898 1 UNITED STATES OF AMERICA Before the 2 OFFICE OF THRIFT SUPERVISION DEPARTMENT OF THE TREASURY 3 In the Matter of: ) 4 ) UNITED SAVING ASSOCIATION OF ) 5 TEXAS, Houston, Texas, and ) ) 6 UNITED FINANCIAL GROUP, INC., ) Houston, Texas, a Savings ) 7 and Loan Holding Company ) ) OTS Order 8 MAXXAM, INC., Houston, Texas, ) No. AP 95-40 a Diversified Savings and ) Date: 9 Loan Holding Company ) Dec. 26, 1995 ) 10 FEDERATED DEVELOPMENT CO., ) a New York Business Trust, ) 11 ) CHARLES E. HURWITZ, ) 12 Institution-Affiliated Party ) and Present and Former Director ) 13 of United Savings Association ) of Texas, United Financial Group,) 14 and/or MAXXAM, Inc.; and ) ) 15 BARRY A. MUNITZ, JENARD M. GROSS,) ARTHUR S. BERNER, RONALD HUEBSCH,) 16 and MICHAEL CROW, Present and ) Former Directors and/or Officers ) 17 of United Savings Association of ) Texas, United Financial Group, ) 18 and/or MAXXAM, Inc., ) ) 19 Respondents. ) 20 TRIAL PROCEEDINGS FOR 9-26-97 21 22 899 1 2 PAUL SCHWARTZ Examination by Mr. Rinaldi 3 JOHN DEIGNAN 4 Examination by Mr. Veis Cross-Examination by Mr. Eisenhart 5 Cross-Examination by Mr. Villa Cross-Examination by Mr. Keeton 6 Cross-Examination by Mr. Nickens Redirect-Examination by Mr. Veis 7 PAUL SCHWARTZ 8 Examination (Continued) by Mr. Rinaldi 9 10 11 12 13 14 15 16 17 18 19 20 21 22 900 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 and BETTINA M. LAWTON, Esquire 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 22 901 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 PAUL DUEFFERT, Esquire of: Williams & Connolly 8 725 Twelfth Street, N.W. Washington, D.C. 20005 9 (202) 434-5000 10 OTS COURT: 11 HONORABLE ARTHUR L. SHIPE Administrative Law Judge 12 Office of Financial Institutions Adjudication 1700 G Street, N.W., 6th Floor 13 Washington, D.C. 20552 Jerry Langdon, Judge Shipe's Clerk 14 REPORTED BY: 15 Ms. Marcy Clark, CSR 16 Ms. Shauna Foreman, CSR 17 18 19 20 21 22 902 1 P-R-O-C-E-E-D-I-N-G-S 2 3 THE COURT: The hearing will come to 4 order. 5 Are there any preliminary matters? 6 MR. EISENHART: Not that I know of, 7 Your Honor. 8 MR. GUIDO: No, Your Honor. 9 THE COURT: If not, we will begin with 10 the witness. 11 MR. EISENHART: Somebody just asked me 12 if we wanted to deal with the schedule. I suggest 13 we simply review that at the end of the day. 14 MR. NICKENS: Your Honor, there is some 15 discussion about -- we are scheduled to go through 16 noon on Wednesday, and there is some discussion 17 about not -- about taking -- about concluding this 18 part of the hearing on the end of the day on 19 Tuesday, and we need to get some decision on that 20 in order for those people that are coming from out 21 of town to make their travel plans, obviously, and 22 allow them to go back home a day earlier. But 903 1 that's -- I don't know where that stands. 2 MR. GUIDO: May I suggest that counsel 3 deal with that at the luncheon break? I don't 4 think it's an issue. I think that there will be 5 plenty of witnesses for us to run through mid-day 6 on Wednesday. 7 THE COURT: All right. Does OTS have a 8 witness now? 9 MR. RINALDI: We do, Your Honor. I'd 10 like to call to the stand Mr. Paul Schwartz. He's 11 an employee of MAXXAM and has been for several 12 years and has agreed to adjust his schedule to 13 meet our demands. 14 THE COURT: Would you approach and be 15 sworn, please? 16 17 PAUL SCHWARTZ, 18 19 called as a witness and having been first duly 20 sworn, testified as follows: 21 22 THE COURT: Be seated, please. 904 1 2 EXAMINATION 3 4 Q. (BY MR. RINALDI) Let me deal with a 5 few preliminaries, Mr. Schwartz. 6 First of all, I'm going to be handing 7 you three copies of most documents if they haven't 8 been put into evidence, in which case it will be 9 incumbent upon you to hand two copies, one onto 10 the judge and one to Mr. Langdon at the end. In 11 the event the document has been placed into 12 evidence, you will only get one copy. That's your 13 copy and you should keep it. 14 Would you state your full name for the 15 record, sir? 16 A. My name is Paul Norman Schwartz. 17 Q. Mr. Schwartz, can you tell the Court 18 how you are presently employed? 19 A. I am presently employed by MAXXAM, Inc. 20 Q. And in what capacity, sir? 21 A. I am executive vice president and chief 22 financial officer of MAXXAM, Inc. 905 1 Q. And how long have you held those 2 positions, sir? 3 A. I've held that position for 4 approximately three years, I believe. 5 Q. And when did you first become employed 6 by either MAXXAM or its predecessor, MCO Holdings 7 or its predecessor, McCullough Oil, or its 8 predecessor? 9 A. I originally became an employee of 10 McCullough Oil Corporation, I believe was the name 11 at the time, in January of 1980. 12 Q. And in what capacity would you have 13 been employed by McCullough Oil? 14 A. I don't recall the exact title at that 15 point in time, but I was employed to work on 16 matters relating to geothermal activities the 17 company was then participating in. 18 Q. Okay. And just so everyone 19 understands, could you just give us a brief sketch 20 of your educational background so we don't think 21 you're a geothermal engineer? 22 A. I attended New York University and I 906 1 graduated in 1967 with a major in English and I 2 attended Columbia University Business School with 3 an MBA in finance in 1970. 4 Q. And after you graduated from Columbia 5 Business School, did you pursue a career in 6 English or in finance? 7 A. After I graduated from Columbia, I 8 pursued a career in finance. 9 Q. Okay. And what, just briefly, was your 10 employment in that regard? 11 A. In 1970 I moved to Washington D.C. 12 where I was employed by the Federal Home Loan Bank 13 system in the office of finance where I managed 14 portfolios of the FSIC and the home loan bank 15 system and the Federal Home Loan Mortgage 16 Corporation and also served as an analyst for a 17 period of time. 18 Q. When you say you managed portfolios, 19 what do you mean by that? 20 A. At that time, as best as I can 21 remember, there were approximately $6 billion of 22 government securities in a portfolio that related 907 1 to the Federal Savings and Loan Insurance 2 Corporation. Several billion dollars of monies 3 that the Federal Home Loan Bank system had for 4 liquidity purposes, and I believe a hundred or 5 $200 million of the Federal Home Loan Mortgage 6 Corporation, and I worked for the chief portfolio 7 manager whose job was to secure the best 8 investment return he could from that portfolio -- 9 those portfolios. 10 Q. And how long did you remain at that 11 position, sir? 12 A. I was in that position for 13 approximately one year. 14 Q. And after you left that position, where 15 did you go? 16 A. I believe I then became the analyst for 17 the year that I spoke about. I'm not sure which 18 came first. I was the analyst for a year and then 19 I did the portfolio management for a year, and 20 then I left to join the Student Loan Marketing 21 Association, which was a government-sponsored 22 private corporation recently at that time 908 1 authorized by Congress. 2 Q. I'm sorry. I didn't mean to interrupt. 3 Continue. 4 A. And I stayed there until the 1980 5 period that you asked me about earlier when I 6 joined McCullough Oil in Los Angeles. 7 Q. And when you were with the Student Loan 8 Marketing Group, what was the nature of the work 9 that you performed there? 10 A. At the time, that was an institution 11 that had a charter but no assets or business and I 12 left with the gentleman who was the first 13 president of that institution from the Federal 14 Home Loan Banks to join the Student Home Loan 15 Marketing Association, and we started up the 16 operations of the student loan marketing 17 association and my jobs were primarily financial, 18 financial planning, financial analysis, treasury 19 activities, and I left there as the chief 20 financial officer of the Student Loan Marketing 21 Association. 22 Q. And when you joined McCullough Oil, you 909 1 indicated you weren't quite sure of the title that 2 you had when you got there. 3 Can you just describe for us sort of 4 the nature of the activities you were involved in? 5 A. Well, I had been recruited by a former 6 board member of the Student Loan Marketing 7 Association, a man named George Kozmetsky, to go 8 to California to join in what the company was then 9 doing in geothermal and I remember asking George, 10 "Well, what do I know about that? How can I 11 contribute?" 12 And his answer was, "What does anybody 13 know or can contribute to that?" 14 And, so, when I went out there, my 15 activities were primarily of an analytical nature 16 trying to understand what it was that the company 17 was then engaged in in respective geothermal 18 activities. 19 Q. Was the company undergoing a 20 transformation at that point in time from the 21 geothermal activity to other areas? 22 A. At that point in time, the company had 910 1 historically been involved in real estate on the 2 one hand and certain types of natural resources 3 activity on the other hand. And there was some 4 effort underway to form a new company that was 5 engaged primarily in natural resources that would 6 be separate, another company that would be engaged 7 primarily in real estate and other activities. 8 Q. And what were the nature of the 9 activities that you were -- you undertook when you 10 went to work for McCullough Oil? 11 A. Initially, it was geothermal that I 12 mentioned. 13 Q. And when you say "geothermal," you were 14 analyzing some aspect of the geothermal industry? 15 A. First tried to understand the industry. 16 Then trying to understand something about what a 17 geothermal resource was, how steam came from the 18 ground. 19 Q. Okay. 20 A. How hot water came from the ground. 21 Then trying to put that together into models that 22 suggested how those activities might perform over 911 1 periods of time and trying to understand the -- if 2 financing could be brought to those activities and 3 if at the end of the day they would be profitable. 4 Q. And did your duties over time begin to 5 change at McCullough Oil? 6 A. They were changing all the time, yes. 7 Q. Okay. And bringing you forward to 8 about the period of, say, 1983, what would you 9 have been doing at McCullough Oil? Or by then it 10 would have been MCO Holdings; is that correct? 