200 1 UNITED STATES OF AMERICA Before the 2 OFFICE OF THRIFT SUPERVISION DEPARTMENT OF THE TREASURY 3 In the Matter of: ) 4 ) UNITED SAVING ASSOCIATION OF ) 5 TEXAS, Houston, Texas, and ) ) 6 UNITED FINANCIAL GROUP, INC., ) Houston, Texas, a Savings ) 7 and Loan Holding Company ) ) OTS Order 8 MAXXAM, INC., Houston, Texas, ) No. AP 95-40 a Diversified Savings and ) Date: 9 Loan Holding Company ) Dec. 26, 1995 ) 10 FEDERATED DEVELOPMENT CO., ) a New York Business Trust, ) 11 ) CHARLES E. HURWITZ, ) 12 Institution-Affiliated Party ) and Present and Former Director ) 13 of United Savings Association ) of Texas, United Financial Group,) 14 and/or MAXXAM, Inc.; and ) ) 15 BARRY A. MUNITZ, JENARD M. GROSS,) ARTHUR S. BERNER, RONALD HUEBSCH,) 16 and MICHAEL CROW, Present and ) Former Directors and/or Officers ) 17 of United Savings Association of ) Texas, United Financial Group, ) 18 and/or MAXXAM, Inc., ) ) 19 Respondents. ) 20 TRIAL PROCEEDINGS FOR 9-23-97 21 22 201 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 22 202 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 Jerry Langdon, Judge Shipe's Clerk 15 REPORTED BY: 16 Ms. Marcy Clark, CSR Ms. Erica Davis, CSR 17 18 19 20 21 22 203 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:03 a.m.) 3 THE COURT: The hearing will come to 4 order. I believe we are prepared to continue with 5 the opening statements of the respondents. 6 MR. NICKENS: Yes, Your Honor. 7 THE COURT: You may proceed, 8 Mr. Nickens. 9 MR. NICKENS: Good morning, Your Honor. 10 For the record, I am J.C. Nickens; and for my 11 portion of these opening statements, on behalf of 12 the respondents, I have been asked to review 13 USAT's investments in mortgage-backed securities 14 which investments are the subjects of Claims 6 15 through 11 of the notice of charges. Your Honor, 16 as I listened to Mr. Guido yesterday, I was struck 17 by how much of the claims in the notice of charges 18 that the Enforcement has either apparently 19 abandoned altogether or substituted claims that 20 contradict those stated in the notice of charges. 21 It appears to us that in the course of 22 discovery, as we have managed to rebut the claims 204 1 of the notice of charges, the Enforcement has 2 taken our very claims and tried to put a twist on 3 them that would make them some violation for 4 presentation to Your Honor. And I will try to 5 illustrate in detail these specific points as we 6 go through them. 7 Mr. Guido yesterday expressed some 8 uncertainty over what was in dispute whereas the 9 notice of charges is quite specific that they 10 relate to USAT's use of risk-controlled arbitrage, 11 what was then popularly known as risk-controlled 12 arbitrage, and that USAT instituted three -- not 13 two -- risk-controlled arbitrage investment 14 programs using mortgage-backed securities. 15 In addition, Your Honor, USAT owned, 16 outside any risk-controlled arbitrage program, 17 substantial amounts of mortgage-backed securities 18 which fact becomes important because of the use or 19 misuse of certain documents in the case relating 20 to those securities owned outside of 21 risk-controlled arbitrage in connection with 22 Claim 4 those RCAs. 205 1 Let me very briefly address the concept 2 of risk-controlled arbitrage using mortgage-backed 3 securities. During the early to mid-Eighties, 4 various investment bankers developed these 5 products that they called RCA. The concept was to 6 develop a spread income by purchasing long-term 7 mortgage-backed securities assets by using 8 short-term borrowing, usually reverse repo 9 agreements which were secured by the MBS itself. 10 Typically, there is a spread between the -- of 11 several hundred basis points between the coupons 12 on the MBS and the rates charged by the repo 13 lenders. Hedging instruments such as swaps, caps, 14 collars, the details of which we needn't get into 15 at this point, are used to protect the arbitrage 16 against the interest rate risk of short-term rates 17 which is -- you're borrowing repricing upwards 18 while you have a fixed return as reflected by your 19 coupon on the MBS. Now, the cost of these hedges 20 reduces the spread; and in some cases, they reduce 21 the investor's opportunity that he would normally 22 have owning MBS from gaining from a reduction 206 1 in -- or from falling rates. This structure, as 2 broadly described, produced a small spread; but it 3 was quite -- or thought to be quite durable over a 4 wide range of interest rate fluctuations. The 5 RCA, therefore, depended upon leverage because the 6 spreads were small but durable. So, for example, 7 an investor could take a hundred thousand dollars, 8 to just use a number. He could, using leverage, 9 purchase a million dollars of MBS; and even though 10 his spread might be small, a hundred basis points, 11 the 10,000-dollar return on his 100,000-dollar 12 investment might be and was an acceptable return 13 given the low level of perceived risk. The RCA 14 investor -- and this is a key point as we get into 15 the facts -- was required to match the cash flows 16 because the cash flows from the MBS are uncertain 17 as to their timing. You will get your principal 18 back at par, but you don't know when. So, you 19 have to match those cash flows with the life of 20 the hedge. And to match cash flows, the tool used 21 in 1985 and which has continued in somewhat 22 different forms even till today was to match the 207 1 expected lives of the assets and the liabilities 2 which, because of the nature of the MBS, required 3 them to estimate prepayments. 4 We agree with Mr. Guido that estimating 5 prepayments is no easy task, though, in 1985, it 6 appeared far easier than it now is thought to be 7 today. That is based upon the experience of 1986. 8 In the early Eighties, economists had 9 been tracking prepayments for several decades; and 10 it was widely believed that a homeowner would have 11 no economic reason to prepay his mortgage unless 12 rates fell at least 200 basis points. That 13 assumption has been largely changed through 14 developments that have occurred since that time 15 and through the experience of 1986. 16 Now, Your Honor, by matching average 17 lives of the assets and the liabilities and making 18 adjustments to keep them matched as they changed 19 with changes in interest rates and prepayments, 20 the model predicted that the investor could 21 maintain a positive spread for the life of the 22 investment which was typically five years or less 208 1 and, accordingly, investment bankers and the 2 supporting academic literature promised that the 3 spreads on the RCA would, as I have said, be 4 durable, although they would fluctuate over 5 interest rates movements of 200 basis points and 6 more. 7 Now, I'd like to pause just a moment to 8 discuss the role of market value. The focus of 9 risk-controlled arbitrage was the maintenance of a 10 positive spread; that is, cash flow. Market 11 values which are expected to go up and down on 12 both sides of your hedge are not relevant as long 13 as the hedges are adjusted and remain in place. 14 Now, as the hedges expire, the market values can 15 be quite significant; and I'm not saying that a 16 good manager ignored market values. But the 17 evidence in this case will be that the focus was 18 on maintaining that spread because at the end of 19 the day, everyone knew that the mortgage-backed 20 securities would prepay at par, whatever had been 21 the movements in the interim. And the way one 22 handled this market value fluctuation was the use 209 1 of something called matching durations to offset 2 the changes in market values. 3 Now, durations is a technical term; has 4 many meanings it has developed. But it measured 5 the sensitivity of the financial instruments to 6 price changes -- price changes sensitivity to 7 interest rate movements which, in the case of 8 mortgage-backed securities, are largely dependent 9 upon prepayments. 10 Now, theoretically, Your Honor, one 11 could match durations such that a rise in value on 12 one side of your hedge would exactly match the 13 loss in value on the other side of the hedge. But 14 it depended upon the ability to estimate in the 15 case of mortgage-backed securities prepayments. 16 Now, let me turn to USAT's assumptions 17 in the setting up of its risk-controlled arbitrage 18 program. USAT was well aware of the duration 19 matching prepayments and other theoretical 20 underpinnings of RCAs. Before deciding to invest, 21 USAT's manager had had formal presentations from 22 at least three leading investment bankers: 210 1 Solomon Brothers, Morgan Stanley, and First 2 Boston. Respondents will introduce the evidence 3 of these presentations in order that you will be 4 able to see the conventional wisdom that existed 5 at that time and upon which they acted that 6 underlaid their investment of RCA. 7 It is not unimportant that the 8 regulators encouraged these investments. MBS was, 9 by itself, far less risky than making a 10 single-family home using deposits. And hedged MBS 11 followed the regulators' recommendations that 12 thrifts reduce their gap exposure between the 13 repricing intervals of their long-term assets and 14 the short-term obligations. 15 Now, as USAT began its first RCA and 16 before the second, USAT informed the Federal Home 17 Loan Bank of its use of RCA and informed them that 18 it had helped them reduce their gap exposure; and 19 it did. I believe that will be undisputed as the 20 facts unfold. They summarized in detail the 21 results of their studies and those of the 22 investment bankers in supporting this proposed 211 1 investment. It also, the evidence will show, 2 reported the RCA investments in its published 3 financial statements even reporting the 4 fluctuating market values of those investments. 5 Now, yesterday, an issue was made about who was 6 assigned to handle the initial RCA, Mr. Joe 7 Phillips. And as I heard Mr. Guido's comments, it 8 was to the effect that Mr. Phillips didn't know 9 what he was doing; he was improperly trained for 10 this job. Mr. Phillips, the evidence will show, 11 was an experienced fixed income portfolio manager 12 with a degree -- with an MBA degree. Contrary to 13 what you heard yesterday, Phillips did not merely 14 rely on promotional materials. He studied the 15 issue, and he had eight years of experience before 16 coming to USAT on the investment committee of a 17 large insurance company that owned MBS. He had 18 never managed an RCA, but it wasn't that he didn't 19 know mortgage-backed securities or that he was 20 some investment neophyte. Indeed, in a document 21 that was -- that you will see -- and it's a report 22 from Neil Twomey and Ginger Baugh to Roy Green, 212 1 principal supervisory agent, May 23, 1986, on the 2 specific issue of Mr. Phillips' qualifications. 3 Now, this is after the rolldown or 4 toward the end of the rolldown; and the examiners 5 are commenting as follows: "Managers directly 6 responsible for their real estate and investment 7 departments" -- now, that's Mr. Phillips, the 8 investment departments -- "are said to have strong 9 experience in their respective fields." This was 10 the conclusion of the examiners at the time with 11 regard to Mr. Phillips. 12 Now, Joe's portfolio, Your Honor, was 13 not begun in 1984. It was begun in the early 14 parts into the mid-parts of 1985. The MBS that 15 USAT opened at the beginning of that year was 16 outside and remained outside of any RCA as I 17 indicated at the beginning. The cash flows from 18 Joe's portfolios of approximately -- which was 19 approximately $490 million in MBAs, $455 million 20 notional amount with swaps was, quote, "fully 21 hedged against rising rates" meaning that payments 22 from the swaps offset any reduced spread between 213 1 the MBS coupons and the reverse repo rates as 2 interest rates generally rose. The durations 3 which have price sensitivities to changing 4 interest rates were as precisely matched as one 5 could do at the time. The portfolio was also 6 projected to be protected against falling rates 7 which, frankly, were of much less concern. 8 The history at the time, again we will 9 show, was that rates had fallen from very 10 dramatically high rates that had existed in the 11 last years of the Carter Administration and were 12 at levels where most economists were expecting a 13 rebound back to higher rates. 14 Moreover, as I indicated earlier, the 15 conventional wisdom was that rates had to fall 200 16 basis points before one would begin to experience 17 any significant prepayments because of the lack of 18 economic reasons for the homeowner to repay or 19 prepay his mortgage. 20 The structure of Joe's portfolio, Your 21 Honor, the evidence will show, was the same as the 22 one discussed in the article entitled, "The ABCs 214 1 of RCAs" published by the Federal Home Loan Bank 2 of Dallas touting these types of investments and 3 explaining them. The structure is very much the 4 same which is, in itself, a remarkable fact 5 because this document was published in the spring 6 of 1987, over a year and a half after USAT had 7 instituted its first RCA. 8 The evidence will show that Joe's 9 portfolio performed as predicted in 1985. It 10 produced a steady positive return that offset 11 USAT's operating losses from its loan portfolios 12 and from its amortization of goodwill. 13 Now, it was based upon this favorable 14 experience that at the end of 1985, USAT 15 instituted a second RCA, much like Joe's 16 portfolio; and it was called United Mortgage 17 Finance. It was set up through a subsidiary 18 because USAT itself was approaching its liability 19 growth limitations. Now, when new regulations 20 were published at the end of 1985, they came out 21 in a form that was different than USAT had 22 expected; and they disqualified the use of United 215 1 Mortgage Finance as a finance subsidiary because 2 of a technical issue involving grandfathering when 3 the reverse repos repriced. As a result, at the 4 end -- United Mortgage Finance had a very short 5 life, and it was prior to year end 1985. In order 6 to avoid the problems associated with the 7 liability growth limitations, USAT unwound most of 8 the portfolio and essentially incorporated it, the 9 remaining assets and liabilities, to the extent it 10 could, into Joe's portfolio which may be the 11 reason that Mr. Guido referred to it as two 12 portfolios, because after 1985 and the unwinding 13 of USAT Mortgage Finance, it was, in fact, two 14 portfolios. 15 Now, let me -- let me talk for a minute 16 or two about the rolldown. During the latter part 17 of 1985, the interest rates which had fluctuated 18 up and down during most of 1985 began to show a 19 decline; and prepayments increased such that in 20 the early part of 1986, Joe's portfolio, augmented 21 with the remnants of United Mortgage Finance, 22 began to experience a growing mismatch of the 216 1 portfolios' expected lives and its durations with 2 its swaps. Phillips, the evidence will show, took 3 corrective actions which was what he was supposed 4 to do by selling the higher coupon MBS and buying 5 substitute lower coupon MBS that had longer 6 average lives and durations that matched the 7 swaps. USAT's management, notably Mr. Gross, 8 questioned the economics of this strategy; and 9 there are several Jenard-o-grams cited by 10 Enforcement where he questions what -- "Is this 11 the proper thing to do?" But he, like the others, 12 became convinced after the matter was explained to 13 him that it was the only viable strategy to 14 counter the duration mismatch. 15 Enforcement cites the memos in which 16 Mr. Gross poses the question, but they fail to 17 note the unequivocal testimony from him and others 18 that he was supplied with satisfactory answers. 19 Now, unfortunately, interest rates 20 continued their decline during 1986; and 21 prepayments reached historically unprecedented 22 levels. USAT could not roll down fast enough to 217 1 maintain the duration match. From the beginning 2 of 1985 -- 1986, Your Honor, through June of 1986, 3 rates declined approximately 300 basis points. 4 But more significantly, during the last months of 5 that period -- and this is not mentioned by 6 Enforcement -- prepayments on some bonds reached 7 constant prepayment rates of 60 to 65. Now, let 8 me repeat that figure: 60 to 65. The prior 9 average, 15-year prior average for CPRs on MBS had 10 been 7 to 7 and a quarter. It got to be 60 when 11 it had had a 15-year average of 7. The 12 theoretical bases for RCAs assumed CPRs at that 13 time in the 6 to 8 range. A 60 percent CPR meant 14 that 60 percent of the mortgages under that 15 mortgage-backed security would prepay in one year 16 if that rate persisted. It was eight to nine 17 times, eight to nine times the historical average 18 for the past 15 years. USAT, like all or 19 virtually all MBS investors, failed to predict 20 these prepayment rates; and, as noted, the 21 prepayment models, whatever their differences, all 22 depended upon the historical rates. It is not 218 1 true that Mr. Phillips did not begin the rolldown 2 until rates had fallen 225 basis points. I think 3 Mr. Guido is apparently measuring rates during an 4 earlier and different time period. 5 During the six-month period in the 6 first half of 1986, Phillips rolled down with rate 7 changes of 50 to 100 basis points as his durations 8 changed; and all of that can be demonstrated with 9 the historical analysis that has been done by our 10 expert. 11 Now, let us note at this point that 12 rates in 1985 which is the period, I believe, 13 Mr. Guido must be referring to, did not free fall. 14 They went up and down, sawtooth kind of pattern. 15 The manager in the midst of these movements has to 16 make a judgment about whether they are permanent 17 or whether they are temporary. Mr. Phillips in 18 hindsight was overly cautious, but that is hardly 19 a basis, Your Honor, for a safety and soundness 20 claim against him -- and he's not charged -- but 21 certainly against directors of the parent 22 organization like Mr. Hurwitz or others like 219 1 Mr. Heubsch or Berner who were neither managers of 2 the MBS or directors. Munitz was an academic. 3 Crow was an accountant. And Gross, a real estate 4 developer, was to his credit demanding to know if 5 the strategy was correct. But most significantly, 6 the claim that Phillips was too slow to roll 7 down -- that's the one Mr. Guido told us about 8 yesterday -- is a complete total about-face from 9 paragraph 148 of the notice of charges where -- 10 and I quote -- Enforcement states, "USAT's 11 rolldown strategy made no economic sense even to 12 the portfolio managers and was done to create a 13 false impression of USAT's compliance with 14 regulatory net-worth requirements." 15 Now, that was the allegation that we 16 came in to rebut based upon the notice of charges 17 yesterday. And now, they say that the rolldown 18 was -- should have been done quicker and more 19 decisively. 20 Now, was the rolldown so obviously 21 correct that Phillips should have executed it 22 sooner and more decisively; or was it so obviously 220 1 wrong that it made no economic sense such that it 2 should have been known to the directors of this 3 institution? This is a question that Enforcement, 4 after 11 years of study, has failed to provide a 5 consistent answer. 6 Now, as a result of the rolldown, USAT 7 had large gains from the sale of its higher coupon 8 MBS. And for accounting purposes, based upon the 9 advice of its independent accountants, 10 Peat Marwick, and consistent with the arbitrage 11 concept of the investment, USAT reduced its basis 12 in the substitute MBS by the amount of the gains. 13 That is -- that had the effect of deferring the 14 recognition of gains as income. Several months 15 later, the auditors changed their minds and forced 16 USAT to recognize the gains because they believed 17 that the substitute collateral, substitute assets 18 being of a different coupon, were required to be 19 recognized even though they were substituted under 20 the accounting rules. And that required UFG to 21 restate its earnings for the first two quarters of 22 1986. 221 1 Now, much, Your Honor, of the notice of 2 charges is devoted to the claim that the RCA was 3 used to produce phantom claims. This was not 4 mentioned yesterday and is apparently abandoned 5 based upon the undisputed fact that USAT's 6 management, given an opportunity to recognize 7 gains, tried to avoid doing so in the midst of 8 charges. They didn't want to do so. They were 9 trying to maintain the arbitrage and following the 10 advice of their accountants. If they had been 11 intending to recognize gains for the use of this 12 particular instrument, surely we wouldn't have a 13 record that demonstrates their effort to avoid 14 that. As a result, Your Honor, of the rolldown 15 experience, USAT consulted again with several 16 experts relating to MBS as to how to manage the 17 portfolio after the rolldown. One option was to 18 reinvest the gains in another RCA. 19 And after considering these options 20 available to them, USAT decided to recruit a new 21 manager whose specialty was only MBS. And after 22 an extended search, USAT hired Sandy Lawrenson for 222 1 this job. Lawrenson, the evidence will show, was 2 an MIT Ph.D. who had worked as Freddie Mac's hedge 3 trader and had trained with Lou Ranieri, touted as 4 the father of the trillion-dollar mortgage-backed 5 securities market, at Solomon Brothers. No one 6 could have been more highly trained or qualified 7 for this job. From October of '86 to early 1988, 8 Lawrenson managed the remainder of Joe's portfolio 9 and set up another RCA that will be described in 10 these proceedings as United MBS. The new RCA, 11 Your Honor, the evidence will show, had nothing to 12 do as stated by Mr. Guido yesterday with USAT's 13 thrift test. It had assets that would qualify it 14 as a thrift. United MBS was structured to protect 15 against rapid prepayments as well as increasing 16 rates. In other words, they weren't going to make 17 the same mistake that they had made in Joe's 18 portfolio of protecting -- if it was a mistake -- 19 of protecting against rising rates too heavily. 20 Now, Mr. Guido -- Mr. Phillips' 21 enforcement -- well, as to this United MBS, 22 Mr. Guido said yesterday that she went naked. 223 1 Mr. Phillips', Enforcement claims, was overdressed 2 and Ms. Lawrenson underdressed even though the 3 evidence will be undisputed that she maintained 4 positive cash flows -- that is the object of the 5 RCA -- in the United MBS portfolio during all of 6 her tenure at USAT despite a large and unfavorable 7 interest rate spike in March of 1987. When USAT 8 was declared insolvent, both of the remaining RCAs 9 were liquidated producing substantial market value 10 losses which is not unexpected if you interrupt 11 the strategy in midstream. 12 Your Honor, that in a nutshell is the 13 story of USAT's MBS portfolio. Let me turn for a 14 second to the claims. In the notice of charges, 15 Enforcement claims that the RCAs were inherently 16 speculative. This is simply untrue. And there 17 was no suggestion of it either that I heard 18 yesterday or as I reread the transcript last 19 night. The facts are that RCAs were correctly 20 perceived as a less risky alternative to the 21 traditional thrift business of making mortgage 22 loans with deposits. If Enforcement is still 224 1 making this claim, you will hear from 2 Frank Fabozzi. Mr. Fabozzi is the most widely 3 published expert perhaps in the world on fixed 4 income securities and mortgage-backed securities. 5 And Mr. Fabozzi will testify that RCA was less 6 risky and less speculative than any other 7 investment -- reasonable investment alternatives 8 available to USAT. Moreover, Your Honor, you will 9 hear from Andrew Carron, again one of the 10 country's leading analysts of MBS portfolios and, 11 I will add, an expert on the thrift industry, one 12 of the early prognosticators of its problems in 13 the early Eighties. He will testify that the 14 structure of Joe's portfolio was, if anything, too 15 conservative; that is, too heavily weighted to 16 protect against rising rates. And it was fully 17 hedged against those rates which hedging is the 18 very fact, Your Honor, that made it vulnerable to 19 rapid prepayments. Mr. Carron will tell you that 20 the statistical probability of what happened with 21 rates in the first half of 1986 was less than 22 4 percent, a 4 percent probability. 225 1 And what happened to prepayments in 2 response to that 4 percent probability was 3 unfathomable. It was inconceivable in the early 4 part of 1986 that CPRs would reach 60. Carron 5 will demonstrate that the prepayments associated 6 with this 4 percent probability were historically 7 unprecedented; and Wall Street professionals took 8 a figurative bath, clothed or unclothed, even 9 though the measures they took in response to these 10 conditions were essentially the same as those 11 taken by USAT. Enforcement's claim about the 12 nature of RCA generally and the structure of 13 USAT's portfolio specifically is contrary to the 14 official positions of the Federal Home Loan Bank 15 who published articles favorable, as I indicated, 16 to the RCA as an alternative to the traditional 17 thrift practices. You will see at least half a 18 dozen such articles. Their position is contrary 19 to the reports of the examiners and the 20 independent auditors who carefully monitored 21 USAT's RCAs to determine that they were proper 22 hedges and who concluded that, although RCA had 226 1 its risk, it was not speculative; the very claim 2 that we see in the notice of charges. 3 Enforcement's second claim was that 4 USAT speculatively managed its RCAs in order, as I 5 mentioned earlier, to realize phantom gains. 6 This, too, is contrary to the facts. It will be 7 undisputed, as I mentioned, that USAT tried to 8 avoid recognizing gains from the rolldown sales 9 but the accounting treatment was forced upon them 10 by their outside auditors. 11 The evidence both from their own 12 contemporaneous publications and examination 13 reports as well as Mr. Carron will be that trading 14 activity is a necessary part of properly managing 15 the RCA and that the activity in USAT's accounts 16 were not unusual and appears, even after all of 17 these years of study and second guessing, to have 18 had an economic purpose consistent with proper 19 management of the RCA. 20 Yesterday, this claim in the notice of 21 charges was transformed into one that USAT failed 22 to minimize risk in violation of some unspecified 227 1 regulations, failed to minimize risk through the 2 RCA when it has admitted that it was less risky 3 than the traditional business of the thrift. 4 Enforcement's third claim, third and 5 final claim with regard to the RCAs, was that USAT 6 misled the regulators by telling them that Joe's 7 portfolio of matching credit regulations 8 encouraged USAT to use the ARMs and caps to reduce 9 regulatory capital requirements. The regulation 10 did not allow the credit to be taken or used for 11 assets or hedges held in a subsidiary even if the 12 institution used consolidated financial reporting 13 as did USAT. In other words, from a management 14 point of view, they regarded the institution as a 15 whole. Accordingly, USAT, with the full knowledge 16 of the examiners, transferred the ARMs; and it 17 reassigned internally the caps from United MBS to 18 USAT. And it is undisputed that that was to take 19 advantage of this regulation that had been 20 instituted by the authorities to encourage them to 21 own these kinds of instruments. In mid-1987, 22 Bruce Williams, the controller/treasurer, wrote a 228 1 memorandum that did not distinguish between the 2 transfer of ARMs and the cap reassignment. And 3 USAT claimed maturity matching credit for the 4 transfers on its September 30th thrift financial 5 report six months after the purchase of the caps. 6 In his memo -- and we have it here -- it's 7 June 17th, 1987, Williams to Mr. Gross and 8 Mr. Crow. In his memo, Williams reminded 9 management that because of the maturity matching 10 credit, USAT would appear to have improved its 11 capital position; but as an economic fact, nothing 12 had changed. It was still reported on a 13 consolidated basis. But the new regs allowed less 14 regulatory capital. Ten years later and despite 15 knowing that the caps were not, in fact, 16 transferred, Enforcement claims that the transfers 17 were sham transactions. They used Williams' memo 18 to claim that USAT management knew that the 19 transfers were a, quote, "sham." 20 Now, if I heard correctly, Mr. Guido 21 yesterday disavowed the reference to sham 22 transactions admitting that it was his 229 1 interpretation of the memo and what it said in the 2 memo. There was no sham. USAT was merely 3 following the incentives that the regulations set 4 out for them. 5 Now, yesterday, Mr. Guido proclaimed 6 the newly-coined smoke and mirrors theme to these 7 claims. Now, it's unfortunate for the rhetorical 8 flourish -- and maybe there is some document out 9 there that I'm either unaware of or have 10 forgotten. But there is no mention of smoke in 11 this memo. I have it here in my hand, and you can 12 see it. And everybody will have a chance to read 13 it. It is clear -- there is a reference to 14 mirrors, and it is clear that the reference to 15 mirrors is a comment on the regulations which 16 allowed USAT to improve its capital position with 17 no change in its economics. This memo does not 18 reflect poor management. It is good management to 19 remind one's self that the Alice in Wonderland of 20 regulatory net worth in the mid-Eighties should be 21 soberly viewed as an economic matter. Williams 22 was merely following Mr. Gross' admonition that 230 1 management had to come clean with itself and to 2 know the true effects of these regulatory gifts. 