10983 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 12-17-97 22 10984 1 A-P-P-E-A-R-A-N-C-E-S 2 ON BEHALF OF THE AGENCY: 3 KENNETH J. GUIDO, Esquire (Not present) Special Enforcement Counsel 4 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 10985 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 (Not present) 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 10986 1 2 EXAMINATION INDEX 3 Page 4 JOHN STONE 5 Cross-Examination by Mr. Blankenstein.....10987 6 Cross-Examination by Mr. Eisenhart........11103 7 Redirect-Examination by Mr. Leiman........11146 8 Voir dire Examination by Mr. Villa........11186 9 Cont'd Redirect-Examination by Mr. Leiman.11187 10 Recross-Examination by Mr. Villa..........11239 11 Recross-Examination by Mr. Blankenstein...11258 12 Recross-Examination by Mr. Griffith.......11268 13 Recross-Examination by Mr. Eisenhart......11279 14 Redirect-Examination by Mr. Leiman........11287 15 16 17 18 19 20 21 22 10987 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:07 a.m.) 3 4 THE COURT: Be seated, please. The 5 hearing will come to order. 6 Mr. Blankenstein, you are going to 7 cross-examine? 8 MR. BLANKENSTEIN: Yes, I am, Your 9 Honor. Thank you. 10 11 CROSS-EXAMINATION 12 13 14 Q. (BY MR. BLANKENSTEIN) Good morning, 15 Mr. Stone. My name is Paul Blankenstein, and I 16 represent Jenard Gross, one of the respondents in 17 this case. 18 Yesterday, Mr. Stone, you reviewed 19 three memoranda of Mr. Gross that he prepared 20 while he was a consultant at USAT. 21 Do you remember that? 22 A. Yes, I do. 10988 1 Q. And in those memorandum, he identified 2 certain problems that existed in USAT's real 3 estate practices, identified certain solutions to 4 those problems, and described his vision of the 5 future of USAT. 6 Do you remember those memos? 7 A. Yes, I do. 8 Q. And if I remember right, you had no 9 real disagreement with what Mr. Gross wrote in 10 those memos, although you did fault him for 11 failing to follow Item No. 9 of his solutions 12 memo. 13 Do you remember that? That's the one 14 where -- "spending more time dealing with real 15 estate loans." Do you remember that? 16 MR. LEIMAN: Mr. Blankenstein, perhaps 17 it would be easier for him to recall if you showed 18 him the memo. 19 MR. BLANKENSTEIN: Sure. 20 Q. (BY MR. BLANKENSTEIN) It's Exhibit 21 T7571. It should be still in front of you, sir. 22 A. There are a number in front of me, but 10989 1 I'll leaf through them. 7571? 2 Q. Yes. 3 A. Yes, I have it. 4 Q. I'm sorry. I directed you to the wrong 5 one. I apologize. It's 7573. 6 A. But you are asking me about all three? 7 Q. I'm just going to ask you about that 8 one. So, why don't you just get 7573, sir. 9 A. 7573? 10 Q. Yes. You see No. 9 on the first page 11 and going over to the second page? 12 A. Before I answer, you had said something 13 in your question that -- 14 Q. I think you said you faulted Mr. Gross 15 when he became an officer of USAT for not spending 16 enough time dealing with real estate loans. In 17 particular, the Park 410 and the Norwood loans; is 18 that right? 19 A. Right. But you had said something else 20 in your question. I just want to make sure I 21 understand your full question, that I agreed with 22 him on -- 10990 1 Q. Well, the only thing -- 2 A. -- some other things. If I had the 3 question back, I think we can -- 4 Q. Why don't we just start -- you 5 testified yesterday, did you not, that Mr. Gross 6 didn't spend enough time dealing with real estate 7 transactions when he became an officer of USAT? 8 A. I said that based on the official 9 records that were made available to me, yes, sir, 10 I did. 11 Q. And in particular, you were critical of 12 the senior loan committee of which Mr. Gross was a 13 member for not spending enough time discussing the 14 Park 410 and Norwood loans; is that right? 15 A. That wasn't the sole part of my 16 exception, but that was part of it. There were 17 other varying deficiencies, but that -- time was 18 something I did cite. 19 Q. Time was one of the matters you did 20 identify. Right? 21 A. Correct. 22 Q. And you said that -- I think you looked 10991 1 at the senior loan committee agenda for the 2 March 17th, 1986 meeting of -- which -- at which 3 the Park 410 loan was discussed, and I think you 4 calculated out that the meeting lasted an hour and 5 nine minutes. 6 Do you remember that? 7 A. Yes. It was roughly that period of 8 time. Not down to the minute; but it was 9 something slightly over an hour, if I recall. 10 Q. And you also spoke about the June 2nd 11 meeting in which the Norwood loan was approved, 12 and I think you calculated that out to be an hour 13 and 15 minutes; is that right? 14 A. Yes. It was longer. 15 Q. And you also mentioned that there were 16 other matters on the agenda for both of those 17 meetings besides the Park 410 and the Norwood 18 loans; is that right? 19 A. That was indicated in those same 20 minutes, yes, in the records. 21 Q. There is no formula, is there, 22 Mr. Stone, for determining how long the loan 10992 1 committee should have discussed a particular loan? 2 We don't have a cookbook recipe -- ten minutes for 3 each 1-million-dollar loan amount; is that right? 4 A. Not that I'm aware of. 5 Q. The loan committee should spend just as 6 much time as necessary so they could discuss all 7 the material issues in the loan and reach a 8 rational decision; isn't that right? 9 A. Seems like a fair statement. 10 Q. So, the length of time is not a 11 determinative matter, right, in whether or not 12 adequate attention was paid to any particular 13 loan; isn't that right? 14 A. I can't jump from what I just answered 15 in the two previous questions to the matter of 16 time is irrelevant. 17 Q. I didn't say it was irrelevant. I said 18 it's not determinative; isn't that right? 19 A. I can't agree with that. 20 Q. So, it is determinative? 21 A. There is no formula, but it is 22 determinative in my opinion. I mean, under your 10993 1 logic, five minutes might have been enough or 2 maybe a minute and a half. I'm saying there is no 3 formula; but the time spent, in my opinion, is 4 determinative. 5 Q. Now, if the loan committee had spent 6 ten hours discussing these loans over the prior 7 two weeks, would five minutes on the day the loans 8 were presented for formal approval be sufficient? 9 A. How long? 10 Q. Five minutes. 11 A. No. The previous -- 12 Q. Ten hours over the previous two weeks. 13 A. Ten? 14 Q. Yes. 15 A. No. 16 Q. So, if they -- it wouldn't be enough if 17 they had spent ten hours over the previous two 18 weeks discussing each loan, that wouldn't be 19 enough? 20 A. Ten hours over the past two weeks 21 discussing the largest loan ever made in the 22 institution's history in which the institution was 10994 1 funding all the cost, all the interest cost, with 2 limited guaranties, based on raw land, 3 constituting 37 percent of its capital, ten hours 4 would not have been sufficient to consider this 5 loan by the collective body, no. 6 Q. Is there anyplace I can find the 7 equation that you're going to use to tell the loan 8 committee how many hours they have to spend 9 discussing a particular loan? 10 A. I shouldn't have to tell them 11 equation -- an equation. I should tell them that 12 they are to exercise due care in the loaning, if 13 you will, of depositors' money to meet -- to make 14 sure in their minds that it's a prudent decision. 15 Q. Isn't it true, Mr. Stone, that with 16 respect to the Norwood loan, USAT's involvement 17 with that project began in December of 1994? 18 A. 1984. 19 Q. 1984. I'm sorry. 20 A. Yes, it was. 21 Q. Is that right? 22 A. That's my recall, yes. 10995 1 Q. So, they had at least a year and a half 2 familiarity with the project before they acted on 3 June 2nd, 1986; isn't that right? 4 A. They had a year and a half of not very 5 good experience with that particular loan. 6 Q. Well, I'm just -- we're just talking 7 right now, Mr. Stone, about how long the loan -- 8 the project was before them and had their 9 attention. That's all we're talking about right 10 now. 11 A. Well -- but you're asking me my 12 opinion. Had that loan been performing as 13 agreed -- 14 Q. I'm not asking your opinion -- 15 Mr. Stone, I'm not asking your opinion. I'm just 16 asking whether it was a year and a half between 17 the time they first acted on the loan and when 18 they approved the loan. 19 A. Okay, if that's all you're asking me. 20 Q. That's all I'm asking. 21 A. I'm sorry. You're exactly right. 22 That's 18 months. 10996 1 Q. That's 18 months. And the Park 410 2 loan, do you know how long that loan was before 3 USAT before they approved the 80-million-dollar 4 loan on March 7th, 1986 -- March 17th, 1986? 5 A. I believe it was one year and two 6 days -- March 15th, 1985, March 17th, 1986. 7 Q. Close enough for government work. I 8 believe it was March 18th, 1985, to March 17th; 9 but close enough for government work, Mr. Stone. 10 A. No, not really. I should have been 11 correct. 12 Q. When you reviewed the files in those 13 loans, did you notice how many occasions the 14 Park 410 loan was discussed by the senior loan 15 committee before March 17th, 1986? 16 A. I observed in one instance that I can 17 recall specifically at the senior loan committee 18 level -- in fact, if I recall, it was the last -- 19 next-to-last agenda item -- that the Park 410 loan 20 was discussed, yes, I do. 21 Q. One other time. That's all you 22 remember? 10997 1 A. That's all I recall seeing at this 2 point. There may be other documents that will 3 refresh my memory. 4 Q. Let me show you what's already been 5 marked as A1643, which is at Tab 159. This is the 6 report of the senior loan committee dated 7 March 18th, 1985, when they first approved a joint 8 venture arrangement with Mr. Rosenberg; is that 9 right? 10 A. Yes, it appears to be. 11 Q. Is this the other instance you've been 12 making reference to? 13 A. No. I was making reference to a senior 14 loan committee meeting either in November, 15 December, or January. November, December of '85 16 or January of '86, if my memory serves me right -- 17 Q. All right. Let me -- 18 A. -- having seen many documents, that the 19 SLC agenda indicated, near the bottom of the 20 minutes, a very short sentence that the Park 410 21 loan was discussed. 22 Q. Let me show you what's been marked as 10998 1 B4167. 2 A. That's the document. 3 Q. Is this the agenda that you've made 4 reference to; is that right? 5 A. Yes, it is. It was December of '85. 6 Q. And that's the only one you remember 7 seeing; is that right? 8 A. There may have been others. This one I 9 specifically recalled before you gave it to me. 10 And it, too, is a rather short meeting with other 11 items -- other matters discussed. This meeting, 12 likewise, wasn't even an hour long. 13 Q. But they discussed Park 410. Right? 14 A. For a few minutes, yes. 15 Q. You don't know how long they discussed 16 Park 410? 17 A. I know they didn't discuss it over an 18 hour. They started at 9:15 and ended at 10:06. 19 Q. But you don't know how long they 20 discussed Park 410; is that right? Let's be 21 precise, Mr. Stone. 22 A. You're referring me to this document. 10999 1 If they discussed it for ten hours at this 2 meeting, it doesn't show that. 3 Q. I'm not suggesting that they discussed 4 it for ten hours. 5 A. I don't want to appear argumentative. 6 You're asking me. I don't know how long they 7 discussed it. All I'm saying is the meeting 8 started at 9:15 and ended at 10:06, according to 9 this document. 10 Q. And you don't know what portion of that 11 meeting was occupied with Park 410; isn't that 12 right? 13 A. Conceded. 14 Q. Let's be precise if we can. Okay? 15 A. I'm trying to be. 16 Q. Thank you. All right. Let me show you 17 what is A1646. 18 MR. BLANKENSTEIN: Your Honor, let me 19 move Exhibit 6147 into evidence. 4167. Sorry. 20 THE COURT: All right. 21 MR. LEIMAN: Which one is that, 22 Mr. Blankenstein? 11000 1 MR. BLANKENSTEIN: That's the 2 December 9th, 1985 senior loan committee 3 minutes -- agenda. 4 MR. LEIMAN: No objection. He said he 5 saw it. 6 THE COURT: All right. Received. 7 Q. (BY MR. BLANKENSTEIN) You have before 8 you the agenda for the January 16th, 1986 meeting 9 of the senior loan committee; is that right, sir? 10 A. Yes, I do. 11 Q. And the minutes, as well? 12 A. Yes, I do. 13 Q. And was Park 410 discussed at that 14 meeting of the senior loan committee? 15 A. Within that 45-minute meeting, it along 16 with other subjects were discussed. 17 Q. And you didn't -- you missed this in 18 your review of the files; is that right? 19 A. I didn't say I missed it. I said in my 20 recall this morning, I recalled particularly this 21 one document, the first one you handed me. I said 22 there perhaps were more; but I couldn't recall, as 11001 1 I did this one, a month, a date, if it was the 2 second item up from the bottom. No, I couldn't 3 remember with that specificity, sir. 4 MR. BLANKENSTEIN: I move Exhibit 1646, 5 Your Honor, into evidence. 6 MR. LEIMAN: Your Honor, I don't think 7 that it's clear that Mr. Stone has actually seen 8 this document. I suppose he's identified it 9 enough. I have no objection to it. 10 THE COURT: Received. 11 Q. (BY MR. BLANKENSTEIN) Let me show you 12 another senior loan committee minute. This is 13 A1647. This is the senior loan committee 14 meeting -- minutes of meeting dated February 10th, 15 1986? 16 A. Yes, it is. 17 Q. Was Park 410 discussed at that meeting, 18 as well? 19 A. Yes, in a 20-minute meeting, it was 20 discussed along with five other items in a 21 20-minute meeting. 22 Q. Park 410 was discussed? 11002 1 A. Yes, sir. 2 Q. And you missed this during your review 3 of the files? 4 A. I don't know that I did. 5 Q. But you forgot about it when you 6 testified? 7 A. I did not say that either. I did not 8 say I specifically recalled it. Had I seen it, I 9 would have taken note of the fact that it was a 10 20-minute meeting and there were other items 11 discussed and I wouldn't have considered that much 12 of a meeting. 13 Q. But you forgot about this when you 14 testified this morning when you told me the only 15 one that you could remember was the one in 16 December; is that right? 17 A. I saw maybe several thousand documents, 18 and you probably can bring up other documents that 19 I can't recall the date and exact content. Yes, 20 sir, I will concede I only recalled the one senior 21 loan committee meeting in December '85; but I said 22 also I may have seen others. 11003 1 MR. BLANKENSTEIN: Your Honor, I'd like 2 to move Exhibit A1647 into evidence. 3 MR. LEIMAN: No objection. 4 THE COURT: Received. 5 Q. (BY MR. BLANKENSTEIN) Now, was the 6 Norwood loan discussed at only one meeting or was 7 it discussed at other meetings of the senior loan 8 committee as you sit here today? Can you 9 remember? 10 A. The Norwood property, let me say, had 11 several discussions as to the property itself: 12 December of '84, June of '85, December of '85, 13 June of '86. Four cases I know for a fact as the 14 loan was renewed at six-month intervals, became 15 past due, restructured. There may well have been 16 other meetings -- well, in fact, you just handed 17 me one -- that in a 20-minute meeting, it as 18 well -- pardon me. Let me back up. 19 In the 51-minute meeting, Park 410 and 20 Norwood were discussed, along with several other 21 items. 22 Q. And that's the December 9th, 1985 11004 1 minutes of the senior loan committee? 2 A. That's not what I was referring to. 3 There is yet another meeting in December of 1985 4 on a second renewal because of lack of payment 5 where it was extended until -- 6 Q. Just so the record's clear, which 7 exhibit are you referring to? 8 A. Pardon me. I'm referring -- I believe 9 it's B1467. Is that the controlling number? 10 Q. Yes. That's the December 9th, 1985 11 meeting of the senior loan committee; is that 12 right? 13 A. That's correct. 14 Q. Now -- I'm sorry. I got distracted. 15 You were listing for me the number of times the 16 Norwood loan, in its various forms, was before the 17 senior loan committee; is that right? 18 A. Yes. I listed four instances, five 19 instances that I knew for a fact. But in 20 responding in that fashion, I have to clarify that 21 I was not talking that in each of those instances, 22 that the subject of the ultimate loan made in June 11005 1 of '86 was discussed because, in December '85, no 2 one contemplated the ultimate loan in its fashion 3 or discussed that. They discussed the extension 4 of an 18.2-million-dollar loan. 5 Q. Didn't the senior loan committee 6 discuss the status of the loans from time to time? 7 A. Yes, they did. 8 Q. And that was in addition to approving 9 the loans on a particular date; isn't that right? 10 You testified, I thought -- maybe I misunderstood 11 you -- that at various times with respect to the 12 Norwood loan, the matter was before the senior 13 loan committee in connection with some particular 14 action, a loan extension or something of that 15 sort, not simply for status purposes; is that 16 right? Did I understand you correctly? 17 A. I said both. I said that at December 18 of '84, June '85, December '85, Norwood or 19 Deauville as it is also known was discussed by the 20 senior loan committee for the purposes of, first, 21 extending the loan in December of '84, renewing it 22 in June of '85, renewing it in December of '85. 11006 1 But I also said that on February -- let me get 2 this correct. 3 Q. December 9th. 4 A. On December 9th, '85, the status in a 5 51-minute meeting in which they discussed Park 410 6 and four other matters, the status was covered. 7 Q. Do you remember any other meetings of 8 the senior loan committee when the status of the 9 Norwood loan was discussed? 10 A. Not off the top of my head by date, no. 11 Q. Now, I've shown you what's been marked 12 as B1543, and that's an agenda and minutes for the 13 March 17th, 1986 meeting of the senior loan 14 committee; is that right? 15 A. Yes, it is. 16 Q. And was the park -- was the Norwood 17 loan discussed at that meeting? 18 A. Again, in a meeting that was an hour 19 and nine minutes in which the Park 410 property 20 was approved -- 21 Q. My question was -- Mr. Stone, my 22 question was: Was the Norwood loan discussed at 11007 1 the meeting? 2 A. Well, if we're forgetting all other 3 relevancies, yes, you're correct. 4 Q. And was -- and was it not connected 5 with any action item; isn't that right? 6 A. A status report. 7 Q. It was a status report. 8 Now, in addition to the formal 9 discussions during the senior loan committee 10 meetings, did the members of the senior loan 11 committee discuss projects that they had before 12 them informally? 13 A. Yes. In materials made available to 14 me -- most notably, depositions -- I believe 15 Mr. Graham as well as Mr. Childress stated that 16 they had ongoing discussions, from time to time 17 exchanged information, sought each other's advice, 18 and if I recall, Mr. Graham and Mr. Childress 19 were, if you will, alternating members of the 20 senior loan committee. If -- one but not both 21 could vote. There were numerous documents in the 22 file regarding the loans of memos to some, if not 11008 1 all, members of the senior loan committee on 2 certain statuses, whether that be of negotiations 3 or of other information, yes. I saw several 4 references to that and considered it fully. 5 Q. And Mr. Gross was involved in those 6 discussions with Mr. Childress and Mr. Graham; is 7 that right? 8 A. Well, in the earlier reference to the 9 depositions of Mr. Graham and Mr. Childress, I 10 think -- I saw most of the discussion was between 11 the two of themselves. But yes, I think it's a 12 fair statement from the documents I reviewed that 13 there were discussions from time to time with 14 Mr. Gross. 15 Q. And several times a week -- isn't that 16 right -- that Mr. Graham and Mr. Childress and 17 Mr. Gross in some combination got together to 18 discuss the work of the real estate department; 19 isn't that right? 20 A. I can't say it was several times a 21 week. I -- what I saw or -- and what I saw in the 22 depositions couldn't lead me to conclude that it 11009 1 was several times a week concerning these very 2 loans. 3 Q. They discussed -- that's not what I 4 said. They discussed the work of the real 5 estate -- the commercial real estate department 6 several times a week; isn't that right? 7 A. Oh, I'm sorry. In my study, I focused 8 on Park 410 and Deauville. So, I cannot respond 9 to other discussions they may or may not have had. 10 Q. Did you review Mr. Graham's testimony 11 at trial in this case? 12 A. Yes. 13 Q. Didn't Mr. Graham say that he met with 14 Mr. Gross several times a week to discuss the 15 various matters pending before the commercial real 16 estate department? 17 A. I don't specifically recall him saying 18 that, but I will accept your statement of that 19 fact if that, in fact, is what he said. 20 Q. Let me just see if this refreshes your 21 recollection. Let me read to you from Page 5709 22 of the trial transcript. 11010 1 Question, "After Mr. Gross became 2 president of United Savings, did you have occasion 3 to have informal discussions with him?" 4 Answer, "Yes." 5 Question, "How frequently?" 6 "Well, I mean, we had all informal 7 discussions among ourselves. Jim and I, our 8 staff, Jenard would drop in and visit. We would 9 pretty -- we operated pretty informally as a 10 company in that respect." 11 "Daily would you have those 12 discussions?" 13 Answer, "Well, if he was there daily. 14 I mean, we would do it weekly, several times a 15 week. I'm not going to say it's daily." 16 Does that refresh your recollection 17 about the frequency of discussions between and 18 among Mr. Gross, Mr. Graham, and Mr. Childress 19 about real estate matters? 20 MR. LEIMAN: Your Honor, I don't -- 21 didn't hear anything in the transcript testimony 22 that Mr. Blankenstein read that suggests he talked 11011 1 about the loan -- the transactions that Mr. Stone 2 reviewed, nor did he say that they talked about 3 real estate. They just talked. They dropped in 4 and chatted. We have no idea what they talked 5 about, at least from what you said. 6 MR. BLANKENSTEIN: I'll read some more 7 to make Mr. Leiman happy. 8 Q. (BY MR. BLANKENSTEIN) It starts on 9 Line 18 of Page 5710. 10 "And what was the purpose of your 11 dropping in on Mr. Gross in his office?" 12 "Could be a multitude of things. 13 Sometimes it was just to kick around something new 14 that came in if he was interested. We wanted to 15 talk about what was going on with things that we 16 were working on. Jenard is easy to talk to. So, 17 I used him as a sounding board as often as I 18 could." 19 Question, "Did you use him as a 20 sounding board in connection with the Norwood 21 project?" 22 "Well, I think we were all somewhat 11012 1 knowledgeable about his involvement, yes." 2 Question, "Did Mr. Gross offer you 3 advice about the Norwood project?" 4 "I mean, like I said, we probably 5 talked about it. I can't tell you specifically 6 what the conversation involved; but I knew we 7 probably discussed it, yeah." 8 Does that refresh your recollection 9 that Mr. Gross and Mr. Graham and Mr. Childress 10 had discussions about -- informal discussions 11 outside of the senior loan committee about the 12 Norwood project? 13 A. Would you read the very last sentence 14 in his response? 15 Q. "Did Mr. Gross offer you advice about 16 the Norwood project?" 17 "I mean, like I said, we probably 18 talked about it. I can't tell you specifically 19 what the conversation involved; but I know we 20 probably discussed it, yeah." 21 A. You said he said "probably" twice? 22 Q. That's what Mr. Graham said, yes, sir. 11013 1 Does that refresh your recollection? 2 A. The exact sentence, no. But 3 "probablies" aren't really sufficient official 4 records of the consideration that goes into making 5 large loans. 6 Q. So, you expect 12 years later 7 Mr. Graham to have a perfect recall of all the 8 conversations he had with Mr. Gross about the 9 Norwood and Park 410 transactions; is that right? 10 Otherwise, you would discount that they ever 11 occurred? 12 A. No, sir. I would expect the bank's 13 records to indicate that due consideration was not 14 only given but it was documented within the bank's 15 records of that consideration. 16 Q. And we've just gone through instances 17 in which those matters, Park 410 and Norwood, were 18 discussed on numerous occasions by the senior loan 19 committee; isn't that right? 20 A. Let me respond to you. We have gone 21 through January 6th, 1986 senior loan committee 22 agenda wherein in a time period of 45 minutes, 11014 1 Park 410 was discussed along with six other 2 matters. So, 45 minutes, seven matters, Park 410 3 was mentioned. 4 We had -- you have given me senior loan 5 committee minutes from February the 10th, 1986, 6 wherein in a 20-minute meeting, Park 410 was 7 mentioned. He didn't say "discussed." He said 8 "stated that the Park 410 is expected to close." 9 Didn't seem to be that he was inquiring to the 10 committee. Didn't say he was giving a status 11 report. Quite frankly, in 20 minutes with all 12 those other matters discussed, that's probably all 13 the time he had to say. But they did discuss in 14 20 minutes, six items. 15 You gave me March -- 16 Q. There is no reason for you to go 17 over -- my question didn't ask you to review each 18 document. 19 A. You don't want to hear what I'm having 20 to say, sir. 21 Q. No. I would like you to answer my 22 questions, if we can do that. That would be very 11015 1 helpful. 2 A. All right. I'm here to help. 3 Q. Thank you. And I think you said that 4 you also saw in the file numerous memos to the 5 senior loan committee discussing the Park 410 and 6 Norwood transactions. 7 Did I hear you right on that? 8 A. If I said "numerous," I'd better 9 qualify it. I saw numerous memos on Park 410 and 10 Norwood, but not all of them were preparatory or 11 precedent, necessarily, to the loans being made. 12 I saw a lot of disbursements to Ms. Wynans. But 13 numerous documents regarding discussions over and 14 above the minutes, I think, would be exaggerating. 15 Q. But there were some in there, at least? 16 A. Some is a -- 17 Q. And you don't know what the number is 18 as you sit here today; isn't that right? 19 A. No, I don't. 20 MR. BLANKENSTEIN: Your Honor, I think 21 I neglected to move into evidence Exhibit B4168. 22 I do that now. That's the March 17th, 1986 agenda 11016 1 of the senior loan committee with the minutes of 2 that date. 3 MR. LEIMAN: No objection. 4 THE COURT: Received. 5 Q. (BY MR. BLANKENSTEIN) Let's turn, 6 Mr. Stone, to your testimony about appraisals and 7 the role of appraisals in the loan approval 8 process, if we can. 9 Is that all right with you? 10 A. That's fine. 11 Q. I would imagine, Mr. Stone, that in 12 your experience as an examiner, you have reviewed 13 many appraisals; is that right? 14 A. No, sir. 15 Q. You haven't? 16 A. Not recently. 17 Q. Well, when you were a bank examiner, 18 did you review appraisals back then? 19 A. Yes. 20 Q. But you don't consider yourself to be 21 an expert about appraisals; isn't that right? 22 A. No. I've stated that on several 11017 1 occasions. 2 Q. So, you would -- would you defer, 3 generally, to the judgment of a certified 4 appraiser with regard to appraisal issues? 5 A. No, sir. 6 Q. With regard to appraisal issues, you 7 would impose your judgment in lieu of the judgment 8 of an MAI certified appraiser; is that right? 9 A. I'm sorry. May I have the question 10 back? 11 Q. Well, let me ask you again. In 12 connection with appraisal issues, would you 13 generally defer to the judgment of an MAI 14 certified appraiser? 15 A. Absolutely not. 16 Q. You would impose your judgment in lieu 17 of the judgment of an MAI certified appraiser in 18 connection with appraisal issues; is that right? 19 A. No. What I would do, whether in my 20 role at the FDIC or if I were in a responsible 21 position in a bank, I would have someone that 22 reports to me with the credentials necessary not 11018 1 to accept the MAI appraisal at face but to go 2 through it and to say, "Does this appraisal 3 conform, one, to regulations? Two, are they using 4 good, valid data, comparables that are 5 reasonable?" 6 No institution should take any 7 appraisal at face. They should analyze it to see 8 that it meets the test of reasonableness, that 9 they approached it correctly. MAI does not in and 10 of itself bestow upon the person infinite wisdom 11 or, for that matter, integrity. 12 Q. In your report, did you incorporate the 13 views of the FDI -- excuse me -- of the OTS 14 industry expert? 15 A. Yes, I did. 16 Q. And you deferred to his judgment; is 17 that right? 18 A. Not just -- I didn't say, "Do you 19 agree?" He said, "No," and I said "thank you" and 20 hang up. 21 I said, "Why?" Much the same a loan 22 officer should ask -- much the same a bank 11019 1 director should ask. "If you don't agree, why?" 2 Q. How long -- was it Mr. Massey you spoke 3 to? 4 A. Yes. 5 Q. Did you meet with Mr. Massey? 6 A. No, I didn't. 7 Q. Did you talk to him on the telephone? 8 A. Yes, I did. 9 Q. Did you spend ten hours talking with 10 Mr. Massey on the telephone? 11 A. No, sir, I didn't. 12 Q. So, you came in here to testify in 13 connection with this OTS proceeding where the OTS 14 is seeking hundreds of millions of dollars against 15 my client and you adopted Mr. Massey's views 16 without spending ten hours discussing it with him 17 on the telephone; is that right? 18 A. No, it's not. 19 Q. You didn't -- did you spend -- you told 20 me you didn't spend ten hours discussing it on the 21 telephone. You told me you didn't meet with him. 22 Did you communicate by smoke signals? 11020 1 A. If we want to get into -- I'm not going 2 to get into a facetious battle with you. 3 Q. I withdraw the question. 4 Can you tell me, did you spend ten 5 hours discussing this with Mr. Massey? 6 A. I did not spend ten hours with 7 Mr. Massey. I did not use Mr. Massey as my sole 8 source in reaching that conclusion. 9 Q. Did your report adopt Mr. Massey's 10 views? 11 A. Let me go exactly to my report. 12 Q. Does your report reference anybody 13 other than Mr. Massey? 14 MR. LEIMAN: In fairness to the 15 witness, Your Honor, he said he needed to go to 16 his report. If you'd like -- 17 THE COURT: I believe he has his 18 report. 19 MR. BLANKENSTEIN: He's looking at his 20 report. 21 MR. LEIMAN: Why don't you hold the 22 question until he gets a chance to look at it? 11021 1 2 (Whereupon the witness reviews his report.) 3 4 A. The only reference I see -- and there 5 may be another one within my report -- is that I 6 don't believe I reached or stated that I reached 7 any particular conclusion. The only sentence I 8 see is "Moreover, both senior officials of OTS and 9 the industry expert retained by OTS have found the 10 appraisals deficient, in violation of 11 then-existing regulations, and individually 12 overstating the values of the underlying 13 properties." 14 Q. (BY MR. BLANKENSTEIN) So, you relied 15 on Mr. Massey; is that right? 16 A. I don't believe that says that. 17 Q. Well, who is the OTS industry official 18 that -- the expert -- 19 A. I'll read my sentence again. "Both 20 senior officials of OTS and the industry expert 21 obtained by OTS have found the appraisals 22 deficient, in violation of then-existing 11022 1 regulations" -- 2 Q. Who were the other officials? Who were 3 the senior officials at OTS with whom you 4 consulted? 5 A. I don't think I consulted. I think 6 within the files that I reviewed, examiners or 7 other senior officials, in communication with 8 USAT, I feel confident found violations of both 9 41B and questioned the appraisals. Specifically I 10 recall -- it may have been a state examination. 11 It may have been work -- I believe it was in the 12 work papers that I saw citing the dates of the 13 comparables as being more than two years old in 14 some cases, not actually being comparable as to 15 the size of the property, not using certain 16 approaches required in 41B -- 17 Q. My question was: What were the OTS 18 officials that you had -- that you relied upon 19 that are referenced in your report? Can you tell 20 me their names? Do you know who they are? 21 Now, OTS began in August of 1989; isn't 22 that right? 11023 1 A. All right. 2 Q. And so, you -- 3 A. I see what you mean. I'm referring -- 4 Q. Can you tell me who the OTS officials 5 are? That's what I'd like to know. Those are the 6 ones you say you had discussions with. 7 Can you tell me who the OTS officials 8 are? 9 A. I see your point and I, as I have done 10 perhaps at some other times, I'm talking FSLIC or 11 Federal Home Loan Bank, looking at the documents 12 at the time the loan was made or near or 13 thereafter rather than talking to OTS. 14 I did not speak with any OTS officials. 15 My misstatement in that sentence was I looked at 16 Federal Home Loan Bank and FSLIC officials back 17 near the time the loan was made or shortly 18 thereafter as to their opinions as to the 19 appraisals, whether they conformed to 41B and 20 whether they were correct in their assumptions and 21 their underlying approach to the appraisal. 22 Q. And did you try and get in contact with 11024 1 any of these officials to discuss their views 2 about -- as set forth in the exam report? Did you 3 try to get in contact with them? 4 A. Well, they set forth their views in the 5 exam report or in the work papers. They wrote 6 out -- 7 Q. Did you try and get in contact with 8 them to discuss further their views? 