11 A. I believe that's right. The name did 12 change from McCullough Oil to MCO or MCO Holdings 13 in the early Eighties, but I don't recall exactly 14 when. And I was involved in a variety of 15 different analytical projects. I had worked on 16 the geothermal. I had been an employee of the 17 resources company, the natural resources company, 18 MCO resources, for about a year. By 1983, if I 19 recall correctly, I don't believe I was then an 20 employee of the resources company. I was an 21 employee of MCO Holdings in Los Angeles. 22 Q. And who did you report to at or about 912 1 that period of time in terms of your employment? 2 A. My best recollection is that I reported 3 at that point in time to Bill Leone, L-e-o-n-e, 4 who was at that time, if I remember correctly, the 5 president of MCO Holdings. 6 Q. And was he then the chief executive 7 officer of MCO Holdings at that period of time, or 8 did he report to someone else? 9 A. I don't know who had the title of chief 10 executive officer, if anyone. He may have been. 11 I don't remember. 12 Q. Do you remember who the chairman of the 13 board would have been of MCO Holdings at that 14 point in time? 15 A. Yes. I believe that was Mr. Hurwitz. 16 Q. So that Mr. Leone would have reported 17 to Mr. Hurwitz and you would have reported to Mr. 18 Leone? 19 A. I don't know who Mr. Leone formally 20 reported to on a formal basis; but on a practical 21 basis, yes, I think that's correct. 22 Q. Now, are you familiar with the entity 913 1 known as Federated Development Corporation? 2 A. I know the name, yes. 3 Q. Okay. Have you had any involvement 4 with Federated Development Corporation in the 5 sense of employment with them? 6 A. No, never. 7 Q. So that throughout your employment with 8 MCO or MAXXAM you've always been employed with the 9 MAXXAM/MCO side? 10 A. Yes. 11 Q. What is your understanding of the 12 relationship between Federated Development 13 Corporation and MCO Holdings and MAXXAM? 14 A. I don't have a very good understanding 15 of the relationship between the Federated 16 companies because I believe there are several -- 17 and MAXXAM -- other than in the general sense that 18 the Federated companies own a significant number 19 of shares in MCO at that time and MAXXAM today. 20 Q. Okay. Now, in connection with your 21 work for Mr. Leone, were you involved in doing 22 special projects for Mr. Leone? 914 1 A. Yes. 2 Q. And what would those special projects 3 have entailed? 4 A. They were a wide-ranging number of 5 things. Everything from taking responsibility for 6 what had been the personnel department to selling 7 certain assets of the company to analyzing certain 8 aspects of the activities of the that the company 9 was then engaged in or contemplating becoming 10 engaged in. 11 Q. Was MCO at this point in time engaged 12 in efforts to acquire other businesses? 13 A. I know that MCO had investments in 14 certain businesses. I don't know whether they 15 were involved in efforts to acquire them. 16 Q. Well, in connection with those 17 investments in other businesses, were you called 18 upon to analyze the potential investments in other 19 business for MCO? 20 A. I don't remember specifically at that 21 time, in the early 1980s, analyzing whether or not 22 we should make investments in anything specific, 915 1 but I might have. I just don't recall any 2 specifics at this point in time. 3 Q. You indicate you don't recall doing it 4 at that time. Subsequent to that period of time, 5 did you engage in those kinds of activities on 6 behalf of MCO Holdings? 7 A. Yes, there did come a time. 8 Q. Okay. And can you just identify some 9 of the activities you were involved in analyzing? 10 A. In the late portion of the 1980s in 11 connection with the acquisition of Kaiser 12 Aluminum, I was certainly involved at that time in 13 analyzing some of the acquisition activities. 14 Q. Did there come a time when MCO Holdings 15 acquired an interest in something known as Pacific 16 Lumber Company? 17 A. Yes. 18 Q. And did you have any involvement in 19 analyzing the acquisition of the Pacific Lumber 20 Company acquisition? 21 A. I recall seeing others who had done 22 some analysis and being asked to make comments; 916 1 but, no, that was an activity that was conducted, 2 as I understood it, by another company. 3 Q. And during the later part of 1980s, did 4 MCO Holdings and its successor, MAXXAM Group, Inc. 5 have occasion to acquire high-yield bonds in the 6 capital markets? I'm sorry. Have occasion to 7 issue high-yield bonds for sale in the capital 8 markets? 9 A. My recollection is that both MCO 10 Holdings, Inc. and MAXXAM Group, Inc. during the 11 mid-1980s did issue high-yield bonds, but I think 12 you said that MAXXAM Group, Inc. was successor to 13 MCO Holdings and I don't remember it that way. 14 Q. Okay. I'm sorry. I misspoke. How do 15 you remember it, just so the record's clear? 16 A. There came a time in the mid-or late 17 1980s that there was a merger, if I recall 18 correctly, between MCO Holdings or its successor 19 and MAXXAM Group, Inc. or MAXXAM Group. 20 Q. And in connection with -- and did you 21 continue to work for which entity? Or you 22 continued to work at the merged entity? Is that 917 1 it? 2 A. Yes. 3 Q. And the merged entity would have been 4 named what? 5 A. I think at the time the companies 6 merged, the name changed of the parent company 7 and, if I remember correctly, it changed to 8 MAXXAM, Inc. 9 Q. Okay. And I had put in MAXXAM Group, 10 Inc. and that was what confused you? 11 A. Yes, sir. 12 Q. Okay. I understand now. Okay. Then 13 in connection with your work at MCO Holdings and 14 MAXXAM, Inc., did you have occasion to assist in 15 the financial analysis of high-yield bond 16 issuances by those entities? 17 A. I was involved with certain aspects of 18 the transactions, yes. 19 Q. And what aspects of the transactions 20 would you have been involved with? 21 A. Well, those involvements would have 22 been at MAXXAM, Inc., not MAXXAM Group, Inc. since 918 1 they were located up in New York and had a 2 separate staff. But at MAXXAM, Inc., I recall 3 that in the mid-1980s, we did issue some 4 35 million worth of high-yield debt. 5 Q. And were there other high-yield bond 6 issuances that you were aware of besides the 7 35 million? 8 A. Yes, there are. 9 Q. Okay. Maybe we can get into that 10 later, but what particular role would you have 11 played in connection with the issuance of, say, 12 the 35 million-dollar high-yield bonds? 13 A. In the course of underwriters 14 performing due diligence, I would have been 15 explaining to them what the company was about, 16 what its activities were, providing them with 17 information or coordinating the provision of 18 information that they might have requested. I 19 would have looked at the proposed terms. We would 20 have looked to other items of a general nature in 21 connection with the issuance. 22 Q. When MCO Holdings issued -- and let's 919 1 use, for example, the 35 million-dollar issuance 2 that you talked about. 3 When they issued those bonds, did they 4 contact more than one investment banker to seek 5 assistance in the issuance? 6 A. Not that I recall, no. 7 Q. I guess what I'm trying to drive at, 8 when one wants to issue high-yield bonds, did they 9 normally -- let me -- I won't ask you normally. 10 But do you seek several different bids from the 11 underwriters to see who will offer the most 12 attractive underwriting package? 13 A. In terms of today's practice, yes, we 14 do seek inputs from numerous people about proposed 15 terms. And from time to time, even bids. But the 16 way I remember that particular issuance is that 17 MAXXAM Group, Inc. had previously done I think it 18 was the 150 million-dollar issue I described to 19 you before. And we looked at MCO Holdings to see 20 if that would be attractive to us and we spoke 21 with the same investment bankers that did the 22 issue for MAXXAM Group, Inc. and I don't recall 920 1 discussions at that time with others. 2 Q. Now, in terms of today's practice, when 3 you go to several investment bankers, do you -- is 4 it then your -- incumbent upon you to analyze 5 which of the investment bankers provide the most 6 attractive bids, so to speak, or the most 7 attractive financing package? 8 A. Generally, yes. 9 Q. And in connection with the 10 35 million-dollar financing, which -- which 11 institution was responsible for underwriting that 12 particular issuance? 13 A. My recollection is that was Drexel 14 Burnham. 15 Q. And do you remember the timing of that 16 35 million-dollar issuance? 17 A. It was, if I remember correctly, a 18 couple months after the MAXXAM Group, Inc. 19 issuance. And it was, I think, about 1985. But I 20 don't specifically remember the date, no. 21 Q. Now, before getting involved in this 22 35 million-dollar high-yield bond transaction 921 1 involving Drexel Burnham Lambert, had you had any 2 other involvement with Drexel Burnham Lambert in 3 connection with the services or special projects 4 that you performed at MCO Holdings? 5 A. Yes. 6 Q. Okay. And can you describe for the 7 Court the nature of that involvement? 8 A. I remember one transaction that they 9 proposed to us wherein we subsequently borrowed 10 some money. 11 Q. And can we be a little more definitive 12 about -- when would that transaction have 13 occurred? 14 A. I'm not very good at specific dates, 15 but approximately in the early Eighties. 16 Q. And can you recall the general 17 structure of the transaction? 18 A. Yes. 19 Q. Would you describe that to us? 20 A. Yes. My recollection is that the name 21 of the company then, to the best of my 22 recollection being MCO, borrowed three and a half 922 1 million dollars, if I recall correctly, through 2 the issuance of a note which Drexel Burnham under 3 wrote. 4 Q. And this note, do you recall was this a 5 zero coupon note? 6 A. Yes, it was. 7 Q. I'm not too good at financial stuff. 8 Can you just sort of explain to me and the Court 9 what is a zero coupon note? 10 A. A zero coupon note, as I understand it, 11 is a note that does not require the payment on a 12 cash basis of interest currently other than at a 13 future date and time when all the interest that 14 has accrued and accumulated is then due and 15 payable. 