says, "There was a significant 17 increase in the volume of securities trading in 18 1985 which directly affected the treasury 19 department. Additionally, the association 20 established a trading room to facilitate 21 securities trades. This increased activity in 22 addition of the trading room has caused 10266 1 deficiencies in the system of internal accounting 2 controls." 3 And then look at bullet point number -- 4 the first one there. It says "Formal trade room 5 policies and procedures for authorization, 6 approval, and initiation of transactions have not 7 been documented. Such policies and procedures 8 should be established with an appropriate control 9 procedure to document approval of the 10 transactions." 11 I know it's been a long time since that 12 paragraph or bullet point was drafted, but can you 13 tell us what your understanding of that language 14 is? 15 A. Well, I don't have a recollection of 16 any specifics at the time. What this seems to say 17 to me is that whatever they had there was 18 auditable, but the audit trail wasn't as clean as 19 it should be and we were asking them to improve 20 that. 21 Q. Now, look at the third bullet point. 22 It says, "Internal trade tickets prepared by the 10267 1 trading department are not always completed 2 properly and approved on a timely basis." 3 Do you see that? 4 A. Yes. 5 Q. What is the significance of the trade 6 tickets and why they needed to be completed 7 properly and approved on a timely basis? 8 A. I really don't recall. 9 Q. I'd like to now direct your attention 10 to Exhibit A7008, which is dated February 6th, 11 1987, and has previously been admitted into 12 evidence, Your Honor. I have -- 13 MR. NICKENS: I think the same error 14 was made, Mr. Guido. That was T7008. 15 MR. GUIDO: Okay. So, this has not 16 been -- 17 MR. NICKENS: That's correct. 18 MR. GUIDO: I think that this was 19 discussed with Mr. Wolfe because I recognized the 20 section in this document. 21 MR. NICKENS: I've asked the only 22 person I know to ask that could -- and she was 10268 1 unable to find the reference. 2 Q. (BY MR. GUIDO) Now, I'd like to 3 direct your attention to the third page of the 4 letter, which talks about reserves for estimated 5 losses. 6 A. Do I have the document you're referring 7 to? 8 Q. Oh, I'm sorry. I have your copy. This 9 again talks about reserves for losses and it -- 10 I'd like to direct your attention to the beginning 11 of the section that says "reserves for estimated 12 losses." 13 It says "The economic environment in 14 which the association operates has resulted in the 15 provisions and allowances for estimated losses 16 having a significant impact on the association's 17 financial statements. 18 And then it goes on and it has reasons 19 or additional observations. But I want to direct 20 your attention to the second full paragraph that 21 says, "We believe that improvements can be made 22 relating to the documentation of reserves as 10269 1 follows: Although the association has prepared an 2 analysis of its reserves on a quarterly basis, the 3 association did not prepare a comprehensive 4 bridging memorandum approved by senior management 5 providing rationale as to the final determination 6 of the estimated reserves." 7 Do you see that? 8 A. Yes. 9 Q. What is a bridging memorandum? 10 A. I do not know. I didn't write this or 11 read this; so, I'm not sure what they mean there. 12 Q. Now, this is -- this had been drafted 13 after you had left -- 14 A. Yes, but it's not a term that had any 15 particular meaning at the time that I can 16 remember. 17 Q. Okay. Now -- then, if you look at the 18 last paragraph on that page, it says, "When 19 determining which loans require updated appraisals 20 for determination of estimated loss reserves, 21 additional consideration is to be given to 22 performance of certain loans in relationship to 10270 1 the original underwriting expectations and the 2 assumptions documented in the original appraisals. 3 In certain instances, updated appraisals were not 4 obtained for loans not performing in accordance 5 with original expectations. We believe that the 6 association should give consideration to 7 performance, economic trends, and continued 8 feasibility of a project, as well as the length of 9 time since the prior appraisal." 10 Do you see that? 11 A. Yes. 12 Q. Now, included within those 13 observations, are the types of criticisms that are 14 set out in T7793 included? 15 A. I don't understand the question. 16 Q. That's the Park 410 document. 17 A. Ask the question again. 