9 A. No. 10 Q. So, you just accepted what they had to 11 say; is that right? 12 A. Several sources. I -- 13 Q. Is that right? You accepted what they 14 had to say without further discussion? 15 A. Well, again, if you'll read the 16 sentence, "Moreover, senior officials at OTS and 17 industry expert retained by OTS have found." I 18 did not say I have found the appraisals in 19 violation. 20 Q. I understand that. I'm familiar with 21 your report. I asked you a different question, 22 sir. 11025 1 I wanted to know whether or not you 2 sought out these officials to discuss with them 3 the views set out in their reports? 4 A. No, sir. Earlier, you asked me if I 5 relied on. Nothing in my report says I relied on. 6 I have said OTS officials and the experts. 7 Q. It was undoubtedly my fault. My 8 question wasn't clear. Let me try it again. 9 The question is: Did you search out 10 these officials to discuss with them the views set 11 out in those examination reports about the 12 adequacy or inadequacy of the appraisals? 13 A. I didn't consider it; but if I had the 14 same decision before me today, I still wouldn't do 15 it for other reasons. 16 Q. So, you accepted their views without 17 qualification; isn't that right? 18 A. Their views on violations of law or 19 adequacy of these two appraisals was far secondary 20 to the information I had before me on both loans 21 that the appraisals were made, if you will, as 22 instructed. In both cases, Park 410 and Norwood, 11026 1 previous appraisals were made of the property that 2 didn't value it high enough. In both cases, new 3 appraisers were retained and said, "This is the 4 value you come up with." 5 So, to go back -- 6 Q. I'm sorry to interrupt you, Mr. Stone? 7 A. After knowing that, to go back and 8 discuss what you think of the appraisal -- 9 Q. I'm sorry, Mr. Stone. You didn't -- 10 you took their views without qualification; isn't 11 that right? You just accepted their views? 12 A. Let me -- 13 Q. I'm not asking you the reasons why you 14 did that. I just want to know: Is that what you 15 did? 16 A. I can't answer your question with a 17 "yes" or "no" in the way you're phrasing it. It 18 would be like if some -- if I knew I was looking 19 at a false financial statement and I said, "Review 20 this and tell me what you think the strength of 21 the person is." 22 I mean, it's -- the appraisals were 11027 1 made to order. Why would I care if they are 2 accurate? 3 Q. And the appraisals made to order -- 4 we'll come back to that, Mr. Stone. We'll come 5 back to that. 6 A. We've already discussed it, but -- 7 Q. Let's -- do you remember I asked you 8 earlier whether you would defer generally to the 9 views of an MAI certified appraiser in connection 10 with appraisal issues? 11 A. Yes, I do. 12 Q. And you said you wouldn't? 13 A. Definitely not. 14 Q. Do you remember your deposition on 15 June 24th, 1997? Do you remember that? I think 16 Mr. Dueffert took your deposition; is that right? 17 A. That's correct. 18 Q. Do you remember the deposition on the 19 24th of this year? 20 A. I remember giving a deposition. 21 Q. And do you remember him asking you this 22 question? This is on Page 14, beginning at Line 11028 1 10. 2 "And I take it in evaluating the 3 adequacy of a written appraisal, you would defer 4 to the judgment of an experienced MAI credentialed 5 appraiser?" 6 Answer, "Were I in that situation; but, 7 again, the appraisal was a very small part of my 8 review and my conclusion in this matter." 9 Do you remember that? 10 A. I'd like to see my deposition, if I 11 may, so I know the context. 12 Q. Sure. It's highlighted for you, sir, 13 so you can -- 14 MR. LEIMAN: What page is that on? 15 MR. BLANKENSTEIN: Page 14, as I said, 16 sir. 17 MR. LEIMAN: Thank you. 18 Q. (BY MR. BLANKENSTEIN) Mr. Villa is 19 going to give you an easier copy to read, 20 Mr. Stone. 21 MR. VILLA: Here's the full text. Let 22 me take this back, and you can have the big page. 11029 1 Q. (BY MR. BLANKENSTEIN) It will be an 2 easier copy for you to read. 3 A. Is there a page number on this? 4 Q. Page 14. 5 A. The same page? 6 Q. Same page. This is just -- the one I 7 handed you was simply a condensed version. 8 A. Well, quite frankly, the other was 9 easier for me as far as getting the context of it. 10 Q. Well, Mr. Villa advises me that this 11 one has some notes of his -- 12 A. Oh, I'm sorry. 13 Q. -- that we might not want you to see 14 right now. 15 A. (Witness reviews the document.) I have 16 read it. 17 Q. Does that refresh your recollection as 18 to whether or not you would defer to an MAI 19 credentialed appraiser in connection with 20 appraisal issues? 21 A. No, it does not. I assume this is a 22 correct transcription, but I cannot imagine that 11030 1 was my answer. 2 Q. You were mistaken under oath; is that 3 right? 4 A. Oh, most definitely. 5 Q. Had you prepared well for the 6 deposition? 7 A. Oh, yes. 8 Q. Did you meet with Mr. Leiman in 9 connection with the deposition? 10 A. Yes. Yes, I did. 11 Q. Did you discuss issues that might be -- 12 might come up during the course of the deposition? 13 Mr. Stone? 14 A. I don't know that we did that. I 15 prepared for it. I don't know that we discussed 16 any items that might come up. 17 Q. Did you prepare to be examined about 18 appraisal issues? Did you prepare to be examined 19 during the course of the deposition about 20 appraisal issues? 21 A. I had no special preparation for the 22 appraisal issue. 11031 1 Q. You weren't -- 2 A. As I said earlier in this same context, 3 that was a far secondary concern to me in the 4 conclusions of my report. 5 Q. Let's move on, Mr. Stone. You 6 mentioned, I believe, that based upon your 7 conversations with Mr. Massey and what you've 8 reviewed, that the appraisals for Norwood and 9 Park 410 were not in conformity with R-41B; is 10 that right? 11 A. I believe I may have said that based on 12 information that I had reviewed, not from my own 13 independent analysis. 14 Q. Am I right that the FDIC has no 15 appraisal guideline comparable to R-41B? 16 A. At that period of time, the FDIC did 17 not. 18 Q. Did the -- when the FDIC was examining 19 the -- I guess state-chartered institutions, 20 commercial banks -- 21 A. And federally-chartered thrifts. 22 Q. -- and federally-chartered thrifts, did 11032 1 it review the real estate loan files to determine 2 whether there was an appraisal in the file? 3 A. Yes, they did. 4 Q. And did the review encompass 5 determining whether the appraisal adequately 6 supported the value stated about the collateral? 7 A. Yes, they would have. 8 Q. And the FDIC did that without reference 9 to the requirements of R-41B; is that right? 10 A. No. In some cases, they might have 11 used 41B. 12 Q. But -- well, in some cases they 13 wouldn't have used 41B; is that right? 14 A. In some cases, they would have. 15 Q. And in some of those cases, they would 16 have found the appraisal satisfactory without 17 reference to R-41B; isn't that right? 18 A. Might have found it satisfactory -- 19 Q. -- satisfactory without reference to 20 R-41B? 21 A. Or unsatisfactory with reference to 22 41B. 11033 1 Q. Doesn't the FDIC's own manual or didn't 2 the FDIC's own manual at the time take a position 3 with regard to appraisals that were different than 4 that set forth in R-41B? 5 A. They may have at that time; but again, 6 if examining a federal thrift, a savings and loan, 7 the FDIC examiner would be expected to review 8 appraisals for conformity to 41B. 9 Q. Mr. Stone, I'm going to show you what 10 is, I believe, the FDIC's manual of examination 11 policies. 12 Can you identify that for me? 13 A. (Witness reviews the document.) 14 MR. BLANKENSTEIN: Your Honor, I don't 15 propose to put that massive document in the 16 record. It's burdened enough. I just wanted 17 Mr. Stone to identify it so I can deal with a 18 small excerpt from that manual, if that's okay 19 with Your Honor. 20 THE COURT: All right. 21 A. The binder you gave me includes 22 instructions for the preparation of a commercial 11034 1 exam report, a sample examination report, and a 2 manual of examination policies for the FDIC. 3 Q. (BY MR. BLANKENSTEIN) And it's this 4 that I'm going to show you an excerpt of in a 5 minute. If I can take this back. I'll bring it 6 back to you so we can make sure that what I'm 7 going to show you is accurate. 8 In connection with your expert 9 testimony and report -- 10 MR. BLANKENSTEIN: I think Mr. Stone 11 would like some more water. 12 Q. (BY MR. BLANKENSTEIN) In connection 13 with your expert report and your testimony, did 14 you have the occasion to review R-41B? 15 A. No, sir. 16 Q. You didn't? So, you don't know what it 17 provides; is that right? 18 A. No. I intentionally did not review 19 41B. 20 Q. So, anything in your report or your 21 testimony concerning R-41B is not based on any 22 personal knowledge; is that right? 11035 1 A. I attributed that to other parties that 2 had reviewed it, yes, sir. 3 Q. I'm going to show you what is R-41B. I 4 believe this is already in evidence. I have it as 5 Exhibit T7760. I'm not sure what tab number that 6 might be. I'm told it's 795. 7 Can you turn to the third page of the 8 document? 9 A. I'm there. 10 Q. And do you see No. 3? It talks 11 about -- if you look back, it talks about what 12 each -- let's start on the previous page, Page 2 13 of the document. 14 A. All right. 15 Q. Under the heading "Appraisal 16 procedure." If we look at the second paragraph, 17 it begins specifically, "each appraisal report 18 must," and then it has -- 19 A. I see that. 20 Q. -- a series of items that it must 21 include. 22 A. Yes. 11036 1 Q. And if you turn to the next page, Item 2 No. 3. It requires that the appraisal contain all 3 recognized approaches to market value unless the 4 appraiser fully explains and documents the 5 rationale for eliminating one or more of the 6 approaches to value; is that right? 7 A. Yes, it does say that. 8 Q. Do you know whether the FDIC in its 9 appraisal -- in that section of its examination 10 manual had a similar requirement during this 11 period of time? 12 A. No, sir, I do not. 13 Q. I'm going to bring you the manual of 14 examination policies, and I'm going to give you an 15 excerpt of that which I've marked as Exhibit 4174. 16 I think I've given you my copy, Mr. Stone. Let me 17 take it back. 18 Can you just compare to see -- I've 19 copied Pages 5, 6, and 7 of that section of the 20 manual dealing with appraisals. 21 Can you check to see whether I've 22 copied the -- correctly copied those pages? 11037 1 A. (Witness reviews the document.) 2 Q. Sir, did I correctly copy those pages? 3 A. Well, I have to look. 4 Q. Okay. 5 A. (Witness reviews the document.) 6 Q. Mr. Stone, I don't think I was clever 7 enough to substitute words in there. So, if you 8 can just grossly look to see whether or not those 9 are the appropriate pages, it might be more 10 efficient. 11 A. Well, what I was looking for, sir, is I 12 see on the second page "types of appraisals." I 13 don't know if that's the beginning of the -- 14 Q. You can compare that to the full 15 version in the manual before you. 16 MR. LEIMAN: Your Honor, among other 17 things, I've got a problem with this particular 18 exhibit having any relevance to what we're doing 19 here since on the bottom -- right-hand bottom of 20 the page, it indicates pretty clearly that this is 21 8-'86, which would be August '86, which is after 22 the time of both of these loans. 11038 1 So, apart from the fact I don't know 2 where this line of questioning is going, I don't 3 know how this document or the FDIC manual is 4 relevant in any case. 5 MR. BLANKENSTEIN: Your Honor, I think 6 it's sufficiently contemporaneous and the witness 7 has testified with respect to R-41B. It's in this 8 case. Mr. Leiman has presented this issue of 9 R-41B compliance in this case, and he has 10 maintained and has asserted that compliance with 11 R-41B is necessary to have an adequate and 12 satisfactory appraisal for real estate property 13 supporting a commercial real estate loan. 14 The question is whether the FDIC, which 15 Mr. Stone has testified reviewed federally-insured 16 thrifts, had a similar requirement. That's what 17 I'm trying to explore. 18 MR. LEIMAN: What does the August 1986 19 document have to do with R-41B, which was 20 rescinded about two months later, Your Honor? On 21 top of which, these -- 22 THE COURT: You're telling us something 11039 1 was rescinded? 2 MR. LEIMAN: R-41B was overtaken and 3 rescinded in October of 1986. I can't even 4 venture to guess what this was. These loans were 5 made in June -- 6 THE COURT: Well, it should be 7 determined whether this was the policy at the time 8 that the appraisal was made. I mean, 8-'86 is 9 pretty close. That doesn't mean that it was first 10 promulgated at that time, but -- 11 MR. LEIMAN: No, Your Honor. But this 12 is the FDIC's appraisal guidelines. 13 THE COURT: I understand. Maybe the 14 witness can tell us what was in effect at that 15 time. 16 THE WITNESS: The parentheses, Your 17 Honor, on the bottom right after "loans" means 18 that for any pages that has that, that was the 19 date of revision. 20 Now, that revision could be 21 substantive, or -- and more often was. It could 22 be one paragraph. It could be an entire document. 11040 1 I can't really say. I don't want to imply that 2 this was a brand-new document in August of '86. 3 It more likely was a revision of something that 4 had been earlier updated, and I can't tell you 5 which part of it was updated. 6 MR. LEIMAN: Your Honor, I still 7 don't -- first of all, we don't know what the 8 nature of the revision might have been. The 9 witness has stated he doesn't know. Unless there 10 is some more of this document which would indicate 11 how -- what particular sections of this had been 12 revised as -- 13 THE COURT: All right. If 14 Mr. Blankenstein wants to compare the requirements 15 of the FDIC with the requirements of the Federal 16 Home Loan Bank Board, then I'm going to allow it. 17 Let's proceed. 18 Q. (BY MR. BLANKENSTEIN) Now, if we can 19 turn to the second page of the excerpt, which is 20 Page 6 which is entitled "Types of appraisals" -- 21 A. Yes. 22 Q. It goes on to identify three types of 11041 1 approaches to identifying value; is that right? 2 A. Yes, it does. 3 Q. The market data approach; is that 4 right? 5 A. Right. 6 Q. The cost approach? 7 A. Correct. 8 Q. And the income approach; is that 9 correct? 10 A. Correct. 11 Q. Is there anything in the -- strike 12 that. 13 The guidelines that you have before you 14 don't direct that each of those approaches must be 15 contained in the appraisal, do they? 16 A. I believe it says "One appraisal 17 technique may be more appropriate in a given 18 circumstance than in another." 19 Q. And that's different than R-41B that we 20 just reviewed that required that all recognized 21 approaches to market value be set out unless -- 22 A. You're right, sir. It certainly does. 11042 1 Q. Okay. Thank you, sir. 2 MR. BLANKENSTEIN: Your Honor, I would 3 move Exhibit 4174 into evidence. 4 MR. LEIMAN: Your Honor, I think I've 5 stated the substance of my objection to this 6 document. 7 THE COURT: All right. Received. 8 Q. (BY MR. BLANKENSTEIN) Mr. Stone, if I 9 remember your testimony right yesterday, you 10 criticized USAT's senior loan committee for 11 approving the Park 410 and Norwood loans without 12 having in hand at the time of the approval written 13 appraisals that complied with R-41B; is that 14 correct? 15 A. Maybe I'd like to see the exact quote. 16 I don't recall. 17 Q. Well, let me ask you the question a 18 little differently. 19 A. I don't remember 41B being a part of 20 it. 21 Q. Let me ask you the question a little 22 differently, then. 11043 1 Do you criticize USAT's senior loan 2 committee for approving the Park 410 and Norwood 3 loans without having in hand a written appraisal 4 that conforms with R-41B at the time they approved 5 the loans? 6 A. Yes. 7 Q. Was it unsafe and unsound practice for 8 the senior loan committee to approve the loans 9 without first having in hand a written appraisal? 10 A. Not -- and I believe they did in one of 11 the two cases. I believe it was Norwood. Not 12 perhaps -- let me qualify this. 13 I believe it was in the case of 14 Norwood, not Park 410. They may have conditioned 15 the approval upon the receipt of an acceptable 16 written appraisal. But again, there was no 17 delegation to any particular official to test that 18 reasonableness and they had already foregone, as 19 far as an official committee, the group judgment 20 of reviewing it. They had delegated to some 21 unknown party that task and that responsibility. 22 But I didn't see in the official 11044 1 records any confirmation back to the committee. 2 It may have been and I may have just missed it. 3 Q. Mr. Stone, let's see if we can break 4 this down to its smaller parts. 5 A. I haven't answered your question, 6 but -- 7 Q. Is it your view that a senior loan 8 committee would act -- would commit an unsafe and 9 unsound practice if it approved a loan without 10 first having in hand a written appraisal? 11 A. If they didn't condition the loan for 12 not having that appraisal, yes. 13 Q. If they did condition the loan, then it 14 wouldn't be an unsafe and unsound practice; is 15 that right? 16 A. Depends. If they conditioned the 17 loan -- 18 Q. It wouldn't, per se, be an unsafe and 19 unsound practice? I'm just trying to take this in 20 small parts. 21 MR. LEIMAN: Have you finished your 22 answer? 11045 1 THE WITNESS: I haven't finished the 2 last two answers. 3 MR. BLANKENSTEIN: I'm sorry, 4 Mr. Stone. 5 MR. LEIMAN: With all due respect -- 6 THE COURT: Finish your answer, please. 7 THE WITNESS: Well, the previous answer 8 that I didn't get to finish was that it is 9 conceivable that a senior loan committee, not 10 having a written appraisal in hand at the time 11 they are requested to approve a loan and that 12 they, in fact, do approve, could possibly delegate 13 to hopefully more than one person the task of 14 reviewing the appraisal when received and prior to 15 disbursing the loan, to test its reasonableness, 16 the underlying assumptions, the comparables used 17 are reasonable. And only if -- hopefully more 18 than one person -- only if they had a very 19 established track record with the committee with 20 the full confidence that they were totally 21 qualified to make that determination. 22 But the condition would be that review 11046 1 has to be done and both of you satisfied. If one 2 of you isn't satisfied, if it's two people, come 3 back to the committee. Under no circumstances, 4 however, until you review that appraisal, disburse 5 the loan proceeds. If you have a problem, come 6 back to the committee. And if we're not 7 satisfied, we will deny the loan if we think it 8 poses our institution an undue risk for lack of 9 sufficient collateral for the loan that's being 10 requested. That is the way I would see the 11 function working. 12 Q. Let me see if I can take it in small 13 bite sizes so I can understand. 14 It is not, per se, an unsafe and 15 unsound practice for a loan -- senior loan 16 committee to approve a loan without first having 17 in hand a written appraisal, provided that the 18 approval is conditioned upon receiving a 19 satisfactory appraisal; is that right? 20 A. That is -- 21 Q. So far? Is that right so far? We'll 22 continue on, sir. 11047 1 A. I don't believe it is. 2 THE WITNESS: Could the court reporter 3 please give me the question as you asked? 4 5 (Whereupon the requested portion 6 was read back by the reporter.) 7 8 A. That could very well be an unsafe and 9 unsound practice dependent on -- conditioned upon 10 receipt of a satisfactory -- I bet if you ask the 11 appraiser who gives it to you "Is this 12 satisfactory," he'd probably say "Okay." He said 13 "Okay." He got that approval. "Check her off and 14 disburse the loan." 15 No, that would not be a safe and sound 16 practice. 17 Q. (BY MR. BLANKENSTEIN) Suppose it's 18 receipt of a written appraisal that supports the 19 value of the collateral. 20 A. Again. Depends on who you ask. If you 21 ask the appraiser, he says, "That's okay. We've 22 got approval. That condition's met." It would be 11048 1 unsafe and unsound. 2 Q. Upon receipt by the institution of a 3 written appraisal -- 4 A. You said "satisfactory." Satisfactory 5 to whom? 6 Q. One that satisfies the institution that 7 the value of the collateral -- 8 A. Who's the institution? I haven't -- 9 Q. We've been talking about the 10 hypothetical Bank of Antioch, sir. 11 A. A teller? The janitor? You could find 12 someone to say, "A-okay." 13 Q. The senior loan committee or delegatee 14 of the senior loan committee. 15 A. Again, my previous answer, I think I 16 explained possibly what could be considered safe 17 and sound, that if it were delegated below -- and 18 that's the whole problem in this institution, is 19 delegations. But if the delegation was below that 20 of the committee, it would have to be more than 21 one person to make that decision. And they would 22 have to have a very established track record with 11049 1 the institution, be experts in appraisals. If one 2 of them disagrees, come back to the committee and 3 hash it out so the delegation, which is very loose 4 in this institution, all the way down from the 5 board would have to be very well-defined, 6 satisfactory to assure the parties that are 7 involved that they are making a safe and sound 8 loan based on reasonable value, sir. 9 Q. Are you familiar with -- strike that. 10 Does -- do agencies set forth policy 11 through the regulatory pronouncements? 12 A. There are regulations. There are 13 policies. 14 Q. Do regulations embody policies of the 15 agency? 16 A. Of the agency? 17 Q. Yes. Of the agency that promulgates 18 the regulation. 19 A. Policies of the -- policies as they 20 affect institutions or policies as they affect 21 only the -- 22 Q. In general. I'm just talking -- you've 11050 1 been -- you were in the government for a very long 2 time. 3 I imagine you reviewed regulations 4 before they were announced; is that right? 5 A. Where I could, yes. 6 Q. Generally those -- whatever the subject 7 matter might be of those regulations, they set 8 forth the policy of the agency with regard to that 9 subject matter; is that right? 10 A. Pardon me. I see where you're going. 11 Yeah. Whether it's a written policy or it just 12 establishes policy to adhere -- to assure 13 adherence to the regulation. 14 Q. Are you familiar with the policy of the 15 Federal Home Loan Bank Board back in 1986, 1987 16 with respect to thrifts approving real estate 17 loans without first having a written appraisal? 18 A. No, sir. 19 Q. Did you think that might be relevant at 20 all to your testimony? 21 A. Oh, pardon me. I believe the 22 chartering authority at least required -- and I 11051 1 feel certain OTS did -- an appraisal -- I'm sure 2 OTS did, as well -- an appraisal on real estate 3 properties. 4 Q. No. 5 A. In fact, the state examination even 6 criticized the institution for not having one. 7 Q. My question is: Are you familiar with 8 the policy of the Bank Board in 1986 and 1987 with 9 respect to whether it is appropriate for a thrift 10 to approve a real estate loan without first having 11 an appraisal in hand? 12 A. In 1986? 13 Q. 1986, 1987. 14 A. I believe 41B came out in 1982, and it 15 would be surprising to me that OTS would say 16 that -- precisely what would have to be in an 17 appraisal, but you can get it any time you want 18 it. "A year after you make the loan, couple of 19 years, whenever you want to get it, go get it and 20 put it in the file." 21 That would be -- so, I would have to 22 think -- but I won't say for a fact -- that if 11052 1 they had a rule as definitive as 41B, they either 2 had it as a requirement before the loan was made 3 or it was a glaring omission. 4 Q. Was -- does 41B, R-41B, deal with this 5 issue at all as to when the thrift must receive 6 the written appraisal? 7 A. I don't know. It may well not. 8 Q. But you just made reference to R-41B as 9 setting forth policy in this area, even though I 10 think you testified earlier that you hadn't even 11 reviewed R-41B; isn't that right? 12 A. I did not testify to that. I said I 13 found -- I would find it extremely strange that 14 the Federal Home Loan Bank in 1982 would issue 15 R-41B which is, again, very, very precise. But at 16 the same time say, "But it doesn't matter when you 17 get this appraisal. You can get it after you make 18 the loan if you want to." 19 That would seem very, very strange. 20 Like I say, if they didn't, then it was a glaring 21 omission. 22 Q. Did you think it relevant to go back 11053 1 and look to the -- relevant to your report and to 2 your testimony here today to go back and determine 3 what that policy was if it existed and, if it did, 4 what it was? 5 A. Let me -- in my deposition, I answered, 6 as well. Let me go back to the deposition you 7 gave me. We're talking about 41B on the page -- 8 Q. No, I'm not asking you about R-41B. 9 I'm asking you whether or not -- 10 A. I'm answering the question you just 11 asked me the same as I did in my deposition since 12 you have given me my deposition back. 13 "Well, the reason I answered in that 14 fashion, I was aware of regulation 41B." 15 "What was the nature of that 16 regulation?" 17 "The standards required of appraisals 18 received by institutions as a result of their 19 lending investment function." 20 "Aware of it, but did not --" 21 "I was not conversant with 41B nor, as 22 I went through my review, cite as necessary or 11054 1 relevant to my basic findings." 2 "Why not?" 3 "Because the size of the loan was the 4 most egregious, if you will, violation of safety 5 and soundness standards that I observed. The 6 appraisal exception, whether it be a violation of 7 41B -- particularly as a violation was a very, 8 very secondary concern." 9 Q. So, if I understand right, your expert 10 testimony that you delivered here in court is 11 based principally on the size of the loan with the 12 appraisal issues being largely secondary; is that 13 right? 14 A. No. It's not that limited. It's -- 15 have you -- maybe you haven't read my report 16 because it goes through what my problems are and 17 appraisals pale in comparison as far as being in 18 conformance with 41B to the problems I have 19 outlined, egregious problems with the way Park 410 20 and Norwood were made. I can read it -- 21 Q. Can you hand me the deposition 22 testimony that you were reading from? 11055 1 A. Sure. I have it right here. 2 THE COURT: We'll take a short recess. 3 4 (A short break was taken 5 at 10:30 a.m.) 6 7 THE COURT: Be seated, please. We'll 8 be back on the record. 9 Mr. Blankenstein, you may continue. 10 MR. BLANKENSTEIN: Thank you, Your 11 Honor. 12 (10:57 a.m.) 13 Q. (BY MR. BLANKENSTEIN) You didn't 14 review any Bank Board regulations, did you, in 15 preparing your report or testimony? 16 MR. LEIMAN: Excuse me. I think the 17 witness was in the middle of an answer when he -- 18 he started -- 19 THE COURT: Let's start over, 20 Mr. Leiman. 21 MR. BLANKENSTEIN: I don't think 22 Judge Shipe cut Mr. Stone off in the middle of an 11056 1 answer. I certainly don't remember that. But if 2 I could continue, sir. 3 THE COURT: Yes, you may. 4 Q. (BY MR. BLANKENSTEIN) You didn't 5 review any Bank Board regulations in preparing 6 your report or preparing for your expert 7 testimony; is that right? 8 A. I will answer "no." I have -- you've 9 shown me yesterday, I think, a policy statement I 10 may have seen. I think concentration -- I've seen 11 a few of the regulations. 12 Q. Before you sat down here today or 13 before you sat down to come to testify, you hadn't 14 reviewed any regulations? 15 A. I look at the loan to one borrower 16 regs. Immediately coming to mind, that's the only 17 one that I glanced at but didn't spend a lot of 18 time with, no. I didn't regard it as part of my 19 engagement, quite frankly. 20 Q. Did you review any Bank Board 21 regulations -- so, you wouldn't have reviewed any 22 Bank Board regulations that might have pertained 11057 1 to appraisals or the standards for appraisals or 2 when appraisals should be received, at what point 3 in the process; is that right? 4 A. My engagement was to look at the safety 5 and soundness implications. 6 Q. And if I understand you right from your 7 testimony yesterday, you don't believe the Bank 8 Board regulations have much bearing on safety and 9 soundness issues; is that right? 10 A. I have testified before that violations 11 of laws and regulations in and of themselves would 12 be an unsafe and unsound practice, but there can 13 be instances where decisions are made -- violating 14 no laws, no regulations, but violate the laws, if 15 you will, of prudence, competency, and due care 16 and regard for the law as far as due attention. 17 Q. I think in response to an earlier 18 question I asked you, you agreed that regulations 19 often set forth the policy of the agency with 20 regard to the subject matter of the regulation. 21 Do you remember that? 22 A. Yes, I do. 11058 1 Q. That would be true for the Bank Board, 2 as well, wouldn't it? 3 A. I would certainly think so. 4 Q. So, if the Bank Board were to issue a 5 regulation with regard to appraisals and when an 6 appraisal would be received in the loan process, 7 that would have something to say about the Bank 8 Board's policy view with respect to that subject 9 matter, correct? 10 A. No, sir. I can't -- I can't say that's 11 correct for the following reason: There are 12 numerous regulations written by the regulatory 13 authorities, and not in all instances is there a 14 written policy as a result of that regulation. In 15 many cases, it's sheer logic. It is -- like I 16 said, you can't regulate, nor could you issue 17 policy instructions on judgment. 18 Q. That's not the question I asked you. 19 The question I asked you -- let me try it again. 20 Let me see if I can do a better job this time. 21 A. Perhaps it's me. 22 Q. A Bank Board regulation discussing when 11059 1 in the loan approval process a written appraisal 2 is necessary would set forth, would it not, the 3 Bank Board's views on that subject matter? 4 MR. LEIMAN: Could you clarify? I 5 request clarification as to the time. If it's the 6 time frame of these loans, that would be one 7 thing. If you're asking him for a general 8 opinion, I don't know if he's qualified. 9 MR. BLANKENSTEIN: I'm not sure what 10 the relevance of the time frame is to my question. 11 Q. (BY MR. BLANKENSTEIN) In 1986 and 12 1987. 13 MR. LEIMAN: I'm going to object to the 14 question if it's 1987 because it was after these 15 loans were made, Your Honor. These loans were 16 both made in 1986. 17 Q. (BY MR. BLANKENSTEIN) In 1986. How's 18 that, Mr. Stone? 19 A. I lost the question at this point in 20 time. Sorry. The court reporter can do it rather 21 than ask you to repeat it. 22 Q. Let me just try it again. In 1986, 11060 1 would a regulation -- strike that. We're going to 2 do -- let's try it this way, Mr. Stone. 3 I put before you, I think, on your 4 left-hand side some folders this morning. And I 5 think they have Tab 847 in them. 6 Do you see that? 7 A. I have 846 and 847. 8 Q. Yes. Can you take a look at 847? 9 A. Okay. (Witness reviews the document.) 10 MR. BLANKENSTEIN: Your Honor, this is 11 Exhibit B87. It's already in evidence at Tab 847. 12 Q. (BY MR. BLANKENSTEIN) This is the 13 1987 version of the Bank Board regulations 14 pertaining to the subject matter that we're 15 talking about. And -- 16 A. Was this a change from what was 17 applicable at the time the loans were made? I'm 18 sorry. 19 Q. We'll get there. 20 A. I was just asking. 21 Q. Let me see if we can get there. We'll 22 get you back to 1986 in a minute. All right? 11061 1 Now, I'm going to direct your 2 attention -- you see on -- this is Section 3 563.17-1? 4 A. Yes, it is. 5 Q. And if you go down on the first page, 6 you see Subsection C. Do you see that? 7 A. Establishment -- 8 Q. On the right-hand side. "Establishment 9 and maintenance of records." 10 Do you see that? 11 A. Yes, I do. 12 Q. Okay. And it contains a list of the 13 records that a thrift must maintain. 14 Do you see that? 15 A. I see "establishment and maintenance of 16 records." I haven't read it yet. 17 Q. Let's turn to the next page. And C1 is 18 entitled "Records with respect to loans secured by 19 real estate." 20 Do you see that? 21 A. Yes, I do. 22 Q. And if you go down to Roman Numeral IV, 11062 1 it deals with appraisals, doesn't it? 2 A. Yes, it does. 3 Q. And it provides that a written 4 appraisal is necessary at the time a loan is made 5 except if the loan approval is conditioned upon 6 receipt of an appraisal that discloses the market 7 value and substantiates the market value of the 8 collateral; isn't that right? 9 MR. LEIMAN: Your Honor, I object to 10 the question. I object to the use of this 11 exhibit. This exhibit has nothing to do with the 12 making of these two loans, his opinion, or his 13 report, which concerned two 1986 loans, the 14 underwriting of. And extensive questioning 15 yesterday by Mr. Villa on the very point of 16 whether or not Mr. Stone's view of this case was a 17 hindsight view or 20/20 hindsight or whether it 18 was a view, which Mr. Stone made very clear, was 19 as of the time to put himself in the shoes of the 20 people that underwrote this loan and the board of 21 directors. 