1 UNITED STATES OF AMERICA Before the 2 OFFICE OF THRIFT SUPERVISION DEPARTMENT OF THE TREASURY 3 In the Matter of: ) 4 ) UNITED SAVING ASSOCIATION OF ) 5 TEXAS, Houston, Texas, and ) ) 6 UNITED FINANCIAL GROUP, INC., ) Houston, Texas, a Savings ) 7 and Loan Holding Company ) ) OTS Order 8 MAXXAM, INC., Houston, Texas, ) No. AP 95-40 a Diversified Savings and ) Date: 9 Loan Holding Company ) Dec. 26, 1995 ) 10 FEDERATED DEVELOPMENT CO., ) a New York Business Trust, ) 11 ) CHARLES E. HURWITZ, ) 12 Institution-Affiliated Party ) and Present and Former Director ) 13 of United Savings Association ) of Texas, United Financial Group,) 14 and/or MAXXAM, Inc.; and ) ) 15 BARRY A. MUNITZ, JENARD M. GROSS,) ARTHUR S. BERNER, RONALD HUEBSCH,) 16 and MICHAEL CROW, Present and ) Former Directors and/or Officers ) 17 of United Savings Association of ) Texas, United Financial Group, ) 18 and/or MAXXAM, Inc., ) ) 19 Respondents. ) 20 TRIAL PROCEEDINGS 21 22 2 1 A-P-P-E-A-R-A-N-C-E-S 2 ON BEHALF OF THE AGENCY: 3 KENNETH J. GUIDO, Esquire Special Enforcement Counsel 4 BRUCE RINALDI, Esquire RICHARD STEARNS, Esquire 5 and BRYAN VEIS, Esquire of: Office of Thrift Supervision 6 Department of the Treasury 1700 G Street, N.W. 7 Washington, D.C. 20552 (202) 906-7395 8 ON BEHALF OF RESPONDENT MAXXAM, INC.: 9 FRANK J. EISENHART, Esquire 10 of: Dechert, Price & Rhoads 1500 K Street, N.W. 11 Washington, D.C. 20005-1208 (202) 626-3306 16 12 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO. AND 13 CHARLES HURWITZ: 14 RICHARD P. KEETON, Esquire of: Mayor, Day, Caldwell & Keeton 15 1900 NationsBank Center, 700 Louisiana Houston, Texas 77002 16 (713) 225-7013 3 17 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO., CHARLES HURWITZ, AND MAXXAM, INC.: 18 JACKS C. NICKENS, Esquire 19 of: Clements, O'Neill, Pierce & Nickens 1000 Louisiana Street, Suite 1800 20 Houston, Texas 77002 (713) 654-7608 21 22 3 1 ON BEHALF OF JENARD M. GROSS: 2 PAUL BLANKENSTEIN, Esquire MARK A. PERRY, Esquire 3 of: Gibson, Dunn & Crutcher 1050 Connecticut Avenue, N.W. 4 Washington, D.C. 20036-5303 (202) 955-8500 5 ON BEHALF OF BERNER, CROW, MUNITZ AND HUEBSCH: 6 JOHN K. VILLA, Esquire 7 MARY CLARK, Esquire PAUL DUEFFERT, Esquire 8 of: Williams & Connolly 725 Twelfth Street, N.W. 9 Washington, D.C. 20005 (202) 434-5000 10 OTS COURT: 11 HONORABLE ARTHUR L. SHIPE 12 Administrative Law Judge Office of Financial Institutions Adjudication 13 1700 G Street, N.W., 6th Floor Washington, D.C. 20552 14 REPORTED BY: 15 Ms. Marcy Clark, CSR 16 Ms. Erica Davis, CSR 17 18 19 20 21 22 4 1 P-R-O-C-E-E-D-I-N-G-S 2 (10:47 a.m.) 3 THE COURT: Good morning. Be seated. 4 The hearing will come to order. It is scheduled 5 for a hearing at this time and place. The 6 proceeding's instituted by the Office of Thrift 7 Supervision by notice of charges on December 22nd, 8 1995, OTS Order AP 95-40. The notice named as 9 respondents Maxxam, Inc., Federated Development 10 Company, Charles E. Hurwitz, Barry A. Munitz, 11 Jenard M. Gross, Arthur S. Burner, Ronald Huebsch, 12 and Michael Crow. The individual respondents are 13 identified as present, former directors or 14 officers of United Saving Association of Texas, 15 United Financial Group, and/or Maxxam. The notice 16 alleges violations of law and regulations by 17 respondents' orders requiring respondents to cease 18 and desist from the violations alleged in the 19 notice of charges, to reimburse the Federal 20 Insurance Fund for losses incurred as a result of 21 respondents' alleged violations of their statutory 22 and regulatory duties, and to reimburse the Office 5 1 of Thrift Supervision for its costs of this 2 proceeding and the underlying investigation. OTS 3 further seeks as relief an order prohibiting 4 respondents from participating in any manner in 5 the conduct of the affairs of any institution 6 specified in Section AD7A of the Federal Deposit 7 Insurance Act for exercising any voting rights in 8 such institution. Also, an order debarring 9 respondent Burner from practicing before the OTS 10 and an order for assessing civil money penalties 11 against respondents Maxxam, Federated, Hurwitz, 12 Munitz, and Gross. This hearing is being held to 13 determine whether the allegations set forth in the 14 notice are true and, if so, whether orders 15 granting the relief sought should be issued -- who 16 appears for the Office of Thrift Supervision -- 17 MR. GUIDO: -- Your Honor, Kenneth 18 Guido appearing for the Office of Thrift 19 Supervision. I'm joined by Richard Stearns who is 20 the director of enforcement, Bruce Rinaldi who is 21 the associate director of enforcement and Bryan 22 Veis who is Senior Counsel. 6 1 THE COURT: Thank you. Let's take the 2 respondents from the left to the right, okay? Who 3 appears for the respondents? 4 MR. NICKENS: Yes. Your Honor, I'm 5 J.C. Nickens with the firm of Clements, O'Neill, 6 Pierce & Nickens a Houston law firm and I have 7 filed of appearance on behalf of Mr. Hurwitz and 8 on behalf of Federated. 9 10 THE COURT: Thank you. 11 MR. EISENHART: Your Honor, my name is 12 Frank Eisenhart. I'm from the law firm of 13 Dechert, Price & Rhoads from Washington with my 14 colleagues Arthur Leibold, Bettina Lawton, 15 Jennifer Kim, and Catherine Boticelli who is not 16 in the courtroom at the moment. We represent the 17 defendant -- or respondent, Maxxam. 18 MR. KEETON: Your Honor, I'm Richard 19 Keeton with Mayor, Day, Caldwell, & Keeton along 20 with David Griffith. We represent Federated and 21 Charles Hurwitz. 22 THE COURT: Thank you. 7 1 MR. BLANKENSTEIN: Paul Blankenstein, 2 Your Honor with Gibson, Dunn & Crutcher and with 3 Mark Perry. We represent Jenard Gross. 4 MR. VILLA: I'm John Villa from 5 Williams & Connolly, Your Honor. I represent the 6 respondents Art Berner, Mike Crow, Dr. Barry 7 Munitz and Ron Huebsch. With me in the courtroom 8 today and also presenting evidence during the 9 course of the trial, Ms. Mary Clark and Mr. Paul 10 Dueffert. 11 THE COURT: Thank you. Now are these 12 others entering appearances, or have they been 13 identified? All right. Is that all the 14 appearances? 15 MR. VILLA: I believe so, Your Honor. 16 MR. STEARNS: Your Honor, for Office of 17 Thrift Supervision as the proceeding continues, 18 there may be other attorneys who will present 19 evidence in the office who are not here today. 20 THE COURT: Who have entered 21 appearances? 22 MR. STEARNS: Yes, there will be full 8 1 line of discussions. 2 THE COURT: Are there any preliminary 3 matters? 4 MR. NICKENS: Yes. Your Honor, we have 5 some preliminary matters with regard to certain 6 agreements that we have made with the OTS to 7 inform the Court and certain logistical issues and 8 I believe we also have filed four motions in 9 limine to present to the Court. 10 With regard to these logical issues and 11 the agreements that we have reached, Your Honor, 12 both sides in the case have identified 13 approximately 150 witnesses, 45 of whom appear on 14 both our lists. And many of these people will 15 have to be subpoenaed to appear here. And as 16 result of that and because of the logistical 17 problems associated with getting the people here 18 in the proper time, we have established certain 19 agreements with the OTS about notifying each other 20 as to when we expect to reach certain witnesses. 21 So, we have agreed that at the close of business 22 on each Thursday, we will try to identify for the 9 1 other side the witnesses that we expect that would 2 be called the following week and that we have an 3 agreement that in any event, that we would give 48 4 hours' notice to the other side prior to calling a 5 witness. These agreements are necessary with this 6 many people involved in order to avoid just utter 7 chaos, and we have agreed to those matters and 8 expect to strictly adhere to those agreements. 9 In addition, Your Honor, there are some 10 8,000 exhibits currently identified. We have not 11 brought them to the courtroom today. We will 12 bring them either late this afternoon, this 13 evening, or in the morning. But there are boxes 14 and boxes, as you might imagine, of these 15 exhibits. 16 I fully expect that many thousands of 17 those will never be referred to in these 18 proceedings; but, nevertheless, they are the ones 19 that each side has designated as possibly relevant 20 to be used. In order to deal with the logistics 21 of having 8,000 exhibits, we have prepared a 22 computer exhibit list that Ms. Richardson will 10 1 maintain in coordination with whoever you might 2 like. We will also provide and have provided to 3 both sides a complete set of these exhibits. Our 4 thought is that as an exhibit is referred to, that 5 we would provide you with one and the witness with 6 one. Although, if Your Honor prefers, we are 7 prepared to provide you with a complete set of 8 your own exhibits. So, we're subject to whatever 9 your instructions are in that regard, although our 10 thought was that we would give you a copy as they 11 are used and try to then, at the end of the day, 12 make sure that they get back into their folders so 13 that they are then available if they are referred 14 to at a later time. But we are subject to your 15 instructions. 16 THE COURT: A large number of them are 17 not going to be referred to at all. I think we 18 better just take them as they are referred to and 19 furnish me a copy at that time. 20 MR. NICKENS: Thank you. We have also 21 agreed that as to certain types of exhibits, 22 summary exhibits, that we will provide the other 11 1 side new exhibits that may be necessary, that we 2 would provide the other side seven days' notice of 3 our intention to use such exhibit so that they 4 could examine those summaries and underlying 5 documents that they represent and to confirm that 6 they are accurate to the best of everybody's 7 information. We are also discussions and it's 8 going to clearly be necessary to supplement at 9 times even this voluminous list, and we are 10 discussing, although we have not yet reached an 11 agreement with regard to a notice period for 12 supplemental exhibits. 13 With regard to authentication, Your 14 Honor, most of these -- almost all of these 15 documents bear some identifying numbers or labels. 16 We have provided the OTS with our identifications 17 of those. We expect to reach agreements so that 18 the source of the document that is being used will 19 be known or available if that matter should become 20 a matter of concern. The management of exhibits, 21 we expect in this number, to be a problem; but we 22 have done everything that we could think to ease 12 1 that difficulty. But there's a certain amount 2 that I expect will develop as we go along. 3 Finally, Your Honor, I expect that the 4 components who are here with the exception of 5 Mr. Munitz, not all of them are going to be able 6 to be here during the entire time of the 7 proceedings; and we will ask your permission to 8 have them excused as their needs are when they are 9 not testifying and have to take care of their 10 other business interests. 11 THE COURT: Okay. Thank you. 12 MR. NICKENS: And with that, your 13 Honor, Mr. Eisenhart, I believe, would present our 14 motion in limine. 