648 1 UNITED STATES OF AMERICA. Before the 2 OFFICE OF THRIFT SUPERVISION DEPARTMENT OF THE TREASURY 3 In the Matter of: ) 4 ) UNITED SAVING ASSOCIATION OF ) 5 TEXAS, Houston, Texas, and ) ) 6 UNITED FINANCIAL GROUP, INC., ) Houston, Texas, a Savings ) 7 and Loan Holding Company ) ) OTS Order 8 MAXXAM, INC., Houston, Texas, ) No. AP 95-40 a Diversified Savings and ) Date: 9 Loan Holding Company ) Dec. 26, 1995 ) 10 FEDERATED DEVELOPMENT CO., ) a New York Business Trust, ) 11 ) CHARLES E. HURWITZ, ) 12 Institution-Affiliated Party ) and Present and Former Director ) 13 of United Savings Association ) of Texas, United Financial Group,) 14 and/or MAXXAM, Inc.; and ) ) 15 BARRY A. MUNITZ, JENARD M. GROSS,) ARTHUR S. BERNER, RONALD HUEBSCH,) 16 and MICHAEL CROW, Present and ) Former Directors and/or Officers ) 17 of United Savings Association of ) Texas, United Financial Group, ) 18 and/or MAXXAM, Inc., ) ) 19 Respondents. ) 20 TRIAL PROCEEDINGS 21 9-25-97 22 649 1 A-P-P-E-A-R-A-N-C-E-S 2 ON BEHALF OF THE AGENCY: 3 KENNETH J. GUIDO, Esquire Special Enforcement Counsel 4 BRUCE RINALDI, Esquire RICHARD STEARNS, Esquire 5 and BRYAN VEIS, Esquire of: Office of Thrift Supervision 6 Department of the Treasury 1700 G Street, N.W. 7 Washington, D.C. 20552 (202) 906-7395 8 ON BEHALF OF RESPONDENT MAXXAM, INC.: 9 FRANK J. EISENHART, Esquire 10 JENNIFER KIM of: Dechert, Price & Rhoads 11 1500 K Street, N.W. Washington, D.C. 20005-1208 12 (202) 626-3306 16 13 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO. AND CHARLES HURWITZ: 14 RICHARD P. KEETON, Esquire 15 of: Mayor, Day, Caldwell & Keeton 1900 NationsBank Center, 700 Louisiana 16 Houston, Texas 77002 (713) 225-7013 3 17 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO., 18 CHARLES HURWITZ, AND MAXXAM, INC.: 19 JACKS C. NICKENS, Esquire of: Clements, O'Neill, Pierce & Nickens 20 1000 Louisiana Street, Suite 1800 Houston, Texas 77002 21 (713) 654-7608 22 650 1 ON BEHALF OF JENARD M. GROSS: 2 PAUL BLANKENSTEIN, Esquire MARK A. PERRY, Esquire 3 of: Gibson, Dunn & Crutcher 1050 Connecticut Avenue, N.W. 4 Washington, D.C. 20036-5303 (202) 955-8500 5 ON BEHALF OF BERNER, CROW, MUNITZ AND HUEBSCH: 6 JOHN K. VILLA, Esquire 7 MARY CLARK, Esquire PAUL DUEFFERT, Esquire 8 of: Williams & Connolly 725 Twelfth Street, N.W. 9 Washington, D.C. 20005 (202) 434-5000 10 OTS COURT: 11 HONORABLE ARTHUR L. SHIPE 12 Administrative Law Judge Office of Financial Institutions Adjudication 13 1700 G Street, N.W., 6th Floor Washington, D.C. 20552 14 REPORTED BY: 15 Ms. Marcy Clark, CSR 16 Ms. Erica Davis, CSR Ms. Shauna Foreman, CSR 17 18 19 20 21 22 651 1 EXAMINATION INDEX 2 EZRA LEVIN Cross-Examination by Mr. Nickens............5 3 Cross-Examination by Mr. Keeton............49 Redirect-Examination by Mr. Guido..........51 4 Cross-Examination by Mr. Eisenhart.........69 5 KEVIN MADIGAN Examination by Mr. Rinaldi.................71 6 Cross-Examination by Mr. Eisenhart........133 Redirect-Examination by Mr. Rinaldi.......143 7 Recross-Examination by Mr. Eisenhart......144 8 CARL DE REMER Examination by Mr. Veis...................146 9 Cross-Examination by Mr. Keeton...........231 Examination by Mr. Eisenhart..............236 10 Redirect-Examination by Mr. Veis..........239 11 12 13 14 15 16 17 18 19 20 21 22 652 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:05 a.m.) 3 THE COURT: The hearing will come to 4 order. The direct examination of Mr. Levin is 5 complete? 6 MR. NICKENS: Yes, Your Honor. 7 THE COURT: Ready for cross? 8 MR. NICKENS: Thank you, Your Honor. 9 10 11 CROSS-EXAMINATION 12 13 Q. (BY MR. NICKENS) Mr. Levin, let's 14 provide a little background information for the 15 judge about you and your work. 16 Where did you grow up? 17 A. Brooklyn, New York. 18 Q. And how old are you? 19 A. I will be 64 in February. 20 Q. And what did you do after high school? 21 A. Well, immediately after high school, I 22 worked for -- I got out of high school a little 653 1 early so that I could work before going to college 2 and I guess I was a messenger, a mimeograph 3 operator. 4 Q. Those sorts of things? 5 A. Whatever else in a small business. 6 Q. And? 7 A. And then I went to college. 8 Q. At some point you went to college. 9 Where did you go to college? 10 A. Columbia College in New York. 11 Q. And what -- you graduated in what year? 12 A. 1955. 13 Q. And what did you do after graduation? 14 A. I went to graduate school at the 15 University of Chicago. 16 Q. And what did you study at the 17 University of Chicago? 18 A. Social sciences, sociology. 19 Q. And did you get a degree from the 20 University of Chicago? 21 A. No. I passed the exam but you had to 22 stay on to write a thesis and I did not. 654 1 Q. And I take it at some point, you went 2 to law school? 3 A. The next year, I entered Columbia Law 4 School. 5 Q. And graduated from Columbia Law School? 6 A. I did. 7 Q. In what year? 8 A. 1959. 9 Q. And briefly describe for the Court your 10 professional history after graduating from law 11 school. 12 A. I was in the Army for six months. I 13 worked at one firm for about six months and then 14 joined a firm called Marshall, Craddock, Green, 15 Allison, Tucker until 1979. That was roughly 1961 16 to 1979 and joined my present firm in June of 17 1979, about 18-plus years ago. 18 Q. Was that at Marshall Bradder that you 19 met Mr. Marlin? 20 A. Yes. 21 Q. And stepping back a bit, have you done 22 any teaching during your career? 655 1 A. Several different times. I've taught 2 Corporation Law at the University of Wisconsin Law 3 School. I've taught securities regulation and 4 legal aspects of corporate finance at the law 5 school of University of Connecticut and I've also 6 taught at Columbia College Sociology of Law and 7 Legal Systems in -- for three years in the 1970s 8 and again in the 1980s and most recently, I 9 co-taught a colloquium on human rights and 10 contrary civilization at Columbia. 11 Q. To come back, you became a partner at 12 Marshall Bradder? 13 A. Yes. 14 Q. And what was your specialty there? 15 A. Corporation Law and Securities. 16 Q. And I gather at some point or another, 17 you moved to the firm that is now known as 18 Kramer Levin? 19 A. Yes. 20 Q. What -- explain to the Court the 21 circumstances of that career move. 22 A. Well, actually, Richard Marlin was 656 1 talking to that firm. I didn't know that and I 2 was talking to Maurey Nessin, one of the partners 3 in that firm because we were on opposite sides; 4 and he said, "I suppose you know we're talking to 5 Richard." 6 I didn't know and I went down the hall; 7 and I said, "Richard, I don't know why you're 8 talking to them. I don't want you to do that." 9 And he said, "you know, they are really 10 interested in you." 11 And I said, "I have no interest." And 12 essentially, he kept at it and Maurey Nessin kept 13 at it and -- 14 Q. And you developed an interest? 15 A. I agreed two weeks later to meet with 16 them, and what I heard was essentially kind of 17 very influential in what generated the move. 18 Q. And so, you moved to Kramer Levin as a 19 named partner in that firm or you became a named 20 partner in the firm of Kramer Levin? 21 A. Six months later, right. 22 Q. And what is the nature of the business 657 1 of Kramer Levin? 2 A. Well, it's a -- we don't do certain 3 things, but we do corporation law, litigation, 4 taxation, trust and estates, real estate, credited 5 rights. We don't do admiralty or patents or 6 negligence, whatever. But full service kind of 7 commercial firm. 8 Q. Tell the Judge -- 9 A. Employee benefits. 10 Q. Tell the Judge some of the people -- 11 some of your partners that you work with or that 12 are with your firm. 13 A. Marvin Frankel is, I guess, the 14 preeminent person, former Federal Judge, was a 15 professor at Columbia Law School before he went on 16 the Bench; and he heads our litigation department. 17 Gary Nessen, who had been an Assistant U.S. 18 Attorney, has taught -- continues to teach at 19 Columbia Law School. Charlotte Fishman teaches 20 ethics at Columbia Law School; Mike Nassau who has 21 been a terrific ERISA lawyer; Maurey Nessin who's 22 a litigator, present Legal Aid Society. Marvin is 658 1 chairman of the Lawyer's Committee for Human 2 Rights; Tom Morelan, who is head of the lawyer -- 3 Poverty Lawyer, something to that effect. I could 4 go on but... 5 Q. Now, are you proud to be associated 6 with these people? 7 A. No question about it. 8 Q. And they all work in the firm in which 9 your name appears? 10 A. Yes. 11 Q. Have you published in any particular 12 areas? 13 A. Well, in the corporation law area, I've 14 published on professionalism in the stockbroker 15 which was a review of the SEC special study from, 16 I think 1962 to '65, Obligations of Directors, 17 Business Lawyer, New York Law Journal, other 18 journals. 19 Q. Do you have activities outside the law? 20 A. I do. 21 Q. Describe some of those for the Court so 22 they can know more about you. 659 1 A. I'm the vice president of the Columbia 2 College Allumni Association, member of the board. 3 I'm a vice president of the Jewish Community 4 Relations Council which is an umbrella group for 5 over 65 organizations in New York City. I serve 6 as pro bono counsel to a hospital. I was 7 previously a member of the board and secretary of 8 college scholarship of education and defense fund 9 for racial equality. That was in the Sixties. 10 The other positions are those I hold now: Cochair 11 at the Coalition for Soviet Jewelry. Member of 12 the board of Hebrew Free Loan Society. 13 Q. Now, have you had any associations 14 during your career with banks? 15 A. I did have an association with a bank 16 in New York City which I incorporated which was 17 UMB Bank and Trust Company. That was in 1978; and 18 I served as a member of the board until about, I 19 think, the end of 1996 or the beginning of this 20 year when it was acquired by another bank and 21 merged. 22 Q. Now, yesterday, in your direct 660 1 testimony, you told the Court something about how 2 you met Mr. Hurwitz and became counsel for certain 3 entities that are involved in this matter; is that 4 correct? 5 A. Yes. 6 Q. And approximately what time period was 7 that when you met Mr. Hurwitz? 8 A. Well, I originally met when we were on 9 the opposite side of a transaction. That was in 10 197 -- it was '71. I'm not quite sure. 11 And then we did not meet again until 12 1973 when he needed counsel in New York. So, 13 there was probably either a year-and-a-half or 14 two-and-a-half-year interim. 15 Q. So, you've known Mr. Hurwitz for how 16 many years? 17 A. I guess going on about 25 years. 18 Q. Since the time that both of you were 19 fairly young men? 20 A. We aren't yet? I guess, yes. I guess 21 that's right. 22 Q. What percentage of the business of 661 1 Kramer Levin is attributable to MAXXAM or 2 Mr. Hurwitz or any institutions, companies 3 associated with them? 4 A. Oh, I would have to guess; but it's 5 probably 2 percent, maybe 2 and 3 percent. It had 6 been higher at some point; but I think probably 7 currently, that's a guess. 8 Q. There were periods of time where you 9 had a lot of activity concerning the acquisition 10 of Kaiser and Pacific Lumber, correct? 11 A. Yes, that is correct. 12 Q. At any point in time has the business 13 of MAXXAM or affiliated entities been more than 14 5 percent of the business of Kramer Levin? 15 A. At some point, probably in some years, 16 it was. It was never more than probably 17 8 percent, but it's kind of varied. 18 Q. Now, yesterday, turning to some of the 19 specific issues that have been raised, you were 20 asked about a zero coupon note transaction? 21 A. Yes. 22 Q. Do you recall that? And Mr. Rinaldi 662 1 apparently made some association between the 2 proceeds from that transaction and possible 3 purchases by MCO of UFG. Do you recall that? 4 A. Yes. 5 Q. Now, explain to the Court what the 6 purpose of the zero coupon note transaction was 7 and, in general, what it was. 8 A. It was primarily a tax -- not 9 exclusively -- but a tax driven kind of 10 transaction; and as I recall, there were a number 11 of investment banks which had been kind of selling 12 this kind of concept. The concept with the zero 13 coupon was that you borrowed "X" dollars; but 14 since you weren't paying interest, the interest 15 would accrue and accrue and accrue depending upon 16 how long it was. 17 So, if it was a 25-year note, under the 18 then tax laws, you could depreciate -- I'm 19 sorry -- you could take as a deduction basically a 20 percentage of that ultimate payout. So, if the 21 ultimate payout was 26 years and it was a 25-year 22 note was what, in fact, what the case was, you 663 1 would be taking a deduction of $10 million a year 2 which was significant. So, it was both an 3 opportunity to raise money in a particularly 4 tax-favorable kind of way. 5 Q. And in that particular transaction, 6 there were proceeds of the note of three and a 7 half million dollars or thereabouts? 8 A. Yes. 9 Q. But the note itself was in the face 10 amount of something like $260 million? 11 A. That's correct. 12 Q. And the company got a 10-million-dollar 13 annual deduction? 14 A. That is correct. 15 Q. For issuance of that note? 16 A. Yes. 17 Q. And did it turn out to be -- have 18 favorable tax consequences for MAXXAM? 19 A. Yes, absolutely. 20 Q. Now, there was some testimony yesterday 21 about Mr. Hurwitz' role in the zero coupon 22 transaction. Did there come a time when 664 1 Mr. Hurwitz personally had some ownership interest 2 in the note? 3 A. He had an option -- he had a call 4 option for the note for the stock into which it 5 could be converted and he was subject to a put 6 option by the then holder of the note. 7 Q. Explain to the Court how that came 8 about, how those -- how that situation arose. 9 A. Because the note would generate a 10 deduction of 10 million, even though no dollars 11 passed hands, no actual cash payment was made, the 12 rules of the IRS were that the holder of the note 13 who would be getting this phantom income would 14 actually have to include that income in its 15 return. So, that one -- what one could get a 16 deduction for, the other would take in as receipt. 17 That put pressure on the holder of the 18 note who would either -- to make this economic -- 19 would either have to have significant tax shelter 20 which would be used up so as not to have to pay 21 tax on phantom income, monies that were never 22 received but would be deemed to have been 665 1 received, or would have to be an offshore company. 2 Drexel ultimately found a buyer which 3 may have been itself initially. I don't know 4 that -- moved to another buyer and then moved to 5 an offshore company called Clarendon. My 6 recollection is that the buyers, the holder in 7 this case, Clarendon, was not looking for an 8 equity purchase, but strictly for interest based 9 piece of paper. But there was no interest; that 10 is, the interest was zero coupon. And they were 11 not prepared to wait what was then probably 12 another 21 or 22 years in order to get their 13 payment. They had no interest in that. So, they 14 needed somebody to say: Look. We'll take you out 15 of this paper. It was not enough -- the paper was 16 callable, but they could not be sure that MAXXAM 17 would call the paper. 18 There was a second problem. To the 19 extent that you took the 10-million-dollar-a-year 20 deduction for the zero coupon, when you bought 21 back the paper, unless you could fit within an 22 exception, you would take in all of that -- you 666 1 would recapture all of those deductions so, if it 2 was four years -- I don't know whether it was 3 three years, four years, six years, you would be 4 taking in quite a lot of money. 5 Q. So, you might have gotten a deferral on 6 your taxes; but you would have to pay the tax on 7 the recapture? 8 A. There was a piece of paper on 9 recapture. So, Clarendon said, "And we'll take 10 this piece of paper, but we have to know that we 11 can get out of it." Well, that meant that you had 12 to find somebody who was willing to take the risk 13 of holding that piece of paper. That's where -- 14 nobody was really prepared to do that. Charles 15 Hurwitz was enlisted in effect to do that. He was 16 a principal holder in MAXXAM at the time; and if 17 it was going to make sense for anybody, it was 18 going to make sense for him. It hardly would make 19 sense for anybody else. 20 Q. Were there convertibility features 21 associated with the note? 22 A. There was no convertibility for a 667 1 period of I think it was five years. The concept 2 of having a conversion feature as I recall 3 initially in the note was that was kind of the 4 theory that MAXXAM would not want some third-party 5 holder of the note but to convert in what, at the 6 end of 26, 25 years, would have turned out to be 7 75 percent of the company. The holder wasn't 8 interested in 75 percent of the company, and 9 MAXXAM wasn't interested in 75 percent of the 10 company. I say 75 percent because the interest 11 accrued each year and the conversion feature was 12 based on the principal amount that would then have 13 been payable had the note been repurchased so that 14 it wasn't 75 percent in year three or four or 15 five. It was a much lesser number. 16 Q. And it increased to approximately 17 $10 million a year on that straight line basis? 18 A. Yes. And then you would divide that by 19 whatever was the strike price and that would get 20 you the number of shares that were issuable upon 21 conversion. 22 Q. Now, to cut through all this technical 668 1 thing, was it true that the -- Mr. Hurwitz taking 2 on this note was to benefit MAXXAM? 3 A. Well, no question about it. 4 Q. And did it, in fact, benefit MAXXAM? 5 A. It did because of that exception that I 6 mentioned, and that was a so-called stock for debt 7 exception. If the note was basically exchanged 8 for stock of the company which would happen when 9 you converted, then there would be no recapture of 10 the depreciation. 11 Q. So, in addition to the deferral because 12 of the structure of the transaction, MAXXAM could 13 get a -- would not have to be -- have to pay tax 14 on their -- would not have any recapture problems? 15 A. Well it, wasn't only that it wouldn't 16 have any recapture problems. It also wouldn't 17 have any debt because the debt was eliminated with 18 the conversion which then became equity. 19 Q. Now, I want to -- if we might, 20 Mr. Levin, turn to some of the issues that were 21 raised by the 13Ds and I have a few questions and 22 I have put those in front of you. And they have 669 1 been identified in the record as Exhibits A2061 2 through A20383. And it's the original 13D with 3 some 22 amendments. Do you have that in front of 4 you? 5 A. Yes. 6 Q. First of all with regard to 2061, can 7 you tell us -- and you recall that you told us in 8 direct about Mr. Ludwig making an offer for 9 purchase of USAT, correct? 10 A. Yes. 11 Q. What was the original purchase price as 12 reflected in A2061 that FedRe paid for its initial 13 shares of UFG and if you could look over to page 14 eight, I think you'll see that. 15 A. Well, the original price that's related 16 in this table is $4.04 and an eighth but I can't 17 tell that you that was the original price that was 18 paid because all that 13D requires is for a 19 purchase is within the prior 60 days; so, it may 20 have been lower. It may have been the same or 21 higher but what it says here is basically the 22 initial -- was in the four-dollar range. 670 1 Q. Okay. And do those 13Ds reflect that 2 the price at which FedRe or later MCO purchased 3 fluctuated? 4 A. Yes. 5 Q. And if you could look over at 6 Exhibit 2062, page seven, does it report 7 additional purchases? 8 A. Yes. 9 Q. And what was the principal reason, if 10 you can tell, Mr. Levin, for the filing of this 11 first amendment? And my focus is on page five. 12 A. That was a situation it appears to be 13 that that reflects the fact that FedRe had 14 notified the Federal Home Loan Bank Board that it 15 was considering increasing its investment to 16 between 10 and 20 percent of the outstanding 17 shares of UFG. 18 Q. And if you look down there on page five 19 in the middle of the carry over paragraph, if you 20 could repaired along with me, it says in 21 mid-February 1982, a representative of FedRe met 22 with representatives of the company and indicated 671 1 that FedRe supports management's declared 2 intention to dispose of the subsidiary. 3 Do you see that? 4 A. Yes. 5 Q. And that subsidiary was USAT, correct? 6 A. I know it was a S&L. I don't remember 7 what it was then called. 8 Q. Okay. Now, tell -- looking at Page 4, 9 can you tell the court what FedRe's investment in 10 UFG was at that time? 11 A. $2,713,080.63. 12 Q. And let me ask you to look now at A2063 13 which purports to be a 13D, May 18th, 1982, 14 reflecting a transaction of May 11th, 1982. 15 What was that transaction or event? 16 A. That on the bottom of Page 4 and the 17 top of Page 5 and then on Page 5 indicated that, I 18 guess, after a series of letters the office of 19 examination and supervision of the Federal Home 20 Loan Bank Board indicated that it did not intend 21 to disapprove of FedRe's proposed acquisition of 22 shares and, indeed, on May 11 FedRe acquired an 672 1 additional 139,000 some odd shares. 2 Q. If you look at Page 6, at what price? 3 A. At a four-dollar price. And shortly 4 thereafter, May 18th, the letter was filed, the 5 13D schedule was filed. 6 Q. Now, let me ask you to look over -- 7 skip one and the third amendment and look at the 8 fourth amendment at Exhibit 2065. 9 What was the event that occasioned the 10 filing of this amendment? 11 A. I think there were probably two 12 purposes. One was to indicate that Dr. George 13 Kozmetsky and Ronya Kozmetsky, who was his wife, 14 had acquired shares. And second was to indicate 15 that FedRe planned to transfer its shares to 16 Federated. It further indicated the Kozmetskys 17 disclaimed that they were members of a group and 18 that they were simply making this filing for 19 purposes of full disclosure. 20 Q. Why did you include them if they were 21 disclaiming that they were members of a group? 22 A. Really, for -- the notion is to have 673 1 full disclosure and not to conceal anything, and 2 that would be a way to do it. 3 Q. Avoid a problem? 4 A. I'm sorry. 5 Q. Avoid a problem of somebody coming in 6 later and saying -- 7 A. "Why didn't you tell us?" 8 Q. You failed to tell us this? 9 A. Right. 10 Q. Okay. Now -- and in this 13D, 11 Exhibit 2065, was any representation made about 12 the intent to acquire control as of this time? 13 And I refer you to the bottom of Page 9. 14 A. No. No such -- they each intend, as 15 large investors, to follow the affairs of the 16 company but didn't have any present intention to 17 seek to acquire or to exercise control over the 18 company or of any of its subsidiaries or 19 affiliates. 20 Q. Now, let me ask you to look over at 21 Page 12 of Exhibit 2065. It reflects the prices 22 of some recent purchases there. 674 1 A. They were in the 275 to 250 area, one 2 or the other. 3 Q. So that price of the shares had fallen 4 by roughly a measure of 50 percent as of this 5 time? 6 A. Right. Maybe a little less, but right. 7 Q. And what was FedRe's or Federated's 8 total investment in UFG at this point? I'm 9 looking for the number. 10 A. 238,000 in terms of the shares owned by 11 Federated and -- and my guess is that the amount 12 for FedRe would appear in a prior 13D, but 13 apparently there was no change. 14 Q. Well, let me ask you to look back at 15 2064 so that we can get that number in mind. If 16 you look at the second page, it gives you a number 17 for the amount that had been invested by FedRe at 18 that point. 19 A. 3,270,480.63. 20 Q. So, if FedRe sold at that point, they 21 would lose approximately, depending upon the basis 22 in each shares, approximately a million six? Half 675 1 of their investment? 2 A. That really depends on whether the 3 prices that were shown during the prior 60 days 4 were, indeed, the prices at which they bought any 5 other shares prior to that 60-day period. If it 6 was the same, it would have been a million six 7 loss. It could have been more, might have been 8 somewhat less. 9 Q. Now, let me ask you to look over at -- 10 let's just skip over to 2068. That's Amendment 11 No. 7. By the way, did you sign this 13D 12 amendment? I'm looking at 2068. 13 A. I did sign it on behalf of Federated 14 Development and the Kozmetskys. I did not sign it 15 on behalf of MCO Holdings. 16 Q. Who signed it on behalf of MCO 17 Holdings? 18 A. Dr. William Leone, who was the 19 president of MCO Holdings. 20 Q. Now, what does this reflect with regard 21 to the amount of investment that MCO or Federated 22 had in UFG at this point in time? And I refer you 676 1 to Page 6. 2 Do you see a figure there down at the 3 bottom of the page? 4 A. Well, that was the amount beneficially 5 owned by Federated and MCO. 6 Q. Right. 7 A. That number is 5,901,774.88. 8 Q. Okay. And then it explains how that 9 number is broken down by the various entities, 10 correct? 11 A. That is correct. 12 Q. And let me ask you to focus, if you 13 will, on Page 7 in the little -- the two Is. It 14 says $238,208.25 was obtained from the general 15 corporate funds of Federated. 16 Now, you were asked some questions 17 about this yesterday, Mr. Levin. Was it -- first 18 of all, the 13D required you to identify a source 19 of funds of these purchases, correct? 