1150 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 9-29-97 21 22 1151 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 LAWTON, Esquire of: Dechert, Price & Rhoads 11 1500 K Street, N.W. Washington, D.C. 20005-1208 12 (202) 626-3306 16 13 DALE A. HEAD (in-house) Managing Counsel 14 MAXXAM, Inc. 5847 San Felipe, Suite 2600 15 Houston, Texas 77057 (713) 267-3668 16 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO. AND 17 CHARLES HURWITZ: 18 RICHARD P. KEETON, Esquire of: Mayor, Day, Caldwell & Keeton 19 1900 NationsBank Center, 700 Louisiana Houston, Texas 77002 20 (713) 225-7013 21 22 1152 1 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO., CHARLES HURWITZ, AND MAXXAM, INC.: 2 JACKS C. NICKENS, Esquire 3 of: Clements, O'Neill, Pierce & Nickens 1000 Louisiana Street, Suite 1800 4 Houston, Texas 77002 (713) 654-7608 5 6 ON BEHALF OF JENARD M. GROSS: 7 PAUL BLANKENSTEIN, Esquire MARK A. PERRY, Esquire 8 of: Gibson, Dunn & Crutcher 1050 Connecticut Avenue, N.W. 9 Washington, D.C. 20036-5303 (202) 955-8500 10 ON BEHALF OF BERNER, CROW, MUNITZ AND HUEBSCH: 11 JOHN K. VILLA, Esquire 12 MARY CLARK, Esquire PAUL DUEFFERT, Esquire 13 of: Williams & Connolly 725 Twelfth Street, N.W. 14 Washington, D.C. 20005 (202) 434-5000 15 OTS COURT: 16 HONORABLE ARTHUR L. SHIPE 17 Administrative Law Judge Office of Financial Institutions Adjudication 18 1700 G Street, N.W., 6th Floor Washington, D.C. 20552 19 Jerry Langdon, Judge Shipe's Clerk 20 REPORTED BY: 21 Ms. Marcy Clark, CSR Ms. Shauna Foreman, CSR 22 1153 1 EXAMINATION INDEX 2 PAUL SCHWARTZ 3 Examination (Continued) by Mr. Rinaldi Cross-Examination by Mr. Villa 4 Cross-Examination by Mr. Eisenhart 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 1154 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:15 a.m.) 3 THE COURT: The hearing will come to 4 order. Are there preliminary matters? 5 MR. RINALDI: At this juncture, Your 6 Honor, I'm prepared to go ahead and examine 7 Mr. Schwartz. Should the -- I think I need to in 8 the process of this lay a foundation, establish 9 what he testified to previously, and then Your 10 Honor can make a determination whether I am in a 11 position -- whether that constitutes a waiver, I 12 think, and if the court concludes it is, then we 13 will go on. If the court concludes it isn't, then 14 I'll continue my examination. 15 I should point out to the court that I 16 delivered to the counsel this morning as well as 17 to the court a pleading entitled OTS submission 18 regarding the waiver of attorney-client privilege. 19 Your Honor had asked for a copy of the testimony 20 or the transcript of the proceedings from, I 21 think, the 23rd, which is the day when the first 22 question of the waiver of the attorney-client 1155 1 privilege had come up. I have attached that, 2 although it indicates in the pleading that that 3 particular passage in the transcript isn't 4 necessarily germane to this issue because the 5 claim we are making here is simply that 6 Mr. Schwartz having testified previously in an 7 investigative deposition while receiving advice of 8 counsel from MAXXAM's counsel who was representing 9 him at the time and in one of the later 10 transcriptions indicated was paid for by MAXXAM, 11 it's our position that would constitute a waiver. 12 But I'll put all of that on the record on the 13 examination this morning and then we can go from 14 there. 15 I should bring the Court's attention to 16 one mistake that was brought to my attention by 17 counsel for the other side. On Page 4 of the 18 pleading, the second sentence in the first full 19 paragraph says "At these depositions, both 20 Mr. Schwartz and Mr. Munitz were represented by 21 Bettina Lawton, MAXXAM's counsel for this 22 proceeding. That is not accurate. Mr. Schwartz 1156 1 was represented by Bettina Lawton. Mr. Munitz at 2 his deposition, it has been brought to my 3 attention, was actually represented by 4 Mr. Stewart. So, in that sense, the -- there is a 5 mistake. 6 THE COURT: All right. Continue. 7 MR. RINALDI: Can we call Mr. Schwartz 8 to the stand? 9 THE COURT: Mr. Schwartz, you 10 understand you remain under oath? 11 THE WITNESS: Yes, Your Honor. 12 13 EXAMINATION 14 15 Q. (BY MR. RINALDI) Now, Mr. Schwartz, 16 when we broke the last time, we had been talking 17 about an option agreement that had been entered 18 into for purchase of certain shares of UFG and the 19 agreement was between MCO and Drexel Burnham 20 Lambert. 21 Going back to that agreement, why was 22 the agreement structured as a call followed by a 1157 1 put? Was there a reason for that? 2 A. Yes. I don't remember if we spoke 3 about it earlier on Friday or if it came up in the 4 deposition before. But because of the NASD rules, 5 we realized that we could not put more than 6 300,000 shares under option at any one point in 7 time so that no put came into being until after 8 the call had expired. 9 Q. Well, I was directing my attention to 10 something slightly different. When you first 11 approached E.F. Hutton and began to discuss, I 12 believe what you call structured or scenarios for 13 acquiring shares of UFG in the future, you 14 indicated that you -- the parties ultimately came 15 to the conclusion that that scenario could be 16 effectuated through the mechanism of a put call 17 option. 18 Do you remember that? 19 A. Well, I think that they proposed that. 20 I don't remember if we did; but, yes, in general 21 terms we thought that was an interesting proposal. 22 Q. Okay. And were you concerned at this 1158 1 point in time that MCO and Federated might exceed 2 the 25 percent ownership level of UFG shares? 3 A. If you're asking me did I track 4 ownership overall of the companies and worry about 5 that, no, I did not. 6 Q. I guess my question to you is: In 7 structuring the transaction, did it have anything 8 to do with MCO and Federated not wanting to 9 acquire more than 25 percent of the outstanding 10 shares of UFG? 11 A. Yes, absolutely. 12 Q. Okay. Can you describe for the Court 13 what that concern was with respect to MCO and 14 Federated? 15 A. Back sometime in June or so of '83, I 16 believe it was, MCO and/or Federated had asked for 17 permission to go and acquire more than 25 percent 18 of the shares of UFG, and I think I testified 19 earlier that there were several issues that were 20 the subject of my continuing effort to understand 21 what it meant if one were given that permission 22 and among them, I think I said earlier were that 1159 1 activities could be limited to certain real estate 2 type of activities. There were certain 3 proportions of business that needed to be in one 4 line or another. There were issues regarding the 5 incurrence of debt, and then there was the issue 6 of net-worth maintenance. And there came a time 7 when MCO and/or Federated received word back from 8 the regulators that if they were to go over the 9 25 percent limit, then they would be required to 10 guarantee, I believe the words were, a pro rata 11 share of net-worth and that was of concern to me. 12 And I trust to the companies, as well, since we 13 had no intention of doing something that would put 14 us in a position to inadvertently become more than 15 a 25 percent holder and inadvertently become in a 16 position where we would need to guarantee 17 net-worth. 18 Q. Was this a consideration which you took 19 into account in structuring the put call option? 20 A. Yes, sir. 21 Q. Okay. And was it your understanding 22 that if MCO acquired an option to purchase the 1160 1 shares or to acquire the shares from Drexel at 2 some point in the future, that those shares would 3 not be counted against MCO in terms of putting it 4 over the 25 percent ownership level? 5 A. Yes, sir, that was my understanding. 6 Q. Now, how did you come to that 7 understanding, sir? 8 A. I came to that understanding primarily 9 through discussions with Dr. Munitz and I also 10 came to that understanding from time to time by 11 some of the items that I think have already been 12 produced here today. I say today. Today and 13 Friday as exhibits. 14 Q. And what items would they be? 15 A. There were from time to time letters 16 from attorneys speaking to issues. 17 Q. Did you personally review the -- strike 18 that. 19 You indicated that when you first 20 became involved in this process of looking at a 21 structure for acquiring shares in the future, you 22 reviewed applicable regulations relating to the 1161 1 holding company? 2 A. Yes, sir, I did. 3 Q. Okay. And in addition to reviewing 4 those regulations, did you have occasion to review 5 opinions of the general counsel of the Federal 6 Home Loan Bank Board on the interpretation of 7 those regulations? 