8852 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 12-4-97 22 8853 1 A-P-P-E-A-R-A-N-C-E-S 2 ON BEHALF OF THE AGENCY: 3 KENNETH J. GUIDO, Esquire Special Enforcement Counsel 4 PAUL LEIMAN, Esquire (Not present) SCOTT SCHWARTZ, Esquire (Not present) 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 (Not present) of: Mayor, Day, Caldwell & Keeton 20 1900 NationsBank Center, 700 Louisiana Houston, Texas 77002 21 (713) 225-7013 22 8854 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 (Not present) 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 8855 1 2 EXAMINATION INDEX 3 4 Page 5 JAMES WOLFE Examination by Mr. Guido.................8856 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 8856 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:00 a.m.) 3 THE COURT: Be seated, please. The 4 hearing will come to order. 5 MR. NICKENS: Mr. Wolfe, I believe, is 6 going to be the first witness. 7 8 JAMES WOLFE, 9 10 called as a witness and having been first duly 11 sworn, testified as follows: 12 13 THE COURT: Be seated, please. 14 15 EXAMINATION 16 17 18 Q. (BY MR. GUIDO) Good morning. Will 19 you please state your full name for the record? 20 A. James Lawrence Wolfe. 21 Q. Where are you employed? 22 A. First American Bank Texas, in Bryan, 8857 1 Texas. 2 Q. And how long have you been employed in 3 that position? 4 A. Since August of '89. 5 Q. And what did you do prior to August of 6 '89? 7 A. I worked at a company called Property 8 Company of America in Tulsa, Oklahoma, from, I 9 believe, April until August of '89. April of '89 10 until August of '89. 11 Q. And prior to April of '89, where did 12 you work? 13 A. At the Bank United. 14 Q. And how long did you work there? 15 A. From January of '89 until April of '89. 16 Q. And prior to that, where did you work? 17 A. At United Savings. 18 Q. When did you first start at United 19 Savings? 20 A. I believe it was either March or April 21 of 1984. 22 Q. Now, in your present position, what are 8858 1 your responsibilities or what is your title? 2 A. My title is chief financial officer. 3 Q. And when you were at the property 4 company between April and August, what was your 5 title? 6 A. Controller. 7 Q. And at Bank United from January '89 8 through April of '89 or March of '89, what was 9 your position? 10 A. Controller. 11 Q. And at USAT, what was your position? 12 A. Controller. 13 Q. Now, what is your educational 14 background post high school? 15 A. I went to Baylor University and 16 graduated in '73, with a BBA in accounting. 17 Q. Are you a CPA? 18 A. Yes, sir. 19 Q. And in your position now as chief 20 financial officer, does the controller report to 21 you? 22 A. Yes, sir. 8859 1 Q. And does the treasurer report to you? 2 A. Yes, sir. 3 Q. Now, why did you leave Bank United? 4 A. To take the job at Property Company of 5 America. 6 Q. Now, Bank United, was that the 7 successor institution to United Savings 8 Association of Texas? 9 A. Yes, sir. 10 Q. And who was the chairman of that 11 company? 12 A. I'm sorry. Could you repeat -- 13 Q. Who was the chairman at Bank United at 14 the time you left, chairman of the board? 15 A. I'm not sure, but I believe Louis 16 Ranieri. 17 Q. Who was the chief operating officer? 18 A. I don't recall. 19 Q. Now, you say you left United Savings 20 Association in the end of 1988 or the beginning of 21 1989. 22 Why did you leave United Savings 8860 1 Association of Texas? 2 A. It failed. I don't know that I left. 3 I mean, it no longer existed. 4 Q. Did some people leave United Savings 5 Association of Texas at the time it failed? 6 A. Yes. 7 Q. Were some people asked to leave United 8 Savings Association of Texas when it failed? 9 A. My understanding, yes. 10 Q. Was Michael Crow one of those people? 11 A. It's my understanding he was asked by 12 the -- I guess the OTS to leave. 13 Q. Was that Mr. Neil Twomey? 14 A. I don't recall. 15 Q. And was it the OTS at the time or the 16 Federal Home Loan Bank Board at the time? 17 A. To me, they are sort of one and the 18 same. I'm not really sure. 19 Q. Now, did you have any meetings with the 20 representatives of the Federal Home Loan Bank 21 Board at the time that USAT was closed to review 22 your job performance? 8861 1 A. Are you referring specifically, I 2 guess, to the day or the night that it was closed 3 down? 4 Q. Shortly thereafter. 5 A. I recall being talked to by someone -- 6 and I'm not exactly sure who they represented -- 7 telling me what had happened. But I really 8 don't -- I don't remember the details. I don't 9 recall discussing my job performance. 10 Q. Do you recall having any discussions 11 with anyone at the time that USAT was closed about 12 whether or not you would be retained in the 13 successor entity? 14 A. No. I don't specifically recall. I do 15 know that -- I do recall finding out that people 16 were not going to be retained, and I don't recall 17 specifically talking to anybody saying that I was 18 going to be retained. But I guess I did because I 19 came in to work the next week. I think the 20 Ranieri people were present in those meetings, 21 whoever it was. 22 Q. Well, how did you come to be employed 8862 1 by Bank United after USAT failed? 2 A. Specifically, I don't know exactly how 3 to answer that question other than I'm sure that I 4 must have talked to someone with the Ranieri 5 organization and they told me that I still was 6 employed or would be employed by the new 7 management or the new company. 8 Q. Now, you left shortly thereafter, I 9 think in April of '89 you testified? 10 A. Yes, sir. 11 Q. Did the people from Bank United 12 indicate to you that they had any views of your 13 performance prior to your departure? 14 A. I don't recall any specific 15 conversations as to my performance, but Lou 16 Ranieri asked me not to leave. 17 Q. And when did that occur? 18 A. I guess in April when I left. 19 Q. Who did you notify at Bank United that 20 you intended to leave? 21 A. I don't recall specifically, but I 22 would guess Mr. David Golash or Golash. 8863 1 Q. Who was he? 2 A. He was the on-site representative of 3 the Ranieri companies, Hyperion, I believe. 4 Q. Now, when you were told or asked not to 5 leave by Mr. Ranieri, did you have any discussions 6 with him about your salary? 7 A. I don't recall. 8 Q. Why was it that you left and joined 9 that property company that you just testified to? 10 A. I guess several reasons. One, I was 11 not part of the new regime. I was from the old 12 regime, the old regime being the United people. 13 So, I did not feel particularly comfortable as to 14 what my long-term future would be there. Two, I 15 had recently had a -- or my wife had a baby boy 16 and we did not necessarily want to stay in the 17 Houston area and raise him in this town. And we 18 left. 19 Q. Who recruited you for the property 20 company that you went to work for? 21 A. Mike Crow. 22 Q. Michael Crow did? 8864 1 A. Uh-huh. (Witness nods head 2 affirmatively.) 3 Q. And was he working for that company at 4 the time? 5 A. Yes, sir. 6 Q. You stayed there from April, I think, 7 until August? 8 A. That's correct. 9 Q. Why did you leave in August from that 10 company? 11 A. The company was a joint venture, and 12 I'm trying to remember the name. It was a joint 13 venture between VMI Xerox or VMS, a real estate 14 company out of Chicago. And by the time that I 15 had gotten there, which -- well, I say "by the 16 time." In May, those two entities had filed suit 17 against each other and were not getting along. 18 And so, I decided that maybe this deal was not 19 going to work out. So, I decided to leave. 20 Q. And you then took your present 21 position? 22 A. That's correct. Well, no, sir. 8865 1 Q. Pardon? 2 A. I went to work at First American Bank 3 as controller. 4 Q. And then you subsequently became the 5 chief financial officer? 6 A. Yes. 7 Q. Now, what sort of investments does the 8 First American bank make? What sort of assets 9 does it hold? 10 A. We have approximately 80 percent of our 11 assets are in loans, and -- I don't know -- 12 10 percent in securities, and the rest in other 13 miscellaneous assets. 14 Q. What sort of securities? 15 A. Primarily CMOs and REMICs. 16 Q. Now, are those similar to the 17 instruments that were held at USAT in its 18 mortgage-backed security portfolio? 19 A. My recollection of the assets at United 20 Savings were that they were more mortgage-backed 21 securities than CMO securities, that most of our 22 CMOs, if not all, are backed by either 8866 1 mortgage-backs or whole loans. 2 Q. Now, prior to joining USAT, what 3 positions did you hold? 4 A. I went to work at -- when I got out of 5 school, I went to work at Peat Marwick here in 6 Houston and stayed there for -- from '74 until 7 '84. 8 Q. Now, during that time period, had you 9 done any audits of savings and loans? 10 A. Primarily, that's all I had done. That 11 and mortgage banks. 12 Q. And mortgage -- pardon me? 13 Mortgage-backs or banks? 14 A. Banks. 15 Q. What are you referring to when you say 16 "mortgage banks"? Mortgage lenders? 17 A. Yes, where they don't retain mortgage 18 loans for portfolio. They just originate them and 19 sell them to permanent investors. 20 Q. And savings and loans. Was USAT one of 21 those savings and loans? 22 A. Yes, it was. 8867 1 Q. And were you an engagement partner for 2 any accounts for savings and loans? 3 A. No, sir. 4 Q. Were you a senior manager on any of the 5 audits of savings and loans? 6 A. Yes, sir. 7 Q. And who asked you to join USAT as 8 controller? 9 A. Mike Crow. 10 Q. Is he the person that first approached 11 you and asked you whether you were interested? 12 A. Certainly from USAT. I'm unclear as to 13 whether Rick Millinor, who was the partner on the 14 job, advised me that they wanted to speak with me 15 regarding the job. I'm not sure of the exact 16 order of who told me first. 17 Q. And you started as the controller of 18 USAT? 19 A. Yes, sir. 20 Q. Now, when Mike Crow met with you when 21 you were discussing joining USAT, did he discuss 22 with you any particular problems at USAT that he 8868 1 wanted you to help address as controller? 2 A. I don't recall any specifics of our 3 conversation, no, sir. 4 Q. Now, as controller of USAT, what were 5 your responsibilities? What did they include? 6 A. Primarily, preparation of the internal 7 and external reports, financial reports. 8 Q. Let's start with the external reports. 9 Were you responsible for preparation of the 10 financial information that went into 10K reports? 11 A. Yes, sir. 12 Q. Were you responsible for the 13 preparation of the financial information that was 14 included in 10Q reports? 15 A. Yes, sir. 16 Q. Were you responsible for the financial 17 information -- preparation of the financial 18 information that went into what I think are called 19 thrift financial reports? 20 A. Yes, sir. 21 Q. Were you responsible for the 22 preparation of the financial information that went 8869 1 into the director's proof lists at USAT? 2 A. I'm not familiar with that term. 3 Q. Were you responsible for the 4 preparation of the financial information that went 5 into the consolidated transactions lists at USAT? 6 A. Those specific terms don't ring a bell. 7 Q. Were you responsible for the 8 preparation of the financial information that went 9 into the performance reports that were sent to 10 management? 11 A. Yes, sir. 12 Q. And who did you work with in the 13 preparation of the performance reports? Who did 14 you work with? Other people outside of the 15 controller's office. Who did you work with in 16 preparation of the performance reports? 17 A. Could you tell me what you mean by 18 "performance report"? 19 Q. There were monthly performance reports 20 that were prepared internally at USAT, were there 21 not? 22 A. Yes, sir. 8870 1 Q. Okay. Those are the performance 2 reports I'm -- 3 A. Not -- Bruce Williams and I worked on 4 the information that was contained in the 5 performance report. I'm -- I do not recall 6 specifically which reports that he worked on or I 7 worked on. But primarily, I would work on the 8 balance sheet and the income statement and I 9 believe Bruce, for the most part, prepared the 10 memo that would be in front of it and some of the 11 other reports. It just depends on what 12 specifically you're referring to. 13 Q. Well, I'll get to that as we go through 14 your testimony. I just wanted to sort of lay the 15 foundation at this point in time, if that's all 16 right. 17 The -- were you responsible, do you 18 recall, for preparation of any of the schedules 19 that were attached to the performance report? 20 A. I don't recall any specifically, but I 21 certainly could have been. 22 Q. Now, besides Bruce Williams, did you 8871 1 work with anyone else in the preparation of the 2 performance reports? 3 A. I would have most likely worked with 4 anyone in the association that would have relevant 5 information. It's not only preparation but 6 accumulation of information. 7 Q. Well, for example, did you work with 8 anyone from the investment department in the 9 preparation of the performance report? 10 A. I'm sure that I did. 11 Q. The -- how many people were in the 12 accounting department when you first joined USAT? 13 A. According to a memo that I wrote, 51. 14 Q. Pardon? 15 A. According to a memo that I have seen 16 that I wrote, 51. 17 Q. Now, you say that you have seen a 18 memorandum. Has anyone provided you with any 19 information prior to your testimony today? 20 A. Yes, sir. 21 Q. Who? 22 A. You. 8872 1 Q. Anyone else? 2 A. No. 3 Q. What did I provide you? 4 A. You provided me with a copy of my 5 deposition that I made a couple years ago, I 6 believe, and the exhibits that were referenced in 7 that deposition. 8 Q. Did I show you any other documents? 9 A. You showed me some documents last night 10 that I had not seen prior to that, yes. 11 Q. Have you seen any other documents other 12 than the documents that I provided you last 13 night -- 14 A. No, sir. 15 Q. -- or those that I had sent to you 16 previously? 17 A. That's correct. 18 Q. Now, were you responsible for 19 determining whether USAT -- or making the 20 calculations to determine whether or not USAT met 21 its minimum net worth requirements? 22 A. Was I responsible for that? 8873 1 Q. Uh-huh. 2 A. For the calculation? I do not recall 3 being specifically responsible for it; but based 4 upon the documentation that I've seen, I certainly 5 did that, yes, sir. 6 Q. Did you -- were you responsible for the 7 calculations to determine whether or not USAT met 8 the direct investment limitations in the Federal 9 Home Loan Bank Board regulations? 10 A. Yes, sir. I would have been involved 11 in gathering the financial information as it 12 related to that. 13 Q. Were you responsible for developing the 14 calculations to determine whether or not USAT fell 15 within the liability growth regulations of the 16 Federal Home Loan Bank Board? 17 A. I'm sorry. Could you repeat that 18 again? 19 Q. Were you responsible for developing the 20 calculations to ascertain whether USAT fell within 21 the liability growth limitations of the Federal 22 Home Loan Bank Board? 8874 1 A. Yes, sir. 2 Q. Were you the person within USAT who was 3 viewed as the resource to turn to regarding the 4 accounting issues that might be encountered with 5 regard to the liability growth limitation? 6 A. As far as accounting, yes. But the -- 7 as far as an interpretation of the regulations, 8 no. 9 Q. Who was responsible for the 10 interpretation of the regulations? 11 A. That was handled by legal counsel 12 either internal or externally. 13 Q. And who were the legal counsel 14 internally who were responsible for those matters? 15 A. Depending upon, I guess, the time 16 frame, it would have either been Jim Pledger or 17 Art Berner. 18 Q. Now, with regard to the minimum net 19 worth requirements, who was responsible for the 20 interpretations of the regulations within USAT? 21 A. I'm not sure I would name a specific 22 person responsible for it. I mean, I certainly 8875 1 did -- you know, filed whatever regulatory forms 2 were on there. 3 Q. Now, did you report to the chief 4 financial officer of USAT? 5 A. Yes, sir. 6 Q. And who was that? 7 A. Mike Crow. 8 Q. And was he the CFO at all times while 9 you were there? 10 A. Yes, sir. 11 Q. And Bruce Williams, was he the 12 treasurer while you were there or at least for a 13 portion of the time that you were there? 14 A. Bruce and I were hired within months, I 15 believe, of each other. But I'm not sure who was 16 there first. 17 Q. Okay. Now, did you sit on any 18 committees of USAT? 19 A. Yes, sir. 20 Q. What committees? 21 A. The internal audit committee, I 22 attended those meetings. I'm not sure whether or 8876 1 not I was an actual member, but I did attend them. 2 Q. And what was the internal audit 3 committee? 4 A. It was a committee that dealt with -- 5 as far as I was concerned -- with reports from the 6 internal -- well, not as far as I was concerned. 7 I had no responsibility. But the internal 8 auditors, when they did their examination and 9 their reviews, made their presentation at that 10 committee; and that committee also was the liaison 11 or the one that dealt with the outside auditors, 12 Peat Marwick. 13 Q. Now, who were the internal auditors at 14 USAT? 15 A. By name? 16 Q. Was it a group of people? 17 A. Yes, sir. 18 Q. Did they report to you? 19 A. No, sir. 20 Q. Who did they report to? 21 A. Initially, they reported to Mike Crow. 22 But subsequent to that, I believe they started 8877 1 reporting to someone else; but I don't recall who. 2 Q. Now, who was the head of the internal 3 audit team? 4 A. Initially, it was Mike Kanat and then 5 later, it was Walter Saunders. Those are the two 6 names that I remember. There may have been 7 others. 8 Q. Was Russ McCann one of the internal 9 auditors? 10 A. No, sir, not that I recall. 11 Q. Who was Russ McCann? 12 A. Russell McCann worked in the treasury 13 area and reported to Bruce Williams. 14 Q. He didn't report to you? 15 A. No, sir. 16 Q. Was he a CPA? 17 A. I'm not sure, but I believe he was. 18 I'm not positive. 19 Q. When did he join USAT? 20 A. I don't recall. 21 Q. It was sometime after you were there, 22 however? 8878 1 A. Yes, sir. 2 Q. And did he have any responsibility for 3 accounting issues in relationship to the liability 4 growth limitation regulations? 5 A. I don't know of any specifically, but 6 he may have been involved in them. I don't 7 recall. 8 Q. Now, did you sit on any other 9 committees other than the internal audit committee 10 at USAT? 11 A. I don't recall any specific committees. 12 I know there were -- I attended meetings -- like, 13 there was a real estate committee and I think 14 there was -- there might have been an 15 asset/liability committee. But I don't recall 16 specifically whether or not I was a member of any 17 of those. 18 Q. Well, let's take the real estate 19 committee. Who was the chairman of that 20 committee? 21 A. I don't recall. I don't recall. 22 Q. Did you attend that meeting on a 8879 1 regular basis? 2 A. I don't recall. I mean, I know there 3 was a committee that would meet on occasion; but I 4 don't know that I was there. 5 Q. How did you come to attend those 6 meetings? Did somebody specifically ask you to 7 attend a specific meeting, or did they notify you 8 that meetings were scheduled at certain times? 9 A. It could have been either way. 10 Q. Did you attend any meetings of the 11 investment committee of USAT? 12 A. Not on a regular basis. 13 Q. Were you -- when you attended those 14 meetings, were you asked to attend for a specific 15 purpose? 16 A. If I had been asked, it would have been 17 for a specific purpose. 18 Q. Did you attend any meetings of the 19 executive committee of USAT? 20 A. If I did, it was not on a regular 21 basis. It would have been on a specific 22 situation. But I don't recall any meetings that I 8880 1 ever attended. 2 Q. Did you attend any meetings of an 3 entity called the strategic planning committee? 4 A. I don't believe I was on that 5 committee, and I don't recall attending any 6 specific meeting, no, sir. 7 Q. Now, did you have any dealings with 8 Barry Munitz? 9 A. On occasion, yes, sir. 10 Q. Do you recall what his position was at 11 USAT? 12 A. I don't know that he had an officer 13 status. I don't recall that. But I think he may 14 have been on the board. 15 Q. Okay. 16 A. On the board of directors. 17 Q. Do you recall what his role was at USAT 18 or United Financial Group? 19 A. I would define it as sort of a liaison 20 between the subsidiary, United Financial Group, 21 and its subsidiaries, and I guess either MCO or 22 whatever the -- I can't recall the name of -- it 8881 1 was MCO Holdings, I believe. 2 Q. Was also one of the entities Federated 3 Development? 4 A. I remember that name. 5 Q. Was he also a liaison with Federated 6 Development? 7 A. I'm not sure. I don't really recall 8 the corporate relationships for all those 9 entities. 10 Q. Do you know how Barry Munitz came to 11 hold that position at USAT and UFG? 12 A. No. 13 Q. How would you describe Barry Munitz' 14 relationship with Charles Hurwitz? 15 A. In the same way that I described the 16 relationship that he had. I mean, he was, I 17 guess, the liaison between those entities which 18 Charles Hurwitz, I guess, owned or whatever. I'm 19 not sure what his ownership was. 20 Q. Well, was he Charles Hurwitz' 21 representative at UFG and USAT? 22 A. It would have been my impression that 8882 1 he was certainly -- he was representing those 2 entities. 3 Q. Would you describe Munitz as Charles 4 Hurwitz' right-hand man? 5 A. I know -- you asked me that question in 6 my deposition, and I did say "yes." But I'm not 7 sure that right-hand man -- I guess we'd better -- 8 need to define what "right-hand man" means. 9 Q. So, at this point in time, you're not 10 sure how close their relationship was. Is that 11 what you're saying? 12 A. "Close" as far as -- 13 Q. Professional relationship. 14 A. Professional relationship? He worked 15 for that group was my understanding. 16 Q. Did Barry Munitz report to Charles 17 Hurwitz? 18 A. That was my impression. 19 Q. And did he take directions from Charles 20 Hurwitz? 21 A. As far as I knew, but I was not privy 22 to that, I guess. 8883 1 Q. Now, had you heard the term "wholesale 2 strategy" at USAT? 3 A. I'm not sure I'd know what the 4 definition of that is. 5 Q. When you joined USAT in 1984, was its 6 investments different than they were when you 7 left? 8 A. Asset composition? 9 Q. Uh-huh. 10 A. Yes, sir. 11 Q. And how would you describe its asset 12 composition when you first joined USAT? 13 A. Primarily mortgage loans and real 14 estate activity. 15 Q. How would you describe it in 1988 prior 16 to USAT's closure? 17 A. Primarily dealing in the same assets 18 with the addition of the equity securities and the 19 corporate bond portfolio. 20 Q. And was there a sizable increase in its 21 mortgage-backed security portfolio between those 22 two times? 8884 1 A. I'm really not clear on the asset -- 2 the total footing size as of '84 and '88. 3 Q. Did USAT -- was USAT heavily involved 4 in investments in mortgage-backed securities 5 during the period of time you were its controller? 6 A. Yes. 7 Q. And did you attend any presentations by 8 investment bankers about how to structure a 9 mortgage-backed security portfolio in a savings 10 and loan? 11 A. I remember one specific meeting with 12 Salomon Brothers early on when I first went to 13 work there, and I'm sure that I attended other 14 meetings. 15 Q. Had you, as an auditor, done any 16 accounting-related work with regard to 17 mortgage-backed securities, risk-controlled 18 arbitrage portfolios before you joined USAT? 19 A. Certainly as it relates to 20 mortgage-backed securities. And to a limited 21 degree, with futures and options and those sorts 22 of things, yes, sir. 8885 1 Q. The hedging instruments? Is that what 2 you're referring to? 3 A. Yes. 4 Q. Had you ever encountered the accounting 5 for swaps prior to joining USAT? 6 A. I don't recall specifically, but -- I 7 don't recall. 8 Q. Now, what was your understanding of the 9 purposes of the equity arbitrage portfolio at 10 USAT, the investment in corporate equity 11 securities? 12 A. What was the purpose of the corporate 13 equity securities portfolio? 14 Q. Yes. What do you understand was the 15 intention for the use of that portfolio in terms 16 of how it was going to earn a profit? 17 A. Through stock appreciation. 18 Q. What -- you indicated that there were 19 also other kinds of corporate securities, I think, 20 in your testimony. 21 Was one of those investments in 22 high-yield bonds? 8886 1 A. Yes, sir. 2 Q. And what is your recollection of the 3 purposes or the objective of the investments in 4 the high-yield bonds and how USAT was going to 5 earn its profit? 6 A. The primary purpose was to create a net 7 interest margin. 8 Q. And what was the net interest margin 9 between? 10 A. The interest income earned on the 11 assets and the expense paid on the liabilities to 12 fund those assets. 13 Q. Was it designed or to be designed in 14 such a way that the durations of the liabilities 15 and the high-yield bonds would be matched in order 16 to avoid any interest rate risk in that portfolio? 