450 1 97-1333 sf/sh 2 OFFICE OF THRIFT SUPERVISION DEPARTMENT OF THE TREASURY 3 NO. AP 95-40 4 In the Matter of: ) 5 ) UNITED SAVINGS ASSOCIATION OF TEXAS, ) 6 Houston, Texas; and ) ) 7 UNITED FINANCIAL GROUP, INC., ) Houston, Texas, a Savings and ) 8 Loan Holding Company ) --------------------------------------------) 9 MAXXAM, INC., Houston, Texas, a ) Diversified Savings and Loan ) 10 Holding Company ) ) 11 FEDERATED DEVELOPMENT CO., a New York ) Business Trust, ) 12 ) CHARLES E. HURWITZ, Institution-Affiliated ) 13 Party and Present and Former Director ) of United Savings Association of Texas, ) 14 United Financial Group, and/or MAXXAM, ) Inc.; and ) 15 ) HARRY A. MUNITZ, JENARD M. GROSS, ARTHUR ) 16 S. BERNER, RONALD HUEBSCH, and MICHAEL ) CROW, Present and Former Directors and/ ) 17 or Officers of United Savings Association ) of Texas, United Financial Group, and/or ) 18 MAXXAM, Inc., Respondents ) 19 20 PROCEEDINGS 9-24-97 21 22 SEPTEMBER 24, 1997 HOUSTON, TEXAS 23 24 A P P E A R A N C E S 25 ON BEHALF OF THE AGENCY: 451 1 KENNETH J. GUIDO, Esquire, Special Enforcement Counsel; and 2 BRUCE RINALDI, Esquire of: Office of Thrift Supervision 3 Department of the Treasury 1700 Street, N.W. 4 Washington, D.C. (202) 906-7395) 5 6 ON BEHALF OF RESPONDENT MAXXAM, INC.: 7 FRANK J. EISENHART, Esquire CATHERINE BOTTICELLI 8 of: DECHERT, PRICE & RHOADS 1500 K Street, N.W. 9 Washington, D.C. 20005-1208 (202) 626-3306 10 11 DALE A. HEAD, Esquire Managing Counsel 12 of: Maxxam, Inc. 5847 San Felipe, Suite 2600 13 Houston, Texas 77257-2887 (713) 267-3668) 14 (Not present) 15 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO. AND CHARLES E. HURWITZ: 16 RICHARD P. KEETON 17 of: MAYOR, DAY, CALDWELL & KEETON 700 Louisiana, Suite 900 18 Houston, Texas 77002 (713) 225-7000 19 20 JACKS C. NICKENS 21 of: CLEMENTS, O'NEILL, PIERCE & NICKENS 1000 Louisiana, Suite 1800 22 Houston, Texas 77002 (713) 654-7608 23 24 25 452 1 ON BEHALF OF THE AGENCY: 2 BRUCE F. RINALDI of: Office of Thrift Supervision 3 1700 G Street, N.W. Washington, D.C. 20552 4 (202) 906-7396 5 ON BEHALF OF JENARD M. GROSS: 6 PAUL BLANKENSTEIN 7 of: GIBSON, DUNN & CRUTCHER 1050 Connecticut Avenue, N.W. 8 Washington, D.C. 20036-5306 (202) 955-8693 9 10 ON BEHALF OF BARRY MUNITZ: 11 DAN HEDGES of: FOSTER & HEDGES 12 700 Louisiana, 35th Floor Houston, Texas 77002 13 14 15 REPORTED BY: 16 Ms. Shauna Foreman 17 . 18 . 19 . 20 . 21 . 22 . 23 . 24 . 25 . 453 1 I N D E X 2 Examination Index: 3 Witness 4 Richard Marlin (Cont'd) 5 by Mr. Rinaldi (Direct Examination) Page 459 by Mr. Nickens (Cross Examination) Page 500 6 by Mr. Rinaldi (Re-direct) Page 525 Ezra Levin 7 by Mr. Rinaldi (Direct Examination) Page 546 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 P R O C E E D I N G S 24 25 THE COURT: The hearing will come to 454 1 order. I wanted to raise a question about how 2 we're handling the exhibits that are admitted. 3 The usual practice is that the reporter takes 4 custody of all admitted exhibits and I don't know 5 if that procedure is going to be practical in this 6 matter or not with the large amount of paper 7 that's being generated. And each party is 8 responsible for making sure that its exhibits are 9 left with the reporter. 10 What are your thoughts on that or how 11 -- I know we received several exhibits yesterday, 12 and I think we have to get a procedure in place to 13 handle it. 14 MR. GUIDO: Your Honor, my 15 understanding is one copy will go to the Court, 16 one will go to the witness, the copy will go to 17 the reporter and that that would be retained, but 18 that there were -- that certain exhibits would be 19 used multiple times so that we would need to 20 retrieve them from the reporter. 21 THE COURT: The question is: Is the 22 reporter going to have them when they are 23 retrieved or where are they going to be? 24 MR. NICKENS: Your Honor, what I would 25 suggest is the reporter can keep the exhibits that 455 1 have been admitted and we would assist them in 2 keeping them in order because it's going to 3 interrupt their work to try to do that and we can 4 assist in that as we go along. 5 Now, you know, that's going to be a 6 problem when this thing gets from one box to two 7 boxes to three boxes. We will put them in folders 8 and maintain the ones that have been admitted in 9 such a way that they could be retrieved. We have 10 these folders here. I think that we can provide 11 that assistance. 12 MR. GUIDO: That was our intention, 13 that we each would do that for the Court. 14 THE COURT: Well, should we have a 15 system to mark the document of record to 16 distinguish it from the bench copies and counsel 17 copies? 18 MR. NICKENS: My understanding, Your 19 Honor, is that we have people that have these 20 lists that are keeping a record of the things that 21 have been offered and admitted as they come up on 22 a computerized exhibit list. So, we can provide 23 that on a periodic basis to people. I think 24 that's going to be the most accurate way of 25 keeping track of the -- of that sort of issue. 456 1 That is, things that were offered but maybe were 2 not admitted or things that were admitted. 3 MR. STERNS: I think what the judge is 4 proposing is how do we tell the official copy from 5 all the others. 6 THE COURT: We have to have a copy of 7 record and the reporter essentially has custody. 8 I don't know if they can exercise that custody 9 with this amount of documents and, especially 10 since we are going from session to session, what 11 happens to the documents between sessions? And 12 I'm afraid we're going to find ourselves down the 13 road and we don't know which ones are the copies 14 of the record and we can tell maybe by the 15 computer. I'm trying to keep a list of the ones 16 that have been received, but where are they and 17 who has them? 18 MR. NICKENS: For our side, there is 19 just one that has an exhibit label, am I correct, 20 that has the actual label, and that would be the 21 official record as opposed to the copies we have 22 made of the ones -- of the record. 23 MR. RINALDI: In our case, the labeled 24 set was kept as a master set and all copies have 25 been made from the master set so that the one I 457 1 have been handing up from the witness does not 2 have an original label sticker on it. Sometimes I 3 speak too low. I noticed -- 4 THE COURT: I can hear you. I don't 5 know if everybody else can. 6 MR. RINALDI: I think that probably the 7 clerk, with our assistance, is going to have to 8 maintain a master set that -- 9 THE COURT: You mean the reporter? 10 MR. RINALDI: The reporter. As I give 11 a document to the witness, I think that gets given 12 by the witness to the reporter and that gets put 13 in a pile and then we perhaps at the end of the 14 day order them to check our list, everybody agrees 15 that these have been admitted or offered in, and 16 the those become the official record. 17 MR. NICKENS: If they will designate a 18 representative and we will have a representative 19 whose responsibilities at the end of the day would 20 be to take the documents and mark them with a date 21 that would indicate -- and that marking would 22 designate those documents as the ones that have 23 become a part of the official record as of that 24 date. It will require coordination. Both sides 25 would have to be a part of that process. It seems 458 1 to me that would be a means on a regular basis of 2 trying to keep our record in shape. 3 MR. RINALDI: There is, I think, one 4 additional issue and that is there may at times be 5 documents that are shown to a witness but then are 6 not offered into evidence. 7 THE COURT: I'm not worried about that. 8 MR. GUIDO: I think Mr. Nickens' 9 suggestion that we take responsibility for the 10 exhibits and putting some identifying mark on the 11 document to indicate that that is the official 12 record -- 13 THE COURT: That would be acceptable. 14 Each side will be responsible for making sure 15 there are copies with the reporter, left with the 16 reporter. 17 MR. NICKENS: Yes, Your Honor. 18 MR. GUIDO: Yes, Your Honor. 19 THE COURT: All right. Let's proceed. 20 21 EXAMINATION 22 23 MR. RINALDI: 24 Q. Good morning, Mr. Marlin. 25 A. Good morning, Mr. Rinaldi. 459 1 Q. I believe when we broke we were 2 reviewing an Exhibit T1090. I would like to go 3 back to that exhibit, if I may. 4 THE COURT: Does the reporter have the 5 stack of exhibits that were here yesterday? 6 MR. RINALDI: 7 Q. Do you recall having received a copy of 8 this letter from Jon Mark, sir? 9 A. I think I said yesterday I do not 10 remember. 11 Q. Now, the first full sentence of that 12 letter indicates that "Enclosed herewith is a copy 13 of the form of stock option agreement as it now 14 stands with blanks for dollars and share amounts 15 to be filled in." 16 I don't recall. Did you indicate 17 yesterday as to who was responsible for filling in 18 those blank amounts? 19 A. Well, we, as counsel, would have had 20 instructions from somebody at MCO in the way this 21 was going. It could have been one of two or three 22 people perhaps, and presumably at the end of the 23 negotiation we confirm what the amount would be. 24 Q. Do you recall whether counsel was ever 25 advised of what the amounts and the share amounts 460 1 and the price per share would be? 2 A. I don't remember. 3 Q. It also indicates that there's enclosed 4 a form of amendment in the event the transaction 5 must be done in two blocks with an agreement to 6 rescind in 90 days. A portion of the transaction 7 requiring NASD approval. 8 Does that refresh your recollection 9 that the parties were contemplating doing the 10 transaction in two blocks? 11 A. Well, as I said, I saw references in 12 Drexel Burnham counsel's letter to their plan or 13 suggestion that the transaction might be done that 14 way, but I have no other recollection of that at 15 all. 16 Q. You don't recall having seen the 17 amendment that's referred to in this letter by 18 Mr. Jon Mark that was sent to you? 19 A. That's correct. 20 Q. Mr. Marlin, in Exhibit T1088, which is 21 the previous exhibit I showed you -- and it's the 22 fax cover sheet to you from Jon Mark. Mr. Mark 23 appears to have sent a letter to the NASD 24 requesting a waiver with respect to the 25 transaction. 461 1 Do you remember looking at this 2 document yesterday? 3 A. Yes. 4 Q. Do you recall whether the NASD 5 ultimately responded to Mr. Mark's inquiry as to 6 whether they could provide a waiver to permit the 7 transaction to go forward for a larger amount of 8 shares than otherwise would have been permitted 9 under NASD rules of fair practice? 10 A. It's my understanding that they did not 11 grant the waiver. 12 Q. Did you ever have occasion to receive a 13 letter from the NASD stating their position in 14 that regard? 15 A. I think I've seen a copy, but I don't 16 remember receiving it in the past. 17 Q. When you say you've seen a copy, you 18 mean someone has showed it to you subsequent to 19 that time? 20 A. Yes, either you or Mr. Nickens. 21 Q. Okay. 22 MR. RINALDI: Let the record reflect 23 I'm handing the witness exhibit number -- strike 24 that. 25 Could we move into evidence, Your 462 1 Honor, the previous exhibit, which is T1090? 2 MR. NICKENS: No objection. 3 MR. RINALDI: A letter from Mr. Mark to 4 Richard Marlin dated December 20th, 1985. 5 MR. NICKENS: No objection, Your Honor. 6 THE COURT: Received. 7 MR. RINALDI: 8 Q. I'm handing the witness and the Court 9 Exhibit T1105. This is a letter dated 10 December 24th, 1985. It's to Jon Mark from a 11 Peter T. Canada, assistant director of NASD 12 operations. 13 Would you pass that on to the judge? 14 A. (Witness complies.) 15 Q. Now, directing your attention to the 16 second full paragraph there, it indicates that the 17 information that had been provided by Mr. Mark to 18 the NASD as a justification for granting an 19 exemption had not raised, quote, "highly-unusual 20 circumstances" and, therefore, the NASD determined 21 not to grant the exemption which Mr. Mark 22 requested. 23 A. So it says. 24 Q. Okay. Do you recall being advised at 25 or about the time and date of this letter that, in 463 1 fact, the NASD had declined to grant the exemption 2 sought by Mr. Mark? 3 A. I don't have any independent 4 recollection of that. 5 Q. Do you recall whether it was necessary 6 to modify the agreement -- that is, the option 7 agreement -- in order to deal with the fact that 8 the NASD had denied the exemption application? 9 A. Well, I see that the option agreement 10 as ultimately entered into dealt with a smaller 11 number of shares and, as a result, I believe that 12 is the modification that you're talking about. 13 Q. Do you recall how many shares as you 14 sit here today the option agreement was ultimately 15 done for, sir? 16 A. 300,000. 17 Q. And in Mr. Mark's letter it states that 18 in the last paragraph for purposes of determining 19 position limits, long calls and short puts and 20 short calls and long puts covering the same 21 underlying security must be aggregated. "As 22 parties to the UFG option transaction set forth in 23 your letter, we'll be holding equal numbers of 24 long and short options on the same side of the 25 market. Options positions covering in excess of 464 1 150,000 shares of UFG common stock would not be 2 permitted under Section 3 of Appendix E." 3 Do you see that? 4 A. Yes. 5 Q. Do you recall learning at about the 6 time the option was being entered into that the 7 call option which was being given by Drexel to MCO 8 and the put option that was given by Maxxam to 9 Drexel Burnham & Lambert had to be aggregated and, 10 therefore, the maximum number of shares was 11 150,000 shares? 12 A. No. 13 Q. Do you recall modifying the agreement 14 in any way to try to circumvent that limitation? 15 A. No. 16 Q. Did it become -- did it come to your 17 attention subsequent to the entry of the option 18 agreement that, in fact, parties to the agreement 19 had modified it in order to circumvent the 20 150,000-dollar limit? 21 A. I think the answer to your question is 22 no. The -- I really have no recollection at all 23 of any 150,000 share number. I have no 24 recollection of seeing this letter. The problem 25 between Drexel Burnham and the NASD was really 465 1 between them and I don't remember being a party to 2 it at all. And the 300,000 shares was a number I 3 think plugged in at Drexel Burnham's suggestion or 4 because they stated that that was the maximum 5 number that they could do. I don't remember the 6 150,000 number. 7 Q. Now, just so I understand the sequence 8 of events, you were in New York City? 9 A. Yes. 10 Q. Along with Mr. -- 11 A. Yeres. 12 Q. And I suppose Mr. Mark -- I mean, 13 Mr. Canada and Mr. Mark were all in New York City? 14 A. Actually, this says he's in Washington. 15 Q. I beg your pardon. You're correct. 16 And Exhibit 1090 indicates that the option 17 agreement formed had been sent out with blanks to 18 the West Coast, had it not? 19 A. Well, Kevin Madigan was on the West 20 Coast when he got a copy of this letter. 21 Q. It says "The execution form was sent to 22 California with Kevin Madigan and I'm sending the 23 stock option agreement, as well." 24 Do you see that? 25 A. Yes. 466 1 Q. Mr. Madigan would have been on the West 2 Coast? 3 A. That's correct. 4 Q. And when the document was executed, it 5 was executed on the West Coast and you were not 6 present, were you? 7 A. That's correct. 8 Q. After the execution of the document, 9 was a copy of it returned to you for your files? 10 A. I must say I don't remember, but in the 11 normal course of things, it would have been. 12 Q. You don't recall having seen the final 13 form of the option that was actually executed by 14 the party? 15 A. That's correct. 16 MR. RINALDI: Now, let me move into 17 evidence, Your Honor, the last exhibit which is 18 the letter from Jon Mark -- I mean from Peter 19 Canada to Jon Mark with a cc to David Yeres. It's 20 Exhibit T1105. 21 MR. NICKENS: No objection. 22 MR. RINALDI: 23 Q. I'm handing the witness a copy of 24 Exhibit T1085. This is the board of directors' 25 meeting dated December 17th, 1985. Attached to 467 1 this document is a copy of the -- what purports to 2 be the finally-executed put call option between 3 MCO and Drexel Burnham Lambert. 4 Now, Mr. Marlin, directing your 5 attention to the stock option agreement, it's -- 6 MR. NICKENS: Your Honor, could I ask 7 for identification purposes because our copy of 8 this exhibit does not have the attachment that the 9 witness could identify the Bates numbers of the 10 document he's looking at. 11 A. The -- OMX 23197. And that goes -- 12 well, in sequence through 23217. 13 MR. NICKENS: Thank you, Your Honor. 14 MR. RINALDI: This is a document that 15 reflects confidential treatment requested by 16 Dechert Price & Rhoads and was produced by Maxxam 17 through their counsel. 18 A. Mr. Nickens was also asking for the 19 Bates number for the board of directors' meetings, 20 and throughout the body of the document there is a 21 number of lines that are stricken through. 22 Q. (BY MR. RINALDI) And then there are 23 signatures in the -- or initials in the right-hand 24 margin. 25 Do you know why the changes that are 468 1 reflected -- that are reflected in the document 2 were put into the document? I don't know why any 3 individual change was made. It's clear that 4 certain terms of the agreement had been left open 5 and those had to be filled in in order for the 6 document to be complete, and it appears that 7 certain other terms were changed at the last 8 minute. 9 Were you consulted regarding those 10 changes, as you recall? 11 A. I don't remember. 12 Q. And the first blank that was filled in, 13 of course, was the 300,000 shares that appears on 14 the first page; is that correct? 15 A. Yes. 16 Q. Do you know how that number was arrived 17 at? 18 A. No, other than what I testified a 19 little while ago. 20 Q. Uh-huh. Then as we go to the bottom of 21 the page it indicates under Paragraph 1, grant of 22 the MCO option, and it talks about that the -- 23 "That the DBL hereby irrevocably grants to MCO an 24 option "the MCO option" to purchase from DBL all, 25 but not less than all, of the shares at a purchase 469 1 price equal to the sum of $2,577,000." 2 Do you know how the parties arrived at 3 the price for the 300,000 shares? 4 A. Without doing any arithmetic, I noted 5 in looking through the minutes that you gave me as 6 part of this exhibit that there was an 7 authorization to purchase the shares at $8.59 per 8 share, and I am postulating that the purchase 9 price results from multiplying 300,000 by that 10 number. 11 Q. Okay. Here's my question to you: Do 12 you know how the parties arrived at that number of 13 $8.59 a share? 14 A. Other than through negotiation, no. 15 Q. You did not participate in those 16 negotiations? 17 A. To the best of my recollection, I did 18 not participate in the negotiations between MCO 19 and Drexel, although I was a party to the 20 transaction in various ways. I must have heard 21 the number at some point. 22 Q. Okay. On the second page of B-3 it 23 makes reference, does it not, to an irrevocable 24 letter of credit commercial bank for the benefit 25 of DVL? 470 1 A. Yes. 2 Q. And we also talked about an indemnity 3 provision. 4 Do you know whether the indemnity 5 provision ultimately was left in the document? 6 A. Yes. It appears on Page 12. 7 Q. And, finally, we talked about the fact 8 that Drexel had sought to have its legal fees in 9 connection with the transaction reimbursed by MCO. 10 Ultimately is there a provision in the 11 option that provides for reimbursement of Drexel? 12 A. Well, I must tell you I don't remember. 13 We would have to read through it and see. Is 14 there a place you would like to direct my 15 attention? 16 Q. Sure. Why don't you take a look at 17 Page 17, Paragraph C? 18 A. (Witness complies). Yes. The legal 19 fees, up to a limit, were reimbursed. 20 Q. Now, directing your attention to the 21 minutes. In the minutes which are dated December 22 the 17th it indicates that Mr. Schwartz reported 23 on an option agreement and he indicated that 24 Drexel Burnham Lambert, Incorporated, was the 25 owner of 300,000 shares of common stock and 471 1 ultimately the board authorizes them, Mr. 2 Schwartz, to go ahead with the purchase of or the 3 option agreement for 300,000 shares. 4 Do you know how the board was able to 5 pass a resolution for 300,000 shares on December 6 17th, 1985 -- 7 A. No. 8 Q. -- when, in fact, the number of shares 9 was dependent upon an exemption being passed by 10 the NASD and the NASD didn't respond until 11 approximately a week later? 12 A. No, I don't know. 13 Q. And you had no discussions with anybody 14 regarding that? 15 A. No. 16 Q. And we talked earlier about the 17 exercise date of the option and it indicates here 18 that the date was set two and a half years into 19 the future? 20 A. That's correct. 21 Q. And, so, the exercise date would have 22 been sometime in July of 1987? 23 A. Actually, '88. 24 Q. I'm sorry. You're correct. I should 25 read the agreement more carefully. Yes, there it 472 1 is. It's on the second page. That MCO -- that 2 the option, MCO's call option, may be exercised 3 during the period of July 1, '88, to June 31st, 4 1988? 5 A. That's correct. To July 31st. 6 Q. I'm sorry. July 31st. 7 MR. RINALDI: Your Honor, I would move 8 into evidence Exhibit T1085, the minutes of the 9 board of directors, December 17th, 1985. 10 MR. NICKENS: Your Honor, we have no 11 objection to the admission of the minutes or of 12 the Drexel option agreement. I note, for the 13 record, that the Bates numbers that were read into 14 the record are not consecutive. So, we would like 15 an opportunity to check those and possibly 16 substitute a document that reflects consecutive 17 numbers. But, other than that, we have no 18 objection to these documents. 19 MR. RINALDI: Actually, I think they 20 are consecutive. I see. There appears to be a 21 couple pages. Let me say this, Your Honor. I 22 think that for all parties involved it would be a 23 good idea for us, since this becomes a seminal 24 document, to agree upon a document because there 25 is all kinds of handwriting and interlineation and 473 1 I know that we don't have the best copy and, in 2 truthfulness, there is a better copy that I got at 3 the assistance of Bettina. She couldn't be 4 assured it was an authentic document. It's a much 5 better-quality document. 6 THE COURT: Well, some of the 7 handwriting and initials are cut off. At least in 8 part -- some of the -- I don't know if somebody 9 knows who they are anyway, but it's not a very 10 good copy. 11 MR. RINALDI: Well, I would -- 12 THE COURT: All right. The document is 13 received, subject to seeing if we can get a better 14 copy. 15 MR. RINALDI: 16 Q. Mr. Marlin, prior to the execution of 17 the option agreement did MCO ever seek the 18 approval of the Federal Home Loan Bank Board for 19 the put call option? 20 A. Not to my knowledge. 21 Q. Did you on MCO's behalf ever advise the 22 Federal Home Loan Bank Board that MCO and DBL were 23 contemplating entering into the put call option 24 prior to engaging in that option? 25 A. Not to my knowledge. 474 1 Q. And, in fact, wasn't the option 2 transaction completed prior to December 26, 1985, 3 so that MCO would be exempt from having to seek 4 prior approval from the Federal Home Loan Bank 5 Board for the transaction? 6 A. That appears to be the case, yes. 7 Q. Now, we've talked about MCO's 8 acquisition of 24.9 percent of the shares of 9 Drexel Burnham prior to entering into the option. 10 A. You misspoke a little bit. 24.9 11 percent of -- 12 Q. The outstanding shares of United 13 Financial Group? 14 A. Correct. 15 Q. What I want to do is just sort of 16 recap. In addition to that, MCO entered into an 17 option agreement with Drexel Burnham to require an 18 additional 300,000 shares of common stock of UFG, 19 and we've just completed talking about that. 20 A. Yes. 21 Q. Okay. After the -- did Drexel -- did 22 MCO, to your knowledge, acquire any additional 23 shares of United Financial Group? 