8 A. I may have. I don't remember 9 specifically seeing an opinion of a general 10 counsel of the Federal Home Loan Bank Board, but I 11 may have. 12 Q. And you indicated that from time to 13 time you read materials that had been submitted 14 to -- well, I don't want to put words in your 15 mouth. You read materials that had come from 16 attorneys; is that correct? 17 MR. EISENHART: Your Honor, I'm going 18 to object at this point. I'm not sure what 19 Mr. Rinaldi is trying to do. I had understood 20 that we were going to conclude this waiver issue 21 one way or another this morning. And it seems to 22 me that he's trying to back into the issue here. 1162 1 I thought this issue was pretty well teed up 2 Friday afternoon and that we were ready to discuss 3 whether there had been a waiver based on prior 4 testimony. I think we ought to get a ruling on 5 that before he starts getting into the issues he's 6 now getting into. 7 MR. RINALDI: Your Honor, I am getting 8 to that right now. I will lay the predicate and 9 then we can go from there with respect to the 10 issue. 11 MR. EISENHART: It seems to me what 12 he's trying to do, Your Honor, is back into some 13 sort of admission on the stand here that he's then 14 going to assert as an additional ground for a 15 waiver. I mean, I think we know what the issue is 16 and I think we know what the parameters of it are 17 and rather than do it by trickery here, I think we 18 ought to just -- we ought to argue the issue and 19 get a ruling. Then we'll all know how to proceed. 20 MR. RINALDI: I don't think there is 21 any trickery here. I'm simply asking him did he 22 consider materials that were prepared by 1163 1 attorneys. He did say he looked at materials that 2 attorneys had prepared, and he made reference to 3 materials that had been presented in this 4 proceeding. I don't think there is any waiver at 5 this point. I'm just asking him did he consider 6 materials that were prepared by legal counsel. 7 MR. EISENHART: Your Honor, it's clear 8 if he keeps asking him "who did you talk to, on 9 what basis did you proceed" that the witness is 10 likely to say he talked to attorneys and he 11 proceeded on that basis. Now, that gets us right 12 into the issue as to which I had understood they 13 were going to seek a ruling from Your Honor and 14 I'm prepared to go ahead and seek a ruling, as 15 well. I just think we ought to do it. 16 MR. RINALDI: Yes. May I have a moment 17 to just finish laying the foundation for this? 18 THE COURT: Yes. We haven't reached 19 any objectionable question yet as far as I'm 20 concerned. 21 A. I'm sorry. Could you please repeat it? 22 Q. (BY MR. RINALDI) Did you have 1164 1 occasion to review materials that were prepared by 2 counsel in formulating your views regarding the 3 put call option? 4 A. Yes. From time to time, I think you've 5 already shown me some materials that were prepared 6 by counsel that had my name on them and I have no 7 reason to expect that I didn't see them at the 8 time. 9 Q. And did you engage in any discussions 10 with counsel on the subject of the put call 11 option? 12 A. Yes. I think from time to time there 13 were discussions that I may have joined in with 14 others -- that is to say, with Barry Munitz. 15 Q. Okay. And do you recall which counsel 16 you may have had your discussions with? 17 A. I remember names, sir. I don't 18 remember who it is I may have simply met as 19 opposed to who I may have had discussions with, 20 although certainly I think I said earlier I had 21 discussions with Mr. Marlin regarding the writing 22 of the option agreement. I remember that I did 1165 1 meet other people: Mr. Pozen, Mr. Eckles. I'm 2 sorry. Eckland. I beg your pardon. 3 Q. And was this -- were these meetings in 4 connection with the put call option, or were they 5 in connection with other legal issues? Your 6 Honor, we're now getting into the subject of his 7 consultation with counsel and I think I would have 8 to interpose the objection. Although, as I say, I 9 think this is where we were Friday and we can go 10 ahead and talk about it. 11 THE COURT: Well, Friday, the issue 12 arose in the objection of whether he had asserted 13 or whether he had asked the question had he sought 14 the advice of counsel. And we had an objection to 15 that and I sustained the objection and I said if 16 you have other grounds other than the admission 17 for these so-called inadvertently produced 18 documents that would establish a waiver, then 19 there may be such a waiver. And it seems to me 20 that there was such a waiver in this deposition as 21 to the question of whether he sought the advice of 22 counsel. 1166 1 Now, if we're getting into those 2 communications, I think we're in another area. 3 MR. EISENHART: We're certainly 4 prepared to address that, Your Honor. We believe 5 that there was not a waiver during the 6 depositions, but clearly we're getting into that 7 same subject matter and I just think we need to 8 have it out and have a ruling on it so that we 9 know where to go with this. 10 MR. RINALDI: And I said as soon as I 11 finish laying the predicate foundation, the 12 problem with Frank is he's impatient. If he can 13 wait just two minutes, we'll finish laying the 14 foundation and he can have his day in court, so to 15 speak. 16 MR. EISENHART: It's not a matter of 17 impatience, Your Honor. This is an issue that 18 every lawyer knows is a variable mine field. I 19 mean, you start tapping around the issue of 20 attorney-client privilege and you get into very, 21 very close judgment calls as to when you need to 22 assert that privilege and at what point somebody's 1167 1 going to say because you didn't assert it you 2 waived it. And every question Mr. Rinaldi asks at 3 this point takes us another inch or two into the 4 mine field and, you know, before we start treading 5 around in there I think we ought to get a ruling 6 so we know where we're going. 7 THE COURT: Well, my understanding, my 8 view is that you may question him about these 9 inadvertently produced exhibits, documents and you 10 may ask him -- and you already have and he's 11 already answered -- whether he sought the advice 12 of counsel. 13 Now, if you're going to get into 14 communications other than what's reflected in 15 these exhibits, I haven't seen a waiver on that, 16 and I'll protect it. 17 MR. RINALDI: Okay. 18 Q. (BY MR. RINALDI) Let me hand you a 19 copy of what's been previously -- well, it's not 20 been previously marked -- which we have just 21 marked as T1209, and I believe we made copies for 22 you and it's also included in the packet of 1168 1 materials I gave you. Excuse me, Frank. You have 2 a chair right there. 3 MR. EISENHART: I thought we were now 4 going to talk about the deposition which takes us 5 right -- 6 MR. RINALDI: I don't think so, Frank. 7 Why don't you just sit down and you can preserve 8 your objections. I'm at the podium asking the 9 witness some questions. Okay? 10 MR. EISENHART: Your Honor, I gather 11 we're going to go on with the examination? 12 THE COURT: Well, I have to see what 13 the question is. I've given my views of the 14 matter. I don't know what the next question is 15 going to be. 16 Q. (BY MR. RINALDI) Directing your 17 attention to what's been marked as T1209, 18 Mr. Schwartz, were you previously subpoenaed to 19 testify on June 13th, 1994, in the matter of a 20 formal investigation conducted by the Office of 21 Thrift Supervision with respect to MAXXAM and MCO? 22 A. Yes. The date here is June 13th, 1995. 1169 1 Q. And do you recall attending that 2 deposition and being asked questions and giving 3 answers? 4 A. Yes, sir. 5 Q. Okay. Now, directing your attention to 6 Page 68, the transcript states as follows at Line 7 16: "Question: Ultimately, what did you conclude 8 regarding this project?" And I believe, if you go 9 back, the project we're talking about is the put 10 call option. 11 "Answer: I know that I concluded -- I 12 think that others may have concluded that, yes, it 13 was possible to so acquire shares and I used that 14 information to try to structure a transaction for 15 the acquisition of some shares. 16 "Question: Who would have concluded 17 that, yes, it was possible to acquire said shares? 18 "Answer: One or another of the 19 attorneys that I had alluded to earlier or some of 20 the other unnamed people who would have worked on 21 it from a legal perspective. 22 Question: Did you ever receive a 1170 1 written opinion from attorneys that you could 2 acquire the additional shares without those shares 3 being counted as going over the 25 percent 4 threshold and MCO becoming a holding company? 5 "Answer: Sitting here today, I don't 6 recall. 