15 THE COURT: I gather the OTS has no 16 response to what Mr. Nickens has said. 17 MR. GUIDO: That has been a long, 18 drawn-out set of negotiations, and is perfectly 19 acceptable. We do have a problem, and we are 20 negotiating the question of how much notice to 21 give either side with regard to the exhibits and 22 with regard to supplemental exhibits because, as 13 1 you can imagine with this large volume of 2 documents both sides have produced, we have tried 3 to create a combined set of documents. It's not 4 sure that all of the documents each side intended 5 to be included have been included in there, Your 6 Honor. 7 THE COURT: Mr. Eisenhart? 8 MR. EISENHART: Thank you, your Honor. 9 I'd like to address first the motion in limine 10 which Maxxam filed. This concerns the scope of 11 this hearing and particularly whether OTS will be 12 entitled to present evidence in this hearing of a 13 so-called controlling influence. 14 The background of this motion is as 15 follows: As your Honor knows, there is a 16 significant case issue in this case with respect 17 to MAXXAM, Federated, and Mr. Hurwitz as to 18 whether they have a liability to maintain the net 19 worth of the United Savings Association of Texas. 20 The so-called net-worth maintenance claim arises 21 out of a bank board resolution which contains a 22 provision in it that says for so long as MCO, 14 1 which was a party to the resolution and MAXXAM'S 2 control the United Saving Association of Texas. 3 They will be responsible to maintain a pro rata 4 share of its net worth. That is the underlying 5 undertaking that triggers the net worth 6 maintenance claim in this case. 7 In the notice of charges, the document 8 that was filed by OTS to commence these 9 proceedings in December 1995 in which defines the 10 case we have been discovering in for the last year 11 and nine months, the issue of control is tied to 12 stock ownership. They plead two theories of 13 control in there. They say that MCO and Federated 14 together exceeded the 25 percent control threshold 15 by virtue of ownership of stock by the so-called 16 Drexel option. This is option stock, stock that 17 under a call option from Drexel but which was not 18 actually owned. OTS says they will prove that we 19 were deemed to own this stock; therefore, we did 20 own it therefore the addition of this stock put us 21 over the 25 percent threshold. That's Theory No. 22 1. Theory No. 2 that was pleaded also involves 15 1 the issue of ownership of stock. It says the 2 112,000 shares of stock that were owned by 3 Mr. Gross should be attributed to Maxxam and 4 Federated under theories that I won't go into at 5 the moment and that amount should be counted along 6 with our stock for determining whether we pass the 7 25 percent threshold and if, indeed, we counted 8 those 112,000 shares, we would pass that 25 9 percent threshold. 10 Those are the two theories they have 11 pleaded in the notice of charges as to how 12 MCO/MAXXAM and Federated controlled the savings 13 institution and therefore are liable under the 14 network maintenance obligation. Recently -- when 15 I say "recently," I mean within the past two or 16 three weeks, OTS has told us in a letter that they 17 intend to allege at this trial a whole other 18 theory of control. They say they intend to prove 19 at this trial that MCO and Federated and 20 Mr. Hurwitz were deemed to be in control of the 21 institution because they exercised, quote, 22 "controlling influence" over the affairs of the 16 1 institution. Controlling influence is set out in 2 the statute as another way by which you can prove 3 control. The way this particular statute is set 4 up; and actually, if your Honor wishes, I have a 5 copy of the statute which I can hand up to you. 6 There are really four ways you can get to control. 7 The first two ways which are Section A and B both 8 involve stock ownership. Those are what they have 9 alleged in the complaint and indeed Sections A and 10 B of this statute are what they have pleaded in 11 the notice of charges as their basis for this 12 claim. 13 Subsection D of the statute refers to 14 the so-called controlling influence. And you'll 15 see I've actually highlighted a portion of that. 16 What it says is that you can be deemed to have 17 control of the savings association or other 18 company if the director determines, after 19 reasonable notice and opportunity for hearing, 20 that such person directly or indirectly exercises 21 a controlling influence over the management or 22 policies of the association. That statute and the 17 1 words "controlling influence" are nowhere pleaded 2 in the notice of charges. There is not a single 3 reference in the notice of charges in Subsection 4 D. The term "controlling influence" appears 5 nowhere in the notice of charges. Indeed, this 6 subsection is somewhat unique in that unlike the 7 other sections of the statute it specifically 8 provides for a hearing. There is actually a 9 preacher called a controlling influence hearing. 10 To our knowledge, neither the bank board or its 11 successor, OTS, has ever held a controlling 12 influence hearing; but unlike the determination of 13 stock ownership which is essentially a fact, you 14 either own the stock or you don't own the stock, 15 controlling influence obviously is something that 16 would have to determine and would be fact 17 intensive. In order to trigger a hearing such as 18 we're involved in right now which is an 19 enforcement hearing under the Federal Deposit 20 Insurance Act, there would have to be a prior 21 determination that a party actually did control 22 the institution by virtue of a controlling 18 1 influence. In other words, if they allege that 2 there's control via a controlling influence, they 3 hold a controlling influence hearing. If the 4 control is then determined, where you go from that 5 is the subject of the next proceeding. There has 6 never been a controlling influence hearing. There 7 has never been any notice that this was to be a 8 controlling influence hearing. And nowhere in the 9 charges is there a reference in the statute or a 10 reference to that term. They have told us in a 11 letter by Mr. Stearns dated September 5th that 12 they think we have always been on notice that this 13 is a controlling influence hearing and they intend 14 to introduce this sort evidence at trial. It's 15 following that letter, we filed a motion in 16 limine. 17 As your Honor knows, there are 18 provisions in the OTS procedural rules dealing 19 with amendment of pleadings to conform to the 20 evidence. The rule provides that if we don't 21 object, the pleading will be deemed amended to 22 conform to the evidence. Well, we very much 19 1 object to this so-called influence evidence. This 2 is not the case we're here to try. We believe, 3 therefore, if they were really to want to go 4 forward with the controlling influence hearing 5 over our objection, they would have to seek leave 6 to amend their complaint which they have never 7 done. Where do we go? We are here to try the 8 case that was pleaded in December 1995. They want 9 to make it a different case, and I don't think 10 they should be permitted to do so. So, we moved 11 in limine to exclude evidence going to so-called 12 controlling influence on the theory that that is 13 not a part of this case. 14 THE COURT: Thank you. Do any of the 15 other respondents wish to be heard on the motion? 16 MR. NICKENS: I think all the 17 respondents join in the motion, but I think Mr. 18 Eisenhart has stated our position. 19 THE COURT: Does the OTS have a 20 response? 21 MR. STEARNS: Yes, Your Honor. Good 22 morning, Your Honor. Richard Stearns for the OTS. 20 1 The OTS is here try precisely the case alleged in 2 the notice of charges. And that notice of charges 3 as I'm sure Your Honor's aware is replete with 4 allegations and statements of fact which allege 5 controlling influence by means of allegations that 6 respondents exercised actual control over the 7 operations, policies, and management of the United 8 Financial Group, the United Savings Association of 9 Texas. If your Honor does look at the statute, 10 you'll notice it is a statute that is designed to 11 determine when a person is deemed to have control; 12 and as Mr. Eisenhart has said, there are several 13 ways of doing so. We have alleged not only that 14 respondents acquired control through stock 15 ownership and not only they acquired control by 16 acting in concert with each other to acquire 17 stock; but they actually, in addition to their 18 acquisition of stock, exercised control over the 19 operations and management of USAT. The notice of 20 charges uses such phrases to put them on notice of 21 those allegations as actually participating in the 22 conduct of the affairs of the association. If I 21 1 can draw your Honor's attention to the early 2 sections concerning jurisdiction. In the 3 statement of who the respondents are, there are 4 allegations, for example, in paragraphs 5 and 6, 5 MAXXAM and Federated participated directly or 6 indirectly in the conduct of the affairs of UFG 7 and USAT. A further example in 15 of the notice 8 respondents in Maxxam and Federated, acting 9 through the individual components and other 10 officers, directors, employees and agents 11 participated in the conducts and affairs of USAT 12 and knowingly or recklessly participated in the 13 activities prescribed herein. Your Honor, if our 14 theories were merely acquisition of control of 15 stock ownership, there would have been no need for 16 the notice charges to then go on an as it does 17 allege actual control and the exercise of actual 18 control over the activities of the institutions. 19 The notice of charges your Honor, contains 20 numerous detail factual allegations of how the 21 respondents exercised their control over the 22 institution, allegations that put the respondents 22 1 on notice from the moment the day they received of 2 the allegations of their exercise of actual 3 control. There are allegations of almost every 4 claim with the exception of those claims that are 5 specific to the acquisition of control through 6 stock ownership as to how these respondents in 7 taking control of this institution then directed 8 the affairs of this institution. Directed the 9 affairs of the institution through failure to 10 maintain net worth of the association as they 11 controlled the UFG, directed the affairs of the 12 institution through the implementation of a 13 strategy to purchase and sell mortgage-backed 14 securities. Exercise control through transactions 15 that involved inflating maturity matching credits 16 and violations of regulations concerning 17 guarantees and direct investment rules, 18 participated in decisions of the association 19 concerning speculative real estate practices and 20 after USAT failed its net worth and participated 21 personally and directly in decisions as to the 22 payment of excessive bonuses and compensation. 23 1 Your Honor, all parties in this case 2 have done a tremendous amount of discovery. There 3 are thousands of pages of documents that have been 4 exchanged and dozens and dozens of depositions. 