24 MR. NICKENS: Your Honor, I object to 25 the form of the question because there's an 475 1 ambiguity about whether he means additional to the 2 24.9 or whether he is implying that the options 3 were additional shares. I have no objection and 4 -- if I understand the question to be additional 5 to the 24.9. I do have an objection to the 6 suggestion that the central issue in the case that 7 those option shares should be counted as 8 additional shares. 9 THE COURT: Can you clarify your 10 question? 11 MR. RINALDI: 12 Q. MCO acquired 24.9 percent of the 13 outstanding shares of UFG prior to 1986; is that 14 correct? 15 A. Yes. 16 Q. And -- 17 MR. NICKENS: Your Honor, I'm sorry. 18 Federated and MCO, not MCO. The two aggregated 19 shares. The question is incorrect as to MCO. 20 A. I'm also not sure that they actually 21 acquired the full 24.9 because there were some 22 around 2, 2 and a half percent they had had the 23 right to go to 24.9. I'm not sure they ever went 24 there. The number is in the 20s. And, to my 25 knowledge, they never exceeded 24.9 percent. 476 1 MR. RINALDI: 2 Q. I'm just trying to establish predicate 3 for the next series of questions. 4 MCO and Federated and other parties 5 whose shares would have to be aggregated with 6 theirs, Mr. Kozmetsky. 7 MR. KEETON: Your Honor, I want to 8 object to the form of the question. Counsel has 9 made a legal assumption that those shares had to 10 be aggregated. If he's got a question, he should 11 ask it, not give a speech. 12 MR. NICKENS: Your Honor, there is an 13 issue about whether Mr. Kozmetsky's shares should 14 be aggregated. There is a substantive basis for 15 our concern with regard to these questions. 16 MR. RINALDI: 17 Q. Sir, did MCO and Federated acquire 18 shares of UFG in excess of 20 percent, to your 19 knowledge? 20 A. Yes. 21 Q. Okay. That would have been sometime 22 prior to 1986? 23 A. That's correct. 24 Q. And, in addition to that, Drexel and 25 MCO entered into an option whereby MCO acquired a 477 1 call option to acquire an additional 300,000 2 shares from Drexel backed up with a put by Drexel 3 back to MCO; is that correct? 4 A. That's correct. 5 Q. Now, after entering into the call put 6 option, to your knowledge did MCO and/or Federated 7 acquire any additional shares of UFG that you are 8 aware of? 9 A. No. 10 Q. To your knowledge, did they acquire any 11 preferred non-voting shares? 12 A. Well, I don't remember. 13 MR. RINALDI: I'm handing the witness a 14 copy of a document entitled -- labeled A2073, 15 and -- 16 MR. NICKENS: 73 or 74? 17 MR. RINALDI: 73. If you'll bear with 18 us a moment. 19 The document, Your Honor, is a 13D. 20 It's Amendment No. 12, and it would have been 21 dated April 17th. 22 Q. (BY MR. RINALDI) Have you had a chance 23 to look at this document, sir? 24 A. I'm looking at it now. 25 Q. Okay. Sir, do you recognize this form 478 1 of document? 2 A. Yes. 3 Q. And can you identify for the court what 4 it is? 5 A. Yes. It's an amendment to a Schedule 6 13D which is required to be filed when there's a 7 change in information previously contained in 8 earlier 13Ds filed by the same filer. 9 Q. And what is the purpose of the 13D? 10 A. It's to give notice to the Securities & 11 Exchange Commission and to the investing public of 12 the stock holdings of persons who hold significant 13 share holdings in public companies. 14 Q. And as a result of MCO and Federated 15 share holdings -- and UFG, were they required 16 under the securities law to file a Schedule 13D 17 with respect to UFG ownership? 18 A. They should have been. 19 Q. And what is the triggering number of 20 shares? 21 A. 5 percent. 22 Q. And I believe that you've previously 23 testified that UFG and -- I mean MCO and Federated 24 had acquired in excess of 5 percent of the 25 outstanding shares of UFG? 479 1 A. Yes. 2 Q. Now, directing your attention to 3 Page 11 of this document. 4 MR. NICKENS: May I ask that the 5 document be offered? 6 MR. RINALDI: Certainly. In fact, Your 7 Honor, I think because these documents appear to 8 all be prepared -- well -- can we offer this into 9 evidence? 10 THE COURT: Yes. 11 MR. NICKENS: No objection. 12 THE COURT: All right. Admitted. 13 MR. RINALDI: What I would like to do 14 with this document and the entire series of 13Ds, 15 because they reflect the entire history of the 16 transactions between MCO, Federated, and their 17 acquisition of shares of UFG, I would like to move 18 those in as a group exhibit, but I wanted to do it 19 through Mr. Levin, who is our next witness. 20 A. I was not the lawyer responsible for 21 the preparation of these series of documents. 22 MR. NICKENS: Your Honor, we have no 23 objection to the admission of the 13Ds and indeed 24 most of the documents have been discussed 25 yesterday and today we could stipulate to their 480 1 admissibility if they were submitted to us ahead 2 of time. If we can merely confirm the accuracy of 3 the documents and the identity, if you will, of 4 the documents that Mr. Rinaldi wants to have 5 introduced as to the 13Ds and perhaps many others, 6 we will agree to their admissibility. It would be 7 helpful and expeditious for everyone to be able to 8 do that and to avoid the time necessary to 9 identify each one and go over these things which 10 can become a matter of record simply by agreement. 11 MR. RINALDI: I couldn't agree more. 12 THE COURT: Well, we'll have to make a 13 record of what is being received. We can't say -- 14 MR. RINALDI: I agree with that. I'm 15 going to offer a whole series of documents through 16 Mr. Levin. I was going to say, Your Honor, 17 yesterday I gave respondents a list of what I 18 thought was all of the documents that I would be 19 showing these witnesses today. Maybe there was a 20 mistake in copying down the number. I think they 21 got 74 instead of 73 and that may be the confusion 22 here, but it had been our intention and we, in 23 fact, endeavored to identify all the documents we 24 would be using today so we could avoid this. 25 MR. NICKENS: With respect to these 481 1 13Ds, we would be happy as long as we can identify 2 them, to stipulate to their admissibility. 3 MR. RINALDI: I will have a complete 4 set that I will give you, and perhaps we can 5 review them at the break in anticipation of Mr. 6 Levin's testimony. 7 MR. RINALDI: 8 Q. Directing your attention to Page 11 -- 9 before we get to that, the -- the first page of 10 this document indicates that Ezra Levin and Kramer 11 Levin & Frankel are the persons authorized to 12 receive notice and communications. 13 Do you see that? 14 A. Actually, no. Ezra is authorized to 15 receive it, and that's part of his address. 16 That's how he would be addressed. 17 Q. And is this a document that would have 18 been prepared by Kramer Levin on behalf of MCO and 19 Federated? 20 A. Yes, yes. 21 Q. And who at Kramer Levin would have been 22 responsible for overseeing? 23 A. Ezra Levin. 24 Q. Now, directing your attention to 25 Page 11, it talks there about "The company has 482 1 announced that it plans to make a rights offering 2 to its stockholders pursuant to which the 3 company's stockholders will receive 4 non-transferrable rights to purchase an aggregate 5 of $750,000 shares of the company's Series C 6 convertible preferred stock." 7 Do you see that? 8 A. Yes. 9 Q. Do you recall that at some time in 10 about 1984 MCO and Federated determined that they 11 wished to acquire shares of the C preferred 12 convertible stock that was being made available by 13 UFG? 14 A. Well, I see it from reading this 15 document, but I have no independent recollection 16 of it. 17 Q. Do you recall having participated in 18 any discussions regarding the conversion of those 19 shares at a subsequent date? 20 A. No. 21 Q. As you sit here today, do you know 22 whether, in fact, MCO and Federated subscribe to 23 the C preferred shares? 24 A. No. 25 MR. RINALDI: Now I'm handing the 483 1 witness a copy of a document dated -- I mean, 2 entitled CT1004 and I believe yesterday -- this is 3 a memorandum to the file from Abbe B. Dienstag 4 dated April the 29th, 1987, and I believe that 5 when yesterday Mr. Eisenhart raised a question of 6 that certain documents that were returned to you 7 were subject to an attorney/client privilege. He 8 indicated that there were three or four additional 9 documents that we intended to utilize which he 10 wanted to assert a privilege to. 11 It's my understanding at that time that 12 he indicated that he did not have any objection to 13 the use of those documents, provided that they 14 carried with them the same agreement that we 15 reached yesterday with respect to the other 16 privileged document. 17 MR. EISENHART: That's correct, Your 18 Honor. This document is one of those that I 19 referred to. There are two additional ones that I 20 believe were on the list they gave us. If you 21 want, I can simply read into the record which 22 these are, as well, and then we won't have to 23 interrupt when they get to them. 24 THE COURT: Do you want to offer all of 25 them at this time? 484 1 MR. RINALDI: Yeah. 2 THE COURT: I'll receive 1104, subject 3 to the conditions discussed yesterday. 4 MR. RINALDI: I would also request that 5 you receive 1103 -- I'm sorry. It's CT1004, 6 CT1003, and I will describe that for the record so 7 that it will help people. CT1003 is a memorandum 8 to Howard J. Bressler from Abbe L. Dienstag dated 9 May 6, 1987, and CT1002 is a memorandum to Steven 10 C. Todrys from Abbe L. Dienstag dated May the 6th, 11 1987, and then in addition there's a fourth 12 document, CT1006, which appears to be a draft -- I 13 mean, a later version of CT1004. And it's also 14 from Abbe L. Dienstag to the files and it's dated 15 May, 1987. 16 MR. EISENHART: That's fine, Your 17 Honor. I would have no objection to their use, 18 subject to the agreement placed on the record 19 yesterday. 20 THE COURT: All right. So received. 21 MR. RINALDI: I believe the witness and 22 the Court have CT1004 before them. 23 MR. RINALDI: 24 Q. Mr. Marlin, who is Abbe Dienstag? 25 A. His name is Dienstag. He was at this 485 1 time an associate and today is associate counsel 2 at our firm. 3 Q. And do you recall receiving a copy of 4 this memoranda to the file that's CT1004 -- 5 A. No. 6 Q. -- from Mr. Dienstag? 7 A. No. 8 Q. And do you recall that an issue arose 9 in about April, 1987, level of ownership? 10 A. Well, I don't recall that. 11 Q. Okay. 12 A. I see that this memorandum addresses 13 that issue, but I don't have a recollection of it 14 and I don't recall it. 15 Q. Okay. Now, you indicated that Mr. 16 Dienstag was an associate, I think you said -- 17 A. Yes. 18 Q. -- at the time? Do you know whether he 19 reported to Mr. Ezra Levin at that point in time? 20 A. I think so, yes. 21 Q. And did Mr. Dienstag have a particular 22 area of expertise that he worked in that you're 23 aware of? 24 A. He was a corporate lawyer with 25 expertise in the securities area. 486 1 Q. Okay. Who is Steven C. Todrys, 2 T-o-d-r-y-s? 3 A. He was a tax partner in the firm. In 4 1987, he may have been an associate of the tax 5 department. Subsequently, I think he became in 6 the tax department. 7 Q. And I'll -- now, if you take a look at 8 what's been marked as CT1003 and pass that along 9 to the Court. 10 MR. RINALDI: Let me just identify it 11 for the record. This is a memorandum dated May 6, 12 1987, to Howard Bressler from Abbe L. Dienstag and 13 it references the same Series C preferred shares. 14 THE COURT: That's one we've received? 15 MR. RINALDI: Yes, that is one we have 16 just received. 17 MR. RINALDI: 18 Q. Directing your attention to the second 19 page of that memoranda, it indicates that a copy 20 of that memorandum was sent to you. 21 Do you see that? 22 A. Yes. 23 Q. Now, would you take a moment and just 24 look at the memorandum and, tell me, do you recall 25 having seen this memorandum before? 487 1 A. No. 2 Q. Is the subject matter of the memoranda 3 familiar to you? 4 A. Well, again, not having any independent 5 recollection of it and looking at this memorandum, 6 I see that it discusses a postponement of the 7 convertible of the Series C stock. Aside from 8 that, I don't have any familiarity with it. I 9 don't know whether that was done. 10 Q. In the first sentence, it indicates 11 that the onset of the convertible of the Series C 12 stock on June 16th, 1987, may render Federated, 13 MCO savings and loan holding companies? 14 A. Yes. 15 Q. Do you recall that subject coming up, 16 the potential for their becoming a potential 17 savings and loan holding company? 18 A. No. 19 Q. Now, as we go down in the letter, it 20 indicates that there is -- now, Mr. Bressler is an 21 employee of Federated, is he not? 22 A. Yes. As I previously testified, he was 23 house counsel at Federated. I thought he was at 24 MCO. You said Federated? 25 Q. I was asking the question. 488 1 A. I think he was house counsel at MCO. 2 Q. Okay. The body of the letter or the 3 memorandum indicates in the second full paragraph 4 "I've prepared the attached memoranda which 5 explores in summary and then extended fashion the 6 legal issues involved in the determination of 7 whether Federated and MCO would be deemed to 8 control UFG by virtue of the Series C stock and 9 the exchange of the Series C stock for a new 10 Series D stock." 11 Do you see that? 12 A. Yes. 13 Q. You have no recollection of the 14 exchange or the discussion of the exchange of C 15 stock for D stock? 16 A. No. 17 Q. Okay. 18 MR. NICKENS: Your Honor, I would note 19 an objection for the record as to the relevance of 20 this line of questioning and note that the notice 21 of charges makes no allegation as to that. If I 22 may correct the record, I think he's referring to 23 Paragraph 108, which is not a letter from MCO. 24 It's a letter referred to in the notice of 25 charges. I believe it's from Mr. Burnham. It was 489 1 on a representation from MCO. 2 MR. RINALDI: I stand corrected. 3 MR. VILLA: As counsel for UFG. 4 MR. RINALDI: That's correct. 5 MR. NICKENS: Further, our point is, 6 Your Honor, there's simply no allegation that the 7 acquisition of the Series C stock or the 8 convertible constituted a violation of any banking 9 regulations. 10 THE COURT: That seems to be the case, 11 but I think, nevertheless, this question is 12 relevant. 13 MR. RINALDI: Thank you, Your Honor. 14 Okay. Now, we have moved and the Court 15 has admitted, I believe, CT1004, 1002, 1003, and 16 1006. 17 MR. RINALDI: 18 Q. Now, can you recall Mr. Marlin, that a 19 similar issue arose in 1988 regarding the exercise 20 of the so-called Drexel option? 21 A. No, I do not. 22 Q. Now, earlier you indicated that in June 23 -- I mean, July of 1988, the option would have -- 24 the call option would have to be exercised by MCO 25 and in the event that it wasn't exercised that 490 1 Drexel could put the shares back to -- to MCO. 2 Do you recall whether in about August 3 of -- I know about May of 1988, the option 4 agreement was extended through an amendment? 5 A. Well, I have seen copies of those 6 amendments, so I understand that it was done. 7 Q. Can we take a look at Exhibit T1150? 8 T1150 is a letter dated August the 9th, 1990, and 9 it's to MCO Holdings from a Neal Thomas, the 10 assistant vice-president for Drexel Burnham, and 11 it's addressed to Kramer Levin to a Mr. Sobel. 12 A. Yes. 13 Q. Have you had a chance to look at that, 14 sir? 15 A. Yes. 16 Q. Now, if the first full paragraph 17 pursuant to the stock option agreement dated 18 December 23rd, 1985, and that's the option 19 agreement that we have been discussing earlier -- 20 amended as of May 18th, 1988, and August 2nd, 21 1988, between Drexel Burnham, Incorporated, and 22 MCO Holdings. 23 Were you aware that the put call option 24 agreement had been amended on May, 1988, and again 25 on August, 1988? 491 1 A. I don't remember one way or the other 2 about that, although I see that it was done. 3 Q. Okay. Now, this letter purports to 4 exercise the option in August of 1990? 5 A. Yes. 6 Q. Do you recall that in or about August 7 August 9th, 1990, the option was exercised by 8 Drexel Burnham? 9 A. Well, I don't recall. As you see, 10 Drexel was dealing with Howard Sobel at that time 11 and not with me, so that I may have been at that 12 time out of the loop. 13 Q. So, after the original option agreement 14 was drafted under your oversight, you did not 15 participate in any further -- 16 A. Well, I participated in -- to a 17 decreasing extent and ultimately was not 18 participating by this time in 1990 very much at 19 all in the affairs of this client. 20 Q. Okay. And did it come to your 21 attention at any time during 1990 that, in fact, 22 Drexel had exercised its option and put the shares 23 back to -- 24 A. You know, it may have. I just don't 25 remember. 492 1 MR. RINALDI: All right. If the 2 parties have no objection, I would like to offer 3 T1150 into evidence, as well. 4 MR. NICKENS: No objection, Your Honor. 5 THE COURT: Received. 6 MR. RINALDI: I think this may be all I 7 have for the witness, but if I may take a moment 8 to confer with counsel. 9 10 (Short break.) 11 12 MR. RINALDI: 13 Q. Now, you indicated that in 1990 you 14 were pretty much out of the affairs of MCO and 15 Federated? 16 A. I think that's correct. 17 Q. And in the early part of 1980 were you 18 involved in any debt financing? 19 A. Yes. 20 Q. And -- 21 A. I don't know if that was 1980. It was 22 the late Seventies or early Eighties. 23 Q. This would have been debt financing for 24 MCO? 25 A. That's correct. 493 1 Q. Do you recall having participated in a 2 debt financing of a zero coupon bond issued by MCO 3 on about June 15th, 1982? 4 A. I'm not sure that I worked on that 5 particular transaction. I worked on a -- 6 high-yield bond, 12 and a half percent to a 99. 7 The zero coupon financing may have been done by 8 Ezra Levin and Howard Sobel. I may have had some 9 connection with it. 10 Q. This would have been a bond for $260 11 million? 12 A. I understand. 13 Q. And it raised about three and a half 14 million dollars. 15 A. And what is the question? 16 Q. You did not work on that bond to the 17 best of your recollection? 18 A. I don't think I worked on it. 19 Q. Do you recall that Drexel Burnham was 20 the entity that purchased the bond? 21 A. I don't recall. 22 MR. RINALDI: I have no further 23 questions of this witness. 24 THE COURT: We'll take a short recess. 25 494 1 (Short break.) 2 3 THE COURT: We're back on the record. 4 I believe the direct examination of the witness is 5 complete and we are ready for cross. 6 MR. RINALDI: There's one housekeeping 7 matter I forgot to mention to Mr. Nickens. 8 We identified four documents at the 9 end, the CT1002 and CT1006 that the parties 10 stipulate could come into evidence. We only put 11 in two, and I would like to move the other two in. 12 MR. NICKENS: As long as it's subject 13 to the same agreements, no objection. 14 THE COURT: Yes. 15 MR. RINALDI: Here is copies for 16 everyone. 17 18 CROSS EXAMINATION 19 20 MR. NICKENS: 21 Q. Mr. Marlin, I would like to provide 22 some additional information for the Court. 23 Would you be willing to help us do 24 that? 25 A. Yes. 495 1 Q. Where did you grow up, Mr. Marlin? 2 A. I was born in Brooklyn, New York, and 3 grew up in New York City. 4 Q. How old are you? 5 A. 64. 6 Q. Where did you attend college after high 7 school? 8 A. Yale College. 9 Q. And graduated from Yale? 10 A. Yes. 11 Q. What year? 12 A. '55. 13 Q. What did you do after college? 14 A. I went to law school, also at Yale. 15 Q. And in what year did you graduate from 16 Yale Law School? 17 A. '58. 18 Q. Did you further your education 19 thereafter after graduating from Yale Law School 20 in 1958? 21 A. Yes. I got a masters in tax law at NYU 22 in 1964. It was several years later. 23 Q. After having graduated from Yale Law 24 School did you become employed as a lawyer? 25 A. Yes. 496 1 Q. Describe for the Court briefly, Mr. 2 Marlin, your occupational background as a lawyer 3 after graduating from law school. 4 A. I went to work as a clerk to the United 5 States District Judge Robert B. Anderson in 6 Connecticut. That lasted a year. I then joined a 7 law firm in Manhattan. I left that firm in around 8 -- that was '59 to about '63. I then worked in 9 two smaller firms until 1968. The second firm in 10 which I became a partner lost its two senior 11 partners and we merged with a firm called Marshall 12 Braddock Allen & Tucker, which I joined as a 13 partner in 1968. I was with that firm until 1979 14 when I left Marshall Braddock Allen & Tucker and 15 joined Kramer Levin, which at that time Ezra Levin 16 and I both left together and went to the firm 17 which became Kramer Levin. 18 Q. Since 1979 you have been a partner with 19 the firm of Kramer Levin? 20 A. That's correct. 21 Q. Please tell Judge Shipe, if he doesn't 22 already know, something about Kramer Levin, the 23 law firm. 24 A. Kramer Levin is a firm of around 160 or 25 165 lawyers. We have, I think, more than 50 497 1 partners. We have a general commercial practice. 2 Probably the largest department in the firm is the 3 corporate department, followed by the litigation 4 department, and then we also have an active real 5 estate and tax and employee benefits practice. 6 The first has a very well-established clientele, 7 including a number of Fortune 500 companies and, 8 of course, including the Maxxam group. 9 Q. When did you first meet Mr. Charles 10 Hurwitz? 11 A. While I was a partner at Marshall, 12 Braddock he was a client of that firm and, in 13 fact, Ezra Levin was his principal attorney and I 14 met him through Ezra at that time. 15 Q. Did you work on projects for Federated 16 or McCullough Oil or MCO while at Marshall 17 Braddock or later at Kramer Levin? 18 A. Yes. Particularly as we were moving 19 from Marshall Braddock to Kramer Levin, in that 20 period of time I worked on several projects in the 21 transition. 22 Q. Tell the judge some of those projects. 23 A. An early project involved the issuance 24 of subordinated debt, which was 12 and a half to 25 7. The pension was due in '89. 498 1 Q. Was Drexel involved in that 2 transaction? 3 A. No. Shortly thereafter there was an 4 acquisition of a cementing block and stock in 5 Simplicity Pattern. That must be around 1980, and 6 I worked on that transaction. 7 Q. Was Drexel involved in that 8 transaction? 9 A. No, they were not. 10 Q. There were, over the years, some 11 additional transactions that I worked on for them, 12 including a deal with Kaiser Aluminum, and Drexel 13 was not involved in that transaction. 14 Q. Were you involved in the acquisition by 15 Federated and McCullough Oil? 16 A. Yes. 17 Q. And what was the nature of that 18 transaction? 19 A. It was a corporate takeover, not 20 necessarily hostile, but -- 21 Q. Was Drexel involved in that 22 transaction? 23 A. Not to my recollection, no. 24 Q. Did you do any financing work for 25 McCullough, or is that the one you described? 499 1 A. That's the one. I think there may have 2 been two. There was a second subordinated issue 3 before the zero coupon issue. 4 Q. Now, Mr. Marlin, I'm going to ask you 5 to look at a document that has been marked as 6 A10106 and also bears the marking NW6. 7 Can you identify that document for us? 8 A. This is a letter dated June 24, 1985, 9 from David Yeres to Debbie Shulevitz enclosing 10 revised drafts of the optional agreements. 11 Q. This is another one of the drafts that 12 you were shown yesterday in your testimony of the 13 Drexel option? 14 A. Yes. 15 MR. NICKENS: Your Honor, we offer 16 A10106. 17 THE COURT: Received. 18 MR. NICKENS: 19 Q. How many drafts were there of the 20 Drexel option, Mr. Marlin? 21 A. Well, without counting them, we've seen 22 admitted into evidence here something like half a 23 dozen or eight different versions, I would 24 estimate. 25 Q. From the time of the first one to the 500 1 execution of the final agreement, how much time 2 passed? 3 A. I would say something like 11 months. 4 Q. And during that time were the terms of 5 that agreement -- how would you describe the 6 negotiations concerning the terms of that 7 agreement? 8 A. Well, the negotiations were very much 9 adversarial. We had difficulty with -- in dealing 10 with Cahill, Gordon, who were Drexel's counsel. 11 They were quite aggressive and not necessarily 12 receptive to our comments. This was not at all a 13 friendly "you scratch my back and I'll scratch 14 yours" kind of negotiation. 