3 Now, finally with regard to the last 4 claim involving mortgage-backed securities which 5 has to do with alleged guarantees, in Claims 8 6 through 11, Enforcement makes a series of claims 7 based upon a factual assertion that these three 8 letters again that I have here constitute 9 guarantees of all of United MBS's debt. These are 10 the letters. They are one-liners. The word 11 "guarantee" doesn't appear anywhere on either the 12 letter, the face, or anything else. The three 13 letters merely promise that USAT -- and these are 14 to the repo lenders. And, in fact, I believe the 15 evidence will show that two of these repo lenders 16 never made any loans to USAT. United MBS's -- 17 they were not and are not guarantees by any 18 recognized legal definition of that term. 19 Yesterday, Mr. Guido endorsed this 20 claim with a somewhat remarkable statement that 21 the guarantees -- and I quote -- "probably even 22 meet the requirements of the applicable law" which 231 1 is Texas law. "Probably even meet." This is the 2 basis for this claim? He asserts, as has 3 Enforcement in the notice of charges, that the 4 guarantees -- that the letters are guarantees, 5 quote, "for purposes of our regulations." 6 Now, when we get back to look at his 7 expert's testimony on this matter, we'll see that 8 he said that the letters were guarantees based 9 upon his own personal definition and without 10 reference to any known legal standards or 11 regulations. 12 Now, I suggest, Your Honor, that these 13 are not guarantees and that that testimony would 14 not support any finding that they were guarantees. 15 Now, it's based upon this factual assertion that 16 OTS claims that USAT violated its liability growth 17 limitations and direct investment limitations. 18 The evidence will be that these letters were not 19 guarantees; therefore, there is no violation of 20 any regulations. But in addition, the evidence 21 will be that the investments involved were 22 mortgage-backed securities, investments which the 232 1 direct investment limitation did not purport to 2 limit in any way. Accordingly, USAT consolidated 3 United MBS's assets for direct investment purposes 4 as the records will clearly demonstrate even -- in 5 other words, Your Honor, even if the letters could 6 somehow be construed as guarantees, they would not 7 have caused a violation of USAT's direct 8 investment limitation. 9 Now, the story of USAT's MBS 10 investments, it can be daunting because of 11 unfamiliar technical language; and you probably 12 have more experience with this than anybody in the 13 room. But when the facts are fully known, they 14 will squarely contradict the Enforcement's claims 15 either as stated in the notice of charges or as I 16 would suggest to Your Honor as reinvented in the 17 opening statement yesterday. The RCA investments 18 were not speculative. They reduced USAT's risk 19 profile. They were less risky than all known 20 alternatives. USAT did not use the RCA to 21 speculate on interest rates. There were no sham 22 transactions. There were no regulatory violations 233 1 of any significance in the use of these 2 investments. The transactions were disclosed to 3 the regulators and to the examiners. The RCAs, 4 remarkably the evidence will show, despite very 5 unexpected and adverse conditions, actually 6 contributed positively as designed to USAT's 7 bottom line as measured by the accounting rules. 8 Now, there will be a lot of criticism 9 of that; but those were the rules that governed 10 USAT's activities. Those were the rules on which 11 they were required to report. And by those rules, 12 during the time that these RCAs were managed by 13 these people and by Mr. Phillips and by 14 Ms. Lawrenson, they contributed to the bottom 15 line. 16 Now, we're not happy to be here; but 17 respondents do welcome the opportunity to present 18 their evidence and all of the evidence that will 19 right the wrong that has been done to them by the 20 bringing and continued prosecution of these 21 claims. 22 I appreciate your time, Your Honor. 234 1 THE COURT: Thank you. Mr. Eisenhart? 2 MR. EISENHART: Thank you, Judge Shipe. 3 If it please the Court, my name is Frank 4 Eisenhart; and with my colleagues from Dechert, 5 Price & Rhoads and my friend, Mr. Nickens, I 6 represent MAXXAM, Inc. I'm going to address four 7 issues hopefully repeating to a minimum, if at 8 all, areas that my colleagues have already 9 covered. I want to talk about the MCO Federated 10 investment in United Saving Association of Texas 11 or USAT as I will probably call it. I want to 12 talk about the net-worth maintenance claim against 13 MAXXAM and Federated. I want to talk about OTS's 14 high-yield bond claim or, as they like to call it, 15 their junk bond claim. And I want to talk 16 generally about the issue of restitution as it 17 pertains in these proceedings. 18 Let me make just one observation, 19 though, at the outset. Representing MAXXAM, I 20 don't have a client that I can have stand up to 21 introduce to Your Honor. But this is a terribly 22 important moment in history for MAXXAM; and I 235 1 think it's important to observe at this point 2 that, like any company, MAXXAM really is composed 3 of its people. And you can't bring all of those 4 people into the courtroom; but when we talk about 5 MAXXAM, we're talking about hundreds of people, 6 hundreds of employees here in Houston, literally 7 thousands of employees around the world. Just to 8 give you one brief example of the kinds of things 9 MAXXAM does, one of the company's operations 10 through its Kaiser Aluminum Facility is in the 11 Republic of Ghana. It's one of the largest 12 employers in that country. It's one of the 13 largest contributors of foreign exchange to that 14 country. Significant amounts of its profits are 15 placed in a trust administered by the Ghananians 16 and used for development purposes in that country. 17 Why do I mention this? I'm not asking Your Honor 18 to decide this case on the basis of sympathy or on 19 some index of MAXXAM's corporate social conscious. 20 I mention it only because the amounts that the 21 government is trying to claim from MAXXAM in this 22 case are frankly enormous. While MAXXAM's a large 236 1 company today, its resources are not unlimited. 2 And the decision which Your Honor is going to make 3 in this case is literally going to affect the 4 futures, the lives, and the fortunes of a great 5 many people around the world. It's a weighty 6 responsibility, and it's one that I know Your 7 Honor takes very seriously. 8 Let me move to the subject of the 9 investment made by MCO and Federated in USAT. As 10 I said, MAXXAM is a corporation located here in 11 Houston. It was formerly known as MCO Holdings, 12 Inc. And, frankly, during the course of this 13 case, I think the terms MCO and MAXXAM are likely 14 to be used interchangeably by the lawyers on both 15 sides; but they are essentially the same company. 16 It's a publicly held corporation. Its shares are 17 traded on the American Stock Exchange; and it's 18 involved in diverse businesses including real 19 estate, forest products, and aluminum. Charles 20 Hurwitz, to whom you've heard reference already, 21 is the president, CEO, and the chairman of MAXXAM. 22 In the 1980s, MAXXAM, which was then known as MCO 237 1 Holdings, considered getting in the savings and 2 loan business. In conjunction with Federated 3 Development Company which is a business trust 4 owned by Mr. Hurwitz and others, it began to 5 acquire shares of United Financial Group which is 6 the holding company of USAT. This was an 7 investment that made a lot of sense. Mr. Hurwitz 8 and his colleagues, as you will hear, as you've 9 already heard in the opening arguments, they were 10 new to the field of finance. They knew the field 11 of real estate. And after all, those are the core 12 businesses of any savings and loan. They also 13 knew Houston. This was their home. 14 You know, OTS has tried to make 15 Mr. Hurwitz and his colleagues out to be evil 16 people who were trying to loot a savings and loan 17 for their own greedy purposes. I assure you 18 nothing could be further from the truth. MCO and 19 Federated invested substantial sums of money in 20 USAT, and they were willing to invest even more if 21 they could do it on some rational basis. They 22 were not willing to write a blank check; but they 238 1 were willing to invest substantially in their 2 money, their energy, and their talents if it could 3 be done on a rational basis. They didn't invest 4 in USAT to see this institution fail. This was a 5 considered investment by knowledgeable businessmen 6 in a major financial institution in their home 7 city. I suggest to Your Honor that that is not a 8 scenario under which anyone invests for failure. 9 They wanted it to succeed, not fail. And the fact 10 that it ultimately did fail was not going to be 11 because this institution was either looted or 12 mismanaged. 13 As you've heard already, running a 14 savings and loan in Houston or, indeed, anywhere 15 in Texas in the late 1980s was no picnic. There 16 was an observation made by Richard Pratt who is 17 the former chairman of the Federal Home Loan Bank 18 Board who is going to be one of the experts that 19 will testify in this case for the respondents. 20 Mr. Pratt said in terms of running a financial 21 institution in Houston, USAT was in the worst 22 business in the worst city in the worst state at 239 1 the worst time. USAT certainly wasn't immune to 2 the economic woes that beset its peers here in 3 Texas, but it did outlast most of them. The 4 evidence is going to show that it survived for as 5 long as it did because of the strength and the 6 innovative skills of its managers. You know, the 7 USAT regulators knew this. They knew there was a 8 good management team. It sometimes made them a 9 little nervous because, I think in the views of 10 the regulators, these weren't traditional savings 11 and loan guys. The fact is that the regulators 12 knew that the institutions here that were being 13 run by the traditional savings and loan guys were 14 failing. 15 USAT, the regulators predicted -- and 16 Your Honor will see, as Mr. Villa mentioned, the 17 cash regulatory documents that talk about these 18 things. USAT, the regulators predicted, would be 19 a survivor; and they were predicting that even in 20 1988. USAT would survive, they thought, because 21 of the strength of its management team. 22 The evidence in this case is going to 240 1 show that that management team was strong, was 2 innovative. They were not trying to loot USAT. 3 They were trying to make a heroic effort to save 4 it under awful circumstances. And the fact that 5 they ultimately did not save it is no reflection 6 on them. 7 Let me turn to the net-worth 8 maintenance claim that's been asserted against 9 MAXXAM and Federated and others to give you a 10 little background of that claim. By mid-1983, MCO 11 and Federated together owned about 22.3 percent of 12 the voting stock of USAT's holding company which 13 is United Financial Group. On June 29th, 1983, 14 mid-1983, they submitted to the Federal Home Loan 15 Bank Board an application which is known as an 16 H(e)-1 application. The purpose of that 17 application was to allow them to acquire up to 18 35 percent of USAT's voting stock; so, they wanted 19 to go from -- I think they were then at about 24 20 something percent. They wanted to go up to 35. 21 Under the law, if you own more than 25 percent of 22 the voting common stock of the savings 241 1 institution, you're deemed to control the 2 institution; and you're required to register as a 3 savings and loan holding company. They knew that; 4 and, of course, if the application was approved, 5 and they actually went over the 25 percent 6 threshold, that would have been the effect of it. 7 The bank board approved the H(e)-1 application on 8 December 6th, 1984, roughly a year and a half 9 after it was submitted. The approval resolution 10 contained a condition which ultimately -- well, 11 which was unacceptable to MCO and Federated and 12 which we have now come to know in this case as the 13 so-called net-worth maintenance condition. It 14 said that so long as MCO and Federated controlled 15 USAT which means if and when you pass that magic 16 25 percent threshold, they would be obligated to 17 contribute a pro rata share of any additional 18 infusion of capital needed to maintain the 19 net-worth of USAT at regulatory levels. The pro 20 rata share would be based on their ownership of 21 stock; that is, if you own 35 percent of the 22 stock, presumably you would be liable for 242 1 35 percent of the infusion. It also said if they 2 should eventually come to own more than 50 percent 3 of the stock, they would be liable for 100 percent 4 of any necessary capital infusion. 5 Now, MCO and Federated indicated from 6 the beginning to the Bank Board that this kind of 7 a net-worth maintenance requirement was 8 unacceptable to them. This was something they 9 simply could not live with. They were willing to 10 make a substantial investment in USAT; and they 11 made that clear to the Bank Board, too. But they 12 were simply unwilling to take on this kind of 13 broad open-ended contingent liability. The 14 evidence that Your Honor will hear will show that 15 there was a very practical reason for this 16 unwillingness. The business activities of these 17 two companies were very capital intensive, and it 18 required them to have ready access to the capital 19 markets. The advice they were receiving from Wall 20 Street from prominent investment management -- 21 investment banking firms was that this kind of an 22 open-ended net-worth maintenance obligation which, 243 1 of course, they would have to disclose, would 2 significantly hamper their access to the capital 3 markets. With this kind of a contingent liability 4 on their books, no potential lender to MCO or 5 Federated or no potential investor in those 6 companies would be able to gauge the true 7 financial health condition of the company. You 8 see this kind of a contingent liability on the 9 books. How on earth can you know what that 10 company is going to look like six months or a year 11 from now if that liability gets triggered? 12 The advice they were getting from Wall 13 Street is: You cannot agree to this. They 14 concurred with that advice, and they so advised 15 the Bank Board. They were willing to discuss and 16 did discuss over a three-year period with the Bank 17 Board alternatives to the net-worth maintenance 18 obligation. They talked about some form of 19 enhanced investment. They talked about some sort 20 of a cap on the obligation. But they never 21 wavered in the position that this broad open-ended 22 net-worth maintenance obligation was unacceptable. 244 1 There were a number of extensions for the closing 2 of the acquisition, extensions of the resolution 3 approving the acquisition. 4 Ultimately, after three years, they 5 simply arrived at loggerheads; and they advised 6 the Bank Board that they would not seek any more 7 extensions. And the resolution was -- the 8 approval resolution was allowed to expire on 9 December 22, 1987. 10 Now, even though MCO and Federated 11 never agreed to the net-worth maintenance 12 obligation and really never closed the deal that 13 was contemplated under the H(e)-1 application, OTS 14 contends that the net-worth maintenance obligation 15 was, nevertheless, triggered. And they say it was 16 triggered because MCO and Federated really did own 17 more than 25 percent of UFG stock. 18 They have advanced two theories in the 19 complaint to get them over that threshold. The 20 first one, which I'm not even sure they are 21 seriously pressing anymore, was that Mr. Gross 22 owned 112,000 shares of UFG stock. And they say 245 1 Mr. Gross was acting in concert with MCO and 2 Federated to get control and that, therefore, you 3 have to count his 112,000 shares as well. I think 4 the evidence is going to show, Your Honor, that 5 Mr. Gross acquired his 112,000 shares for 6 investment purposes and that in no fashion was he 7 acting in concert with MCO or Federated. I also 8 think that the regulations -- you will find that 9 the regulations they rely on to make this argument 10 really are not applicable, and they are trying to 11 apply retroactively a regulation that didn't exist 12 at the time the transaction took place. But as I 13 say, I'm not even sure they are pushing that 14 theory anymore. 15 The one that they do seem to still be 16 pushing, though, is their second theory that MCO 17 should be deemed to own 300,000 shares of UFG 18 stock that was actually owned by Drexel, Burnham, 19 Lambert but on which -- on which Drexel had given 20 MCO a purchase option; and this has come to be 21 known in the case as "the Drexel option." I guess 22 this is the term we now put in quotes because it 246 1 has certainly become a term of art in this case. 2 What's the evidence on the Drexel 3 option? The evidence is going to show that in 4 December 1985, Drexel and MCO entered into an 5 option agreement. Drexel gave MCO an option to 6 buy 300,000 shares of USAT's stock owned by Drexel 7 at a fixed price. The option was exercisable 8 during a 30-day period two and a half years down 9 the road; so, the option agreement was entered 10 into in December 1985. The option to MCO to 11 purchase this stock was exercisable for 30 days 12 beginning July 1, 1988. And the option contained 13 several other conditions. There was a fee paid 14 for the option itself. There was then a price to 15 be paid upon exercise. There were also certain 16 representations and warranties in the option, one 17 of which was that if MCO exercised the purchase 18 option, it represented that it had regulatory 19 approval to acquire the shares and to become a 20 savings and loan holding company. That's 21 significant because its ability to obtain that 22 regulatory approval was conditioned upon the 247 1 net-worth maintenance agreement. 2 So, even under the terms of the option, 3 in order for MCO to exercise that, it either had 4 to agree to the net-worth maintenance condition, 5 which it was not going to do, or it had to resolve 6 its differences with the Bank Board and arrive at 7 some sort of substitute arrangement. 8 The option also provided that if MCO 9 did not exercise its option during that 30-day 10 period beginning July 1, 1988, Drexel then had an 11 option to put the shares to MCO at a fixed price 12 during the next 30-day period beginning August 1. 13 It also provided that MCO's option for 14 the purchase price of the shares was secured by a 15 letter of credit. You will hear testimony from 16 respondents and others that the Drexel option was 17 a prudent means by which MCO was assuring itself 18 that it could obtain additional shares of UFG 19 stock at a reasonable price in the future if and 20 when it worked out the net-worth maintenance issue 21 with the Bank Board and was, therefore, in a 22 position to increase its investment in UFG. 248 1 The respondents are emphatic, Your 2 Honor, that under no circumstances would they or 3 could they have ever exercised the Drexel option 4 and assumed ownership of these shares unless they 5 had the Bank Board's position which means, of 6 course, that they would have to have resolved the 7 net-worth maintenance issue. If this option had 8 not been extended, as it ultimately was, and had 9 Drexel attempted to put the shares to MCO as it 10 had the right to do, I think the testimony -- I 11 know the testimony will show that MCO certainly 12 would have refused to accept them. This might 13 have left Drexel with a claim for damages against 14 MCO. And as you think about it, the purchase 15 price for the shares was roughly around $2 and a 16 half million so that Drexel's claim would have 17 been somewhere between zero and 250 million -- or 18 2.5 million -- excuse me -- depending on the -- 19 depending on the price of the shares. But they 20 simply would have refused to accept the shares 21 which, of course, they couldn't do without -- 22 without going over the 25 percent and triggering 249 1 the net-worth maintenance obligation. 2 Now, having that kind of a liability as 3 a result of refusing to accept the shares, of 4 course, was not a perfect answer; but it was far 5 preferable in their view to have that sort of a 6 damage claim than to have this open-ended 7 contingent liability that would render them -- 8 would deny them access to the capital markets and 9 could ultimately cost them, as OTS is now 10 contending it does, hundreds of millions of 11 dollars. 12 Now, I was frankly astonished 13 yesterday, Your Honor, to hear Mr. Guido stand up 14 in this courtroom and claim that the Drexel option 15 was concealed from federal regulators. I was 16 truly astonished to hear that. I have to tell 17 Your Honor, if MCO really tried to conceal this 18 option from the federal regulators, it was the 19 most inept job of concealment that has ever 20 occurred. I had somebody last night run for me a 21 list of the documents. These are not MCO 22 documents. These are disclosures to the SEC, 250 1 disclosures to the Federal Home Loan Bank Board, 2 disclosures to the Federal Home Loan Bank of 3 Dallas, or internal documents within the Federal 4 Home Loan Bank of Dallas that refer to and 5 describe the Drexel option. I don't know how 6 complete this list was because it was done kind of 7 on the hurry last night, but I find no less than 8 19 separate documents between 1985 and 1989 that 9 disclose or discuss in some way the Drexel option. 10 And how Mr. Guido could stand up in this courtroom 11 and claim that there was an attempt to conceal the 12 Drexel option from the regulators is frankly 13 astonishing to me. 14 Now, the evidence is going to show that 15 under the terms of the Drexel option, of course, 16 there was no immediate right of MCO to obtain the 17 shares. It couldn't obtain the shares for two and 18 a half years. It will show that MCO had paid, in 19 terms of the fee to acquire the option, an amount 20 to Drexel that was well less than half the cost of 21 the option of shares; and it's going to show that, 22 contractually, Drexel retained the right to vote 251 1 the shares and the right to receive all dividends 2 under the shares. 3 So, I think that what the evidence is 4 going to show is that ownership of these 300,000 5 shares clearly remained with Drexel and never 6 resided in MCO. And I believe that OTS is not 7 going to be able to establish, either under the 8 facts or the law, that these 300,000 shares were 9 ever actually owned by MCO and that, therefore, 10 they ever provided any basis for triggering the 11 net-worth maintenance obligation. 12 Now, of course, as of yesterday, we now 13 have an issue in this case as well under the 14 so-called controlling influence portion of the 15 statute which I contended unsuccessfully yesterday 16 had not been pleaded. I don't know, quite 17 frankly, what OTS is going to claim was the 18 controlling influence by MCO or Federated in the 19 affairs of USAT. I don't think that they are 20 going to be able to show that kind of controlling 21 influence on behalf of either of these defendants, 22 but we're going to have to wait and see what their 252 1 evidence is going to be on that. 2 Let me speak for a moment to the 3 high-yield bond claim or, as Mr. Guido loves to 4 put it, the junk bond claim. OTS is claiming, if 5 I understand that theory -- and I'm not really 6 sure I do -- $47 million in restitution for 7 alleged losses by United Savings Association on 8 high-yield bonds. And the OTS theory again, if I 9 understand it, is that the purchase by USAT of 10 high-yield bonds that were underwritten by Drexel 11 Burnham Lambert somehow constitutes a transaction 12 with an affiliate. They say, as I understand it, 13 that Drexel was an affiliate either because it 14 owned stock in USAT's holding company, UFG, as 15 Drexel itself owned stock in UFG, or because it 16 was acting in concert with MCO to acquire stock in 17 UFG. They say that affiliate -- transactions with 18 an affiliate under a statute require approval by 19 the regulators, and they say OTS -- OTS says USAT 20 didn't get that approval. And from this, they 21 claim that they are able to seek restitution for 22 these transactions with affiliate losses. 253 1 Well, I doubt that OTS is really going 2 to be able to prove that Drexel was an affiliate 3 of USAT. I don't think they are going to be able 4 to show that it was acting in concert with MCO or 5 MCO or Federated to obtain control. And I don't 6 really think that they are going to be able to 7 show that it was an affiliate in any other way. 8 But even if they could, even putting that 9 difficulty aside, if there was an affiliated 10 transaction between Drexel and USAT, I frankly 11 don't understand how that implicates MAXXAM or 12 Federated. The parties to that transaction are 13 USAT and Drexel. If USAT failed to get advanced 14 approval of this transaction, it seems to me that 15 that's a problem for USAT or a problem for Drexel, 16 neither of which is a defendant here. 17 Beyond that, though, the -- I want to 18 talk for a second about the amount that OTS is 19 claiming, this so-called 47 million-dollar loss 20 which frankly is pure fiction. It gets to this 21 47 million-dollar number by having an expert -- 22 and I'm putting that in quotes for the time being 254 1 because I'm not sure she really even performs the 2 function a normal expert witness performs, 3 although I assume she's going to testify here. 4 But they have this expert make up a list of every 5 Drexel underwritten bond that USAT sold for less 6 than it paid for. Buy a bond for a million 7 dollars and they sell it for $990,000, she says 8 there is a 10,000-dollar loss on that bond. 9 Well, it's obvious that in any 10 securities portfolio -- and you've heard 11 references to the securities portfolios -- if you 12 run a portfolio, you're going to sell your bonds. 13 Some, you're going to make money on. Some, you're 14 going to lose money on. They have focused only on 15 the Drexel underwritten bonds on which there was a 16 loss. I will say happily in the USAT portfolio, 17 there are a great many more bonds sold as a profit 18 than bonds sold as a loss; but they ignore the 19 ones that were sold as a profit. They then told 20 the expert -- and as she confirmed, she got these 21 instructions really from the OTS lawyers -- to 22 ignore completely any interest that was received 255 1 on the bonds during the time that USAT held them. 2 This, to me, is somewhat puzzling since I had 3 always understood, in my naive way, that interest 4 is what people buy bonds for, particularly 5 high-yield bonds. The attraction of high-yield 6 bonds, I had always understood, was that they 7 produced a high-interest yield. Their expert was 8 told to totally ignore the interest yield, and she 9 did. And by ignoring all the bonds in the 10 portfolio on which there were gains and ignoring 11 all the interest yield on all the bonds in the 12 portfolio, she comes up with a number of 13 $47 million which she says represents the losses. 14 It's remarkable -- it's been remarkable 15 to me all along that OTS would even try to bring a 16 claim related to USAT's high-yield bond portfolio. 17 I say that because the high-yield bond portfolio 18 was really one of the great success stories of 19 that institution. At a time when the Houston 20 economy didn't really offer USAT many 21 possibilities for making quality commercial 22 loans -- and after all, when you think about it, a 256 1 bond really is simply a form of a commercial 2 loan -- the high-yield bond portfolio yielded 3 millions of dollars of profits for United Savings 4 Association of Texas. It permitted the company, 5 in effect, to make good loans to well-established 6 corporations located throughout the country; 7 therefore, minimizing the effect of the poor 8 economy here in Texas. 