5 Those depositions or those documents are replete 6 in themselves with proof concerning the actual 7 exercise of control by the respondents over this 8 association Mr. Eisenhart, I think, would say 9 unless the phrase "controlling influence" appears 10 some place in the notice, there is not reasonable 11 notice. 12 The statute says reasonable notice of 13 our allegation that these individuals controlled 14 the institution. That's what the notice contains 15 in more than 100 pages. Allegations that they 16 controlled the institution. The statute also 17 provides before the director can make a 18 determination of controlling influence not only 19 must the respondents have reasonable notice, but 20 they must have an opportunity for hearing. The 21 respondents' allegation is that the agency through 22 its director has never issued regulations that 24 1 implement that part of the statute. But, in fact, 2 those regulations are part of Part 509 of 12CFR. 3 509.100 provides that any hearing to be held under 4 this subsection, Subsection A2D shall be held in 5 accordance with the rules set forth in Subpart A 6 which are the rules of uniform practice and 7 procedure that govern this proceeding we're at 8 today. And Part 509.1G specifically says that 9 those uniform rules, practice and procedure cover 10 any nonenumerated type of hearing which by statute 11 calls for an opportunity for hearing which 12 precisely what A2D provides, an opportunity for 13 hearing. In short, your Honor, there's been both 14 elements as required by the statute for purposes 15 of determining whether or not respondents 16 exercised control or exercised a controlling 17 influence, as respondents would have it, over the 18 operation and management of the association. 19 There's been reasonable notice provided to the 20 facts of the notice of charges. The notice of 21 charges cites the savings loan holding company as 22 a jurisdictional basis and there is today an 25 1 opportunity for a hearing as provided for by 2 regulations through the rules that govern this 3 procedure. 4 MR. EISENHART: Your Honor, may I 5 briefly respond? 6 THE COURT: Yes. 7 MR. EISENHART: The examples 8 Mr. Stearns gave actually underscore, in my view, 9 the seriousness of this motion. He talks, for 10 instance, about control over purchases of 11 mortgage-backed securities or control over real 12 estate transactions. My client, MAXXAM, is not 13 named in the notice of charges as having anything 14 to do with the charges pertaining to real estate 15 or anything to do with the charges pertaining to 16 mortgage-backed securities. That is not an area 17 of the case in which we are a named respondent. 18 It is not an area in the case that we have paid 19 that much attention to in the discovery in this 20 case. That's been very ably handled by some of 21 our colleagues whose clients are directly involved 22 in that. If I am now being told that MAXXAM is 26 1 going to be held liable because it exercised a 2 controlling influence over mortgage-backed 3 securities or over real estate. I can assure you, 4 your Honor, that is a very new charge. That is 5 not one I have heard before. And I would have 6 conducted myself very differently over the past 7 two years, with respect to discovery in those 8 areas had I had any inkling that MAXXAM was going 9 to be held responsible. I think the word 10 "control" is being thrown around quite a bit in 11 the complaint; but the word "control" as applied 12 to MAXXAM in this case has been always limited to 13 control via stock ownership. There has never been 14 any reference to controlling influence, and 15 there's never been any reference to the portion of 16 the statute dealing with control via controlling 17 influence. The problem we have and the prejudice 18 we face if they are allowed to go forward with 19 this new theory at this point are several. That 20 statute specifically requires adequate notice. We 21 don't believe that telling us on the 5th of 22 September, that this is now part of the case is 27 1 adequate notice. We have had no ability to 2 conduct discovery. I don't know what are the 3 so-called controlling influences we are supposed 4 to have alleged. They are not set out anywhere in 5 the notice of charges. They have not been 6 provided to me. I have no idea whether we have 7 addressed some or all of any of those so-called 8 controlling influences in the discovery of this 9 case. There are no experts in this case on either 10 who are prepared to come into court and talk about 11 controlling influence. There are experts who have 12 dealt with the issues of control. Both their 13 experts and their expert on that issue have dealt 14 with control; but they have dealt with it on the 15 context of stock ownership. There is no expert 16 that has ever addressed the subject of what is a 17 controlling influence. What is the lure? How is 18 that defined in bank word and OTS terminology? 19 Nobody has opined on that because nobody has ever 20 thought until September 5th that it was part of 21 this case. We believe that if they were to add 22 this new charge at this point, there would be 28 1 statute of limitations concerns. This is now 2 1997. We're talking about an institution that was 3 put in receivership in 1988 and events that 4 happened many years prior to that. I'd have to 5 see what they're alleging the so-called 6 controlling influence conduct to be, but I cannot 7 believe that at this late date, that wouldn't 8 raise statute of limitations concerns. There are 9 waiver and estoppel concerns that would arise. 10 These are all defenses that I would assume we 11 would plead and pursue if they were to amend their 12 complaint to set out the controlling influence 13 charge. But since they've never done that, we've 14 never had opportunity to do it. 15 Indeed, there would be an issue as to 16 whether OTS can hold a hearing now because this is 17 one of the many statutes that was changed 18 completely. When FIRREA was passed in 1989, 19 statute that they would go forward with now if 20 they were going to hold a so-called controlling 21 influence hearing is a statute that came into 22 being in 1989. The prior statute which would have 29 1 been in place when all the conduct supposedly took 2 place was repealed in 1989. I have never looked 3 at this. I don't whether they would have the 4 ability to hold a controlling influence hearing 5 now on pre-FIRREA based on pre-FIRREA conduct, but 6 the most important prejudice is that this injects 7 in this file a whole new issue that nobody has 8 looked at over the past nine months to over which 9 there are many, many implications not the least of 10 which is adequate notice and due process. And for 11 all of these reasons, I believe our motion should 12 be granted; and they should not be permitted to 13 amend their complaint; and they should not be 14 permitted to introduce this evidence. 15 MR. NICKENS: Your Honor, might I offer 16 one point of clarification? Mister Eisenhart's 17 comments might have suggested that MAXXAM wasn't 18 named in certain parts of the claim when, in fact, 19 I think they are named. But there are no 20 supporting factual allegations that would ever 21 have suggested that the controlling influence was 22 a basis for those allegations. 30 1 THE COURT: Thank you. 2 MR. STEARNS: Brief response, your 3 Honor? Very briefly, Your Honor, Mr. Nickens is 4 right. It is very clear from the face of the 5 notice, the charges that each of the respondents 6 are named in the individual claims as they are set 7 forth. Our allegations against them are in a 140 8 pages of detailed notice of charges to demonstrate 9 how the respondents exercised control over these 10 associations. Their acquisition control not 11 merely just through obtaining ownership of stock 12 or acting in concert with others' ownership of 13 stock, that's a small part of this notice of 14 charges limited to just a few of these claims. 15 All of the other claims -- more ten of them are 16 factual allegations. They are set forth in great 17 detail as to how actual control is set forth to 18 direct the operations, policies, and the 19 management of this association. Mr. Eisenhart's 20 point that he believes he was prejudiced because 21 it was something that occurred to them and they 22 did not raise affirmative defenses, really in this 31 1 case, each of the arguments he raises is a legal 2 argument which certainly can be addressed at any 3 stage of the proceedings including now. One of 4 those arguments in the statute of limitations is 5 an argument Your Honor's already ruled on with 6 respect to applicable statute of limitations. I 7 don't see that a prejudice. I see that all of the 8 facts which are the basis of this hearing have 9 been alleged and have been well-known to the 10 respondents for the discovery in this case for 11 quite some period of time. 12 THE COURT: I'm prepared to rule. I 13 deny the motion. It does not seem to me that the 14 notice can be construed as alleging the exercise 15 of control based solely on stock ownership, and I 16 see nothing inconsistent with the procedure 17 required on the 1467G3D with that being followed 18 here. It's a notice of hearing and evidence, and 19 I don't see any requirement that there be a prior 20 determination. And then you have another hearing. 21 And it seems to me granting the motion would 22 exclude evidence that pertained to many quite 32 1 explicit allegations in the notice; so, I deny the 2 motion. 3 MR. EISENHART: May I ask whether your 4 Honor will require OTS to amend its notice of 5 charges to assert this? 6 THE COURT: No. 7 MR. EISENHART: Your Honor, I want to 8 address briefly two other motions in limine; and I 9 think these will not need to detain us long. We 10 filed a motion dealing with the scope of rebuttal 11 testimony. And the genesis of that motion was, 12 quite frankly, a concern on our part that OTS 13 might be attempting to push into the so-called 14 rebuttal phase of its case evidence which more 15 properly belonged in its case-in-chief. We have 16 since taken the deposition of Mr. Oliver who was 17 one of the -- I'm sorry. I'm getting ahead of 18 myself. We have discussed this with OTS; and I 19 think at this point, we are prepared to take them 20 at their word on the notion that they are not 21 going to play fast and lose with the concept of 22 rebuttal. We still have some concerns, and we 33 1 still have some suspicions. But we think at this 2 point, we can ask the Court to defer any ruling on 3 this issue unless and until the problem arises. 4 We will be waiting to see what they actually try 5 in rebuttal and take it up then if we need to. 6 THE COURT: Thank you. I accept that. 7 And let me just say that I don't look with favor 8 on a party holding something up his sleeve so he 9 can spring it in for rebuttal. And so, I have 10 that concern, too. But, I'm taking OTS at their 11 word, also. 12 MR. STEARNS: I certainly accept 13 Mr. Eisenhart's representation. I think that is 14 an appropriate way to go, and I think it applies 15 surrebuttal, Your Honor, and I don't think there's 16 any way the Court at this beginning stage in the 17 hearing can make those determinations that they 18 have to reserve. 