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 witness 11 with another witness. My objection is that the 12 question has become repetitive. 13 MR. RINALDI: I'll move on, Your Honor. 14 Q. (BY MR. RINALDI) Do you recall why it 15 is -- MCO, just to cut to the chaise here, did not 16 do a deal with E.F. Hutton, did they? 17 A. No, sir, they did not. 18 Q. Okay. Do you recall why the proposed 19 transaction with E.F. Hutton didn't go through? 20 A. I think, as best as I can recall, we 21 thought, among other things, that it was very 22 expensive. I don't recall what other issues we 993 1 might have had with it. 2 Q. So, after you decided you didn't want 3 to do the deal with E.F. Hutton, how was it that 4 you came to decide that it would be appropriate or 5 desirable to do the deal with Drexel Burnham 6 Lambert? 7 A. I remember that we felt it would be 8 desirable to do the transaction if and only if we 9 could do it before the end of 1985 before 10 something -- just slightly before the end of 1985. 11 Q. Okay. But we're still only at 12 February 11th or I mean January 17th, 1985. So, 13 we're more than a year away or less than a year 14 away, but nearly a year away. 15 Here's my question to you. You say "we 16 felt." When you use the term "we" and you also 17 said "we felt that the cost of the E.F. Hutton 18 contract was a question," who would you have taken 19 counsel with and discussed this matter? 20 A. Barry Munitz. 21 Q. And, so, you and Mr. Munitz then 22 concluded that E.F. Hutton's proposal was 994 1 unacceptable to the best of your recollection? 2 A. At some point in time to the best of my 3 recollection, yes. 4 Q. And would it have been you and 5 Mr. Munitz then who decided to take the -- make 6 the offer directly to Drexel Burnham Lambert? 7 A. At some point in time, we did an option 8 with Drexel. And sometime between this time and 9 the time that we did it, I know we discussed with 10 Drexel the form of an option as being something 11 that we wanted to do and would they be interested. 12 But I don't have any specific recollection of how 13 we went from the point in time here, January 1985, 14 to later in the year culminating finally in 15 December as to how the back and forth might have 16 gone. 17 Q. Now, you indicated that you and 18 Mr. Berner -- I'm sorry -- Munitz would have 19 decided that the E.F. Hutton proposal was not one 20 which you wished to pursue. 21 Would anyone else have participated in 22 that decision? 995 1 A. I would think that I would have spoken 2 to people in Los Angeles and perhaps Dr. Munitz 3 spoke to people in Houston. 4 Q. Okay. Now, I notice that the E.F. 5 Hutton letter which is dated -- which is T1061 at 6 the top and is dated January 16th, 1985, is 7 telecopied the next day to Mr. Charles Hurwitz 8 from Paul Schwartz. 9 Do you see that? 10 A. Yes, sir. 11 Q. Do you recall having any discussions 12 with Mr. Hurwitz regarding the E.F. Hutton 13 proposal? 14 A. I don't recall any specific 15 discussions. 16 Q. Do you know whether Mr. Hurwitz 17 participated in the decision along with Mr. Munitz 18 not to go along with the E.F. Hutton proposal? 19 A. I don't know. You would have to ask 20 one of them. 21 Q. But you didn't participate in any 22 discussions with Mr. Hurwitz on that subject? 996 1 A. I think I testified earlier that 2 Mr. Hurwitz would call from time to time on items 3 he was interested in. 4 Q. Do you recall him phoning on this 5 particular item? 6 A. But I have no specific recollection of 7 any particular phone call with him on either the 8 E.F. Hutton letter in particular or, for that 9 matter, on the option in general. 10 Q. And when you say you have no specific 11 recollection of a specific phone call, do you have 12 a general recollection that from time to time, you 13 spoke to him about the general subject of the 14 option agreement? 15 A. It's possible, yes. 16 Q. Well, it's possible that you have a 17 recollection or it's possible that you spoke with 18 him? 19 A. It's possible I spoke with him, yes. 20 Q. But as you sit here, you don't have a 21 recollection of any general conversation with him 22 at which the option arrangement was discussed? 997 1 A. No. 2 Q. Would you take a look at what's been 3 previously marked as T1064? And this is a letter 4 from David Yeres to a Ms. Shulevitz dated 5 February 15th, 1985. And it has attached to it a 6 draft option agreement. Just so you don't think 7 that I'm skipping anything in the interest of 8 time, there are several other communications but I 9 have just selected this one to try to see what 10 your recollection of the process is. But I -- 11 certainly if you want to see all the drafts, I'll 12 be happy to provide you with them. But this is a 13 draft to Ms. Shulevitz from Mr. Yeres, and this 14 one indicates that a copy was sent to Mr. Paul 15 Schwartz. 16 Do you recall receiving a copy of this 17 at or about the time the date that appears on the 18 cover letter, February 15th, 1985? 19 A. No, not specifically, but I have no 20 reason to doubt that I did. 21 Q. Okay. Now, Ms. Shulevitz was an 22 attorney that worked for Kramer Levin; is that 998 1 correct? 2 A. Yes, sir. 3 Q. And were there other attorneys that you 4 recall that worked on the option arrangement from 5 Kramer Levin? 6 A. Sitting here today, I couldn't tell you 7 which attorneys specifically worked on the option 8 arrangement at Kramer Levin. 9 Q. Do you recall talking to Mr. Richard 10 Marlin about this transaction? 11 A. About this transaction or about the 12 matters in general that we talked about earlier, 13 yes. 14 Q. Well, my question is: Was Mr. Marlin 15 involved to the best of your recollection in the 16 drafting of the option arrangement? 17 A. I don't know if it was Mr. Marlin or 18 perhaps Mr. Sobel and/or perhaps Ms. Shulevitz. I 19 don't know for certain, but I believe it was one 20 of those people, if not more than one. 21 Q. Okay. And Mr. Yeres represented Drexel 22 Burnham Lambert, did he not? 999 1 A. Yes, sir. 2 Q. And Mr. Yeres is with Cahill Gordon. 3 He was in New York City. Ms. Shulevitz is with 4 Kramer Levin. They were in New York City and you 5 were out on the West Coast in Los Angeles; is that 6 correct? 7 A. Yes, sir. 8 Q. And Mr. Madigan, who was he? 9 A. He was an attorney at Drexel Burnham in 10 Los Angeles at the time that I knew him. 11 Q. Okay. Now, do you recall how the 12 process of drafting the put call option began? 13 Did you phone up Kramer Levin and say, "Hey, we 14 want to do a deal"? 15 A. I don't recall the details of the 16 process. 17 Q. But at least at some point in time, the 18 parties started trading copies of draft agreements 19 for the respective parties on either side to 20 comment on; is that correct? 21 A. Yes, sir. 22 Q. And this would have been a copy of such 1000 1 a draft that was provided to you by counsel for 2 Drexel Burnham Lambert; is that correct? 3 A. Yes, sir. 4 Q. And I notice at the top of the first 5 full page of the document it indicates that the 6 total numbers of common stock involved in the 7 transaction are at this point 585,000. 8 Do you see that? 9 A. Yes, sir. 10 Q. And that's the same number that 11 appeared in the two letters that you had sent to 12 Mr. De Remer and the same number that appeared in 13 the E.F. Hutton letter, correct? 14 A. Yes, sir. 15 Q. Was it your understanding at this point 16 in time that that was the number of shares that 17 Drexel Burnham Lambert had available to it for 18 purposes of the option arrangement? 19 A. Yes. 20 Q. Now, at the bottom of the page under 21 Paragraph 1 it talks about a grant of the put call 22 option and it indicates that "DBL hereby 1001 1 irrevocably grants to MCO an option to purchase 2 from DBL all, but not less than all, of the shares 3 at an aggregate purchase price of blank." 4 Do you see that? 5 A. Yes. 6 Q. How was the blank -- that is, the 7 purchase price -- to be negotiated? 8 A. I'm not sure I know. 9 Q. Well, did you have the discretion in 10 your capacity at MCO to just pick a number that 11 you felt was reasonable for insertion in as the 12 purchase price? 13 A. I could pick a number to insert, but it 14 didn't mean that we would do it. These matters, 15 as I recall, went to the board of directors -- 16 Q. So, that would -- 17 A. -- for approval. 18 Q. -- have been a number that would have 19 to be submitted to the board of directors for 20 their approval? 21 A. As I remember it, sir, yes. 22 Q. And was the number of shares also 1002 1 something that would have had to have been 2 submitted to the board of directors for their 3 approval? 4 A. Yes. I think the whole substance of 5 the agreement, sir, would have been submitted to 6 the board of directors. 7 Q. And finally, if we look at the Page 3, 8 there is a nonrefundable premium that's to be paid 9 to DBL. 10 What is your understanding of how that 11 premium was to be arrived at? 12 A. I seem to remember a period of argument 13 or -- and/or discussion regarding what that number 14 ought to be. 15 Q. Argument and/or discussion between 16 whom? 17 A. Between myself and people at Drexel 18 Burnham. 19 Q. And which people at Drexel Burnham did 20 you deal with the question of the size of the 21 premium? 22 A. To the best of my recollection, it was 1003 1 Art Bilger, at least on the subsequent renewal. 2 And I believe it was Art Bilger, also, on the 3 first go-round. 4 Q. And who is Mr. Bilger? 5 A. Mr. Bilger was a banker in the 6 corporate finance department of Drexel Burnham at 7 the time. 8 Q. And would Mr. Bilger have been the 9 individual that you would have discussed the 10 question of the purchase price with, as well? 11 A. No. I don't believe I discussed with 12 him the purchase price. I believe I discussed 13 with him the option premium. 14 Q. With whom did you discuss the purchase 15 price at Drexel? 16 A. I don't know that I had discussions 17 other than asking "What is it you're proposing as 18 a price?" 19 Q. And who would you ask that question to? 20 A. Could have been Art Bilger. Could have 21 been Carl De Remer. Could have been attorneys for 22 Drexel at Cahill Gordon. Could have been Kevin 1004 1 Madigan. I don't remember who. 2 Q. Do you recall whether Kevin Madigan was 3 involved in the financial side of the transaction, 4 or was he simply limited to drafting the legal 5 portions of the document? 6 A. Well, I recall meeting with him, 7 discussing terms of the agreement, and I remember 8 him being an attorney; but I don't know what he 9 was limited to within Drexel. 10 Q. Now, who was Art Bilger, sir? 11 A. Art Bilger was the investment banker in 12 the corporate finance department that you asked me 13 about just before. 14 Q. And it was Mr. Bilger, wasn't it, that 15 brought the 260 million-dollar zero coupon bond 16 proposal to MCO back in 1982? 17 A. To the best of my recollection, it was 18 a gentleman named Peter Ackerman who first spoke 19 with people at MCO in Los Angeles about the zero 20 coupon. 21 Q. And after you spoke to Mr. Ackerman, 22 did you have subsequent discussions with 1005 1 Mr. Bilger about the zero coupon? 2 A. My recollection is that Mr. Bilger was 3 a member of the corporate finance department. 4 There were others, as well. I don't recall if it 5 was him in particular or not. It may have been. 6 Q. Now, I notice that -- strike that. 7 Following the submission of this 8 initial draft, do you recall were there a number 9 of subsequent drafts that this option went 10 through? 11 A. Was this the initial draft, sir? 12 Q. I'm sorry. It's the initial draft that 13 was proposed by Mr. Yeres. There had been an 14 earlier draft that I am aware of that was 15 submitted to Mr. Yeres on February 11th, 1985, by 16 Cahill Gordon. It was in a different form. 17 After this draft that you see here, do 18 you recall there being a number of other drafts? 19 A. As a general matter, I recall that 20 there were a number of other drafts, yes. 21 Q. Okay. Would you take a look at what's 22 been marked as T1066? Now, this is a letter to a 1006 1 Mr. Richard Marlin from David Yeres and it makes a 2 reference to a revised option agreement and escrow 3 arrangement and a letter of credit. 4 Do you see that? 5 A. Yes, sir. 6 Q. Do you recall that during the course of 7 the negotiation of the option arrangement the 8 question of a letter of credit arose? 9 A. Not specifically, no. The final option 10 agreement did have it; so, I assume at some point 11 it did. 12 Q. Okay. And if you take a look at Page 2 13 under B triple I, there is a reference there to an 14 irrevocable letter of credit. 15 Do you see that? 16 A. Yes, sir. 17 Q. Do you know who proposed that there be 18 an irrevocable letter of credit for the benefit of 19 DBL? 20 A. No, sir. 21 Q. Do you recall why it is a letter of 22 credit was put into the put call agreement? 1007 1 A. Yes, I think so. 2 Q. Okay. What is your understanding of 3 why it was put in there? 4 A. If under the call option MCO did not 5 exercise the call some two and a half years later, 6 then there was to be granted at that point in time 7 a put option. And if MCO was incapable of or did 8 not honor the put, then the letter of credit, as I 9 recall, was a means by which the other side hoped 10 to obtain certain money. 11 Q. So, is it fair to say that it's your 12 understanding that the letter of credit was put 13 into the put call option for the benefit of Drexel 14 Burnham Lambert to assure performance on the part 15 of MCO? 16 A. Performance in the sense of providing 17 them with money, yes. 18 Q. Okay. And in the earlier draft that I 19 gave you -- that is, T1064 -- Drexel had proposed 20 that it be given a grant of a security interest. 21 If you take a look at that, you'll see it's on 22 Page 16. 1008 1 A. Yes. 2 Q. And then in the margin, there is a "no" 3 or a word written in, "no." 4 Do you know whose handwriting that is? 5 A. Looks like Howard Bressler's 6 handwriting, but I couldn't say for certain. 7 Q. Do you recall that an issue -- and 8 Mr. Bressler is the general counsel for MCO? 9 A. Was, sir, at that time, yes, I believe 10 so. 11 Q. Okay. And do you recall a discussion 12 with Mr. Bressler at which he indicated that the 13 grant of a security interest as appears in 14 Paragraph 7 was unacceptable to MCO? 15 A. I don't have a specific recollection of 16 it, no. 17 Q. In any event, in the next version of 18 the draft it appears that in lieu of the grant of 19 a security interest Drexel has now put in an 20 irrevocable letter of credit and dropped the 21 security interest; is that correct? 22 A. Yes. That seems to be right. I 1009 1 haven't had time to go through the whole draft, 2 but that seems right. 3 Q. Now, do you recall what the parties 4 were going to do with the shares? Were they going 5 to be escrowed? 6 A. Yes. It ended up that way. I don't 7 know if that was what was proposed here or not. 8 Q. And when you say it ended up that way, 9 do you recall who the escrow agent was? 10 A. I believe it was Kramer Levin. 11 Q. Okay. And what was the purpose of 12 escrowing the shares? 13 A. Sitting here today, I'm not sure. 14 Q. Would you take a look -- I'm handing 15 you a copy of what's been previously marked as 16 T1074. This is a letter dated July the 12th, 17 1985, and it's to Barry Munitz from a Richard 18 Marlin. 19 Do you see that? This has already been 20 admitted into evidence. Now, do you recognize 21 this letter? It indicates on the second page that 22 you were cc'd with a copy of it. 1010 1 Have you had a chance to look at T1074, 2 sir? 3 A. Yes, sir. 4 Q. Is that a document that you received or 5 that you recall receiving at or about July 12th, 6 1985? 7 A. I don't recall specifically, but I 8 don't have any reason to doubt that I did receive 9 it. 10 Q. Now, I notice that at the bottom of the 11 page there is some handwriting. And it looks very 12 familiar. I'm wondering, is that your 13 handwriting, sir? 14 A. Looks like it. 15 Q. And could you read into the record what 16 it says? 17 A. Part of it, sir. "7-12. Marlin noted 18 that in view of Texas statute, Munitz will need to 19 visit with S&L commissioner and that 30-day option 20 period will probably" -- can't read the next 21 scribble -- "be made longer." 22 Q. Do you recall what that written comment 1011 1 refers to? 2 A. No. 3 Q. When it says the 30-day option period, 4 is that the period in which MCO could exercise the 5 option? 6 A. Well, in the final agreement there was 7 a period of 30 days, yes. 8 Q. But you don't know -- 9 A. I don't know if that's the period we're 10 talking about there. 11 Q. And I believe Drexel had a similar 12 period of 30 days, did it not, to exercise the put 13 option? 14 A. It had a dissimilar period; but it was 15 30 days, yes. 16 Q. Okay. Now, directing your attention to 17 the first paragraph there, it says "Dear Barry. I 18 understand that the DBL option transaction has 19 once again become a top priority item." 20 Do you recall that in about July 1985, 21 this was a top priority item? 22 A. No, sir. Don't recall it being a top 1012 1 priority or bottom priority item any more than 2 anything else that we've talked about here so far 3 today. 