7 "Question: Is it fair to say that you 8 relied upon the representations of counsel in 9 coming to your conclusion that the project could 10 be done and that you could acquire additional 11 shares without going over the 25 percent 12 threshold? 13 "Yes, absolutely yes." 14 Do you recall being asked those 15 questions and giving those answers at the 16 deposition on June the 13th, 1995, in this 17 proceeding or in the investigative proceeding? 18 MR. EISENHART: Your Honor, before 19 there is an answer to that question, I would 20 interpose an objection on behalf of MAXXAM, Inc. 21 that that -- placing that question and answer on 22 the record violates the attorney-client privilege. 1171 1 Our position is several fold, and I'm perfectly 2 prepared to explain it now. 3 Mr. Schwartz gave that deposition as an 4 individual subpoenaed by the Office of Thrift 5 Supervision. MAXXAM, Inc. which is the owner of 6 the privilege, is not under OTS rules and was 7 specifically not allowed to be present at that 8 deposition. Mr. Schwartz was represented at the 9 deposition by my partner, Bettina Lawton. 10 However, she represented him in his individual 11 capacity. That was clearly stated upon the record 12 by OTS because as an attorney for MAXXAM, she 13 would not have been permitted to be present. 14 Mr. Schwartz as an individual was not authorized 15 by MAXXAM to waive any privilege. MAXXAM is the 16 owner of the privilege and only MAXXAM can waive 17 the privilege. He was not authorized to do it and 18 under the case law -- and I can site Your Honor 19 specifically to a Delaware case, MAXXAM being a 20 Delaware corporation. The testimony by an 21 individual, even though he may be an employee of a 22 corporation and even though he may be an officer 1172 1 of the corporation, who is not specifically 2 authorized to waive the privilege, in fact, does 3 not waive the privilege. With respect -- and I'm 4 not sure where Mr. Rinaldi intends to go with this 5 waiver issue, Your Honor. I don't know whether he 6 intends to limit it to the questions Mr. Schwartz 7 was asked at his deposition or to whether he -- or 8 whether he intends to assert that there is any 9 broader waiver. But I would point out that in 10 this case MAXXAM has not asserted as an 11 affirmative defense the defense of reliance on 12 counsel. We are making no offensive use of 13 consultation with attorneys. Both the courts of 14 Texas and the courts of Delaware, MAXXAM being a 15 Delaware corporation principally located in the 16 State of Texas where we are trying this case, make 17 it clear that where a party is not intending to 18 use a privilege affirmatively, i.e., has not cited 19 a reliance on counsel defense, the fact that that 20 party or an employee of that party may have been 21 asked in a deposition by the other side a question 22 about consultation with a lawyer and may have 1173 1 answered that question does not waive the 2 privilege. It may waive it with respect to that 3 question and answer which obviously then are on 4 the record but it does not if effectuate any 5 broader waiver as long as the party is not 6 intending to use advice of counsel. 7 So, our position, Your Honor, would be 8 that we don't think any of this ought to come in 9 because Mr. Schwartz was certainly not authorized 10 to waive the privilege. But if it does come in, 11 at most, it does not assert any broader waiver and 12 it should be limited to questions that he was 13 asked at his deposition and the answers that he 14 gave there. That's our position. 15 MR. RINALDI: Your Honor, first -- 16 MR. EISENHART: I have -- if Your Honor 17 wishes, I have copies of the cases supporting this 18 which I can give to Mr. Langdon. 19 MR. RINALDI: Your Honor, first of all, 20 I would point out to the Court that while 21 Mr. Eisenhart makes the point that MAXXAM was not 22 present at the administrative -- the investigative 1174 1 deposition, nothing could be further from the 2 truth. In fact, when we first began the 3 investigation, I contacted a former employee of 4 MAXXAM that had worked for them some ten years 5 ago, a Roni Fischer, and attempted to talk to Ms. 6 Fischer about her prior employment at MAXXAM. 7 I received a letter from MAXXAM counsel 8 telling me that if I ever talked to anyone at 9 MAXXAM ever again about anything that they would 10 take me to the District of Columbia bar and that I 11 was acting in an unethical manner and there is a 12 whole series of correspondence back and forth. 13 They said, "If you want to talk to any MAXXAM 14 employee, past, present, or management, the lowest 15 level line worker, you need to come through 16 Dechert, Price." 17 And, Your Honor, I did not talk to 18 Mr. Schwartz. I did not talk to any other MAXXAM 19 employee, officer, or director without first going 20 directly to Dechert, Price. And when I went to 21 Dechert, Price, I was informed that they 22 represented every one of those employees and 1175 1 Mr. Schwartz in a subsequent deposition testifies 2 that, in fact, MAXXAM was the one that was paying 3 for his legal defense. 4 And so, what we have is MAXXAM's 5 counsel sitting in defending Mr. Schwartz in the 6 investigative deposition and with MAXXAM's counsel 7 present representing Mr. Schwartz and him in his 8 personal capacity, Mr. Schwartz was asked whether 9 he relied upon counsel, whether he had received an 10 opinion of counsel, and he testified fully 11 regarding that issue. 12 I would submit to you, Your Honor, that 13 not only did Mr. Schwartz waive the privilege as 14 the chief financial officer of MAXXAM, that he 15 waived the privilege as to MAXXAM as well, 16 particularly when MAXXAM's own attorney was 17 sitting in the room when the testimony was given. 18 And having done that, it's our position 19 that he has waived the privilege as to the whole 20 issue of what advice he received with respect to 21 the entry into the put call option. Now, 22 Mr. Eisenhart makes a big deal out of the fact 1176 1 that they have never raised this as an affirmative 2 defense. In fact, Your Honor, our burden of proof 3 is to establish that these people acted with 4 reckless disregard. And it seems to me that 5 the -- the question at this essential element of 6 reckless disregard is to engage in a highly, 7 highly technical transaction that could violate 8 the rules of the banking agency without first 9 making perfectly sure that what you were doing did 10 not violate those regulations without going out 11 and getting opinion of counsel and without 12 establishing definitively that what you were doing 13 would not cause you to go over the 25 percent 14 limit and cause you to become a holding company. 15 And if someone engages in that activity such as 16 that without first obtaining an opinion of counsel 17 to the effect that it's not going to violate the 18 rules and they are not going to then become a 19 holding company, that strikes me as being reckless 20 and in reckless disregard of the applicable 21 statutes. And I think that where there has been a 22 waiver and where I carry that burden, I have an 1177 1 entitlement to probe what the basis for his 2 statement is that, yes, he relied upon counsel. 3 MR. EISENHART: Well, with respect to 4 the question of who represented him in his 5 deposition, I'm looking at Page 6 of the 6 transcript. Mr. Veis says counsel -- is saying to 7 Ms. Lawton, "Counsel, are you representing 8 Mr. Schwartz as his personal counsel?" And she 9 answered, "Yes, I am." 10 In fact, I have and can show the court 11 a copy of the engagement letter that was sent to 12 Mr. Schwartz prior to that deposition confirming 13 that he had retained our firm as his personal 14 counsel for purpose of representing him at his 15 deposition. I'm not sure what Mr. Rinaldi is 16 talking about in terms of paying the cost of his 17 defense. Mr. Schwartz isn't a party to this case 18 and he's not presenting a defense in this case. 19 It was a question of who represented him at the 20 deposition. We did. We represented him in his 21 personal capacity. I have every reason to believe 22 that if Ms. Lawton had attempted to assert a 1178 1 privilege on behalf of MAXXAM or had intended to 2 perform as MAXXAM's counsel to be that deposition, 3 they would have thrown her out because their rules 4 clearly state that the target of an 5 investigation -- there was no proceeding at that 6 point. It was an investigation -- the target of 7 an investigation which was MAXXAM has no right to 8 be present at an investigatory deposition. 9 As a matter of fact, Mr. Head, the 10 house counsel for MAXXAM, had asked to attend the 11 deposition and he was told he was not allowed to 12 attend. 13 So, it's perfectly clear that any 14 position she took or did not take in that 15 deposition was not as counsel for Mr. Schwartz. 