22 It is utterly unfair and inappropriate 11063 1 and irrelevant to have a 1987 appraisal regulation 2 to be the subject of questioning for this 3 particular witness. 4 MR. BLANKENSTEIN: Let me respond to 5 this. I'll bring this back in a moment to 1986 to 6 solve Mr. Leiman's concerns. We will have in a 7 moment what the policy of the Bank Board was in 8 1986 on this very subject matter. 9 MR. VILLA: And Your Honor, I must say 10 for the respondents as a group, we try not to 11 interrupt Mr. Leiman's examinations; but his 12 apparent attempts to protect his witness during 13 cross-examination are very disruptive, both to me 14 yesterday and to the respondents as a group. And 15 I would ask that he not make -- get up and make 16 objections on relevancy grounds and make speeches 17 on this point. It's very difficult to conduct any 18 examination like this. 19 MR. LEIMAN: Come on, John. 20 THE COURT: All right. The objection 21 is denied. 22 Q. (BY MR. BLANKENSTEIN) Did I 11064 1 accurately characterize the regulation, Mr. Stone? 2 Did you follow that? 3 A. I believe you were up to the point 4 of -- 5 Q. That you have to have a written 6 appraisal in hand, except that you can make the 7 loan conditioned upon the receipt of a 8 satisfactory written appraisal as long as that 9 appraisal is obtained prior to the disbursement of 10 any loan proceeds, correct? 11 A. It says more than that, sir. It says 12 "Prior to any loan disbursement by a person or 13 persons duly appointed and qualified as appraisers 14 by the board of directors of such lender, 15 disclosing the market value of the security 16 offered by the borrower and containing sufficient 17 information and data concerning the appraised 18 property to substantiate the market value of the 19 security described in such reports." 20 For the purpose of my testimony, I did 21 not see what this regulation requires, that -- and 22 maybe it's in the records and I haven't seen it -- 11065 1 that the board of directors adhered to this by 2 duly -- let me get the words -- duly appointed, 3 checked their qualifications. I believe 4 Mr. Graham said in his deposition he didn't feel 5 qualified in appraisals. "Disclosing the market 6 value, containing sufficient information and data 7 concerning the appraised property to substantiate 8 the market value." In both cases -- 9 Q. You're reading this -- 10 A. I'm reading the reg as it's stated as 11 an examiner would read it. 12 Q. A regulation as requiring that the 13 appraisers be employees of the institution? 14 A. No, I'm not saying that. 15 Q. Okay. 16 A. I'm saying they duly appoint -- I'm 17 reading the reg you handed me. You're faulting me 18 for not having read it before. I'm reading it 19 word for word, and you don't like what I'm saying. 20 Q. No. I like what you're saying very 21 much, Mr. Stone. 22 A. Thank you. 11066 1 Q. I really do. I think it's great for 2 us. 3 A. You made my day. The -- 4 Q. Now, let's deal with Mr. Leiman's 5 problem? 6 THE COURT: Had you finished your 7 answer, Mr. Stone? 8 THE WITNESS: Not entirely. 9 Q. (BY MR. BLANKENSTEIN) Please. I'm 10 sorry. Go ahead. 11 A. The -- this regulation that I've just 12 read for the first time clearly says it's an 13 exception not to have the appraisal in hand. To 14 qualify for that exception, the board of 15 directors -- which I have been harping on through 16 my entire testimony -- it doesn't say "senior loan 17 committee," unless your copy is different than 18 mine. It says "Board of directors shall -- 19 "Qualified as appraisers by the board of directors 20 of such lender." 21 I haven't seen the delegation. I have 22 seen Mr. Graham's deposition that he didn't feel 11067 1 qualified in making appraisals, and he got 2 appraisals only after he decided he wanted to make 3 the loan to support the loan. 4 Then it goes on to say "Disclosing the 5 market value of the security offered by the 6 borrower and containing sufficient information and 7 data concerning the appraised property to 8 substantiate the market value of the security." 9 In both cases, as I've testified 10 earlier, I know of no party, informed party at 11 USAT, that could have made such a conclusion -- 12 both from the qualification standpoint and at 13 least for Mr. Graham -- but if they were informed 14 when they find out that in both cases they had an 15 appraisal. In one case they saw it. In one case 16 they didn't. They did see, apparently, the 17 Love & Dugger report on Park 410. They didn't 18 like the value. So, they told Mr. Schulz what 19 they wanted, according to sworn deposition and 20 testimony. 21 In the Norwood case, they got an 22 appraisal from Appraisal Associates of Austin, 11068 1 AAA, paid for it out of the loan proceeds -- from 2 sworn depositions -- not even sure they saw it. 3 So, what did they do? They told Mr. Bolin the 4 number he had to come up with. 5 I don't see, even though this didn't 6 apply to USAT at the time those loans were made, 7 but you nonetheless gave it to me. Maybe this 8 wasn't the requirement in '86 and maybe they 9 didn't violate it. But nonetheless, I am saying 10 and my whole testimony is saying I didn't look at 11 the rules and regulations. I looked at the 12 propriety, the safety and soundness. You can pull 13 out Federal Home Loan Bank regulations from now as 14 long as you're allowed to and I will say I haven't 15 read them. 16 But yet, I have seen a regulation that 17 convinces me that I was wrong in Park 410, it was 18 a safe and sound loan, Norwood is a safe and sound 19 loan, that they weren't two large in relation to 20 the institution, that future prospects and all the 21 other negative features. We're harping on 22 technicals that have no bearing whatsoever on the 11069 1 substantive parts of my conclusions. 2 Q. And that's because the size of the 3 loan, in your view, was the most egregious 4 violation of safety and soundness standards and 5 overshadowed everything else; is that right? 6 A. Part of it. I had other exceptions. 7 That was the most egregious, but there were some 8 right behind it a tad less egregious. 9 Q. Didn't you say it overshadowed 10 everything else? I didn't make that up, did I? 11 A. I said it was the most egregious. 12 Q. And didn't you also say it overshadowed 13 everything else? 14 A. Yeah. 15 Q. Now, let's see if we can deal with 16 Mr. Leiman's problem. I want you to turn to 17 Exhibit 848, if you would. Excuse me. Tab 848, 18 which is Exhibit B3857. 19 A. B87? 20 Q. It's Tab 848, sir. 21 A. I have it. 22 Q. Now, this is a Federal Register 11070 1 publication excerpt from Friday, August 29th, 2 1986; is that right, sir? 3 A. That's what it says at the top of the 4 document, yes. 5 Q. And having been in government a long 6 time, you know that the Federal Register is the 7 place where you publish final regulations; isn't 8 that right? 9 A. Yes. That's the earliest you see it. 10 The final comes out in different forms. 11 Q. And this is one, if you can see the 12 excerpt in front of you, of regulations being 13 published by the Federal Home Loan Bank Board; 14 isn't that right? 15 A. Yes, it is. 16 Q. And if you look down on the middle 17 column of the page, it talks about -- it deals 18 with Section 563.17(1)(c), and that's the 19 regulation I just discussed with you -- isn't that 20 right -- the '87 version, the one that you were 21 quoting that you were reading from? 22 A. This one pre-dates the '87 -- 11071 1 Q. I understand. This is the publication 2 in the Federal Register in 1986 of the regulation 3 we were talking about? 4 A. The same regulation? 5 Q. That's right. 6 MR. LEIMAN: May I have a continuing 7 objection to this entire line of questioning? 8 THE COURT: Yes, you may. 9 Q. (BY MR. BLANKENSTEIN) Right? You 10 publish a regulation in the Federal Register and 11 then it becomes effective, correct? 12 A. I understand. I just want to be able 13 to answer your question. It apparently refers -- 14 yes, I believe it does. 15 Q. Now, I want you to -- you see under 16 "General scope and requirements," do you see that 17 section? It's the middle column. 18 A. Yes. 19 Q. All right. It says, "The main purpose 20 of the proposal, clarifying it, and expanding the 21 existing recordkeeping provisions of Section 22 563.17-1(c) was not to introduce a series of new 11072 1 underwriting concepts but, as many commenters 2 recognize, to set forth in greater detail existing 3 prudent lending requirements as required by the 4 board and the courts," correct? 5 A. Yes. 6 Q. Now, let's see if we can turn to the 7 very particulars we were discussing. If you turn 8 to the next page -- do you have that, sir, the 9 next page? 10 A. If your exhibit is correct, yes, I do. 11 There's several pages. 12 Q. Page 30849? 13 A. I have that. 14 Q. In the left-hand column, do you see it 15 starts "Requirements with respect to loans made on 16 the security of real estate"? 17 A. Yes. 18 Q. In the middle of that column, do you 19 see the sentence that begins "several"? It's -- 20 A. Oh, the very first sentence? "Several 21 commenters"? 22 Q. No. Do you see the second paragraph in 11073 1 that column? 2 A. "The Board believes" -- 3 Q. Yes. If you go to the sentence that 4 immediately precedes that, it begins "several." 5 MR. BLANKENSTEIN: Can I approach the 6 witness just to point that word out? 7 A. I've got it. 8 Q. (BY MR. BLANKENSTEIN) Okay. 9 A. "Several commenters express concern 10 that the proposed regulation" -- 11 Q. Why don't you go ahead and read it? 12 A. "Several commenters expressed concern 13 that the proposed regulation does not incorporate 14 the Board's view stated in the preamble that a 15 loan may be approved prior to the receipt of an 16 appraisal if the approval is conditioned on the 17 receipt of a satisfactory appraisal before funds 18 are disbursed." 19 Q. And that's an expression of what the 20 Board's views were with regard to prudent lending 21 policy, correct? 22 A. No, sir. It says several commenters -- 11074 1 I think they put this out for comment. I don't 2 see the board -- unless the board commented on 3 some regulation. 4 Q. Why don't we go ahead and see what the 5 Board's comment was? Why don't you go down to the 6 last sentence on the page? 7 A. All right. 8 Q. The one that begins "lastly." Why 9 don't you read that one into the record, please? 10 A. "Lastly, the Board is incorporating in 11 the final regulation its previously-expressed view 12 that it is acceptable to grant a loan without a 13 prior appraisal if the approval is conditioned 14 upon receiving a satisfactory appraisal which 15 meets the standards of R series Memorandum No. 41 16 issued by OES before funds are disbursed." 17 Is that what you wanted me to read? 18 Q. Uh-huh. Now, would you agree with me 19 then that this describes what the Board believes 20 to be prudent lending policy? 21 A. No. This is what's in the Federal 22 Register. 11075 1 Q. All right. 2 A. What you gave me previously -- 3 Q. Excuse me. I'm sorry. Go ahead. 4 A. But what you gave me -- you told me 5 that this was in the Federal Register and that the 6 previous document that you provided me was the 7 regulation that was announced for the first time 8 in the Federal Register. And the final 9 regulation -- you viewed what some commenter said 10 and what in a previous statement concisely what 11 the Board said, but we read exactly what this 12 regulation required. 13 And again, I'll state that if that is 14 done -- if in fact, a loan is approved prior to a 15 written appraisal, "Prior to any loan disbursement 16 by a person or persons duly appointed and 17 qualified as appraisers by the board of directors 18 of such lender, disclosing the market value of the 19 security offered by the borrower and containing 20 sufficient information and data concerning the 21 appraised property to substantiate the market 22 value," that this is just an explanation about the 11076 1 comments they received, their decision-making 2 process. But this is the reg they adopted. 3 Q. I think your testimony -- let's move 4 on, Mr. Stone. 5 I think your testimony was that you 6 didn't see any process at USAT where appraisals, 7 whether received at the time of the loan approval 8 or afterwards, were reviewed for conformity with 9 R-41B or with appropriate appraising standards; is 10 that right? 11 A. I'd like to see my exact wording, 12 please. 13 Q. Well, I'm asking you: Is that -- let 14 me change it. Is that your testimony? 15 A. Well, if you're reading a quote -- 16 Q. No, I'm not reading -- I'm asking you a 17 question. 18 Is that your testimony, that you didn't 19 see any process at USAT where appraisals received 20 from outside appraisers were reviewed by USAT to 21 determine their conformity with R-41B or with 22 appraisal standards in general? 11077 1 A. The only reason I asked to see it is 2 that I don't know that I said 41B. 3 Q. Well if you give me a minute, I'll see 4 if I can -- 5 A. Counsel, before I put you through that, 6 if I -- even if I didn't, they should, 7 nonetheless, conform to governing regulations, 8 even though it wasn't my focus or my intent. Even 9 if I didn't say it, I would say yes, they should 10 have documentation to show that they conform to 11 the regulations as well as to safe and sound 12 lending practices. 13 Q. Did you find any such process at USAT 14 when you went through the loan files? 15 A. Not in the materials I had, no. 16 Q. And do you have access to all of the 17 loan files? 18 A. I'd have to -- I'd have to defer to the 19 OTS as to that representation, but I was told that 20 it was the entire loan files of Park 410 and of 21 Norwood, which were my charge. 22 Q. Did you discuss with OTS the general 11078 1 scope of your testimony, including what you would 2 have to say about appraisals? 3 A. The OTS did not limit me in my 4 engagement. 5 Q. I didn't -- did you tell them -- did 6 you discuss with them what your testimony would 7 be? Did you tell them you'd be talking about 8 appraisals? Did you tell them that you'd be 9 expressing a view with regard to the procedures or 10 lack thereof at USAT concerning appraisal review? 11 MR. LEIMAN: Compound, Your Honor. 12 Which question would Mr. Blankenstein like an 13 answer to? 14 MR. BLANKENSTEIN: I think the witness 15 can handle it. 16 THE COURT: Did you understand? 17 THE WITNESS: Only if the court 18 reporter could please read it back. Sorry. 19 MR. BLANKENSTEIN: I'll ask it again, 20 Your Honor. 21 Q. (BY MR. BLANKENSTEIN) You had 22 conversations with OTS where you discussed the 11079 1 scope of your testimony? 2 A. Yes. 3 Q. During those conversations, did you 4 talk about that part of your testimony that would 5 bear on appraisals? 6 A. No. 7 Q. Let's talk about what processes were or 8 were not in place at USAT during 1986 with regard 9 to appraisal review. 10 I'm going to show you what's A7006 11 which I think is already in evidence -- is that 12 right -- at Tab 987. 13 A. It's -- I don't have the tab. Is it 14 A7006? 15 Q. It's A7006. 16 A. Correct. Yes, I've seen this. 17 Q. Have you seen this? 18 A. Yes. 19 Q. And so, you reviewed this in connection 20 with your report and testimony? 21 A. I don't know that I had it at the time 22 of my report, but I have seen it in my 11080 1 preparation. 2 Q. If you turn to the second page of the 3 exhibit, which is Bates stamp 120498. 4 A. Yes. 5 Q. You see it's headed "appraisals"; isn't 6 that right? 7 A. Yes, it is. 8 Q. And before we talk about that, this is 9 Peat Marwick -- this is a letter from 10 Peat Marwick; is that right? 11 A. Yes, it is. 12 Q. To the board of directors of USAT. 13 Right? 14 A. Yes, it is. 15 Q. And this is what is called a management 16 letter in the parlance? Have you seen letters 17 like this before? 18 A. Yes, I have. I just don't want to put 19 a term on it. It is a letter to the board of 20 directors from Peat Marwick. 21 Q. And it discusses what the auditors find 22 during the course of their examination and 11081 1 suggests corrections; is that right? 2 A. Correct. 3 Q. Let's talk about appraisals now. It 4 says that -- the second sentence under 5 "appraisals," it says "We understand that the 6 association has initiated a review of existing 7 appraisals to determine compliance with applicable 8 rules and regulations and establish procedures to 9 determine compliance for future appraisal 10 reports." 11 Do you remember reviewing that? 12 A. This, as a matter of fact, was 13 discussed by me yesterday, including the first 14 sentence. "However, that the review of loans 15 receivable and real estate acquired for 16 development or sale revealed certain deficiencies 17 related to appraisals." 18 Now, it says we understand" -- in other 19 words, this is a common parlance, examiners as 20 well as auditors. When an examiner/auditor finds 21 a problem, discuss it with management. Management 22 has said they have initiated a review to determine 11082 1 compliance with future reports. 2 I also said in relation to this, 12 3 months later or 11 months later, the very same 4 entity that wrote this said here Park 410 5 doesn't -- "Even though we advised you back in 6 January," I think it was December, the same 7 authority said "Park 410 does not comply." 8 Q. What question were you answering? My 9 question that I asked you was simply whether, in 10 this letter, Peat Marwick related that they had 11 identified an issue with regard to appraisal 12 reviews -- 13 THE COURT: Let's go to the next 14 question. 15 Q. (BY MR. BLANKENSTEIN) Do you see the 16 language that says they had established 17 procedures -- they established procedures to 18 determine compliance with future appraisal 19 reports? Do you see that? 20 A. It's predicated they have initiated a 21 review. This letter does not say they have 22 systems in place. And ten months later, 11 months 11083 1 later, they say you don't. 2 Q. I understand that. Now, we have -- 3 this is January 31st, 1986; isn't that right? 4 A. Yes. 5 Q. The date of the letter? That's 6 before -- before the Park 410 and Norwood loans. 7 Right? 8 A. That's the particular point. This 9 should have alerted them to look at Park 410 and 10 Norwood. 11 Q. Now, did you find -- looking at that, 12 did you -- when you looked through the files since 13 you had a copy of this management letter, did you 14 do anything to determine whether USAT had, in 15 fact, implemented any such procedure? 16 A. I saw ample evidence that they had not. 17 Q. Okay. Let's see what -- let's see what 18 we have here, sir. Let me show you what has been 19 marked as T7041. 20 MR. BLANKENSTEIN: This is a letter, 21 Your Honor, or a memo from David Graham to 22 Jerry Williams dated September 18th, 1986. And it 11084 1 talks about examination exceptions for 2 Norwood/United Park. 3 Q. (BY MR. BLANKENSTEIN) Did you review 4 this memorandum in connection with your expert 5 testimony and report? 6 A. I am not entirely certain given the 7 volume, but I won't say that I didn't. I don't 8 recall it as a major -- I haven't read it all yet, 9 but I don't recall it as a major document. But 10 let's -- 11 Q. All right. Look at Item No. 3. 12 A. Yes, I'm looking at it. 13 Q. And it's responding -- Mr. Graham is 14 responding to a criticism, is he not, in an 15 examination report, correct? 16 A. Yes. That seems to be the subject, 17 "Examination exceptions Norwood/United Park." 18 Q. All right. And the particular 19 criticism involved is that the loan file did not 20 contain a written appraisal report, which suggests 21 that no appraisal was received prior to the 22 extension of credit; isn't that right? 11085 1 A. Yes. 2 THE COURT: That's not quite -- 3 MR. BLANKENSTEIN: I'm sorry. 4 THE COURT: "Reviewed." 5 MR. BLANKENSTEIN: Excuse me, Your 6 Honor. Thank you for the correction. "Was 7 reviewed prior to the extension of credit." 8 Q. (BY MR. BLANKENSTEIN) Do you see 9 that? 10 A. Yes, I do. 11 Q. And Mr. Graham provides his answer to 12 that, doesn't he? And he says, among other 13 things, that there was an appraisal in a different 14 file. Right? 15 A. Yes, he does. 16 Q. And then he goes on to say "We had 17 received the full appraisal and had reviewed it 18 prior to completing the transaction as is our 19 procedure on all new loans." 20 Do you see that? Did he say that? 21 A. He certainly did. 22 Q. Now, we have a statement in January of 11086 1 '96 (sic) that they were implementing a procedure. 2 That was in the Peat Marwick letter we looked at. 3 Peat Marwick says that USAT said they will be 4 implementing a procedure to review appraisals; 5 isn't that right? 6 A. Yes. They said they were initiating a 7 review. 8 Q. Right. And now we have Mr. Graham 9 saying that there is such a procedure in place, 10 don't we? 11 A. This one document, he does say that; 12 but it's contrary to -- 13 MR. BLANKENSTEIN: Your Honor, I move 14 T7041 into evidence. 15 MR. LEIMAN: Your Honor, I'd like the 16 witness to have the opportunity to finish his 17 answer. I don't have an objection to this coming 18 into evidence. 19 THE COURT: All right. Received. Did 20 you have more? 21 THE WITNESS: Yes. I was interrupted. 22 While this does say that and Mr. Graham does, in 11087 1 fact, say it -- I can refer to my notes and show 2 that on Park 410 particularly, that the date of 3 the appraisal, if I am right -- and I stand 4 corrected if I am not -- and the receipt of it, 5 the written appraisal which this refers to, was 6 received after the loan was disbursed and the loan 7 was -- 8 Q. (BY MR. BLANKENSTEIN) Are you sure 9 about that? 10 A. I just qualified it. That's why I 11 said -- 12 Q. You're not sure? 13 A. I started off by saying "if I may refer 14 to my notes," I thought. 15 Q. We want to make sure that your 16 testimony is accurate. 17 A. Definitely. 18 Q. Maybe the next exhibit will help us in 19 this area, Mr. Stone. And maybe we can identify 20 when the loan on the Park 410 -- the loan proceeds 21 were disbursed. 22 A. It was disbursed April 17th. 11088 1 Q. And do you remember what the date of 2 Mr. Schulz' report is? How about March 19th? 3 Does that refresh your recollection? 4 Why don't I just show you that so we don't waste 5 unnecessary time. 6 Is the appraisal dated March 19th? 7 A. Yes, it is. 8 Q. And so, the appraisal -- and who is it 9 sent to? 10 A. Mr. David Graham. 11 Q. He's at United, correct? 12 A. Vice president, United Savings of 13 Texas. 14 Q. Thank you. Let's get back to where we 15 were. 16 If there was a procedure in place for 17 appraisal review, you would expect some 18 documentation to reflect that, wouldn't you? 19 A. If there were a procedure in place for 20 appraisal review, I'd expect -- yes, I would. 21 Q. You didn't find any; is that right? 22 A. Not in the documents I saw. 11089 1 Q. Let's take a look at B1012. 2 MR. BLANKENSTEIN: Did I not give you 3 copies? 4 Q. (BY MR. BLANKENSTEIN) Mr. Stone, this 5 is entitled "Construction loan checklist: 6 Acquisition, development, construction loans." 7 Do you see that? 8 A. I've seen it before, yes. 9 Q. Have you seen it before? 10 A. Oh, yes. 11 Q. And this was provided to you by OTS; is 12 that right? 13 A. It was in the files, yes. 14 Q. All right. And does it have a section 15 that deals with appraisals? 16 A. I believe it does. 17 Q. It's on the first page of the exhibit 18 towards the bottom right under -- right above 19 "insurance." 20 Do you see that? 21 A. Yes. 22 Q. And it has the name of the appraiser as 11090 1 Edward Schulz. Right? 2 A. Yes, it does. 3 Q. It has the appraised value, correct -- 4 A. Yes. 5 Q. -- as 88 million? 6 It has the date of the appraisal; is 7 that right? 8 A. Yes, it does. 9 Q. And then what does it say next to that? 10 A. "Conforms to R-41B." 11 Q. And what does it say? 12 A. "Yes." 13 Q. So, does this indicate to you that 14 someone reviewed the appraisal to determine 15 compliance with R-41B? 16 A. It does not tell me who did that, nor 17 does it tell me, in compliance with 41B, that that 18 person or persons were duly appointed by the board 19 of directors with the qualifications of an 20 appraisal -- 21 Q. I'm sorry. Go ahead. 22 A. You've asked me a question. 11091 1 Q. Yes. I'm sorry. Continue, please. 2 A. It doesn't tell me who did it or who 3 made that -- who gave that opinion and evidenced 4 that they were duly appointed by the board of 5 directors for that purpose and meets the other 6 requirements of 563.17, which I pointed out I 7 don't know existed. When you first gave it to me, 8 it was a 1987 date. I'd have to go back and look 9 at the documents again. 10 Q. Now, you may not agree with the 11 procedure. But there was a procedure in place at 12 USAT; isn't that right? 13 A. You're asking me for conformance to 14 41B, and I'm merely saying I see no evidence of 15 that. 16 Q. You see no evidence of any procedure; 17 is that right? 18 A. Filling out five lines -- it doesn't 19 take a very sophisticated person to write down 20 that Edward Schulz did the appraisal and he 21 appraised it at 88 -- now, that doesn't take a lot 22 of analytical ability -- nor the loan ratio, 11092 1 90.9 percent, nor the date of that appraisal, and 2 to write "yes" in a column. If that is a review 3 of appraisals and the total review, that even 4 further validates my opinion that it was totally 5 inadequate. 6 Q. Let me just -- when I was with the 7 government, the Department of Justice, we used to 8 litigate a lot of APA cases. Those are 9 Administrative Procedure Act cases, and they were 10 divided into two parts: Process and substance. 11 The process is the steps by which you undertake a 12 certain act, and the substance is the -- the 13 rationale behind the decision itself. 14 A. The judgment? 15 Q. Right. I'm just talking right now 16 about process. 17 Wasn't there a process at USAT -- you 18 may quarrel about the substance, the judgment, but 19 I want to know about process. 20 MR. LEIMAN: Your Honor, may I ask a 21 question? Is this document in evidence? 22 MR. BLANKENSTEIN: I'm going to move 11093 1 B1144 into evidence, Your Honor. 2 MR. LEIMAN: And I'm going to object to 3 it. 4 MR. BLANKENSTEIN: Excuse me. That was 5 the wrong -- 6 MR. LEIMAN: It's 1012? Is that -- 7 MR. BLANKENSTEIN: 1012. 8 MR. LEIMAN: I'm going to object to it, 9 Your Honor. Previously, you've not accepted this 10 particular document into evidence. No one could 11 be found to support it. He's just shown it to 12 Mr. Stone. Apparently, Mr. Stone has no 13 recognition of the document. It wasn't 14 significant to him. 15 MR. BLANKENSTEIN: Excuse me. 16 Mr. Stone said he reviewed the document. It was 17 provided by OTS. It was signed by Karen Wynans. 18 There was evidence put in the record of senior 19 loan committee minutes showing that Ms. Wynans was 20 a member of the senior loan committee as late as 21 June 2nd, 1986. This is dated May 30th, 1986. 22 It seems to me the authenticity of this 11094 1 document is beyond question. I don't know what 2 Mr. Leiman's objection is, other than he doesn't 3 like the consequences of the document coming into 4 evidence. 5 THE COURT: All right. Let's hear your 6 objection. 7 MR. LEIMAN: My objection, Your 8 Honor -- may I ask the witness whether or not this 9 was in any way significant, prior to today, to the 10 formation of your opinion or in any way related to 11 your report? 12 THE WITNESS: No. I saw the document. 13 It was of no significance to me. 14 MR. BLANKENSTEIN: That's the very 15 point, Your Honor, that he saw it and it was of no 16 significance to him. This is an appropriate 17 document for admission. 18 MR. SCHWARTZ: Your Honor, if I may, 19 Mr. Leiman -- and I apologize for interjecting. 20 Mr. Leiman wasn't present during the testimony of 21 Mr. Cool. It was in front of Mr. Cool that 22 Mr. Blankenstein had placed this document when you 11095 1 had not -- when you decided not to receive it. 2 And if I recall correctly -- Mr. Blankenstein can 3 correct me if I'm wrong -- that the basis for your 4 refusing to receive it was the fact that there was 5 no indication from the witness as to any 6 recognition of what the meaning of these 7 handwritten notations of Ms. Wynans means or 8 whether or not she, in fact, made those 9 representations, whether or not in fact that's her 10 handwriting or not. 11 MR. BLANKENSTEIN: Your Honor, I 12 think -- this is a business record. We've 13 established -- and I don't believe Mr. Schwartz is 14 going to quarrel -- that Ms. Wynans was a member 15 of the -- was an employee of USAT, nor can he 16 reasonably quarrel with the proposition that she 17 was a participant in the senior loan committee. 18 It seems to me there is no question as 19 to the authenticity of these documents. It's a 20 business record. If we were going to question 21 every handwritten document that ever came in on a 22 form, this record in this case would have been a 11096 1 lot shorter than it is. 2 MR. SCHWARTZ: Your Honor, consistent 3 with your prior rulings, I recall several times 4 when we -- to perform exactly what 5 Mr. Blankenstein is arguing against when I 6 provided the business records of Mr. Dugger and 7 his associate, Mr. Gerald Schulz, of the 8 handwritten notes of meetings that he attended, 9 respondents' counsel stood up and insisted that we 10 bring in Mr. Gerald Schulz to authenticate what he 11 meant when he wrote those handwritten notes. 12 It is exactly the same rationale and 13 Your Honor did sustain their objection to the 14 document for precisely those same reasons. 15 MR. BLANKENSTEIN: I think the -- 16 MR. SCHWARTZ: And I think the 17 consistency dictates that you do so again. 18 MR. BLANKENSTEIN: I think that there 19 is a significant difference here. This is the -- 20 this document was prepared by the institution in 21 the normal course of business. There was no 22 question -- Mr. Schwartz has apparently withdrawn 11097 1 his earlier objection as to he didn't know who 2 Ms. Wynans was, where she was, and what she was 3 doing at the time. 4 I'm only offering it to show that there 5 was a procedure in place, not to the substance. 6 THE COURT: I'm going to receive the 7 document. 8 Q. (BY MR. BLANKENSTEIN) Now, we looked 9 at one of these construction loan checklists for 10 Park 410. 11 When you reviewed the file, did you see 12 one for Norwood? 13 A. I may have. I think I've seen more 14 than one of these forms. 15 Q. This is the same form filled out for 16 Norwood; is that right? 17 A. It appears so. This one isn't signed, 18 but -- 19 Q. It is signed, sir. 20 A. No. I mean, I point that out. 21 Q. Excuse me? 22 A. I just pointed out it's not a signed 11098 1 document. 2 Q. It is signed. Why don't you look on 3 the last page? 4 A. Is there a -- pardon me. There was a 5 page stuck. 6 Q. So, it is signed; is that correct? 7 A. I don't know who that is. Yes, it is. 8 Q. All right. And again, is there a 9 section that indicates that it was reviewed for 10 conformity with R-41B? 11 A. There is a mark on that line -- 12 Q. Looks like a check mark? 13 A. I concede that's possibly what it is, 14 yes. I won't argue that point. 15 MR. BLANKENSTEIN: Your Honor, if I 16 could have a second just to check my notes. 17 Q. (BY MR. BLANKENSTEIN) To clean up a 18 point that I wasn't certain of earlier, I think 19 one of the things you said in response to one of 20 my questions was that the comparables in one of 21 the appraisal reports was -- were too old or 22 inappropriate property; is that right? 11099 1 A. Yes, I did see that comment, I think, 2 by both -- I know I saw it in documents, that 3 80 percent or some rather large percent of the 4 comparables were over one year. I may not be 5 totally correct on that; but yes, I did see that. 6 Q. Do you remember whether it was for the 7 Park 410 property, Mr. Schulz' appraisal? 8 A. Not having the documents readily 9 available to me, I am fairly -- no. I believe it 10 was Park 410, but I reserve the right to see 11 documents to either validate or correct. 12 Q. Do you know who Douglas Lovell is? 13 A. Yes. 14 Q. Who is Mr. Lovell? 15 A. Best I recall, an official with the 16 Federal Home Loan Bank, I think stationed in 17 either Atlanta or Florida. 18 Q. Is he the chief appraiser for the 19 Atlanta region? 20 A. He may be. I don't recall the exact 21 title. 22 Q. Would you agree that Mr. Lovell's views 11100 1 of the quality of Mister -- of the comparables in 2 Mr. Schulz' appraisal would be relevant? 3 A. I would certainly consider them, yes. 4 Q. You wouldn't defer to them, though? 5 A. Huh? 6 Q. You wouldn't defer to Mr. Lovell's 7 views; is that correct? 8 A. Well, it depends on what position I'm 9 in. If I were a director of an institution or an 10 officer, I'd want to -- 11 Q. With respect to -- I'm sorry. Go 12 ahead. 13 A. A higher level of assurance would be 14 required. 15 Q. With respect to your testimony that 16 there was some problems with comparables in 17 Mr. Schulz' appraisal, would you defer to 18 Mr. Lovell's views on those? 19 A. I don't know Mr. Lovell. I would -- I 20 likely would want more than one view. 21 Q. Now, Mr. Lovell is the chief appraiser 22 of the Atlanta region, and you would want a second 11101 1 opinion; is that right? 2 A. Again, I don't know Mr. Lovell. 3 Q. I'm telling you his qualifications. He 4 is the chief appraiser of OTS' Atlanta region, and 5 you would still want a second opinion; is that 6 right? 7 A. I'm pretty impressed with that 8 position. But again, I think I would want a 9 second opinion. 