9 Now, these weren't high-risk 10 fly-by-night borrowers which is how OTS tries to 11 characterize them. These were not junky 12 companies. I think when Your Honor looks at the 13 composition of the high-yield bond portfolio at 14 USAT, you're going to see some of the best known 15 corporate names in America. Also, the evidence is 16 going to show that these issues were carefully 17 selected and thoroughly researched before they 18 were presented to the investment committee for 19 decision. 20 Dr. Lawrence Benveniste, 21 B-E-N-V-E-N-I-S-T-E, who is a professor at the 22 Business School of the University of Minnesota 257 1 studied the USAT portfolio for us. He's going to 2 testify that not only was the portfolio highly 3 profitable but it was very carefully diversified 4 over a wide spectrum of industries. 5 And the other odd aspect of the OTS 6 claim, though, is the claim which is really 7 implicit in their theory that, somehow, the 8 regulators didn't know what was in the portfolio; 9 it didn't know that USAT was buying Drexel 10 underwritten bonds and wouldn't have approved it 11 if they knew. Well, this is simply untrue. The 12 evidence is going to show that USAT informed both 13 its state and federal regulators every month of 14 every addition to and subtraction from the 15 high-yield bond portfolio. 16 Initially, they would seek advanced 17 approval from the regulators for these. But this 18 proved unworkable; so, they asked for and received 19 permission to report after the fact. They 20 reported after the fact each month. Those letters 21 went to the Texas regulators with a copy to the 22 Federal Home Loan Bank of Dallas. Neither 258 1 regulator ever disapproved, to my knowledge, a 2 single bond purchase. 3 Now, OTS is contending now in its 4 theory here that Drexel was an affiliate of USAT; 5 but Your Honor is going to see evidence certainly 6 that nobody at the time ever thought that. As a 7 matter of fact, one regulator even referred in a 8 memo to Drexel's stock ownership in USAT and -- or 9 in UFG, and it referred to its ownership by an 10 unaffiliated third party. Now, hindsight's a 11 fascinating process; but I doubt that OTS is going 12 to be able to present any single fact bearing on 13 the issue of Drexel as an affiliate that wasn't 14 fully known to USAT's regulators at the time. And 15 if those regulators didn't think Drexel was an 16 affiliate and if those regulators didn't think 17 that these transactions that they were fully aware 18 of every month required advanced approval, I don't 19 know why, frankly, that this Court should find any 20 differently. 21 Let me turn to the subject of -- let me 22 just say one more word about high-yield bonds. 259 1 The high-yield bond portfolio was certainly no 2 secret from the regulators; and, as you've heard 3 from some of the statements made yesterday, this 4 was something the regulators looked at fairly 5 closely on a number of occasions. One of the 6 things you're going to hear is that the Federal 7 Home Loan Bank of Dallas actually at one point 8 even sent two of its own investment experts, 9 Dr. Jonathan Scott and Terry Smith, two Ph.D.s who 10 worked for the Federal Home Loan Bank of Dallas. 11 They sent them to Houston to look specifically at 12 the USAT high-yield bond portfolio and to give 13 their views on whether it was well run. I think 14 Mr. Villa quoted their report yesterday. They 15 came back, and they found that the portfolio was 16 very well managed and very well run. Well, we 17 took a deposition in this case from George Barclay 18 who's -- I think he's still the president of the 19 Federal Home Loan Bank of Dallas. And we said, 20 "Do you know these two investment experts? What 21 do you think of them?" 22 And he said, "Oh, yeah." He knew them 260 1 very well. And he said, "I'll tell you, if 2 Jonathan Scott and Terry Smith think a high-yield 3 bond program is impressive and well run" -- I 4 don't think Mr. Barclay was choosing to make a 5 pun, but he said, "That's an opinion you can take 6 to the bank. Those guys know their stuff." And 7 these were people who went firsthand hands on, 8 examined the portfolio, found it very well run. 9 You know, the purpose of bank 10 regulations is supposed to be, as I have always 11 understood it, to guide the way parties conduct 12 themselves in the real world. And as I look at 13 this high-yield bond portfolio claim, it seems to 14 me that the enforcement lawyers are trying to use 15 those regulations not in the real world but simply 16 to conjure up some technical violation in this 17 case and then say, you know, "Gotcha," 10, 15 18 years after the fact. But I think when the Court 19 hears the evidence, you're going to agree that 20 there is no substance and no merit to this 21 high-yield bond claim. 22 Let me touch for a moment on the 261 1 subject of restitution. The OTS net-worth 2 maintenance claim and its high-yield bond claim 3 and, indeed, in many of the other claims in the 4 case, OTS seeks money damages in the form of 5 restitution. I think the law is quite clear. 6 Even Mr. Retsinas now seems to agree that a claim 7 for restitution requires that the agency prove 8 either unjust enrichment or reckless disregard for 9 law or regulation. Here, OTS is claiming unjust 10 enrichment. I believe they are. And if they do 11 that, they are going to have to show that MAXXAM 12 and Federated received some benefit in connection 13 with their investment in UFG, some benefit which 14 they retained and which it would now be unjust of 15 them not to give up. I think that is how the law 16 now defines restitution in the context of these 17 cases. 18 Now, OTS has pleaded that MAXXAM and 19 Federated were unjustly enriched because they 20 retained money which they were required to infuse 21 into USAT. However, I think the cases, 22 particularly the Wachtel and the Rapaport cases, 262 1 have made it quite clear that that doesn't 2 constitute unjust enrichment in the context of a 3 net-worth maintenance claim. And I think however 4 much OTS Enforcement might disagree with those 5 cases, they have to accept the fact that their own 6 director now cites them as government law. 7 That leaves OTS really with a claim 8 that MAXXAM, Federated, and Mr. Hurwitz were 9 somehow advantaged in their other activities by 10 financial assistance that they received from 11 Drexel as a result of USAT's purchase of Drexel 12 underwritten investments. And, frankly, as I 13 understand it, that is their theory of unjust 14 enrichment at this point. 15 Now, I question whether that kind of a 16 benefit, if true, even if proved, could ever 17 support a restitution claim. But I think the fact 18 is that OTS is never going to be able to prove 19 that. They rely heavily on what we in the case 20 have come to call the Drexel connection; that 21 there was some quid pro quo arrangement; that 22 Drexel sold high-yield bonds to USAT and, in 263 1 return, MAXXAM and Federated and Mr. Hurwitz got 2 some advantage from Drexel somewhere else. It's 3 nice for lawyers to stand up and say that. But 4 it's going to be quite another thing for them to 5 prove it, and I don't think they are going to be 6 able to do it. 7 But what the evidence is going to show 8 is that when MCO and MAXXAM used Drexel as an 9 investment banker -- and they used Drexel as they 10 used other investment bankers. Drexel was well 11 paid for its services. There wasn't any back 12 scratching here. Drexel got good money when it 13 acted as an investment banker. It's also going to 14 show that payment for those services was 15 negotiated at arm's length and with a fairly high 16 degree of intensity. I think Your Honor will 17 listen to great interest when the witnesses 18 describe some of these fee negotiations. I can 19 assure you that there is no evidence that you're 20 going to hear of any quid pro quo arrangement tied 21 to USAT purchases of high-yield bonds. It's not 22 there. 264 1 Let me just make one observation in 2 conclusion, Your Honor. I think you'll recall 3 that about five years ago, I appeared before you 4 in a claim by this same agency against Mr. Kaleb 5 West down in Newport News. And when OTS Director 6 Ryan affirmed Your Honor's decision in the West 7 case, December 1992, and dismissed the charges 8 against Mr. West, he made an interesting 9 observation. He noted that many of the charges in 10 that case were quite old, and he doubted the 11 wisdom -- I think I'm almost quoting him now. He 12 doubted the wisdom of devoting OTS Enforcement 13 assets to the pursuit of such stale claims. 14 Here we are again, though, five years 15 later. We're talking about events that happened 16 10 to 15 years ago. We're going to be dealing 17 with witnesses who are struggling to recollect 18 those events. We're going to be dealing with all 19 the uncertainties about missing or incomplete 20 documents, all of those same difficulties that 21 caused Director Ryan to make that comment in the 22 West case. I have to think that if there was 265 1 really, really some wrongdoing at United Savings 2 Association of Texas, somebody would have 3 identified it and somebody would have done 4 something about it a long time before now. 5 When we see a case of this sort brought 6 10 to 15 years after the fact, I at least can't 7 help but wonder what kind of agenda is at work. 8 Is it politics? Is it politics because the 9 environmentalists think they see a way through 10 this case to get at MAXXAM's redwood trees? I 11 don't know that. We've seen some of them in the 12 courtroom. They are here watching the case. 13 Maybe that's it. Is it regulatory survival? Is 14 this an agency and enforcement division that are 15 out to prove that there is some reason for them to 16 continue to exist? I don't know. That may be 17 what this fuss is all about. 18 Thank you for your attention, Your 19 Honor. 20 THE COURT: Thank you. We'll take a 21 short recess. 22 266 1 (A short break was taken. 2 from 10:21 a.m. to 10:45.) 3 4 THE COURT: We're back on the record. 5 Mr. Keeton, you look like you're ready to go. 6 MR. KEETON: Yes, Your Honor. May it 7 please the Court. I'm here speaking for 8 Mr. Hurwitz, and the other respondents have been 9 introduced. 10 Charles, would you stand up so the 11 judge can see what a bad guy like you looks like? 12 Sit down. 13 Mr. Hurwitz, Your Honor, is 57 years 14 old, grew up in Kilgore, Texas. That's up in 15 East Texas. His parents were in the clothing 16 business. He went to the University of Oklahoma, 17 graduated, became a broker, and, as they say, the 18 rest is history except he married his high school 19 sweetheart. They have two grown sons. They are 20 grandparents. It's a close family. The Hurwitzes 21 have been very philanthropic but very private. 22 Most of the stories you've ever read about 267 1 Mr. Hurwitz, if you've read any -- and I wouldn't 2 say that was improper if you had -- would show 3 that he's a very, very private person. He is. 4 And as a result of that, they are not people and 5 he particularly is not a person to talk about all 6 the good things that they do besides the public 7 business that people know about. However, in 8 talking to Barbara the other night, I gained some 9 insight as to a bit of their philanthropy. 10 I would say, after looking at the list, 11 they have given to every major charity in this 12 town and over this country and not insubstantial 13 sums. Mrs. Hurwitz particularly, but Mr. Hurwitz 14 behind her, has been responsible recently for 15 raising over $18 million, of which some of that is 16 theirs, for the park here that this city is trying 17 to redo. It's the equivalent of our Central Park. 18 It's called Hermann Park; but it, like Central 19 Park, has fallen into disarray. They are both on 20 the board of M.D. Anderson Cancer Hospital which 21 we like to think may be the greatest cancer 22 research center hospital in the world. It's 268 1 certainly one of the most well-known ones. And 2 they have lent both their time as board members 3 and their money and treasure for that. In 4 addition to that, Mrs. Hurwitz serves on the board 5 of one of our local colleges; and, together, they 6 have endowed scholarships and created a program 7 where they bring guest speakers. 8 Not to be the least of this, there is 9 also a foundation called "Knowledge is Power" 10 which has as its mission, and which the Hurwitzes 11 support greatly, bringing down students from 12 prestigious colleges in the East such as Yale and 13 others and sending them to teach in our Fifth Ward 14 which is our most impacted and impoverished 15 minority district in this town. 16 Now, least is that in their religious 17 subjects, they have given generously -- and I will 18 not state the number, but it is huge -- to their 19 temple. None of these things are almost -- or 20 almost none of these things are known publicly 21 because that's the kind of people they are and the 22 kind of family people they are, also. The sons, I 269 1 have had the pleasure of knowing. I've seen the 2 grandkids. 3 So, it's a little different view of the 4 world to look at Mr. Hurwitz through that prism. 5 That's not going to say that's the end of this 6 case because that's not the end of this case. It 7 may not even be relevant, but I think it is when 8 it comes time to judge a man's credibility and the 9 veracity of the things he's saying. Mr. Hurwitz, 10 in the charges, has been called a corporate 11 raider; and that name had been used in stories 12 about him. 13 He is not. If you look at his history 14 of business, he purchases -- and the companies 15 that he's associated with purchase companies, 16 operates those companies -- almost exclusively 17 operates them with the people who were there 18 before the purchase, and holds those companies and 19 tries to build up the assets. There is no burn 20 and pillage, no stripping of assets, none of that. 21 Now, in December of '81, they did spot 22 an opportunity for what they thought was an asset 270 1 purchase at the time because it had been announced 2 that UFG, the holding company, had entered into an 3 agreement to sell USAT, the thrift, to a third 4 party and that UFG was going to be left with only 5 cash and land, piece of land. 6 After analyzing that situation, it 7 looked attractive. And the start of acquisition 8 of UFG shares began with the understanding and 9 certainly the thought that they were not acquiring 10 a thrift; they were acquiring an entity, UFG, that 11 would have cash and the real estate. Later on, 12 I'll address the real estate. 13 What happened? Well, it had nothing to 14 do with Mr. Hurwitz; but that transaction which 15 had been publicly announced fell through for 16 whatever reasons. And all of a sudden, Federated 17 and MAXXAM now see themselves as holders of shares 18 of UFG which also now has a hundred percent owned 19 thrift. And it's from there that this saga 20 starts. Yes, I suppose they could have sold their 21 shares right then. But after studying it 22 further -- and like many of us in Houston at the 271 1 '81/'82 time with the hope that the economy was 2 getting ready to change, it looked like an 3 interesting opportunity. So, he proceeded to 4 purchase the shares that we've been talking about. 5 I'm not going to get into the 24.9 and 6 how it goes up and down. You've heard all about 7 that. But the purchase was made. At the same 8 time, what occurred is that the board was changed 9 somewhat; and there has been the contention -- in 10 fact, we've argued about it to Your Honor about 11 this controlling influence. And while I realize 12 that term, I think, is being applied in saying 13 that Drexel is a controlling influence with MAXXAM 14 and UFG, I'm not sure how they are using that. 15 But let's look at the board of UFG as 16 it was constituted over the various years. For a 17 moment, just so that we can dispel some of the 18 indications if not implications that the board was 19 constituted by Mr. Hurwitz only, maybe with 20 Mr. Munitz, and then, sometime along the line, 21 Mr. Gross came. That's it. That's what you would 22 think if you had been sitting in here listening to 272 1 the government. 2 Now, before I get started, Your Honor, 3 I'm not putting this in as an exhibit yet because 4 out here in '88, some people go off early in '88. 5 Some come on later in '88. All these people were 6 on the board at one point or another in '88. But 7 '88 has certain problems with some of these people 8 on timing, and I know that. But I'm trying -- the 9 point I'm trying to illustrate is made without 10 worrying about those nuances. Let me -- all the 11 red -- the color, by and large, has no 12 significance, Your Honor, except two colors on 13 this board do have significance: The red and the 14 yellow. 15 The red are directors who were 16 directors of USAT prior to Federated and MAXXAM 17 getting involved in any way. And if you look at 18 the UFG chart, you will see the red predominates 19 all the way through. 20 The yellow are people who were 21 designated four places by a company called 22 PennCorp Financial, and that grows out of the 273 1 First American Financial acquisition. And I'll go 2 over those; but when the merger with First 3 American occurred, these people came on. And you 4 notice the yellow predominates all the way 5 through. 6 But let me take these people for a 7 moment because you may say, "Well, yeah. Maybe 8 all these guys are a bunch of idiots or crooks or 9 maybe they are, you know, Mr. Hurwitz' best 10 friends or something." 11 Let me tell you who they are. 12 C.E. Bentley was the president at various times 13 and chairman of USAT before the acquisition by 14 Federated and Hurwitz. And he keeps going, 15 mid-'85. 16 Mr. Coles was president and chairman of 17 USAT. He had previously been president of 18 Imperial Corporation -- I think that's the name -- 19 a large holding company of several savings and 20 loans in San Diego. Very well-known, very 21 experienced. He was virtually at retirement age 22 about the time he goes off. 274 1 Mr. L.L. Duckett is the senior partner 2 of a very well-known firm in El Campo, a 3 relatively small town 50, 60 miles from here. 4 Very respected, a business lawyer, pillar of his 5 community, a knowledgeable man who served on banks 6 as well as this S&L. And you notice he goes all 7 the way. 8 Edgar Keltner is a named partner in a 9 very prestigious Fort Worth law firm, large firm. 10 He's a business lawyer, very well-respected member 11 of the bar. He goes all the way. 12 Charles A. LeMaistre -- he will also be 13 called Dr. LeMaistre -- at this time was C.E.O and 14 president of M.D. Anderson Hospital which is, as 15 I've already said, a very large institution. 16 Prior to this, for a number of years, he had been 17 president and then chancellor of the University of 18 Texas system in Austin. He understands 19 administration. He is not -- I don't want to do 20 the Doctor a disservice. He is not a medical 21 doctor, but this is a man who understands business 22 and has been managing and running institutions. 275 1 Mr. Barry Putegnat -- I'm not sure I 2 pronounced that right -- but he is an owner and a 3 president of a large cleaning commercial -- also 4 been a director, and was at this time, of a 5 company called Daniel Industries, a large company 6 listed on the New York Stock Exchange that's an 7 oil and gas service business/manufacturer, and 8 Dorchester Gas, another large company listed on 9 the Exchange. I might add Dr. LeMaistre was on 10 the board of Enron, may still be on the board of 11 Enron, a large energy company here. 12 Now, those people go through this. 13 They weren't selected by Mr. Hurwitz. They 14 weren't selected by Federated, Mr. Gross, or 15 Mr. Munitz. They were there and they stayed there 16 and they were valuable board members. 17 The yellow -- let me take the yellow. 18 How the yellow comes about, Your Honor, is 19 PennCorp had a debt of -- I think it's like in the 20 40 million, 50 million -- that was owed to it by 21 First American Financial, the holder -- the 22 holding company for Houston First Savings which 276 1 merged with USAT. Obviously, that debt 2 transferred over. And under their loan agreement, 3 PennCorp had the right to name four members of the 4 board -- obviously, First American -- and that 5 carried through, and no one tried to cancel it 6 when the merge occurred. 7 Mr. Burton Borman goes all the way 8 through. Mr. Borman was the president and C.E.O 9 of PennCorp Corporation and has an incredibly 10 impressive resume as both a manager and a 11 financial man. He's out of California. 12 Steve Silverman was a vice president of 13 PennCorp and also associate general counsel, 14 distinguished resume. He stays all the way 15 through. Gets off sometime in '88. 16 Barry Sterling was the general counsel 17 and executive vice president, I think was his 18 title, of PennCorp. Again out of California, a 19 lawyer, but also a manager. He's executive vice 20 president of that company. He also was counsel to 21 the well-known firm of Wyman Bautzer out in LA, 22 very distinguished member of the bar with plenty 277 1 of business experience. 2 Finally, Wayne Winters had been 3 president of First American before the merger. He 4 stayed on as one of PennCorp's designees. I 5 assume without reading Mr. Borman's mind, he 6 figured, "Well, Mr. Winters knows S&L business 7 real good; and he knows it in this area." He 8 stays on the board all the way to the first of 9 '87. 10 The other board members that come on at 11 various times -- let's kind of take it by date. 12 Dr. Munitz comes on sometime in '82 and stays 13 there. 14 '83, we've got Mr. Campbell. 15 Mr. Campbell is an independent investor. He had 16 actually been a director of USAT earlier times 17 back in the Seventies; had, for whatever reason, 18 not stood for election but came back on here. He 19 also was a director and -- no, not an officer -- a 20 director of Abilene State Bank and I think one 21 other bank, an experienced financial person. 22 Nobody's lacking. 278 1 Mr. B.D. Holt, again, is like 2 Mr. Campbell. He had been on the board previously 3 and came back on. He is the owner of a large 4 company in Corpus Christi, Texas, that sells and 5 distributes heavy equipment; and he is also or was 6 a director of a Corpus Christi Bank. These are 7 people who are knowledgeable about business. It's 8 not wives and sisters or your brother-in-law. 9 Then we've got Mr. Hurwitz who comes on 10 at the same time, and we've talked about 11 Mr. Hurwitz or we will. 12 George Kozmetsky comes on in '83. He's 13 variously called Dr. Kozmetsky or Dean Kozmetsky. 14 Some mention has been made of him, but I would say 15 that everyone in the financial community in this 16 country of real sophistication knows George 17 Kozmetsky and knows him with both affection and 18 great respect. He's had a distinguished career 19 teaching, among other places, at the Harvard 20 Business School; then went into business, made a 21 tremendous amount of money. He's principally 22 associated with Teledyne, but he's been a director 279 1 of numerous companies. He then came back to the 2 University of Texas and set up the Texas Business 3 School. It is now called the Kozmetsky Business 4 School. And Dr. Kozmetsky's career and personage 5 is one most impressive. He's written widely. He 6 is known for rectitude. He is known for the 7 ethics of business. And he is known for his own 8 personal ethics. He still works seven days a 9 week, as one of his lawyers said one time during 10 this investigation, giving away his money. He and 11 his wife have already donated hundreds of millions 12 of dollars, not just promised to do it when they 13 die. And he thinks all the time at the cutting 14 edge of what is good for this country and what is 15 good to make the financial engine of our society 16 work well. But he is not a man driven by greed. 17 He is a man driven by honor. And you'll see 18 Dr. Kozmetsky on the stand. But he comes on in 19 '83 and stays on all the way to '87. Anybody that 20 tells you that Mr. Hurwitz or anybody else is 21 going to control George Kozmetsky is wrong. 22 Now, Jerry Williams comes on mid-'83 280 1 and stays on till '87. You've heard about Jerry 2 Williams. He is not a respondent here, but you 3 heard his pedigree. And he had been chief 4 operating officer at First City Bank, a man of 5 high integrity, wide experience, sophisticated. 6 There is Mr. Williams. 7 Mr. Gross comes on mid-'85. I'm not 8 going to try to repeat the statements about 9 Mr. Gross, but you've heard about him. 10 Now, that is the board of UFG. And, 11 indeed, I even tried to figure out -- for whatever 12 it's worth, it has seven members in '81, eight in 13 '82, 16 in '83, 16 in '84, 16 in '85, 13 in '86, 14 11 in '87. I think I came out with 11 in '88; 15 but, remember, I've got a few little errors there. 16 The point being this is not some board that is 17 going to do imprudent things just to help either 18 MAXXAM, Federated, Drexel, or Charles Hurwitz. 19 This is a board that is going to carry out its 20 fiduciary duties. 21 Now, very quickly, Your Honor, this 22 board, which looks very similar, is the USAT 281 1 board. It's not hard to figure out there are some 2 differences. Certain of these directors were not 3 on the USAT board: Mr. Holt, Mr. Campbell, 4 Mr. Borman, Mr. Hurwitz. Otherwise, it looks very 5 similar including the red predominating all the 6 way across, the yellow predominating all the way 7 across. And Mary Grisby probably could have been 8 put in yellow. She may not have been a nominee 9 of -- of PennCorp, but she comes out of the First 10 American acquisition. She had been the chairman 11 of the board. Later, as I think you've been 12 told -- but I will say it again -- she is actually 13 appointed to the Federal Home Loan Bank Board. 14 Now, that's what it looks like; and 15 this doesn't even come close to showing you the 16 operators underneath, all of whom were capable and 17 who are independent in the sense that they are not 18 beholden to these people other than to do a good 19 job and to carry out their duties. 20 Mr. Guido said that what happened here 21 was they stripped out the profitable assets which 22 caused a bigger loss at the end and they did it 282 1 because Mr. Hurwitz, MAXXAM, and Federated hoped 2 to benefit from the recovery if they could make 3 the institution survive. Well, I don't -- I don't 4 agree with this stripped out connotation. That 5 sounds like something imprudent or in some way 6 stripped out and put it in your pocket which they 7 didn't. But I do agree that every one of those 8 directors was trying to turn this institution 9 around and save it. That's why it survived so 10 long. 11 And while I'm on the point, I ought to 12 make this point when I mentioned stripped out. 13 You do not have cars. You don't have vacation 14 homes. You don't have airplanes. You don't have 15 money. You don't have any of the self-dealing. 16 You don't have a loan to your brother that's 17 undisclosed. You don't trade your cow for his 18 horse and everybody backs it up a hundred thousand 19 dollars like some savings and loans did. 20 None of that in this case. You have 21 people struggling at the most sophisticated and 22 highest level to do what they can best do to make 283 1 this institution survive. They failed, but that 2 is not actionable. 3 Mr. Guido says Drexel owned some shares 4 in MAXXAM. So what? MAXXAM's a publicly traded 5 company. If we all had bought shares, then we 6 might have made a lot of money. I looked it up. 7 But that's not the issue. He just says Drexel 8 bought shares in MAXXAM. MAXXAM did not buy 9 high-yield bonds from Drexel. Well, where is he 10 going with that? That's not MAXXAM's business. 11 They are not in that kind of business. So what 12 that MAXXAM didn't buy high-yield bonds from 13 Drexel? I suspect Drexel owned shares in General 14 Electric and Coca-Cola and lots of other places, 15 and they probably didn't buy high-yield bonds 16 either. The point is high-yield bonds are used by 17 certain types of financial institutions. That's 18 not MAXXAM. 19 And he said so -- since MAXXAM didn't 20 buy high-yield bonds, though, Mr. Guido in his 21 mind says, "Well, MAXXAM got USAT to buy Drexel 22 high-yield bonds." So what? They made money. 284 1 And I don't think it was quite as clear as I would 2 have liked it this morning from my brother 3 Eisenhart who said all the rest of it better than 4 I could have said it. 5 This institution bought high-yield 6 bonds from everybody: Merrill-Lynch, First 7 Boston, Solomon Brothers, on and on and on. Among 8 those were Drexel. We all know Drexel underwrote 9 a large percentage of high-yield bonds during that 10 time. But these other institutions did, too; and 11 MAXXAM -- I misstated -- USAT bought from all of 12 them, and it's that that they made money on. They 13 didn't just buy from Drexel and lose money. It 14 was a portfolio. And, indeed, one of the 15 interesting aspects of this, Your Honor, unlike a 16 lot of cases that were brought out of the Drexel 17 failure, USAT's percentage each year of high-yield 18 bonds that were underwritten by Drexel that it 19 bought was a smaller percentage than Drexel 20 actually constituted of the whole high-yield 21 market each year. 22 Now, why is that important? Because we 285 1 have seen -- all of us who have lived through this 2 S&L failure -- some of those institutions had 3 hundred percent Drexel bonds and didn't buy from 4 anybody else or it looks like they did foist off 5 dogs and cats on them. That's not here. You had 6 professionals deciding; not Mr. Hurwitz like 7 Mr. Guido said. We have professionals deciding 8 which high-yield bonds to buy. There are none of 9 them on here. They have got great pedigrees, 10 great resumes, and they made money. But anyway, 11 he says, so, since USAT bought high-yield bonds 12 from Drexel, MAXXAM didn't, Drexel owned MAXXAM. 