16 And if she had attempted to act as counsel for 17 MAXXAM, they would have thrown her out with 18 respect to the other issues, what was said at the 19 deposition was said and, you know, if he's going 20 to read that into the record and if Your Honor is 21 going to permit it, obviously I can't stop it. My 22 only point is I don't think under the law that 1179 1 there is any basis for asserting on the basis of 2 what was said during this deposition and given the 3 defenses that MAXXAM is or is not asserting in 4 this case that there is any broad base waiver of 5 privilege. I don't think he has the right to go 6 out and reopen discovery or start questioning 7 other witnesses or issuing new subpoenas. I don't 8 think the law would support that. 9 THE COURT: I'm not sure you can 10 separate Mr. Schwartz from MAXXAM. If MAXXAM says 11 a separate entity disclosed this to Mr. Schwartz 12 who is an independent entity, then it's no longer 13 a privileged communication, is it? 14 MR. EISENHART: Well, they are the ones 15 who have separated him on occasion, Your Honor. 16 They have taken his deposition three times. The 17 first time was during the investigative stage when 18 they subpoenaed him as an individual. And 19 obviously if an individual is asked a question 20 that says "Did you talk to Lawyer X on such and 21 such a day," you know, he's under oath. He has an 22 obligation to answer that question unless somebody 1180 1 or some court or some lawyer instructs him not to 2 answer it. There was nobody at his deposition as 3 an individual who was in a position to instruct 4 him not to answer that question. As I say, had 5 Ms. Lawton attempted to do it in her capacity as 6 counsel for MAXXAM, they would have thrown her out 7 because she wasn't entitled to be this in that 8 capacity. 9 The second time they took his 10 deposition, they took it as an officer of MAXXAM, 11 and there he was represented by MAXXAM's counsel 12 and the appropriate privileges were asserted. 13 The third time they took it, they took 14 him as a so-called representative witness, what we 15 will call in a civil case a 30(b)(6) witness as 16 the spokesman for MAXXAM. Again, there, he was 17 represented by MAXXAM's counsel and there the 18 privileges were asserted. 19 So, the only -- the only testimony that 20 they are talking about as constituting a waiver 21 was on the one occasion when they clearly took him 22 as an individual capacity and, although he may 1181 1 have been an officer of MAXXAM, he was in no 2 position to assert any privileges on MAXXAM, nor 3 was there any lawyer who could have advised him to 4 do so. And I think the cases say that under those 5 circumstances, it's not at all clear that he could 6 have waived the privilege which belongs to MAXXAM, 7 but clearly you cannot base any broad-based waiver 8 about that. The most you could do would be to 9 allow the same questions and answers to be posed 10 to him here. 11 MR. RINALDI: Your Honor, I would just 12 point out that Ms. Lawton was present and the 13 question at the deposition with Mr. Schwartz did 14 come up and in response to my suggestion that this 15 raised questions as to whether we were entitled to 16 materials that they had withheld on the basis of a 17 privilege log, Ms. Lawton then said obviously 18 there is an enormous privilege here that we have 19 run straight into. If there are other things that 20 we can try to work around and then after raising 21 the issue that there did exist a privilege, 22 Mr. Schwartz went on and testified further and, in 1182 1 fact, what -- well, he hasn't answered the first 2 question, but I think for purposes of completeness 3 of the record at this point he should be allowed 4 to answer whether he gave those answers -- was 5 asked those questions and gave those answers. 6 MR. EISENHART: That's precisely what I 7 said. There certainly were privileged issues that 8 were implicated by what they were asking him. She 9 was in no position to instruct him not to answer 10 as MAXXAM's counsel because I haven't heard 11 Mr. Rinaldi deny this yet. Had she done so, they 12 would have thrown her out of the deposition 13 because they had already taken the position that 14 MAXXAM wasn't entitled to be there. 15 MR. RINALDI: I would deny that 16 categorically. We have never -- let the record 17 reflect -- thrown anybody out of a deposition in 18 this proceeding. If Frank is aware of a situation 19 where someone was thrown out of a deposition, then 20 I would certainly welcome the information. But 21 that's never occurred, Your Honor. 22 THE COURT: All right. I'm going to 1183 1 ask the witness to answer whether those were his 2 answers to the questions there and read into -- 3 that were read into the record. 4 Do you remember the questions and 5 answers that he read into the record? 6 THE WITNESS: The ones, Your Honor, 7 that he read from the transcript? 8 THE COURT: Yes. 9 THE WITNESS: Yes, sir. 10 Q. (BY MR. RINALDI) They appear at Page 11 68, Line 16 through Page 69, Line 12, of what's 12 been marked as T1209. 13 A. If the question is did I say this, yes, 14 I did say this. 15 Q. Okay. Now, directing your attention 16 then also to Page 70 -- and I will make this very 17 brief -- at Line 21, it states: "Question: Let's 18 see where we can get to. Ultimately, you 19 concluded that it was possible for MCO to acquire 20 additional shares through some mechanism without 21 exceeding those being counted as going over the 22 24.9 percent ownership that you presently had; is 1184 1 that correct? 2 "Answer: Yes. Relying on counsel's 3 advice, yes. 4 "To the best of your recollection, the 5 counsel you would have relied upon would have been 6 Mr. Eckland and Mr. Richard Marlin of Kramer 7 Levin? 8 "I can't say for certain. There were 9 other people involved from time to time and, 10 sitting here today, I couldn't tell you who 11 produced what. A lot of people were spoken to. A 12 lot of people, as I recall, had other names, as 13 well. 14 "Question: Ultimately, was it decided 15 to go ahead and acquire the additional shares of 16 UFG by MCO? 17 "Answer: It was ultimately decided 18 that there was a transaction that at some future 19 point -- that might at some future point lead to 20 such an acquisition, yes. 21 "Did you -- were you asked those 22 questions and did you give those answers? 1185 1 A. Yes. 2 Q. I think we're back on the record, Your 3 Honor, and I'm not sure at this juncture what the 4 Court's ruling has been. I would like to propound 5 those questions again in the context of this 6 proceeding, but is it the Court's ruling that 7 those questions and answers may be -- I mean those 8 questions may be propounded to the witness at this 9 time? 10 MR. EISENHART: Your Honor, I had 11 understood we were on the record just then. 12 THE COURT: We were certainly on the 13 record. I hadn't gone off the record. 14 MR. RINALDI: No, no. I knew we were 15 on the record. My question to you is I was simply 16 reading from a transcript. 17 MR. EISENHART: Well, it was my 18 understanding, Your Honor, that those questions 19 and answers were just read into the record. 20 THE COURT: You want him to repeat them 21 here? 22 Q. (BY MR. RINALDI) I guess my question 1186 1 is, Mr. Schwartz: Did you ever receive a written 2 opinion from attorneys that you could acquire the 3 additional shares without those shares being 4 counted as going over the 25 percent threshold and 5 MCO becoming a holding company? 6 MR. EISENHART: Your Honor, that's a 7 different question and I would assert -- I'm 8 sorry. I hadn't -- if he's reading from the 9 transcript, if he could just tell us what page 10 he's reading from. 11 MR. RINALDI: It's Page 69, Lines 2 12 through five. 13 Q. (BY MR. RINALDI) Do you have an 14 answer, sir? 15 A. Sitting here today, I don't recall. 16 Q. Now, you were asked to review the 17 record of this transaction as MAXXAM's 18 representative, were you not? 19 A. Yes, sir. 20 Q. Okay. And in connection with that 21 review, did it come to your attention that MAXXAM 22 had received a written opinion from attorneys that 1187 1 you could acquire the additional shares without 2 those shares being counted as going over the 3 25 percent threshold and MCO becoming a holding 4 company? 5 MR. EISENHART: Your Honor, that's a 6 different question. We're now moving into present 7 questions out of the areas that he was asked 8 duration during his deposition. 9 THE COURT: I know it's different, but 10 it -- I just have difficulty separating 11 Mr. Schwartz from MAXXAM and it seems to me there 12 has been a waiver here and I'm going to allow this 13 to proceed. 14 MR. EISENHART: Your Honor, may we 15 understand what the scope of the waiver is? That 16 way, I won't have to interrupt the flow of 17 Mr. Rinaldi's questions. Am I to understand that 18 it's limited to the subjects that he was asked and 19 answered in his deposition. 