4 Q. Well, you testified in response to a 5 question relating to the E.F. Hutton document 6 which was dated January the 17th, 1985, that there 7 was a desire to get the deal done before the end 8 of the year. 9 Do you remember that? There is nothing 10 in the document to that effect, but my 11 recollection is that you made a reference to the 12 fact that you recall that you wanted to get the 13 deal done before the end of the year. 14 A. Yes, sir. I was looking back to see if 15 there was anything in the January material 16 speaking to that desire. There came a time during 17 the course of the year when I knew that if we were 18 ever going to do an option that it would need to 19 be done before the end of the year, before 20 Christmas Eve. 21 Q. And why was that? 22 A. Because I came to understand that 1013 1 certain rules that governed terms of the option 2 agreement were going to change at a date just 3 after that time. 4 Q. And how did you come to that 5 understanding, sir? 6 A. Someone told me, but I don't know who. 7 Q. Was that something you would have 8 understood or known as early as July 1985 when 9 this letter is written to Mr. Munitz by 10 Mr. Marlin? 11 A. I couldn't say. I don't know. 12 Q. Now, you indicated earlier that as part 13 of your review of this assignment, you looked at 14 the rules of the Texas Savings and Loan Commission 15 as they related to savings and loan associations; 16 is that correct? 17 A. Yes, as to associations and holding 18 companies, yes. 19 Q. Okay. And in this document Mr. Marlin 20 makes reference to a Rule 71.3 that -- and then he 21 attaches a copy of the Chapter 71 of the Texas 22 savings and loan rules that pertain to the issue 1014 1 of change of control. 2 Do you see that? 3 A. Yes. 4 Q. Was this one of the sections of the 5 Texas savings and loan rules that you reviewed 6 earlier in connection with your special project 7 review of the transaction? 8 A. It's possible, sir. I couldn't say 9 with certainty. It's familiar material in 10 general, but whether I actually looked at this 11 rule or not I couldn't say. 12 Q. And in here, Mr. Marlin talks about the 13 savings and loan department rules presenting a 14 problem. 15 Was the problem over the definition of 16 voting security under Texas law and whether 17 acquisition of the option to acquire a voting 18 share would be treated as the acquisition of the 19 underlying voting share? 20 A. I'm not sure what he's alluding to here 21 in the front. If you would want me to read this 22 material, perhaps I could answer that question. 1015 1 Q. Well, I'm asking you: Was there some 2 concern at this point in time that if MCO acquired 3 an option to acquire voting shares, that under the 4 Texas savings and loan rules that that option 5 would be treated as a voting security or 6 acquisition of the underlying shares? 7 A. I don't think so. 8 Q. You don't recall that issue coming up? 9 A. I remember discussing whether an option 10 was or was not the same as acquiring voting stock, 11 but I don't remember whether or not that was an 12 issue that's being addressed here. I don't think 13 it was. 14 Q. Well, take a look at Page 129 of the 15 rules, and it's just above Rule 71.3. It talks 16 about "voting security shall include any security 17 convertible into or evidencing a right to acquire 18 a voting security." 19 Do you see that? 20 A. Yes. 21 Q. Was there concern that because an 22 option was a security that was convertible into or 1016 1 evidencing a right to acquire a voting security, 2 that the option shares would be considered voting 3 securities for purposes of the change of control 4 act? 5 A. My understanding at some point in time 6 was that if there was an option to acquire voting 7 securities which was not then currently 8 exercisable, that that would not pose a problem in 9 respect of any of the relevant regulations 10 regarding what it meant to become a savings and 11 loan holding company. 12 Q. And did you come to that understanding 13 as a result of Mr. Munitz writing a letter to the 14 Texas Savings and Loan Department to clarify that 15 point? 16 A. I don't know what letters he wrote to 17 clarify what points. 18 Q. Do you recall that Mr. Munitz, after 19 the transaction had been entered into, wrote a 20 letter to the Texas Savings and Loan Department 21 and requested that -- and identified the 22 transaction to them and indicated to them that -- 1017 1 and asked them whether it would be necessary to 2 file a change of control application on behalf of 3 MCO? 4 A. I remember talking with Dr. Munitz 5 about notifying appropriate people. I remember 6 that, indeed, he notified the Texas Savings and 7 Loan Commission. I don't recall what the 8 substance of that notification was. 9 Q. And do you recall whether he notified 10 them before or after you did the transaction? 11 A. I recall that he wrote a letter after 12 we did the transaction. I don't know what 13 communications he had with them before. 14 Q. Okay. And in the discussion we're 15 having here, we're talking about the Texas Savings 16 and Loan Commission -- is that correct -- or the 17 Texas Savings and Loan Department? 18 A. I know he filed a letter with the Texas 19 Savings and Loan commissioner. I don't know what 20 discussions he had with people either at the Texas 21 level or the federal level regarding the option. 22 Q. Did you have any discussions with 1018 1 Mr. Munitz on the subject of whether MCO should 2 advise the federal regulators that MCO intended to 3 enter into the put call option? 4 A. Other than the general one that I just 5 indicated to you that I remember saying, "Hey, 6 Barry, are you sure you've notified all the 7 appropriate people," no. 8 THE COURT: Mr. Rinaldi, I assume you 9 have more cross or more examination of this 10 witness? 11 MR. RINALDI: Yes, I do, Your Honor. 12 THE COURT: We'll adjourn for a lunch 13 break. 14 MR. GUIDO: Your Honor, could we raise 15 a preliminary matter before the break? And that 16 is with regard to Mr. Deignan, I think, is the 17 name of the witness who has come in from New York, 18 he's available to start for an hour where Mr. Veis 19 has indicated it would take with him and he would 20 propose that we interrupt this witness and we put 21 Mr. Deignan on for an hour and then let him catch 22 his plane back to New York if that's -- 1019 1 THE COURT: You're going to have him 2 for an hour; is that right? 3 MR. GUIDO: We would have him for about 4 an hour. 5 THE COURT: And how about the cross? 6 MR. EISENHART: Your Honor, when this 7 subject of Mr. Deignan interrupting Mr. Schwartz' 8 testimony was first raised, I don't remember 9 hearing anything about an hour's worth of 10 testimony. I recall being told that Mr. Deignan's 11 testimony would be a matter of a very short period 12 of time, minutes, not an hour. I think -- 13 MR. GUIDO: I just spoke with Mr. Veis 14 whose -- he's indicated that he thought that the 15 witness would take an hour. 16 MR. EISENHART: I have no idea what he 17 is planning to do with him for an hour based on 18 what I know of this witness; so, it would be hard 19 for me to estimate how much longer the 20 cross-examination would go. But it sounds to me 21 as though this is going to be not the short 22 interruption that was proposed but a major 1020 1 interruption. I'm now hearing this for the first 2 time. 3 THE COURT: Well, he's here and we'll 4 hear him. 5 MR. GUIDO: Thank you, Your Honor. 6 THE COURT: We'll adjourn. 7 8 (Luncheon recess) 9 10 THE COURT: The hearing will come to 11 order. Mr. Veis? 12 MR. VEIS: I would like to thank the 13 Court and respondents' counsel for their 14 indulgence in allowing Mr. Deignan to testify at 15 this time. 16 MR. EISENHART: Your Honor, at the risk 17 of now causing him to take that back, I have one 18 matter I would like to take up with the Court. 19 This concerns the scheduling of Mr. Schwartz. It 20 seems, given the time estimates now for 21 Mr. Deignan that we were given before lunch 22 that -- and just based on my estimate of what they 1021 1 have for Mr. Schwartz, it seems unlikely that they 2 will finish him this afternoon. The list that 3 we've been provided by OTS of their witnesses for 4 Monday are Dr. Kozmetsky, Mr. Eckland, and 5 Mr. Bentley. None of the three is from Houston. 6 Mr. Eckland will come from Washington. 7 Dr. Kozmetsky, I believe, lives in Austin, and 8 Mr. Bentley lives in Texas but somewhere outside 9 of Houston. I doubt that any of them is on the 10 road or on the plane yet. So, what I would like 11 is assurance from OTS that if we do not finish 12 Mr. Schwartz this afternoon, he will be on the 13 witness stand Monday morning and be finished. 14 MR. GUIDO: Your Honor, we intend to 15 continue with Mr. Schwartz and finish his 16 deposition before we start with any other witness, 17 if that's what Mr. Eisenhart is asking. And these 18 witnesses will have to move down in terms of time 19 as we go unless they seek relief from the Court in 20 some way. But we intend to move the witness list 21 in the order that we had presented it to opposing 22 counsel and we do not intend to shift witnesses 1022 1 like has been going on in the past. We believe -- 2 THE COURT: I'll allow it. 3 MR. GUIDO: It's so distracting for 4 everyone. And if the witness has an inconvenience 5 and counsel who represents them, the witness will 6 have to bring it to the attention of the Court 7 through one or the other counsel and seek relief 8 of the Court. We believe that the way things have 9 been going have been too disruptive for all 10 parties and that we will just move sequentially in 11 the order that we designate the witnesses and we 12 will attempt to give an approximate time for them 13 to appear and an approximate amount of testimony 14 for them. 15 THE COURT: Well, that's fine. It does 16 seem to me, though, that if you're not going -- 17 depending on what it looks like with Mr. Schwartz, 18 if you're not going to get to some of those three 19 witnesses, they should be notified. 20 MR. GUIDO: We will notify them. 21 THE COURT: So they are not sitting 22 around here. 1023 1 MR. GUIDO: We will notify them of any 2 slippage in the schedule and try and give them as 3 much notice as possible, but it seems to me that's 4 the most practical way of resolving this problem. 5 Otherwise, we we're just shifting witnesses back 6 and forth and no one really wants that, Your 7 Honor. 8 MR. EISENHART: We will be glad to 9 continue to work with them on scheduling. It's 10 just in this one instance I didn't want Monday 11 morning to come and there be a claim that they 12 couldn't put Mr. Schwartz on because Mr. Eckland 13 came all the way from Washington. 14 THE COURT: I believe that's settled. 15 MR. VEIS: Your Honor, may I proceed? 16 THE COURT: Yes, you may. 17 MR. VEIS: OTS calls John Deignan. 18 19 JOHN DEIGNAN, 20 21 called as a witness and having been first duly 22 sworn, testified as follows: 1024 1 THE COURT: Be seated, please. 2 3 EXAMINATION 4 5 Q. (BY MR. VEIS) Mr. Deignan, would you 6 state your full name, please? 7 A. John Frederick Deignan. 8 Q. What is your address? 9 A. 1394 Gibson Street, Far Oak Wood, New 10 York, 11691. 11 Q. What is your business address? 12 A. 19 Ruckter Street, New York, New York 13 10005. 14 Q. Who is your current employer? 15 A. Dan Allen Investment Group. 16 Q. What is the business of Dan Allen 17 Investment Group? 18 A. They are a broker/dealer. 19 Q. What is your position at Dan Allen 20 Investment Group? 21 A. I'm a trader. 22 Q. Do you hold any securities licenses? 1025 1 A. Yes, I do. 2 Q. What licenses do you hold? 3 A. I hold the 3, the 7, the 63, the 24, 4 and the 27. 5 Q. And would you please tell us what a 6 Series 3 license entails? 7 A. It's a commodities license, the ability 8 to trade commodities and futures. 9 Q. And what is a Series 7 license? 10 A. It's a general representative exam that 11 allows you to contact clients and solicit business 12 either as a broker or a trader. 13 Q. So, that would be a license that a 14 securities account executive would normally hold? 15 A. That would be the general license. 16 Q. And what is a Series 24 license? 17 A. It's a GSP license, a general 18 securities principal. It allows you to act as a 19 supervisor to other traders or brokers. 20 Q. What is a 27 license? 21 A. It's a financial and operations 22 principal which in effect gives me the right to 1026 1 prepare and sign off on firm focus reports. 2 Q. What is a focus report? 3 A. A focus report is basically a monthly 4 report to the SEC on the financial standing of the 5 firm. 6 Q. What is a Series 63 license? 7 A. 63 is a blue sky license. It basically 8 makes the Series 7 valid in the 50 states. 9 Q. And essentially, do these licenses give 10 you the right to operate your own securities firm? 11 A. Yes, they would. 12 Q. And, in fact, is it your intention in 13 the near future that you will be doing so? 14 A. In the near future, I will become a 15 head trader to a securities firm and use a Series 16 24 and the other licenses. 17 Q. Now, were you employed at one time by 18 Drexel Burnham Lambert, Inc.? 19 A. Yes, I was. 20 Q. When did you first go to work for 21 Drexel Burnham Lambert? 22 A. I believe it was in March of 1985. 1027 1 Q. What was your job at Drexel Burnham at 2 that time? 3 A. I was in the operations department in 4 the New York office, 60 Broad Street, in the 5 corporate bond interest area. 6 Q. What was your job title? 7 A. Corporate bond interest clerk, I would 8 imagine. 9 Q. And did there come a time when you left 10 the 60 Broad Street office of Drexel Burnham 11 Lambert and move to a different office? 12 A. Yes. I went to work in the Beverly 13 Hills office, the high-yield bond office. 14 Q. Approximately when did that take place? 15 A. Approximately a year and a half later 16 in September of '87. 17 Q. And what was your position at the 18 Beverly Hills office of Drexel Burnham Lambert? 19 A. When I went out there, I was in the 20 operations department, primarily in the 21 reorganization area of the operations department. 22 Q. What is the function of the 1028 1 reorganization sector of the operations 2 department? 3 A. Primarily, we dealt in indenture 4 offers, exchanges, redemptions, solicitations of 5 consent. 6 Q. What do you mean by a solicitation of 7 consent? 8 A. Sometimes within the bond indenture, if 9 a company wanted to change its business in any 10 specific way, it might have to obtain a 11 solicitation of consent from a certain percentage 12 of the bondholders. 13 Q. And to whom did you report in the 14 operations department of the Beverly Hills office 15 of Drexel Burnham Lambert? 16 A. Joseph Redecki. 17 Q. And to whom did Mr. Redecki report? 18 A. Charles Thurner. 19 Q. And to whom did Mr. Thurner report? 20 A. Ultimately Michael, I would imagine. 21 Q. Michael who? 22 A. Michael Milken. 1029 1 Q. Thank you. In the course of your 2 duties in the reorganization sector of the 3 operations department in Beverly Hills, were you 4 from time to time asked to ascertain how shares 5 should be voted in connection with proxy 6 solicitations? 7 A. Yes, I was. 8 Q. Would you tell me how operationally it 9 would come about that you were asked to do that? 10 A. The proxy department in New York would 11 receive the material. They would determine 12 whether or not the high-yield bond office had such 13 a position to warrant a vote. They would then 14 inform me and ask me to get back to them by a 15 specified date with the answers. 16 Q. By "the answers," you mean how those 17 shares should be voted in a proxy? 18 A. That's correct. 19 Q. And after you had been asked to do 20 that, what did you do? 21 A. I would normally go to my computer and 22 get a printout of the stock record, determine 1030 1 which accounts the high-yield bond office had an 2 interest in, and then I would go -- if it was an 3 individual or a corporate account -- to the sales 4 assistants and try to receive an answer from them. 5 If it was a firm account, I would try to get 6 someone responsible for the firm trading account 7 to give me an answer. And then I would orally 8 give that answer back to the New York office. 9 Q. And did you maintain files of your 10 activities in connection with those proxy 11 solicitations? 12 A. Yes, we did. 13 Q. Did Drexel customarily maintain files 14 on those solicitations? 15 A. Yes, we did. 16 Q. What would be contained in those files? 17 A. The letter in regard to what was being 18 voted on, stock record, any correspondence from 19 New York in the request that they would ask and 20 then the specific answers that were given to me 21 and who gave me those answers and the dates, of 22 course. 1031 1 Q. Would it include the proxy statement 2 itself, as well? 3 A. Yes, it would. 4 MR. VEIS: May the record reflect I'm 5 handing the witness an exhibit that has been 6 marked T1200. I'd also like to note that I have 7 attached a Post-It note for the witness' and the 8 Court's convenience because that is the beginning 9 of the pages I will be referring to as I question 10 the witness. Would you hand two copies to the 11 judge please? 