15 Q. You were aware of the H-(e)1 16 application that you had filed back in June of 17 1983 and the granting of that application subject 18 to certain conditions in December of 1994? 19 A. Yes. 20 THE COURT: You're saying '93 and '94. 21 A. Should be '80 something. 22 MR. NICKENS: Yes, sir, I am. I will 23 try to avoid that. 24 MR. NICKENS: 25 Q. We're talking about, 1983, 1984. So, 501 1 during these negotiations you were aware of the 2 actions that had been taken by the Federal Home 3 Loan Bank in December of '84? 4 A. That's correct. 5 Q. Would you say that this transaction was 6 lightly lawyered or heavily lawyered? 7 A. I think it was heavily lawyered. 8 Q. Now, did you charge for your time? 9 A. Yes. 10 Q. And Drexel was represented by 11 attorneys? 12 A. Yes. 13 Q. And would it be your expectation that 14 they charged for their time? 15 A. In fact, we saw that their fees were 16 reimbursed by MCO up to a maximum of $40,000. 17 Q. Were you ever aware of some kind of 18 secret deal, some side understanding concerning 19 this transaction? 20 A. No. 21 Q. Now, are you familiar with Mr. Leonard 22 Volin? 23 A. Yes. 24 Q. Who is Mr. Volin? 25 A. He was a lawyer with Lafferty, Goldberg 502 1 & Canter. They were a law firm in the 1980s 2 specializing in savings and loan work. They were 3 headquartered in Washington, D.C. and were 4 retained by Federated/MCO to provide banking law 5 advice. 6 Q. Mr. Rinaldi asked you about a letter of 7 credit that is a part of the Drexel option. 8 Do you recall that? 9 A. Yes. 10 Q. I know you've indicated that you don't 11 recall the negotiations concerning that, but in 12 looking at that transaction what does the 13 existence of the letter of credit suggest to you 14 as far as the parties' concerns? 15 A. In our first draft of the option 16 agreement we provided for a put and call option. 17 There was no backup for MCO's ability to honor the 18 call or put, payment requirement, and the letter 19 of credit provided assurance that the third party 20 would stand behind the obligation to pay Drexel 21 the money if the stock were put to MCO 22 particularly. 23 Q. Were there concerns that MCO might not 24 be able to take the shares? 25 A. Yes. In fact, the first draft of the 503 1 agreement specifically conditioned MCO's 2 obligations to buy the stock on its getting 3 necessary bank board approvals. That condition 4 was removed when the letter of credit was 5 inserted. 6 Q. Let me ask you to look at a document 7 that's been made part of the record, Mr. Marlin, 8 as Exhibit T1085, which is the Maxxam minutes of 9 the December 17th, 1985, meeting to which the 10 executed document is attached. 11 Do you have that in front of you? 12 A. I can get it. 13 Q. Let me ask you to look over at -- 14 A. I do have it. 15 Q. Let me ask you to look at Page 10 of 16 the agreement itself, and it's Paragraph D. 17 Paragraph 6D. 18 A. Yes. 19 Q. Could you read that for the court's 20 benefit? 21 A. It says "Subject to the submission and 22 obtaining the approval of, one, the Federal Home 23 Loan Bank Board of the application on Form H-(e)1 24 filed by MCO pursuant to certain regulations and 25 registration by MCO as a savings and loan holding 504 1 company and, two, the Texas Savings and Loan 2 Commission of an application to be filed by MCO 3 pursuant to the rules of Texas Savings and Loan 4 Department, no authorization, consent, approval, 5 license, qualification, or formal exemption from, 6 nor any filing, declaration, or registration with 7 any court or governmental agency or regulatory 8 authority or any securities exchange or any other 9 person or entity is in connection with the 10 execution or delivery by MCO of this agreement or 11 consummation of the transactions contemplated 12 hereby." 13 Q. Paragraph 6 was a part of the 14 representations and warranties of which of the 15 parties -- 16 A. Made by MCO. 17 Q. Now, let me ask you to look at a 18 document that has been marked as A10155. 19 Is this a letter of January 25th, 1986, 20 from Mr. Barry Munitz as president of Federated 21 Development Company addressed to Mr. L.L. Bowman, 22 III, commissioner of the Texas Savings and Loan 23 Department. 24 A. Yes. 25 Q. Do you see in this document a reference 505 1 to the Drexel option? 2 A. Yes, I do, in the third paragraph. 3 Q. Now, this is about a month after the 4 execution of the Drexel option? 5 A. That's correct. 6 MR. NICKENS: Okay. And we offer, Your 7 Honor, A10155, which has also been identified as 8 NW55. 9 THE COURT: Received. 10 MR. NICKENS: 11 Q. Would you read for Your Honor the 12 paragraph -- the last paragraph on the first page 13 of this document? 14 A. "I am writing at this time in order to 15 bring to your attention a transaction that has 16 recently closed by MCO. On December 24, 1985, MCO 17 entered into a stock option agreement with Drexel 18 Burnham Lamert, Incorporated, pursuant to which 19 DBL has granted a call option on 300,000 shares of 20 UFG common stock. Exercise will be during a -- 21 one-month period commencing July 1, 1988. In the 22 event that MCO does not exercise the call, it is 23 required to grant to DBL a put option on the 24 shares exercisable during a one-month period 25 commencing August 1, 1988. The shares have been 506 1 escrowed until such time as the call or the put, 2 if any, has been exercised. In the event that MCO 3 exercises the call but not does make full payment 4 to DBL for the shares or that DBL exercises the 5 put but does not receive full payment for the 6 shares, DBL may draw upon a letter of credit 7 obtained by MCO in the amount of the shares' 8 purchase price of the shares." 9 Q. Does that accurately describe obviously 10 in summarized terms the Drexel option as you 11 understood it? 12 A. In summarized terms, yes. 13 Q. There's no question that that reference 14 is to the Drexel option? 15 A. No. That is a reference to the option 16 we've been discussing. 17 Q. Let me show you a document at this time 18 that has been marked as A10156 and also bears the 19 identifying mark NW56. 20 Mr. Marlin, does that appear to be Mr. 21 Bowman's response to Mr. Munitz' letter? 22 A. Yes. 23 MR. NICKENS: And we offer, Your Honor, 24 A10156. 25 THE COURT: Received. 507 1 MR. RINALDI: No objection, Your Honor. 2 MR. NICKENS: 3 Q. What was the action taken by the Texas 4 Savings and Loan commissioner with regard to the 5 notification of the Drexel option? 6 A. The letter acknowledges receipt of the 7 notice and states in summary that assuming the 8 300,000 shares do not represent control of the UFG 9 or its subsidiary, USAT, the Department will not 10 require a change of control application by either 11 party. However, by exercising Federated will own 12 25 percent or more of the common stock, then a 13 change of control application must be filed by the 14 companies and approved by the Texas Savings and 15 Loan Commission prior to the exercise of the 16 option. 17 Q. Now, would you say, Mr. Marlin, that 18 such notification and action was consistent or 19 inconsistent with hiding the terms of the Drexel 20 option? 21 A. It was inconsistent with hiding the 22 terms. 23 Q. Let me ask you to look at a document 24 that has been marked as Exhibit 2074 in this 25 matter. 508 1 Can you identify that document for the 2 court? 3 A. This is Amendment No. 13 to the 4 Schedule 13D of United Financial Group immediately 5 following Amendment No. 12, which was admitted 6 into evidence previously. 7 MR. NICKENS: Now, we offer, Your 8 Honor, Exhibit A2074. 9 MR. RINALDI: No objection, Your Honor. 10 THE COURT: Received. 11 MR. NICKENS: 12 Q. If you would turn over, Mr. Marlin, to 13 Page 16 of 67 of Exhibit 2074. 14 A. (Witness complies). Yes, I have. 15 Q. And do you see at the top of the 16 page there -- what agreement is being described 17 there? 18 A. This is a description of the stock 19 option agreement with Drexel Burnham for the 20 300,000 shares exercisable during a one-month 21 period commencing July 1, 1988. 22 Q. And it indicates that a copy of the 23 agreement was filed with the Securities & Exchange 24 Commission, correct? 25 A. That's correct. 509 1 Q. And if you look over toward the end of 2 the document, can you find, in fact, that it was 3 the stock option agreement was, in fact, filed as 4 a matter of record with the Securities & Exchange 5 Commission as a part of this 13D? 6 A. Actually, it starts at page -- 7 immediately following Page 26 of 67 as Exhibit 4, 8 a copy of the executed option agreement is 9 attached. 10 Q. Now, when was this notice filed? 11 A. Well, I was looking for the date. This 12 is dated April 30th -- sorry. I believe this was 13 dated April 30, 1986, and must have been filed on 14 that date. I don't see a date stamp on the front 15 of the document. 16 Q. So, how long after the Drexel option 17 was this document filed with the Securities & 18 Exchange Commission? 19 A. Approximately four months. 20 Q. Now, would you say the filing of -- 21 well, do you have any experience as to whether 22 filings of this nature are sent to the Federal 23 Home Loan Bank? 24 A. No, I don't. 25 Q. Would you say that the filing of this 510 1 document was consistent or inconsistent with the 2 allegation that the Drexel option was hidden from 3 governmental authorities? 4 A. Inconsistent with that. 5 Q. Now, you referenced an earlier 13D 6 which Mr. Rinaldi questioned you about, which I 7 believe is identified in the record as A2073. 8 Could I ask you to briefly look at that 9 document? 10 A. (Witness complies). Yes, I have it. 11 Q. Now, do you see that the occasion for 12 filing this 12th amendment was to inform the 13 S.E.C. that Mr. Hurwitz had acquired 500 shares -- 14 I'm referring to Page 9 -- as a result of a 15 distribution by his father's estate? 16 A. That's correct. 17 Q. And that those 500 shares had a value 18 at that time of $2,912? 19 A. Yes. 20 Q. And was that the reason that this 21 document was filed, as far as you can tell, with 22 the Securities & Exchange Commission? 23 A. Well, there are other transactions or 24 amendments made to the previous filing, but they 25 all seem to relate to that particular transaction. 511 1 Q. And, Mr. Marlin, I would like to draw 2 your specific attention to Page 16 of the 3 document. 4 A. Yes. 5 Q. Do you see there that they are 6 discussing the ownership of shares of UFG by the 7 Kozmetskys? 8 A. Yes. 9 Q. If you would, would you read for the 10 Court the -- it's actually mid sentence, like six 11 lines up which starts with Dr. and Mrs. Kozmetsky? 12 A. Well, the sentence that I'm looking at 13 begins "Although Federated, MCO, Mr. Hurwitz, and 14 Dr. and Mrs. Kozmetsky anticipate that they may 15 consult with each other from time to time 16 concerning matters relating to their respective 17 investments in the company, Mr. Hurwitz and Dr. 18 and Mrs. Kozmetsky expressly disclaim that they 19 are members of a group as defined by Rule 20 13d-5(b)(1), as they are not parties to any 21 agreement for the purpose of acquiring, holding, 22 voting or disposing of their respective shares." 23 I should also call your attention to 24 the last sentence on Page 15 which reads "Pursuant 25 to Rule 13d-4 promulgated under the Securities 512 1 Exchange Act of 1934, as amended, Dr. Munitz and 2 Dr. and Mrs. Kozmetsky declare that the filing of 3 this statement is for informational purposes only, 4 and shall not construed as an admission that any 5 of them beneficially owns, for purposes of Section 6 13(d) or 13(g)of the Exchange Act any of the 7 shares owned by Federated or MCO." 8 Q. And, to your knowledge, was that 9 disclaimer included as a matter of routine, as a 10 part of the filings after the Kozmetskys had 11 acquired their UFG shares? 12 A. Well, to my knowledge that disclaimer 13 would appear in the Securities Act filing. 14 Q. And did you ever make any determination 15 that the shares of the Kozmetskys should be 16 included or aggregated with those of MCO and 17 Federated for banking regulation purposes? 18 A. No. 19 Q. Now, to your knowledge did MCO ever 20 acquire more than 24.9 percent of the common stock 21 of UFG? 22 A. No. 23 Q. Were there extensions granted 24 concerning the granting of the -- in December of 25 1984 -- the granting of the H-(e)1 application? 513 1 A. Yes. 2 Q. What eventually happened with regard to 3 those extensions, if you recall? 4 A. I don't recall. 5 Q. Now, there's a provision in the option 6 agreement with regard to indemnification that Mr. 7 Rinaldi brought to your attention. 8 Do you recall that? 9 A. Yes. 10 Q. Was it common or uncommon to have such 11 indemnification agreements in this agreement? 12 A. It doesn't always appear. It's not in 13 every agreement. 14 Q. Was there anything surprising or 15 sinister, some conclusion that we should draw from 16 the fact that there is an indemnification 17 agreement in the Drexel option? 18 A. No. 19 Q. Now, do you know who under that 20 agreement had the voting rights for the shares 21 that were subject to the option? 22 A. Drexel. 23 Q. That's in Paragraph 5D of the option? 24 A. On page -- 25 Q. Page 8, I believe, if my notes are 514 1 correct. 2 A. Yes. Section 5D says "DBL currently 3 possesses and shall retain sole rights to vote the 4 shares unless" -- 5 Q. Do you have any information to disclose 6 to the court or to the people here about a 7 different agreement? 8 A. No. 9 Q. Do you have any information to indicate 10 that Drexel did not, in fact, have a right to vote 11 those shares? 12 A. No. 13 Q. At the time of the negotiations of the 14 option agreement, Mr. Marlin, did you know that 15 United Savings was purchasing high-yield bonds 16 from Drexel? 17 A. No. 18 Q. Did that matter ever come up, to your 19 knowledge, in these discussions of the option? 20 A. No. 21 Q. Did it ever come up in your other 22 dealings with Drexel, to your knowledge? 23 A. That United Savings was purchasing -- 24 Q. High-yield bonds? 25 A. No. 515 1 Q. Now, to turn to a different subject, 2 Mr. Marlin, would you characterize Mr. Charles 3 Hurwitz as a corporate raider? 4 A. No. 5 Q. Why not? 6 A. I think of Charles Hurwitz as an 7 entrepreneur and I think of a raider as a person 8 who uses companies, takes them over and uses their 9 assets for his own purposes. That has not been 10 Charles' history. 11 Q. Earlier you mentioned the Kaiser 12 acquisition and I would like to refresh your 13 recollection that Drexel was involved in that 14 transaction as a co-underwriter. 15 A. Yes, okay. 16 Q. You were talking about the later 17 transaction? 18 A. I was actually talking about the part 19 of that transaction that I was responsible for, 20 which was the acquisition of the control block of 21 stock from the Allen Clore group and Drexel was 22 not involved in that. 23 Q. Now, were you involved with the Pacific 24 Lumber acquisition? 25 A. Only tangentially at most. I had very 516 1 little contact with that. 2 Q. Mr. Marlin, were you ever asked to do 3 anything by Maxxam, Federated, or anyone 4 associated with them that you considered to be 5 illegal? 6 A. No. 7 Q. Do you know of any side deals, secret 8 agreements, anything of that nature between Drexel 9 and Maxxam, Federated, or any of their officers, 10 employees, with respect to the option agreement or 11 any other transaction? 12 A. I do not. 13 MR. NICKENS: No further questions, 14 Your Honor. 15 THE COURT: Do any of the other 16 respondents have questions? 17 MR. BLANKENSTEIN: No questions, Your 18 Honor. 19 MR. EISENHART: No questions, Your 20 Honor. 21 MR. VILLA: No questions. 22 MR. RINALDI: If I might take just a 23 moment. 24 THE COURT: All right. 25 517 1 (Short break.) 2 FURTHER DIRECT EXAMINATION 3 4 MR. RINALDI: 5 Q. Mr. Marlin, in response to the 6 questions of Mr. Nickens you indicated that you 7 had worked on a number of financings on behalf of 8 entities that Charles Hurwitz was involved in. 9 Do you recall that? 10 A. Yes. 11 Q. And you mentioned the issuance of 12 subordinated debt 12 and a half percent due in 13 1989? 14 A. 1999. 15 Q. What entity was that debt for? 16 A. It was for MCO. 17 Q. And how much was it, the amount? 18 A. $23 million. 19 Q. And was that debt secured by assets? 20 A. No. 21 Q. Was it guaranteed by Mr. Hurwitz? 22 A. No. 23 Q. And it didn't involve Drexel Burnham? 24 A. No. 25 Q. You testified there was a financing 518 1 with Simplicity Pattern. 2 What was that? 3 A. Actually, it was the acquisition of 4 stock in Simplicity Pattern. I don't believe it 5 was a financial. 6 Q. Okay. And you say it didn't involve 7 Drexel Burnham? 8 A. No. 9 Q. What do you mean by that? 10 A. I mean that there was no investment 11 banker who acted as advisor to Federated in 12 connection with the acquisition or who supplied or 13 underwrote securities or help find financing for 14 them. 15 Q. Did some investment banker other than 16 Drexel serve that function? 17 A. I'm not sure they had any. 18 Q. You made reference to Kaiser Aluminum, 19 a financing with Kaiser Aluminum. 20 A. Yes. 21 Q. What was that all about? 22 A. Well, part of the transaction that I 23 was involved with involved the acquisition of a 24 block of stock which was held by an English 25 investor, David Allen Clore. That transaction, 519 1 when consummated, gave Maxxam a key block of stock 2 in the Kaiser companies. 3 Q. And was there something remarkable 4 about the fact that Drexel wasn't involved in 5 that? 6 A. No, but it indicated that in fact -- 7 Q. Was someone else involved in it? 8 A. They had other people involved in the 9 transaction I was involved in, yes. Solomon 10 Brothers, Inc., was providing advice. 11 Q. And did they provide financing? 12 A. No, I don't believe so. 13 Q. Or assistance in acquiring financing? 14 A. No. 15 Q. So, Solomon Brothers -- 16 A. They had relationships with other 17 investors. 18 Q. Okay. Then you said there was an 19 acquisition by Federated of a position in 20 McCullough Oil. 21 What was that in reference to? 22 A. It was an early 1980s expansion of 23 Federated's business activities and it was the 24 transaction in which they established their stake 25 in what became MCO. McCullough Oil is the 520 1 predecessor name of MCO Holdings. 2 Q. Did that involve some financing? 3 A. I don't recall. It was not a Drexel 4 Burnham transaction. 5 Q. Was some other entity involved in that 6 transaction? 7 A. I don't recall. 8 Q. Are those the only five or six 9 transactions that you were involved in with 10 Mr. Hurwitz? 11 A. Yes. 12 Q. Were you involved in any transactions 13 that did involve Drexel Burnham? 14 A. Well, as I was reminded, the Kaiser 15 Aluminum transaction in a subsequent aspect of the 16 transaction involved -- Drexel was co-underwriter 17 with another underwriter, but I was not actively 18 involved in that. This -- 19 Q. Wasn't there a -- 20 MR. NICKENS: Your Honor, I don't 21 believe the witness had finished his answer. 22 A. I'm sorry. Thinking back over those 23 other ones, I don't believe there was anything 24 else with DBL. 25 Q. (BY MR. RINALDI) What was the timing 521 1 on that first subordinated 12 and a half percent? 2 A. That was in '79. 3 Q. That was six years before the put call 4 option? 5 A. Yes. 6 Q. And the Simplicity Pattern? 7 A. That would be, say, 1981. 8 Q. That would be four years before? 9 A. Yes. 10 Q. How about the McCullough -- 11 A. I would guess it was '81, '82. 12 Q. Okay. Again, that was before the put 13 call option? 14 A. Correct. 15 Q. Are you familiar with an entity called 16 Kaiser Tech? 17 A. I only know of it. I haven't done any 18 work for it. 19 Q. Now, you mentioned that the -- the 20 amount, I believe, of the first 12 and a half 21 percent debt. Did you say it was 24 million? 22 A. That's my recollection, that it was a 23 relatively small transaction by today's standards. 24 Q. And the Simplicity Pattern matter, that 25 was just the acquisition of stock, wasn't it? 522 1 A. Yes. 2 Q. Do you recall the amount of stock that 3 was involved in it? 4 A. No. 5 Q. And the McCullough Oil issue that 6 you've raised? 7 A. Are you asking about the principal 8 amount? 9 Q. Yeah. 10 A. I don't remember. 11 Q. Now, in working with Mr. Hurwitz over 12 the years, was the put call option the only 13 transaction you were involved in that also 14 involved DBL? 15 A. I think to the best of my recollection 16 today it was. 17 Q. Okay. Now, you indicated that you were 18 aware of the Federal Home Loan Bank Board actions 19 in December of 1984 and I think that when you said 20 that you were referring to the bank board's 21 approval of the H-(e)1 application; is that 22 correct? 23 A. Yes. 24 Q. And when the bank board approved the 25 H-(e)1 application, they authorized MCO to acquire 523 1 in excess of 25 percent of the shares of UFG, did 2 they not? 3 A. Yes. 4 Q. So, there was no regulatory restriction 5 at that point upon MCO and Federated acquiring 6 additional shares of UFG? 7 A. Correct. 8 Q. So that if the put call option were 9 exercised, MCO and Federated would have been in a 10 position to acquire the shares without 11 violating -- 12 A. I think that's correct. 13 Q. Now, you've mentioned a Mr. Leonard 14 Volin. 15 What precise role did Mr. Volin play in 16 the put call option? 17 A. I can't tell you what precise role he 18 played. On any particular day I wouldn't expect 19 any particular decision, except that he was 20 retained to provide advice with respect to the 21 investment by Federated MCO into UFG and the 22 banking law ramifications of that. 23 Q. Did MCO and Federated seek a written 24 opinion from Mr. Volin that if they acquired the 25 300,000 shares of UFG from DBL that such shares 524 1 would not be deemed to be shares of MCO until the 2 option was exercised? 3 A. Not that I recall. 4 Q. Did MCO Federated ever seek a written 5 opinion from Mr. Volin on whether acquiring shares 6 of the UFG under the put call option would give 7 MCO beneficial ownership and trigger an obligation 8 of MCO and Federated to maintain the network of 9 USAT? 10 A. I don't know. 11 Q. Have you ever seen such a written 12 opinion by any entity? 13 A. Not that I recall. 14 Q. Now, you were concerned about the 15 application of the Texas savings and loan laws as 16 they would apply to the put call transaction, were 17 you not? 18 A. Yes. 19 Q. And there was a concern that those 20 shares that were acquired -- that were subject to 21 the option might require -- strike that. 22 Were you concerned that MCO might be 23 required under Texas savings and loan law to file 24 a change of control notice before they could 25 acquire the shares under the option? 525 1 A. I think we saw yesterday that the 2 regulations required that a notification be given. 3 Q. And it was uncertain in your mind 4 whether you could do the option without first 5 giving a notification; is that correct? 6 A. Correct. 7 Q. Is there a reason that Mr. Munitz 8 waited until a full month after the transaction 9 was entered into to apply to the Texas Savings and 10 Loan Department to seek their views on the option 11 arrangement? 12 A. It's my belief that Mr. Munitz was in 13 contact with them regularly in advance of that 14 anyway, and I can't tell you why the letter was 15 dated that. 16 Q. Is it normally your practice when 17 there's a concern about the regulatory impact of a 18 transaction that your clients are undertaking to 19 wait until after the transaction to ascertain 20 whether the transaction may violate applicable 21 regulations? 22 A. I don't think we waited until after the 23 transaction to find out whether it would violate 24 it. I called it to his attention. I believe he 25 called it to the regulator's attention on a timely 526 1 basis. I do see the formal notification was sent 2 late. 3 Q. And in the formal notification he then 4 describes in express detail the nature of the 5 transaction, correct? 6 A. Yes. 7 Q. Now, was a copy of the letter to Mr. 8 Bowman forwarded to the federal regulators? 9 A. It's not so indicated. 10 MR. NICKENS: I'm sure he means the 11 letters by Mr. Munitz. 12 A. Yes. 13 Q. (BY MR. RINALDI) Did you have any 14 discussions with anyone at all during this period 15 of time as to whether the letter to Mr. Bowman 16 should also be copied to the Federal Home Loan 17 Bank Board? 18 A. I don't recall any such discussion. 