17 A. Well, based upon the documentation that 18 I've looked at, yes, sir. 19 Q. Has -- what documentation are you 20 referring to? 21 A. The exhibits that were a part of my 22 deposition. There were memos in there that 8887 1 describe the duration. I don't recall 2 specifically that; but having read that memo, that 3 refreshed my memory. But I'm not sure that I can 4 embellish any more other than what was in that 5 memo. 6 Q. Now, with regard to the mortgage-backed 7 securities portfolios at USAT, what was your 8 understanding of how USAT would earn a profit on 9 those portfolios? 10 A. It would be the same as I described on 11 the corporate securities. 12 Q. Was it your understanding that it 13 was -- they were intended to be portfolios where 14 the institution would earn a profit on a net 15 interest margin, the difference between the cost 16 of funds, the liabilities, and the interest earned 17 on the mortgage-backed securities? 18 A. Yes, sir. 19 Q. And was it your understanding that USAT 20 was going to put into place hedging instruments to 21 hedge the risk between the short-term liabilities 22 that were used to fund that portfolio and the 8888 1 interest earned on the mortgage-backed securities? 2 A. Yes, sir. 3 Q. Now, I'd like to show you some 4 documents that have previously been introduced 5 into the record. The first document I'd like to 6 show you is a document that is T4103, which is a 7 July 12th, 1985 memorandum from Gerald Williams to 8 Mr. Bonczak. It's at Tab 176. 9 MR. GUIDO: Your Honor, I have extra 10 copies of the document. These are -- these 11 documents were introduced in Gerald Williams' 12 deposition, Your Honor. 13 Q. (BY MR. GUIDO) I'd like to direct 14 your attention to the first page of the document. 15 Do you see where it says -- you see the first 16 paragraph of the letter? It's addressing the 17 liability growth issue that occurred in 1985. 18 A. Yes, sir. 19 Q. Do you recall that issue coming up in 20 1985? 21 A. Yes, sir. 22 Q. Now, look at Paragraph 1 where there is 8889 1 a description of the growth in the first half of 2 1985 in USAT. It says, "The association's use of 3 reverse repurchase agreements and purchase of 4 mortgage-backed securities has increased from 5 60 million at the base period of November 30, 6 1984, to 539 million at June 30, 1985. All of 7 these investments are fully hedged and the related 8 interest rate gap exposure has been reduced to the 9 maximum amount possible." 10 Do you see that? 11 A. Yes, sir. 12 Q. Is that your understanding of what the 13 intentions were with regard to the investments in 14 mortgage-backed securities at USAT during the time 15 you were the controller? 16 A. The only clarification that I would add 17 is that they were not matched or not hedged so 18 much that it would eliminate any net interest 19 spread. 20 Q. Okay. What was your understanding of 21 what the hedge was put on at USAT to minimize 22 interest rate risk exposure? 8890 1 A. I'm not sure I followed your question. 2 Q. Well, what is your understanding of 3 what the hedge instruments were designed to hedge 4 at USAT? 5 A. Oh, the liabilities. 6 Q. And that is any shift in the short-term 7 liabilities upward; is that correct? 8 A. Right. 9 Q. And that is your understanding of what 10 the interest rate risk exposure was that was fully 11 hedged or to be hedged? 12 A. Right. 13 Q. Now, the -- look at Paragraph 2. It 14 talks about -- it says, "The association began 15 issuing long-term jumbo deposits in December 1984 16 that have increased to 295 million by June 30, 17 1985. These retail deposits have been invested in 18 high-yield corporate securities with matching 19 maturities and a built-in interest rate spread of 20 approximately 2.59 percent." 21 Do you see that? 22 A. Yes, sir. 8891 1 Q. Now, is it your understanding that 2 those were -- that was the intention with regard 3 to the high-yield bond portfolios at USAT? 4 A. That's consistent. 5 Q. Now -- 6 THE COURT: Mr. Guido, it seems that 7 the -- this exhibit was put in as A10566. Now we 8 are numbering it T4103. I don't think we should 9 have them both in the record. 10 MR. GUIDO: Your Honor, I'm not 11 offering it. I thought this was the copy that was 12 introduced. I have it as both numbers, and I just 13 must have misspoke. It is in as A10566. I 14 thought it was at 4103, and my notes were 15 confusing. I'm sorry, Your Honor. 16 Q. (BY MR. GUIDO) This document that I 17 referred to as 4103 is Exhibit A10566. 18 A. It can be either one? 19 Q. For you. 20 MR. GUIDO: I'm sorry for the 21 confusion, Your Honor. 22 Q. (BY MR. GUIDO) I'd like to show you 8892 1 another document that has been introduced in the 2 record previously, and this is Exhibit B1042. And 3 it was a memorandum from Jonathan Scott to Neil 4 Twomey dated June 12th, 1986. And it's a 5 memorandum of a meeting that was held with Michael 6 Crow, Bruce Williams, Joe Phillips, and Art Berner 7 to discuss the corporate bond portfolio. 8 And I'd like to direct your attention 9 to the second full paragraph. It says, "In 10 September of 1984, United conceived the strategy 11 of purchasing less than investment grade corporate 12 debentures, B and BB rated bonds, financed with 13 term deposits issued through brokers. The idea 14 behind the strategy was to have a dedicated 15 portfolio of bonds duration matched with the term 16 deposits to achieve a 200 basis point spread. The 17 term CDs financing this portfolio range from 7 to 18 10 in straight coupons to 6 to 12 year zeros with 19 a total all-in cost of 11.6 percent. While the 20 portfolio does require certain adjustments to keep 21 the durations matched, the management of the bond 22 portfolio does not involve bond swapping to pick 8893 1 up yields or premature selling to capture capital 2 gains currently unrealized. In as much as the 3 emphasis of the portfolio is on maintaining the 4 spread, any unrealized gains or losses on the 5 bonds themselves are not of significant concern to 6 United because, in theory, an offsetting gain or 7 loss in the term deposits should exist." 8 Does that conform to your understanding 9 of what the purposes were of the high-yield bond 10 portfolio at USAT? 11 A. (Witness reviews the document.) Yes, 12 except for the last sentence. 13 Q. And what is it about the last sentence 14 that -- 15 A. I'm not sure I follow the offsetting 16 gain or loss on the term deposits, other than if 17 they are talking about the interest rate movements 18 on the bonds and the deposits being the same. But 19 I don't recall that -- I don't recall that issue. 20 Q. You don't recall that being discussed 21 at USAT? 22 A. No, not -- no, sir. I'm not saying it 8894 1 wasn't discussed. I just don't recall. 2 Q. But it's your understanding that other 3 than for that sentence -- is it the entire 4 sentence that you have a problem with, that you 5 don't recall? Let me read you portions of it and 6 ask you some questions about it. 7 "In as much as the emphasis on the 8 portfolio is on maintaining the spread, any 9 unrealized gains or losses on the bonds themselves 10 are not of significant concern to United." 11 Is that your understanding of what was 12 included in the purposes of USAT with regard to 13 that portfolio? 14 A. My problem with the sentence starts -- 15 or let me say it another way. The part that is 16 consistent with my understanding is the first part 17 of the sentence, "In as much as the emphasis of 18 the portfolio is on maintaining the spread." That 19 is consistent. I'm not sure that I fully 20 understand what the writer is saying in the rest 21 of that sentence. 22 Q. With the rest -- with regard to the 8895 1 rest of that sentence? 2 A. (Witness nods head affirmatively.) 3 Q. But it was your understanding that the 4 purpose of the portfolio was to earn an income by 5 maintaining a spread between the interest paid on 6 the CDs and the high-yield bonds that were 7 purchased with those funds? 8 A. Yes, sir. 9 Q. And is it your understanding that that 10 portfolio was not invested in for purposes of 11 realizing gains due to capital appreciation? 12 A. That was not the intent of the 13 portfolio, as I recall it. 14 Q. Now, with regard -- I'd like to show 15 you another document that is -- 16 THE COURT: Could I interrupt just a 17 moment? 18 MR. GUIDO: Yes, Your Honor. 19 THE COURT: I'm sure this must be in 20 record, but who is Jonathan Scott? 21 THE WITNESS: I don't know. 22 MR. GUIDO: Your Honor, Jonathan Scott 8896 1 was at the Federal Home Loan Bank of Dallas. I 2 think that if you look at the portion of the 3 transcript of Mr. Smith -- is that I think his 4 name? 5 MR. NICKENS: Terry Smith. 6 MR. GUIDO: He will define who Jonathan 7 Scott is. But he was the person at the Federal 8 Home Loan Bank with Mr. Smith who wrote those 9 articles that we -- 10 THE COURT: I thought it was probably 11 in the record, but I just wanted to make sure. 12 MR. GUIDO: That's who Jonathan 13 Scott -- 14 MR. NICKENS: He's a colleague of 15 Dr. Smith at the Federal Home Loan Bank of Dallas. 16 THE COURT: All right. 17 Q. (BY MR. GUIDO) I'd like to show you a 18 document now that has also been included in the 19 record. It is A10690. It's a memorandum from 20 Michael Crow to Art Berner dated November 4th, 21 1986. And that is at -- 22 MR. GUIDO: 566? 8897 1 MR. NICKENS: 568, I am told. 2 Q. (BY MR. GUIDO) Have you seen Exhibit 3 A10690 before? 4 A. Yes, sir. 5 Q. Was this one of the exhibits that was 6 attached to your deposition that I provided you? 7 A. Yes. 8 Q. Now, take a look the first page. It 9 says "to Art Berner" and has Michael Crow's 10 initials there. It says, "Art, please arrange to 11 have the attached policy adopted at the investment 12 committee. We have been advised by Peat Marwick 13 that we need to put on the record our policies 14 that relate to junk bonds to avoid mark-to-market 15 treatment." 16 Do you see that? 17 A. Yes, sir. 18 Q. Now, do you know whether or not this 19 policy was adopted by any committee or any board 20 of USAT? 21 A. Specifically, no. 22 Q. Now, do you recall the question coming 8898 1 up with regard to putting on the record USAT's 2 policy with regard to junk bonds? 3 A. In general terms. (Witness nods head 4 affirmatively.) 5 Q. Okay. Now, I'd like to direct your 6 attention to Page 2 of that. It says, "It is the 7 policy of United Savings Association of Texas to 8 invest in corporate debt securities as market 9 opportunities exist. The objective of such 10 investments is to spread income over an extended 11 period of time. In general, the portfolio will be 12 match funded with long-term CDs. Sales of such 13 securities will be executed from time to time as 14 changes in the credit quality of the particular 15 security exists. An opportunity to upgrade credit 16 with a similar yield is present to adjust the 17 portfolio for industry exposure and other 18 appropriate reasons as may be approved by the 19 investment committee. The corporate bond 20 portfolio is not a trading account, however, and 21 should not be managed as a trading vehicle. 22 Accordingly, it is the policy of the association 8899 1 to record investments at cost and establish 2 reserves against known or probable losses in the 3 portfolio. The portfolio would not be 4 mark-to-market on a periodic basis since it is not 5 a trading account." 6 Do you see that? 7 A. Yes, sir. 8 Q. Is that your understanding of what the 9 purposes were of the high-yield bond portfolio? 10 A. That is consistent. 11 Q. And was that portfolio not 12 mark-to-market on a periodic basis? 13 A. I don't believe it was. 14 Q. Now, did you in the accounting 15 department maintain any records that you could 16 determine the market value of the high-yield bond 17 portfolio? 18 A. I don't believe we were responsible for 19 marking that portfolio. 20 Q. Okay. Now, I'd like to direct your 21 attention to another document. And it is a letter 22 dated May 9th, 1985, to Mr. James Halverson of the 8900 1 Federal Home Loan Bank Board from Art Berner. And 2 it deals with a meeting with regard to -- 3 MR. NICKENS: We need some numbers. 4 MR. GUIDO: It's T4197. I'm sorry. I 5 was wondering why you were looking at me like 6 that. 7 Excuse me, Your Honor. Your Honor, 8 apparently this document has been introduced 9 twice. I have it at Tab 720 at T4197. It also 10 apparently is at Tab 108 at A10634. I'm going to 11 refer to it as the T4197 document. 12 Q. (BY MR. GUIDO) I'd like to direct 13 your attention to the first paragraph. First of 14 all, it says, "On behalf of Messrs. Munitz, Gross, 15 Williams, and myself, I would like to thank you 16 and Ginger Baugh for taking the time to meet with 17 us to discuss the United Savings Association of 18 Texas senior subordinated note application. We 19 very much appreciate the effort of the Federal 20 Home Loan Bank Board in attempting to expedite 21 approval of this application." 22 Do you recall an application with 8901 1 regard to a senior subordinated note to be issued 2 by USAT? 3 A. Not specifically. I remember it, 4 again, in general terms; but I couldn't -- I don't 5 believe we ended up doing it. 6 Q. Okay. Now, I'd like to direct your 7 attention to Page 2 of the document. Do you see 8 the paragraph that -- the section that starts "to 9 corporate bond strategy"? I'd like to direct your 10 attention to the third paragraph of that section 11 on Page 2. It says, "The association has 12 implemented its program of investing in corporate 13 bonds in order to maintain an interest rate spread 14 between the high-yield corporate bonds and 15 duration matched long-term certificates of 16 deposit. By building in this matched spread, the 17 association has been able to increase its capital 18 and profitability through what we believe to be a 19 balanced portfolio of corporate debt." 20 Do you see that? 21 A. Yes, sir. 22 Q. Is it -- does that conform to your 8902 1 understanding of the purposes for holding the 2 high-yield bond portfolio at USAT? 3 A. It is consistent. 4 Q. Now, I'd like to direct your attention 5 to the next page. Look at the top paragraph. It 6 says, "For their examination in deciding whether 7 or not to make an investment, the committee has 8 established certain objectives for all investment 9 decisions. One, security of the association's 10 principal; two, maintenance of interest rate 11 spread; and three, possible capital appreciation." 12 Do you see that? 13 A. Yes, sir. 14 Q. Now -- then if you drop down to the 15 third paragraph and the fourth paragraph, I'd like 16 to direct your attention to those. The third 17 paragraph says, "Moreover, once a decision to 18 invest is made, the review and supervision of an 19 investment does not stop. USAT's analysts 20 continually monitor the issue and the issuer in 21 order to satisfy themselves that both the credit 22 and the instruments satisfy the association's 8903 1 investment policies. In addition, a thorough 2 review of each debt instrument held by the 3 association is made by the committee on a regular 4 basis." 5 And then this next paragraph says, "As 6 set forth in Exhibit A, the investment in 7 corporate high-yield bonds has provided a 8 recognized profit of 27.2 million since 1984 and 9 as of April 30, 1986, the association has an 10 unrecognized gain of approximately $11.6 million. 11 This gain is in addition to the built in interest 12 rate spread of approximately 2.5 percent which the 13 association has maintained between the corporate 14 debt and matched certificates of deposit." 15 Do you see that paragraph? 16 A. Uh-huh. (Witness nods head 17 affirmatively.) 18 Q. Now, does that paragraph conform with 19 what you testified was your understanding that the 20 purpose of the corporate high-yield bond portfolio 21 or junk bond portfolio was to earn a yield based 22 on the net interest rate spread between the 8904 1 certificates of deposits and the high-yield bond 2 that were purchased with those funds? 3 MR. NICKENS: Your Honor, I object to 4 that summary of the testimony. The witness 5 testified as to a specific statement in the 6 document and said that it was consistent with his 7 understanding. Now Mr. Guido has taken that and 8 said, "Now, that's what you said was the purpose" 9 when that was not what the witness has said. 10 So, I object to the question as 11 misstating the record. 12 THE COURT: Restate it, please. 13 MR. GUIDO: Your Honor, I think that 14 that is what the witness' testimony is; but I'll 15 ask the witness again. 16 Q. (BY MR. GUIDO) Is it your 17 understanding that the purpose of the high-yield 18 bond portfolio was to earn an income on the net 19 interest spread between the certificates of 20 deposits and the high-yield bonds that were 21 purchased with those funds? 22 A. Yes. 8905 1 Q. Okay. Now, is this paragraph 2 consistent with that understanding? 3 A. The -- I'm not sure what generated the 4 recognition of the profit. It's certainly not 5 inconsistent with it in terms of if there was a 6 reason why they moved out of a particular 7 security. I mean, I don't know -- I'd have to 8 know what generated the $27 million and the -- 9 well, the 27 million that was recognized. 10 Q. Would it have been consistent with the 11 policy as you understood it if the gains on the 12 sales had been sales of one security -- one 13 high-yield bond -- and the purchase of another 14 because of concern about the credit quality of the 15 first security at a time when interest rates had 16 declined? 17 A. I'm not sure there is a direct 18 correlation between credit quality of an issue and 19 a decline in interest rates. 20 Q. No. I didn't mean to infer that there 21 was. Just assume that you had a fact situation 22 where interest rates had declined so that all 8906 1 bonds were profitable because interest rates had 2 gone down. 3 A. Okay. 4 Q. Assume that hypothetical. And that the 5 entity, USAT, had sold one set of high-yield bond 6 because there was a problem with the credit 7 quality of the bond or they thought there might be 8 a problem with the credit quality of that bond 9 even though it showed a capital depreciation and 10 decided to purchase another one because of the 11 concern about the credit quality. 12 Would that have been consistent with 13 your understanding of the policy at USAT at the 14 time? 15 A. It's certainly consistent with what 16 I've read in these documents, yes, sir. 17 Q. And particularly when you look at 18 Exhibit A10690. Right? 19 A. Correct. 20 Q. If these sales that are referred to 21 here on this paragraph had been sales that were 22 made on a quarterly basis to bolster the income to 8907 1 be reported on quarterly financial statements, 2 would that have been consistent with the policies 3 that you just referred to in Exhibit A10690? 4 A. Are you saying that if the only reason 5 the securities were sold was to bolster -- 6 Q. That's right. The only reason. 7 A. No, that would not be consistent. I 8 don't recall reading that in here. No, sir. That 9 would not be consistent with that policy. 10 Q. That would be the trading for gains 11 that's referred to in the policy specifically as 12 what was not intended for the portfolio, would it 13 not? 14 A. I believe if it was a trading account, 15 that the gains would be recognized without having 16 to sell them. 17 Q. Right. And the portfolio would be 18 mark-to-market. Right? 19 A. That's correct, so that -- 20 Q. Now -- but it wasn't mark-to-market? 21 A. Right. It was not mark-to-market. 22 Q. Now, I'd like to direct your attention 8908 1 to the next page of the memorandum. And under the 2 section "gap management," it says, "As you are 3 aware, many savings and loan associations 4 throughout the country had their capital severely 5 impaired during the late 1970s and early Eighties 6 as a result of having fixed rate assets and 7 floating rate liabilities. In order to assure 8 itself that it would no longer be subject to the 9 mismatch of assets and liabilities (generally 10 called the gap), USAT has instituted a program of 11 utilizing Ginnie Maes, Fannie Maes, and Freddie 12 Mac securities to match its assets and liabilities 13 in a sophisticated government securities matched 14 investment program. These matching techniques 15 eventually result in long-term assets and 16 liabilities being duration matched with a built-in 17 spread such that the association has significantly 18 reduced the risk of interest rate fluctuations. 19 As described in the offering circular provided to 20 the Federal Home Loan Bank Board, through the use 21 of these devices the association has significantly 22 improved the gap position between its assets and 8909 1 liabilities and is consistently striving to 2 further close the gap position." 3 MR. RINALDI: Ken, that was "constantly 4 striving." 5 MR. GUIDO: "Constantly." Excuse me. 6 Q. (BY MR. GUIDO) Then dropping down to 7 the last paragraph, it says "While utilization of 8 these techniques has resulted in the association 9 not taking full advantage of the recent dramatic 10 decline in interest rates, USAT's management 11 believes that USAT should not be in the interest 12 rate speculation business. Rather, management 13 believes we should protect our interest rate 14 spread and reduce our gap to the fullest extent 15 possible in all interest rate environments." 16 Is that your understanding of what the 17 purposes were of the mortgage-backed security 18 portfolios at USAT at the time you were its 19 controller? 20 A. Yes, sir. 21 Q. Now, do you recall the creation of an 22 entity called United Mortgage Finance as a 8910 1 subsidiary of USAT? 2 A. I recall the name. 3 Q. Do you recall why it was created? 4 A. Could you better describe what the 5 entity did? 6 Q. Do you recall the creation of an entity 7 at the end of 1985 to purchase about $500 million 8 worth of mortgage-backed securities in a separate 9 subsidiary of USAT? 10 A. Yes, sir. 11 Q. And do you recall that that entity had 12 been created sometime around the end of November 13 of 1985? 14 A. Yes, sir, based on the information 15 contained in these exhibits that I've seen. 16 Q. The exhibits that you've seen? 17 A. Yeah. 18 Q. Not those that are in front of you? 19 A. No. 20 Q. Now, with regard to that entity, did 21 you participate in any discussions about the 22 creation of that entity? 8911 1 A. I don't recall any specific meetings, 2 but I'm sure I was involved in meetings. 3 Q. I'd like to show you a document that 4 has been marked as A1074, and it's dated 5 November 24th, 1985. And it's at Tab 570. It is 6 the Michael Crow memorandum regarding the creation 7 of USAT Mortgage Finance. 8 THE COURT: Mr. Guido, we'll take a 9 short recess. 10 11 (A short break was taken 12 at 10:24 a.m.) 13 14 THE COURT: Be seated, please. We'll 15 be back on the record. 16 Mr. Guido, you may continue. 17 MR. GUIDO: Your Honor, I was informed 18 that I misspoke about the exhibit number. It is 19 10574. It is the Crow memorandum regarding the 20 creation of United Mortgage Finance of 11-24-85. 21 It's at Tab 570. 22 (10:46 a.m.) 8912 1 Q. (BY MR. GUIDO) Before I ask you some 2 questions about that document, Mr. Williams, I 3 want to direct your attention back to the GAAP 4 portion of the memo that was a previous exhibit 5 where you read the portion that dealt with 6 mortgage-backed securities and the risk-controlled 7 arbitrage aspect of those portfolios. 8 Do you recall that paragraph -- those 9 paragraphs that you read? 10 A. Yes, sir. 11 Q. Is -- I want to give you two 12 hypotheticals and ask you your view of whether or 13 not they are consistent with what you understand 14 the purposes to be as reflected in that 15 memorandum. 16 Would the recognition of profits on the 17 sale of the mortgage-backed security that was sold 18 in order to avoid an anticipated acceleration of 19 prepayment rates in that mortgage-backed security, 20 would that have been consistent with the purposes 21 of the mortgage-backed security portfolios at USAT 22 that you understood to exist? 8913 1 A. I don't think that it was ever 2 anticipated -- I mean, the intent was to create a 3 net interest margin, and that would not 4 contemplate the sale of the securities. 5 Q. Well, what -- let me rephrase the 6 question a little bit for you. 7 In the course of managing 8 mortgage-backed securities portfolios that are 9 hedged, is it your understanding that there was a 10 need to rebalance the portfolio periodically 11 because of changes in prepayment speeds? 12 A. Conditions changed from what was 13 initially anticipated and adjustments were made. 14 Q. And is it your understanding that if 15 there were gains that occurred as a result of 16 changing the composition of the portfolio in 17 response to anticipated prepayment changes, that 18 that was consistent with the purposes of the 19 mortgage-backed securities portfolios as expressed 20 in Exhibit A10690 that you just read? 21 A. That's this one? 22 Q. Yes, sir. 8914 1 A. (Witness reviews the document.) 2 MR. NICKENS: Your Honor, A10690 3 relates to high-yield bond. It does not relate to 4 mortgage-backed securities. 5 MR. GUIDO: I'm sorry. I misspoke the 6 exhibit number, Your Honor. It is T4197. I'm 7 sorry. 8 A. What's the question again, please? 9 Q. (BY MR. GUIDO) Was the -- if -- 10 THE COURT: What was that last number, 11 Mr. Guido? 12 MR. GUIDO: T4197, Your Honor. It's 13 the May 9th letter to Mr. Halverson. 