20 A. Right. 21 Q. And was it unusual for you to report 22 that the funds would be coming out of general 677 1 corporate funds? 2 A. Not unusual. 3 Q. In other words, is that what you would 4 put unless you had some specific source to report? 5 A. Yes, unless you had a margin loan or 6 another -- right. That's what you would put. 7 Q. Now -- okay. Now, what is the price as 8 of the date of 2068 as reflected in the purchases 9 that had occurred since the last amendment? 10 A. On Page 8, that suggests -- the bottom 11 suggests that as of March 15 and March 17 the 12 prices were 8.495 and 8.175 respectively. 13 Q. Let me ask you to look at 2069 and tell 14 the court what was the principal purpose or event 15 for having to file this 13D amendment, No. 8. 16 A. Well, this would appear to have had a 17 number of reasons for the filing, and that's 18 detailed on Page 8 and 9 essentially. 19 Q. Okay. 20 A. And carry over to 10. One was the 21 merger of FAF and United Financial Group and the 22 increase in the number of shares held by MCO as a 678 1 stockholder of FAF. I'm sorry. The number of 2 shares held by MCO in United Financial Group by 3 reason of the merger of FAF in which it also held 4 shares. 5 Q. Yes, sir. 6 A. A second basis was to indicate that 7 Hurwitz and Kozmetsky and Munitz had -- were on 8 the board of UFG. Third reason relates to the 9 statement by MCO of its anticipated exercise of 10 the call option that it had from Federated. And 11 the fourth relates to the notion that MCO and 12 Federated were considering the acquisition by MCO 13 of additional shares so that the aggregate number 14 would exceed 25 percent. 15 Q. Okay. 16 A. Of those two entities together. 17 Q. And at this point in time? 18 A. And that an application would be filed 19 with the Federal Home Loan Bank Board. 20 Q. And at this point in time and I refer 21 to you Page 6. Approximately what was the amount 22 of the investment in UFG by these reporting 679 1 entities? 2 A. The amount by Federated and MCO was 3 9,180,661.63. 4 Q. Now, let me ask you to look over to 5 Exhibit 2074, which is the Amendment No. 13. And 6 if you look over at Page 19 of this document, we 7 see that it was signed by Mr. Bressler as of 8 April 30th, 1986? 9 A. Right. 10 Q. And let me ask you to look at Page 11 11 and at that long carry-over paragraph there. If 12 you could read that for the Court relating to the 13 action taken by the Federal Home Loan Bank on the 14 application. 15 A. The application was approved by the 16 FHLBB on December 6th, 1984, subject to compliance 17 with several conditions, including that as long as 18 Federated and MCO controlled United Saving 19 Association of Texas, USAT, the company's 20 subsidiary savings and loan institution, they 21 shall contribute their pro rata share based on 22 their holdings of the company of any additional 680 1 infusion of capital that may be necessary for USAT 2 to maintain its regulatory net-worth. In 3 addition, if Federated and MCO acquire in the 4 aggregate in excess of 50 percent of the voting 5 shares of the company, they would be required to 6 contribute 100 percent of any additional capital 7 that may be required to maintain the regulatory 8 net-worth of USAT. Federated and MCO are 9 currently discussing with the FALBB the possible 10 modification of the condition relating to the 11 maintenance of USAT's regulatory net-worth. 12 Q. Okay. And if you could read the next 13 paragraph, also. 14 A. The FHLBB originally granted Federated 15 and MCO 120 days from December 6, 1984, within 16 which to consummate the acquisition of additional 17 shares of UFG's common stock. This period has 18 been extended by the FHLBB in order to provide 19 sufficient time for Federated and MCO and the 20 FHLBB to continue discussions regarding the 21 requested modification of net-worth guarantee. 22 Q. Did MCO or MAXXAM ever agree to the 681 1 modification -- to the condition for the net-worth 2 maintenance condition described in Exhibit 2074? 3 A. No. 4 Q. And you've touched upon this yesterday, 5 but explain to the court your reasoning as to why 6 that was not a good business judgment or good 7 thing to do. 8 A. Well, from my vantage point, you had a 9 investment in a company. You knew how much you 10 could lose essentially. If you had an open-ended 11 net-worth maintenance guarantee and the Federal 12 Home Loan Bank Board said you need additional 13 capital, basically, it essentially meant that you 14 no longer had a finite sum at risk. You were, in 15 effect, betting the ranch, it might be said. And 16 to me, that was crazy. 17 Q. Did MAXXAM or MCO ever agree to any 18 such condition? 19 A. No. 20 Q. Were the discussions mentioned in 2074 21 extended for several other times? 22 A. I believe it was. I really couldn't 682 1 tell you the specifics of that. I believe it was. 2 Q. Let me ask you to skip over several 3 documents and, as it turns out, several years to 4 2079. I'm sorry. I believe it's 2078. 5 A. Yes. 6 Q. And I specifically would refer you, 7 Mr. Levin, to Page 9 of these 13 pages. 8 Could you turn there? 9 A. Yes. 10 Q. And what is that at Page 9? 11 A. That appears to be a letter from MAXXAM 12 group signed by Mr. Hurwitz as chairman and C.E.O 13 to the director of the agency group of the Federal 14 Home Loan Bank of San Francisco with respect to 15 United Saving Association of Texas and, quote, 16 charter package, close quote. 17 Q. And the letter at the beginning reads: 18 Dear Mr. Patriarca, at the specific request of 19 Tom Lykos, with whom we met last Friday afternoon 20 in Washington, D.C., I am submitting the attached 21 detailed bid sheet as a supplement to my letter of 22 October 17th, 1988, and to the United Saving's 683 1 bids of October 14th, 1988. As I explained to 2 Mr. Lykos, now that MAXXAM has closed the hundred 3 percent purchase of Kaiser Aluminum, we can focus 4 our attention on this joint effort with United's 5 current management to restructure and recapitalize 6 United Savings of Texas. And he goes on there. 7 You see Paragraph 1? 8 A. Yes. 9 Q. He indicates -- 10 MR. RINALDI: Mr. Nickens, I'm afraid 11 we don't have a copy of the exhibit. 12 MR. NICKENS: Do we have an extra copy? 13 MR. RINALDI: This is an attachment -- 14 oh, I'm sorry. I was looking at the wrong thing. 15 THE COURT: Are you ready to go? 16 MR. RINALDI: Yes. I'm sorry, Your 17 Honor. 18 THE COURT: All right. Proceed. 19 Q. (BY MR. NICKENS) Now, in this 20 offer -- it's signed by Mr. Hurwitz on behalf of 21 MAXXAM for MAXXAM group. Right? 22 A. Correct. 684 1 Q. And offers to -- let's see. No. 1 says 2 to raise the newly-structured association of 3 capital to a 6 percent ratio of regulatory 4 capital, correct? 5 A. Yes. 6 Q. And offering warrants to the FSLIC for 7 up to 10 percent ownership in the new institution, 8 correct? 9 A. Correct. 10 Q. Tax benefits of $25 million of a 11 guaranteed reduced cost to FSLIC, correct? 12 A. Yes. 13 Q. Do you know how much cash this offer 14 involved? 15 A. I don't have any independent 16 recollection of that. 17 Q. We can -- we'll be able to prove that 18 some other way, Mr. Levin. What -- well, let me 19 ask you to look over, then, to Exhibit 2079. 20 A. There is a -- I just noticed. There is 21 a third page which is Page 11 of 13 which may be 22 helpful in terms of capitalization. 685 1 Q. Okay. That -- I appreciate that. It 2 indicates in capitalization that the newly-formed 3 company would acquire all of United's common stock 4 for a capital -- for a price of $50 million, 5 right? 6 A. Capitalization says for at least 7 50 million. 8 Q. And at B it said that they were 9 committed to raise another $200 million in the 10 public market to be sold to outside investors? 11 A. Outside investors. Might be done 12 privately to outside investors. 13 Q. In other words, MAXXAM was offering to 14 raise capital of $250 million for this new 15 institution? 16 A. Apparently, yes. 17 Q. Including $50 million in cash? 18 A. Correct. 19 Q. Now, if you'll turn over to 2079, maybe 20 we'll find out what happened with the bid. 21 By the way, what was the date of that 22 letter again? October 31, 1988? 686 1 A. Yes. 2 Q. You see there at Page 2 in the last 3 paragraph it reports on the action taken with 4 regard to MAXXAM's bid? 5 A. Yes. The MAXXAM bid submitted to FSLIC 6 by USAT was not accepted and on December 30. The 7 company announced that USAT had been placed into 8 receivership by FSLIC. 9 Q. Now -- and then if you look at 280, 10 August 9th, 1990, that reports the bankruptcy of 11 UFG? 12 MR. RINALDI: Is there a page you're 13 reading from? 14 MR. NICKENS: It's -- 15 A. Well, on Page 8 of 18, if I'm looking 16 at the right exhibit. It's 2080. 17 Q. (BY MR. NICKENS) Yes. 18 A. That describes the preliminary plan 19 that contemplates a reorganization of the company 20 under the Federal Bankruptcy Code. I'm not sure 21 if this is the one to which you are referring. 22 Q. Yes, sir, it is. Anyway, we can tell 687 1 from the document at this point in time UFG was in 2 some form of bankruptcy or reorganization? 3 A. Well, I think from the prior document, 4 which was No. 2 079, it was there that immediately 5 after the company announced that USAT had been 6 placed into receivership. So, I think one would 7 know it as of that earlier time. 8 Q. But -- but we're talking about UFG in 9 regard? 10 A. Okay. Yes. 11 Q. And this is a reorganization of UFG, 12 correct? 13 A. That company is formulating a plan of 14 reorganization, right. 15 Q. Okay. Now, let me turn for a few 16 minutes, Mr. Levin, to ask you some questions 17 about Drexel. 18 Are you familiar with the firm Drexel 19 Burnham Lambert? 20 A. Yes. 21 Q. What was the nature of its business? 22 A. It was a broker/dealer investment 688 1 banker, investment advisor. 2 Q. What size firm was it? 3 A. I really couldn't tell you. I thought 4 it was a significant firm, probably over a billion 5 in capital. 6 Q. And in the mid-Eighties was it an 7 important or unimportant part of the high-yield 8 bond market? 9 A. Important part. 10 Q. What were the types of services offered 11 by Drexel Burnham? 12 A. Well, it was a broker. It was a 13 dealer. It was an investment banker, was an 14 investment advisor. If you're referring to 15 investment banking services, it would raise money 16 for companies both in the equity and in the debt 17 markets, including in particular the high-yield 18 markets. It might also in connection with 19 acquisitions raise acquisition financing. 20 Q. Was its broker/dealer operations -- and 21 by that you mean providing services to investors 22 to buy and sell stock or -- 689 1 A. Yes, as a broker function as an agent, 2 as a dealer for its own account. 3 Q. And were the operations of its -- its 4 operations as broker/dealer separate or combined 5 with its operations as an investment banker? 6 A. Well, it was under one roof, but 7 typically there would be a Chinese wall between 8 the investment banking operations and the 9 brokerage operations. 10 Q. Describe for the Court, if you will, 11 Mr. Levin, the relationship as you observed it 12 between Mr. Hurwitz, MAXXAM, and Drexel Burnham. 13 A. It was a business relationship. They 14 would provide services to MAXXAM, and it was a -- 15 there were tough negotiations between the parties. 16 Q. Do you know Mr. Art Bilger? 17 A. Yes. 18 Q. Did there -- who is Mr. Bilger? 19 A. He was, I guess, a senior managing 20 director of Drexel Burnham Lambert in mid-Eighties 21 until Drexel went out of business. 22 Q. Did you ever become aware of Mr. Bilger 690 1 negotiating with MAXXAM from a vacation place in 2 Bermuda? 3 A. Yes. 4 Q. What is your understanding of that 5 situation? 6 A. Well, as Art Bilger tells it, he was 7 kept on the phone for -- he was at a phone booth I 8 think on the street and negotiating with MAXXAM in 9 connection with a particular transaction in which 10 they were insisting on -- they were refusing to 11 agree to some term that Drexel had insisted on. I 12 think he was there for about an hour, and it was a 13 kind of comical situation as he describes it. 14 Q. Did the Pacific -- tell the court about 15 the situation with regard to the negotiation of 16 certain warrants that Drexel wanted in connection 17 with the Pacific Lumber transaction. 18 A. Well, that was -- that almost broke up 19 the deal, and the MAXXAM group was -- refused to 20 yield in connection with the demand of Drexel that 21 they receive warrants which they claim and it 22 was -- in fact, the case had received in many 691 1 other -- most other transactions and MAXXAM said, 2 you know, we don't care what you got in other 3 transactions. It's not appropriate. It's 4 outrageous and -- there was a day when that deal 5 was not going to go forward because of their 6 demands. Ultimately it was compromised and 7 they -- Drexel agreed to take fewer warrants than 8 they had demanded. 9 Q. Mr. Levin, in all of your dealings with 10 MAXXAM and Drexel did you ever have any indication 11 that USAT's purchase of high-yield bonds was 12 providing some benefit to MAXXAM in its dealings 13 with Drexel? 14 A. No. 15 Q. Was there ever any indication in all of 16 these dealings for these many years of any quid 17 pro quo between MAXXAM and Drexel? 18 A. No. 19 Q. Now, did MAXXAM have dealings with 20 other investment bankers? 21 A. Yes. 22 Q. Tell the court some of those situations 692 1 that you're aware of. 2 A. I'm sure I can't remember all of them. 3 There was -- shortly after MAXXAM group raised 4 money, I think it was $150 million in 1985, they 5 were approached by the investment bankers for AMF. 6 I think that was either Gold Sachs or Morgan 7 Stanley, I'm not sure. And they were asked to be 8 a white knight, if you will, to come to the rescue 9 of AMF, which was then the subject of an offer 10 from Minstar, Fellow, Erwin, Jacobs and Shearson, 11 Lehman represented -- I'm not sure it was Lehman 12 at that point. But it was Shearson Ladenstone was 13 representing MAXXAM in that transaction. There 14 was another transaction in which -- 15 Q. Was that the sort of service that 16 Drexel provided? 17 A. Yes. 18 Q. Okay. Any other transactions that you 19 can recall involving other investment bankers 20 other than Drexel? 21 A. There was a transaction with a utility 22 company in which Bear Sterns -- Bear Sterns was to 693 1 be the investment banker and actually was 2 initially a joint Alamito. Alamito was the name 3 of that company and Bear Sterns was the investment 4 banker and kind of a joint venture with -- I think 5 it was MAXXAM Group, Inc. at that time. Roughly 6 about the same time. Maybe it was a year later -- 7 Q. Now -- 8 A. There was another deal with Amstar and, 9 I think, First Boston. I remember there was a 10 much earlier deal, I think, with DLJ -- Donaldson, 11 Lufkin, Jennrette with National Aviation. 12 Q. Now, Mr. Levin, you've testified that 13 you've known Mr. Hurwitz for a long time; is that 14 correct? 15 A. Right. 16 Q. Do you like him? 17 A. Yes. 18 Q. Describe for the Court your perception 19 of his strengths and weaknesses. 20 A. Well, a strength and a weakness is that 21 he's an internal optimist. He's persuaded that 22 he's going to be able to do certain things and 694 1 they are going to turn out well and, you know, 2 that's terrific if he's right and, unfortunately, 3 he lost a lot of money in UFG when he was wrong. 4 The company, like most other S&Ls in Texas, 5 declared bankruptcy. He's very smart. He can be 6 very tough. He's also a lot of fun to me and a 7 good guy. 8 Q. Would you lie for him? 9 A. No. 10 Q. Would you cheat for him? 11 A. Forget about it. 12 Q. Would you cut corners for him? 13 A. No. 14 Q. Would you sacrifice your reputation for 15 him? 16 A. No. 17 Q. Would you sacrifice your principles for 18 him? 19 A. No. 20 Q. Were you ever asked to do anything by 21 MAXXAM or Mr. Hurwitz or any of their officers 22 that you regard as being illegal or unethical? 695 1 A. No. 2 Q. Do you know of any side deals, secret 3 agreements, or anything of that nature in all 4 dealings that you've had between Drexel and 5 MAXXAM, Federated or any of their officers, 6 directors, or employees with regard to the option 7 agreement or any other transaction? 8 A. No. 9 MR. NICKENS: That's all we have, Your 10 Honor. Thank you. 11 THE COURT: Do any of the other 12 respondents have questions for Mr. Levin? 13 MS. CLARK: No. 14 MR. BLANKENSTEIN: No questions, Your 15 Honor. 16 MR. EISENHART: No questions, Your 17 Honor. 18 MR. KEETON: I have one, Your Honor. 19 THE COURT: Mr. Keeton. 20 MR. KEETON: May I ask it from here? 21 THE COURT: Yes, you may. 22 696 1 2 CROSS-EXAMINATION 3 4 Q. (BY MR. KEETON) Mr. Levin, yesterday, 5 you were asked and led through a number of 6 transactions with Drexel Burnham that involved 7 MAXXAM on high-yield bonds. 8 Do you recall that line of inquiry? 9 A. Yes. 10 Q. In any of the instances where Drexel 11 Burnham either underwrote or co- underwrote or 12 served as a distributing broker for those 13 high-yield bonds for either MAXXAM or Pacific 14 Lumber, was there a default by the company? 15 A. No. 16 MR. KEETON: Thank you. 17 THE COURT: Recross? 18 MR. GUIDO: Yes, Your Honor. 19 MR. NICKENS: Your Honor, we would 20 object. Mr. Rinaldi did the examination and 21 apparently Mr. Guido is going to do a new 22 examination. We think that we've got a very long 697 1 trial here and we would think that we should try 2 to maintain a single counsel with a witness unless 3 there is some special reason for doing so. 4 MR. GUIDO: Your Honor, 12CFR509.3583, 5 which Mr. Nickens apparently isn't aware of, 6 provides a party may have one counsel to conduct 7 the direct examination and another party conduct 8 the re-examination of witnesses. The Rules 9 expressly provide for what we are doing. I'm only 10 going to cross-examine the witness about his 11 testimony here. I'm not going to bring up 12 anything new that hasn't been raised, Your Honor. 13 The Rules expressly provide for what we are doing. 14 MR. NICKENS: I am, in fact, familiar 15 with the Rules, Your Honor, and I believe that 16 those rules indicate that you may have different 17 parties with regard to direct but obviously, by 18 the nature of this examination, the examination by 19 OTS is, in fact, a cross-examination of Mr. Levin 20 and, on that point, the Rules do not provide for 21 different attorneys. 22 MR. GUIDO: And it deals with exactly 698 1 the same subject matter as direct, and I am just 2 going to elaborate on the direct testimony as a 3 way of cross-examining this witness. 4 THE COURT: I'd like to move this thing 5 along and I think I'm going to allow it, but it 6 will be cross. There is not going to be -- 7 MR. GUIDO: No, Your Honor. There is 8 not going to be anything beyond what this witness 9 has testified about this morning, Your Honor. 10 THE COURT: All right. 11 12 13 REDIRECT-EXAMINATION 14 15 Q. (BY MR. GUIDO) Mr. Levin, you were 16 asked to read a number of numbers into the record 17 from various 13Ds during your testimony. 18 Do you have any independent 19 recollection of any of those numbers that you read 20 into the record? 21 A. No. 22 Q. Now, with regard to your testimony 699 1 yesterday, did you testify that on September 16th, 2 1982, the MCO and Federated Reinsurance had 3 entered into a loan agreement for the purchase of 4 UFG stock? 5 A. I believe I was asked a question about 6 that and referred to with a 13D. 7 Q. Which provided that on September 16th, 8 1982 -- I think you were asked to look at what I 9 think is Exhibit T1012, which were minutes of the 10 board meeting in which the loan agreement was 11 approved. The board minutes of September 16th, 12 1982 of MCO Holdings. 13 A. I don't remember the specific question, 14 but I'm happy to have you show me whatever -- I 15 don't have T1012 in front of me. 16 MR. NICKENS: Are you looking for the 17 13Ds? 18 MR. GUIDO: No. T1012 was the minutes 19 of September 16th. 20 Q. (BY MR. GUIDO) Let me hand you the 21 document T1012. That document -- 22 THE COURT: Has that document been put 700 1 in? 2 MR. GUIDO: T1012, I understood, had 3 been put in yesterday, Your Honor. 4 THE COURT: C1012. 5 MR. GUIDO: Excuse me, Your Honor. The 6 number I have is T1012 from the book. Is that C? 7 THE COURT: Yeah. That seems to be 8 another series of numbers. We have a T, and I 9 don't see that there is a T1012. There is a 10 C12012 -- C1012, which is the minutes of 11 October 16th. 12 Do those minutes provide for the loan 13 agreement between Federated Development Company 14 and MCO Holdings with regard to a loan for the 15 purchase of UFG stock, Mr. Levin? It's on Page 7 16 of the minutes. 17 A. Yes. 18 Q. And the zero coupon bond that you've 19 testified about today, Mr. Levin, I think you 20 testified yesterday that that netted $3.5 million 21 to MCO Holdings when it sold that bond to Drexel 22 or that note, that zero coupon note, to Drexel? 701 1 A. I don't know what it netted, but that 2 was the purchase price. 3 Q. So that -- and those funds were put 4 into MCO Holdings' general corporate funds, were 5 they not? 6 A. I believe they were. 7 Q. Okay. And I think you testified 8 yesterday that one of the 13Ds that you were 9 reading from provided that one of the sources of 10 funds that Federated had used for the purchase of 11 UFG stock was a loan from -- that is described in 12 T1012 from MCO Holdings? 13 A. One of the sources for Federated's or 14 FedRe's purchase, I believe that's correct. 15 Q. And it was approximately $3.5 million, 16 was it not? 17 A. I don't recall. 18 Q. I mean, the document is in the record 19 and will speak for itself, Your Honor. 20 A. Right. 21 MR. GUIDO: I won't dwell on that. 22 Q. (BY MR. GUIDO) Now, you testified 702 1 today that with regard to the net-worth condition 2 that was imposed by the Federal Home Loan Bank 3 Board as a condition to the acquisition of more 4 than 25 percent of the stock by MCO Holdings and 5 Federated that you didn't think it was a very good 6 idea. I think you used the term betting the ranch 7 is the term you used. 8 A. Right. 9 Q. Now, if that was the case, why was the 10 put call agreement entered into? 11 A. Well, I suppose it was entered into in 12 the event that the condition could be modified or 13 waived. 14 Q. But why even bother with the put call 15 agreement? Why not just wait? Why didn't you 16 just wait until the condition had been 17 renegotiated? 18 A. It depends on whether you're an 19 optimist or a pessimist. If you think that there 20 is a possibility that the condition can be 21 renegotiated and you think that there will be 22 additional value in the company, then you would 703 1 want to have the option which would allow you have 2 the right to call the shares without actually 3 buying the shares. Let's assume there was no 4 25 percent limitation. You'd rather have an 5 option than buy the shares themselves if you 6 thought that you could buy the option at a useful 7 price so you wouldn't be expending the full amount 8 of the purchase price at the same time that you 9 were assured the possibility of being able to buy 10 the shares. 11 Q. But at the time that MCO Holdings 12 entered into the put call agreement with Drexel? 13 A. Right. 14 Q. Was it its view that that would not 15 trigger the net-worth maintenance condition? 16 A. Yes, it was that is -- that was its 17 view, that it did not and would not. 18 Q. And was that one of the reasons for the 19 put call arrangement, so as to -- 20 A. That was not a basic reason, but that 21 had to be an underlying premise, sure. 22 Q. Now, you also testified with regard to 704 1 the bid package. 2 Do you recall that testimony this 3 morning? 4 A. Yes. 5 Q. And that was in 1988 after United 6 Saving Association had been put into receivership 7 or was that before? 8 A. I'm not sure. I mean, it was at 9 about -- I think it was -- I don't recall whether 10 it was put into receivership and then there was a 11 bid package. I'm sorry. 12 Q. Was it USAT that you referred to or 13 UFG? USAT was placed into receivership at one 14 point in time, right? 15 A. Yes. 16 Q. And was the proposal to Mr. Patriarca 17 for the Federal Home Loan Bank Board, was that 18 before or after USAT was placed into receivership? 19 A. I don't know of -- I don't recall of my 20 own knowledge. I'd have to take a look at what 21 the dates are. 22 MR. NICKENS: Your Honor, we will 705 1 stipulate that it was before. It's quite clear on 2 the record. 3 Q. (BY MR. GUIDO) Now, with regard to 4 that bid package, was that discussed at the board 5 of MAXXAM? 6 A. I believe there was a discussion at 7 some point. I don't know whether it was at a 8 board. I knew generally that there was a bid that 9 was going to be formulated. I don't have any 10 recollection of where it was discussed. 11 Q. Was that bid accepted by the Federal 12 Home Loan Bank Board? 13 A. Apparently not. 14 Q. A competing bid was accepted, was it 15 not? 16 A. Yes. 17 Q. Why did MAXXAM want to purchase the 18 restructured USAT? 19 A. Look. MAXXAM had a significant 20 investment in USAT through UFG. It apparently 21 believed that it would be in a position to 22 generate value from USAT. The state of the Texas 706 1 economy at the time with what happened in oil 2 prices which had a significant impact on 3 homeowners which had a significant impact on 4 mortgages and the stories of home buyers coming up 5 to the bank, "Here are your keys. We're going to 6 Oklahoma or someplace else. We can't make it 7 here." The theory was that that was going to 8 change, that the economy would come back, that 9 there would be a revival all of which has 10 happened. The timing was not quite right, but the 11 concept was that there would be value and that 12 MAXXAM could be useful in generating that value. 