16 Q. And this was a 260 million-dollar zero 17 coupon bond? Is that your recollection? 18 A. That sounds about right, yes. 19 Q. And you're telling me that for three 20 and a half million dollars, they then accrue the 21 interest and at some period in the future, that 22 obligation ends up being $260 million? 923 1 A. Yes, sir. I'm reminded of a story of a 2 king who exacts a tribute from one of his noblemen 3 of a grain of corn the first day and then doubled 4 it the day after and then doubled it the day 5 after. And apparently if you go for 30 days or so 6 you've exhausted the entire world's production of 7 grain for I don't know how many hundreds of years. 8 But, yes, over a long period of time, 9 in this case, the note would compound to what 10 seems like an extraordinary number, yes. 11 Q. And the period of time involved with 12 this note was what period? 13 A. I believe it was 25 years plus or 14 minus. 15 Q. And do you remember, was there an 16 interest rate associated with the note that would 17 have caused the three and a half million to grow 18 to 260? 19 A. Yes, sir, there was. 20 Q. And do you recall what that was? 21 A. Not exactly, but something over 22 15 percent if I remember correctly. 924 1 Q. Now, you indicated that this is a 2 transaction where MCO had borrowed three and a 3 half million dollars. 4 Do you recall saying that? 5 A. Yes. 6 Q. Okay. Was -- to your knowledge as the 7 financial analyst, was there some other purpose 8 for entering into this transaction other than the 9 acquisition of funds? 10 A. Yes. 11 Q. Okay. And what was the other purpose 12 of the note? 13 A. The transaction had certain tax aspects 14 to it that were considered very advantageous and 15 they derived from the fact that the issuance of 16 the note gave rise to approximately a 17 10 million-dollar tax deduction per year for the 18 period in which the note was outstanding. 19 Q. And as you sit here today, was the 20 principal factor for entering into the note MCO's 21 need for cash that it was borrowing or its desire 22 to simply take advantage of a tax procedure that 925 1 would be advantageous? 2 A. I believe that if the tax advantages 3 hadn't been there, it's not clear to me that MCO 4 would have borrowed the three and a half million 5 dollars. 6 Q. Do you recall what MCO did with the 7 three and a half million dollars? 8 A. I assume it added it to its general 9 corporate funds; but, no, I don't know of any 10 specific use of the three and a half million 11 dollars. 12 Q. And when you say it added to its 13 corporate funds, it would have just gone into 14 operating capital; is that it? 15 A. Yes, as I understand it. 16 Q. And, so, it would have been available 17 for whatever purposes that MCO wanted to use it 18 for; is that correct? 19 A. Yes, sir. General corporate purposes, 20 I believe, was the term that we used at the time. 21 Q. Now, previously, sir, in this 22 proceeding, you were directed by the Court -- 926 1 strike that. 2 The Court directed MAXXAM to identify 3 an individual to testify on behalf of MAXXAM, and 4 do you recall being designated as a witness to 5 speak on behalf of MAXXAM with respect to certain 6 transactions? 7 A. Yes, sir. 8 Q. Okay. And in connection with that, was 9 there a particular transaction that you were asked 10 to testify about as MAXXAM's designated 11 spokesperson? 12 A. Yes, sir. 13 Q. Okay. And can you describe for the 14 Court what that transaction was? 15 A. I believe that that was in connection 16 with the entering into of an option by MCO to 17 acquire at a future date certain shares of 18 United Financial Group, Inc. 19 Q. And pursuant to the direction of your 20 counsel or counsel for MAXXAM, did you undertake 21 to inform yourself about the nature of that 22 transaction? 927 1 A. Yes, sir. 2 Q. And just so it's clear, that was a 3 transaction in which you had been involved in at 4 the time the transaction was entered into; is that 5 not correct? 6 A. Yes, sir, that's correct. 7 Q. Would it be fair to say that when that 8 transaction was undertaken that you were the 9 principal person at MCO in structuring and 10 negotiating the transaction? 11 A. I think I was one of the principal 12 persons but not necessarily the principal person, 13 yes. 14 Q. Well, who else would have been a 15 principal person in that, in structuring that 16 transaction? 17 A. Barry Munitz would have been another 18 person. 19 Q. Anyone else? 20 A. No, I don't believe so. 21 Q. How about Mr. Leone? 22 A. No, sir, he wouldn't have been. 928 1 Q. How about Mr. Hurwitz? Was that 2 something about which he was involved? 3 A. Not that I'm aware of, sir, no. 4 Q. He had no involvement in that 5 transaction? 6 A. Well, I can't speak specifically to how 7 much involvement he had because at that point in 8 time I was sitting in the offices in Los Angeles 9 of what was then called MCO or MCO Holdings or 10 previously McCullough Oil, and Dr. Munitz and 11 Mr. Hurwitz were down in Houston. And you asked 12 me who the principal people were and certainly 13 from my perspective, no, he was not a principal 14 person. Did he have no involvement? No, I don't 15 think I could say he had no involvement, but I 16 don't recall him participating in discussions with 17 myself and Dr. Munitz. 18 Q. But -- 19 A. By way of example. 20 Q. But do you recall keeping him apprised 21 of what was going on with respect to the matter? 22 A. Not specifically, no. 929 1 Q. Do you recall generally? 2 A. If Mr. Hurwitz had something happening 3 in the company in which he had an interest, he 4 would not hesitate to pick up the phone and ask, 5 but I don't recall any specific requests or 6 conversations about that transaction. 7 Q. Now, in connection with your 8 designation to testify on behalf of MAXXAM with 9 respect to this transaction, did you undertake a 10 review of the records of MAXXAM of some sort to 11 prepare yourself? 12 A. Yes, I did, in connection with my 13 attorneys. 14 Q. Okay. And can you describe for the 15 Court what it is you did in order to inform 16 yourself as to the nature and details of that 17 transaction? 18 A. Well, I spent some considerable time 19 with attorneys reviewing documents. I looked 20 myself to see if there were any things in my own 21 files that would have refreshed my memory. I 22 asked people in the company if there was anything 930 1 else that they could recall regarding the 2 transaction. 3 Q. Did you ask -- 4 A. I had my own secretary look in the 5 files to see what we might have had, and I think I 6 asked the legal department perhaps to look at 7 their files, too. That's basically what I 8 remember, sir. 9 Q. And in connection with your review and 10 search, did you find anything that had not been 11 previously produced to the Office of Thrift 12 Supervision in connection with their subpoena to 13 the -- to MAXXAM in this proceeding? 14 A. I don't know how to answer that 15 question because all the productions were done by 16 people other than me. I don't believe I found any 17 documents that we hadn't found before that hadn't 18 already been turned over to attorneys who were 19 involved with the production. I couldn't say with 20 certainty that every document had been turned 21 over. 22 Q. Is it fair to say that you would be the 931 1 most knowledgeable person at MAXXAM today 2 regarding the transaction at issue -- that is, the 3 put call option transaction? 4 A. Yes, I think so. 5 Q. Now, Mr. Schwartz, the put call option 6 involved the -- a number of shares of a company 7 known as United Financial Group; is that correct? 8 A. Yes. United Financial Group, Inc. was 9 the name of the company. 10 Q. And the shares that were the subject of 11 the option had -- were owned by another entity 12 known as Drexel Burnham Lambert; is that correct? 13 A. At one point or another, yes. 14 Q. And you seem to hesitate. Is the 15 reason for your hesitation that at one point some 16 of the documents had carried the name Drexel 17 Burnham Lambert Arbitrage or had a slightly 18 different name than Drexel Burnham Lambert? 19 A. No. It's because I don't know at what 20 point Drexel Burnham became the owner of UFGI 21 shares. 22 Q. Okay. Now, when did you first learn 932 1 that MAXXAM or MCO Holdings was interested in 2 acquiring a position or had acquired a position in 3 United Financial Group? 4 A. Sometime in the early 1980s. 5 Q. Okay. And do you recall how that 6 information came to your attention? 7 A. I don't recall how the information came 8 to my attention of their original acquisition, no. 9 Q. When you learned of the acquisition, 10 had they already acquired the shares or was this 11 a -- an acquisition that you were asked to 12 analyze? 13 A. I think, sir, that we are talking about 14 two different things. 15 Q. Okay. 16 A. I think you began by asking me about 17 the option agreement. 18 Q. Yes. 19 A. Which was not then an acquisition of 20 shares. And then you asked me how I came to 21 understand that MCO or MAXXAM had acquired shares, 22 and I think what I was trying to say to you was 933 1 that it was my understanding that MCO had 2 originally acquired some number of UFGI shares in 3 the early 1980s, and I don't remember how I first 4 found out about that. I found out about it, to 5 the best of my recollection, after they had 6 acquired them. 7 Q. Okay. So that you weren't asked to do 8 a due diligence or any kind of financial analysis 9 with respect to United Financial Group before they 10 initially acquired a position in United Financial 11 Group? 12 A. No, not that I recall. 13 Q. Do you recall the level of ownership of 14 UFG shares by MCO at the time you learned of their 15 position in UFG? 16 A. Approximately, yes, in the sense that 17 at the time that I was looking at the possible 18 option or by the time we entered into the option, 19 it was my understanding that MCO owned 20 approximately 12 or 13 percent, if memory serves 21 me correctly. 22 Q. And do you recall whether in addition 934 1 to the shares owned by MCO Federated also owned 2 shares of United Financial Group? 