14 THE COURT: Thank you. 15 Q. (BY MR. GUIDO) If gains were 16 recognized on the sale of mortgage-backed 17 securities because of a need on the part -- or 18 perceived need on the part of the manager of the 19 portfolio to sell those because of anticipated 20 increases in prepayment speeds because of a 21 declining interest rate environment, would the 22 recognition of the gains have been consistent with 8915 1 your understanding of the purposes of USAT's 2 mortgage-backed security portfolio which was 3 primarily to earn a net interest spread? 4 A. I guess what I'm struggling with is 5 when the securities were bought, a prepayment 6 assumption was made at that time. And if results 7 differed from what was contemplated, I'm not 8 clear -- I don't really recollect what was to be 9 done in that event. 10 Q. Okay. In terms of accounting? 11 A. Right, yeah. I mean, the -- again -- 12 Q. Let's put the accounting aside. 13 A. No. I'm talking about where if -- I 14 was not involved in the decisions to buy or sell 15 securities. I was primarily involved in how to 16 account for those -- whatever transactions 17 occurred. 18 Q. Okay. Now, would -- let me ask you 19 this: Would the sale of mortgage-backed 20 securities out of USAT's hedged mortgage-backed 21 security portfolios for the purpose of bolstering 22 profits at quarter end have been consistent with 8916 1 your understanding of what the intended purposes 2 of that portfolio were? 3 MR. NICKENS: This is a hypothetical 4 question, as I understand it. 5 MR. GUIDO: This is a pure hypothetical 6 question. 7 A. I'm not sure I understand the question. 8 I'm sorry. I missed it. I mean, I heard you 9 but -- 10 Q. (BY MR. GUIDO) I'm trying to phrase 11 the question as parallel to those that I asked you 12 about the high-yield bonds using different 13 references. 14 If the mortgage-backed security 15 portfolio that was at USAT for the purposes that 16 you just testified to were set up, if there were 17 sales made out of that portfolio solely for the 18 purpose to bolster profits to be reported in 19 quarterly financial statements, would that have 20 been consistent with your understanding of what 21 the purposes of USAT's mortgage-backed securities 22 portfolios were? 8917 1 MR. NICKENS: Your Honor, I'm sorry. I 2 have to object. The record is very clear that 3 there were a number of portfolios and that 4 mortgage-backed securities were held for a number 5 of purposes. Mr. Guido's first question related 6 to a specific portfolio, I thought, as to hedged, 7 which I would identify it as Joe's portfolio. But 8 now he's gone -- now he's gone to "portfolios." 9 MR. GUIDO: Your Honor, we don't need 10 to go through this. I will rephrase the question. 11 Q. (BY MR. GUIDO) Is it your 12 understanding that the mortgage-backed security 13 portfolios at USAT were to be hedged portfolios to 14 protect against interest rate movements? 15 A. They were to be hedged to protect 16 against -- yes. 17 Q. Okay. To protect against the upward 18 movement of interest rates? 19 A. Depending upon which portfolio you were 20 talking about, I think there were some that were 21 in addition to falling rates were possibly hedged. 22 Q. But it's your understanding that all of 8918 1 the portfolios were hedged to protect against 2 rising interest rates? 3 A. I hesitate to use the word "all"; but 4 in general, that was the purpose. 5 Q. Okay. Now, given that sort of "in 6 general" understanding, if sales were made out of 7 those portfolios solely for the purpose of 8 bolstering profits to be reported on a quarterly 9 financial statement, would that have been 10 consistent with your understanding of what the 11 purposes of the mortgage-backed security hedged 12 portfolios were at USAT? 13 A. The question is "if." Right? Not -- 14 Q. Right. 15 A. No, that would not be consistent. But 16 I guess where I'm -- 17 Q. We're not talking about -- 18 MR. NICKENS: Your Honor, would he let 19 the witness finish his answer? 20 A. I don't know of any instances where 21 they were sold to bolster -- 22 Q. (BY MR. GUIDO) I understand. 8919 1 A. -- profits at the end of the quarter. 2 Q. Now, the -- if sales were made out of 3 those portfolios in order to minimize the impact 4 of increased prepayment speeds, would that have 5 been consistent with your understanding of the 6 purposes of those portfolios? 7 A. The reason for my slow response is that 8 I'm not sure which portfolio that we're talking 9 about. If you're talking about the portfolio 10 where the gain was deferred and then subsequently 11 recognized, then when we deferred that gain, that 12 was my understanding of economically what we were 13 trying to do. It turned out to be the wrong 14 accounting for it; but it was the proper economic 15 answer, I thought. 16 So, I mean, I guess to -- and I think 17 I'm answering your question. The sale of the 18 securities in terms of generating a profit would 19 have not been inconsistent with what we were 20 trying to accomplish, but it was not the objective 21 of the program. 22 Q. Now I'd like to move to the creation of 8920 1 United Mortgage Finance, if I may. 2 A. Okay. Is that this one? 3 Q. That's the Michael Crow memorandum. 4 I'd like you to take a look the first page of the 5 memorandum and see the second full paragraph that 6 starts with "Given these key requirements for 7 regulatory non-consolidation of the financing sub 8 with the parent, we have determined that our 9 present mortgage-backed securities financed with 10 reverse repurchase agreements and the associated 11 interest rate swaps will not meet the necessary 12 criteria. The key factors is that no cash will be 13 advanced back to the parent by pushing down this 14 transaction from USAT to the financing sub. Cash 15 cannot be raised because the mortgage-backed 16 securities are already encumbered by present 17 repurchase agreements used to finance their 18 purchase." 19 So, this is a description by Michael 20 Crow of what one of the problems was of just 21 taking the mortgage-backed securities that were at 22 USAT and transferring them to USAT Mortgage 8921 1 Finance. 2 Is it your understanding that when USAT 3 Mortgage Finance was created, that one of the 4 alternatives that was considered was to take the 5 present mortgage-backed security portfolio 6 financed with reverse repurchase agreements and 7 hedged with interest rate swaps and simply 8 transfer them to USAT Mortgage Finance? 9 A. I don't recall that. 10 Q. Okay. Now, do you recall what the 11 structure was of the subsidiary? 12 A. Of which -- 13 Q. The USAT Mortgage Finance subsidiary 14 that was being contemplated at the end of 1985. 15 A. No. I mean, it was either a finance 16 sub or a service corp. I'm not sure which. 17 Q. Okay. Well, is it your understanding 18 that that subsidiary that was set up had 19 approximately $500 million worth of 20 mortgage-backed securities in it? 21 A. Yes, sir. 22 Q. Is it your understanding that that 8922 1 finance subsidiary was -- had as a source of its 2 financing for the purchase of the mortgage-backed 3 securities reverse repurchase agreements? 4 A. Yes, sir. 5 Q. And is it your understanding that the 6 interest rate risk that was generated by the 7 short-term reverse repurchase agreements used as a 8 financing tool was hedged with swap instruments to 9 extend their life out to a life that approximated 10 the life of the mortgage-backed securities? 11 A. Yes, sir. I mean, all of those points 12 you've made are consistent with the documents that 13 I've -- 14 Q. Okay. And it's consistent with your 15 recollection refreshed with the documents that 16 you've seen? 17 A. That's correct. 18 Q. Okay. Now, Page 2 of the memorandum, 19 it says, "A final direction/determination will be 20 determined at the next asset/liability committee 21 meeting on October 25th. There is absolutely no 22 assures that this transaction will be exempt from 8923 1 consolidation with the parent. It is possible 2 that only a CMO configuration will meet the new 3 requirements. Additionally, the definition of a 4 reverse repurchase agreement as a security is an 5 aggressive interpretation according to our legal 6 staff." 7 Do you see that? 8 A. (Witness nods head affirmatively.) 9 Q. Is that your understanding of the 10 assessment of the impact of the regulations on 11 that subsidiary? 12 A. I don't really recall the specific -- I 13 mean, other than this refreshing my memory, I 14 don't recall the specifics. But I do recall that 15 the subsidiary had to be dismantled or whatever 16 the word would be because of the growth problems. 17 Q. Were you privy to any conversations in 18 which there was an assessment of what the risks 19 were with the interpretation that was relied upon 20 to create the subsidiary? 21 A. I don't specifically recall any 22 conversation or meeting, but I'm not saying I 8924 1 might not have been there. 2 Q. Okay. Now, the last paragraph says, 3 "Assuming this transaction does not work and that 4 the new regulations would require consolidation 5 with the parent, it would be our intent to place 6 the mortgage-backed securities and the associated 7 reverse repurchase agreements back into USAT. 8 However, this would be consistent with our overall 9 business plan." 10 Do you see that? 11 A. Yes, sir. 12 Q. Now, what were the components of USAT's 13 business plan, the areas that were addressed in 14 USAT's business plan when you were the controller? 15 A. I don't recall. 16 Q. Was one of those subjects that was 17 covered the liability growth or the growth of the 18 institution that was addressed in business plans? 19 A. It possibly could have been. I don't 20 recall. 21 Q. Do you recall whether -- prior to the 22 disbandment or dissolution of USAT Mortgage 8925 1 Finance, prior to its creation, participating in 2 any discussions where it was stated that if the 3 USAT Finance didn't qualify as a financing 4 subsidiary for purposes of consolidation, that the 5 assets and liabilities would be transferred back 6 to USAT? 7 A. I don't recall any such meeting. 8 Q. Okay. Now, I'd like to direct your 9 attention to Exhibit A1620. 10 A. Is that one I have here? 11 Q. No. I have to get it for you. I'm 12 sorry. That is the minutes of the asset/liability 13 committee meeting of November 1st. It's a 14 memorandum dated November 6th, 1985. 15 MR. GUIDO: That's at Tab 502. 16 Q. (BY MR. GUIDO) I'd like to direct 17 your attention to the Paragraph 2 of that 18 memorandum. But before I do that, do you see the 19 names at the top of the list: Mike Crow, Joe 20 Phillips, Ron Huebsch, and Jim Jackson? 21 A. Yes, sir. 22 Q. And were those the members of the 8926 1 asset/liability committee, as you recall? 2 A. I don't recall. 3 Q. Now, look at the second paragraph of 4 the paragraph that's numbered 2. It says, "A 5 discussion of M. Crow's short-term tactical 6 planning memo conclude that had we need to stay 7 flexible in terms of year end planning. We have 8 an opportunity to add up to $400 million in 9 liability growth by 12-31-85, but this needs to be 10 managed closely given the current unknown status 11 of the branch sales and the financing subsidiary." 12 Who at USAT was responsible for doing 13 the calculations to determine how much room there 14 was for USAT to grow under its liability growth 15 regulations? 16 A. I was, would be my guess, as far as 17 getting the numbers to do the actual calculation. 18 Q. Okay. So that you would have been the 19 source of the -- for whatever the figures were 20 that were necessary to calculate the $400 million 21 room to grow by 12-31-85 in this memo? 22 A. Certainly would have been involved in 8927 1 the calculation of that number, I would think. 2 Q. Now, I'd like to direct your attention 3 to Exhibit 1623, which are the minutes of the 4 asset/liability committee of 11-15-85. I'll 5 direct your attention to Paragraph 2. It says, 6 "Year end tactical planning." It says, "The 7 committee will continue to closely monitor USAT's 8 year end balance sheet position. The goal at year 9 end will be to show the largest balance possible 10 to use as a base for future growth. The final 11 year end figure will depend on our regulatory net 12 worth at that date (which will be a function above 13 earnings and scheduled items). Growth at year end 14 will likely come in the form of temporary 15 investment in treasury securities funded with 16 reverse repurchase agreements." 17 What are treasury securities? 18 A. To me, that would be obligations of the 19 U.S. government. 20 Q. Now, it says, "The goal at year end 21 will be to show the largest balance possible to 22 use as a base for future growth." 8928 1 Do you see that sentence? 2 A. Uh-huh. (Witness nods head 3 affirmatively.) 4 Q. Why was that important? 5 A. I assume this is referring to the 6 growth regulations. 7 Q. Well, let me ask you: How were the 8 growth regulations calculated, or how were they 9 calculated at that time? 10 A. I believe that the ensuing quarter's 11 growth was -- the amount that you could grow was 12 based upon the prior quarter's growth rate or 13 balance, rather. Excuse me. 14 Q. Okay. So, in other words, under the 15 regulations as you understand it, you would take, 16 let's say, a given quarter's liability position 17 and then you could grow a percentage on top of 18 that. 19 Is that your understanding? 20 A. That's correct. 21 Q. And what was your understanding of the 22 growth percentage that was allowed at that time? 8929 1 A. 25 percent. 2 Q. 25 percent per quarter? 3 A. Either that or two quarters in a row. 4 I'm not real clear. I don't -- it was in those 5 documents that had been previously supplied to me. 6 Q. So that from the exhibits that I showed 7 you, you could ascertain what that figure was? 8 A. (Witness nods head affirmatively.) 9 Q. Now, why was it important to show the 10 largest balance possible on liabilities at year 11 end 1985 at USAT for purposes of future growth? 12 A. I assume what is being referred to is 13 so that as large as possible growth could occur in 14 the ensuing quarters because the higher the 15 balance, when you multiply it by the percentage, 16 you get a bigger number. 17 Q. Now, I'd like to direct your attention 18 to Exhibit B690, which was a document dated 19 12-11-1985. It's a memorandum from Mr. Pledger, 20 and it's at Tab 585. 21 Now, before we go into this memorandum, 22 you testified that it's your understanding that 8930 1 the assets were sold out of USAT Mortgage Finance, 2 the mortgage-backed securities, because they could 3 not be absorbed into USAT because of the liability 4 growth limitation. 5 Is that a fair characterization of your 6 testimony? 7 A. My recollection is that the -- those 8 securities were sold because the subsidiary that 9 was formed in November or October, whatever the 10 time frame, was not going to work for purposes of 11 the liability growth. And, therefore, those -- it 12 was liquidated or those assets -- the mortgage 13 assets could not -- if they had been retained, we 14 would have exceeded the allowed growth for that 15 quarter or period. 16 Q. Now, what was your understanding of 17 what period was to be used to determine whether or 18 not the growth limitation had been exceeded that 19 was set by the Federal Home Loan Bank Board? 20 A. Without looking at the specific 21 documentation, I believe it was six months, the 22 prior six months. June 30th or -- of '85, I 8931 1 think. Is that what -- 2 Q. What do you mean June 30th? Why would 3 you use six months prior to December 31, 1985, as 4 the date? 5 A. To determine how much you could grow -- 6 Q. No. I'm sorry. Not how much you could 7 grow. 8 A. Oh, I misunderstood. 9 Q. You indicated that one of the 10 reasons -- or the reason that mortgage-backed 11 securities were sold was that the financing sub 12 didn't qualify or USAT Mortgage Financing did not 13 qualify as a financing sub that did not have to be 14 consolidated with USAT. Right? 15 A. That's correct. 16 Q. And that the assets were sold because 17 if the assets and the reverse repos were tucked 18 back into USAT for consolidated financing purposes 19 for liability growth, that the liability growth 20 limitation would have been violated. Is that -- 21 A. That's my understanding, yes, sir. 22 Q. Now, what liability growth figure -- 8932 1 what liability figure under the growth regulation 2 are you talking about? Are you talking about 3 December 31, 1985 -- 4 A. The balance that we could -- yes, 5 December 31, 1985. 6 Q. So, it's your understanding -- to 7 calculate whether or not USAT would have violated 8 the liability growth regulation, it's your 9 understanding that you needed to use the 10 December 31, 1985 date? 11 A. That would have been the quarter end. 12 Q. Now, I'd like to show you a memorandum 13 from Jim Pledger to distribution regarding the 14 recent Federal Home Loan Bank Board subsidiary 15 regulations. And the distribution of the 16 memorandum includes Mr. Gross, Mr. Williams, 17 Mr. Munitz, Mr. Crow, Mr. Berner, yourself, 18 Mr. Phillips, and Bruce Williams. 19 I'll ask you to take a look at that 20 document to refresh your recollection so I can ask 21 you some questions about it. 22 A. Do you want me to read it? 8933 1 Q. Yeah. I would like you to read it to 2 familiarize yourself enough to whether or not -- 3 you can testify whether or not you recall 4 receiving the document. 5 A. (Witness reviews the document.) I read 6 the first two pages, and I don't recall getting it 7 or not getting it. 8 Q. Now, let's take a look at Page 3 of the 9 memorandum. And the third -- the second full 10 paragraph, see where it says "If the issuance 11 fails to meet the duration matching test," that 12 paragraph? 13 A. (Witness nods head affirmatively.) 14 Q. It says "If the issuance fails to meet 15 the duration matching test, the proceeds of the 16 issuance will be counted in the association's 17 calculation of total liabilities. Since the 18 duration matching test does not permit the 19 consideration of hedges or swaps, it appears there 20 will be a significant difference between the 21 maturities and the repurchase agreements and the 22 mortgage securities and would, therefore, be 8934 1 included in the association's total liabilities." 2 Is that your understanding of the 3 impact of the regulations that were adopted at the 4 end of 1985? 5 A. It's not inconsistent with my 6 recollection. 7 Q. Okay. That's fine. Then -- let's go 8 on. It says "An increase in total liabilities 9 that have a significant impact on the 10 association's net worth requirements and on its 11 liability growth." 12 Do you see that? 13 A. Uh-huh. (Witness nods head 14 affirmatively.) 15 Q. Do you recall whether or not the 16 increase in total liabilities that were -- would 17 have been occasioned by the consolidation of the 18 assets and liabilities of USAT Mortgage Finance 19 with USAT would have created a net worth 20 requirement problem? Was that ever discussed? 21 A. I don't recall that. You changed -- 22 net worth versus liability growth? 8935 1 Q. Right. 2 A. Retention would have caused a liability 3 net worth -- I don't recall that. 4 Q. Okay. Then it goes on, "Note also that 5 the association's board adopted a resolution to 6 limit liability growth to 4.68 billion by year 7 end." 8 Do you see that? 9 A. Uh-huh. (Witness nods head 10 affirmatively.) 11 Q. Does that conform to your understanding 12 of what the association's board did at USAT in 13 response to the questions raised about liability 14 growth by the Federal Home Loan Bank Board? 15 A. Yes. That is consistent with the 16 exhibits that have been previously supplied to me. 17 Q. And it's consistent with your 18 understanding as refreshed by those exhibits? 19 A. That's correct. 20 Q. Then it goes on, "The effective date of 21 these regulations is almost certainly going to be 22 before year end." Then it says, "Therefore, the 8936 1 actual rollover dates of the reverse repurchase 2 agreements will be very important. If they occur 3 after January 1, 1986, then the impact on 4 liability growth can be much more easily managed 5 and the association will be able to meet its 4.68 6 billion liability target." 7 Do you see that? 8 A. Yes, sir. 9 Q. Was it your understanding that the 10 liabilities of USAT were such that -- USAT 11 Mortgage Financing were such -- the reverse repos 12 were such that you had to use the December 31, 13 4.68-billion-dollar figure to determine whether or 14 not the liability growth regulation had been 15 satisfied? 16 A. I do not recall the date of those 17 liabilities. 18 Q. But it's your understanding that that 19 was the date that you needed to use, the 12-31-85 20 date, to ascertain whether or not consolidation of 21 USAT Mortgage Finance would trigger a liability 22 growth problem for USAT? 8937 1 A. Again, I guess my problem is 2 differentiating between what I remember and what 3 I've read. I don't -- based on what I've read, 4 you know, there was a lot of concern over not 5 exceeding the 4.68 billion-dollar target. 6 Q. Okay. And not some other target? 7 A. That is correct. 8 Q. Now, I'd like to direct your attention 9 to a document that has been at Tab 571 -- has been 10 introduced in the record as a memorandum from Joe 11 Phillips to the file dated January 10th, 1986. 12 And it's Exhibit A10594. 13 Now, this is a memorandum from Joe 14 Phillips to the file dated January 10th, 1986, and 15 the subject is MBS sale. Is this one of the 16 documents that you reviewed as a packet of 17 exhibits to your deposition that I provided to 18 you? 19 A. Yes, sir. 20 Q. And I'd like to direct your attention 21 to the first paragraph of the document. It says, 22 "In November 1985, $500 million of mortgage-backed 8938 1 securities were acquired and funded by reverse 2 repurchase agreements. Also, interest rate swaps, 3 caps, and collars totaling $535 million were put 4 into place to limit our exposure to interest rate 5 risks. The original purpose of the transaction 6 was to provide an income stream through a hedged 7 arbitrage transaction to a violation of the 8 liability growth regulation within the 9 association." 10 MR. NICKENS: Your Honor, for the 11 record, the word "liability" doesn't appear in my 12 copy. 13 MR. GUIDO: "Violation of the growth 14 regulation within the association." Excuse me. 15 Q. (BY MR. GUIDO) "USAT Mortgage 16 Finance, Inc. was formed as a wholly-owned 17 financing subsidiary of the association." 18 Is that your understanding of what the 19 original structure was of USAT Mortgage Finance 20 and the interest rate -- how the interest rate 21 risk was to be hedged in that portfolio? 22 A. It is consistent with the intent that I 8939 1 understood, yes, sir. 2 Q. Now -- then it says in the next 3 paragraph, "Subsequent to the formation of the 4 finance subsidiary and acquisition of the 5 securities, the regulations applicable to finance 6 subsidiaries were amended. Such amendment 7 disqualified USAT Mortgage Finance, Inc. as a 8 finance subsidiary and, accordingly, such 9 liability growth would have put the association in 10 violation of the growth regulation for the quarter 11 ended March 31, 1986. Accordingly, $350 million 12 in mortgage-backed securities and related reverse 13 repurchase agreements had to be undone in order to 14 avoid growth regulation problems." 15 Do you see that? 16 A. Yes, sir. 17 Q. Does that conform to your understanding 18 of the facts? 19 A. Yes, sir. 20 Q. Now, this makes mention to the quarter 21 ended March 31, '86, not December 31, 1985, does 22 it not? 8940 1 A. That's correct. 2 Q. So, at least Joe Phillips thought that 3 the March 31, '86 date was the appropriate date to 4 be used to determine whether or not that 5 subsidiary had violated the liability growth 6 regulations? 7 A. Is that a question? 8 Q. Well, that -- I mean, does that 9 memorandum reflect that Joe Phillips thought that 10 the date the liability growth limitation that was 11 to be utilized to determine whether or not the 12 assets and liabilities could be consolidated with 13 USAT were to be determined as of March 31, 1986, 14 not December 31, 1985? 15 MR. NICKENS: Your Honor, I object. 16 He's asking the witness to guess as to what 17 Mister -- or to tell us what Mister -- based upon 18 this document what Mr. Phillips' state of mind 19 was, which all of us can do to the extent that we 20 can. This witness has no qualifications to be 21 able to do that. 22 THE COURT: All right. I'll sustain 8941 1 the objection. 2 MR. GUIDO: I'll rephrase the question, 3 Your Honor. 4 Q. (BY MR. GUIDO) After having read this 5 document, is it still your understanding that at 6 the time that the issue arose, that the liability 7 growth for purposes of determining whether or not 8 absorption of the assets and liabilities into USAT 9 would have violated the liability growth was 10 December 31, 1985 and not March 31, 1986? 11 A. There is confusion in my mind as of 12 this very minute whether it had to do with the 13 agreed growth with the Federal Home Loan Bank as 14 of -- I think -- I don't recall how the 4.68 15 million, if that's the correct number, was 16 established. 17 Q. That was the '85 figure, correct. 18 A. Am I in the wrong year? Oh, I'm sorry. 19 I'm sorry. This is a prospective looking deal. 20 Okay. (Witness reviews the document.) Right. My 21 recollection of the regulations would have been 22 that you would have taken the balance as of 8942 1 December 31st, 1985, multiplied it times the 2 applicable percentage, and that's how much you 3 could have grown in the next quarter. But I don't 4 remember the -- I'd have to look at the reg, I 5 guess, to -- 6 Q. Okay. Now -- so, you don't -- I'd like 7 to now show you Exhibit B892, which is a 8 memorandum from Joe Phillips to the file dated 9 March 25, 1986. 