13 In fact, that happened with Ranieri, who was the 14 winning bidder. Though, as I recall, he paid a 15 lot less money than MAXXAM bid. 16 Q. Now, didn't the bid package contemplate 17 a restructured USAT? 18 A. I couldn't tell you what the details of 19 the bid package were of my own recollection. 20 First time I looked at it was -- 21 Q. When you read the letter into the 22 record? 707 1 A. Right. 2 Q. Did MAXXAM at some point in time 3 challenge the acceptance of the bid package from 4 Mr. Ranieri? 5 A. I think recently either in this or some 6 other litigation when they discovered the 7 memoranda of the people at either the Federal 8 Deposit Insurance Corporation or Federal Home Loan 9 Bank Board that the MAXXAM bid was a higher bid by 10 a hundred million dollars or so. I think at that 11 point they were outraged and I think challenged it 12 in either this or some other -- I guess in the 13 litigation that's pending. 14 Q. In the Fifth Circuit? You don't know? 15 A. I couldn't tell you where it's pending. 16 Q. You don't know the outcome of that 17 case? 18 A. No. 19 Q. You don't know that MAXXAM lost that 20 case? 21 A. I couldn't tell you. 22 Q. Now, the -- at some point in time, 708 1 MAXXAM's preferred convertible stock was 2 converted, was it not? 3 A. Yes. 4 Q. Do you know -- recall when that 5 happened? 6 A. Are you talking about the zero coupon 7 convertible? 8 Q. No. I'm sorry. The preferred stock 9 that was held in UFG by MAXXAM. You testified 10 yesterday about that. 11 A. I believe that after UFG no longer had 12 an interest in USAT. I don't know of my own 13 knowledge, no. 14 Q. You don't know of your own knowledge? 15 A. I don't know. 16 Q. So, you don't know the circumstances of 17 that conversion? 18 A. Or that it was converted. 19 Q. Now, you testified about Drexel and you 20 testified about other investment banking firms. 21 Let me first go to the other investment banking 22 firms that you discussed in your testimony. In 709 1 any of those transactions did any of those 2 investment banking firms underwrite high-yield 3 bonds or junk bonds for MAXXAM? 4 A. No. 5 Q. Is the only investment banking firm 6 that has underwritten high-yield bonds or junk 7 bonds for MAXXAM Drexel? 8 A. I don't think so. I think PaineWebber 9 was a co-underwriter in some of the transactions. 10 Q. And was that a transaction where 11 PaineWebber had represented the acquired company 12 previously? 13 A. I couldn't tell you. It may have. I'm 14 not sure. May have -- if that was in -- I don't 15 know whether it was in Kaiser or Pacific Lumber. 16 Q. In Pacific Lumber, do you remember who 17 the investment banking firm was who represented 18 Pacific Lumber in those transactions? 19 A. I know it was Drexel Burnham. Whether 20 there was a co-underwriter or not, I don't 21 remember. 22 Q. With regard to the Kaiser Aluminum, do 710 1 you recall? 2 A. Same answer. 3 Q. Same answer. Now, you also indicated 4 that you understood certain things about Drexel, 5 that it was an important part of the high-yield 6 bond market. 7 Do you recall that? 8 A. Yes. 9 Q. Do you recall that Drexel was sued by 10 the FDIC for its activities in the high-yield bond 11 market with regard to savings and loans? 12 A. I don't personally recall that. 13 Q. Do you recall whether Drexel Burnham 14 paid a substantial sum of money to the FDIC 15 because of its conduct in dealings with savings 16 and loans in the high-yield bond market? 17 MR. KEETON: Your Honor, I think you 18 and Mr. Guido both will qualify as Texas lawyers 19 if we're going to try to retry the Drexel case 20 which UFG, MAXXAM weren't even in. I object to 21 the entire line of questioning. 22 MR. GUIDO: Your Honor, I think that 711 1 this line of questioning is relevant to an 2 assessment of this witness's testimony about the 3 nature of Drexel's operations and its relationship 4 with -- 5 THE COURT: All right. 6 MR. GUIDO: -- MAXXAM. 7 THE COURT: You may answer. 8 A. Could you read back the question, 9 please? 10 Q. Would you please read back the 11 question? 12 13 (The requested question was read back 14 by the court reporter.) 15 16 A. I don't recall. 17 Q. (BY MR. GUIDO) Now, you also 18 testified that there was a Chinese wall in Drexel. 19 Do you recall that testimony? 20 A. That is typically what happens in an 21 investment banking firm, that's correct. 22 Q. Now, what was the Chinese wall between? 712 1 A. Typically, the Chinese wall in an 2 investment banking firm which had brokerage 3 operations would be between the brokers on the one 4 hand and the people who were involved in the 5 investment banking operations on the other. 6 Q. And the investment banking people being 7 the underwriters and the brokers being the 8 salesman; is that correct? 9 A. Correct. 10 Q. And is it your understanding that 11 Drexel maintained such a Chinese wall? 12 A. I believe that all investment banking 13 firms, in fact, maintained such a Chinese wall, 14 but if you are going with a notion that there was 15 some comfortable relationship between MAXXAM and 16 Drexel, I believe you're entirely mistaken, that 17 there was as a tough fight between MAXXAM and 18 Drexel as there was with any other firm and more 19 so. And if you ask Art Bilger, if you think back, 20 I can think back of the types I got called from 21 Cahill Gordon as why are we being so tough, Cahill 22 Gordon representing Drexel, I think you'll find 713 1 those answers. 2 Q. That wasn't my question. My question 3 was about the Chinese wall between the investment 4 bankers and the brokers at Drexel. And my 5 question was focused on that. Did you ever 6 represent Drexel? 7 A. In the distant, distant past. 8 Q. Prior to the 1980s? 9 A. Yes. 10 Q. So, your testimony about a Chinese wall 11 between the investment bankers and the brokers is 12 based on your experience prior to 1980? 13 A. I'm not counsel -- I was not counsel 14 for Drexel. The theory of an investment banking 15 relationship is that it's going to be separate 16 from the broker dealer so that information can be 17 kept confidential. Whether Drexel always kept 18 that information confidential was a matter of some 19 dispute. I'm not an expert on that, but I do know 20 in terms of the relationship between MAXXAM and 21 Drexel what I've testified to. 22 Q. So, that with regard to the Chinese 714 1 wall, you don't have any personal knowledge of a 2 Chinese wall at Drexel? 3 A. That's correct. 4 Q. Now -- and your testimony is that the 5 negotiations with Drexel for the underwriting of 6 various high-yield or junk bond issues were tough 7 negotiations? 8 A. Yes. 9 Q. Were the issuance of the high-yield or 10 the junk bonds underwritten by Drexel an advantage 11 to MAXXAM? 12 A. Yes. 13 Q. Were they a substantial advantage? 14 A. I think it accomplished -- MAXXAM was 15 able to accomplish what it sought in connection 16 with a raising of funds. 17 Q. And you testified, I think, about one 18 transaction and you spoke about Art Bilger being 19 in a phone booth in Bermuda having to negotiate 20 some issue with regard to one of those junk bond 21 issuances. 22 Do you recall that testimony? 715 1 A. Right. 2 Q. And was that the Pacific Lumber 3 transaction? 4 A. I don't recall specifically. I think 5 it might have been, but I'm not sure. 6 Q. Was that a transaction in which there 7 was a dispute about the number of warrants that 8 Drexel wanted for the underwriting? 9 A. The warrant dispute was in connection 10 with PLCO, yes, Pacific Lumber. 11 Q. And was that the one you were referring 12 to when you were referring to Art Bilger being in 13 that phone booth? 14 A. No. That was a separate negotiation. 15 Q. Now, what was with -- 16 A. Drexel Burnham for warrants in 17 connection with the Pacific Lumber transaction. 18 Q. And that one you said was so 19 contentious that it almost -- 20 A. There was a period when the deal was 21 off. 22 Q. When the deal was off. During the 716 1 period of time when the deal was off did MAXXAM 2 seek underwriting assistance from any other 3 investment banker? 4 A. No. 5 MR. GUIDO: I have no further 6 questions, Your Honor. 7 MR. NICKENS: We have nothing -- I have 8 nothing further from this witness, Your Honor, and 9 do you have some questions? 10 MR. EISENHART: I have one question, 11 Your Honor. 12 THE COURT: Mr. Eisenhart. 13 14 15 CROSS-EXAMINATION 16 17 Q. (BY MR. EISENHART) Mr. Levin, 18 Mr. Guido just asked you whether the financings 19 that Drexel did provided advantage to MAXXAM, and 20 I believe you said they did; is that correct? 21 A. Yes. 22 Q. To the extent Drexel provided advantage 717 1 to MAXXAM through its services on those matters, 2 was it well compensated for those services? 3 A. Yes. 4 MR. EISENHART: Thank you. 5 MR. NICKENS: We would ask -- 6 THE COURT: Thank you, Mr. Levin. You 7 may step down. You're excused. We'll take a 8 short recess. 9 . 10 (A break was taken.) 11 . 12 THE COURT: We're back on the record. 13 Mr. Rinaldi, you're calling another witness? 14 MR. RINALDI: Yes, Your Honor. Could I 15 call to the witness stand Kevin Madigan? 16 THE COURT: Would you approach examine 17 be sworn, please? 18 19 KEVIN MADIGAN, 20 21 called as a witness and having been first duly 22 sworn, testified as follows: 718 1 THE COURT: Be seated, please. 2 Mr. Rinaldi. 3 MR. RINALDI: Thank you, Your Honor. 4 5 6 EXAMINATION 7 8 Q. (BY MR. RINALDI) Would you state your 9 full name for the record, sir? 10 A. Kevin Madigan. 11 Q. And how are you currently employed? 12 A. CS Manager Corp. 13 Q. And in what capacity? 14 A. Secretary/treasurer and general 15 counsel. 16 Q. And are you -- what is your educational 17 background? 18 A. Starting with? 19 Q. Oh, just college is fine. 20 A. Fordham University. 21 Q. And when did you graduate? 22 A. 1975. 719 1 Q. And following your graduation from 2 Fordham University, did you attend some -- a 3 professional school? 4 A. Yes, I did. 5 Q. And what school did you attend? 6 A. Brooklyn Law. 7 Q. And when did you graduate, or did you 8 graduate from Brooklyn Law? 9 A. Yes, I did. 10 Q. And when did you graduate, sir? 11 A. 1979. 12 Q. And following your graduation from 13 Brooklyn Law in 1979, whom were you subsequently 14 employed by? 15 A. I was with a firm called Loeb, Rhoads, 16 Hornblower initially. 17 Q. And how would you describe the nature 18 of the work that you did for Loeb, Rhoads, 19 Hornblower? 20 A. I was a law clerk. 21 Q. And how long did you remain with that 22 position? 720 1 A. I was there from '76 through '79. 2 Q. And in that capacity did you have any 3 particular area of work that you predominantly 4 worked in? 5 A. I was an associate in the compliance 6 department. 7 Q. Okay. And what do you mean by "an 8 associate in the compliance department"? 9 A. I would assist in compliance matters as 10 well as representing the firm in arbitrations 11 involving commodities. 12 Q. And did you subsequently leave that 13 position and accept a new position? 14 A. Yes, I did. 15 Q. And what was the new position you 16 accepted? 17 A. I became an associate of Howard G. 18 Meyers, a sole practitioner in Manhattan. 19 Q. And how long did you remain in the 20 employ of Mr. Meyers? 21 A. One year. 22 Q. And after Mr. Meyers? 721 1 A. I joined the firm of E.F. Hutton & 2 Company. 3 Q. And how long were you at E.F. Hutton? 4 A. One year. 5 Q. And what was the nature of the work 6 that you performed at E.F. Hutton? 7 A. Assistant general counsel. 8 Q. And was that in any particular area of 9 expertise? 10 A. No. I was a general list in the legal 11 department. 12 Q. And when you left E.F. Hutton, where 13 did you go next? 14 A. Drexel Burnham. 15 Q. And what year was it that you went to 16 Drexel Burnham? 17 A. I believe it was 1981. 18 Q. And were you in New York at that time? 19 A. That's correct. 20 Q. Now, describe for us your employment 21 with Drexel Burnham and the nature of the 22 positions that you held during that -- the period 722 1 you were employed for them? 2 A. On the legal side? 3 Q. Uh-huh. 4 A. I was assistant general counsel in the 5 legal department responsible for a variety of 6 areas, including the government securities area, 7 personnel, real estate, and general retail 8 questions. 9 Q. And did you have other responsibilities 10 other than on the legal side? 11 A. Not at that time. 12 Q. Okay. How long did you remain in that 13 capacity that you've just described? 14 A. Until March of '84. 15 Q. And in March of '84 how -- did your job 16 change? 17 A. Yes, it. 18 Q. And how did your job change? 19 A. I transferred to the locks in 1984, 20 locks high-yield bond department. 21 Q. And when you arrived in Los Angeles in 22 1984, what were your duties there? 723 1 A. Basically, provide legal services for 2 the department and act as legal liaison with 3 outside counsel. 4 Q. And how long did you remain in that 5 capacity? 6 A. Until June of 1990. 7 Q. So that you were involved in the 8 drafting of an arrangement between Drexel Burnham 9 Lambert and MCO Holdings involving shares of a 10 corporation known as United Financial Group? 11 A. Yes. 12 Q. Okay. And did it come to your 13 attention at or about 1985 that Drexel Burnham 14 Lambert had a position or had assumed a position 15 with respect to United Financial Group stock? 16 A. I would have known that. 17 Q. Okay. 18 A. I would have known that prior to that 19 time, too. 20 Q. And how would that have come to your 21 attention? 22 A. Through trading rooms. 724 1 Q. Okay. And let me hand you a copy of an 2 exhibit and please provide a copy -- two copies to 3 the judge. 4 MR. EISENHART: Your Honor, may we know 5 what the exhibit number is? 6 MR. RINALDI: Yes. I'm going to read 7 that into the record. This is Exhibit T1063. 8 It's a Form 13G of United Financial Group, Inc., 9 of Texas filed by Drexel Burnham Lambert and it's 10 dated February the 15th, 1985. 11 Q. (BY MR. RINALDI) Now, you indicated 12 that you would have been aware of the fact that 13 Drexel had a position in United Financial Group's 14 stock. 15 How would that have come to your 16 attention in the course of your duties at Drexel 17 Burnham? 18 A. Two ways. One, on a regular basis, if 19 it was daily at that time, we'd receive both a 20 trading run and a position run which would 21 indicate all securities the department held in its 22 own accounts. In addition, I would see any 13Gs 725 1 filed or 13Ds or 16As that were filed with respect 2 to our positions. 3 Q. Okay. Now, what was the purpose for 4 your reviewing the trading run? 5 A. Basically, to be familiar with the 6 activity in the department and be better able to 7 answer questions that came up. And if I saw any 8 wrongdoing, put a stop to it. 9 Q. Okay. And you indicated you would also 10 be familiar with 13Gs, I believe? 11 A. Correct. 12 Q. What is a Form 13G? 13 A. It's a form -- I forget today sitting 14 here -- one that's required to be filed that 15 indicates a position in excess of a certain 16 amount. 17 Q. And directing your attention to what's 18 been marked as T1063, it indicates that on 19 February the 15th, 1986, Drexel Burnham Lambert 20 reported that it had 585,371 shares of stock in 21 United Financial Group which represented 71 -- I 22 mean 7.1 percent of the outstanding common shares 726 1 of the corporation. 2 Do you see that? 3 A. Yes, I do. 4 Q. Would that have been something that you 5 would have been aware of in your capacity as 6 the -- at Drexel Burnham as its financial officer 7 in the high-yield bond department? 8 A. Yes. 9 Q. I'm sorry. As a financial officer. I 10 meant legal officer. 11 A. Yes, I would. 12 Q. Now, did there come a time when you 13 became involved in the preparation of an agreement 14 that related to these shares which were of UFG 15 that were held by Drexel Burnham Lambert? 16 A. Yes. 17 Q. Okay. Can you describe for the Court 18 the circumstances that led to that involvement? 19 A. To the best of my recollection, someone 20 in the department -- I believe it was 21 Mr. De Remer, Carl De Remer -- either had me get 22 in touch with a Mr. Schwartz or told me that 727 1 Mr. Schwartz was going to be contacting me. 2 Q. And who was Mr. Schwartz? 3 A. He was a representative of MCO. I 4 believe at that time Mr. De Remer or the 5 individual I spoke to would have basically 6 outlined some sort of transaction. 7 Q. And was MCO a client of Drexel Burnham 8 Lambert, to the best of your knowledge? 9 A. Yes. 10 Q. And do you recall what the nature of 11 the client services Drexel Burnham provided to 12 MCO? 13 A. No, I don't. 14 Q. Do you recall whether they assisted 15 Drexel Burnham -- whether Drexel Burnham assisted 16 MCO with high-yield bond underwriting? 17 A. I believe they did, but I'm not 18 certain. 19 Q. Did Drexel Burnham Lambert also trade 20 high-yield bonds issued by MCO? 21 A. I believe so. 22 Q. Now, after contacting or being placed 728 1 in contact with Mr. Schwartz, what did you learn 2 regarding the shares that we've just identified of 3 United Financial Group? 4 A. Mr. Schwartz and I explored the 5 feasibility of structuring some sort of put call 6 arrangement dealing with those shares. 7 Q. Now, at the time that you spoke to 8 Mr. Schwartz at the outset, was the general form 9 of the transaction already agreed upon -- that is, 10 a put call option? 11 A. I can't say it was agreed upon, but 12 that was the form that was being discussed. 13 Q. And after your initial discussions with 14 Mr. Schwartz did you proceed to draft a put call 15 agreement? 16 A. I believe I was in touch with Cahill 17 Gordon, our outside counsel, and they, I think, 18 put together the initial draft. 19 Q. Now, let me show you a copy of what's 20 been marked T1064. This is a letter from a 21 Mr. David Yeres to a Ms. Shulevitz and it's dated 22 February the 15th, 1985. And I believe this has 729 1 been previously marked into evidence but, if it 2 has not, I will pass along a copy through to the 3 Court. Can I just take one moment, Your Honor, 4 because I want to make sure that documents I've 5 shown him heretofore have not been moved into 6 evidence. If they haven't, I will move them now. 7 THE COURT: Well, 1063 has been. 8 MR. RINALDI: Okay. Fine. That's what 9 my assistant informs me. And 1064 has, as well, 10 has it not? Okay. Yes. These have both been 11 moved into evidence, Your Honor. 12 Q. (BY MR. RINALDI) Mr. Madigan, you've 13 had a moment to look at what's marked as T1064. 14 Let me ask you a few general questions about the 15 cover letter. 16 Do you recall who Mr. Yeres was? 17 A. Yes. 18 Q. And who was Mr. Yeres? 19 A. He was a counsel. I think he was of 20 counsel at Cahill Gordon, and we used him on 21 transactions. 22 Q. Okay. And was he the individual that 730 1 you contacted with respect to the preparation of 2 the put call agreement -- 3 A. Yes. 4 Q. -- you previously discussed? 5 A. Yes. 6 Q. And do you recall who Ms. Shulevitz 7 was? 8 A. Vaguely. 9 Q. And, based upon this letter, it appears 10 she was an attorney with Kramer Levin; is that 11 correct? 12 A. Yes. 13 Q. Okay. Now, do you recognize what's 14 been marked as T1064? 15 A. Yes. 16 Q. Okay. And can you describe for the 17 Court what it is? 18 A. It's an early draft of a proposed put 19 call arrangement. 20 Q. And at the bottom of the letter it 21 indicates that you were provided a copy of this at 22 or about the time that the document was drafted; 731 1 is that correct? 2 A. Yes. 3 Q. Now -- and in the first sentence there 4 it makes reference to the fact that "At the 5 instruction of our client, Drexel Burnham Lambert, 6 Inc., we have prepared the enclosed draft option." 7 Would you have been the person at 8 Drexel Burnham Lambert as the client that would 9 have instructed Mr. Yeres to prepare this 10 document? 11 A. Yes. 12 Q. And directing your attention to the 13 stock option agreement, it indicates in Paragraph 14 1 that there is a grant of an option to MCO and 15 then it's followed on Page 5 by a grant of DBL 16 option. 17 Do you see that? 18 A. Page 6. 19 Q. Oh, I'm sorry. You're right. Some of 20 these copies aren't so good. 21 Was that the general form of the 22 transaction that you've described? 732 1 A. Generally, yes. 2 Q. Okay. And, in your own words, can you 3 just describe for the Court how the transaction 4 was supposed to work as you recall? 5 A. To the best of my recollection, Drexel 6 had a certain amount of shares. MCO had a call on 7 those shares exercisable a few years down the road 8 and, in the event they did not exercise that call, 9 Drexel had a put back to MCO on those same shares. 10 Q. And do you recall what the purpose was 11 for structuring the transaction in that fashion? 12 A. No. 13 Q. And turning your attention to Page 16, 14 it talks about the grant of a security interest 15 and it says "As an inducement by MCO to DBL to 16 enter into this agreement, MCO hereby delivers 17 funds in an amount equal to blank, quoting the 18 collateral to DBL to be held and used by DBL -- to 19 be held and used by DBL as hereinafter provided." 20 Do you recall that the initial drafts 21 of this document provided for a grant of a 22 security interest to DBL? 733 1 A. I don't recall the security interest. 2 Q. Now, as time went by do you remember, 3 were there a number -- more than one draft of the 4 document that was produced? 5 A. There were several. 6 Q. Okay. And over what period of time, if 7 you recall, did the negotiations of that document 8 span? 9 A. From at least February of '85 through 10 Christmas Eve of '85, December 24. 11 Q. And what is the significance of 12 Christmas Eve? 13 A. That was the day that the agreement was 14 executed. 15 Q. And as you sit here today you recall 16 that incident? 17 A. Yes. 18 Q. How -- does that stick out in your mind 19 for some reason? 20 A. Yes. 21 Q. Why is that? 22 A. I wanted to go home, as everyone else 734 1 did. 2 Q. Let me show you what's been previously 3 marked as T1066. 4 MR. RINALDI: This also has been 5 previously moved into evidence, Your Honor. 6 Q. (BY MR. RINALDI) And this would 7 appear to be a subsequent draft of the document, 8 of the option, would it not? 9 A. Yes. 10 Q. Okay. Would you take a moment to read 11 the cover letter, and then I have a couple of 12 questions I wanted to ask you. In the first -- I 13 mean the second sentence there it talks about 14 there are enclosing a revised option agreement and 15 that would be, of course, the agreement we've been 16 talking about, would it not? 17 A. Yes. 18 Q. And then it makes reference to an 19 escrow agreement and then a letter of credit. 20 Do you recall that there was a letter 21 of credit that was involved in the put call option 22 agreement? 735 1 A. Yes. 2 Q. Okay. And can you -- what is your 3 recollection of that? 4 A. We wanted a letter of credit put up by 5 MCO to ensure the performance on the contract. 6 Q. And when you refer to "we," you mean 7 Drexel Burnham Lambert? 8 A. Correct. 9 Q. And you say "to ensure their 10 performance." You mean two years down or in the 11 future when the -- 12 A. Upon exercise of either of the options. 13 Q. Okay. Now, if you take a look at Page 14 2 of the option agreement, this version, I 15 believe, at B3 incorporates -- or B triple I on 16 Page 2 incorporates the concept of an irrevocable 17 letter of credit from a commercial bank. 18 Do you see that? 19 A. Yes, I do. 20 Q. And that's what you were referring to a 21 moment ago when you said it was to ensure 22 performance? 736 1 A. Correct. 2 Q. Okay. And above that, after -- on Page 3 1 and then trailing over to Page 2 it talks about 4 the grant of the MCO option, and I know you had 5 indicated that it was going to be -- the option 6 would be exercisable in the future. 7 Does that refresh your recollection as 8 to how long into the future the option would be 9 subject to being exercised? 10 A. Yes. 11 Q. Okay. And how long was it? 12 A. September, '87. So, two and a half 13 years. 14 Q. And do you recall why it is the parties 15 wanted to make the exercise date two and a half 16 years into the future? 17 A. No. 18 Q. If Drexel -- I mean -- I'm sorry. If 19 MCO had not exercised its option under the call 20 option, what would have -- would Drexel then have 21 had an opportunity to exercise a put of its own? 22 A. That was the intention. 737 1 Q. And when would the put come into being 2 or be exercisable? Do you recall? 3 A. At the expiration of the exercise 4 period for the call option, I believe. 5 Q. And if you take a look at Page 6, I 6 believe it describes -- or maybe that's 5. It 7 describes the time frame at the top of the page 8 there, does it not? 9 A. Yes, I believe so. 10 Q. And it would have become exercisable at 11 some time after the call option was exercised? I 12 mean if the call option was not exercised? 13 A. Correct. 14 Q. Okay. Now, directing your attention to 15 Page 11, there is a reference to indemnification. 16 Do you recall what that provision was 17 placed in the agreement for? 18 A. I don't specifically recall, but I 19 would ordinarily put an indemnification in if I 20 was able to. 21 Q. And what generally was the purpose of 22 the indemnification agreement? 