13 Then what? 14 He then leaps the farthest leap of 15 faith I have ever seen. He says it must be that 16 Drexel then agreed to do financings for MAXXAM. 17 Let's be clear on this. MAXXAM did financings 18 with a lot of people again: First Boston, Barry 19 Stearns, Merrill-Lynch, and, yes, Drexel because 20 Drexel was good at it. But those were all head 21 up, head up. Each stood on its own, no quid pro 22 quos; and they will never prove a cent of it 286 1 because it didn't occur; not because we're tricky. 2 It did not occur. 3 Now, what happens? We go along all of 4 this -- oh, by the way, I just came to where 5 Mr. Guido said many things about Mr. Hurwitz like 6 he's running everything even though he has another 7 business, several to run. It's not like this is 8 the only thing on his plate, as you will hear. 9 But he did get good managers. He did get good 10 board members, and he did see that the right kinds 11 of policies were instituted. 12 Mr. Guido said Mr. Hurwitz instructed 13 that the Park 410 loan be made. That's not true, 14 and you're going to hear about it. Two people ran 15 the real estate part and they are well-known and 16 respected at USAT and they were employees of USAT 17 before Federated and MAXXAM bought any shares. 18 They are named David Graham and Gem Childress. 19 They first found this opportunity. They analyzed 20 that opportunity just like the Norwood and all the 21 rest, and it went through the channels. These are 22 not beginners, the people I'm talking about. 287 1 These are people who, in the real estate community 2 in this town, are well-known; and they are still 3 in it. And they are still employed in different 4 companies, and they absolutely are respected 5 individuals. And they are going to tell you 6 Mr. Hurwitz never told them to do any one of these 7 things despite what Mr. Guido might like to say. 8 Now, the last thing is, Your Honor, 9 this institution, as I believe it was basically 10 argued by Mr. Villa, was limping along but still 11 going along; and everybody was hoping it was going 12 to be a survivor. In fact, everyone anticipated 13 that it might be one of those institutions that 14 would be used under the Southwest Plan to rally 15 other institutions that were failing, too. And 16 the reports of the regulators, which Mr. Villa 17 referred you to, will be in evidence. 18 I would tell Your Honor that I know 19 we've given you an absolute mountain of paper to 20 read; but if you read nothing of the preliminary 21 prehearing statements that the respondents 22 submitted which was long, admittedly so, because 288 1 it tried to deal in detail with each of these, I 2 wish you would read that section about the 3 supervisory history -- it's 50 pages -- because 4 there, it's using the supervisor's own words and 5 the supervisor's own comments which find that 6 these people are actually highly talented, highly 7 trained, and they like them. 8 But all of a sudden, Representative 9 Dingell is getting on Milken and Boesky. Now, 10 Mr. Hurwitz was never sued in the Milken and 11 Boesky things. But I'll tell you this: 12 99 percent of the public doesn't know it because 13 the way it was publicized and the way some of the 14 politicians did, it had the effect of smearing 15 him. But he wasn't. He testified in front of 16 that committee. But Representative Dingell who 17 I've had the pleasure of being in front of with 18 two or three clients -- not Mr. Hurwitz -- is 19 fairly tough about making up his own mind and 20 don't confuse me with the facts. And he was also 21 tough in those days about crowding down on 22 agencies and scaring the heck out of them. And 289 1 you can see in what Mr. Villa's part -- I say 2 Mr. Villa wrote that section I told you I thought 3 was the best. So, I'd like to take credit for it; 4 but I didn't. 5 You can see the supervisors are 6 starting to tell, in '88, the USAT people and the 7 UFG people, "Look. We'd like to do something more 8 for you. But, you know, we're getting inquiries 9 from Dingell. And it might hurt us if we get an 10 inquiry from Dingell even though we think your 11 capital forbearance request is okay and we know 12 it'll save us money. But we don't want to be 13 criticized by him, and we can't take the heat." 14 They didn't say that in the memo, but that's the 15 message. And it all plays out at the end because 16 when it's -- close to the time that this 17 institution was shut down, they asked for bids 18 under the Southwest Plan. And MAXXAM made a bid 19 and was even told -- they weren't telling MAXXAM 20 what was really going on internally about the 21 well-being. They got MAXXAM to spend a lot of 22 time and money making a bid for this institution 290 1 under the Southwest Plan. And in discovery, we 2 actually received documents where, after we lost, 3 you see, they said, "Well, your bid just wasn't 4 good enough." That's all they told us. 5 In point of fact, we have documents 6 from the government that show that MAXXAM's bid 7 was a hundred million dollars better than the 8 successful bidder; but by then, the political 9 pressure was such that they couldn't take it. 10 Now, we're not here litigating that 11 case. But it's a sad day when, again, ten years 12 later now, we're litigating a case where you don't 13 have people stealing. By the way, Mr. Hurwitz 14 didn't get any of that compensation. 15 Now, I think that the arguments of the 16 other lawyers is that the propriety is fine; and 17 I'm not arguing that. But I just want to make it 18 clear. Mr. Hurwitz didn't get any compensation. 19 What he got was ownership in companies, MAXXAM and 20 Federated, that lost all their money, millions of 21 dollars, and a lot of years of grief. And we also 22 got to sit in the courtroom. Your Honor, I'm 291 1 going to look forward, as we go forward, to seeing 2 what the real proof is; and I hope at the end, 3 I'll make this same argument. But I'll just say, 4 "Judge, I told you so." Thank you very much. 5 THE COURT: Thank you. I gather that 6 concludes the opening statements. Does 7 Enforcement wish to proceed with a witness? 8 MR. RINALDI: We do, Your Honor. First 9 of all, there are a number of people in the 10 courtroom today, some of whom may ultimately be 11 called as witnesses. And we would like to invoke 12 the rule and ask any potential witnesses other 13 than the witness that is obviously being called to 14 testify to leave the room while other witnesses 15 may be testifying. 16 MR. NICKENS: Well, who do you have in 17 mind? 18 MR. RINALDI: Many of these people I 19 don't even recognize. I'm just asking that we -- 20 that any persons who come to the courtroom who are 21 going to be called as witnesses not sit in the 22 room and listen to the testimony of other 292 1 witnesses. 2 MR. NICKENS: Your Honor, I -- 3 MR. VILLA: Is it people you have under 4 subpoena? 5 MR. RINALDI: Uh-huh. 6 MR. VILLA: Do you know the people you 7 have under subpoena? 8 MR. RINALDI: I'm not speaking 9 necessarily as to today but as a convention for 10 the future. 11 MR. KEETON: There isn't anybody here 12 that you haven't -- 13 MR. NICKENS: I don't believe there is 14 anyone here -- 15 THE COURT: I'll simply announce that 16 if there are persons here who are potential 17 witnesses, I'll ask you to leave the courtroom. 18 MR. NICKENS: Mr. Park is the paralegal 19 at Mayor Day. I don't think he's a potential 20 witness. 21 MR. KEETON: That's right. I think 22 he's just going to work, Your Honor. 293 1 THE COURT: We'll be off the record if 2 we're going to have a discussion. 3 MR. RINALDI: Your Honor, I was just 4 talking to Mr. Nickens regarding the question of 5 documents. There is a voluminous amount of 6 documents, and I think it might be appropriate if 7 we came to some convention on how we should deal 8 with the documents. The first witness, I'm happy 9 to start right now with a set of documents that we 10 have; but it may be that as time goes by, we'll 11 need to come to some convention between us to try 12 to figure out what's the most convenient manner 13 for handling them so that we don't confuse 14 ourselves and the Court as well. 15 MR. NICKENS: We're perfectly willing 16 and open to those suggestions, Your Honor. Our 17 plan was -- and we still maintain that -- to 18 provide the witness and yourself with the 19 documents as either side identifies it. Our 20 exhibits are now in the jury room, I believe; and 21 we're working out a plan for trying to get them in 22 the courtroom so that they can be used. We don't 294 1 have the shelving or tables, and there are how 2 many? There are of 66 boxes of documents at this 3 time. 4 MR. RINALDI: What I would suggest, 5 Your Honor, is I have a very discrete universe of 6 documents that I'm going to use with the first 7 witness. And we can at least, at this point, try 8 examining the witness document by document. I 9 will be handing out for -- someone assisting me 10 will be handing out the documents to both the 11 witness and the Court as we look at each of the 12 documents in turn. We'll see how that works. If 13 it presents a problem or if it's too cumbersome of 14 a process, then I'm sure the parties can work out 15 something. 16 THE COURT: Do the respondents have 17 copies of the documents you're going to be using? 18 MR. RINALDI: Yes, they do. And it was 19 not my intention to give the respondents copies 20 since they all have -- 21 MR. NICKENS: If he could identify 22 them, we will obtain the copies. 295 1 THE COURT: All right. 2 MR. KEETON: How are you going to get 3 them on cross-examination? 4 THE COURT: Take the oath, please. 5 6 RICHARD MARLIN, 7 8 called as a witness and having been first duly 9 sworn, testified as follows: 10 11 EXAMINATION 12 13 THE COURT: Be seated, please. 14 Q. (BY MR. RINALDI) Good morning. 15 A. Good morning. 16 Q. My name is Bruce Rinaldi. I think we 17 met some time ago. Would you state your name for 18 the record, sir. 19 A. Richard Marlin. 20 Q. And Mr. Marlin, how are you employed? 21 A. I'm a lawyer. 22 Q. And with what law firm? 296 1 A. Kramer, Levin, Nessin & Frankel in 2 New York City. 3 Q. And do you have a particular area of 4 legal expertise? 5 A. Yes. Corporate and securities law. 6 Q. And do you also practice banking law, 7 sir? 8 A. No. 9 Q. That's not an area of expertise that -- 10 A. No, it's not. 11 Q. -- you're involved in? Are you 12 familiar with the corporation known as 13 MCO Holding? 14 A. Yes. 15 Q. And can you tell the Court how you came 16 to be familiar with that corporation? 17 A. That company became a client of our 18 firm in the late 1970s. 19 Q. And can you tell us how it became -- 20 under what circumstances it became a client of 21 your firm? 22 A. Another company we represented, 297 1 Federated Development, acquired a stock position 2 in that company. 3 Q. And when Federated Development acquired 4 a stock position in MCO, was it still named MCO; 5 or did -- was it a predecessor corporation with a 6 different name at that time? 7 A. They have been called McCullough Oil. 8 Q. And at that time, did you assume any 9 positions on the board of McCullough Oil or any of 10 its subsidiaries? 11 A. Did we -- sorry. Would you repeat 12 that? 13 Q. Did you assume any positions on the 14 board of McCullough Oil or any of its subsidiaries 15 at that time? 16 A. Me personally? 17 Q. Yes. 18 A. Not to the best of my recollection. 19 Q. Did any members of your law firm assume 20 any positions as directors on the board of 21 McCullough Oil or its subsidiaries? 22 A. It's possible, but I don't remember 298 1 specifically. 2 Q. Ezra Levin? 3 A. Ezra Levin is one of my partners, and 4 he has from time to time served as a director of 5 one or more companies within the MAXXAM group. 6 And he may have been a director even very early of 7 McCullough Oil. Wouldn't surprise me, but I just 8 don't remember that he was. 9 Q. Now, when you first became associated 10 with McCullough Oil or involved in the legal 11 representation of McCullough Oil, what kind of 12 work were you providing for them? 13 A. General corporate representation. 14 Q. And what does that include? 15 A. Includes providing advice in connection 16 with business activities of the company, 17 financings for the company, acquisitions by the 18 company. 19 Q. And was the company at that point in 20 time involved in acquiring other companies? 21 A. It did make acquisitions from time to 22 time. 299 1 Q. And did you also prepare filings for 2 the Securities and Exchange Commission -- 3 A. Yes. 4 Q. -- for McCullough Oil? 5 A. Yes. 6 Q. And what would be the nature of those 7 filings that you prepared? 8 A. Well, there are periodic filings 9 required of all public companies. So, whatever 10 was required, we would have done. 11 Q. And would that have included 10Ks? 12 A. Yes. 13 Q. What is a 10K, sir? 14 A. It's an annual report on forms 15 prescribed by the SEC. 16 Q. And did the Kramer Levin law firm 17 prepare the annual reports -- 18 A. I believe so. 19 Q. -- for McCullough Oil Company? 20 A. I believe so. 21 Q. And did they also prepare the 10Qs? 22 A. 10Qs are quarterly reports, and 300 1 Kramer Levin would have done that. 2 Q. Was Kramer Levin also involved in 3 preparing 13Ds for McCullough Oil Company? 4 A. Kramer Levin would have been -- I'm 5 answering these questions in general based upon my 6 knowledge of what the general representation of 7 the client would be and not specifically as to 8 this or that document as to which I may have had 9 no activity at all. 10 Q. I understand that. And when we refer 11 to a 13D, what is that, sir? 12 A. That's a report of ownership by an 13 individual entity once it exceeds 5 percent of the 14 stock. 15 Q. So, if McCullough Oil had engaged in an 16 acquisition and acquired over 5 percent of another 17 entity, they would have filed a 13D? Is that 18 fair? 19 A. Yes. 20 Q. And that would have been something that 21 would have fallen within the sphere of legal 22 services provided by Kramer Levin to McCullough? 301 1 A. Yes. 2 Q. Now, you also indicated that you 3 provided some legal services to a company called 4 Federated. What was the relationship of Federated 5 to McCullough Oil or its successor, MCO? 6 A. Federated was, I believe, a stockholder 7 in MCO. 8 Q. Were they a controlling stockholder of 9 MCO? Do you know? 10 A. You know, I don't remember specifically 11 how much stock they had. 12 Q. And did you also provide securities 13 services to Federated? 14 A. Yes. 15 Q. What was the nature of Federated's 16 corporate structure? 17 A. Federated was known as a New York 18 business trust. 19 Q. Okay. And what is a New York business 20 trust as opposed to a corporation? 21 A. It's analogous to a corporation. It's 22 a different form of legal organization, rather 302 1 unusual. Business trusts were more common in 2 Massachusetts, and there are occasionally business 3 trusts in other states. It's a different way of 4 reflecting the ownership of the entity through 5 trust certificates as opposed to stock 6 certificates. 7 Q. And in terms of the operations of the 8 trust, does it have a board of directors or a 9 board of trustees; or how does that work? 10 A. You know, I don't -- I mean, it would 11 have a board of trustees. I don't remember too 12 much about Federated. 13 Q. And do you recall whether Mr. Ezra 14 Levin, your partner, was a trustee for Federated? 15 A. No, I don't remember. 16 Q. Now, you indicated that -- well, were 17 there any other subsidiaries or affiliates of 18 Federated or MCO that you provided legal services 19 for? 20 A. One of the affiliated companies was 21 known as Federated Reinsurance Corporation. 22 Q. Okay. And what was Federated 303 1 Reinsurance Corporation? 2 A. It was an insurance company. It was 3 actually a reinsurance company. 4 Q. And was it a subsidiary, then, of 5 Federated? 6 A. I believe it was a subsidiary of 7 Federated Development. 8 Q. Was this a publicly traded company or a 9 wholly-owned subsidiary of -- 10 A. I think it was a wholly-owned 11 subsidiary. 12 Q. Are there any other entities of 13 Federated, affiliates of Federated or MCO to which 14 you have provided legal services? 15 A. At what time? 16 Q. At any time since you've commenced your 17 legal representation of Federated, MCO, and its 18 affiliated entities. 19 A. When you say "you," do you mean me or 20 Kramer Levin? 21 Q. I'm referring to Kramer Levin. 22 A. Yes. The answer's: Yes. 304 1 Q. Okay. And what would those entities 2 be? 3 A. There is a large group of companies 4 which controls the Kaiser Aluminum Company and now 5 has related companies and entities. They include 6 Pacific Lumber Company. There are also some 7 subsidiaries of MCO now known as MAXXAM to which 8 we render services. 9 Q. And are you corporate counsel then 10 to -- or did you provide legal services in the 11 securities area to all of those entities? 12 A. I can't say to all of them; but from 13 time to time, we provide those services to many, 14 if not all, of them. 15 Q. Now, in connection with your 16 representation of Federated and MCO and its 17 affiliates, is there one particular partner who is 18 the principal partner with respect to that 19 representation? 20 A. Yes. That's Ezra Levin. 21 Q. And how did Mr. Levin first become 22 associated with -- do you -- if you know -- with 305 1 MCO, Federated, and the affiliated entities? 2 A. Well, I don't know which came first, 3 the chicken or the egg; but he -- Ezra was an 4 attorney for Charles Hurwitz who was a principal 5 stockholder in Federated and, through that 6 relationship, became the principal partner with 7 respect to these various businesses. 8 Q. Now, what relationship does Mr. Hurwitz 9 have to Federated? 10 A. He's a stockholder and a trustee. 11 Q. Is he a controlling person of 12 Federated? 13 A. I would -- I would think he is, yes. 14 Q. And is he also a controlling person of 15 MCO? 16 A. Well, in what sense do you mean 17 "controlling person" there? It's easier now -- 18 Q. Does this refresh your recollection 19 that Federated Reinsurance Corporation at this 20 point in time had assumed a position with respect 21 to the shares of United Financial Group? 22 A. Yes. 306 1 Q. And it indicates that they had a 2 position of 8.2 percent of the outstanding shares; 3 is that correct? 4 MR. NICKENS: Your Honor, may I ask 5 that the document be offered into evidence? I 6 have no objection to it, but I would prefer that 7 it be in evidence. 8 MR. RINALDI: I don't have a problem 9 with it being offered into evidence. I thought it 10 might be easier at the end of the examination to 11 simply offer all the documents as a group; but if 12 you'd like to do them seriatim, that's fine. 13 THE COURT: All right. Received. 14 Q. (BY MR. RINALDI) As you sit here 15 today, sir, what is your understanding of the 16 purpose of this letter that you submitted to the 17 Office of the Secretariat on behalf of Federated 18 Reinsurance Corporation? 19 A. It made a request that the acquisition 20 of additional shares going above 10 percent not be 21 deemed conclusively to establish that FedRe had 22 the power to direct the management and policies of 307 1 UFG. 2 Q. And in the letter, you're asking that 3 Federated Reinsurance Corporation not be presumed 4 to direct the management and policies of 5 United Financial Group by virtue of its proposal 6 to acquire between 10 and 20 percent of the 7 outstanding shares. Is that fair? 8 A. That's correct. 9 Q. Now, how did you determine that FedRe 10 was interested in obtaining 10 to 20 percent of 11 the outstanding shares of United Financial Group? 12 A. I was so advised by the client. 13 Q. And who would the client have been, 14 sir? 15 A. I don't know who it was. It was 16 somebody connected with the client, but I don't 17 have any specific recollection. 18 Q. And in the letter, you attempt to rebut 19 the presumption that by acquiring in excess of 20 10 percent, FedRe would acquire the power to 21 direct the management and policies of UFG? 22 A. Yes. 308 1 Q. Now, after submitting this letter to 2 the Federal Home Loan Bank Board -- strike that. 3 What was the reason that you believe 4 that the Bank Board should not presume that FedRe 5 would acquire control over UFG if it acquired 6 between 10 and 20 percent of the outstanding 7 shares of UFG? 8 A. Well, the letter states that UFG has a 9 lot of other stockholders and that FedRe's 10 interest is in acquiring its stake for investment 11 in view of the proposed sale by UFG of its savings 12 and loan company, USAT, a goal with which FedRe 13 agreed so that it had no interest at all in making 14 any -- having any influence over these decisions. 15 Q. And the last line or last three lines 16 on the second page of that document, it reads, 17 "FedRe's investing in UFG not with a view towards 18 controlling the management of the savings and loan 19 institution but, rather, with the hopes of 20 benefiting from UFG's intended disposition of 21 United Savings and FedRe has so advised UFG's 22 management." Do you see that? 309 1 A. Yes. 2 Q. And do you recall who provided that 3 information to you? 4 A. No. 5 Q. Would it have been Charles Hurwitz? 6 A. I just don't remember who it would have 7 been. You understand we're talking about 8 something that's 15 years old now, and I really 9 have no recollection. 10 Q. All right. 11 A. And, in fact, without a document like 12 this, no independent recollection at all; and the 13 document is helpful in that respect to bring back 14 some of it but not very much. 15 Q. Now, after you filed this application 16 with the Federal Home Loan Bank Board attempting 17 to rebut the presumption that by acquiring over 18 10 percent of the shares of United Financial 19 Group, that Federated Reinsurance Corporation 20 should not be presumed to acquire the power to 21 direct the management and policies of the insured 22 institution, did you receive a response from the 310 1 Federal Home Loan Bank Board to your inquiry? 2 A. I believe I received a response. 3 Q. Okay. And do you recall what the 4 response was? 5 A. I think that they agreed. 6 Q. Let me show the witness what's been 7 previously marked as Exhibit -- it appears -- 8 well, while the witness is looking -- I mean, 9 while we're looking for the exhibit, perhaps the 10 witness can take a look at what's been marked as 11 B176. As I said, Your Honor, I apologize. We, 12 obviously, are going to have to work on the manner 13 in which we present documents to the witnesses; 14 but I'm certain by day's end, we'll have it sorted 15 out. 16 THE WITNESS: Okay. 17 Q. (BY MR. RINALDI) And this is a letter 18 dated March 30th, 1982; and it's from a 19 James Croft, director, to a Richard Marlin. It is 20 the OTS Exhibit T1003, and I believe it is -- 21 MR. NICKENS: B176. And we have no 22 objections to it, Your Honor. 311 1 Q. (BY MR. RINALDI) And Mr. Marlin, do 2 you recall receiving this letter which has been 3 marked as -- 4 THE COURT: All right. Let's just 5 identify it if there is no objection. The 6 document is received. 7 MR. RINALDI: And for the Court's -- 8 well, for the Court's benefit, this is a similar 9 copy, although this is marked with our 10 identification number which is T1003. 11 Q. (BY MR. RINALDI) Do you recall 12 receiving this letter from the Federal Home Loan 13 Bank Board on behalf of your client and FedRe 14 Reinsurance? 15 A. Yes, I now remember. 16 Q. And is this -- here is the same 17 version. I'm directing your attention to the last 18 full paragraph in the first page. It states, 19 "After review and consideration of this 20 information, the Office of Examination and 21 Supervision has decided that the presumption 22 herein referred to has not been rebutted"? 312 1 A. That's correct. 2 Q. So, does that refresh your recollection 3 that -- 4 A. Yes. In fact, it shows how faulty my 5 recollection was; and, in fact, they did not agree 6 with the request. 7 Q. And it states that their reason for 8 that was that ownership of 10 to 20 percent of 9 these shares would exceed the percentage owned by 10 any other stockholders. If the ownership were 11 20 percent, it would exceed by 300 percent the 12 percentage owned by the next largest stockholder. 13 Do you see that? 14 A. Yes. 15 Q. And then on the next page, it states, 16 "Therefore, we have concluded that FedRe would 17 acquire the power to direct the management and 18 policies of United Financial if between 10 and 19 20 percent of the outstanding stock were acquired 20 by FedRe." Now -- 21 A. It states that, yes. 22 Q. And after receiving this letter, did 313 1 you then make an additional -- at the bottom of 2 the letter, the last paragraph makes reference 3 to -- that if FedRe wished to acquire in excess of 4 10 percent of the stock, they would be required to 5 file prior written notice in accordance with the 6 insurance regulation. And it cites you to a 7 regulatory provision. Do you see that? 8 A. Yes. 9 Q. Now, as a consequence of receiving this 10 letter, did you, on behalf of FedRe, then file a 11 notice of FedRe's intention to acquire more than 12 10 percent or a change of control application as 13 it is sometimes referred to on behalf of FedRe? 14 A. I believe so. 15 Q. And would you take a look at what's 16 been marked as T1004? This is a letter to the 17 Office of the Secretariat dated April the 2nd, 18 1982, and take a moment to look at that. 19 MR. NICKENS: Your Honor, this is our 20 B179; and I have no objection should Mr. Rinaldi 21 want to offer it. 22 THE COURT: All right. I think I'm 314 1 going to allow the attorney who is presenting this 2 to move his own exhibits into the record. 3 MR. RINALDI: Would you prefer that I 4 do them with each exhibit or -- 5 THE COURT: Yes. I think that might 6 be -- 7 MR. RINALDI: Fine. Then I would move 8 into evidence Exhibits 1000 -- T1001 that is the 9 letter dated February 19th, 1982, written by 10 Mr. Marlin to the Federal Home Loan Bank Board and 11 Exhibit T1003 which is the letter dated 12 March the 30th, 1982, to Mr. Marlin from the 13 Federal Home Loan Bank Board. 14 Q. (BY MR. RINALDI) Mr. Marlin, 15 directing your attention to Exhibit T1004, does 16 that appear to be your signature on the last page 17 of the document? 18 A. Yes. 19 Q. Okay. And does this appear to be a 20 submission which you submitted to the Federal Home 21 Loan Bank Board on behalf of FedRe? 22 A. Yes. 315 1 Q. Okay. And I notice in the first full 2 paragraph, it indicates that now several months 3 later after your first submission, FedRe is 4 contemplating increasing its investment in UFG to 5 up to 24.9 percent of the outstanding shares. Do 6 you see that? 7 A. Yes. 8 Q. Do you know what changed in the interim 9 between April -- I mean February and April 1982 10 that caused FedRe to now request permission to 11 obtain up to 24.9 percent? 12 A. No. 13 Q. And once again, you represent, do you 14 not, on page 2 to the Bank Board that FedRe does 15 not otherwise admit or allege that upon the 16 acquisition of additional shares of UFG, it will 17 exercise a controlling influence over the 18 management or policies of such institution; and 19 was that information that you acquired from 20 representatives of FedRe? 21 A. Yes. 22 Q. Now, directing your attention now to 316 1 Exhibit T1005 -- 2 MR. RINALDI: And Your Honor, I would 3 ask that Exhibit T1004 be moved into evidence. 4 THE COURT: Proceed. 5 Q. (BY MR. RINALDI) T1005 is a letter 6 dated six days later with respect to the same 7 change of control application which had been filed 8 on April the 2nd with the Federal Home Loan Bank 9 Board. Do you recognize this document, sir, as 10 being one you prepared? 11 MR. NICKENS: Your Honor, I'm not sure 12 I have this document. Just one second. What's 13 the date? April 6th? 14 MR. RINALDI: It's April the 8th, 1982. 15 MR. NICKENS: Your Honor, might I 16 suggest -- it's five minutes to 12:00. We might 17 take our break and give us an opportunity to try 18 to work out some of these logistical problems. I 19 don't have this document. We'll have to get it 20 out of the room here. We need to get these 21 documents moved in here where we can get better 22 access to them. 317 1 THE COURT: All right. We'll adjourn 2 until 1:30. 3 . 4 (Luncheon recess) 5 6 THE COURT: We will be back on the 7 record. Mr. Rinaldi, you may continue with your 8 examination of the witness. 