3 A. I recall that one of the companies that 4 has the name Federated in it was also an owner of 5 UFGI shares, yes. 6 Q. And do you recall in the aggregate how 7 much the total shares were approximately that MCO 8 and Federated or Federated's affiliate owned at 9 that time? 10 A. Well, there came a time that I 11 understood that the two companies together owned 12 approximately 24 point something or other shares 13 of UFGI. 14 Q. Okay. I'm handing you a copy of what's 15 been marked previously as T1042. Because it's 16 already been marked, you need not pass it along, 17 but I'd ask you to take a look at it. It's a form 18 H(e)-1 application that was prepared for 19 submission to the Office of Examination and 20 Supervision and it is accompanied by a cover 21 letter dated June 29th, 1983? 22 THE COURT: Would you give the number 935 1 of that exhibit again? 2 MR. RINALDI: It's T1042. Your Honor, 3 this is -- I do this every time. This is the 4 document that has a page missing from it and we 5 always have to then go to a different document, 6 which is T44. So, the document that Your Honor 7 has is T44. 8 MR. GUIDO: I think it's T4040. 9 MR. RINALDI: That's correct. They are 10 the identical document with the exception of a 11 page missing from the one that Mr. Schwartz has, 12 but I will not ask him any questions about that. 13 I just want to show him the document and see if he 14 recalls having seen it. 15 Q. (BY MR. RINALDI) And, Mr. Schwartz, 16 we do have a copy of T4040. It does have the 17 second page. So, I would ask to substitute and 18 give you T4040 and I'll take this one back. Thank 19 you. 20 MR. RINALDI: I apologize, Your Honor. 21 Q. (BY MR. RINALDI) Do you recall having 22 seen a copy of that document at or about the time 936 1 it's dated? 2 A. Sitting here today, I can't say that I 3 necessarily saw this document at the time it was 4 dated, but I may have. 5 Q. Well, on the front page of the 6 document, it indicates that MCO and Federated 7 currently own approximately 12.3 and 10 percent 8 respectively of the outstanding shares or an 9 aggregate of 22.3 percent of the outstanding 10 shares of United Financial Group. 11 And the only reason I am showing this 12 to you is to try to identify whether this was the 13 approximate period of time when you would have 14 learned of MCO's acquisition of UFG shares. 15 A. Certainly no later I would think than 16 this, yes. 17 Q. And if you look at the second full 18 paragraph on the first page, did you have some 19 understanding at that point in time when you 20 learned about MCO's position in UFG shares that 21 MCO was proposing to acquire additional shares of 22 UFG? 937 1 A. Yes. 2 Q. And what was your understanding in that 3 regard, sir? Yes, sir. Did you have some 4 understanding as to the intentions at MCO 5 regarding future acquisitions of UFG shares? 6 A. My understanding is that there was a 7 contemplation of acquiring additional shares of 8 UFGI such that the combined ownership of MCO and 9 Federated might be close to the 25 percent 10 combined ownership level and that this application 11 was seeking permission to go beyond the 25 percent 12 and to understand what, if any, conditions would 13 attach to that. 14 Q. And did you understand that they 15 were -- that MCO and Federated anticipated that 16 assuming that the proposed acquisition is approved 17 and made, that MCO will own approximately 18 25 percent of the outstanding shares and Federated 19 will retain approximately 10 percent of the 20 outstanding shares? 21 A. I had a slightly different 22 understanding that if the proposal was approved 938 1 that they might own as much as, combined, 2 35 percent depending upon the kind of approval 3 that was received. 4 Q. Now, do you recall the circumstances in 5 which you learned about MCO's interest in 6 acquiring additional shares of -- or MCO's 7 position with respect to UFG shares? How did it 8 come up? 9 A. I'm sorry, sir. I don't understand the 10 question. 11 Q. Do you recall the circumstances 12 surrounding the question of MCO's ownership of UFG 13 shares? I mean, how did it come to your 14 attention? 15 A. Well, I thought I testified earlier 16 that I don't remember how I came to know that MCO 17 and/or Federated owned what they did. 18 Q. Okay. But -- 19 A. I think it wouldn't have been later 20 than this period. It was probably before this 21 period, but just when, I couldn't say. 22 Q. Okay. And then? 939 1 A. Or how. 2 Q. It was your understanding, though, that 3 they had a desire to acquire up to 35 percent 4 depending on the nature of the approval of the 5 application which is Exhibit T1042; is that 6 correct? 7 A. Yes, depending upon the nature of the 8 approval. 9 Q. And my question to you is: When or how 10 did this aspect of it come to your attention that 11 MCO desired to acquire up to 35 percent? 12 A. Well, again, I don't recall if I saw 13 specifically this document at this time; but I do 14 remember that sometime during the period 1983 or 15 perhaps even 1982, that I had become involved in 16 some analysis of what it meant to be a savings and 17 loan holding company. 18 Q. And you say you became involved in some 19 analysis. Was this one of the special projects 20 that you were asked to perform as an employee of 21 MCO? 22 A. Yes, sir. 940 1 Q. And who would have asked you to perform 2 that special project? 3 A. I don't remember who asked me. 4 Q. Do you recall who you would have 5 reported the -- your conclusions to? 6 A. Yes. 7 Q. And who would that have been? 8 A. Well, I saw Dr. Leone every day and 9 certainly I would have said to him what I was 10 doing and commented from time to time about where 11 I thought we were. But I would have been sharing 12 most of my conclusions with Dr. Munitz. 13 Q. And who is Dr. Munitz, sir? 14 A. Dr. Munitz is Barry Munitz. He was in 15 Houston while I was in Los Angeles, and he was an 16 employee of one of the companies down there. 17 Q. And was Dr. Munitz also on the board of 18 MCO Holdings? 19 A. I'm not sure. He might have been. 20 Q. Were there any other -- would you take 21 a look at Page 32 of Document T4040 and see if 22 that refreshes your recollection as to whether 941 1 Mr. Munitz was on the board of MCO or not? 2 A. Yes, sir, it does. He was at June 1983 3 a director of MCO according to Page 32. 4 Q. And he had been since 1982 according to 5 this document? 6 A. Yes, sir. 7 Q. And Mr. Munitz you say lived in 8 Houston? 9 A. Yes, sir. 10 Q. So, you would communicate with him by 11 telephone? 12 A. Primarily, sir, yes. 13 Q. And then it indicates below there that 14 Charles Hurwitz was also a director of MCO. 15 Where was Mr. Hurwitz located at this 16 point in time? 17 A. He also was in Houston. 18 Q. And Dr. George Kozmetsky was also a 19 director. Where was he located? 20 A. Yes, sir. I believe at this time he 21 had a primary residence in Austin and a secondary 22 residence in Los Angeles. 942 1 Q. Now, Ezra Levin, we've seen him testify 2 previously. He was a lawyer that was in New York; 3 is that correct? 4 A. Yes, sir. 5 Q. And Stanley Rosenberg, who is 6 Mr. Rosenberg? 7 A. He is an attorney, sir, and he was 8 domiciled in San Antonio, Texas, I believe. 9 Q. And Mr. Leone, I believe you testified 10 he supervised your work and he was in LA? 11 A. Yes, sir. 12 Q. Okay. And how about Joseph Hegener? 13 A. Yes, sir. Mr. Hegener was also a 14 director, and he lived in Los Angeles. 15 Q. Okay. Now -- so that Mr. Munitz who 16 you were dealing with on this project was in Texas 17 at the time, and is he the one that you 18 principally reported to regarding this special 19 project? 20 A. Yes, I believe so. 21 Q. And was Mr. Munitz also on the board of 22 directors of United Financial Group at this point 943 1 in time? 2 A. He was at some point in time. I don't 3 know if it was this point in time. 4 Q. Well, take a look at Page 29 of that 5 same document. I believe it indicates that 6 Mr. Munitz was the president, trustee of 7 Federated, vice president and chairman of MCO, and 8 also on the board of United Financial Group. 9 Do you see that, about the middle of 10 Page 29? 11 A. Yes, sir. 12 Q. Does that refresh your recollection 13 then, sir? 14 A. Yes, sir. 15 Q. And do you recall at this point in time 16 whether Mr. George Kozmetsky, who was also listed 17 here as a director of UFG, was also on the UFG 18 board at this point in time? 19 A. Yes, sir, that's what it says. 20 Q. And so was Charles Hurwitz, correct? 21 A. Yes, sir, that's what it says. 22 Q. Do you know whether Mr. Munitz was 944 1 sharing the information you provided to him with 2 either Mr. Hurwitz or Mr. Kozmetsky, the other 3 members of the board who were also directors of 4 MCO? 5 A. I don't know. 6 Q. Now, I'm handing you a copy of what's 7 been previously marked as T1041. You'll receive 8 three copies. It's a memo to Barry Munitz from 9 Roni, R-o-n-i, L. Fischer dated June the 9th, 10 1983, and it indicates that Mr. Paul Schwartz 11 received a copy. 12 Would you pass two copies on to the 13 Court and retain one for yourself, sir? 14 A. Yes, sir. Do I just hand them here to 15 you, Your Honor? 16 THE COURT: Yes. 17 Q. (BY MR. RINALDI) Have you ever seen 18 T1041 before, sir? 19 A. Yes, sir. 20 Q. And can you describe for the Court what 21 it is? 22 A. It's a memorandum from Roni Fischer to 945 1 Barry Munitz speaking to her transmittal of a 2 structure by which MCO might acquire additional 3 shares of United Financial Group stock at some 4 future time. 5 Q. And it's dated June 29th, 1983, which 6 is the same day as -- that the H(e)-1 application 7 was filed which is Exhibit T4040; is that correct? 8 A. Yes, sir, it is. 9 Q. So that this memo contemplates MCO 10 acquiring shares at some future date over and 11 above the shares which are listed in the H(e)-1 12 application. Is that fair to say? 13 A. Yes, I think it is. 14 Q. Now, who was Roni Fischer? 15 A. Roni Fischer was a lady who was at that 16 time an analyst who worked for me. 17 Q. Okay. And when you? 18 A. In Los Angeles. 19 Q. And when you say she worked for you, 20 what kind of work would she do as an analyst? Was 21 she a number cruncher kind of thing or did she run 22 out pro formas? 946 1 A. Yes. Among other things, yes. 2 Q. And do you recall what you had asked 3 her to do in connection with creating a structure 4 by which MCO might acquire additional shares of 5 UFG? 6 A. At this particular point in time, no, 7 not specifically. 