10 Q. Now, if Mr. Schulz at his deposition 11 when asked, "Did you have any critique of 12 Mr. Schulz' comparables," said "no," would you 13 take that into account? 14 MR. LEIMAN: You said "Schulz." 15 Q. (BY MR. BLANKENSTEIN) At Mr. Lovell's 16 deposition when he was asked "Did you have any 17 critique of Mr. Schulz' comparables" and he said 18 "no," would that have some effect on your opinions 19 that you testified to here? 20 A. Yes, because I don't remember reading 21 him saying that. But I -- and I didn't have that 22 available to me when I wrote the report. But it 11102 1 would discount perhaps, to some extent, other 2 criticisms or that comment being made by other 3 examiners with then FSLIC or Bank Board that don't 4 have his qualifications. 5 Q. Did you review Mr. Lovell's deposition 6 testimony taken on October 21st, 1997, in 7 connection with the preparation for your testimony 8 here today? 9 A. I did, but only very, very quickly 10 because, again, of the relevancy to my report. 11 Q. Let me show you -- and I've highlighted 12 for you, Mr. Stone, the question and answer. 13 I read them correctly, didn't I? 14 A. "Did you have any critique of 15 Mr. Schulz' comparables?" 16 The answer was "No." 17 Q. Do you remember reading that? 18 A. No, I don't recall. Like I said in my 19 previous answer, I reviewed it very quickly 20 because the appraisals were a small part of my 21 analysis, my scope, and my report. 22 Q. Well, since the appraisals are a small 11103 1 part of your testimony -- 2 A. Pardon me. The content of the 3 appraisals. How they were received, how they were 4 reviewed, how they were obtained were most 5 important. The actual content of each of those 6 appraisals, I have said from the minute I have 7 been testifying and asked, I am not an appraisal 8 expert. I did not review appraisals. I only 9 talked to Mr. Massey briefly. It was a very small 10 part of my conclusion. 11 MR. BLANKENSTEIN: I have no further 12 questions of this witness. 13 THE COURT: Mr. Eisenhart? 14 MR. EISENHART: Thank you, Your Honor. 15 16 CROSS-EXAMINATION 17 18 (11:50 a.m.) 19 Q. (BY MR. EISENHART) Mr. Stone, my name 20 is Frank Eisenhart, and I represent MAXXAM, Inc. 21 in this proceeding. 22 As I understand it, you retired from 11104 1 the FDIC in 1995? 2 A. December 2nd, yes. 3 Q. And at the time you retired, if I 4 remember your testimony, you were -- your title 5 was executive director; is that correct? 6 A. Executive director of the divisions of 7 supervision, compliance, and resolutions. 8 Q. Right. And in that position as 9 executive director, you said, I think, that you 10 reported to the board of the FDIC? 11 A. I started to change that. I did 12 practically report to the board because memoranda 13 on important decisions that I signed would be 14 directed, addressed to a member of the board or 15 the board of directors, not to the chairman. From 16 an operational standpoint, day-to-day matters 17 concerning the divisions I supervised and on an 18 organizational chart, it would show that I 19 reported to the chairman. 20 Q. And you had actually served as 21 assistant to the chairman, had you not? 22 A. No. Previously, it was deputy -- 11105 1 Q. Deputy? 2 A. -- to the chairman. And that was for a 3 previous chairman, Mr. Hove. 4 Q. Okay. So, at the time -- 5 A. Or acting chairman. 6 Q. At the time you retired, Ms. Helfer was 7 chairman? 8 A. Yes, she was. 9 Q. Okay. And you reported to her on the 10 organization chart; but functionally, you really 11 reported to the board? 12 A. Memoranda that -- of major cases before 13 the board of directors that would involve me would 14 be signed by me to the board, not the chairman. 15 But you're right. Functionally, matters of 16 personnel, general matters, I would report 17 directly to Ms. Helfer, not to the board members. 18 Q. Now, the divisions that you were in 19 charge of -- you said it was resolution, 20 supervision, and compliance? 21 A. Yes. 22 Q. Resolution is the division within the 11106 1 FDIC that deals with receiverships and failed 2 institutions; is that correct? 3 A. Not so much with the receivership, but 4 with failed institutions. 5 Q. And -- 6 A. There is a liquidation division which 7 has a new title, I think division of asset 8 disposition or something, that handles the -- is 9 the receiver going forward. 10 Q. Did you -- 11 A. Resolution just handles it up to the 12 failure and finding a buyer, if you will. 13 Q. I see. And did you have any 14 responsibility for the entity that handles the 15 receiverships? 16 A. No. Well, pardon me. When I was 17 deputy to the chairman, obviously, in that, 18 matters of budget, the division of liquidation 19 director would be reporting to me on certain 20 facets during that brief time when I was deputy to 21 the chairman. 22 Q. Okay. So, you have some knowledge of 11107 1 the workings of that branch of the FDIC? 2 A. The receivership function? 3 Q. Yes, sir. 4 A. Some knowledge. I have never actually 5 worked in that division. 6 Q. Now, the supervision group, they are 7 the ones that actually do the bank examinations 8 and handle the supervisory functions? 9 A. They and the compliance people, yes, 10 both. 11 Q. I was going to ask you what's the 12 difference between supervision and compliance? 13 A. Mainly the division of supervision is 14 the -- what is known as the standard bank 15 examination, looking into the qualitative aspects, 16 the managerial aspects, what have you, the wider, 17 broader scope of examinations. 18 The compliance division is 19 predominantly -- not solely, but predominantly 20 involved in supervising for the adherence to 21 consumer laws and regulations. Such items as 22 Regulation Z, truth in savings, those types of 11108 1 laws. 2 Q. And if I heard you correctly yesterday, 3 at the time you retired from the FDIC, you were 4 the highest-ranking and highest-paid career 5 employee in the agency? 6 A. Right. I believe I was right before I 7 retired, but there is an article in the American 8 Banker. In fact, there was someone who was named 9 John Bovenzi, who was the director of liquidation, 10 I think nosed me out by $400. But it ranked all 11 the agencies and their career people by salary 12 rank. 13 So, I think Mr. Bovenzi may have been 14 listed as No. 1 at that time. 15 Q. Well, without offending your sense of 16 modesty, would I be accurate in saying at the time 17 you retired, you were a very important person 18 within the FDIC? 19 A. It's hard for me to say that, but 20 people -- 21 Q. That's how I said it. 22 A. People told me I was. 11109 1 Q. Okay. And do I take from that that you 2 would have had input or at least knowledge of most 3 of the important decisions that were made within 4 the FDIC in the years, say, '92 through '95? 5 A. In parts of '92. But from September of 6 '93 to '95, I may have been in board meetings when 7 matters came up that did not involve the divisions 8 of supervision, compliance, or resolution. But I 9 would not have had any input nor been that 10 involved with them. Only matters involving the 11 divisions that I was executive director of. 12 Q. Well, that's why I said "input or 13 knowledge." Even though you might not have had 14 any input over other important matters, you would 15 have been knowledgeable of them? 16 A. I might not even go to a meeting if we 17 didn't have a board case for one of my divisions 18 is what I'm saying. So, I wouldn't necessarily 19 have knowledge. 20 Q. Have you ever done any teaching or 21 lecturing on the subject of bank regulation or 22 evaluation of loans? 11110 1 A. Yes. Extensively. 2 Q. And have you published any treatises or 3 scholarly works on the subject? 4 A. Not to that extent. I've only had one 5 pulication that I recall, and that's when I was 6 outside the realm of government. I was in the 7 private sector. There may have been other quotes, 8 but I don't recall any other publications and I 9 don't have any copies of speeches. 10 Q. Has any of your teaching been done at 11 university levels? 12 A. I was on the faculty of the Stonier 13 Graduate School of Banking in the years '74, '75, 14 maybe a little later. 15 Q. And what were you? An adjunct? 16 A. Not that formally. Having received 17 my -- and completed my requirements, including 18 thesis, from the Graduate School of Banking at 19 Stonier, which was at Rutgers University, I was 20 selected to return for at least the next two 21 years -- it may have been longer. And when 22 serving on the faculty, my primary role was being 11111 1 an instructor in what was then called the bank 2 simulation model which involved me staying 3 throughout the residency requirement of those 4 students, working with them closely, and analyzing 5 the results of their input into that model. 6 Q. Other than that one stint, though, 7 early in your career, have you done any teaching 8 on any subject at the university level? 9 A. Time would not permit it during the 10 Eighties, no. No, sir. 11 Q. Have you testified previously as an 12 expert witness? 13 A. No, sir. 14 Q. Now, with the passage of FIREA in 1989, 15 the FDIC -- the FSLIC went out of business, did it 16 not? 17 A. Yes. I don't -- exact dates around 18 that time period, I can't quote you. But that 19 sounds familiar, yes. 20 Q. And the FDIC, as I understand it, 21 replaced the FSLIC as receiver in cases in which 22 FSLIC had been the receiver; is that correct? 11112 1 A. Actually, as insurer and, I guess, as 2 receiver, yes. 3 Q. Now, are you aware that USAT was placed 4 in receivership in December 1988? 5 A. I knew it was about that time. I 6 didn't know if it was '88 or '89. 7 Q. And were you aware that in 1989, the 8 FDIC replaced FSLIC as the receiver for USAT? 9 A. I didn't know the date, but I did see 10 documents with "FDIC" on them rather than "RTC." 11 Q. So -- and you would take from that that 12 the FDIC replaced FSLIC as receiver? 13 A. There is no question in my mind that 14 FDIC had some involvement after the failure, if 15 you will, of USAT. 16 Q. Now, have you reviewed the notice of 17 charges in this case? Is that one of the 18 documents OTS gave you? 19 A. Parts of it, and not since last 20 November. I was just told what pages applied to 21 these particular loan transactions. I did glance 22 at other parts of the charges, but not in -- I 11113 1 would -- I wouldn't say I read them. 2 Q. Are you aware that in this case, OTS is 3 making substantial claims for restitution? 4 A. If I recall, the action was removal and 5 restitution but I don't know what amounts. 6 Q. Well, without knowing the specific 7 amounts, are you aware that the amounts are quite 8 substantial? 9 A. I don't -- well, I don't know the 10 amounts. I wouldn't believe we would be spending 11 this much time, though, on a small case. 12 Q. From your knowledge of the receivership 13 process, are you aware that amounts recovered as 14 restitution in this case would likely go to the 15 receiver of USAT? 16 A. Logically, that's entirely logical. 17 Q. That would be the FDIC? 18 A. Right, to recover for the government 19 any losses they incurred as a result of that 20 failure. 21 Q. Now, when were you first retained by 22 OTS as an expert witness in this case? 11114 1 A. I believe November of last year. I 2 think earlier I might have said it was December or 3 January, but I think it was actually November of 4 last year. 5 Q. And do you have a contract with them? 6 A. Of sorts. It's an OTS form. 7 Q. A purchase order type form? 8 A. It's not like a formalized contract. 9 It's -- there's a form name for it just indicating 10 the expected amount of expenditure and what the 11 scope of the engagement is, who the contacts are. 12 Q. And you're being paid for your work on 13 this case at a rate of, if I remember correctly, 14 $250 an hour? 15 A. Well, initially, it was $200 for loan 16 file review. And then beyond that, if there were 17 a report to be prepared, deposition testimony, it 18 would be at $250 an hour. 19 Q. And you submit your bills to OTS? 20 A. Yes, I do. 21 Q. I'd like to show you a document, 22 Mr. Stone, that's been marked as Exhibit B4180. 11115 1 This is a letter from Carolyn B. Leiberman, acting 2 chief counsel of the Office of Thrift Supervision, 3 to Jack D. Smith of the legal division of the FDIC 4 dated May 28th, 1994. 5 Have you ever seen this document 6 before? 7 A. Well, I haven't read it yet; but I -- 8 Q. Well, why don't you go ahead and look 9 at it? I apologize for the quality of it. It's 10 been photocopied probably a few too many times. 11 A. (Witness reviews the document.) I have 12 read this. 13 Q. I'm sorry. Did you say you have seen 14 this before? 15 A. Yes. I have read it. 16 Q. You've read it now, but have you ever 17 seen it before? 18 A. No, I have not. 19 Q. Were you aware in your position at the 20 FDIC in 1994 that the FDIC had hired OTS to bring 21 this proceeding? 22 A. No. Well, I don't recall it. 11116 1 Q. So, this wasn't something that you were 2 aware of in depositions? 3 A. The reason I gave the second answer is 4 I don't recall it. Now, it's conceivable in 1994 5 that I attended a board meeting where this subject 6 might have been discussed; but it wouldn't have 7 registered with me of any significance. And I 8 wouldn't want it said that if, in fact, that did 9 happen, that I would be anything but truthful 10 today by saying I don't recall it. 11 Q. In fact, according to this letter, not 12 only are the counsel fees being paid by the FDIC 13 but the expenses, such as your expert witness 14 fees, are being paid by the FDIC, as well; is that 15 correct? 16 A. I saw a reference to counsel fees. I 17 guess it would be all fees. 18 Q. Well, I think it actually says "counsel 19 fees and out-of-pocket costs." 20 A. Oh, okay. 21 Q. That would include your expert witness 22 fees? 11117 1 A. Apparently, it would. 2 Q. Given this arrangement, Mr. Stone, 3 would you agree with me that it would seem that in 4 presenting your testimony here, you are a former 5 high official of the FDIC, that you're now being 6 paid by the FDIC to give testimony in which the 7 FDIC stands to achieve a monetary recovery if 8 there is one? 9 MR. LEIMAN: Your Honor, that 10 mischaracterizes the letter. The letter says -- 11 THE COURT: Leave the letter out of it. 12 He can answer the question. 13 Q. (BY MR. EISENHART) Would you agree 14 with me, Mr. Stone, that that seems to be the 15 situation we have here? 16 A. It may be -- well, it certainly appears 17 so. It may be some technicality I'm not aware of 18 if I'm being paid by a receiver versus FDIC 19 corporate. But that I'll leave to -- I don't know 20 that distinction, but I know it is made 21 frequently. 22 Q. But barring some such technicality, 11118 1 would you agree that the situation seems to be as 2 I have just described it? 3 A. That as a former high official, I am 4 indirectly working for the FDIC who could stand to 5 gain as a result -- or potentially gain as a 6 result of this proceeding? 7 Q. That's correct. 8 A. I guess I'd have to acknowledge that. 9 MR. EISENHART: Thank you. That's all 10 I have. 11 MR. BLANKENSTEIN: Your Honor, a 12 housekeeping matter. I overlooked moving into 13 evidence B1144, which is the construction loan 14 checklist document for Norwood. I'd like to move 15 that now, if I might. 16 MR. LEIMAN: The same objections, Your 17 Honor. This particular document doesn't even have 18 a legible name, nor does it appear to have had any 19 influence that registered with Mr. Stone. 20 THE COURT: I'll receive the document. 21 MR. BLANKENSTEIN: Thank you, Your 22 Honor. 11119 1 MR. EISENHART: Your Honor, I move 2 B4180. 3 MR. LEIMAN: No objection. 4 THE COURT: Received. 5 MR. KEETON: Your Honor, do you want me 6 to go forward or take a break? 7 THE COURT: How much are you going to 8 have? 9 MR. KEETON: 10, 15 minutes. 10 THE COURT: We'll adjourn until 1:30. 11 12 (Luncheon recess taken at 12:09 p.m.) 13 14 THE COURT: Be seated, please. We'll 15 be back on the record. 16 Mr. Keeton, you may cross-examine. 17 MR. KEETON: Thank you, Your Honor. 18 (1:35 p.m.) 19 Q. (BY MR. KEETON) Mr. Stone, you 20 characterized Mr. Rosenberg as an insider? 21 A. In my opinion, yes. 22 Q. And you realize, of course, he was not 11120 1 associated with either United Savings or with the 2 holding company as such, United Financial Group? 3 A. Let me just verify before I answer, 4 please. (Witness reviews a document.) Perhaps my 5 information is wrong. I was of the information 6 that he was a shareholder in United Financial 7 Group, which is the holding company of USAT, and 8 that he was a director and shareholder of 9 MCO/MAXXAM. That was the information I had. 10 Q. MCO/MAXXAM, along with Federated, owned 11 less than 25 percent of the stock of UFG, didn't 12 they? 13 A. Yes, sir. I believe -- I won't attest 14 to that exact number, but I believe it was in that 15 neighborhood. 16 Q. And as far as the Park 410 deal, you 17 said you read Mr. Gindy's deposition, didn't you? 18 A. Yes, I did. 19 Q. Did you read his trial deposition -- 20 trial testimony also? 21 A. Yes, sir. 22 Q. Do you see where Mr. Gindy, who was the 11121 1 lawyer for the borrowers, the Park 410 Joint 2 Venture, characterized the papers in the deal as 3 "very tough, very stringent, tougher than other 4 deals being done at the same time on the 5 borrowers"? 6 A. I'm sorry. I don't recall it in those 7 terms, but I'll take you at your word that that is 8 what he said in the interest of saving time. 9 Q. Do you know how many points were paid 10 by the borrowers on the closing of the loan? 11 A. I recall 3 percent. 12 Q. Do you also recall that that was a very 13 high amount of points to be paid at that time, 14 according to all the witnesses? 15 A. I saw witnesses that did say, in fact, 16 3 percent was high. 17 Q. And while you may have trouble 18 interpreting the guaranties, they were real 19 guaranties, weren't they? Enforceable. 20 A. There was subsequent interpretation as 21 to whether the guaranties actually equated to 22 $20 million. I didn't question the value of the 11122 1 LOCs, letters of credit. 2 Q. And there was $10 million of LOCs put 3 up at the time? 4 A. Yes, there were. 5 Q. All of those being a part of 6 requirements on the borrowers in that instance. 7 Right? 8 A. Yes, sir, but -- 9 Q. And -- 10 THE COURT: Did you have more? 11 THE WITNESS: Yes. Your Honor, I think 12 it may save some time on my opinion, not saying -- 13 trying to keep counsel from asking me questions. 14 But on the terms, if I may use this chart for a 15 minute, I am not able to answer -- I'm afraid I'm 16 giving the wrong signal to the Court. 17 MR. KEETON: Your Honor, I have no 18 question pending. If the witness wants to make a 19 speech, let him do it afterwards. 20 A. No, sir. You have asked me questions 21 about -- 22 Q. (BY MR. KEETON) You've answered my 11123 1 questions. 2 A. -- being very tough, and I think I can 3 show you very quickly those terms were not tough 4 at all. 5 Q. We're past that question. 6 MR. LEIMAN: It's only fair to allow 7 the witness to complete his answer. 8 MR. KEETON: That was four questions 9 ago, Your Honor. How far are we going to go back? 10 THE COURT: All right. Mr. Leiman, why 11 don't you take that up on your redirect? 12 Q. (BY MR. KEETON) Mr. Rosenberg was not 13 some sort of undisclosed principal in this 14 situation, was he? 15 A. I don't believe so, except for the 16 letter I saw from -- to Mr. Rosenberg from GMR 17 saying "per our agreement" -- doesn't say "per 18 USAT agreement." It says "our agreement," the 19 $300,000 in annual fees that are to come to GMR, 20 we are going to share 25 percent with you, quote, 21 "for your assistance," which again, I didn't see 22 that in any document with USAT and you would think 11124 1 if that were the case, they would have paid 2 Mr. Rosenberg directly rather than through GMR. 3 But that part didn't seem to be abundantly evident 4 or disclosed in any other document I saw except 5 that agreement between GMR and Mr. Rosenberg. 6 Q. Do you know if that document was 7 included among the closing binder that went to 8 everyone including United Savings? 9 A. No. I just conditioned it. I said I 10 didn't see evidence as disclosed. Perhaps it had 11 been; but that document, I recall, was dated after 12 the letter to Mr. Rosenberg. Maybe it's referring 13 to an agreement that may have been distributed, 14 but I didn't see that agreement. 15 Q. Closing binders might get put together 16 sometime later than the actual closing, mightn't 17 it? 18 A. Well, but after the closing, it's a 19 little late for any of the approving officials in 20 reviewing it to have anything to say about it. 21 $45 million has gone out the door. 22 Q. Are you saying that United Savings did 11125 1 not know of that arrangement? 2 A. I'm saying I saw no evidence that they 3 did. The evidence that I saw was strictly a 4 communicate between GMR, one of the partners, and 5 Mr. Rosenberg. 6 Q. Do you know what Mr. Rosenberg did for 7 that -- for his 25 percent? 8 A. It was styled in his partner's letter 9 to him as "for your assistance." 10 Q. Do you know if that also included 11 future assistance? 12 A. Well, yes, because it was on a 13 continuing basis. It was 300,000 per annum to 14 GMR, which 25 percent would be to Mr. Rosenberg. 15 And then the following year -- it had a schedule 16 that he is to continue to get that fee on a 17 continuing basis. 18 At some point in time, it dropped from 19 75 to 50,000. But then I saw two years -- I 20 believe two years later, April of '88, yet another 21 letter to GMR or from GMR to Mr. Rosenberg citing 22 that very fee and saying that USAT was reducing 11126 1 the fee to 200,000 per annum, if my memory serves 2 me correct, which they thought was bare bones 3 operation for GMR. And, consequently, they were 4 going to defer Mr. Rosenberg's portion until -- up 5 and until moneys would come in from sales of 6 properties. 7 Q. What years were you not employed by the 8 FDIC? 9 A. Nineteen -- well, up until 1965 when I 10 joined. I left spring -- late winter, early 11 spring of 1982. Rejoined the FDIC in mid-1985. 12 Q. And you sat in on the FDIC board 13 meetings from '92 to '95. Is that what you said? 14 A. No. I sat in board meetings much 15 longer than that. I sat in board meetings -- the 16 board meetings in whole or in part -- virtually 17 from the time I came back with the FDIC. When I 18 say "in part," with the number of banks we had 19 closing, sometimes I would have to join the 20 meeting, explain which banks were closing, get the 21 necessary approvals, and return to those same 22 duties. 11127 1 I started attending the meetings on a 2 regular basis -- by that, attending the full 3 meeting -- probably in 1988 when I became 4 associate director and had duties other than just 5 failing banks through probably sometime in early 6 1995. 7 Q. You left in December, so -- 8 A. But sometime before I left, as I 9 explained earlier, the job was becoming redundant. 10 I took several weeks of vacation, annual leave, 11 that I had accumulated in the summer and early 12 fall of 1995. And upon returning, knowing that I 13 would be leaving, I thought it best, since I had 14 no official business before the board, that it 15 would be better -- and that was at my election -- 16 that I not attend meetings, knowing that I was 17 leaving the agency. 18 Q. Did you review the minutes of United 19 Savings' board of directors from '84 through '86, 20 your time frame? 21 A. I believe I reviewed them all. I know 22 there were quarterly meetings, but I can't -- I 11128 1 know I reviewed the relevant board meetings 2 relevant to the two loans. I think I reviewed 3 them all during the time frame, yes. 4 Q. In order to determine what was 5 relevant, I guess you'd have to look at all of 6 them, wouldn't you? 7 A. True. 8 Q. Now, you made mention of the fact that 9 you saw that Mr. Hurwitz, from time to time, and 10 others who were not members of United Savings' 11 board would sit in on meetings? 12 A. Mr. Hurwitz, yes. I'm trying to think 13 who the other parties -- 14 Q. Well, the very meeting you referred to, 15 a Mr. Borman was there. 16 Do you know who he is? 17 A. No, I do not. 18 Q. Do you know if he might have been a 19 board member of United Financial Group? 20 A. Again, I do not. 21 Q. Now, the fact that Mr. Hurwitz, from 22 time to time, would sit in on United Savings' 11129 1 board meeting, you don't find that unusual, do 2 you? 3 A. Yes, sir, I do, I think I responded. 4 Q. Is it unusual that you attended the 5 FDIC board minutes when -- meetings when you 6 weren't a member? 7 A. I was required to. I was a division 8 director. 9 Q. Do you think directors should keep 10 themselves informed of the affairs of their 11 companies? 12 A. Most definitely. 13 Q. Most definitely, they should? 14 A. Oh, definitely, yes. 15 Q. You're aware that Mr. Hurwitz was 16 chairman of the board of United Financial Group 17 and that its major and almost sole asset was 18 United Savings? 19 A. I know it was an asset of United 20 Financial Group. I didn't review the entire 21 statement of them. But yes, sir. 22 Q. And yet, you're critical of Mr. Hurwitz 11130 1 for sitting in on United Savings' board meetings 2 under those circumstances? 3 A. Yes, sir, I am. 4 Q. Are you also aware that quite often, 5 United Financial Group would schedule its board 6 meeting to precede the United Savings board 7 meeting? 8 A. Yes, sir. I saw that. 9 Q. And so, they would close one and then 10 go into the other? 11 A. I don't know that I coincided -- I did 12 know -- in fact, I think there may have been one 13 joint meeting. You're right. I saw some evidence 14 that they would hold meetings either close 15 together or they possibly even had a joint 16 meeting. 17 Q. It surprises me that you find it 18 objectionable that the chairman of the holding 19 company might attend a board of directors meeting 20 of a significant subsidiary. 21 A. It shouldn't if you're familiar with 22 banking and bank holding companies. It should be 11131 1 no surprise. 2 Q. Banking and bank holding companies are 3 in some fashion different than the rest of the 4 world? 5 A. No. It's the same as thrift and thrift 6 holding companies. Well, in my experience -- I 7 can't answer to the rest of the world, but I 8 certainly can answer, authoritatively, for the 9 relationships between holding companies, whether 10 they be thrift or bank, with their insured 11 institutions, yes. 12 Q. Even when the insured institution is a 13 significant portion of the asset of the holding 14 company? 15 A. Yes. Let me -- may I explain why? 16 Q. Sure. 17 A. We commonly see, as regulators, common 18 officers and common directors. In other words, 19 many of the directors of the holding company or 20 some of the directors may, in fact, even be 21 directors of the institution. That gives pause 22 for less concern, mainly because if I am a 11132 1 director/officer of a holding company and I assume 2 the role of a director of our subsidiary financial 3 institution, I have taken on a responsibility for 4 the operation of that particular institution. I 5 have an obligation that's established in case law. 6 However, if I say, "No, I won't be a 7 board member. I'll just attend," I might be faced 8 from time to time with a conflicting interest. 9 For example, what we've seen with holding 10 companies for years and what has to be policed 11 very closely. The holding company conceivably -- 12 I'm not saying in this case, but I'm saying 13 conceivably -- could have a cash need. And you 14 said UFG -- this was their largest asset -- might 15 turn to it. Might say, "We need $32 and a half 16 million in dividends. We need it to be upstream. 17 Let's see if we can get permission." 18 Now, there I am. I'm attending that 19 board meeting and speaking at that board meeting 20 of that institution, but I have no official role. 21 I haven't signed the oath of office of a director. 22 I have no legal -- the same legal obligations as a 11133 1 director of that institution, but I do have that 2 obligation and that responsibility to my holding 3 company. 4 So, if I can attend without the legal 5 responsibilities and represent another entity, 6 namely that of the owner, I'm in a very 7 conflicting position. 8 Q. Even though there is no better way to 9 inform yourself of what's going on on a snapshot 10 basis? 11 A. Well, if that had been the case and if 12 there is no regulation that I am aware of in 13 thrift institutions and savings and loans and 14 holding companies, if there is no prohibition, if 15 you truly wanted to be informed, you should be a 16 director. If you're going to attend anyway, why 17 not? If you're going to attend SLC meetings, if 18 you're going to participate in the affairs of the 19 bank, how can you continue to do that in such a 20 participatory fashion but have no official -- 21 official designation with that institution but yet 22 participate? 11134 1 Q. Did you see this ever written down in 2 any regulation? 3 A. No. I dealt with it so much through 4 the Eighties. A lot in this state. First 5 Republic, other -- and before that. It's well 6 established that a bank director has their 7 obligation to the institution that -- of which 8 they are a director. 9 Q. You and I do not quarrel about that. 10 A. And that another party attended -- no 11 official designation, not officered, not titled, 12 not a director -- for another entity, even if it 13 be the owner, that can regularly sit in on the 14 meetings, can even second motions in the meeting, 15 can guide and direct, can communicate with 16 borrowers, but has no duty bound from a legal 17 perspective, official tie to that institution. 18 I'm telling you that in my experience, that leads 19 to conflicts of interest. 20 Q. Being the owner doesn't give you any 21 official tie to the institution? 22 A. The directors serve at the pleasure of 11135 1 the owner. In other words, UFG could fire the 2 board tomorrow and put their own people on it. No 3 question about that. But you see this conflict -- 4 and we saw it repeatedly where individual boards 5 of holding companies would be called on by their 6 owner to get funds up to them to take care of a 7 sister subsidiary bank, and directors resigned 8 over that. 9 They said, "My obligation is not to my 10 owner. My obligation is my obligation to this 11 institution. And taking money out of this 12 institution to put in another bank in the holding 13 company is not in the best interest of this 14 institution, and many of them resigned for that 15 reason. Because that was the conflict of owner 16 versus director. 17 Q. You didn't see any of that in this 18 case? 19 A. No, sir. No, sir. Well, I did see -- 20 I did see the facts around the 32 and a 21 half-million-dollar dividend; but that, again, 22 wasn't my charge and it was approved. 11136 1 Q. And it was approved by everybody 2 including the regulators. Right? 3 A. It was. 4 Q. And that money didn't leave the 5 institution -- I mean leave UFG? 6 A. Sure it left the institution. 7 Q. It didn't leave UFG, the holding 8 company? 9 A. It came to UFG. 10 Q. It didn't leave it, did it? 11 A. It left USAT, the insured institution. 12 Q. After approvals by all the regulators? 13 A. I didn't see the approvals, but I'm 14 sure it must have been approved or it wouldn't 15 have been permitted. 16 Q. And you talk about seconding motions. 17 There were some errors in your report, right? 18 A. Yes, there were. 19 Q. In reviewing all those minutes over the 20 course of three years, did you ever see 21 Mr. Hurwitz making or seconding motions other than 22 this one time that his name appeared? 11137 1 A. It's the only time I noticed it. 2 Q. Did you look at '82, '83, '87, '88 -- 3 A. No, I didn't. 4 Q. -- to see if his name ever appeared 5 doing any of those things except this one time -- 6 A. I didn't notice it or I didn't look at 7 those other documents. 8 Q. Yours were errors. Right? 9 A. Yes, they were. 10 Q. Unintentional, but errors that you 11 made. Right? 12 A. Yes. 13 Q. You think maybe the secretary might 14 have gotten it wrong as to who actually was 15 seconding that motion which was unanimously 16 adopted to approve the financials? 17 A. Possible. But at three months later, 18 that same board approved those minutes and 19 didn't -- if those directors in their collective 20 judgment and eyes didn't see it, I'm surprised 21 they approved the minutes with that type of a 22 mistake in it, that a non-director seconded a 11138 1 motion. 2 Q. Let's talk about the board minutes. 3 You said having four board meetings a 4 year was much too few. 5 A. Most definitely. 6 Q. And you go -- I mean, that's just 7 really horrible. Right? 8 A. It is derelict. 9 Q. Did you look at the executive committee 10 meetings which might have occurred in between 11 board meetings? 12 A. I did not have available to me, to the 13 best of my memory, executive committee minutes. 14 Q. Did you ask for them? 15 A. I had all information provided 16 concerning the loans in question. 17 Q. Do you think anything in the executive 18 committee minutes might be about the loans? 19 A. Again, it's conceivable. 20 Q. Well, back to the general point. In 21 the same minutes that you've been referring to and 22 that was referred to in your testimony, did you 11139 1 notice that there had been no less than eight 2 meetings of the executive committee in between 3 board meetings? Eight, and all of them had 4 minutes and the board reviewed those minutes. 