9 MR. RINALDI: If it please the Court, I 10 have one housekeeping matter to bring up. Because 11 the opening statements ran over, the witness that 12 we had planned this afternoon is unavailable 13 this -- I mean has indicated he cannot stay until 14 tomorrow morning. Therefore, we have tried to 15 rejuggle the -- or to juggle the schedule. What 16 we've determined is that we will take the witness 17 intended tomorrow -- I mean Mr. Ezra Levin 18 tomorrow morning, a partner of Mr. Marlin's. And 19 then we intended to put on Paul Schwartz. 20 Mr. Schwartz is the chief financial officer of 21 MAXXAM, and he is here in Houston. We intend to 22 start him on Wednesday. But he is a very key 318 1 figure in all of this, and it may take longer than 2 a half a day to finish him. On Thursday morning, 3 I have made arrangements for an individual, Carl 4 Madigan, to appear and testify. Mr. Madigan has 5 four children and is divorced, and I made the 6 arrangements several weeks ago that he could come 7 in on Thursday morning. He is flying in on the 8 red-eye. He'll be here at whatever time the Court 9 wants to start, and I have promised him that I 10 will get him on and off so that he can get back to 11 his family or his children in Los Angeles. I 12 suggested to the other side that if we started 13 with Mr. Schwartz on Wednesday and we didn't 14 finish him, that I would like to put on 15 Mr. Madigan who, I think, is a relatively short 16 witness, perhaps an hour or so. And then after 17 Mr. Madigan gets off, to continue with 18 Mr. Schwartz. 19 My understanding is that Mr. Eisenhart 20 takes objection to that. I believe he -- it is 21 his position that once you start with a witness, 22 you cannot break up the testimony. 319 1 On behalf of Mr. Madigan, I would 2 request that the Court allow Mr. Madigan to go on 3 first thing Thursday morning so that he may get 4 back to his family. 5 MR. EISENHART: Your Honor, the 6 difficulty we've had -- been having is perhaps a 7 little broader than what Mr. Rinaldi's been 8 stating. We're having a very difficult time 9 confirming with the OTS what the order and 10 schedule of their witnesses is. And they had 11 indicated to us at one point that they planned to 12 use Mr. Schwartz and perhaps other witnesses who 13 were local as filler, an hour here or an hour 14 there whenever they needed a witness. We have 15 told them that we do object to that procedure; 16 that we feel that once they put a witness on, they 17 ought to carry through with that witness. 18 Mr. Schwartz is the chief financial 19 officer of MAXXAM. He has a lot of commitments. 20 We have tried to adjust to the shifting schedules 21 of OTS in terms of his availability. He is now 22 available tomorrow afternoon. We've confirmed 320 1 that. He is available Thursday morning. He has a 2 board meeting Thursday afternoon. I'm concerned 3 that we may now be getting to the point where he's 4 going to be used as filler again, and I wish to 5 avoid that. I'd actually understood when 6 Mr. Rinaldi talked to me that he had both 7 Mr. Madigan and Mr. DeRamer coming in Thursday 8 morning. I now hear it's only Mr. Madigan that's 9 the problem. I don't know whether Mr. DeRamer is 10 still on for Thursday or not. 11 MR. RINALDI: Mr. DeRamer is coming in, 12 but Mr. DeRamer does not have the same time 13 constraints that Mr. Madigan has. I think that 14 Frank overstates the position I've taken. What I 15 have said to Frank, Your Honor, is that because it 16 is very disruptive to call people in from outside 17 the city and, indeed, from the West or East Coast, 18 I would make every effort to accommodate their 19 travel schedules. And I have said to him that I 20 would expect that the local people would have 21 somewhat more flexibility and that if there was 22 someone coming from out of town that we couldn't 321 1 otherwise accommodate, perhaps we could then try 2 to move local people around. To suggest that I 3 was treating Mr. Schwartz as some kind of filler 4 or cannon fodder, I think, is a slight 5 overstatement. I was expressing to him my desire 6 to try to accommodate witnesses in these 7 proceedings. And in that regard, I will avow to 8 the Court that we will start as early as the Court 9 wants and get Mr. Madigan on as quickly as 10 possible and off on Thursday morning. He has, as 11 I said, planned to leave early in the morning 12 on -- from Los Angeles to be here at 6:00 on the 13 red-eye. 14 THE COURT: How long is his testimony 15 going to be? 16 MR. RINALDI: You know, for 17 direct-examination, I don't think it's going to be 18 more than an hour and a half. I'm not certain 19 what the respondents have in terms of 20 cross-examination. 21 THE COURT: I'm thinking this is 22 Tuesday. Couldn't we defer him till Friday? 322 1 MR. RINALDI: He's not available on 2 Friday. These were -- this was scheduling that 3 was made at least two weeks ago. He was one of 4 the first witnesses to respond; and we told him 5 that in the orderly course of things, we thought 6 that we would be finished with Mr. Schwartz by now 7 because I did not anticipate that opening 8 statements would run almost a day and a half. My 9 expectation was that we would start this morning 10 and probably be all the way through Mr. Schwartz 11 by the afternoon of Wednesday. 12 THE COURT: So, now, your intention is 13 to put Mr. Madigan on on Thursday morning? 14 MR. RINALDI: Well, that's what I'd 15 like to do to accommodate Mr. Madigan. 16 THE COURT: And who is going to be on 17 tomorrow then? 18 MR. RINALDI: Tomorrow, we would have 19 Mr. Levin in the morning; and then in the 20 afternoon, we would start Mr. Schwartz. And in 21 the event that we were unable to finish 22 Mr. Schwartz, then we could complete Mr. Schwartz 323 1 in the late morning after Mr. Madigan was done. 2 MR. EISENHART: That's my concern, Your 3 Honor. They are going to be an hour and a half 4 with Mr. Madigan on direct. I mean, I know 5 something about Mr. Madigan. I don't know that I 6 know everything they propose to cover with him. I 7 would think there might be an hour or more of 8 cross-examination of Mr. Madigan. There's 9 Thursday morning pretty well gone. If 10 Mr. Schwartz has a board meeting Thursday 11 afternoon, you know, I don't know when we finish 12 him up or when we get him back on the stand which 13 is why I think when they put him on, they ought to 14 finish him. 15 THE COURT: Is he available on Friday? 16 MR. EISENHART: I haven't checked 17 Friday, Your Honor. Nobody has ever asked me 18 about him for Friday. 19 THE COURT: I'm trying to accommodate 20 everybody. 21 MR. EISENHART: Sure. I do know that 22 Mr. Lazard who was supposed to be this afternoon, 324 1 who we have just put off, they have now scheduled 2 to bring back on Friday. I just let Mr. Lazard go 3 to the airport and said, "Jack, be back Friday 4 morning." And he's now planning to be back on 5 Friday. 6 I sympathize with them. It's a tough 7 thing to juggle, but I just -- I think there has 8 to be a concern on both sides of this. I'm not 9 unsympathetic to Mr. Madigan's position, but I 10 think they are being somewhat unsympathetic to 11 Mr. Schwartz' position on this. 12 MR. RINALDI: Well, this all started 13 from, as I say, matters beyond my control. I had 14 told Mr. Lazard that he would be available to go 15 on this afternoon. Mr. Lazard indicated to me -- 16 he's a former employee of MAXXAM -- said there was 17 no way he could stay tomorrow. And Mr. Eisenhart 18 came to me and said, "Can we let Mr. Lazard go, 19 and can we bring him back at a later time?" 20 I said, "Fine." And otherwise, what I 21 would have done is put on Mr. Lazard and then put 22 on Mr. Levin. Then -- and then we could have gone 325 1 on to Mr. Madigan and then started Mr. Schwartz 2 without breaking it up. All I can do is say, Your 3 Honor, I'm trying my best. And all I'm asking is 4 that we put Mr. Madigan on at the time I indicated 5 to him and he indicated he's available some 6 several weeks ago. 7 THE COURT: I think we'll have to do 8 that. I will allow Mr. Madigan on Thursday 9 morning. If Mr. Schwartz is available, we'll have 10 to put him on when he is available; and if he's 11 not available tomorrow afternoon, we'll have to 12 arrange if he's available on Friday or whenever. 13 MR. EISENHART: He is available 14 tomorrow afternoon, Your Honor. I just anticipate 15 that we won't finish him. 16 MR. NICKENS: Your Honor, I think, 17 although these things are all subject to -- they 18 are all predictions, Mr. Levin could take the 19 better part of tomorrow. If you're going to take 20 a couple hours, I suspect that we'll take every 21 bit of that. That would leave some open time in 22 the afternoon. 326 1 MR. RINALDI: Tomorrow? 2 MR. NICKENS: Yeah. 3 MR. RINALDI: For Schwartz? 4 MR. NICKENS: Well, I'm asking you if 5 you have an estimate of the amount of time that 6 you might spend with Mr. Levin. 7 MR. RINALDI: Yeah. I mean, I think 8 probably Mr. Levin will -- our direct-examination 9 will probably take at least through the morning. 10 MR. NICKENS: See, I think we'll take 11 the afternoon; so, we may not have this problem. 12 MR. RINALDI: So, we'll just put 13 Madigan on in the morning; and then what do we -- 14 MR. NICKENS: Well, if we take all of 15 tomorrow with Mr. Levin, then you could start on 16 Thursday morning with Mr. Madigan and then 17 reschedule Mr. Schwartz when he is available and 18 when he fits your schedule. 19 MR. RINALDI: Well -- but that leaves 20 Mr. DeRamer, and then we're -- Mr. DeRamer's not 21 going to take -- Mr. DeRamer and Mr. Madigan won't 22 take all day Thursday. Mr. Lazard, I don't think, 327 1 is available to come back then. I guess we can 2 try to fly someone in from the OTS. 3 MR. EISENHART: You've got Kevin 4 Corcoran who's your guy. 5 MR. RINALDI: I understand that, and I 6 would make every effort to fly him in to get him 7 here from the East Coast. 8 MR. NICKENS: I'm not sure we have this 9 problem for tomorrow. 10 THE COURT: Well, I have just indicated 11 that in reference to Mr. Madigan's problems, I 12 will hear him when he's scheduled. 13 MR. RINALDI: And we will, between 14 ourselves, figure out the rest of the schedule 15 without laying it at your feet, Your Honor. I'm 16 sure we can work it out. I, for my part, will 17 commit to bring whatever people I control in at 18 whatever times we can fit them in; and I'm sure 19 counsel will endeavor to do the same, I hope. 20 MR. EISENHART: I certainly will, Your 21 Honor. But I think this probably underscores the 22 importance of both sides making an effort to 328 1 really adhere to what we've agreed to in terms of 2 the 48-hour rule of really kind of planning things 3 that far in advance. 4 5 (Discussion off the record.) 6 7 MR. RINALDI: We're back on the record, 8 Your Honor. 9 THE COURT: Yes. 10 Q. (BY MR. RINALDI) Mr. Marlin, when we 11 broke, I believe we had given you a document 12 No. T105. Do you have that document in front of 13 you? 14 A. Yes. 15 Q. Have you had an opportunity to review 16 that document, sir? 17 A. Yes. 18 Q. Okay. And this is a letter to the 19 commissioner of the Texas Savings and Loan 20 Department, and it appears to be signed at the 21 bottom by you. Is that a document you prepared? 22 A. Yes. 329 1 Q. Okay. And were you directed to prepare 2 this document and send it to the Texas Savings and 3 Loan Department by Mr. Hurwitz? 4 A. Yes, I was. 5 Q. Okay. And does that refresh your 6 recollection as to the person that you dealt with 7 at Federated Reinsurance regarding the change of 8 control application that you were filing on their 9 behalf? 10 A. No. 11 Q. Does it appear from the letter that you 12 spoke to Mr. Hurwitz regarding that subject 13 matter? 14 A. It appears from 1005 that I spoke to 15 him about dealing with Texas -- 16 Q. And does it appear from that document 17 that he instructed you to send the change of 18 control notice which is Exhibit 1000 -- T1004 19 dated April 2nd, 1982, to the Texas Savings and 20 Loan Department? 21 A. Yes. 22 Q. Now, I'm going to hand you a copy of 330 1 what's been marked T1008. Do you recall whether 2 the Texas Savings and Loan Department acted on 3 your -- I'm sorry -- Texas Savings and Loan 4 Department -- the Federal Home Loan Bank Board 5 acted on the change of control application that 6 you filed with -- on behalf of Federated on April 7 the 2nd, 1982? 8 A. Well, looking at T1008, it appears that 9 they did not disapprove the proposed acquisition 10 of the stock. 11 Q. And by that, they meant that FedRe 12 could go ahead and acquire over 10 percent of the 13 outstanding shares of United Financial Group? 14 A. Correct. 15 Q. Now, subsequent to filing the 16 application for change of control with respect to 17 Federated, did you have occasion to amend that 18 application? 19 MR. NICKENS: I would ask that T1008 be 20 put in the record. 21 MR. RINALDI: I beg your pardon, Your 22 Honor. I would ask that T1008 be put into the 331 1 record -- 2 MR. NICKENS: No objection, Your Honor. 3 MR. RINALDI: -- as well as T1005 if 4 that is so moved. 5 THE COURT: Have we received 1004? 6 MR. RINALDI: I would ask that that be 7 moved in if we have not. 8 THE COURT: Received. 9 MR. NICKENS: No objection, Your Honor. 10 Q. (BY MR. RINALDI) Following the 11 approval of the application -- the receipt of 12 T1008 where the Federal Home Loan Bank Board did 13 not intend to disapprove the proposed acquisition 14 by Federated Insurance, did you have occasion to 15 amend the notice of change of control that had 16 been previously filed? 17 A. I believe so, yes. 18 Q. Okay. And do you recall what the 19 nature of that amendment was? 20 A. One amendment was to include MCO. 21 Q. And you say one amendment. Was there 22 more than one amendment? 332 1 A. I don't remember. If you have letters 2 to show me, I'm happy to look at them. 3 Q. Would you take a look at what's been 4 marked as T1010? And I specifically direct your 5 attention to the last full page. Does that appear 6 to be your signature? 7 A. Yes. 8 MR. EISENHART: Your Honor, could we 9 ask Mr. Rinaldi at the time he hands these 10 documents to the witness to give some 11 identification of the document? Because of the 12 differing numbering systems, it's very hard for 13 those of us who don't have copies to figure out 14 what's being talked about or whether there might 15 be any objection. 16 MR. RINALDI: Let the record reflect 17 that I have handed to Mr. Marlin a document dated 18 August the 2nd, 1982, to the Office of the 19 Secretariat of the Federal Home Loan Bank Board 20 signed by Mr. Marlin. It's captioned Federated 21 Development Company's notice pursuant to 22 12 USC1730Q with respect to investment in 333 1 United Financial Group, Inc. 2 Q. (BY MR. RINALDI) Do you recognize 3 that document, sir? 4 A. Yes. 5 Q. And can you describe for the Court what 6 it is? 7 A. It's a letter from me on behalf of 8 Federated Development addressed to Secretariat of 9 the Federal Home Loan Bank Board requesting that 10 the April 2 notice be amended to include Federated 11 Development really in place of FedRe. 12 Q. And do you recall what the reason for 13 substituting Federated for FedRe was? 14 A. The letter says, "Federated has 15 recently decided to sell FedRe, and the purchaser 16 of FedRe is not interested in acquiring certain of 17 the investments of FedRe including the UFG 18 shares." 19 Q. And do you recall whether the 20 application to substitute FedRe -- Federated for 21 FedRe was approved by the Federal Home Loan Bank 22 Board? 334 1 A. Well, I believe it was. 2 Q. Okay. Let me hand you a copy of what's 3 been marked as T1010, and while -- 4 MR. RINALDI: Can we move for admission 5 of T1010? And I'm handing you T1011. 6 THE WITNESS: Which is? Would you read 7 out what it is so they will be able to find it? 8 MR. RINALDI: Yes. And this is a -- I 9 was going to read it. 10 THE COURT: All right. T1010 is 11 received. 12 MR. NICKENS: No objection. And are 13 you offering 1011 as well? 14 MR. RINALDI: Yes. And T1011 is a 15 letter to Mr. Marlin from the Federal Home Loan 16 Bank Board dated August the 13th, 1982. 17 MR. NICKENS: No objection, Your Honor. 18 THE COURT: All right. 19 MR. RINALDI: And I'd offer to move 20 that for admission. 21 Q. (BY MR. RINALDI) Do you recognize 22 this document, sir? 335 1 THE COURT: Received. 2 A. Yes. 3 Q. (BY MR. RINALDI) And does it indicate 4 that the application to substitute Federated in 5 the change of control application had not been 6 disapproved? 7 A. Yes. 8 Q. And I believe it indicates there is an 9 enclosure, but the enclosure is not attached; is 10 that correct, sir? 11 A. Yes. 12 Q. Thank you. Now, I'm handing you a copy 13 of what's been marked as T1013. This is a letter 14 dated September the 28th, 1982, which bears your 15 signature or appears to bear your signature; and 16 it's to the Office of the Secretariat to the 17 Federal Home Loan Bank Board. And this is in 18 reference to MCO Holdings, Inc. Do you recognize 19 this document, sir? 20 A. Yes. 21 Q. Is this the document that you were 22 referring to a moment ago when you indicated that 336 1 you thought you had filed an amendment to the 2 FedRe notice of change of control on behalf of 3 MCO? 4 A. Yes. 5 Q. Now, do you recall why it was you were 6 filing this amendment on behalf of MCO? 7 A. MCO was stating its intention, without 8 having a firm determination to do so, to 9 participate in UFG stock purchases. 10 Q. And it indicates in the letter that by 11 this time, by September 28, 1982, Federated had 12 acquired additional shares of United Financial 13 Group and, in fact, had acquired in excess of 14 10 percent of the outstanding shares; is that 15 correct? 16 A. That is correct. 17 Q. In fact, they had acquired 18 12.03 percent? 19 A. So it says. 20 Q. And in preparing this, to the best of 21 your knowledge, this was a true and accurate 22 representation of their stock ownership at that 337 1 point in time. Is that a fair statement? 2 A. Yes. I would not have made any 3 independent inquiry about this, but I would have 4 relied on what my client told me. 5 Q. Now, on the -- the first page at the 6 bottom, it talks about three of the six trustees 7 of Federated serve on the board of directors of 8 MCO and two of such persons also serve on the 9 board of directors of FedRe: Charles E. Hurwitz, 10 chairman of the board, chief executive officer, 11 and trustee of Federated and chairman of the board 12 and director of FedRe. He's also the chairman, 13 chief executive officer, and director of MCO. Do 14 you see that? 15 A. Yes. 16 Q. Do you know who the other persons were 17 that were being referred to there as being the 18 trustees of Federated who also served on the board 19 of directors of MCO? 20 A. One of them would be Ezra Levin. 21 Q. And the other? 22 A. Might be Mister -- Dr. Kozmetsky, but 338 1 I'm not sure. 2 Q. Okay. 3 MR. NICKENS: Are you going to -- 4 MR. RINALDI: Yes. I'm going to offer 5 this into evidence at this time, but I still have 6 several more questions I'd like to ask. But I 7 will offer it. 8 THE COURT: Received. 9 Q. (BY MR. RINALDI) Now, at the top of 10 the third page, there is a paragraph that makes a 11 representation regarding the board of directors of 12 MCO. And it states that MCO has considered the 13 matter and concluded that UFG stock would be a 14 good investment opportunity for MCO. Do you see 15 that? 16 A. Yes. 17 Q. Okay. How did you learn that 18 information? 19 A. I really don't remember. 20 Q. Would that have come from Mr. Ezra 21 Levin? 22 A. It would have come from somebody acting 339 1 on behalf of the client; and whether that was 2 Ezra Levin or some other person, I don't know. 3 Q. Well, let me ask you this: Mr. Levin 4 occupied offices in the same office that you did 5 in New York City; is that correct? 6 A. Yes. 7 Q. And when he attended board meetings of 8 MCO, would he -- when he returned, would he report 9 to you what had occurred? 10 A. Not typically. 11 Q. If there were some action that had to 12 be taken on behalf of -- on Kramer Levin's part on 13 behalf of MCO, would he advise you of that fact 14 upon his return from board meetings? 15 A. He might, but he would not necessarily. 16 Q. Now, the next full paragraph makes 17 representations regarding a financial arrangement 18 between Federated and MCO to finance the purchase 19 of an indeterminate number of shares of 20 United Financial Group. Do you see that? 21 A. Yes. 22 Q. Do you recall what that makes reference 340 1 to? 2 A. It refers to the fact that Federated 3 has arranged to borrow funds from MCO to finance 4 the purchase of an indeterminate number of 5 additional shares of UFG within the 24.9 percent 6 limitation. 7 Q. Okay. Now, when it talks about the 8 24.9 percent limitation, what was your 9 understanding of the significance of the 10 24.9 percent limitation? 11 A. Well, previously, they had applied for 12 permission to acquire from 10 to 24.9 percent. 13 Q. Okay. And if MCO or Federated had 14 exceeded that 24.9 percent level, was it your 15 understanding that they would have then been 16 treated as a holding company? 17 A. Yes. 18 Q. And so, was it the intention of MCO and 19 Federated to obtain shares up to but not to exceed 20 the 24.9 percent level? 21 A. Well, they had stated their intention 22 to acquire up to 24.9 percent. 341 1 Q. Okay. And they stated that intention 2 to you; is that correct? 3 A. They stated it through me to the Bank 4 Board. 5 Q. And what was your understanding as to 6 why they didn't want to exceed the 24.9 percent 7 level? 8 A. Well, they didn't want to become a 9 holding company, among other things, because there 10 were consequences to that that they weren't 11 prepared to accept. 12 Q. Okay. And what were the consequences 13 that they weren't prepared to accept? 14 A. Well, most importantly was what has 15 been referred to in the courtroom as the net-worth 16 commitment. 17 Q. And you mean by that the obligation to 18 maintain the capital levels of United Savings 19 Association of Texas -- 20 A. Yes. 21 Q. -- at their minimum required level? 22 A. Yes. 342 1 Q. Now, you indicated a moment ago that 2 Federated was going to borrow money, I believe, 3 from MCO to finance the purchase of shares. Do 4 you recall why it was they were purchasing the 5 shares through Federated rather than through MCO? 6 A. Well, what the letter says is, "Pending 7 receipt of your response to this application, 8 Federated has arranged to borrow funds from MCO." 9 It's not clear from that sentence alone whether, 10 if the application made by this letter was 11 approved, that Federated would borrow the funds or 12 whether MCO might participate in buying directly. 13 I'm not sure the answer to the question. 14 Q. Well, it says -- in the last sentence 15 in that paragraph, it says, "If FSLIC objects to 16 the within application, Federated intends to 17 retain the UFG shares for its own account." Does 18 it appear from that that Federated was going to go 19 ahead and purchase the shares irrespective of 20 whether the Bank Board had acted on the 21 application? 22 A. Yes, I would say so. 343 1 Q. Okay. Now, do you recall whether the 2 Bank Board also issued a non-disapproval level? 3 A. I think, yes, it did. 4 Q. Okay. Let me ask you to take a look at 5 what's been marked as -- I'm sorry. Take a look 6 at what's been marked as Exhibit T1014. This is a 7 loan agreement dated October the 1st, 1988, by and 8 between MCO Holdings and Federated Development 9 Corporation. Do you recognize this document, sir? 10 MR. NICKENS: We don't have a copy of 11 the document, Your Honor. 12 A. Well, it is what it purports to be 13 which is a loan agreement between Federated and 14 MCO. I'm not sure I recognize it as such. 15 Doesn't have a signature on it that's mine. 16 Q. (BY MR. RINALDI) Do you recognize the 17 signature on the -- that is there as being that of 18 Charles Hurwitz? 19 A. That looks like Mr. Hurwitz's 20 signature, yes. 21 Q. And he executed the document on behalf 22 of MCO or Federated? 344 1 A. Federated. 2 Q. Does that appear to be the loan -- a 3 loan agreement that -- that's reflected in 4 Exhibit T1013; that is, pending the receipt of 5 this application, Federated has arranged to borrow 6 funds from MCO to finance the purchase of shares? 7 A. Yes. It likely is the loan agreement 8 that was referenced in T1013. 9 MR. RINALDI: Do you have an objection? 10 MR. NICKENS: No objection. 11 MR. RINALDI: I would move, then, for 12 the admission of that document, Your Honor. 13 THE COURT: 1014 will be -- did you 14 move 1014? 15 MR. RINALDI: If I didn't, I would move 16 at this time, sir. 17 MR. NICKENS: No objection. 18 THE COURT: Received. 19 Q. (BY MR. RINALDI) A moment ago, we 20 talked about whether a non-objection letter had 21 been received regarding the change of control 22 application that had been filed on behalf of MCO. 345 1 Would you take a look at that document? And for 2 the record, it's a letter to Richard Marlin dated 3 November the 21st, 1982. It's from James Croft, 4 the director; and it indicates that, "Enclosed is 5 a letter stating that the Federal Savings and Loan 6 Insurance Corporation does not intend to 7 disapprove the proposed acquisition by MCO of 8 control of United Financial Group, Inc." Do you 9 see that? 10 A. Yes. 11 Q. And then attached is a letter that 12 formally communicates that? 13 A. Yes. 14 Q. Do you recall receiving this? 15 A. Candidly, no. 16 Q. Does this appear to be a document that 17 you would have received in response to your 18 earlier application on behalf of MCO? 19 A. Yes. 20 MR. RINALDI: I would ask to move into 21 evidence Exhibit T1026. 22 MR. NICKENS: No objection, Your Honor. 346 1 THE COURT: Received. 2 Q. (BY MR. RINALDI) Now, at the bottom 3 of this document, there is a reference to three 4 individuals: A Josh Glikman, Ezra Levin, and a 5 Jill Martin. Do you see that? 6 A. Yes. 7 Q. Who are those individuals? 8 A. Ezra Levin is the partner in my firm we 9 spoke about. Jill Martin was at that time an 10 associate in the corporate department of the firm. 11 And I think Joshua Glikman also was an associate 12 of the corporate department. 13 Q. Now, was it -- is that your handwriting 14 at the bottom, sir? 15 A. No, it is not. 16 Q. Would it normally have been your 17 practice when you received something like this to 18 provide a copy to Mr. Levin to let him know what 19 was going on? 20 A. I don't believe so, no. 21 Q. Okay. Now, did there come a time after 22 you filed the change of control application on 347 1 behalf of MCO when it was approved by the bank 2 board for it to acquire shares of UFG in excess 3 of 10 percent that you filed a second application 4 with respect to MCO's acquisition of shares of 5 First Financial of Texas? 6 A. Frankly, I don't believe that I did 7 that. 8 Q. You say you don't believe -- 9 A. I don't remember doing that. Let me 10 put it that way. 11 Q. Are you familiar with the entity First 12 Financial of Texas? 13 A. No. 14 Q. Do you recall that there came a point 15 in time when United Financial Group and First 16 Financial of Texas entered into an agreement to 17 merge? 18 A. Well, I heard that referred to a little 19 earlier today. 20 Q. But you have no independent 21 recollection of that at this time? 22 A. That's correct. 348 1 Q. Okay. Would you please take a look at 2 what's been marked as Exhibit T1033? This is a 3 letter dated December 27th, 1982. It's from the 4 Office of the Secretariat -- to the Office of 5 Secretariat and it appears to be signed by 6 Richard Marlin. 7 A. Yes, it appears to be my signature, and 8 it relates to First American Financial of Texas. 9 Q. Now, directing your attention to the 10 last sentence on the first page of that document, 11 it indicates that MCO is contemplating increasing 12 its investment in FAF by acquiring an additional 13 603,448 shares amounting to approximately 14 20.2 percent of the outstanding common stock of 15 FAF? 16 A. Yes. 17 Q. Do you know why -- well, do you know 18 why MCO was acquiring shares of FAF? 19 A. I don't have any independent 20 recollection of that. This document refreshes my 21 recollection to the extent of informing me that I 22 did write for permission for them to make that 349 1 acquisition, but I don't remember the specific 2 purpose for the acquisition. 3 Q. Okay. Now, at the bottom of page 2, it 4 says: October 27th, 1982, FAF and 5 United Financial Group, a savings and loan holding 6 company, entered into a definitive agreement for 7 the merger of FAF and UFG, a merger pursuant to 8 which each outstanding share of FAF common stock 9 would be exchanged for .7 shares of UFG common 10 stock? 11 A. Yes. 12 Q. And then it goes on and says that in 13 the third line on that page, MCO and its parent, 14 Federated Development Company Incorporated, 15 currently own approximately 19 percent in the 16 aggregate of UFG common stock. MCO's aware of the 17 proposed merger and proposing to acquire stock in 18 the expectation that the merger will take place. 