19 Q. Is there a reason why if USAT was 20 subject to the joint regulation of the Texas 21 Savings and Loan Department as well as the Federal 22 Home Loan Bank Board that such a letter would be 23 sent to the Federal Home Loan Bank Board? 24 A. We didn't send the Federal Home Loan 25 Bank Board copies of everything. In fact, if it 527 1 was required to be filed in Washington I'm sure we 2 would have filed it. The Texas regulations 3 required that it be filed in Texas, not that 4 copies be sent to Washington. I don't understand 5 your question to be predicated on any requirement 6 that it be filed in Washington. 7 Q. Was it generally your practice that 8 when you complied with one regulation of one 9 regulator that you copied the other regulator? 10 A. No. 11 Q. Now, what kinds of information are 12 required to be reported in a 13D? 13 A. Well, there is a list -- section of 14 instructions that have to be complied with that 15 deal with source and use of funds, intention of 16 the party who acquired the shares as to what he 17 will do, who the people are who make up the 18 entity, and so on and so forth. 19 Q. And there's a materiality requirement 20 if there is a material change that you need to 21 report that? 22 A. Yes. 23 Q. What are the consequences of failing to 24 report something required on a 13D? 25 A. You know, I'm not sure I could tell you 528 1 off the top of my head. Certainly you would be in 2 violation of that section of the '34 act. 3 Q. And you would be subject to civil as 4 well as criminal penalties? 5 A. I don't know. 6 Q. Now, when the 13Ds were filed to your 7 knowledge were copies of those sent by MCO to the 8 Federal Home Loan Bank Board? 9 A. Not to my knowledge, no. 10 Q. 13Ds are filed with the Securities & 11 Exchange Commission, aren't they? 12 A. Yes. 13 Q. Now, you indicated that Mr. Kozmetsky 14 shares -- you made a reference to they shouldn't 15 be aggregated. 16 What were you making reference to 17 there? 18 A. In yesterday's testimony I think you 19 had directed my attention to the fact that in one 20 of the applications -- probably the H(e)-1 21 application that it was a footnote indicating that 22 the shares -- that the number of shares being 23 shown included certain shares owned by George and 24 Ronnie Kozmetsky. That's what I was referring to. 25 Q. And aren't there certain presumptions 529 1 regarding aggregation of shares? 2 A. I don't know. 3 Q. In fact, if Mr. Kozmetsky served on the 4 board of directors of MCO with Mr. Hurwitz, who 5 controlled MCO and Federated, under the banking 6 laws doesn't that raise a presumption that they 7 may be acting together? 8 A. As I've said, I really don't consider 9 myself a banking lawyer and I can't dispute what 10 you're saying, but I can't agree with it either. 11 Q. Now, you also talked about the 12 indemnification agreement and said that it was not 13 unusual. Do you recall that? Now, this 14 indemnification agreement I think we've shown you 15 on the February 15th draft provided by Mr. Yeres, 16 he originally requested that there be collateral 17 deposited with Drexel Burnham. 18 Do you remember that? 19 A. Yes. 20 Q. And that was obviously so that Drexel 21 would have the money in hand if the option were 22 exercised, correct? 23 A. Yes. 24 Q. And later Drexel agreed that they would 25 forego that collateral requirement in return for 530 1 which they have received a letter of credit? 2 A. Your summary is perhaps hypothetical. 3 The later document provides for the letter of 4 credit and doesn't provide for the the collateral. 5 Q. And, in addition, the document also 6 provides for an indemnification against all loss 7 on the transactions? 8 A. Yes. 9 Q. So that if, for example, Drexel could 10 not put the shares back for any reason and had to 11 sell them for less than the price agreed in the 12 option, MCO would have been obligated to indemnify 13 them for any loss they would have sustained? 14 A. If for some reason the letter of credit 15 was not collectible, I believe they could only 16 collect the damages they suffered. If, in fact, 17 they collected the full amount under the letter of 18 credit, what the indemnification would have 19 protected them against was any expenses they 20 incurred in doing that. 21 Q. It also says they are indemnified 22 against any loss? 23 A. For example, if the letter of credit 24 for some reason was not sufficient, the difference 25 would have to be paid up by MCO. 531 1 Q. Now, you indicated that Drexel Burnham 2 retained the voting rights as to the stock. 3 Do you know how Drexel voted the stock? 4 A. No. 5 Q. Under securities law didn't Drexel have 6 a fiduciary obligation to vote the shares 7 consistent with the interest of its client, 8 Charles Hurwitz and MCO? 9 A. No. 10 MR. NICKENS: There's no evidence to 11 support the -- no basis for that in the evidence 12 for that allegation. I object to that. 13 THE COURT: I deny the objection. You 14 may answer. 15 A. The answer to the question, based on my 16 knowledge, is no. I'm not aware of any fiduciary 17 obligation that binds an investment banker that 18 has an investment position in his own stock to 19 vote in favor of somebody that happens to be a 20 client. 21 Q. Even if they are providing finance to 22 the client? 23 A. Absolutely. 24 Q. Now, did Drexel Burnham provide any 25 financing assistance to Charles Hurwitz in 532 1 connection with the Patco Lumber acquisition? 2 A. I believe he did, but I'm not familiar 3 with any of the details of that. 4 Q. Are you aware that Mr. Hurwitz has been 5 sued in the past as -- under allegations that he 6 was a corporate raider? 7 MR. KEETON: Your Honor, what's that 8 have to do with this case? 9 MR. RINALDI: Well, your co-counsel 10 asked him about was Mr. Hurwitz a corporate 11 raider. All I'm asking is was he aware of any 12 litigation in which he's been sued. 13 MR. NICKENS: I would ask that the -- 14 THE COURT: I'll sustain the objection. 15 Move on. 16 MR. RINALDI: I don't have anything 17 further, Your Honor. 18 MR. NICKENS: We have no further 19 questions of Mr. Marlin, and we would ask that he 20 be released from his subpoena so that he can 21 return to his work and regular activities. 22 THE COURT: Mr. Marlin, you may step 23 down. 24 Mr. Rinaldi, do you wish to begin with 25 another witness, or do you want to take an early 533 1 lunch or what's your pleasure? 2 MR. GUIDO: I think it would be 3 appropriate to break for lunch. 4 THE COURT: All right. We'll adjourn 5 to lunch. 1:00 o'clock. 6 7 (Lunch break.) 8 9 MR. RINALDI: Your Honor, Mr. Eisenhart 10 has been discussing the witness schedule. Because 11 of the schedules of the various witnesses we have 12 brought in and the concerns we have about some of 13 the witnesses being able to get in and out in one 14 day, we've determined that we may have a short day 15 on Friday. 16 I'll explain what the problem is. As 17 we currently scheduled several witnesses, we had 18 thought we might attempt to bring Mr. Lazard back 19 Friday to testify. However, based on estimates of 20 time, it -- we're not certain we can finish Mr. 21 Lazard on Friday. Mr. Lazard lives in Arizona, 22 and he's already flown in here once. We intended 23 to put him on yesterday. We believe it might be 24 agreeable to allow for the possibility that Friday 25 might be a short day. We're not certain that that 534 1 will be the case. It may well be the testimony 2 Friday could run an entire day. Obviously, it's a 3 question we wanted to put in front of Your Honor. 4 Mr. Lazard is a former controller. 5 MR. EISENHART: I think the problem is, 6 Your Honor, the schedule we worked out with OTS 7 will have Mr. Levin on the stand this afternoon. 8 They believe they will be able to finish him then. 9 We will, as well. The witnesses for tomorrow are 10 Mr. Madigan, Mr. Kramer, and then we're going to 11 start Mr. Schwartz probably sometime, I would 12 estimate, after lunch tomorrow. The estimate is 13 that Mr. Schwartz will still be on the stand 14 Friday morning. The question is how far along -- 15 they have Mr. Dignam coming in on Friday. I have 16 a real concern that if we brought in Mr. Lazard, I 17 know we might not get him on. With him having 18 flown in from Arizona once already, I would hate 19 to have him fly in again. 20 THE COURT: That sounds like a pretty 21 full schedule anyway. I think that's fine. 22 MR. NICKENS: This is Ezra Levin, who I 23 understand to be the next witness. 24 THE COURT: Mr. Rinaldi, you're calling 25 Mr. Levin? 535 1 MR. RINALDI: I am, Your Honor. 2 3 (Witness sworn.) 4 5 6 EXAMINATION 7 8 MR. RINALDI: 9 Q. Would you state your full name for the 10 record, sir? 11 A. I am Ezra G. Levin. 12 Q. And where are you currently employed, 13 Mr. Levin? 14 A. At the firm of Kramer Levin Nessen 15 Kamin & Frankel in New York City. 16 Q. That's a law firm, is it not? 17 A. Yes, it is. 18 Q. How long have you been employed at 19 Kramer Levin? 20 A. About 18 years. 21 Q. And you're the Levin in the Kramer 22 Levin? 23 A. For the moment. 24 Q. Are you familiar with an individual 25 named Charles Hurwitz? 536 1 A. I am. 2 Q. Can you describe the circumstances 3 under which you first became acquainted with 4 Mr. Hurwitz? 5 A. I believe I met Mr. Hurwitz in about 6 1970 or '71, at which time I was representing an 7 investment banking firm or firms who were involved 8 in a public offering of shares of a company of 9 which Mr. Hurwitz was the CEO. That was the first 10 time that I met him. 11 Q. And after meeting him, did he 12 subsequently become a client of yours? 13 A. About two years later, after having 14 been on the opposite side in the investment 15 banking situation, he did have a matter involving 16 a New York law -- a New York company, and my firm 17 was retained at that time by Mr. Hurwitz and Mr. 18 Hurwitz' firm. 19 Q. What was Mr. Hurwitz' firm at that 20 time? 21 A. I believe it was Summit Group, Inc. 22 Q. Was he a principal or an employee? 23 A. He was a large shareholder and the CEO. 24 Q. This would have been about the early 25 1970s? 537 1 A. Either 1970 or '71, yes. 2 Q. Now, following that initial legal 3 assistance that you provided to Mr. Hurwitz, did 4 you continue then to serve as -- provide him with 5 legal services? 6 A. Yes, since about 1973. 7 Q. And what is your area of 8 specialization, sir? 9 A. Corporate law, securities law. 10 Q. Now, did there come a time when 11 Mr. Hurwitz became involved with an entity known 12 as McCullough Oil? 13 A. Yes. 14 Q. About when would that have been? 15 A. I think that was in the spring of 1978. 16 Q. And did McCullough Oil then 17 subsequently become another entity? 18 A. Well, it changed its name. I think it 19 remained as the same corporate entity. I think it 20 changed its name to MCO Holdings. 21 Q. Did there come a time when MCO Holdings 22 became an entity known as Maxxam, Inc.? 23 A. Yes. Well, it was again the same 24 entity, but sometime I believe in late 1980s a 25 company called Maxxam Group, Inc. was merged into 538 1 a subsidiary of MCO Holdings and at that time MCO 2 Holdings changed its name to Maxxam, Inc. 3 Q. Okay. Now, I'll be examining you here 4 today principally about the time frame in 1984 or 5 '82, '83, '84 and certain activities of MCO which, 6 as you indicated, is now known as Maxxam and an 7 entity known as Federated and we'll be talking 8 about Federated and Maxxam's acquisition of shares 9 of an entity or thereabouts. 10 Is it also true that the outstanding 11 shares of MCO or Maxxam have also declined, as 12 well? 13 A. I'm not certain. One would have to 14 look at the particular period. At some point, 15 they increased because of the MCO merger with 16 Maxxam Group. So, I could not definitely tell 17 you. 18 Q. Now, do you serve as a member of a 19 board or in a capacity with Federated and MCO or 20 Maxxam? 21 A. I serve as a member of the board of 22 directors of Maxxam, Inc. 23 Q. And how long have you been on the 24 board? 25 A. Since about June of 1978. 539 1 Q. And do you also serve as an officer of 2 that entity? 3 A. No. 4 Q. What about with respect to Federated, 5 do you hold any position with respect to 6 Federated? 7 A. I do not now. I did until I think 8 about two or three years ago. I was a member of 9 the board of trustees of Federated, but not an 10 officer. 11 Q. And for approximately what period did 12 you serve as a member of the board of trustees of 13 Federated? 14 A. Since about 1973, after an acquisition 15 of Federated by -- by a company which Mr. Hurwitz 16 was involved. 17 Q. And have you served in any other 18 capacities with respect to any affiliation of 19 either Federated or Maxxam? 20 A. Not as an officer, but I have served as 21 a member of the board of a variety of affiliations 22 from time to time. 23 Q. Which ones have you served on? 24 A. I served as a member of the board of 25 Kaiser Aluminum Corporation and of Pacific Lumber 540 1 Company, and I believe a subsidiary of each of 2 those two companies. 3 Q. And are you familiar with an entity 4 that existed back in 1982 known as Federated 5 Reinsurance? 6 A. I am familiar -- was familiar with that 7 company, which was sold at about that time, if I'm 8 not mistaken. I may have been a director of that 9 company. I believe I was, but I'm not certain. 10 Q. Now, in your -- you indicated that you 11 represent Mr. Hurwitz and his various corporate 12 enterprises; is that correct? 13 A. Well, my firm has represented various 14 corporate enterprises. I am less certain about 15 representation of Mr. Hurwitz as an individual, 16 but we may have at some point. 17 Q. Well, directing to your attention to 18 the period of about 1982 through 1988, did you 19 represent Maxxam and Federated with respect to 20 security matters? 21 A. My firm did represent them with respect 22 to security matters, yes. 23 Q. And when you say you represented them 24 with respect to security matters, would that have 25 included the preparation of form 13Ds for the 541 1 Securities & Exchange Commission? 2 A. Yes. 3 Q. Do you know whether your firm prepared 4 forms 13D for Federated and Maxxam in connection 5 with their acquisition of shares of UFG beginning 6 in about 1982? 7 A. Yes, I believe we did. 8 MR. RINALDI: Okay. What I would like 9 to do is pass out to the witness a series of 10 documents. This is a set of documents, A2061 11 through A2083, and I have three full sets. 12 Q. (BY MR. RINALDI) Now, Mr. Levin, could 13 you take a look at the documents that I placed 14 before you and I would ask you to just look 15 through them and tell me if you recognize what 16 they are. 17 A. (Witness complies). This appears to be 18 the Schedule 13D originally filed in respect of 19 United Financial Group and includes Amendments 20 Nos. 1 through 22 to that Schedule 13D. 21 Q. Okay. Have you seen these documents 22 before, sir? 23 A. Yes. 24 Q. And were they documents that your law 25 firm would have prepared? 542 1 A. Yes. 2 Q. And I notice on the front of the 3 document it indicates your name -- 4 A. Correct. 5 Q. -- as a person authorized to receive 6 notices and communications. 7 A. Correct. 8 Q. Now, did you oversee the preparation of 9 these documents on behalf of MCO and Federated? 10 A. On behalf of whomever was included 11 among the filing persons, which initially I think 12 did not include MCO; but the answer is yes. 13 Q. Okay. And prior to the filing of these 14 documents did you review them for completeness and 15 accuracy? 16 A. I would try to. 17 Q. Now, I notice in the first series of 18 documents your signature appears on the last page 19 of the actual form and it says "After reasonable 20 inquiry and to the best knowledge and belief of 21 the undersigned, the undersigned certifies that 22 the information set forth in this statement is 23 true, complete, and correct." 24 Do you see that? 25 A. Yes. 543 1 Q. Now, subsequent to the filing of the 2 initial 13Ds I notice that you stopped signing the 3 13Ds and they were frequently signed by a 4 corporate officer, and I think if you look at some 5 of the later ones you will see that they do not 6 have your signature but rather have the signature 7 of various corporate officers of MCO Holdings and 8 Federated. 9 A. Uh-huh. 10 Q. Is there a reason why you would have 11 stopped signing these documents? 12 A. There may have been. I just don't 13 recall. 14 Q. Even though you stopped signing them, 15 it was your practice to review them for 16 completeness and accuracy? 17 A. To the best of my recollection, yes. 18 Q. Okay. And in executing them, in what 19 capacity were you acting as a director of 20 Federated? 21 A. I think I was acting pursuant to a 22 power of attorney. 23 Q. It states "Attorney in fact." 24 A. Okay. 25 Q. So, that would indicate you were acting 544 1 pursuant to a power of attorney? 2 A. I think there's actually a footnote on 3 the first document which so indicates. 4 Q. Okay. I see that. Thank you. 5 Did there come a time when FedRe 6 determined that it wished to acquire in excess of 7 10 percent of the outstanding shares of United 8 Financial Group? 9 A. I believe so. 10 Q. In connection with that, did FedRe file 11 a notice with the Federal Home Loan Bank Board 12 indicating their desire to acquire in excess of 13 10 percent of the outstanding shares of United 14 Financial Group? 15 A. I'm not sure of the year, but I believe 16 they did, yes. 17 Q. Do you recall that in that filing they 18 indicated that FedRe did not intend to acquire or 19 exercise control over UFG? 20 A. They may have so indicated. I don't 21 independently recall. 22 Q. Okay. What do you recall as you sit 23 here today as the reason why FedRe initially 24 determined that it wished to acquire an interest 25 in United Financial Group? 545 1 A. My best recollection is that a 2 subsidiary of United Financial Group was going to 3 be sold. There was somebody who was going to 4 acquire the S&L that was held by United Financial 5 Group with the result that United Financial Group 6 would have ended up with quite a lot of cash, more 7 than it had, and with real estate holdings. And 8 that was the incentive, as best I can recall, for 9 the initial investment by Federated Reinsurance. 10 Q. Do you know how that prospect or that 11 investment opportunity was first brought to the 12 FedRe board? 13 A. I don't recall independently, no. 14 Q. Was it presented to the board by 15 Charles Hurwitz? 16 A. In all likelihood, but I don't have a 17 specific recollection of it. 18 Q. Well, when you say "in all likelihood," 19 do you mean it's likely that he would have? 20 A. It's likely that someone from 21 management, and it would have been either 22 Mr. Hurwitz or Dr. Leone. 23 Q. And Dr. Leone, was he involved in 24 administrative matters or did he actually get 25 involved in the financial matters? 546 1 A. Well, I think he got involved in 2 everything. 3 Q. Now, if you take a look at the first -- 4 A2062, which is the 13D dated February the 19th, 5 1982 -- 6 MR. RINALDI: Your Honor, I would like 7 to offer this as a group of exhibits -- that is, 8 the entire set of 13Ds that have been identified 9 by Mr. Levin, A2061 through A2083. 10 MR. NICKENS: No objection, Your Honor. 11 THE COURT: Received. 12 MR. RINALDI: 13 Q. Now, it indicates in A2062 that as of 14 February the 19th, 1982, FedRe Reinsurance had 15 acquired 9.68 percent of the shares of United 16 Financial Group. 17 Do you see that? It's on Page 26 of 18 that document. 19 A. Yes. 9.68? 20 Q. Yes. 21 A. Yes. 22 Q. And then turning to the 11th page of 23 that document, it talks about -- I mean, there is 24 an application that we discussed a moment ago, I 25 believe. 547 1 Do you recognize that application 2 that's prepared by Richard Marlin dated February 3 the 19th, 1982? 4 A. I see it. 5 Q. And it attempts to rebut a presumption 6 that if FedRe acquires in excess of 10 or between 7 10 and 20 percent of the outstanding shares, it 8 should not be presumed to acquire the power to 9 direct management and policies of an insured 10 institution. 11 Do you see that? 12 A. If you would point me to the paragraph, 13 I'm sure I would see it. 14 Q. Okay. 15 A. You're talking about the very bottom of 16 Page 11? 17 Q. No, I'm sorry. I'm actually on 18 Page 10, Section 563. "In pertinent part." 19 A. Yes, I see that. 20 Q. Then it goes on and says at the bottom 21 of Page 11, "FedRe considers UFG to present a 22 favorable investment opportunity. FedRe has 23 advised us that its interests in UFG results from 24 UFG's negotiations to sell United Savings. (Its 25 entire savings and loan operation) to a third 548 1 party nonaffiliated with FedRe." 2 Then it goes on and says "FedRe is 3 investing in UFG not with a view toward 4 controlling the management of a savings and loan 5 institution but rather with the hope of 6 benefitting from UFG's intended disposition of 7 United Savings, and FedRe has so advised UFG's 8 management. 9 It says then at the bottom of the first 10 full paragraph, "Accordingly, we request your 11 determination that such presumption is rebutted 12 under the circumstances described herein." 13 Do you see that? 14 A. Yeah. 15 Q. Okay. What was the purpose of FedRe's 16 investment in UFG if it was not intending to 17 control the management of the savings and loan 18 institution? 19 A. My impression is that FedRe at that 20 time thought that the S&L would be sold, that the 21 investment would be a good investment because 22 additional cash would come in to United Financial 23 Group, and it would have also some valuable real 24 estate. 25 Q. Attached as Page 13 is an enclosure and 549 1 it talks about a press release in which United 2 Financial Group announces that its board has 3 approved a sale on USAT to an investor Dan K. 4 Ludwig. 5 Does that refresh your recollection 6 that USAT was going to be sold to Mr. Ludwig? 7 A. It doesn't refresh it very much, but I 8 see what you're saying, yes. 9 Q. It was because of that proposed sale 10 that FedRe viewed USAT as potentially an 11 attractive investment opportunity? 12 A. I believe that is certainly initially 13 correct, yes. 14 Q. Well, you say "that is certainly 15 initially correct." Did FedRe's view of UFG as an 16 investment opportunity change over time? 17 A. I don't know that its view as an 18 opportunity changed, but I think the facts about 19 UFG changed because I think, if I'm not mistaken, 20 that the Ludwig purchase fell through or was 21 cancelled for some reason. 22 Q. And after the Ludwig purchase was 23 cancelled, did the -- did UFG's investment plans 24 with respect to UFG -- MCO and Federated 25 Investments' plans with respect to UFG change? 550 1 A. I'm not certain how to evaluate that. 2 I know what they did. 3 Q. Okay. 4 A. I believe that the MCO became involved 5 shortly thereafter. Federated Reinsurance was 6 acquired by a third party unaffiliated with 7 Federated Development. I believe that MCO then 8 took a position and Federated Development Company, 9 which was the parent of FedRe, assumed the FedRe 10 position that FedRe had acquired in United 11 Financial Group. 12 Q. Let me hand you a copy of what's been 13 marked as T1004. 14 MR. RINALDI: This is a document, Your 15 Honor, that was admitted yesterday, although I 16 have another copy, if you would like. 17 THE COURT: I think I have it. 18 MR. RINALDI: 19 Q. This is a document dated April the 2nd, 20 1982, and it's a notice of change of control or 21 amendment to change of control application filed 22 by Federated with the Federal Home Loan Bank 23 Board. 24 Do you recognize this document, sir? 25 A. I see it. I'm not sure I know what you 551 1 mean by "recognize." 2 Q. Is it something that you've seen 3 before? 4 A. I did see it in preparation for this 5 proceeding. I reviewed a number of documents, but 6 I did not recall seeing it when I saw it for that 7 purpose. 8 Q. Okay. 9 A. But I may well have seen it in the 10 past. 11 Q. In fact, would you also take a look at 12 what's been marked as T1010? 13 MR. RINALDI: Again, this is a document 14 that was admitted into evidence yesterday, Your 15 Honor. 16 Q. (BY MR. RINALDI) This is a document 17 dated August the 2nd, 1982, and I'm afraid I 18 misspoke with respect to the previous document. 