20 THE COURT: Well, as far as I'm 21 concerned, it pertains to the put call option and 22 the reliance on advice in entering into that, sort 1188 1 of the regulations of the Federal Home Loan Bank 2 Board are involved. 3 MR. EISENHART: Thank you, Your Honor. 4 Q. (BY MR. RINALDI) Do you recall the 5 question, sir? 6 A. No, I don't. 7 Q. During the -- you were subsequently 8 designated as MAXXAM's witness to testify 9 regarding the put call option; is that correct? 10 A. Yes. 11 Q. You have to respond audibly. You can't 12 just nod your head. 13 A. Yes. 14 Q. Okay. And in connection with that, you 15 were asked to review all of the documents that 16 were available to MAXXAM regarding that 17 transaction, correct? 18 A. I don't think so because I don't think 19 I reviewed anything that came from attorneys. 20 Q. So, in other words, when you conducted 21 your review, you only reviewed -- well, tell me 22 what it is that you did review, sir. 1189 1 A. As I recall, I read a bunch of things 2 that were supplied to me by attorneys in-house, 3 perhaps outside as well, that -- a lot of those 4 were depositions of other people, documents 5 relating to the transaction. But I don't recall 6 included in those documents analyses or otherwise 7 produced by legal firms. I may be mistaken, but 8 sitting here today I do not recall seeing those. 9 Q. As a consequence of that review, to 10 your knowledge, did MAXXAM receive a written 11 opinion from attorneys that they could acquire the 12 additional shares without those shares being 13 counted as going over the 25 percent threshold and 14 MCO becoming a holding company? 15 A. Well, again, I don't recall if they 16 received a written opinion. And I have to say 17 that I've come to understand that there are 18 opinions big O and opinions little O and I'm not 19 sure I understand the difference between those 20 either, sir. But if you're asking me, you know, 21 did we talk extensively with attorneys, the answer 22 is yes. 1190 1 Q. Okay. 2 A. Extensively. And did we enter into it 3 with the understanding that in entering into the 4 agreement that we would not then be exceeding the 5 24.9 percent ownership and the answer is, yes, 6 that was certainly my understanding, yes. 7 Q. Okay. And which attorneys did you 8 speak to in this regard, sir? 9 A. Again, I couldn't separate out, but I 10 think I named several earlier: Mr. Marlin, 11 Mr. Eckland, Mr. Pozen. I think there was a 12 Mr. Roster at one point in time. 13 Q. And did those attorneys indicate to you 14 that the question of whether the option shares 15 would be treated as shares of MCO was a very 16 difficult question to resolve under the federal 17 banking regulations? 18 A. No, sir. I can't say that I remember 19 it being difficult but, here again, I don't 20 remember precisely which attorneys were involved 21 in that particular side of it. The people that I 22 named were involved in the general inquiry into 1191 1 what did it mean to be a savings and loan holding 2 company and other issues for, like, for example, 3 what kinds of net-worth maintenance arrangements 4 had other people entered into and what were the 5 implications of those. 6 Q. Okay. But we're limited in our 7 discussion here to the question of the put call 8 option. 9 Did the attorneys indicate to you that 10 there was a risk involved in entering into the 11 option, a risk that the bank board might treat the 12 option shares as being owned by MCO? 13 A. If you're asking me was there a hundred 14 percent certainty on what we did, no, I can't sit 15 here and tell you there was a hundred percent 16 certainty. 17 Q. Did any attorney that you spoke to 18 suggest that you seek an opinion of the general 19 counsel's office of the Federal Home Loan Bank 20 Board before going ahead with the transaction? 21 A. No, I don't recall anybody suggesting 22 that. 1192 1 Q. Do you recall any discussions of 2 whether you should get an opinion of the Federal 3 Home Loan Bank Board before going ahead with the 4 transaction? 5 A. No, sir. I don't recall being a 6 participant in any such discussions. I don't know 7 if they were held. 8 Q. Now, when you say that you understood 9 that nothing was a hundred percent certainty, what 10 do you recall of those conversations? 11 A. That like everything in life, nothing 12 is a hundred percent certain. That looking back, 13 people may come to conclusions other than what 14 seems appropriate at the time or that people may 15 have different understandings at that point in 16 time. 17 Q. So that you understood that when you 18 entered into this transaction, it could be viewed 19 differently by the Federal Home Loan Bank Board 20 than MAXXAM or MCO viewed it? 21 A. I think the fair statement is that 22 those who I spoke with felt comfortable that this 1193 1 was a transaction that didn't pose issues, that 2 right-thinking people ought to come to the 3 conclusion they did not count towards the 4 24.9 percent but I don't know that anybody ever 5 when we spoke to them has ever come back to us and 6 said on any issue, but that doesn't mean that 7 other people couldn't take a different view. It's 8 just that we felt that our view was the correct 9 one and that it would be the prevailing view. 10 Q. Now, at this point in time, you were in 11 fairly frequent contact with the Federal Home Loan 12 Bank Board, weren't you, you and Mr. Munitz? 13 A. I don't think I ever spoke with anybody 14 at the Federal Home Loan Bank Board during this 15 period of time, but if you could tell me the 16 people who were there, that might jog my 17 recollection. 18 Q. Well, did there come a time when, after 19 the net-worth maintenance obligation was imposed 20 as part of the resolution that MCO attempted to 21 modify that net-worth obligation? 22 A. If you're asking me after the H(e)-1 1194 1 was approved, did there come a time when it was 2 then subject to discussion as to whether it could 3 be modified, yes. But I do not recall 4 participating with people from the bank board -- 5 or not to quibble here -- about people either from 6 the Texas Savings and Loan Commission with any 7 representative of government about those 8 conditions. That would have been for others to 9 do, as I understood it. 10 Q. Okay. And who would have participated 11 in those conversations? 12 A. Dr. Munitz, so far as I know. 13 Q. And to your knowledge, did Mr. Munitz 14 meet with the federal regulators on occasion -- on 15 several occasions to attempt to modify the 16 net-worth condition that had been imposed? 17 A. My understanding is that he had lots 18 and lots of discussions. I don't know whether 19 they were in person or by telephone or how, but my 20 understanding was there was substantial discussion 21 about that and other related matters, yes. 22 Q. And during those discussions, did it 1195 1 come to your attention that Mr. Munitz had advised 2 the regulators that MCO had acquired -- entered 3 into the put call option with Drexel Burnham 4 Lambert? 5 A. I don't know what it is he said to them 6 during the pendency of those. I understand that 7 we did notify them through the filing of documents 8 where we disclosed the option, but I can't say 9 what it is he said to them. I wasn't at the 10 meetings. I don't know. 11 Q. And the documents you're making 12 reference to are documents filed with the 13 Securities and Exchange Commission? 14 A. Among others, yes, sir. But there were 15 others that were filed, if I recall correctly, 16 that spoke to requests to issue subordinated debt, 17 for example, where we alluded to that or business 18 plans that were submitted to either the Texas or 19 federal regulators where we disclosed that or 20 others that don't come immediately to mind. 21 Q. Okay. And did you ever or to your 22 knowledge, did MAXXAM or MCO ever go to the 1196 1 regulators and say to them "We are planning to 2 enter into a put call option in this form and 3 we -- we don't want to exceed the 24.9 percent 4 limit of ownership. Will this transaction pass 5 muster?" Was that ever done? 6 A. To my knowledge, no, not before the 7 transaction was completed. 8 Q. Now, you indicated that you had spoken 9 to Mr. Eckland. Do you recall that? 10 A. Yes, I had occasion to remember that he 11 was involved and I believe I did, yes. 12 Q. Did you speak to Mr. Eckland face to 13 face, or would that have been by telephone? 14 A. I don't know for certain. 15 Q. And when you spoke to Mr. Eckland, did 16 Mr. Eckland work on the put call option 17 arrangement or were you discussing the question of 18 modification of the net-worth commitment with him. 19 A. I'm sorry. I don't have an independent 20 recollection of that. If you have a document, 21 perhaps that will help; but I don't know for 22 certain. 