19 MR. EISENHART: The other half of that 20 motion dealt with what we have referred to as 21 summary witnesses. OTS identified rather late in 22 the game two witnesses, a Mr. Oliver and 34 1 Mr. Cooper whom they described as summary 2 witnesses. We have some concern that these might 3 be new expert witnesses being snuck in under the 4 guise of summary witnesses. We have taken the 5 deposition of Mr. Oliver and at least on the 6 subjects we believe they're offering and we think 7 that he is, in fact, a genuine summary witness. 8 We have no objection at this point on that basis. 9 With respect to Mr. Cooper, what we would like to 10 propose is that during the course of this 11 proceeding before he testifies, that we take the 12 deposition of Mr. Cooper. If, as is the case with 13 Mr. Oliver, he does look like a genuine summary 14 witness, there will not be an issue for the Court 15 to resolve. 16 MR. STEARNS: Mr. Cooper, Your Honor, 17 was listed at the appropriate time on our witness 18 list as an individual who will present summary 19 testimony has publicly available information 20 concerning housing conditions and market 21 conditions in Texas in the 1980's which he has 22 collected. In order to facilitate in court, he 35 1 will provide a summary testimony as to what the 2 bind of that information states. He is available 3 for deposition. We have offered him for 4 deposition. They have not yet noticed this 5 deposition, and we will certainly find time to do 6 that. 7 MR. EISENHART: We will do it, Your 8 Honor, and if there's a problem then, we will take 9 it up with the Court at that time. And I believe 10 there's a last matter to be considered and Mr. 11 Blankenstein will address that. 12 MR. BLANKENSTEIN: Your Honor, with 13 your permission I would like Mr. Perry to address 14 that last motion in limine that was filed on 15 behalf of Jim R. Gross. 16 MR. PERRY: Thank you, Your Honor. As 17 you know Mr. Gross has filed a motion in limine 18 that addresses two issues in the notice of charges 19 the. First one is the question whether the 1987 20 bonuses are properly part of this case. In the 21 13th claim for relief the OTS makes various 22 allegations regarding the compensation practices 36 1 charging that they were unsafe and unsound against 2 Mr. Gross and some of the other individual 3 respondents. 4 Nowhere in that claim or anywhere else 5 in that notice are the 1987 bonuses are mentioned. 6 The 1988 bonuses are mentioned but not the 1987 7 bonuses. In discovery their expert made -- he had 8 certain opinions regarding the 1987 bonuses. We 9 have therefore filed a motion in limine to 10 preclude them from bringing that into this case at 11 this late date because it's not in the notice of 12 charges. OTS says that all compensation practices 13 in 1988 are encompassed by the notice of charges. 14 That's not true, Your Honor. They haven't 15 alleged, for example, that Lawrence Pinell's 16 contract was unsafe and unsound. In fact, the 17 notice is specific about the three areas that they 18 do claim are unsafe and unsound. The 1987 bonus 19 is not one of them. They effectively concede that 20 they did not include it in the notice of charges 21 by asserting that respondents had ample notice in 22 this claim because their expert Alan Dermany 37 1 offered an opinion about the 1987 bonuses. Your 2 Honor, there is no authority for the proposition 3 that the litigant can amend its pleadings by 4 procuring expert testimony on an issue that is not 5 in the notice of charges itself. 6 In fact, OTS has said that it wouldn't 7 amend the notice of charges and the statute of 8 limitations clearly precludes them from doing so. 9 The 1987 bonuses were paid in January of 1988. A 10 lot more than six years, five years or whatever 11 the statute of limitation has passed since then. 12 OTS also claims that we have waived this argument 13 by not raising it apparently at the time 14 Mr. Dermany testified. Your Honor, that would not 15 have been a proper objection to Mr. Determines 16 deposition testimony. It was not appropriate at 17 the summary disposition stage because it did not 18 get rid of a claim. In fact, it is exactly what a 19 motion in limine is designed for, carved out a 20 particular small issue, not raised in the 21 pleadings in this case and just make sure that 22 it's not presented in the hearing. 38 1 The second issue, Your Honor, in our 2 motion of limine concerns the acting in concert 3 allegations. This issue is previously before Your 4 Honor in a motion for summary disposition. Our 5 position is that the notice of charges contains 6 only one allegation of fact, relating to 7 Mr. Gross' alleged acting in concert with any 8 other respondent to control UFG and that is, that 9 Mr. Gross and Mr. Hurwitz both were directors of 10 Weingarten Realty. OTS again effectively concedes 11 this point by stating that in its opposition for 12 summary disposition it raised -- and it raised for 13 the first time in that point Your Honor -- a 14 number of factual issues regarding Gross' 15 acquisition of UFG shares. Those factual issues 16 were not raised in the notice of charges and we 17 submit are not proper issues in this case. We are 18 not seeking reconsideration of your earlier 19 ruling. We understand that you have rules. As a 20 matter of law, OTS would receive but as a matter 21 of pleading in trial practice we are asking you to 22 preclude them from introducing evidence on a 39 1 theory that they have not pleaded or given us 2 notice of. 3 Your Honor, OTS investigated this case 4 for a long time. As Mr. Stearns just pointed out, 5 the notice of charges is 140 pages long and 6 contains detailed allegations. OTS chose not to 7 include in those allegations anything relating to 8 the 1987 bonuses or anything acting in concert by 9 Mr. Gross other than Weingarten. It's too late in 10 the day and the statute of limitations prevents 11 OTS from bringing new issues in at this point. 12 Thank you. 13 THE COURT: Thank you. 14 MR. RINALDI: If it please the Court, 15 Bruce Rinaldi responding for the OTS. First with 16 respect to the compensation issue and whether the 17 1987 bonuses, which were paid in 1998, are 18 included within the notice of charges. The OTS 19 asserted in the notice of charges that when it 20 became apparent that respondents could no longer 21 concede that USAT failed its minimum capital, 22 respondents caused UFG and USAT to enter into 40 1 employment agreements with exorbitant, illegal, 2 and unsafe provisions for the benefit of certain 3 individual respondents. And then we go on and we 4 talk about all of the various employment practices 5 that we're engaged in. They increase their own 6 salaries by 55 to 80 percent. They paid 7 themselves bonuses in 1980, a special bonus -- 8 THE COURT: Excuse me. What year? 9 1980? 10 MR. RINALDI: I'm sorry. '88, excuse 11 me. And we go on and we also identified 12 employment agreements that provided for lavish 13 severance benefits for over two years' 14 compensation in the event that these individuals 15 were terminated at USAT. The notice of charges 16 makes it very clear that once these individuals 17 realized what was happening, that the thrift was 18 failing and that they were going to lose their 19 jobs, they simply treated the thrift as a piggy 20 bank and started to use compensation practices as 21 a mechanism for their on personal aggrandizement. 22 Now, in that regard having alleged the general 41 1 allegations that they have done these things, 2 during did course of discovery we advised them on 3 several occasion that one of the factors which we 4 considered to be unsafe and unsound was the 5 payment of a 55 to 80 percent bonuses in the case 6 of Mr. Gross, to be perfectly honest his bonus was 7 only 55 percent and represent $167,000 but there 8 are other individuals who received much greater 9 bonuses in 1988. This was some three months after 10 they had been advised by their general counsel 11 that they were about to fail their net-worth 12 requirements. Mr. Dermany states unequivocally, 13 in his opinion, that it was unsafe and unsound for 14 them to have paid those bonuses at that time when 15 the thrift was failing its net-worth requirements. 16 This was on April the 15th that they were advised 17 of this fact; so, they've known for some five, six 18 months now that this was one of the contentions of 19 the Office of Thrift Supervision. They then 20 deposed Mr. Dermany on two different occasions and 21 he made it very explicit in his deposition that it 22 was unsafe and unsound for them to have paid these 42 1 bonuses. They now state that well, when they read 2 the notice of charges, there's not an explicit 3 statement that says this particular bonuses was 4 unsafe and unsound. It talks about other bonuses 5 that were paid. It talks about generally their 6 compensation practices, but they claim that it 7 wasn't specific enough. The fact is they've began 8 on notice for months, Your Honor, regarding this 9 bonus claim rather than at some point earlier in 10 the proceedings filing some pleading to state that 11 claims with respect to the this should be 12 stricken. They simply laid in the weeds. Now 13 they say gee, we didn't have enough notice. We 14 didn't know what was going on when clearly they 15 were on notice as much as five months ago. In 16 fact, if one reads their pleading very carefully, 17 on page 2 they say the following: OTS has 18 indicated in discovery that it intends to attempt 19 to prove that the 1987 payments were unsafe and 20 unsound. That's their own statement. Now, they 21 claim they didn't know. I think it's palpably 22 absurd to make such a claim on their behalf. The 43 1 second point they make raises the issue was 2 Mr. Gross placed on adequate notice of the fact 3 that he was acting in concert with the other 4 respondents in this case to be part of a control 5 group. The notice of charges sets out very 6 clearly on page 23 at paragraph 58 that Mr. Gross 7 acquired some 112,000 shares of UFG. Now, we did 8 not spell out the specific detail of how that 9 occurred. We said that he acquired 110,000 shares 10 of UFG and his total holdings were 112. The 11 110,000 shares were acquired by Mr. Gross with a 12 loan that was funded 100 percent by UFG that was 13 presented to him by respondents in this case. And 14 for him to acquire a portion of the company; and 15 then subsequent to that when Mr. Gross could not 16 pay off the loans that were owed to him they 17 simply forgave the debt. And in effect Mr. Gross 18 held a substantial block of stock in the company 19 throughout the whole period of this challenge here 20 today that's part of our claims today. And during 21 that period of time it is our assertion that he 22 was acting in concert with other individuals who 44 1 also held shares of UFG. The notice of charges 2 are replete with allegation that he was acting in 3 concert of all of these individuals. To state 4 that because we alleged greater detail with 5 respect to the Weingarten Realty part of the case, 6 isn't really a claim at all. They were placed by 7 notice by virtue of, one, stock ownership and; 8 two, his direct representation along with Charles 9 Hurwitz and the Weingarten board that he would be 10 deemed to be acting in concert with Mr. Hurwitz 11 and therefore part of the control group. I would 12 submit to the Court that at this point in time 13 this is not a new claim, that it's one that's 14 fully evident from the face of the notice of 15 charges and it would be inappropriate for the 16 Court to dismiss or at least restrict evidence 17 with respect to that aspect of our claim of acting 18 in concert. Thank you. 19 MR. PERRY: Very briefly, Your Honor? 