12 MR. EISENHART: Your Honor, I would 13 like to say with respect to Exhibit T1200 there is 14 no source indicator on this for the document. 15 There is no Bates number to indicate where this 16 came from. Now, I assume Mr. Veis is going to 17 tell us that this is -- these are some of the 18 documents that OTS got out of the warehouse and 19 that's why there is no Bates number on them. But 20 I would also point out that having gone through 21 this, it does not appear to me to be a unitary 22 document -- that is, this appears to be a 1032 1 compilation of a number of documents. There are 2 things kind of stuck in the middle that are 3 clearly not related to what it appears to be. 4 So, I don't know what foundation he 5 attempts to -- he's going to attempt to lay for 6 this, but I wanted to advise the Court that there 7 do appear to be some problems with this particular 8 document. 9 MR. VEIS: Your Honor, I believe we can 10 answer all of Mr. Eisenhart's questions and 11 perhaps more and I will represent that these were, 12 in fact, documents that were obtained from the 13 files of the Drexel Burnham liquidating trust and 14 they were, in fact, in the warehouse and copies 15 have been provided -- as well as access to the 16 warehouse have been provided to the respondents. 17 Q. (BY MR. VEIS) Mr. Deignan, did you 18 have an opportunity prior to coming here today to 19 review this document? 20 A. Yes. This was faxed to me about a week 21 ago. 22 Q. And with respect to the remainder of 1033 1 the document, did you have an opportunity to 2 review that today? 3 A. Yes, I have. 4 Q. The full document, do you recognize 5 that document? 6 A. Yes. It seems to be something 7 consistent with the work I did on a daily basis 8 some years ago. 9 MR. EISENHART: Your Honor, could we 10 know what document he's referring to? The OT -- 11 the documents the OTS gave us don't have the 12 little helpful Post-Its on it. 13 MR. VEIS: I'm not referring to any 14 particular page at this point. I'm referring to 15 the entire exhibit. 16 MR. KEETON: You're saying some was 17 faxed and some he saw today. 18 MR. EISENHART: Seems to me when the 19 witness said this was faxed to me he was referring 20 to a specific piece of paper that had the Post-It 21 on it. 22 MR. VEIS: And I referred the witness 1034 1 to the entire document, Your Honor. I think if 2 counsel will allow me to ask my questions, I think 3 we will clear all of this up. 4 MR. EISENHART: Your Honor, the witness 5 seemed to indicate two different things. He 6 seemed to indicate that the one page with the 7 Post-It on it was faxed to him and that the rest 8 of the material was material that he saw today 9 when he arrived. I just wanted to record to 10 reflect that. 11 THE COURT: All right. Let's clear 12 that up. 13 MR. VEIS: In fact, I will tell the 14 Court that is, in fact, the case. 15 Q. (BY MR. VEIS) Let me ask you, 16 Mr. Deignan, with respect to the entire exhibit, 17 does this appear to be the type of file which you 18 previously described which Drexel Burnham Lambert 19 maintained in respect to proxy solicitations for 20 stock held in Drexel Burnham Lambert accounts? 21 A. This would be consistent with what we'd 22 have in the files. 1035 1 Q. And the first segment of this document 2 appears to be, indeed, a proxy solicitation of a 3 special meeting of shareholders and a proxy 4 statement for MCO Holdings and MAXXAM Group, Inc.; 5 is that correct? 6 A. This memo dated February 12th, 1987. 7 Q. There is one dated -- the first page is 8 February 11th. The second page, I believe, is 9 February -- 10 MR. EISENHART: Your Honor, I have no 11 way of knowing from my document what counsel and 12 the witness are referring to. 13 THE COURT: All right. Well, we'll 14 have to make some more specific identification. 15 Q. (BY MR. VEIS) With respect to -- you 16 see a letter on the -- bearing the name MCO 17 Holdings, Inc. -- please go to the first page of 18 the document we have -- of the entire exhibit. 19 A. Yes. 20 Q. Do you see that letter? That's 21 February 11th, 1988? 22 A. Right. 1036 1 Q. That's what I'm referring to. It is a 2 letter to stockholders on MCO Holdings letterhead. 3 Do you see that? 4 A. Yes, I do. 5 Q. Does that appear to be a stockholder 6 letter followed on the next page by a notice of 7 special meeting of stockholders? 8 A. Yes. 9 Q. And following that, a joint proxy 10 statement and prospectus on the third page? 11 A. Yes. 12 Q. And is that the sort of proxy 13 solicitation material that Drexel Burnham Lambert 14 maintained in the files related to proxy 15 solicitations? 16 A. Yes. 17 Q. And that's the sort of material that 18 you -- that your department compiled as part of 19 that file in the course of determining how proxy 20 should be voted for shares held in Drexel Burnham 21 Lambert accounts; is that correct? 22 A. That's correct. 1037 1 Q. Thank you. Now, if you would turn to 2 the Post-It note -- and I will tell counsel it 3 is -- the pages to which I am about to refer are, 4 I suspect, the pages Mr. Eisenhart just referred 5 to that he said didn't look like they fit the rest 6 of the file. 7 Mr. Deignan, I direct your attention to 8 the page that's marked with the Post-It note. See 9 that memoranda? 10 A. Yes. 11 Q. Yes, sir. Do you see that? Can you -- 12 MR. EISENHART: Your Honor, may I go up 13 and see -- since we have no Post-It note in 14 ours -- 15 MR. VEIS: That's it right there, sir. 16 MR. EISENHART: All right. Let the 17 record show that counsel is referring to a 18 handwritten page, appears to bear a date of 19 February 23rd, 1987, to John Deignan from Sal 20 Stabile. 21 MR. VEIS: I would prefer, Your Honor, 22 to let the witness identify the exhibit, which was 1038 1 the purpose of my directing him to that page to 2 ask him questions about it. 3 THE COURT: All right. Continue. How 4 am I going to find that page? 5 MR. VEIS: The Post-It is right there, 6 Your Honor. 7 THE COURT: All right. Thank you. 8 Q. (BY MR. VEIS) Mr. Deignan, have you 9 seen that document before? 10 A. Yes, I have. 11 Q. What is it? 12 A. It's a memo from Sal Stabile to me 13 regarding an MCO Holdings proxy vote. Gives the 14 meeting date and asks me to instruct him on the 15 specific number of accounts as to which way they 16 would vote. 17 Q. Who was Mr. Stabile? 18 A. Sal Stabile was a clerk in the proxy 19 department in the New York office at 60 Broad 20 Street. 21 Q. Did you perform some sort of a liaison 22 function with the New York office proxy 1039 1 department? 2 A. Right. I was an operations liaison 3 with the New York office. 4 Q. So, it was your function to receive 5 memos such as this one from the New York office 6 and to report back to Mr. Stabile? 7 A. Yes. That was fairly common. 8 Q. And is this the type of document that 9 would be maintained in the files that were kept 10 with respect to proxy solicitations by Drexel 11 Burnham Lambert, Inc. in its normal course of 12 business? 13 A. Yes. 14 MR. VEIS: I'd like to turn to the next 15 page, and I would simply state that we are not 16 going to ask any questions about that, Your Honor, 17 nor the two following pages. 18 Q. (BY MR. VEIS) Following that, 19 Mr. Deignan, do you see a letter on the letterhead 20 of MCO Holdings with some handwriting on it? 21 A. Not with the letterhead you're talking 22 about. The stock record? 1040 1 Q. No. May I approach the witness, Your 2 Honor? 3 THE COURT: Yes, you may. 4 MR. VEIS: It's two pages after the -- 5 yes, sir. That one. 6 THE COURT: All right. Can we identify 7 it for the record? 8 MR. VEIS: Yes, Your Honor. I will do 9 so. 10 Q. (BY MR. VEIS) Mr. Deignan, I direct 11 your attention to a letter on the letterhead of 12 MCO Holdings, Inc. that bears the date of 13 February 12th, 1987, and is directed to "our 14 stockholders." And it bears a printed in the 15 signature block the names Charles E. Hurwitz and 16 Dr. William C. Leone. 17 Do you see that? 18 A. Yes, I do. 19 Q. You see there is some handwriting on 20 that document? 21 A. Yes. 22 Q. I direct your attention to the top of 1041 1 the page. 2 Do you see that number 06-12942? 3 A. Yes, I do. 4 Q. Do you know what that number is? 5 A. It's an account number at Drexel 6 Burnham. 7 Q. Do you know whether that's your 8 handwriting? 9 A. It appears to be. It's pretty generic, 10 but it looks like something I would have written. 11 Q. And do you see the number below it? It 12 seems to say 233600 followed by -- is that SHS? 13 A. Yes. 14 Q. What -- is that your handwriting? 15 A. It appears to be. 16 Q. And what does that say? 17 A. It would indicate that this 06 account 18 had 233,600 shares of MCO Holdings. 19 Q. And you referred to it as a 06 account. 20 What does that mean? 21 A. 06 were house accounts at Drexel. 22 Q. So, they were accounts that were owned 1042 1 by the firm; is that correct? 2 A. Owned by -- they were always a house 3 account. They were not customer accounts, 4 individual accounts. They were accounts held -- 5 for instance, all of our trading accounts would be 6 housed under 06. 7 Q. And directing your attention to the 8 bottom of the page, you see the word "yes" in 9 quotes? 10 A. Yes, I do. 11 Q. Is that your handwriting? 12 A. It appears to be. 13 Q. And can you tell me what that means? 14 Yes to what? 15 A. It would indicate to me that the 06 or 16 the house account would be voting yes on the 17 shareholder vote and that Gail gave me the answer. 18 Q. Thank you. Mr. Deignan, I direct your 19 attention to the next three pages following the 20 shareholder letter and ask you to look at those. 21 Tell me if you can identify those three 22 pages of what appear to be a computer printout 1043 1 with handwritten notations. 2 A. They are computer printouts of a stock 3 record of MCO Holdings. 4 Q. Is that a computer printout from the 5 records of Drexel Burnham Lambert? 6 A. It appears to be, yes. 7 Q. Was this a document that was printed 8 out especially for purposes of determining stock 9 holdings and accounts at Drexel Burnham Lambert? 10 A. Yes. That's what the stock record is 11 for. 12 Q. And I take it then that when you 13 received a proxy solicitation, you printed out 14 such a stock record with respect to holdings of 15 that stock in Drexel accounts to determine what 16 accounts needed to be contacted with respect to 17 the solicitation? 18 A. That's correct. 19 MR. EISENHART: Your Honor, I would 20 object to the leading questions at this point. 21 This is replacing testimony by the witness now. 22 Q. (BY MR. VEIS) What did you do to get 1044 1 this stock record? 2 A. When I would receive a memo similar to 3 one that Sal sent me in this case, I would just 4 punch up a stock record through a computer, get a 5 printout, and see which accounts related to the 6 Beverly Hills office that I might be able to 7 answer for Sal. 8 Q. Now, directing your attention to these 9 documents, they appear to differ somewhat in their 10 contents. 11 Can you explain that? 12 A. I would check the stock record every 13 day in case there were any trades so that the 14 document that had the most answers were the latest 15 stock record. So, if I were to pick the third 16 document which seems to have more answers on it, 17 it was the last of these three that I worked on. 18 Q. Well, other than the handwritten 19 comments, are these documents identical? 20 A. The positions seem to be the same, yes. 21 Q. And the accounts reflected on them, are 22 they the same? 1045 1 A. Yes. They seem to be. I don't think 2 there were any changes. 3 Q. I wonder if you could, to better 4 understand this document, walk us through the 5 entries. Let me direct your attention -- I 6 think -- I guess they are all reasonably legible. 7 Let me direct your attention to the 8 first page, the first of the three copies of the 9 computer printout. Now, there is an entry MCO 10 Holdings, Inc. Do you see that? 11 A. Yes, I do. 12 Q. And does that reflect the stock as to 13 which this is a stock record? 14 A. Yes. 15 Q. Now, below that, directly below that 16 entry, there is a number, 06-12942-3- -- I believe 17 it's zero. 18 Do you see that? 19 A. Yes, I do. 20 Q. Can you explain that number to us, 21 please? 22 A. It's a firm account or house account 1046 1 number because it starts with 06, as all of our 2 house account numbers did. And underneath the 3 handwriting "firm," do you want me to explain 4 that? 5 Q. Yes, sir. 6 A. It would indicate to me -- I don't 7 recall the account numbers but if it was a firm, 8 it's a firm trading account. And below that, the 9 handwriting shorthand for "with" and then 10 management is just that the firm was voting with 11 management on that specific. 12 Q. Let me go back to the account number. 13 Thank you, sir. Let me go back to the account 14 number. Following the 12942 is another number: 15 3. 16 Can you tell me what that is, please? 17 A. It's a check digit, and the check digit 18 just verified that all of the other numbers were 19 in sequence and made sense. It was a logarithmic 20 equation just to make sure that the numbers were 21 accurate, the account number given was accurate. 22 Q. And following that, there is another 1047 1 number. In this case, a zero. What is that 2 number? 3 A. That's the account type. 4 Q. What type of account is zero account? 5 A. Most house accounts, they would just 6 put a zero at the end, more or less a default 7 function. 8 Q. Were there other numbers that could be 9 placed in that column? 10 A. Yes, there were. 11 Q. And what were those? 12 A. Typical to most brokerage firms, I 13 guess Type 1 is a cash account. Type 2 is a 14 margin account. I believe at Drexel they used a 15 Type 7 for private placements or legal transfers 16 and the like. 17 Q. Made some kind of a restriction on 18 transfer? 19 A. Yes. Anything that was not freely 20 tradable for one reason or another would go into a 21 Type 7. 22 Q. Now, with respect to a position in an 1048 1 account, if a position was transferred from a Type 2 1 to a Type 2 account, was there any change in the 3 number of shares that were owned by the account 4 holder? 5 A. No. 6 Q. So, it's simply a bookkeeping matter 7 within the firm as to how the shares are held in 8 the account? 9 A. Yes. 10 Q. Thank you. Now, directing your 11 attention to the second set of account numbers, 12 there is a handwritten notation that appears to 13 say Essex. Is that what that says? 14 A. Yes. 15 Q. What does that say? 16 A. Looks like it says Essex Financial. 17 Q. And does that relate to the account 18 number immediately above it? 19 A. Yes, it does. 20 Q. What does that indicate? 21 A. The account number above it, if I punch 22 it up on a screen, would show that it's Essex 1049 1 Financial. 2 Q. The 16? 3 A. 09036-7. 4 Q. Is the Essex Financial account? 5 A. Yes. 6 Q. And if you would, please explain the 7 date immediately below that account number. 8 A. Where it says the January 27, 1987, 9 it's an indication of the last time a stock record 10 has changed in that account. So, that was 11 either -- if the customer bought it and it settled 12 on that day or if they moved it from one type of 13 position to another, from a safekeeping account to 14 segregated account, for instances. 15 Q. So, it would be any type of change, not 16 just a trade? It would be any type of trade? 17 A. Right. A change in number. 18 Q. So, then, for example -- is that 19 October 2nd, 1986? Is that that date up on the 20 firm account that the 12-9 -- 12942 account? 21 A. Yeah. It appears to be October 2nd, 22 1986. 1050 1 Q. And that would be the -- that's the 2 last date something changed? 3 A. Yes. 4 Q. Thank you. Now, I notice that the code 5 in front of the Essex Financial account is not 06. 6 It appears to be something else. 7 Can you tell me the significance of 8 that? 9 A. The prefix is 16. 16 were the 10 high-yield bond accounts, the Beverly Hills 11 accounts that we dealt with. 12 Q. What kind -- were there -- were these 13 individual accounts? 14 A. They could be either individual or 15 corporate accounts. 16 Q. What sort of individual accounts did 17 the Beverly Hills office have? 18 A. Primarily, our individual accounts were 19 either employee accounts or employee-related 20 accounts or individuals affiliated in one way or 21 another with companies that Drexel did business 22 with. 1051 1 Q. Directing your attention to the next 2 set of numbers -- that would be the third segment 3 of accounts. See where there is a line there 4 where -- I think it says Alice Brown? 5 A. Yes. 6 Q. Do you see that? 7 A. Yes. 8 Q. Okay. In that line, if you look over 9 to the third block, do you see an account that 10 starts with Account No. 16-09332? 11 A. Yes. 12 Q. Do you see that account? Below that, 13 there is some handwriting. What does that 14 indicate? 15 A. ML Associates is -- the name of the 16 account was ML Associates. 17 Q. Is that your handwriting? 18 A. It appears to be, yes. 19 Q. And again, going back to the firm 20 account, is that your handwriting where it says 21 "firm"? 22 A. That also appears to be, yes. 1052 1 Q. And I believe you interpreted it as 2 with management, "W/"? 