5 A. What time period, pardon me, so I can 6 understand your question? 7 Q. The minutes that you refer to where 8 Mr. Hurwitz attends is May 8th, 1986. 9 A. All right. 10 Q. And in those same minutes, it reflects 11 that there have been eight meetings of the 12 executive committee of United Savings from the 13 last board meeting, which I presume would have 14 been in early February. 15 A. No, sir. I don't -- I did not pick up 16 on that. I will concede that point to you. I did 17 not pick up on that. 18 Q. An executive committee composed of 19 representative people, including board members of 20 United Savings, might very well substitute for an 21 extra board meeting or two, mightn't they? 22 A. I'm sorry. I need the question. 11140 1 Q. And an executive committee composed of 2 a representative group, including persons that 3 were members of the United Savings board, which 4 met eight times in between board meetings might 5 then make up for the lack of a board meeting every 6 month as you seem to be advocating? 7 A. I'll accept that with your word 8 "might." 9 Q. And eight times for three months and 10 then you've got another board meeting, that's a 11 lot of meetings, isn't it? 12 A. Well, again, I don't know who was 13 there, what was discussed. 14 Q. You didn't look -- bother to look at 15 the minutes? 16 A. I just didn't have them available. And 17 you're right, I did not ask for them. 18 Q. Did you check on the backgrounds of the 19 board members of United Savings? 20 A. No, sir, I did not. 21 Q. You said that when you were with the 22 FDIC, at some point, you had to sign off or 11141 1 approve suits against professionals? 2 A. Yes, I did for a brief period during 3 1992 and 1993. 4 Q. And what was your position at the time 5 that caused you to sign off on those kind of 6 suits? 7 A. Deputy to the chairman. 8 Q. Did you ever approve any suits where 9 the staff's recommendation was that there was less 10 than 50 percent chance of victory? 11 A. I don't -- I don't recall doing so. 12 Q. Was there any policy that said no suits 13 are even going to be brought to your level as the 14 deputy unless there is greater than a 50 percent 15 chance of winning? 16 A. No. It was a little different 17 consideration on the part of the FDIC, which I 18 gained from being in previous meetings. There 19 were times that the board had taken action prior 20 to me having that authority, deputy to the 21 chairman, that they may take the action at a lower 22 projected success rate than maybe they had in 11142 1 other cases. I can't -- 50 percent, I don't 2 believe so. But because -- 3 Q. What do you mean when you say -- 4 A. -- they felt -- 5 Q. I beg your pardon. When you say 6 "50 percent, I don't believe so," what do you -- 7 MR. LEIMAN: Your Honor, I have a 8 concern about this line of questioning because it 9 appears that it's quite possible Mr. Keeton is 10 using this forum for discovery in connection with 11 the district court case in which very similar 12 parties are involved. And I think that if 13 Mr. Keeton, with all due respect, would like to 14 take Mr. Stone's deposition, he can do so outside 15 of this forum. It's inappropriate to do so here. 16 MR. KEETON: Could he finish the 17 answer, Your Honor? 18 THE COURT: Yes. You can finish your 19 answer. 20 THE WITNESS: Answer it? 21 THE COURT: You may. 22 THE WITNESS: There were instances 11143 1 before the agency when I can recall, while the 2 staff legal people that were recommending the 3 action back when it was before the board, may have 4 projected a lower success rate than perhaps the 5 board before had approved. There were instances 6 where the board decided in its collective judgment 7 that the occurrences surrounding the case were 8 sufficiently egregious, that the fact that there 9 may have been, in the legal staff's view, some 10 technical potential obstacles that the board 11 nonetheless felt they had to proceed. 12 Q. (BY MR. KEETON) Did you function at 13 all when this institution was closed and taken 14 over and sold? 15 MR. LEIMAN: I didn't hear the 16 question. I didn't understand. 17 Q. (BY MR. KEETON) Did you function at 18 all at the time this institution was taken over 19 and closed and then sold? 20 MR. LEIMAN: Did he function? 21 THE COURT: I don't understand the 22 question. 11144 1 Q. (BY MR. KEETON) Did you have anything 2 to do with any of those events? 3 A. I answered previously not to the best 4 of my knowledge, conceding the fact that there 5 could have been topics on the board agenda 6 relating to this institution but outside of my 7 purview that I didn't make note of. I did not 8 recognize the name of this institution when I 9 first had my discussions with OTS. Obviously, had 10 I heard of the name of the institution or had been 11 aware that I had been involved in any way, I would 12 have fully disclosed it. I wouldn't -- I'm not 13 seeking consulting business. I definitely 14 wouldn't put myself in a conflicting role. 15 Q. So, you played no part in the decision 16 to sell the institution to Mr. Ranieri? 17 A. I certainly don't believe so. I think 18 I would have remembered that. 19 Q. Do you know who Mr. Ranieri is? 20 A. Yes. 21 Q. Have you ever met him? 22 A. I don't believe so. 11145 1 Q. All right. 2 MR. KEETON: That's all I have. Thank 3 you. 4 MR. VILLA: Your Honor, I noticed that 5 Mr. Stone was referring to notes while he was 6 testifying. I just would like to see a copy of 7 those notes to make sure that they are no 8 different than the notes that he showed us earlier 9 today. 10 May I approach the witness? 11 THE COURT: Yes, you may. 12 THE WITNESS: The notes I referred to? 13 MR. VILLA: Yes. You gave us some 14 notes before. 15 THE WITNESS: Yes, it's the same, but 16 in deposition. 17 MR. VILLA: These are the deposition 18 notes and these are the ones you gave us copies of 19 yesterday, right. Now, what are these notes here? 20 Have you given us copies of these? 21 THE WITNESS: Yes. You have those. 22 MR. VILLA: These are attachments to 11146 1 the deposition, as well; is that right, sir? I 2 don't have the deposition exhibits. 3 MR. LEIMAN: Yes. That was a 4 portion -- if you had looked in the exhibits, 5 Mr. Villa, you would have noted that was, in fact, 6 an attachment, an exhibit by Mr. Dueffert. 7 MR. VILLA: Thanks very much. 8 THE COURT: Mr. Leiman, are you going 9 to do redirect? 10 MR. LEIMAN: Yes, I am. 11 THE COURT: All right. Proceed. 12 MR. LEIMAN: If I could move the 13 lecturn, Your Honor. 14 15 REDIRECT-EXAMINATION 16 17 (2:08 p.m.) 18 Q. (BY MR. LEIMAN) Mr. Stone, do you 19 have in front of you Tab 946, which is 20 Exhibit T7130? Tab 18 of that exhibit. 21 A. Pardon me. The terminology of "tab," 22 does that mean -- 11147 1 Q. You may not have it. 2 A. Yes, I see Tab 18, if that is the 3 guaranty agreement. 4 Q. Well, it's one of the guaranty 5 agreements. If you'll look on the last page, this 6 one happens to have been signed by Stanley 7 Rosenberg. 8 A. Yes. 9 Q. If you would, turn with me to Page 6 of 10 the guaranty and look under "limitation of 11 liability," Paragraph 14. 12 A. All right. 13 Q. Do you see where it says 14 "Notwithstanding anything contained herein, 15 liability of guarantors shall be limited to" -- do 16 you see that -- "50 percent of the 25 percent of 17 the principal balance of the note." 18 A. Sorry. I thought I had it. 19 Q. Top of the page, top of the -- 20 A. Oh, I'm sorry. I saw another 21 "notwithstanding." Okay. 22 Q. Okay. Was this what you were referring 11148 1 to earlier in your testimony when you were being 2 cross-examined in connection with the guaranty, 3 that there was a limitation on the liability or 4 one of the limitations in the liability? 5 A. Yes. Earlier -- yes. 6 Q. All right. Now, look with me, if you 7 would, please, about two-thirds of the way down 8 the page. You'll see a clause that starts -- the 9 left side of the page starts with the word 10 "paragraph" just below "personally." It starts 11 with the word "notwithstanding anything contained 12 herein." 13 Do you see that? 14 A. Sorry. I don't have it yet. (Witness 15 reviews the document.) Yes. 16 Q. Do you see that? Read that out loud, 17 would you? 18 A. If I have the right line. There's 19 several "notwithstandings." "Notwithstanding 20 anything contained herein, in the note or security 21 documents to the contrary, guarantors shall 22 receive a credit against their liabilities 11149 1 specified in this Paragraph 14, for an amount 2 equal to the sum actually received by lender upon 3 lender drawing upon any letter of credit which 4 guarantors delivered to lender as additional 5 security for the loan." 6 Q. Do you -- in the course of your file 7 review, did you happen to notice whether or not 8 Mr. Rosenberg had put up a letter of credit 9 himself individually? 10 A. There were several letters of credit. 11 Mr. Rosenberg, I recall -- even some small -- 12 smaller letters of credit, maybe even 100,000 or 13 smaller with his name, but there was some 14 arrangement Mr. Rosenberg made to, if you will, 15 lay off part of his liability by bringing in other 16 partners. 17 Now, as far as letters of credit, my 18 understanding would be Mr. Rosenberg's guaranty to 19 USAT wouldn't change. But, for example, there was 20 a 3-million-dollar certificate of deposit or maybe 21 initially a letter of credit. I thought -- there 22 was another financial institution involved for 11150 1 $3 million. There were several other individuals 2 that delivered letters of credit instead of 3 Mr. Rosenberg putting up his full amount. And my 4 understanding of it was that he may have given up 5 partial interest in the profits to obtain these 6 people providing security under his letter of 7 credit obligation. 8 Q. All right. 9 A. I'm sorry if that wasn't very 10 articulate, but it's memory. 11 Q. That's just fine after a long day so 12 far, Mr. Stone. 13 Mr. Keeton was asking you a question. 14 You indicated you wanted to use a flip chart. 15 What was it that you wanted to explain? 16 A. The -- 17 Q. And if you want to, there is a chart 18 right behind you. You can do that now. 19 A. It was in reference to -- I believe he 20 said that Mr. Gindy's -- Mr. Gindy's statement in 21 his deposition, that the loan fees or the loan 22 terms, I believe, were as tight -- or something of 11151 1 that effect -- as he had ever seen or were very 2 tight terms. And I'm not in any way impugning 3 Mr. Gindy with what he said with regard to the 4 difference of opinion. This won't take long, if I 5 may. 6 I think the best way to look at it is 7 what did USAT get in this transaction and what did 8 the borrowers. USAT in this transaction -- and 9 I'll qualify this later -- is out 80 million cash. 10 Now, I'll explain this in more detail. 11 First of all, it wasn't all cash. Some was 12 interest reserves. Second of all, it wasn't fully 13 funded. I believe it came up to 73 million plus. 14 Borrowers, out zero. All right? 15 USAT in -- cash in in this transaction, 16 zero. 17 Borrowers in, Mr. Rosenberg, the 18 400,000-dollar loan fee. That's per the closing 19 document. That's how it's styled, "loan fee." 20 GMR, developer, received $250,000 21 developer fee. 22 This, by the way, is 4-17-86, the day 11152 1 the loan disbursed. This happened on April 17th. 2 This happened on April 17th. 3 In addition to this, $300,000 per 4 annum, cutting that off, is 4-17 -- this is going 5 forward. 400,000 per annum is being funded out of 6 the loan to GMR. GMR, in turn, agreed that 7 25 percent or $75,000 would go to Mr. Rosenberg, 8 quote, "for his assistance in this loan." 9 This amount, from all I can tell -- 10 other documents may prove me wrong. This amount, 11 75 to Mr. Rosenberg, after he's received 400, and 12 225,000 to GMR, were fees. They were not styled 13 in any way in any document I saw as 14 reimbursements. Other reimbursements, costs, 15 legal costs were all a part of this loan and were 16 documented. 17 This fee, as far as I can tell, went 18 from '86 from the time of the loan to '87 April 19 and apparently from April '87 to '88. So, you 20 have another 300,000 cash in pocket for the 21 borrowers in '87 to '88. 22 Now, in '89, that amount was reduced, I 11153 1 mentioned earlier in previous testimony 2 Mr. Rosenberg's 75,000 was deferred because this 3 amount was dropped to 200. But nonetheless, 200 4 was coming to GMR. 5 Now, for this -- and there were others. 6 This listing isn't all complete. There were other 7 reimbursements. Some capital contributions of the 8 partners that they had made in the previous 9 transaction were reimbursed. 10 Let's just deal with this for a minute. 11 Here USAT is out $80 million less the interest 12 reserve. The borrowers are out nothing. In fact, 13 they are in 400,000, 250, 300,000 ongoing. 14 So, now, looking at this loan, 15 forgetting all the other flaws it had, appraisals, 16 whatever, size of capital, what happens if the 17 loan is successful? If totally successful, 18 everything just works just as agreed -- those lots 19 sell like hot cakes. They are fighting people 20 off. They all want them and you sell them for 21 that price. 22 USAT, what do you get? You get 11154 1 25 percent of the profits. Borrowers, what do you 2 get? Well, you got this much already. You're 3 going to get 75 percent. 4 Well, now, that's one eventuality. But 5 what if things are totally bust? Totally bust. 6 Nothing comes in. USAT, you lose 75 percent. 7 Borrowers, you lose 25 percent. Now, initially -- 8 I mean, the equation just doesn't add up to me. 9 One party is out $80 million. One party puts 10 nothing in it. In fact, this party even gives 11 this party a little money, not real small in my 12 terms. That's a lot of hours at 250 an hour. And 13 if totally successful after putting all this money 14 up and giving the partners some, they get 15 25 percent of it. But if we lose, we lose 75. 16 Now, this 25 percent, just a 17 clarification -- and that's why I continue to say 18 limited guaranty -- and it is limited. This is 19 what I meant by "limited." 75/25 loss, to me, is 20 limited. But it was further stated -- and in the 21 guaranty we see there that this is not 22 $20 million. 11155 1 So, if these fees and these terms for 2 this loan are tight, I'd love to see a liberal 3 one. 4 Q. Let me ask you a question. I think 5 that -- something that just occurs to me is where 6 would you account for the $2.4 million in loan 7 fees that USAT paid itself? 8 A. Well, that's another issue in and of 9 itself that really wasn't directly in my scope 10 that didn't go unnoticed. Of this amount -- and 11 like I say in parens, this didn't go to 80 with 73 12 million, 75. But of that amount as stated in the 13 closing documents, $17 million, first of all, was 14 an interest reserve. 15 So, this institution, when they made 16 this, knowing the terms, realizing this property 17 is raw land, has to be built out, said 18 "Developers, you don't have to pay any interest. 19 We're going to fund it through this loan." 20 So, for those TFRs that go forward the 21 next few quarters, they are booking at the rate, 22 rough estimate, of 4 million to 6 million a year 11156 1 under the caption in the income statement 2 "interest collected." Well, pardon me. "Interest 3 income." 4 That interest income was no more than 5 taking this money out of this pocket. I just had 6 some income. That's exactly -- it was no more 7 than that. It wasn't cash out the door, I'll 8 grant you. But it was recorded as interest 9 income, conventional. They did not violate any 10 accounting rules, no accounting rules. 11 And as best I know, they -- and been 12 discussed here -- there was no prohibition. But 13 I'm talking about the safety and soundness of it. 14 And as a director or official, someone should have 15 gone at least to this line and said, "Is this what 16 a financial institution that is loaning depositor 17 funds -- is this what they should be doing? And 18 as a director, should I be a part of it?" 19 Back to that question, in addition to 20 that money going into that income, the 2.4 million 21 was, again, funded. I have never -- and again, it 22 wasn't in my scope. I didn't dig through the 11157 1 records. I don't know when USAT booked the 2 2.4 million loan fee that was associated with 3 this. 4 As I understand it, at the time -- and 5 again, it's been discussed here at length about my 6 knowledge or lack thereof of thrift and Federal 7 Home Loan Bank and FSLIC rules. But my 8 understanding was that the 2.4 million 9 conceivably -- in Park 410, not Norwood -- could 10 have been booked immediately. But again, I 11 didn't -- wasn't able to verify or refute that. 12 Q. With regard to what you've just 13 testified to, Mr. Stone, Mr. Villa mentioned 14 yesterday the -- he saw the smile of a bank 15 regulator looking at the Bank Board's regulations 16 in the 1980s. 17 Do you remember him making that 18 statement? 19 A. Yes, I do. 20 Q. Okay. Do you view all ADC loans as 21 being unsafe and unsound? 22 A. No. And I have seen safe and sound -- 11158 1 my concern yesterday was -- perhaps you still have 2 it -- the board that was put up that was a policy 3 statement describing ADC loans with six 4 characteristics in a careful reading would see no 5 equity on the part of the borrower, interest rates 6 are funded by the bank, whatever. That if those 7 six characteristics existed, that you would have 8 to account for fees in a different fashion and 9 account for various, perhaps, other things. I 10 didn't read the whole report. 11 My fear was that that was being 12 portrayed. And, in fact, I thought the statement 13 was typical. Well, those six factors do not 14 describe an ADC loan. I think we saw from 15 Gibraltar Savings, looking at this very same 16 loan -- maybe I'm wrong, but the fact that 17 Gibraltar, in making this loan, wasn't going to be 18 out 80 million -- they said they wanted 16 million 19 cash or a letter of credit up front. And they 20 wanted a guaranty for 25 percent -- I'd have to go 21 back and look at the exact wording -- plus 22 100 percent of the accrued interest. 11159 1 Now, if that meant because Gibraltar 2 got the money up front, got some equity in it, 3 that now it's not an ADC loan, I don't think 4 that's the case. It still was an ADC loan. I'm 5 not sure I would have been real excited about 6 those terms, but they were better than what 7 Park 410 offered and actually booked. 8 Q. So, can ADC loans be made in a 9 manner -- in a fashion that is safe and sound? 10 A. Certainly. 11 Q. As I understand your testimony, the 12 Park 410 loan was not? 13 A. Was not what? I'm sorry. 14 Q. Made in a safe and sound fashion. 15 A. Yes, that's correct. 16 Q. All right. Mr. Keeton was talking to 17 you for a while during his examination about 18 Mr. Rosenberg. 19 Do you remember that? 20 A. Yes. 21 Q. Okay. Take a look at -- and I think 22 you should have it there -- A1643. 11160 1 Do you see that? It should be in your 2 stack of documents that Mr. Blankenstein showed 3 you this morning. 4 A. It might help, instead of just looking 5 for the number, if you'll tell me what the heading 6 is. 7 Q. I'll tell you what it is. It's the 8 real estate investment committee minutes of 9 March 18th, 1985, and it's A1643. 10 A. What date? 11 Q. March 18, 1985. 12 A. Oh, I have it. 13 Q. Find it? 14 A. Yes. 15 Q. Okay. Turn to the last page of this 16 document. 17 A. Yes. 18 Q. Now, look at Item No. 3. What is this 19 item that's being set forth here? Read it, would 20 you? Read it out loud. 21 A. Yes. From the top, "United Savings 22 Association of Texas real estate investment 11161 1 committee." 2 Q. Read No. 3. 3 A. No. 3 on the last page under 4 "comments," "Mr. Rosenberg -- 5 Q. I think you're there. 6 A. "Mr. Rosenberg is very high on this 7 tract based upon his knowledge of what has 8 happened in this general area and Mr. Cisneros' 9 commitment to the freeway and the full development 10 of the western section of San Antonio." 11 Q. Is this the kind of information that is 12 consistent with your review of the files in 13 connection with Park 410 regarding Mr. Rosenberg's 14 interest in the tract, keeping in mind this is a 15 March '85 document? 16 A. Yes. I believe I recall the history of 17 Mr. Rosenberg's involvement. In fact, I think it 18 preceded this date when he attended a meeting with 19 USAT on this very same property. 20 Q. When you were responding to some 21 questions by Mr. Keeton, what was the net effect, 22 in your opinion, of Mr. Rosenberg's involvement 11162 1 with Park 410? 2 A. The -- Mr. Rosenberg's involvement in 3 Park 410, in addition to the fact that he was 4 involved with it and it was, again, the largest 5 loan ever made, did have the concerns given his 6 involvement in, as I call it, an insider 7 relationship not just because of these fees but 8 possibly -- and I have to say "possibly" because 9 of Mr. Graham's deposition -- if Mr. Rosenberg's 10 close association with Mr. Hurwitz may have swayed 11 Mr. Graham some. There are statements in his 12 deposition as to Mr. Rosenberg's involvement 13 and -- but primarily, it was the inside 14 relationships, his involvement with the loan, and 15 the fees coming out of it. 16 Q. Mr. Keeton also asked you about whether 17 you knew about executive committee meetings. 18 Do you remember that? 19 A. Yes, he did. 20 Q. Would the executive committee meetings 21 of an institution, not necessarily USAT, be an 22 equal swap for full board of director meetings? 11163 1 A. I wouldn't say necessarily a full swap. 2 I think I may have even said in my report about 3 having observed representative committees of the 4 board for certain actions wherein if that 5 committee was comprised of a number of people that 6 could pass on an action as a body on their own 7 before the board and if that committee was 8 comprised of a majority of outside directors -- by 9 "outside," I mean directors, not officers, of the 10 entity -- within certain parameters, I have seen 11 that work unobjectionably in financial 12 institutions. But not for the major decisions 13 that come before the board, the very major 14 decisions that come before the board, which always 15 is hard to define, what is a major decision. 16 But -- 17 Q. Would the Park 410 loan have been a 18 major decision? 19 A. Yes. I have stated repeatedly that 20 would be. 21 Q. All right. Do you remember you were 22 asked earlier today about senior loan committee 11164 1 discussions? Do you remember that? 2 A. Yes. 3 Q. And Mr. Blankenstein showed you a 4 series of documents. I think you still have them 5 in front of you: B1647, A1643. You don't have to 6 get them out. I think you looked at them already. 7 What could you detect from those? What 8 were you able to glean from those as an examiner? 9 A. Well, Mr. Blankenstein was correct. I 10 had mentioned several meetings that I knew of. I 11 believe he may have come up with one or two 12 meetings that I hadn't mentioned off my feet, if 13 you will, in a direct question. But even after 14 having observed them, minutes that were held of a 15 duration of 55 minutes and five or six other items 16 discussed -- one meeting was 20 minutes in 17 which -- I believe it was -- Norwood was 18 discussed. And probably the most important was, 19 in discussing that, Norwood was, in fact, 20 discussed at these meetings. That was the subject 21 at the time I was being asked -- used the example 22 of the March 17th, 1986 meeting, which was the 11165 1 exact meeting that the Park 410 70-million-dollar 2 loan was considered and approved. And that very 3 meeting was one hour and nine minutes, which 4 included approving the largest loan ever granted 5 by the institution. Amended authorization to 6 Billy Goldberg, an assumption of the Wood Creek 7 Shopping Center by Wood Creek Limited Partnership 8 was approved. "Terms and conditions are shown in 9 the attached sheet." Discussion of the proposal 10 in a Toyota dealership at Highway 290 and Eldridge 11 Road. "It was agreed" -- sounds like there at 12 least was a discussion of that -- "that United 13 would review the proposal of the terms contained 14 and participation" -- it says "David Graham 15 presented a status on the Deauville property in 16 Austin," and the minutes from the last meeting 17 were discussed. 18 All that was done in an hour and nine 19 minutes. But as previous counsel mentioned, I 20 made typos. If someone says -- if this was 21 10:30 a.m. the next day, I would say maybe it was 22 adequately discussed. 11166 1 Q. Is this an adequate written record of 2 loan discussion, in your opinion? 3 A. Not for the 70-million-dollar loan, no. 4 Q. What about for Norwood? 5 A. I would have expected rather than just 6 presenting a status on the Deauville property, 7 that if Mr. Graham presented such status, I would 8 think he would have it in writing. It could have 9 been attached to see if any other members had 10 questions at the time. In fact, as a reviewer, 11 what is that status? But you can't tell from the 12 minutes. 13 And I'm assuming, again, that -- I have 14 a document that right now has Park 410 15 attachments. Maybe there is such a document that 16 has attached to it a Norwood status report. But 17 again, even if it did, given the short duration of 18 that meeting, I don't know how justice could have 19 been done to the 70-million-dollar loan, much less 20 the other items. 21 Q. One of the things Mr. Blankenstein was 22 going to show you but never got around to doing 11167 1 it, as I recall, was the 1986 regulation that 2 actually was applicable to the Park 410 loan 3 transaction as well as the Norwood transaction. 4 Do you remember him showing it to you? 5 A. All I remember was the Federal Register 6 announcing a change, and that might have been 7 dated shortly after March of '86. But then he 8 showed me the reg itself, which I think was dated 9 in '87, but I assume when it was put in the 10 Federal Register, it was effective that date. But 11 in any event, the '86 document he showed me, I 12 think, was post-March 17th. I'm not sure about 13 post-June. 14 MR. LEIMAN: I will represent to 15 counsel that this is a copy of 12 CFR Section 16 563.17-1 in its entirety. 17 Q. (BY MR. LEIMAN) If you would, look in 18 this document, Mr. Stone, at Page 321 which is, in 19 the document, 563.17-1(a) -- sorry -- (c)1(iii). 20 It's in the lower right-hand corner. 21 A. Yeah. "One or more written appraisal 22 reports"? 11168 1 Q. Why don't you read that out loud as to 2 what's required in connection with making a loan 3 in 1986. 4 A. "One or more written appraisal reports, 5 prepared and signed, prior to the approval of such 6 application, by a person or persons duly appointed 7 and qualified as appraiser or appraisers by the 8 board of directors of such institution, disclosing 9 the market value of the security offered by the 10 applicant and containing sufficient information 11 and data concerning the appraised property to 12 substantiate the market value of the security 13 described in such report; or, if such loan is an 14 insured loan or a guaranteed loan, a certification 15 of the valuation assigned to the real estate 16 security by the appraiser accepted by the insuring 17 or guaranteeing agency and furnished to the 18 institution by such agency." 19 Q. Regarding Park 410 and the approval by 20 the senior loan committee in March of 1986, did 21 they have a written appraisal prepared and signed 22 prior to the approval? 11169 1 A. Senior loan committee approval -- I'm 2 sorry. 3 Q. Before the -- 4 A. I was reading. 5 Q. Sure. Before the senior loan committee 6 had approved that loan, did they have a signed -- 7 a signed appraisal? 8 A. No. I think, as counsel showed me when 9 I had stated in there that they didn't have one at 10 the time of the disbursement, I believe he handed 11 me the appraisal and it was dated shortly after 12 that approval. 13 Q. Now, let's assume -- you were saying 14 earlier in your testimony, I think, when Mister -- 15 in response to some questions by Mr. Villa -- you 16 said that technical violations don't -- I hope I 17 get this right -- you said technical violations 18 don't necessarily always result in an unsafe and 19 unsound practice. 20 Is that what you said? 21 A. I don't even think I used the term 22 "technical." I said that -- perhaps I did. 11170 1 You're right. I said that violations of laws and 2 regulations are, in themselves, unsafe and 3 unsound. However, I have never gone into an 4 institution that didn't have some violation of 5 some type, whether that would be in the State of 6 Ohio because they couldn't find the certificate -- 7 title insurance or whether it be in an institution 8 that, on one day, was under its reserve 9 requirement or back years ago because a loan 10 secured by a CD didn't have an interest rate 11 2 percent above the rate on the CD. 12 So, minor and technical and inadvertent 13 violations are technical exceptions and do not 14 constitute unsafe and unsound. 15 Q. Would the safety and soundness -- 16 strike that. 17 If I understand your report, you were 18 not necessarily concerned with -- because it was 19 not your expertise -- about the technical details 20 of what was in each appraisal document; is that 21 right? 22 A. That's a general characterization. It 11171 1 was my understanding that was not what I was 2 retained for to begin with. Those exceptions -- 3 that was not, again, my specialty. I was to look 4 at strictly the safety and soundness implications. 5 Q. And you're not an appraiser? 6 A. I wasn't limited to looking at anything 7 else, but -- no, I'm not an appraiser. 8 Q. Okay. And in your report, if we could 9 turn to your report and actually -- let's take a 10 look at that on Page 7 of your report, please, 11 which I think is T7451. 12 Do you have that? 13 A. My report? 14 Q. Yes, sir. Your report, Mr. Stone, 15 which is T7451. All right. Do you have that? 16 A. I have my report. 17 Q. All right. Let's look at No. 4 in your 18 report, and let's look at the second full 19 paragraph. 20 Have you got it. 21 THE COURT: Are you on Page 4? 22 MR. LEIMAN: I'm on Page 7, 11172 1 paragraph -- numbered Paragraph 4 on Page 7, Your 2 Honor. 3 THE COURT: Thank you. 4 Q. (BY MR. LEIMAN) Actually, let's take 5 a look at the very first sentence. You say that 6 "In both the Park 410 and Norwood situations, the 7 sound and prudent use of independent appraisals on 8 loan collateral was not employed." 9 What did you mean by that? 10 A. As I testified earlier, in both cases, 11 at the time the loans were approved by the senior 12 loan committee, they did not have written 13 appraisals in hand. That is what I meant at that 14 time, and I saw no delegations -- I think I saw a 15 condition in one of the two cases that it was 16 subject to the condition that someone unnamed -- 17 the actual condition was subject to an acceptable 18 appraisal. I saw that non-delegated. I didn't 19 see any report back or any analysis of that. 20 But more importantly, and subsequent to 21 the time of writing this report, this concern of 22 mine was significantly enhanced as a result of 11173 1 subsequent review and namely because, as I have 2 said now several times before the Court, the way 3 the Schulz appraisal was obtained on Park 410 and 4 the way that the Bolin appraisal was obtained on 5 Norwood. I refer subsequently on this same page 6 about the Bolin appraisal, but I learned even more 7 about that subsequent to this report. 8 Q. So, assuming even for the sake of 9 argument that they had had appraisals in the files 10 prior to approving these credits, you would have 11 had objections to these appraisals because of the 12 manner in which they were derived? 13 A. Let me explain that. Yes, because in 14 both cases, Park 410 and Norwood, appraisals were 15 performed on both properties. In one case, by 16 Appraisal Associates of Austin. In another case, 17 by Love & Dugger. Love & Dugger being 410. AAA, 18 Norwood. 19 In both of those cases, the appraisals 20 performed did not support making either one of 21 these loans. In both cases, disregarded -- I 22 didn't see any documentation that anyone said they 11174 1 were insufficient. They were poorly prepared. 2 They lacked sound analysis. I didn't see that. 3 In fact, I saw an analysis to the 4 contrary. Not that they were good, but that they 5 didn't come up with the number, quote, "we need." 6 So, in both cases, went out and got the 7 Schulz appraisal and the Bolin appraisal. Based 8 on what I now know about those appraisals and how 9 those were derived, as I just explained, had they 10 been in hand prior to approval, I would have had 11 exactly the same concerns unless questions were 12 raised, discussed, flaws seen in the document, 13 and, in fact, were disapproved as they should have 14 been. 15 Q. Mr. Stone, do you believe that -- let 16 me give you a general proposition. 17 Do you agree with this statement that 18 an appraisal report should be a useful tool for 19 prudent underwriting? Do you agree with that? 20 Let me repeat it more slowly. 21 An appraisal report should be a useful 22 tool for prudent underwriting. 11175 1 A. I would change the word "should" to 2 "is." An appraisal is a useful tool, and I'd even 3 consider saying "is a useful and required tool." 4 Q. Look with me, please, at Exhibit T7760 5 that Mr. Blankenstein showed you earlier today. 6 This would be a copy of R-41B. And I'd like you 7 to look at the second page of the exhibit. 