10 MR. GUIDO: This has been previously 11 introduced into the record, Your Honor. It's at 12 Tab 584. 13 Q. (BY MR. GUIDO) Were there more than 14 one financing subsidiary at USAT that needed to be 15 consolidated because of the new regulations with 16 the assets and liabilities of USAT? 17 A. Not to my recollection. 18 Q. Now, let's read the first paragraph of 19 this exhibit. This says, "In November 1985, USAT 20 Mortgage Finance, Inc., UMFI, was formed and 21 acquired 500 million in mortgage-backed 22 securities. The mortgage-backed securities were 8943 1 financed with repurchase agreements. Simultaneous 2 with this transaction, interest rate swaps 3 totaling 410 million were put in place in USAT. 4 The effect of these swaps was to convert the 5 variable short-term rate financing to long-term 6 fixed rate which more closely reflected the assets 7 acquired." 8 Do you see that? 9 A. Uh-huh. (Witness nods head 10 affirmatively.) 11 Q. Now, does that conform to your 12 understanding of USAT Mortgage Finance? 13 A. In general, yes. 14 Q. I mean, there seem to be differences 15 between the descriptions of USAT Mortgage Finance 16 and the Joe Phillips January 10th, '86 memo to the 17 file and the March '86 memo to the file, does 18 there not? 19 A. Yes. 20 Q. And are they necessarily inconsistent 21 with each other? 22 A. The numbers are different, but the 8944 1 intent is the same. 2 Q. Well, let's go over the numbers. The 3 $500 million of mortgage-backed securities is the 4 same in both figures. Right? 5 A. Yes, sir. 6 Q. Okay. And then the -- one says 7 interest rate swaps totaling 410 million were put 8 in place. The other says interest rate swaps, 9 caps, and collars totaling 535 million were put in 10 place. 11 Do you see that? 12 A. Uh-huh. (Witness nods head 13 affirmatively.) 14 Q. Do you know why there is the omission 15 of the caps and collars in the latter memorandum? 16 A. No, sir. 17 Q. Now -- 18 A. Well -- 19 Q. Pardon? 20 A. (Witness reviews the document.) The -- 21 I could only hazard a guess. I mean, I really 22 don't know. 8945 1 Q. Don't guess. We don't want you to 2 speculate. Let's move on to the second paragraph. 3 Okay? "The subsidiary was initially formed as a 4 finance subsidiary under Federal Home Loan Bank 5 guidelines. The purpose of forming this 6 subsidiary was to provide a fixed net interest 7 margin and, at the same time, ensure compliance 8 with regulatory growth limitations." 9 Do you see that? 10 A. Uh-huh. (Witness nods head 11 affirmatively.) 12 Q. And that -- although the language is 13 different, that essentially is the basic thrust of 14 the purpose of the subsidiary; is that correct? 15 A. Yes. 16 Q. As reflected in both memorandum? 17 A. (Witness nods head affirmatively.) 18 Q. Then it says, "Subsequent to the 19 formation of the subsidiary and prior to 20 December 31, 1985, the Federal Home Loan Bank 21 issued additional regulations that disqualified 22 some of UMFI's liabilities under the finance 8946 1 subsidiary regulations." 2 The language is somewhat different, but 3 the general thrust is essentially the same in this 4 memorandum as well as the January 10th memorandum, 5 is it not? 6 A. It appears to be. Oh, you want a 7 "yes"? I mean, I'm having a hard time jumping 8 back and forth here between the two. But they 9 basically say the same thing, except the numbers 10 are different. 11 Q. Now, the next sentence says, 12 "Consequently, in order to avoid violation of the 13 growth regulation, $350 million of the 14 mortgage-backed securities were sold at a gain of 15 $9 million." 16 Do you see that? 17 A. Uh-huh. (Witness nods head 18 affirmatively.) 19 Q. Now, the other memo says "Accordingly, 20 350 million in mortgage-backed securities and 21 related repurchase agreements had to be undone in 22 order to avoid growth regulation problems." 8947 1 Do you see that sentence? 2 A. Uh-huh. (Witness nods head 3 affirmatively.) 4 Q. Now, my question for you is: Do you 5 know whether there were other alternatives to 6 selling the $350 million of mortgage-backed 7 securities that were available to USAT at the time 8 it decided to sell those securities in order to 9 avoid violation of the growth regulations? 10 A. No, sir. I don't recall. 11 Q. Did anyone ask you to look at the 12 portfolio of USAT as reflected in the books and 13 records that were available to the controller's 14 office to ascertain whether or not there were 15 other ways to restructure USAT's portfolio so as 16 to avoid violating the growth regulations and not 17 have to sell those mortgage-backed securities? 18 A. I don't recall being asked. 19 Q. Now -- then in both memorandum, it 20 talks about the sale. It says, "Consequently, to 21 avoid violation of the growth regulations" -- in 22 B892 it says, "$350 million in the mortgage-backed 8948 1 securities were sold at a gain of $9 million." 2 And then the January 10th memo says, "At the time 3 the decision was made, one, to sell the 4 mortgage-backed securities resulting in a 5 12.4-million-dollar gain." 6 Do you know why the difference between 7 the two figures? 8 A. No, sir. 9 Q. And between these two dates, were 10 the -- were the books and records of USAT and its 11 subsidiaries audited by Peat Marwick and the 12 internal auditors? 13 A. During that time frame an audit would 14 have been conducted by the external auditors, yes. 15 Q. And then it goes on to say, "At that 16 time, it was determined to leave all of the swaps 17 in place and utilize them as a blanket swap for 18 the association." The January 10th says, "Retain 19 the swaps and utilize them for general association 20 interest rate hedge rather than close them out 21 (USAT as it had an existing general swap for 22 several years)." 8949 1 Do you see that? 2 A. Uh-huh. (Witness nods head 3 affirmatively.) 4 Q. And then the B892 says "(This is not 5 the first time this approach has been used. USAT 6 has had a blanket swap in place for two to three 7 years)." 8 Do you see that? 9 A. Yes, sir. 10 Q. What is the reference to a blanket swap 11 in both of those exhibits? Do you know? 12 A. To me, it means a general swap, not 13 tied to a specific liability such as reverse 14 repos. It was just out there as a general hedge 15 is -- 16 Q. Was there such a general hedge that was 17 on the books and records of USAT at the time? 18 A. I do not recall specifically, no, sir. 19 Q. Do you recall anything generally? 20 A. In general, having been refreshed by 21 these -- by this -- the January 10th memo and the 22 memo from Rick Millinor, in the back of my mind, I 8950 1 remember there being a hedge or a swap or 2 something that was out there that was, I believe, 3 just tied to the deposits. But other than that, I 4 don't remember anything in any great specificity. 5 Q. Then it goes on to make mention of 6 "Subsequently, a mirror swap was put into place." 7 Do you see that reference? 8 A. Which one? The 892? 9 Q. Yes. 10 A. Yes. 11 Q. Now, what is the reference to a mirror 12 swap? What's your understanding of what that 13 reference was? 14 A. To me, the mirror swap would be a swap 15 that would act just the opposite of the one that 16 it was out there, but I'm not real sure. 17 Q. Well, do you recall the transaction of 18 the purchase of a swap to mirror that that was in 19 effect? 20 A. To the extent my memory's been 21 refreshed, yes, sir. But the actual purchase of 22 it, I would have not been involved in. 8951 1 Q. Do you recall whether or not that was 2 purchased from the Federal Home Loan Bank of 3 Dallas? 4 A. No, sir. 5 Q. I'd like to show you now Exhibit B819 6 which has previously been admitted. It is the 7 document and the typewritten rendition that was 8 provided by respondents' counsel. It's a 9 combination of -- conversion of Rick Millinor's 10 handwritten memorandum dated January 31, 1986, to 11 typewritten form. It's UFG memo "Re: Interest 12 rate swaps, 12-31-85, PMM Workpaper Z-56." 13 This, I think, is much easier to read 14 than the document that you've had to look at. 15 Take a look at the third page of this packet. See 16 the handwritten document there -- 17 A. Yes. 18 Q. -- which is the subsequent three pages? 19 Do you see that? 20 A. Uh-huh. (Witness nods head 21 affirmatively.) 22 Q. Is that the document or one of the 8952 1 documents that were exhibits to your deposition 2 that I provided to you to refresh your 3 recollection for your testimony today? 4 A. Not in connection with my deposition. 5 Q. Did you see that document as an exhibit 6 to your deposition? 7 A. I don't recall. The first time I 8 recall seeing it was last night. 9 Q. Okay. I was just trying to clarify 10 when it was that you saw that document. 11 Now, this is much easier to read than 12 the handwritten document. So, we'll work off of 13 the typewritten rendition. 14 Do you -- and I direct your attention 15 to the -- the third paragraph. It says, "After 16 learning of these transactions, I felt that some 17 accounting questions existed as to the proper 18 treatment for GAAP. I talked to Walter Erickson 19 and Walter Schuetze about this topic and learned 20 the following and it has some points." 21 Can you tell us who Walter Erickson was 22 or is? 8953 1 A. He was the partner in charge of Peat 2 Marwick's either savings and loan practice or bank 3 practice. 4 Q. And do you know who Walter Schuetze 5 was? 6 A. He was the -- he also worked at 7 Peat Marwick and he was, I believe, the head 8 resource for accounting-related issues. 9 Q. Accounting-related issues to what? 10 Savings and loans or all accounting-related 11 issues? 12 A. I think all accounting-related issues. 13 I think everything. 14 Q. Now, look at Point No. 1. It says, 15 "Under no circumstances would GAAP require or even 16 permit the deferral of the gain on sale of 17 securities whether in a swap program or not." 18 Do you see that? 19 A. Uh-huh. (Witness nods head 20 affirmatively.) 21 Q. Was that your understanding of GAAP as 22 of 12-31-1985? 8954 1 A. It depends on what, I guess, it's in 2 reference to. 3 Q. What do you mean? 4 A. Well, if you're talking about the sale 5 of securities that were sold, I think, in '86 6 where we originally deferred the gain and then 7 were told that the gain had to be recognized, my 8 answer would be that, no, that it was not 9 necessarily my understanding of GAAP, that the 10 deferral could not be made. 11 Q. Well, let me back up. I'm talking as 12 of December 31, 1985, prior to Rick Millinor 13 telling you you had to defer the gains on the 14 so-called roll-down. Prior to that, prior to 15 discussions with Rick Millinor, what I'm trying to 16 ascertain is what your understanding of GAAP was 17 as of 12-31-85 when the gains were recognized on 18 the sale of the mortgage-backed securities that 19 were sold out of the USAT Mortgage Finance 20 subsidiary. That's the time frame I'm referring 21 to. And I know it's difficult. It's 12 years 22 ago, and it's difficult to recall. 8955 1 But prior to discussions with Rick 2 Millinor about the so-called roll-down, I'm trying 3 to ascertain what your understanding was of GAAP 4 at the time. This memorandum in Point 1 says 5 "Under no circumstances would GAAP require or even 6 permit a deferral of the gain on sale of 7 securities whether in a swap program or not." 8 Now, prior to -- 9 A. Specifically as it relates to the 10 500,000? 11 Q. The $500 million. 12 A. Or $500 million? I'm not sure I can 13 answer that question with a "yes" or "no." It 14 would have to be looking at all of the -- 15 Q. That's an answer. 16 MR. NICKENS: Your Honor, let him 17 finish if he's going to ask him. 18 MR. GUIDO: I'm sorry. 19 A. Without looking at all of the specific 20 details and what we did, I mean, I -- I don't know 21 how to answer it specifically. In general, I 22 don't disagree with what those two gentlemen said. 8956 1 And if I did, I'm not sure it would matter. But I 2 just -- I'm not sure I know how to answer the 3 question. 4 Q. (BY MR. GUIDO) Okay. 5 A. Because I don't remember. 6 Q. Now, No. 2 says, "We do believe that 7 GAAP and RAP would require loss recognition of the 8 cost of the swap agreement being terminated 9 concurrently with the security sale; terminated 10 defined as closing the swap and paying the broker 11 for any inherent loss in the contract." 12 Do you see that reference? 13 A. Uh-huh. (Witness nods head 14 affirmatively.) 15 Q. Then it says 3, "United's use of a 16 mirror wasn't anything that seemed to fit 17 comfortably within recognized GAAP." 18 Do you see that? 19 A. (Witness nods head affirmatively.) 20 Q. Do you recall discussing, with 21 Mr. Millinor, Mr. Erickson's and Mr. Schuetze's 22 observations with regard to the use of the mirror 8957 1 swap? 2 A. I don't recall specific conversations 3 with -- ever having a conversation with Walter 4 Erickson and Walter Schuetze about it, but I'm 5 sure that I had conversations with Rick Millinor. 6 I don't recall a specific conversation, though. 7 Q. Had you ever encountered a mirror swap 8 prior to this instance at USAT? 9 A. No, sir. 10 Q. Did you ever encounter one subsequent 11 to that point in time? 12 A. No, sir. 13 Q. Have you ever had any opportunity to 14 review any literature regarding how to account for 15 mirror swaps in the accounting literature? 16 A. I don't recall. I mean, I may have at 17 the time; but I don't recall. 18 Q. Other than at the time, have you ever 19 seen any literature that explains how to account 20 for a mirror transaction such as occurred here? 21 A. I do not recall, no, sir. 22 Q. Then it says "Because of the 8958 1 circumstances surrounding United's transaction 2 (the securities were acquired for one purpose and 3 disposed of only because regulatory approval 4 wasn't obtained for the single-purpose sub)." 5 Do you see that? 6 A. Uh-huh. (Witness nods head 7 affirmatively.) 8 Q. Does that conform to your understanding 9 of the -- 10 MR. NICKENS: Your Honor, I would 11 submit to read the remainder of the sentence, not 12 just the first clause. 13 MR. GUIDO: I'm sorry. 14 Q. (BY MR. GUIDO) "It seems clear that 15 United wasn't making any effort to circumvent the 16 rules; in fact, they were surprised that any 17 question existed on the accounting." 18 Do you see that sentence? 19 A. Yes, sir. 20 Q. Now, I'd like to ask you a question 21 about the "because of the circumstances 22 surrounding United's transaction," and one of them 8959 1 is a description of what transpired that led to 2 the sale. And it says "The securities were 3 acquired for one purpose and disposed of only 4 because regulatory approval wasn't obtained for 5 the single-purpose sub." 6 Was United Mortgage Finance assets 7 disposed of because regulatory approval wasn't 8 obtained for the single-purpose sub? 9 A. I'm not sure what Mr. Millinor means 10 by -- what he's saying. But my understanding was 11 that what we had -- the subsidiaries' structure 12 was not going to pass the test as it relates to 13 the growth rate. 14 Q. Now -- then it says, "It seems clear 15 that United wasn't making any effort to circumvent 16 the rules." 17 Do you see that? 18 A. (Witness nods head affirmatively.) 19 Q. You weren't making any effort to 20 circumvent the rules, were you? 21 A. No, sir. 22 Q. I mean, you consulted with Mr. Millinor 8960 1 quite closely about the accounting for this 2 transaction, did you not? 3 A. I would think I did. I don't remember 4 specifically, you know, when we talked or any 5 details like that. But as a general rule, I did 6 then and I do now consult with him. 7 Q. Now, this all came up in the context of 8 the year end audit, the accounting question was 9 addressed by Rick Millinor, was it not? 10 A. Uh-huh. (Witness nods head 11 affirmatively.) 12 THE COURT: Would you speak up, please, 13 sir? 14 THE WITNESS: Yes, sir. 15 Q. (BY MR. GUIDO) Was he consulted prior 16 to the sale of the mortgage-backed securities at 17 USAT for his views? 18 A. I don't recall. 19 Q. You don't recall one way or the other, 20 or you don't think so? 21 A. I don't recall one way or the other. 22 Q. Now -- then it says, "In fact, they 8961 1 were surprised that any question existed on the 2 accounting." 3 Do you see that? 4 A. Uh-huh. (Witness nods head 5 affirmatively.) 6 Q. Who else besides you did Rick Millinor 7 and the people on the audit team from Peat Marwick 8 deal with at USAT? 9 A. They had access to anyone at the 10 institution. 11 Q. Okay. Now, was Russ McCann at the 12 institution at the time? 13 A. I don't know. 14 Q. Did Bruce Williams -- was he a CPA? 15 A. I don't know. 16 Q. Did he have an accounting degree? Do 17 you know? 18 A. I don't know. 19 Q. Was he familiar with accounting 20 principles? 21 A. I guess that would depend on your 22 definition of "familiar." 8962 1 Q. Well, did he have occasion to prepare 2 memoranda that you saw interpreting accounting 3 literature? 4 A. I don't recall any, but I'm sure he 5 could have had his interpretation. 6 Q. Now, do you know what this reference is 7 to? "They were surprised that any question 8 existed on the accounting." 9 A. Not without -- no, I'm not sure what he 10 meant by that. I know -- I can surmise what I 11 think it means, but I don't know specifically. 12 Q. Well, were you surprised that questions 13 existed on the accounting regarding the 14 transactions that occurred upon the disposition of 15 the assets of USAT Mortgage Finance? 16 A. I don't recall being surprised. I 17 don't recall being not surprised either. I mean, 18 I'm not -- I guess -- I mean, assuming I'm part of 19 "they," I guess I was, according to Rick. 20 Q. Well, I mean, do you recall being 21 surprised? 22 A. I recall this being an issue, you know, 8963 1 the mirrors and the sale and all of that, yes, 2 sir. I remember that, but I don't remember my 3 frame of mind. 4 Q. How did you learn about the mirror? 5 A. I don't know. 6 Q. Did you learn about it before or after 7 it had occurred? 8 A. I don't know. 9 Q. Now -- then it goes on, "It is also 10 United's contention that the mirror swap doesn't 11 lock-in to any other swap agreement and that their 12 macro hedging policy by way of the swaps remains 13 valid and in place." 14 Do you see that? 15 A. Uh-huh. (Witness nods head 16 affirmatively.) 17 Q. Now, that's very similar to the point 18 that's made in Exhibit A10594 and B892 by 19 Mr. Phillips, is it not? If you look at the last 20 sentence of A10594 on the second full paragraph, 21 it says, "Neither the mirror swap nor the original 22 swaps are tied together in any legal or 8964 1 contractual manner. Either swap can be terminated 2 without effecting the other." 3 A. That seems to be consistent. 4 Q. Now, why was that fact significant to 5 the application of GAAP to this transaction? 6 A. I'm not sure. 7 Q. Do you recall having any discussions 8 with anyone about that issue being relevant to the 9 determination of whether or not GAAP was 10 applicable? 11 A. I don't recall any. I'm sure that 12 there were; but, you know, these were highly 13 technical areas. And by the fact that Walter 14 Erickson and Walter Schuetze were involved in it, 15 which were the highest level of Peat Marwick, it 16 was obviously a very complicated area to which to 17 determine the proper accounting. 18 Q. Now, take a look at Item 3 in 19 Exhibit B819 again, which is Walter Erickson's and 20 Walter Schuetze's observations. It says "United's 21 use of a mirror wasn't anything that seemed to fit 22 comfortably within recognized GAAP." 8965 1 Do you see that? 2 A. Uh-huh. (Witness nods head 3 affirmatively.) 4 Q. What do you ascertain that to mean, 5 given your background as a CPA? 6 A. What that means to me is that there was 7 not a written rule that this situation would be 8 appropriate to rely upon, and that's what it means 9 to me. 10 Q. So that when -- in your view, when an 11 auditor uses the term "something doesn't fit 12 comfortably within recognized GAAP," they are just 13 saying, "Well, there isn't any specific piece of 14 literature that I can focus on that would tell me 15 the answer one way or the other"? 16 MR. KEETON: Your Honor, the witness 17 gave his answer. Mr. Guido rephrased it. This is 18 a very polite witness. He may think he's got to 19 agree with him. Why don't we just get one answer 20 and move on? I object to the question. It's 21 redundant. 22 THE COURT: Sustained. 8966 1 Q. (BY MR. GUIDO) Look at the last 2 sentence of that paragraph. It says, "They point 3 out correctly that if they simply were trying to 4 boost earnings, they wouldn't have acquired the 5 mirror and the gain would be clearly recognizable 6 with no offsetting cost." 7 Do you see that? 8 A. Uh-huh. (Witness nods head 9 affirmatively.) 10 Q. Is that correct, that sentence? 11 A. I'm not sure what it means, to be 12 honest. Let me read it again. (Witness reviews 13 the document.) I cannot interpret what that 14 means. 15 Q. Well, if the mirror wasn't -- hadn't 16 been acquired, what would the accounting 17 literature have required with regard to the 18 recognition of a gain or loss on the swap 19 transaction? 20 A. If the mirror had not -- I want to ask 21 you a question. If the mirror had not been 22 acquired? 8967 1 Q. Right. 2 A. So, if all that was out there was the 3 interest rate swap, what would the accounting have 4 been? 5 Q. Yeah. How would that swap had to have 6 been accounted for? 7 A. I'm not sure I know the answer to that 8 question. 9 THE COURT: We'll adjourn until 1:30. 10 11 (Luncheon recess taken at 12:06 p.m.) 12 13 THE COURT: Be seated, please. We'll 14 be back on the record. 15 Mr. Guido, you may continue. 16 (1:33 p.m.) 17 Q. (BY MR. GUIDO) I think when we 18 adjourned, I was asking you some questions about 19 Exhibit B819. I'd like you to take a look at that 20 memorandum. Look at the last paragraph. It says 21 "Given the facts and circumstances, it does not 22 appear to me that we have any firm rules that 8968 1 would require any 1985 loss recognition to offset 2 United's 1985 gain. United understands the 3 economic reasoning for doing so, however, and has 4 agreed to start offsetting any such gains in 1986 5 so that their spreads will not be distorted." 6 Do you see that? 7 A. (Witness nods head affirmatively.) 8 Q. And my question is: Is it your 9 recollection that the gains on the sales of the 10 securities as part of the purported roll-down in 11 1986 were deferred at Mr. Millinor's request? 12 A. The gains that were deferred in 1986? 13 Q. And then subsequently restated. Were 14 they initially deferred at his request? 15 A. Not at his request, but with his 16 consultation as to the proper accounting 17 treatment. 18 Q. And did you participate in those 19 consultations? 20 A. I don't remember specifically, but I 21 feel comfortable in saying that I did. 22 Q. Okay. And the gains were deferred in 8969 1 1986 on the sales of the mortgage-backed 2 securities as part of what's been referred to as 3 the roll-down? 4 A. Yes, sir. 5 Q. Now, do you recall during what time 6 period the roll-down occurred? 7 A. Other than the first quarter of 1986, 8 no, sir. 9 Q. Do you recall that it occurred 10 subsequent to that time period? 11 A. The only reason that I think it 12 occurred during the first quarter is because when 13 we restated our 10Q, that gain was recognized, I 14 thought, in the first quarter. 15 Q. Now, there were additional sales in the 16 second quarter of 1986, were there not, out of the 17 mortgage-backed securities portfolio? 18 A. Yes, because we recorded additional 19 gains during that quarter. 20 Q. And those gains were recognized in the 21 June 1986 financial statement? 22 A. Yes, sir. 8970 1 Q. And the gains on the sale of the 2 mortgage-backed securities that were part of USAT 3 Mortgage Finance were recognized in the 4 December 31, 1985 financials, were they not? 5 A. The ones referred to in the Joe 6 Phillips memo? 7 Q. Yeah, the January 10th memorandum. 8 A. Yes. Those were recorded. Those were 9 recorded in the fourth quarter of 1985. 10 Q. Right. Now, my question is: Was it 11 your understanding that as of December 31, 1985, 12 that it was permissible to recognize gains on the 13 sales of the mortgage-backed securities out of a 14 portfolio of mortgage-backs that had been hedged 15 with swap instruments as of December 31, 1985? 16 A. It must have been because that's how we 17 accounted for it. 18 Q. Did -- were there any questions raised 19 about whether or not those gains should have to be 20 deferred prior to the discussions with Rick 21 Millinor in January of 1986? 22 A. I don't recall any specific 8971 1 discussions, but they may have occurred. 2 Q. You don't recall any having transpired? 3 A. No, sir. 4 Q. I'd like to direct your attention now 5 to the document that is marked as Exhibit A1624, 6 which is a set of investment committee minutes -- 7 I mean asset/liability committee minutes of 8 January 10th, 1986. 9 I'd like to direct your attention to 10 the second paragraph. It says, "Liquidity remains 11 high -- unusually high due to the year end sale of 12 securities and the recent sale of equity arbitrage 13 stocks. Ron and Joe were going to reinvest a 14 portion of the liquidity and liquidity investments 15 geared to the three-year treasury market. Bruce 16 and Mary Mims" -- it says "was" -- "to notify Ron 17 and Joe on the volume of liquidity securities that 18 would be needed to replace those sold at year end. 19 We have paid off most of our Federal Home Loan 20 Bank borrowings. So, those lines are now 21 available to meet our short-term funding 22 requirements." 