1197 1 Q. Was MCO concerned that the option 2 shares might be attributed to MCO and that MCO 3 might be deemed to control over 25 percent of the 4 outstanding voting shares of UFG if they went 5 forward with the option arrangement? 6 A. I think we had that concern before we 7 entered into the option arrangement, not after we 8 did in a sense that, as I said, we were looking 9 for a transaction that would pass muster so that 10 we would not and, having moved forward, no, I 11 don't think that people were sitting there 12 concerned about it. 13 Q. But before you entered into it, that 14 was a very, very real concern from your 15 perspective, wasn't it? 16 A. Yes, sir. 17 Q. And, in fact, isn't that the very 18 reason that they accelerated the date for closing 19 on the option transaction, because they hoped that 20 by getting it in before the new rules took effect 21 that those shares wouldn't be counted as shares of 22 MCO? 1198 1 A. Well, yes, we did accelerate it. No 2 question, before the date that the regs changed 3 but I thought that was because the regulation that 4 we were relying upon would have changed so that 5 indeed, to have that assurance, we had to close 6 beforehand. 7 Q. And so, you moved -- 8 A. I think I had testified earlier that I 9 don't think we could have closed the arrangement 10 we did and come away comfortable with that 11 arrangement after the date of December the 26th, I 12 think it was, 1985. 13 Q. Okay. Now, I believe I previously 14 handed to you a document T1084. And I don't think 15 it was ever admitted into evidence, but if you'll 16 take a look. 17 MR. RINALDI: And I would move to admit 18 at this point, Your Honor, Document -- the 19 transcript, which is T1209. 20 MR. EISENHART: Your Honor, I have no 21 objection to that. 22 MR. NICKENS: Your Honor, I have an 1199 1 objection to the admission of transcripts of prior 2 testimony. As you know, there are rules dealing 3 with the use of depositions that specifically say 4 that the witness must be unavailable before those 5 depositions can be used. However, in this 6 particular situation, he has read the questions 7 into the record. That objection has been 8 resolved. But I do have an objection to just the 9 wholesale admission of a transcript which the 10 rules clearly don't provide for when the witness 11 is available. 12 THE COURT: Well, I'm not sure where 13 any prejudice would be allowed and it's only a few 14 pages and, as you say, it's already been read into 15 the transcript. 16 MR. NICKENS: Yes, sir. Your Honor, my 17 concern is setting a precedent with coming in here 18 and trying to put in transcript testimony of 19 depositions where the Rules clearly provide that 20 they are not in normal circumstance action. 21 THE COURT: I assure you we are not 22 going to do that. 1200 1 MR. EISENHART: Your Honor, I had 2 understood that the exhibit he was offering was 3 only those portions of the transcript he read into 4 the record. 5 THE COURT: Well, that's what I thought 6 I was receiving and I thought that's -- I'm not 7 receiving the entire transcript. 8 MR. RINALDI: And the exhibit 9 encompasses a couple of pages before the 10 discussion on reliance on counsel and then it 11 takes -- it goes another page afterwards so that 12 it's in context. But we're not offering the 13 entire transcript, Your Honor. It's just the 14 exhibit that I tendered up. 15 Q. (BY MR. RINALDI) Now, have you been 16 able to locate Exhibit T1084? 17 A. I'm sorry. I thought you were going to 18 hand it to me. I didn't realize I was supposed to 19 be looking for it. 20 Q. I thought we had handed it up the other 21 day, and I may have been mistaken. If I haven't, 22 then here is a second copy and I suppose I should 1201 1 put a -- 2 A. Yes, I have that. 3 Q. Oh, you do? 4 A. I do. 5 Q. Fine. Then I won't need to give it to 6 you. 7 THE COURT: Mr. Rinaldi, T1089, that is 8 the transcript of the deposition? 9 MR. RINALDI: It's actually T1209. 10 Q. (BY MR. RINALDI) Now, you've 11 identified, I believe, three or perhaps four 12 attorneys whom you think from time to time may 13 have been talked to regarding the put call option. 14 There has been Mr. Marlin; is that correct? 15 A. Yes, sir. 16 Q. He's the gentleman from Kramer Levin 17 who helped draft the document? 18 A. Yes, sir. 19 Q. To your knowledge, was Mr. Marlin an 20 attorney with a background in banking law? 21 A. I knew him as a corporate attorney. He 22 may or may not have banking. I don't know. 1202 1 Q. Did MCO rely upon other attorneys when 2 dealing with the Federal Home Loan Bank Board and 3 issues pertaining to the application of the 4 federal banking regulations? 5 A. Yes. 6 Q. Okay. And who would they have used for 7 those kinds of legal assignments? 8 A. Well, other than the people I named 9 before but not specifically understanding in what 10 particular area. Those certainly, but there may 11 have been others. I don't know. 12 Q. Mr. Lazard? I'm sorry. Strike that. 13 Mister -- Mr. Pozen was one of them I 14 think you named? 15 A. Yes, sir. 16 Q. And then I believe you indicated a 17 Mr. Eckland? 18 A. Yes, sir. 19 Q. Okay. And we discussed Mr. Eckland and 20 you said you had no specific recollection of any 21 conversations with Mr. Eckland; is that correct? 22 A. No, sir. I think what I said was I 1203 1 didn't remember whether I had met him or not, but 2 I think, best of my recollection, I spoke to him 3 either in person or by the telephone perhaps with 4 others -- more likely with others. 5 Q. And did you discuss with him whether 6 MCO could enter into the put call option in the 7 form that was being proposed without going over 8 the 25 percent ownership of UFG shares? 9 A. I don't recall any specific 10 recollection with him or any other attorney 11 specifically about that particular question 12 sitting here today. I can't tell you whether I 13 did or I didn't. I don't know for certain. I 14 know that those were questions that were posed. I 15 just don't know if I posed them or if Dr. Munitz 16 posed them or if others posed them. But at the 17 end of the day, I did come to the conclusion that 18 you asked me about earlier, that entering into 19 that arrangement would not be a problem and I know 20 that this was a highly lawyered transaction and 21 many, many, many attorneys weighed in with -- 22 again, I don't know if it was little O or big O 1204 1 opinions about how they felt on that matter. 2 Q. But that was a very, very real concern 3 to MAXXAM, that if they entered into the 4 transaction, there might be a risk that they could 5 go over the 25 percent level? 6 A. Well, there was a concern as to whether 7 or not it would be possible to structure a 8 transaction that wouldn't give rise to concern, 9 and I think at the end of the day we structured a 10 transaction that left us feeling very, very, very 11 comfortable. There was certainly no intention 12 ever of entering into a transaction where people 13 could reasonably argue that somehow we had crossed 14 the 24.9 percent limit because so far as I know, 15 the company had no intention ever of undertaking 16 what it had heard from the bank board in terms of 17 those conditions that would be attendant to that 18 ownership over 24.9 percent. 19 Q. But at no time do you recall any 20 discussion of going to the bank board and seeking 21 their views as to whether the proposed transaction 22 would be one which would not put MCO over the 1205 1 25 percent ownership level? 2 A. No, sir. I don't recall anyone going 3 and suggesting that we do that. 4 Q. Now, directing your attention to the 5 opinion of Mister -- I'm sorry. Strike that. 6 Directing your attention to the -- it's 7 a memorandum dated December 2nd, 1985. It's from 8 Bob Pozen to Paul Schwartz. Do you recall 9 receiving this memorandum from Mr. Schwartz? I 10 mean Mr. Posun? 11 A. Again, no. I don't recall receiving it 12 specifically, but I see it's addressed to me and I 13 have no reason to question that I did receive it. 14 Q. And in the second full paragraph, it 15 says "If these options are acquired after the 16 effective date of the new acquisition rule, there 17 is a strong argument that MCO will lose its 18 grandfathered position." 19 Do you see that? 20 MR. EISENHART: Your Honor, let me just 21 state with respect to this document -- I may have 22 said this on Friday. If so, I apologize. But 1206 1 this is one of the documents as to which we assert 2 the inadvertently produced status and we would ask 3 that its use be conditioned along the lines of the 4 agreement that we've reached in this courtroom 5 concerning use of such documents. 