8 A. What tab is it? I'm sorry. 9 MR. LEIMAN: Do we have a tab number 10 for that, Ms. Allen? That was just introduced by 11 Mr. Blankenstein. 7716. 12 MS. ALLEN: 795. 13 THE COURT: We'll take a short recess. 14 15 (A short break was taken 16 at 2:51 p.m.) 17 18 THE COURT: Be seated, please. We'll 19 be back on the record. 20 Mr. Leiman, you may continue. 21 MR. LEIMAN: All right, Your Honor. 22 Thank you very much. 11176 1 (3:14 p.m.) 2 Q. (BY MR. LEIMAN) When we -- just 3 before the break, Mr. Stone, I had asked you to 4 locate on your -- in the witness Tab 795, Exhibit 5 7760. 6 A. It has been located for me. 7 Q. Turn, please, to the second page of the 8 document. 9 A. I have it. 10 Q. And look with me under the heading 11 "Appraisal procedures." 12 Do you see that? 13 A. Yes, I do. 14 Q. Okay. Read out loud what it says under 15 the term -- where it says "specifically." 16 Do you see that? 17 A. Yes. 18 Q. Read it out loud for me. Read down 19 through A. 20 A. "Specifically, each appraisal report 21 must be totally self-contained so that it is a 22 useful tool for prudent underwriting, real estate 11177 1 owned, or" -- I can't read. 2 Q. "LTF decisions"? 3 A. Doesn't look like an "L." Okay. 4 "decisions." Loans to facilitate, I assume. 5 Q. That is correct. 6 Mr. Stone, does that look familiar in 7 connection with what I had asked you previously as 8 to whether you agreed with the fact that an 9 appraisal report must be a useful tool for 10 underwriting and you said it is a useful tool? 11 A. Yes. 12 Q. And should be required. Right? 13 A. Yes. 14 Q. Okay. Procedurally, based upon the 15 information that you have and your review of the 16 files as well as the testimony in this case, is it 17 possible that -- strike that. 18 Would the appraisals for Norwood and 19 Park 410, the one done by Schulz and the one done 20 by Bolin, be useful for prudent underwriting? 21 A. Not based on the information that I 22 have seen and have testified today, due to the 11178 1 nature in which they were obtained. 2 Q. Are you basing that opinion on any 3 substantive knowledge of appraisal, technical 4 information? 5 A. No. That was not my charge. 6 Q. It's purely the procedural aspects of 7 how those appraisals were acquired; is that right? 8 A. Right. 9 Q. And derived? 10 A. Right. And from documentation seen 11 during my testimony. 12 Q. Now, do you remember Mr. Keeton asked 13 you about the executive committee minutes. 14 Do you remember that, Mr. Stone? 15 A. Yes, he did. 16 Q. Could I have Exhibit A114, please? 17 Mr. Stone, I handed you Exhibit A114? 18 MR. VILLA: Excuse me, sir. Is there a 19 tab number? Is it a tabbed exhibit? 20 MR. LEIMAN: No, I don't think it is, 21 Mr. Villa. 22 MR. VILLA: We have no copies. 11179 1 MR. LEIMAN: It was on the pull list, 2 Mr. Villa. I said all committee -- all USAT 3 minutes -- USAT and UFG board minutes. 4 MR. VILLA: Your Honor, they gave us a 5 pull list that said all USAT and UFG board 6 minutes. We're talking about something like this, 7 all executive committee minutes, all loan 8 committee minutes. There is a practical limit as 9 to what any lawyers can bring into the courtroom. 10 THE COURT: Do you have another copy 11 for counsel? 12 MR. LEIMAN: I assume that the 13 respondents' counsel had one, based on all their 14 questions about them. 15 THE COURT: We'll be off the record. 16 17 (Discussion off the record.) 18 19 THE COURT: We'll be back on the 20 record. 21 Mr. Leiman, you're going on to another 22 topic? 11180 1 MR. LEIMAN: Yes, I am, Your Honor. 2 Q. (BY MR. LEIMAN) Mr. Stone? 3 A. Yes. 4 Q. In the course of preparing your report 5 as well as in preparing for testimony in this 6 matter, did you have occasion to read the sworn 7 testimony of Gerald R. Williams? 8 A. I believe I did. 9 Q. Mr. Williams, the former president of 10 United Savings. 11 Do you remember that? 12 A. I believe that may be correct. 13 Q. Do you remember reading a statement in 14 here by Mr. Williams in which Mister -- 15 MR. BLANKENSTEIN: Could Mr. Leiman 16 refer us to where -- from where he's reading? 17 MR. LEIMAN: Sure. Yes, of course. 18 This would be the official transcript of 19 proceedings, sworn testimony of Gerald R. 20 Williams, Page 118. 21 MR. VILLA: What's the date? 22 MR. LEIMAN: Line 13. 11181 1 MR. BLANKENSTEIN: What's the date? 2 MR. LEIMAN: Monday, June 12, 1995. 3 MR. VILLA: We object to that, Your 4 Honor. Mr. Williams was called to testify as a 5 witness in this court and he had direct -- called 6 by the government or the OTS. He had direct 7 examination. They could have elicited from him 8 what they wanted and then subjected him to 9 cross-examination by us on those issues. They 10 apparently chose not to ask him whatever questions 11 they have now selected to present to this witness. 12 Consequently, we have had no opportunity to 13 cross-examine because their administrative 14 depositions are ex parte in the sense that we 15 don't participate in them. 16 Having chosen not to ask Mr. Williams 17 the same questions in this court and subject him 18 to cross-examination so we can now present the 19 expert with the cross-examination, it is 20 extraordinarily unfair and prejudicial for them to 21 be able to select out those portions and use them 22 to present to this witness and, thus, try to get 11182 1 in before this tribunal evidence that you would 2 not otherwise deign to let in. 3 So, I object to it. They had 4 Mr. Williams here. They could have asked him 5 whatever questions they wanted. They didn't ask 6 him, and we don't think that they ought to be able 7 to read in his ex parte deposition and ask this 8 witness to base his opinion on it. 9 THE COURT: Sustained. 10 MR. LEIMAN: Your Honor, before -- if I 11 might, I do believe it's fair for the following 12 reason: Mr. Gerald Williams was represented at 13 this particular session and in this deposition by 14 Robert M. Crasney, Esq., Donald R. Carlson, Esq., 15 both of the firm of Williams & Connolly in 16 Washington, D.C. That, in fact, is Mr. Villa's 17 law firm and they did have an opportunity to 18 cross-examine this witness, both of those 19 gentlemen. 20 MR. BLANKENSTEIN: I didn't have an 21 opportunity to cross-examine this witness as 22 counsel for Jenard Gross. 11183 1 MR. KEETON: And I didn't either, Your 2 Honor, as counsel for Mr. Hurwitz. 3 MR. EISENHART: Nor would MAXXAM have 4 had an opportunity. 5 MR. LEIMAN: I believe that's covered 6 by a joint defense agreement, Your Honor. And in 7 this case -- 8 MR. BLANKENSTEIN: Your Honor, there is 9 no -- 10 MR. KEETON: That is incredible 11 argument for counsel to make, that the joint 12 defense agreement says we can't attend a 13 deposition but we're bound by it. That's not the 14 law. 15 MR. LEIMAN: Your Honor, this is being 16 used -- this is being used to determine whether or 17 not Mr. Stone was aware of this material and 18 whether it had an impact and related to his 19 opinion. As I said, Mr. Villa's law firm was at 20 the -- 21 THE COURT: Well, it seems to me his 22 memory was pretty vague that he had even read it 11184 1 or not. So, I think if you're going to read it to 2 him and then ask him, I think that's, in effect, 3 putting in the deposition. 4 MR. LEIMAN: Well, may I ask one 5 question? 6 THE COURT: Yes. 7 MR. LEIMAN: Thank you. 8 Q. (BY MR. LEIMAN) Do you remember 9 reading in this testimony the following -- 10 MR. BLANKENSTEIN: Objection, Your 11 Honor. He's reading the testimony. 12 THE COURT: There has to be some other 13 way rather than reading the deposition -- 14 MR. LEIMAN: Okay, Your Honor. I'll 15 figure out another way. 16 Q. (BY MR. LEIMAN) Do you remember 17 reading in the testimony of Gerald R. Williams his 18 statement that Charles -- 19 MR. BLANKENSTEIN: Your Honor, I don't 20 see the difference here. 21 MR. LEIMAN: I'm not reading the 22 testimony, Mr. Blankenstein. I'm formulating a 11185 1 question. 2 MR. BLANKENSTEIN: Why don't we have 3 Mr. Leiman close the book and let's see if he can 4 repeat it from memory. He's reading the 5 testimony. 6 MR. LEIMAN: I'm quite certain I can, 7 Mr. Blankenstein. I'll do it now. 8 Q. (BY MR. LEIMAN) Do you remember 9 reading in Mr. Williams' testimony -- 10 THE COURT: Why don't we stop right 11 there? 12 Do you remember reading his testimony? 13 THE WITNESS: I am certain that I did. 14 To say -- Your Honor, if you ask me specific 15 questions about it, I don't know that I could 16 respond. I believe I did review the testimony, 17 but I cannot -- 18 MR. VILLA: May I do a voir dire on him 19 to see what he recalls about the testimony? 20 THE WITNESS: That's what I just told 21 Your Honor. I don't believe -- if you asked 22 questions, I -- well, maybe I can. 11186 1 2 VOIR DIRE EXAMINATION 3 4 (3:25 p.m.) 5 Q. (BY MR. VILLA) How many loans were 6 discussed in the testimony, sir? Was it more than 7 three full days of testimony? 8 A. I can't respond to that either, 9 Mr. Villa. 10 Q. To what extent did it go into the sale 11 of mortgage-back securities? 12 A. I have read no testimony on 13 mortgage-backed securities. 14 MR. VILLA: Your Honor, he has no idea 15 what the testimony is. He's just going to agree 16 to whatever Mr. Leiman says to him. I think we 17 ought to move on. 18 THE COURT: I just don't think that 19 this is the way to put evidence in, by reading 20 into the record an investigatory deposition. 21 MR. LEIMAN: Your Honor, if I might 22 just ask a single question. 11187 1 Q. (BY MR. LEIMAN) Do you remember -- 2 MR. LEIMAN: And my question would be 3 this. 4 5 CONTINUED REDIRECT-EXAMINATION 6 7 (3:26 p.m.) 8 Q. (BY MR. LEIMAN) Do you remember 9 reading anything about Mr. Williams' 10 qualifications and his discussion about his 11 qualifications in connection with real estate 12 transactions? 13 THE WITNESS: Your Honor, may I just 14 ask a question so we can speed this along? I've 15 heard Mr. Williams -- and maybe this is part of my 16 problem -- that what I may have reviewed was 17 testimony. And I have heard the term used -- and 18 it may be because I'm non-legal -- that it may be 19 a deposition. 20 May I ask whether what we are 21 discussing was Mr. Williams' testimony before this 22 court, or was it a deposition taken previously? 11188 1 THE COURT: As I understand, Mr. Leiman 2 is referring to a deposition that was taken before 3 this proceeding started. 4 MR. LEIMAN: That's correct, Your 5 Honor. 6 THE WITNESS: I can refresh myself on 7 that on notes that I have given -- or copies have 8 been made of. 9 Q. (BY MR. LEIMAN) Who did you give the 10 notes to? 11 A. It was asked by -- 12 Q. Was it Mr. Villa? 13 A. Villa. I'm sorry. I will correct 14 myself. I did read Mr. Williams' deposition. I 15 believe my notes say it was on June 12th, 16 nineteen -- it says 1995. Probably nineteen -- I 17 won't say -- I have read a deposition of 18 Mr. Gerald Williams. 19 Q. That was the date of the transcript, 20 Your Honor. That was -- the date of these 21 proceedings was June 12th. 22 THE COURT: Well, can you ask him your 11189 1 question without quoting the deposition? 2 MR. LEIMAN: I'll try, Your Honor. 3 Q. (BY MR. LEIMAN) Do you remember, 4 Mr. Stone, whether or not Mr. Williams discussed 5 with me in that -- in those proceedings whether or 6 not Charles Hurwitz had visited Austin, Texas, 7 with him, with Mr. Williams, in connection with 8 the Norwood project? 9 A. I'm sorry. I cannot recall -- well, I 10 cannot recall it. 11 Q. Do you remember any discussion about 12 Mister -- Mr. Williams' discussion about Stanley 13 David Rosenberg and the influence and the part 14 that he played in connection with Park 410? 15 A. I do not recall that from Mr. Williams' 16 deposition. 17 Q. Do you remember whether or not 18 Mr. Williams responded to questions with regard to 19 his area of expertise in real estate? 20 A. I just don't recall. 21 MR. LEIMAN: Under the circumstances, 22 Your Honor, I would agree. I think the witness 11190 1 probably does not have sufficient recall to 2 respond to this. 3 Q. (BY MR. LEIMAN) Do you remember, 4 Mr. Stone, reading in the testimony of this case, 5 in this proceeding, the testimony of David Graham? 6 A. Yes. 7 Q. All right. All parties were 8 represented, and I believe that this would be a 9 fair question to ask you, Mr. Stone. 10 Do you remember the following colloquy: 11 "When I asked Mr. Graham, well, what about the 12 various assignments? Who would parse out, for 13 example, appraisals for review?" 14 Answer, "Probably if we parceled it out 15 or Gem parceled it out, it depends on probably 16 availability, who had the time to help." 17 Question, "So, there was no individual 18 that specialized in appraisal review?" 19 Answer, "Oh, none." 20 Question, "Now, in connection with 21 appraisal review, was there ever a written record 22 made -- for example, a summary analysis or some 11191 1 other documentation -- that would go through what 2 the appraisal highlighted?" 3 "No. It wasn't standard procedure for 4 us to do that at that time." 5 Question, "We're talking about 1984?" 6 "Yes. '85, '86, that's correct." 7 Question, "So, there never was a 8 written record?" 9 Answer, "No." 10 "That would be true" -- question, "That 11 would be true, I assume, in connection, as well, 12 with loan committees, senior loan committee 13 meetings. There was no written record presented 14 other than an appraisal which might bring -- which 15 you might bring; is that right?" 16 Answer, "Well, other than the actual 17 loan presentation which spoke for itself." 18 Is that consistent with the operation 19 that you observed regarding appraisal procedures 20 in United Savings Association of Texas regarding 21 the loans that you reviewed? 22 A. Yes. As I had stated before, I had 11192 1 seen no such analyses, no such review. And 2 Mr. Graham's statement states there weren't -- 3 apparently, I didn't miss anything. Apparently, 4 there were none to be seen. 5 Q. Who's Mr. Graham? Do you remember who 6 Mr. Graham was? 7 A. Yes. 8 Q. Who was he? 9 A. As far as both Park 410 and Norwood, 10 the senior lending official that I saw had the 11 most involvement in both loans. 12 Q. Take a look, if you would, please, at 13 the stack of documents in front of you. I'd like 14 you to look at Exhibit B1012 and Exhibit B1144. I 15 think Mr. Blankenstein might have shown you this. 16 A. These were in folders? 17 Q. They look like this. 18 A. 1012 and 1144? 19 Q. That's correct, Mr. Stone. It would 20 have a "B" in front of it. 21 A. Yes. 22 Q. Yes. Do you remember Mr. Blankenstein 11193 1 asking you about these two documents? 2 A. Yes. 3 Q. Do either of these documents constitute 4 the kind of appraisal analysis that you would 5 expect in connection with a loan of $30 million or 6 a loan of $80 million? 7 A. No, sir, it does not. 8 Q. Why not? 9 A. Because all this is -- calls for five 10 line items -- at least, I'm looking at 1012. The 11 name of appraiser, I don't know of a lot of 12 analysis that went into filling that out, nor the 13 fact what the appraiser reached, $88 million, nor 14 what the loan ratio is, nor merely the date. And 15 then the last was "conforms to R-41B," which is 16 indicated "yes" in 1012 and apparently a check 17 mark on 1144. 18 Q. Do you see anything inconsistent with 19 either of these two exhibits -- B1012 or B1144 -- 20 that's in any way inconsistent with the statement 21 I read to you by Mr. Graham? 22 A. No. There is nothing inconsistent. 11194 1 This is not evidence of a written analysis. 2 MR. LEIMAN: Your Honor, I believe 3 Mr. Schwartz is back with the copies of the 4 minutes. 5 Q. (BY MR. LEIMAN) Okay. Mr. Stone, if 6 you would, please, look with me at Bates stamp 7 Page K004709. 8 THE COURT: Am I supposed to have that? 9 MR. VILLA: Does it say "compensation 10 committee" on it? 11 THE WITNESS: Mine does. 12 MR. VILLA: For the record, this is 13 Exhibit A114. Right? 14 MR. LEIMAN: That is correct, 15 Mr. Villa. Thank you. 16 THE COURT: What page are we supposed 17 to be looking at? 18 MR. LEIMAN: K004079. I misspoke, Your 19 Honor. It should be 4078. 20 THE COURT: Okay. The first page I was 21 looking at was 4833, and now we're back to 47. 22 Okay. 11195 1 Q. (BY MR. LEIMAN) Mr. Stone, do you 2 have the February 13th, 1986 minutes of the 3 meeting of the board of directors of United 4 Savings Association of Texas in front of you? 5 A. Yes, I do. 6 Q. Okay. Do you see near the bottom of 7 the page on this Exhibit A1114, "executive 8 committee"? 9 A. Yes, I do. 10 Q. All right. Do you see that this is -- 11 it states "It's the intention of the board of 12 directors to constitute a committee with the same 13 effect as if it acted -- as if acted on by the 14 entire board"? 15 Do you see that, that statement there 16 in the "whereas" clause? 17 A. Yes. 18 Q. In that preparatory clause. Okay. 19 Look at the next page, which should be 20 4709. 21 A. Okay. 22 Q. Would you read the resolution where it 11196 1 says "resolved"? 2 A. "That an executive committee of four 3 directors is appointed to serve until their 4 successors are named, that the committee appointed 5 is: Jenard M. Gross, Gerald R. Williams, James 6 R. Whatley, and Barry Munitz, chairman." 7 Q. Are any of those names familiar to you? 8 A. Yes. 9 Q. Which ones? 10 A. Mr. Gross, Mr. Williams. I've see 11 Mr. Whatley's name, but I would not say it's 12 familiar to me. I will say I have seen his name 13 in other documents, as well as Mr. Munitz. If 14 that's the same Munitz that's referred to as 15 Dr. Munitz, I believe it is. It is familiar to 16 me. 17 Q. Which of these individuals would be, as 18 you understand it, members of the official family 19 of United Savings Association of Texas? 20 A. I can respond to Mr. Gross, 21 Mr. Williams, and Mr. Munitz. But Mr. Whatley, I 22 am at a bit of a loss to recall his role in USAT. 11197 1 Q. Mr. Gross was an officer, wasn't he? 2 A. Yes, he was. 3 Q. What about Mr. Williams? We talked 4 about him a little bit today. 5 A. Yes. I am just at a loss for his title 6 at that particular time. 7 Q. Do you know if Mister -- if Dr. Munitz 8 was an officer of USAT? 9 A. I know he was a director. Possibly an 10 officer. I just -- 11 Q. But you know he was a director? 12 A. Yes. 13 Q. Is this the kind of an executive 14 committee that you were referring to earlier as 15 being the kind of committee that could substitute 16 on some basis for the board of directors? 17 A. Well, to respond to your question, I 18 think since it is my opinion, it would probably be 19 "should." But again excusing the fact that I 20 cannot recall whether Mr. Whatley was an officer 21 or not and believing to be but stand to be 22 corrected that Mr. Munitz was, in fact, an 11198 1 officer -- but I am a little fuzzy on that now -- 2 no, because for someone to act with the -- and 3 commit the institution to the same extent of the 4 board, I would want to see the predominant 5 membership of non-officer/directors. 6 Q. Why would you -- 7 MR. VILLA: Your Honor, I'd like to 8 reassert my continuing objection. This case is 9 taking a long time. We've raised the issue as to 10 whether we're litigating the -- how frequently the 11 board of directors meetings should be held. They 12 elicited from Mr. Stone in his direct examination 13 that he thinks board of directors meetings should 14 be held more frequently. I objected. I said 15 that's not part of this case. My objection was 16 overruled. I asked for a standing objection to 17 it. We had to respond a little bit by putting in 18 the executive committee. Now we're off to the 19 races litigating how often -- 20 MR. LEIMAN: Your Honor -- 21 MR. VILLA: May I finish my comments, 22 Counsel? 11199 1 THE COURT: Mr. Leiman, Mr. Villa has 2 the floor. 3 MR. VILLA: Your Honor, my only point 4 is that issue is not before the Court. We're 5 prepared to respond to any issues they raise 6 against our respondents, but that is not the issue 7 we're litigating today or hopefully ever in this 8 case. This case has to do with certain loans. I 9 have -- I reassert my objection and ask that we 10 get back to the Park 410 and Norwood loans and not 11 talk about the composition of the executive 12 committee or how often the board of directors 13 meets. 14 So, if the Court would like to listen 15 to Mr. Stone, I understand that; but I reassert my 16 objection and ask for a standing objection to this 17 entire line of wasteful examination. 18 THE COURT: All right. Mr. Leiman, 19 I'll hear you. 20 MR. LEIMAN: Yes, Your Honor. This was 21 a matter that was brought up by respondents' 22 counsel and inquired into of Mr. Stone. This was 11200 1 a legitimate part of Mr. Stone's report. They 2 have had notice of Mr. Stone's report for months, 3 Your Honor. 4 For Mr. Villa to stand here and 5 speechify on a matter which really the matter 6 deals with relevance rather than the guts of this 7 issue, which is who actually approved this loan 8 and the unsafe and unsound manner in which it was 9 done and the policy issues that are related to it 10 by virtue of the board of directors, I think is 11 specious. 12 I can't imagine why they would go into 13 this issue on cross-examination and then object to 14 my responding to it on redirect. I am stunned. 15 THE COURT: All right. What's your 16 question? You may have a continuing objection, 17 Mr. Villa. 18 MR. VILLA: Thank you. 19 Q. (BY MR. LEIMAN) Mr. Stone, turn, 20 please, to the February 13th, 1986 minutes of the 21 executive committee of the board of directors of 22 USAT dated February 13, '86, which is at K004802. 11201 1 A. February 13th, 1986? 2 Q. Yes, Mr. Stone. 3 A. Thank you. I have it. 4 Q. Do you see who was present at this 5 meeting? 6 A. Yes. 7 Q. Who was present at the meeting? 8 A. Mr. Hurwitz, Mr. Williams, Dr. Munitz, 9 Mr. Gross, and Ms. Kulik was in attendance as the 10 secretary of the meeting. 11 Q. Looking over the minutes, do you see 12 any mention of Park 410 here? 13 A. No, I do not. 14 Q. All right. Let's take a look at 15 K004811. It's the March 18th, 1986 minutes of the 16 executive committee of the board. 17 A. I have that. 18 Q. Who was in attendance? 19 A. Listed as members: Mr. Gross, 20 Mr. Williams, and Dr. Munitz. 21 Q. Do you see it also -- go ahead. 22 A. You asked me who was in attendance. 11202 1 Q. Continue. 2 MR. BLANKENSTEIN: Excuse me, 3 Mr. Leiman. What's the Bates number page? 4 MR. LEIMAN: K004811. 5 MR. BLANKENSTEIN: Thank you. 6 Q. (BY MR. LEIMAN) Go ahead, Mr. Stone. 7 A. Also present listed is Arthur Berner, 8 vice president, Mister -- period. 9 Q. Look through the minutes, please, which 10 I think consume two pages and tell me if you see 11 any mention of Park 410. 12 MR. EISENHART: Your Honor, I'm going 13 to object to this as absolutely wasteful of time. 14 The point Mr. Keeton brought out on 15 cross-examination which I thought was fairly 16 apparent was that the purpose of the executive 17 committee was to allow supervision and functioning 18 between board minutes. Nobody has ever claimed 19 that Park 410 or Norwood was discussed at each 20 executive committee meeting. That point has never 21 been made. I don't know what Mr. Leiman thinks 22 he's rebutting with this. 11203 1 THE COURT: Can we stipulate that it 2 was not discussed at these executive committee 3 meetings? 4 MR. EISENHART: I don't think we could 5 stipulate that it was not discussed, Your Honor. 6 The point was not that it was discussed at every 7 executive committee meeting. The point was that 8 there was a mechanism between board meetings by 9 which the board could have addressed issues that 10 would normally come up at board meetings. Nobody 11 ever claimed it was discussed at every meeting. 12 MR. VILLA: I believe, Your Honor, we 13 could stipulate that it wasn't in any executive 14 committee minutes. Okay? Nobody can remember 15 exactly what was said 10 years ago. But rather 16 than have him put two or 300 minutes in front of 17 him and say "Is anything there" which, by any 18 sense, by any standard is pointless, I think we 19 can stipulate it's not in any executive committee 20 minutes. Maybe we can save a little time on that. 21 THE COURT: All right. I think we'd 22 better go on with that stipulation. 11204 1 MR. LEIMAN: I will accept the 2 stipulation, Your Honor. I move the admission of 3 A114. 4 MR. VILLA: Your Honor, the only -- we 5 notice that the Bates stamps are out of order. 6 Is that just a copying error? 7 MR. LEIMAN: I think it's a collating 8 error, Mr. Villa. 9 MR. VILLA: No objection. 10 THE COURT: Received. 11 Q. (BY MR. LEIMAN) Do you remember 12 Mr. Villa asked you yesterday, Mr. Stone, a number 13 of questions about regulations that you responded 14 to, specifically 563 regulations, 545 regulations? 15 Do you remember that? 16 A. Not by your cite, but he did ask me 17 about certain regulations and/or policy 18 statements. 19 Q. Do you remember he asked you about the 20 minutes of United Savings Association of Texas in 21 connection with Mr. James Pledger? Do you 22 remember that? 11205 1 A. Yes, I do recall that. 2 Q. And do you remember that he did a 3 computation near the end of his examination of you 4 in which he took you through some arithmetic 5 exercises in order to back in to a percentage 6 figure that you had previously mentioned? 7 Do you remember that? 8 A. Yes, I believe I do. 9 Q. Let me ask you a question: In 10 connection with the delegation of 11 70-million-dollar loan authority, do you remember 12 how Mr. Villa made that computation? 13 A. I remember in one instance referring me 14 to the regulation -- I believe he had it on a 15 board -- indicating that 2 percent of an 16 association's assets could be invested with a 17 single borrower. 18 Q. Do you remember him asking -- your 19 response that in the case of USAT, based upon his 20 question, you said 5.1 billion, as you said, would 21 be roughly $100 million, 2 percent of 5.1 billion? 22 Do you remember that? 11206 1 A. Yes, I do. 2 Q. Okay. 3 A. If I remember, that would be the case 4 with USAT with 215.3 million in capital or if it 5 had $1 in capital. 6 MR. VILLA: Your Honor, for point of 7 clarification, I think that was the concentration 8 reg, 545, so we don't get the record any more 9 mixed up than necessary. The 2 percent had to do 10 with the concentration reg 545, and the regulatory 11 capital was 563, which is what he originally 12 started off with, the loans to one borrower rate. 13 THE WITNESS: I apologize. I just 14 didn't know it by cites. We did talk about it, 15 though. 16 Q. (BY MR. LEIMAN) You remember, though, 17 he took you through some calculations and he did 18 the calculation. He said in his question, "And I 19 have done the calculations. 35 to 50 percent of 20 215 million would mean that the maximum delegation 21 would be between 75 and $108 million." 22 Do you remember that? 11207 1 A. Yes. Not exactly to the dollar; but 2 yes, I do recall him. 3 Q. All right. Did you believe him when he 4 told you that the assets of United Savings 5 Association of Texas in 1984 were $5.1 billion? 6 Did you accept that figure? 7 MR. VILLA: 1986. April of 1986 was my 8 question. It was the time of the Park 410 loan, 9 April of 1986. It was the state examination 10 report you put into evidence, Exhibit 7502, from 11 which I got the numbers, Your Honor. 12 MR. LEIMAN: Your Honor, if I might 13 continue with the examination. 14 MR. VILLA: Well, if you're going to 15 give a date attributed to me, I would appreciate 16 you giving the correct date. I said "As of the 17 date of the loan, April 1986, the state 18 examination report says $5.1 billion." 19 THE COURT: All right. What's your 20 question? 21 Q. (BY MR. LEIMAN) Do you know what the 22 figure was for the net asset value, the actual net 11208 1 asset value of USAT in -- for the -- at the end of 2 the first quarter in 1986? 3 A. The total assets that I had recorded 4 had 4.9 billion, but I will add there were several 5 revisions to that March '86 TFR that I saw and I 6 didn't necessarily change these original notes. 7 Q. Do you remember Mr. Villa showed you 8 some board of directors minutes in which the 9 70-million-dollar delegation also existed in 1985? 10 Do you remember that? 11 A. Yes. 12 Q. Do you know what the net assets -- the 13 assets of United Savings Association of Texas were 14 in 1985? 15 A. It ranged quarterly from a low of 16 3.9 billion in March to 4.8 billion in December. 17 Q. Now, would that have changed -- if the 18 calculation had been done as I believe was being 19 implied by Mr. Pledger in order to derive the 20 75-million-dollar -- 70-million-dollar delegation, 21 would that 70-million-dollar delegation still 22 stand up in light of the assets that you've just 11209 1 related: 3.9 billion, I believe? 2 A. 3.9 billion for a low and -- 3.9 3 billion in March of '85 for a low. 4.8 billion in 4 December '85 for a high. If the regulation 5 obviously was predicated on assets, that same 6 number wouldn't be true. But, of course, the same 7 is true for '84 because the original delegation I 8 saw was in 1984 for the same amount of money and 9 the assets were even lower at that time except for 10 year end 1984 where it was 3.9 billion. 11 Q. Do you have any reason to think based 12 upon looking over the asset values that you've 13 just looked at that Mr. Pledger actually went 14 through some kind of an arithmetic calculation in 15 order to compute a 70-million-dollar delegation in 16 1984? 17 A. I don't recall the computation being 18 mentioned as being attributed to Mr. Pledger more 19 so than anyone else. It may be late in the day 20 and I don't recall that, but perhaps if you ask 21 your question again. I was thinking about 22 Mr. Pledger's involvement in that. I just don't 11210 1 recall. 2 Q. How do you think the 70-million-dollar 3 delegation was arrived at? 4 A. Oh, I have no idea whatsoever. I saw 5 it for the first time in the 1984 board minutes. 6 I saw it carried forward to 1985 and to August of 7 1986. 8 Q. And that -- 9 A. So, I have no idea the derivation of 10 the 70-million-dollar amount. 11 Q. And how did you compute your ultimate 12 20-million-dollar figure in that regard? 13 A. It wasn't, as I think I explained 14 yesterday, a computation, formula, or a 15 percentage. It was consideration on my part of 16 the accounting convention allowed at that time, 17 disregarding the fact that the institution had no 18 tangible worth. And looking at the size of the 19 institution, I think I said it being the largest 20 savings and loan -- if my information is 21 correct -- at that time in the MSA of Houston. 22 And given the fact that it was a bit more 11211 1 arbitrary than -- well, equally arbitrary with 2 some percentage perhaps, but that was an amount 3 that I just deemed to be reasonable for the 4 maximum loan for the institution to make. And by 5 that, I mean with full board -- that wasn't a 6 delegation level I was referring to. It was a 7 maximum loan that I was referring to. 8 Q. Let's look at Exhibit A11042 at Tab 9 982. 10 A. In here? Is it up here? 11 Q. I think so. Tab 982. 12 13 (Discussion off the record.) 14 15 Q. (BY MR. LEIMAN) Do you have A11042 in 16 front of you? 17 A. Yes. 18 Q. The first two pages of this exhibit are 19 a transmittal letter dated in April nineteen -- 20 actually dated April 16th, 1987 from Daniel A. 21 Thomas, senior supervisory agent, to the board of 22 directors of United Savings Association of Texas. 11212 1 Have you seen this before? 2 A. Yes, I have. 3 Q. When did you see it? 4 A. I believe near the onset of my 5 engagement last November or December. 6 Q. What is the "as of" date shown on this 7 transmittal letter? 8 A. The "as of" date is May 27th, 1986. 9 Q. And that's for the report of 10 examination? 11 A. That was the day of -- "as of" date of 12 the examination, correct. 13 Q. What does an "as of date" mean with 14 regard to a report of examination? 15 A. That is the date selected by the 16 examining authority involved as a record date of 17 the books and records and the balance sheet, if 18 you will, statement of condition of the 19 institution. Historically, examinations have had 20 an "as of" date so you're dealing with all things 21 at the same point in time. 22 Q. As of May 27th, 1986 -- strike that. 11213 1 Look at the second page, please. Look 2 about a third of the way down the page. In the 3 first full paragraph, the sixth line down, do you 4 see the sentence beginning with "As members of the 5 board"? 6 A. Yes, I do. 7 Q. Would you read that out loud? 8 A. Yes. "As members of the board, you 9 have the responsibility to determine the true 10 condition of the association. This office is very 11 concerned that United's true condition has not yet 12 been revealed. Exacerbating our concern is the 13 questionable state of United's books, records, and 14 systems as noted in the report on" -- I believe 15 that's "Pages 24 and 25. Of further note is 16 United's history of net operating losses and its 17 dependence on non-operating income to produce 18 profits." 19 Q. Have you read that -- those sentences 20 prior to today? 21 A. Yes, I have. 22 Q. Were they significant to you in 11214 1 formulating your opinion either in connection with 2 your report or regarding your testimony? 3 A. Particularly regarding my testimony. 