20 With respect to the 1987 bonuses, I think 21 Mr. Rinaldi just admitted they are nowhere in the 22 notice of charges. He said it came up in 45 1 discovery. He says we should have filed some 2 pleading before we filed our motion in limine. He 3 didn't tell you what pleading that should have 4 been, and I don't know what pleading it should 5 have been. The only pleading I know of to 6 preclude evidence at the hearing of a theory that 7 is not raised in the notice of charges is the 8 motion in limine. We agreed on a schedule for 9 filing the notice, Court approved it and we filed 10 it on time. I'm not sure what this pleading that 11 Mr. Rinaldi has in mind is. When it came to our 12 attention, we dealt with it. And as for acting in 13 concert issue, I think Mr. Rinaldi has also 14 admitted that the facts that he just laid out for 15 Your Honor are not in the notice of charges. 16 They're in OTS's new theory, way late, about how 17 Mr. Gross allegedly acted in concert. If you look 18 in the notice of charges, it says 19 Weingarten Realty. Yes, it says he purchased UFG 20 shares. Nowhere is that connected with Mr. 21 Hurwitz, any of the other respondents, control of 22 UFG or anything else that OTS now says. It simply 46 1 isn't there, Your Honor; and we ask that it not 2 get into this case. Thank you. 3 THE COURT: I've looked at this 4 question about whether there are other factors 5 alleged pertaining to Mr. Gross' acting in 6 concert. And it seems to me that the notice does 7 put him on notice that there are other issues 8 involved. As to the '87 bonus, there were general 9 allegations and I believe the specifics have come 10 up during discovery and I believe as of this 11 moment, we're aware of what the issues are and 12 that there has been adequate notice, and I deny 13 the motion. 14 MR. NICKENS: Your Honor, we have one 15 other minor preliminary matter prior to opening 16 statements. When I first stood up today I 17 indicated that my notice of appearance was on 18 behalf of Mr. Hurwitz and Federated which it is 19 and I would ask permission from Your Honor to be 20 able to file a notice of appearance as co-counsel 21 for MAXXAM the purpose of this is to allow us to 22 allocate and assign primary responsibility for 47 1 certain witnesses in areas of expertise that we 2 have developed in the case. 3 THE COURT: Very well. Are you going 4 to file a formal notice? 5 MR. NICKENS: Yes, Your Honor I will 6 and I apologize for not having done so prior to 7 this time; but I wanted get this matter here; and 8 I will file a formal piece of paper. 9 MR. VEIS: Your Honor, we have one 10 other preliminary matter if I may. Your Honor, 11 last month we filed a motion for additional 12 Drexel-related discovery which Your Honor granted 13 ten days ago. It required that Federated and 14 MAXXAM supply to the OTS shareholder lists. Both 15 of those entities have failed to comply to Your 16 Honor's order and I would like to bring it to the 17 attention of Court and ask that it be so required. 18 In our motion, we set forth the factual matters 19 that we have discovered in the course of discovery 20 in analysis of documents. We stated in view of 21 this newly discovered information OTS requests 22 that the terms of the May 7, 1986 order be 48 1 modified and that MAXXAM be required the provide 2 to the OTS copies of its shareholders' lists for 3 all classes of stock, and records of shareholders' 4 votes, including copies of proxy cards for the 5 period January 1, 1981, to present in order that 6 OTS can seek to determine whether other 7 Milken-Drexel related partnerships or other 8 entities may be or may have been shareholders. In 9 addition to facts now known to OTS suggests a 10 pattern by Drexel and Milkens and in investing in 11 stock of companies of which they were doing 12 business, OTS requests that Federated Development 13 Company be required to provide the copies of its 14 shareholder list or the equivalent documents 15 maintained by a New York business trust and 16 records of shareholders votes including copies of 17 proxy cards for the same period. Your Honor 18 granted our motion after briefing by both sides. 19 I have copies of the responses or the productions 20 by both and MAXXAM and Federated which I would 21 like to hand up to Your Honor and discuss the 22 reason why they are inadequate. 49 1 THE COURT: With respect to these 2 documents, are these documents that I have not 3 seen? 4 MR. VEIS: Yes, Your Honor we have 5 received them they are letters dated September 6 18th, last Friday. 7 In a letter from Ms. Lawton on behalf 8 of MAXXAM to Mr. Stearns and Mr. Guido in it says: 9 In response to Mr. Law Judge Shipes September 12, 10 1997, order regarding modified discovery MAXXAM 11 Inc., hereby provides copies of sections of the 12 proxy detailed voting tabulation reflecting 13 Drexel, Burnham, Lambert Inc.'s ownership in 1984 14 and 1985 of shares of MCO Holdings, Inc. The 15 responsive documents were located during a search 16 conducted pursuant to the Judge's order under the 17 direction or Mr. Bernard L. Brickell. A copy of 18 Mr. Brickell's affidavit says: Under my direction 19 a diligent search was conducted for the 20 shareholder lifts and proxy cards for the period 21 of January 1, 1981, to December 31, 1988, that's 22 the first noncompliance because we asked for 50 1 documents to the present and Your Honor ordered 2 such documents to be produced. 3 Next paragraph: As a result of this 4 search the following items were located: 5 (A) certified stockholder list of MCO 6 Holdings, Inc., MCO, for April 18, 1984, (for 7 uncommon stock) March 20, 1987, (common and 8 preferred stock) and February 9, 1987, common and 9 preferred stock relating respectively for its 10 1984, 1987, and 1988 annual meeting of 11 shareholders; and (B) it's proxy summary report, 12 proxy detailed voting tabulation, for 1985 dated 13 January 10th, 1985; and (C) MCO's proxy cards with 14 respect to MCO's 1987 meeting of shareholders. 15 It indicates that certain documents 16 were not located. However, it then says in 17 paragraph 5: With the exception of Drexel's 18 ownership of MCO's shares, reflected in the 19 attached proxy detailed voting tabulations, none 20 of the persons or entities identified in OTS's 21 motion specifically Michael Milken, Loel Milken, 22 GLJ Partnership, Lorsend Partnership, Wilham 51 1 Financial Group Incorporated, Essex Financial, for 2 ML Associates are reflected in the certified 3 stockholders' lists, proxy summary reports, or 4 proxy cards of MCO located by MAXXAM and referred 5 in paragraph 3 above. 6 Attached are three copies of redacted 7 pages from the shareholder list indicating that at 8 various points in time, Drexel, Burnham, Lambert 9 was listed as a record shareholder. Your Honor, 10 this merely confirms what we already knew and it's 11 completely unresponsive to the motion and the 12 order. We asked for those documents in order to 13 determine whether or not there were other Drexel 14 or Milken related entities. We didn't ask them to 15 search for the entities we have identified. We 16 want to know if there are others and there 17 are/were in existence hundreds of Drexel-related 18 participants and Drexel had numerous employees. 19 Their search to the extent that a search of the 20 files was appropriate was completely unresponsive 21 and we submit they should have produced the 22 shareholder lists and proxy records in their 52 1 entirety. 2 Looking at Federated's. Federated as 3 also provided a similar set of documents. In 4 Mr. Griffith's letter the second document which I 5 handed to you it says: Please find closed 6 Federated's documents responsive to administrative 7 Law Judge Shipes September 12th, 1997, order 8 regarding modified discovery. For your 9 information there are no responsive documents 10 concerning Michael Milken, Loel Milken, GLJ 11 Partnership, Lorsend Partnership, Wilkin Financial 12 Group Inc., Essex Financial, or ML associates. 13 Attached to that letter appear to be five pages of 14 redacted shareholder lists that indicate at some 15 point in time, Drexel, Burnham, Lambert was a 16 shareholder of Federated. 17 Again this is inadequate. It simply 18 confirms that we suspected that Drexel itself 19 might own shares; but it does not answer the 20 question as to whether other Drexel-related 21 entities with Milkens through partnership, owned 22 shares. It does not answer the question as to 53 1 whether Drexel employees might own shares. 2 Your Honor, we simply ask that these 3 two respondents be required to comply with your 4 preexisting order. And I think this is not the 5 time for anybody to re-argue the basis for the 6 order. We simply just want compliance. 7 MR. EISENHART: I will speak on behalf 8 of MAXXAM. I think much of what I have to say may 9 pertain to Federated, too, but certainly Mr. 10 Griffith and Mr. Keeton could add whatever needs 11 to be added for Federated. We did get Your 12 Honor's order, and we actually thought we had 13 complied with it. The period of time for 14 discovery in this case from time of memorial has 15 been up to and including the end of 1988. For 16 every proceeding I'm aware of in this case that is 17 what the parties have agreed is the relevant 18 period of discovery and indeed I can't imagine 19 since the institution was put into receivership in 20 the end of 1988 what need they could have for 21 Maxxam's shareholder lists for 1987 and 1997, '96, 22 or '95. We treated the time period the way every 54 1 party in this case has treated every other 2 discovery request in this case as running through 3 1988. And that's what we searched for. We also 4 took their motion at what we thought was face 5 value. What they were interested in was ownership 6 by the Milkens and by the partnerships that they 7 had identified in their motion. 8 That's what we searched for, and that's 9 what Mr. Brickell's affidavit goes to. I don't, 10 frankly, know what more they want. If they have 11 some master list that they have developed of 12 Drexel-related partnerships, they can give it to 13 us. We will redo the search and if we turn up 14 anymore of those we would let them know. We 15 thought we knew the entities they were interested 16 in; but if they have some larger list, we will be 17 glad to search on the larger list as well. Beyond 18 that, I don't know what more I can say except 19 shareholder lifts are regarded by MAXXAM and by 20 many other companies as extremely sensitive 21 documents. 