738 1 A. To protect my firm as much as possible. 2 Q. And here it says "MCO agrees to 3 indemnify and hold harmless DBL and its affiliates 4 from and against any and all losses, claims, 5 damages, liabilities, and expenses arising out of 6 and based upon or relating to this agreement or 7 the transactions contemplated thereby." 8 Do you see that? 9 A. Yes. 10 Q. And would that have included 11 indemnification against any loss with respect to 12 the transaction? 13 A. I would argue it's broad enough to 14 include that. 15 Q. So, in other words, if MCO didn't 16 exercise its put for -- I mean its call and Drexel 17 attempted to put the shares back to MCO, if, for 18 any reason, M -- I mean Drexel was unable to do 19 that or lost money, would they be entitled to be 20 indemnified by MCO? 21 A. I would argue that. 22 Q. And would it also indemnify Drexel 739 1 against any legal fees or expenses that it might 2 incur if there were litigation that arose out of 3 this? 4 A. Yes. 5 Q. Now, directing your attention then to 6 Page 15, there is a provision in there for -- 7 under miscellaneous (C). 8 Do you recall that MCO or it was 9 proposed that MCO should pay all of the costs and 10 expenses in connection with the negotiation, 11 preparation, timing, reproduction, and execution 12 and delivery of the agreement? 13 A. Yes. 14 Q. And that's reflected on Page 15, 15 correct? 16 A. Correct. 17 Q. Now, going back to the beginning of the 18 document and directing you specifically to Page 2, 19 it indicates in the first full paragraph that 20 there would be a purchase price and the purchase 21 price is left blank. 22 Do you see that? 740 1 A. Yes. 2 Q. Were you responsible for negotiating 3 with Mr. Schwartz that aspect of the contract? 4 A. No. 5 Q. And as you go down the page it talks 6 about a nonrefundable premium and, again, that is 7 blank. 8 Do you see that? 9 A. Yes, I do. 10 Q. And was that something that you would 11 have been responsible for negotiating with 12 Mr. Schwartz? 13 A. No. 14 Q. What is your understanding of how those 15 blanks -- that is, the price per share -- was 16 going to be set and how the premium was going to 17 be set? 18 A. I don't recall. 19 Q. Was there someone that you were working 20 with at Drexel that would have been responsible 21 for providing that? 22 A. The only person I remember talking to 741 1 at Drexel in the high-yield bond department was 2 Carl De Remer. 3 Q. With respect to this matter? 4 A. Yes. 5 Q. As you sit here today, do you know if 6 that was information that Mr. DeReamer was going 7 to provide to you in connection with this 8 agreement? 9 A. I don't recall. 10 Q. Okay. Now, what was Mr. De Remer's 11 position at Drexel at this point in time? 12 A. At that point in time, I believe he may 13 still have had some trading responsibilities and I 14 believe he was also involved in sales. 15 Q. Now, when you say he would have had 16 trading responsibilities, trading of what? 17 A. I believe Carl did common stock. 18 Q. And was he employed in the high-yield 19 bond department? 20 A. Yes. 21 Q. And, in addition to that, you said he 22 may be -- in addition to trading that he may have 742 1 had some other -- 2 A. He may also have been involved in 3 sales. 4 Q. Sales. And would that have been 5 high-yield bonds or stock? 6 A. Could have been both. Either or both. 7 Q. In his -- did he have a title that 8 you're aware of? 9 A. Not that I recall. 10 Q. In -- 11 A. He probably did. I just don't recall 12 what it was. 13 Q. In his capacity as you've described, 14 was Mr. De Remer in a position to authorize Drexel 15 Burnham Lambert to enter into the kind of put call 16 arrangement that we've been talking about here 17 without some approval by someone above him? 18 A. Well, without certain input and/or 19 approval, there are a variety of people including 20 myself on the legal issues. 21 Q. Okay. I guess what I'm trying to 22 ascertain is would Mr. De Remer have been in a 743 1 position to, on his own, make a decision that 2 Drexel was going to enter into a transaction of 3 this nature or would he have to receive approval 4 from someone at a higher level? 5 A. He clearly would have needed approval 6 on the legal issues. As to the economics, I don't 7 know. 8 Q. Okay. Now, directing your attention to 9 what's been -- what's marked as T1067, this is a 10 letter dated May 17th, 1985, and it's from David 11 Yeres. And this time it's sent to a Mr. Richard 12 Marlin. Now, this has previously been admitted as 13 an exhibit, and it's T1067. I'd like to take a 14 look at the cover letter and then the attached 15 draft to that cover letter. After you've had a 16 chance to look at it, then I have a couple of 17 questions I wanted to ask you. 18 Now, the cover page dated May 17th, 19 1985, is addressed to Mr. Richard Marlin. Do you 20 recall who Mr. Marlin was? 21 A. Yes. 22 Q. And who was he? 744 1 A. He was a lawyer at Kramer Levin. 2 Q. And was he one of the lawyers that was 3 drafting the option arrangement for MCO? 4 A. I don't know if he was the drafter, but 5 I believe he had input into it. 6 Q. And at the bottom of the page it 7 indicates that a cc of this letter was sent to 8 Kevin Madigan. 9 Do you see that? 10 A. Yes, I do. 11 Q. Do you recall receiving a copy of this 12 letter at or about May 17th, 1985? 13 A. I believe I received this letter at 14 some point in time. 15 Q. Does the subject matter of the 16 letter -- that is, a draft request NASD approval 17 of the transaction -- is that something that you 18 recall? 19 A. Yes, I do. 20 Q. Okay. And what is it that you recall 21 about the NASD approval question? 22 A. Drexel was a member of the NASD, which 745 1 had certain rules governing option transactions, 2 and although the transaction we were structuring 3 was not an exchange-traded option, a 4 publicly-traded option, we were concerned that the 5 NASD might view their rules as applying to this 6 transaction. So, we decided to contact them and 7 get their approval for it. 8 Q. And do you recall, ultimately was the 9 NASD contacted? 10 A. They took the position that their rules 11 did apply to it. 12 Q. Do you recall at or about this time 13 whether there were -- what the limits were under 14 the NASD rules regarding option contracts as 15 between members of -- that were regulated by the 16 NASD and their clients? 17 A. I don't recall generally what they 18 were. 19 Q. And at the bottom of Page 1 and the top 20 of Page 2 it generally describes the put call 21 arrangement between DBL and MCO. 22 Do you see that? 746 1 A. Yes, I do. 2 Q. And does that generally describe or 3 accurately describe the general nature of the 4 option arrangement that you were discussing with 5 Mr. Schwartz? 6 A. At that time, yes. 7 Q. And, to your recollection, was there 8 any significant change to the option as finally 9 entered into from that as it's described here? 10 A. I believe it was changed to provide 11 that the option Drexel received was granted after 12 the expiration of the option MCO received and that 13 was to comply with some advice we got from the 14 NASD. 15 Q. And here it states that simultaneously 16 with the DBL grant of the MCO call option, MCO 17 would grant DBL a put option on the shares? 18 A. Correct. 19 Q. So that as contemplated on May 17th, 20 1985, the parties intended at that point in the 21 proceedings that there should be simultaneous -- a 22 simultaneous call option for the benefit of MCO 747 1 and a put option for the benefit of Drexel? 2 A. Correct. 3 Q. And do you recall that that structure 4 changed slightly in the final document? 5 A. Yes. 6 Q. We'll get to the final document in a 7 moment, but I have a few other questions I'd like 8 to ask you first before we get to that. 9 Directing your attention to what's been 10 previously marked as T10373, this has not been 11 admitted into evidence previously. It is yet 12 another draft of the -- I'm sorry. It has been 13 entered into evidence, hasn't it? Have we put in 14 T1073? I will pass on copies just in the event 15 that it has not. And would you take a moment to 16 read the cover letter and then look at the 17 document for a moment? 18 Now, I'm mostly interested in the cover 19 letter because it, I think, raises a couple of 20 issues I'd like to address with you. In the 21 second full paragraph, it says I have made -- and 22 "I" in this case is Mr. Yeres -- he writes to 748 1 Debbie Shulevitz, "I have made a number of changes 2 recently proposed by Paul Schwartz to Kevin 3 Madigan." 4 Did you and Mr. Schwartz sit down 5 together and discuss the content of this document, 6 or was it just negotiated over the phone and by 7 fax? 8 A. Sometimes by phone. Sometimes in 9 person. 10 Q. Okay. And Mr. Schwartz was at that 11 time employed by MCO in Los Angeles? 12 A. I believe so, yes. 13 Q. But Ms. Shulevitz and Mr. Yeres were 14 both in New York; is that correct? 15 A. Correct. 16 Q. So that if you had a change, you would 17 then send the proposed changes back to Mr. Yeres 18 and to Ms. Shulevitz and then they would prepare a 19 new draft for you and Mr. Schwartz to review? 20 A. Paul and I would discuss certain 21 changes and then I would talk to David and 22 presumably he would talk to Debra and they would 749 1 prepare a new draft. 2 Q. And then? 3 A. Reflecting the change. 4 Q. And then the draft would be forwarded 5 to you for your review? 6 A. Correct. 7 Q. Now, I'd like to show you a copy of 8 what's been marked as Exhibit T1077. This is a 9 draft -- I'm sorry. 1078. This has also been 10 moved into evidence. Take a moment to look at 11 that document, sir. 12 Now, this appears to be yet another 13 draft of the option agreement and on it there is a 14 cover letter from Debbie Shulevitz to Mr. Yeres. 15 In that cover letter, the first sentence says 16 "Enclosed is a draft of the UFG stock option 17 agreement marked to suggest some changes in the 18 language of the agreement." 19 Do you see that? 20 A. Yes, I do. 21 Q. And this was being transmitted from 22 Ms. Shulevitz to Mr. Yeres and it appears that you 750 1 received a copy; is that correct? 2 A. Yes. 3 Q. And on the first full page of the 4 document itself, in the second paragraph, there is 5 a number 585 -- 585,371. 6 Do you see that? 7 A. Yes, I do. 8 Q. And I believe if you check 9 Exhibit T1063 you'll see that that corresponds to 10 the precise number of shares which were reported 11 in the 13G filed by Drexel Burnham Lambert with 12 respect to United Financial Group on 13 February 15th, 1986. 14 A. Do I have that document? 15 Q. Yes, you do. I believe it's the first 16 document that I showed you. No. I think those 17 are from the last witness. So, perhaps you should 18 be -- I believe it would be the bottom of the 19 pile. 20 A. Here it is. 21 Q. Okay. T10363. 22 A. The numbers do match. 751 1 Q. Okay. Now, it indicates on Document 2 No. T1078 next in the margin, this number will 3 change and it appears to refer to the 585,371. 4 Do you see that? 5 A. Yes, I do. 6 Q. Now, that -- that -- do you recognize 7 the handwriting? 8 A. No, I do not. 9 Q. Okay. And it would appear from the 10 cover letter that that was something that was put 11 on the document on the MAXXAM or MCO side. Is 12 that fair? 13 A. I would guess so. 14 Q. Now, did -- 15 A. I have no way of knowing who put them 16 on. 17 Q. Did it come to your attention, sir, 18 that the number of shares which would be the 19 subject of the option was going to increase above 20 the 585,371 that had been contemplated in earlier 21 drafts? 22 A. I don't recall. 752 1 Q. Were you aware that Drexel Burnham 2 Lambert had acquired additional shares of UFG 3 stock over and above the amount that was reported 4 in the 13G on February 15th, 1985? 5 A. I don't remember that, but I believe in 6 the ordinary course of business I would have known 7 that. 8 Q. From your perspective as an attorney, 9 was 7.1 percent of the outstanding shares of UFG a 10 substantial position for Drexel to have? 11 A. It was significant, but it was not 12 unusual. 13 Q. Okay. And it was significant in what 14 sense from your perspective? 15 A. 7.1 percent of a security. 16 Q. Okay. And would it have required you 17 to take any special action with respect to the 18 Securities and Exchange Commission? 19 A. Yes. There were certain beneficial 20 ownership reports we would have had on to file. 21 Q. And so, when you reviewed the list of 22 stockholders -- I mean of shares that were owned 753 1 by DBL, that's one of the things that you would 2 have considered, whether there were filings that 3 would have to be made with respect to stock 4 ownership? 5 A. That's correct. 6 Q. With the SEC? Now, I'd ask you to take 7 a look at what is marked as T1083. This is a fax 8 transmission from Drexel Burnham Lambert to -- 9 under the name of Kevin Madigan/Paul Schwartz and 10 it's dated December 7th, 1985. And there is an 11 attached letter in what appears to be a draft 12 format. Would you take a look at the draft letter 13 that's attached to the fax? Have you had a chance 14 to look at the documents? 15 A. Yes, I have. 16 Q. And does the cover fax transmission 17 appear to be something that would have been sent 18 from your office to Paul Schwartz? 19 A. It's not my handwriting, but it looks 20 like it came from our department. 21 Q. And do you recall having seen the 22 attached draft letter which bears the typewritten 754 1 name David Yeres under the unsigned "sincerely"? 2 A. I know I saw this before, and I believe 3 the handwritten word draft is in my writing. 4 Q. Okay. And underneath that it describes 5 a transaction between Drexel Burnham Lambert and 6 MCO Holdings, Inc., involving a block of 790459 7 shares of common stock. 8 Do you see that? 9 A. Yes. 10 Q. Do you know how the number of shares 11 for the contemplated transaction increased from 12 585,371 to 790459? 13 A. I don't recall. 14 Q. Do you recall that Drexel continued to 15 acquire UFG shares during the period that the 16 option arrangement was being negotiated between 17 you and Mr. Schwartz? 18 A. I don't recall. 19 Q. Would that appear to be the case if, in 20 fact, Drexel Burnham Lambert by December, 1985, 21 had 790,459 shares? 22 A. It appears that our position increased. 755 1 Q. Now, take a look at what's been marked 2 previously as Exhibit 1088, T1088. This is again 3 a fax transmission, but it's from Jon Mark to 4 Richard Marlin and it appears to bear the date 5 1220. Does not indicate what year. And attached 6 to that document is a three-page letter signed by 7 Mr. Mark dated December 20th in 1985 to a 8 Mr. Canada at the NASD and the letter that's 9 attached is dated December 20th, 1985. 10 Would you take a moment to look at 11 that -- the letter that's attached that was sent 12 to Mr. Canada? 13 MR. RINALDI: Your Honor, I would like 14 to move into evidence Exhibit T1083, which is the 15 most recent document that I showed you. My 16 associate indicates that there may be one other 17 document which I haven't moved in to evidence, but 18 we'll try to ascertain that at the -- is it -- 19 1073, which I believe is a draft dated June 24th, 20 1985. 21 MR. EISENHART: We have no objections 22 to either document, Your Honor. 756 1 MR. RINALDI: And I would move them 2 into evidence at this time, Your Honor. 3 THE COURT: Received. 4 Q. (BY MR. RINALDI) Mr. Madigan, you've 5 had an opportunity to review Exhibit T1088. Who 6 was Jon Mark, the individual who signs the letter 7 to Mr. Canada at the NASD? 8 A. An attorney at Cahill Gordon. 9 Q. And do you recall why Mr. Mark was 10 sending this letter to the NASD? 11 A. To get their approval and to close the 12 transaction. 13 Q. And was there some particular concern 14 which you had regarding the transaction? 15 A. As a point I mentioned earlier, the 16 NASD has certain rules governing option 17 transactions. We were concerned that although 18 this was not a publicly-traded option, they might 19 take the position that their rules applied to it 20 and among the rules were certain limitations of 21 the size of options. 22 Q. And as you sit here today, do you know 757 1 whether the NASD -- well, strike that. 2 On the front page it indicates that the 3 proposed transaction at this point involved 4 790,459 shares and in this letter they are 5 requesting an exemption or approval for MCO to 6 enter into a transaction with DBL for that number 7 of shares. 8 Do you recall whether they approved the 9 transaction of that size? 10 A. No, they did not. 11 Q. And do you recall what the -- what -- 12 did they approve any transaction, to your 13 recollection? 14 A. Well, I won't say they approved a 15 transaction, but they gave us their view of how 16 the rules applied. And in giving that view, they 17 indicated certain figures which we took to mean 18 they couldn't be more than 300,000 shares. 19 Q. Okay. Now, a moment ago, you -- or 20 earlier in your examination you indicated that you 21 recall that this was a transaction which was being 22 consummated on Christmas Eve and this letter 758 1 indicates that Mr. Mark wrote to the NASD on 2 December 20th, 1985, seeking their approval of the 3 transaction. 4 Do you recall whether the NASD 5 responded to Mr. Mark's inquiry in writing? 6 A. Yes, I do. 7 Q. And let me show you what's been marked 8 as Exhibit T1105. This is a letter dated 9 December 24th, 1985, from Mr. Canada at the NASD 10 to a Mr. Mark. Now, this letter does not indicate 11 that you actually received a copy. Mr. Yeres, 12 your counsel, was cc'd. 13 Do you recall receiving a copy of this 14 at or about the time of December 24th, 1985? 15 A. At some point in time I received the 16 actual document, but I'm sure I received the 17 information contained in the document at that 18 time. 19 Q. Okay. And what is your recollection of 20 what the NASD informed you regarding the 21 application to grant the exception which you had 22 requested? 759 1 A. I'm sorry. Could you repeat that? 2 Q. Well, what was the NASD's response to 3 your application for an exemption? 4 A. Basically, they viewed the rules 5 applying -- they would not give us a waiver from 6 the rules and they indicated we could not have 7 more than 150,000 shares on one side of the 8 option. 9 Q. Okay. And in the last paragraph it 10 says you are further reminded that Section 3 of 11 Appendix E states that for purposes of determining 12 position limits, long calls and short puts and 13 short calls and long puts covering the same 14 underlying security must be aggregated. 15 Now, was this a short call and a long 16 put? 17 A. I don't know technically how you'd -- 18 what you'd call it. But, as a result of this 19 letter, we felt the NASD was of the view we could 20 not simultaneously have 150,000 shares subject to 21 the call option and the put option. 22 Q. Or that that was the maximum, you mean? 760 1 A. Right. 2 Q. And was that because? 3 A. I'm sorry. I think what they were 4 saying is that you couldn't have 150,000 shares on 5 the put and the call at the same time. In other 6 words, the put and the call could not be 7 simultaneous. 8 Q. Okay. Did you have an understanding as 9 to what the maximum number of shares were that 10 could be optioned under the NASD rules? 11 A. I don't recall what they were. 12 Q. Do you recall the number of shares that 13 was ultimately optioned in the agreement? 14 A. I believe it was 300,000 shares. 15 Q. And is it your understanding today that 16 that -- that you had set it at 300,000 shares 17 because you believed that was the maximum number 18 that could be optioned under the NASD rules? 19 A. Yes. 20 Q. Okay. Now, going back to the 21 December 20th letter, you mentioned earlier in 22 your testimony that there was an effort to 761 1 consummate the agreement on Christmas Eve prior to 2 the December 25th holiday. 3 Do you recall that? 4 A. Yes. 5 Q. Does the letter dated December 20, 6 1985, attached to T1088 refresh your recollection 7 as to why it was important for the parties to 8 consummate the transaction on Christmas Eve? 9 A. I see what the letter says. I don't 10 recall at the time what my understanding was. I 11 knew it had to be done that evening. 12 Q. Okay. And the letter says that there 13 was going to be a change in the regulations 14 under -- that under the new regulations the 15 parties would have to seek prior approval for the 16 transaction from the Federal Home Loan Bank Board 17 for the acquisition. 18 Do you see that? 19 A. Yes. 20 Q. And it indicates that the parties 21 therefore wish to avail themselves of the 22 exemption afforded by the new rules -- that is, to 762 1 undertake the transaction before the new rules 2 take effect. 3 Do you recall having a discussion of 4 that issue with anyone in connection with the 5 execution of the agreement? 6 A. No. 7 Q. Now, the last full paragraph indicates 8 as follows: As we discussed, in the event 9 approval is not obtainable in the time frame 10 requested, the parties would intend to close a 11 portion of the transaction relating to 490,459 12 shares subject to being rescinded in the event 13 NASD approval is not obtained within 90 days. 14 And then it says "I understand from our 15 conversation that you would have no objection to 16 this procedure." 17 Do you have -- do you recall that the 18 transaction was being contemplated as being done 19 in two parts? 20 A. I have no recollection of that. 21 Q. Now, let me show you what's been marked 22 as Exhibit T1090. This is a letter dated 763 1 December 20th, 1985, and it's to Richard Yeres 2 from -- I mean -- sorry -- Richard Marlin from 3 Jon Mark. 4 Have you had a chance to read the 5 document, sir? 6 A. Yes, I have. 7 Q. Now, the first sentence there, it 8 indicates that a copy of the form of stock option 9 agreement as it now stands with blanks for dollars 10 and share amounts to be filled in is being 11 forwarded. 12 Do you see that? 13 A. Yes. 14 Q. When you received the stock option 15 agreement that was ultimately executed, did it 16 still have blanks that needed to be filled in by 17 the executing parties? 18 A. I don't recall. 19 Q. And in the second sentence it says 20 "Also enclosed is a form amendment in the event 21 the transaction must be done in two blocks with 22 the agreement to rescind in 90 days the portion of 764 1 the transaction requiring NASD approval." 2 Does that refresh your recollection 3 that the parties contemplated doing the 4 transaction in two blocks? 5 A. No. 6 Q. Okay. Now, do you recall after 7 receiving the NASD letter on December the 24th, 8 1985, did the parties go forward and execute a 9 transaction in a put call format? 10 A. Yes. 11 Q. And let me show you a copy of what's 12 been marked as Exhibit T1085. This is a document 13 which is the minutes of the MCO, Inc., board of 14 directors' meeting but attached to it -- you can 15 ignore the board of directors' meetings. Attached 16 to it is a stock option agreement, and I'd like 17 you to take a look at that. This has been 18 previously offered into evidence. 19 Have you had a chance to look at the 20 document, sir? 21 A. Yes, I have. 22 Q. And I notice that there are a number of 765 1 handwritten changes and then there are some 2 signatures or initials on the side of the page 3 partially cut off in the copy. 4 Do those appear to be your initials 5 that appear in the margins? 6 A. Some of them are. 7 Q. And do you recognize the other set of 8 initials that are in the margin? 9 A. No. 10 Q. Okay. Now, directing your attention to 11 the last page of the document, is that your 12 signature on behalf of Drexel Burnham Lambert? 13 A. Yes. 14 Q. And below that does that appear to be 15 the signature of Paul Schwartz? 16 A. Could be. 17 Q. Okay. To the best of your 18 recollection, was it you and Mr. Schwartz that 19 executed the document on behalf of the respective 20 parties? 21 A. Yes. 22 Q. And would it have been you and 766 1 Mr. Schwartz that ultimately filled in the numbers 2 on Pages 1 and 2? 3 A. Either we did or we told the lawyers 4 what the numbers were to be. 5 Q. Okay. Now, you mentioned earlier that 6 the form of the stock option changed in its 7 final -- as it was finally executed from what had 8 been contemplated earlier. And I believe what you 9 said is the actual executed document didn't have a 10 simultaneous call and put option; is that correct? 11 A. Correct. 12 Q. And as you look through this document, 13 do you see where that has been changed in the 14 document? 15 A. Yes. 16 Q. And where would that be? 17 A. Page 5, Paragraph 3. 18 Q. Okay. And what was the change that was 19 done? 20 A. As opposed to MCO granting the option 21 at the time of the execution of the agreement, 22 they agreed to grant such an option in the event 767 1 that their option expired on exercise. 2 Q. And it says in the interlineation above 3 Paragraph 3, "In the event that the MCO option 4 expires unexercised, then at that time MCO agrees 5 to grant to DBL an option"; is that correct? 6 A. Correct. 7 Q. And what was the reason that you 8 understand that change was made? 9 A. To the best of my recollection, we made 10 the change to accommodate comments of NASD 11 concerning the limits on option positions. 12 Q. And did that permit the parties to then 13 enter into the transaction at the higher number of 14 shares, at 300,000 shares rather than the 150 15 reflected in Mr. Canada's letter? 