6 THE COURT: All right. Do you recall, 7 we put certain conditions on the use of these 8 documents we refer to as the inadvertently 9 produced. 10 MR. RINALDI: At this point, it's being 11 accepted by virtue of it being accepted and used 12 in this proceeding. There will be no waiver. We 13 still preserve the right to claim that there was 14 no inadvertence and that we are entitled to 15 receive this otherwise; but for purposes of using 16 it in this courtroom, there is no waiver. 17 THE COURT: All right. 18 Q. (BY MR. RINALDI) Do you recall that 19 it was Mr. Pozen that suggested that at the bottom 20 of that page, "Therefore, it is important for this 21 option agreement to be signed either before the 22 effective date of the acquisition regulations, 1207 1 December 26th, '85, or that the option agreement 2 be not be signed until after MCO has been approved 3 as an S&L holding company on terms acceptable to 4 MCO." 5 Do you see that? 6 A. Yes, I do. 7 Q. Now -- 8 A. I don't know that I remember this 9 advice coming only from Mr. Pozen, though. 10 Q. Do you recall it coming from someone 11 else? 12 A. I just remember in general that for 13 reasons that I can't totally recall here today, 14 that we had to close it before December 26th to be 15 feeling very comfortable under regulations that 16 were due to change after December 26th which would 17 make us feel uncomfortable. 18 Q. Okay. Now directing your attention to 19 Paragraph 5, it says "By our calculations, this 20 option plus the conversion of the preferred 1987 21 will put MCO into a position to own 45 percent of 22 United Financial Group at that time. Since it's 1208 1 unclear if MCO can obtain an acceptable net-worth 2 maintenance agreement over 50 percent, we would 3 think that MCO should not buy any significant 4 amount more of United financial stock." 5 Do you see that? 6 A. Yes. 7 Q. Do you know or do you understand what 8 he is referring to when he says MCO will be in a 9 position to own 45 percent of United Financial 10 stock? 11 A. I can assume what he's talking about, 12 but I don't know for certain. 13 Q. Well, what do you assume that he's 14 talking about in this letter here? 15 A. There was, if I remember correctly, a 16 preferred stock outstanding at the time, and I 17 believe that it was not then currently convertible 18 into UFGI common stock. And I don't recall which 19 entity or entities owned it, whether it was MCO 20 and/or Federated. But looking at this, I would 21 think that he is taking whatever the ownership of 22 common stock was at the time -- 1209 1 Q. Which would have been about 2 24.9 percent? 3 A. Yes, sir. 4 Q. And then what does he add to that? 5 A. And adding the shares attributable to 6 the ability to convert at a later date those 7 preferred shares. 8 Q. Is that the C preferred? 9 A. I don't know if it was C at the time. 10 As I recall, it had various designations over 11 time. 12 Q. Okay. 13 A. And then, adding to that the shares 14 subject to this option. I don't know how many 15 shares he's counting in that at this point in 16 time. 17 Q. Now, at this point in time, though, as 18 we discussed on Friday, Drexel had 790,000 shares 19 of UFG; is that correct? 20 A. Best of my recollection, it was 21 approximately that amount, yes. 22 Q. And if UFG had approximately 8 million 1210 1 shares outstanding, that would have represented 2 just under 10 percent, correct? 3 A. Yes, on a pre-conversion basis. No, on 4 a post-conversion basis of the preferred. 5 Q. Right. 6 A. That is to say that converting the 7 preferred would have made, I believe, the 8 denominator larger. 9 Q. Right. So that there would have been 10 some dilution if subsequently there was a 11 conversion of preferred to common? 12 A. Yes. More shares of common 13 outstanding. 14 Q. But at the point in time when the put 15 call option was being considered, the 790,000 16 shares that were owned by Drexel Burnham Lambert 17 would have represented almost 10 percent of the 18 outstanding shares of UFG? 19 A. I think so. 20 Q. So, is it your understanding that 21 that's how Mr. Pozen comes to that 45 percent 22 number or that? 1211 1 A. Again, I'm guessing a little bit. I 2 don't have a pencil and the actual numbers but it 3 sounds about right, yes. 4 Q. Now, directing your attention to the 5 first full paragraph of the Pozen memo, he states 6 there "We understand that approximately 25 percent 7 of the purchase price will be paid as the premium 8 for the options which will run for a period of two 9 and a half years." 10 Do you see that? 11 A. Yes. Two to two and a half years, yes. 12 Q. And then he says "As long as the 13 premium is less than 50 percent of the purchase 14 price, the stock should not be deemed voting stock 15 acquired by MCO." 16 Do you see that? 17 A. Yes. 18 Q. Was it your understanding that in as 19 much as the premium was less than 50 percent of 20 the purchase price that the stock would not be 21 deemed voting stock acquired by MCO? 22 A. Sitting here today, I don't remember 1212 1 having that understanding at the time. But seeing 2 it written here, I can only assume people told me 3 about it and I was aware of it. 4 Q. Okay. 5 A. It doesn't stick in my mind, though. 6 Q. And you shared this document with 7 Mr. Munitz, correct? 8 A. Looks like Mr. Pozen shared it with 9 Mr. Munitz, sir. 10 Q. Okay. And then the next sentence says 11 "However, the exact wording of the exclusion of 12 such options from voting stock states that MCO can 13 have no other economic interest in the underlying 14 voting stock." 15 Do you see that? 16 A. Yes, sir. 17 Q. Doesn't the put give MCO the downside 18 risk if the shares lose value? 19 A. At a later point in time, yes. 20 Q. And isn't that another economic risk in 21 the underlying stock like Mr. Pozen was 22 cautioning? 1213 1 MR. EISENHART: Your Honor, the 2 language Mr. Pozen has is "economic interest." 3 Mr. Rinaldi has just changed it -- 4 MR. RINALDI: All right. 5 MR. EISENHART: -- to economic risk. 6 MR. RINALDI: I will rephrase the 7 question. 8 Q. (BY MR. RINALDI) Isn't that another 9 economic interest in the underlying stock like? 10 Mr. Pozen cautioned against? 11 A. Sir, if you're asking me to understand 12 the context in which no other economic interest in 13 the underlying voting stock comes from, I'm not 14 sure I can go and do that for you. But, yes, it's 15 true that having a put did, in response to your 16 question earlier, give MCO the risk of a downside. 17 Q. And that -- 18 A. At a future point in time. 19 Q. -- that downside risk would have been 20 of economic interest to MCO, wouldn't it? 21 A. I don't know if this is a legal term or 22 not and I don't know how to answer that question, 1214 1 sir. 2 Q. Is that something you considered prior 3 to entering into the put call option? 4 A. Presumably, sir, any regulation was 5 considered by all the many attorneys who were 6 involved. And, yes, it's true I tried to read the 7 regulations myself. The regulations are very 8 long. The regulations are complicated. Did I 9 come to rely for legal advice then by hearing what 10 other people had to say through Dr. Barry Munitz 11 or otherwise? Yes. 12 So, I would have to tell you that 13 whoever came to that conclusion in its ultimate 14 interpretation and within the context of where 15 that's written was not me. 16 Q. And you never considered going to the 17 regulators and simply asking them if this 18 structure that you had come up with would have 19 created an additional economic interest in the 20 underlying stock that would have caused those 21 shares to be attributed to MCO? 22 MR. KEETON: Your Honor, that's the 1215 1 fifth time. I object as not only repetitious but 2 it's harassment of the witness. 3 THE COURT: Sustained. 4 Q. (BY MR. RINALDI) Now, you mentioned a 5 moment ago that there were efforts to modify the 6 net-worth condition. 7 Do you recall that? 8 A. Yes. 9 Q. And do you recall what kinds of 10 modifications were sought by MCO regarding the 11 net-worth condition? 12 A. Generally, yes. 13 Q. And can you describe for the Court 14 generally what those modifications were? 15 A. I think I can. As best as I can 16 remember it, the H(e)-1 application came back with 17 language that spoke to a pro rata contribution 18 which would be required from MCO and/or Federated 19 for net-worth deficiencies and we could never 20 understand at MCO what that meant. 21 Did that mean if one owned 30 percent 22 of the common stock of UFG, did that mean that if 1216 1 the net-worth deficiency on day one, if one should 2 ever come to pass, was a hundred million dollars 3 that we would be asked to put in $30 million that 4 that would be the end of it or did it mean that if 5 on Day 2 it was then $70 million, that we'd be 6 asked to put in 30 percent of that $70 million 7 rather than the $21 million. 