18 Q. Are the type of objections or the type 19 of observations that are made with regard to the 20 deficiencies in the appraisals that are addressed 21 in T7793 of the type that are addressed in the 22 last paragraph of the first page of the exhibit to 10271 1 A7008 at OW011337? 2 A. Could they be? 3 Q. Yes. 4 A. They could be. 5 Q. Do they appear to be to you, based on 6 your experience at Peat Marwick? 7 A. It sounds like it could be. 8 Q. Now, I'd like to -- 9 MR. NICKENS: Your Honor, for the 10 record and before would we move on to the next 11 document, this document was admitted as B1481 at 12 Tab 902. 13 THE COURT: Thank you. 14 Q. (BY MR. GUIDO) Now, I'd like to move 15 to the USAT Mortgage Finance transaction. 16 MR. GUIDO: And Your Honor, I will be 17 looking -- using Exhibits B819, A10594, B892 in 18 discussing this issue with Mr. Millinor. 19 THE COURT: What were those numbers 20 again, Mr. Guido? 21 MR. GUIDO: B819, Your Honor, which is 22 the Rick Millinor handwritten memorandum that was 10272 1 converted to typewritten form. The second is 2 A10594, which is the Joe Phillips memorandum to 3 the file dated January 10th, 1986. That's A10594. 4 And then the third is the Joe Phillips memo to the 5 file that was March 25th, 1986. It was B892, Your 6 Honor. 7 THE COURT: Thank you. 8 Q. (BY MR. GUIDO) Now, I'd like to 9 direct your attention to B819, Mr. Millinor. 10 Have you had an opportunity to review 11 this prior to appearing here as a witness today? 12 A. In the handwritten form, yes. 13 Q. Now, it says, "As discussed in a memo 14 from Joe Phillips dated 1-10-86, United sold some 15 mortgage-backed securities in 1985 that were 16 included in their interest rate swap program." 17 Now, this is -- the handwritten 18 rendition says it's PMM Work Paper Z-56. In the 19 far right-hand corner at the bottom, it has some 20 initials on that handwritten document. 21 Do you see that? 22 A. Yes. 10273 1 Q. Whose initials are those? 2 A. I don't know. 3 Q. Now, is that your handwriting on that 4 document? 5 A. Yes. 6 Q. Okay. Is it the practice of people on 7 an engagement team if they have reviewed a 8 document that was part of the work papers prepared 9 by someone else to initial them to indicate that 10 they have reviewed those documents? 11 A. Up through the senior at least, it is. 12 I'm not sure about managers. I don't remember 13 whether we required managers to sign every work 14 paper or not. 15 Q. Now, I'd like to direct your attention 16 to the last page of the packet of materials, which 17 is a memo from Joe Phillips to the file dated 18 January 10th, 1986. Subject: MBS sale. 19 This document was prepared by you, was 20 it not? The handwritten document was prepared 21 and, essentially, it summarizes your understanding 22 of the facts with regard to the sale of 10274 1 mortgage-backed securities out of a subsidiary of 2 USAT? 3 A. You're talking about B819? 4 Q. Yes. 5 A. Yes. 6 Q. Now, remember when I spoke with you 7 earlier about who did what in the course of an 8 audit and who went and looked at the underlying 9 factual information and developed the summaries 10 that went into the work papers and you indicated 11 that was primarily the responsibility of the 12 seniors and the people working for them and 13 possibly the manager? 14 A. (Witness nods head affirmatively.) 15 Q. Here we have an instance where you as 16 the engagement partner prepared the memorandum. 17 Was there a reason in this instance why 18 you were the person who prepared this document? 19 A. Any time that we correspond with New 20 York professional practice, typically it's the 21 partner that's doing that -- it certainly was in 22 that case. And I was the one that had the 10275 1 relevant facts of what people said and what the 2 conclusions were. 3 Q. So, when it comes to documentation of 4 the advice from the New York practice group or 5 subject matter practice group in New York, it's 6 the responsibility of the partner to do that and 7 that's why you wrote this work paper? 8 A. Much more typically, it's the partner, 9 yes. 10 Q. Okay. Now, I want to go through some 11 of the statements here and ascertain your 12 understanding of some of those. 13 A. Okay. 14 Q. The factual basis says "As discussed in 15 a memo from Joe Phillips dated 1-10-86, United 16 sold some mortgage-backed securities in 1985 that 17 were included in their interest rate swap program. 18 The securities were sold at a gain and were sold 19 only because United had to unwind a single-purpose 20 subsidiary that didn't meet with regulatory 21 approval." 22 Was the only source of that factual 10276 1 information the Joe Phillips memo to the file 2 dated January 10th, 1986, that's attached to that 3 exhibit? 4 A. I don't recall. 