8972 1 Do you see that? 2 A. Yes, sir. 3 Q. Now, what does it mean, "liquidity 4 investments geared to the three-year treasury 5 market"? Do you know? 6 A. To me, that would mean that -- 7 securities that had either a weighted average life 8 or a bullet maturity of three years or final 9 maturity. 10 Q. Now, I'd like to direct your attention 11 to Exhibit A1625, which is a set of the minutes of 12 the asset/liability committee of January 31, 1986. 13 I don't have the tab number, so I'll just look on 14 with you. 15 MR. BLANKENSTEIN: 507. 16 MR. GUIDO: 507? 17 Q. (BY MR. GUIDO) I'll direct your 18 attention to Paragraph 2. It says, "Finance 19 subsidiary." It says, "It was agreed that in 20 February when the reverse repos and the financing 21 subsidiary roll, we should officially dissolve the 22 entity and consolidate the assets, liabilities, 8973 1 and swaps into USAT." 2 Do you see that? 3 A. Yes, sir. 4 Q. Now, this indicates that the reverse 5 repos expire sometime in February. 6 Do you see that? 7 A. Yes, sir. 8 Q. Is that your understanding of when they 9 expired? 10 A. I don't recall specifically when they 11 were to expire. 12 Q. Now, look at Paragraph 4. It says, "It 13 was agreed investments would buy $100 million in 14 mortgage-backed securities to match against the 15 100-million-dollar five-year collar which USAT 16 owns as a result of the partial dissolution of the 17 financing subsidiary in December 1985." 18 Do you see that? 19 A. Yes, sir. 20 Q. Now, do you know what the collar was 21 that's referred to there with regard to the 22 financing subsidiary? 8974 1 A. No, sir, other than it was a type of 2 hedge instrument. But I don't know that it was 3 specifically -- where it was as far as what its 4 use was. 5 Q. Do you know what the amount of the 6 losses were if the swaps that had been mirrored 7 had been closed out would have resulted in to USAT 8 at the end of 1985? 9 A. No, sir, I don't recall specifically. 10 But I think it may have been in some of the 11 information that I've seen previously. 12 Q. You mean prior to your testimony that 13 you reviewed? 14 A. In connection with my deposition, that 15 information. 16 Q. Do you recall whether the amount of the 17 losses on the swap were equal to or exceeded the 18 amount of the gains of the mortgage-backed 19 securities? 20 A. I don't recall the specific amount, but 21 it would make sense that it would be equal to or 22 near the amount of the gain, based on how the 8975 1 hedge should work. 2 Q. Now, based on what transpired in the 3 mirror hedge, what happened to those losses? Were 4 they deferred and amortized out over the life of 5 the swap instrument? 6 A. I don't think there was a deferral. I 7 think they continued in place and the interest 8 payments were made as required. 9 Q. Now, did you attempt to, at the time 10 that the issue came up with regard to the failure 11 of USAT Mortgage Finance to meet the requirements 12 not to be consolidated with USAT, attempt to 13 ascertain whether, given the liability and asset 14 structure of USAT, that it would have been 15 possible to have restructured USAT in January or 16 February of 1986 so that those assets, the 17 mortgage-backed securities that had been sold, the 18 $350 million and the mirror swap had been 19 purchased would not have had to have been 20 undertaken, that there were other alternatives 21 that you were able to identify? 22 A. I do not recall any such conversations. 8976 1 Q. I'd like to direct your attention to 2 Exhibit 5010, which is the February 1986 3 performance report and particularly, the portions 4 of that report that apply to the -- 5 MR. GUIDO: What tab number is this? 6 MR. NICKENS: 557. 7 Q. (BY MR. GUIDO) And I particularly 8 would like to direct your attention to the page 9 that on the bottom right-hand corner has Bates 10 stamp US1676. 11 Do you have that page? 12 A. Yes, sir. 13 Q. Now, take a look at the section that 14 says "regulatory compliance." 15 Do you see that? 16 A. Yes, sir. 17 Q. Did you or people in the controller's 18 office calculate those figures for regulatory 19 compliance? 20 A. I believe we would have, yes, sir. 21 Q. Okay. Now, take a look at the section 22 under "liability growth." 8977 1 Do you see that? 2 A. The line item? 3 Q. The line item "liability growth." 4 A. Yes, sir. 5 Q. Is that in reference to the liability 6 growth regulation that was in effect at the time 7 promulgated by the Federal Home Loan Bank Board? 8 A. That would be my understanding. 9 Q. Now, this shows January 31, '86 -- it 10 says "actual $4,430,000,000." 11 Do you see that? 12 A. Yes, sir. 13 Q. And then it has over there under 14 "regulatory limit" of $4,752,000,000. 15 A. I see that, yes, sir. 16 Q. And for a difference of $322 million. 17 Do you see that? 18 A. I don't see the difference. Are you 19 just subtracting the two numbers? 20 Q. Just subtracting the two numbers, does 21 that come out to approximately $322 million? 22 A. Looks like it to me. 8978 1 Q. Okay. Now, did -- if you take a look 2 at the next page of the exhibit, that shows assets 3 and liabilities of USAT, does it not? 4 A. 1677? 5 Q. Yes. 6 A. No, sir. That's the United Financial 7 Group. 8 Q. So, that isn't just the assets of 9 United Savings Association of Texas? 10 A. No, sir. 11 Q. Okay. And where would we find that in 12 the performance report? 13 A. I'll look through here. 14 Q. Would you take a look through there? 15 A. On 1679. 16 Q. 1679? Now, is there any way to look at 17 that balance sheet and ascertain whether or not 18 there are any treasury securities that are held by 19 USAT as part of its liquidity portfolio? 20 A. No, sir. 21 Q. Where do they appear in that financial 22 statement? 8979 1 A. I mean, if they were there, they would 2 be under -- I assume under the "investment 3 securities and other." 4 Q. Okay. Now, what was the liquidity 5 requirement at the time for USAT, the percentage 6 requirement? 7 A. I'm not for sure. I think it might 8 have been 5 percent. 9 Q. 5 percent of what? 10 A. Deposits. 11 Q. Did anyone ask you to go back and take 12 a look and see whether or not you could 13 reconfigure the assets and liabilities of USAT in 14 January or February of 1986 to avoid having to 15 liquidate the mortgage-backed securities that were 16 sold upon the dissolution of USAT Mortgage 17 Finance? 18 A. No, sir. I don't recall anybody asking 19 me that. 20 Q. Now -- you don't recall, or you don't 21 think it happened? 22 A. I don't recall. 8980 1 Q. You don't recall one way or the other? 2 Is that what you're saying? 3 A. No, sir. I don't -- yeah. 4 Q. Now, at the end of 1987 -- I mean '85, 5 what was the financial condition of USAT? 6 A. At the end of 1985? 7 Q. Yes. 8 A. In what respect? 9 Q. In terms of its income-generating 10 abilities. 11 A. I really don't recall without looking 12 at the financial statements. 13 Q. Will you take a look at the earlier 14 part of this exhibit? It's the fourth quarter and 15 total 1985 performance. And can you ascertain 16 from that document what the financial condition 17 was of USAT in terms of its earning abilities in 18 1985? 19 A. According to this, the -- and again, 20 this is -- well, this is UFG on the consolidated 21 basis. But it would be a loss of 3.1 million. 22 Q. And if you look at the fourth quarter 8981 1 of 1985 -- and you're looking at, what, Bates 2 stamp US1113? 3 A. Yes, sir. 4 Q. If you look at the fourth quarter, what 5 does it show for income at that time? 6 A. A gain of 1.8 million. 7 Q. Now, did that gain include the gain on 8 the sales of securities? 9 A. Up at the top, it has a line item that 10 says that, yes, sir. 11 Q. Now, turn to US1115. Do you see the 12 non-interest income section on that page? 13 A. Yes, sir. 14 Q. And that shows -- it says 15 mortgage-backed securities, 12.504 million. 16 Corporate securities, 6.223. Liquidity 17 securities, 2.509. 18 Do you see that? 19 A. Yes, sir. 20 Q. For a total of 21 million 236? 21 A. Yes, sir. 22 Q. Then it says "The gains on 8982 1 mortgage-backed security sales were largely 2 produced by the liquidation of $350 million of the 3 500-million-dollar financing subsidiary 4 established in late November." 5 Do you see that? 6 A. Yes, sir. 7 Q. Now, do you recall whether there was 8 concern at USAT at the end of 1985 about whether 9 or not it would meet its net worth maintenance -- 10 excuse me -- its minimum net worth requirements? 11 A. I don't recall any specific 12 conversations, but that was a concern at all 13 times. 14 Q. It was a concern at all times that you 15 were at USAT? 16 A. What the amount of our minimum net 17 worth was or what our net worth was, yes, sir. 18 Q. Okay. And why was that of concern? 19 A. Because it's the basis for the activity 20 that the institution can conduct. 21 Q. Was USAT coming very close to its 22 minimum net worth requirement at the end of 1985? 8983 1 A. I don't recall, but let me look back 2 over here on this page. (Witness reviews the 3 document.) According to this, we had -- USAT had 4 regulatory capital of 189 million and a regulatory 5 limit, which I assume means the minimum, of 6 175 million. So, that's close. 7 Q. What was that? Approximately, what, 12 8 to $14 million above? 9 A. Yes, sir. 10 Q. Do you recall whether or not there were 11 any discussions at the end of '85 about the sale 12 of any assets to bolster the earnings, such as the 13 sale of branches, so as to maintain the minimum 14 regulatory net worth? 15 A. I recall discussions regarding the sale 16 of the branches. I'm not sure what -- I'm not 17 sure which -- I think we had two branch sales. 18 One was -- one to Independent Savings, I believe, 19 was the name. I'm not sure when that occurred, 20 but I know that that was a significant transaction 21 that would add a significant level of capital. 22 Q. Do you recall when that transaction 8984 1 occurred? 2 A. No, sir. I'm not sure. I don't -- 3 Q. I'd like to now move forward to some 4 other questions for you starting with the 5 purported roll-down in 1986, the beginning of 6 1986. 7 Did you participate in any discussions 8 in which the reasons for the roll-down were 9 explained by Joe Phillips to the participants in 10 the meetings? 11 A. I don't recall being in attendance at 12 any meeting where it was discussed, but I'm not 13 saying that I wouldn't have been. 14 Q. Did you learn about the roll-down prior 15 to its occurrence or subsequent to its occurrence 16 or the initiation of the roll-down? 17 A. I'm not sure when I would have become 18 aware of it, whether it was before or after. I 19 don't know. I mean, certainly afterwards because 20 we would have been involved and did the review of 21 those -- of that transaction. 22 Q. You mean review in terms of the 8985 1 accounting for that transaction. Right? 2 A. That's correct. 3 Q. And you initially applied the advice 4 that Mr. Millinor gave you, and that is you 5 deferred the gains on the sale of those 6 mortgage-backed securities, at least in the first 7 quarter of 1986. 8 Do you recall that? 9 A. That would be -- I don't recall a 10 conversation with Millinor, but we would have -- I 11 feel confident that discussions were held before 12 we did the accounting for it. 13 Q. Now, do you recall any discussions with 14 Joe Phillips of why these sales were made out of 15 that portfolio in the beginning of 1986 as part of 16 the purported roll-down? 17 A. No, sir. 18 Q. Do you know what the claimed reasons 19 were for the purported roll-down? 20 A. The prepayments were the issue. 21 Q. Do you recall what it was that was said 22 about the prepayments? 8986 1 A. I don't recall any specific 2 conversations, but only through the -- again, 3 through the documentation related to my deposition 4 that I saw, it was a concern that due to the 5 prepayments, the value -- the increase in the 6 value of the securities as a result of the drop in 7 interest rates, you know, they were going to 8 prepay. And so, we were going to have to reinvest 9 cash or reinvest the cash proceeds. 10 Q. How did -- do you know how Mr. Phillips 11 learned about the acceleration of the prepayments? 12 A. No, sir. I don't know specifically how 13 he learned about it, but I would assume that when 14 he saw the principal remittances coming in and saw 15 the increased level of them, that he realized they 16 were starting to prepay faster than expected. 17 Q. I'd like to direct your attention to 18 Exhibit A1422, which is a set of investment 19 committee minutes of December 15th, 1986. 20 Now, I think you testified that you did 21 not -- or you were not a member of the investment 22 committee; is that correct? 8987 1 A. That's correct. I don't recall being 2 on that committee. 3 Q. Okay. And that you did attend 4 meetings, but there were very few times that you 5 attended meetings? 6 A. Very few. 7 Q. Now, did you have -- or did you receive 8 periodically copies of the investment committee 9 minutes? 10 A. I don't recall receiving them. I might 11 have been routed on them. I don't know. 12 Q. Do you recall whether or not you 13 reviewed them periodically? 14 A. No, sir. I don't recall. 15 Q. I'd like to direct your attention to 16 Bates stamp US35160 through US35162 of those 17 investment committee minutes. 5160 is essentially 18 the settled portfolio as it existed on the date 19 that it's dated, December 10th, 1986. 20 Now, I'm directing your attention now 21 to US35161 which at the heading says "sales 22 pending: Profits and losses," and there's 8988 1 "pending transactions." And it shows sales of a 2 face amount under a DARTs portfolio of $17,893,000 3 Do you see that entry? 4 A. Under "face"? 5 Q. Yes. 6 A. Yes. 7 Q. Do you know what the reference is to 8 the DARTs in that entry? 9 A. I think the DARTs were the Dutch 10 Auction Rate Securities or something like that. 11 Q. Were they a separate -- were they in a 12 separate subsidiary of USAT? 13 A. Yes. 14 Q. And then it has "treasury" under it. 15 Do you see that? It has a figure of 16 zero under it. 17 A. Uh-huh. (Witness nods head 18 affirmatively.) 19 Q. Then it has the category called 20 "investment." 21 Do you see that? 22 A. Directly under "total investments"? 8989 1 Q. You see "investments"? 2 A. Right. 3 Q. Then it has "total investments," face 4 value of that which was sold was $917,363,000. 5 Do you see that? 6 A. Yes, sir. 7 Q. And then on the far right, it has 8 realized gain or loss of $14,581,000. 9 A. Yes, sir. 10 Q. Then on the next page, it has 11 "purchases." And that shows the -- at US35162, it 12 shows purchases of DARTs -- do you see that -- of 13 approximately $20,100,000? 14 A. Yes, sir. 15 Q. And then it shows purchases of total 16 investments, I think, of 585 million 354 for a 17 gain of 7,191,000. 18 Do you see that? 19 A. I see that line. Looks more like 785, 20 but I see the 71. 21 Q. I'm sorry. You said 785? 22 A. It looks like 785 million 354 to me. 8990 1 Q. That is the face amount of the 2 investments that were purchased. Right? 3 A. Right. 4 Q. And then the gain was 7 million 191? 5 Is that what it is? 6 A. Yes, sir. 7 Q. Why would there be a gain recorded on 8 purchases, or is that the unrealized gain from the 9 time it was purchased to the date of this report? 10 A. That's what it would indicate to me. I 11 don't know for sure, but that's what it looks 12 like. 13 Q. Did your office prepare any schedules 14 that were used by the investment committee, to 15 your knowledge? 16 A. No. Not -- there may have been some 17 that we prepared; but I think, by and large, they 18 were prepared by the treasury area. 19 Q. Okay. Take these three schedules on 20 US35160, 5162 -- 5160, 5161, and 5162. 21 Were those prepared by your office? 22 A. I don't think so, but they may have. 8991 1 But I don't think so. 2 Q. Now, looking at the magnitude of those 3 claims or the sales and the purchases, at the time 4 you were at USAT, did the purchases and sales show 5 up in any records that the controller's office 6 generated? 7 A. I can't think of any that we might have 8 specifically done, but we would have relied upon 9 the information that was being prepared by the -- 10 in the treasury area as to those transactions and 11 reviewing it from that perspective. But I'm not 12 sure that we developed the -- necessarily 13 developed any detailed schedules. 14 Q. Well, in terms of preparing the 15 financial statements -- I mean, this is coming 16 close to year end 1986. Did the treasury 17 department -- I mean the controller's office have 18 records that would indicate what the turnover was 19 in the portfolios that were held by USAT? 20 A. I don't recall. 21 Q. You don't recall, or you don't know? 22 A. I don't recall having any records. I 8992 1 do know that -- I do recall the issue of the 2 turnover being discussed, but only in a general -- 3 I can't remember any specifics related to 4 turnover. But I can remember that in one of the 5 various portfolios, whether it's securities or 6 mortgage-backs or corporate securities or 7 whatever, the turnover in that portfolio being an 8 issue. 9 Q. Was that at the end of 1986? Do you 10 recall? 11 A. I don't recall the time frame. 12 Q. Was that at a time when -- at a time 13 when the auditors had started raising questions 14 with regard to trading versus investment? 15 A. I do remember in that -- in that 16 context. 17 Q. So that those two things were related. 18 Does this turnover here that we see here in this 19 investment portfolio of sales of 900 million -- 20 917 million 363 and a purchase of 485 million 354 21 raise any questions in your mind about the 22 turnover of that portfolio? 8993 1 A. I'm not sure what portfolio it is. 2 Q. It references the investment portfolio, 3 and that's been described as the portfolio that 4 Joe Phillips managed as part of a risk-controlled 5 arbitrage. 6 MR. NICKENS: Your Honor, I'm not sure 7 what the evidence is going to show on that. If he 8 wants to ask him to assume that for purposes of 9 the question, that's one thing. But to tell him 10 that that's a fact -- 11 Q. (BY MR. GUIDO) Will you assume that 12 for purposes of the question? 13 A. I'm sorry. Assume what? 14 Q. Will you assume that this investment 15 refers to the Joe Phillips portfolio that was 16 structured as a risk-controlled arbitrage at USAT? 17 A. Okay. I'll assume that. Now, what do 18 I -- what's the question? 19 Q. Does the turnover in that portfolio 20 raise any questions in your mind about whether or 21 not that turnover was consistent with the purposes 22 of the portfolio? 8994 1 A. If this was an investment portfolio, 2 just looking at these numbers, it would indicate a 3 100 percent turnover, which would raise an issue 4 in my mind, yes. But, you know, that's just 5 looking at these two sheets of paper and not 6 knowing what other facts are out there. 7 Q. Well, do you recall when the issue was 8 raised, came up in the context of the auditors 9 raising the question about trading versus 10 investment, inquiring of what were the reasons for 11 the sales that were made out of the USAT 12 portfolios so that you could transmit that 13 information to the auditors in response to their 14 questions about the turnover in the portfolio? 15 A. I don't recall necessarily the reasons. 16 The part that I recall is the number or the 17 turnover ratio, whatever you want -- the number of 18 times the portfolio might have turned over. I 19 don't recall any numbers, but just that you can't 20 have -- at some point in time, if there is a lot 21 of turnover, then it has to move from an 22 investment into another category -- trading or 8995 1 whatever the other appropriate category would be. 2 Q. And what is the consequence of moving 3 into that other category? 4 A. I'm not sure what -- at this time frame 5 what categories were out there. But currently, 6 it's investment or available for sale and trading. 7 And if it's trading, it's mark-to-market. And if 8 it's available for sale, it's lower of cost to 9 market. 10 Q. Now, the -- with regard to when it's 11 classified as a trading portfolio, what would 12 happen to the hedge instruments that were 13 affiliated with that portfolio if it were 14 mark-to-market? Would they also be 15 mark-to-market? 16 A. I don't know the answer to that without 17 doing some research. 18 Q. I'm not talking about today. I'm 19 talking about your understanding back then. 20 A. I'm talking back then. I mean, I don't 21 recall then, and -- 22 Q. You don't recall whether or not you 8996 1 received any advice from the outside auditors on 2 that question? 3 A. I don't recall any specifically, no, 4 sir. But I feel confident that we consulted with 5 them. 6 Q. Now, I'd like to direct your attention 7 to A5017, which is the December 1986 performance 8 report of United Financial Group. 9 MR. NICKENS: 564. 10 Q. (BY MR. GUIDO) I'd like to direct 11 your attention to the Schedule DJ that's attached 12 to this performance report. 13 Do you see that schedule? 14 A. Is it titled "gain on sale of 15 investment securities"? 16 Q. Yes. 17 A. Yes. 18 Q. Now, take a look at the category that 19 says "current month" at the top under "USAT." 20 Do you see that? 21 A. Yes, sir. 22 Q. Now, it has a number of instruments 8997 1 that say Colt Industries, Scoville, Control Data, 2 down through Marc IV Industries. 3 Do you see that packet? 4 A. Yes, sir. 5 Q. Does that make reference to high-yield 6 bonds, to your knowledge? 7 A. I don't know whether those were 8 high-yield bonds or the equity securities. 9 Q. Do you know who prepared this schedule? 10 A. Either myself or someone in the 11 treasury department. 12 Q. I'd like you to turn back -- move back 13 in terms of the schedule or back to the beginning 14 to DD, Schedule DD. 15 Do you see that schedule? 16 A. Yes, sir. 17 Q. That says "equity arbitrage profit 18 contribution," does it not? 19 A. Yes, sir. 20 Q. And that's where the gains and sales on 21 the corporate equity securities were recorded, is 22 it not? 8998 1 A. Yes, sir. 2 Q. So, then let's go back to DJ. Those 3 entities that are listed there, those are 4 corporate debt securities, are they not? 5 A. I have no way of knowing that they are. 6 They -- I don't recognize any of the names as 7 being a security, but that certainly would be 8 consistent with my knowledge of where we would 9 have reported that. 10 Q. Let me ask you something. Let's just 11 walk through the schedules. Maybe that will help. 12 You start -- after Page 5 of the document, you've 13 got consolidated statements of financial 14 condition, which is the AA schedule. Let's just 15 identify who prepared what. 16 A. Okay. 17 Q. Is that something that the controller's 18 office prepared? 19 A. Yes, sir. 20 Q. Okay. And AB, is that something that 21 the controller's office prepared? 22 A. Yes, sir. 8999 1 Q. AC, is that something that the 2 controller's office prepared? 3 A. I believe so, yes, sir. 4 Q. AD, is that something that the 5 controller's office prepared? 6 A. Yes, sir. 7 Q. AE, is that something that the 8 controller's office prepared? 9 A. I would think, yes, sir. 10 Q. Pardon? 11 A. Yes, sir, I would think it is. 12 Q. AE, is that something the controller's 13 office prepared? 14 A. I would think so. 15 Q. And then it switches to DB. It says 16 "analysis of base net interest income." 17 Is that something that the controller's 18 office prepared? 19 A. I'm not sure as to whether it would 20 have been us or treasury department. 21 Q. Okay. Now -- then let's go to DC, 22 "cost of carry on non-earning assets." 9000 1 Is that something the controller's 2 office prepared? 3 A. I believe this is one that we did 4 prepare. 5 Q. Okay. DD, "equity arbitrage profit 6 contribution," is that something the controller's 7 office prepared? 8 A. I think this is one the treasury 9 department would have prepared, but I'm not sure. 10 Q. Now, do you recall there was -- at 11 sometime shortly after you arrived at USAT, there 12 was a discussion about developing an information 13 system that would allocate items to various profit 14 centers to create matches between the cost of 15 funds for that profit center and the assets in 16 those various profit centers? 17 A. I don't remember specific 18 conversations, but that was an objective. 19 Q. And was one of those profit centers 20 determined to be equity arbitrage? 21 A. It would have been, yes, sir. 22 Q. Now, who was it that was -- had the 9001 1 primary responsibility for maintaining the books 2 and records by profit centers at USAT? Was it 3 treasury or the controller's office or both? 4 A. I was responsible for maintaining -- 5 for accuracy and maintenance of the general 6 ledger. But there were reports like this where 7 allocations could be made on -- you know, for 8 management reporting purposes that could have been 9 performed by us or treasury. 10 Q. Is that because each of the -- 11 A. Or actually, the corporate -- I think 12 it was the corporate planning and budget or a name 13 like that, part of the treasury department. 14 Q. So, then, take a look at DE, "merchant 15 banking profit contribution." 16 Was that something that the 17 controller's office prepared? 18 A. We might have. I'm just -- I just 19 don't recall. 20 Q. You don't recall? 21 A. (Witness shakes head negatively.) 22 Q. DF, the real estate profit 9002 1 contribution. 2 A. We may have done that one. 3 Q. Okay. DG, "equity investments and 4 other asset loss contribution." 