22 In Maxxam's case there has been at 55 1 least one fairly hotly contested shareholder 2 resolution within the past few years; and there 3 are, quite frankly, a number of people who would 4 like to get their hands on our shareholder list. 5 It is not something we give lightly access to or 6 lightly give out. If OTS has some compelling need 7 to get in and see our shareholder list themselves, 8 as distinguishing them from giving us the list and 9 having us do the search themselves, I would be 10 glad to hear what it is. If, in fact, they are 11 going to be allowed to do that, let them Your 12 Honor is going to insist that we produce the 13 shareholder list to them and allow them to do the 14 search instead of us, I would very much like to 15 get from a confidentiality order to make sure that 16 the information that is disclosed, stays in the 17 possession of OTS and is used only for the 18 purposes of this case and it goes no further. 19 We have had instances were things have 20 been leaked out to persons not involved in this 21 case and persons who have interests that are 22 really unrelated to this case but interests that 56 1 are very hostile and adverse to MAXXAM. Our 2 position is we think we have complied. We think 3 we gave them what they want to the extent that 4 it's information relevant to this case. If there 5 is something more than they have, we will be glad 6 to expand the list if they think they have some 7 compelling reasons to go beyond the year 1988, I'd 8 like to hear it. 9 MR. GRIFFITH: Your honor, Dave 10 Griffith of Federated, I was the author of the 11 letter that was read into the record. The timing 12 question for Federated is basically irrelevant. 13 We went private in '87. So, we don't have 14 shareholder lists after '88. The order that Your 15 Honor signed was documents the subject of the 16 motion. And you can read the motion and the 17 subject of it deals with the Drexel and all of the 18 various entities that they identify in this motion 19 and that's why we thought we were responding to 20 the Judge's order and this is the first time that 21 we have heard we are not. 22 MR. VEIS: Your Honor, if I may. I 57 1 think it's very clear that the documents that are 2 subject to the motion are all the shareholder 3 lists. The entities are listed because we had 4 reason to believe there might be others; and 5 that's what we wanted to search for. 6 As to the time frame Mr. Eisenhart is 7 correct that December 1988 has been considered a 8 cutoff for many of items of discovery in this 9 case, but not necessarily all. 10 Now, as to why there might be some 11 cause for need after that date, among other things 12 the Drexel, Burnham, Lambert liquidating trust did 13 not go out of business until April of this year. 14 It may well be that there were shares held then. 15 THE COURT: How would that bear on this 16 case? 17 MR. VEIS: It simply would indicate a 18 continuity of ownership. There may be 19 participants that still exist. I don't know. We 20 would be happy to agree to a confidentiality order 21 if that would decrease the concerns that 22 Mr. Eisenhart has raised provided that we are able 58 1 to use in evidence anything which we find 2 appropriate. We are willing to keep confident the 3 shareholder lists that the respondents are 4 concerned about. 5 THE COURT: You think that if you had 6 the shareholder lists, you could identify Drexel 7 employees? 8 MR. VEIS: We could, Your Honor, but it 9 would be, at this point in time, it would take 10 longer to compile a list of entities to be 11 identified than it would to simply look through 12 the lists and time is of the essence because we 13 are now at the beginning of trial. 14 THE COURT: Are you suggesting that the 15 respondents should have been able to identify 16 others or -- 17 MR. VEIS: No, Your Honor, I'm 18 suggesting that they should have given us the list 19 so that we could identify the others. 20 THE COURT: Well, I think if the 21 parties can work a confidentiality protection 22 order out, respondents should make available the 59 1 entire list. I see no reason why it should not be 2 held in confidence. 3 MR. VEIS: There is none, Your Honor. 4 THE COURT: I'll sign a protective 5 order. 6 MR. EISENHART: Your Honor, may I ask 7 the time period? Is there really a need to make 8 current lists? 9 THE COURT: I agree with the 10 respondents. I think if they owned it in '88, the 11 fact that it continued -- I don't see. I really 12 can't see. 13 MR. EISENHART: Drexel went into 14 liquidation, I believe, in 1990. 15 THE COURT: So, let's use that. 16 MR. VEIS: Thank you, Your Honor. 17 MR. EISENHART: Thank you, Your Honor. 18 MR. GUIDO: Your Honor, its five 19 minutes to noon. I don't know what you're 20 preference is. 21 THE COURT: I was thinking perhaps we 22 would adjourn for lunch and begin the next item of 60 1 business, the opening statements. 2 MR. NICKENS: Opening statements. And 3 I believe that will take the entire afternoon. 4 MR. KEETON: Your honor, on behalf of 5 Mr. Hurwitz of Federated, I want to move for a 6 continuance given your ruling on the control and 7 influence document issue. That issue is much 8 broader than I think Your Honor appreciates, it's 9 much different than the discovery, and there's 10 much discovery that would have occurred had that 11 been in the case. So, I've got to move for a 12 continuance on behalf of my clients. 13 MR. EISENHART: Your Honor, MAXXAM 14 would join in that motion. 15 MR. GUIDO: You Honor, I would like to 16 respond to that motion. 17 THE COURT: Motion denied. 18 19 (Whereupon a lunch break was taken.) 20 21 THE COURT: The hearing will come to 22 order. I believe at this time, we are going to 61 1 have opening statements. Mr. Guido? 2 MR. GUIDO: May it please the Court, my 3 name is Kenneth Guido; and I represent the Office 4 of Thrift Supervision in this proceeding. As 5 introduction to my opening statement, I thought it 6 would be important to summarize the notice of 7 charges or the claims that are set forth in the 8 notice that was filed on December 26th, 1995. The 9 first claims in the notice deal with respondents' 10 failure to maintain the net worth of United 11 Savings Association of Texas as it required as a 12 condition MCO and Federated having required 13 control of USAT and its holding company, United 14 Financial Group, and the respondents causing false 15 and misleading statements to be made regarding the 16 put call option with regard to the acquisition of 17 the stock of United Financial Group. Those are 18 claims 1 through 3 of the notice. In addition, 19 the notice alleges violations of the Control Act 20 and its applicable regulations for the failure to 21 register MCO and Federated as savings and loan 22 holding companies and failure to file annual 62 1 reports with the FSLIC savings and loan holding 2 companies. That's Claim No. 4, Your Honor. 3 Claim No. 2, Your Honor, is that the 4 respondents failed to comply with United Financial 5 Group's net worth maintenance condition that was 6 imposed as a result of a merger of United 7 Financial Group with another savings and loan 8 holding company. 9 In addition, the notice of charges 10 alleges that the respondents caused USAT to 11 purchase junk bonds from Drexel, Burnham, Lambert 12 with whom respondents were acting in concert to 13 acquire control of UFG and USAT, and it did so 14 without the prior written consent of the Federal 15 Home Loan Bank Board causing respondents to 16 violate and causing USAT to violate the affiliated 17 party regulations of 12CFR. 18 In addition, the notice of charges 19 alleges that respondents engaged in unsafe and 20 unsound practices and made false and misleading 21 statements while speculating in USAT's portfolios 22 of mortgage-backed securities. Those are claims 6 63 1 and 7, Your Honor. 2 In addition, the notice of charges 3 alleges that when the respondents could no longer 4 use accounting gains to generate profits to shore 5 up the capital of United Savings Association of 6 Texas, they engaged in sham transactions to 7 transfer caps and adjustable rate mortgages from a 8 subsidiary, United MBS, to the parent company, 9 USAT, in order to reduce the capital requirements 10 for the holding company. 11 The notice of charges also alleges that 12 the respondents caused USAT to guarantee a debt or 13 the debts of a subsidiary corporation, United MBS, 14 in violation of the applicable service corporation 15 regulations, the liability growth regulations, and 16 the direct investment regulations. So, those are 17 the claims, I believe, that are claims 9 through 18 11 in the notice of charges, Your Honor. 19 The notice of charges also alleges that 20 the respondents, in order to generate profits for 21 USAT, engaged in unsafe and unsound lending and 22 investment practices and violated the applicable 64 1 regulations in connection with speculative 2 investments in Park 410, an 80 million-dollar 3 loan, and the Norwood United Project which was a 4 30 million-dollar loan with a 9 million-dollar 5 capital contribution. The allegations in there 6 are that the respondents failed to properly 7 underwrite the loans, relied on inadequate and 8 fraud appraisals, approved disbursements prior to 9 loan approval by the board of directors, and 10 failed to comply with applicable lending 11 regulations as a result of which USAT incurred 12 losses in excess of $80 million. That's Claim 13 No. 12 in the notice of charges, Your Honor. 14 Then, finally, at a time when USAT 15 couldn't meet its minimum regulatory capital 16 requirements and when it was rapidly approaching 17 insolvency, respondents, with knowledge of both of 18 these facts, approved retroactive increases in 19 compensation, bonuses, severances, payments, and 20 debt forgiveness for themselves and other USAT 21 insiders in excess of $40 million. 22 They, therefore, caused the limited 65 1 remaining assets of USAT/UFG to be distributed 2 themselves, further depleting those assets and 3 damaging their financial condition and impairing 4 their ability to meet UFG's net worth maintenance 5 obligation. That's claim No. 12, Your Honor. 6 And before I proceed, elaborate on 7 these, Your Honor, I think it's important to put 8 this into context by looking at the financial 9 condition of United Financial Group over time and 10 the financial condition of MCO over time, Your 11 Honor. 12 In 1982, prior to acquisition of 13 control of USAT and UFG, UFG had total assets of 14 $1.8 billion, Your Honor. At the same time, MCO 15 had assets of $484 million, Your Honor. By 1987, 16 a year before USAT was closed, UFG had assets of 17 $7.1 billion, Your Honor. And MCO or MAXXAM at 18 the time -- it's not clear to me when MCO Holdings 19 became MAXXAM -- had assets of $1.4 billion 20 approximately which increased in 1988 to 21 $3.63 billion. 22 During this time period, Your Honor, 66 1 from 1984 to 1988, USAT purchased junk bonds 2 underwritten by Drexel Burnham Lambert, a total of 3 about $1.6 billion, I believe, Your Honor. In 4 1984, they bought $49 million. 1985, the amount 5 went up to $317 million. 1986, it went to 6 $772 million. 1987, it was $267 million. And 7 1988, it fell off because of the decline in the 8 thrift to $115 million. 9 During that same time period, Drexel 10 Burnham Lambert on net underwrote approximately 11 $1.8 billion in junk bond issuances by MAXXAM. 12 I believe, in addition, there are two 13 other telling facts. You've heard this morning a 14 little bit about Drexel Burnham Lambert's 15 ownership of MCO stock which, I think, is relevant 16 to issues that will come up in this proceeding; 17 but, also, you will hear in the testimony that 18 during this entire time period, MCO Holdings, 19 Federated, and the related entities other than UFG 20 and its subsidiaries purchased no junk bonds from 21 Drexel Burnham Lambert or anyone else, Your Honor. 