19 This particular document is an application on 20 behalf of FedRe where they seek to amend the April 21 notice to include Federated -- sorry -- on behalf 22 of Federated where it seeks to amend the April 23 notice to include Federated as a person filing 24 such notice. That's in the third full paragraph 25 on the front page. 552 1 And in this it describes at the top of 2 the second page that Federated had recently 3 decided to sell FedRe and the purchaser which has 4 agreed to acquire all the outstanding stock of 5 FedRe, I understand, to continue the reinsurancing 6 business of FedRe but is not interested in 7 acquiring certain services of FedRe. 8 Do you see that, sir? 9 A. Yes, sir. 10 Q. Is that the circumstance you were 11 describing a moment ago that led Federated to 12 acquire the shares of UFG? 13 A. Yes. 14 Q. Now, at this point in time it indicates 15 on the front page that the outstanding number of 16 shares owned by FedRe was 12.03 percent. 17 Do you see that? 18 A. Yes, I do. 19 Q. Did Federated acquire the full 12.03 20 percent? 21 A. I don't independently recall, but they 22 may well have. 23 Q. Okay. Now, at the third full paragraph 24 on the second page, it says "Federated does not 25 otherwise admit or allege that upon the 553 1 acquisition of shares of UFG it will exercise a 2 controlling influence over the management or 3 policies of such institution." 4 Do you see that? 5 A. Yes. 6 Q. Did the board of directors -- the board 7 of trustees of FedRe, did they have to prove 8 FedRe's acquisition of the UFG shares from -- I'm 9 sorry. 10 Did the board of Federated have to 11 approve Federated's acquisition of UFG shares from 12 FedRe? 13 A. I don't know whether they would have 14 had to as a legal matter, but I suspect that as 15 part of the sale to the third party that would 16 have been embraced in that transaction. In other 17 words, they would have approved the sale of the 18 FedRe and the sale of FedRe in a sense would have 19 left behind with Federated the shares of UFG then 20 held by FedRe. 21 Q. Now, after Federated acquired these 22 shares, it indicates that they intended to acquire 23 up to 24.9 percent of the outstanding shares of 24 UFG. 25 Do you see that in the paragraph above? 554 1 A. Yes, I do. 2 Q. Do you recall any discussions with the 3 board of trustees of Federated as to why Federated 4 was interested in acquiring up to 24.9 percent of 5 the outstanding shares of UFG? 6 A. As I sit here today, I really cannot 7 recall. 8 Q. Do you know by this time had Mr. 9 Ludwig's attempt to purchase United Savings 10 Association, a subsidiary of UFG, had that effort 11 failed by the time that Federated acquired the UFG 12 shares? 13 A. I have not crossed the dates. I don't 14 know as I sit here, but I guess one could find out 15 by looking at the 13D. I don't have any 16 independent recollection. 17 Q. Well, would the 13D reflect whether Mr. 18 Ludwig was still attempting to purchase UFG 19 shares? 20 A. It might have. I'm not certain if that 21 deal had fallen through or not. 22 Q. Okay. Now, would you take a look at 23 what's been marked as A2065? That's one of the 24 group exhibits. 25 A. Yes. 555 1 Q. And it indicates here that in addition 2 to the 711,000 shares of UFG held by Federated 3 Reinsurance Company that also Federated 4 Development Company had 90,941 shares. So, this 5 would have been before Federated actually acquired 6 FedRe's interest, correct? 7 A. I believe that has to be correct. 8 Q. Okay. And on the next page, it 9 indicates that a Mr. George Kozmetsky also had an 10 identical number of shares, 90,941 -- to the 11 number held by Federated Development. 12 Do you see that? 13 A. I do. 14 Q. Who is Mr. Kozmetsky? 15 A. Dr. George Kozmetsky is a former -- I 16 guess, co-founder of Teledyne who became the dean 17 of the School of Business at the University of 18 Texas Business System and he had some other 19 titles, as well. 20 Q. I notice that he's listed in the 13D 21 along with Federated Development Company and 22 FedRe. 23 Did he have some affiliation with 24 either of those entities? 25 A. He was at the time, I believe, a member 556 1 of the board of trustees of Federated Development 2 Company. 3 Q. So, he sat along with you on the board 4 of trustees of that institution? 5 A. Yes, he did. 6 Q. Who else was on the board of Federated 7 at that time, if you recall? 8 A. I believe that Dr. David Lerner, 9 Mr. Hurwitz, I believe Dr. Barry Munitz. I'm not 10 certain of the dates, but I think that's the case. 11 Q. Okay. Now, directing your attention to 12 Page 8 of the document we've just been looking at, 13 in the next to the last paragraph it makes 14 reference to the very individual you just 15 mentioned, a Dr. Barry Munitz. 16 A. Yeah. 17 Q. It says "On August 26th, 1982, Dr. 18 Barry A. Munitz, president of Federated, was 19 elected to the board of directors of the company." 20 And the company in this case is UFG, is it not? 21 A. Yes. It's so defined on Page 6. 22 Q. And how was it that Mr. -- how was it 23 that Mr. Munitz came to be a member of the board 24 of directors of UFG? 25 A. I believe that at an earlier time 557 1 Federated -- I think it was Federated or Federated 2 Reinsurance -- asked the board of UFG, in light of 3 the investment that FedRe had in UFG, to have the 4 person from FedRe or Federated sit on the board of 5 UFG. 6 Q. Okay. So, was Mr. Munitz then 7 designated as a nominee by Federated or FedRe to 8 sit on the board of UFG? 9 A. I could speculate that that was the 10 case. I don't have a direct recollection of that. 11 Q. Well, in your experience in sitting on 12 both the board of Federated and MCO and Maxxam, 13 when those entities acquired an interest in an 14 acquisition or acquired a substantial interest in 15 another entity, was it their practice to seek to 16 place members of their own employees or directors 17 on the board of the entity they were acquiring? 18 A. It would depend on how substantial the 19 position was; but if it was substantial, the 20 answer is yes. 21 Q. If the position were up to 24.9 percent 22 of the outstanding shares, would that have been a 23 substantial position in your mind? 24 A. Yes. 25 Q. In this case, it indicates that, in 558 1 fact, Federated had a 12 percent interest in UFG 2 and it would appear that Federated Development 3 Company another 1.5. 4 Would you consider that their aggregate 5 interest of 13.5 was a substantial enough 6 interest? 7 A. The answer is yes, but really it would 8 depend on the dollar amount, but I think in both 9 cases -- 10 Q. Well, take a look at Page 2 and 3, I 11 believe. It does not indicate the dollar amount. 12 A. I've been looking for that. I have no 13 reason not to believe that that's what happened. 14 I just can't tell you that I have a direct 15 recollection of that. 16 Q. But it was customary when there was 17 either a significant share position or a 18 significant dollar amount in terms of investment 19 that MCO and Federated would -- 20 A. Seek some representation on the board. 21 Q. Thank you. Now, directing your 22 attention to Page 11 and 12, it indicates that Mr. 23 Kozmetsky acquired 1.5 percent of the shares of 24 UFG at the same time that Federated acquired 1.5 25 percent, I believe. 559 1 Do you see that? 2 A. Yes. 3 Q. Or is that the same 1.5? Maybe I'm 4 missreading it. 5 A. I don't think you are. I think that 6 that would appear on Page 12. 7 Q. Thank you. 8 Do you know what the circumstances were 9 that caused Federated and Mr. Kozmetsky to acquire 10 these shares? 11 A. I would have to be speculating, and -- 12 Q. Am I correct as I read this that they 13 acquired identical positions on three different 14 dates? 15 A. I suspect, again, that what happened 16 was an indication by Dr. Kozmetsky or Dr. and Mrs. 17 Kozmetsky was that they were interested in 18 acquiring shares and rather than compete with 19 Federated that the shares would go basically on an 20 equal basis so that neither would be prejudiced by 21 pricing or something like that. 22 Q. So, in other words, they split the 23 purchase? 24 A. That's right. 25 Q. Was it common practice for Mr. 560 1 Kozmetsky to invest in the same investments that 2 either Federated or MCO were investing in? 3 A. I could not tell you. It may have 4 happened occasionally. I don't know that it would 5 amount to a practice. I couldn't tell you that. 6 I don't recall other -- I don't recall other 13Ds, 7 but maybe they didn't amount to that. I really 8 don't know. 9 Q. So that other than UFG you're not aware 10 of any other investments that Federated or MCO 11 made in which Mr. Kozmetsky would have joined? 12 A. I believe that Dr. Kozmetsky did make 13 an investment in what was then called McCullough 14 Oil Corporation, but I don't -- I don't recall 15 what the volume was. I do believe he was an 16 investor at some point. 17 Q. Now, I'm going to hand you a copy of 18 Exhibit T1012. This is a set of minutes for MCO 19 Holding, Inc. dated September the 16th, 1982, and 20 I apologize for all the blank pages, but this is 21 the form in which we received it. So, I would 22 direct your attention to the only significant 23 writing which appears on what would be Pages 6 and 24 7. 25 THE COURT: Have you previously offered 561 1 that exhibit? 2 MR. RINALDI: My belief is that we have 3 not, Your Honor. As soon as he identifies it as a 4 set of minutes, I will move to have it admitted. 5 MR. RINALDI: 6 Q. Did you get a copy? We have to pass 7 these along. 8 Take a moment to read that section that 9 has not been redacted, and then I have a few 10 questions on it. 11 A. (Witness complies). Yes. 12 Q. Now, does this appear to be the meeting 13 of the board of directors of MCO at which MCO 14 Holdings, Inc. first considered acquiring a -- a 15 position in United Financial Group? 16 A. I can't say that for certain, but it's 17 probably one of the earliest. I can't tell from 18 the first paragraph. 19 Q. And that's because the chairman has 20 announced that he had recently purchased shares in 21 United Financial Group, a Texas based savings and 22 loan, is that correct, so that it appears that 23 there would have already been a purchase prior to 24 the actual date of these minutes? 25 MR. NICKENS: Your Honor, I object in 562 1 this regard. What it says is that the chairman 2 reported Federated Development Company. Mr. 3 Rinaldi said that he. 4 MR. RINALDI: I'm sorry. I misread. I 5 apologize, Your Honor. 6 A. Says that it presented an interesting 7 investment opportunity. I don't know whether that 8 means that anything had been purchased prior 9 thereto. I just can't tell from this. 10 MR. RINALDI: 11 Q. Now, it indicates that it presented an 12 interesting investment opportunity. 13 Why was United Financial Group 14 considered an interesting investment opportunity 15 to MCO Holdings at this point in time? 16 A. I truthfully don't recall. 17 Q. Now, earlier you testified that you 18 recall that Mr. Ludwig or -- strike that. 19 You testified that UFG had announced 20 that it was going to sell USAT. 21 Do you know by the time MCO considered 22 acquiring the position in UFG whether UFG's 23 efforts to sell USAT had fallen through? 24 A. I don't know. 25 Q. Do you recall any discussions at the 563 1 board meeting where Mr. Hurwitz indicated his 2 views regarding the advisability of acquiring an 3 interest in UFG at the MCO Holdings level? 4 A. Other than what I see here, I don't 5 have any independent recollection. 6 Q. Okay. Do you recall any conversations 7 with Mr. Hurwitz on that subject as to why UFG was 8 a desirable investment opportunity or an 9 interesting investment opportunity? 10 A. No. 11 Q. And since the date of this initial 12 board meeting, do you recall any subsequent 13 discussions with Mr. Hurwitz in which he expressed 14 his views as to why UFG would be an interesting 15 investment opportunity? 16 A. Other than it possibly being 17 undervalued in price in the market, I don't recall 18 any such discussion. 19 Q. Now, you say "other than it possibly 20 being undervalued in price in the market." 21 Do you recall a discussion with 22 Mr. Hurwitz in which he indicated to you that he 23 felt UFG was undervalued? 24 A. I cannot specifically recall. 25 Q. Now, prior to MCO authorizing -- prior 564 1 to MCO resolving to invest in UFG, did some 2 individual at MCO Holdings, Inc. do a due 3 diligence examination of the UFG investment? 4 A. They may have, but I have no specific 5 recollection. 6 Q. In connection with MCO Holdings' 7 acquisitions, who at MCO Holdings would be in a 8 position to do the due diligence examinations of 9 potential acquisitions? 10 A. At what period of time are you talking 11 about? At that time? 12 Q. Yes. 13 A. Oh, probably the financial people and 14 Paul Schwartz. I guess it would depend on the 15 nature of the acquisition opportunity. That is, 16 if it were a question of, you know, an operating 17 company that might require somebody like Billy 18 Young who had been the president of a large 19 operating company and was himself an engineer. I 20 would imagine Paul Schwartz, perhaps Jacques 21 Lazard. 22 Q. Is that the kind of thing that 23 Mr. Hurwitz would have done? 24 A. In certain aspects of it, yes. 25 Q. When you say "in certain aspects," what 565 1 do you mean by that? 2 A. Well, I guess he would look at their -- 3 at the portfolio of the savings and loan or United 4 Financial Group. I don't recall what the balance 5 sheets looked like, but it was largely an 6 investment analysis and real estate and 7 Mr. Hurwitz would look at the real estate. 8 Q. Okay. And here it says that 9 Mr. Hurwitz indicated that based upon his review 10 of UFG it presented an interesting investment 11 opportunity. 12 Does that suggest to you that it was 13 Mr. Hurwitz who did the due diligence 14 investigation with respect to MCO original 15 acquisition of UFG? 16 A. Well, it would suggest to me that he 17 was familiar with whatever was done. He may have 18 been coordinating the work of others, but 19 certainly a part of it, and the part of it that 20 would relate to the real estate and the portfolio 21 I would be sure that he would take a close look 22 at. 23 Q. Now, it indicates at the bottom of the 24 page that MCO Holdings resolved to acquire up to 25 10 percent of United Financial Group. 566 1 Do you see that? 2 A. Yes. 3 Q. And it further states that Mr. Ezra G. 4 Levin -- is it Levin or Levin? 5 A. I pronounce it as Levin. 6 Q. Okay. But you're not offended if I get 7 it wrong? 8 A. If you don't do it too many times. 9 Q. Okay. That Mr. Ezra G. Levin or 10 Richard Marlin, partners of the law firm of Kramer 11 Levin Nessen Kamin & Soll, counsel for the 12 corporation, file a notice pursuant to 12 U.S.C. 13 1730(g) with respect to investment in UFG. 14 Do you see that? 15 A. Yes. 16 Q. Did Kramer Levin then subsequently file 17 the requested notice that's in that paragraph? 18 A. I believe we did. 19 Q. And it goes on and talks about in the 20 next paragraph "Resolve further that the 21 corporation enter into a loan agreement and call 22 agreement between the corporation and Federated 23 Development Company, Federated, dealing with the 24 possible purchases by Federated of UFG common 25 stock." 567 1 Do you recall what that refers to? 2 A. I see it, but I don't have any 3 independent recollection of it. 4 Q. Do you recall that MCO loaned money to 5 Federated and that Federated purchased shares of 6 United Financial Group with the money that it 7 received pursuant to the loan from MCO? 8 A. If you asked me without my seeing this, 9 I would not have recalled it. I do see it, but I 10 don't have any independent recollection of it. 11 Q. Do you have any knowledge as to why the 12 transaction was structured in that fashion, that 13 is as to why MCO loaned money to Federated for 14 Federated to buy the shares of UFG and then 15 received a call from Federated to call the shares? 16 A. I really -- I don't know whether MCO 17 could have purchased shares that they would have 18 liked to purchase without the filing of that form 19 and the approval from the Federal Home Loan Bank 20 Board, but I'm really speculating. I really don't 21 know why it was entered into, as we sit here. 22 Q. Okay. Let me show you what's been 23 marked as T1013, and I believe this is a document 24 which has been previously marked. So, the Court 25 should have a copy. It's dated September the 568 1 28th, 1982, and this is an application from -- by 2 MCO, a change of control notice. 3 MR. RINALDI: And before we get into 4 this document, I would like to move 1012, that is 5 the minutes of the meeting on September 16th, 6 1982, into evidence. 7 MR. NICKENS: No objection, Your Honor. 8 THE COURT: Received. 9 MR. RINALDI: 10 Q. And directing your attention to the 11 third page of that document, it indicates in the 12 second full paragraph "Pending receipt of your 13 response to this application, Federated has 14 arranged to borrow funds from MCO to finance the 15 purchase of an indeterminate number of shares of 16 UFG within the above-described 24.9 percent 17 limitation." 18 Do you see that? 19 A. Yeah. 20 Q. Does that refresh your recollection 21 then as to the reason why Federated was borrowing 22 money from MCO to purchase the shares? 23 A. It really doesn't. I mean, I think my 24 speculation may well have been correct, but I 25 cannot tell you that I have a recollection of what 569 1 happened at that time. 2 Q. Now, in order for MCO -- do you recall 3 whether ultimately MCO loaned money to Federated 4 to acquire shares of UFG? 5 A. I guess before I came in this morning I 6 was told that there were a number of documents on 7 which that you would ask me about, and I looked at 8 those documents. And on the basis of having 9 looked at that document, I believe that the loan, 10 in fact, went forward, but I -- it's not 11 refreshing my recollection because I don't have 12 any recollection of it, per se. 13 Q. Take a look at A2056. Or is it 66? I 14 can't read my handwriting. This would be the 13D 15 that would be the fifth amendment. 16 Do you see that? 17 A. Yes. 18 Q. And I believe that attached to that on 19 Page 24 there is a loan agreement that appears to 20 have been executed by Federated and MCO Holdings. 21 It indicates on the first page "whereas" -- strike 22 that. 23 "Whereas Federated and its wholly-owned 24 subsidiary Federated Reinsurance Corporation have 25 purchased shares of common stock without par value 570 1 of UFG, Inc., a Texas savings and loan holding 2 company, (the UFG stock). And MCO has filed a 3 notice dated September 28th, 1982, with the 4 Federal Home Loan Bank Board of its intention to 5 acquire shares of UFG stock (MCO's notice). 6 Federated is contemplating the purchase of 7 additional shares of UFG stock, (the additional 8 shares) and desires to borrow from MCO an 9 aggregate principal amount hereinafter described." 10 Do you see that? 11 A. Yes. 12 Q. And then a loan agreement follows? 13 A. Yeah. 14 Q. Do you recognize the signatures that 15 appear on Page 34, the last page of the loan 16 agreement? 17 A. Yes. 18 Q. And whose are they? 19 A. Dr. Leone, William C. Leone on behalf 20 of MCO Holdings, and I'm kind of guessing that it 21 is Mr. Hurwitz for Federated Development Company. 22 Q. And that's because the writing is a 23 little obliterated? 24 A. It didn't come out too well. 25 Q. Yes. But it does appear to be Mr. 571 1 Hurwitz' signature? 2 A. I'm not sure, but -- yes. I say that 3 on the basis of Page 42 where it's somewhat more 4 clear and it appears to be in the same slant. 5 Q. And this is, on Page 42, a letter 6 agreement setting forth an understanding with 7 respect to a call option that was being granted by 8 Federated to MCO Holdings? 9 A. Yes. 10 Q. And do you recall that, in fact, 11 Federated and MCO Holdings entered into such a 12 call option, independent of having seen the 13 documents recently? 14 A. No. 15 Q. Now, let me hand you a copy of what's 16 marked -- this hasn't been marked. T1018. Now, 17 this is a promissory note. And the document is 18 dated October 22nd, 1982, and it talks about the 19 exercise of a call as defined in the loan 20 agreement which we previously looked at, and then 21 on the next page it says "note is one of the notes 22 issued pursuant to the loan agreement dated 23 October 1st, 1982 (the loan agreement) by and 24 between MCO and Federated and is subject to 25 prepayment and acceleration of maturity," and it 572 1 goes on. 2 Now, do you recognize the signatures on 3 that page? 4 A. Yes. 5 Q. And whose are they? 6 A. Mr. Hurwitz on the right side and 7 Mr. James Pauling attesting to his signature. 8 Q. Mr. James Pauling was who? 9 A. Is a secretary of Federated Development 10 Company, I believe. 11 Q. Now, do you recall were there 12 additional promissory notes entered into between 13 Federated and MCO for the purposes of Federated's 14 acquisition of shares? 15 A. I don't independently recall, but I do 16 see that attached to the document, part of the 17 document of T1018 is indeed a non-negotiable 18 promissory note dated October 11th, 1982, in the 19 principal amount of $40,000. I don't have any 20 independent recollection of whether there were any 21 other notes, but there may have been. 22 Q. Okay. Let me hand you a copy of what's 23 been previously marked. 24 MR. RINALDI: Allow me to move into 25 evidence the last document, Your Honor. It's 573 1 T1018. 2 MR. NICKENS: No objection. 3 THE COURT: Received. 4 MR. RINALDI: 5 Q. Directing your attention, then, sir, as 6 to T1026, this is a document that was previously 7 moved into evidence yesterday afternoon. This is 8 a letter from the Federal Home Loan Bank Board for 9 a Mr. Marlin. 10 Do you have any recollection of having 11 seen this letter at or about the time it's dated, 12 that is November 24th, 1982? 13 A. I have no independent recollection. I 14 may well have seen it, but I don't recall 15 specifically seeing it. 16 Q. Down below it says that a cc of their 17 letter was passed along to Ezra Levin. 18 Do you see that? 19 A. Yes, I do. 20 Q. Does it appear to indicate that the 21 Federal Home Loan Bank Board indicated that it did 22 not intend to disapprove the proposed acquisition 23 by MCO Holdings of control of United Financial 24 Group? 25 A. It says that FSLIC does not intend to 574 1 disapprove. Federal Savings and Loan Insurance 2 Corporation would not disapprove. 3 Q. I'm sorry. I misspoke. 4 Do you have any independent 5 recollection of having seen either of those prior 6 to today? 7 A. No, other than perhaps in the documents 8 that were given to me before I came, you know, 9 this morning. 10 Q. Do you recall that at or about the time 11 that this letter was written that, in fact, MCO 12 did receive notification from the regulatory 13 authorities that there was no objection to MCO 14 Holdings acquiring in excess of 10 percent of the 15 outstanding shares? 16 A. I don't specifically recall the letter. 17 I guess I do recall by the fact that they 18 purchased more than 10 percent, that they had such 19 approval. 20 Q. Okay. And you indicated that MCO then 21 at some time after filing the application acquired 22 additional shares of UFG? 23 A. I believe so. 24 Q. And what do you recall of that? 25 A. I believe they acquired approximately 575 1 12 percent or thereabouts. 2 Q. Now, do you recall that UFG was in the 3 process of entering into a merger with First 4 American Financial of Texas and that pursuant to 5 that merger shares of First financial -- First 6 American Financial of Texas would be exchanged for 7 shares of UFG? 8 A. I didn't recall that independently. 9 When I went through the 13Ds this morning and 10 whatever other documents you indicated to counsel 11 you would be talking about, I saw that, but I 12 didn't have any independent recollection of it. 13 Q. Okay. Would you pass those on along to 14 the Court? Thank you. 15 I'm handing you a copy of what is 16 marked as T1032. These are the MCO Holdings, Inc. 17 board of directors' meeting minutes of December 18 the 15th, 1982. 19 Now, I would ask you to take a look at 20 them and review briefly the unredacted portions. 21 A. (Witness complies). Can you tell me if 22 you attended this board meeting, sir? 23 A. I cannot tell. That is, I see that my 24 name -- I don't see a signature next to my name, 25 which may indicate that I wasn't there, but I 576 1 don't have any recollection specifically of that. 2 Q. Okay. Well, at least on the front page 3 there's no indication or, if there was, it's been 4 redacted, as to who attended the meeting. 