16 A. We felt so. 17 Q. And do you know at this point in time 18 what the shares of UFG were trading at? 19 A. No. 20 Q. Do you know whether the price of 21 2,577,000 had -- purchase price for the 300,000 22 shares represented an out-of-the-money option? 768 1 A. I don't recall. 2 Q. And when I say "out-of-the-money," that 3 means above its present trading price. 4 A. I just don't recall what it was trading 5 at. 6 Q. Okay. But -- then the next blank down 7 talks about a nonrefundable premium. 8 Did -- do you know who fixed the amount 9 of the premium of $683,147? 10 A. I don't recall. 11 Q. Okay. Let me show you what's been 12 marked as -- ultimately as the transaction was 13 consummated, do you recall whether it involved a 14 letter of credit? 15 A. I believe it did. 16 Q. Okay. Let me show you a copy of what's 17 been marked as T1093. And does this appear to be 18 the letter of credit from MCO for the benefit of 19 Drexel Burnham Lambert in connection with the 20 300,000 shares of United Financial Group common 21 stock? 22 A. I believe it's the letter of credit MCO 769 1 arranged for. 2 Q. Okay. Do you recall whether you saw it 3 at the time or a copy was provided to you at the 4 time? 5 A. I believe so. 6 Q. Okay. 7 MR. RINALDI: I would move to have 1093 8 admitted into evidence, Your Honor. 9 MR. EISENHART: No objection. 10 THE COURT: Received. 11 Q. (BY MR. RINALDI) And would you take a 12 look at what's been marked as T11034 and, in 13 particular, this is a two-page document with a 14 cashier's check on the front cover in the amount 15 of 683,147 and then attached to that is what 16 appears to be a Drexel Burnham Lambert record. 17 Do you recognize this document or the 18 two items that are included within this document? 19 A. The first page, no. The second page, 20 yes. 21 Q. Okay. And what is on the second page 22 of the document? 770 1 A. It's a formal confirmation. 2 Q. A confirmation of the option purchased 3 by MCO from Drexel Burnham Lambert or -- well -- 4 A. It appears to be an attempt to confirm 5 transaction. I'm not sure if it adequately 6 describes it. 7 Q. Okay. And does it indicate what the 8 per share price of the stock is under the option 9 arrangement? 10 A. If it does, I can't read it. 11 Q. Okay. And would this -- what would be 12 the purpose of this Drexel document? To confirm 13 the purchase or confirm the transaction? 14 A. I believe the '34 Act required 15 broker/dealers to send out documents such as these 16 whenever you effected a transaction with a 17 customer. 18 Q. Okay. 19 MR. RINALDI: Your Honor, I'd move to 20 have T1103 placed into evidence. 21 MR. EISENHART: No objection. 22 THE COURT: Received. 771 1 Q. (BY MR. RINALDI) Now, after the entry 2 into this -- or put call option arrangement, do 3 you know whether Drexel Burnham Lambert continued 4 to hold shares of United Financial Group over and 5 above the 300,000 shares that it had optioned to 6 MCO? 7 A. I don't recall. 8 Q. Okay. Would you take a look at what's 9 been marked -- what is marked as T1129? This 10 appears to be another 13G. And directing your 11 attention to -- 12 A. I need one. 13 Q. Pardon? Oh, I'm sorry. Forgive me. 14 This is T1129. It's got a cover letter 15 dated February 13th, 1987, and is that -- it is 16 T1129? 17 A. Correct. 18 Q. Okay. Now, directing your attention to 19 the third page of that document, can you tell by 20 looking at the 13G whether Drexel Burnham Lambert 21 continued to hold a position with respect to UFG 22 stocks over and above the 300,000 shares that it 772 1 had -- that were the subject of the option? 2 A. It appears that we did. 3 Q. And they continued to hold that at 4 least through February 13, 1987; is that fair? 5 A. Well, at least as of 6 December 31st, '86. 7 Q. Okay. Now, did there come a time when 8 the option agreement was renewed that you're aware 9 of? 10 A. I believe it was. 11 Q. Okay. And let me show you a document 12 that's previously been marked T1144. I believe 13 this is a new document. 14 MR. RINALDI: I would move the last 15 document, Your Honor, into evidence. It's T1129. 16 MR. EISENHART: If I could have a 17 second to find it. Oh, I have no objection, Your 18 Honor. 19 THE COURT: Received. 20 Q. (BY MR. RINALDI) Have you had a 21 chance to look at T1144, sir? 22 A. Yes. 773 1 Q. Does this appear to be a document that 2 you executed? 3 A. Yes. 4 Q. And can you just describe for me what 5 it is? 6 A. I believe it was an extension of the 7 previously executed option agreement. 8 Q. And it extended the option for 9 approximately one month, did it not? 10 A. I believe so, yes. 11 Q. And after extending it for that 12 one-month period do you recall whether a second 13 stock option agreement amendment was entered into? 14 A. Yes. 15 Q. Okay. Would you take a look at what's 16 been marked as Exhibit T1146? 17 MR. RINALDI: And I would move T1144 18 into evidence at this time, Your Honor. 19 MR. EISENHART: Your Honor, we have no 20 objection. 21 THE COURT: Received. 22 Q. (BY MR. RINALDI) Did it come to your 774 1 attention, sir, that a second option agreement was 2 entered into with respect to the -- a second 3 option amendment was entered into with respect to 4 the option extending the option for a period of 5 additional years to 1990? 6 A. I knew that such an extension was 7 entered into. 8 Q. And does this appear to be the 9 extension, what's been marked as T1146? 10 A. I don't recall seeing this, but it 11 appears to be the document that effected that. 12 Q. And who was Mr. Redecki? 13 A. He worked in the operations area of the 14 high-yield bond department in Los Angeles. 15 Q. And Mr. Redecki then executed the 16 second amendment on behalf of Drexel Burnham 17 Lambert? 18 A. Correct. 19 Q. And in connection with the extension, 20 do you recall whether a premium or an additional 21 premium was paid to extend the option for the 22 additional period of time through till July of 775 1 1990? 2 A. I don't recall. 3 Q. Directing your attention to Paragraph 4 6A of the document on the third full page, does it 5 indicate that such a premium was paid? 6 A. Yes. 7 Q. And the amount of that premium? 8 A. 524,664. 9 Q. Do you know -- when did you leave 10 Drexel Burnham Lambert? 11 A. Either June or July of 1990. 12 Q. And do you know at the time you left 13 Drexel Burnham Lambert whether the option had ever 14 been exercised? 15 A. I believe at the time I was there it 16 had not yet been exercised. 17 Q. And do you know whether ultimately it 18 was exercised by MCO? 19 A. I believe it was. 20 Q. But you have no direct knowledge of 21 that? 22 A. I believe one of the last things I did 776 1 at Drexel was send a memo reminding certain 2 officers in New York of the existence of the 3 option. 4 Q. Okay. Let me -- 5 A. And I believe I was subsequently 6 informed that it was exercised. 7 MR. EISENHART: Your Honor, I believe 8 Mr. Rinaldi may have misspoke. I'm not sure I 9 understood his question. His question was: Was 10 the option exercised by MCO? I'm not sure that -- 11 MR. RINALDI: Yes. And I wanted to 12 clarify that. 13 Q. (BY MR. RINALDI) Was it your 14 understanding that MCO had exercised the option or 15 that the MCO's call option had lapsed and that -- 16 A. I don't recall which way it was. 17 Q. Would you take a look at what's been 18 marked as T1150? This appears to be a letter 19 dated August 9th, 1990, and it's signed by 20 Mr. Neil Thomas. 21 Do you know who Mr. Thomas was? 22 A. Yes. 777 1 Q. And who was he? 2 A. He worked in the cashiers department of 3 Drexel Burnham. 4 Q. And was he someone you would have 5 spoken to about the option while you were still at 6 Drexel Burnham? 7 A. I may have, but I don't recall. 8 Q. And as you review the letter, does it 9 appear that Drexel Burnham ultimately exercised 10 its put and tendered the 300,000 shares to MCO? 11 A. It appears to be the case. 12 Q. In return for which they were wired 13 funds of $2,577,000; is that correct? 14 A. I don't know if, in fact, they wired 15 it. 16 Q. But that's what's indicated in the 17 letter? 18 A. They were asked to wire the funds. 19 MR. RINALDI: Okay. I would ask to 20 admit into evidence T1150, Your Honor. 21 THE COURT: I believe it's already 22 entered. 778 1 MR. RINALDI: Okay. 2 . 3 (A break was taken.) 4 . 5 THE COURT: We are back on the record. 6 Mr. Rinaldi, you have some more questions for the 7 witness? 8 MR. RINALDI: Yes. I just have one 9 final series of questions, and then Mr. Eisenhart 10 can examine the witness. 11 Q. (BY MR. RINALDI) Mr. Madigan, in 12 connection with this stock option arrangement, as 13 between MCO and Drexel Burnham Lambert, who had 14 the market risk with respect to the shares of UFG? 15 A. I believe it was MCO. 16 Q. And why do you say that? 17 A. We went to whatever length we could to 18 ensure that if they did not exercise their option, 19 we were given a position to exercise ours and 20 payment would be guaranteed by the letter of 21 credit. 22 Q. And if the shares that were the subject 779 1 of the option had declined in value, would you -- 2 who would have borne the risk of that decline in 3 value? 4 A. As between ourselves and MCO? 5 Q. Yes. 6 A. I believe MCO. 7 Q. And would that be because you would 8 have put the shares back to MCO and collected the 9 strike price from the letter of credit? 10 A. That's what my intention was. 11 MR. RINALDI: I have no further 12 questions for the witness. 13 THE COURT: Mr. Eisenhart, you are 14 going to cross-exam? 15 MR. EISENHART: I am. Thank you, Your 16 Honor. And I will try to make it brief in the 17 hope that maybe we can get Mr. Madigan to the 18 airport. 19 20 21 22 780 1 2 CROSS-EXAMINATION 3 4 Q. (BY MR. EISENHART) Mr. Madigan, 5 following up on the last question by Mr. Rinaldi 6 about market risk, who had the market risk if the 7 price of these shares went up? 8 A. MCO. 9 Q. Well if the price of the shares went 10 up, MCO would receive a substantial benefit, would 11 they not, if the shares went up well beyond the 12 call price? 13 A. That is correct. 14 Q. And isn't it a fact that in granting 15 this kind of an option, Drexel relinquishes the 16 right to realize the benefit if the shares 17 appreciate in value? 18 A. That is correct. 19 Q. So, to that extent, that is a market 20 risk that Drexel assumed in this transaction, is 21 it not? 22 A. We gave up the up side. 781 1 Q. You were talking earlier about the 2 letter of credit, and I gather that was something 3 that was included in this arrangement at Drexel's 4 request? 5 A. I believe so. 6 Q. And I think you said that the purpose 7 of putting the letter of credit in was to be sure 8 that Drexel could be paid either under the call or 9 the put obligation, correct? 10 A. Correct. 11 Q. And that eliminates a risk, a 12 litigation risk, that you would have to sue to get 13 paid if you weren't paid? 14 A. Assuming the bank was solid. 15 Q. And I gather the letter of credit would 16 also protect Drexel in the event that it put the 17 shares and MCO declined to take them; would it 18 not? 19 A. That is correct. 20 Q. How would that work under that 21 scenario? If Drexel exercises its put obligation 22 but MCO is not in a position to take the shares 782 1 and refuses to take them, what would happen then? 2 A. I believe it was structured that we 3 could call down on the letter of credit and get 4 the proceeds from the bank. 5 Q. And you at that point would do what? 6 Tender the shares to the bank? 7 A. I don't recall exactly the mechanics. 8 I believe we would have delivered the shares to 9 them and they would have paid us. 10 Q. You would deliver the shares to the 11 bank, and the bank would pay you? 12 A. I believe so, yes. 13 Q. And then what happened thereafter would 14 be between the bank and MCO? 15 A. Correct. 16 Q. Now, did you have any idea how, when, 17 or under what circumstances Drexel accumulated the 18 shares that it held in its position? 19 A. No. 20 Q. And as I understand it, you were 21 involved with the lawyering of this deal, not 22 particularly with the trading strategy or the 783 1 economics of the deal; is that correct? 2 A. That is correct. 3 Q. Was this deal considered a trade within 4 Drexel? 5 A. Well, we sent a confirmation out. So, 6 in that respect, it would be a trade. 7 Q. And by the confirmation you're 8 referring to the second page of what was marked as 9 T1103? 10 A. Yes. 11 Q. And that actually describes it as a 12 cash trade, does it not? 13 A. I believe so, yes. 14 Q. Now, were you aware of any side deals 15 or understandings associated with this 16 transaction, anything that's not reflected in the 17 written agreement? 18 A. No. 19 Q. During the course of this transaction, 20 during the course of time you were negotiating 21 this transaction for Drexel, was there ever any 22 reference made to the purchase of Drexel 784 1 high-yield bonds by United Saving Association of 2 Texas? 3 A. Not that I recall. 4 Q. So, that was never -- that was never 5 mentioned in connection with this deal? 6 A. Not to me. 7 Q. Mr. Rinaldi asked you about Drexel 8 Burnham's underwriting of high-yield bonds. It 9 was quite prominent in the high-yield bond field, 10 was it not? 11 A. Very prominent. 12 Q. How many companies would you say Drexel 13 underwrote high-yield bonds for in the Eighties? 14 A. I have no idea. It was numerous. 15 Q. They were also quite prominent in the 16 sale of high-yield bonds, were they not? 17 A. Yes. 18 Q. Drexel was a major figure, if not the 19 dominant figure in the high-yield bond market in 20 the Eighties, was it not? 21 A. I believe we were the dominant figure. 22 Q. And could you give me any estimate of 785 1 the number of companies or institutions to whom 2 Drexel would have sold high-yield bonds any time 3 in the Eighties? 4 A. No. It was numerous. 5 Q. Would have probably been in the 6 thousands? 7 A. I'd be speculating, but I would not be 8 surprised. 9 Q. Now, would you take a look at 10 Exhibit 1085 which are the board minutes that have 11 attached to them the executed copy of the 12 agreement? Would you turn to Page 8 of the 13 agreement? Now, on Page 8 -- and I'm referring 14 you specifically to Paragraph 5B. That provides, 15 does it not, that Drexel will have the sole power 16 to vote these shares unless and until the option 17 is exercised? 18 A. Yes. 19 Q. Was there any understanding to your 20 knowledge that MCO would in any way direct the 21 manner in which Drexel would vote those shares? 22 A. I don't recall any discussion 786 1 concerning voting rights. 2 Q. So, would you conclude that based on 3 this agreement, unless and until that option was 4 exercised, Drexel would vote those shares as 5 Drexel determined? 6 A. Or not vote any. 7 Q. Vote them or not vote them as Drexel 8 determined? 9 A. Correct. 10 Q. But that was solely Drexel's call? 11 A. That's what the agreement appears to 12 provide. 13 Q. And you're not aware of any 14 understanding to the contrary? 15 A. Correct. 16 Q. Going to the next paragraph, that would 17 indicate that Drexel would have the right to any 18 dividends declared on the shares during the period 19 of time it held them unless and until the option 20 was executed; is that correct? 21 A. What does Section 9 say? 22 Q. I'm sorry. I was referring you to 787 1 Section 5C. 2 A. Well, that says the DBL has the right 3 to any dividends declared, et cetera, except as 4 expressly provided for by Section 9. I just don't 5 know what Section 9 says. It appears that we have 6 the rights of dividends. 7 Q. And, in fact, Section 9 simply adjusts 8 the option in the event there is a stock dividend? 9 A. That is correct. 10 Q. So, if there is a stock dividend, the 11 stock dividend would remain in the escrow account 12 and would simply increase the number of shares 13 that were ultimately subject to the option? 14 A. Yes. 15 Q. And, to your knowledge, was there any 16 understanding outside the scope of this document 17 that would affect in any way Drexel's right to 18 retain those dividends? 19 A. I don't recall any agreement outside 20 the scope of the document. 21 Q. So, as far as you're concerned, this 22 was a deal done within the four corners of this 788 1 document? 2 A. Yes. 3 Q. And there was no understanding to the 4 contrary? 5 A. That's my understanding. 6 Q. Now, Mr. Rinaldi had you look at 7 Document T1150, which is the letter from Drexel to 8 MCO Holdings dated August 9th, 1990. And that's 9 actually dated after the date you left Drexel, is 10 it not? 11 A. Yes. 12 Q. Are you aware that as of August 9th, 13 1990, United Saving Association of Texas had been 14 in receivership for nearly two years? 15 A. No. 16 Q. Were you aware that United Saving 17 Association was placed in receivership in 1988? 18 A. I may have been. I probably was. 19 Q. Okay. Take a look again at 20 Exhibit T1105. That's the letter from Mr. Canada 21 of the NASD dated December 24th, 1985. 22 A. A letter to Mr. Canada? 789 1 Q. No. This is the letter from Mr. Canada 2 to Mr. Mark dated December 24th, 1985. This is 3 the one that informed him of the NASD's position 4 on the option. 5 A. I think I might have misplaced that 6 one. 7 Q. Why don't you take a look at my copy? 8 If I understand the NASD's position -- and you 9 tell me if I'm wrong -- their position was that if 10 the options were simultaneous -- that is, the put 11 existed and the call existed at the same time -- 12 the total number of shares you could option was 13 150,000 shares; is that correct? 14 A. That was my understanding of their 15 condition. 16 Q. If the options were split so that there 17 was no portion of them that overlapped, you could 18 then do 300,000 shares? 19 A. Correct. 20 Q. And that's what you ultimately did? 21 A. That is correct. 22 MR. EISENHART: I have no further 790 1 questions, Your Honor. 2 THE COURT: Is there any redirect? 3 MR. RINALDI: Yes. Just one point, 4 Your Honor. 5 6 7 REDIRECT-EXAMINATION 8 9 Q. (BY MR. RINALDI) Mr. Eisenhart posed 10 a hypothetical to you of what if the shares had 11 been put back by Drexel and Drexel had drawn down 12 on the letter of credit and he indicated to you if 13 MCO refused to accept the shares and the shares 14 were put back to the bank, in that instance would 15 not MCO still have the market risk with respect to 16 any decline in value regarding the shares? 17 A. I believe so. 18 Q. And in that regard, if the shares were 19 worthless, then the bank would have an action back 20 against Drexel under the letter of credit; is that 21 fair? 22 A. No. 791 1 Q. I'm sorry. If the shares were 2 worthless, then the bank would have an action back 3 against MCO? 4 A. I believe -- 5 Q. On the letter of credit? 6 A. I believe so. 7 Q. Okay. 8 MR. RINALDI: No further questions, 9 Your Honor. 10 MR. EISENHART: One follow-up question 11 on that. 12 13 14 RECROSS-EXAMINATION 15 16 Q. (BY MR. EISENHART) Mr. Madigan, just 17 again to look at the opposite side of that 18 transaction, if the shares had gone up in value, 19 if they were -- the market price was considerably 20 above the strike price, then you'd never get into 21 the scenario because Drexel wouldn't put the 22 shares, would it? 792 1 A. I presume they would have been called. 2 Q. Or if they were not called, presumably 3 Drexel would liquidate the position that they 4 could profit for itself, wouldn't it? 5 A. Yes. 6 MR. EISENHART: Thank you. 7 THE COURT: If there are no more 8 questions, the witness is excused. Thank you, 9 Mr. Madigan. We'll adjourn until 2:00 o'clock. 10 . 11 (A break was taken.) 12 . 13 THE COURT: The hearing will come to 14 order. Mr. Veis? 15 MR. VEIS: Yes, Your Honor. Brian Veis 16 for the OTS. The OTS calls Carl De Remer. 17 18 CARL DE REMER, 19 20 called as a witness and having been first duly 21 sworn, testified as follows: 22 THE COURT: Be seated, please. 793 1 2 EXAMINATION 3 4 Q. (BY MR. VEIS) Mr. De Remer, would you 5 state your name for the record, please? 6 A. Carl Robert De Remer. 7 Q. What is your address? 8 A. Home address? 9 Q. Yes, sir. 10 A. 10445 Wilshire Boulevard, Apartment 11 1201, Los Angeles, California 90024. 12 Q. Would you state your business address, 13 please? 14 A. 11150 Santa Monica Boulevard, Suite 15 750, Los Angeles, 90025. 16 Q. Who is your current employer? 17 A. Krutten & Roth. 18 Q. What is the business of Krutten & Roth? 19 A. It's a broker/dealer specializing in 20 small cap and micro cap stocks. 21 Q. What is your position with Krutten? 22 A. Vice president capital markets. 794 1 Q. In that position, what are your job 2 responsibilities? 3 A. I finance small companies with private 4 debt issuance, and I get involved in specific 5 industries in initial public offerings and 6 secondary common stock. 7 Q. How long have you been with Krutten & 8 Roth? 9 A. About two years. 10 Q. What was your prior position? 11 A. I was on my own, De Remer & Associates. 12 Q. And how long have you been on your own 13 as De Remer & Associates? 14 A. Couple years. 15 Q. Mr. De Remer, could you tell us where 16 you went to college? 17 A. Eastern Baptist College in St. David's, 18 Pennsylvania. 19 Q. What year did you graduate? 20 A. I didn't graduate. 21 Q. What was your first position after you 22 left St. David's? 795 1 A. It was a family business, an amusement 2 park business. 3 Q. And following that -- 4 A. I went to Merrill-Lynch as a trainee. 5 Q. What year was that? 6 A. 1968. 7 Q. How long were you at Merrill-Lynch? 8 A. I think till '72. 9 Q. What was your position with 10 Merrill-Lynch? 11 A. I started as a trainee in the 12 convertible bond department. 13 Q. How long were you a trainee? 14 A. Nine months approximately. 15 Q. Following your period as a trainee, 16 what was your position? 17 A. Convertible bond trader. 18 Q. How long did you hold that position? 19 A. Until I left, about 1972. 20 Q. What were your responsibilities as a 21 convertible bond trader? 22 A. Essentially making a market in 796 1 convertible bonds for institutional clients, 2 bidding, adding liquidity to the marketplace, 3 bidding and offering. 4 Q. And I take it there came a time when 5 you left Merrill-Lynch; is that correct? 6 A. Yes. 7 Q. What was your next position? 8 A. Blythe, Eastman, Dillon. 9 Q. What were your responsibilities there? 10 A. Same. Convertible bond trading. 11 Q. How long did you remain at Blythe, 12 Eastman, Dillon? 13 A. Till 1974. 14 Q. In 1974, did you take another job? 15 A. Drexel, Burnham, Lambert. 16 Q. What was your position at Drexel, 17 Burnham, Lambert? 18 A. Convertible bond trading in the 19 high-yield bond department. 20 Q. How long were you at Drexel Lambert? 21 A. Till June of '90. 22 Q. Who hired you at Drexel Burnham? 797 1 A. Mike Milken. 2 Q. Was Mr. Milken your supervisor? 3 A. Yes. 4 Q. Was he your supervisor in 1974? 5 A. Yes. 6 Q. How long did he continue to be your 7 supervisor? 8 A. Until he left. Oh, no. I'd say 1985, 9 '86. 10 Q. What happened in that time period? 11 A. The -- they installed an institutional 12 sales manager. 13 Q. But I take it prior to that time 14 Mr. Milken was your direct supervisor; is that 15 correct? 16 A. Yes. 17 Q. And I take it you were a convertible 18 bond trader at Drexel Burnham Lambert when it 19 began? 20 A. When it began, yes. 21 Q. How long did you remained a convertible 22 bond trader? 798 1 A. Until sometime around 1980. 2 Q. And at that point did your job change? 3 A. I began to move into high-yield 4 institutional sales. 5 Q. Did you continue to trade convertible 6 bonds at the same time? 7 A. No, sir. 8 Q. What were your responsibilities as -- 9 in high-yield bond sales? 10 A. Covering institutional accounts for 11 secondary and new issue high-yield bonds. 12 Q. And were those bonds that were 13 underwritten by Drexel? 14 A. New issues were underwritten by Drexel. 15 Secondary market could have been anyone. 16 Q. And, in particular, what was your role 17 with respect to sales of bonds underwritten by 18 Drexel? 19 A. Getting my clients to buy them. 20 Q. Did you have any sort of supervisory 21 role with respect to those sales? 22 A. Supervisory role? No. 799 1 Q. Did you have a role in coordinating 2 other salesmen with those? 3 A. On specific issues, yeah, I was a point 4 man, yes. 5 Q. What sorts of issues were you the point 6 man on? 7 A. Different industries. At one point, it 8 was McCall Cellular. At one point, it was Cable 9 Vision. It was also MAXXAM, Pacific Lumber. 10 Q. Kaiser Tech? 11 A. Kaiser. 12 Q. Are you familiar with the term "road 13 show"? 14 A. Yes. 15 Q. What is that? 16 A. It's -- after a high-yield transaction 17 is filed, you take a company and/or its 18 subsidiaries on the road to meet buyers. 19 Q. Who goes on those road shows? 20 A. Management, corporate finance for 21 Drexel. 22 Q. So, you as a bond salesman or point man 800 1 did not go on those road shows? 2 A. I would go on a show if it was in LA. 3 In general, it was the corporate finance people. 4 Q. And why was that? 5 A. They were, obviously, more in depth 6 with the company, knew more. 7 Q. In what sense? 8 A. Well, they had done the due diligence. 9 Q. In other words, you had less particular 10 knowledge of the financial condition of the 11 issuer? Is that what you're talking about? 12 A. Yeah, sure. 13 Q. So, the analysts would present that 14 information on the road show? 15 A. Correct. 16 Q. If a client or potential client was 17 interested in having bonds underwritten by Drexel, 18 how did that client arrange to enter into a 19 transaction? 20 MR. KEETON: Excuse me, Mr. Veis. I 21 can't quite hear every word you're saying. 