8 Q. And it makes reference in the second 9 sentence to "This scenario involves the 10 participation of an outside party referred to as 11 EXCO." 12 What is EXCO? 13 A. EXCO is a name placeholder, a 14 theoretical name. X company, Y company, new 15 company. 16 Q. At this point in time, do you know 17 whether Drexel Burnham Lambert had a position in 18 shares of United Financial Group? 19 A. I came to understand that they did have 20 a position in shares of United Financial Group, 21 but I don't know if I knew that at this point in 22 time. 947 1 Q. Now, in the next sentence, it talks 2 about a copy of the enclosed analysis was 3 previously sent to Richard Marlin at Kramer Levin. 4 Do you see that? 5 A. Yes, sir. 6 Q. And it says he feels relatively 7 comfortable with this concept. 8 Do you know what the analysis was that 9 was being transmitted? Do you recall? 10 A. No. 11 Q. And at the bottom of the page it talks 12 about number -- there is some handwritten stuff 13 and there is a "7-6 Roni will put on computer." 14 Do you see that? 15 A. Yes, sir. 16 Q. Do you know what that makes reference 17 to? 18 A. Yes, sir. 19 Q. Could you tell the Court what it refers 20 to? 21 A. It looks like my scribbling, and it 22 means that whatever was attached, Roni Fischer was 948 1 going to be putting up as a computer model. 2 Q. And as an analyst, that's one of the 3 things that she typically did for you? 4 A. Yes. This was about the time that we 5 began to work with computers to do those kinds of 6 things. 7 Q. Now, following this -- well, strike 8 that. 9 Had you been working on this project, 10 as you recall, prior to this June 29th, 1983, memo 11 or is this more or less the period of time when 12 you started to study the issue of whether you 13 could create a structure that -- by which MCO 14 might acquire additional shares of UFG? 15 A. Other than by referring to the 16 documents here, I'm not sure I could remember. 17 But seeing here this transmittal, I would say that 18 this began before June of 1983. But just when, I 19 couldn't say with certainty, sir. 20 Q. Now, you indicated previously that as 21 part of this special project you had undertaken to 22 review some regulations. 949 1 Do you recall that? 2 A. Yes, sir. 3 Q. What were the regulations that you 4 undertook to review? Can you just describe for me 5 generally what you did? 6 A. Yes, sir. I recall generally receiving 7 copies of regulations of the State of Texas and/or 8 the Federal Home Loan Bank Board regarding savings 9 and loan holding companies, what it meant to be, 10 if one was a savings and loan holding company, 11 what activities a savings and loan holding company 12 could participate in, what constraints might 13 attach to becoming a savings and loan holding 14 company, what, in fact, the definition of a 15 savings and loan holding company was, and other 16 related areas. 17 Q. And do you recall, would you have 18 aggregated that information and conducted that 19 review prior to June 29th, 1983, when T1041 is 20 dated? 21 A. Best of my recollection, I got the 22 regulations at the beginning of the process. I 950 1 don't know how far along I might have been at this 2 point in time. 3 Q. Well, I guess on June 29th, 1983, there 4 is a holding company application filed on behalf 5 of MCO and Federated. 6 Do you know whether -- well, had you 7 been -- had your input been sought in connection 8 with the decision by MCO and Federated to file 9 this holding company application which is dated 10 June 29th, 1983? 11 A. No, not that I remember. 12 Q. So that your review would have been 13 independent of the preparation of T4040 from your 14 perspective? 15 A. I don't know how to answer the question 16 when you say "independent." Certainly there were 17 issues regarding both that were common, but I 18 don't remember being asked specifically to 19 participate in the filing of the H(e)-1. I 20 remember discussing issues that might pertain to 21 what would happen if the H(e)-1 were approved and, 22 depending upon how it was approved, if the company 951 1 chose to become a savings and loan holding 2 company. 3 Q. Would those discussions have occurred 4 after the application was -- had been filed and 5 while it was pending approval? 6 A. I don't remember specifically. They 7 might have been before, as well, but I don't 8 remember specifically. 9 Q. Do you have any recollection of anyone 10 coming to you and asking you to prepare 11 information for inclusion in the H(e)-1 12 application? 13 A. No, sir. I don't remember anybody 14 asking me to help them in preparing any 15 information in the application. 16 Q. Now, when you talked to Mr. Munitz 17 about this special project, did he indicate to you 18 the reasons why MCO was interested in acquiring 19 additional shares of UFG? 20 A. I had a general understanding, yes, but 21 I don't remember if it came from Mr. Munitz or 22 not. 952 1 Q. Well, what was your general 2 understanding as to why MCO was interested in 3 acquiring control of UFG? 4 A. Well, I don't remember that MCO was 5 interested in acquiring control of UFG. I 6 remember that MCO was interested in acquiring 7 potentially at some future date additional shares 8 of UFG because they felt they would prove to be a 9 good investment. 10 Q. And the additional shares they were 11 interested in acquiring would have put them over 12 the 25 percent threshold; isn't that correct? 13 A. Depending upon the number of shares 14 they acquired and when they acquired them, it 15 could have put them over 25 percent but to my 16 knowledge, it never did put them over 25 percent. 17 Q. But if they -- the proposal in the 18 H(e)-1 application indicates that they anticipate, 19 assuming that the proposed acquisition was 20 approved and made, that they would acquire in 21 excess of 25 percent; is that correct? 22 A. Well, sir, it says that they propose to 953 1 acquire. The way I remember the discussion on or 2 about this time was that there was a fair amount 3 of discussion underway as to what it might mean to 4 become a savings and loan holding company. And 5 it's not clear to me sitting here at this point 6 that at this point in time many of those issues 7 had yet been resolved in the minds of those who 8 were looking at them. 9 Q. I understand that they hadn't been 10 resolved, but my question is: If they filed an 11 H(e)-1 application, they are, in essence, seeking 12 the approval of the bank board to acquire more 13 than 25 percent of the outstanding shares of UFG. 14 Okay? Is that correct? 15 A. Yes. They are seeking approval. 16 Q. Okay. And if that approval is granted, 17 they would be deemed under federal regulations to 18 control UFG; is that correct? 19 A. No, sir. 20 MR. KEETON: I object. That's calling 21 for a legal conclusion from a non-legal witness. 22 MR. EISENHART: It also misstates the 954 1 conditions. He's talking only in terms of the 2 approval of the application. 3 THE COURT: All right. I think you'll 4 have to confine it to his understanding. 5 Q. (BY MR. RINALDI) Is it your 6 understanding, sir, that if they acquired over 7 25 percent of the outstanding shares that they 8 would be considered by the bank board as in 9 control of United Financial Group? 10 A. Yes. 11 Q. And did you have any discussions with 12 Mr. Munitz as to why it might be desirable for MCO 13 to acquire in excess of 25 percent of the 14 outstanding shares of UFG? 15 A. More about how it might be undesirable 16 to do so, yes. 17 Q. Okay. Well, let's try them both. What 18 were the undesirable aspects? 19 A. As I recall, there were limitations 20 upon activities of entities that owned more than 21 25 percent of the stock of companies like UFG. 22 Q. And what were those -- I'm sorry. 955 1 A. And that among them, as I remember, 2 were the limits that could be placed upon the 3 business activities of entities that owned more 4 than 25 percent on the ability of those entities 5 to incur debt and requirements that could give 6 rise to the need at some future point to guarantee 7 the net worth of those institutions. 8 Q. Now, in terms of the time frame, were 9 these discussions that were going on after the 10 H(e)-1 application had been filed but before the 11 bank board had issued a Resolution 84-712 in which 12 it approved the application? 13 A. What date, sir, was that? 14 Q. Would have been December the 6th, I 15 believe, 1984. 16 A. I don't know if those discussions were 17 going on beyond that date or not, sir. Best as I 18 can remember, they were going on during the period 19 of at least 1983, some periods, I believe, during 20 1984, and perhaps even into 1985. 21 Q. So that the discussions would have been 22 undertaken prior to the bank board acting on the 956 1 H(e)-1 application and entering its resolution in 2 December of 1984? 3 A. Yes, sir. I certainly think they would 4 have begun before then. I just don't know if they 5 didn't continue for some additional period. 6 Q. I understand. And you were talking a 7 moment ago about the disadvantages of becoming a 8 savings and loan holding company. And I think you 9 said that there were some limitations on MCO's 10 ability to do business. 11 What specific limitations do you recall 12 that were considered disadvantageous? 13 A. I don't recall specifically all of 14 them, but there were certain aspects of business 15 that, if I remember correctly, relating to real 16 estate, for example, and certain percentages that 17 had to be or couldn't be exceeded if one were to 18 be deemed a savings and loan holding company. I 19 remember some discussion at the time about 20 insurance activities and whether or not those 21 could be undertaken by savings and loan holding 22 companies. I remember a discussion about what 957 1 percent of one's business derived from real estate 2 related activities and what that could mean to the 3 institution or to the holding company. 4 Q. Now, you indicated that -- you 5 generally talked about the disadvantages. Was 6 there some advantage to acquiring additional 7 shares of United Financial Group that was 8 perceived by MCO that you were aware of? 9 A. Yes, sir. 10 Q. And what was that advantage? 11 A. We thought, sir, that they would prove 12 to be a good investment, the shares. 