5 Do you see that on the first page? 6 A. I see that there's nothing there about 7 attendees, yes. 8 Q. But I believe if you look in about 9 three quarters of the way down the long paragraph 10 on Page 3 there's a reference to -- 11 A. I do see my name. 12 Q. Yes. Do you recall the subject of this 13 meeting or attending this meeting? 14 A. No. 15 Q. Do you recall having any discussion 16 with the chairman -- that is, Mr. Hurwitz -- 17 regarding MCO's acquisition of a block of 603,448 18 shares of First American Financial of Texas? 19 A. I'm sure there was such a discussion. 20 I have no particular recollection of this. 21 Q. Do you recall any discussion with 22 Mr. Hurwitz at or about this time as to why he was 23 interested in acquiring or -- strike that -- as to 24 why MCO should acquire a larger interest in United 25 Financial Group? 577 1 A. I really don't have any specific 2 recollection. 3 Q. Now, further down in that paragraph it 4 makes reference to the fact that Mr. Munitz 5 reported that if the merger does take place on the 6 terms agreed the corporation will exchange stock 7 in First American Financial and collectively 8 continue to own less than 24.9 percent of the 9 surviving company even after giving effect to the 10 proposed acquisition of the stock by the 11 corporation. 12 Do you recall why it was important that 13 MCO not exceed the 24.9 percent level of ownership 14 of stock of UFG? 15 A. I recall the 24.9 percent as an 16 important percentage, yes. 17 Q. Do you recall why it was important? 18 A. I believe that if a holder went above 19 that percentage one would become an S&L holding 20 company and that was -- you couldn't do that 21 without approval. 22 Q. Okay. And do you recall having any 23 discussions with the other members of the board 24 regarding the advantages or disadvantages of 25 becoming an S&L holding company? 578 1 A. I do recall, but I don't know whether 2 it was at this time or not. I do recall at a 3 later time discussions with respect to the problem 4 at a later time, as I recall when the application 5 was approved and it was approved on the condition 6 that there be a pro rata network guarantee which, 7 as I recall, was unacceptable to the corporation. 8 Q. And is this recollection something 9 that's based upon your recollection of events that 10 occurred at the time or on your review of 11 documents within the past few days? 12 A. That particular recollection of what I 13 characterized as a foolishness of agreeing to a 14 net worth guarantee is independent of the document 15 review. 16 Q. Do you recall who you would have had 17 these discussions with? 18 A. Members of the board at board meetings. 19 There may have been other discussions which might 20 well be privileged discussions. 21 Q. Well, are you -- 22 A. But with members of the board at 23 directors' meetings, I recall generally talking 24 about that issue. 25 Q. And did the board consider that to be a 579 1 disadvantage of acquiring in excess of 24.9 2 percent of the shares? 3 A. Acquiring in excess of 24.9 was not a 4 disadvantage, but adhering to the conditions was 5 absolutely unacceptable. 6 Q. Okay. And in the view of the board 7 were there advantages to acquiring in excess of 8 24.9 percent of the shares of UFG? 9 A. I think the advantage was simply in 10 having a larger investment position. That's what 11 I recall as a principal advantage. Beyond that, 12 I'm not sure that I have any particular 13 recollection. 14 Q. If you acquire -- if MCO had acquired 15 in excess of 24.9 percent of the shares of UFG, 16 would they not have had control of UFG? 17 A. That would depend on -- they might have 18 control, but it would depend on was there anybody 19 else who had a higher percentage. So, it would 20 not ipso facto mean that they would have control, 21 but it could ultimately mean that. 22 Q. Would that have been a benefit to MCO 23 to have had control of UFG? 24 A. It might have been. 25 Q. Do you recall any discussions with the 580 1 board members regarding the benefits of obtaining 2 control of UFG? 3 A. No. 4 Q. Do you recall any discussions with 5 Mr. Hurwitz regarding the possible benefits of 6 obtaining control of UFG? 7 A. There may have been, but I don't recall 8 them. 9 THE COURT: We'll take a short recess. 10 11 (Short break.) 12 13 THE COURT: We're back on the record 14 Mr. Rinaldi. You may continue. 15 MR. RINALDI: 16 Q. Mr. Levin, did there come a time when 17 MCO determined that it wished to file an 18 application to become a savings and loan holding 19 company? 20 A. I believe they did, yes. 21 Q. And did the board of directors then 22 authorize the filing of an application with the 23 Federal Home Loan Bank Board for that purpose? 24 A. I believe they did, yes. 25 Q. Now, let me ask you to take a look at 581 1 what's been previously marked as T0142. This is a 2 letter dated June 29th -- oh, boy. It's got a 3 page missing. June 29th, 1983. And since there 4 is a page missing, I will not ask you anything 5 about the cover letter, but attached to it is 6 something called an H-(e)1 application and I would 7 ask you to take a look at the H-(e)1 application. 8 A. (Witness complies.) 9 THE COURT: What is the number of that? 10 THE WITNESS: T0142. 11 MR. RINALDI: There's also a parallel 12 document that's T4040 that has a complete set, and 13 I think that instead of making the complete one 14 they made a copy of the incomplete one. Here is 15 T4040. That's fine. I do have it. 16 MR. RINALDI: 17 Q. I would ask you to take a look at -- 18 no, that's not the right one. Let's take a look 19 at the cover letter, as well. 20 Do you recognize this document, sir? 21 A. I see the document, and I may well have 22 seen it when I went through some papers that you 23 had indicated to counsel you would be talking 24 about, but I don't otherwise have an independent 25 recollection of it. 582 1 Q. Okay. On the last full page of the 2 document it indicates it's signed by Richard 3 Marlin who, of course, is your partner. 4 Do you recall that Richard Marlin was 5 instructed by MCO to file an H-(e)1 application 6 for Federal Home Loan & Bank Board for purposes of 7 obtaining -- requesting to become a holding 8 company? 9 A. I don't recall it. I think it may have 10 been in the minutes, and I know that it happened. 11 Q. Now, directing your attention to the 12 second full page of the -- 13 THE COURT: Excuse me. Which document 14 are you looking at? 15 MR. RINALDI: Well, there are two. 16 There's T4040, which I believe is the complete 17 version. Mr. Levin has also a copy, but it is the 18 same document with a different number on it. And 19 that is A8003, but they are -- the cover letter to 20 the H-(e)1 application dated June 29th, 1983. 21 Do you have a copy of the document? 22 THE COURT: I have 4040. 23 MR. RINALDI: Yes, that is the same 24 document. They're in several places. 25 MR. RINALDI: 583 1 Q. Sir, at the top of that page it 2 indicates that MCO is principally engaged in land 3 development and financing. 4 Do you see that? 5 A. Yes. 6 Q. And exploration for and production of 7 and marketing of crude oil, natural gas, and 8 geothermal resources, gas transmission, and 9 processing. 10 What was the nature of Federated's 11 business? 12 A. Principally in the development of real 13 estate. 14 Q. Now, at this point in time, in addition 15 to MCO, which was involved in natural gas and 16 geothermal, and Federated, which you've indicated 17 was involved principally in real estate, did MCO 18 also have a subsidiary known as Simplicity 19 Pattern? 20 A. Yes. 21 Q. What was the nature of the business of 22 Simplicity Pattern? 23 A. It was in the business of manufacturing 24 and sales of paper patterns for home sewing, as 25 the letter indicates. 584 1 Q. And in the letter it indicates that it 2 is an application being submitted in accordance 3 with the requirements of the National Housing Act 4 for savings and loan companies and it's to acquire 5 an application to become a savings and loan 6 holding company. 7 How did UFG and USAT fit into 8 Federated's business plan if they were in natural 9 gas and geothermal and real estate? 10 A. I don't have a specific recollection of 11 the balance sheet of UFG. I believe it had cash 12 and that it held -- it had a portfolio through 13 USAT and there were interests in real estate among 14 its holdings. That was, in a sense, the 15 relationship. 16 Q. And was MCO interested in acquiring 17 certain of the real estate that was held in the 18 portfolio of UFG and its subsidiary, USAT? 19 A. I don't recall. I think it may 20 originally, I think, as I indicated, if the Ludwig 21 sale were to have gone through, that's what UFG 22 would have ended up with, cash and real estate. 23 Q. Yes, but that -- I'm sorry. 24 A. Yeah. 25 Q. But that would have been back in 585 1 February of 1982 when originally FedRe acquired 2 shares of UFG. Now, over almost a year and a half 3 has gone by and Mr. Ludwig apparently did not 4 acquire USAT from UFG and I guess my question to 5 you is: Given the nature -- the businesses in 6 which MCO and Federated and its affiliations were 7 involved, what was the purpose for MCO and 8 Federated acquiring a savings and loan such as 9 UFG? 10 A. To the extent that the savings and loan 11 held assets which were familiar to the people at 12 MCO, which also, bear in mind, knew about real 13 estate, and that had a portfolio, which is to say 14 investments, that's what I would see as the 15 analogous kinds of businesses. I don't have a 16 specific recollection or discussion at the time, 17 but that's the impression that I have looking back 18 at the relationship. 19 Q. Did MCO or Federated feel that they 20 could assist UFG and USAT's subsidiary with their 21 real property holdings? 22 A. I have no notion if they could assist, 23 but they could certainly understand. 24 Q. And, in that sense, it would have been 25 a familiar investment for MCO or Federated? 586 1 A. They could understand it, correct. 2 Q. Do you recall having any discussions 3 with Mr. Hurwitz as to why he felt it desirable 4 for MCO and Federated to become a holding company 5 of a savings and loan? 6 A. No, not specifically. 7 Q. Do you recall any discussions 8 generally? 9 A. No. 10 Q. Now, on the day the H-(e)1 application 11 was filed, Kramer Levin also on behalf of -- 12 Kramer Levin also filed a 13D Amendment No. 10. 13 It's marked as Exhibit No. A2071. I would ask you 14 to take a look at that. Directing your attention 15 to the second and third pages, it indicates the 16 levels of stock ownership which had been obtained 17 in UFG by Federated and MCO Holdings, respectively 18 and on Page 2 it indicates that they collectively 19 held 24.9 percent of the outstanding shares of 20 United Financial Group. 21 Do you see that? 22 A. Yes. 23 Q. Now, as you turn to the fourth page of 24 the document, it talks about the source and amount 25 of funds or other consideration that was paid by 587 1 Federated and MCO for the shares of UFG which it 2 held. 3 It indicates on the Page 4 that 4 Federated and MCO shares which had beneficially 5 owned were acquired at a cost of $10,305,061.63. 6 Do you see that? 7 A. Yes. 8 Q. As we turn to the next page, it 9 indicates the sources of the funds from which that 10 aggregate purchase price came. First it says that 11 such amount, $3,270,480.63 represent the aggregate 12 purchase price of the shares of FAF. That is -- 13 I'm sorry -- Federated Insurance Corporation. Do 14 you see that. 15 A. Yes. 16 Q. And then the next one down talks about 17 $238,208.25 was obtained from the general 18 corporate funds of Federated. 19 What does it mean, the moneys were 20 obtained from the general corporate funds of 21 Federated? 22 A. I guess kind of what it says. 23 Q. You mean that's just out of their 24 operating capital? 25 A. Out of their working capital, funds, 588 1 yeah. 2 Q. Okay. And next it says that $3,518,086 3 was obtained from the general corporate funds of 4 MCO. 5 Do you see that? 6 A. Yes. 7 Q. Is that again money that would have 8 came out of the working capital of MCO? 9 A. Yes. 10 Q. Then 4, it says that an additional 11 amount of $3,278,886.75 relates to the aggregate 12 purchase price for 746,997 shares of common stock 13 of First American Financial of Texas, previously 14 acquired by MCO, which were converted and 15 exchanged for 522,898 shares pursuant to the terms 16 of the merger, okay? 17 A. Yes. 18 Q. Now, at or about the time that MCO was 19 acquiring an interest in UFG, did MCO acquire 20 financing from or through Drexel Burnham, 21 Incorporated, through the issuance of subordinated 22 convertible coupon note for a purchase price of 23 $3,500,000 in cash? 24 A. I think so. 25 Q. I'll hand you an exhibit. It's been 589 1 marked as T3001, and this is MCO Holdings, Inc. 2 annual meeting of the board of directors, 3 June 15th, 1982. It says "Action" and it says 4 "Authorized the corporation to issue and sell to 5 Drexel Burnham, Incorporated, its subordinated 6 convertible zero coupon note for a purchase price 7 of $3,500,000 in cash." 8 Was that a financing that you were 9 involved in? 10 A. Our firm was involved in it, yes. 11 Q. And in that regard did you have any 12 participation in it? 13 A. I believe I had some participation. I 14 don't believe that I was principally involved in 15 it, but I did have some participation. I think 16 our tax department was more involved. 17 Q. Do you recall that the bond in question 18 or the zero coupon note in question was a 260 19 million-dollar zero coupon bond? 20 A. Yes. 21 Q. And it had been issued or underwritten 22 by Drexel Burnham? 23 A. It may have been purchased by them, 24 yes. 25 Q. Okay. I'm sorry. 590 1 Now, it indicates here that the 2 purchase price was $3,500,000 in cash. 3 Do you know what the proceeds of that 4 note were used for after -- when it was purchased 5 by Drexel Burnham? 6 A. I'm not sure there was any specific use 7 of funds. I think it went into the treasury of 8 MCO. 9 Q. So, it would have gone to MCO's 10 operating capital; is that correct? 11 A. Well, I guess it would have been cash 12 on the balance sheet. 13 Q. And it would have been, then, general 14 corporate funds? 15 A. Yes. 16 Q. And were those funds that would have 17 been available for the purchase of UFG shares by 18 MCO? 19 A. Together with what any other funds 20 might have been. Cash is fungible. 21 Q. All right. Now, directing your 22 attention back to the H-(e)1 application, I would 23 like you to take a look at the application itself. 24 MR. RINALDI: I would offer T3001 into 25 evidence as an exhibit, Your Honor. 591 1 MR. NICKENS: No objection. 2 THE COURT: Received. 3 MR. RINALDI: 4 Q. Mr. Levin, before we get back into the 5 H-(e)1 application, T3001 indicates that it is 6 from the annual meeting of the board of directors, 7 but it says "Action." 8 Is this actually a part of the minutes 9 or is it an addendum or an attachment to the 10 minutes? Can you tell by looking at it? 11 A. I cannot tell, no. 12 Q. Now, it indicates in Page 7 in the 13 summary of the proposed acquisition that it was 14 the intention of MCO and Federated to acquire up 15 to 25 percent and 10 percent respectively of the 16 outstanding shares of UFG. 17 Do you see that? 18 A. Yes. 19 Q. So that between MCO and Federated they 20 would have collectively owned approximately 21 35 percent of the outstanding shares of UFG; is 22 that correct? 23 A. If they carried out what was 24 anticipated, that is correct. 25 Q. Yes. And do you recall any discussions 592 1 at the board of directors meetings of either -- of 2 MCO or at the board of trustee meetings of 3 Federated as to why it would have been desirable 4 for MCO and Federated to obtain up to 35 percent 5 of the outstanding shares of UFG? 6 A. No. 7 Q. And directing your attention to 8 Page 17, the top of the page it talks about 9 "During the next 12 months MCO proposes to acquire 10 additional shares in the open market or otherwise. 11 The source of the funds for such proposed 12 acquisitions will be the general corporate funds 13 of MCO." 14 Do you see that? 15 A. I do. 16 Q. Would that have been the same source of 17 funds with which MCO had previously purchased 18 three and a half million dollars of UFG shares? 19 A. As a general category, I would have to 20 look back, but I think that that is correct. I 21 know you read off something previously -- one, 22 two, three, four. I don't recall where it was. 23 Q. I was reading from Amendment No. 13D, 24 and I was on Page 4 and Page 5 is the section I 25 was reading. 593 1 A. Yes. You were actually reading from 2 Amendment No. 10 to 13D and is -- that is correct. 3 That is correct. 4 Q. That would have been the same account 5 into which the three and a half million dollars 6 proceeds of the zero coupon note would have gone 7 as well? 8 A. It was anticipated to have gone. 9 Whether it did or not, I don't remember or I don't 10 know. 11 Q. I would have to talk to the comptroller 12 or somebody of that nature to find out if it 13 actually did, correct? 14 A. I guess you would have to check the 15 records. I would assume that that's a big 16 category and that that's where it would have gone, 17 yes. 18 Q. Now, it talks about on Page 37 the 19 future prospects of MCO, Federated, UFG, and USAT. 20 And it starts -- it starts off in about the middle 21 of the page that MCO and Federated believe that 22 financial services industries entering into a 23 period of rapid growth, diversification, change. 24 MCO and Federated Development in UFG will enable 25 them to participate in an increasingly diversified 594 1 financial services industry. 2 What do you understand was meant by 3 that statement, the future proposals? 4 A. I really have no recollection of what I 5 understood at that time or that I -- or would pay 6 attention to use this document. I just don't 7 recall having done so, though I may have. If you 8 ask me what it means today, I would think about 9 the diversification of the financial services 10 industry, all kinds of things happening in that 11 area. 12 Q. Well, did -- how would the acquisition 13 of USAT even and MCO to participate in the 14 diversified financial industry? 15 A. Really the same way that a mutual fund 16 as an example can participate in a sector of the 17 economy, by investing in companies that are in 18 that particular sector. If MCO and Federated had 19 a 35 percent interest in the holding company, they 20 would be participating in that sector of the 21 economy represented by that investment. In that 22 respect, they would be participating, albeit 23 indirectly. 24 Q. So that MCO and Federated interests in 25 acquiring a thrift was simply to benefit from 595 1 whatever profits might inure to that thrift and 2 that particular industry? 3 A. I can't tell you that, but if I'm right 4 about what I said today, that would seem to be 5 equally applicable as of 14 years ago. 6 Q. But you have no independent 7 recollection of any discussions of what's 8 reflected here in the future prospects? 9 A. I'm sorry. I don't really have any 10 recollection at all. 11 Q. Now, the last full sentence there 12 says -- or next to the last -- that UFG and USAT 13 will benefit from MCO and Federated's experience 14 in real estate development and sales, as well as 15 MCO's and Federated investment expertise in the 16 financial markets. 17 Was it expected that MCO and Federated 18 would become involved in the operations of UFG if 19 they acquired a 35 percent interest in the entity? 20 A. I can't -- I don't believe that they 21 would become involved, but to the extent that they 22 would be useful in setting a direction or in 23 helping in analysis, I think that is a fashion in 24 which their expertise would benefit the UFG. 25 Q. And did MCO and Federated help set the 596 1 direction of UFG -- following the filing of this 2 application? 3 A. Well, again, this is what they were 4 anticipating in the event that they were to get 5 permission and become an S&L holding company. So, 6 I really can't tell you since it never happened 7 and I wasn't involved with UFG, whether -- whether 8 anything happened. 9 Q. Well, I understand they didn't acquire 10 the additional 10 percent of the shares, but they 11 did have 24.9 percent of the shares and my 12 question to you is: At that level did they become 13 involved in setting the direction and assisting 14 UFG and USAT in conducting its affairs? 15 A. I can't really tell you that since I 16 wasn't on the board and I guess you -- you know, 17 you had a pretty strong board and I would hope 18 that whoever was a representative of MCO may view 19 -- made his views known, but I can't really tell 20 you empirically what happened. 21 Q. When you say you weren't on the board, 22 you mean by that you weren't on the UFG board? 23 A. That is correct, or of USAT where its 24 -- I guess where its investments took place. I 25 don't know where its real estate activities took 597 1 place. 2 Q. But you were on the board of MCO and 3 you were on the board of Federated and since this 4 was an investment of 24.9 percent of the 5 outstanding shares of UFG, didn't the 6 representatives of MCO and Federated who sat on 7 the board of UFG report back to Federated and MCO 8 periodically about what was going on? 9 A. That's very different than the question 10 you asked earlier as to whether or not they had 11 any kind of an influence in respect of the 12 investment activities or the real estate 13 activities. That is an empirical question. I 14 don't know the answer to that. In a general way, 15 I believe there were reports that we have an 16 investment, most of it related to what was 17 happening to the H-(e)1 application, but I 18 really -- not having been there and my 19 recollection is that there was a separate USAT 20 investment committee which was separate from MCO 21 and Federated, that they operated independently. 22 Q. How did you come to that understanding, 23 sir? 24 A. I believe that they had separate people 25 on their payroll. I recall that there was a woman 598 1 that held a Ph.D. who worked for UFG or USAT, and 2 they had a separate investment committee and I am 3 not aware of -- of this by the MCO people on that 4 committee. I don't know whether that would have 5 changed had MCO gone above the 24.9, but while it 6 was below the 24.9, I believe that was the case. 7 Q. Who were the individuals that you 8 recall that were on the UFG board that were 9 representatives or -- representatives of MCO or 10 Federated? 11 A. I recall that Dr. Munitz was on the 12 board, and I don't -- 13 Q. We're talking about the USAT board or 14 the UFG board? 15 A. I believe the UFG board. He may have 16 also been on the USAT board, but I don't know 17 that. 18 Q. Do you recall whether Mr. Hurwitz was 19 on the board of UFG? 20 A. I think at some point he was, yes. 21 Q. Okay. And how about Mr. Kozmetsky? 22 A. I don't independently recall whether 23 Dr. Kozmetsky was on the board, but he may well 24 have been. 25 Q. Okay. And if you look at Pages 27 599 1 through 29, I believe it lists the management of 2 UFG and it indicates who the directors of UFG are 3 and it includes Mr. Hurwitz, Mr. Kozmetsky, and 4 Mr. Munitz. 5 Do you see that? 6 A. Yes. 7 Q. All of whom are on the board of MCO; is 8 that correct? 9 A. At various times, yes. 10 Q. Well, at or about the time of the 11 H-(e)1 application were they not on the board of 12 MCO? 13 A. Yes, yes. 14 Q. And they were -- were they also 15 trustees of Federated at or about that point in 16 time? 17 A. Yes. 18 Q. All right. And do you know whether 19 those three individuals participated in the 20 executive committee of UFG? 21 A. I don't know. 22 Q. Now, after the filing of the -- strike 23 that. 24 Do you recall that shortly after the 25 filing of the H-(e)1 application? 600 1 A. You know, today, or last night that -- 2 in fact, that it had happened. So, I have 3 subsequently within the last 24 hours looked at 4 documents which indicate that there was an 5 interest in a C preferred. 6 Q. Apart from your knowledge that there 7 was such an investment, you have no independent 8 recollection of the circumstances surrounding the 9 acquisition of those shares? 10 A. Right. 