5 Q. Okay. Could there have been other 6 sources of information that you relied upon for 7 this memorandum? 8 A. Certainly. 9 Q. Now, would there have been audit work 10 papers that would have reflected the summary of 11 the facts that you relied upon? 12 A. I wouldn't be surprised if there were 13 work papers like that. 14 Q. And would you not -- would you not be 15 surprised if there were not work papers, that this 16 was the only summary that existed? 17 A. Well, certainly there were work papers 18 involved with that sub. I mean, that was -- if I 19 remember correctly, that was a public entity. 20 There was a lot of work that went into forming and 21 pulling down that subsidiary. So, there had to 22 have been work papers associated with it. 10277 1 Q. You mean USAT Mortgage Finance was a 2 publicly-traded entity? 3 A. If I remember correctly, it was. Maybe 4 not. I'm sorry. But I thought that it was. At 5 some point in here, we were dealing with Wall 6 Street firms. Goldman Sachs was involved with one 7 of these. So, I assumed it was a publicly -- 8 maybe it wasn't. 9 Q. The sub that I'm asking you questions 10 about was created in -- around November 15th of 11 1985 and disbanded in December of 1985 and it was 12 to hold $500 million of mortgage-backed 13 securities. 14 A. Then this is not the same thing. 15 Q. Then the -- what were the 16 representations -- now, you indicated that in 17 terms of representations from the client, you 18 would get them in writing to assure their accuracy 19 as much as possible. 20 A. Uh-huh. (Witness nods head 21 affirmatively.) 22 Q. What were the representations in 10278 1 writing that you got from the client with regard 2 to why the subsidiary had to be unwound? 3 A. I don't recall. 4 Q. Wouldn't the Joe Phillips memo to the 5 file have constituted an acceptable written 6 representation? 7 A. It's conceivable that it could. 8 Q. Now, then there is the statement 9 "Although United matches up their securities with 10 their swaps on a macro basis, no specific 11 identification exists between any single security 12 or group of securities and any single swap 13 agreement." 14 Do you see that? 15 A. Yes. 16 Q. Do you know what the reference to macro 17 is that you make there? 18 A. If I remember correctly, that's simply 19 a term to define something that isn't matched up 20 on a security-by-security basis, that there is a 21 portfolio on the left-hand side and a portfolio on 22 the right-hand side that they have tried to match 10279 1 up. But it's not tied together on a 2 security-by-security basis. 3 Q. What is the significance of that, or 4 what was the significance? 5 A. If I remember correctly, the 6 significance to us was that it made it more 7 difficult to determine what was in a hedge and not 8 in a hedge. If all you had was a client saying 9 "We have put this bag in this bag and matched them 10 up and, therefore, it's a hedge according to the 11 accounting rule," it made it harder to define that 12 as opposed to what historically people had used as 13 hedges, I think, where very specific 14 identification of a loan by loan or security by 15 security was in the hedge and you would know very 16 clearly when something was broken out of a hedge. 17 Q. Now, is that because of the applicable 18 accounting literature on when you could defer 19 gains or losses as part of the hedge instrument? 20 A. Is what because? 21 Q. Was the significance of the difference 22 between macro and micro for accounting purposes 10280 1 the -- whether or not FASB 80, for example, that 2 dealt with accounting for hedges was applicable to 3 the transaction? 4 A. If I remember correctly, that was the 5 issue. 6 Q. So, if it was a macro basis, then FASB 7 80 wasn't applicable? 8 A. I can't recall that specifically. 9 Q. But it was -- whatever macro, micro was 10 applied to, it's your understanding that that 11 macro distinction as opposed to a micro 12 distinction determined whether or not the 13 accounting literature had been satisfied? 14 A. I don't remember it being that precise. 15 This could be nothing more than my word trying to 16 deal with something that maybe we hadn't seen 17 before and trying to figure out what the rules 18 were for such -- 19 Q. Had you ever seen a transaction like 20 this before? 21 A. I don't recall. 22 Q. Now, it says -- the next sentence -- 10281 1 "They are free to trade the securities included in 2 the swap program without violating the swap 3 agreements." 4 Do you see that? 5 A. Uh-huh. (Witness nods head 6 affirmatively.) 7 Q. Is that what you're referring to when 8 you make reference to "macro" there? 