5 A. We may have prepared that, as well. 6 Q. DH, "fees and service charges." 7 A. I feel confident that we would have 8 prepared that one. 9 Q. And DI, "gain on sale of loans." 10 A. We may have prepared that one, also. 11 Q. And DJ, back to the gain on sale of 12 investment securities. 13 A. We may have prepared this one, too. 14 Q. So, remember when I asked you questions 15 earlier today about whether or not the schedules 16 were prepared by treasury and the basic data for 17 the part of the report was prepared by treasury, 18 your answer would be that with regard to the 19 schedules, it's likely that the controller's 20 office prepared those schedules? 21 A. Based on information submitted to us 22 from other departments, we very well could have. 9003 1 I don't recall. 2 Q. Now, take a look at the gain on sale of 3 investment securities again. It shows 172,499,000 4 in Fannie Maes having been sold. 5 A. Are we on this gain of sale of -- 6 Q. D. 7 A. D? 8 Q. Investment securities again. 9 A. Okay. 10 Q. Do you see the entry, Fannie Mae, 11 172 million 499? 12 A. Yes, sir. 13 Q. And Freddie Mac, 613 million 755? 14 A. Yes, sir. 15 Q. And Ginnie Maes, 448 million? Do you 16 see those figures? 17 A. Yes, sir. 18 Q. Now, those are quite large figures, 19 aren't they, in terms of the size of the 20 mortgage-backed security portfolios at USAT? 21 A. Let me see what size. It would 22 represent a third of the ending balance at 12-31. 9004 1 Q. And if that was entirely out of the 2 investment portfolio, which was one-third 3 approximately -- assuming that it was one-third of 4 the size of the mortgage-backed security portfolio 5 at USAT, that would be a very sizable percentage, 6 would it not? 7 MR. NICKENS: Your Honor, what are the 8 assumptions we're making? We're making the 9 assumption that the investment portfolio was 10 one-third of the total and we're assuming that all 11 of these sales were attributable to that 12 portfolio? 13 MR. GUIDO: Thank you for clarifying my 14 question, Mr. Nickens. 15 Q. (BY MR. GUIDO) Take those assumptions 16 Mr. Nickens just set out. 17 A. That this represents one-third of 18 the -- 19 Q. Assume that these sales were out of the 20 investment portfolio, which was one-third the size 21 of the total that you just read off. 22 A. Okay. If I make that assumption -- 9005 1 Q. What would be the percentage at this 2 point? 3 A. I guess one-third, looking at the 4 numbers. Let me -- I'm not sure I'm clear. 5 Q. What was the total portfolio size of 6 mortgage-backed securities? 7 A. 1.9 billion plus 700 million. So, 2.6. 8 Q. So, let's say approximately $2 billion? 9 A. 2.6. 10 Q. I'm sorry. Did you say 2.6? 11 MR. GUIDO: I'm sorry. I thought he 12 said 1.97. Excuse me. I'm sorry. 13 Q. (BY MR. GUIDO) What did you say the 14 total was? I misunderstood. 15 A. 2.6 billion. 16 Q. Billion? Okay. I'm sorry. And the 17 total sales approximate what? 18 A. 900 million. 19 Q. Okay. So, assume that the 900 million 20 all came out of the portfolio that was one-third 21 the size of the total. What percentage would that 22 be? 9006 1 A. Put me on the spot. I can't do that in 2 my head. 3 Q. I'm sorry. Mr. Williams was able to do 4 one calculation in 32 seconds. I'm sorry. 5 A. I would say something -- let's see. 6 It's less than 50 percent. How's that? 7 Q. All right. We'll leave that. 8 $900 million is a sizable amount of sales in a 9 one-month time period out of a portfolio that 10 totals 2.8, 2.9 billion, is it not? 11 A. Yes. 12 Q. And would that raise questions in your 13 mind about what the purposes of the sales were? 14 A. It would -- yes. Not knowing any other 15 facts, just looking at that, yes. 16 Q. Now take a look at -- under "gain on 17 sale of investment securities year-to-date under 18 USAT" on a monthly basis. 19 Do you see that? 20 A. Uh-huh. (Witness nods head 21 affirmatively.) 22 Q. It shows that in March there was a gain 9007 1 of 31,637,000. 2 Do you see that? 3 A. Yes, sir, I do. 4 Q. And it shows in June a gain of 5 9,302,000. 6 Do you see that? 7 A. Yes, sir. 8 Q. In September, it shows a gain of 9 14,504,000. 10 Do you see that? 11 A. Yes, sir. 12 Q. And in December, it shows a gain of 13 14,498,000. 14 Do you see that? 15 A. Yes, sir. 16 Q. Do you notice the pattern of the gains 17 recognized there, that they all seem to end or 18 increase sizably in the months that are quarterly 19 reporting dates for financial reporting purposes? 20 A. There is a correlation there. 21 Q. Does that raise a question in your mind 22 about what the purposes of the sales were? 9008 1 A. In what respect? 2 Q. What the purposes were. Whether or not 3 they were sales made for the purposes of 4 generating gains to be reported in the financial 5 statements at quarter's end. 6 A. It would not -- are these -- these are 7 loan sales; is that correct? 8 Q. No. These are gains on sales of 9 investment securities which -- 10 A. I mean, the timing of it, I don't know 11 that it would matter whether it was in that 12 quarter or the next -- or in April. I mean, does 13 it raise concerns? Yes, it would raise a question 14 as to looking at it. If I was an auditor or go 15 back and look and see why these were occurring 16 like that -- 17 Q. Now, you were the controller. You were 18 the person, were you not, that prepared the 19 financial statements that were filed pursuant to 20 the laws under the jurisdiction of the Securities 21 and Exchange Commission, were you not? 22 A. That's correct. 9009 1 Q. And did you sign those statements? 2 A. That's correct. 3 Q. And one of the questions that a person 4 would raise with regard to those statements is 5 whether or not they are accurate. Right? 6 A. That's correct. 7 Q. And when you signed those statements, 8 you vouched for the accuracy of those statements. 9 Right? 10 A. That's correct. 11 Q. Did you ever go back and check and 12 ascertain what the purposes were for the sales 13 that were made out of the investment securities at 14 USAT at year end 1986 before filing those reports? 15 A. I'm not sure that the purpose would 16 have anything to do with the accuracy of the 17 reported gain. 18 Q. You indicated that one of the things 19 that the purpose determines is whether or not you 20 classify a portfolio as trading versus investment. 21 Right? 22 A. Right. 9010 1 Q. And if you classify the portfolio as 2 trading, you have to report the gains and losses, 3 the unrealized gains and losses as part of your 4 income in that financial report. Correct? 5 A. That's correct. 6 Q. And that -- so that what the purposes 7 were for these transactions could have 8 significance for the accuracy of those financial 9 statements that were filed in December of 1986, 10 would they not? 11 A. That's correct. 12 Q. Did you attempt to go back and 13 ascertain what the purposes were of those sales 14 that generated those gains in 1986? 15 A. No, sir. I don't recall going back and 16 looking at those. 17 Q. Do you recall ever asking anyone why 18 they did that? Why those sales were made? 19 A. I don't recall those questions being 20 asked, but -- of me asking them or any -- I don't 21 recall me asking those questions. But I do 22 recall, again, the issue that was raised by Peat, 9011 1 who came in every quarter and looked at our 2 financials, the 10Qs, before they were issued as I 3 remember the concept of trading versus held for 4 investment. But I'm not sure I remember the time 5 frame. I don't know if it was '86 or '85 or '87. 6 Q. When the issue was raised -- 7 A. Yes, sir. 8 Q. No matter what the time period. When 9 the issue was raised, was any effort made to go 10 back and ascertain what the purposes of the sales 11 were that triggered the question in the minds of 12 the auditor that there may be a trading versus 13 investment issue here? 14 A. I don't recall. 15 Q. How did you learn that there was a 16 trading versus investment issue raised by the 17 auditors? 18 A. I'm sure they would have communicated 19 that to me or I would have -- excuse me -- heard 20 it through them. 21 Q. Pardon? 22 A. I would have heard it through either -- 9012 1 through them directly. Or if they communicated it 2 to Mike or Bruce, perhaps through them; but I 3 don't recall. 4 Q. Did you meet regularly with 5 Mr. Millinor to discuss accounting issues related 6 to USAT? 7 A. Yes. 8 Q. And in the course of those meetings, 9 did you have other people come in and make 10 presentations to explain to Mr. Millinor what they 11 had been doing in response to questions that he 12 raised? 13 A. I don't remember any specifics; but if 14 I could not answer the questions, I would have 15 made sure we got the people in there that could 16 answer the questions or they would have gone to 17 them direct. 18 Q. When the issue was raised about the 19 trading versus investment, were you aware that 20 there had been -- or did you know one way or the 21 other whether there had been sales made out of the 22 high-yield bond portfolio at quarter's end in 9013 1 order to generate gains? 2 A. If there was a sale that would have 3 generated gains, I would have been aware of it 4 because it would have been recorded. I'm not sure 5 that's your question, though. 6 Q. You don't -- I'm sorry? 7 A. I'm not sure I understand your 8 question. If bonds or corporate securities had 9 been sold and generated a gain, I would have been 10 aware of that. 11 Q. And how -- were you aware at the time 12 the issue was raised, with regard to trading 13 versus investment, that sales had been made out of 14 the mortgage-backed security portfolio at USAT in 15 order to generate gains at quarter end? 16 A. Again, I guess I'm not following your 17 question. I mean, at the time that the trading 18 issue was raised -- 19 Q. Yes. 20 A. -- was I aware that mortgage-backed 21 securities were being sold to generate a gain? 22 Q. Uh-huh. (Nods head affirmatively.) 9014 1 MR. NICKENS: I think the question, 2 Your Honor, was not mortgage-backed securities. 3 MR. GUIDO: No. I changed the question 4 to mortgage-backed securities. 5 MR. NICKENS: I'm sorry. 6 A. I guess I'm not sure that I was aware. 7 I don't recall. 8 Q. (BY MR. GUIDO) Have you ever seen any 9 documents that indicate that there may have been 10 sales out of the high-yield bond portfolios at 11 quarter end to generate gains? 12 A. In the documents that I've received -- 13 Q. Yeah, from me. 14 A. -- in the last week? 15 Q. The last week or two. 16 A. The only memo that comes to mind is the 17 memo that Mike Crow wrote to Bruce and I asking if 18 there were any unrealized gains in the third 19 quarter. 20 Q. Do you recall receiving that 21 memorandum? 22 A. I'm sure I did. I mean, I don't recall 9015 1 getting it, no; but I'm sure I did. 2 Q. You don't recall getting the 3 memorandum? 4 A. (Witness shakes head negatively.) 5 Q. Do you -- 6 THE COURT: Would you speak, sir? 7 THE WITNESS: Oh, no, sir. 8 Q. (BY MR. GUIDO) I'm sorry. You have 9 to verbalize. 10 A. No, I don't recall getting it. 11 Q. Do you recall ever seeing any memoranda 12 that indicated that Ron Huebsch wanted to know 13 what the needs would be so that he could determine 14 which high-yield bonds to sell for purposes of 15 generating gains at quarter end to bolster 16 profits? 17 A. I don't recall a memo, no, sir. 18 Q. You don't recall ever seeing such a 19 memorandum? 20 A. I know there's -- in the information 21 that I received recently, there is a memo to Ron 22 Huebsch. But I'm not exactly sure -- 9016 1 THE COURT: Mr. Guido, we'll take a 2 short recess. 3 MR. GUIDO: Okay, Your Honor. 4 A. -- what was on it. 5 6 (A short break was taken 7 at 2:31 p.m.) 8 9 THE COURT: We'll be back on the 10 record. Mr. Guido. 11 MR. GUIDO: Thank you, Your Honor. 12 (3:00 p.m.) 13 Q. (BY MR. GUIDO) When we broke, I was 14 asking you about some documents. And I'd like to 15 direct your attention to T5302, which is at Tab 16 566. It's a memorandum dated November 13th, 1986? 17 MR. BLANKENSTEIN: Mr. Guido, I believe 18 you misspoke. I believe it's 4302. 19 MR. GUIDO: 4302. Excuse me. 20 Q. (BY MR. GUIDO) It's a memo from 21 Mike Crow to Bruce Williams. It says, "Bruce, we 22 had a discussion at the investment committee on 9017 1 selling junk bonds for profits for purposes of 2 quarterly earnings." 3 Do you see that reference? 4 A. Yes, sir. 5 Q. Then it says, "Ron Huebsch made an 6 impassioned plea to get the word now if we are 7 going to need a lot of profits because the market 8 is favorable right now to getting out of some 9 bonds taking a profit and having a chance of 10 getting back into some good yielding stuff. He's 11 probably absolutely correct. GRW and I stated 12 that we would need major amounts of profits 13 because we cannot depend on such things as a 14 branch sale, loan servicing sale, and consumer 15 sale to pull us out of the fire." 16 Then it says "Charles asked to see some 17 projections on the quarter prior to making a 18 definitive decision. Would you start pulling 19 together what you think the quarter will look like 20 without extraordinary gains? It should be macro 21 in nature and should not be an elaborate exercise 22 and, in my opinion, should not take more than 9018 1 about an hour (at least that is the kind of effort 2 I am envisioning)." 3 Do you see that? 4 A. Yes, sir. 5 Q. Is that one of the memoranda that I 6 showed you prior to your testimony today? 7 A. No, sir. 8 Q. Does that memorandum indicate to you 9 that the -- that the variations in the figures 10 that we looked at in the December performance 11 report a few minutes ago may raise a question of 12 whether or not the high-yield bond portfolio was 13 being used for trading versus investment purposes? 14 A. It would raise that issue, but I'm not 15 sure that -- what the answer would be. 16 Q. Now, I'd like to direct your attention 17 to Exhibit 4192, which is at Tab 565. 18 Do you have that document in front of 19 you? That's the April 24th, 1986 memo from 20 Mike Crow to Jenard Gross and Jerry Williams. It 21 says, "In the spirit of bad news to the top, this 22 is something I'm sure you're aware of but I 9019 1 thought I would remind you. It appears that 2 several of the gains that we had counted on to 3 bolster second quarter profits may be deferred/not 4 occur: One, branch sale to Merabank; two, 5 consumer loans to Security Pacific; three, sale of 6 Weingarten stock)." 7 Do you see that? 8 A. Yes, sir. 9 Q. "Should none of these transactions 10 close (or at least get to a state where we can 11 book an accounting profit) second quarter earnings 12 will probably be at a loss position unless: One, 13 we can allow our reserves to slide substantially. 14 This may be impossible unless scheduled items 15 decrease; two, equity arbitrage has an outstanding 16 performance for the quarter." 17 Do you see that paragraph? 18 A. Yes, sir. 19 Q. Then it says, "I am unaware of any 20 significant opportunities to take additional bond 21 profits (as we did in the first quarter) or any 22 pending real estate sales which would produce a 9020 1 profit)." 2 Do you see that? 3 A. Yes, sir. 4 Q. Does that indicate to you that there 5 may be a need to look more closely at the pattern 6 of gains in the high-yield bond and the 7 mortgage-backed securities portfolio to ascertain 8 whether those are trading versus investment 9 portfolios? 10 A. Yes, sir. 11 Q. Now, looking at the next document that 12 I've put in front of you as Tab 567, it's a 13 September 23rd, 1986 memorandum from Mike Crow to 14 Jenard Gross and Jerry Williams. And it's T4251, 15 Tab 567. 16 It says, "The attached schedule 17 presents our best estimate of gains that will be 18 needed for quarterly earnings. We are proceeding 19 with taking these gains. 20 Do you see that? 21 A. Yes, sir. 22 Q. And then look at the second page. It 9021 1 says "Gains/to alleviate deficit. Liquidity, 2.3 2 million. Freddie Mac stock, 1.2 million. 3 Mortgage-backed securities, 1.9 million. And junk 4 bonds, 6.0 million." 5 Do you see that? 6 A. Yes, sir. 7 Q. Does that indicate to you that there 8 may be a need to look more closely at the pattern 9 of gains that were reflected in the December '86 10 performance report that I showed you to ascertain 11 whether or not the mortgage-backed security 12 portfolios at USAT and the high-yield bond 13 portfolios were trading versus investment 14 portfolios? 15 A. In and of itself, yes, sir. I mean, 16 just standing there looking at them. 17 Q. Now, I'd like to direct your attention 18 to a document that is the October 8th, 1986 19 investment committee minutes. It is 20 Exhibit A1412. 21 I'd like to direct your attention to 22 the second page of the document at the top. It's 9022 1 Bates stamped US3010551. 2 A. I'm sorry. Could you repeat that 3 number? 4 Q. The second page which is US3010551. 5 A. Is this on Exhibit A1412? 6 Q. 1412. You've got a different Bates 7 stamp number? I'm sorry. I have an older copy. 8 It's the second page of the exhibit. It says at 9 the top, "Ms. Laurenson then discussed the 10 association's mortgage-backed securities. She 11 presented a proposal regarding mortgage-backed 12 security trading policy. Such policy was fully 13 discussed and unanimously approved by the 14 investment committee. It was ordered that such 15 proposal would be presented to the board of 16 directors for their approval." 17 Do you see that? 18 A. Yes, sir. 19 Q. And turn to the third page where it 20 says, "United" -- regarding mortgage-backed 21 security trading policy. It says, "It shall be 22 the policy of United Savings Association of Texas 9023 1 to undertake trading activities" -- 2 A. Excuse me, sir. 3 Q. The third -- I'm sorry. My document is 4 in a different order than yours. I'm sorry. 5 Yours is at US3004917. It's halfway into the 6 packet of the exhibits. 7 Do you see the heading that says 8 "United regarding mortgage-backed security trading 9 policy"? 10 A. Yes, sir. 11 Q. And it says, "It shall be the policy of 12 United Savings Association of Texas to undertake 13 trading activities related to the mortgage-backed 14 securities investment portfolio trading operation 15 from time to time in order to enhance the 16 profitability of the association." 17 Do you see that sentence? 18 A. Yes, sir. 19 Q. Have you ever seen that sentence 20 before? 21 A. I don't recall seeing it. 22 Q. You don't recall, or you never saw it? 9024 1 A. I don't recall having seen it. I don't 2 know whether I did or did not. 3 Q. Does that sentence, that statement, 4 conform to your understanding of what the 5 mortgage-backed securities portfolios' purpose 6 were at USAT? 7 A. I recall or recollect that I think 8 there was a trading account for mortgage-backed 9 securities, but I'm not for sure when or the 10 duration that it was there or utilized. 11 Q. And what -- what do you recall about a 12 mortgage-backed security trading portfolio? 13 A. What I previously said. I mean, I just 14 remember in general terms that there might have 15 been one. I'm not positive that there was. I 16 just remember that we had -- I mean, there were so 17 many numerous mortgage-backed portfolios, I'm not 18 sure that I could specifically point to any one at 19 any point in time. I certainly don't recall 20 specifically. 21 Q. Do you recall there being a speculative 22 trading account at USAT? 9025 1 A. Not with that -- not that particular -- 2 no, I do not. 3 Q. Do you remember seeing any documents 4 that indicated that there may have been such an 5 account? 6 A. Recently? 7 Q. Uh-huh. (Nods head affirmatively.) 8 A. No, sir. 9 Q. Does this policy that is mentioned here 10 conform to your understanding of the policy with 11 regard to the hedged mortgage-backed securities 12 portfolios financed with reverse repurchase 13 agreements? 14 A. I'm sorry. Could you repeat that 15 again? 16 Q. Does this statement conform with 17 your -- 18 A. This first sentence? 19 Q. This first sentence. Does it conform 20 with your understanding of the policies with 21 regard to the mortgage-backed securities 22 portfolios at USAT funded with reverse repos 9026 1 hedged with swaps? Does this conform to your 2 understanding of what the purposes of those 3 portfolios were? 4 A. It could. I don't -- I'm not sure that 5 I -- that a trading account would have hedges on 6 it, but I guess it could. It does not ring -- 7 Q. I'm talking about -- remember we talked 8 about the portfolios at the beginning, of what you 9 understood the mortgage-backed securities 10 portfolios -- 11 A. In order to produce a net interest 12 margin? 13 Q. Yes. Do you remember that discussion? 14 A. (Witness nods head affirmatively.) 15 Q. Does this policy that's reflected here 16 conform with your understanding of what the 17 purposes were of those portfolios? 18 A. No. But this, to me, addresses a 19 different portfolio. 20 Q. At least you think it addresses a 21 different portfolio? 22 A. Yes, sir. 9027 1 Q. Right? You think -- 2 A. I think it does. I don't know -- 3 Q. You don't know whether it does, and you 4 don't know if it's applicable? 5 A. No. 6 Q. But if this policy was applied to the 7 portfolios that you testified to as being the 8 hedged mortgage-backed securities portfolios that 9 were structured in order to generate a net 10 interest spread over time, would those portfolios 11 have to be mark-to-market? 12 A. My understanding of those portfolios 13 and this sentence would not be consistent. 14 Q. And what would be the consequences if 15 this policy turned out to be the practice in those 16 portfolios? 17 A. If this policy was the practice? 18 Q. Uh-huh. (Nods head affirmatively.) 19 A. There would have to be a reconciliation 20 to the -- then my understanding of what the -- 21 what I thought the actual policy was would have 22 been incorrect. 9028 1 Q. Okay. And would the portfolio also 2 have to have been mark-to-market as a trading 3 portfolio? 4 A. If that's what the portfolio was deemed 5 to be, I think that would be the proper 6 accounting. 7 Q. Now, I'd like to move to another set of 8 documents. And I'd like to direct your attention 9 to a document marked as 1406, and it is in Tab 10 543. It is a set of the August 28th, 1986 11 investment committee minutes of USAT. 12 I'd like to direct your attention to 13 the third page of the exhibit, which is US34861. 14 And I'd like to direct your attention to the first 15 full paragraph. It says that "Mr. Phillips noted 16 that there was only one mortgage-backed security 17 transaction that occurred during the prior two 18 weeks which was a value trade of 80-million-dollar 19 Freddie Mac 9s to 50-million-dollar Fannie Mae 9s. 20 The economic result of this transaction was to 21 increase the yield on these securities by about 12 22 basis points." 9029 1 Do you see that? 2 A. Yes, sir. 3 Q. Do you know what a value trade refers 4 to? 5 A. I'm not sure I do, no, sir. 6 Q. Have you ever heard that term before? 7 A. No, sir. 8 Q. Now, the next paragraph says, "Mr. Crow 9 proposed that until our new mortgage-backed 10 securities position was filled that we consider 11 moving ahead with approving mortgage-backed 12 security value trades that will improve the 13 overall portfolio position and yield. In the 14 future, he proposed that mortgage-backed 15 securities trading be accomplished through a 16 committee consisting of Mr. Crow, Mr. Phillips, 17 Mr. Bruce Williams, and Mr. Doug Hansen." 18 Do you see that? 19 A. Yes, sir. 20 Q. Do you know who Mr. Hansen was? 21 A. I remember the name. He worked there. 22 I know that. 9030 1 Q. Do you know what he did? 2 A. No. 3 Q. Then it goes on to say that 4 "Mortgage-backed security trades would be executed 5 by a majority vote of the members of the committee 6 and the concurrence of Smith Breeden Associates. 7 Smith Breeden would be consulted on each trade 8 involving mortgage-backed securities, and the 9 economics and reasons for each trade would be 10 reported to the investment committee." 11 Do you see that sentence? 12 A. Yes. 13 Q. Then it says "The committee approved 14 these procedures for future trading in 15 mortgage-backed securities and they were to be 16 presented for final approval to Mr. Jenard Gross 17 before implementation." 18 Do you see that? 19 A. Yes, sir. 20 Q. Have you ever heard of a trading 21 committee that was set up to trade mortgage-backed 22 securities at USAT? 9031 1 A. I don't recall the committee, no, sir. 2 Q. I mean, you don't recall one way or the 3 other or you don't think you ever heard of it? 4 A. I don't recall ever hearing it. I'm 5 not saying I haven't. It's like -- looking back, 6 the same would go for value -- a value trade. I 7 don't remember hearing the term, but I'm not sure 8 that it wasn't used. 9 Q. You mean it wasn't used in your 10 presence or -- 11 A. I don't remember. 12 Q. -- that it wasn't used by somebody 13 in -- it was obviously used in these minutes? 14 A. I'm saying I don't recall -- 15 MR. NICKENS: Your Honor, I object. He 16 said he doesn't recall. It's got to be some kind 17 of philosophical issue about when a person says he 18 doesn't recall about whether or not it ever 19 happened. He said he didn't recall. 20 MR. GUIDO: Your Honor -- 21 THE COURT: Let's move on. 22 Q. (BY MR. GUIDO) I'd like to direct 9032 1 your attention now to Exhibit 1409 -- excuse me -- 2 1410 which is at Tab 546. And it's investment 3 committee minutes dated 9-24-1986. This is the 4 investment committee minutes of September 24. And 5 if you look at the fourth paragraph down, it says, 6 "Mr. Phillips then reported on the mortgage-backed 7 securities portfolio. He stated that the 8 association had sold some mortgage-backed 9 securities and had profited to the extent of $1.4 10 million." 