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 dat