9 A. I assume so. 10 Q. Okay. Then it says, "Because the 11 forced sale of securities left an imbalance 12 between the securities portfolio and the swap 13 agreements, United entered into a mirror swap that 14 offset the imbalanced position." 15 Do you see that? 16 A. Yes. 17 Q. What does the reference to "mirrored 18 swap" mean to you? 19 A. I don't recall exactly what they did. 20 Q. But it refers to as a swap transaction 21 essentially offset the imbalanced position. 22 Is that basically just going the 10282 1 opposite way on the swap that's outstanding? 2 A. I don't recall even which way they were 3 out of balance other than what this memo seems to 4 say is that this was what they did instead of 5 buying more securities, which they couldn't do. 6 Q. Well, the memorandum that's attached, 7 the Joe Phillips memorandum, says "The 8 $350 million worth of mortgage-backed securities 9 were sold and, as a consequence, there were swaps 10 out there that were extending the life of reverse 11 repos to the assumed life of some mortgage-backed 12 securities but those mortgage-backed securities no 13 longer existed." 14 A. Uh-huh. (Witness nods head 15 affirmatively.) 16 Q. Do you see that? So that that trend -- 17 so that there is a swap sitting out there. There 18 are no reverse repos and there are no 19 mortgage-backed securities any longer. 20 Is that what the "imbalanced position" 21 refers to here? 22 A. I don't know. It's been much too long. 10283 1 Q. We'd have to look at that ourselves? 2 A. Yes. 3 Q. Then it says "Because United was close 4 to their regulatory growth limits, they didn't 5 have the option of simply buying more securities 6 at the S&L level to cure the imbalance." 7 Do you see that? 8 A. Yes. 9 Q. What is the factual basis for that? 10 The Joe Phillips memo again? 11 A. I would assume that there were work 12 papers besides Joe Phillips' memo documenting that 13 they were close to their growth limits and 14 couldn't expand the balance sheet that way. 15 Q. If we can't find any, can we assume 16 that there were not any? 17 MR. NICKENS: Your Honor, I object to 18 that question. 19 A. I don't know how to answer that. 20 MR. NICKENS: I mean, I don't know -- 21 "if we can't find any," what kind of assumption is 22 that for the witness to work on? It's pure 10284 1 speculation. And it's a hypothetical for which 2 there is nothing in the record and there will not 3 be anything in the record. 4 MR. GUIDO: I'll rephrase the question, 5 Your Honor. 6 THE COURT: All right. 7 Q. (BY MR. GUIDO) Do you know whether or 8 not there are any work papers other than this work 9 paper reflecting this transaction? 10 A. I don't have any specific recollection, 11 no, I do not. 12 Q. All right. Now, it says "After 13 learning of these transactions, I felt that some 14 accounting questions existed as to the proper 15 treatment for GAAP. I talked to Walter Erickson 16 and Walter Schuetze about this topic and learned 17 the following: One, under no circumstances would 18 GAAP require or even permit the deferral of the 19 gain on sale of securities whether in a swap 20 program or not." 21 Do you see that? 22 A. Yes. 10285 1 Q. Is that your general understanding of 2 the literature at the time? 3 A. I don't have a recollection of the 4 literature at the time. 5 Q. Okay. And then it says, "Two, we do 6 not believe that GAAP and RAP would require loss 7 recognition of the cost of the swap" -- 8 THE COURT: Would you read that -- 9 start over again, Mr. Guido? 10 MR. GUIDO: I'm sorry. 11 Q. (BY MR. GUIDO) No. 2, "We do believe 12 that GAAP and RAP would require loss recognition 13 of the cost of a swap agreement being terminated 14 concurrently with the security sale. Terminated 15 defined as closing the swap and paying the broker 16 for any inherent loss in the contract." 17 Do you see that? 18 A. Yes. 19 Q. And then it says, 3, "United's use of a 20 mirror wasn't anything that seemed to fit 21 comfortably within recognized GAAP." 22 Do you see that? 10286 1 A. Yes. 2 Q. What in accounting terminology does it 3 mean when an auditor refers to something as not 4 fitting comfortably within recognized GAAP? 5 A. Well, I don't know if there is anything 6 generally recognized is what that means. 7 Obviously, at the time, I was very unsure as to 8 how to account for that mirror. 9 Q. This also indicates that so was Walter 10 Erickson and Walter Schuetze? 11 A. No. That's why I called them. 12 Q. Well, it says "I talked with Walter 13 Erickson" -- 14 A. I'm sorry. It says "and learned the 15 following." Perhaps it does mean that, yes. 16 Q. So, they indicated that it didn't fit 17 comfortably within recognized GAAP to them? 18 A. That could be. It sound like that was 19 the case, yes. 20 Q. Does that mean that there isn't any 21 literature or any practice that indicates that 22 that's a generally-accepted accounting principle? 