22 MR. VEIS: I'm sorry. I'll speak up. 801 1 Q. (BY MR. VEIS) If a client or 2 potential client was interested in having Drexel 3 underwrite bonds for the client, how would that 4 potential client go about arranging that? 5 A. He'd have to work through the corporate 6 finance department. 7 Q. Who in the corporate finance department 8 in particular? 9 A. It would depend on the issuer, the 10 industry. 11 Q. On the West Coast, was there someone in 12 charge of corporate finance? 13 A. There was John Kissick, head of West 14 Coast corporate finance. 15 Q. And was there anyone else? 16 A. At a later date, I think there was Art 17 Bilger. 18 Q. Do you recall a series of transactions 19 involving companies affiliated with MCO Holdings 20 or MAXXAM, Inc.? 21 MR. VEIS: I'm sorry, Your Honor. I'll 22 try and speak up. 802 1 Q. (BY MR. VEIS) Do you recall a series 2 of transactions involving companies that are 3 affiliates of MCO Holdings or MAXXAM, Inc.? 4 A. High-yield transaction? 5 Q. Yes. 6 A. Yes, I do. 7 Q. What do you recall concerning those 8 transactions? 9 A. Drexel did a number of those 10 transactions, high-yield bonds of different size 11 for a number of, if you would, the MAXXAM family. 12 Q. All right. Let me ask you: Do you 13 recall a transaction for $150 million in 1985 and 14 the issuance of MAXXAM Group, Inc., 13 and 15 five-eighth senior subordinated notes due 5/15/92? 16 A. I recall that. 17 Q. Was that transaction underwritten by 18 Drexel? 19 A. Yes. 20 Q. Do you recall a transaction in the 21 amount of $35 million that closed in July of 1985 22 entitled MCO Holdings, Inc., 14 and a quarter 803 1 senior subordinated note due August 1st, 1992? 2 A. I recall the issue. The date and the 3 size, again, I'm not sure of. 4 Q. Do you recall a transaction in the 5 amount of $180 million that closed on 6 December 2nd, 1985, entitled Pacific Lumber 7 Company, senior subordinated extendible note due 8 June 2nd, 1996? 9 A. Yes. 10 Q. Was that a Drexel underwritten 11 transaction? 12 A. Yes. 13 Q. Do you recall another transaction of 14 $270 million that closed on December 2nd, 1985, 15 entitled Pacific Lumber Company, senior 16 subordinated zero coupon extendible notes due 17 June 2nd, 1986? 18 A. Due when? 19 Q. June 2nd, 1986. Oh, I'm sorry. 20 A. '96, yes. 21 Q. Do you recall that transaction? 22 A. Yes. 804 1 Q. What about a transaction of Pacific 2 Lumber Company, senior subordinated extendible 3 notes, 12 percent initial rate for $480 million 4 also -- which took place in June of '86? 5 A. It was a Drexel underwriting. Again, 6 I'm not sure of the size or the date. 7 Q. And would the same be true with respect 8 to a $75 million-dollar transaction, June 26th, 9 1986, Pacific Lumber Company, 12.5 percent senior 10 subordinated debenture due 1998? 11 A. Drexel underwriting. 12 Q. And with respect to Pacific Lumber 13 Company, 12.2 percent, senior notes due July 1st, 14 1996, $355,472,000? 15 A. Drexel underwriting. 16 Q. And with respect to the Pacific Lumber 17 Company 12 percent Series A, also June 26th, 1986 18 in the amount of $250 million? 19 A. Drexel underwriting. 20 Q. And Kaiser Tech Corporation's senior 21 increasing rate note, 13.44 percent, October 28, 22 1988, $625 million? 805 1 A. It was a Drexel underwriting. 2 Q. And the Kaiser Tech Corporation senior 3 subordinated increasing rate note 13.44 percent, 4 $300 million the same day? 5 A. Drexel underwriting. 6 Q. And prior to that, do you recall a 7 Kaiser Aluminum Chemical Corporation senior 8 subordinated note of 14 and a quarter percent due 9 12/15, 1995, that was issued on December 14, 1989, 10 in the amount of $350 million? 11 A. Yes. It was a Drexel underwriting. 12 Q. Were you involved in the sales of all 13 of those underwritten bonds? 14 A. Yes. 15 Q. Was MCO Holdings a large client of 16 Drexel's? 17 A. It was a substantial client. 18 Q. Was it an important client? 19 A. Not as important as Ted Turner but, 20 yes, an important client. 21 Q. In particular, clients involved in 22 selling bonds of companies affiliated with MCO 806 1 Holdings or, later, MAXXAM? Do you recall? 2 A. I'm sorry. I didn't -- 3 Q. Were there any characteristics of -- 4 general characteristics of the bonds that you 5 recall with respect to all of the issues by the 6 MCO affiliates? 7 A. They generally carried a more generous 8 coupon and probably a -- I'm not exactly sure -- a 9 shorter maturity than what is common at that point 10 in time in the marketplace. 11 Q. Why was that? 12 A. Because most of these entities were 13 fairly largely leveraged. 14 Q. How did that come about? 15 A. Through acquisitions primarily, if I 16 remember correctly. 17 Q. Were these leverage buy-outs? 18 A. Typically. 19 Q. So, they were secured by the assets to 20 be purchased; is that correct? 21 A. Not necessarily secured but if you 22 notice, some were senior. Some were senior 807 1 subordinated. I don't recall any senior 2 securities. That may -- except maybe the Kaiser 3 loan. 4 Q. How was it that -- strike that. 5 What was it about these bonds issued by 6 the MCO affiliates that you brought particularly 7 to the attention of potential buyers in an effort 8 to sell the bonds to those buyers? 9 A. You mean the methodology of selling 10 them -- 11 Q. Yes. 12 A. -- to an institution? The quality of 13 management, to begin with. In some cases, there 14 would be asset values. But you had to have a 15 great deal of confidence and quality of operating 16 management going forward to pay the bills. 17 Q. Why was that? 18 A. Because of the leverage. 19 Q. Can you give us some ideas of the debt 20 coverage ratio of most of these issues? 21 A. I don't remember for sure. One, a 22 quarter to two times. I just -- quite frankly, 808 1 I'm guessing. 2 Q. As to the general marketplace, was that 3 a significantly higher leverage? 4 A. I believe it was. 5 MR. VEIS: Pardon me, Your Honor. May 6 the record reflect that I'm handing the witness a 7 document that has been marked Exhibit A3075. It 8 purports to be a Schedule 13G filed with the 9 Securities and Exchange Commission and consists of 10 six pages and bears on the fifth page the date 11 February 13th, 1985. If you would be so kind as 12 to hand two copies to the judge. Thank you, 13 Mr. De Remer. 14 Q. (BY MR. VEIS) Mr. De Remer, have you 15 ever seen -- well, first off, would you look at 16 Exhibit A3075, please? Have you examined the 17 document, sir? 18 A. Yes, sir. 19 Q. Have you seen that document before? 20 A. Yes. 21 Q. Do you know what it is? 22 A. It's a filing under the Securities and 809 1 Exchange Act of 1934. 2 Q. And directing your attention to the 3 fifth page, you'll see a signature. 4 A. Yes. 5 Q. And do you know whose signature that 6 is? 7 A. It's Edwin Kantor. 8 Q. And who was Mr. Kantor? 9 A. Senior executive vice president was his 10 title, according to this, at Drexel Burnham. 11 Q. And this purports to be a filing on 12 behalf of Drexel Burnham; is that correct? 13 A. Yes. 14 MR. VEIS: Your Honor, at this time I 15 would move the admission of Exhibit A3075. 16 MR. KEETON: No objection. 17 THE COURT: Proceed. 18 MR. VEIS: Thank you, Your Honor. 19 Q. (BY MR. VEIS) Mr. De Remer, if you 20 would turn to the second page of the document, do 21 you see that? 22 A. Yes. 810 1 Q. Do you see under Line 6 there is an 2 entry for shared voting power? 3 A. Yes. 4 Q. And -- well, actually, Line 9 is 5 perhaps the one. 6 Do you receive the line for aggregate 7 beneficially owned by each reporting person? 8 A. Yes. 9 Q. And how much is that? 10 A. 585,371 shares. 11 Q. And does that page report the 12 percentage of stock that is owned in that? 13 A. Percent of class representatives, 14 7.1 percent. 15 Q. And if you turn back to the first page, 16 it indicates what the stock -- subject of the 17 report is. 18 Do you see that? 19 A. Yes. 20 Q. And what company is that? 21 A. United Financial Group, Inc. 22 Q. So, this document reports to the 811 1 Securities and Exchange Commission that Drexel 2 Burnham Lambert, Inc. and I guess Drexel Burnham 3 Lambert Group, Inc. are the beneficial owners of 4 585,371 shares of stock which is 7.1 percent of 5 the shares of United Financial Group? 6 A. Drexel Burnham Lambert, Incorporated, 7 yes. 8 Q. If you turn to the second page, I think 9 you'll see. 10 A. Yes. 11 Q. What's the relationship between Drexel 12 Burnham Lambert Group, Inc. and Drexel Burnham 13 Lambert, Incorporated at that time? 14 A. I believe Group, Inc. was the parent of 15 Lambert. 16 MR. VEIS: Let the record reflect I'm 17 handing Mr. De Remer a copy of a letter and, 18 attached, a schedule 13G. The letter bears the 19 date February 13, 1986, and is on the letterhead 20 of Drexel, Burnham, Lambert, Inc. The document 21 has been marked Exhibit T1116. 22 Q. (BY MR. VEIS) Mr. De Remer, would you 812 1 please review that document? Have you reviewed 2 it, sir? 3 A. Yes. 4 Q. Directing your attention to the first 5 page of the exhibit, which is the letter, do you 6 recognize the name at the bottom on the signature 7 block? 8 A. It says Burton Fendelman. 9 Q. Do you know who Mr. Fendelman is? 10 A. Pardon me? 11 Q. Do you know who Mr. Fendelman is or 12 was? 13 A. No. 14 Q. Turning to Page 5 of the document 15 itself, there is a signature at the bottom of that 16 page. Do you see that? 17 A. Yes. 18 Q. And is that Mr. Kantor's signature? 19 A. It says Edwin Kantor. 20 Q. And Mr. Kantor was the senior executive 21 vice-president of Drexel Burnham Lambert; is that 22 correct. 813 1 A. Yes, he was. 2 Q. Now, you were -- 3 MR. VEIS: At this time I would move 4 the admission of Exhibit T1116. 5 MR. KEETON: No objection. 6 THE COURT: Received. 7 MR. VEIS: Thank you, Your Honor. 8 Q. (BY MR. VEIS) If you would, turn to 9 the first page of the Schedule 13G, Mr. De Remer. 10 You see this purports to be Amendment -- you see 11 where it says it's Amendment No. 1 under the -- 12 A. The second page? 13 Q. I'm sorry. It's the first page of the 14 13G itself, yes. If you look under the words 13 15 -- Schedule 13G, it says it's Amendment No. 1, 16 correct? 17 A. Right. 18 Q. And this is with respect to United 19 Financial Group, Inc. stock? 20 A. Yes, it is. 21 Q. If you turn to the next page, what's 22 the amount under Line 9 aggregate amount 814 1 beneficially owned? 2 A. $488,931. 3 Q. And the percentage reported? 4 A. Percent of class is 6 percent. 5 Q. And, again, this is -- is that also the 6 case with respect to the third page which deals 7 with Drexel Burnham Lambert group, Inc.? 8 A. Yes, it is. 9 MR. VEIS: May the record reflect that 10 I'm handing the witness a copy of a document 11 that's been marked T1129. It is a letter dated 12 February 13th, 1987. This appears to be on the 13 letterhead of Drexel Burnham Lambert, re: 14 Amendment No. 2 to Schedule 13G filed in 15 connection with United Financial Group, Inc. and 16 attached to it is a Schedule 13G marked Amendment 17 No. 2. 18 Q. (BY MR. VEIS) Mr. De Remer, do you 19 recognize that document? 20 A. Yes. 21 Q. What is it? 22 A. It's an amendment to -- another 815 1 amendment to a Schedule 13G. 2 Q. And with respect to the stock of what 3 company? 4 A. United Financial Group. 5 Q. And what date does that document bear? 6 I think if you'll look at Page 5. 7 A. February 13th, 1987. 8 Q. And do you see the signature at the 9 bottom of that? 10 A. It's the same. Edwin Kantor. 11 Q. He was a senior executive 12 vice-president of Drexel Burnham Lambert. Right? 13 A. Yes. 14 Q. All right. 15 MR. VEIS: Your Honor, at this time I 16 would move the admission of Exhibit T1129. 17 MR. KEETON: No objections. 18 THE COURT: It's been previously 19 admitted. 20 MR. VEIS: I'm sorry. I didn't realize 21 that one had been. 22 Q. (BY MR. VEIS) Directing your 816 1 attention to the second page of the document of 2 the 13G itself, you see the aggregate amount 3 beneficially owned by each reporting person? 4 A. Yes. 5 Q. And what is that amount? 6 A. 789,853. 7 Q. And in Line 11 do you see the percent 8 of the class owned? 9 A. 9.7 percent. 10 Q. Turning to the next page, does it 11 report the same data with respect to Drexel 12 Burnham Lambert Group, Inc.? 13 A. Yes. 14 Q. Mr. De Remer, are you familiar with the 15 term market maker? 16 A. Yes. 17 Q. Can you explain to the Court what a 18 market maker is, please? 19 A. A market maker is one who makes to 20 public or clients a bid and an offer for his own 21 account in a security, be it a stock or a bond or 22 a preferred or an option. 817 1 Q. What is the function of a market maker 2 vis-a-vis the market? 3 A. Vis-a-vis the market data, to add 4 liquidity. 5 Q. So, in other words, the market maker 6 performs a service by offering to buy and sell a 7 particular security at a particular bid and 8 prices. 9 A. For a profit, yes. 10 Q. Is it customary for market makers to 11 carry large positions of stock in which they make 12 a market in your experience? 13 A. Could you tell me what a large position 14 is? I mean, that's relative to the marketplace. 15 Q. Well, in terms of a percentage of the 16 outstanding shares of a company, would a market 17 maker say, for example, customarily carry an 18 amount up to, say, 5 percent of the outstanding 19 shares? 20 A. In a market making function? 21 Q. Yes, sir. 22 A. My limited experience, probably not. 818 1 Q. And then I take it that a market maker 2 would be unlikely in your experience to carry a 3 position of 9.7 percent entries in the form -- 4 and I'll get to the handwritten matter later. But 5 for example, in the first line, it says buyer 6 cross trade seller. 7 Do you see that? 8 A. Yes. 9 Q. Could you explain how that information 10 is filled out and utilized in connection with a 11 trade in stock or securities? 12 A. Do you want me to say what this ticket 13 represents or -- 14 Q. Yes, sir. That's exactly what I want. 15 A. This ticket is circled buyer on the 16 left. 17 Q. Circled F, which equals or the number 18 of bonds? 19 A. Number of shares and number of bonds, 20 yes. 21 Q. And, followed by that, it says the 22 symbol? 819 1 A. Trading symbol, yes. 2 Q. And that would be the symbol that's 3 reported on the Exchange or the NASDAQ? 4 A. Exchange. 5 Q. Then I take it the following blocks for 6 year and coupon would relate to bond description? 7 A. Bonds only. 8 Q. Bonds only? 9 A. Right. 10 Q. And the price I would assume would be? 11 A. Transaction price. 12 Q. Then below that I see there are two 13 blocks that seem to be identical. One on the left 14 and one on the right, where it's got F-firm or 15 CP-client. 16 A. Correct. 17 Q. What is the significance of there being 18 two blocks on that document? 19 A. In this instance -- perhaps this is 20 easier -- where you see buyer circled, it 21 represents who the buyer is. The right-hand box 22 would be applicable if you had circled seller at 820 1 the top. In other words, the left-hand side is 2 the buyer's side of the ticket. The right-hand 3 side is the seller's side of the ticket. 4 Q. So, in other words, if an F is circled 5 on the left-hand side of the ticket, that 6 indicates that the buyer was the firm? 7 A. Correct. 8 Q. And "the firm" meaning Drexel Burnham 9 Lambert? 10 A. Correct. 11 Q. I take it then similarly on the right 12 side, if an F is circled, it would indicate the 13 firm is the seller of the security? 14 A. Correct. 15 Q. Now, below that, there are a number -- 16 there is a block. It says "firm account number" 17 and there are a number of numbers running across 18 the page. 19 Could you explain the significance of 20 those, please? 21 A. They are different trading accounts 22 within the firm. 821 1 Q. I notice this particular one has a 2 circle around what appears to be 42. 3 Do you see that? 4 A. Correct. 5 Q. Do you recall the significance of 42? 6 A. I believe it was one of the stock 7 trading accounts. 8 Q. That was an equity account as opposed 9 to a bond account? 10 A. Yeah, I believe so. 11 Q. Well, was there an account that was 12 known within the office as the 42 account? 13 A. Correct. 14 Q. And is it your belief that that 15 indicates that that was the 42 account that's 16 referred to on this trade ticket? 17 A. Yes, sir. 18 Q. Now, below that, there is a space for 19 account number. 20 Do you see that? 21 A. Yes. 22 Q. Actually, there are two spaces: One on 822 1 the left and one on the right? 2 A. Correct. 3 Q. Would the one on the left then indicate 4 the account number of a buyer? 5 A. Account number of a buyer other than 6 the firm for our client. 7 Q. Yes, sir. And would the account number 8 on the left indicate the account number of the 9 seller if it were other than the firm? 10 A. You mean the account number on the 11 right? 12 Q. I'm sorry. 13 A. Account number on the right if it 14 were -- there would have been a client's account 15 number. 16 Q. And there is a line further down that 17 indicates transaction. Is it "trans number"? 18 A. Transaction number. 19 Q. Is that something that a trader or 20 trader's assistant would be concerned with? 21 A. It's an internal number. I don't 22 remember exactly what it was used for. 823 1 Q. And then further down there is a line 2 which bears the entry BKR/GU? 3 A. Uh-huh. 4 Q. Do you know what that line was used 5 for? 6 A. That's the contra broker -- 7 Q. Which one? 8 A. -- or if you bought on exchange. In 9 other words, who you bought it from. 10 Q. Or in the case of a seller would be who 11 you sold it to? 12 A. Correct. 13 Q. Thank you. 14 A. If it were a street trade, if you were 15 buying and selling on the street. 16 Q. And below that, there was a line for -- 17 is that commission charge, COMCHG? 18 A. Right. 19 Q. I take it you're saying it is 20 commission charge? 21 A. That's what it means, yes. 22 Q. And the account name? 824 1 A. Account name. 2 Q. Is that the -- 3 MR. VEIS: Contra account Drexel 4 Burnham Lambert liquidating trust documents that 5 were produced out of their mountain warehouse in 6 Sterling, Virginia? It may be that the 7 respondents didn't copy them when they went 8 through them. They were given full access to 9 those documents for a number of days nearly nine 10 months ago. 11 Certainly, I have no objection to 12 Mr. Keeton asking a couple of questions about the 13 handwriting, but I think -- I think I've already 14 established that these are business records kept 15 in the normal course of Drexel's business. 16 THE COURT: All right. Ask your 17 question. 18 Q. (BY MR. KEETON) Mr. De Remer, does 19 your handwriting appear on any of these documents, 20 to your knowledge? 21 A. No, sir. 22 Q. Do you supervise the people that 825 1 prepared these tickets? 2 A. No, sir. 3 Q. Did you ever supervise the department 4 that's responsible for maintaining these tickets? 5 A. Department? 6 Q. Wherever they are maintained, do you -- 7 did you ever supervise that? Was that part of 8 your responsibility? 9 A. Department that maintains these 10 tickets, no. 11 MR. KEETON: Your Honor, I stick with 12 my objection. I think it's hearsay. Somebody 13 else may -- 14 THE COURT: Why is your name on the 15 tickets? 16 THE WITNESS: I don't recall. 17 THE COURT: Were you the salesman or -- 18 involved in the transaction? 19 THE WITNESS: I just -- I honestly 20 don't recall. 21 THE COURT: All right. I'll receive 22 the document. 826 1 MR. VEIS: Thank you, Your Honor. May 2 the record reflect that I'm handing the witness a 3 rather more voluminous set of what appear to be 4 high-yield bond department trade tickets that have 5 been marked Exhibit T1196. 6 Q. (BY MR. VEIS) Mr. De Remer, would you 7 examine the complete set of those, please? 8 A. Complete set? 9 Q. Yes, sir. Have you completed that 10 review, sir? 11 A. Yes, I have. 12 Q. Do all of the documents in 13 Exhibit T1196 appear to be records of transactions 14 in securities in the high-yield bond department of 15 Drexel Burnham Lambert? 16 A. Yes. 17 Q. And, again, we've already established 18 that you're familiar with that type of document, 19 correct? 20 A. Yes. 21 Q. And we've gone through the procedure 22 for creating those documents, correct? 827 1 A. Yes. 2 Q. And you've stated that those are filled 3 out at the time of the trade, correct, or near? 4 A. I'm sorry. 5 Q. You stated that those are filled out at 6 or near the time of the trade; is that correct? 7 A. Right. 8 Q. And is it the regular practice of 9 Drexel to create such trade tickets, correct? 10 A. Correct. 11 Q. And it was -- these were kept in the 12 regular course of Drexel's business activity, 13 correct? 14 A. Correct. 15 Q. And that's based upon your experience 16 with having been a trader -- a salesperson at 17 Drexel, right? 18 A. Yes. 19 MR. VEIS: Your Honor, at this time, 20 I'd move the admission of T1196. 21 MR. KEETON: I only have one question 22 this time, Your Honor. 828 1 THE COURT: All right. 2 Q. (BY MR. KEETON) Mr. De Remer, did you 3 find any of your writing on any of these tickets, 4 or did you find your name on any of these tickets? 5 A. No, sir. 6 MR. KEETON: I object, Your Honor. I 7 think it's clear hearsay as to this witness and I 8 don't think he's competent to prove it up as a 9 business record given his lack of experience with 10 dealing with these tickets on a day-to-day basis, 11 Your Honor. 12 MR. VEIS: Your Honor, I believe that 13 Mr. De Remer has demonstrated he is fully familiar 14 with the business practices of Drexel through his 15 experience as a trader. It's not necessary for 16 him to have overseen or made the particular 17 entries in the record if he can testify that these 18 are documents that are kept in the ordinary 19 course. Therefore, I believe they are qualified 20 as business records and ought to be admitted. 21 THE COURT: Well, of course, this is 22 not the best foundation in the world for these 829 1 documents but, on the other hand, there doesn't 2 seem to be any real question about their 3 authenticity. I'll receive the documents. 4 MR. VEIS: Thank you, Your Honor. May 5 the record reflect I'm handing Mr. De Remer a 6 single page exhibit that's been marked T1197. It 7 appears to be another trade ticket with respect 8 to -- this time with respect to a United Financial 9 Group call. 10 Q. (BY MR. VEIS) Mr. De Remer, would you 11 review that document, please? 12 A. Yes. 13 MR. KEETON: Your Honor, may I approach 14 the witness and look at his exhibit a minute? It 15 wasn't on the list, and we don't have been a copy. 16 MR. VEIS: I'm sorry. I thought we had 17 provided copies of that exhibit. 18 MR. KEETON: No. 19 MR. VEIS: I apologize. Your Honor, if 20 I might make a suggestion. I could have a copy 21 made. The next exhibit that I intend to ask the 22 witness to review -- actually, two exhibits, 1198 830 1 and 1199 are voluminous, and perhaps we could 2 recess while Mr. De Remer is reviewing them so 3 that we could go forward if that is convenient 4 for -- 5 THE COURT: Do you need to make a copy 6 of this one? 7 MR. VEIS: Yes. Apparently, we need to 8 copy. 9 MR. KEETON: I have a copy now, Your 10 Honor. 11 MR. VEIS: May we proceed, then? 12 THE COURT: Proceed with this one. If 13 you want to give him time to review the large 14 one -- 15 MR. VEIS: I think that would be 16 prudent. Thank you, Your Honor. 17 Q. (BY MR. VEIS) Mr. De Remer? 18 A. Yes, sir. 19 Q. Have you read Exhibit T1197? 20 A. Yes. 21 Q. And do you recognize that as a record 22 of a transaction in the high-yield bond department 831 1 of Drexel Burnham Lambert? 2 A. Yes, I do. 3 Q. And we've already established that 4 you're familiar with this type of document; is 5 that correct? 6 A. Yes. 7 Q. And you've testified to the procedure 8 for creating those trade tickets, correct? 9 A. Yes. 10 Q. And you've testified that they are 11 filled out at or near the time of the trade, 12 correct? 13 A. Normally, yes. 14 Q. And is it -- you've testified that it's 15 the regular practice at Drexel to create such 16 tickets, correct? 17 A. Yes. 18 Q. And they are kept in the regular course 19 of Drexel's business activity, correct? 20 A. Correct. 21 Q. Now, directing your attention to the 22 "improved by" block, can you recognize the 832 1 initials in that block? 2 A. They appear to be BN, Bruce Newberg. 3 Q. And who was Mr. Newberg? 4 A. He was a trader. 5 Q. And Mr. Newberg would have had 6 authority to approve such a trade; is that 7 correct? 8 A. I assume so. 9 Q. Now, the security here is 10 United Financial Group call; is that correct? 11 A. That's what it says. 12 Q. And it indicates a quantity of 300,000 13 shares? 14 A. 300,000 shares. 15 Q. And it indicates a symbol of UFGI? 16 A. UFGI. 17 Q. Do you recognize that symbol? 18 A. Yeah. United Financial Group. 19 Q. And there is an account number in 20 that -- in the account number block of -- is that 21 the purchaser? 22 A. That's the client purchaser. 833 1 Q. And do you recognize that account 2 number? 3 A. It's the same account number that was 4 on the statement you showed me. 5 Q. That was the statement that purports to 6 be that of MCO Holdings under the account name. 7 Do you see the name there? 8 A. MCO Holdings. 9 MR. VEIS: Your Honor, at this point I 10 would move the admission of T1197. 11 MR. EISENHART: Your Honor, I'm going 12 to object to this one because, as to this one, he 13 has not laid any foundation that this was created 14 in the ordinary course of business and this one, 15 quite frankly, in view of some of the earlier 16 documents we've seen, seems odd. 17 MR. KEETON: If you notice, Your Honor, 18 it says trade date, settlement dates down in 19 December. We know that nothing closed then in '88 20 and yet something about December 1, '88. I don't 21 think this one fits any exception unless 22 Mr. De Remer is personally familiar with it or -- 834 1 THE COURT: All right. Well, why don't 2 you explore those questions that you have about 3 that? 4 MR. VEIS: May I, Your Honor? 