3 A. Yes. 4 Q. That says with management? Okay. 5 Directing your attention back to the ML Associates 6 entry, if you move immediately to the right entry, 7 you see where it says "will"? Is that will 8 something? 9 A. Will Chemical Financial. 10 Q. Is that the name of the entity that's 11 affiliated with Account 1609566-3? 12 A. Yes. It should be. 13 Q. So, does that indicate then -- well, 14 what does "shareholder" indicate for Will Chemical 15 Financial? 16 A. 10,820 shares of common. 17 Q. With respect to ML Associates, what 18 shareholdings are indicated here? 19 A. 2,180 shares. 20 Q. And with respect to Essex Financial, 21 how many shares are indicated? 22 A. 100,000 shares. 1053 1 Q. And that would be consistent -- if you 2 would turn back to the February 23rd memoranda 3 from Mr. Stabile. If you compare the number of 4 shares as to which Mr. Stabile sought instructions 5 with the number of shares indicated on the stock 6 record for the four accounts we have discussed. 7 A. They are the same. 8 Q. They are the same. Which would 9 indicate then that those, in fact, were the share 10 holdings of MCO Holdings, Incorporated in those 11 four accounts as of the date that you printed 12 this -- 13 A. Yes. 14 Q. -- out? Approximately when did you do 15 that? 16 A. A short time after Sal would have given 17 me this memo. So, towards the end of February, 18 sometime after February 23rd. 19 Q. But I take it before the proxy 20 solicitation was due? 21 A. Right. Meeting day was March 25th. 22 So, somewhere between February 23rd and 1054 1 March 25th. 2 Q. Now, if you look at the handwritten 3 materials under Will Chemical Financial, do you 4 see that document? 5 A. Yes, I do. 6 Q. Let me direct your attention to the 7 first page. There is a handwritten note below the 8 words Will Chemical Financial. 9 What does that say? 10 A. "Okay per Richard Sandler." 11 Q. Who is Richard Sandler? 12 A. Richard Sandler was an attorney in the 13 same office building as Drexel Burnham, and I know 14 he did some business with Drexel. To what extent, 15 I don't know. 16 Q. Did he represent Mr. Michael Milken? 17 A. I know he does now, and I believe he 18 again dealt with Drexel or with Michael. I just 19 knew him to be an attorney that dealt with us. 20 Q. Is that your handwriting? 21 A. That does not appear to be my 22 handwriting, no. 1055 1 Q. Who might have written those words on 2 this document? 3 A. One of the other people in operations 4 in the high-yield bond department, either Jim 5 Gilmore, Joe Redecki, or Karen Backstrom. 6 Q. Would anyone outside the operations 7 department have written those words? 8 A. No, I don't believe so. 9 Q. It would have been the job of any of 10 the people -- it would have been the job of any of 11 the people you mentioned to ascertain how those 12 shares should be voted? 13 A. Yes. 14 Q. Was that -- that was simply part of the 15 relation operations department responsibility? 16 A. For whatever reason, I didn't get the 17 answer and they reported to someone else they 18 would handle it. 19 Q. Was that information that you would 20 then report to the New York office for further 21 action? 22 A. Yes, it was. 1056 1 Q. What would they do in New York? 2 A. They would then vote the way I told 3 them that our clients have instructed us and I'd 4 give oral instructions to the New York office. 5 Q. Let me direct your attention to the 6 third of the three printouts which I think is 7 slightly more legible than the handwritten 8 portion. Underneath the words Essex Financial are 9 what appears to be a name. 10 Do you see that? 11 A. Yeah. It's -- 12 Q. What is that name? 13 A. Janice Shapiro, and below that is 14 probably her extension number. 15 Q. Who is Ms. Shapiro? 16 A. She was an employee in the high-yield 17 bond department. 18 Q. Did she work for Michael Milken? 19 A. We all worked for Michael. I don't 20 know if she -- she didn't work directly for him as 21 a sales analyst or anything, but she reported to 22 Michael. 1057 1 Q. And I see -- is that her name also 2 under ML Associates? 3 A. Yes, it is. 4 Q. And I take it -- if you go back, there 5 is an entry on the second column for Charles 6 Causey? 7 A. Yes. 8 Q. And below that, are those the words 9 yes? 10 A. Yes, it is. 11 Q. What does that indicate? 12 A. That Charles Causey, we were to vote 13 yes for Charles Causey's account. 14 Q. Who is Charles Causey? 15 A. I don't recall. It appears that the 16 person below that gave the answer was C. Fischer. 17 I recall the name Charlie Fischer, but I again 18 don't recall what his position is, where he was. 19 Q. Next to that, there is another entry 20 for an individual. 21 A. Bruce Brown was an analyst at Drexel 22 and he would have voted in favor. And since there 1058 1 is no name below it, I'm sure I contacted Bruce 2 directly. 3 Q. Then looking at this third page, is it 4 correct that with the exception of the note with 5 respect to Richard Sandler that all of the 6 handwriting is -- on this document is yours? 7 A. Also -- well, that and above Richard 8 Sandler's name is -- where it says it looks like 9 maybe Richard Bergman is not mine. But the rest 10 of it would be -- it appears to be my handwriting. 11 Q. And that all reflects instructions you 12 received in respect of these accounts with respect 13 to voting those shares, correct? 14 A. Yes. 15 Q. Following that, it appears there is 16 some additional proxy materials. 17 Do you see those? 18 A. Yes. 19 Q. And are those materials that would be 20 found in the file relating to proxy solicitations 21 as kept by Drexel Burnham Lambert? 22 A. Yeah. That would be consistent with 1059 1 the work we normally did. 2 Q. So, then, is it your testimony that 3 this is a record of business activity at Drexel 4 Burnham Lambert? 5 A. Yes. It seems to be the typical kind 6 of work that I would have done. You know, ten 7 years ago, I don't recall the specific matter; but 8 it was consistent with the work I've done. 9 Q. Are you familiar with this type of 10 compilation of documents through your work at 11 Drexel? Is that fair? 12 A. Yes. 13 Q. And did you use these types of 14 compilation in his your work? 15 A. Yes. Frequently. 16 Q. And were these compilations created at 17 or near the time of that activity? 18 A. Yes, they would have been. 19 Q. And was it the regular practice at 20 Drexel to create those compilations? 21 A. Yes. 22 Q. And were they -- those compilations 1060 1 kept in the regular course of Drexel's business 2 activity? 3 A. Yes. 4 MR. VEIS: Your Honor, we move the 5 admission of Exhibit T1200 at this time. 6 MR. EISENHART: Your Honor, I would 7 object to the material certainly that the witness 8 cannot identify as being his handwriting since we 9 have no idea when, by whom, or under what 10 circumstances those were put on there. 11 THE COURT: I'll receive the document. 12 MR. VEIS: Thank you, Your Honor. 13 MR. EISENHART: Your Honor, I just want 14 to make sure I understand what's been admitted. 15 Do I understand that the entire exhibit is 16 accepted or merely the documents to which this 17 witness has testified. 18 THE COURT: Well, the entire document 19 was offered. 20 MR. EISENHART: We've had testimony 21 really only with respect to several pages of it. 22 THE COURT: I know. 1061 1 MR. VEIS: Well, Your Honor, we will 2 not rely upon any handwriting that Mr. Deignan has 3 not -- 4 THE COURT: I mean all these other 5 pages. 6 MR. EISENHART: Many of which have 7 markings on them. 8 MR. VEIS: Well, he's testified that 9 those were kept in the normal course. Your Honor, 10 I would be pleased to cut down the volume of this 11 exhibit and amend Exhibit T1200 to include only 12 those pages as to which he's testified. 13 THE COURT: I wish you'd do that. 14 MR. VEIS: I would be happy to. 15 MR. EISENHART: So, it would be the 16 Stabile to Deignan note and the three pages of 17 records as to which the witness has actually 18 testified then. 19 MR. VEIS: He also -- I think I would 20 like to include the shareholder letter following 21 the Stabile note to which he's testified to and he 22 identified the account number. But I think with 1062 1 that exception, I'd be pleased to cut the exhibit 2 down to that and we will do that. 3 THE COURT: All right. Well, why don't 4 you do that off the record and we'll retain the 5 same number? 6 MR. VEIS: Thank you, Your Honor. 7 May the record reflect that I'm handing 8 the witness an exhibit that has been marked as 9 Exhibit T193. 10 THE COURT: Mr. Veis, let me return 11 this to you. 12 MR. VEIS: Thank you, Your Honor. 13 Q. (BY MR. VEIS) Mr. Deignan, do you 14 recognize this document? 15 A. It's a weekly stock record dated 16 January of '83. 17 Q. Is it a Drexel Burnham Lambert 18 document? 19 A. Yes. 20 Q. Are you familiar with that document 21 from your work at Drexel Burnham Lambert? 22 A. Yes. It's -- we would on microfiche 1063 1 store at the close of business at the end of each 2 week a stock record for every position that we had 3 at Drexel. 4 Q. And did you have an opportunity to 5 review the entirety of this document? 6 A. Yes. 7 Q. Prior to coming here today? 8 A. I flipped through most of the document. 9 Q. And I will inform the Court and counsel 10 at some point there are some handwritten notes on 11 there. We do not seek to put those in evidence. 12 We are not aware of the source of those and we 13 would ask that they simply be ignored. 14 MR. KEETON: I cannot hear. 15 MR. VEIS: I said I would inform the 16 Court that there are some handwritten numbers on 17 these documents. We are not aware of the source 18 of those. We do not seek to put those into 19 evidence. We'd simply ask that they simply be 20 ignored. 21 Q. (BY MR. VEIS) Mr. Deignan, I take it 22 that from time to time, you would work with the 1064 1 weekly stock record; is that correct? 2 A. Yes. 3 Q. And how would you go about obtaining 4 them? 5 A. They were stored on microfiche and we 6 would just store it in the order, I believe, of 7 the security or the number of the security and we 8 would just make a copy of the microfiche. 9 Q. And how was the microfiche created? Do 10 you know? 11 A. I don't know. I think it was an 12 outside vendor done in New York. 13 Q. But I mean the source of the 14 information of the microfiche, where was that 15 from? 16 A. Again, they pulled the -- at the end -- 17 close of business each week, normally a Friday, 18 the -- on a weekly basis, we'd just show or 19 capture on microfiche every security that we had a 20 position in and then subsequently a stock record 21 would be generated. 22 Q. Directing your attention to the first 1065 1 page, if you could just explain to how to read 2 this document. If I might direct your attention 3 to the first -- the fourth line of the first page 4 of this document, there is a date, appears to be 5 January 7, 1983. Do you see that? 6 A. Yes. 7 Q. I'm sorry. I said the first line. In 8 the listing of -- the columnar listing of numbers, 9 there is a series of numbers and if you go to the 10 fourth line, it indicates there is a date that 11 appears of January 7, 1983. Do you see that? 12 A. Yes, I do. 13 Q. And opposite that, is that an account 14 number? 15 A. Yes, it is. 16 Q. What is that account number? 17 A. I don't recall who the -- what the 05 18 represented. It was another office at Drexel 19 other than the high-yield office and then followed 20 by the account number, the check digit, and the 21 type. 22 Q. Now, let me direct your attention to 1066 1 the fourth line. Do you see that account number? 2 A. The fourth line down from -- in the 3 columns? 4 Q. Yes, sir. 5 A. Yes. 6 Q. And what account number is that? 7 A. 061-3013-2-0. 8 Q. And I believe you said 06 indicated it 9 was a Drexel firm account; is that correct? 10 A. A house account, yes. 11 Q. And what does the 00 at the end mean? 12 A. Again, that was the account type and 13 most often in the 06 accounts the type was 14 defaulted to zero. 15 Q. Now, I'd like you to go forward, if you 16 would, to the tabbed page which is dated 17 December 20th, I believe, 1985. 18 Are you at that page, sir? 19 A. Yes, I am. 20 Q. Please ignore the handwritten number on 21 that page. I direct your attention down the page. 22 Do you find account number 061294 on 1067 1 that page? 2 A. Yes, I do. 3 Q. And can you tell me what the balance is 4 on that account? 5 A. 061294 two shows in the settlement 6 quantities 790,459 shares of United Financial 7 Group, Inc. 8 Q. Directing your attention to the 9 following page which is dated December 31, 1985, 10 do you see that? 11 A. Yes, I do. 12 Q. And, again, please ignore the 13 handwritten note on there. It has no evidentiary 14 value. 15 Can you find account 0612942? 16 A. Yes, I can. 17 Q. And what's the balance there? 18 A. The settled balance is 490,200 shares. 19 Q. Now, what is does the difference 20 between the previous balance of 790,459 shares and 21 the balance on December 31st, 1985, of 490,200 22 shares indicate? 1068 1 A. That 300,000 shares were either sold or 2 transferred to another house account. 3 Q. And continuing, the following page, do 4 you see the balance in the Account 0612942? 5 A. On the next page? 6 Q. Yes, sir. 7 MR. KEETON: What page are we on? The 8 Bates number. 9 MR. VEIS: This would be January 3rd, 10 '86. There is a Bates number of zero -- I'm 11 sorry -- OWO25155. 12 MR. KEETON: Once again, please. 13 MR. VEIS: 25155. 14 Q. (BY MR. VEIS) Do you see that, sir? 15 A. Yes, I do. 16 Q. What is the balance in Account 12942? 17 A. Settled balance, 490,200 shares. 18 Q. I direct your attention forward to 19 Bates page 025164. The date is slightly obscured, 20 but it would appear to be March 20th or 21st of 21 1986. 22 A. I have that. 1069 1 Q. Do you have that, sir? 2 A. Yes. 3 Q. What does that indicate with respect to 4 Account 12942? 5 A. There a long -- account is long 6 788,096. 7 Q. And I notice some entries under that 8 account besides the type zero account. 9 What are those? 10 A. It shows 300,000 long in Type 7 and it 11 shows 300,000 short in Type 1 of the same account 12 number. 13 Q. Do those entries offset one another for 14 purposes of computing the total balance in the 15 account? 16 A. Yes. It would indicate that the shares 17 of, again, Type 7 being the restricted account of 18 some sort that the -- there were 300,000 shares 19 that's in question of whether or not they were 20 freely tradable. 21 Q. Now, you had the opportunity to review 22 this document prior to coming here. 1070 1 Do the 300,000 shares remain in the 2 Type 7 account until you reach the end of the 3 document? 4 MR. VILLA: Might I ask, Counsel, if 5 you refer to it as an exhibit you won't get as 6 confused. 7 MR. VEIS: I'm sorry. 8 Q. (BY MR. VEIS) To this exhibit. 9 A. Yes. On the last page of the exhibit, 10 the Account 0612942 is still long 300,000 shares 11 of the total position. 12 Q. Now, based upon your prior review of 13 this document, did there come a time when the 14 unrestricted shares were sold? 15 A. It appears to me that that account 16 still shows as being long of 300,000 shares. 17 Q. But with respect to the unrestricted 18 shares -- 19 A. The unrestricted shares appear to have 20 either been sold or journaled to another account, 21 but they are certainly no longer there. 22 Q. Does Exhibit T1193 -- well, let me 1071 1 first ask you: Based upon your prior review of 2 this document -- and you've indicated that this is 3 the document you reviewed prior to coming in -- 4 were the -- is there a balance shown for each week 5 following March 21st, 1986, in the 12942 account? 6 A. There always seems to be a balance. I 7 haven't looked through every page, but it looks to 8 me there is always a balance of 300,000 shares. 9 Q. And there is always -- well, I think we 10 may have to look through. 11 A. In some cases, there is more than that 12 but at least 300,000 shares. 13 Q. But beginning in March of 1986, is 14 there always a balance in that account of at least 15 300,000 shares? 16 A. Without looking through every page and 17 scanning, yes, it seems to be. 18 Q. And do the figures reflected there 19 accurately reflect what was held -- what the books 20 and records of Drexel Burnham Lambert reflect was 21 held in that account for that period? 22 A. It seems to be. 1072 1 Q. Now, is this a record of business 2 activity at Drexel? 3 A. It appears consistent with what I did 4 ten years ago, yeah. I can't prove its 5 authenticity, but it looks consistent. 6 Q. You're familiar with -- you're familiar 7 with Drexel's weekly stock records through your 8 work at Drexel; isn't that correct? 9 A. Yes. 10 Q. And the weekly stock record is a record 11 of business activity at Drexel, is it not? 12 A. Yes. 13 Q. And you described for us the procedure 14 for creating that document, didn't you? 15 A. Yes, I did. 16 Q. And was that document created on a 17 regular basis at the end of each week? 18 A. The fiche were created. The printouts 19 on an ad hoc basis as needed. 20 Q. But the fiche from which the printouts 21 were prepared were prepared every week on Friday, 22 correct? 1073 1 A. That's correct. 