10287 1 A. That very well could be true. There 2 were a lot of things like that at the time. 3 Q. Now, remember we talked about -- well, 4 let's look at the last sentence on this page. It 5 says, "Given the facts and circumstances, it does 6 not appear to me that we have any firm rules that 7 would require any 1985 loss recognition to offset 8 United's 1985 gain." 9 Do you see that? 10 A. Yes. 11 Q. Now, do you remember we discussed 12 earlier who was responsible for the financial 13 statements that were issued by a client and you 14 indicated that it was the management's 15 responsibility? 16 A. Client. 17 Q. Client's management's responsibility? 18 A. Yes. 19 Q. And you indicated what the auditor's 20 responsibility was. 21 Was it your understanding at the time 22 that the auditor was obligated to accept the 10288 1 application of generally-accepted accounting 2 principles that were applied by the client unless 3 there was literature that had indicated -- or 4 generally-accepted accounting principles that 5 indicated that that was an inappropriate 6 application of GAAP? 7 A. Not necessarily. I think there were a 8 lot of gray areas where the accounting rules 9 weren't precise, but the accountant had to decide 10 what the rule was or what the rule's intent was. 11 And then it was their job to decide whether the 12 client had financial statements that were in 13 accordance with GAAP. 14 Q. So, there were times when the 15 literature wasn't necessarily all that clear and 16 the auditor still required the client to adopt the 17 auditor's view of what was appropriate? 18 A. Well, required them -- our only choice 19 was to give a clean opinion or not. 20 Q. Right. 21 A. That's right. 22 Q. And if the client wanted a clean 10289 1 opinion, it would have to accept that 2 interpretation? 3 A. Occasionally, it came to that. 4 Q. So, to that extent, it was the 5 auditor's interpretation of GAAP and not the 6 client's? 7 A. That meant what? 8 Q. That determined what GAAP was that was 9 applicable to the client's business? 10 A. Well, if the client didn't agree, the 11 client wouldn't go along with our opinion and they 12 would state their financial statements how they 13 wanted to. 14 Q. And then they would not receive an 15 unqualified opinion? 16 A. That's correct. That's possible. 17 Q. Now -- then, the next sentence says, 18 "United understands the economic reasoning for 19 doing so, however, and has agreed to start 20 offsetting all such gains in '86 so that their 21 spreads will not be distorted." 22 Do you see that reference? 10290 1 A. Yes. 2 Q. And why was it that you suggested to 3 them that they start offsetting all gains in '86 4 so the spreads would not be distorted? 5 A. Well, without remembering precisely 6 what the portfolios looked like or even some of 7 the details in this memo, I remember doing that 8 because I remember clearly the unwinding of that 9 the next quarter when New York forced me to change 10 their position. I felt it made perfectly good 11 sense. 12 Q. Well, I mean, the way I read this 13 sentence, it's saying, "Well, you've recognized 14 gains here on these mortgage-backed securities. 15 If you're going to do this in the future, you've 16 got to recognize a loss on the swap side." 17 Is that a fair reading of that 18 sentence? "However, and has agreed to start 19 offsetting all such gains in '86 so that the 20 spreads will not be distorted"? 21 A. Offsetting gains in '86, correct. 22 Q. Right? 10291 1 A. (Witness nods head affirmatively.) 2 Q. Now, didn't the client essentially do 3 something different? It didn't recognize the 4 gain. It deferred the gain and just spread it out 5 over the life of the swap? 6 A. The only thing I remember precisely is, 7 yes, they deferred gains in '86. 8 Q. Okay. As opposed to recognizing losses 9 to offset gains? 10 A. I don't know what the losses have to do 11 with it, but they deferred gains. 12 Q. Okay. Now, they did that in the 13 beginning of 1986. Now, I'd like to direct your 14 attention to Exhibit A10594, which is another copy 15 of the Joe Phillips document. And it has attached 16 to it another page. 17 And this document is -- the second page 18 is US886. This makes reference to certain 19 publications. 87-7 is the one that has the 20 bracket around it, early termination of an 21 interest rate swap. 22 Do you see that one? 10292 1 A. Yes. 2 Q. Do you know what those references are, 3 84-7, 84-8, and 84-9 on that page? 4 A. No, I don't. 5 Q. Do those look likely Emerging Issues 6 Task Force numbering? 