13 Q. And did one of the scenarios that you 14 worked on include MCO acquiring non-voting 15 preferred shares of UFG that would not be counted 16 towards its ownership of voting shares? 17 A. I don't recall specifically working on 18 that proposal, sir, no. 19 MR. RINALDI: Your Honor, I'd like to 20 offer into evidence at this time the last exhibit, 21 which is T1041. 22 MR. EISENHART: No objection, Your 958 1 Honor. 2 THE COURT: Received. 3 Q. (BY MR. RINALDI) Would you take a 4 look at what's marked -- pass a copy along -- as 5 T1053? This is the minutes of the annual meeting 6 of the board of directors of MCO Holdings, Inc. 7 and it's dated June 12th, 1984. And if you'll 8 turn to the inside, there is some text, both on 9 the first page and Page 4 and 5 and the rest of 10 the -- that I'd like to ask you questions about. 11 If you'd just take a moment to look at that. 12 Now, sir, on the cover of the minutes, 13 it indicates that you were present at the MCO 14 board of directors meeting on June the 12th, 1984. 15 Did you have occasion to attend the board meetings 16 of MCO on occasion? 17 A. Yes, sir, but not necessarily for 18 entire meetings. Sometimes for only a portion. 19 Q. Okay. And you indicated that beginning 20 sometime around the time the H(e)-1 application 21 was filed with the Federal Home Loan Bank Board 22 that you began looking at structures by which MCO 959 1 might acquire additional shares of 2 United Financial Group and then we see on 3 June 12th, 1984, in the board minutes that there 4 is -- on Page 4, it states "Mr. Hurwitz reported 5 that the corporation had an opportunity to acquire 6 up to 755,000 subscription rights to the 7 corresponding number of shares of newly-issued 8 Series C convertible preferred stock without par 9 value of United Financial Group." 10 Was this one of the scenarios that you 11 worked on? 12 A. Not that I remember, sir, no. 13 Q. So, you were unaware that MCO was going 14 to acquire or had the potential opportunity to 15 subscribe to C convertible preferred stock of UFG 16 prior to this board meeting? 17 A. I don't think I can say that, sir. I 18 just don't remember working on anything in respect 19 of UFG and its offering. I may have become aware 20 of it, however, at a time earlier than this. I 21 don't recall doing any work on it, sir. 22 Q. Okay. Do you recall this subject 960 1 coming up at the board of directors meeting? 2 A. No, sir, not specifically. 3 Q. Do you recall learning at or about the 4 point in time of the board meeting that, in fact, 5 MCO was contemplating acquiring 755,000 shares or 6 subscription rights to C preferred? 7 A. At some point in time, yes, sir. 8 Q. Would that have been at or about the 9 time of this board meeting? 10 A. Yes, sir, I believe so. Perhaps 11 earlier, as I indicated earlier to you. 12 Q. Was that something that you would have 13 discussed with Mr. Munitz? 14 A. I might have. I don't have a specific 15 recollection of a discussion, but I might have. 16 Q. Now, after this board meeting, did you 17 continue throughout the period of 1984 to explore 18 means by which MCO might structure a transaction 19 where they could acquire additional shares of 20 United Financial Group stock at some future time? 21 A. Yes, sir. 22 Q. And was this a project that you worked 961 1 on continually or off and on? How would you 2 describe it? 3 A. Off and on, sir. 4 Q. And I'll show you a copy of what's been 5 marked as T1055 and ask you to take a look at 6 that. I'm sorry. I didn't give you enough 7 copies. 8 This is a letter from you to a Mr. Carl 9 De Remer and it's dated November 21st, 1984. And 10 it has attached to it some what appear to be 11 computer projections or analyses. 12 Do you recognize that document, sir? 13 A. Yes, sir. 14 Q. Okay. And do you recall sending this 15 letter to Mr. De Remer? 16 A. Not specifically, sir, but I'm sure I 17 did. 18 Q. And who was Mr. De Remer? 19 A. As I recall, he was a salesman at 20 Drexel Burnham. 21 Q. And do you recall what type of 22 instruments he sold? Was he in the high-yield 962 1 bond department or -- 2 A. I couldn't say for sure, sir. 3 Q. Okay. And how did you come to know 4 Mr. De Remer? 5 A. I was introduced to him at some point 6 in time in the early 1980s, but I don't remember 7 how. 8 Q. And do you recall why it is you were 9 sending this letter to Mr. De Remer? 10 A. Yes, sir. 11 Q. Okay. Would you tell the Court why you 12 were? 13 A. Well, I had indicated earlier that I 14 was working on a project by which we might think 15 about acquiring at some future date shares of 16 United Financial Group, Inc. and these were two 17 thoughts that we had about a structure by which we 18 might do that. And I sent this to Mr. De Remer 19 for his comments, his thoughts, would he be 20 interested, his firm be interested. 21 Q. At this point in time, were you aware 22 that his firm had a position in UFG shares? 963 1 A. I became aware of it at a point in 2 time. I think at this point in time, I knew. I 3 can't say for certain. 4 Q. Do you know how -- 5 THE COURT: Mr. Rinaldi, we'll take a 6 short recess. 7 8 (A break was taken.) 9 10 THE COURT: We'll be back on the 11 record. Mr. Rinaldi, you may continue. 12 Q. (BY MR. RINALDI) Mr. Schwartz, we're 13 looking at Exhibit T1055. 14 Had you known Mr. De Remer prior to 15 sending him this letter with the possible 16 structure for EXCO Corporation? 17 A. I think I had met him and/or spoken to 18 him, yes. 19 Q. Okay. And how is it that you came to 20 send him a copy of this possible structure of EXCO 21 corporation? 22 A. Well, my recollection is that I had, 964 1 together with Barry, discussed possible structures 2 and that at some point in time, I sent materials 3 like what you see here to several different people 4 to see if they might not be interested in pursuing 5 the structure that was outlined on the pages. 6 Q. Okay. But I mean, you just picked his 7 name out of a phone book or did Barry say, "Hey, 8 Carl De Remer can help us out"? I'm trying to 9 figure out why it is you sent it to Carl. 10 A. I think at some point in time, I 11 indicated earlier I came to understand that Drexel 12 Burnham did own shares. I don't know if that was 13 precisely at this time or some earlier time. And 14 I don't remember how, but I do recall that from 15 time to time I spoke to Mr. De Remer about whether 16 or not Drexel might not be interested in looking 17 at what we were working on and might they be 18 interested in a transaction along the lines of 19 what was suggested here. 20 Q. Did Mr. Munitz tell you call Mr. De 21 Remer or send this to Mr. De Remer? 22 A. I don't remember if anyone told me to 965 1 call him. He might have called me. I don't 2 remember. Mr. De Remer might have called me. I 3 don't remember. 4 Q. And do you recall after you contacted 5 Mr. De Remer, did you discuss with him what MCO's 6 desires were with respect to this EXCO Corp.? 7 A. I think I recall having discussions 8 with him about what the attached pages meant and 9 asking would he be interested. I don't ever 10 recall hearing back from them that they were 11 interested. 12 Q. Do you recall having conversations with 13 him prior to sending him this document? I mean, 14 it indicates that you had some discussion with 15 him. 16 A. Yes, it does say that. I don't recall 17 any specific discussion, but it does say that I 18 did. 19 Q. And you don't recall how that 20 discussion originated? 21 A. In the sense of whether he called me or 22 someone asked me to call him or I just picked up 966 1 the phone to call him, no, I don't remember. 2 Q. Now, it makes reference here on the 3 first full page of this document to EXCO 4 Corporation and at the top, it indicates that UFG 5 common shares outstanding -- do you see that? And 6 then below it it says "UFG common shares purchased 7 by EXCO, 585,000." 8 Do you see that? 9 A. Yes, sir. 10 Q. Do you know where that 585,000 number 11 would have come from? 12 A. At some point I came to understand that 13 Drexel Burnham owned approximately 585,000 shares; 14 but other than that, no. 15 Q. Do you recall how you came to that 16 understanding? 17 A. Someone told me, but I don't remember 18 who. 19 Q. Would that have been something that 20 Mr. Munitz would have told you? 21 A. Perhaps. I don't recall. 22 Q. Well, do you recall, was Mr. Munitz 967 1 surprised when he learned that Drexel owned 2 585,000 shares of United Financial Group, a 3 company that MCO and Federated were interested in 4 acquiring additional shares in? 5 A. I don't know that I had any discussion 6 with Dr. Munitz about whether he was surprised or 7 not, no, not that I remember. 8 Q. And looking at -- well, do you recall 9 whether Mister -- Dr. Munitz even knew that Drexel 10 had a substantial position, 585,000 shares of UFG 11 shares? 12 A. At some point in time, Dr. Munitz came 13 to understand as I came to understand that Drexel 14 owned approximately 585,000 shares. 15 Q. But as you sit here today, you have no 16 idea how you came to that understanding, who would 17 have told you that? 18 A. I remember asking if we were going to 19 acquire shares at some future date, how many 20 shares were we talking about, and I remember at 21 some point in time learning that Drexel Burnham 22 did own 585,000 but I don't remember who would 968 1 have said that to me or told me that. 2 Q. You say you remember asking "How many 3 shares are we going to acquire?" Who do you 4 remember asking that to? 5 A. I remember discussing with Barry in the 6 context of the bigger issue of the savings and 7 loan holding company and what it meant to become 8 one. 9 Q. And what did Barry indicate? 10 A. I don't know that Barry had an answer. 11 Q. Well -- 12 A. I don't know that Barry knew. 13 Q. The H(e)-1 application had indicated 14 that they desired to acquire up to 10 percent; 15 isn't that correct? 16 A. Depending upon the approvals that they 17 received, yes. As I recall the application, it 18 spoke to a proposal. 19 Q. So -- 20 A. But I don't have any reason to know 21 that at that point in time that any of us 22 understood what, if anything, any one particular 969 1 firm owned at that point in time. 2 Q. But you said you had a discussion with 3 Barry about how many additional shares to acquire, 4 and you have no recollection as to what he told 5 you in that regard? 