5 THE COURT: Yes, you may. 6 Q. (BY MR. VEIS) Mr. De Remer, with 7 respect to a call, is that a reference to an 8 option? 9 A. It's an option. 10 Q. And when there is an entry in the year 11 section of a trade ticket relating to an option, 12 what would that indicate? 13 A. It says down at the bottom "see 14 expiration date of the call." 15 Q. Are you aware of any options with 16 respect to United Financial Group purchased by MCO 17 Holdings, Inc.? 18 A. I wasn't until a deposition two years 19 ago. 20 Q. And what did you become aware of two 21 years ago at your deposition? 22 A. That there was an option created under 835 1 United Financial Group. 2 Q. And that was because you looked at an 3 option agreement; is that correct? 4 A. Yes. 5 MR. VEIS: Well, Your Honor, I believe 6 he's clearly demonstrated he has knowledge of the 7 transaction. Let me ask one more question. 8 Q. (BY MR. VEIS) See the date on this, 9 the date stamp on it? Can you read that? 10 A. Can't read it. 11 Q. What year? 12 A. '88, but I don't know. That's all I 13 can read. 14 Q. It indicates trade date of 12-24, 15 right? 16 A. Down at the bottom, yes. 17 Q. And a settlement date of 12-24; is that 18 correct? 19 A. That's what it says. 20 Q. Would that indicate a cash transaction 21 as opposed to be a regular way settlement 22 transaction? 836 1 A. It's a cash transaction. 2 MR. VEIS: Your Honor, I think he's 3 displayed familiarity with the underlying 4 transaction and has demonstrated that this is a 5 trade ticket that is generated in the ordinary 6 course relating to this type of transaction. 7 MR. EISENHART: Your Honor, given what 8 we have seen of this transaction so far, we know 9 the option agreement was entered into. We know it 10 was twice extended in 1988. Comparing this 11 exhibit to T1136, which is an account statement on 12 the same account in 1987 that shows the 300,000 13 share option, I don't think there is any way that 14 this witness can accurately testify that this was 15 a ticket prepared in the ordinary course of 16 business. I think we would need the person who 17 prepared this ticket to explain how those numbers 18 and how those transactions square with what we've 19 already seen in the record. This one -- I don't 20 think simply because the witness is familiar with 21 the form that that's a proper foundation for this 22 document, and it certainly doesn't vouch for the 837 1 accuracy of the information that's set forth on 2 it. 3 MR. KEETON: I join in that objection, 4 Your Honor. And, in addition, contrary to what 5 counsel for the prosecution just said, this 6 witness said he was not familiar with the option 7 until he was shown something in a deposition in 8 this case two years ago. So, he's not familiar 9 with this transaction. 10 THE COURT: Are you familiar with these 11 forms when they were used on the option 12 transactions? 13 THE WITNESS: I'm familiar with this 14 form. I've then never done an option trade in my 15 life. 16 THE COURT: I'll receive the document. 17 MR. VEIS: Thank you, Your Honor. 18 Q. (BY MR. VEIS) At this point, I have 19 two exhibits that I'd like Mr. De Remer to review. 20 They are both quite voluminous. It may be 21 convenient for -- 22 THE COURT: All right. We'll take a 838 1 short recess. 2 MR. VEIS: Thank you, Your Honor. 3 . 4 (A break was taken.) 5 6 THE COURT: Back on the record. 7 Q. (BY MR. VEIS) I believe, 8 Mr. De Remer -- your Honor, I believe Mr. De Remer 9 has almost finished reviewing the second exhibit 10 and we have moved the closer to the microphone. 11 So, I hope I'll be able to be heard better, Your 12 Honor. 13 Your Honor, while Mr. De Remer is 14 finishing up, I would just like to explain to the 15 court that Exhibits 1198 and 1199 are actually one 16 continuous series but due to an error in the 17 marking of exhibits, they were marked separately. 18 I think at this point it would be just as easy to 19 keep them as separate exhibits, but I just would 20 like on the record that they all pertain to one 21 subject matter which I will demonstrate when 22 Mr. De Remer finishes his review. 839 1 THE COURT: Mr. De Remer, have you 2 spent the recess reviewing these documents? 3 THE WITNESS: Yes, sir. 4 THE COURT: Do you need a break? 5 THE WITNESS: No. I'm fine. 6 THE COURT: Proceed. 7 Q. (BY MR. VEIS) Thank you, Your Honor. 8 Mr. De Remer, we have asked you during 9 the break to review two exhibits, one marked T1198 10 and one T1199. Your Honor, I believe your copies 11 are beside the bench. 12 Q. (BY MR. VEIS) Mr. De Remer, if I 13 could first direct your attention to 14 Exhibit T1198. 15 A. Yes, sir. 16 Q. Have you completed your review of that 17 document? 18 A. Yes. 19 Q. Those documents -- 20 A. Yes. 21 Q. What are those documents? 22 A. They represent transactions in 840 1 United Financial Group. 2 Q. Those are trade tickets from the 3 high-yield bond department of Drexel Burnham 4 Lambert? 5 A. Yes, sir. 6 Q. And they are records of transactions 7 conducted in those -- in United Financial Group, 8 Incorporated common stock in the high-yield bond 9 department of Drexel Burnham Lambert? 10 A. It's primarily United Financial Group 11 common stock. There is one ticket in here a 12 preferred and one in an MCO. 13 Q. And you've previously testified that 14 you're familiar with that type of document through 15 your work at Drexel, correct? 16 A. Yes. 17 Q. And you've testified as to the 18 procedure for creating trade tickets; isn't that 19 correct? 20 A. Yes. 21 Q. And you've testified that these trade 22 tickets are filled out at or near the time of the 841 1 trade; isn't that correct? 2 A. Yes. 3 Q. And you've testified that it's the 4 regular practice of Drexel to create such tickets 5 in the course of its business; is that correct? 6 A. Yes. 7 Q. And you've testified that these trade 8 tickets were kept in the regular course of 9 Drexel's business activity; is that correct? 10 A. Yes. 11 Q. Directing your attention to the first 12 page, the one that's actually marked T1198, would 13 you look at the "approved by" block? 14 A. Yes. 15 Q. Whose initials are those? 16 A. They are mine. 17 Q. Turning to the second -- 18 THE COURT: Do we have to go through 19 all these. 20 MR. VEIS: Well, Your Honor, I intend 21 to move the admission of these documents. There's 22 been some issue previously about Mr. De Remer not 842 1 being personally familiar with some of them. I 2 would be happy to forego that, but if it's -- if 3 the court deems it necessary for their admission, 4 I will proceed. 5 At this time, I would move the 6 admission of Exhibit T1198 in evidence as a 7 business record of Drexel Burnham Lambert. 8 MR. KEETON: Your Honor, I continue to 9 maintain my objection except those where 10 Mr. De Remer has his initials on them, I do not 11 object to. I assume you mean when they -- your 12 initials, they are in your handwriting, 13 Mr. De Remer. 14 THE WITNESS: Yes, sir. 15 MR. KEETON: Okay. I have no problem 16 with those. 17 MR. VEIS: I suggest that with respect 18 to the additional documents Mr. De Remer has 19 provided the same foundation as the previous 20 exhibits as to his familiarity. 21 THE COURT: I think so. Received. 22 MR. VEIS: Thank you, Your Honor. 843 1 Q. (BY MR. VEIS) Now, let me go to the 2 transaction on what appears to be November 21st, 3 19 -- the stamp is very difficult to read. I 4 believe it's '83. If you would look at the trade 5 date on the tickets and follow them through, they 6 should be pretty close to chronological order. 7 A. November? 8 Q. November 28th dated -- settlement date 9 of December the 5th. 10 A. Right. 11 Q. Okay. Now, looking at the initials 12 there, are those Bruce Newberg's initials? 13 A. I believe so, yes. 14 Q. Now, I direct your attention to a trade 15 two pages further on. It is -- has two 16 transaction numbers on T229 and 20. 17 THE COURT: Can you use that stamp 18 number that's down in the corner and tell us 19 what -- 20 MR. VEIS: The date is 11-29, the trade 21 date. You see, it's not quite in chronological 22 order. 844 1 MR. VILLA: How about the Bates number? 2 MR. VEIS: There is no Bates number. 3 Oh, I'm sorry. OWO25391. Not all of these have 4 Bates numbers on them. And that is because they 5 were copied at two different times. But there is 6 a Bates number on this particular one. It's 7 OWO25391. It's dated November 29th. It's two 8 pages past the one that I just referred to. Your 9 Honor, may I proceed? 10 THE COURT: Yes, you may. 11 MR. VEIS: Thank you. 12 Q. (BY MR. VEIS) Looking at that 13 document, you see there is an entry on the 14 left-hand side under firm or client. You see 15 that? 16 A. Yes. 17 Q. That indicates it's a firm trade; is 18 that correct? 19 A. Yes. 20 Q. Is that a firm trade in the so-called 21 42 account? 22 A. Yes. 845 1 Q. Looking at the account number block 2 below the circled 42, do you see that account? 3 A. Yes, I do. 4 Q. And do you know what that account 5 represents? 6 A. I don't. 7 Q. Do you know what the office code 06 8 represents? 9 A. No, I don't. 10 Q. Do you know what office code is used 11 for house accounts? 12 A. I think I saw in some of the earlier 13 tickets as a 16. 14 Q. Wasn't 16 the Los Angeles office 15 account? 16 A. Yeah, I believe so. 17 Q. I'll direct your attention, a little 18 further on, there is one marked 0W0625403. It's 19 got a trade date of 3-17. 20 A. 483? 21 Q. I'm sorry? 22 A. Trade date? 846 1 Q. 3-17. It's got a date stamp for 2 March 17th, 1983. Have you found that? 3 A. Yes. 4 Q. Can you tell us what that -- I'm 5 sorry -- what that trade ticket indicates in terms 6 of what the transaction -- represents it was? 7 A. It's a trade of 10,000 shares of UFG. 8 Q. Do you recognize the account number of 9 the buyer? 10 A. The account number is the same one on 11 the statement, whatever exhibit you have. 12 Q. That's the MCO statement? 13 A. Correct. 14 Q. Incidentally, what is a house account? 15 A. It's a trading account. 16 Q. Trading account of the firm's? 17 A. Correct. 18 Q. So, for example, the firm account 19 numbers across here on a trade ticket would list 20 12, 13, 14, 33, 34, et cetera. Are those what are 21 known as house accounts? 22 A. Trading accounts, house accounts, yes. 847 1 Q. And those are owned by the firm? 2 A. Pardon me? 3 Q. Those are firm accounts? 4 A. Correct. 5 Q. Thank you. Mr. De Remer, are you 6 familiar with a firm called Rotan Mosley? 7 A. It's a or was -- I think it's still 8 around -- brokerage firm. 9 Q. Where is it located? 10 A. I believe in Houston. 11 Q. Thank you. I'd like to now direct your 12 attention to Exhibit T1199. You reviewed that 13 exhibit during the break, right? 14 A. Yes, I did. 15 Q. And is that a record of transactions in 16 the high-yield bond department of Drexel Burnham 17 Lambert? 18 A. Yes. 19 Q. And each of those trade tickets is a 20 record of one such transaction, correct? 21 A. A buy or sell, yes. 22 Q. And you indicated further that -- 848 1 earlier that you are familiar with this type of 2 document through your work at Drexel, correct? 3 A. Yes. 4 Q. And you had indicated the procedure by 5 which those documents are created, correct? 6 A. Yes. 7 Q. You further indicated that those 8 documents are filled out at or near the time of 9 the transaction, correct? 10 A. Yes. 11 Q. And you had indicated in addition that 12 it was the regular practice of Drexel to create 13 such tickets; is that correct? 14 A. Yes. 15 Q. And they are kept in the regular course 16 of business activity at Drexel, right? 17 A. That's right. 18 MR. VEIS: Your Honor, I move the 19 admission of Exhibit T1199 at this time. 20 MR. KEETON: Same objection, Your 21 Honor. 22 THE COURT: Received. 849 1 MR. VEIS: Thank you, Your Honor. 2 Q. (BY MR. VEIS) Now, if you would turn, 3 Mr. De Remer -- I don't know if you recall exactly 4 where it is. There is a transaction trade date of 5 June 6th, 1986, according to the date stamp. 6 A. Right. 7 Q. That bears the transaction number 8 708121. 9 A. Yes. 10 Q. Now, is that the document you had 11 referred to as a trade in MCO stock as opposed to 12 the United Financial Group stock which most of the 13 trade tickets record? 14 A. Yes. 15 Q. Thank you. Now, directing your 16 attention to -- well, let me ask for a general 17 observation from your review of Exhibits 1198 and 18 1199. 19 Do those transactions represent 20 predominantly buy transactions? 21 A. Predominantly, yes. 22 Q. I take it, though, that there were some 850 1 small number of sell transactions? 2 A. Yes. 3 Q. But the buy transactions predominate 4 throughout this -- these two exhibits; is that 5 correct? 6 A. They are the majority, yes. 7 Q. Mr. De Remer, you know what a MAD ratio 8 is? 9 A. Yes. 10 Q. What is it? 11 A. What's called a market adjusted debt 12 ratio. 13 Q. Can you explain what that is? 14 A. It takes the book value of a company's 15 debt and marks it to market essentially. 16 Q. And why would one want to do that? 17 A. Just to measure corporate health. 18 Q. I'm sorry. What? 19 A. We used it as a measure of corporate 20 health. 21 Q. And how does that indicate corporate 22 health? 851 1 A. If -- to be simplistic, if there is a 2 hundred million in debt on a company's books and 3 it trades at par, the market perceives its worth 4 par a hundred million dollars in debt on the books 5 and it trades at 50, perhaps there is a problem. 6 Or, conversely, you can look at it -- look at it 7 two ways. Conversely, you can say that that's the 8 real debt side of that company's ledger. Just a 9 measure -- a tool to measure corporate health. 10 Q. Are you familiar with MAD ratios for 11 MCO Holdings or companies affiliated with it? 12 A. I'm sorry? 13 Q. Are you familiar with MAD ratios for 14 MCO Holdings or companies affiliated with MCO 15 Holdings? 16 A. I am not today. I was earlier. 17 Q. How did you become familiar in the 18 past? 19 A. It was one of the Drexel's research 20 tools we published. 21 Q. In what sort of publication? 22 A. Newsletters, research reports. 852 1 Q. Were those newsletters or research 2 reports used for the purpose of communicating with 3 clients of the firm? 4 A. Yes. 5 Q. And were they used for the purpose of 6 advising or seeking to convince clients that -- or 7 potential buyers of securities that they should 8 buy those securities? 9 A. Buy or sell. 10 Q. Buy or sell? 11 A. Yes. 12 Q. And so, you would -- or that to say 13 Drexel would make known these MAD ratios in the 14 course of providing disclosure information to 15 potential buyers or -- 16 MR. VEIS: May the record reflect I'm 17 handing the witness an exhibit that's been marked 18 T4036. 19 Q. (BY MR. VEIS) Mr. De Remer, would you 20 review Exhibit T4036, please? 21 MR. VEIS: I apologize both to the 22 court and all counsel for the quality of the 853 1 legibility. This is a blow back from microfiche, 2 and it's the best copy we could create. 3 Q. (BY MR. VEIS) Have you completed your 4 review, sir? 5 A. Yes, sir. 6 Q. Do you recognize this document? 7 A. Yes. It's a high-yield newsletter. 8 Q. Is that something that was issued by 9 Drexel Burnham Lambert? 10 A. Yes, it was. 11 Q. And that's the sort of information 12 we've been discussing previously that Drexel 13 provided to potential buyers and sellers of 14 securities? 15 A. Correct. 16 Q. Directing your attention to Appendix A, 17 Page 2. 18 MR. KEETON: Your Honor, I'm going to 19 object to this witness. It's also the sort of 20 information that is clear hearsay. Just a 21 newsletter out of Drexel Burnham. This man didn't 22 write it. It contains a lot of stuff. I also 854 1 object on relevancy. 2 THE COURT: I'd like to hear what we're 3 trying to show here. 4 MR. VEIS: Well, with a couple more 5 questions, Your Honor, I think I'll be able to. 6 A. I can't read Appendix A. 7 Q. (BY MR. VEIS) If that's the case, we 8 can turn to Appendix B and see if we can read that 9 any better. 10 A. Or B. 11 Q. Well, in that case, we'll go to the 12 next exhibit. Let me first ask: Was this the 13 sort of information that Drexel used in the course 14 of its business, compiled and used in its 15 business? 16 A. Yes. 17 MR. VEIS: Your Honor, I believe that 18 that's sufficient basis to admit this as -- 19 MR. KEETON: I don't know where we get 20 that, but that does not make this a business 21 record under any conditions, Your Honor. It's not 22 subject to any exception I note. I also would 855 1 like to point out Mr. De Remer is not testifying 2 here as an expert even though the OTS prosecution 3 seems to want to make him that. They also 4 designated hill on the net-worth maintenance and 5 affiliated party transaction. None of this has 6 anything to do with that. 7 MR. VEIS: Your Honor, if I were 8 offered the opportunity to ask a question 9 concerning the information in the appendix, I 10 think I can tie all this together. We are trying 11 to find a copy that's legible and Mr. De Remer 12 said he can't read it. So, I will withdraw any 13 suggestions to Exhibit T4066 and go on to a more 14 legible exhibit to make my point. I will withdraw 15 the previous. 16 MR. EISENHART: Can we ask Mr. Veis to 17 keep his voice up? I'm sitting 5 feet away from 18 him, and I can't hear a word he's saying. 19 MR. VEIS: I'm sorry. My voice is 20 going. I'm doing the best I can. 21 Q. (BY MR. VEIS) Let me hand -- let the 22 record reflect I'm handing Mr. De Remer the 856 1 exhibit that's been marked T4066. 2 Q. (BY MR. VEIS) Mr. De Remer, before I 3 ask you to review the document for authenticity, 4 let me simply ask you if you can read the pages 5 that are marked Appendix A and B in this document. 6 A. I apologize. I don't have A. 7 Q. Keep going. It's out of order. 8 A. Really? 9 Q. A is -- I think it's -- 10 A. Oh, here it is. It's out of sync. 11 Q. It is out of sync. It's the way it was 12 produced to us. 13 A. I can barely read it. 14 Q. Well, you can read it. Now, you 15 testified previously that MCO Holdings and its 16 previous companies were highly leveraged; is that 17 correct? 18 A. Yes. 19 Q. And you had indicated that the MAD 20 ratio is a measure of corporate health; is that 21 correct? 22 A. It's one we used, yes. 857 1 Q. Now, are you able to read the -- you 2 indicated further that you were at one point 3 familiar with the MAD ratio of MCO Holdings and 4 its affiliated companies? 5 A. Correct. 6 Q. Are you able to read the document 7 that's at Appendix A? 8 A. Yes. 9 Q. Do you see MCO Holdings there? 10 A. Yes. 11 Q. Does it indicate a MAD ratio? 12 A. 75 percent. 13 Q. And if you then turn to Appendix B, are 14 you able to find MCO Holdings listed in Appendix 15 B? And I'll direct your attention in particular 16 to Page 2. 17 A. I don't see it. 18 Q. Let me direct your attention to Line 19 115. 20 A. Oh, I see it. I'm sorry. 21 Q. Do you see that there? 22 A. Yes, I do. 858 1 Q. Does that indicate MCO Holdings had a 2 MAD ratio on the date indicated here? 3 A. 75 percent. 4 Q. What is the significance of the numbers 5 on the left-hand side of the page? 6 A. On the left-hand side? It's a ranking. 7 Q. A ranking. So, I take it that MCO 8 Holdings was ranked 115 on that date? 9 A. That's the way -- yes. 10 Q. And what does this mean, the heading, 11 market adjusted rate, MAD -- market adjusted debt 12 ratios ranked lowest to highest 7-31-84? What is 13 a low rating vis a vis a high one? 14 A. A low rating -- you're talking about 15 the ratio itself, whether it's 25, 50, or 75? 16 You're talking about a low rating is a better 17 quality credit. A higher rating is a lower 18 quality credit. 19 Q. So? 20 A. In other words, on a scale of 1 to 100, 21 if you're 90 you're bad. 22 Q. So, then, I take it that the first 859 1 company listed here, Roar Industries, is listed as 2 No. 1? 3 A. I am out of -- bear with me. I'm out 4 of sync here. Yeah. 5 Q. That would be the healthiest company on 6 this list; is that correct? 7 A. Right. 8 Q. Moving to the second page. 9 A. Right. 10 Q. I take it the companies on the second 11 page are less healthy than the companies on the 12 first page according to the MAD ratio? 13 A. According to this ratio. 14 Q. And the companies on the bottom of the 15 page are less healthy than the companies on the 16 top of the page, is that correct, according to the 17 MAD ratio? 18 A. That's correct. 19 Q. And it appears that there are listed 20 128 companies in this appendix; is that correct? 21 A. It appears that way, yes. 22 Q. And out of those companies, I take it 860 1 MCO Holdings was 115th, is that -- 2 A. According to this, yes. 3 Q. And this is a document that you would 4 have relied upon and reviewed to make yourself -- 5 let me strike that question. 6 This is a document that you would have 7 reviewed to make yourself familiar with the 8 financial health of MCO Holdings; is that correct? 9 A. Among others, yes. 10 Q. And does this refresh your recollection 11 as to the MAD ratio of MCO Holdings in 1984? 12 A. Yes, it appears correct. 13 Q. So, then, you now recall that MCO 14 Holdings was 115th out of 128 on the list that 15 Drexel published in 1984; is that correct? 16 A. In August of '84. 17 MR. VEIS: May the record reflect that 18 I'm handing Mr. De Remer an exhibit that's been 19 marked T4073. It appears to be a high-yield 20 newsletter, December, 1984. Your Honor, at this 21 time, I'd also move to admit T4066 into evidence. 22 MR. KEETON: Your Honor, that's still a 861 1 hearsay document. It's replete with hearsay all 2 through it. He's testified to that number, which 3 we'll find out later what it means, but I don't 4 want him introducing this document which this 5 man -- 6 THE COURT: I'm going to sustain the 7 objection on the newsletter. 8 Q. (BY MR. VEIS) Your Honor -- I'm 9 sorry. 10 Q. (BY MR. VEIS) Mr. De Remer, do you 11 have a recollection as to the MAD ratio of MCO 12 Holdings in December 1984? 13 A. Look it up. I don't recall -- 14 Q. First I asked if you looked at it. 15 A. No, I don't. 16 Q. Would Exhibit 4073 refresh your 17 recollection as to the MAD ratio? 18 A. Yes, it would. 19 Q. Directing your attention to Appendix A 20 on Page 2, does that assist you? 21 A. It's very difficult to read. I'm 22 sorry. 862 1 Q. Directing your attention to -- are you 2 able to read it at all? 3 A. Not accurately, no. 4 Q. Directing your attention to Page 2 of 5 Appendix B, are you able to read that document? 6 A. Yes. I think I can, yes. 7 Q. In particular, where are you looking to 8 refresh your recollection? 9 A. Item 114, MCO Holdings. 10 Q. What does that indicate to you? 11 A. It shows a MAD ratio in December of 12 75 percent. 13 Q. And what ranking does that indicate? 14 A. No. 114. 15 Q. Out of how many? 16 A. Appears to be 130. 17 Q. Do you now recall that to be the case? 18 A. It seems correct. 19 MR. VEIS: Your Honor, just for the 20 record, I would move to admit this exhibit. 21 MR. KEETON: I cannot hear what you 22 said. 863 1 MR. VEIS: I said for the record, I 2 move to admit Exhibit T4073 into evidence. 3 MR. KEETON: Same objection as I 4 interposed to the other one. It's the same kind 5 of document. 6 THE COURT: Sustained. 7 MR. VEIS: Thank you, Your Honor. 8 Q. (BY MR. VEIS) Mr. De Remer? 9 A. Yes, sir. 10 Q. Do you have a recollection of the MAD 11 ratio of MCO Holdings or its affiliated companies 12 in April, 1985? 13 A. In April of '85, no, I don't. 14 Q. I have some documents that might 15 refresh your recollection. 16 Are there any documents that might 17 refresh your recollection? 18 A. Do you have the newsletter for that 19 month? 20 Q. Let the record reflect I'm handing the 21 witness a document that's been marked T4089. 22 Would you review that document, please? 864 1 A. Yes, sir. 2 Q. Does anything on that document refresh 3 your recollection as to the MAD ratio in April of 4 1985? 5 A. Appendix B has MCO Holdings ranked 115 6 with a MAD ratio of 76 percent. 7 Q. And does that refresh your recollection 8 as to the financial health of MCO Holdings at that 9 time? 10 A. I can't disagree with the newsletter. 11 Q. Thank you. 12 MR. VEIS: For the record, I move the 13 admission of this exhibit. I said, for the 14 record, Your Honor, I move the admission of 15 Exhibit T4089. 16 MR. KEETON: Same objection, Your 17 Honor. 18 THE COURT: Sustained. 19 MR. VEIS: May the record reflect that 20 I'm handing to the witness a series of exhibits. 21 One, a Drexel high-yield newsletter dated June, 22 1985, that's been marked T4096, a Drexel 865 1 high-yield newsletter that's been marked T4108 2 dated August, 1985, a Drexel high-yield newsletter 3 dated December, 1985, that's been marked T4139, a 4 Drexel newsletter dated February, 1986, that has 5 been marked Exhibit T4175, a Drexel high-yield 6 newsletter dated June, 1986, that's been marked 7 Exhibit T4207, a Drexel newsletter marked T4231 8 dated August, 1986, and a Drexel newsletter dated 9 October, 1986, which has been marked T4257. 10 Q. (BY MR. VEIS) Would you take a moment 11 and review those documents, Mr. De Remer. 