7 A. I don't recall if that's how they 8 numbered their statements or not. 9 Q. Look at the one that's right above the 10 early termination of interest rate swaps where it 11 says "Action, the task force concensus." 12 A. Uh-huh, yes. 13 Q. Is the Emerging Issues Task Force known 14 as "the task force"? 15 A. I don't know if that's what they are 16 referring to or not. 17 Q. Okay. Look at the consensus in the 18 bracketed portion under 84-7 and in the very last 19 sentence, it says, "Under FASB Statement No. 80, 20 the gain or loss on a terminated futures hedge, to 21 the extent it has been an effective hedge, must 22 continue to be deferred and recognized when the 10293 1 offsetting gain or loss is recognized on the 2 hedged" -- H-E-D-G-E-D -- "transaction." 3 Do you see that? 4 A. Yes. 5 Q. What does that refer to, "hedged 6 transaction"? Is that making reference to the 7 hedging instrument, the swap, or the instrument 8 that -- the hedging instrument the swap is 9 hedging? 10 MR. NICKENS: Your Honor, I object. He 11 is asking -- 12 A. I don't know. 13 MR. NICKENS: He asked him what does it 14 refer to, and then he gave -- immediately asked a 15 second question which only gave him two choices. 16 THE COURT: Well, let's hear it without 17 the choices and see if you can answer it. 18 A. I cannot. 19 MR. GUIDO: The witness has indicated 20 he cannot previously in an answer. 21 THE COURT: All right. 22 Q. (BY MR. GUIDO) Now, I'd like to 10294 1 direct your attention to Exhibit B892. This is 2 another memo to the file from Joe Phillips dated 3 March 25th, 1986, and it summarizes the 4 transactions. 5 Have you had an opportunity to review 6 this document, as well? 7 A. I don't know. 8 Q. Will you take a look at the document? 9 A. (Witness reviews the document.) Okay. 10 Q. And you remember the January 10th, memo 11 to the file of Joe Phillips? 12 A. Yes. 13 Q. Now, here what we have is we have the 14 Joe Phillips rendition of the January 10th, '86 15 memorandum attached to your handwritten notes to 16 the work papers without an attachment. We then 17 have the January 10th, '86 memorandum to the file 18 with Joe Phillips as Exhibit 10594 with the 19 attachment, which was not part of Exhibit B819. 20 And now we have Exhibit B892, a March 25th, 1986 21 memo to the file by Joe Phillips. 22 As an auditor, if you had encountered 10295 1 that situation where there were three renditions 2 of written representations to the files, would 3 that have caused you to have concern and initiate 4 additional procedures to ascertain the accuracy of 5 the statements that were made in those documents? 6 A. You mean simply because Joe Phillips 7 wrote two memos to file, was that -- should that 8 be a concern? 9 Q. And they are different. 10 A. Well, I haven't studied them, and I 11 don't know what the differences are. If there 12 were significant differences in fact 13 circumstance -- 14 Q. Yes, uh-huh. 15 A. -- would that be of concern? 16 Q. Uh-huh. 17 A. I imagine it would be, yes. 18 Q. And what does an auditor do under those 19 circumstances? 20 A. Tries to discover what the true facts 21 are. 22 Q. Is that what's referred to as 10296 1 "additional procedures"? 2 A. I don't know what "additional 3 procedures" are. 4 Q. But it would initiate additional 5 auditing steps to ascertain what the correct facts 6 are? 7 A. Very well could. 8 Q. Pardon? 9 A. Very well could. 10 Q. Now, I'd like to shift to another 11 document, which is A10716, which is a memorandum 12 from Mike Crow to Bruce Williams and Jim Wolfe 13 dated January 12th, 1987. Now, this was after you 14 had left; but it deals with this trading versus 15 investment issue. I thought I would use this to 16 refresh your recollection, if necessary, regarding 17 this issue. 18 I'd like to direct your attention to 19 the paragraph that says "accounting guidance." It 20 says, "Substantially all GAAP accounting 21 guidance" -- referring to the issue here -- "is 22 provided by the AICPA Audit of Banks Industry and 10297 1 Audit Guide (The Guide). Management's intent 2 appears to be the prevailing factor in 3 determination of the appropriate accounting. 4 Intent of investment and trading portfolios are 5 summarized from the Guide as follows: If the 6 intent (and the ability) is to hold securities on 7 a longer term basis, with the objective being an 8 optimum balance between credit quality, liquidity 9 and income, the portfolio would be considered an 10 investment account. If the intent is to deal in 11 certain securities for profit, the portfolio would 12 be considered a trading account." 13 Was the application of the standard of 14 determining whether or not an account is to be 15 classified as an investment or trading account, at 16 the time you were at Peat Marwick, primarily one 17 of the client's intention? 