2 Q. And that was a regular practice of 3 doing that at Drexel, wasn't it? 4 A. Yes, it was. 5 Q. And these documents were kept in the 6 regular course of Drexel's business activity? 7 A. Yes. 8 MR. VEIS: Your Honor, we move the 9 admission of Exhibit T1193 . 10 MR. EISENHART: No objection, Your 11 Honor. 12 THE COURT: Received. 13 MR. VEIS: Thank you, Your Honor. I 14 have nothing further of this witness. 15 THE COURT: Cross examination? 16 MR. EISENHART: Thank you, Your Honor. 17 18 CROSS-EXAMINATION 19 20 21 Q. (BY MR. EISENHART) Good afternoon, 22 Mr. Deignan. My name is Frank Eisenhart, and I 1074 1 represent MAXXAM. 2 A. Hello. 3 Q. We spoke by phone the other night, did 4 we not? 5 A. Yes, we did. 6 Q. As I understand it, particularly from 7 our phone conversation the other night, you had 8 not seen any of these documents with the exception 9 of the one little memo from Sal Stabile to 10 yourself prior to coming here today; is that 11 correct? 12 A. Sales memo, the three stock records, 13 and the memo to shareholders from MCO or MAXXAM. 14 Q. So, these other documents that you've 15 testified to here today you hadn't seen before you 16 arrived here and the OTS lawyer showed them to 17 you; is that correct? 18 A. That's correct. 19 Q. And I gather you can't really vouch for 20 the accuracy of any of the numbers in any of these 21 documents, can you? 22 A. No, I can't. 1075 1 Q. All you can simply say is that these 2 look like things you used to work with at Drexel? 3 A. That's correct. 4 Q. I'd like to ask you to take a look for 5 a second at the three pages of stock records that 6 have some of your handwriting on them. If I 7 understood it -- if I understood you correctly, 8 you said that these three pages are really just 9 different versions of the same page -- that is, 10 you added things as you got more information? 11 A. Yes. And sometimes what would happen, 12 there is not a date shown but oftentimes, I would 13 just check the next day's work to make sure that 14 the stock record didn't change in any way. 15 Q. So, this was actually one sheet of 16 paper that you might have kept going for a couple 17 of days, each day writing in more information as 18 you got it? 19 A. That's correct. 20 Q. I noticed on the first page of these 21 three where there is the reference to Richard 22 Sandler, it looks like it says "okay per Richard 1076 1 Sandler." 2 A. Yes. 3 Q. And that's written in in somebody's 4 hand other than yours, correct? 5 A. That's correct. 6 Q. And you don't know who wrote that in? 7 A. No, I don't. 8 Q. If you look at the next two pages, that 9 little handwritten "okay per Richard Sandler" 10 doesn't seem to be there, does it? 11 A. No. It says "yes per Richard Sandler." 12 Q. And that's not in your handwriting 13 either, is it, the yes? 14 A. The printed yes, it's hard -- doesn't 15 look like the yes above it which looks like my 16 handwriting. I guess it's not. 17 Q. So, the last two pages, instead of 18 having the "okay per Richard Sandler," say the 19 "yes per Richard Sandler" and that -- the "yes per 20 Richard Sandler" is not in your handwriting? 21 A. No. 22 Q. Otherwise, many of the entries on the 1077 1 documents appear to be similar -- that is, the 2 printed material that is in your handwriting? 3 A. Yes. 4 Q. Do you have any explanation for why 5 there would be different handwritten notations on 6 what otherwise appears to be the same document? 7 A. In regards to the okay versus the yes 8 per Richard Sandler? 9 Q. Yeah. 10 A. Just might have been whoever wrote that 11 just transferring it over instead of okay or yes 12 or with management would seem to, in effect, all 13 mean the same thing in regards to this. 14 Q. But you don't have any explanation for 15 why it appears that portions of the document are 16 saying -- are the same and yet this particular 17 notation is different? 18 A. No, I don't. 19 Q. Mr. Veis referred you to someone named 20 Janice Shapiro and I think he -- he asked you 21 whether she worked for Mike? 22 A. Yes. 1078 1 Q. And your answer was she worked for Mike 2 in the same sense that you-all did? 3 A. That's correct. 4 Q. Did she work for Mike any more than you 5 did? 6 A. No, I don't believe so I don't believe 7 she did. 8 Q. So, what you're saying is that kind of 9 the way that office was set up at the time, 10 everybody in theory worked for Mr. Milken? 11 A. That's true. 12 Q. Now, do you know whether any of those 13 compilations that you saw today for the first time 14 when the OTS lawyer showed them to you, do you 15 know whether those are complete? 16 A. No. I have no way of knowing that. 17 Q. And you have no way of knowing where 18 they have been kept all these years? 19 A. No. I have no idea. 20 Q. Okay. Now, would you turn again to the 21 page -- I think it's Bates No. 2 5164. I think 22 you said that's the first page you saw where the 1079 1 300,000 shares appears as an entry? 2 A. Yes. 3 Q. And that's in the -- this is hard to 4 read, but the 942 account? 5 A. That's right. 6 Q. Then you said that there appear to be 7 two other entries in there, one of which is long 8 300,000 shares and the other which is short 9 300,000 shares? 10 A. Yes. 11 Q. Might that indicate that there has been 12 an option written on those 300,000 shares? 13 A. A private option agreement possibly, 14 sure. 15 Q. Thank you. 16 MR. EISENHART: That's all I have, Your 17 Honor. 18 MR. VEIS: I have no questions, Your 19 Honor. 20 MR. VILLA: Your Honor, I have a few 21 questions. 22 THE COURT: Mr. Villa? 1080 1 MR. VILLA: Yes, Your Honor. Which 2 exhibit is this from? 3 MR. EISENHART: That is from T1200. 4 5 CROSS-EXAMINATION 6 7 8 Q. (BY MR. VILLA) Can you open to T1200 9 where it says MCO Holdings? Do you see the MCO 10 Holdings? 11 A. Dated February 12th, 1987? 12 Q. Yes. 13 A. Yes. 14 Q. Now, does that indicate that you talked 15 to somebody at the firm, that somebody at the firm 16 was contacted? 17 A. Which firm? MCO or Drexel? 18 Q. MCO. 19 A. It just -- it implies to me that MCO 20 Holdings contacted someone at Drexel in the proxy 21 department and that's how I received a copy. 22 Q. I see. 1081 1 MR. VILLA: Thank you. 2 THE COURT: Thank you, sir. Do you 3 have a question, Mr. Keeton? 4 MR. KEETON: Yes, Your Honor. Just a 5 few. 6 7 CROSS-EXAMINATION 8 9 10 Q. (BY MR. KEETON) Mr. Deignan, will you 11 give me your educational background, please? 12 A. I went to SUNY at Binghampton State 13 University in New York at Binghampton. I did not 14 graduate there. 15 Q. And you started to work at Drexel in 16 '85? 17 A. Right. 18 Q. Was that after you left school? 19 A. Yes, it was. 20 Q. And you were a clerk in the operations 21 department of corporate bond department, New York? 22 A. Corporate bond interest department, 1082 1 that's right. 2 Q. And then in September, '87, moved to 3 the Beverly Hills office where you were a clerk in 4 the operations department of the reorganization 5 section? 6 A. I believe that dates correct, yes. 7 Q. Why would the reorganization section 8 deal with these proxies, or is that because there 9 might be a reorganization going out from these? 10 A. Right. It fell under the general 11 umbrella because it was consistent with other work 12 in the reorganizations, specifically taking votes 13 or getting yes or no answers. 14 Q. But you were not the one to make the 15 decision on a yes or no answer even on firm 16 accounts; is that correct? 17 A. That's correct. 18 Q. Gail is another one of the clerks in 19 that department? You mentioned something about 20 Gail 21 A. Where it says "yes per Gail" on the MCO 22 Holdings letter dated February 12th, it would be 1083 1 that Gail said yes on behalf of someone at the 2 firm. 3 Q. Were there hundreds of people in the 4 Beverly Hills office at the time you were there? 5 A. I believe there were approximately 200. 6 Q. Now, the 16 account you said was a 7 high-yield account? 8 A. Right, a Beverly Hills high-yield 9 account. 10 Q. Now, does that mean it's an account 11 that the firm owns the assets in it or third 12 parties do or possibly both? 13 A. The 16 account represents that it was a 14 Beverly Hills account on behalf of a corporation 15 or a customer. It is possible and likely that the 16 shares were held in, quote, unquote, street name 17 either in the name of Drexel Burnham or CDN 18 Company or Depositor Trust Company. 19 Q. Okay. So, shares were to be held in a 20 street name or CDN Company or street -- they would 21 get a 16 nomenclature even though some third party 22 might be the owner? 1084 1 A. I just mean -- no. The beneficial 2 owner would be the people represented on the 16 3 account. I'm just saying that it would not -- for 4 instance, when we brought up Essex Financial, 5 Essex Financial would be the owner as far as I 6 know. It's just that it would probably -- in 7 fact, in that case, it would not be in the name of 8 Essex Financial. It would be in the name of 9 either CDN Company or Drexel Burnham street name. 10 Q. And you mentioned that there was an 11 account that had Bruce Brown -- that you 12 identified as an analyst at Drexel Burnham had one 13 of those accounts? 14 A. That's right. 15 Q. Would that mean that Mr. Brown would 16 own that -- the shares that were in that account? 17 A. Yes. 18 Q. And from your experience over the years 19 with Drexel, did Drexel actually own shares 20 itself? I'm not talking about in street name or 21 for other customers, but Drexel in its trading 22 account in hundreds of companies. 1085 1 A. Yes, that's correct. 2 Q. Maybe thousands? 3 A. I'm sure thousands. 4 Q. Sometimes very large positions in all 5 of those companies, correct? 6 A. That's correct. 7 Q. And you saw those pass across your desk 8 from time to time; is that correct? 9 A. That's correct. 10 MR. KEETON: Thank you. 11 MR. NICKENS: Your Honor, I just have 12 perhaps one question. 13 14 CROSS-EXAMINATION 15 16 17 Q. (BY MR. NICKENS) Mr. Deignan, my name 18 is J.C. Nickens. 19 With regard to your reference to firm, 20 the firm is Drexel Burnham Lambert, correct? 21 A. That's correct. 22 Q. And, so, when you're contacting someone 1086 1 at the firm, you're contacting someone at Drexel 2 Burnham Lambert to get instructions on how to vote 3 those shares? 4 A. That's correct. 5 Q. And in this indication the instruction 6 you received was to vote with management? 7 A. That's correct. 8 Q. Now, was that really highly unusual? 9 A. No. That would be the norm. 10 MR. NICKENS: Thank you very much. 11 That's all I have, Your Honor. 12 THE COURT: Redirect, Mr. Veis? 13 MR. VEIS: Yes, Your Honor. 14 15 REDIRECT-EXAMINATION 16 17 18 Q. (BY MR. VEIS) I'm sorry. Let me be 19 sure I understood this. You just testified that 20 the normal practice at Drexel was for the firm to 21 vote with management on proxy solicitations; is 22 that right? 1087 1 A. I would say the vast majority of the 2 time we voted with management. 3 Q. And I just want to clarify the issue of 4 customer accounts have firm accounts. Is it 06 5 that I beg your pardon indicates a firm account? 6 A. Yes, it is. 7 Q. And 16 indicates a customer account 8 that's held through the Beverly Hills office, 9 correct? 10 A. That's correct. 11 Q. And, so, shares in that account would 12 be the shares that belong to the customer whether 13 they are held in street name or not? 14 A. That's right. 15 MR. VEIS: Thank you. Nothing further, 16 Your Honor. 17 THE COURT: The 06 account, those 18 shares could also be held for the benefit of 19 somebody else. 20 THE WITNESS: No. If it was in an 06 21 trading account, it was for the firm, for Drexel 22 Burnham Lambert. 1088 1 THE COURT: Okay. Are there any more 2 questions? 3 MR. NICKENS: No. 4 THE COURT: Thank you. You may step 5 down. We'll take a short recess. 6 7 (A break was taken.) 8 9 THE COURT: We're back on the record. 10 Mr. Rinaldi? 11 MR. VEIS: Your Honor, if I may. 12 THE COURT: Mr. Veis. 13 MR. VEIS: Mr. Langdon suggested that 14 while we were reassembling the Exhibit 1200 that 15 was just admitted that we number the pages of the 16 new exhibit and read into the record what it is. 17 What I have done is taken the cover 18 page of the exhibit and left it as it is. The 19 second page which will be numbered 1200A, the 20 February 23rd, memorandum to John Deignan from Sal 21 Stabile re: MCO Holdings. 22 The following page, No. 1200B, will be 1089 1 the proxy solicitation letter from MCO Holdings 2 which bears the notations of the Account 3 No. 30612942 and the notation of 233,600 shares, 4 the word yes, and "as per Gail." 5 And 1200C, D, and E will be the three 6 computer printouts in the order we discussed and 7 in the order they were presented in the original 8 exhibit with the handwritten notations that 9 Mr. Deignan testified to. And with the Court's 10 permission, I'd like to hand the Court's copy and 11 Mr. Langdon's copy to him at this time. 12 MR. EISENHART: No objection, Your 13 Honor. 14 THE COURT: All right. Proceed. 15 16 EXAMINATION (Continued) 17 18 Q. (BY MR. RINALDI) Mr. Schwartz, when 19 we broke last we were discussing Exhibit No. T1074 20 which made reference to a problem with the Texas 21 Savings and Loan Department rules regarding change 22 of control provisions. 1090 1 Do you recall that? 2 A. Yes, I recall we were talking about it. 3 Q. Okay. And you also indicated that 4 subsequent to that a letter was sent to the Texas 5 Savings and Loan Department regarding this issue, 6 or maybe you didn't. 7 A. I thought that what I was saying -- 8 perhaps it didn't come out right -- was that at 9 the time that we did the option, that I had said 10 to Barry Munitz, "Well, have you notified the 11 appropriate people?" And that at that point or 12 soon thereafter a letter went to the Texas Savings 13 and Loan commissioner. 14 Q. Okay. And when you asked him had he 15 notified the appropriate people, were you also 16 referring to the federal regulators or were you 17 simply referring to the state savings and loan 18 department? 19 A. I think it was a general statement. I 20 didn't know who all he had been speaking with or 21 who all he should be advising. 22 Q. To your knowledge, did Mr. Munitz 1091 1 advise the federal regulators -- that is, the 2 Federal Home Loan Bank Board or the Federal Home 3 Loan Bank of Dallas -- that MCO was intending to 4 enter into the put call option to -- with respect 5 to the UFG shares? 6 A. I am not aware of any letter. I don't 7 know what discussions he may have had with them. 8 Q. Okay. Now, let me hand up to you a 9 copy of yet another draft of the option agreement. 10 It's dated August 20th, 1985. I really only have 11 one question about it. This has previously been 12 admitted into evidence. And if you'll turn to the 13 first page of the draft -- 14 MR. EISENHART: May we know the exhibit 15 number? 16 MR. RINALDI: T1077. It's got a cover 17 letter dated August 20th, 1985. 18 Q. (BY MR. RINALDI) Now, it indicates on 19 the cover letter that "The proposed revisions have 20 not yet been reviewed by Paul Schwartz, to whom I 21 am sending a copy of the markup at this time." 22 And then if you turn the page, there is a draft of 1092 1 the stock option agreement and it appears that on 2 the first and the subsequent pages, there are some 3 markings. 4 Do you see that? 5 A. Yes, sir. 6 Q. Directing your attention to the 7 markings that appear on the first page of the 8 draft, the number 585,371 shares is circled and in 9 the margin it says "this number will change." 10 Do you see that? 11 A. Yes, sir. 12 Q. Do you know whose markings those are in 13 the margin and circling the sharing number? 14 A. No, sir. 15 Q. When -- do you recall receiving a copy 16 of this draft so marked? 17 A. Well, I see that I received a copy of 18 the draft. I don't know if it was so marked and I 19 don't have a specific recollection of receiving 20 this particular draft any more than I have one of 21 the other drafts you've shown me. 22 Q. Did the number of shares that were 1093 1 going to be subject to the option at some time 2 change as far as the parties were concerned? 3 A. Yes. 4 Q. Okay. And during the course of the 5 preparation of the drafts, did it come to your 6 attention that the number of shares that would be 7 the subject of the option was going to increase 8 above 585,371? 9 A. I remember talking about numbers both 10 greater and lesser than that number, yes. 11 Q. Well, focusing just on the numbers 12 greater than that, who would you have had those 13 conversations with, sir? 14 A. I would have talked about it with Barry 15 Munitz. 16 Q. Did someone inform you that Drexel was 17 acquiring additional shares for purposes of 18 optioning them to MCO? 19 A. No. 20 Q. When I say "additional," I mean over 21 and above the original 585,371. 22 A. No. I came to understand that Drexel 1094 1 at some point did own more, and I recall at some 2 point in time wondering would we be willing to 3 place a larger number under option. 4 Q. And how did you come to that 5 understanding? 6 A. Someone told me, but I don't remember 7 who. 8 Q. Was it Mr. Munitz? 9 A. Don't remember. 10 Q. Now, you said you began to wonder 11 whether we would be interested in additional 12 shares. 