6 A. Well, what I remember is that I was 7 given the broader issue to consider that I talked 8 about earlier and that eventually became centered 9 around ways in which we might structure a 10 transaction to acquire, at a future point in time 11 if we had certain approvals and other things came 12 to pass, some number of shares of UFG. And, yes, 13 at some point in time, I'm sure that in connection 14 with that, I said to Barry or to anyone else, 15 "Well, what are we talking about? How many 16 shares?" But I don't recall any connection 17 between that discussion and anything that had to 18 do with the H(e)-1. 19 Q. And when you discussed how many 20 additional shares of UFG that you might acquire, 21 do you recall any percentage or any number of 22 shares being discussed? 970 1 A. Other than the 585,000 you see here or 2 other documents that I think speak to both higher 3 and lower numbers, no. 4 Q. Okay. And by "other documents that 5 speak to higher and lower numbers," those are 6 documents that occurred at a subsequent period of 7 time with respect to the negotiations of the put 8 call option. Is that fair? 9 A. Yes, sir. 10 Q. Okay. But at this point in time, the 11 amount that was being considered was 585,000 12 shares; is that correct? 13 A. Yes, sir. 14 Q. And that was the amount that you 15 understood was held by Drexel? 16 A. Yes. At some point in time I came to 17 understand that they owned 585,000 shares. 18 Q. Well, it would have been before the 19 date of this letter, would it not? 20 A. Yes, sir. I think that's fair. 21 Q. Now, there is a second letter dated 22 November 26th, 1984. This is Exhibit T1056. And 971 1 I'd ask that you take a look at this. It's to Mr. 2 De Remer again and it's from Mr. Paul Schwartz. 3 I'd also ask you to take a look at the letter that 4 is attached to that document. It has a computer 5 print out and then the last page at OMX19035 is a 6 letter to Mr. Robert -- I'm sorry -- Rob Rosen. 7 A. Yes, sir. 8 Q. And this indicates yet a third EXCO 9 structure, this time with a convertible debenture 10 with warrants. 11 Do you see that? 12 A. Yes, sir. 13 Q. And then when we turn the page, once 14 again, it shows at the top about three -- two 15 lines down in the chart that UFG common shares 16 purchased by EXCO would be 585,000 shares. 17 Do you see that? 18 A. Yes, sir. 19 Q. So, this is another scenario, is it? 20 A. Yes. 21 Q. Of a mechanism by which MCO could 22 acquire shares in the future of UFG? 972 1 A. Could have the opportunity to do so, 2 yes. 3 Q. Okay. Now, was Drexel asked to 4 accumulate the 585,000 shares by anyone at MCO? 5 A. Not to my knowledge. 6 Q. You didn't? 7 A. No, sir. 8 Q. Do you know whether Mr. Munitz asked 9 them to accumulate those shares for MCO? 10 A. Not to my knowledge, sir. 11 Q. I asked did you know whether Mr. Munitz 12 had asked them. 13 A. I'm sorry. I don't understand the 14 difference of what you're asking me -- 15 Q. You say not to your knowledge. I'm 16 just -- do you know whether Mr. Munitz asked them 17 to accumulate the shares for the benefit of MCO? 18 MR. VILLA: Objection, Your Honor. How 19 does somebody know what another person does except 20 by stating what their knowledge level is? I 21 believe he's responded to the question in ordinary 22 English. 973 1 Q. (BY MR. RINALDI) Is your answer to 2 that question no? 3 A. It's not to my knowledge. To my 4 knowledge, no one asked anyone to acquire any 5 shares on behalf of MCO. 6 Q. So that someone at MCO could have done 7 that. It's just that you don't know whether they 8 did or not. Is that fair? 9 MR. EISENHART: I object. That's 10 calling -- that's asking the witness to speculate. 11 MR. RINALDI: I'm trying to understand 12 what it is he's actually responding to, Your 13 Honor. That's all. 14 Q. (BY MR. RINALDI) Do you have any 15 personal knowledge as to whether anyone at MCO 16 asked Drexel to accumulate the 585,000 shares for 17 the benefit of MCO? 18 THE COURT: I believe that question was 19 answered. 20 Q. (BY MR. RINALDI) Do you know whether 21 Mr. Munitz had any discussions with Mr. De Remer 22 outside the discussions that you had? 974 1 A. I don't think so. 2 Q. So, were you the only person at MCO 3 that was dealing with Drexel with respect to the 4 question of structuring an EXCO corporation 5 structure for the acquisition in the future 6 possibly of UFG shares? 7 A. There may have been others. Our 8 attorneys, for example, or others. I don't have a 9 specific recollection, though, of anyone talking 10 to Mr. De Remer other than me. 11 Q. If someone had, who would it have been? 12 MR. NICKENS: Your Honor, that is 13 speculative. If someone -- he said he didn't 14 know. 15 MR. RINALDI: He said there may have 16 been others, and I'm just asking who would those 17 others have been. 18 THE COURT: All right. Objection 19 denied. 20 A. I'm sorry. Could you please repeat the 21 question? 22 Q. (BY MR. RINALDI) You said there may 975 1 have been other people that spoke to Mr. De Remer. 2 Who would they have been? 3 A. I don't have any reason to believe that 4 anyone else spoke to Mr. De Remer based on, by way 5 of example, me being involved in a third-party 6 conversation or hearing that they had spoken with 7 him. I don't know who else might have spoken to 8 Mr. De Remer about the offering. 9 Q. Now, as a result of your communications 10 with Mr. De Remer, did he express an interest in 11 undertaking to set up one of these structures that 12 are referred to in Exhibits T1055 and T1056? 13 A. No, sir. He did not lead me to believe 14 that he was interested in doing any of these 15 structures. 16 Q. And all of the structures that you 17 identify in T1056 contemplate a third party other 18 than Drexel engaging in the transaction. Is that 19 fair? 20 A. I'm not sure. Perhaps it could have 21 been Drexel, also, or a subsidiary thereof. 22 Q. So that -- 976 1 A. Couldn't say for certain at this point. 2 Q. So that Drexel could have been EXCO 3 corporation here? 4 A. Perhaps. 5 Q. And when you spoke to Mr. De Remer, 6 were you -- did you discuss Drexel possibly being 7 EXCO? 8 A. Well, my recollection was that it was 9 either Drexel or a third party. 10 Q. Did you contact any other entities 11 regarding a possible structuring of an EXCO 12 structure under which MCO could acquire in the 13 future additional shares of United Financial 14 Group? 15 A. Yes, sir. I recall at least one other. 16 Q. Okay. And what is the other that you 17 recall? 18 A. I recall that I contacted E.F. Hutton. 19 MR. RINALDI: Your Honor, at this time 20 I'd like to move into evidence the last two 21 exhibits which are the two letters to Mr. De 22 Remer. 977 1 MR. EISENHART: No objection, Your 2 Honor. 3 MR. RINALDI: They are T1055 and T1056. 4 Q. (BY MR. RINALDI) Now, you indicated 5 that -- 6 THE COURT: Received. 7 Q. (BY MR. RINALDI) You indicated that 8 you contacted E.F. Hutton. 9 What do you recall of that, sir? 10 A. To the best of my recollection, someone 11 at Kramer Levin suggested that people at E.F. 12 Hutton that they had known from some time in the 13 past might be interested in hearing what we had to 14 say about a structure like this and that I sent to 15 them or met with them -- I believe I met with them 16 to discuss a possible transaction. 17 Q. Now, were you discussing this same 18 proposal with attorneys at Kramer Levin in about 19 the end of 1984? 20 A. I recall that Kramer Levin at some 21 point became the scrivener of the document that 22 eventually we signed and Drexel Burnham signed. 978 1 Q. But they wouldn't have drafted the 2 document -- I'm sorry. Did you -- was your answer 3 complete? 4 A. No. I remember Mr. Marlin being 5 involved at one point or another as a corporate 6 attorney. 7 Q. Okay. But Mr. Marlin and Kramer Levin 8 wouldn't have become involved in drafting the 9 document until you actually had decided to do a 10 deal with Drexel Burnham Lambert. Isn't that 11 fair? 12 A. I think probably so, yes. 13 Q. Okay. And my question to you is: 14 Prior to that when you were still considering 15 structuring an EXCO structure, did you have 16 discussions with Kramer Levin about that 17 structure? 18 A. I don't sitting here today remember, 19 but if you've got a document that shows that I 20 did, I might remember. 21 Q. I'm not sure that I have a document 22 that will show you anything. All I'm suggesting 979 1 to you is you said you thought that the way you 2 got in touch with E.F. Hutton to talk with E.F. 3 Hutton about a possible EXCO structure was you 4 were directed to them by an attorney from Kramer 5 Levin. 6 Do you recall that? 7 A. Yes, I did, sir, and I stand by that, 8 yes. 9 Q. And I guess my question to you is: Had 10 you been discussing this EXCO structure with 11 Kramer Levin? 12 A. I don't recall any specific discussions 13 with Kramer Levin about the EXCO structure. 14 Q. And that would have been at the time 15 prior to your involvement with Drexel and the 16 option? 17 A. Yes, I believe so. 18 Q. Okay. Because obviously after Drexel 19 becomes involved then you have testified Kramer 20 Levin was, quote, the scrivener and they would 21 have been involved at that point in time? 22 A. That's how I remember it, sir. 980 1 Q. Okay. Would you take a look at what's 2 been marked as Exhibit T1061? 3 MR. RINALDI: At this point, Your 4 Honor, I would like to admit into evidence 5 Exhibit 1053, as well. That's the minutes of the 6 board of directors meeting dated June 12th, 1984. 7 I believe we omitted to admit that into evidence. 8 I take it there is no objection? 9 MR. EISENHART: No objection, Your 10 Honor. 11 THE COURT: Received. 12 Q. (BY MR. RINALDI) Now, do you recall 13 who at -- 14 A. I'm sorry. Was I supposed to give Your 15 Honor the documents or -- 16 Q. Yes. 17 THE COURT: Which one is this? 18 MR. RINALDI: Is this one in evidence? 19 Okay. It's in evidence. We only need to give you 20 the one. I'm sorry. 21 Q. (BY MR. RINALDI) Would you take a look 22 at what's been marked as T1061? 981 1 A. Yes, sir. 2 Q. Now, do you recall as you sit here 3 today who the attorney was at Kramer Levin that 4 put you or directed you to E.F. Hutton? 5 A. No, sir. 6 Q. If you see, there is a cc down at the 7 bottom of the page. 8 Do you know who Howard Sobel is? 9 A. Yes, I do, sir. 10 Q. Who is he? 11 A. He's an attorney at Kramer Levin. 