18 A. If I remember correctly, we relied very 19 heavily on the client's intent. 20 Q. And you went -- did you go so far as to 21 obtain written representations from the client of 22 what their intentions were? 10298 1 A. Yes, I believe that was part of all of 2 our representation letters. 3 Q. Now, two paragraphs down, it says, 4 "Recording the security in the investment 5 portfolio does not preclude it from being traded 6 if such trading activity has a specific purpose 7 such as maintenance of the optimum balance (as 8 noted above) due to cash requirements, or for tax 9 planning purposes. However, the Guide notes that 10 if there is a substantial turnover in the 11 investment portfolio, management's intention and 12 experience determine whether a trading function is 13 occurring and the appropriate classification and 14 valuation method is to be used." 15 Do you see that? 16 A. Yes. 17 Q. Okay. So, you can have an investment 18 portfolio and have a certain degree of turnover in 19 that portfolio under the literature. 20 Is that your understanding of Peat 21 Marwick's -- 22 A. That's my recollection, yes. 10299 1 Q. Now -- so, was it management's 2 intention of why it was engaging in the turnover 3 of the portfolio, why it was turning over the 4 portfolio, was that the determining factor for 5 Peat Marwick at the time in ascertaining whether 6 or not a portfolio was classified as trading 7 versus investment? 8 A. Could you restate that? I'm not sure I 9 understood what you're asking. 10 Q. Was the client's intention on why they 11 were making sales out of a portfolio the primary 12 consideration that Peat Marwick relied upon in 13 ascertaining whether or not the portfolio was 14 properly classified as a trading versus investment 15 portfolio? 16 A. Well, I think the intent question 17 generally was that if the initiation of the 18 investment and circumstances changed afterwards, 19 then I think it was up to the client to document 20 why they were trading securities that they had an 21 intent to hold at one point. 22 Q. Well, let's say they put the portfolio 10300 1 on in, let's say, November of 1984 and then in 2 December of 1985 there is a great deal of turnover 3 in the portfolio. 4 Do you measure the intention as of 5 December or as of November of '84? 6 A. Well, I think the reasons rather than 7 intent -- the reasons for the turnover in December 8 a year later would be very important. 9 Q. Okay. Now, remember the sales out of 10 the portfolio that the gains were deferred in the 11 beginning of 1986 at USAT? 12 A. Yes. 13 Q. Okay. And then they were restated in 14 the -- I think it was the second quarter, and you 15 required a restatement after consulting with New 16 York -- 17 A. Yes. 18 Q. -- of the first quarter's financials? 19 Did -- was it your understanding that those sales 20 were made for a specific purpose? 21 A. I don't remember -- 22 Q. Okay. 10301 1 A. -- at the time. 2 Q. Did anyone tell you that those sales 3 were made to rebalance the portfolios because of 4 increases in prepayment speeds in the 5 mortgage-backed securities? 6 A. I don't recall any specific statements 7 by anybody. 8 Q. Okay. Is it you don't recall or that 9 they weren't made? 10 A. I don't recall. 11 Q. Okay. Did anyone tell you that those 12 sales were made out of that portfolio in order to 13 generate gains so as to bolster profits and net 14 worth at quarter's end? 15 A. I don't recall any statement made like 16 that. 17 Q. Did you attempt to ascertain what the 18 reasons were for the sales out of that portfolio? 19 A. I don't remember. 20 Q. And with regard to sales that were made 21 between June and when you left in 1986, did anyone 22 ever tell you that gains were made out of that 10302 1 portfolio to generate profits so as to bolster net 2 worth? 3 A. I don't recall any such statement. 4 Q. Now, how did you find out that the 5 financial statements needed to be restated? 6 A. I don't remember that. I'm not sure. 7 Q. You're not sure how that happened? 8 A. No. 9 Q. I mean, was it initiated by you, that 10 question? 11 A. I really don't remember how it came up 12 as another -- as an issue. I didn't think it was 13 an issue. I was surprised to find out that it was 14 one. So, where it came up and how, I don't know. 15 Q. Okay. So, you were surprised that it 16 came up? 17 A. I was surprised that it was a problem. 18 Q. Okay. And who did you notify at the 19 client once you heard that it was a problem? 20 A. I don't remember who I talked to first, 21 if that's the question. 22 Q. What was their reaction? 