13 Who at MCO was the person that would 14 have advised you as to the number of shares MCO 15 was interested in? 16 A. Well, I mentioned earlier I talked 17 about these things with Dr. Munitz. I don't know 18 that he's the only person I spoke with. 19 Q. Well, if there was a question as to how 20 many shares MCO desired to acquire pursuant to the 21 option arrangement, would it have been Mr. Munitz 22 that you would have gone to for clarification? 1095 1 A. Yes, I think at this point in time 2 that's a fair assumption. 3 Q. Do you know if it was Mr. Munitz that 4 advised you that the number of shares that might 5 be subject to the option might exceed 585,371? 6 A. Again, I have no recollection of who in 7 particular at what point advised me that Drexel 8 owned more shares. 9 Q. Okay. Now, did an issue arise during 10 the course of the negotiations of the put call 11 option as to whether there were limitations 12 imposed by the NASD as to the number of shares 13 that Drexel could option to MCO? 14 A. Yes. 15 Q. Can you tell me what you recall of 16 that? 17 A. Yes. I believe that sometime during 18 1985, I became aware that there were limitations 19 in the number of shares that could be optioned by 20 a member of the NASD and any security and that 21 that number was a number of 300,000 shares and 22 that we tried to understand what that meant. 1096 1 Q. And how did that come to your 2 attention, sir? 3 A. Again, I don't know who raised it. In 4 the course of the discussions, I became aware of 5 it, though. 6 Q. And would this have been something you 7 were aware of early on or was it toward the end of 8 the negotiation that ultimately resulted in the 9 option? 10 A. It was sometime during '85 to the best 11 of my recollection. I don't remember specifically 12 when. 13 Q. Let me show you a document that's been 14 marked T1088. This is a fax from Richard Marlin 15 to Jon Mark and it attaches to it a letter from a 16 Mr. Mark to Mr. Canada at the NASD. I'd like you 17 to take a look at that. 18 A. I'm sorry. Had you asked me a 19 question? 20 Q. No. I was just waiting for you to look 21 up. I saw you were reading the letter fairly 22 intently. In the first page and, indeed, in the 1097 1 first sentence, it indicates that "We hereby 2 request your approval for a proposed option 3 transaction between DBL, an NASD member, and MCO 4 Holdings, Inc. involving a block of 790,459 shares 5 of common stock." 6 Do you see that? 7 A. Yes. 8 Q. Do you recall how it is that the number 9 of shares that were subject to the option 10 increased from 585,000 up to 790,459? 11 A. Other than what I've already said to 12 you, no. 13 Q. Do you recall -- did you go to 14 Mr. Munitz or anyone else at MCO and get approval 15 to do the transaction at the 70,930,459 shares 16 level? 17 A. I'm sure I discussed it with people. I 18 don't know that I necessarily sought approval. 19 That would have been for others to provide, I 20 believe. 21 Q. Well, others would have provided the 22 approval, but you would have sought their 1098 1 approval, correct? 2 A. Well, no. I don't mean that. I meant 3 that at the end of the day it was my understanding 4 the board would pass on whether or not they wished 5 to move forward with it. 6 Q. And at this point in time, was it -- 7 well, strike that. 8 If there had been no problem with NASD, 9 was it your understanding that MCO was intending 10 to go forward with the full 790,459 shares? 11 A. Yes. 12 Q. Now, do you recall having seen this 13 letter at or about the time that it was sent out 14 to the NASD? 15 A. I can't say for certain. I understood 16 that at the time there was certain correspondence 17 and/or discussions occurring. I remember the name 18 Mr. Canada. 19 Q. Now, it indicates at the bottom of the 20 second full page that the parties wish to be able 21 to close this transaction no later than 22 December 26th, 1985. Do you see that? 1099 1 A. Yes. 2 Q. And then, if you turn to the next page, 3 the paragraph at the top of the third page 4 explains the rationale as to why the parties wish 5 to close the transaction before December 26th, 6 1985. 7 Does that paragraph accurately reflect 8 your understanding of why the parties wish to 9 close the transaction before December 26th, 1985? 10 A. Well, I think I testified earlier that 11 I understood there was a change that was to take 12 place approximately at December 26th, but whether 13 this particular sentence at the top of Page 3 is 14 the reason that as a company we wished to do it 15 prior to that time, I don't really know. 16 Q. And it says here that if you were to 17 wait and do the transaction after December 26th, 18 that such regulations require entities that 19 acquire additional securities which may be deemed 20 to be voting stock as defined in the regulations 21 of the savings and loan holding company so as to 22 acquire control as defined in the regulations of a 1100 1 savings and loan holding company to seek prior 2 approval of the Federal Home Loan Bank Board for 3 such acquisition. 4 Do you see that? 5 A. Yes. 6 Q. Do you recall having a discussion with 7 anyone at that time that if you waited until after 8 the December 26th, 1985 date, that it would be 9 necessary to seek prior approval for the 10 transaction with the regulators for the Federal 11 Home Loan Bank Board? 12 A. No, not specifically. 13 Q. Well, do you have some general 14 recollection of a discussion of that nature? 15 A. I have general recollections that if we 16 didn't consummate the transaction before 17 December 26th, 1985, that for all practical 18 purposes, we were not going to consummate the 19 transaction after December 26th, 1985. 20 Q. Do you have any recollections of 21 discussions as to whether it was advisable to seek 22 prior approval of the Federal Home Loan Bank Board 1101 1 for the acquisitions prior to entering into the 2 option arrangement? 3 A. No. 4 Q. And that wasn't discussed with anyone 5 that you recall? 6 A. I don't recall having such cushion 7 discussions. It may have been discussed by 8 others, but I don't recall them. 9 Q. To your knowledge, did anyone on behalf 10 of MCO approach the Federal Home Loan Bank Board 11 and seek their approval of the option arrangement 12 prior to entering into the option arrangement? 13 A. To my knowledge, no. 14 Q. And then in the last full paragraph 15 there, it talks about "In the event approval is 16 not obtainable in the time frame requested, the 17 parties would intend to close a portion of the 18 transaction relating to 490,459 shares subject to 19 being rescinded in the event NASD approval is not 20 obtained within 90 days." 21 Do you see that? 22 A. Yes. 1102 1 Q. Is it -- do you know what that sentence 2 is referring to there? Was the deal going to be 3 done in two blocks? 4 A. Not so far as I was concerned, no. 5 Q. Was it your understanding that there 6 was going to be a transaction for 300,000 shares 7 and a second transaction for 490,459 shares and 8 that if approval wasn't obtained for the 490,459 9 shares that it would be subject to rescission? 10 A. No. That was never my idea nor how I 11 thought of the transaction at this point. I 12 thought there would be one transaction and only 13 one transaction, but I didn't know for how many 14 shares that would be. 15 Q. And you thought initially that that 16 transaction would be for the full 790,000 shares? 17 A. Yes. 18 Q. And then at some time subsequent to 19 that, it was determined -- was it determined that 20 you could not do the entire transaction for the 21 790,000 shares? 22 A. Yes. 1103 1 Q. And how did you come to that 2 understanding? 3 A. I recall that a letter came from the 4 NASD in response to either this request or other 5 requests that said "Thank you for asking us about 6 this, but so far as we're concerned 300,000 shares 7 is all that can be subject to an option." 8 Q. Okay. Let me hand you a copy of what's 9 been marked T1105. This is a letter dated 10 December 24th, 1985, and it's from Mr. Peter 11 Canada to Mr. Jon Mark and it appears to be in 12 response to the letter which Mr. Mark sent to 13 Mr. Canada on December 20th which is marked as 14 Exhibit T1088 that we've just reviewed. 15 Do you recall seeing this letter 16 previously? 17 A. Yes, I believe I did. 18 Q. And upon receiving that response, did 19 the parties then decide to reduce the number of 20 shares that would be subject to the put call 21 option? 22 A. Yes. 1104 1 Q. And prior to receiving the letter, it 2 was your intention to enter into the transaction 3 for the full 790,000 shares; is that correct? 4 A. For the option in respect of those 5 shares, yes. 6 Q. Okay. And after receiving the letter, 7 did that number then change? 8 A. Yes. 9 Q. And how did it change, sir? 10 A. It was reduced to 300,000. 11 Q. Now, it says in the letter that "as 12 parties to the UFG option transaction set forth in 13 your letter, we'll be holding equal numbers of 14 long and short options on the same side of the 15 market. Option positions covering in excess of 16 150,000 shares of UFG common stock would not be 17 permitted under Section 3 of Appendix E." 18 Do you see that? 19 A. Yes. 20 Q. Was it your understanding that if there 21 was a simultaneous call option backed up by a put 22 option that you would be limited to 150,000 shares 1105 1 under the NASD rules? 2 A. Wanting to answer the question quickly 3 and not to quibble with the words, basically, yes, 4 that's correct. 5 Q. Okay. And in order to circumvent that 6 or deal with that issue, did the parties modify 7 the option arrangement? 8 A. Well, not to circumvent but to comply, 9 yes, they did. 10 Q. Okay. And what was the modification 11 that they undertook in order to come into 12 compliance with those provisions of the NASD? 13 A. Basically, that upon entering into the 14 arrangement there would be an option to acquire 15 shares, a call option, by MCO at a future point in 16 time, about two and a half years, for a period of 17 about 30 days and then if and only if MCO did not 18 exercise that option would there then at a future 19 date be an option, a put option of Drexel Burnham 20 for 300,000 shares. 21 Q. Now, let me give you a copy of what's 22 been marked as T1085. And if you'll look at the 1106 1 back of that document -- yes. Here's a copy of 2 the option agreement. Would you turn to the 3 option agreement and maybe we can take a look at 4 it for a moment? 5 A. Would it be okay if I could move these? 6 Q. Certainly. I think those are from the 7 last witness anyway. 8 A. Okay. 9 Q. First of all, does that appear to be 10 the stock option agreement that was ultimately 11 entered into by the parties? 12 A. Yes, sir. 13 Q. And if you turn to the last page, is 14 that your signature that appears on behalf of MCO 15 Holdings, Inc.? 16 A. Yes, sir. 17 Q. Now, I notice that there are some 18 initials in the margin and opposite various 19 changes in the document. 20 When you received the document, were 21 all of the numbers in the document filled in or 22 were they blank? 1107 1 A. When I received the document, sir? 2 Q. Yes. Was the document forwarded to you 3 by legal counsel? 4 A. Yes, to the best of my recollection. 5 Q. Okay. And when it was sent to you, did 6 the document have the number of shares that would 7 be the subject of the stock option agreement 8 filled in or was that something that you filled 9 in? 10 A. To the best of my recollection, we 11 filled it in, sir. 12 Q. Okay. Now, the document had been 13 prepared in New York and then sent out to 14 California for execution by you and Mr. Madigan? 15 A. Don't know. 16 Q. Well, you were in California, were you 17 not -- 18 A. I was. 19 Q. -- when you executed the document? 20 A. Yes, I was. 21 Q. Do you recall was it at the offices of 22 Drexel Burnham Lambert? 1108 1 A. Yes, I do recall that. 2 Q. And do you recall the day on which the 3 document was executed? 4 A. I believe it was Christmas Eve. 5 Q. Okay. And that was because you were 6 anxious -- I mean MCO was anxious to get the 7 option agreement executed prior to December 26th, 8 1985, when the regulations changed; is that 9 correct? 10 A. Yes. 11 Q. Now, there are also some words that are 12 stricken from the document or struck through and 13 then there are -- there is language that is 14 interlineated in places. 15 Do you know who struck the language out 16 and interlineated the new language? 17 A. One of the attorneys present at the 18 closing. 19 Q. And were you present when that 20 interlineation took place? 21 A. Yes, I believe I was. 22 Q. And you approved the changes that the 1109 1 attorneys had made? 2 A. Yes. I initialed them all here, I see. 3 Q. Okay. And so, those are your initials 4 that appear in the margins? 5 A. Yes. 6 Q. And you indicated that the document had 7 been modified so that there was not a simultaneous 8 put -- a call followed up by a simultaneous put 9 option; is that correct? 10 A. It was modified so that there would not 11 be both a put and a call outstanding at the same 12 time, yes. 13 Q. And if you turn to Page 5 and look at 14 the changes that appear on Paragraph 3, are those 15 the modifications you're making reference to? 16 A. Yes. 17 Q. And could you read into the record what 18 the interlineation there is after grant of the DBL 19 option? 20 A. Yes. "A. In the event that the MCO 21 option expires unexercised, then at that time MCO 22 agrees to grant to DBL an option." 1110 1 Q. Okay. Now -- and since there weren't 2 two options outstanding at the same time, it was 3 then possible to undertake the transaction for 4 300,000 shares. Is that fair? 5 A. Yes. 6 Q. I mean under the NASD rules. And, so, 7 that would explain how the 300,000 number was come 8 at on Page 1; is that correct? I mean, Page 1 of 9 the stock option agreement. 10 A. Yes. 11 Q. Okay. Now, with respect to the 12 purchase price, it indicates it would be equal to 13 the sum of 2,557,000 had in cash. Now, I believe 14 if you do the math on that, you come up with $8.59 15 a share for the 300,000 shares. 16 Do you recall how the parties came to 17 that per share price for the option arrangement? 18 A. No. 19 Q. Was the per share price above the then 20 price at which MCO -- I'm sorry -- UFG shares were 21 trading? 22 A. My recollection is that that price was 1111 1 somewhere within the range of where the UFGI stock 2 had been trading over a period going back to 3 roughly the time that we began to talk with Drexel 4 Burnham and others. 5 Q. Well, for purpose of this examination, 6 assume -- and I can certainly show you the 7 documentation of the NASD -- but assume that the 8 bid and ask price on December the 24th for those 9 shares was $6 -- six and a quarter to six and a 10 half. 11 How was it that you arrived at a per 12 share price of $8.59 which is over $2 above the 13 then trading price of the shares? 14 A. I don't know how that price was arrived 15 at. 16 Q. Was that the price at which Drexel 17 Burnham Lambert had acquired the shares over a 18 period of time in the past? 19 A. I have no idea. 20 Q. Who gave you that number, sir? 21 A. I don't know who gave it. 22 Q. Someone did, but you don't know who it 1112 1 was? 2 A. No. 3 Q. It would have been someone at MCO? 4 A. At MCO or at Drexel or Drexel's 5 attorneys, but I don't know which. 6 Q. Well, if it had been Drexel's 7 attorneys, you would have had to have gone back to 8 MCO and advised them, someone, that this was the 9 price at which the shares were going to be 10 optioned, wouldn't you? 11 A. It would have been part, I believe, of 12 what was presented to the board. 13 Q. Well, do you recall going to Mr. Munitz 14 and telling him before you executed the document 15 that, "Hey, these guys want 8.59 a share and it's 16 several dollars over what the price of the shares 17 is presently trading for"? 18 A. Specifically going to Mr. Munitz and 19 saying that, no, but I might have. 20 Q. But as you sit here today, you haven't 21 any idea of how that number was arrived at? 22 A. I know I was not a part of the process 1113 1 that led to that number, whatever that process 2 might have been. 3 Q. Do you have any idea who was a part of 4 that process? 5 A. No. 6 Q. But you are the person at MAXXAM that 7 would be most knowledgeable about this 8 transaction, correct, sir? 9 A. Yes. 10 Q. So, is it fair to say that there is 11 known at MAXXAM that knows how the price was 12 arrived at? 13 A. I think it's fair to say that I asked 14 during the course of my inquiry that you asked me 15 about earlier to see if there was anybody who did 16 know, and I was not able to come up with any 17 answers to that question. 18 Q. Now, the next number down there, 19 $683 -- strike that. 20 The next number, $683,147, that looks 21 to me to represent a premium of roughly $2.28 or 22 so a share? 1114 1 A. Yes. 2 Q. Okay. Do you know how that premium 3 price was arrived at? 4 A. Yes. 5 Q. And how was that? 6 A. Through my discussion/arguments with 7 people at Drexel. 8 Q. And who were the people at Drexel that 9 you talked to about that? 10 A. I think I said earlier that I thought 11 it was Art Bilger. 