12 Q. And how about Richard T. Sharp? 13 A. I don't know who he is. 14 Q. Okay. Would Mr. Sobel have been the 15 individual that directed you to E.F. Hutton? 16 A. I couldn't say, sir. 17 Q. Now, do you recognize this document? 18 It's a letter from E.F. Hutton to you. 19 A. Well, yes, I do; but it seems to be 20 something that has an extra couple of pages that 21 I'm not clear are related to the first three 22 pages. 982 1 Q. Well, I certainly apologize for that 2 but this is the way this was produced by MAXXAM 3 and you'll see that the pages are numbered 4 consecutively with a Bates stamp from 00374 to 5 00378. So, if it's your testimony that you don't 6 think that a portion of these pages were on the 7 document, then we should put that on the record. 8 MR. EISENHART: Your Honor, I would 9 state for the record that the fact that the Bates 10 stamp numbers are consecutive does not mean it was 11 necessarily produced as one document. In fact, I 12 don't believe the last two pages were part of the 13 document. 14 MR. RINALDI: My distinct recollection 15 upon receiving the production is that they were 16 paper clipped all together in one bunch. If they 17 got slid under the paper clip, I don't know. 18 You're laughing, J.C. 19 MR. NICKENS: I apologize, Your Honor, 20 but the idea that he could recall in the millions 21 of pages of documents that this particular 22 document was produced in this way -- I apologize 983 1 to the Court, but it astounds me. 2 MR. RINALDI: Well -- 3 THE COURT: All right. The document 4 has been received as it's constituted now, and I'm 5 going to leave it that way. We can take whatever 6 testimony we need about whether it belongs 7 together or not. 8 Q. (BY MR. RINALDI) Mr. Schwartz, do you 9 recognize at least the first three pages as the 10 letter that you received from -- a letter and an 11 attachment that you received from E.F. Hutton at 12 or about January 17th, 1985? 13 A. Yes, sir. 14 Q. Okay. And describe for me how you -- 15 this came about. That is, did you contact E.F. 16 Hutton? 17 A. That's my recollection, sir. 18 Q. Did you write them a letter and 19 describe for them what it is you were attempting 20 to do by setting up this structure? 21 A. Well, I don't remember specifically; 22 but I do recall, to the best of my ability, going 984 1 to New York and meeting with them and talking with 2 them. And I don't know what I brought with me, if 3 I brought anything or what I might have sent to 4 them before; but I do certainly remember having 5 discussions with people at E.F. Hutton. 6 Q. And when would this meeting in New York 7 have taken place? 8 A. On or before or somewhat after this 9 January 17th, 1985 date. 10 Q. Well, is it your testimony that they 11 first sent you a letter and made a proposal and 12 then following their proposal you went to New York 13 to talk to them about it? 14 A. I'd be guessing if I told you. I don't 15 remember. 16 Q. Now, the draft dated 1-17-85 which 17 composes the second two pages of the attachment 18 after the letter makes reference to a proposed 19 transaction and it states "Subject to execution of 20 a simultaneous agreement, the agreement between 21 MCO Holdings, Inc. and E.F. Hutton & Company, 22 Inc." -- 985 1 A. I'm sorry, sir. I can't see where 2 you're reading from. 3 Q. I'm reading right at the top of the 4 second page of the document where it says 5 "proposed transaction." 6 A. I'm sorry. 7 Q. It says "E.F. Hutton will purchase 8 shares at $8.25 per share from Drexel Burnham 9 Lambert." 10 Do you see that? 11 A. Yes, sir. 12 Q. And then it says "Agreement Terms. 13 "E.F. Hutton will sell a call to MCO and MCO will 14 grant a put to E.F. Hutton covering the shares 15 exercisable on an all or none basis." 16 Do you see that? 17 A. Yes, sir. 18 Q. Was it E.F. Hutton that came up with 19 the idea of structuring the transaction as a call 20 to MCO and a put to E.F. Hutton? 21 A. I can't say for certain. It may be. 22 Q. Well, as a result of your discussions 986 1 with Mr. Munitz and your review of the regulations 2 and your discussions with Mr. De Remer and the 3 work that you did over the previous year and a 4 half since the H(e)-1 application had been applied 5 for, had you come to a determination of the -- a 6 manner in which MCO might structure an EXCO 7 transaction whereby they could acquire shares of 8 UFG in the future? 9 A. I had come up with several proposals, 10 sir, which you showed me earlier; but I don't know 11 that I ever came up with one that had the concept 12 of the option or not. I might have. I don't 13 remember. 14 Q. Ultimately did you reach a conclusion 15 that a transaction structured as a call to MCO 16 backed up by a put to EXCO would be a desirable 17 form for the transaction? 18 A. I came to understand that we could 19 enter into a call agreement which provided for us 20 to acquire at a later date the shares, and I came 21 to understand that there could then be a put in 22 place if we didn't acquire the shares as an 987 1 acceptable form of the transaction, yes. 2 Q. Okay. And what I am trying to 3 ascertain, sir, how you came to that 4 understanding. 5 Was that a structure that was proposed 6 to you by E.F. Hutton or was that a structure 7 which you took to E.F. Hutton and proposed to 8 them? 9 A. Well, what I described to you just now 10 was the final structure, and that was not 11 proposed, if I recall correctly, to anyone until 12 very nearly the time at which we signed the 13 agreement in late 1985. 14 Q. Well, if you take a look at what's been 15 marked as T1061, clearly as of almost a year 16 before the option agreement is exercised -- I mean 17 is executed, you are discussing virtually the same 18 general structure of a transaction -- that is, a 19 call to MCO backed up by a put from E.F. Hutton. 20 Do you see that? Is that a fair 21 statement, sir? 22 A. It's a fair statement that this is the 988 1 first time in writing that I see a form of option 2 proposed, but I don't think it's fair to say that 3 this is the same kind of option agreement that was 4 entered into later because there seem to be 5 differences. 6 Q. Well, I would agree with you that there 7 are some differences. I'm asking you if the 8 general structure that is the idea of giving a 9 call option to MCO and backing it up with a put 10 option to E.F. Hutton or some other third party 11 that are exercisable some point several years into 12 the future isn't the same general structure that 13 was ultimately agreed upon in the final option 14 arrangement. 15 A. They are similar in the sense that they 16 both have a call and a put, but they are 17 dissimilar in terms of the way one would go 18 forward and use those calls and puts. 19 Q. Well, let's see. Did both of them have 20 letters of credit to back up the performance of 21 MCO under the call -- put option? 22 A. They are similar in the sense they both 989 1 have a letter of credit. The specific use of the 2 letter of credit is not identical, no. 3 Q. And did they both have a provision that 4 provided that MCO would agree to reimburse the 5 other party for attorney fees? 6 A. They are similar in the sense of 7 reimbursement of attorneys fees. They are 8 dissimilar, if I remember correctly, in the amount 9 of fees. 10 Q. And that's because Drexel ended up 11 having a higher figure, 40,000, as opposed to 25? 12 A. Yes, sir. That's how I remember it. 13 Q. And did both of the agreements have an 14 indemnification provision that in the event MCO 15 did not exercise the call or was unable to pay for 16 the shares pursuant to the exercise of the put, 17 that MCO would reimburse the other side? 18 A. Well, they are similar in the sense 19 that they both have indemnification provisions, 20 but those provisions at the end of the day were 21 left to attorneys and I'm not prepared to speak 22 about what they provide for. 990 1 Q. And in both instances, did MCO agree to 2 pay a substantial premium to the other side for 3 entering into the transaction? 4 A. No, sir, I don't think so. I think 5 that this proposal is for $2 million. I think at 6 the end of the day the proposal was for a 7 600,000-dollar option premium. 8 Q. So, in either event, the premiums were 9 substantial, were they not? 10 A. Not relative to each other, no. 11 Q. And in this proposal, the exercise 12 periods were set off to some period into the 13 future as early as 1987 and ultimately as late as 14 1990 if extended. Do you see that? 15 A. I see the provision, yes. 16 Q. And if the option is actually done, the 17 exercise period was for a finite period, was it 18 not? That is, two and a half years or so into the 19 future? 20 A. If I recall correctly, the final option 21 agreement provided for an exercise period of 22 approximately 30 days that was some two and a half 991 1 years into the future from the time of entering 2 into the option. 3 Q. So, there are slightly different terms 4 of the exercise period but in both instances, they 5 are at some time several years into the future; is 6 that correct? 7 A. Yes, I believe that's correct. 8 Q. But as you sit here today you don't 9 know whether the form of structure which appears 10 on this term sheet was one which you advised E.F. 11 Hutton you would like to enter into or whether 12 this was one that E.F. Hutton themselves proposed 13 to you as an appropriate means of effectuating 14 your purpose? 15 A. Sitting here today, I can't remember 16 precisely what it is I said to them. I feel 17 comfortable in thinking that I talked to them 18 about the kinds of proposals that you showed me in 19 the earlier exhibits, but I couldn't tell you for 20 certain as to whether or not I did or didn't 21 propose to them some form of an option agreement. 22 But if I did, I wouldn't think that I would have 992 1 proposed to them something as fleshed out as what 2 I see here with all the many terms that it has. 3 Q. Well, I guess what I was trying to get 4 at is did you propose to them the general idea of 5 a call backed up by a put? 6 MR. NICKENS: Your Honor, I think at 7 this point this line of questioning has become 8 repetitive, if not argumentative, on this 9 particular point. We have -- we do have limited 10 time. They have asked to interrupt this wit