10303 1 A. It was unpleasant. 2 Q. Was one of those people Jerry Williams? 3 A. It was. 4 Q. And was also one of those people 5 Michael Crow? 6 A. I really don't remember Mike's 7 reaction. Mike's a fairly understated guy, but 8 Jerry was not. And Jerry's reaction is clear and 9 memorable. 10 Q. And that is that he didn't want to 11 recognize the gains? 12 A. He was very unhappy. 13 Q. About that? 14 A. Surely seemed to me to be, yes. 15 Q. Okay. Would it surprise you, in light 16 of that, that he has testified in this case that 17 sales were made out of the mortgage-backed 18 security portfolio in 1986 in order to generate 19 profits to bolster net worth? 20 MR. NICKENS: Your Honor, I object to 21 Mr. Guido telling the witness what someone else 22 has testified to. That's an improper question. 10304 1 THE COURT: I'll sustain the objection. 2 MR. GUIDO: I'll rephrase the question, 3 Your Honor. I didn't mean to state it that that 4 was his testimony. I meant to state -- and I'm 5 sorry. 6 Q. (BY MR. GUIDO) Would it surprise you 7 if he would testify that sales were made out of 8 the mortgage-backed securities portfolio in order 9 to generate gains to bolster profits and net worth 10 in 1986? 11 A. I think taken -- I don't know how to 12 put that question in context. If it was what the 13 accounting dictated, that gains be recognized, if 14 a man said "I sold some securities to book gains 15 to make my net worth better because I want to save 16 this institution," no, that wouldn't surprise me. 17 Was this before or after we had the 18 accounting change? 19 Q. I'm just asking you if he testified 20 about in 1986 -- or if he would testify to that, 21 in light of what his reaction was when you 22 notified him that they had to restate to recognize 10305 1 profits -- 2 A. Well, he clearly was unhappy about 3 having to restate his earnings. 4 Q. Okay. 5 A. Subsequent to that, once he knew that 6 the accounting required gain recognition, I don't 7 know what Jerry would have said. His attitude 8 about it might be quite different. 9 Q. Okay. 10 MR. GUIDO: No further questions, Your 11 Honor. 12 THE COURT: I assume there is going to 13 be some cross of this witness? 14 MR. NICKENS: Yes, Your Honor. 15 THE COURT: We'll adjourn until 16 9:00 o'clock. 17 MR. NICKENS: Your Honor, the witness 18 has indicated that he has a conflict with tomorrow 19 morning, which would put us in the position of 20 having, once again, to bring someone back. We 21 will speak to him about the appropriate time. We 22 may not be starting, depending upon his schedule 10306 1 because he has told us before today that tomorrow 2 morning is a difficulty for him. 3 THE COURT: Well, would you have 4 another witness for tomorrow? 5 MR. GUIDO: I have another witness for 6 the morning, Your Honor. 7 THE COURT: All right. 8 9 (Whereupon at 4:30 p.m. 10 the proceedings were recessed.) 11 12 13 14 15 16 17 18 19 20 21 22 10307 1 STATE OF TEXAS COUNTY OF HARRIS 2 REPORTER'S CERTIFICATION 3 TO THE TRIAL PROCEEDINGS 4 I, Marcy Clark, the undersigned Certified 5 Shorthand Reporter in and for the State of Texas, 6 certify that the facts stated in the foregoing 7 pages are true and correct to the best of my ability. 8 I further certify that I am neither 9 attorney nor counsel for, related to nor employed 10 by, any of the parties to the action in which this 11 testimony was taken and, further, I am not a 12 relative or employee of any counsel employed by 13 the parties hereto, or financially interested in 14 the action. 15 SUBSCRIBED AND SWORN TO under my hand 16 and seal of office on this the 11th day of 17 December, 1997. 18 ____________________________ MARCY CLARK, CSR 19 Certified Shorthand Reporter In and for the State of Texas 20 Certification No. 4935 Expiration Date: 12-31-97 21 22 10308 1 STATE OF TEXAS COUNTY OF HARRIS 2 REPORTER'S CERTIFICATION 3 TO THE TRIAL PROCEEDINGS 4 I, Shauna Foreman, the undersigned 5 Certified Shorthand Reporter in and for the 6 State of Texas, certify that the facts stated 7 in the foregoing pages are true and correct 8 to the best of my ability. 9 I further certify that I am neither 10 attorney nor counsel for, related to nor employed 11 by, any of the parties to the action in which this 12 testimony was taken and, further, I am not a 13 relative or employee of any counsel employed by 14 the parties hereto, or financially interested in 15 the action. 16 SUBSCRIBED AND SWORN TO under my hand 17 and seal of office on this the 11th day of 18 December, 1997. 19 _____________________________ SHAUNA FOREMAN, CSR 20 Certified Shorthand Reporter In and for the State of Texas 21 Certification No. 3786 Expiration Date: 12-31-98 22