12 Q. Now, you said you thought you talked to 13 Mr. Bilger about the subsequent amendment. Is it 14 also your recollection that you talked to 15 Mr. Bilger about the initial option? 16 A. Yes. 17 Q. Okay. And how was it that you know 18 Mr. Bilger? Had you worked with him on other 19 projects with Drexel Burnham Lambert? 20 A. Yes. 21 Q. Okay. And what were the nature of the 22 projects that you worked with Mr. Bilger on? 1115 1 A. He was in the corporate banking 2 department. He was one of a few investment 3 bankers in the early 1980s and I had occasion to 4 meet with him over the years. 5 Q. And had he assisted MCO in acquiring 6 financing through high-yield bonds? 7 A. Prior to December, '85? 8 Q. Yeah. 9 A. Yes, I believe so. 10 Q. And subsequent to 1985, did you 11 continue to have involvement with Mr. Bilger in 12 acquiring financing for MCO through the issuance 13 of high-yield bonds? 14 A. For MCO or for companies with which MCO 15 was affiliated, yes. 16 Q. Did Mr. Bilger work in the high-yield 17 bond department of Drexel Burnham Lambert? 18 A. My recollection is he was in the 19 corporate finance department. 20 Q. And would that have been different from 21 the high-yield bond department? 22 A. To my way of thinking, yes, this would 1116 1 have been working with issuers as opposed to the 2 high-yield department from the perspective of 3 trading or otherwise. 4 Q. Okay. And then I notice ultimately the 5 transaction did incorporate the notion of an 6 irrevocable letter of credit. It sets out that in 7 the Paragraph B3 down below, does it not, on Page 8 2 of the document? 9 A. Yes. 10 Q. And do you recall, in addition, was 11 there an indemnification provision to indemnify 12 Drexel against any losses associated with entering 13 into the transaction? 14 A. Yes, there was an indemnification 15 provision. I don't know that it was with respect 16 to any losses. That was something negotiated by 17 the attorneys. 18 Q. Well, take a look at Paragraph 8. It's 19 on Page 12. See if it doesn't indicate that. It 20 indicates, does it not, that they would be 21 indemnified from and against any and all losses? 22 Do you see that? 1117 1 A. I see the words, yes. 2 Q. Okay. In addition to that, ultimately, 3 did the parties agree as to who should pay for the 4 legal fees of Drexel in entering into or the cost 5 and expenses occurred in connection with this 6 negotiation and transaction? 7 A. Yes. My recollection is that MCO 8 agreed to pay up to $40,000 of those costs or 9 expenses. 10 Q. And if you take a look -- let me just 11 stop for a moment here and just see if I've got it 12 straight. On December 24th, the parties 13 contemplated doing a transaction for 790,459 14 shares subject to the approval of the NASD. And 15 sometime later that day, on the day of December 16 the 24th, 1985, you received a letter from 17 Mr. Canada and Mr. Canada indicated that the 18 transaction could not be done for the number of 19 shares you had contemplated; is that correct? 20 A. Yes, but I may have heard about it the 21 evening before. I don't remember for sure. 22 Q. You mean, he may have phoned over and 1118 1 followed it up with a letter? 2 A. Yes. 3 Q. Okay. But then at least on the date of 4 December the 23rd, 1985, in the morning, the 5 parties intended to do 790,459 shares were it 6 possible. And upon learning on either the 23rd or 7 the 24th from Mr. Canada that there were 8 limitations imposed by the NASD, the parties then 9 amended the draft agreement and agreed to do the 10 transaction for 300,000 shares. Is that fair? 11 A. Yes. 12 Q. Okay. Now, my question is: If the 13 parties didn't decide to do the transaction for 14 300,000 shares until sometime on December the 23rd 15 or 24th, how is it that the board minutes dated 16 December the 17th, 1985, approve a transaction for 17 300,000 shares that wasn't agreed upon until 18 almost a week after the board met and approved the 19 option agreement? 20 A. I can guess at that. I don't have a 21 clear answer for it based on personal knowledge. 22 Q. Well, did you attend the December 17th, 1119 1 1985, meeting of the board of directors? 2 A. Yes, I believe I did. 3 Q. And at the meeting of the board of 4 directors, did the board approve a transaction in 5 the amount of 300,000 shares? 6 A. No. The way I remember it is the board 7 approved a transaction for a larger amount of 8 shares if that number was possible. 9 Q. So -- 10 A. If that number was legal. 11 Q. Okay. So, in other words, the minutes 12 of the board approving this do not accurately 13 reflect what occurred at the board meeting on 14 December the 17th, 1985? 15 A. In that respect, yes. 16 Q. Okay. Now, it says here on Page 4 of 17 the board minutes, "DBL was willing to grant a 18 30-day option to the corporation to acquire such 19 shares at a purchase price of $8.59 per share." 20 Did the board approve an 8.59 -- 21 eight-dollar and fifty-nine cent per share price 22 for the purchase of the shares at the meeting on 1120 1 December the 17th, 1985? 2 A. I believe so. 3 Q. And did they also approve the payment 4 of a premium to Drexel Burnham Lambert to acquire 5 the shares? As I look at the board minutes, I 6 don't see a reference to a premium; but it's late 7 in the day and perhaps my eyes deceive me. 8 A. Well, I don't see it there either, but 9 it would be my recollection that they approved all 10 material terms of the transaction. So, my answer 11 would be yes. 12 Q. And as you came away from that board 13 meeting, it was your understanding that the board 14 desired to enter into this transaction for the 15 full 790,459 shares if it were possible to do so? 16 A. Yes, that was my understanding. 17 Q. And then a week later, when you 18 determined that the rules would not permit that, 19 they -- you executed the transaction for the 20 300,000 shares, correct? 21 A. Yes. 22 Q. Okay. Do you know -- 1121 1 A. For the option on the 300,000 shares. 2 Q. And do you know how it is then that the 3 board minutes came to reflect only the 300,000 4 share transaction? 5 A. Again, I can only think that -- and I 6 don't know for certain because I didn't draft the 7 minutes -- that those who did did it -- 8 Q. Well -- 9 A. -- looking backwards. 10 Q. Okay. If you don't know, we'll have 11 other people that can probably identify that for 12 us. 13 Did MCO seek a written opinion from 14 legal counsel that if MCO entered into the put 15 call option with Drexel to acquire 300,000 shares 16 of UFG stock, MCO would not be deemed to hold the 17 underlying UFG stock. 18 MR. EISENHART: Your Honor, I think 19 questions as to what advice MCO may have sought 20 from its counsel and what advice may have been 21 given by its counsel are privileged. We would 22 assert the attorney-client privilege and we would 1122 1 object on that basis to the question. 2 MR. RINALDI: Your Honor, we are 3 charged here with the obligation of showing that 4 these people acted with reckless disregard of the 5 law. And it strikes me that if these people 6 entered into a transaction not knowing whether 7 that transaction was undertaken in a legal fashion 8 or not, I am entitled to know whether they sought 9 an opinion. Now, the fact of the seeking of an 10 opinion is one issue. The content of the opinion 11 and what the conversation or the communications 12 were regarding the substance of that opinion is 13 quite another issue. But I think I am entitled at 14 the very least to know whether they sought the 15 opinion of legal counsel as to whether they could 16 enter into this transaction or not. 17 MR. EISENHART: Your Honor, MCO as a 18 company like any citizen of this country. It has 19 the right to consult with counsel and has the 20 right to do so with the expectation that the 21 consultations will be kept confidential. And I 22 think it's highly inappropriate for Mr. Rinaldi as 1123 1 an officer of the government to try to circumvent 2 that privilege and that basic right. 3 MR. RINALDI: Well, they may have a 4 right, Your Honor, but the right does not go 5 beyond those matters as to which they -- first of 6 all, the privilege does not apply as to simply the 7 question "did they seek an opinion?" That doesn't 8 require us to learn anything about a 9 communication. Okay? 10 MR. EISENHART: That wasn't his 11 question, Your Honor. And when you say "Did you 12 seek an opinion on such and such a matter," how 13 can he possibly answer that question without 14 disclosing the nature of the legal advice he 15 sought and obtained? 16 THE COURT: I'll sustain the objection. 17 MR. RINALDI: If I may point out, Your 18 Honor, there are innumerable memoranda with 19 regulatory counsel in this case that have been 20 disclosed by counsel. When counsel discloses the 21 contents of legal advice it has been -- that has 22 been given to them regarding one aspect of a 1124 1 transaction, they will have waived their right to 2 assert the privilege as to other aspects of that 3 transaction. And in this case we will see that 4 there is a number of legal memoranda that were 5 voluntarily turned over to the OTS on precisely 6 this subject. 7 MR. EISENHART: Your Honor, I believe 8 what he's referring to -- perhaps Mr. Rinaldi 9 wasn't in the courtroom when we had this 10 discussion, but I believe what he was referring to 11 were the inadvertently produced privileged 12 documents that have already been the subject of 13 discussion in this courtroom. And I believe the 14 arrangement with which we are using them in this 15 case is that the waiver will go only to the 16 document itself, thereby avoiding the need for an 17 inquiry into the circumstances of the production 18 and whether any broader waiver was intended. 19 THE COURT: If those are the documents, 20 the ruling was that they would not be used as a 21 basis for asserting the waiver of attorney-client. 22 MR. RINALDI: Your Honor, the 1125 1 documents -- I said that at the time and I thought 2 the agreement was that we could use the documents 3 and that we would not at that time deal with the 4 question of waiver. But if we have come to the 5 point now of did they waive the privilege or not, 6 I think it incumbent upon the -- this tribunal to 7 make a determination about whether there is a 8 waiver because if there has been a waiver, then we 9 are entitled to go into this line of questioning. 10 And -- 11 THE COURT: But you're -- seems to me 12 the agreement was that the inadvertently -- and we 13 haven't clearly determined that, but the documents 14 referred to as inadvertently produced, it was my 15 clear recollection that they would not be used as 16 a basis for asserting the waiver on other matters 17 and that was the basis on which they were 18 received. 19 Now, if you have some other grounds for 20 asserting the waiver, that's another matter. As 21 to -- if you're asserting the waiver based on the 22 so-called inadvertently produced documents, it's 1126 1 my ruling that that will not fly. 2 MR. RINALDI: Okay. Then maybe we are 3 at some misunderstanding, Your Honor, because 4 Mr. Eisenhart said "If we have to stop this 5 proceeding here to do a waiver hearing, then we 6 will be here forever." 7 And I said, "Fine. For the purposes of 8 this examination, we will not -- we will agree 9 that the waiver issue has not been resolved." 10 But the problem I have at this point in 11 time is that we have no basis upon which 12 Mr. Eisenhart can assert that there was 13 inadvertence. 14 The law is to the effect, Your Honor, 15 that the burden is on Mr. Eisenhart to establish 16 that the document is -- falls within the privilege 17 and to do that, it is his burden of demonstrating 18 that the waiver was inadvertent. 19 There has been no evidence thus far in 20 this proceeding -- and I would submit to the Court 21 that Mr. Eisenhart cannot produce that evidence, 22 mainly because I know that these documents were 1127 1 turned over to the FDIC as part of disclosure in a 2 different proceeding. And in that proceeding 3 there was a clear waiver of any entitlement to the 4 attorney-client privilege. 5 And, so, to now argue that there has 6 been no waiver and it was inadvertent, it's his 7 burden to do so. And absent establishing that 8 burden, I think I'm entitled to go into this line 9 of questioning. 10 THE COURT: Well, as far as I'm 11 concerned, that issue was settled the other day 12 when we received those documents. 13 MR. RINALDI: Okay. Then -- what about 14 the further question? May I ask the witness 15 whether an opinion was sought irrespective of the 16 question of whether, as to the content of the 17 opinion? I'm not going to ask him the nature of 18 the opinion but was any opinion sought from 19 counsel. 20 MR. EISENHART: Your Honor, I don't see 21 how he could answer that question in any 22 meaningful context. I mean, people seek opinions 1128 1 from their lawyers all the time; and that fact 2 alone is not very meaningful. 3 MR. RINALDI: Well, Your Honor, may I 4 suggest something, a procedure, because I think 5 that this is going to be a problem that's going to 6 nag this proceeding. I would like to submit a 7 brief to the Court on the subject of waiver 8 because the problem I have is Mr. Eisenhart keeps 9 claiming that these things were inadvertent and, 10 yet, his assertion that they are inadvertent 11 doesn't carry the burden. 12 The burden requires that he prove that 13 there was inadvertence. And it's not my 14 responsibility to prove that it was not 15 inadvertent. If I have the document, it carries 16 with it a presumption that these were -- these 17 disclosures were advertent and it's his burden to 18 prove otherwise. And absent that, the privilege 19 has been waived. 20 THE COURT: You can submit your brief, 21 but I hope that you'll review the transcript where 22 this was discussed the other day where those 1129 1 documents were received. 2 MR. RINALDI: Okay. But just so I 3 understand it, Your Honor, because I'm having a 4 little bit of difficulty in terms of understanding 5 what the Court thinks the ruling was with respect 6 to those documents the other day because I thought 7 the ruling was we were going to allow them to come 8 in and the question of privilege -- the fact that 9 they came in would not be a basis for claiming 10 waiver of privilege but that I did not waive the 11 right to claim that there had been a waiver 12 previous to that by virtue of them having turned 13 them over to the FDIC. 14 THE COURT: It's my understanding they 15 were received and, as to them, any dispute as to 16 waiver was set aside but the receipt of those 17 documents would not be used as a basis to argue 18 waiver as to other documents at a later time. 19 MR. RINALDI: Fine. And I agree with 20 that, Your Honor. All I'm suggesting is now we've 21 reached another juncture and what I'm saying is 22 there are documents that pertain to the option 1130 1 agreement that are attorney-client privileged that 2 have been turned over to the OTS by the other 3 side. And having turned -- well, I suggest that 4 what we do at this time is that I put on yet 5 another document. Okay? And then after we put on 6 that document, I will reassert the argument 7 because I think you will see that they have turned 8 over attorney-client privileged matter to us 9 regarding this very subject. And once they have 10 turned over a privileged document with respect to 11 this subject, they have waived the privilege. 12 THE COURT: Is this the claimed 13 inadvertently produced documents? 14 MR. RINALDI: No. This -- well, this 15 is claimed inadvertently, but I have -- as I said, 16 I have correspondence from the FDIC saying these 17 are the documents turned over to us by -- I 18 believe it was the law firm of Mr. Keeton some two 19 years ago or two and a half years ago to the FDIC. 20 MR. KEETON: About five years ago, 21 maybe six. 22 MR. RINALDI: They were turned over? 1131 1 MR. KEETON: No. They weren't turned 2 over by me. They were produced by MAXXAM. They 3 were produced in my offices. MAXXAM speaks to it. 4 But that's how long ago this investigation 5 started. 6 MR. RINALDI: Well, MAXXAM produced 7 them in Mr. Keeton's offices. Now, after the 8 fact, MAXXAM's counsel says, "Well, those were 9 inadvertently produced." 10 It seems to me that where they are 11 going to make an argument that there was 12 inadvertence, they should have done something with 13 it five years ago rather than wait until we get to 14 a hearing on this matter and, as I present a 15 document to the individual, they then indicate to 16 me, "No, those are privileged." 17 MR. KEETON: Your Honor, let's be clear 18 on what happened. There were, like, 60 boxes of 19 documents produced as part of an informal 20 production trying to cooperate with the FDIC by 21 MAXXAM. They were produced in my office because 22 it was convenient because I was producing 1132 1 documents for Mr. Hurwitz. The FDIC went through 2 all those and designated some to be copied. It's 3 not like there was a small stack. There were 60 4 boxes when issues were not joined. If we're going 5 to talk about it was their burden or MAXXAM's 6 burden -- and Mr. Eisenhart will speak to it -- 7 it's counsel's burden before you get into trial if 8 he's trying to claim a blanket waiver. This 9 issue's never been joined. 