19 Now, does that refresh your 20 recollection that MCO intended to acquire the 21 shares so that they could obtain a greater 22 investment in UFG following the merger? 350 1 A. Well, it doesn't say exactly that. It 2 refreshes my recollection, if you will, to the 3 extent of saying that the acquisition of FAF was 4 intended as part of the merger of the two 5 companies. 6 MR. RINALDI: I would move to have this 7 document admitted into evidence, Your Honor. 8 MR. NICKENS: No objection, Your Honor. 9 THE COURT: Entered. 10 Q. (BY MR. RINALDI) The next document is 11 T1035. Do you recognize this document? (Brief 12 pause) It's a letter to MCO Holdings, Inc. from 13 the Federal Home Loan Bank Board dated March the 14 11th, 1983. Does this appear to be a response to 15 the letter dated December 27, 1982, which was the 16 application for change of control or the notice of 17 change of control of First Financial of Texas by 18 MCO? 19 A. It does, yes. 20 Q. And the bank board indicated once again 21 that it did not intend to disapprove a proposed 22 acquisition of control of First Financial of Texas 351 1 by MCO provided the acquisitions are consummated 2 within a year and absent any material changes in 3 circumstances? 4 A. Yes, that's what it says. 5 Q. Do you recall receiving this, sir? 6 A. No, I don't. 7 Q. Okay. Now, after all these 8 applications had been made by MCO and Federated -- 9 MR. NICKENS: May I ask. 10 MR. RINALDI: I move to admit it into 11 evidence, Your Honor. 12 MR. NICKENS: No objection. 13 THE COURT: 1035, received. 14 Q. (BY MR. RINALDI) After all of these 15 applications and notices had been filed of change 16 of control -- and I think we've seen there were 17 four of them. The first one by FedRe and then 18 there was one by Federated and then there was one 19 by MCO and then one by -- all of which were for 20 United Financial Group and then finally there was 21 one by MCO for First -- or for FAF. Did MCO and 22 Federated, to the best of your knowledge, acquire 352 1 a position of shares in United Financial Group? 2 A. Yes. 3 Q. Do you recall how many shares or the -- 4 I mean the percentage of ownership they acquired 5 at that point in time? 6 A. I don't remember how much it was at 7 that point in time. It was in excess of 8 20 percent. 9 Q. But it was less than the 24.9 percent 10 that would have caused them to become a savings 11 and loan holding company? 12 A. That's correct. 13 Q. Okay. Now, did there come a point in 14 time after acquiring those shares when you were 15 asked to prepare an application on behalf of MCO 16 and Federated for them to become a holding 17 company? 18 A. Yes. 19 Q. And what do you recall of that? 20 A. Not very much other than I have looked 21 at the document and I saw that I prepared and 22 submitted it. 353 1 Q. When did you last look at the document, 2 sir? 3 A. Last night. 4 Q. And what were the circumstances under 5 which you were asked to review that document? 6 A. I was sitting with Mr. Nickens -- 7 Q. I see. 8 A. -- and reviewing some of the materials 9 involved in this case. 10 MR. RINALDI: Now, Your Honor, in going 11 through this particular exhibit, I notice that a 12 page somehow was inadvertently left out of the 13 document. 14 MR. NICKENS: Which exhibit? 15 MR. RINALDI: So, my suggestion would 16 be that if there is a -- it's the application, the 17 June 29th, 1983, application which is A8003. It 18 is also OTS document T1042. The document 19 apparently appears in several places -- the 20 document apparently appears in several places in 21 the parties' lists and I have a complete copy here 22 which is T4040, but I would assert to you it 354 1 appears to be the same document that you have, 2 J.C., which is A8003. But to move this along, I 3 would propose that we use T -- I mean T4040. 4 MR. NICKENS: Your Honor, I haven't 5 been able to check page by page. I do note that 6 they have different Bates numbers. But based upon 7 the representation by Mr. Rinaldi that the 8 documents are identical and subject to our ability 9 to review them at a later time, I have no 10 objection. 11 THE COURT: All right. T4040 is 12 received. 13 Q. (BY MR. RINALDI) Now, you've had a 14 moment to look at the document. This is a letter 15 to the Office of Examinations which appears to be 16 under your signature and then attached to it is 17 something called an Application H(e)1. Does this 18 appear to be a document that you prepared on 19 behalf of MCO and Federated? 20 A. Yes, or was prepared under my 21 supervision. 22 Q. And it indicates on the first page that 355 1 by June 29th, 1983, MCO and Federated had jointly 2 obtained 22.3 percent of the outstanding shares of 3 UFG. You see that? 4 A. Well, except for the word "jointly." 5 Q. I'm sorry. 6 A. Yes. 7 Q. It states that MCO and Federated 8 currently own approximately 12.3 and 10 percent 9 respectively? 10 A. Yes. 11 Q. Of the outstanding shares? 12 A. Right. 13 Q. For an aggregate of 22.3 percent of the 14 outstanding shares. And what was the purpose of 15 filing this application, sir? 16 A. I think the purpose was to seek 17 approval by the board of proposed acquisitions of 18 additional shares by MCO in excess of 19 24.9 percent. 20 Q. And it was MCO and Federated's 21 intention then by acquiring more than 25 percent 22 of the outstanding shares of UFG to become a 356 1 savings and loan holding company; is that correct? 2 A. Well, the consequence of that would 3 have been that they would have become a savings 4 and loan holding company. 5 Q. Okay. Now, who did you discuss this 6 application with before filing it? 7 A. A number of the people who were copied 8 on this letter were people with whom I might have 9 had conversations. I have no specific 10 recollection of conversations with any of them and 11 there is a list of half a dozen people, seven 12 people, all of whom were connected with Federated 13 and/or MCO on the last page of the letter. 14 Q. Well? 15 A. One of them is a lawyer not employed by 16 Federated or MCO who was outside bank counsel, 17 Leonard Volin. 18 Q. And who was Howard Bressler, the first 19 name? 20 A. He was general counsel employed by MCO, 21 I believe, at that time. 22 Q. And we know who Mr. Hurwitz is. Whose 357 1 James V. Iaco? 2 A. He was chief financial officer, I 3 believe, of MCO but Mr. Lazard also had that same 4 area of responsibility. I'm not sure which of 5 them had what title. 6 Q. And who was Barry Munitz? 7 A. He was a director of MCO and also an 8 officer. 9 Q. Do you know if he was also a director 10 of Federated or a trustee of Federated? 11 A. I don't remember. 12 Q. And James Paulin, Jr.? 13 A. Was an officer of MCO. I believe 14 Mr. Paulin was an officer of Federated. 15 Q. Now, in the second full paragraph of 16 the document, it says although the exact number of 17 shares to be acquired by MCO during the next 12 18 months has not yet been determined, it's 19 anticipated that assuming that the proposed 20 acquisition is approved and made, MCO will own 21 approximately 25 percent of the outstanding shares 22 and Federated will retain approximately 10 percent 358 1 of the outstanding shares. Do you see that? 2 A. Yes. 3 Q. Was it your understanding that 4 collectively, MCO and Federated were proposing to 5 acquire 35 percent of the outstanding shares of 6 UFG? 7 A. Well, actually, based on what you've 8 read and this says it, sounded to me like MCO was 9 going to acquire the balance and Federated would 10 keep its 10 percent. 11 Q. And together -- 12 A. Together, they would own 35 percent. 13 Q. And because Federated -- was it your 14 understanding that because of the relationship 15 between Federated and MCO, that the shares of 16 Federated and MCO would be aggregated for purposes 17 of determining whether they exceeded the 18 25 percent level? 19 A. Yes. 20 Q. And that was because Federated was the 21 parent of MCO? 22 A. You know, I don't recall how many 359 1 shares Federated had of MCO; so, I'm having a 2 little trouble about agreeing that it was a 3 parent. But the answer to the previous question 4 was yes, that is my understanding. They would be 5 considered together, aggregated. 6 Q. Now, directing your attention to page 7 16 of the H(e)-1 application, it makes reference 8 to -- do you see that? 9 A. Yes. 10 Q. And do you see the chart on page 16 of 11 the application? 12 A. Yes. 13 Q. And it makes reference there to the 14 fact that MCO and Federated are proposing to 15 acquire 35 percent of the shares of UFG. Do you 16 see that? 17 A. Yes. 18 Q. Okay. Now, in the next paragraph down, 19 it talks about a George Kozmetsky and Ronya 20 Kozmetsky. Who's George Kozmetsky? 21 A. He was, among other things, the dean of 22 the Texas Business School and also a director of 360 1 MCO and, I believe, of Federated; and Ronya 2 Kozmetsky was his wife. 3 Q. Okay. And as a result of Mr. Kozmetsky 4 serving as a trustee of Federated and a director 5 of MCO, was it your understanding that any shares 6 of UFG that he owned would be aggregated along 7 with -- 8 A. Well. 9 Q. -- those of Federated and MCO? 10 A. I don't remember what my understanding 11 was. This paragraph says that his shares are 12 included above in the shares owned by the group. 13 Q. Now, turning to the next page, it 14 says -- it makes reference to MCO's acquisition of 15 additional shares in the open market. What was 16 your understanding of where MCO was going to 17 acquire the funds to purchase the additional 18 shares of UFG that it proposed to acquire? 19 A. The second sentence on page 17 says the 20 source of funds for such proposed acquisitions 21 will be the general corporate funds of MCO. 22 Q. And you would have obtained that 361 1 information from one of the individuals that are 2 listed on -- as having received the letter on the 3 third page of this document? 4 A. That's correct. 5 Q. Do you know which of the individuals 6 provided you with that information? 7 A. No, I don't. 8 Q. And you have no recollection as you sit 9 here today of speaking to any of them in 10 particular with reference to this application? 11 A. That's correct. 12 Q. Now, directing your attention to page 13 20 -- I'm sorry. I can't read my own handwriting. 14 Now, directing your attention to page 27, it 15 refers to managerial resources and it starts off 16 by talking about the management of UFG and it 17 indicates who the directors of UFG were at this 18 point in time. Directing your attention to page 19 28, it indicates that Charles Hurwitz was on the 20 board of directors of UFG. Do you see that? 21 A. Yes. 22 Q. Were there any other directors of MCO 362 1 that were also on the board of UFG at this time? 2 A. Well, turning to page 29, it appears 3 that Dr. George Kozmetsky and Dr. Barry Munitz 4 were also directors of UFG and I see no other 5 names among the 15 directors of UFG who would, to 6 my knowledge, also be directors of MCO. 7 Q. Okay. Now, there had been some 8 question earlier about the directors of MCO and 9 whether certain individuals were on the board. On 10 page 32, does it list the directors as of that 11 time of MCO? 12 A. Yes, it does. 13 Q. And it includes Mr. Levin who, of 14 course, is your partner along with George 15 Kozmetsky, Mr. Hurwitz, and Mr. Munitz; is that 16 correct? 17 A. Yes, that's correct. 18 Q. And who is Mr. Leone? 19 A. He was another director of MCO who was 20 the president of MCO at that time. 21 Q. Okay. And Mr. Hegener? 22 A. He was an officer -- he was a director 363 1 and vice chairman of MCO at that time. 2 Q. And Stanley Rosenberg? 3 A. He was a member of an outside law firm 4 and a director of MCO. 5 Q. And of the seven individuals that were 6 directors of management at MCO, four of them were 7 also trustees of Federated; is that correct? 8 A. Is that in this document? 9 Q. I believe if you turn to the next page, 10 it indicates that. 11 A. Trustees of Federated included 12 Mr. Hurwitz, Dr. Kozmetsky, Ezra Levin and 13 Dr. Munitz. So, there were four there. 14 Q. Okay. And if you'll bear with me for a 15 moment, I had -- would you take a look at page 14? 16 We had a discussion earlier about Mr. Hurwitz's 17 ownership of Federated and MCO and I wonder if you 18 could perhaps take a look at pages 14 and 15 and 19 see if that doesn't clarify the -- his own -- the 20 percent of voting shares of Federated which he 21 controlled. 22 A. Well, it does refresh my memory; and it 364 1 shows that taking his common and preferred stock 2 in MCO together, Federated owned approximately 3 54.9 percent of the total voting power of MCO. 4 Q. And then on the next page, it indicates 5 that Mr. Hurwitz owns approximately 53 percent of 6 the shares of beneficial interest-to-dollar stated 7 value in Federated; is that correct? 8 A. Yes. 9 Q. And the Federated MCO are both listed 10 as controlling persons in the document. 11 A. Okay. 12 Q. So, is it fair to say then that 13 Mr. Hurwitz owned a controlling interest or 14 53 percent of Federated and that Federated, in 15 turn, owned 54.9 percent of MCO? 16 A. Yes. 17 MR. EISENHART: Your Honor, I would 18 object to this line of questioning. It's not 19 clear to me whether he's asking the witness 20 whether he knows these facts or whether this is 21 simply what the document indicates. The 22 question's ambiguous. 365 1 MR. RINALDI: Well, I think the 2 individual indicated that he prepared this 3 document and that it would be true and accurate to 4 the best of the information that he has and that 5 he in his professional capacity prepared the 6 document. I suppose if. 7 THE COURT: Well, I don't believe you 8 asked him that. Maybe you should ask him. 9 Q. (BY MR. RINALDI) Sir, when you were 10 asked to prepare this document -- were you asked 11 to prepare this document by MCO and Federated? 12 A. Yes. 13 Q. And did you attempt to ascertain 14 whether the information provided in the document 15 was true and correct? 16 A. The answer to that is yes. 17 Q. And you did that by making appropriate 18 inquiries at MCO and Federated as to the veracity 19 of the information contained in the document? 20 A. Yes, although as you've heard, our firm 21 represented both entities and had been preparing 22 numerous reports for them so that there would be a 366 1 residue of knowledge in the firm collectively 2 about these issues. 3 Q. And those documents you're referring to 4 are likely to have been submissions to the 5 Securities and Exchange Commission? 6 A. Yes, or the preparation of other 7 documents concerning the companies. 8 Q. And you would have felt a high degree 9 of confidence that those documents would have been 10 accurate? 11 A. Yes. 12 THE COURT: In response to the inquiry 13 of Mr. Eisenhart, you're not testifying from 14 independent recollection. 15 THE WITNESS: That's correct. I think 16 I've indicated that my recollection of many of 17 these statistics and events of 14 to 17 years ago 18 is necessarily hazy and that for the most part, 19 the answers I'm giving to him as I've tried to 20 indicate are based upon my reading of the 21 documents he's shown me and accurately reporting 22 or agreeing with him that that's what the document 367 1 states. 2 Q. (BY MR. RINALDI) Now, directing your 3 attention to page 37 of the document, there are 4 representations made on that page regarding the 5 future prospects of MCO, Federated, UFG, USAT, and 6 their subsidiaries. Do you see that? 7 A. Yes. 8 Q. Is the information contained in that 9 paragraph information that would have been 10 provided to you by MCO and Federated? 11 A. Yes, it is. 12 Q. Okay. Now, about halfway down the 13 page, it starts out: MCO and Federated believe 14 that the financial services industry is entering 15 into a period of rapid growth, diversifications, 16 and change, that MCO and Federated's investment in 17 UFG will enable them to participate in an 18 increasingly diversified financial services 19 industry. 20 Do you see that? 21 A. Yes. 22 Q. What was your understanding of what was 368 1 meant by the fact that the -- MCO and Federated's 2 investment in UFG will enable them to participate 3 in an increasingly diversified financial services 4 industry? 5 A. Any answer I gave you now would be one 6 I'm manufacturing today and not based upon a 7 recollection of what I had when this was written. 8 Q. The sentence goes on to state: And 9 that, in turn, UFG and USAT will benefit from MCO 10 and Federated's experience in real estate 11 development and sales as well as MCO and 12 Federated's investment expertise in the financial 13 markets. 14 Was it your understanding that UFG was 15 going to engage in activities that would involve 16 greater participation in the financial markets if 17 MCO and Federated acquired control of UFG? 18 A. Not necessarily. 19 Q. It goes on and says: MCO and Federated 20 also anticipate that they will be able to 21 facilitate access to capital markets on favorable 22 terms when and if UFG and USAT desire or need such 369 1 access. 2 What was your understanding of what was 3 meant by that sentence? 4 A. Well, it's just an elaboration of the 5 thought that's being expressed in the preceding 6 sentence or two sentences. 7 Q. Was it your understanding that MCO and 8 Federated intended to engage in activities that 9 would have required UFG and USAT to have greater 10 access to capital markets? 11 A. No. That's not my understanding at 12 all. I think this is couched always in terms of 13 what USAT itself may want to do, and what this is 14 saying is that MCO and Federated have particular 15 knowledge or expertise that may be of use to USAT. 16 Q. Now, after you filed the H(e)-1 17 application with the Federal Home Loan Bank Board 18 on behalf of MCO and Federated, did the question 19 arise as to whether in connection with this 20 application, MCO and Federated would have to agree 21 to maintain the net worth of USAT? 22 A. Yes, a question arose about that. It 370 1 was discussed from time to time. 2 MR. RINALDI: May I move into evidence, 3 Your Honor -- 4 MR. NICKENS: You already have. 5 MR. RINALDI: Have I? I guess this 6 will be T4040. Directing your attention to T1044. 7 THE COURT: Let me ask you Mr. Rinaldi, 8 do you have an extra copy of your exhibits that I 9 could share with Mr. Langdon. 10 MR. RINALDI: I believe we do have a 11 binder set that's probably -- 12 MR. STEARNS: Yes, we do Your Honor and 13 at the break, if I may, I will pull copies for 14 Mr. Langdon. 15 THE COURT: Thank you. 16 MR. NICKENS: What did you say it was? 17 MR. STEARNS: T1044. This is a letter 18 dated October 13th, 1983, to Jearlene Miller from 19 Federated Development Company, from a 20 Barry A. Munitz. And it indicates that a copy of 21 this letter was sent to Mr. Richard Marlin. Would 22 you take a moment to look at the letter, 371 1 Mr. Marlin? 2 A. Yes, I have done so. 3 Q. Do you recall having received a copy of 4 this letter written by Barry Munitz to 5 Jearlene Miller at or about October 13th, 1983? 6 A. I see that I was copied. I have 7 perhaps a vague recollection of having seen it, 8 yes. 9 Q. Okay. And in the second full paragraph 10 on the first page, it talks about that Ms. Miller 11 had informally indicated to Federated that the 12 acquisition portion of the H(e)-1 application 13 would meet the conditions of Section 584.4G for 14 approval by the supervisory agent but for the 15 condition of Subsections 3 and 4, and then it goes 16 onto describe Sections 3 and 4. Section 3 refers 17 to a limitation on dividends that could be paid by 18 USAT to UFG and then the second section refers to 19 Subsection 4 requiring MCO and Federated ensure 20 that USAT meet the minimum statutory reserve and 21 net-worth requirements applicable to the 22 institutions insured for 20 years or more. 372 1 Do you see that? 2 A. Yes. 3 Q. And is that the condition that you were 4 referring to a moment ago that was a problem with 5 respect to MCO and Federated? 6 A. The Condition 4 is what you referred to 7 or we have heard referred to as the net worth 8 condition. 9 Q. Okay. And on the next page of the 10 letter, it indicates under Section B that -- I'm 11 sorry. At the top of the page, it indicates we do 12 not believe that it would be appropriate at this 13 time to make the representations set forth in 14 548.(g)(4) of the regulations because MCO and 15 Federated will own substantially less than 16 50 percent of the capital stock of the parent 17 company. Do you see that? 18 A. Yes. 19 Q. Was it MCO and Federated's position 20 that they would not maintain -- agree to maintain 21 the net worth of UFG unless and until they had 22 acquired in excess of 50 percent of the 373 1 outstanding shares of UFG? 2 A. That's what this letter is saying with 3 a modification that they would, I believe, use 4 their best efforts to do so if they were below 5 50 percent but would not commit to do so unless 6 they exceeded 50 percent. 7 Q. And to the best of your recollection, 8 was that the position that they continued to take 9 with respect to the imposition of the net-worth 10 condition? 11 A. To the best of my knowledge, they never 12 were willing to agree to a net-worth commitment, 13 whether it was always couched in terms of 14 50 percent or not, I'm not sure. 15 Q. Now, you say they were never willing to 16 agree. Were you party to any negotiations with 17 the Federal Home Loan Bank Board whereby MCO and 18 Federated discussed with the Bank Board 19 alternatives to the net worth condition that's 20 described in Exhibit T1044? 21 A. No. 22 Q. To your knowledge, were such 374 1 discussions going on? 2 A. I understand that those discussions 3 were going on, yes. 4 Q. And do you know who was carrying on 5 those discussions? 6 A. Well, I know Dr. Munitz was 7 participating in the discussions; but I don't know 8 specifically other people who did. 9 Q. Is it fair to say that after you filed 10 the H(e)-1 application, that your participation in 11 the follow-up discussions were limited? 12 A. I believe that's a fair statement. 13 Q. Do you know whether some other legal 14 counsel was participating along with Mr. Munitz in 15 the discussions with the Bank Board regarding the 16 net-worth condition? 17 A. Well, it's my recollection that there 18 was other counsel; and I believe it was 19 Washington-based counsel who were experts in 20 banking matters. 21 Q. And was the reason for that that you 22 didn't consider yourself to have sufficient 375 1 expertise in that particular area? 2 A. Yes. 3 Q. Now, did there come a time when the 4 H(e)-1 application was formally approved? 5 A. Yes. I believe there was such a time. 6 Q. I'll hand you a copy of what's been 7 marked as -- oh -- 8 MR. RINALDI: Could I move the letter 9 which is T1044 into evidence, Your Honor? 10 MR. NICKENS: No objection. 11 THE COURT: Received. 12 Q. (BY MR. RINALDI) I'm handing you a 13 copy of a letter dated December 19th, 1984. It's 14 to Mr. Bressler; and it's from Charles Denson, the 15 supervisory agent. And attached to it is a 16 resolution of the Federal Home Loan Bank Board 17 dated -- 84-712 dated December 6th, 1984. Did 18 there come a time when you learned that the H(e)-1 19 application which you had filed on behalf of 20 Federated and MCO had been approved by the Federal 21 Home Loan Bank Board? 22 A. Yes. I suppose there was, although I 376 1 do not have an independent recollection of when 2 that was. 3 Q. Okay. And do you recognize the 4 resolution which is attached to the letter that's 5 marked as Exhibit 1059? 6 A. I don't have any independent 7 recollection of that aside from having looked at 8 it recently. 9 Q. When you say looked at it recently, 10 under what circumstances did you have occasion? 11 A. I mean preparing to testify or perhaps 12 in -- when you examined me in connection with the 13 pretrial examination that we went through some 14 time ago. 15 MR. NICKENS: Your Honor, there is no 16 indication from the document itself that 17 Mr. Marlin saw it and I don't believe he has any 18 recollection of it, but we don't have any 19 objection to the admission of the document. That 20 might make things a little easier. 21 THE COURT: All right. Are you 22 offering 1059. 377 1 MR. RINALDI: I am, Your Honor. 2 THE COURT: Received. 3 MR. RINALDI: Thank you, Mr. Nickens. 4 I think this will move along the proceeding. 5 Q. (BY MR. RINALDI) Did you also learn 6 that as a condition of approving the H(e)-1 7 application, that the Federal Home Loan Bank Board 8 had imposed a net-worth condition? 9 A. I must say I don't have any independent 10 recollection of that. 11 Q. Now, at or about the time that you 12 filed the net worth application, do you recall 13 having any discussions with Barry Munitz or Paul 14 Schwartz regarding MCO's acquisition of additional 15 shares of UFG prior to the approval of the 16 application? 17 A. I don't have any specific recollection. 18 The application -- the H(e)-1(e)-1 application was 19 filed in June of 1983. 20 Q. And that's been some time, sir, so I 21 understand. 22 A. No. But I mean I just don't have any 378 1 independent recollection of that. The document 2 says that it's their intention to buy additional 3 shares in the open market or otherwise and aside 4 from that, I don't have any recollection of what 5 any discussion might have been or was. 6 Q. Okay. And at that point in time when 7 the application was filed, I believe you testified 8 earlier the application reflected they had 9 24.9 percent or 20 plus -- between 20 and 10 25 percent of the outstanding shares and were not 11 in a position to acquire additional shares of any 12 substantial amount without becoming a holding 13 company? 14 A. That's correct. 15 Q. Exceeding the 25 percent level? Would 16 you take a look at what's been marked as T1041? 17 A. Did you want to offer this? 18 Q. Yes, I would. I think we did. J.C. in 19 his infinite wisdom agreed that we could offer it. 20 A. I see. 21 Q. But thank you for reminding me. 22 A. 1041? Yeah. 379 1 Q. Now, this is an interoffice memo. It's 2 to Barry Munitz and it's from Roni L. Fischer with 3 a CC to Mr. Paul N. Schwartz. Who was 4 Mr. Schwartz? 5 A. He was an officer in the financial 6 office of MCO. 7 Q. And was Mr. Schwartz someone that you 8 would talk to from time to time regarding matters 9 associated with MCO or Federated? 10 A. Yes, he was. 11 Q. And he was with MCO, was he not? 12 A. Yes. 13 Q. Okay. Now, the subject of this 14 memorandum is the structure for future 15 acquisitions of UFG shares. Do you see that? 16 A. Yes. 17 Q. Do you recall any discussions with 18 Mr. Schwartz or with Ms. Fischer regarding the 19 structure for future acquisitions of UFG shares at 20 or about June 29, 1983? 21 A. Well, first, I don't remember 22 Ms. Fischer at all and I do remember from time to 380 1 time talking to Mr. Schwartz, but I couldn't fix 2 timewise when those discussions were. It states 3 there that at Mr. Schwartz' request, I'm 4 forwarding two copies of a structure by which we 5 might acquire additional shares of United 6 Financial Group's stock at some future time; and 7 then it talks about this scenario involves the 8 participation of an outside party referred to as 9 EXCO. Do you understand what he what that means 10 by the reference to the participation of an 11 outside party referred to as EXCO? 12 MR. NICKENS: Your Honor, we do have an 13 objection to this document. This witness is only 14 shown that it's indicated that a copy was sent to 15 him. I believe he's indicated he has no memory of 16 the document and we do have an objection and we'd 17 prefer not to have the document read into the 18 records in light of our objection. 19 THE COURT: Well, I don't know. It's a 20 very short document. It seems to me the witness 21 may not be a responding witness to be questioned 22 about the information it refers to. I believe 381 1 that the question was what does he know about 2 EXCO. 3 Q. (BY MR. RINALDI) Do you know what 4 they are referring to in the document when it 5 talks about participation of an outside party 6 referred to as EXCO? 7 A. No. 8 Q. And you don't have any recollection of 9 having discussed that with Mr. Schwartz? 10 A. No. 11 Q. Now, the next sentence makes reference 12 to your having been provided with an analysis and 13 that you -- and that you feel, quote, relatively 14 comfortable with this concept. Do you know what 15 that makes reference to? 16 A. No. 17 Q. And you have no recollection of 18 discussing an analysis of? 19 A. Well, I will say this: Mr. Schwartz is 20 an exceptionally inventive financial analyst and 21 perhaps on numerous occasions over the years, has 22 developed some analysis or other and sent it to me 382 1 for discussion. But what the reference would be 2 here I have no idea. And incidentally, it was 3 very imaginative and it's not always clear that I 4 could understand or follow what he was saying and; 5 so, that the statement, once or twice removed, 6 that I feel relatively comfortable with the 7 concept amuses me. 8 Q. So, you weren't giving him any kind of 9 legal opinion that this -- 10 A. Most certainly not. Certainly not on 11 the basis of something like this. 12 Q. Now -- 13 THE COURT: Take a short recess. 