22 Now, turning to the first and fourth 67 1 claims, MCO's net-worth maintenance obligation, 2 Your Honor, the facts will show that with the 3 assistance of Drexel, MCO Holdings and Federated 4 purchased 24.9 percent of the outstanding stock of 5 United Financial Group. It initially did so 6 through a subsidiary of Federated called -- 7 Federated Reinsurance, I think, was the name of 8 that company which it filed an application to 9 acquire something in excess of 10 percent. And it 10 sought approval of the Federal Home Loan Bank 11 Board to do so. It did receive that approval. It 12 was told that it would have to rebut a presumption 13 of control if it did so. It sought to rebut that 14 presumption. Federal Home Loan Bank Board 15 determined that it had not rebutted that 16 presumption and concluded that for purposes of the 17 regulations, Federal Reinsurance was in control. 18 Subsequent to that point in time, MCO 19 and Federated increased their purchases of stock 20 so that the amount finally reached to 21 24.9 percent, as I indicated, was purchased with 22 the assistance of Drexel. In addition, MCO and 68 1 Federated filed an application, H(e)1 application, 2 to obtain control of United Financial Group and, 3 indirectly, its hundred-percent owned subsidiary, 4 USAT. That application was approved. 5 As a condition to that application, 6 Your Honor, the bank board provided that for as 7 long as they, MCO and Federated or the applicants, 8 directly or indirectly controlled United Savings, 9 applicants shall contribute a pro rata share based 10 on their UFG holdings of any additional infusions 11 of capital in a form satisfactory to the 12 supervisory agents that may become necessary to 13 maintain its net worth at the level required by 14 the corporation's net-worth regulations. 15 At about the same time, the evidence 16 will show that Drexel's -- excuse me -- that MCO 17 Holdings sought other ways to obtain stock in UFG 18 without triggering this provision which would 19 establish control. The evidence will show that it 20 did so because it did not want to be bound by the 21 net-worth maintenance condition; and, in fact, it 22 sought repeatedly to get the bank board to change 69 1 the net-worth condition. 2 It entered into an agreement with 3 Drexel, in order to avoid the prescriptions in 4 that condition, to acquire another 790,000 shares 5 of stock of UFG in addition to the 24.9 percent 6 that it owned. And over a long period of time in 7 negotiations, it sought to draft what is referred 8 to as a "put call option" in this situation. 9 Under that agreement which was 10 eventually adopted, Drexel agreed to hold stock 11 for MCO. MCO had the right to call that stock for 12 payment of the fee which it paid at a 13 predetermined price. If that call option were not 14 exercised, Drexel negotiated and received the 15 right to put that stock to MCO. 16 The negotiations didn't stop there 17 however, Your Honor. Drexel demanded and 18 received, in addition, guarantees that it would be 19 reimbursed for any losses that it might occur; and 20 it also received a letter of credit guaranteeing 21 that if it put that stock to MCO, because of MCO's 22 failure to call the stock, that it would receive 70 1 its fee that it had contracted for and the full 2 amount of that stock. The full 790,000 shares 3 approximately, Your Honor, were not included in 4 that put call option because it turned out that 5 there were regulations of the National Association 6 of Securities Dealers that didn't allow broker 7 dealers such as Drexel to enter into such an 8 agreement. It had a limit of 150,000 shares that 9 could be covered in this situation. 10 Because of the staggered term of the 11 put and the call here, however, Your Honor, Drexel 12 and MCO were permitted to enter into an agreement 13 for 300,000 of those shares. 14 What happened to the 490,000 shares, 15 Your Honor, that were left? Drexel held them. It 16 held them during a long period of time when the 17 UFG stock prices were declining. It only sold 18 that stock after MCO announced that it was no 19 longer going to attempt, in the parlance of the 20 Federal Home Loan Bank Board, to acquire control 21 over UFG. 22 Your Honor, that put call agreement 71 1 that was entered into with Drexel imposed the 2 preponderate economic risk of ownership on MCO. 3 There was no risk whatsoever to Drexel under that 4 arrangement. Unless the third-party entity had 5 issued the letter of credit, it defaulted on its 6 obligation. But in all respects, the contract 7 shifted all risks of ownership to MCO. No other 8 party had a risk of ownership. 9 Now, one of the questions that will 10 come up in this proceeding as we go is the whole 11 question of: Why are there net-worth maintenance 12 conditions? Why did the agency require net-worth 13 maintenance conditions? 14 You will hear testimony, Your Honor, 15 that net-worth maintenance conditions were a 16 bargain between individuals that purchased savings 17 and loans and the Federal Home Loan Bank Board. 18 You will hear testimony that in the 1979/1980 time 19 period, traditional thrifts were in a great deal 20 of trouble financially because of the oil crisis 21 and the spike in interest rates that went with 22 inflationary impacts that were related to attempts 72 1 to defend the dollar during that time period. 2 You will hear testimony that there was 3 a need to get new management into savings and 4 loans to expand them into less traditional 5 activities, Your Honor. You will hear testimony 6 that Congress expanded the investment powers of 7 savings and loans at this point in time in the 8 1979/1980 time period in order to assist them in 9 becoming profitable again. 10 You will also hear, however, Your 11 Honor, testimony that when recruiting new 12 management or attempting to make savings and loans 13 available to new management and new owners, there 14 was no opportunity to get infusions of capital or 15 very little opportunities to do so because people 16 didn't want to risk their funds, putting it into 17 entities that were as severely damaged as savings 18 and loans were at that time. 19 You will hear, Your Honor, testimony 20 that the reason why net-worth conditions were 21 demanded is because the agencies wanted something 22 in return. They couldn't get people to risk their 73 1 capital as a way of assuring that they wouldn't 2 abuse their powers as managers of those thrifts 3 like they can do today. 4 So, instead, what they did is they 5 extracted net-worth maintenance conditions; and 6 they did so in a number of ways, one of which was 7 to unilaterally impose conditions in the 8 resolution as was done here stating that if 9 certain acts were undertaken on the other side, 10 that the net-worth maintenance condition would be 11 triggered. 12 But you will hear testimony, Your 13 Honor, that it was viewed as a bargain, that it 14 was something that was being extracted in exchange 15 for giving people the right to control savings and 16 loans, to expand their geographic lending areas, 17 to expand their investment powers and allow them 18 to engage in activities that traditional thrifts 19 had not been allowed to engage in at that point in 20 time. 21 Now, we believe that the statutory or 22 the acquisition of stock meets the requirements of 74 1 control, Your Honor; but we do not stop there, 2 Your Honor. You will hear testimony, Your Honor, 3 that at all relevant times, Mr. Hurwitz was the 4 controlling shareholder of a business trust named 5 Federated Development which was one of the two 6 acquirers. He was the chairman and chief 7 executive officer of that entity. He was also a 8 trustee of that entity as were two of his 9 associates, George Kozmetsky and Barry Munitz. 10 Through Federated, Hurwitz controlled MAXXAM/MCO 11 Holdings which was formerly known as McCullough 12 Oil Company. He was also its chairman and chief 13 executive officer. And he, Kozmetsky, and Munitz 14 were all directors of MCO. They also all became 15 directors of UFG. Hurwitz became the chairman of 16 the board and CEO of UFG; and Munitz was also a 17 director of USAT, positions they held as 18 representatives of MCO and Federated. 19 In fact, Barry Munitz had 20 correspondence that will be part of the record of 21 these proceedings that shows Barry Munitz has an 22 indemnification agreement with MCO because of his 75 1 serving on that, on the board of UFG at MCO's 2 behest. The board of directors' meetings of UFG, 3 which had absolutely no operations other than 4 USAT, were held simultaneously with USAT's boards. 5 The evidence will show that 6 Charles Hurwitz attended those meetings and in 7 some of those instances will show that 8 Charles Hurwitz was reporting to the board of USAT 9 on activities of USAT, that he also in some 10 instances even went so far as to second motions 11 that were made by Mr. Munitz you will find in the 12 course of this. The record of evidence will show 13 that Mr. Hurwitz, Mr. Kozmetsky, and Munitz 14 attended most of those joint board meetings. 15 The evidence will show that 16 Mr. Hurwitz -- that Mr. Munitz directed the hiring 17 of UFG and USAT senior management. The evidence 18 will show that Mr. Hurwitz and Munitz were the 19 only two UFG board members who were on what was 20 referred to as the "strategic planning committee" 21 which I will get to a little later on when I 22 explain how they transformed this thrift from a 76 1 traditional savings and loan to one that engaged 2 in what the respondents refer to as wholesale 3 activities. That strategic planning committee 4 that was so instrumental in defining the direction 5 of UFG and USAT had, as its only other members, 6 senior employees hired by either Charles Hurwitz 7 or Barry Munitz. In addition, Charles Hurwitz and 8 Barry Munitz were also members of the management 9 committees, were also senior employees that 10 Mr. Hurwitz and Mr. Munitz had hired. In 11 addition, Mr. Hurwitz and Mr. Munitz caused UFG 12 and USAT to create a joint investment committee 13 which had exactly the same members. It was 14 composed entirely of senior management that they 15 had selected; and Mr. Hurwitz and Mr. Munitz, to a 16 lesser extent, actively participated in its 17 deliberations. None of this should be a surprise 18 because in the H(e)1 application to acquire 19 control, MCO and Federated stated their intentions 20 for UFG and USAT once control had been acquired. 21 The record will show that they stated in that 22 application MCO and Federated believed that the 77 1 financial services industry is entering into a 2 period of rapid growth, diversification, and 3 change. MCO and Federated's investment in UFG 4 will enable them to participate in an increasingly 5 diversified financial services industry that, in 6 turn, UFG and USAT will benefit from MCO's 7 investment expertise in the financial markets. 