12 MR. NICKENS: Your Honor, if Mr. Veis 13 will recommend that these are similar to the 14 others, make the offer. We'll make a similar 15 objection and we'd expect a similar result and we 16 could move on. 17 MR. VEIS: That's satisfactory to me, 18 Your Honor, if Mr. De Remer will indicate that 19 these are all high-yield newsletters and then I 20 have one question, one series of questions similar 21 to my previous ones and then I'll move on. 22 THE COURT: Well, let's identify them 866 1 and -- 2 Q. (BY MR. VEIS) Mr. De Remer, what was 3 the first one? 4096 is the first one I handed 4 you, sir? What is T4096? 5 A. June, '85. 6 Q. Is that a Drexel high-yield newsletter? 7 A. Yes. 8 Q. And was it published under similar 9 circumstances and given -- distributed in a 10 similar fashion as the previous Drexel high-yield 11 newsletters? 12 A. Yes. 13 Q. directing your attention to 14 Exhibit T4139. 15 A. December, '85, high-yield newsletter. 16 Q. And was that compiled in the same 17 fashion, published and distributed in the same 18 fashion as the previous high-yield newsletters 19 we've discussed? 20 A. Yes, it is. 21 Q. Directing your attention to 22 Exhibit T4175, what is that? 867 1 A. February, 1986, high-yield newsletter. 2 Q. Did that contain information compiled, 3 published, and distributed in the same fashion as 4 the previous high-yield newsletters we've 5 discussed? 6 A. Yes, it is. 7 Q. Turning to Exhibit T4207, was what is 8 that document? 9 A. June 1986 high-yield newsletter. It's 10 the same. 11 Q. And was that -- the information therein 12 compiled and the document published and 13 distributed in the same fashion as the previous 14 Drexel high-yield newsletters that we've 15 discussed? 16 A. Yes. 17 Q. And turning to Exhibit T4231, what is 18 that? 19 A. August, 1986, high-yield newsletter. 20 Q. And was the information therein 21 compiled and the document -- and distributed in 22 the same fashion as we have discussed previously? 868 1 A. Yes, it is. 2 Q. And, finally, T4257. 3 A. October, 1986, high-yield newsletter. 4 Q. And was that document compiled, 5 published, and distributed in the same fashion as 6 the Drexel high-yield newsletters we've previously 7 discussed? 8 A. Yes. 9 Q. Mr. De Remer, looking at T4257, do you 10 have a recollection of the MAD ratio of MCO 11 Holdings or MAXXAM Group in -- on or about 12 September 30, 1986? 13 A. I don't. 14 Q. Would this document refresh your 15 recollection? 16 A. Yes. 17 Q. Would you please review it and see if 18 your recollection is refreshed? 19 A. On Appendix B, Page 2, MAXXAM Group is 20 number 128 with a MAD ratio of 86 percent. 21 Q. And that's the third highest MAD ratio 22 on the list; is that correct? 869 1 A. Yes, that's correct. 2 Q. Okay. Do you now recall that that was 3 the case? 4 A. I have to rely on the document. 5 Q. Thank you. 6 MR. VEIS: Your Honor, for the record, 7 I move the admission of Exhibits T4096, T4108, 8 T4139, T41757, T4207, T4231, and T4257. 9 MR. KEETON: Same objection, Your 10 Honor. 11 THE COURT: Sustained. It does seem to 12 me that we have a witness here who can provide 13 some reliability to the figures that he's 14 testified to, but it's hard to say what all is 15 included in this document and it seems to me to 16 just put the document itself into the record puts 17 a lot of stuff in there of dubious reliability and 18 I sustain the objection. 19 MR. VEIS: Thank you, Your Honor. 20 Q. (BY MR. VEIS) Could you explain the 21 significance of an 86 percent MAD ratio? 22 A. It's at the lower end of the credit 870 1 spectrum. It's a weaker high-yield credit as 2 measured by MAD ratio. 3 Q. A weak credit? 4 A. Yes. 5 Q. And that would be in part because the 6 company was very highly leveraged? 7 A. Yes. 8 Q. And so, as a consequence, what -- what 9 are the consequences of that sort of ratio in 10 selling bonds issued by that company? 11 A. They sell at dramatically higher yields 12 and steeper discounts to their face value. 13 Q. And that's because they are perceived 14 in the marketplace to be a weaker credit; is that 15 correct? 16 A. A weaker end of the credit spectrum. 17 Q. So, in order to sell those, you had to 18 stress other aspects of the company; is that 19 correct? 20 A. Yes. 21 Q. And what were those? 22 A. Well, I mean, you had subsidiaries that 871 1 were large. I'm not sure -- I think -- I really 2 couldn't comment going back to '86, but you'd 3 comment on management of subsidiaries. You're 4 compensated for the risk with the extra yield. 5 But in that specific time frame, I don't remember 6 enough. 7 Q. Did you have to stress the future 8 prospects of the company to cover that large debt? 9 A. Yes, of course. 10 Q. And how did you do that? 11 A. I'd have to go back and reconstruct it 12 11 years ago. 13 MR. VEIS: May I have a moment, Your 14 Honor? 15 THE COURT: Yes. 16 Q. (BY MR. VEIS) Now, where do you 17 obtain the information that you used when you were 18 attempting to sell high-yield bonds for MAXXAM? 19 A. In the case of a new issue, it would be 20 prospectus, prior research reports, road shows, in 21 respect to an existing issue. It would be 22 financial reporting, market levels, a number of 872 1 different things. 2 Q. And did you obtain information from the 3 corporate finance department? 4 A. They were the ones that structured and 5 provided the information for use on the new issue 6 side, yes. 7 Q. So, would you have obtained information 8 from Art Bilger? 9 A. Not necessarily directly, but his 10 people. 11 Q. You would have obtained information 12 from -- prepared under his supervision; is that 13 correct? 14 A. Yes. 15 Q. And the same goes with John Kissick; is 16 that correct? 17 A. I don't remember the circumstances. 18 Q. Now, I take it that you did not attend 19 road shows; is that correct? 20 A. If they were in Los Angeles and I had 21 the time, I would attend the road show. 22 Q. But normally it was the corporate 873 1 finance people that attended road shows; is that 2 correct? 3 A. That's correct. 4 Q. And those were the people that worked 5 for Mr. Bilger and Mr. Kissick? 6 A. That's correct. 7 Q. Is any sort of -- was there any sort of 8 Chinese wall at Drexel between the people in 9 corporate financial and the people on the sales 10 force? 11 A. Yes. 12 Q. And what was the nature of that? 13 A. They were in a separate part of the 14 building with Los Angeles that only they could 15 operate. You couldn't go there. 16 Q. Was Art Bilger one of the corporate 17 finance people who underwrote MAXXAM junk -- I'm 18 sorry -- MAXXAM high-yield bonds? 19 A. He was the banker on at least the 20 majority of the deals, if I remember correctly. 21 Q. Who were the major purchasers of junk 22 bonds? 874 1 A. In what period? 2 Q. Through the course of your sales of -- 3 sales experience. 4 A. In my experience, the major purchases I 5 had were mutual funds primarily and some insurance 6 companies. 7 Q. Did savings and loans purchase 8 high-yield bonds? 9 A. They did. I didn't have any savings 10 and loans accounts. 11 Q. Did Mr. Bilger participate in the sales 12 of MCO Holdings' high-yield bonds? 13 A. In the actual sales, no. 14 Q. Did he participate in the road shows? 15 A. Some of them, yes. 16 Q. Did MCO Holdings or Federated 17 Development purchase high-yield bonds? 18 A. Not to my knowledge. 19 Q. Do you know why not? 20 A. No, I don't. 21 Q. Do you know whether United Saving 22 Association of Texas was a major purchaser of 875 1 high-yield bonds? 2 A. It was disclosed in an earlier 3 deposition that they were. 4 Q. Do you know that of your own knowledge? 5 A. Not of my own knowledge. 6 Q. Did you ever have any contact with 7 anyone at United Savings of Texas? 8 A. No. 9 Q. Did Drexel hold periodic high-yield 10 bond conferences? 11 A. Yearly. 12 Q. Who were the invitees to such 13 conferences? 14 A. The issuers of high-yield debt, 15 potential issuers of high-yield debt, buyers of 16 high-yield debt, and potential buyers of 17 high-yield debt. 18 Q. What was the purpose of those 19 conferences? 20 A. To acquaint them with the buyers and 21 sellers, to make up-going, current presentations 22 to bring clients up-to-date, that kind of stuff. 876 1 Q. Who made the decision as to who was to 2 be invited to those bond conferences? 3 A. Many people. The high-yield bond desk, 4 Mr. Milken, the corporate finance guys made 5 suggestions. 6 Q. Would a major -- I'm sorry. Would a 7 major purchaser of savings -- I'm sorry -- a major 8 purchaser of high-yield bonds be invited as a 9 matter of course? 10 A. As a matter of course, yes. 11 Q. Do you know whether Mr. Hurwitz 12 attended any high-yield bond conferences at 13 Drexel? 14 A. I believe he did, yes. 15 Q. And was he invited as an attendee from 16 United Saving Association of Texas? 17 A. I don't know. 18 Q. Did Dr. Barry Munitz attend high-yield 19 bond conferences? 20 A. I don't recall. 21 Q. Do you know whether Eugene Stodart 22 attended high-yield bond conferences? 877 1 A. I don't know. 2 Q. And whether Joe Phillips attended 3 high-yield bond conferences? 4 A. I don't know. 5 Q. Do you know whether Ronald Heubsch 6 attended high-yield bond conferences? 7 A. I don't know. 8 Q. Was it common in selling high-yield 9 bonds to stress recent acquisitions and the 10 potential growth as a selling point? 11 A. Is it common? Let me put this way. 12 It's not unusual depending on the issuer. 13 Q. What sort of issuer would one stress 14 recent acquisitions with? 15 A. One that had done some acquisitions, 16 one that had demonstrated the ability to continue 17 to do acquisitions in its management team. 18 MR. VEIS: I have nothing further, Your 19 Honor. 20 THE COURT: Mr. Keeton, are you going 21 to cross-examine? 22 MR. KEETON: Yes, Your Honor. 878 1 THE COURT: All right. Proceed. 2 MR. KEETON: May it please the court. 3 4 5 CROSS-EXAMINATION 6 7 Q. (BY MR. KEETON) Mr. De Remer, you did 8 not negotiate the fees or the arrangements between 9 issuers of high-yield bonds and the corporate 10 finance section of Drexel, did you? 11 A. No. 12 Q. And as you've just told counsel, there 13 was a Chinese wall behind locked doors. And, so, 14 that was all done outside of your presence and 15 without your knowledge? 16 A. Yes, sir. 17 Q. And, therefore, would it be fair to 18 conclude that you know of no arrangement that said 19 that MAXXAM got some sort of favored treatment in 20 the banking area, corporate finance area of Drexel 21 because USAT bought high-yield bonds from Drexel? 22 Do you know anything about that? 879 1 A. No, sir. 2 Q. Have you ever heard it said that that's 3 why MAXXAM got financing from Drexel? 4 A. Have I heard it said? No. 5 Q. In the early and mid-Eighties, how many 6 people would Mr. Mike Milken have reporting to him 7 in your estimate? Can you give me an estimate? 8 A. Reporting to him? 9 Q. Yeah. 10 A. Wow. A hundred. 11 Q. Maybe more? 12 A. Could have been. 13 Q. You said something about -- just to 14 clear it up -- that MAXXAM or MCO did leverage 15 buy-outs. 16 Don't you mean they used leverage as 17 opposed to an LBO which has a more specific 18 meaning? 19 A. Yes. I misspoke. They used leverage 20 to acquire businesses. 21 Q. You did sell MAXXAM or some of its 22 affiliated companies high-yield bonds to certain 880 1 of your customers, didn't you? 2 A. Yes, sir. 3 Q. Any of those bonds ever default? 4 A. No, sir. 5 Q. Do you know anything about how Form 13G 6 gets prepared and filed, Mr. De Remer? You were 7 shown some of those, remember, where it showed the 8 number of shares owned? 9 A. I don't know how it's done, no. 10 Q. And it would appear that it was done 11 out of the New York legal office. 12 Were you ever called to work with them 13 on preparation of a 13G for UFG or any other 14 company? 15 A. No, sir. The first time I saw that 16 document was in a deposition a couple years ago. 17 Q. When the government showed it to you? 18 A. Yes, sir. 19 Q. And that was a deposition they took 20 without anyone else present other than you and 21 your lawyer, right? 22 A. That's correct, sir. 881 1 Q. And, to your recollection, were you 2 ever asked to review the accuracy of any 13G filed 3 by Drexel before it was filed? 4 A. No, sir. 5 Q. You were never asked; is that correct? 6 A. Yes, sir. 7 Q. You made a few -- gave a few opinions 8 on what kind of position Drexel might take as a 9 market maker. 10 Did Drexel also buy and sell shares for 11 its own account without being a market maker? 12 A. Probably, but I don't know for sure. 13 Q. Is that outside the area that you 14 worked in? 15 A. It would be, yes. 16 Q. Okay. So, in trying to assess whether 17 the position in UFG which may have been roughly 18 five or $6 million was a large or small one for 19 Drexel, do you have any ability to assess that? 20 A. For the firm as a whole, no. 21 Q. And you've made the statement you 22 assumed that maybe Michael Milken would be 882 1 consulted before acquisition of shares of UFG. 2 Do you have any actual recollection or 3 knowledge of that? 4 A. No, sir. 5 Q. And there were others who could have 6 authorized that other than Mr. Milken, weren't 7 there? 8 A. Probably. 9 Q. The -- I guess I've got to ask about it 10 because we've been talking about the MAD ratio. 11 Were you the person or did you perform 12 the calculations that went into any of those 13 numbers in front of you? 14 A. No, sir. 15 Q. And is the MAD ratio actually whether a 16 company is healthy or not healthy? 17 A. It's a measure of relative health. 18 Q. It's a measure of relative leverage, 19 isn't it? 20 A. Yeah. 21 Q. It's not necessarily a measure of 22 health, is it? 883 1 A. Relative leverage, I think, is a better 2 term, yes. 3 Q. You're not actually a stock analyst as 4 such, are you? 5 A. No, sir. 6 Q. And you don't hold yourself out as a 7 stock analyst, do you? 8 A. No, sir. 9 Q. Okay. 10 MR. KEETON: I have no other questions, 11 Your Honor. Thank you. 12 THE COURT: Do the other respondents 13 have questions? 14 MR. EISENHART: I have one or two, Your 15 Honor. 16 THE COURT: All right, Mr. Eisenhart. 17 18 19 EXAMINATION 20 21 Q. (BY MR. EISENHART) Mr. De Remer, you 22 mentioned that in your capacity as a high-yield 884 1 bond salesman you sold issues underwritten by 2 Drexel on the primary market; is that correct? 3 A. In the new issue market, yes. 4 Q. And I think you mentioned that in the 5 secondary market you would also sell high-yield 6 bond issues that had been underwritten by other 7 investment banking firms; is that correct? 8 A. Underwritten or created in other ways. 9 Some debt is created through exchange offers. 10 Some debt is created through an acquisition. 11 Q. So, if I was a customer coming to you 12 as a Drexel salesman, I could buy from you both a 13 Drexel underwritten bond or a bond underwritten by 14 someone else; is that right? 15 A. In the secondary market, yes. 16 Q. And was that true of other firms that 17 sold high-yield bonds as well, that they would 18 sell -- they would sell bonds both in the primary 19 and secondary market? 20 A. Yes, sir. 21 Q. And so, I could go to one of your 22 competitors, for example, and I could buy in the 885 1 secondary market a bond that had been underwritten 2 by Drexel; is that correct? 3 A. Wouldn't get as good a price. But you 4 could, yes. 5 Q. Some days I'm smarter than others? 6 A. Right. 7 Q. So, there was an established secondary 8 market for these high-yield bonds? 9 A. Yes, sir. 10 Q. You were shown a number of collections 11 of trade tickets involving trades of both UFG and 12 MCO securities. 13 Do you have any idea whether those 14 collections you were shown were complete or 15 comprehensive for the periods of time they appear 16 to cover? 17 A. No, I don't. 18 Q. And you have no way of determining that 19 from what's been put in front of you today? 20 A. No, sir. 21 Q. Mr. Veis asked you whether people who 22 bought large amounts of high-yield bonds were 886 1 invited to the high-yield bond conference. 2 Would the chairman and C.E.O of a 3 company that issued large amounts of high-yield 4 bonds generally be invited to that high-yield bond 5 conference? 6 A. That's correct. 7 MR. EISENHART: Thank you, 8 Mr. De Remer. I don't have any other questions. 9 THE COURT: Any other questions over 10 here? 11 MR. BLANKENSTEIN: No questions, Your 12 Honor. 13 MR. VILLA: No, Your Honor. 14 THE COURT: Any redirect? 15 16 RE-DIRECT EXAMINATION 17 18 Q. (BY MR. VEIS) Mr. De Remer, Drexel 19 was a large underwriter of high-yield bonds, junk 20 bonds; isn't that correct? 21 A. Yes, sir. 22 Q. And would you tell me again who are the 887 1 major purchasers of high-yield bonds over the 2 course of the years? 3 A. The major purchasers of high-yield 4 bonds that I saw primarily were mutual funds and 5 insurance companies. Other purchasers, money 6 managers, savings and loans. I think that's about 7 it. 8 Q. Could Drexel have had as large a 9 percentage of the junk bond market as it did if 10 mutual funds, insurance companies, and savings and 11 loans had not purchased junk bonds? 12 A. I'm sorry. Could you phrase that 13 again, please? 14 Q. I said could Drexel have had as large a 15 percentage share of the market for high-yield 16 bonds as it did if mutual funds, insurance 17 companies, and savings and loans had not purchased 18 them? 19 A. You had to sell them. I'm sorry. I 20 don't follow your question. 21 MR. VEIS: Thank you, Your Honor. 22 Nothing further, Your Honor. 888 1 THE COURT: If there are no more 2 questions, you are excused, Mr. De Remer. 3 Are there any other matters we should 4 consider before adjournment? 5 MR. GUIDO: Your Honor, there is one 6 more matter. I understand yesterday a question 7 was raised about whether I had acted 8 inappropriately by referring to a case that I 9 hadn't given to the witness prior to that in court 10 and I didn't -- 11 THE COURT: Oh, I didn't mean to imply 12 that. I just wanted to see it. 13 MR. GUIDO: Yes, Your Honor. I have a 14 copy here for you and for the clerk and for 15 opposing counsel. 16 THE COURT: Thank you. 17 MR. VEIS: There is one further matter, 18 Your Honor. And maybe it's a scheduling issue. 19 It poses, I think, sort of an awkward situation. 20 I believe the next witness scheduled to be called 21 is Mr. Schwartz, and we have another witness. We 22 had anticipated that Mr. Schwartz would go on 889 1 today, but obviously at 4:30, with Your Honor's 2 mention of adjournment, I assume Mr. Schwartz is 3 not, which means that presumably he will begin his 4 testimony tomorrow morning. 5 We have a witness who is flying in in 6 the morning from New York. He will be here and 7 will arrive at the airport at about 10:30 and 8 probably be downtown sometime around 1:30 or 2:00. 9 He's involved in the securities industry in New 10 York and has already indicated to me that he's 11 been highly inconvenienced by having to come down 12 here. Certainly, he's willing to respond to 13 subpoena, but I would like to accommodate him if 14 possible. We had discussed among counsel whether 15 it would be appropriate to interrupt the 16 examination of Mr. Schwartz tomorrow to put 17 Mr. Deignan. Mr. Eisenhart, I believe, is not 18 favorably disposed toward that proposal. But I 19 lay it before Your Honor that we would certainly 20 like to accommodate Mr. Deitan's schedule if it's 21 at all possible. And if Your Honor is willing to 22 do that, we would propose to put him on when he 890 1 comes and allow Mr. Schwartz a brief rest during 2 his testimony. I expect Mr. Deignan will be an 3 hour at the most. 4 MR. EISENHART: As I understand it, 5 Mr. Deignan is flying in tomorrow. So, you can't 6 put him on first. 7 MR. VEIS: I can't put him on first, 8 that's correct, because he won't be here until 9 probably 11:30. 10 MR. NICKENS: How long do you 11 anticipate taking with Mr. Schwartz? 12 MR. VEIS: Well, I think the 13 thinking -- of course, I won't be questioning 14 Mr. Schwartz. I think Mr. Rinaldi will. The 15 thinking was it will be -- previously, we thought 16 we would finish Mr. Schwartz this afternoon and 17 carrying over to sometime in the morning that you 18 would have cross-examination and we had expected 19 Mr. Deignan would come on approximately, you know, 20 noon or 1:00 o'clock or 2:00 so he could make his 21 plane and get back to New York. 22 MR. NICKENS: Your Honor, I would 891 1 propose that we start with Mr. Schwartz. Let's 2 see how we're going. If it appears that we would 3 not be able to finish him and could get an hour or 4 so with Mr. Deitman, I believe we'd be amenable to 5 that, but let's start with Mr. Schwartz and see if 6 we can finish him. 7 THE COURT: All right. Well it, sounds 8 like we should be able to finish Mr. Schwartz by 9 noon tomorrow. 10 MR. GUIDO: Your Honor, I'm sorry. 11 I've heard something different than what I heard 12 when I was negotiating a schedule with opposing 13 counsel. I think that Mr. Nickens and I, we're 14 talking about three and a half hours a side for 15 Mr. Schwartz. I was told that Mr. Schwartz was 16 going to be on for a great deal of time on 17 cross-examination. So, I don't think that it is 18 realistic to think we will be able to finish that 19 quickly. Now, the schedule has altered since 20 then, but I think it's important for the Court to 21 know what the discussions have been between 22 counsel. 892 1 MR. NICKENS: That's true, Your Honor, 2 although virtually all of those discussions have 3 changed in one degree or another. All I'm 4 suggesting is that it is my belief that if we 5 start with Mr. Schwartz and proceed expeditiously, 6 there is a chance that we will finish him. If it 7 appears that that is not the case, then our side 8 of the table is willing to consider interrupting 9 his testimony in order to accommodate Mr. Deitman, 10 who is a brief witness, so that we could then 11 resume Mr. Schwartz. If that is what appears has 12 happened -- 13 THE COURT: All right. We'll try that. 14 MR. VEIS: Thank you. 15 THE COURT: We'll start with 16 Mr. Schwartz and if the other witness should 17 interrupt, we'll see how long that takes. If we 18 can go back to Mr. Schwartz tomorrow or next week. 19 But we'll see how it goes. 20 MR. NICKENS: Mr. Schwartz -- 21 MR. EISENHART: Your Honor, I can make 22 no representations at this point to OTS about 893 1 Mr. Schwartz' availability next week. I mean, 2 he's been sitting over there all afternoon. We 3 expected he was going on this afternoon. We never 4 expected that we were going to go on with this 5 length with Mr. De Remer and, you know, he's -- he 6 was available today and tomorrow. I don't know if 7 he's available next week. We'll find out. 8 MR. NICKENS: We don't have to air all 9 this. Let's start tomorrow, do our best, and 10 things will work out. 11 THE COURT: All right. We'll adjourn 12 until 9:00 o'clock tomorrow. 13 MR. VEIS: Thank you, Your Honor. 14 15 (Whereupon at 4:32 p.m. the 16 proceedings were recessed.) 17 18 19 20 21 22 894 1 2 (Whereupon at 5:07 p.m. 3 the proceedings were recessed.) 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 895 1 STATE OF TEXAS COUNTY OF HARRIS 2 REPORTER'S CERTIFICATION 3 TO THE TRIAL PROCEEDINGS 4 I, Marcy Clark, the undersigned Certified 5 Shorthand Reporter in and for the State of Texas, 6 certify that the facts stated in the foregoing 7 pages are true and correct to the best of my ability. 8 I further certify that I am neither 9 attorney nor counsel for, related to nor employed 10 by, any of the parties to the action in which this 11 testimony was taken and, further, I am not a 12 relative or employee of any counsel employed by 13 the parties hereto, or financially interested in 14 the action. 15 SUBSCRIBED AND SWORN TO under my hand 16 and seal of office on this the 25th day of 17 September, 1997. 18 ____________________________ MARCY CLARK, CSR 19 Certified Shorthand Reporter In and for the State of Texas 20 Certification No. 4935 Expiration Date: 12-31-97 21 22 896 1 STATE OF TEXAS COUNTY OF HARRIS 2 REPORTER'S CERTIFICATION 3 TO THE TRIAL PROCEEDINGS 4 I, Erica Davis, the undersigned Certified 5 Shorthand Reporter in and for the State of Texas, 6 certify that the facts stated in the foregoing 7 pages are true and correct to the best of my ability. 8 I further certify that I am neither 9 attorney nor counsel for, related to nor employed 10 by, any of the parties to the action in which this 11 testimony was taken and, further, I am not a 12 relative or employee of any counsel employed by 13 the parties hereto, or financially interested in 14 the action. 15 SUBSCRIBED AND SWORN TO under my hand 16 and seal of office on this the 25th day of 17 September, 1997. 18 _____________________________ ERICA DAVIS, CSR 19 Certified Shorthand Reporter In and for the State of Texas 20 Certification No. 6479. Expiration Date: 12-31-98 21 22 897 1 STATE OF TEXAS COUNTY OF HARRIS 2 REPORTER'S CERTIFICATION 3 TO THE TRIAL PROCEEDINGS 4 I, Shauna Foreman, the undersigned Certified 5 Shorthand Reporter in and for the State of Texas, 6 certify that the facts stated in the foregoing 7 pages are true and correct to the best of my ability. 8 I further certify that I am neither 9 attorney nor counsel for, related to nor employed 10 by, any of the parties to the action in which this 11 testimony was taken and, further, I am not a 12 relative or employee of any counsel employed by 13 the parties hereto, or financially interested in 14 the action. 15 SUBSCRIBED AND SWORN TO under my hand 16 and seal of office on this the 25th day of 17 September, 1997. 18 _____________________________ SHAUNA FOREMAN, CSR 19 Certified Shorthand Reporter In and for the State of Texas 20 Certification No. 3786 Expiration Date: 12-31-98 21 22