4 Q. How so? 5 A. On questions posed to me about did 6 examiners at the time take exception, as I have in 7 my report, to Park 410 and to Norwood. If these 8 two loans had been a problem, why were -- at least 9 Park 410 -- why was it not in the examination 10 report? Various questions to me in that regard 11 that I responded to. Consequently, it's part of 12 my testimony. The... 13 Q. I'm sorry. I missed what you said. 14 A. Well, it's just that in reading this, 15 to me, I have -- 16 THE WITNESS: Your Honor, this is 17 generally what is considered a transmittal report. 18 When you send the examination back to the 19 institution, you transmit it, the senior official 20 in that office, as in this case, describing in 21 summary detail the major problems if, in fact, the 22 institution has problems. It is the first time -- 11215 1 and I have read Federal Home Loan Bank transmittal 2 letters, Controller of the Currency, Federal 3 Reserve, state authorities, FDIC. 4 It's the first time in my recall that 5 the examining authority has stated that "This 6 office is very concerned that United's true 7 condition has not yet been revealed." And as they 8 said, as members of the board, the board has that 9 responsibility. That's not necessarily the 10 responsibility, at least to the board, of the 11 Federal Home Loan Bank of Dallas. 12 And yesterday -- I think I have a 13 partial explanation. I believe yesterday, near 14 the close of my testimony, it was pointed out that 15 I may have underestimated the number of Federal 16 Home Loan Bank examiners that were available on 17 that exam because I said maybe they didn't have 18 time, maybe they didn't have the staff. 19 It was pointed out to me that there 20 were some 2800 hours estimated spent by 17 21 examiners over a four-month period. And while 22 that sounds like a lot of numbers, a lot of hours, 11216 1 if my math is right, 2800 hours would be 70 2 examiners -- pardon me -- 70 examiner weeks. If 3 17 examiners participated and stayed right through 4 on a constant basis, I believe that would equate 5 to four weeks and one day. But I'm told it went 6 over four months, which -- apparently there was 7 some coming and going, which is not an efficient 8 way to examine an institution. You forget things. 9 You have to refresh yourself. You have to pick up 10 where you left off. And coincidentally -- and 11 there was no way I could anticipate this question 12 in my testimony the first day when asked about the 13 differences between examining in the Sixties and 14 examining in the Eighties. I believe my 15 transcript will bear out that I said and mentioned 16 the shortages in the Eighties of personnel, that 17 in the Sixties, we would send 15 to 20 people into 18 a 50-million-dollar bank. And I don't think I 19 covered duration, but we would likely have been -- 20 in that size bank at that time -- three to four 21 weeks. 22 My point is -- and I didn't really get 11217 1 to respond to it yesterday. I mean, I wasn't cut 2 off or anything, but I didn't respond to it. My 3 opinion is that 17 people for four weeks in a 4 5 billion-dollar institution with a host of 5 problems as you can tell from the transmittal 6 letter was not justice to the examination. 7 I believe that this cover letter points 8 that out, that the Federal Home Loan Bank 9 subsequent to that examination, with the 10 assistance of the state authority -- Mr. Cool, I 11 believe his name was, and his assistants -- that 12 this office is very concerned that United's true 13 condition has not yet been revealed. And that was 14 the significance, primarily, of this document to 15 me. 16 Q. (BY MR. LEIMAN) In response to one of 17 Mr. Villa's questions, you said -- reading his 18 question, "And you said you totally disagree with 19 the examiners. Right?" 20 Answer -- this is on Page 10962 of your 21 testimony yesterday. 22 "If they didn't -- well, if they had an 11218 1 opportunity to sufficiently review them in the 2 time frame involved." 3 Would these examiners have had a 4 sufficient -- strike that. 5 Would these examiners have had an 6 opportunity to sufficiently review United Savings 7 Association of Texas, a 5-billion-dollar 8 institution with the kinds of issues that are 9 shown in this transmittal letter and in this 10 report of examination, in the time allotted as 11 you've computed it? 12 A. If, in fact, the number that I was 13 given was 2800 hours and over a period of four 14 months, I would say not. That was not sufficient. 15 Q. Let's look at the examination report 16 for a minute, please. I'd like to just explore 17 with you one possible explanation as to why there 18 might not have been enough time. 19 If you would, look with me, please, at 20 Page OW089666, which is Page 6 of this report of 21 examination. And it relates to Item 8, the Couch 22 loans. 11219 1 A. All right. I see that. 2 Q. Do you see that? 3 A. Yes. 4 Q. Would you read it to yourself, please, 5 that paragraph? 6 A. (Witness reviews the document.) I have 7 read it down to "see loans to facilitate." 8 Q. What do you understand the examiner's 9 concerns to be here with regard to the Couch 10 Mortgage loans? 11 A. A very heightened degree of concern for 12 reasons I think that are discussed in this 13 write-up. The write-up is revealing outside of 14 just the Couch loans, as well. 15 Q. Why is that? 16 A. If I'm reading correctly -- if I'm 17 reading correctly, they purchased single-family 18 mortgage loans totaling 139,158,000 as of 19 June 30th. Now, I don't know if that means -- I 20 don't know at the time of this review -- I'm 21 assuming the balance was approximately that 22 amount. But I notice halfway down the write-up 11220 1 that the examiners reviewed 169 loans purchased 2 from Couch totaling 20,169,000. 3 As concerned as the examiners are about 4 these loans, it appears that they were only -- if 5 I am right -- and this is the first time I've read 6 this -- they were only able to review 169 loans 7 totaling only 20 million of a total line of 8 139 million. And examiners concerned about that, 9 if they had time, I am sure would have reviewed 10 more than 20 million out of 139 million. 11 Q. Look the first page of this exhibit, 12 A11042. And specifically, I'd like you to look at 13 the second -- 14 A. I'm lost. 15 Q. Turn to the first page and look at the 16 second full paragraph from the bottom of the page. 17 A. Yes. 18 Q. Do you see that? 19 A. Yes. 20 Q. Okay. There is a net worth calculation 21 that's been done and that's being recited here. 22 Do you see that? 11221 1 A. Yes. 2 Q. What do you understand the following to 3 mean: "With the additional adjustment to net 4 worth for specific reserves totaling $3.9 million 5 requested during the examination, United's net 6 worth as of June 30, 1986, was $14.4 million below 7 the required amount. The deficit amount totals 8 6.3 percent of net worth." 9 What do you understand that to mean? 10 A. Well, what I understand it to mean, 11 just as it says, is that because of the 12 examination, examiners believed that $3.9 million 13 should be taken in specific reserves, which is 14 tantamount to a charge-off or a total elimination 15 of the asset or a part of the asset. And it's 16 saying that United's net worth as of June 30th, 17 1986, was 14.4 million below what was required 18 under the net worth requirement. 19 Now, the deficit amounts to 6.3 percent 20 of net worth is what I'm trying to figure out. I 21 can't tell if 14.4 million is the deficit because 22 it's below the required amount and that represents 11222 1 6.3 percent of outstanding net worth. I'd have to 2 spend some time to understand really what that 3 last sentence means to me. 4 Q. Look at the second sentence in the last 5 paragraph. It says, "Specifically, management has 6 protested the inclusion of the $140 million in 7 Couch Mortgage Company loans as scheduled items." 8 Do you see that? 9 A. Yes. 10 Q. If $140 million in Couch Mortgage loans 11 had been classified, do you know what the effect 12 would have been in connection with the net worth 13 of USAT? 14 A. Well, it depends on the classification. 15 If the classification had been "loss," which would 16 have been the worst case, which is not really 17 feasible, I don't think, because these were made 18 up of numerous mortgage loans. So, a total loss, 19 I think, would be impossible. Apparently -- even 20 with the deficiencies that are listed. 21 Any significant loss out of 140 million 22 which, based on the write-up I saw and the nature 11223 1 in which the -- they came in and the quality of 2 them and the missing documentation, would 3 significantly affect the net worth of the 4 institution. 5 Q. When did you, if you remember -- I 6 don't know if you remember the exact date. 7 Do you remember when USAT did a 8 39.4-million-dollar transaction with Krasovec and 9 Minch regarding Norwood? 10 A. How much was the amount, please? 11 Q. It was a 30-million-dollar loan and -- 12 A. In June. 13 Q. And 9.4-million-dollar -- 14 A. Right. 15 Q. -- equity -- 16 A. June of '86, they made a 17 30-million-dollar loan which wasn't all new money. 18 It incorporated a loan of either 18.2 million or a 19 little over 20 million. There was a 20 2.8-million-dollar additional advance. So, I'm 21 not sure if it was 18.2 million or 21 million. 22 But in any event, there may have been 11224 1 21 million -- a 9-million-dollar additional 2 commitment plus an equity injection done through 3 UFC, a subsidiary of USAT, for 9 -- either 9.2 or 4 9.4 million. That was done -- for some reason, I 5 want to say June 2nd -- but I may be wrong -- of 6 1986. It was in June. 7 Q. Is the information you've just read in 8 connection with this particular exhibit consistent 9 with your view that United Savings Association of 10 Texas and the board of directors engaged in an 11 unsafe and unsound practice in reckless disregard 12 of the safety and soundness of the institution? 13 A. This exhibit that's contained therein 14 validates, to some extent, my already drawn 15 conclusion -- or further validates, I should say, 16 that USAT's board of directors knew or should have 17 known that the granting of loans of $80 million in 18 Park 410's case and in Norwood, a loan investment 19 of 39.2 million put the institution, USAT, at a 20 high potential for loss relative to its existing 21 capital and was an unsafe -- both of them were 22 unsafe and unsound in that regard. 11225 1 THE COURT: How much more do you have, 2 Mr. Leiman? 3 MR. LEIMAN: I expect probably about 4 another half hour to 45 minutes, Your Honor. 5 THE COURT: All right. Continue. 6 Q. (BY MR. LEIMAN) Mr. Villa asked you 7 yesterday, Mr. Stone, the following. This is on 8 Page 10847 of your transcript. 9 "The other agencies didn't issue these 10 guidelines and procedures like the Federal Home 11 Loan Bank Board. Did they regulate their 12 institutions through their general safety and 13 soundness powers?" 14 "Yes, they did." 15 Do you remember that? 16 A. Yes. 17 Q. Do you know if the Federal Home Loan 18 Bank Board and the FSLIC also regulated through 19 their general powers of safety and soundness as 20 you understand them? 21 A. Yes, I knew of enforcement activities, 22 some isolated activities that the Federal Home 11226 1 Loan Bank had taken. In other words, the mere 2 fact that they had issued more rules and 3 regulations and memoranda didn't substitute their 4 prerogatives and authorities under the enforcement 5 remedies available to them or just in determining 6 objectionable practices. 7 Q. Mr. Villa asked you some questions 8 about responsibility for what you've stated in 9 your report as unsafe and unsound conduct in 10 reckless disregard of safe and sound practices. 11 Do you remember he asked you that? 12 A. The responsibility? 13 Q. He asked you who was responsible, 14 effectively. If you'd like, I'll read you the 15 question back. 16 A. I've got the transcript. 17 Q. Turn with me, please, to Page 10824. 18 A. Okay. 19 Q. Mr. Villa said at Line 18 -- sorry. 20 You said, "Mr. Villa, I am asking -- you're asking 21 on the respondents individually, not USAT as an 22 institution. Am I correct?" 11227 1 Mr. Villa said, "That's correct." 2 Answer, "No, sir. I cannot say for the 3 respondents you mentioned that they individually 4 violated, to my knowledge, laws, regulations, or 5 orders of the Federal Home Loan Bank. That wasn't 6 a part of my report." 7 Do you see that? 8 A. Yes. Yes, I do. 9 Q. Do you believe any of the -- in your 10 opinion, were there any individuals involved in 11 this case that were responsible for engaging in 12 conduct that you've described as unsafe and 13 unsound in reckless disregard of safe and sound 14 practices? And if you can't tell me individuals, 15 can you tell me as a class or group? 16 MR. VILLA: I object to that question. 17 We're not on trial here as a class. These are 18 individuals, Your Honor. 19 MR. LEIMAN: I'm asking for his best 20 estimate, Your Honor, as to whom -- 21 MR. VILLA: I have an objection to the 22 question. The respondents are entitled to a 11228 1 decision one by one. 2 THE COURT: Let's get it individually. 3 MR. LEIMAN: If I might, Your Honor. 4 Q. (BY MR. LEIMAN) What about the board 5 of directors? 6 A. Yes, I have said that previously, that 7 because of their -- under their stewardship, the 8 two loans in question were made, given the 9 condition of United Savings Association at the 10 time the loans were made and what the reasonable 11 prospects were, because of the insider 12 implications, because of -- now what I've learned 13 even more -- on the way that the valuations were 14 received, on their underlying collateral. 15 I am very confident in saying that the 16 board of directors of USAT showed reckless 17 disregard -- in this case, both by omission and 18 co-omission -- omission in letting a lower level 19 obligate and distribute 45 -- obligate $70 million 20 and distribute 45 million without even the board 21 of directors' consideration. And by co-omission 22 for their approval of an additional $10 million to 11229 1 that same line of credit and for the Norwood loans 2 for the same reasons. 3 Pardon me. For the Norwood loans for 4 the same reasons, because the board of directors, 5 in their official minutes of the board, make no 6 mention of the Norwood loan at all as being 7 considered by them as a group. 8 Q. I'm sorry for cutting you off. Are you 9 finished? 10 A. As a group. 11 Q. Would you be including in that group -- 12 and turn with me, please, to Exhibit A11042, which 13 is at Tab 982. And I'd like you to look at 14 page -- this is the report of examination you were 15 just looking at. 16 A. Yes. 17 Q. Take a look at Page OW089661. 18 A. 661? 19 Q. Yes, sir. OW089661. 20 A. I'm there. 21 Q. Let's go through a list of people that 22 are mentioned here as directors. Heading the list 11230 1 is Jenard M. Gross. 2 Do you see that? 3 A. Yes, I do. 4 Q. And do you see in the title code next 5 to "occupation" -- 6 A. CEO and CB/O, chief executive officer 7 and chairman of the board. I assume that means -- 8 Q. I believe that's a "D" actually. 9 A. Director. All right. 10 Q. Would he be one of the people to which 11 you're referring as being responsible board of 12 directors? 13 A. If my memory serves me right, he voted 14 affirmatively on the ratification and the 15 additional $10 million on Park 410. So, yes. 16 Q. How about Barry Munitz? President and 17 trustee, and he's a director. 18 Do you see that? 19 A. Yes, I do. 20 Q. Would he be included, too, in the -- in 21 the group if he voted for this credit, Park 410 22 and Norwood? 11231 1 A. Yes. Pardon me. If he were at that 2 board meeting -- if he were at that board meeting, 3 yes, he participated in that decision. 4 Q. How about Wayne Winters? He voted 5 against it. 6 A. Yes, he did. And he -- at least, the 7 board minutes cited his objections being the size 8 of the loan and one other factor. And I believe 9 he resigned shortly thereafter. Not because of 10 that. Perhaps for another opportunity. But no, I 11 don't believe I could say that Mr. Winters, who 12 did dissent, would be listed equally. 13 Q. In your report, Mr. Stone, you mention 14 that certain officers -- well, rather than guess, 15 perhaps you should get your report out. It's 16 Exhibit T7451. 17 Do you have that? 18 A. My report? 19 Q. Yes, sir. 20 A. Yes, I do. 21 Q. On Page No. 3 of your report, you note 22 that "In approving the Park 410 and Norwood loans, 11232 1 lending officers and senior officials did not 2 employ safe and sound lending practices and the 3 board of directors did not establish or did not 4 enforce the sound loan policies and underwriting 5 standards." 6 A. Yes, that's correct. 7 Q. In E, you say "In approving the 8 Park 410 loan, lending officers and senior 9 officials did not exercise due care and the board 10 of directors did not establish or did not enforce 11 sound policies for loans to affiliated parties of 12 USAT." 13 Do you see that? 14 A. That's correct. 15 Q. Specifically, what officers -- lending 16 officers and senior officials were you referring 17 to in reaching that conclusion or, based upon what 18 you've now seen in your testimony and in reviewing 19 the testimony and in reviewing the files in this 20 case, who do you believe is -- would fall within 21 that ambit? 22 A. Well, not particularly in any rank or 11233 1 order: Mr. Graham obviously listed, Mr. Gross. 2 This Mr. Gross -- as being on the senior loan 3 committee and being involved in the approval 4 process. I believe also involved in the approval 5 process -- I may have to refer back. I believe it 6 was Mr. Crow, Mr. Williams. And I'm listing those 7 as the lending officers or senior officials. 8 Q. Anybody else, Mr. Stone, that would 9 fall within the ambit of the senior lending 10 officials? 11 A. Pardon me. I'm going to have to back 12 up. Were you referring to Item E? 13 Q. I had actually lumped them together. 14 A. Well, I don't -- 15 Q. D and E, I lumped those two together. 16 A. I'm sorry, but I don't believe we could 17 do that because I don't believe for Item E that I 18 could say that Mr. Graham was culpable for not 19 establishing sound policies because that would not 20 be his role. That is a role reserved for the 21 board of directors. 22 Now, if there are such policies that 11234 1 would extend as far as I have as far as what is 2 the official family or an insider that I have not 3 seen or been advised of and he violated that or 4 did not enforce them, then that would be a 5 different matter. 6 As far as No. E, absent anyone showing 7 me that there were some policies for those type of 8 loans, I think that only directors could be held 9 accountable for the failure to establish sound 10 policies, not anyone below the directors' level. 11 Q. Would you include anyone else? 12 A. As lending officers or senior 13 officials? 14 Q. Yes, sir. 15 A. Directors? Well, not in that 16 definition. There is another individual, but he 17 had no official role in the institution. 18 Q. Who was that? 19 A. Well, evidence available to me was that 20 Mr. Hurwitz did play an active role in the 21 granting of at least Park 410. 22 THE WITNESS: Let me rephrase that, 11235 1 Your Honor. 2 Evidence showed me that Mr. Hurwitz was 3 well aware or should have been aware of Park 410 4 prior to the March '86 action. I can recall 5 specifically -- and there are other documents 6 perhaps -- a December 30, 1985 memorandum to 7 Mr. Hurwitz, Mr. Crow, and -- Mr. Hurwitz, 8 Mr. Gross, and one other party indicating that 9 Mr. Graham had heard from the borrowers of 10 Park 410 regarding the proposal that United 11 Savings had put before them for the loan and that 12 Mr. Graham was soliciting of these people their 13 feedback, according to his note, so that he could 14 conclude the transaction and close the loan and 15 asked that they get back quickly so he could 16 respond to the borrowers. 17 There are other such documents; but 18 again, other things come to mind. I mean, 19 Mr. Hurwitz was, in fact, at the board meeting 20 where this Park 410 was approved. He did have 21 contact with the borrowers in either Norwood and 22 Park 410 or both because of notes that I have seen 11236 1 in documents, people meeting with him, borrowers 2 discussing potential loans with him. 3 So, even though he had no official 4 capacity at United Savings, he acted and 5 participated in a fashion tantamount, except for 6 the overall responsibility that goes with it. 7 Q. And that's what you were led to believe 8 by your review of the files and all of the 9 evidence that you've seen in this matter; is that 10 right? 11 A. That is correct. 12 Q. Mr. Stone, let me ask you one or two 13 final questions. 14 Mr. Eisenhart and Mr. Keeton raised 15 some questions about your former employer, 16 payment, those kinds of things. He showed you a 17 memorandum by Carolyn Buck Leiberman. 18 Is the opinion that you have given to 19 the OTS as shown in T7451, which is what you've 20 got in front of you, your honest and impartial 21 opinion? 22 A. Yes, it is. I would have no -- I have 11237 1 no continuing interest with the FDIC. 2 Q. Were you prepared to turn down this 3 engagement if you did not believe that 4 transactions that you have reviewed were unsafe 5 and unsound? 6 A. That was the oral understanding that we 7 had at the time engaged, that I was to get back to 8 you and if I didn't feel unsafe and unsound, that 9 would be the end of the engagement. 10 Q. Is your testimony here in this court 11 honest and impartial and neutral? 12 A. In all respects. 13 Q. You have no continuing interest 14 whatsoever in this litigation, do you? 15 A. I am a retiree of the FDIC, but I have 16 no -- I think even legally, the pension funds come 17 out of a different place now. But I know of no 18 conflict that I have, with the caveat I gave 19 counsel that there could be a possibility I 20 attended a board meeting in 1989 or subsequent 21 when some matter of USAT was discussed, that if 22 there is, I certainly don't recall it. My memory 11238 1 is fairly good, but it's not perfect. 2 MR. LEIMAN: I have no further 3 questions at this time, Your Honor. Thank you 4 very much, Mr. Stone. You are a respected former 5 public official and I thank you. 6 MR. VILLA: Your Honor, I have about 7 five minutes. 8 MR. LEIMAN: If I might. Excuse me one 9 second, Counsel. Perhaps we should move the 10 admission of Mr. Stone's drawing, chart. 11 MR. VILLA: No objection. 12 THE COURT: Do you have a number? 13 MR. SCHWARTZ: I'm told that the next 14 number in order is T7807, Your Honor. 15 THE COURT: All right. Received. 16 Do any of the other respondents have 17 recross? 18 MR. GRIFFITH: Yes, Your Honor. 19 MR. BLANKENSTEIN: Maybe two or three 20 minutes. 21 THE COURT: All right. Let's finish 22 then. 11239 1 Mr. Villa. 2 MR. VILLA: Thank you. 3 4 RECROSS-EXAMINATION 5 6 (4:46 p.m.) 7 Q. (BY MR. VILLA) A couple of questions, 8 Mr. Stone. 9 I gather that you believe 2800 hours 10 devoted to the examination of United in the fall 11 of 1986, spring and fall of 1986, would not be 12 sufficient because the examiners might be called 13 upon to do other things, as well; is that right? 14 A. No, no, no. That's -- I'm assuming 15 they were. I'm saying that a devotion of 2800 16 hours for a 5-billion-dollar company with the 17 conditions as we see in the exam report is totally 18 insufficient. 19 What I did say is if you look at 2800 20 hours and 17 people, I believe, assuming 40-hour 21 work weeks, that would be four hours in one day. 22 If you're referring to my question, well, that 11240 1 went over four months, I am telling you that it 2 wasn't four weeks. It wasn't 17 people dedicated 3 from start to finish. It was 17 people over four 4 months. 5 I am just saying that that is a very, 6 very inefficient way and you don't get the same 7 out of 2800 hours that way as if you do working an 8 examination from start to finish. And even then, 9 that is not enough people to satisfactorily 10 examine the institution, given its complexities 11 and size. 12 Q. Because it has other things like 13 mortgage-backed securities portfolios and real 14 estate owned and community reinvestment -- 15 A. But Couch Mortgage, I am sure, consumed 16 a lot of time and they didn't even really get to 17 cover it in depth. They only covered 20 million 18 out of 120, which is a pretty low coverage for a 19 portfolio with those characteristics. 20 Q. So, those examiners spread over all 21 these different tasks would make it much harder 22 for them to do the kind of work you'd expect at 11241 1 the FDIC; is that right? 2 A. No. 3 Q. Now, sir -- thank you for your answer. 4 THE COURT: Are you finished? 5 THE WITNESS: I don't want to hold up 6 the Court. 7 Q. (BY MR. VILLA) You said, sir, that 8 the Federal Home Loan Bank Board also had safety 9 and soundness authority. Right? 10 A. Yes, they did. 11 Q. So that the Federal Home Loan Bank 12 Board examiners would have the authority and, in 13 your view, obligation if they saw that Park 410 14 loan to be unsafe and unsound to reflect that in 15 their examination reports; is that right? 16 A. Yes, they would. 17 Q. Now, sir, you say you have no 18 continuing obligation to any of these companies. 19 Don't you -- haven't you demanded an 20 indemnity from the Office of Thrift Supervision? 21 A. Yes. I didn't demand. I asked. I 22 have only had this engagement since my retirement 11242 1 and one other. Pardon me. There were two others. 2 I have turned down far more. I am not really 3 interested in this type of work. I enjoy 4 retirement, and I wanted to be confident that if I 5 do become involved, that I don't put my own 6 personal assets at risk because I don't need the 7 income and I'd rather -- almost rather not do it. 8 But under the circumstances of this particular 9 situation, I agreed. And the other case that I 10 worked with, Rhode Island, for the state and the 11 credit unions -- over the issue of the credit 12 unions that failed in 1991, I also agreed somewhat 13 reluctantly. But I since got some appeasement 14 that as long as I render my opinion and my expert 15 opinion, case law has that I don't have that much 16 exposure. And I was given that information 17 subsequent to my concerns. 18 Q. And subsequent to obtaining the 19 indemnity. Right? 20 A. Yes, I believe so. 21 Q. You said you don't need the income. I 22 wouldn't ordinarily inquire, but are you 11243 1 independently wealthy? 2 A. No, but I have a working wife and I 3 have a pension and I have no debt and I have two 4 grown children and two young grandchildren and my 5 children are totally independent. I am 6 comfortable. I don't know your term of "wealthy," 7 but I don't believe I'd qualify for that. 8 Q. Now, Mr. Leiman asked you some 9 questions about the computation of the maximum 10 loan -- I'm sorry -- the maximum delegation. 11 Do you remember when I stood up and 12 corrected him? 13 A. Yes. I remember that. 14 Q. Do you remember, sir, that the 15 discussion we went through is that in your direct 16 examination, Mr. Leiman asked you what would be 17 the maximum delegation in your experience that you 18 had seen and you said between 35 and 50 percent of 19 the maximum loan limit of the association. He 20 asked you that on Page 10686 to 87 on the first 21 day. 22 In response to his questions, you told 11244 1 him it was 35 to 50 percent of the association's 2 maximum loan. And then what I simply did was I 3 multiplied that 35 to 50 percent against the 4 maximum loan limit of United Savings Association 5 of Texas. 6 Do you now recall how we got to that? 7 A. I don't think I really understood it 8 yesterday, but I understand you now of how you got 9 to that number. 10 Q. I never suggested that Mr. Pledger had 11 done that calculation, did I, sir? 12 A. I didn't -- (Witness shakes head 13 negatively.) 14 Q. Sir, on that chart you've done behind 15 you there, down at the bottom, it says if it's 16 totally successful, 25 percent USAT/75 percent 17 borrowers. Right? 18 A. Yes. 19 Q. Okay. As I understand it -- let's say 20 it was totally successful and the project sold out 21 for $120 million. 22 Does that mean that the borrowers get 11245 1 75 percent of $120 million and USAT gets 2 25 percent? Is that how it works? 3 A. Pardon me. One more time. I didn't -- 4 Q. Well, this chart is -- if totally 5 successful -- it says if totally successful, it's 6 got 25 percent USAT and 75 percent borrowers as 7 given by you to illustrate what an unbelievably 8 favorable arrangement this is to the borrowers and 9 how badly USAT got hurt. 10 So, my question is: If the project 11 sells out for $120 million, okay, does that mean 12 that the borrowers get 75 percent of that and USAT 13 gets 25 percent? Is that how it works? 14 A. I knew they had a kicker for 15 25 percent -- "they" USAT -- but I don't know all 16 the nuances of that. I will acknowledge if there 17 is a more involved agreement or a more involved 18 formula. 19 Q. Doesn't -- 20 A. If it's as simple as you're just 21 looking at -- 22 Q. Doesn't the borrower have to pay back 11246 1 the loan out of that 120 million? 2 A. Oh, obviously. 3 Q. Well, if it was so obvious, sir, why 4 did it take you two minutes to try to calculate 5 what percentage of 120 million came to the 6 borrowers and what percentage of 120 million came 7 to USAT? USAT gets -- 8 MR. LEIMAN: Objection, Your Honor. 9 Q. (BY MR. VILLA) USAT gets its 10 $80 million back first over the top of which 11 57 million is principal and 23 million is interest 12 and fees before we start splitting up any of the 13 profit. Right? 14 A. Well, I don't know as to -- 15 MR. LEIMAN: Your Honor, I think I have 16 an objection pending. 17 THE COURT: What is your objection? 18 MR. LEIMAN: My objection is that in 19 this connection, what Mr. Villa is doing is 20 he's -- I guess badgering the witness, telling him 21 it's taking him two minutes to make a calculation 22 on a question which is not obvious, which was very 11247 1 unclear. It was unclear to me what he was even 2 asking. 75 percent of -- 3 THE COURT: We've gotten an answer. 4 Let's move on. 5 Q. (BY MR. VILLA) Now, sir, do you 6 recall that during the course of our -- my 7 examination of you yesterday, we talked about 8 various factors in ADC loans? 9 Do you remember that? There were six 10 factors in ADC loans? 11 A. I believe that's what you had 12 displayed, yes. 13 Q. And you began reading off the factors 14 and as you read off the -- you started reading 15 off -- you got to Factor No. 1, and I said, "That 16 isn't what I'm looking for. I'd just like you to 17 review the six factors for me and tell me whether 18 or not a loan which is characterized by those six 19 factors and has no other problems is, in your 20 judgment, unsafe and unsound." 21 Do you remember that, sir? 22 A. Yes, I did. Yes, I do, and I recall 11248 1 reading them as quickly as I possibly could to 2 answer your question. 3 Q. Right. Let me hand you what's been 4 marked as Exhibit B4171. It's the regulation. 5 I'm not sure if we have one in evidence. 6 Now, sir, you began reading off the 7 factors. I interrupted you. It says -- going to 8 Page 10870 of the transcript, it says, question, 9 "Sir, I understand what the regulation says. I'm 10 asking you whether the loan described in the 11 regulation is unsafe and unsound. We know what 12 the regulation says. Let's deal with the issue of 13 whether the loan described in the regulation is 14 unsafe and unsound." 15 Answer, "I'll agree with No. 1." 16 Question, "What do you mean 'I'll agree 17 with it'?" 18 Answer, "To that extent, quote, 'the 19 borrower has title to, but little or no equity in, 20 the underlying property that exists.'" 21 Do you see that, sir? 22 A. Yes, I do. 11249 1 Q. Now, I'd like you to mark on that 2 exhibit exactly where those words are. 3 Do you see that? Would you mark that 4 for me, sir? Okay. 5 A. What do you want me to mark? 6 Q. The words that we just read, that you 7 had read into the record, "The borrower has title 8 to, but little or no equity in, the underlying 9 property that exists." 10 Do you see that, sir, right there? 11 A. Sure. 12 Q. Okay. Now, after that point, you 13 reviewed the remaining six factors -- is that 14 correct, sir -- and at the end of it you expressed 15 the opinion that a loan that was characterized by 16 those six factors was, in your judgment, unsafe 17 and unsound? 18 A. You said the remaining six factors? 19 Q. The remaining five factors. I'm 20 actually -- you don't have to reapply them now. 21 I'm just asking you whether you recall that's what 22 you did. 11250 1 A. Well, yesterday, I answered as quickly 2 as I could because, again, you insisted on a quick 3 answer. If I'm going to answer again today, I'd 4 like to read it more carefully. 5 MR. VILLA: I'll withdraw the question. 6 Q. (BY MR. VILLA) Sir, when you 7 testified in response to Mr. Leiman's question, 8 you suggested that when you had answered my 9 question, you were trying -- you were not 10 referring to the factors that characterized the 11 typical ADC loan. 12 You said, in response to Mr. Leiman's 13 question, that you were looking at some of the 14 factors that might characterize the question of 15 whether it's a loan or investment. 16 Do you remember saying that? 17 A. I thought -- I thought this document 18 that's presented -- and I hadn't seen it before 19 yesterday -- was merely describing -- and I think 20 it was described as policy -- the accounting for 21 loans that meet the definition of these six 22 factors versus what you typically see in loans. I 11251 1 may be wrong on that, but that's the way I 2 understood it. 3 Q. Sir, what I was doing and which I 4 thought you pretty clearly understood yesterday, 5 but it seemed like there might have been a little 6 muddying of the thinking during your examination 7 today. I had shown you 571.17. I actually blew 8 it up so we wouldn't have this kind of 9 controversy. 