11 Do you see that reference? 12 A. Yes, sir. 13 Q. Did you ever have any discussions with 14 Mr. Phillips in which he indicated to you that he 15 had been selling mortgage-backed securities out of 16 the portfolio other than as part of the purported 17 roll-down and that the portfolio had benefited by 18 a profit of more than a million dollars by the 19 transaction? 20 A. I don't recall any specific 21 conversations, no, sir. 22 Q. Is it you don't recall or you don't 9033 1 think that they occurred? 2 A. I don't recall. They may have 3 occurred. I just don't recall. 4 Q. Now, were there any trades that were 5 made that you know the purposes of, out of the 6 mortgage-backed security portfolios at USAT, other 7 than the purported roll-down at the beginning of 8 1986? 9 A. Did I know the purpose of? 10 Q. Uh-huh. (Nods head affirmatively.) 11 A. I was not involved in that end of the 12 business. So, I'm not -- as far as the purpose of 13 it, I would not have been involved in it. 14 Q. I'd like to direct your attention now 15 to a document that's been marked as B1231. It is 16 a memo from Doug Hansen to Mike Crow, Joe 17 Phillips, Bruce Williams, and the investment 18 committee regarding mortgage-backed securities 19 trading committee and has a date of 20 September 22nd, 1986. 21 22 (Discussion off the record.) 9034 1 Q. (BY MR. GUIDO) This says "The 2 committee met several times during the week of 3 September 15th to approve and execute a trade from 4 Freddie Mac 9 and a half's to Freddie Mac 8 and a 5 half's. Crow and and Williams were absent. Smith 6 Breeden was consulted on the trade. The gain 7 booked is $700 million. The loss in spread income 8 is $150 million in the first year." 9 Do you see that? 10 A. Million or -- 11 Q. Thousand. Excuse me. 12 A. Yes, sir. 13 Q. And it's a 700,000-dollar gain that was 14 booked. 15 Does this transaction raise a question 16 in your mind about whether there is a need to look 17 more closely at the pattern of gains that were 18 reflected in the performance report of 19 December 1986 that I showed you to ascertain 20 whether or not mortgage-backed securities 21 portfolios at USAT might possibly have to be 22 classified as a trading versus an investment 9035 1 portfolio? 2 A. Again, I'm not sure what portfolio 3 we're talking about. But if this is -- has been 4 designated -- I mean, if this is a trading 5 committee and it's a trading portfolio, then it 6 seems to me just reading this that it would be, 7 you know, proper -- I don't see any problems with 8 the sales. But I don't know what this relates to. 9 Q. Okay. Well, assume that this 10 transaction was a transaction that came out of a 11 portfolio that you had been accounting for as an 12 investment portfolio as opposed to a trading 13 portfolio. Just assume that. 14 Would this raise a question in your 15 mind about whether or not you were properly 16 accounting for that portfolio? 17 A. Not knowing why the sales occurred, it 18 would -- I mean, just standing on its own, yes, I 19 guess. But I'm not sure -- I don't know why the 20 sales had occurred or what they were trying to 21 accomplish. 22 Q. But beyond that, just taking that 9036 1 document, would this raise a question in your mind 2 that you needed to look more closely at that 3 portfolio to ascertain whether or not you were 4 properly accounting for it as an investment 5 portfolio as opposed to a trading portfolio? 6 A. I guess it could in and of itself, yes, 7 sir. But it doesn't -- I mean, I'm having a 8 difficult time taking this memo and relating it 9 back to anything specifically. So, I mean, it's 10 sort of out of context for me, but -- 11 Q. That's why I asked you whether or not 12 it raised a question in your mind. I didn't ask 13 you whether or not you reached a conclusion that 14 the portfolio needed to be reclassified. I just 15 said: Assuming it was an investment portfolio and 16 looking at this transaction, this piece of paper, 17 would that raise a question in your mind that you 18 needed to look further at that portfolio to 19 ascertain whether or not it needed to be 20 classified as a trading versus an investment 21 portfolio? 22 A. That question, yes, could go through my 9037 1 mind. 2 Q. Now, I'd like to direct your attention 3 to a document which I think is A111 (sic), which 4 is at Tab 547. It's the minutes of October 1st, 5 1986. 6 THE COURT: Is that entered as A1411? 7 MR. GUIDO: Yes, Your Honor. A1411. I 8 also have it as A10676, but I think it was 9 introduced as A1411. 10 MR. RINALDI: What is the document? 11 MR. GUIDO: It's the October 1st, 1986 12 minutes of the investment committee. 13 Q. (BY MR. GUIDO) I'd like to direct 14 your attention to the fourth paragraph. It says, 15 "Mr. Phillips recommended the sale of a portion of 16 the liquidity and mortgage-backed securities 17 portfolios to recognize profits which were 18 recently created by the market rally." 19 Do you see that? 20 A. Yes, sir. 21 Q. If the -- well, let's start with -- 22 first of all, what was your understanding of the 9038 1 liquidity portfolio at USAT? 2 A. I'm not sure that this liquidity 3 portfolio referenced here is the same as my 4 understanding, but my understanding of a liquidity 5 portfolio would have been the required liquidity 6 that we had to maintain for regulatory purposes. 7 Q. Okay. And was that portfolio a 8 portfolio that included United States Treasury 9 securities? 10 A. They would have qualified as liquidity 11 and could have. 12 Q. Did it also include mortgage-backed 13 securities issued by Ginnie Mae, Fannie Mae, or 14 Freddie Mac? 15 A. Could have. They would have also 16 qualified. 17 Q. And was that portfolio denominated 18 essentially as a, quote, "treasury portfolio" at 19 USAT? 20 A. I don't recall. 21 Q. You wouldn't dispute it if someone else 22 had testified that that was the term that was used 9039 1 to describe the liquidity portfolio? 2 A. No, sir. 3 Q. Was the liquidity portfolio used as 4 collateral for borrowings periodically at USAT? 5 A. I'm sorry. What? 6 Q. Was the liquidity portfolio used 7 periodically for borrowings of funds from the 8 Federal Home Loan Bank or investment bankers 9 periodically? 10 A. It could have, but the -- I believe the 11 securities would no longer have qualified for 12 liquidity purposes. But I'm not -- 13 Q. At that time? 14 A. I think you have to back it out. 15 Q. I mean, what is it that made a security 16 qualify as a liquidity security on the books and 17 records of USAT? 18 A. I really don't recall the specifics of 19 the regulation, but I think it had to have certain 20 maturities, like within five years. 21 Q. Did it have to be -- 22 A. Things like that. I really don't 9040 1 recall. 2 Q. How did you account for the liquidity 3 portfolio at USAT? Did you account for it as a 4 trading or an investment portfolio? 5 A. I don't recall which -- I'm not sure 6 that it would have mattered. It could have been 7 either, I believe, and still qualified as 8 liquidity. 9 Q. Was it mark-to-market? 10 A. I don't know. I don't recall. 11 Q. Now, if these sales out of the 12 mortgage-backed securities portfolio that are 13 described in this memorandum were out of a 14 portfolio that you had accounted for as an 15 investment portfolio, would the fact that they 16 were sold to recognize profits which were recently 17 created by a market rally have led you to 18 reclassify that portfolio as a trading portfolio? 19 A. It could have. 20 Q. You indicated, I think, when you 21 testified earlier that one of the things that you 22 looked to is the purposes for the transaction to 9041 1 ascertain whether or not to classify something as 2 a trading versus an investment portfolio. 3 Do you recall that? 4 A. Repeat that again, please. 5 Q. You indicated that one of the things 6 that you looked to to ascertain whether or not a 7 portfolio should be classified as a trading versus 8 an investment portfolio is what the purposes of 9 the sales that were made out of the portfolio 10 were. Right? 11 A. What is your -- 12 Q. I'll rephrase the question. 13 A. I'm not -- I'm trying to understand 14 what you are saying and comparing it to what you 15 think I said and I'm getting lost. 16 Q. I'm sorry. I'll rephrase the question. 17 Is one of the factors that you looked 18 to or have looked to to determine whether or not a 19 portfolio was to be classified as a trading 20 portfolio versus an investment portfolio, was one 21 of those factors you looked to the purposes for 22 which the trade was made? 9042 1 A. The purpose for which the trade was 2 made? I don't -- that -- in determining whether 3 or not a portfolio is investment or trading, I'm 4 not sure the reason why a trade was made is a 5 parameter. I mean, it's ability of -- the intent 6 of management when they initially acquire the 7 security. 8 Q. If management is selling out of that 9 portfolio for purposes of realizing unrealized 10 gains, what does that tell you about management's 11 intent? 12 A. If that was the only reason, that would 13 be -- that would cause reason to look at it 14 closely because that sounds closer to a trading 15 than an investment. 16 Q. Now, I'd like to direct your attention 17 to a document that has been marked as 18 Exhibit A1426. And it's the January 1st, 1987 19 investment committee minutes. And it's at Tab 20 357. 21 I'd like to direct your attention to 22 the pages that are Bates stamped US35227 and 9043 1 US35228. These are those pending transaction 2 schedules that I showed you earlier. These are 3 the pending transactions as of January 20th, 1987. 4 And if you look at US35227, you see under the 5 DARTs -- do you see that at the top -- there were 6 sales of 84 million or sales of securities with a 7 face value of $84,394,000 for a realized gain of 8 $3,269,000. 9 Do you see that? 10 A. Yes, sir. 11 Q. And then if you look under "treasury," 12 it shows sales from the treasury portfolio of 1 -- 13 face value of 132,172,000 for a realized gain of 14 1,731,000. 15 Do you see that? 16 A. Yes, sir. 17 Q. And then if you look under 18 "investments," you see the sale -- total sales 19 from investments with a face value of 20 1,018,589,000 for a gain of 14,395,000. 21 Do you see that? 22 A. Yes, sir. 9044 1 Q. And then when you look over at the next 2 page, which are the purchases pending, you see 3 that under the "DARTs" you have total DARTs face 4 value sales of 84,866,000 and then a gain of 5 $867,000. 6 Do you see that? 7 A. Yes, sir. 8 Q. And then from treasury -- and I presume 9 that this "unrealized gain from loss for book" has 10 something to do with the change in interest rates 11 during the period of time the contract was entered 12 into on the settlement date. 13 Is that your assumption? 14 A. What column are you looking at? 15 Q. It talks about "unrealized gain on loss 16 for book." 17 Do you see that? 18 A. What -- does the next one say "for 19 day"? I can't read -- 20 Q. It says "for book, for day, for week." 21 A. To me, the 867,000 represents the 22 profit that would be -- 9045 1 Q. These are purchases. 2 A. Oh, these are purchases? Oh. I'm not 3 sure what -- I guess the unrealized gain since it 4 had been purchased, I guess. I don't know. 5 Q. Okay. And prior to the settlement or 6 subsequent to settlement? I'm only asking these 7 questions if you know. I'm not asking you to 8 ascertain -- if you don't know, you don't know. 9 A. This is the first time, other than the 10 earlier schedule that I've looked at. So, I 11 don't -- without studying it more, I'm not sure. 12 Q. Do you recall whether or not you ever 13 saw any of these type schedules when you were at 14 USAT? 15 A. Specifically, no, but I think I've seen 16 them. You know, I mean, I don't know this 17 particular one that I've seen. 18 Q. Let's move on to the treasury 19 portfolio. That shows purchases of face value of 20 73,400,000. 21 Do you see that figure? 22 A. Is this on 5227? 9046 1 Q. 228. These are the purchases, not the 2 sales. 3 A. Sorry. Wrong page. What was the 4 number? 73 million 400? 5 Q. Yes. Do you see that? 6 A. Yes. 7 Q. And then see under "investments," it 8 has -- it looks like total investments face value 9 of 591,475? 10 A. I see that. 11 Q. Okay. And then look under "arbitrage." 12 It shows purchases of 510,187,000. 13 Do you see that? 14 A. I see that, yes. 15 Q. Now, this -- these two schedules show 16 that in the same month or two months, there was 17 a -- if you look at the bottom of the page -- a 18 grand total of face value of sales of 19 1,235,155,000. 20 Do you see that at the bottom of Bates 21 stamp 5227? 22 A. Yes. 9047 1 Q. And then it shows purchases of grand 2 total of 1,259,925,000. 3 Do you see that? 4 A. Yes. 5 Q. Did USAT have any speculative portfolio 6 that was as large as a billion dollars? 7 A. I don't recall. 8 Q. You don't recall or -- or there wasn't 9 one? 10 A. I don't recall that there was one or 11 that there was not one. 12 Q. Okay. Was the portfolio that was 13 managed by Joe Phillips prior to Sandy Laurenson 14 arriving, what has been denominated as the 15 investment portfolio, was that accounted for as a 16 speculative trading portfolio? 17 A. I don't know -- I'm not sure that I 18 know which portfolio you're talking about. I'm 19 not -- I don't -- 20 Q. Do you recall that there was a 21 portfolio referred to as Joe's portfolio? Do you 22 recall that? 9048 1 A. I recall that name. 2 Q. Okay. Was that accounted for as an 3 investment or a trading portfolio? 4 A. I don't know what portfolio that was. 5 Q. Were any mortgage-backed security 6 portfolios, to your knowledge today, accounted for 7 as a trading portfolio? 8 A. I don't specifically know that there 9 was one; but in general terms, I recall that -- 10 that there -- I remember by seeing the trading 11 account, the memo that we looked at earlier, the 12 trading account committee and those sort of things 13 tends to make me believe that there was. But I 14 mean, I couldn't point or recall a specific 15 portfolio entitled "trading." 16 Q. You don't recall there being a 17 portfolio that was denominated "trading" for 18 purposes of being accounted for as mark-to-market, 19 do you? 20 A. No, sir. 21 Q. Now, I'd like to direct your attention 22 to the page that's Bates stamped US35224. I'm 9049 1 going to ask you some questions about your 2 understanding of the United MBS portfolio that was 3 established at USAT at or about the time Sandy 4 Laurenson came on as the mortgage-backed security 5 portfolio manager. It's called United MBS. 6 Do you recall that entity? 7 A. I recall the name. I don't recall the 8 time. And I don't necessarily associate it with 9 Sandy, but... 10 Q. Do you recall when it was set up? 11 A. No, sir. 12 Q. Do you recall whether it was in late 13 1986? 14 A. Is this the portfolio that I had 15 written the memo to Joe Parsons who was with 16 Peat Marwick? 17 Q. With regard to the questions that were 18 raised about the accounting for that, yes. 19 A. Okay. Then yes, I recall that. 20 Q. You now recall that. And that was a 21 mortgage-backed security portfolio, was it not? 22 A. It had one? 9050 1 Q. It was one. It was a mortgage-backed 2 security portfolio, was it not? 3 A. The subsidiary? 4 Q. Yes, the subsidiary. 5 A. It had one, yes. I'm not -- 6 Q. I'm sorry. The portfolio -- 7 A. United MBS was a corporation that 8 had -- 9 Q. It was a separate corporation. 10 A. Right. 11 Q. United MBS -- 12 THE COURT: If you don't know the 13 answer to a question, just say so. You can't 14 elicit the information from counsel. 15 THE WITNESS: Oh, I'm sorry. 16 Q. (BY MR. GUIDO) In other words, I'm 17 the only one that's allowed to ask questions. 18 A. I'll stop. 19 Q. Okay. Do you recall that there was a 20 subsidiary that was set up of USAT that was called 21 United MBS and its purposes were to purchase 22 mortgage-backed securities? 9051 1 A. Yes. 2 Q. Okay. And do you recall that that was 3 a portfolio that was to be managed by Sandy 4 Laurenson after she arrived at USAT? 5 A. Yes. 6 Q. And do you recall that there was an 7 investment strategy developed for that portfolio 8 in conjunction with Smith Breeden, the consulting 9 firm, which the accountants said would not qualify 10 for hedge accounting under their standards? 11 A. I recall that based on having recently 12 reviewed these documents, yes. 13 Q. And did those documents refresh your 14 recollection that that issue had come up with 15 regard to that portfolio with the Peat Marwick 16 people? 17 A. Yes. 18 Q. And did you understand at the time that 19 that portfolio was to be a portfolio that was to 20 be a hedged portfolio in order to generate an 21 interest rate spread between mortgage-backed 22 securities and the liabilities over time as a way 9052 1 of earning a profit for USAT? 2 A. I understood that the purpose of that 3 subsidiary was to generate a net interest margin. 4 Q. And was it your understanding that that 5 portfolio was to be hedged to protect against 6 upward movements in interest rates? 7 A. I don't recollect whether it was only 8 upward, but it was to be hedged to protect against 9 interest rate movements. 10 Q. Okay. Did you ever learn that that 11 portfolio had about a billion dollars worth of 12 mortgage-backed securities held in it and it was 13 not hedged with any instruments? 14 A. Sir, could you repeat that? 15 Q. Did you ever learn that that portfolio, 16 for a period of time, had approximately a billion 17 dollars worth of mortgage-backed securities in it 18 and were not hedged? 19 A. I don't recall that, no, sir. 20 Q. You don't recall, or you don't believe 21 you ever heard that? 22 A. I don't believe that it was my 9053 1 understanding that it was never unhedged. 2 Q. So, it's your understanding that that 3 portfolio was intended to be hedged to protect it 4 against interest rate movements at all times? 5 A. Yes, sir. 6 Q. Now, did you have any meetings with 7 representatives of Peat Marwick regarding the 8 accounting for that portfolio? 9 A. I don't recall any specific meetings, 10 but I'm sure we did. 11 Q. I'd like to direct your attention to -- 12 THE COURT: We'll take a short recess. 13 MR. GUIDO: Thank you, Your Honor. 14 15 (A short break was taken 16 at 3:53 p.m.) 17 18 THE COURT: Be seated, please. We'll 19 be back on the record. Mr. Guido. 20 (4:15 p.m.) 21 Q. (BY MR. GUIDO) I'd like to show you, 22 Mr. Wolfe, a document that we've marked as A10716, 9054 1 which is a memorandum from Mike Crow to you and 2 Bruce Williams dated January 12th, 1987. And it 3 includes as an attachment a memorandum from Joe 4 Parsons at Peat Marwick Mitchell & Company to 5 Mike Crow, United Savings Association of Texas, 6 with a CC to Jerry Claiborne dated January 5th, 7 1987. 8 Who was Joe Parsons? 9 A. He was on the audit. 10 Q. Was he the senior manager on the 11 USAT/UFG audits for Peat Marwick? 12 A. I'm not sure of his title, but I think 13 he was the manager on the job. 14 Q. He was a manager? 15 A. Or senior manager. 16 Q. What is the role of a manager in an 17 audit? 18 A. To manage the audit. 19 Q. Was he the primary supervisor of the 20 field staff of the audits for an accounting firm 21 of its clients? 22 A. The primary field -- 9055 1 Q. Uh-huh. 2 A. -- supervisor? 3 Q. Uh-huh. 4 A. Yes. 5 Q. And then it says "CC Jerry Claiborne." 6 Do you see that on the second page? 7 I'm sorry. Do you see that? "CC Jerry 8 Claiborne"? 9 A. Yes. 10 Q. In the right-hand corner. 11 A. Yes. 12 Q. Who was Jerry Claiborne? 13 A. He was or is -- was then and is now an 14 audit partner at Peat Marwick. 15 Q. And was he the engagement partner for 16 the December 31, 1986 audit of USAT? 17 A. I'm not sure. 18 Q. Okay. Now, let's turn back to the 19 memorandum from Michael Crow to you and to Bruce 20 Williams. It says, "Bruce, please take the lead 21 in answering the attached issues raised by 22 Peat Marwick. I believe we can make a decent case 9056 1 that while it is our intent to hold securities 2 long term, the very volatile markets which we have 3 been experiencing have created a necessity to do 4 some portfolio trading out." 5 Do you see that? 6 A. Yes. 7 Q. Do you know what that referred to? 8 A. I don't recall. 9 Q. Okay. Then it says, "Perhaps we should 10 split our mortgage-backed securities into two 11 accounts: One main account that would not be 12 mark-to-market and a small account which would be 13 mark-to-market. For example, the mortgage-backs 14 that Sandy is currently purchasing (totaling about 15 100 million) where we are strictly speculating on 16 the market should be trading. We have no intent 17 to hold that for the term of the investment." 18 Do you see that? 19 A. Yes. 20 Q. Do you recall that Sandy was purchasing 21 mortgage-backed securities as of July 12th, 1987, 22 as speculation on the market? 9057 1 MR. NICKENS: Your Honor, the date is 2 January 12th, 1987, not July. 3 MR. GUIDO: I'm sorry. January 12th. 4 A. I don't recall anything other than 5 specifically what I'm reading here. 6 Q. (BY MR. GUIDO) And then it says, "A 7 lot of the other stuff in the memo appears to me 8 to really be difficult to administer and very 9 non-productive. I think it is an absolutely 10 untenable position for us to mark-to-market the 11 whole portfolios. Our profits will swing plus or 12 minus 20 million just depending on how the bond 13 markets are doing, and that is silly." 14 Do you see that? 15 A. Yes, sir. 16 Q. Do you recall having a meeting with 17 Mike Crow and Bruce Williams to discuss the 18 memorandum that was attached to Mike Crow's 19 memorandum? 20 A. I don't recall specifically having a 21 meeting, no, sir. 22 Q. With regard to the memorandum, do you 9058 1 have any reason to doubt that you received the 2 memorandum? 3 A. None at all. 4 Q. Now, let's look at the Joe Parsons 5 memorandum that Mike Crow is commenting on. It 6 says, "Purpose. The purpose of this memorandum is 7 to present certain information and criteria 8 regarding investment versus trading account 9 treatment, elicit your response to certain of our 10 concerns, and to present certain recommendations 11 regarding future documentation of your activity." 12 Do you see that paragraph? 13 A. Yes, sir. 14 Q. Then it says, "Audit concern. During 15 1986, we have noted a considerable amount of 16 activity in the high-yield (junk) bond and 17 mortgage-backed securities portfolios. Such 18 activity raises the question as to whether such 19 portfolios should be more properly accounted for 20 on an investment or trading basis. In addition to 21 our concern as raised by this activity, we have 22 also noted that the accounting basis for similar 9059 1 portfolios has been under scrutiny by regulatory 2 and GAAP accounting authorities." 3 Do you see that? 4 A. Yes, sir. 5 Q. Now, do you recall -- does this refresh 6 your recollection that the auditors raised 7 concerns during the course of the audit regarding 8 the turnover in the high-yield junk bond 9 portfolios and the mortgage-backed securities 10 portfolios? 11 A. Yes, it verifies in my mind that my 12 general thoughts were correct. 13 Q. What general thoughts are you referring 14 to? 15 A. That there was -- an issue was raised 16 regarding investment versus trading. 17 Q. Okay. Then he summarizes the 18 accounting guidance. It says, "Substantially all 19 GAAP accounting guidance is provided by the AICPA 20 Audit of Banks Industry and Audit Guide (the 21 Guide). Management's intent appears to be the 22 prevailing factor in determination of the 9060 1 appropriate accounting. Intent of investment and 2 trading portfolios are summarized from the Guide 3 as follows: If the intent (and the ability) is to 4 hold securities on a longer term basis, with the 5 objective being an optimum balance between credit 6 quality, liquidity and income, the portfolio would 7 be considered an investment account. If the 8 intent is to deal in certain securities for 9 profit, the portfolio would be considered a 10 trading account." 11 Then it says "The Guide indicates that 12 recording of a security in the trading or 13 investment portfolio should be documented at the 14 time of purchase, as per management's intent." 15 Do you see that? 16 A. Yes, sir. 17 Q. Then it says, "Recording a security in 18 the investment portfolio does not preclude it from 19 being traded if such trading activity has a 20 specific purpose, such as: Maintenance of the 21 optimum balance, as noted above; due to cash 22 requirements; or for tax planning purposes. 9061 1 However, the Guide notes that" -- and then it 2 quotes the guide -- "'If there is substantial 3 turnover in the investment portfolio, management's 4 intention and experience determines whether 5 trading function is occurring and the appropriate 6 classification and valuation method to be used.'" 7 Then it says "In summary, management's 8 intent governs the classification of a portfolio 9 as trading or investment accounting treatment. 10 Such intent should be determined and documented at 11 the time of purchase. Turnover in the portfolio 12 is possible; however, without a record of the 13 intent and strategy at the time of purchase or 14 trading, turnover may become an indicator of 15 management's intent." 16 Is that your understanding of the 17 applicable literature at the time in 1987? 