14 MR. VILLA: Your Honor, we have an 15 issue with respect to documents I'd like to raise 16 perhaps before the recess maybe for two minutes. 17 THE COURT: All right. 18 MR. VILLA: And Mr. Marlin doesn't have 19 to be there. Your Honor, we're having difficulty 20 following the examination. Without getting prior 21 notice of the documents that they are using, we 22 can't anticipate exactly what Mr. Marlin's going 383 1 to be asked about. We don't have -- they are not 2 giving us copies of the documents before the 3 examination, and they are not giving us notice. 4 So, it's impossible for counsel to follow along 5 with the witness. 6 Here's an example. I represent 7 Dr. Munitz and there has been an examination here 8 with respect to a memorandum involving Dr. Munitz. 9 We have one copy of it and we're trying to pass it 10 around among five lawyers. Seems to me that if 11 they know ahead of time well enough to make copies 12 for the witness and for the Court and to pull one 13 for Mr. Langdon, they can give adequate copies for 14 counsel or they can give us copies, tell us ahead 15 of time the day before so we can make copies. But 16 it is impossible for counsel to follow the 17 examination with one piece of paper of these 18 complicated documents being passed around the 19 table. So, I object to this procedure in the 20 future, Your Honor. 21 MR. STEARNS: Your Honor, we had a 22 brief conversation, part of what Mr. Nickens and 384 1 we said were the mechanics of working out 2 documents so they go more smoothly. Prior to 3 Mr. Marlin or as Mr. Marlin took the stand, we 4 gave him a list of documents we would be using 5 with him. We will do that before the next witness 6 takes the stand. We will sit down and cross 7 reference our documents with you so you can 8 identify them by your numbers as we introduce them 9 by our numbers so that you will have copies, 10 before witnesses take the stand, of the documents 11 we intend to use with the witnesses. 12 THE COURT: All right. I expect some 13 such procedure to be followed because you're 14 required to furnish the opposing parties copies of 15 your exhibits. 16 MR. STEARNS: That's been done so, Your 17 Honor. 18 THE COURT: In mass before the hearing? 19 MR. STEARNS: That was done pursuant to 20 your order, yes. 21 MR. VILLA: The problem that we face 22 obviously, Your Honor, is that unless we get 385 1 them -- know exactly which ones they are going to 2 use, if he asks a question of Mr. Marlin, I'd have 3 to say Your Honor, may we adjourn the proceedings 4 for five minutes while we go and pull out copies 5 of the documents and that's going to stop this 6 examination cold. So, we're trying to facilitate 7 the examination as long as we get them ahead of 8 time, we won't object. 9 MR. NICKENS: The construction of the 10 matter, Your Honor, has to do with the timing; 11 that is, how far in advance we can get the 12 exhibits? Mr. Rinaldi has indicated that as far 13 as the examination tomorrow, that he will provide 14 those documents to us this evening. That will we 15 are pulling the documents for Mr. Levin right now; 16 and we'll give counsel the numbers of the 17 documents so they will have them this evening. 18 THE COURT: I expect cooperation in 19 that area. Thank you. 20 21 (A short break was taken 22 from 2:57p.m. to 3:20 p.m.) 386 1 2 THE COURT: Back on the record. Thank 3 you. Mr. Rinaldi, you may continue with your 4 examination of the witness. 5 Q. (BY MR. RINALDI) Mr. Marlin, who is 6 Howard Sobel? 7 A. Howard Sobel is now a partner of 8 Kramer Levin. At that time -- at the times we've 9 been talking about, he was an associate with 10 Kramer Levin. 11 Q. And was he involved in the work that 12 you did with MCO and Federated? 13 A. He was involved in some matters and not 14 in others. 15 Q. And to the extent that he worked on 16 matters for Federated or MCO, did he work under 17 your direction? 18 A. Not always. He might have worked, for 19 example, under Ezra's direction or under the 20 direction of another partner. 21 Q. I'm handing you a copy of a document 22 which is Exhibit T1061. It's a letter dated 387 1 January 17th, 1985, and it's to Paul Schwartz from 2 a Michael Mendelson and it's on E.F. Hutton 3 letterhead and it indicates that a CC was sent to 4 Howard Sobel, Esq. Would that be the Howard Sobel 5 that worked for Kramer Levin? 6 A. Yes. 7 Q. Now, in the document, it describes a 8 revised draft term sheet for a proposed 9 transaction and the transaction relates to the 10 acquisition of 585,000 shares of United Financial 11 Group which it is proposed E.F. Hutton will sell a 12 call to MCO and that MCO will grant and put to 13 E.F. Hutton. Do you recall ever having seen this 14 document, sir? 15 A. No. 16 Q. Do you recall having any discussions 17 with Mr. Sobel regarding a possible transaction 18 involving a put call option between E.F. Hutton 19 and MCO for the acquisition of shares of 20 United Financial Group? 21 A. No, I don't. 22 Q. Do you recall discussing with Paul 388 1 Schwartz such a transaction? 2 A. Would you repeat the question? 3 Q. Did you discuss such a transaction with 4 Paul Schwartz? 5 A. What do you mean by such -- that's the 6 part I'm -- 7 Q. The transaction that is described here, 8 that is the acquisition of 585,000 shares of 9 United Financial Group in the form of a call 10 option between E.F. Hutton and MCO and then a put 11 to E.F. Hutton from MCO. 12 A. I don't recall that, no. 13 Q. Now, it indicates in the document at 14 the top of the page that E.F. Hutton will purchase 15 the shares, that is 585,000 shares, from Drexel 16 Burnham Lambert. Did there come a time when you 17 learned that Drexel Burnham Lambert had a 18 substantial block of shares of United Financial 19 Group? 20 A. Yes. 21 Q. And how did that information come to 22 your attention? 389 1 A. I was asked to do work on an agreement 2 between, I guess, MCO and Drexel Burnham relating 3 to that kind of block of stock. 4 Q. And when you say you were asked to do 5 work on an agreement, do you recall who asked you 6 to do the work on the agreement? 7 A. I don't specifically recall, no. 8 Q. As a result of the request for you to 9 do work on an agreement, did you, in fact, prepare 10 an agreement for MCO? 11 A. Yes. 12 Q. And could you describe for the Court 13 your recollection of that agreement? 14 A. It was a call and put option agreement 15 between Drexel and MCO under which MCO would have 16 the right to buy shares of UFG from Drexel and if 17 that didn't happen, Drexel would have the right to 18 sell them to MCO. 19 Q. Now, was there any particular person or 20 persons at MCO that you dealt with regarding this 21 agreement that you've just described? 22 A. I know that I dealt with Paul Schwartz. 390 1 I may have dealt with Dr. Munitz. I'm not sure. 2 Q. Now, directing your attention to 3 Exhibit T1061 where a similar -- where -- strike 4 that. 5 Directing your attention to 6 Exhibit T1061 which discusses a proposed agreement 7 between E.F. Hutton and MCO for 585,000 shares of 8 Drexel Burnham Lambert, at the top of that 9 document, it indicates that a tell copy of that 10 was sent to Charles Hurwitz. Did you have 11 occasion to discuss this agreement that you have 12 described with Charles Hurwitz? 13 A. I don't remember. 14 Q. Was it unusual for you to communicate 15 with Mr. Hurwitz directly regarding work that you 16 were performing on behalf of MCO? 17 A. Well, I spoke to the subordinates at 18 the company much more often than Mr. Hurwitz. 19 Q. And you have no recollection of 20 discussing this arrangement to purchase shares 21 from Drexel that you've described of discuss that 22 go with Mr. Hurwitz? 391 1 A. Right. 2 Q. Your Honor, the last two exhibits I 3 have not moved into evidence, I think, for the 4 reason that this individual could not recall 5 having ever seen them or received a copy of them. 6 So, at this point, I'm going to proceed on and 7 subject to moving their admission through other 8 subsequent witnesses? 9 THE COURT: All right. That's T1041 10 and 1061. 11 MR. RINALDI: That's correct and 1061. 12 Q. (BY MR. RINALDI) As a result of your 13 conversations with MCO regarding the preparation 14 of an agreement to purchase the Drexel shares with 15 a put call option, did you have occasion then to 16 prepare a draft agreement on such an option? 17 A. Yes. 18 Q. Do you recall who was working on the 19 assignment at that time? 20 A. I believe that I had an associate named 21 Debra Shulevitz who worked on the assignment at 22 that time. 392 1 Q. And? 2 A. That's S-H-U-L-E-V-I-T-Z. 3 Q. And would you take a look at -- I'm 4 handing you a copy of what's marked as T1062. 5 This is a letter dated February 11th, 1985. It's 6 to David Yeres from Debra Shulevitz and attached 7 to it is something called an option agreement, 8 draft, 2/11/85. Would you take a look at that 9 document, sir? 10 A. Yes. 11 Q. Now, do you recognize this? 12 A. Yes. 13 Q. And it indicates on the cover letter 14 that at Richard Marlin's request, Debbie Shulevitz 15 was sending the draft to David Yeres? 16 A. That's correct. 17 Q. Do you recall directing Ms. Shulevitz 18 to send this document to Mr. Yeres? 19 A. I don't specifically recall it, no. 20 Q. Now, would this document have been 21 prepared by yourself or by Ms. Shulevitz? 22 A. Probably, it was a joint either. 393 1 Q. And when you say a joint effort, do you 2 mean she would have prepared the initial draft for 3 your review? 4 A. That's correct, and then I would have 5 edited it and worked on it with her before sending 6 it out. 7 Q. And before it went to Mr. Yeres, you 8 would have reviewed it? 9 A. That's correct. 10 Q. And in terms of the structure of the 11 document and the terms that are contained in 12 there, how would you have obtained the information 13 such as the number of shares that were going to be 14 subject to the option? 15 A. Normally, I would receive instructions 16 on the telephone from our client. 17 Q. Now, on the cover page of this, it 18 indicates that there is a CC to Paul Schwartz? 19 A. That's correct. 20 Q. And you've identified him previously as 21 being an individual who served as an analyst, I 22 believe? 394 1 A. Yes. 2 Q. At MCO? 3 A. Yes. 4 Q. I know that's not his exact title 5 but -- 6 A. Correct. 7 Q. He did financial analyses for -- 8 A. Yes. 9 Q. -- MCO? Did Mr. Schwartz provide you 10 with the information that's contained in here 11 regarding the number of shares? 12 A. I believe he would have provided us 13 with the business terms of the transaction. 14 Q. And when you say "would have provided 15 you with the business terms of the transaction," 16 would it have been Mr. Schwartz that would have 17 advised you of the form that the agreement should 18 take; that is, as a put call option? 19 A. Yes. 20 Q. You didn't devise that form on your 21 own? 22 A. No, I don't believe so. I may have 395 1 discussed it with Mr. Schwartz; but in general, 2 this -- these instructions would have come from 3 him. 4 Q. Now, on the front of this version that 5 we have here, T1062, there is some handwriting. 6 Do you recognize that handwriting? 7 A. No. 8 Q. Now, do you recall whether -- what the 9 exercise period would be for the proposed option 10 agreement? 11 A. Well, I think it's exercisable in July 12 of 1988, '87 or '88. 13 Q. And this was being drafted in February 14 of 1985, so -- 15 A. That's correct. 16 Q. -- it wouldn't have been exercisable 17 for at least -- 18 A. -- two and a half years approximately. 19 The paragraph 1 says during the period commencing 20 August blank '87 and terminating 30 days 21 thereafter and only during that period may the 22 call be exercised. 396 1 Q. And do you recall why it was the call 2 was going to be exercisable two and a half years 3 into the future? 4 A. No. 5 Q. Was there some business purpose that 6 you were aware of? 7 A. No. 8 Q. You don't recall discuss that go with 9 Mr. Schwartz? 10 A. No. 11 Q. And he would have simply instructed you 12 that I want a call option exercisable two and a 13 half years in the future? 14 A. Not necessarily. It's just that I 15 don't recall it. 16 Q. And then as we turn to page three, it 17 indicates that DBLA which I believe is Drexel, 18 Burnham, Lambert, Arbitrage, Inc. would -- DBLA 19 put option. Was it your understanding that if MCO 20 didn't exercise the call option, that Drexel, 21 Burnham, Lambert, Arbitrage would then have an 22 opportunity to put the shares? 397 1 A. Yes. 2 Q. Pursuant to a put option? 3 A. Yes. 4 Q. Okay. So, what does that mean in terms 5 of MCO? 6 A. It means that if MCO didn't ask to buy 7 the stock, that Drexel had the right to put the 8 stock to them. 9 Q. Had -- in your experience as a 10 securities lawyer, had you ever been involved in 11 other similar transactions involving a call option 12 backed up by a put? 13 A. These are transactions that I have 14 worked on. I couldn't tell you exactly when or 15 where. 16 Q. And in your experience as a securities 17 lawyer, what benefit is a structuring a 18 transaction in this form; that is, a call option 19 exercisable in the future backed up by a put? 20 A. There may be any number of reasons for 21 doing something of this kind. 22 Q. Is it fair to say that it puts off the 398 1 date when the person who is entitled to the call 2 option can call the shares? 3 A. Yes. 4 Q. Was that the intent of MCO by entering 5 into this, to put off the date on which it would 6 acquire shares of Drexel Burnham Lambert? 7 A. I don't have any specific recollection 8 of their intention. 9 Q. Now, who was David Yeres? 10 A. He was a lawyer at Cahill Gordon. 11 Q. Am I pronouncing that right? 12 A. I think so. And Cahill Gordon was the 13 firm that principally represented Drexel Burnham. 14 Q. Now, the document has a number of 15 blanks in it. For example, the -- on page 4, it 16 talks about the purchase price to be paid for the 17 common shares by MCO pursuant to the call option 18 shall be. That's left blank. And then on the 19 next page, it also has a blank for the put option. 20 Who is responsible for filling in the blanks for 21 establishing the price? 22 A. I think what this meant to me is that 399 1 the price remained to be negotiated and that when 2 it was negotiated, presumably at around the time 3 the document would be signed, the parties would 4 have an agreement on what the price was. 5 Q. Okay. And the parties in this case 6 were Drexel Burnham and MCO? 7 A. Yes. 8 Q. Now, you were in New York City drafting 9 this document, were you not? 10 A. Yes. 11 Q. And where was Mr. Schwartz whom you 12 were dealing with? 13 A. Probably in Houston. 14 Q. Okay. And Mr. Yeres was also? 15 A. In New York City. 16 Q. And do you know who was doing the 17 negotiating on behalf of Drexel Burnham Lambert? 18 A. There was a lawyer at Drexel Burnham 19 named Kevin Madigan who was involved at one stage 20 or another, but I don't know who was doing the 21 negotiation. I don't know whether it was he or 22 somebody else. 400 1 Q. Does the name Carl DeRamer ring any 2 bells? 3 A. Not really. 4 Q. Do you recall Mr. DeRamer as being an 5 employee of Drexel Burnham Lambert that 6 participated in this transaction? 7 A. I do not. 8 Q. Okay. Now -- 9 MR. RINALDI: Your Honor, I'd like to 10 move T1062 into evidence. Now, after you -- yes? 11 MR. NICKENS: Your Honor, we have no 12 objection to the document. We do have an 13 objection to this writing on the first page of the 14 document. 15 I don't know that the writing has ever 16 been identified and there is no evidence that it 17 was done contemporaneously with the document and 18 not as with many other documents in this case at a 19 later time by other people who were looking at it, 20 analyzing it. So, to the extent of the writing, 21 we do have an objection on the first Bate stamp is 22 a MAXXAM Bate stamp. 401 1 It was produced to us with this writing 2 on it. You know, I don't know how it got on there 3 but that's in an amount equal to and then it says: 4 Blank, the collateral to DBL to be held and used 5 by DBL as hereinafter provided. Do you see that. 6 A. Yes. 7 Q. Did an issue come up at the outset as 8 to how the MCO's payment for the shares would be 9 secured by MCO? 10 A. Well, I don't know that it came up at 11 the outset. There was this proposal that MCO put 12 up cash which, to the best of my knowledge, was 13 not part of the deal as it finally was done and 14 didn't appear in subsequent drafts. There was 15 also a proposal that MCO put up a letter of credit 16 which was, in fact, I think part of the final 17 deal. 18 Q. But at least initially, Mr. Yeres on 19 behalf of Drexel Burnham Lambert was proposing 20 that MCO pay cash and put that up as a form of 21 collateral to assure MCO's ability to comply with 22 the option agreement. Is that fair? 402 1 A. So it seems, yes. 2 Q. Now, there is some handwriting in the 3 margin there. It says "no." Is that your 4 handwriting? 5 A. No. 6 Q. Do you recognize whose it is? 7 A. No. 8 Q. Do you recall discussing this 9 collateral issue with Mr. Schwartz? 10 A. No. 11 MR. RINALDI: Your Honor, I'd like to 12 move T1064 into evidence. 13 MR. NICKENS: No objection. 14 MR. RINALDI: Now, after -- 15 THE COURT: Received. 16 Q. (BY MR. RINALDI) After the two 17 initial drafts that I have shown you; that is, the 18 February 11th and the February 15th, 1985 -- 19 strike that. 20 Were those the first two drafts of the 21 document that you recall that I've just shown you? 22 A. Well, to the best of my knowledge, yes. 403 1 Q. Okay. And after exchanging those 2 drafts, did the parties then proceed to exchange a 3 number of drafts over a period of time? 4 A. Yes. 5 Q. Okay. And I've handed up to you a 6 document marked T1066. Does this appear to be yet 7 another draft of the document sent to you by 8 Mr. Yeres? 9 A. Yes. 10 Q. And directing your attention to? 11 MR. NICKENS: May I ask, Your Honor, 12 the date. 13 MR. RINALDI: I'm sorry. It's dated 14 March 26th, 1985, and the attached draft also 15 indicates what appears to be the same date. 16 Q. (BY MR. RINALDI) And directing your 17 attention to the draft itself -- strike that. 18 Did the form of the transaction; that 19 is, as a call option from Drexel to MCO backed up 20 by a put option from MCO to Drexel, did that basic 21 form ever change? 22 A. Those basic features remained in the 404 1 transaction. 2 Q. So, they were constant throughout? 3 A. Yes. 4 Q. And the final -- did a final agreement 5 ultimately get executed by the parties? 6 A. Yes. 7 Q. And the final agreement incorporated 8 that core idea of a call backed up by a put? 9 A. Yes. 10 Q. Okay. Now, directing your attention to 11 the third page of this exhibit or page 2 of the 12 draft which is dated March 26th, 1985, and looking 13 at paragraph B3I there, it talks about an 14 irrevocable letter of credit from blank, a 15 commercial bank, for the benefit of DBL 16 substantially in the form of "Exhibit blank here" 17 after in the amount of the MCO purchase price. 18 Do you see that? 19 A. Yes. It says "Exhibit blank hereto --" 20 Q. Yes. 21 A. -- in the amount of the MCO purchase 22 price. 405 1 Q. And is this the letter of credit 2 provision that you referred to earlier? 3 A. Yes. 4 Q. Now, whose idea was it to put in this 5 letter of credit provision? 6 A. Well, I don't remember. 7 Q. What was the purpose of the letter of 8 credit as you recall, sir? 9 A. Well, the letter of credit provided 10 assurance to Drexel that if, for any reason, MCO 11 could not pay the purchase price or would not pay 12 the purchase price, that they would have access to 13 funds to pay them in lieu of getting the money 14 from MCO. 15 Q. And so, it would permit them to put the 16 shares and collect the money that was owed them 17 under the purchase? 18 A. It would permit them to collect the 19 money, putting the shares is a different issue. 20 Q. When you say it was a different issue, 21 if they didn't put the shares, were they permitted 22 to collect the money? 406 1 A. Yes. They had to put the shares; that 2 is, they had to offer the shares. 3 Q. Right. 4 A. And if MCO didn't pay, they had the 5 right to collect on the letter of credit. 6 Q. Okay. Now, above that, there is also a 7 provision under B2. Do you see that? 8 A. Yes. 9 Q. And it makes reference to a written 10 opinion of Kramer, Levin, Nessin and Frankel. 11 What was the nature of the written opinion that 12 was being caught from Kramer Levin? 13 A. Well, you'd have to look at the opinion 14 and see specifically what they wanted; but it was 15 an opinion as to various legal issues in 16 connection with the purchase and sale of the 17 stock. 18 Q. And this was a legal opinion for the 19 benefit of Drexel Burnham Lambert? 20 A. Yes. 21 Q. Now, was the opinion directed at the 22 issue of whether MCO, if they acquired -- entered 407 1 into the put call option, would exceed the 2 25 percent level of stock ownership; and thereby 3 be considered a holding company? 4 A. You know, we'd have to have a look at 5 the opinion the way it ultimately worked out in 6 order for me to answer that question accurately. 7 There were many paragraphs, A through H, of the 8 opinion starting presumably with ownership of the 9 shares and authorization of the transaction and so 10 on. So, there would be a lot of things. The -- 11 if you really want me to focus on the opinion, 12 you'll have to give me a copy of it to look at. 13 Q. Okay. Well, we'll get to that then. 14 But the issues that are referenced here are under 15 paragraph 7A; is that correct? 16 A. This is actually in Section 6. 17 Q. 6A. I'm sorry. And 6A appears on page 18 7. Do you see that? 19 A. Yes. 20 Q. And it starts off by saying: Escrowing 21 of the shares -- 22 A. No. I'm sorry. 6A in this document 408 1 says representations and warranties of MCO. MCO 2 is a corporation. 3 Q. I'm sorry. I can't read the writing on 4 the document. It talks about the representations 5 of the warranties of MCO? 6 A. Yes. 7 Q. And would you take a look at that 8 and -- 9 A. Yes. 10 Q. -- see if you can recall, based upon 11 your review of that, what the nature of the 12 opinion was that was being sought? 13 A. Yes. First, is that due organization 14 in existence of MCO? 15 And second is due authorization on the 16 part of MCO, the agreement and corporate power of 17 MCO. 18 The third is that the execution and 19 delivery of the agreement and the consummation of 20 the transactions won't result in any violation of 21 or be in conflict or constitute a default under 22 any term of the Certificate of Incorporation under 409 1 any governmental regulation including, without 2 limitation, Regulations G, T, Y, or U of the 3 Federal Reserve System so on, so on, or any term 4 or agreement or other instrument to which MCO is a 5 party. 6 Four, which says except as heretofore 7 disclosed in writing to Drexel, no authorization 8 consent approval license qualification, et cetera, 9 or registration is required in connection with the 10 execution delivery of performance by MCO of this 11 agreement. 12 Fifth says MCO is not an investment 13 company. 14 The sixth says MCO is not engaged 15 directly or indirectly principally in the business 16 of extending or arranging for the extension of 17 credit. 18 The next says MCO has obtained and made 19 all authorizations licenses permits, consents, 20 registrations declarations of filings in 21 connection with the issuance by DBL of the option 22 necessary to be obtained by MCO including without 410 1 limitation any necessary authorization, license, 2 permit, et cetera, of the Federal Home Loan Bank 3 Board. That's the last one. 4 Q. Okay. So, to get back to my question, 5 the opinion that was being sought here did not go 6 to the issue of whether, if MCO entered into the 7 put call option, whether those option shares would 8 be counted as shares which were shares of MCO and, 9 therefore, would increase MCO's ownership to over 10 25 percent of the outstanding shares of UFG? 11 A. If you say so. 12 Q. Well, my question is: Was that the 13 kind of opinion that you were asked to give, that 14 is as to the regulatory impact of the put call 15 option? 16 A. Look. I think that they were asking 17 for an opinion that MCO has obtained all necessary 18 authorizations that are necessary to get the put 19 call option. They didn't ask me, in your words, 20 whether MCO's ownership of the option is the 21 equivalent of owning the stock. That's not the 22 opinion. 411 1 Q. And MCO had acquired permission to 2 become a holding company had they not? 3 A. Yes. 4 Q. And pursuant to that permission to 5 become a holding company, they were authorized to 6 acquire in excess of 25 percent of the outstanding 7 shares of UFG; is that correct? 8 A. Yes. 9 Q. Now, on page 11, there is a provision 10 entitled "Indemnification." Was that put in at 11 the insistence of Drexel Burnham Lambert? 12 A. Yes. 13 Q. And what was the impact of that 14 indemnification provision? 15 A. Well, the intention, I suppose, was 16 that they would be reimbursed for any expenses 17 they incurred or liabilities they incurred 18 relating to this agreement on the transactions 19 they were engaging in pursuant to the agreement. 20 Q. And it states there that it would hold 21 harmless DBL and its affiliates from and against 22 any and all losses; is that correct? 412 1 A. Yes. 2 Q. So, that it assured DBL that it could 3 not lose money on the transaction. Is that fair? 4 A. Well, it contained MCO's promise to 5 indemnify DBL. 6 Q. Okay. And I suppose if MCO couldn't 7 have been made good on the promise, then DBL could 8 have lost money on the transaction? 9 A. That's correct. 10 Q. And on page 15, there is a provision 11 under "miscellaneous" under C. Ultimately, did 12 MCO agree to pay all the costs and expenses in 13 connection with the negotiation, preparation, 14 typing, reproduction, and execution and delivery 15 of this agreement? 16 A. Well, we're not looking at the executed 17 document and if we look at that, I can tell you; 18 but it would surprise me if this particular clause 19 remains substantially the same way in the final 20 document. 21 Q. Okay. And was this clause put in for 22 the benefit of MCO or for DBL? 413 1 A. DBL. 2 Q. And was it at their insistence? 3 A. Well, they are the ones that drafted 4 this. It was not in my draft. 5 MR. RINALDI: Now, I'd like to move 6 into evidence the T1066 that's the March 26th, 7 1985, draft of the put call option. 8 MR. NICKENS: No objection, Your Honor. 9 THE COURT: Received. 10 Q. (BY MR. RINALDI) I've handed you a 11 copy of a letter dated May 17th, 1985. It's to 12 you from David Yeres and attached to it is a draft 13 letter that Mr. Yeres is proposing to send to the 14 NASD. Do you recall receiving this letter from 15 Mr. Yeres? 16 MR. NICKENS: Your Honor, this is not 17 among -- we were provided with a list of exhibits; 18 and as far as I can tell us, this was not among 19 them. We need to have the number so that we can 20 try to find it. 21 A. MW12. Does that help you? 22 MR. NICKENS: Yes, that will help. 414 1 Thank you very much. 2 A. I do not have a recollection of having 3 seen this letter of 1985, no. 4 Q. (BY MR. RINALDI) Do you recall? 5 THE COURT: Mr. Rinaldi, would you hold 6 it just a minute? 7 MR. RINALDI: I'm sorry. 8 Q. (BY MR. RINALDI) Do you recall that 9 during the negotiations of this option agreement, 10 an issue arose as to whether the option agreement 11 could be entered into without obtaining some 12 approval from the National Association of 13 Securities Dealers? 14 A. Yes. 15 Q. NASD? 16 A. Yes. 17 Q. You recall that? 18 A. Yes. 19 Q. And do you recall what the issue was 20 regarding the NASD? 21 A. It would have to do with the size of 22 the block or the number of shares as to which 415 1 there was an option perhaps. 2 Q. Was it your understanding that under 3 the NASD rules of fair practice, that there was a 4 limit on the number of shares that DBL could 5 option to MCO? 6 A. It's actually not my understanding, was 7 not my understanding, but... 8 Q. Did you ultimately, during the course 9 of this negotiation, come to some understanding? 10 A. Yes, I think that's a fair way to say 11 it. 12 Q. And what understanding did you come to? 13 A. That there was a limit. 14 Q. And beyond that, you had no further 15 understanding as to why there was such a limit? 16 A. Right. 17 Q. Did you have some understanding as to 18 the extent of the limit; that is, in terms of 19 shares? 20 A. Well, what we appear to have settled on 21 was there was a limit of 300,000 shares. 22 Q. And when you say what you appeared to 416 1 settle on, as you sit here today, it's your 2 recollection that the option agreement as finally 3 entered into was for 300,000 shares? 4 A. That's correct. 5 Q. Now, in the letter to the NASD that's 6 attached to Exhibit T1067, it indicates that MCO 7 was contemplating acquiring a block from DBL of 8 585,371 shares of common stock. Do you see that? 9 A. Yes. 10 Q. Did that number change from time to 11 time while you were negotiating the put call 12 option? 