8 Following that admonition, Mr. Hurwitz 9 and Mr. Munitz, acting through various UFG and 10 USAT committees, selected financial analysts to 11 help devise a new investment strategy for UFG as 12 described in the H(e)1 application. In response, 13 the strategic planning committee adopted an 14 investment strategy recommended by the analysts 15 and advocated by Charles Hurwitz that dramatically 16 changed USAT's business operations. The change, 17 as I said, caused USAT to shift away from being a 18 traditional thrift that originated residential 19 loans funded with retail deposits to a wholesale 20 strategy funded with broker deposits and, in this 21 case, reverse repo agreements. The evidence will 22 show they caused USAT's size to increase, as I 78 1 stated at the outset, from 1 -- from a 2 1.8 billion-dollar institution to one with 3 $7 billion in assets. They structured the USAT 4 committees in a way in order to dominate USAT's 5 policies and procedures. They devised its 6 strategic plan. Charles Hurwitz advocated that 7 they sell branches to generate capital to grow, 8 which they did. He advocated that they curtail 9 retail residential lending, which they did. He 10 advocated they redirect its investments into 11 high-risk junk bonds, which they did. He 12 advocated that they direct other investments into 13 corporate equity securities, which they did. He 14 advocated that they purchase mortgage-backed 15 securities funded with reverse repos, which they 16 did. 17 As a consequence of the change, the 18 evidence will show that USAT's balance sheet was 19 stripped of profitable assets in order to meet 20 regulatory capital requirements and forced the 21 failure of regulatory capital, the net effect of 22 which was to increase the losses to the Federal 79 1 Insurance Funds when the institution failed. 2 The evidence will show, Your Honor, 3 that the growth, the redirection of investment 4 activity, and the stripping of the balance sheet 5 were done by the respondents in order to survive a 6 downturn in the Texas economy, to continue their 7 investment activities as a diversified financial 8 institution, have USAT emerge as a viable entity, 9 and have respondents Hurwitz, MAXXAM, MCO, and 10 Federated benefit financially from a hope for 11 recovery. 12 The evidence, in essence, Your Honor, 13 will show that the respondents received the 14 benefit of control of a multi-billion-dollar 15 institution and deliberately redirected its 16 investments and operations which, if they had not 17 obtained deposit insurance, would have cost 18 substantial sums of money in the hundreds of 19 millions of dollars assuming that they could have 20 even gone out and raised those funds. 21 The facts will show, Your Honor, that, 22 in essence, the government conferred a 80 1 quantifiable substantial financial benefit, the 2 control of USAT, on the respondents Hurwitz, MCO, 3 and Federated -- those respondents accepted and 4 retained the benefits of control; and, in fact, 5 they vigorously exercised it -- and that those 6 respondents are seeking to avoid that -- their 7 obligation to meet the net-worth maintenance 8 condition which was the benefit that the Federal 9 Home Loan Bank Board thought it was obtaining when 10 it allowed them to obtain control. 11 Respondents' control over USAT's 12 investments, as the evidence will show, 13 facilitated their receipt of financial assistance 14 from Drexel. I indicated at the outset that 15 Drexel had underwritten 1 -- approximately 16 $1.8 billion in financing junk bonds for MCO or 17 MCO-related entities. I also pointed out the 18 evidence will show that during that time period, 19 USAT purchased $1.6 billion in junk bonds 20 underwritten by Drexel. 21 The evidence will also show, as Your 22 Honor is aware from the earlier matters that came 81 1 up today, that Drexel loaned approximately 230- to 2 250,000 shares of MCO directly in its own name. 3 The evidence will also show, as I pointed out, 4 that MCO didn't purchase any junk bonds at all 5 during this time period. But what is also 6 significant is that during the time period of 1982 7 through 1988, Drexel was also a major financier of 8 USAT's purchase of mortgage-backed securities. In 9 fact, at a time when USAT was running into 10 financial trouble, Drexel stepped in, the evidence 11 will show, and picked up the gap in the financing 12 of USAT's mortgage-backed security portfolio, Your 13 Honor. In essence, the relationship between 14 Drexel, MCO, and Federated was of mutual benefit. 15 The benefit from the MCO side will dramatically be 16 evidenced by the statements that Mr. Munitz made 17 in his interview with the FDIC when he was asked, 18 "What were Mr. Hurwitz's motivations for owning 19 USAT and continuing to keep it open?" 20 And he said, as reflected in the notes 21 of the counsel for the FDIC, "Peer group 22 pressure." 82 1 Who was going down, and who was still 2 alive? He did not want to hurt his reputation 3 among Pierce and Miliken. He was concerned about 4 a net-worth maintenance risk to MAXXAM, and USAT 5 was his ticket to ride with Drexel. The evidence 6 will show that the OTS sought to get Mr. Munitz to 7 testify to these matters; and his testimony was 8 not satisfactory so that the OTS sought a subpoena 9 enforcement or initiated a subpoena enforcement 10 action for the notes which it had sought. And he 11 would not voluntarily provide the notes that his 12 lawyers had prepared, the two of them in the room 13 with the FDIC people; and the two sets of notes 14 were then taken and combined into a recitation of 15 the facts. That subpoena enforcement action 16 failed, Your Honor, the evidence will show; but 17 the District Court observed that the FDIC's 18 attorney's testimony appeared to provide ample 19 proof of what Dr. Munitz said. And, therefore, in 20 the Court's view, there wasn't substantial need to 21 overcome the prescriptions of the attorney work 22 product document. 83 1 In either case, Your Honor, the 2 evidence -- we will attempt to introduce the 3 evidence of the two FDIC attorneys of what 4 Mr. Munitz said at that interview which we believe 5 explains the benefits to the continued operations 6 of USAT that Charles Hurwitz derived from his 7 ownership. 8 Essentially, the evidence will show 9 that USAT was important to Hurwitz in maintaining 10 his relationship with Pierce including Milken; but 11 the evidence will also show that Milken was 12 extremely dependent upon savings and loans 13 purchases of junk bonds in order to maintain a 14 market for Drexel's underwriting activities. 15 As I stated earlier, the size of this 16 symbiotic relationship, Your Honor, was 17 $1.6 billion of purchases of junk bonds by USAT 18 and the underwriting of approximately $1.8 billion 19 of junk bonds from respondents which allowed it to 20 increase from the size of an institution of about 21 $500 million to well over 300 million or to well 22 over a 3 billion-dollar institution. 84 1 Under those circumstances, Your Honor, 2 the existence of the put call -- the full extent 3 of the put call option from the regulators in 4 order to avoid any risk, that there would be the 5 imposition of a net-worth maintenance condition. 6 The evidence will also show that MAXXAM 7 and Federated and Mr. Hurwitz had another reason 8 for not having the net-worth maintenance condition 9 triggered by the put call option and obscuring the 10 full significance of the put call option from the 11 regulators, and that was that they didn't want to 12 be in a position where the federal regulators 13 could review MCO's issuance of junk bonds. 14 The evidence will show that if a 15 holding company comes within the jurisdiction of 16 the Federal Home Loan Bank Board, it then had to 17 get its approval for the issuance of debt. That 18 would have had a detrimental effect, from the 19 testimony of MCO employees, on MCO's operations; 20 and, therefore, it was something to be avoided. 21 Therefore, what happened was that MCO never sought 22 the approval of the regulators for the put call 85 1 option or asked whether or not it would trigger 2 the net-worth maintenance condition despite the 3 fact that there were opinions that had previously 4 been issued by the general counsel's office of the 5 Federal Home Loan Bank board that said when you 6 have contractual rights such as an option to 7 obtain stock in an entity and you have the 8 preponderate economic interest in that stock 9 because of that contractual relationship, you are 10 deemed to hold the voting stock for purposes of 11 the control regulations. And the opinions went on 12 further to say that if you have any question about 13 this, you should submit the issue to us for our 14 opinion. 15 We believe that by failing to notify or 16 to request an opinion by the actions that it took 17 to obscure the full significance of the put call 18 option and, particularly, the letter of credit, 19 Your Honor, that the respondents acted in reckless 20 disregard of the law. 21 Now, I'd like to move to the second 22 claim, Your Honor, which is the claim with regard 86 1 to UFG's net-worth maintenance obligation. As I 2 stated earlier at the outset, it also had a 3 net-worth maintenance obligation. That obligation 4 was imposed when it granted UFG's application to 5 acquire Houston First American Savings Association 6 and merge it into USAT and a stipulation executed 7 by the chairman of the UFG, Mr. Gross -- I'm 8 sorry. I think it was Mr. Williams at the time. 9 Excuse me, Your Honor. By failing to direct UFG 10 to make the required contributions to the 11 net-worth of USAT as required by the applicable 12 regulations, the individual respondents 13 essentially violated a written agreement entered 14 into with the Federal Home Loan Bank Board. They 15 violated a condition imposed in writing by the 16 Federal Home Loan Bank Board in connection with 17 the granting of that application and engaged in 18 unsafe and unsound practices within the meaning of 19 12 USC1818. Those violations, the failure to 20 satisfy the net-worth maintenance obligation of 21 UFG, were a reckless disregard to the law where 22 applicable regulations are ordered by the Federal 87 1 Home Loan Bank Board. The individual respondents 2 were aware of the resolution that imposed the 3 condition and the stipulation executed by the 4 chairman in October of 1983. They were aware that 5 USAT had failed to meet its regulatory capital 6 requirements as of December 31, '87. 7 As members of UFG's board of directors, 8 they received a written demand from the Federal 9 Home Loan Bank Board supervisory agent on 10 May 13th, 1988, to meet that obligation. They did 11 not respond to the request and took no steps to 12 contribute any capital to USAT at any time before 13 the association was placed into receivership. As 14 a consequence of their actions, the assets of UFG 15 were substantially depleted so that when the OTS 16 and the Federal Home Loan Bank Board, in a 17 bankruptcy proceeding that UFG had filed, finally 18 was able to perfect its claim, substantial sums of 19 monies had been dissipated. 20 One of the ways those funds was 21 dissipated, Your Honor, was the payment of excess 22 salaries, bonuses, and severance benefits that the 88 1 respondents authorized to be paid to others and to 2 themselves. I think the total amount was 3 somewhere around the range of $4 million, two of 4 which went to the respondents in this matter. We 5 believe