18 A. Based on what I'm reading here, yes, 19 sir. 20 Q. You don't have any reason to dispute 21 that that is an accurate description of the 22 accounting literature at the time? 9062 1 A. No, sir. 2 Q. And you don't -- you didn't make any 3 challenge to that accounting literature at the 4 time, did you? 5 A. I don't recall that. 6 Q. Okay. Mike Crow, in his cover memo, 7 did not challenge the accuracy of the accounting 8 literature, did he? 9 A. I don't think so. 10 Q. Now, look at the next page. It talks 11 about United's intent. Will you read that 12 paragraph at the top of the page while I pull out 13 a document for you to take a look at, the quoted 14 portion of that. 15 A. (Whereupon the witness complies.) I've 16 read it. 17 Q. Okay. Is that the same policy that we 18 discussed when we looked at Exhibit 10690, which 19 was a memorandum from Mike Crow to Art Berner 20 dated November 7th, 1986? 21 A. Without reading it word for word, it 22 appears to be. 9063 1 Q. Now, the next paragraph says, "Such 2 stated policy does appear to state United's intent 3 to establish an investment portfolio for this 4 portfolio of investments. However, it does not 5 present the objective of the portfolio and the 6 specific strategy for obtaining such objective. 7 We have also reviewed certain of the minutes of 8 the investment committee which describe purchases 9 and trades with approvals thereof, but also noted 10 that the minutes did not include descriptions of 11 the objectives and the specific strategies." 12 Do you see that? 13 A. Yes. 14 Q. Then it says, "We believe that in order 15 to conclude as to the appropriateness of the 16 accounting treatment the junk bond or 17 mortgage-backed securities portfolios that we must 18 understand the objective and strategy which was 19 used at the time of purchase in trades of the 20 securities. Without such documentation, it is 21 impossible to conclude whether trades were made 22 for the purpose of short-term gains or for other 9064 1 valid purposes consistent with an investment 2 portfolio." Then it sets out some objectives and 3 strategies, and then it addresses those. 4 Now, did you have any further 5 discussions with the people at Peat Marwick 6 regarding the high-yield bond portfolio management 7 so as to alleviate their concerns about whether or 8 not the portfolio was being properly classified as 9 an investment or a trading portfolio for 10 accounting purposes? 11 A. I don't recall any specifically, but 12 I'm sure there were additional conversations after 13 this memo was issued. 14 Q. Did the Peat Marwick people ultimately 15 issue an opinion that accompanied the December 31, 16 1985 financial statements in which they indicated 17 that the financial statements had been prepared in 18 accordance with generally-accepted accounting 19 principles? 20 A. December 31, '85? 21 Q. I'm sorry. '86. 22 A. '86, yes. 9065 1 Q. Now, I'd like to direct your attention 2 to another document, which is Exhibit B1452. 3 Exhibit B1452 is a memorandum from Jim Wolfe to 4 Joe Parsons dated January 28th, 1987. And it was 5 attached to some work papers that were from the 6 files of Peat Marwick & Company. 7 MR. GUIDO: I would like to move the 8 admission of A10716 and B1452, Your Honor. 9 MR. NICKENS: No objection, Your Honor. 10 THE COURT: Received. 11 Q. (BY MR. GUIDO) The -- this memorandum 12 dated January 28th, 1987, says it's regarding 13 accounting issues relative to United MBS 14 Corporation. 15 Do you see that? 16 A. Yes, sir. 17 Q. And it's a memo from you to Joe 18 Parsons. It says, "Based on our meeting on 19 January 23, 1987, to discuss various issues 20 involving the hedging activities of United MBS 21 Corporation, it is apparent to me that there 22 exists several issues that are still open or 9066 1 subject to interpretation, such as treatment of 2 the Ginnie Mae puts and correlation." 3 Do you see that? 4 A. Yes, sir. 5 Q. Now, what does the reference to 6 "correlation" mean? 7 A. To the best of my recollection, 8 correlation has to do with how the hedging 9 instrument acts in relation to the instrument that 10 it is hedging. 11 Q. Now, how, for accounting purposes, do 12 you measure correlation? 13 A. I don't recall specifically how it was 14 done, but it was expressed as a percentage, I 15 believe. 16 Q. Now, was that correlation something 17 that was included in the financial statements that 18 were issued as 10Ks or 10Qs by United Financial 19 Group? 20 A. I don't recall specifically, no, sir. 21 Q. Now, with regard to the correlation 22 analysis as you understand it, was it the 9067 1 measurement -- let's take a risk-controlled 2 arbitrage as an example which has a 3 mortgage-backed security funded with a reverse 4 repurchase agreement and the reverse repurchase 5 agreement is hedged with the swap agreement. 6 Is the correlation that is done an 7 analysis of the correlation between the swap and 8 the liability that it is hedging? 9 A. I don't recall. 10 Q. Now, this goes on and says "After your 11 having read United MBS's statement of 12 purpose/accounting guidelines and various 13 discussions held regarding the activities of the 14 subsidiary, I feel comfortable that you understand 15 United's business and economic objectives for such 16 company." 17 And then you've attached this United 18 MBS Corporation statement of purpose/accounting 19 guidelines. 20 MR. GUIDO: I apologize, Your Honor, 21 for the difficulty in reading this. There are 22 better copies of this document, and we will -- we 9068 1 will provide another exhibit that will be easier 2 to read. 3 Q. (BY MR. GUIDO) It says "Purpose of 4 subsidiary: To create an arbitrage which produces 5 a hedged net interest spread between 6 mortgage-backed securities assets and various 7 funding sources over a two-year time period," I 8 think is what that is. 9 Do you see that? 10 A. That's what it looks like to me, too. 11 Q. Do you understand that that was the 12 purpose of the United MBS Corporation that was set 13 up as a subsidiary of USAT? 14 A. I'm sorry. Could you repeat -- 15 Q. Do you recall that that was the purpose 16 of the subsidiary that was set up as United MBS? 17 A. After having read this, yes. 18 Q. Is it your understanding that the 19 United MBS Corporation was to operate in 20 accordance with the memorandum that is attached to 21 your memorandum to Joe Parsons dated January 28th, 22 1987, and marked as Exhibit B1452? 9069 1 A. Based on reading this, that would be -- 2 I would agree with that. 3 Q. Okay. And do you know who prepared the 4 United MBS statement of purpose/accounting 5 guidelines? 6 A. Not specifically, no, sir. 7 Q. Do you have any idea generally who 8 prepared it? 9 A. From looking at it, it would have been 10 a combination of treasury, myself, and -- well, 11 and the securities people. 12 Q. Now, why, looking at it, do you come to 13 that conclusion? 14 A. Because -- the accounting -- because it 15 says -- "accounting guidelines" gets me to that 16 conclusion, I guess. And it deals with the areas 17 that they would be involved in, the other two 18 departments, being treasury -- 19 Q. Treasury and investments? 20 A. Yes. 21 Q. Now -- 22 A. I don't know that for a fact. That's 9070 1 just my guess. 2 Q. Now, this says "Draft to M. Crow, 3 J. Wolfe, R. McCann, B." -- I can't read that 4 word. Who is that, or who do you think it might 5 be? It looks like it's T-I-E-D-T. 6 A. It's Barry Tiedt. 7 Q. Who is he? 8 A. He was on the audit -- I think he was 9 the senior or staff member. 10 Q. Of what? 11 A. Peat Marwick. 12 Q. Of Peat Marwick? And he was on the 13 audit team? 14 A. I think. I think that's who that is. 15 Q. Now, I'd like to show you another 16 document that has been marked as Exhibit B1455. 17 B1455 is another document that comes from the work 18 papers of Peat Marwick, and it's a memo from Joe 19 Parsons to the work papers dated January 29th, 20 1987. 21 MR. GUIDO: I'd like to move the 22 admission of B1455, Your Honor. 9071 1 MR. NICKENS: No objection, Your Honor, 2 although I would like to record for the record 3 with regard to the previous exhibit, B1452, which 4 we didn't object to and has been received -- but 5 in looking at it, I note that the first number 6 only, the first page of the document only is 7 marked with the KPMG number. And although 8 internally it appears to reference what is 9 identified as a document, in fact, this has got a 10 different set of numbers and bears a different 11 exhibit reference. So, there are some issues of 12 authenticity. Individually, I don't have an 13 objection to either document. 14 THE COURT: All right. Exhibit B1455 15 is received. 16 Q. (BY MR. GUIDO) Now, this says "On 17 January 23rd, 1987, Peat Marwick representatives 18 Barry Tiedt and myself met with Jim Wolfe, Bruce 19 Williams, and Russ McCann to discuss the hedge 20 program and related accounted treatment. Sandra 21 Laurenson joined the meeting after it had 22 started." And then it says a number of items were 9072 1 discussed. 2 Do you recall attending such a meeting 3 in January of 1987? 4 A. I don't recall the meeting, but I have 5 no reason to believe I wasn't there. 6 Q. Well, take a look at Exhibit B1452. 7 That is a memo from you to Joe Parsons, and is 8 that your initials on that memorandum? 9 A. On the other one? 10 Q. The previous one, 1452. 11 A. Yes, it looks like them. 12 Q. And it says, the first sentence, "Based 13 on our meeting on January 23, 1987." 14 Do you see that? 15 A. I see that. 16 Q. Okay. And B1455 is making reference to 17 a meeting of January 23rd, 1987. Is it fair for 18 us to assume that those are the same meeting? 19 A. I feel that way, yes. 20 Q. Now, it says the following items were 21 discussed at that meeting and it goes through a 22 number of them, issues. And if you turn to the 9073 1 second page or the third page, excuse me, at the 2 top of the third page, it says "We briefly walked 3 through the exhibits that were attached to 4 Williams' draft memo in order to clarify for me 5 what the schedules meant. As a result of the 6 walk-through, a number of my questions were 7 answered. Audit work on the subsidiary is 8 pending." 9 Do you see that reference at the top? 10 A. Yes, sir. 11 Q. Was the draft memorandum that is 12 referred to the document that is attached to 13 the -- your memo of January 28th, 1987? 14 A. It looks like that could be what that 15 reference is to. You're referring to the B1452? 16 Q. Uh-huh. 17 A. That would be the -- 18 Q. Yeah. 19 A. Yes. I don't doubt that, no, sir. 20 Q. Now, I'd like to direct your attention 21 back to Page 2 of the memorandum. It says, what 22 is the expectation that the MBS will be traded? 9074 1 Under what circumstances would the MBS be traded? 2 Note: I thought that it was important to 3 establish that the MBS would not be traded or at 4 least there would be minimal trading activity. If 5 the MBS were to be traded, it would appear that 6 the hedged position should be considered to be 7 speculative." That's Joe Parsons writing to the 8 work papers. 9 Then he says "Laurenson stated that the 10 MBS would not be traded under any circumstances." 11 Do you see that reference? 12 A. Yes, sir. 13 Q. Do you recall that Sandy Laurenson said 14 that the mortgage-backed securities would not be 15 traded under any circumstances in a meeting with 16 Peat Marwick? 17 A. I don't recall her saying it. 18 Q. Do you have any reason to doubt the 19 accuracy of Joe Parsons' memorandum reporting that 20 she had said that? 21 A. Not at all. 22 Q. I'd like to now direct your attention 9075 1 to Exhibit B1459. This is a memorandum from Joe 2 Parsons to you dated January 29th, 1987, with 3 copies to J. Claiborne, Mike Crow, Bruce Williams, 4 and Russ McCann. This says, "In response to your 5 memorandum of January 28th, I have attached my 6 memorandum to our work papers addressing issues 7 relating to the hedging program. In the memo, I 8 have concluded that the program is theoretically 9 appropriate for hedge accounting treatment under 10 the criteria established by FASB 80 and AcSEC 11 Issues Paper 86-2. A final conclusion is pending 12 receipt of, quote, 'a regression analysis 13 indicating a high correlation of changes in the 14 market value of the Ginnie Mae options with the 15 hedged assets so that the result of the options 16 contracts will substantially offset the effects of 17 price changes and a correlation analysis as of 18 December 31, 1986." 19 Do you see that? 20 A. Yes, sir. 21 Q. Now, what was the regression analysis 22 that's referred to in that? 9076 1 A. It is a statistical calculation that 2 I'm not familiar with in detail. 3 Q. Is it the -- one of the methods that's 4 used to determine whether or not there is high 5 correlation between the asset or liability that is 6 hedged and the hedging instrument? 7 A. According to this, it is. 8 Q. But you don't have any independent 9 recollection of what regression analysis is today? 10 A. As it relates to this or what a 11 regression analysis is -- 12 Q. Under FASB 80. 13 A. No, sir. I'd have to go back and 14 reread. 15 Q. So, you don't know? So -- look at 16 Page 4 of the exhibit. "Can the hedge program be, 17 quote, 'managed'? A hedge program should be 18 considered to be a structured program, and we 19 believe that the original structure should be 20 maintained to be considered a hedge. Although 21 FASB 80 states that, quote, 'If a futures (or 22 options) contract that has been accounted for as a 9077 1 hedge is closed before the date of the anticipated 2 transaction, the accumulated change in value of 3 the contract shall continue to be carried forward 4 (subject to ongoing assessment of correlation) and 5 included in the measurement of the related 6 transaction,' we believe that if it becomes 7 apparent that the hedge is being managed in order 8 to maximize profits, the program should 9 subsequently be considered to be a speculative 10 position." 11 Do you see that? 12 A. No, I didn't. 13 Q. I'm sorry. 14 A. I lost you. 15 Q. It's on Page 4 of the document. 16 A. Is that 8690 or 86 -- 17 Q. 8690. Let me show you where it is. 18 I'll just quote the second portion of the 19 paragraph is what I wanted to direct your 20 attention to. It says, "We believe that if it 21 becomes apparent that the hedge is being managed 22 in order to maximize profits, the program should 9078 1 subsequently be considered to be a speculative 2 position." 3 Do you see that? 4 A. Yes. 5 Q. Now, do you remember I asked you what 6 your understanding was of whether or not you 7 looked at sales to ascertain whether or not those 8 sales were made for a purpose that was -- a 9 purpose that required the portfolio to be 10 accounted for as a trading portfolio as opposed to 11 an investment portfolio? 12 A. Are you referring -- no, sir. 13 Q. Reading this, is it fair to conclude 14 that if a portfolio is managed in order to 15 maximize profits, that it should be accounted for 16 as a trading portfolio? 17 A. According to that, that's the correct 18 conclusion. 19 Q. And that is the view that you held at 20 the time you were the controller at USAT? 21 A. I don't understand the question. 22 Q. Was that the view that you held when 9079 1 you applied the accounting literature to the 2 transactions that were occurring at United Savings 3 Association at the time that you were its 4 controller? 5 A. I'm still not -- I hear your question. 6 I don't know how to relate it. 7 Q. Let me rephrase the question. Was it 8 your understanding that's what the literature 9 required at the time that you were the controller 10 for USAT? 11 A. This particular sentence? 12 Q. Yes. 13 A. Yes, based on reading it here. 14 Q. Now, I'd like to direct your attention 15 to another document; and that is Exhibit B1698. 16 Exhibit B1698 is a letter from Joe Parsons, senior 17 manager, to Michael Crow dated July 7th, 1987. 18 And it has attached to it another copy of the same 19 letter, which is Exhibit No. A10756, and it has 20 some handwritten writing at the top on the same 21 letter. We will identify the document as 22 Exhibit B1698 for purposes of the record. 9080 1 MR. GUIDO: I'd like to move the 2 admission of Exhibits B1459 and B1698, Your Honor. 3 MR. NICKENS: No objection as to B1459. 4 THE COURT: Received. 5 MR. NICKENS: As to 1698, Your Honor, I 6 don't know why -- they are from apparently two 7 different sources. It is the same document with 8 some differences in handwriting. No objection. 9 THE COURT: Received. 10 Q. (BY MR. GUIDO) Now, this says, "Dear 11 Mike, you have requested from us guidance 12 regarding certain proposed sales and 13 reacquisitions of securities. In the situation 14 described, United owns a security with the intent 15 of holding it as a long-term investment. However, 16 you have recognized an opportunity where you 17 believe the security is overpriced. Accordingly, 18 to maximize the return, the security should be 19 sold and reacquired after the market is corrected. 20 Because your intent was for long-term investment, 21 you would prefer to defer the gain." 22 Do you see that? 9081 1 A. Yes, sir. 2 Q. And then it says -- move down four 3 paragraphs. It says, "In the situation as 4 described above, I would assume that the security 5 was actively traded and displayed price volatility 6 based on your expectation of a quick market 7 correction. Accordingly, we would conclude that a 8 gain or loss would be deferred if the reinvestment 9 occurred within a week measured by the trade 10 dates." 11 Do you see that? 12 A. Yes, sir. 13 Q. Is -- what does that last sentence mean 14 to you: "Accordingly, we would conclude that a 15 gain or loss would be deferred if the reinvestment 16 occurred within a week"? 17 A. May I -- it means to me what it says. 18 I'm not -- 19 Q. Well, what does "deferred" mean -- 20 A. Not recognized. 21 Q. -- for you? Not recognized. So that, 22 in other words, it would be an adjustment to the 9082 1 basis of the asset or the liability that was sold 2 and repurchased, not recognized in the income of 3 the institution? 4 A. That's correct. 5 Q. Now, were the performance reports that 6 were utilized at USAT, were those performance 7 reports reports that were prepared based on the 8 GAAP accounting rules with regard to when income 9 should be recognized? 10 A. Yes, sir. 11 Q. So that if there was a gain that was 12 recorded in those -- or reflected in those 13 performance reports, that gain would have been a 14 gain that was sanctioned by generally-accepted 15 accounting principles? 16 A. As we understood them, yes, sir. 17 Q. And so, if those performance reports 18 reflected a gain in -- on a sale of a security, 19 those gains would have been recorded in accordance 20 with generally-accepted accounting principles? 21 A. Yes. 22 Q. And is it your understanding that the 9083 1 accounting advice given in Exhibit B1698 from Joe 2 Parsons to Michael Crow was an interpretation of 3 generally-accepted accounting principles? 4 A. As it relates to wash sales. 5 Q. Pardon? 6 A. As it relates to wash sales as it's 7 called here. 8 Q. Yes. 9 A. Yes. 10 Q. Now, I'd like to direct your attention 11 to a document that's been marked as Exhibit B1481 12 which is dated February 6th, 1987 which is the 13 Peat Marwick management letter that accompanied 14 its opinion on the financial statements of 15 United Financial Group as of January 31st, 1986. 16 MR. GUIDO: I'd like to move the 17 admission of Exhibit B1481, Your Honor. 18 MR. NICKENS: No objection, Your Honor. 19 THE COURT: Received. 20 Q. (BY MR. GUIDO) Now, look at the third 21 page of the attachment to the exhibit that's 22 attached to the letter to the board of directors. 9084 1 Do you see that page? It says 2 OW156942. 3 A. Yes, sir. 4 Q. It says "During 1986, all investments 5 in corporate debt and mortgage-backed 6 securities" -- do you see that section? 7 A. Yes, sir. 8 Q. -- "were accounted for on an investment 9 basis." 10 Do you see that? 11 A. Yes. 12 Q. Does that refresh your recollection 13 that the mortgage-backed securities portfolios 14 held by USAT in 1986 and the high-yield corporate 15 bonds were all accounted for on an investment and 16 not a trading basis? 17 A. Based on reading this, yes. 18 Q. "And we were informed that the 19 association is to establish accounts for the 20 purpose of accounting for both investment and 21 trading activities and that a standard policy is 22 being established relating to corporate debt 9085 1 securities and MBS accounted for under the 2 investment accounting treatment to document why 3 trades of such securities are made with an 4 indication of why such trades are consistent with 5 the investment treatment." 6 Do you see that? 7 A. Yes. 8 Q. We recommend the implementation of this 9 policy be closely monitored to ensure compliance 10 with management's intent." 11 Do you see that? 12 A. Yes. 13 Q. Then it says "Response: A separate 14 account was established in January 1987 which is 15 held to segregate and record MBS trading 16 activities. Trading transactions, along with 17 investment transactions, will be discussed and 18 approved weekly by the investment committee." 19 Do you see that response? 20 A. I heard you say it. 21 MR. NICKENS: I think it says, Your 22 Honor, "are discussed and approved." 9086 1 Q. (BY MR. GUIDO) Now, does this refresh 2 your recollection about the creation of an account 3 at USAT to segregate and record trading 4 transactions? 5 A. This would indicate that one was 6 established, yes. 7 Q. Now, I'd like to direct your attention 8 to -- 9 THE COURT: Mr. Guido, how much -- 10 MR. GUIDO: I have two more documents, 11 Your Honor, and then I will finish. I have a few 12 general questions afterwards, and I could wait 13 until the morning if you want me to. 14 THE COURT: Let's finish. 15 MR. GUIDO: Okay. 16 Q. (BY MR. GUIDO) Exhibit B1617 is the 17 next document I'd like you to take a look at. 18 Exhibit B1617 is a memorandum from Mike Crow to 19 Sandy Laurenson and Russell McCann. It says -- 20 dated May 11th, 1987 -- "It is my understanding 21 that the MBS speculative account has been/soon 22 will be effectively closed, so that it will be 9087 1 impossible to have a mark-to-market gain or loss 2 flow through earnings. If this is not correct, 3 please let me know. Michael Crow." 4 Does that refresh your recollection 5 that during the time period for which a 6 speculative account existed for the trading of 7 mortgage-backed securities? 8 A. It indicates to me that during 1987, 9 prior to May 11th, that we must have had one. 10 Q. Okay. Now, I'd like to direct your 11 attention to Exhibit B1622. B1622 is a memorandum 12 from Russell McCann to you and to Bruce Williams 13 dated May 12th, 1987. It says, "A request was 14 received from the accounting department to 15 quantify the balances in the trading inventory for 16 disclosure purposes for the 10Q filing." 17 Do you see that? 18 A. Yes, sir. 19 Q. And then it lists certain transactions 20 that were the balances in the trading account as 21 of March 31st and April 30th. 22 Do you see those -- 9088 1 A. Yes, sir. 2 Q. -- figures? And what do those -- what 3 do those transactions reflect to you? 4 A. I really don't know. 5 Q. Well, what is usually a long position 6 or a short position? 7 A. Some sort of future. 8 Q. A futures contract? 9 A. Yes. 10 Q. Now, have you ever seen this document 11 before? 12 A. I saw it last night for the first time. 13 Q. And what was your reaction last night 14 to this document? 15 A. That I had not seen it before and I 16 wasn't really -- I mean, as far as -- I wasn't 17 exactly sure what it was about, and I'm still not. 18 Q. Is that because you had never heard of 19 a speculative trading account at USAT before you 20 met with me last night? 21 A. I had never heard of it? 22 Q. Uh-huh. 9089 1 A. I don't recall saying I had never heard 2 of it. I don't recall it. 3 Q. Okay. Now, this indicates that if 4 there were a speculative trading account, we would 5 be able to ascertain its size and magnitude by 6 reviewing the 10Ks and 10Qs that were issued by 7 UFG, does it not? 8 A. If it was deemed that disclosure was 9 necessary. 10 Q. Is it your understanding that 11 disclosure was necessary under the 12 generally-accepted accounting principles? 13 A. I don't recall. 14 MR. GUIDO: I'd like to move the 15 admission of Exhibits 1622 and 1617, Your Honor. 16 MR. NICKENS: No objection, Your Honor. 17 THE COURT: Received. 18 Q. (BY MR. GUIDO) I've asked you a lot 19 of questions about various subjects dealing with 20 the portfolio at USAT in mortgage-backed 21 securities and high-yield bonds. 22 Were you ever told that the high-yield 9090 1 bond portfolio was being managed to generate 2 profits to be reflected in the quarterly financial 3 reports of United Financial Group or USAT? 4 A. I don't recall being told that. 5 Q. Were you ever told that the 6 mortgage-backed securities that were held in the 7 various portfolios that were accounted for as 8 investment portfolios were being sold periodically 9 to generate gains to bolster profits in the 10 financial statements of UFG or USAT? 11 A. I don't recall being told that. 12 MR. GUIDO: I have no further 13 questions, Your Honor. 14 THE COURT: All right. We'll adjourn 15 until 9:00 o'clock tomorrow. 16 17 (Whereupon at 5:08 p.m. 18 the proceedings were recessed.) 19 20 21 22 9091 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 4th 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 9092 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 4th 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