13 A. I think there were other numbers used 14 at different times, but this is a number that was 15 present for a long time. 16 Q. And do you recall why the number 17 changed? 18 A. No. 19 Q. Do you recall whether DBL as during the 20 course of the negotiation with MCO was acquiring 21 additional shares of UFG? 22 A. I don't recall. 417 1 Q. Now, you indicated earlier that you had 2 to provide a legal opinion to MCO regarding the 3 transaction. Among other things, did you have to 4 opine that the transaction could be undertaken by 5 MCO under the applicable rules of the Texas 6 Savings and Loan Commission as they applied to 7 thrifts? 8 A. I'd have to take a look at the opinion 9 to refresh my memory. 10 Q. I am handing the witness a copy of a 11 document. It's dated July the 12th, 1985. It's 12 Exhibit T1074. It bears the Bates stamp at the 13 bottom MAXXAM -- or MX007672; and it's MW17 is 14 handwritten in the upper corner. 15 A. May be MW7. 16 MR. RINALDI: Oh, seven? I'm sorry. 17 MR. EISENHART: Your Honor, there is a 18 problem with respect to this document. It may 19 affect several others, but this is the first time 20 it's come up so let me address it if I may. This 21 is one of a group of documents that MAXXAM -- as 22 to which MAXXAM claims the attorney-client 418 1 privilege. These documents were inadvertently 2 produced in a production to the FDIC back 3 actually, I think, before this action was even 4 commenced. During the course of this action, we 5 have continued to maintain our claim of privilege 6 with respect to these documents, although 7 obviously, the OTS has them, has used them during 8 depositions; and we can't prevent them from using 9 them. 10 I believe the position we would take 11 with respect to the documents now is I would have 12 no objection to OTS using this particular document 13 or, indeed, the other documents that fall into 14 this category so long as in doing so, they will 15 not attempt to claim a broader subject matter 16 waiver. We are perfectly willing to wave the 17 privilege with respect to these particular 18 documents and have these particular documents used 19 as long as they don't claim that that's grounds 20 for a broader waiver. 21 If they are willing to make that 22 agreement, then it's fine. He can go ahead and 419 1 use the document. If it's not, then we would have 2 to assert the attorney-client privilege with 3 respect to this document and, as I said, the 4 others in this group. 5 MR. RINALDI: Your Honor, first of all, 6 with respect to the assertion of Mr. Eisenhart 7 that this was inadvertently produced, I think that 8 his assertion -- and it's nothing more than 9 that -- that it was inadvertently produced really 10 doesn't overcome the waiver problem that he has. 11 A ton of documents were turned over to the FDIC 12 during an unrelated proceeding in federal court. 13 Those were made available to us; and to our 14 knowledge, there was never any claim of privilege 15 raised with respect to those documents in the FDIC 16 proceeding. When we subpoenaed the same 17 documents, they claimed that those documents were 18 privileged and withheld something in the order of, 19 I believe, -- I have it written down here 20 coincidentally. I believe they withheld 266 21 documents. I went through their list and 22 identified 71 documents that had been turned over 420 1 to the FDIC on that list. So, they have basically 2 selectively withheld documents on the grounds of 3 privilege. 4 I don't believe that there is any 5 legitimate basis for them to claim privilege now 6 as to this document, and I believe that we have 7 the right, should we choose to do so, to seek the 8 remaining documents as to which they have asserted 9 privilege provided they apply to the same subject 10 matter as this document here. That is, once you 11 wave the privilege as to a particular subject 12 matter, I think we're entitled to all documents. 13 So, I'm not willing to go along with 14 Mr. Eisenhart's assertion that -- 15 MR. EISENHART: Well, I think my 16 response to that would be, Your Honor, we do 17 continue to assert the privilege. We do contend 18 that the production of these documents in the FDIC 19 proceeding was inadvertent. Now, if Mr. Rinaldi 20 wants to challenge that, I suppose what we would 21 have to do is stop this hearing and have Your 22 Honor conduct an evidentiary hearing on, among 421 1 other things, I suppose the circumstances of the 2 production of these documents in the FDIC action. 3 We can bring in, I suppose, the people 4 who were actually involved in the production. I 5 was not. I was not involved in that case. But we 6 could bring those people in. We could hold an 7 evidentiary hearing as to whether the production 8 was or was not inadvertent. 9 At that point, I assume based on what 10 Your Honor heard, you could make a ruling on our 11 assertion of privilege and whether the privilege 12 was waved by the production there. It seems to me 13 it would be a lot easier simply for them to go 14 ahead and use these documents and, as I say, if -- 15 you know, if they are not going to use them as a 16 basis for a subject matter waiver -- and let me 17 say, Your Honor, the notion of trying a subject 18 matter waiver now on September 23 is a little 19 daunting, too. They have never moved over the 20 course of this proceeding -- even though we have 21 consistently told them that we maintained the 22 privilege for these documents, they have never 422 1 moved to raise the issue. 2 I suppose if we were to hold this 3 hearing, if Your Honor were to hold -- to rule 4 that the waiver or the production was not 5 inadvertent and we, therefore, have waved the 6 privilege, we would not only be talking about 7 these documents but I suppose every other 8 assertion of privilege we've made in this case. I 9 think, quite frankly, we would be calling a halt 10 to these proceedings for some period of time while 11 we went back and tried to resolve this issue. 12 MR. RINALDI: I think maybe we were at 13 cross purposes here, Your Honor. I don't have any 14 problem with his suggestion provided that, in no 15 way, waves my right to later claim that the 16 withholding of the remainder of the documents may 17 not be challenged. All I'm suggesting is that 18 by -- 19 THE COURT: I didn't quite understand 20 that statement. Are you suggesting that your 21 claim for the other documents cannot be 22 challenged? Is that what you said? Did I 423 1 misunderstand? 2 MR. RINALDI: They have withheld a ton 3 of documents and -- 4 THE COURT: And you haven't moved -- 5 MR. RINALDI: That's correct. And all 6 I'm saying is that by using this document in this 7 proceeding, I am not consenting to waving my right 8 to assert an entitlement to those other documents. 9 That's the only point I'm making. And by them 10 allowing the document to be used in this 11 proceeding, I am not -- they are not then waving 12 the subject matter objection or the objection to 13 other documents of a similar subject matter. 14 THE COURT: All right. The use of this 15 document here, you're not saying the respondents 16 are waving their claim to the other. 17 MR. RINALDI: That's correct, nor am I 18 waving my right to claim that I have an 19 entitlement to them. That's all. So, the parties 20 are exactly where they are now. 21 THE COURT: But you would like to 22 establish your claim on some other base than these 424 1 documents. 2 MR. RINALDI: Yes. On some other basis 3 than their having allowed it to have been used in 4 this proceeding. 5 THE COURT: All right. 6 MR. RINALDI: I don't think we have an 7 issue. 8 THE COURT: I don't believe we do 9 either. 10 MR. EISENHART: Thank you, Your Honor. 11 Q. (BY MR. RINALDI) Have you had a 12 chance to look at the document, Mr. Marlin? 13 A. Yes. 14 Q. Okay. And before you go any further, I 15 need to move the last document into evidence. 16 MR. RINALDI: I believe it's document 17 number T1067 and -- 18 THE COURT: That's a letter dated 19 May 17. 20 MR. NICKENS: Your Honor, I have no 21 objection to the document. I do note for the 22 record that the document appears to be incomplete 425 1 in that it references a set of revised -- a 2 revised set of draft documents as well as this 3 letter and the Bates numbers as at least as 4 originally produced have a large gap. And I take 5 it that what has occurred is that someone has 6 taken out this revised set of draft documents; but 7 with that note, I have no objection to it. 8 MR. EISENHART: Your Honor, there is 9 one further issue, let me raise, with respect to 10 these documents. 11 THE COURT: Could we -- does that 12 pertain to 1067? 13 MR. RINALDI: To 1067. Allow me to 14 say, Your Honor, they produced the documents and 15 in producing the documents, they produced large 16 gaps because what they did was they Bate stamped 17 everything and then took out everything that was 18 privileged. And to the extent that there is a 19 privileged document between document 0MX21359 and 20 OMX21398, it's gone. 21 MR. NICKENS: Your Honor, I'm merely 22 noting that fact for the record. 426 1 THE COURT: All right. I'll receive 2 that document, 1067. Does Mr. Eisenhart's comment 3 refer to 1067? 4 MR. EISENHART: It does, Your Honor. 5 I'm sorry, Your Honor. It's 1074. 6 THE COURT: That's what I thought. 7 MR. EISENHART: That's the one I was 8 talking about a moment ago. Excuse me. Your 9 Honor, the one additional concern we have about 10 these documents is these raised in our view a 11 somewhat higher level of sensitivity with respect 12 to disclosure to third parties than do most of the 13 other documents that are being offered in evidence 14 in this case. May we move to have these 15 documents -- as to which we have asserted 16 privilege but are going to be used here -- 17 restricted in access to third parties, i.e., not 18 to be used outside of this case? 19 MR. RINALDI: I don't know why that 20 makes any sense. These are documents that you've 21 turned over in the course of discovery, and they 22 were not pursuant to any kind of protective order. 427 1 And now, they want to impose some kind of postlock 2 limitation on their disclosure. 3 MR. EISENHART: Well, the concern is 4 that, of course, we have a waiver issue here that 5 I think we've resolved for purposes of this 6 proceeding. If these documents are then shared by 7 OTS with someone else -- as I alluded yesterday, 8 we do have some concerns about material from this 9 and other litigations that seems to have found its 10 way to others who have issues with MAXXAM -- we 11 don't want the existence of these documents and 12 their use in this case to be claimed in some other 13 proceeding to be a waiver. We'd, kind of, like it 14 to stop here if we could. 15 THE COURT: Well, I have a question. 16 We only have one document. You're referring to 17 documents. So, I don't know what other documents. 18 MR. RINALDI: Your Honor, there are 19 three more at the end of my examination that I 20 intend to show to Mr. Marlin that I think is the 21 subject of his further comments. 22 THE COURT: Well, I would like a 428 1 recommendation from the OTS that they are not 2 going to use these for any other purposes than 3 this proceeding. 4 MR. RINALDI: Well, that would be the 5 only purpose we would use them for is this 6 proceeding. However, as you know, we are 7 statutorily bound under certain circumstances to 8 turn over documents obtained in investigations to 9 other government agencies and so forth. So, I 10 take it that to the extent that we're talking 11 about those kinds of disseminations that we would 12 in no way be limited. 13 THE COURT: If you're required by law 14 to turn them over to some other -- 15 MR. STEARNS: To make it clear, Your 16 Honor that, if they are subpoenaed, if we are 17 required by law to produce them and, of course, 18 they are becoming part of the record of this 19 proceeding which is public record at some point, 20 I'm not sure if subject to that, that's what 21 you're asking, Mr. Eisenhart. 22 MR. EISENHART: Well, I would like 429 1 them -- to the extent that they are part of the 2 record in this case -- to be sealed and that their 3 use be restricted to this case. 4 MR. STEARNS: Your Honor -- 5 MR. RINALDI: Well, he's only talking 6 about the use of the documents insofar as they are 7 part of this proceeding. Insofar as they are 8 subpoenaed from us, I don't think it would cover 9 that. 10 MR. STEARNS: All right. Make this 11 representation and perhaps this will end it, Your 12 Honor. With the understanding that to the extent 13 we are required to produce them by law pursuant to 14 valid subpoena and to the extent that they are 15 part of this public proceeding, we would agree 16 with what Mr. Eisenhart said but there may be 17 circumstances with which we would be required to 18 produce them. 19 THE COURT: Well, I guess the issue is 20 whether or not they should be put -- go through 21 some procedure for sealing them so that if some 22 member of the -- I don't know, who would want to 430 1 look at them, then they could look at them as part 2 of the public record. 3 MR. STEARNS: My suggestion would be 4 that if any request comes to the OTS for such 5 documents, we inform Mr. Eisenhart and he then may 6 assert whatever objection he has in a proper form. 7 But I don't think it's warranted in this public 8 proceeding to put these documents under seal and 9 refuse to allow any member of the public, if they 10 have a right otherwise, to see such documents. 11 MR. EISENHART: We're trying to assert 12 the protection of documents that, frankly, we 13 don't think should have been part of the 14 proceeding anyhow; and yet, at the same time 15 accommodate the fact that they are -- they want to 16 use them here. 17 The privilege issue has never been 18 determined -- or I said waiver of privilege issue 19 has never been determined, and we don't want to 20 interrupt this proceeding to determine it. But we 21 would like simply some assurance that the privacy 22 of these materials will be maintained. I think 431 1 that would entail using them under seal here and 2 at least their assurance that they will notify me 3 if anyone attempts to get them through any other 4 process. 5 THE COURT: Well, I think that's about 6 as far as I'm willing to go. The representation's 7 very cumbersome with documents under seal and 8 unnecessarily in most cases. I don't think 9 anybody's going to go looking for these documents. 10 Maybe it's piqued some curiosities in the 11 courtroom; but otherwise, I doubt very much -- 12 MR. EISENHART: If I've done that, it's 13 surely inadvertent, Your Honor, because I've seen 14 these documents and curiosity should be unfounded. 15 THE COURT: All right. 16 MR. EISENHART: Thank you. 17 Q. (BY MR. RINALDI) Well, with that, 18 Mr. Marlin, have you had an opportunity to look at 19 what's been marked as T1074? 20 A. Yes. 21 Q. And in the second paragraph, it says in 22 your letter to Mr. Munitz, you may recall that the 432 1 change of control provisions of the Texas savings 2 and loan department rules present a problem which 3 must be resolved before we could acquire those UFG 4 shares. Do you recall what the problem was with 5 the Texas savings and loan department rules that 6 you were alluding to in the letter? 7 A. Yes. 8 Q. And what was that? 9 A. Those rules required a notification to 10 be given before a party could enter into an 11 agreement to acquire securities that would effect 12 the change in control, and securities were defined 13 to include options to acquire of the securities. 14 Q. And so, if MCO entered into an option 15 agreement with Drexel, was it your concern that 16 the option shares would be counted as shares that 17 were shares of MCO? 18 A. No. 19 Q. What was your concern? 20 A. My concern was that a notification had 21 to be given to the Texas commission before we 22 could give the opinion. 433 1 Q. And as a consequence of this concern 2 which you raised, what ultimately did you do? 3 A. I believe we filed this notification. 4 Q. And was a notification filed before or 5 after you entered into the option arrangement? 6 A. I don't remember. 7 Q. Now, directing your attention to -- I 8 have a letter here dated August 20th, 1985, which 9 appears to be yet another draft of the put call 10 option that we've been discussing here today. 11 It's number T1078. 12 MR. RINALDI: While I'm at it, let me 13 move into evidence the last document which is 14 T1074. 15 Q. (BY MR. RINALDI) Now, do you recognize 16 T1078, sir? 17 MR. NICKENS: Subject to our earlier 18 discussion, Your Honor, with regard to the 19 treatment of this document, we have no objection. 20 THE COURT: All right. As I 21 understand, we have agreed that OTS will not make 22 this available to anyone else outside the 434 1 proceeding unless pursuant to legal requirements 2 such as subpoena and that if they have a request 3 from a member of the public, they will notify the 4 respondents, subject to those conditions, the 5 document is received. 6 Q. (BY MR. RINALDI) Okay. Now, 7 directing your attention to T1078, this is a draft 8 from Debra Shulevitz to David Yeres and it 9 indicates a CC to Richard Marlin. Do you 10 remember -- does this appear to be a document 11 which you supervised the creation of? 12 A. No. 13 Q. Does this appear to be a document that 14 was prepared by Kramer Levin? 15 A. No. 16 Q. I'm sorry. I've become confused. The 17 attached document or the draft is dated 8/9/85? 18 A. Yes. 19 Q. And does it appear that it was prepared 20 by Mr. Yeres at the Cahill Gordon Reindel firm? 21 A. Yes. 22 Q. And Ms. Shulevitz, I take it, is 435 1 sending the draft back to Mr. Yeres with comments 2 subject it? 3 A. That's what it appears to me. 4 Q. Okay. And the comments that were sent 5 back would have been ones that were put on by MCO. 6 Is that fair? 7 A. By MCO's counsel, yes. 8 Q. Okay. Now, on the first full page, it 9 indicates a circle around the No. 585371 and 10 that's the number of shares I think you stated 11 earlier which had been discussed as being the 12 subject of the option early on. Is that fair? 13 A. Yes. 14 Q. And in the margin, it says this number 15 will change. Do you know what that refers to, the 16 handwriting in the margin? 17 A. Well, it's an expression by somebody of 18 a belief that the number will change. 19 Q. And the number being the amount of 20 shares which MCO is going to option -- 21 A. That's correct. 22 Q. -- from Drexel. Do you know who's 436 1 handwriting that is? 2 A. No. 3 Q. It's not Ms. Shulevitz's? 4 A. It may be; but it ain't mine. 5 Q. Okay. Was it your understanding at 6 this point in time that the number would change? 7 A. I must tell you, I have no recollection 8 of my understanding at that time. 9 Q. And you don't recall having any 10 discussions with Mr. Schwartz? 11 A. On this subject at this time, no. 12 Q. Do you remember having a discussion 13 with Mr. Schwartz on this subject at any time 14 during the negotiations? 15 A. Not with Mr. Schwartz; but I remember, 16 as I testified previously, learning about the 17 Drexel problem and learning that the number was a 18 problem for Drexel. 19 Q. And so, when it said this number will 20 change, it's your interpretation that what's meant 21 by that, that Drexel couldn't option that number 22 of shares to MCO? 437 1 A. Well, I'm suggesting in response to 2 your series of questions that you're guessing; and 3 if I agreed with you, I'd be guessing, too. I 4 just don't know. 5 Q. Okay. Fine. The last thing we want 6 you to do is to guess. And I'm sure your counsel 7 told you that, too. I'd like to move Exhibit 1078 8 into evidence, Your Honor? 9 MR. NICKENS: No objection, Your Honor. 10 THE COURT: Received. 11 Q. (BY MR. RINALDI) I'm handing you a 12 copy of what appears to be another draft of the 13 option agreement. This one's dated 14 September 26th, 1985 and it's Exhibit T1080. And 15 do you recall receiving a copy of this from 16 Ms. Shulevitz during the course of the preparation 17 of the put call option? 18 A. Well, unfortunately, I do not recall 19 receiving it from Ms. Shulevitz. It is quite 20 likely I saw it. 21 Q. Okay. And if Ms. Shulevitz had 22 received something from Mr. Yeres that had any 438 1 changes on it, would she normally have presented 2 that to you -- 3 A. Yes. 4 Q. -- for your review? And if -- 5 directing your attention to the last three or four 6 pages of the document, there appears to be a draft 7 opinion dated 9/25/85. 8 A. Yes. 9 Q. Okay. And is this the opinion that 10 Kramer Levin was contemplating giving in 11 connection with the entry into the option 12 arrangement? 13 A. It certainly is the opinion that they 14 were asking us to give at this stage, and it may 15 very well be very close to what we wound up 16 giving. 17 Q. And ultimately, do you recall -- you 18 did give an opinion in connection with this? 19 A. Yes. 20 Q. Okay. Now, let me show you what's been 21 marked as T1088? 22 MR. NICKENS: You want to offer 1080. 439 1 MR. RINALDI: Yes. I'd like to offer 2 1080 into evidence, Your Honor. 3 MR. NICKENS: No objection. 4 THE COURT: Received. 5 Q. (BY MR. RINALDI) This is a fax which 6 appears to have been transmitted to you on 7 December 20th, 1985. It comes from an individual 8 named Jon Mark at the Cahill Gordon law firm. Do 9 you recall who Mr. Mark was? 10 A. No. 11 Q. Now, attached to the fax transmission 12 on T1088 is a three-page letter from Mr. Mark to a 13 Mr. Canada at the National Association of Security 14 Dealers, NASDAQ, and do you recall having received 15 a copy of this letter from Mr. Mark to Mr. Canada 16 at or about the time the option agreement was 17 being negotiated? 18 A. I do not recall it, no. 19 Q. Now, directing your attention to the 20 fifth line down, Mr. Mark states that he's seeking 21 approval for a proposed option transaction between 22 DBL and an NASD member -- an NASD member, and MCO 440 1 Holdings, Inc., involving a block of 790,459 2 shares of common stock. Do you see that? 3 A. Yes. 4 Q. Do you know how the number of shares 5 went from 585,000 as reflected in the August 20th, 6 1985, draft to 790,459 shares? 7 A. I do not. 8 Q. Did you have any discussions with 9 anyone at MCO that the number of shares that were 10 contemplated under the option were going to 11 increase to the level indicated in the Mark 12 letter? 13 A. Not that I recall. 14 Q. Now, in the letter, at the bottom of 15 the second page and going over to the top of the 16 third page, it describes a regulatory issue. It 17 says as a result of recent adoptive regulations of 18 the Federal Home Loan Bank Board, (published in 19 the federal register on November 26, 1985) 20 applicable to UFG as a savings and loan holding 21 company, the parties wish to be able to close this 22 transaction no later than December 26th, 1985. Do 441 1 you recall why it was important to close the 2 transaction prior to December 26th, 1985? 3 A. Well, I'm reading from page 3 which 4 says that acquisitions -- that there has been a 5 change in the regulations which will be effective 6 after December 26 and that transactions that are 7 closed before December 26 will not be governed by 8 the new regulations. 9 Q. And under the new regulations, it 10 states such regulations that require entities 11 additional securities which may be deemed to be 12 voting stock as defined in the regulations of a 13 savings and loan holding company so as to acquire 14 control as defined in the regulations of the 15 savings and loan holding company to seek prior 16 approval of the Federal Home Loan Bank Board for 17 such acquisitions? 18 A. Yes. 19 Q. Was it your understanding that if the 20 transaction was completed prior to December 26, 21 1985, that MCO would not have to seek the approval 22 of the Federal Home Loan Bank Board for this 442 1 transaction? 2 A. Well, first of all, this is not my 3 letter. It's Mr. Mark's letter. Frankly, I don't 4 remember at this date sitting here enough about it 5 to agree or disagree with what you've just said. 6 Those regulations, I suppose, speak for 7 themselves; and it was clearly the intention of 8 the deal at that point and the understanding of 9 the people doing the deal that closing before 10 December 26th would not subject the entity to make 11 that filing. 12 Q. And did you have occasion to discuss 13 with either Mr. Schwartz or anyone else at Drexel 14 Burnham Lambert -- I'm sorry. Strike that. 15 At MCO their views as to whether it 16 would be desirable to seek the prior approval of 17 the Federal Home Loan Bank Board for the option 18 agreement? 19 A. I don't remember any of those -- any 20 such discussions. 21 Q. Now, do you recall that there was a 22 great effort around this time to try to get the 443 1 transaction done prior to December 26? 2 A. Frankly, that's Christmas week. 3 Q. Yes. 4 A. I'm sure it was very difficult to get 5 it done around that time. Aside from that, I have 6 no special recollection. 7 Q. Do you recall that the parties were 8 working on the day before Christmas up to 9 Christmas Eve? 10 A. Yes. I've seen correspondence that 11 indicates that. 12 Q. And so, they worked all the way up to 13 Christmas Eve to attempt to get this done prior to 14 December 25th. Is that fair? 15 A. Yes. 16 Q. And by doing it before December 25th, 17 they avoided having to subject the option to the 18 new regulations which took effect on the 26th? 19 A. It appears so. 20 Q. Now, the next paragraph talks about 21 doing the transaction in essentially two 22 traunches? 444 1 A. That is in Mr. Mark's letter? 2 Q. Yes. And "traunch" is perhaps my word. 3 A. What page are you referring to? 4 Q. I'm talking about the last paragraph. 5 Do you see that? 6 A. On page 3? 7 Q. That is correct. 8 A. Yes. Okay. 9 Q. And it talks about as we discussed, in 10 the event approval is not obtained in the time 11 frame requested, the parties would intend to close 12 a portion of the transaction relating to 490,459 13 shares subject to being rescinded in the event the 14 NASD approval is not obtained within 90 days. Do 15 you see that? 16 A. Yes. 17 Q. Was it your understanding that because 18 of the NASD limitations, they were going to go 19 ahead and do the transaction for 300,000 shares 20 and then a second transaction for 490,459 shares 21 which would be subject to being rescinded in the 22 event the NASD didn't approve the second half of 445 1 the transaction? 2 A. Well, I don't remember, frankly, 3 this -- what is discussed in this sentence. 4 Q. Okay. Do you recall that, in fact, a 5 portion of the transaction was rescinded? 6 A. No. 7 Q. As a consequence of the NASD not 8 approving? 9 A. I do not remember that. I remember the 10 transaction was done for 300,000. 11 Q. Okay. And on the December 20th letter, 12 it makes reference to doing it for 790459 shares? 13 A. Yes. I just don't know -- I don't have 14 a recollection. 15 Q. Fine. 16 MR. RINALDI: Your Honor, I'd like to 17 move T1088 into evidence. 18 MR. NICKENS: No objection. 19 THE COURT: Received. 20 Q. (BY MR. RINALDI) I'm handing you a 21 copy of what's been marked as T1090. It's a 22 letter to you from, again, Jon Mark and it's also 446 1 dated December 20th, 1985, and it's in reference 2 to the completion of this transaction. Would you 3 take a moment to review the letter, sir? Now, do 4 you recall receiving this letter from Mr. Mark? 5 A. No. 6 Q. Does the first full pair -- do you have 7 any reason to believe that you didn't receive any 8 indication? 9 A. No, I certainly don't. 10 Q. And if indicates -- 11 MR. NICKENS: Your Honor, I apologize; 12 but we can't seem to locate the document. 13 A. My document is called MW11. 14 MR. RINALDI: It's December 20th, 1985. 15 THE COURT: We'll be off the record for 16 a moment. 17 . 18 (Discussion held off the record.) 19 . 20 THE COURT: Back on the record. 21 MR. RINALDI: Thank you, Your Honor. 22 THE COURT: Mr. Rinaldi, how much 447 1 longer do you have with this witness? 2 MR. RINALDI: I think we're coming down 3 to the end here. What time do you like to break 4 for the day, Your Honor? 5 THE COURT: Well, I would adjourn now; 6 but if we can finish by about 5:00, we'll stay. 7 MR. RINALDI: I will certainly try my 8 best, Your Honor. 9 MR. NICKENS: Your Honor, I can see 10 that he's not going to finish in five minutes; 11 but -- 12 MR. RINALDI: If that's the case 13 then -- 14 MR. NICKENS: -- we have some questions 15 also. 16 MR. RINALDI: If that's the case, then 17 it probably makes sense that we just adjourn for 18 the day, Your Honor. 19 THE COURT: All right. We'll adjourn 20 until 9:00 o'clock. 21 (Whereupon at 4:36 p.m. 22 the proceedings were recessed.) 448 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 23rd day of 17 September, 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 22 449 1 STATE OF TEXAS COUNTY OF HARRIS 2 REPORTER'S CERTIFICATION 3 TO THE TRIAL PROCEEDINGS 4 I, Erica Davis, 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 23rd day of 17 September, 1997. 18 _____________________________ ERICA DAVIS, CSR 19 Certified Shorthand Reporter In and for the State of Texas 20 Certification No. 6479 Expiration Date: 12-31-98 21 22