10 In our FDIC case upstairs, we got it 11 joined, joined against the FDIC on boxes of 12 materials they produced out of about five boxes. 13 But if counsel is to come into court now while 14 we're in the middle of trial and against what he 15 said to Your Honor the other day and say, "Oh, now 16 we've got a general waiver" is simply wrong. 17 MR. RINALDI: Your Honor, I would 18 suggest that if there is an issue of waiver with 19 respect to a particular document, that perhaps 20 Mr. Eisenhart had it right. Perhaps we have to 21 have some resolution of this issue and the parties 22 who participated in the production of the 1133 1 documents need to present evidence regarding that 2 issue. But it seems to me that when they turn 3 these documents over, I mean in the course of a 4 proceeding, they have, in effect, waived their 5 right to claim the privilege. 6 But just to make the record clear, 7 allow me to submit to the Court yet another 8 document that is not one of the group that I 9 turned over yesterday that goes directly to the 10 very issues we're talking about today and the 11 applicability of the federal regulations to the 12 put call option. 13 MR. EISENHART: Your Honor, may I just 14 say one thing? At the risk of repeating what I 15 did say the other day, the documents were turned 16 over to the FDIC in an unrelated matter and 17 apparently given by the FDIC to the OTS. We have 18 consistently objected to their use and, as I 19 informed the Court, we will not object to the use 20 of these specific documents in the courtroom. Had 21 they wished to seek a broader waiver, they have 22 had several years to do so. The hearing that 1134 1 would be necessary to support their claim for a 2 broader waiver would substantially disrupt the 3 trial. They have never tried to do it up till 4 now, and I think it would be very disruptive to 5 this proceeding to do it now. 6 MR. RINALDI: Well, I don't know of any 7 proceeding before the administrative law judge 8 that permits the administrative law judge to 9 conduct pre-hearing discovery proceedings and to 10 take evidence on waiver of issues -- waivers of 11 issues of this nature. But I'd submit to the 12 Court that if this is an issue, we can arrange to 13 bring in the witnesses that can testify as to this 14 particular issue, put on the evidence, and the 15 Court may determine for itself whether there has 16 been a waiver or not. 17 If there has not been a waiver, then 18 the documents can be used in the proceeding and if 19 there has been a waiver, then the Court would be 20 in the position to delete the documents from the 21 record. 22 MR. EISENHART: Well, as to the 1135 1 procedural aspects of it, the issue has come up in 2 any number of depositions because they have used 3 these documents during the depositions. We have 4 said essentially what I've said in the courtroom, 5 which was these were inadvertently produced 6 documents. We object to their use. We can't stop 7 you from using them. They have never sought a 8 ruling on those objections. They have never 9 sought to assert any broad waiver or claim of 10 privilege. They have had ample time to do it, and 11 I think this Court has plenty of power. This 12 Court could have resolved the issue certainly in 13 the context of those depositions had OTS ever 14 sought to raise it. 15 MR. RINALDI: Actually, if I may make 16 one point about that. When Mr. Schwartz 17 originally testified about that, I asked him this 18 line of questions and he answered with regard to 19 the question of whether he had sought advice of 20 legal counsel. The second time that I deposed 21 him, the privilege was interposed at that point in 22 time. But on the first instance when the issues 1136 1 were raised and the questions were asked while his 2 counsel, Ms. Lawton was present, there was no -- 3 he answered fully as to whether he had sought 4 legal -- whether he had sought legal opinions. 5 And, so, from my speaker speculative in 6 this proceeding, there had been a waiver. 7 MR. VILLA: Your Honor, at the risk of 8 being an innocent bystander here, I think that we 9 would object to terminating the orderly 10 progression of this trial for a motion -- this is 11 effectively a motion to compel which should have 12 been filed six months ago by the OTS if they were 13 alleging waiver and not stopping an ongoing trial 14 to litigate what should have come up on a motion 15 to compel. So, we would object to stopping this 16 proceeding for a couple of days for an evidentiary 17 hearing. 18 MR. RINALDI: I don't think I was 19 suggesting stopping the proceeding. I think the 20 parties can agree upon who the witnesses are, 21 bring the witnesses in, and in the process of the 22 proceeding, put them on. 1137 1 THE COURT: Well, you've raised a new 2 issue here. You've said that, in deposition, the 3 witness answered the question. Now, that's not an 4 inadvertent waiver of production of documents. 5 That's a new ground that was allowed by our ruling 6 the other day. So -- 7 MS. LAWTON: Your Honor -- 8 THE COURT: Miss -- 9 MS. LAWTON: -- if I can speak to that. 10 It was not a -- what we would consider to be a 11 deposition in which Mr. Schwartz gave answers as 12 to whether they sought advice from counsel or 13 relied on advice of counsel. It was in the course 14 of the deposition where we did not have these 15 documents. They were presented during the 16 deposition. Limited questions were asked about 17 them. He answered them and it was our position at 18 the time that because there was no proceeding and 19 OTS represented at that time -- and this is over 20 two years ago -- that they were on a fact finding, 21 that there were no issues, there was no proceeding 22 and it was our view that reliance on counsel, a 1138 1 reliance on counsel defense was something that 2 required an actual allegation. And the OTS was 3 representing at that time that there was no 4 allegation and it was only with respect to a 5 limited number -- I think perhaps one or two 6 documents -- and it was "Did you rely on counsel? 7 Yes. What was the advice?" And I don't believe a 8 specific answer was given, but perhaps my 9 recollection two and a half years later is wrong. 10 MR. RINALDI: Well, Your Honor, my 11 recollection is somewhat different, but I can 12 certainly assure the Court that we can easily 13 provide a copy of the investigative deposition. 14 Mr. Schwartz was called as a witness on this very 15 subject and he was asked this very question in an 16 investigative deposition. At that time, I asked 17 him about the -- whether he had received advice of 18 counsel before he entered into this. He gave his 19 response. When I followed up on further 20 questions, Ms. Lawton said she was going to 21 instruct the witness not to answer any further 22 questions and there was a colloquy on the record 1139 1 and we went on. 2 But he clearly answered questions, 3 particularly the question that I'm asking now: 4 Did he seek the advice of counsel? And the 5 responses at least went that far. 6 THE COURT: Well, that would be a 7 waiver based on something other than the receipt 8 of these documents; so, as far as I'm concerned, 9 if you can establish that, you've established 10 waiver as to that question. 11 MR. VEIS: All right. Well, I suggest 12 that we proceed on with the examination. And this 13 obviously is going to slop over until Monday 14 morning. I would be happy to pull the materials 15 and present them to the Court on Monday morning 16 and then we can at that point in time, I guess, 17 see to what extent there would have been a waiver 18 in the prior deposition because I don't want to 19 represent anything to the Court. I'm sure 20 Ms. Lawton doesn't either. I haven't looked at 21 that material in probably a week or so and I'd 22 need to review it to make sure exactly what it 1140 1 does contain. 2 THE COURT: Fine. 3 MR. EISENHART: Fine, Your Honor. 4 Q. (BY MR. RINALDI) Now, I think 5 probably that at this juncture while we're into 6 the subject, I'm going to hand another document -- 7 the witness another document that is clearly going 8 to be within the privileged area, but I think we 9 ought to make a record and then it will reflect 10 that there has been a privilege claimed and then 11 we can compare -- 12 THE COURT: I don't know what you're 13 talking about. We agreed we would receive those 14 documents if they had been inadvertently produced. 15 MR. RINALDI: Okay. This is another 16 document that we have not seen before. This is 17 yet a new one. 18 MR. EISENHART: This is Exhibit 19 --assuming he's referring to Exhibit T1084, Your 20 Honor, this is another of the documents that would 21 fall into that -- the inadvertently produced 22 category. 1141 1 Q. (BY MR. RINALDI) I guess I'm at this 2 point not sure where I am mainly because -- would 3 it be appropriate to take a five minute break, 4 Your Honor? 5 THE COURT: It might be appropriate to 6 adjourn until Monday morning. 7 Do you have an objection to that. 8 MR. RINALDI: No, I don't, Your Honor. 9 THE COURT: I think we should set some 10 boundaries as to what happened. Let me just say 11 that it was my understanding that the agreement 12 was that we would receive these alleged 13 inadvertently produced documents but that -- the 14 receipt of those and so on would not be used as a 15 claim of waiver as to other matters. Now, that 16 was my understanding. 17 MR. RINALDI: I am in agreement with 18 that but I thought, also -- my position was that 19 that didn't foreclose me from arguing that by 20 having produced those documents to us, that there 21 had been a waiver. 22 THE COURT: That wasn't the way I -- 1142 1 that's not my understanding. I thought if you had 2 other grounds such as the business that he 3 answered questions on this subject in another 4 setting, that would be another grounds for waiver. 5 But it would not be based on the inadvertent 6 production of the document. 7 MR. RINALDI: No. That was -- well -- 8 THE COURT: Let's take the weekend and 9 you have the transcript of that hearing that we 10 just were -- 11 MR. RINALDI: I'm sure we do. I 12 haven't looked at it, but I know that it's been 13 ordered and we'll take a look at it. 14 THE COURT: And -- the transcript where 15 you say Mr. Schwartz answered your question as to 16 whether he sought legal advice, if he answered it 17 there, I don't care if it was a formal or informal 18 proceeding, I think it's a waiver. 19 MR. RINALDI: All right. I will pull 20 that out and make copies and submit them to the 21 Court along with the transcript of the proceeding. 22 THE COURT: All right. Are there other 1143 1 matters? 2 MR. NICKENS: No, Your Honor, other 3 than the scheduling issue which we may not be able 4 to address at this moment. We do have these three 5 people from out of town, and they need to advise 6 us who they expect that they would call and how 7 long they would take to finish Mr. Schwartz. 8 MR. RINALDI: Would it be wise, Your 9 Honor, since Wednesday looks as if it's probably 10 going to be open in the morning or we have some 11 flexibility there to go ahead with the remaining 12 witnesses, try to resolve this question of 13 privilege, and then see if we could just finish up 14 Mr. Schwartz on Wednesday after we've resolved the 15 privilege issue. 16 THE COURT: Well, we've been around a 17 couple times on that one. I thought we had agreed 18 to stay with Mr. Schwartz. 19 MR. EISENHART: We had, Your Honor. 20 MR. RINALDI: Fine. Then we'll keep 21 going with Mr. Schwartz and I think Mr. Guido 22 addressed this earlier. If the witnesses come, 1144 1 then the witnesses will come and simply have to 2 wait. 3 THE COURT: I'm just suggesting you 4 have some obligation if you think it unlikely 5 you're going to get to them -- 6 MR. RINALDI: Certainly, yes. I 7 couldn't agree with you more. 8 MR. NICKENS: Dr. Kozmetsky is in his 9 Eighties. I mean, he should be advised -- he 10 shouldn't come here and then not be reached to 11 give his testimony. It's only a matter of 12 courtesy that -- for everybody that we make some 13 estimate to try to accommodate those situations. 14 THE COURT: I think they have agreed to 15 that. 16 MR. RINALDI: Well, I will agree to try 17 to accommodate them. I guess the problem I'm 18 always running into with other counsel is their 19 saying, "Well, how long will you need for this" 20 and "how long do you need for that" and I cannot 21 give them a finite estimate. I think that we can 22 finish with Mr. Schwartz, assuming that they don't 1145 1 have a long cross-examination of him, in several 2 hours. But I would think that Mr. Kozmetsky if we 3 put him on, may get on perhaps before noon, but I 4 don't think much before then. And Mr. Kozmetsky's 5 counsel had indicated to me that he would prefer 6 to do this in the morning because Mr. Kozmetsky is 7 better in the morning than he is at other times. 8 So, maybe we should just plan to do the rest of 9 Mr. Schwartz in the morning on Monday and then 10 just pick up with the other witnesses in the 11 afternoon. I don't know what to say. 12 THE COURT: Well, you have other 13 witnesses scheduled. What else would -- 14 MR. RINALDI: Well, I have a witness 15 coming from out of town who can't get here until 16 the afternoon session, Eckland, Mr. Eckland, who 17 is probably going to raise some privilege issues, 18 as well. I don't know. 19 MR. EISENHART: He's an attorney. 20 MR. RINALDI: And then there is another 21 individual that I can get here. Perhaps I could 22 ask Mr. Bentley, who is probably a short witness 1146 1 and who has expressed -- and seems to be extremely 2 cooperative in terms of his flexibility. Perhaps 3 we could do Mister -- finish Mr. Schwartz, do 4 Mr. Bentley in the morning, and then do -- oh, 5 boy. 6 MR. NICKENS: Your Honor, I'm not at 7 all sure that Mr. Bentley will be a short witness 8 and he also, if not 80, is approaching that age. 9 We will be happy to sit down with them to give 10 estimates of time. I'm only suggesting that these 11 people, in addition to the people in the 12 courtroom, deserve that courtesy. 13 THE COURT: All right. Well, I think 14 counsel is trying to do it. I know it's a 15 difficult task. 16 MR. RINALDI: Your Honor, I would 17 commit right now that if we could take a is a 18 minimum break to finish Mr. Schwartz this evening, 19 while I know the Court is not disposed to go long 20 hours, I'd be happy to try to just finish this 21 thing and at least get as far as we can, preserve 22 the attorney-client issue, and if the Court rules 1147 1 that there has been a waiver we can bring him back 2 for a few questions later and then we won't blow 3 the schedule. 4 THE COURT: Well, I assume there is 5 going to be some cross of Mr. Schwartz. 6 MR. NICKENS: Well, if counsel is 7 saying that he can finish with Mr. Schwartz in 30 8 minutes. 9 MR. RINALDI: No. I don't think I can 10 finish in 30 minutes, but I'll go to 6:00 or 6:30 11 if people want me to. But -- you know, then you 12 get into this whole issue of you throw off all the 13 next week over these issues. And I'm just -- 14 this -- I'm sorry. I've got a terrible headache 15 at this point, and I don't know what's going on. 16 THE COURT: We'll adjourn until 17 9:00 o'clock Monday. 18 19 (Whereupon at 4:13 p.m. 20 the proceedings were recessed.) 21 22 1148 1 STATE OF TEXAS COUNTY OF HARRIS 2 REPORTER'S CERTIFICATION 3 TO THE TRIAL PROCEEDINGS 4 I, Marcy Clark, the undersigned Certified 5 Shorthand Reporter in and for the State of Texas, 6 certify that the facts stated in the foregoing 7 pages are true and correct to the best of my ability. 8 I further certify that I am neither 9 attorney nor counsel for, related to nor employed 10 by, any of the parties to the action in which this 11 testimony was taken and, further, I am not a 12 relative or employee of any counsel employed by 13 the parties hereto, or financially interested in 14 the action. 15 SUBSCRIBED AND SWORN TO under my hand 16 and seal of office on this the 26th day of 17 September, 1997. 18 ____________________________ MARCY CLARK, CSR 19 Certified Shorthand Reporter In and for the State of Texas 20 Certification No. 4935 Expiration Date: 12-31-97 21 22 1149 1 STATE OF TEXAS COUNTY OF HARRIS 2 REPORTER'S CERTIFICATION 3 TO THE TRIAL PROCEEDINGS 4 I, Shauna Foreman, the undersigned Certified 5 Shorthand Reporter in and for the State of Texas, 6 certify that the facts stated in the foregoing 7 pages are true and correct to the best of my ability. 8 I further certify that I am neither 9 attorney nor counsel for, related to nor employed 10 by, any of the parties to the action in which this 11 testimony was taken and, further, I am not a 12 relative or employee of any counsel employed by 13 the parties hereto, or financially interested in 14 the action. 15 SUBSCRIBED AND SWORN TO under my hand 16 and seal of office on this the 26th day of 17 September, 1997. 18 _____________________________ SHAUNA FOREMAN, CSR 19 Certified Shorthand Reporter In and for the State of Texas 20 Certification No. 3786 Expiration Date: 12-31-98 21 22