11 Q. Do you have any independent 12 recollection of the circumstances surrounding 13 disposition of those shares from C preferred to 14 what's called D preferred? 15 A. Independent of my review, no. 16 Q. Did there come a time when you learned 17 that Drexel Burnham had acquired a substantial 18 amount with respect to the moving shares of United 19 Financial Group? 20 A. Yes. 21 Q. And do you recall how that information 22 came to your attention? 23 A. I'm trying to distinguish between what 24 I read in the last 24 hours and what I previously 25 knew, and I was aware of the fact that I believe 601 1 Maxxam or MCO had entered into an agreement with 2 Drexel Burnham to acquire shares which Drexel 3 Burnham held in UFG. I do not believe I was aware 4 of that prior to the negotiations for that option. 5 Q. So that as a board member when the 6 matter came before the board for the board's 7 approval would have been the first time that you 8 learned of Drexel's ownership of the shares? 9 A. I don't know whether it was as a board 10 member or whether or not there was an option 11 discussed much earlier than the time that it came 12 to the board. I couldn't really tell you which of 13 those dates it might have been or what -- or what 14 period of time might have -- might have ensued 15 between the discussions and the actual entering 16 into of the option. 17 MR. RINALDI: Your Honor, I believe I 18 may have omitted to admit into evidence Document 19 T1032. These are the minutes dated December 15th, 20 1982, and they relate to the acquisition of shares 21 of First American Financial and it's board minutes 22 of MCO Holdings of December 15, 1992. 23 If there's no objection, I would like 24 to admit them into evidence now. 25 MR. NICKENS: No objection. 602 1 THE COURT: Received. 2 MR. RINALDI: 3 Q. Handing you a copy of a 13G. This is 4 Exhibit T1063 -- well, I guess I should ask you. 5 What is a 13G, sir? 6 A. 13G is kind of a variant of a 13D. It 7 is the schedule that the institution files 8 essentially once a year when it has purchased a 9 position for investment. 10 Q. How does it differ with 13D? It's 11 filed only annually? 12 A. Yes, among other things. 13 Q. The 13D gets filed periodically 14 whenever a significant activity occurs? 15 A. If there is a disparity of 1 percent or 16 more in the holdings, 1 percent measured by the 17 issued and outstanding shares of the issuer. 18 Q. Now, it indicates here in Exhibit T1063 19 that Drexel Burnham held 485,371 shares of UFG 20 stock at or about February the 15th, 1986. I'm 21 sorry. '85. It's a blurred copy. 22 Can you tell, by looking at the 23 document, is this an initial filing? I guess what 24 I'm driving at is in the other documents, the 13Ds 25 we have seen, always indicate that they are 603 1 amendments of an original filing and this 2 particular document there is no amendment and I'm 3 wondering does that mean generally that this is 4 the original filing? 5 A. You could not make that conclusion from 6 this alone because you wouldn't be amending the 7 13G and I would say from the first page of the 8 document inasmuch as a fee is not required if the 9 filing person has a previous statement on file and 10 hasn't filed any subsequent amendment and since 11 they have checked the box that a fee is being 12 paid -- I haven't really studied this, but if you 13 ask me, it's likely this is the first time, but I 14 can't say that I've studied this. 15 Q. So that it's likely that the shares 16 that are referenced here by Drexel Burnham would 17 have been obtained within the previous year? 18 A. Yes. 19 Q. Do you recall having seen a copy of 20 this document at or about the time that MCO 21 entered into the arrangement with Drexel Burnham 22 that you alluded to earlier? 23 A. No. I have no recollection of seeing 24 this document at that time. 25 Q. Okay. Now, let me hand you a copy of 604 1 what's marked -- previously marked as -- I guess 2 this has not been previously marked. This is 3 T1061. Actually, I think it has, but we'll fail 4 on the safe side. 5 A. What you've given me -- I'm sorry. 6 MR. RINALDI: And let me move into 7 evidence the last document which is T1063. 8 MR. NICKENS: No objection. 9 THE COURT: Received. 10 MR. RINALDI: 11 Q. Okay. 12 A. I'm sorry. You're talking about T1061 13 now? 14 Q. Yes. 15 A. All right. 16 Q. And this is a letter from Mr. Mendelson 17 with E.F. Hutton to Paul Schwartz and it talks 18 about a revised draft term sheet for a proposed 19 transaction and the cc at the bottom of the page 20 it makes reference to Howard Sobel, Esq. 21 Do you see that? 22 A. Yes. 23 Q. And Mr. Sobel was an attorney in the 24 Kramer Levin law firm, is he not? 25 A. That's correct. 605 1 Q. On the next page it discusses an 2 arrangement between MCO Holding Company and E.F. 3 Hutton Company pursuant to which E.F. Hutton was 4 going to purchase shares of UFG owned by Drexel 5 Burnham and then give a call option to MCO for 6 their shares. 7 Do you see that? 8 A. Yes. 9 Q. And if you go on further, it talks 10 about a put option by E.F. Hutton from MCO in 11 favor of E.F. Hutton. 12 A. Yes. 13 Q. Do you recall as a member of the board 14 any discussions of a transaction between MCO 15 Holding -- MCO and E.F. Hutton Company with 16 respect to the shares of Drexel Burnham that's 17 referenced in this document? 18 A. No. 19 Q. Did you have any discussions with Mr. 20 Sobel about a transaction structured in this 21 manner? 22 A. I believe I did, but I have no 23 independent recollection. I'm sure I would have 24 had. 25 Q. Was Mr. Sobel at that point in time a 606 1 partner or an associate? 2 A. I think he was not yet a partner. He 3 is now. I think at that point he was not. 4 Q. Okay. And in what area did Mr. Sobel 5 work? 6 A. Securities and corporate law. 7 Q. Did he work under your direction? 8 A. Among other partners. He worked with 9 me, yes. 10 Q. And if he was working on a matter of 11 this nature for MCO since you were on the board of 12 MCO, would he have kept you apprised of what was 13 going on? 14 A. The likelihood is that he would have, 15 yes. 16 Q. Okay. Now, let me hand you a copy of 17 what's been previously marked as T1062 and, out of 18 an abundance of caution, if we haven't already 19 admitted T1061 I would move for its admission. 20 MR. NICKENS: This document came up 21 yesterday, Your Honor, but I don't believe it was 22 offered or, if it was offered, I may have objected 23 and they withdrew it. I don't think this witness 24 knows anything about this document, but it is 25 likely to come in later. So, I have no objection. 607 1 THE COURT: All right. Received. 2 MR. RINALDI: 3 Q. Now, I've handed you a copy of a 4 document that's marked as T1062. And this is a 5 letter from David Yeres -- I mean to David Yeres 6 from Debbie Shulevitz and it makes reference to 7 the -- a Richard Marlin requesting that Ms. 8 Shulevitz enclose an option agreement that is 9 proposed between MCO Holdings and DBL Arbitron and 10 attached is a form of an option agreement. If you 11 would take a moment and just look at the document. 12 A. (Witness complies.) 13 Q. Do you recall at or about February of 14 1985 that MCO entered into negotiations with 15 Drexel Burnham for the acquisition of a put option 16 with respect to shares of UFG that were held by 17 Drexel Burnham? 18 A. Again, I don't -- I know that it 19 happened. I don't have an independent 20 recollection of it, but I do know that it happened 21 and there were negotiations, yes. 22 Q. Okay. Now, Mr. Marlin, we know, was 23 your partner and Ms. Shulevitz worked in the firm 24 as an associate at that time? 25 A. Yes, she did. 608 1 Q. Would they have kept you apprised of 2 this kind of transaction since it related to MCO 3 and you were on the board of directors of MCO? 4 A. In a general way, I'm sure I was -- I 5 knew about it. How much detail I knew would vary 6 since Richard was essentially in charge of it. 7 Q. Do you recall having any discussions 8 with members of the board regarding the 9 acquisition of shares of UFG from Drexel Burnham? 10 A. No. 11 Q. Okay. 12 A. I may have, but I don't recall. 13 Q. Okay. Now, directing your attention to 14 what's been previously admitted into evidence as 15 T1085, this is a minutes of the board of directors 16 meeting of MCO dated December 17th, 1985, and it 17 reflects on the front page that all of the 18 directors of the corporation were present at the 19 meeting, and then if you will turn to the fourth 20 page with the writing on it, if you would just 21 take a moment and look at the text there. 22 A. (Witness complies). 23 Q. I have a few questions I would like to 24 ask you. 25 A. Yes, I've looked at this page. 609 1 Q. Do you recall attending a meeting at 2 which a put call option between MCO and Drexel 3 Burnham was approved by the board of MCO Holdings, 4 Inc.? 5 A. No. 6 Q. Do you have any recollection of Mr. 7 Schwartz making a presentation regarding the 8 acquisition of shares of UFG from Drexel Burnham 9 through an option room? 10 A. I don't have any independent 11 recollection of that happening. I'm sure it 12 happened. 13 Q. Did you know that courts have held that 14 similar put call options have placed the 15 beneficial ownership of the shares in the 16 purchaser such as MCO in this case? 17 A. I don't think I understand what you're 18 talking about. 19 MR. KEETON: Your Honor, I object 20 unless we see the opinions, unless we know the 21 context, whether it was for purposes exactly like 22 this or for some other purpose. All he's doing is 23 asking some speculative, hypothetical question. 24 THE COURT: I think you can rephrase 25 the question. 610 1 Q. (BY MR. RINALDI) Are you aware that 2 when put call arrangements such as the one that is 3 described in the minutes here have been reviewed 4 by courts in the past they have treated such 5 arrangements as placing the beneficial ownership 6 of the shares into the purchaser? 7 MR. KEETON: Same objection, Your 8 Honor. 9 THE COURT: Denied. 10 A. I am not aware of any such put hold. 11 My best recollection is if you don't have the 12 voting right on the shares underlying the option 13 and if you don't pay more than half of the 14 purchase price of the shares at the time of 15 payment of the option that you are not deemed to 16 have the beneficial interest in those shares. 17 MR. RINALDI: 18 Q. And on what do you base that statement? 19 A. That's a kind of general recollection 20 of -- of the law, but I couldn't cite you without 21 doing a search to the cases, if you didn't pay 22 half and you don't have the voting rights. So, I 23 guess the direct answer to your question is I'm 24 not aware of whatever courts have made whatever 25 decisions in whatever context. And if you asked 611 1 me as a securities lawyer without checking the 2 books, I would have a quite opposite reaction. 3 Q. Would that have been your understanding 4 at the time or is that some understanding you've 5 come to since the time that MCO entered into this 6 transaction? 7 A. Neither. I don't recall having any 8 understanding because I don't -- I just don't 9 recall specifically, but you asked me the question 10 and I'm giving you my reaction as somebody who 11 practices in this area. 12 Q. Okay. Now, the put option that was 13 received by Drexel Burnham was secured by a letter 14 of credit so that in the event that MCO, for any 15 reason, if it did not exercise its call and Drexel 16 attempted to put the shares back to MCO, if MCO 17 for any reason refused to pay the purchase price 18 or could not, then Drexel had a letter of credit 19 which you could draw-down on for the purchase 20 price of the put shares. 21 Have you ever been involved in such a 22 put call arrangement of that nature before? 23 A. I've been involved in put call 24 arrangements. I don't recall specifically whether 25 I've been involved in put call arrangements which 612 1 are secured by a letter of credit. But by other 2 security arrangements, the answer would be yes. 3 Q. And what is, in your experience, the 4 purpose of such a put call arrangement? 5 A. Well, are you asking me about? The 6 letter of credit? 7 Q. In your experience as a security 8 lawyer, why do investors enter into those kinds of 9 put call relationships? 10 A. Typically they have different views of 11 the market and the buyer of the call wants to be 12 able, in a leveraged fashion, to be able to take 13 advantage of an increase in the price and the 14 buyer of the put wants to be able to cap its 15 downside in effect and is prepared to limit its 16 upside. That's a general kind of negotiation. In 17 this case, you had both, a put and a call. 18 Q. Yes. And I'm making reference to 19 situations where the buyer receives a call and the 20 seller is entitled to a put should the buyer not 21 exercise the call. 22 A. I think I said that the buyer of the 23 call is an optimist and the buyer of the put is 24 happy to get whatever kind of premium and to limit 25 its up side in return. 613 1 Q. Okay. And by adding the letter of 2 credit and guaranteeing a price to the -- 3 A. Holder of the put. 4 Q. Yes. The holder of the put is not 5 taking a risk on the credit of the buyer of the 6 put. 7 Q. Okay. Now, at the point in time when 8 the option we've been discussing that's included 9 in or discussed in Exhibit T1085 -- 10 THE COURT: Mr. Rinaldi, I don't show 11 1085 as having been admitted. 12 MR. RINALDI: I'm sorry. If it has 13 not, then I would move its admission since it's 14 clearly a seminal document in this proceeding, it 15 being the board of director minutes. 16 MR. NICKENS: I have no objection to 17 the document. I do have a bit of an objection to 18 characterizing the document by Mr. Rinaldi, but I 19 have no objection to the admission of the document 20 and I guess we'll find out through the course of 21 the proceedings just exactly how important it is. 22 THE COURT: All right. Received. 23 MR. RINALDI: 24 Q. In your experience as a securities 25 lawyer, is this put call arrangement we discussed 614 1 previously -- is it your understanding that 2 another reason for parties engaging in such a put 3 call relationship is to avoid Hart-Scott-Rodino? 4 A. That has characterized some of the put 5 call contracts, yes. 6 Q. And can you explain to the Court what 7 Hart-Scott-Rodino is? 8 A. It's the Antitrust Improvements Act 9 which requires a particular level of acquisition 10 involving the filing of an application with the 11 Federal Trade Commission and you can send it to 12 the Department of Justice to be certain that 13 there's no violation of that act. And it requires 14 a filing for that purpose, if you were to go over 15 X million dollars investment and particular 16 percentages. 17 Q. And if you enter into a put call 18 relationship, then the shares that are subject to 19 the put call don't have to be reported for 20 purposes of Hart-Scott-Rodino? 21 A. Typically it would be -- if 22 Hart-Scott-Rodino was applicable -- and it may be 23 in a particular case -- then typically it would be 24 subject to the failure of the Federal Trade 25 Commission to object to the acquisition of the 615 1 shares which are subject to the call or put, as 2 the case may be. 3 Q. And do you recall in your -- in working 4 with Mr. Hurwitz ever having used a put call 5 option on any other option than the one we're 6 discussing here? 7 A. I believe there were, but I could not 8 identify it and I may be confusing it with some 9 other clients. 10 Q. Do you recall in connection with Mr. -- 11 I'm sorry -- with MCO's acquisition of Pacific 12 Lumber Company that MCO, through Mr. Hurwitz, 13 arranged for a put call option so as to limit the 14 number of shares that Mr. -- MCO held in the 15 Pacific Lumber Company? 16 MR. NICKENS: Your Honor, I believe 17 that Maxxam Group was the entity involved in that 18 transaction, and I doubt very seriously that MCO 19 would have been the relevant entity that Mr. 20 Rinaldi is asking about. 21 MR. RINALDI: 22 Q. Well, then, do you recall with respect 23 to Maxxam Group? 24 A. If my recollection is correct, I do not 25 believe that a put call agreement was entered 616 1 into, although a draft of an agreement was 2 negotiated and the parties could not get together 3 on the terms and I do recall the specific term 4 that Maxxam Group could not agree to, and it was 5 as a result of the inability of Maxxam Group to 6 agree to a term that the party on the other side 7 shifted upon that led to the -- essentially 8 inability of the parties to enter into that 9 agreement. 10 Q. And who were the -- 11 A. It did not enter into such an 12 agreement. 13 Q. Who were the parties that were 14 considering the put call option, Maxxam Group on 15 the one hand and -- 16 A. I think it was Jeffries & Company. 17 Q. And Jeffries & Company is close under 18 Hart-Scott-Rodino? 19 A. Not at all. 20 Q. What effect would the option have had? 21 A. There would have been a filing which 22 would have been subject to Hart-Scott-Rodino. In 23 other words, you could not exercise the option, as 24 I recall, unless you had approval of 25 Hart-Scott-Rodino. And if you did not then, in 617 1 effect -- I don't know whether -- I just don't 2 recall enough about that negotiation. I do know 3 that the parties did not reach agreement and did 4 not enter into that put call agreement, if it was 5 a put call agreement. 6 Q. You did indicate, though, you did 7 recall the reason that it fell through? 8 A. Yes. 9 Q. What was the reason? 10 A. I believe that the seller of the call 11 required a representation by the buyer of the 12 call, namely Maxxam Group, Inc., that it was not 13 intending to make a tender offer for shares and 14 Maxxam refused to make that representation because 15 it would not have been true. 16 Q. Okay. It couldn't have made the 17 representation because it was, in fact, planning 18 on making a tender offer? 19 A. That is correct. 20 Q. And, in fact, it did make a tender 21 offer as a result of which it required control of 22 Pacific Lumber; is that correct? 23 A. Also correct. 24 Q. And did that transaction or proposed 25 transaction then become the subject of a 618 1 Congressional inquiry? 2 A. It was a Congressional inquiry, and I 3 can't remember whether it specifically touched on 4 that transaction, but it may well have. 5 Q. Okay. I believe we -- I showed you the 6 -- a document T1061. This is a proposed 7 transaction between E.F. Hutton and MCO? 8 A. Yes. 9 Q. And just so the record is clear, do you 10 have any recollection of why that proposed 11 transaction did not take place? 12 A. I'm afraid I don't. I don't know that 13 I have 1061, but I don't have any -- I have it. 14 Sorry. I don't have any recollection of that. 15 Q. Now, do you recall that the H-(e)1 16 application which was filed by MCO was ultimately 17 approved by the bank board? 18 A. I know that it was, yes. 19 Q. Okay. And as a result of that approval 20 were there any conditions that were placed on 21 Maxxam or MCO for its becoming a savings and loan 22 holding company? 23 A. Having looked at the document, again, I 24 think this morning, there was such a condition, 25 yes. 619 1 Q. Was there more than one condition that 2 you recall? 3 A. I think one related to going above 4 25 percent and below 50 and another one in the 5 event you go above 50 percent of UFG. 6 Q. Okay. And what is your understanding 7 as you sit here today of what those conditions 8 were? 9 A. My understanding is that if you went 10 above 25 percent and below 50, you would be 11 required to diffuse into UFG a pro rata portion of 12 the capital that the Federal Home Loan Bank Board 13 determined ought to be infused in their discretion 14 into UFG or perhaps USAT. And if you went above 15 50 percent or 50 percent or more, you would be 16 required to maintain the entire net worth of the 17 -- of the S&L itself. 18 Q. Now, before coming to Houston to 19 testify in this matter did you have any 20 independent recollection of those conditions, or 21 is this information that you have acquired since 22 you arrived in Houston? 23 A. I remembered that there were conditions 24 and that the board and I myself personally opposed 25 those conditions. 620 1 Q. And why did you personally feel that 2 the conditions were something that you should 3 oppose? 4 A. I guess I'm not a believer in unlimited 5 guarantees, and it seems to me the only holding 6 company that ought to agree to such a condition 7 would be a holding company that had no net worth 8 outside of its investment in the S&L. Otherwise, 9 if there was a change in the fortunes, misfortunes 10 of the S&L, you could be faced with a disaster. 11 In effect, it was -- instead of having a limited 12 investment based on your evaluation of the market 13 when you bought the shares, you were, in effect, 14 betting the ranch, if you will, the entire 15 company, on the furtunes of the S&L. I mean, it 16 was ridiculous. 17 Q. Did you view the control of UFG as 18 conferring any benefit upon MCO -- that is, if -- 19 A. I think the only benefit that I recall 20 is you would have a larger investment and you 21 could perhaps be in a position to influence the 22 portfolio company, if you will, in a fashion that 23 you were not doing previously. 24 Q. And do you view the ability to 25 influence the thrift to be a benefit to the 621 1 holding company? 2 A. It could be. 3 Q. Now, do you recall after the condition 4 was imposed whether efforts were taken on behalf 5 of MCO to modify the condition? 6 A. I knew as a general matter that there 7 were efforts to modify the condition, but I didn't 8 really know what they were in any kind of detail 9 or didn't certainly remember them until I saw some 10 documents this morning in that connection. 11 Q. All right. Do you recall that the 12 efforts -- independent of what you saw today, did 13 you recall that MCO and Federated continued for at 14 least several years negotiating with the Federal 15 Home Loan Bank Board to obtain more favorable 16 conditions? 17 A. In a general way, I knew that there 18 were prolonged negotiations and I couldn't tell 19 you the specific number of years, but I did know 20 that it took a long time. 21 Q. And in a general way, how would that 22 information have come to you? Was that something 23 that would have been reported to you as a member 24 of the board periodically? 25 A. Probably. Probably as a member of the 622 1 board I might have seen some documents. Richard 2 Marlin might have gave them to me. Might have 3 been either of those or both. 4 Q. Do you recall receiving any 5 correspondence from -- regarding the modifications 6 of the net worth condition? 7 A. I don't specifically recall. Again, I 8 saw something this morning that a lawyer not from 9 our firm had submitted to the Federal Home Loan 10 Bank Board in connection with the under 50 percent 11 concept, something about agreeing to raise 12 $40 million, for the public to infuse the 13 $40 million into either I guess the United 14 Financial Group or -- I don't have an independent 15 recollection of the specifics. I did not before I 16 looked at the document, I think, just within an 17 hour or two before I came to testify. 18 Q. So, what you just testified to now is 19 just a recitation of what you read recently? 20 A. Yes. 21 Q. And do you recall the name of the 22 attorney that had written that document that you 23 saw? 24 A. I don't recall the name, but I think it 25 was from a firm -- Cuneo was the last name 623 1 perhaps. 2 Q. McKenna, Conner & Cuneo? 3 A. Yes. 4 Q. Would you take a look at what's been 5 marked as A2075? This is a Schedule 13D and its 6 Amendment No. 14. 7 A. I see No. 14. I don't see a number on 8 it. OFD6725? 9 Q. Yes. If you look up in the corner it's 10 a very dark Xerox. 11 A. I cannot make out the number, but I do 12 have Amendment No. 14. 13 Q. Fine. And I believe I had asked you a 14 question about this earlier, but if you would 15 direct your attention to Page 12 and just take a 16 look at that paragraph that begins -- the last 17 full paragraph on that page and tell me if you 18 have any recollection of the transaction that's 19 described there. 20 A. Again, I looked at this before I came 21 here. In a general way, I knew that there were 22 exchanges but I could not have told you -- if you 23 had asked me two days ago, I would not have known 24 what you're referring to. 25 Q. Okay. And directing your attention to 624 1 A2077, this is Amendment No. 16. 