10 I pointed out to you that Paragraph C, 11 1 through 6, identifies six factors that 12 characterize ADC loans. And then I went through 13 those six factors with you, showed them to you, 14 and asked you whether that loan, a loan 15 characterized by those six factors, was an unsafe 16 and unsound loan in your judgment, and you agreed 17 to it. 18 Do you remember that that we went 19 through yesterday? 20 A. I believe that's correct. 21 Q. Okay. Finally, sir, let me show you -- 22 I don't have any additional copies. 11252 1 MR. VILLA: Your Honor, I would like to 2 introduce into the record the copy of this exhibit 3 with his -- with Mr. Stone's writing on it so it's 4 clear which set of factors he's agreed to. With 5 the Court's permission, I'll give it to 6 Mr. Langdon. 7 MR. LEIMAN: Your Honor, I object to 8 the last comment. I don't know what he agreed to 9 at all. Agreed to in what respect? 10 MR. VILLA: Referred to, Your Honor. 11 Q. (BY MR. VILLA) Finally, sir, let me 12 show you what has been -- 13 THE COURT: Received. 14 Q. (BY MR. VILLA) -- marked as Exhibit 15 -- this is a -- an exhibit that was -- it's marked 16 as T7501. It's an exhibit that was introduced 17 earlier by the OTS, and they gave us a better copy 18 of it. It's a work paper of the Federal Home Loan 19 Bank of Dallas. It's actually a work paper from 20 the Texas state examiners which was given to the 21 Federal Home Loan Bank of Dallas and produced to 22 us through the Federal Home Loan Bank of Dallas on 11253 1 the Park 410 loan. And along the sides, I'll ask 2 you if you can read that language there. 3 Do you see that, sir? 4 A. Yes, I can. 5 Q. What does it say? 6 MR. LEIMAN: Your Honor, may I -- 7 Mr. Villa? 8 THE COURT: Do you have an objection, 9 Mr. Leiman? 10 MR. LEIMAN: Yes, I do have an 11 objection. 12 THE COURT: State it, please. 13 MR. LEIMAN: If he's going to have 14 Mr. Stone read into the record statements that are 15 made in handwriting on this particular document, I 16 think he ought to investigate and lay a foundation 17 as to whether this particular witness has seen 18 this document or knows what it is. 19 MR. VILLA: Your Honor, it always comes 20 as a mystery to me why Mr. Leiman makes these 21 objections. My point is that he hasn't seen the 22 document. 11254 1 Q. (BY MR. VILLA) Sir, have you seen the 2 Federal Home Loan Bank of Dallas' comments on the 3 Park 410 loan in reaching your opinion as to 4 whether or not it is an unsafe and unsound 5 practice? Did the OTS give you this work paper 6 from the Federal Home Loan Bank of Dallas? 7 A. Your question was much more involved 8 than that. That's why I -- 9 Q. Let's start off with a simple one, 10 then. 11 Did they give you this work paper to 12 review with these comments on it prior to the time 13 that I handed it to you about 90 seconds ago? 14 A. I have seen this document before. The 15 only question I have is whose document it is. At 16 first, you said it was the Federal Home Loan Bank 17 but then I thought you said it was the state 18 authority's comments they passed along to the 19 Federal Home Loan Bank. So, I'm questioning even 20 when I reviewed it exactly whose papers these are. 21 Q. I thought you told us during your 22 questions and answers that you hadn't reviewed any 11255 1 work papers. 2 A. Oh, yes. Yesterday -- 3 Q. You reviewed examiners work papers? 4 A. I reviewed documents like this. 5 Q. I see. 6 A. They were, for the most part, either 7 copies attached to them that we've discussed here 8 today or in the last two days and a few notes such 9 as this. 10 Q. Let's see. We now have a legible copy 11 of this. Can you read that into the record, sir? 12 A. It says -- it's a parenthetical. "We 13 will pass. Weakness not material to classify," 14 but I don't know -- 15 Q. Okay? 16 A. -- the author. 17 Q. And up here. This, as well. 18 A. Yes. 19 Q. The word in the far right side. 20 A. Because it's been crossed out. 21 Q. That word. 22 A. It says "pass" which, in examiner 11256 1 terms, means "do not classify." 2 Q. Thank you. 3 MR. VILLA: No further questions. Your 4 Honor, this is the substitute version of this 5 document that we had objected to, if you recall, 6 during the earlier examination and I move now to 7 introduce this in lieu of the earlier version. 8 We'll give you the tab number, Mr. Langdon. 9 MR. LEIMAN: Your Honor, I object to 10 the introduction of the document. 11 MR. VILLA: Your Honor, they introduced 12 the document with one of their witnesses and I 13 objected saying, "You have to bring a legible 14 copy." 15 And they said, "Okay. We'll bring a 16 legible copy." 17 Now that they have got a legible copy, 18 they object to it. I understand why they don't 19 want you to read that, but I don't know that 20 that's a basis to object to the document which is 21 now legible. 22 THE COURT: What's your objection, 11257 1 Mr. Leiman? 2 MR. LEIMAN: I don't think that this 3 witness is able to authenticate what it is or 4 lay -- 5 THE COURT: We're not talking about 6 this witness now. It's a document that you put 7 in, and this apparently is a more legible copy. 8 So, why can't we put the more legible copy in? 9 MR. LEIMAN: My objection is to this 10 witness. I'll withdraw the objection, Your Honor. 11 THE COURT: Mr. Villa, on the document 12 B4171, as I understood, you wanted the witness' 13 notations on the document. If you're going to do 14 that, you'll have to make an original one for the 15 receipt of the record. The copies that we have 16 are bench copies. 17 MR. VILLA: Yes, Your Honor. I'm 18 sorry. I'll do that with this one. 19 THE COURT: All right. 20 MR. VILLA: I'll leave it in your 21 custody until the conclusion of the hearing, and 22 then I'll put it -- thank you, Your Honor. No 11258 1 further questions. 2 THE COURT: Mr. Blankenstein. 3 MR. BLANKENSTEIN: Thank you, Your 4 Honor. 5 6 RECROSS-EXAMINATION 7 8 (5:06 p.m.) 9 Q. (BY MR. BLANKENSTEIN) You've on a 10 number of occasions mentioned the fact that there 11 existed an appraisal, the Love & Dugger appraisal, 12 for the Park 410 loan as a basis for your 13 conclusion or your opinion that the Schulz loan 14 was not the product of an independent appraisal; 15 is that right? 16 THE COURT: I think you misspoke. You 17 said the Schulz loan. 18 MR. BLANKENSTEIN: Excuse me. The 19 Schulz appraisal. 20 A. Not exactly my words, but I -- I did 21 say Love & Dugger was received first. There has 22 been testimony it didn't meet the number. Schulz 11259 1 was contacted, and he was told the number to come 2 up with. That's what I said. 3 Q. (BY MR. BLANKENSTEIN) Do you know 4 whether the Love & Dugger appraisal was consistent 5 with the requirements of R-41B and, thus, proper 6 to support the Park 410 loan? 7 A. The reference I have to Love & Dugger 8 and 41B was the testimony of Mr. Charles White. 9 There's only one sentence I need to read. "While 10 at this time the appraised value that 11 Love & Dugger was indicating they would be able to 12 achieve did not come near the figure that we 13 needed on an R-41B appraisal in order to make the 14 loan." There was no indication that it was -- it 15 didn't meet the requirements of the 41B appraisal. 16 It didn't meet the requirements of the loan. 17 Q. I know that's what Mr. White said. Did 18 you conduct any investigation to determine whether 19 the Love & Dugger appraisal satisfied the 20 requirements of R-41B? 21 A. No. I saw nothing in the file to 22 indicate that it wasn't in conformance. 11260 1 Q. Before you went out and reached your 2 conclusion, this inference that you drew, you 3 didn't think it was important to find out whether 4 there might be other reasons why the Love & Dugger 5 appraisal would be insufficient or inadequate or 6 rejected in connection with the Park 410 loan? 7 You didn't think that was important. 8 Right? 9 A. Well, if it didn't reach the R -- if it 10 didn't meet the R-41 requirements, yet was at a 11 value that wouldn't justify the loan and because 12 of that, dropped, I don't know why the conformance 13 would be necessary. 14 Q. Was the loan for Park 410 done for a 15 development property? 16 A. Yes, it was. 17 Q. And the amount of the loan was as the 18 property -- it was for development purposes. 19 Right? 20 A. Building the infrastructure. 21 Q. And the appraisal in that connection 22 would have to be an as-is appraisal; is that 11261 1 correct? Excuse me. An as-developed appraisal? 2 A. Well, quite frankly, I think you'd want 3 both; but I'll leave that to an appraisal expert. 4 Q. At least it has to have the 5 as-developed value; is that correct? 6 MR. LEIMAN: Asked and answered. He 7 just said it would have to have both. 8 Q. (BY MR. BLANKENSTEIN) It would at 9 least have to have the as-developed value, 10 correct? 11 A. Correct. 12 Q. Okay. Did you examine the 13 Love & Dugger appraisal to determine whether it 14 presented an as-developed value? 15 A. In as much as it was dropped and wasn't 16 used, I don't recall that I did. I was more 17 concerned with the appraisal that was used. 18 Q. Let's take a look and see whether the 19 Love & Dugger appraisal presented an as-developed 20 value. I'm showing you what is T7143. 21 Is that the Love & Dugger appraisal, 22 sir? 11262 1 A. I don't know that it is, quote, "the 2 Love & Dugger." There may be more than one. 3 Q. Which Love & Dugger appraisal were you 4 making reference to in your report? This is one 5 that is February 12th, 1986. 6 A. I don't believe I made reference in my 7 report to Love & Dugger's appraisal. 8 Q. Well, in your testimony, which one did 9 you make reference to, if you believe there were 10 more than one? If you're looking at Mr. White's 11 testimony, I don't think it will help you on this 12 score. 13 A. I believe it has. 14 Q. Remember, my question is: Which 15 Love & Dugger appraisal were you making reference 16 to if you believe there were more than one? 17 A. I believe I was answering a question on 18 whether Love & Dugger was not used because it did 19 not comply with 41B, and Mr. White says "That 20 wasn't the reason. It was that it didn't come up 21 with a high enough amount." 22 Q. I'm asking -- my question is -- you 11263 1 made reference to a Love & Dugger report. Which 2 Love & Dugger report were you making reference to, 3 sir? 4 A. The Love & Dugger report as being 5 discussed by Mr. White in his testimony. 6 Q. Which one is that? 7 A. Let me see if he identifies it. 8 Q. So, as I understand it, you didn't 9 bother to determine that before you came to 10 testify; is that right? 11 A. I, upon learning that an appraisal had 12 been received and in the sworn testimony being 13 said "It wasn't the number we needed. We dropped 14 it. We went to get another appraisal, saw no need 15 whatsoever under those circumstances to see if the 16 dropped appraisal met regulatory requirements." I 17 mean, it's -- 18 Q. You didn't make any -- I'm sorry. Did 19 you finish? 20 A. I didn't, but let's say I did. 21 Q. You didn't make any -- you didn't 22 inquire to determine whether there was some other 11264 1 alternative explanation for the Love & Dugger 2 appraisal not being used; is that right? 3 A. I said earlier in my testimony that I 4 accepted sworn testimony at face value. 5 Q. So, the answer to my question is "no," 6 you made no other inquiry; is that right? 7 A. That is right. 8 Q. Okay. Let's take a look at whether the 9 Love & Dugger appraisal, the one that you have 10 here which is dated April -- excuse me -- 11 February 12th, 1986, provides an as-developed or 12 an as-is value. 13 Which one does it provide, sir, if you 14 can look on Page Roman Numeral IV of the report? 15 A. It says on this Page 4, "We have also 16 analyzed the appraised property using the 17 developmental approach. The developmental 18 approach assumes that the appraised property is 19 developed with streets, utilities, and drainage 20 channels, and divided into 38 tracts for resale to 21 users. The per price selling price, et cetera, 22 all expenses necessary." 11265 1 As a result of that, this -- there's 2 further sentences that describe all other 3 adjustments. 4 Q. Why don't you read the last sentence of 5 the middle paragraph on the page? 6 A. "The resultant net cash flows"? 7 Q. Uh-huh. 8 A. "The resultant net cash flows were 9 discounted at an appropriate rate and then 10 combined to provide an indication of the value of 11 the unimproved appraised property." 12 Q. So, they are providing unimproved -- a 13 value for the property as unimproved property; is 14 that correct? Just the unimproved, undeveloped 15 property? Isn't that what they are doing? 16 A. I'm not certain that's exactly what 17 they are doing. 18 MR. LEIMAN: Your Honor, Mr. Stone has 19 indicated he's not an appraiser. With that in 20 mind, I'm not sure where we're going with this as 21 to whether he can dissect the technical aspects of 22 this particular appraisal. 11266 1 MR. BLANKENSTEIN: Let me move on. 2 Q. (BY MR. BLANKENSTEIN) Did you read -- 3 do you remember Mr. Lovell? We discussed him 4 earlier today. 5 A. I don't remember him. I did read his 6 testimony. 7 Q. And did you read his trial testimony, 8 as well? 9 A. I believe that's -- 10 Q. He was called as an expert by OTS on 11 appraisals; isn't that right? 12 A. I believe that's what I read. 13 Q. And do you remember him talking about 14 the Love & Dugger appraisal at all? 15 MR. LEIMAN: Your Honor, I don't 16 remember going into anything related to 17 Mr. Lovell. I don't know what Mr. Blankenstein is 18 doing at 5:15 in the afternoon, opening up a 19 completely new area that he could have gone into, 20 I suppose, on cross-examination. It's 21 inappropriate for recross. We'll be here all 22 night. 11267 1 MR. BLANKENSTEIN: I have one other 2 question. 3 Q. (BY MR. BLANKENSTEIN) Just let me 4 read to you what Mr. Lovell said about the 5 Love & Dugger report. This is on Page 8001 and on 6 to 8002. 7 Question, "And the Love & Dugger report 8 is incomplete because it doesn't value the 9 collateral of Park 410 property at the end of the 10 loan process; isn't that right?" 11 Answer, "That's one of the defects, 12 yes. One of the things that would make -- you'd 13 have to have as an ingredient in underwriting that 14 type of loan." 15 Do you remember reading that? 16 A. Yes. I -- remember it, no; but I read 17 the testimony. 18 Q. And so, Mr. Lovell said that the 19 Love & Dugger appraisal was inadequate as -- for 20 the Park 410 loan; isn't that right? 21 A. I believe that's what you read to me. 22 Q. Right. And that's an alternative 11268 1 explanation, is it not, for why the Love & Dugger 2 report wasn't used by USAT? 3 A. If Mr. White perjured himself, I guess 4 that would be the case. 5 Q. Well, that's a possibility, isn't it? 6 MR. BLANKENSTEIN: Thank you. No 7 further questions. 8 THE COURT: Are there any other 9 questions? 10 MR. GRIFFITH: Yes, Your Honor. 11 12 RECROSS-EXAMINATION 13 14 (5:18 p.m.) 15 Q. (BY MR. GRIFFITH) Sir, I'd like to 16 return to your opinion about Mr. Hurwitz' active 17 participation in the Park 410 loan. 18 You were not an active participant in 19 that loan, were you, sir? 20 A. At the time it was made? 21 Q. Yes, sir. 22 A. I feel like I am now. 11269 1 Q. Right. 2 A. No, I wasn't. 3 Q. You realize, sir, that the active 4 participants in that loan have testified in this 5 proceeding to the Court? 6 A. The active participants testified. I 7 accept that. 8 Q. And you're not accusing any of those 9 people of misrepresenting the facts to the Court? 10 MR. LEIMAN: Your Honor, I'd ask that 11 Mr. Griffith clarify who the active participants 12 are under his definition because that's a 13 brand-new one. Mr. Stone has used the term 14 "insider family." I don't know what he's 15 referring to, who the active participants are. 16 For example, Mr. Gross hasn't been here. 17 Q. (BY MR. GRIFFITH) Some of the active 18 participants have testified in this proceeding, 19 and that is a term you used in your direct -- I 20 mean in your redirect, sir, wasn't it? 21 MR. LEIMAN: Your Honor, my objection 22 is who is he talking about? 11270 1 THE COURT: All right. Can you restate 2 the question and indicate who -- 3 Q. (BY MR. GRIFFITH) Do you recall, sir, 4 using the term "active participant" in connection 5 with Mr. Hurwitz in the examination by Mr. Leiman 6 on redirect? 7 A. I believe I said it appeared to me that 8 he may have been an active participant, and I 9 think I qualified it based on some documents that 10 I have seen. And I think I mentioned a particular 11 memorandum to him, him being listed first, asking 12 that he get back as soon as possible to the 13 author, Mr. Graham. 14 Q. Using your meaning of the term "active 15 participant," he wasn't the only active 16 participant in the Park 410 loan, was he, sir? 17 A. No, obviously. 18 Q. Okay. Using your definition of the 19 term "active participant," some of the active 20 participants in that loan have testified to the 21 Court. 22 You understand that. Right, sir? 11271 1 A. I know Mr. Graham has. 2 Q. Would you consider Mr. White an active 3 participant in the loan? 4 A. Yes. Mr. White. 5 Q. Maybe some of the appraisers? 6 A. Active participants in the decision 7 process or the formulation of the loan for the 8 decision is my terminology. 9 Q. Have you reviewed the testimony of 10 Mr. White in this case? 11 A. Yes. 12 Q. Have you reviewed the testimony of 13 Mr. Graham in this case? 14 A. Yes, I have. 15 Q. How about Mr. Kozmetsky? 16 A. I don't believe I have. I may have. 17 Q. Do you realize he was on the board of 18 directors of USAT during this time frame, sir? 19 A. I may have, but -- 20 Q. If he was, would you consider him an 21 active participant in the Park 410 -- 22 A. If he was a board member? 11272 1 Q. Yes. 2 A. Yes, I would. 3 Q. How about Mr. Whatley? Did you review 4 his testimony in this case? 5 A. I don't recall. 6 Q. You understand he's a member of the 7 board of directors of USAT during this time frame. 8 Right, sir? 9 A. Yes, I do. 10 Q. And as a result, he'd be an active 11 participant in the Park 410 loan. Right, sir? 12 A. If he was at the meeting and voted, 13 yes. 14 Q. What about Gerald Williams? Was he an 15 active participant in your understanding of that 16 term, sir? 17 A. I believe so. 18 Q. Did you review his testimony in this 19 case about the Park 410 loan? 20 A. I believe I reviewed -- it's all 21 running together. So many depositions and as many 22 testimonies. I really can't recall at this point. 11273 1 Q. His testimony about who the active 2 participants were in that loan would be relevant 3 in determining who the other active participants 4 in that loan would be, wouldn't it, sir? 5 A. Please, the question again. 6 Q. His testimony about who participated in 7 the decision making regarding the loan of Park 410 8 would be relevant to trying to figure out who were 9 the other participants in that loan? 10 A. Well, I don't think that I was at any 11 loss in determining who were active participants 12 based on a large amount of information made 13 available to me. I didn't -- I don't know that, 14 unless there was some secret participant, that I 15 am unaware -- or plural -- that escaped all 16 documentation, I believe I am well aware after 17 looking at thousands of documents of two 18 individual loans who were active participants in 19 them. 20 Q. I haven't asked you about any secret 21 participants, sir. I'm asking you whether 22 Mr. Williams' testimony would be relevant about 11274 1 who the active participants were in the Park 410 2 loan. 3 A. I'll answer the same. Perhaps it could 4 be. But for, again, with the documents I went 5 through, it would have had to have been someone 6 secret that's going to be a real surprise to me to 7 be added to that list. 8 Q. What about Mr. Winters? Did you review 9 his testimony, sir? 10 A. Yes, I did. 11 Q. Okay. He was an active participant in 12 the decision-making process? 13 A. Yes. He objected to the loan. 14 Q. But was he an active participant in the 15 loan, sir? 16 A. An active participant? Yes. I would 17 say as a board member, he was active in that he 18 used his own independent judgment and voted no. 19 Therefore, he was not passive. He took an 20 active -- not affirmative, but an active role in 21 the decision-making process as a director. 22 Q. And you're not accusing any of those 11275 1 people that we've just listed of misrepresenting 2 the facts to the Court in testifying about who the 3 participants were in the Park 410 loan, are you, 4 sir? 5 MR. LEIMAN: I object, Your Honor. 6 He's not accusing anybody of anything. 7 THE COURT: We'll let the witness 8 answer. 9 A. I have made no accusations of any 10 deponent or anyone giving testimony. 11 Q. (BY MR. GRIFFITH) I want to take you 12 back to that May '86 board of director meeting 13 minute in which you noted that Mr. Hurwitz was 14 reflected as having seconded a motion -- 15 A. Yes. 16 Q. -- regarding the financial statements 17 being approved. 18 Do you recall that, sir? 19 A. I don't recall -- 20 Q. What the substance of the motion was? 21 A. -- what the motion was. But, yes. 22 Q. Assuming the minutes were accurate and 11276 1 Mr. Hurwitz seconded a motion, would you be 2 critical of him if he had actually voted in favor 3 of that motion? 4 A. I would just again object for reasons 5 it may have been discussed before you arrived. I 6 didn't observe you earlier -- 7 Q. I'm the secret participant. 8 A. I believe it is inappropriate for a 9 non-officer, non-director, one, to sit in on a 10 board meeting; two, much more to take an active 11 part not only in a board meeting but in which 12 loans are made by the institution, having 13 communication with the individual members, 14 involved with friends and common business 15 associates, attending savings -- pardon me -- 16 senior loan committee minutes or meetings and not 17 yet have any official role with the insured 18 institution that he is exerting as much influence 19 over attending official meetings without 20 credentials or -- well, I won't say 21 qualifications. Without credentials. 22 I have had situations in my experience 11277 1 in problem bank situations and, in some cases, 2 more serious where I've been told that a 3 particular director's attorney is going to be 4 present at the board meeting and I have had to 5 enforce the rule. They have no standing. They 6 are not retained by the institution. They don't 7 represent the institution. They represent an 8 individual. 9 I believe earlier, counsel for the 10 respondents -- I forgot who -- said, "Well, don't 11 you think it's legitimate Mr. Hurwitz would be in 12 the institution protecting his interests because 13 of the interest in the holding company?" And I 14 said, "That's exactly another problem." It's a 15 conflicting interest because the owner -- and Lord 16 knows, we have learned as regulators for many, 17 many years, all of us, the Federal Home Loan Bank, 18 the OCC, the fed, FDIC, that owners' interests are 19 not always -- do not always coincide with the 20 institutions they own. History is replete -- case 21 histories are replete with that conflict of 22 interest. Much less, to be an active participant 11278 1 in the affairs in a non-official role. 2 Q. Let me return to my question. 3 A. I thought I was answering it. 4 Q. No. Would you have been as critical of 5 Mr. Hurwitz if he had voted in favor of that 6 motion that you are critical of him for seconding? 7 A. I'll answer in the same fashion. He 8 had no role at that meeting. Regardless of what 9 he voted for, regardless of what motion he made, 10 he had no standing. He had no legal 11 responsibility as a director, yet he was 12 discussing the affairs of that institution at the 13 board of directors as if he were an equal or 14 perhaps even more equal participant with other 15 directors. So, yes, to answer your question. 16 Q. And I assume you would be as critical 17 of Mr. Hurwitz if he had voted "no" on the 18 Park 410 loan? 19 A. I -- 20 MR. LEIMAN: May I ask in what capacity 21 Mr. Griffith is referring? Voted in his capacity 22 as having no capacity or in his capacity as being 11279 1 the UFG director or as the head of MAXXAM? What 2 are we talking about? 3 MR. HEAD: That's the answer I need, 4 Your Honor. I'll withdraw my question. 5 THE COURT: Do you have any more 6 questions? 7 MR. GRIFFITH: No, sir. 8 THE COURT: Thank you. 9 MR. EISENHART: I have just a couple, 10 Your Honor. 11 12 RECROSS-EXAMINATION 13 14 (5:31 p.m.) 15 Q. (BY MR. EISENHART) I'm going to have 16 to walk up here. I can't remember the exhibit 17 number of this, and my eyesight isn't good enough 18 to see it. 19 T7807, Mr. Stone, is your chart. There 20 are a couple things that you have left off of your 21 chart, I think. There was $10 million in 22 collateral that was posted, wasn't there, in the 11280 1 form of letters of credit? 2 A. Oh, pardon me. Down here on the -- 3 pardon me -- the loss side, this 25 percent -- I'm 4 glad you mentioned that because on this 25 percent 5 saying they would lose 25 percent and the 6 75 percent, it's good you mentioned this because 7 this 25 percent is the guaranty, half of which is 8 letters of credit. 9 Now, in many documents, when they refer 10 in the bank's documents to this guaranty, they say 11 $20 million, which is 25 percent of this. 12 However, in a subsequent 13 interpretation, legal interpretation of what that 14 guaranty really was, I can use -- it ended up that 15 if the principal -- 25 percent of the principal as 16 it may be reduced from time to time. And that 17 includes if they resorted to collateral and sold 18 the collateral. 19 So, in the following example, if that 20 interpretation is correct -- and I'll qualify 21 that. If that interpretation is correct and let's 22 say USAT was foreclosed and Park 410 was 11281 1 foreclosed and they realized 40 million. And 2 let's assume the balance, even though it was never 3 fully disbursed, was 80 million. They, according 4 to that legal opinion they received, would deduct 5 40 -- have a 40-million-dollar deficiency, and the 6 guarantors would only be responsible for 7 25 percent. 8 So, only their letters of credit -- 9 that would be all that they would lose in that 10 situation, not the bank -- USAT did not have 11 $20 million worth of protection if that legal 12 interpretation is correct. 13 But back to my original point. I 14 conceded half of this, most of this, and said 15 limited guaranties is guaranties of 25 percent 16 versus 75 percent risk borne by the institution. 17 Q. On your chart, the $10 million should 18 go up onto the "out" column, should it not, since 19 they had to put that up? 20 A. No. Absolutely not. Where is my 21 marker? Absolutely not. What happened is these 22 borrowers didn't put up one penny. They went out 11282 1 to get, from other institutions, letters of credit 2 which the bank in its -- 3 MR. BLANKENSTEIN: Your Honor, I don't 4 think he should write on that chart since it's 5 been admitted into evidence. 6 THE COURT: Okay. I don't think so. 7 THE WITNESS: I won't. 8 A. Out of the proceeds of this loan, when 9 the borrowers went out to get their letters of 10 credit under their guaranty, they didn't even have 11 to pay the fee for the damn letters. These guys 12 paid it. I mean, it was ridiculous. They are 13 supposed to guaranty -- the requirement was to 14 come up with $10 million letters of credit. But 15 then the guarantor said, "Can't take it out of my 16 pocket. You're the guys with the big pocket. 17 I'll go get it and you reimburse my fees." 18 So, that's exactly what -- 19 MR. SCHWARTZ: Your Honor, because this 20 is relevant to his explanation of the chart, I 21 would propose that we allow him to mark -- just 22 use a different color so that it's clear which is 11283 1 the additional. 2 THE COURT: Let's leave it and move on. 3 MR. EISENHART: I have no interest in 4 marking the chart in blue or anything else, Your 5 Honor. 6 Q. (BY MR. EISENHART) Mr. Stone, as I 7 understand it, you are critical of any director 8 who voted in favor of the Park 410 loan and you 9 say that any director that voted in favor of that 10 loan abdicated his duty as a director? 11 A. No. That's not -- I am saying because 12 the directors -- there is a whole host of reasons. 13 But because the directors that we're mentioning 14 had no problem and didn't see a problem with 15 administering the affairs which they were charged 16 with of USAT, saw no problem in meeting quarterly, 17 saw no problem -- abdication, to me, is the 18 delegation, abdication of the 70 million, 19 abdication is meeting only quarterly. Let the 20 staff run the show. The voting on the loan is 21 part abdication and part, to me, reckless 22 disregard because voting on the 70 million is -- 11284 1 they didn't vote on the 70 million. $45 million 2 of this loan -- 3 Q. Mr. Stone, before you get -- 4 A. -- was out of the bank. 5 Q. Before you get too worked up, I think 6 you're forgetting my question. 7 A. No, I'm not. 8 Q. My question was: Are you critical of 9 each of the directors who voted on the loan? That 10 does not require a speech. That requires a simple 11 "yes" or "no" answer. 12 A. I'll say "yes" to that. 13 Q. Okay. So, if I were to go down the 14 list of directors other than those that you've 15 already mentioned, we would talk about Gerald 16 Williams, L.L. Duckett, James Whatley, Stephen 17 Silverman, Barry Sterling, George Kozmetsky, 18 Charles LeMaistre, and Edward Keltner. 19 To the extent each of those directors 20 was present when the loan was approved and voted 21 in favor of it, you would be critical of each of 22 them? 11285 1 A. Unless there is other information I 2 haven't seen -- I'm relying on the minutes of that 3 board as being reflective of the meeting -- yes, I 4 would be equally as critical. 5 Q. Okay. None of them has been charged in 6 this case, have they? 7 A. That wasn't a basis for my decision. I 8 didn't custom make an opinion. 9 Q. Let me ask you -- just let me talk to 10 you about just one other area, Mr. Stone. When I 11 asked you questions before, we had established, I 12 think, that you had never been an expert witness 13 before, that you hadn't published any leading 14 treatises on this area of banking regulation, that 15 you didn't hold any prominent university chairs or 16 anything of the sort that would give you academic 17 disability in this area. 18 I think we had agreed that all that was 19 accurate; is that correct? 20 A. Yes. 21 Q. How did the OTS lawyers come to select 22 you as their expert in this case? Do you know? 11286 1 A. As unqualified as I am, they -- 2 Q. I made no such representation. I 3 merely asked if you knew. 4 A. The exact way that it happened, I got a 5 call from a former associate friend of mine. I 6 hadn't seen him in a while. Jim Sexton. Jim 7 Sexton at that time was a consultant with 8 Bracewell Patterson. I believe Bracewell is out 9 of Austin. I'm not sure. Maybe they have other 10 offices. And Jim formerly held the director of 11 supervision position that I held at the FDIC. He 12 was never executive director, the higher position, 13 because we didn't have it at the time. He then 14 moved on to the Commissioner of Banks-Texas and 15 then consultant at Bracewell Patterson. 16 He had -- he called me to say that he 17 had been retained by OTS. But as he got through 18 the materials, he ran across the name Bracewell 19 Patterson and felt that he was conflicted out and 20 told me that OTS needed someone to fill in his 21 shoes, asked if I might have an interest, and he 22 said time was a problem. And I agreed, and I 11287 1 guess he told them. They, in fact, did call me. 2 Q. So, it was through -- basically through 3 your FDIC connections then or through a former 4 colleague of the FDIC? 5 A. Jim hasn't been with the FDIC for 6 probably 15 years. 7 MR. EISENHART: Okay. That's all. 8 Thanks. 9 THE COURT: Are we through? 10 MR. LEIMAN: Your Honor, I think I just 11 have one question. 12 THE COURT: Do we still have the 13 reporters? 14 15 REDIRECT-EXAMINATION 16 17 (5:40 p.m.) 18 Q. (BY MR. LEIMAN) Mr. Blankenstein 19 asked you some questions about the Love & Dugger 20 appraisal and which appraisal it was. 21 Do you remember that question? 22 A. Yes, I do. 11288 1 Q. You weren't able to definitively tell 2 them exactly what it was that you looked at or 3 hadn't looked at. You referred to Mr. White. 4 Do you remember that? 5 A. Yes, I did. 6 Q. Okay. Even if the opinion that he 7 referred to, the Love & Dugger opinion, was in 8 some manner technically incomplete, would that 9 make a difference as to your opinion with respect 10 to the appraisal problems in connection with your 11 opinion in this matter? 12 A. Oh, no. None whatsoever. 13 MR. LEIMAN: I don't have anything 14 else, Your Honor. 15 THE COURT: Thank you, Mr. Stone. You 16 may step down. 17 THE WITNESS: Thank you. 18 THE COURT: We'll adjourn until 19 9:00 o'clock tomorrow. 20 21 (Whereupon at 5:41 p.m. 22 the proceedings were recessed.) 11289 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 17th 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 11290 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 17th 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