2 A. Yes. 3 Q. And at the bottom of the page there it 4 makes reference to the option agreement that we've 5 talked about and it says MCO and DBL executed a 6 second amendment to the agreement, the second 7 amendment, dated as August 2nd, 1988, providing 8 that the call was exercisable during the one-month 9 period commencing during the period July 1st, 10 1990. 11 Do you recall anything of the amendment 12 that was executed to that document, that is the 13 put call option? 14 A. Really only in the same way that I've 15 testified about prior documents in this series, if 16 you will. 17 Q. Do you recall that the parties amended 18 the put call option so that the option would not 19 be exercised and the shares put back to MCO by 20 Drexel? 21 A. I don't recall what you're -- I don't 22 recall what you're referring to, that the put 23 would not be exercised or that it would be 24 deferred. 25 Q. Exactly. That they amended the option 625 1 arrangement to put off the put option so that the 2 shares would not be put back. 3 A. I do know that that happened. I could 4 not tell you when I had that knowledge. I clearly 5 had it when I sued this in anticipation of this 6 testimony and I may well have remembered it 7 earlier, but I don't remember. 8 Q. Do you recall what the reason was for 9 extending the option? 10 A. I believe the parties were still 11 negotiating with the Federal Home Loan Bank Board 12 about those conditions to which you referred. 13 Q. And, so, until it had reached a 14 satisfactory resolution regarding the net worth 15 condition that the bank board was seeking, they 16 did not want to acquire the shares and go with the 17 25 percent level? 18 A. Right. 19 Q. Okay. Now, do you recall ultimately 20 what happened to MCO's investment in UFG? 21 A. I think that it lost it all. 22 Q. And do you recall that ultimately MCO 23 took a writedown on the investment? 24 A. Yes. 25 Q. I'm handing you a copy of what purports 626 1 to be the MCO Holding, Inc., board of directors 2 meeting minutes of December 15th, 1983. The 3 document is a C document dash T1001 and it bears 4 the Bates stamps KLN10017 through KLN10024. I 5 would ask you to take a look at that for a moment. 6 Q. Again, the text that appears on page -- 7 do you recall attending that meeting of the board, 8 sir? 9 A. I don't have an independent 10 recollection of that attendance. I'm sure I did. 11 Q. And it indicates that the chairman made 12 a presentation? 13 A. Yes. 14 Q. Do you recall that presentation? 15 A. I don't independently, no. 16 MR. RINALDI: If I may take just a 17 moment, Your Honor. I have a few more questions, 18 I think, but I think we can finish very shortly 19 with the examination of the witness. 20 I would like to offer the document. 21 MR. NICKENS: No objection, Your Honor, 22 to CT1001. We have altered the document. There 23 was a cover letter to the document. We removed 24 that and renumbered it. So, for those people that 25 have an index, it's going to be slightly different 627 1 than what might appear in the files prior to now. 2 For the record, it is documents KLN10017 through 3 KLN10024. 4 MR. RINALDI: Your Honor, I have a few 5 final questions for the witness, but I think it 6 might be appropriate if we could break at this 7 time. I can finish within 15 minutes tomorrow. 8 MR. NICKENS: Your Honor, it would seem 9 to me that we ought to go ahead and at least 10 finish with the direct examination. 11 MR. RINALDI: Well, if we can take 12 about a five-minute break. 13 THE COURT: We'll take a 10-minute 14 recess. 15 16 (Short break.) 17 18 THE COURT: Back on the record. Mr. 19 Rinaldi. 20 MR. RINALDI: Thank you, Your Honor. 21 MR. RINALDI: 22 Q. Mr. Levin, based on your prior 23 testimony you've had over 20 years experience 24 sitting on boards of entities involving 25 Mr. Hurwitz; is that correct? 628 1 A. That's right. 2 Q. And in your experience how would you 3 characterize Mr. Hurwitz' manner in running or 4 chairing the boards on which he has been the 5 chairman? 6 A. In a consensical, informative -- 7 Q. Is he a strong personality on the 8 board? 9 A. He is a strong personality. He is 10 probably less strong on the board than he is 11 otherwise. 12 Q. In your experience on the board of 13 Federated and MCO, is it your experience that if 14 Mr. Hurwitz wanted something done by those 15 entities that it usually got done? 16 A. I guess the answer to that is yes, but 17 it really wouldn't be a full answer. First of 18 all, it would not be the answer if it related to 19 an interested transaction in which he or a party 20 that he had an interest in was on the other side. 21 On situations in which that was not the case, as 22 the chief executive officer, naturally he would, 23 together with management, be bringing to the board 24 proposals as to what to do. 25 As a general matter, after talking to 629 1 board members we typically would happen before a 2 board meeting to give people a heads-up on what 3 would happen. It would be discussed and, 4 generally, because they were good ideas and people 5 reported to Mr. Hurwitz and gave him an 6 opportunity to say "You really ought not to do 7 this in this fashion," or "You really ought not to 8 do it at all," as a general matter, yes, it did 9 get done. 10 Q. And if something came before the board 11 that Mr. Hurwitz was opposed to, it's likely that 12 that would not get done; isn't that true? 13 A. I guess the answer really relates back 14 to the consensical negotiation, that that 15 typically would get discussed in advance with the 16 board members and it wouldn't come to the board. 17 So, I can't remember something that Mr. Hurwitz 18 did not want to have done that actually was not 19 done, other than in a situation in which he was on 20 the other side and there were the exceptions and 21 things that he didn't want to happen, in fact, 22 happened. 23 Q. And in connection with the acquisition 24 of shares of United Financial Group, was 25 Mr. Hurwitz a leading proponent of that investment 630 1 on the MCO and board and the Federated trustee 2 board? 3 A. He probably was a leading proponent. 4 There may well have been others. I don't recall 5 it quite in that staging, if you would. 6 Q. Did Federated or MCO Holdings issue any 7 debt securities underwritten by an investment 8 banking firm prior to the issuance of the $260 9 million July 15th, 1982, zero coupon bond that we 10 previously discussed after you became a member of 11 the board? 12 A. I'm having a little trouble with the 13 dates. I believe there was a 12 and a half 14 percent subordinated debenture. I know there were 15 others. I don't recall quite the sequence, 16 whether it was before or after, and there were -- 17 I also don't recall -- in the respect of MCO, 18 there was a split in that company at some point 19 where the McCullough Oil part of the company, 20 which is to say the natural resource business, 21 became MCO Resources. And there may have been an 22 underwriting in that connection, but that was kind 23 of a split-off, if you will. 24 Q. But that may have been -- there may 25 have been one, then? 631 1 A. Without really refreshing my 2 recollection and looking at the balance sheet as 3 of that 1982 transaction, I could not definitely 4 tell you, but that's how one would know. 5 Q. Now, previously when we talked about 6 the 260 million-dollar zero coupon bond -- do you 7 recall that discussion and the bond that I'm 8 making reference to? 9 A. Yes. 10 Q. Now, did Drexel initially purchase that 11 zero coupon bond? 12 A. I'm not really sure who was the initial 13 purchaser. I think it was Drexel, but I don't 14 know that they held it for more than a short 15 period of time and I know ultimately it was 16 transferred to Clarendon, which was an offshore, I 17 think, Bermuda company. 18 Q. And Clarendon was owned by principals 19 at Drexel and Executive Life, was it not? 20 A. I don't have any notion if that's 21 correct. 22 Q. You don't know one way or another -- 23 A. I don't know if either of those parties 24 owned any part of Clarendon. 25 Q. What is Executive Life? 632 1 A. An insurance company. 2 Q. Was it affiliated with Drexel? 3 A. Not that I'm aware of. 4 Q. Was the zero coupon bond that we've 5 been talking about convertible into MCO stock? 6 A. At some point it was to be convertible 7 into MCO stock. It was not initially convertible 8 into MCO stock. 9 Q. Did Mr. Hurwitz eventually acquire the 10 zero coupon bond? 11 A. He did. I'm not sure he did. He 12 acquired the stock, which was issuable upon 13 conversion. I don't know if he acquired the bond. 14 Q. Did an entity he had a financial 15 interest in acquire the zero coupon bond? 16 A. I don't think so. Its possible, but I 17 think that -- I think he may have gone or -- I 18 don't know whether he or the entity went directly 19 into the stock. I just don't recall the sequence, 20 but one followed on the other very quickly. 21 Q. So, when they converted the bond, 22 Mr. Hurwitz ultimately ended up with the MCO 23 stock? 24 A. He was the subject of a put and he had 25 a call in connection with the zero coupon bond, 633 1 correct. 2 Q. And how were the funds obtained for 3 Mr. Hurwitz or the entity that acquired the bond 4 ultimately converted obtained? 5 A. I don't understand your question. 6 Q. Well, you testified a moment ago that 7 eventually Mr. Hurwitz acquired the zero coupon 8 bond. 9 A. Right. 10 Q. My question to you is: Do you know how 11 the funds were obtained for Mr. Hurwitz to acquire 12 that bond? 13 A. No. 14 Q. Did the acquisition of stock as a 15 result of the conversion of the zero coupon bond 16 ultimately become the subject of litigation? 17 A. The zero coupon bond was the subject of 18 litigation, yes. 19 Q. Can you describe that litigation? 20 A. I guess the significant thing about the 21 litigation is that nothing has happened on that 22 litigation probably for about three or four years. 23 The claim was that the board erred and subjected 24 MCO to liability. The facts are otherwise. The 25 tax case has been closed and turned out there had 634 1 been a terrific transaction for MCO Holdings, now 2 known as Maxxam, Inc. 3 Q. And were the nature of the allegations 4 that there had been securities fraud in connection 5 with -- 6 MR. KEETON: Your Honor, I didn't 7 object to the first three questions, but are we 8 trying some other case especially when nothing has 9 happened? As far as I'm concerned, the only 10 purpose for this question is to try to run a bunch 11 of innuendo into this record and not try the case 12 they have actually brought. I object to the 13 entire line of questioning. 14 THE COURT: Sustain the objection. 15 MR. RINALDI: 16 Q. Were high-yield bonds issued by MCO and 17 Maxxam subsequent to the issue of the zero coupon 18 bond? 19 A. I believe so. 20 Q. Was one of them the Maxxam Group, Inc., 21 13 and 58th senior subordinated notice due 5-15, 22 1992, in the amount of $150 million? 23 A. Yes. 24 Q. And was Drexel Burnham the underwriter 25 of that issue? 635 1 A. I believe they were. I don't know if 2 they were the sole underwriter, but they were -- I 3 believe they were the underwriter. 4 Q. Were other investment bankers asked to 5 submit proposals? 6 A. I don't recall. They may well have. 7 Q. And was another one of them the MCO 8 Holdings, Inc., fourteen and a quarter senior 9 subordinated note which closed on 7-31-1995 in the 10 amount of $35 million? 11 A. I believe that's correct. 12 Q. And was that also underwritten by 13 Drexel Burnham? 14 A. I believe so. I don't have an 15 independent recollection. I think they were. 16 Q. Were other investment bankers asked to 17 submit proposals, do you know? 18 A. I could not tell you. I know Maxxam 19 dealt with other investment bankers. I don't know 20 whether they submitted proposals. 21 Q. Was another one of the high-yield bonds 22 issued after the zero coupon bond the Maxxam 23 Pacific Lumber Company senior subordinated 24 extended note which was closed on 12-2-85 in the 25 amount of $180 million? 636 1 A. I don't know about the title of that 2 bond. I would have to look at it. So, I couldn't 3 really tell you. You called it the Maxxam/Pacific 4 Lumber Company bond? 5 Q. Pacific Lumber Company senior 6 subordinated extended note due private placement 7 refinanced. 8 A. I don't know. 9 Q. Do you recall a 180 million-dollar 10 refinance? 11 A. I don't, but I know that there was 12 refinancing at the time of the Pacific Lumber 13 acquisition and ultimately it was very favorable, 14 as it happened. 15 Q. Was that refinancing -- did it involve 16 Drexel Burnham? 17 A. I believe so. Whether as sole or co-, 18 I don't recall. 19 Q. And was another high-yield bond issued 20 after the zero coupon bond the Maxxam Pacific 21 Lumber Company senior subordinated zero coupon 22 extendable note that had a closing date of 12-2-85 23 in the amount of $270 million? 24 A. Sounds right, but I don't have a 25 specific recollection of the numbers. There was 637 1 financing at the time. 2 Q. Was that also done by Drexel Burnham? 3 A. Probably. I don't have a specific 4 recollection. 5 Q. And was another the Maxxam Pacific 6 Lumber Company senior subordinated extendable 7 notes 12 percent initial rates which closed on 8 6-2-86 in the amount of $480 million? 9 A. Sounds like it might have been in 10 connection with the Pacific Lumber merger, if you 11 will, the second step. I can't recall the 12 numbers, per se. 13 Q. And would that also have involved 14 Drexel Burnham? 15 A. I believe it was a continuation of 16 their financing of that transaction. 17 Q. And they were the underwriters for 18 those bonds? 19 A. I believe so. 20 Q. And would another of the high-yield 21 bonds issued after the zero coupon bond have been 22 the Pacific Lumber Company 12 and a half percent 23 senior subordinated debenture due in 1998 as a 24 public offering and its closing date was 6-26-96 25 in the amount of $75 million? 638 1 A. Without looking at a balance sheet and 2 a list of all of the debentures, if you will, or 3 notes, I couldn't tell you specifically. But in a 4 general fashion, that is correct. I'm not sure if 5 I misspoke in the earlier question when you asked 6 me if they were an underwriter. They may have 7 been simply the replacement agent, but I don't 8 recall. 9 Q. Okay. And do you recall yet another 10 bond issued by Pacific Lumber Company, a 12.2 11 percent senior subordinated note, that is, that 12 are due 7-1-96, public offering with a closing 13 date of 6-26-86 in the amount of $355,472,000? 14 A. Might well have been. Same answer, 15 basically. Would they have been by Drexel 16 Burnham? Same answer. 17 Q. The answer is yes? 18 A. I believe so. Again, I don't have a 19 specific recollection. What was the date of 20 issuance of that note? 21 Q. The closing date or -- 22 A. The issuance date. Anything after when 23 Drexel Burnham went out of business, which was the 24 early Nineties, would not have been a Drexel deal. 25 Q. Okay. 6-26-86? 639 1 A. Yes. 2 Q. Okay. And then how about Pacific 3 Lumber Company 12 percent series, a senior note 4 closing date 6-26-86 in the amount of $250 5 million? 6 A. Same answer. No specific recollection. 7 I believe that DBL was involved in the financing 8 for the Pacific Lumber acquisition. 9 Q. And all of those notes which I have 10 referred to or these issuances of bonds are ones 11 that were obtained in connection with MCO or 12 Maxxam's acquisition of Pacific Lumber? 13 A. You know, I would have to probably see 14 it in front of me. It sounds from the date that 15 that would be the case. 16 Q. Okay. Do you know in connection with 17 Kaiser Tech whether there were any high-yield 18 bonds issued? 19 A. I believe there were. I don't know 20 whether Drexel was alone or worked with 21 PaineWebber in that transaction, but I believe 22 that there were high-yield bonds which where 23 indeed issued at about the time of that 24 acquisition. 25 Q. Do you recall whether one such issuance 640 1 was Kaiser Tech Corporation senior increasing rate 2 note 14.44 percent private placement with a 3 closing date of 10-28-88 in the amount of 4 $625 million? 5 A. I recall that there were increasing 6 rate notes, which was the means of financing prior 7 to a refinancing, and the increasing rate note 8 technique was the one that was used to be certain 9 that there would be a refinancing. 10 Q. And do you recall whether those 11 increasing rate notes involved in any way Drexel 12 Burnham? 13 A. I don't recall. I believe they did. 14 Q. And did Kaiser Tech Corporation also 15 have a senior subordinated increasing rate note in 16 the amount of 14.44 percent with a closing date of 17 10-28-88 in the amount of $300 million? 18 A. It may have. I know there was 19 financing in connection with the acquisition. I 20 don't have a specific recollection of the details. 21 Q. And finally, did Kaiser -- was there a 22 Kaiser Aluminum & Chemical Corporation senior 23 subordinated note at 14.25 percent with a closing 24 date of 12-14-89 in the amount of $355 million? 25 A. I don't have a specific recollection of 641 1 the details of the balance sheet. That's a 2 subsidiary of Kaiser Aluminum Corporation. I 3 believe that there were financings. I couldn't 4 really verify for you from memory the details. 5 Q. If I were to ask you to verify all of 6 those notes and their amounts that I have just 7 read to you, what documents would you need to 8 verify that to give me a definitive answer? 9 A. I would either see the documents 10 themselves -- that is, the offering memorandum or 11 the registration statement for a private or public 12 offering, as the case may be. Probably a shorter 13 way to do it would be to see the balance sheet 14 under the assumption that the balance sheet having 15 been certified by Arthur Andersen is correct and 16 that would be a way of looking at that. 17 Q. Would those also be found in the annual 18 reports and the forms 10Ks? 19 A. Yes. 20 Q. And if I were able to show you either 21 the annual reports or the forms 10Ks for the 22 applicable years, 1989, could you verify that 23 data? 24 A. I could verify the nature of the debt. 25 I couldn't verify the Drexel Burnham part unless I 642 1 saw the actual document which would either be the 2 private placement memorandum or the prospectus 3 because the balance sheet, I believe, would not 4 include the private placement agent or the 5 investment banking firm that would be 6 underwriting. 7 Q. How is it that you have come to be 8 familiar with the financing that has been issued 9 for these high-yield bonds that have been issued 10 to facilitate Maxxam and MCO's acquisition 11 activities? 12 A. By basically being involved through my 13 law firm and being -- knowing about the financing 14 through the reviews that are affected at board 15 meetings. 16 Q. And through your law firm have you been 17 responsible in any way for overseeing the legal 18 work that's been done in order to obtain these 19 high-yield bond issues? 20 A. In a general way, yes. 21 Q. When you say "in a general way," what 22 do you mean? 23 A. Well, as lawyers increase in seniority 24 and maturity, they are basically able to work on 25 these transactions really independently and that 643 1 is, in fact, what has happened increasingly. 2 Q. Do you still oversee what goes on in a 3 sort of general way? 4 A. Depends on, I guess, what you mean. In 5 a general way, I will be informed that there is a 6 financing. I will not typically be involved in 7 the paperwork. 8 Q. And as a result of your involvement on 9 the board and your work as counsel for MCO and 10 Maxxam and its affiliated entities, you have 11 therefore acquired knowledge of the high-yield 12 bond financing that was engaged in between 1985 13 and 1989 by MCO, Maxxam, and their related 14 entities? 15 A. I suppose you could say that. 16 Q. You indicated that there were other 17 entities that underwrote high-yield bonds on 18 occasion for Maxxam? 19 A. I said I wasn't certain whether another 20 investment banking firm participated. I do know 21 that other entities have participated without 22 Drexel, but I don't recall whether Drexel was the 23 sole underwriter or placement agent in the 24 transactions to which you referred. 25 Q. In your experience between 1985 and 644 1 1989 was Drexel the principal underwriter for 2 high-yield bonds issued by Maxxam, MCO and their 3 related entities during that time period? 4 A. And for everybody else in the market, 5 as well, yes. They had a disproportionately high 6 percentage of the high-yield market. 7 MR. RINALDI: I don't think I have any 8 further questions. 9 MR. NICKENS: Your Honor, my 10 examination, I estimate, would be about 45 minutes 11 and perhaps a bit longer. I would expect to be 12 able to finish with certainly -- we ought to be 13 able to finish with this witness within an hour 14 tomorrow because we are trying to accommodate Mr. 15 Madigan, but we would like to finish with this 16 witness. He has agreed to stay over this evening, 17 but we would like to finish him in the morning and 18 I estimate that even with redirect, reasonable 19 redirect, we ought to be able to do that within an 20 hour. 21 THE COURT: You think we could still 22 finish with Mr. Madigan tomorrow? 23 MR. RINALDI: Sure. Frankly, if we are 24 going to start at 9:00 as we did today and finish 25 this by 10:00, that will be plenty of time. 645 1 MR. NICKENS: Before we adjourn, I had 2 one other matter. There were some questions today 3 in which Mr. Rinaldi referenced supposedly some 4 existing case law with regard to put call options. 5 We would request that the OTS produce to us any 6 such case law that supports the questions that Mr. 7 Rinaldi posed. We believe that he has to have 8 some reasonable basis before suggesting to the 9 court there is such authority, and we would like 10 to examine what they say support those questions. 11 THE COURT: I think that's reasonable. 12 Do you have something like that? 13 MR. RINALDI: Yes, we do, Your Honor. 14 THE COURT: Well, I think in some form 15 or another you should supply it to me and to the 16 respondent. 17 MR. RINALDI: I agree. I would simply 18 point out, Your Honor, right now our computer is 19 not working quite up to snuff. It may be several 20 days, but I certainly will provide that. 21 THE COURT: Let's adjourn until 22 tomorrow at 9:00. 23 24 (Whereupon at 4:55 p.m. the 25 proceedings were adjourned.) 646 1 STATE OF TEXAS 2 COUNTY OF HARRIS 3 4 I, the undersigned certified shorthand reporter and notary public in and for the State of 5 Texas, certify that the facts stated in the foregoing pages are true and correct to the best 6 of my ability. 7 I further certify that I am neither attorney or counsel for, nor related to or 8 employed by, any of the parties to the action in which this transcription is taken and, further, 9 that I am not a relative or employee of any counsel employed by the parties hereto, or 10 financially interested in the action. 11 SUBSCRIBED AND SWORN TO UNDER MY HAND AND SEAL OF OFFICE on this the ________ day of 12 __________________, 1997. 13 ________________________________ SHAUNA FOREMAN, CSR 14 Certified Shorthand Reporter and Notary Public in and for the 15 State of Texas 16 Certificate No. 3786 Expiration date: 12-31-98 17 My Commission expires: 9-14-99 18 . 19 . 20 . 21 . 22 . 23 . 24 . 25 . 647 1 STATE OF TEXAS 2 COUNTY OF HARRIS 3 4 I, the undersigned certified shorthand reporter and notary public in and for the State of 5 Texas, certify that the facts stated in the foregoing pages are true and correct to the best 6 of my ability. 7 I further certify that I am neither attorney or counsel for, nor related to or 8 employed by, any of the parties to the action in which this transcription is taken and, further, 9 that I am not a relative or employee of any counsel employed by the parties hereto, or 10 financially interested in the action. 11 SUBSCRIBED AND SWORN TO UNDER MY HAND AND SEAL OF OFFICE on this the ________ day of 12 __________________, 1997. 13 ________________________________ SHANON M. HAIR, CSR 14 Certified Shorthand Reporter and Notary Public in and for the 15 State of Texas 16 Certificate No. 6513 Expiration date: 12-31-99 17 My Commission expires: 9-14-99 18 19 20 21 22 23 24 25