8 So, most of what I remember relates to 9 the trying to bring some certainty to the maximum 10 amount of the obligation that one might undertake 11 by agreeing to either a -- what was called then a 12 forward first nationwide type of agreement where, 13 if I recall correctly, they had agreed to infuse a 14 certain amount of capital up front once and for 15 all or if we could have a modification of that 16 such that our exposure would be capped at some 17 particular level or if we could acquire, by way of 18 example, a failing institution and put more 19 capital into that up front or even put more 20 capital in up front into UFGI if that couldn't 21 just be it. If there could be a known certain 22 number at which exposure would be limited I think 1217 1 generally, that's the way we tried to proceed. 2 And those are the alternatives I think that were 3 explored by Dr. Munitz with the regulators and 4 that he discussed with attorneys, too. 5 Q. And, in fact, wasn't Mr. Eckland the 6 person or the legal counsel that was principally 7 responsible for advising MCO with respect to this 8 issue, the modification of the net-worth 9 obligation? 10 A. I couldn't say for sure. 11 Q. Would you take a look at what's been 12 marked as T1109. This is a fax from Mr. William 13 Eckland to a Mr. Schwartz dated 1-17-86, and it 14 attaches a letter? 15 MR. EISENHART: Your Honor, will you 16 give us a moment? This apparently was not on the 17 list of documents that OTS said they were going to 18 produce with Mr. Schwartz and it may take us a 19 second to find it. 20 MR. RINALDI: Actually, I'll just skip 21 over this document then. It's only being shown so 22 that I can show he received a copy because it 1218 1 turns out -- do you have T1113. 2 MR. KEETON: That's not on the list 3 either. 4 MS. LAWTON: That's not on the list 5 either. 6 MR. EISENHART: Your Honor, the 7 difficulty we have is they give us a list 8 beforehand of what they intend to use so that we 9 have those documents here and if they go beyond, 10 we probably have it across the street. May I at 11 least just look over Mr. Rinaldi's shoulder to see 12 what documents he's showing the witness? 13 THE COURT: We'll take a short recess. 14 15 (A break was taken.) 16 17 THE COURT: We'll be back on the 18 record. Mr. Rinaldi, you may continue. 19 Q. (BY MR. RINALDI) Would you look once 20 again at T1084? That's the document I handed you 21 before we went to Exhibit T1109. Turning to the 22 second page, Paragraph 4, it indicates that 1219 1 Mr. Pozen states "We assume that the signing of 2 this option agreement would be reported by MCO 3 under the Securities Act." And then he goes on 4 and says "The options appear to be immediately 5 exercisable because MCO has received all required 6 approvals, although the terms of such approvals 7 may not be to MCO's liking." 8 Do you see that? 9 A. Yes. 10 Q. Did that concern you, that Mr. Pozen 11 felt that the options appeared to be immediately 12 exercisable? 13 A. Well, I don't understand what he's 14 saying here because it wasn't my understanding 15 that they were immediately exercisable. 16 Q. Does it appear that Mr. Pozen had some 17 confusion regarding his understanding of the 18 arrangement with Drexel Burnham Lambert? 19 A. Sitting here today, I don't know what 20 to think about that statement. 21 Q. Okay. Now, because there was some 22 confusion a moment ago regarding Exhibit 1109, let 1220 1 me hand you a copy of what's been marked as T1113 2 and, I will represent to you that this is a letter 3 dated January the 3rd, 1986. But attached to the 4 letter is a copy of a letter dated December 3rd, 5 1985, and that attachment appears to be the same 6 document as T1109. 7 Do you see that? 8 A. Well, T1109 seems to be a smaller 9 document than the attachment to T1113. Doesn't 10 seem to have the last several pages. 11 Q. Well, if you'll look, I think you'll 12 see that it's the same document but that the -- 13 T1109 did not have the attachments. And T1113 has 14 the complete version of the December 3rd, 1985, 15 letter attached along with the attachments. 16 Do you see that? 17 A. Yes, sir. I see that one has and one 18 does not have the attachments. 19 Q. Okay. Well, directing your attention 20 to the attachment to T1113 -- that is, the 21 December 3rd, 1985, letter that has attachments to 22 it -- do you recall having received a copy of this 1221 1 letter with the attachments at or about the time 2 it's dated? 3 MR. EISENHART: By "the letter," we're 4 talking about the December 3rd letter? 5 MR. RINALDI: That's correct. 6 A. Well, I don't have any specific 7 recollection of receiving this at the time, but 8 what you had showed me earlier, a fax transmittal 9 to me of the letter itself without the 10 attachments, I have no reason to expect I didn't 11 receive it. 12 Q. (BY MR. RINALDI) Okay. And in the 13 letter, if I direct your attention to the bottom 14 of the second full page, it talks about the 15 language of the holding company's proposed 16 modification of the order is attached hereto as 17 Exhibit D. 18 Do you see that, the very last sentence 19 on the second page? 20 A. Yes. 21 Q. And then if you turn to Exhibit D 22 attached to that letter, there is a proposed 1222 1 modification of the language in Paragraph 4 of the 2 order. 3 Do you see that? 4 A. Yes, I see an Exhibit D. I haven't 5 read it. 6 Q. Okay. Would you just take a look at 7 that and then I have just one or two questions for 8 and you then we can move on. 9 A. Yes, sir. 10 Q. Now -- 11 A. I've read it. 12 Q. Is Exhibit D the proposal that MCO made 13 to the Federal Home Loan Bank Board at or about 14 December 3rd, 1985, regarding the modification to 15 the net-worth obligation? 16 A. I have no reason to doubt that this is 17 a genuine application or letter. 18 Q. Okay. And do you recall having seen 19 this at or about this time and discussed this 20 modification with Mr. Eckland? 21 A. Again, as I testified earlier, I 22 remember discussions regarding placing limits on 1223 1 the total amount that might be required if one 2 were to move forward and guarantee net-worth. But 3 I don't know that I saw at December 3rd the letter 4 with attachments. I may have. 5 Q. Okay. And as you look at Exhibit D, 6 does it achieve the purpose that you had described 7 earlier -- that is, placing a cap on the liability 8 that MCO had under the net-worth commitment? 9 A. I think so. It would have. 10 Q. Okay. And now, going back to the text 11 of the letter at Page 2, it describes the reason 12 for MCO desiring to place a cap upon the liability 13 or a cap on the net-worth commitment. And it 14 states in the fourth sentence down in the first 15 paragraph under discussion, "Holding company" -- 16 and "holding company" for purposes of the letter 17 is MCO -- "is reluctant to enter into the 18 net-worth maintenance agreement contained in the 19 order because it has learned that the unlimited 20 financial commitment contained therein would be 21 viewed adversely by the financial community and 22 would, therefore, limit access to the capital 1224 1 markets." 2 Do you see that? 3 A. Yes. 4 Q. Why was it that that commitment would 5 limit MCO's access to the capital markets? 6 A. I would have to read the Solomon 7 Brothers letter attached, if you have a moment for 8 me to do so. 9 Q. Well, let me ask you this question. Do 10 you recall being advised by your accountants or by 11 Mark Wilson that if MCO were obligated under the 12 net-worth maintenance commitment to maintain the 13 net-worth of UFG, that that was something that 14 would have to be disclosed in MCO's financial 15 statements? 16 A. I don't specifically remember Mark 17 Wilson raising that, but I have a recollection of 18 appropriate disclosures and it wouldn't surprise 19 me if that was someone's recommendation. 20 Q. Who was Mr. Wilson, sir? 21 A. I believe he was someone who worked in 22 the accounting department. I think he was 1225 1 responsible for financial reporting at one point 2 in time. 3 Q. And do you recall that Mr. Wilson 4 advised you that if there were a net-worth 5 obligation -- that is, if MCO went over the 6 25 percent ownership level of UFG shares and it 7 had a net-worth obligation to UFG, that that was 8 something that would have to be reported in its 9 financial disclosure statements? 10 A. Well, again, not specifically; but it 11 wouldn't surprise me if he did if you have a piece 12 of paper that shows that. 13 Q. Okay. And then as you mentioned to me, 14 Solomon Brothers also gave MCO an opinion, did 15 they not, regarding the impact of the net-worth 16 maintenance commitment upon MCO? 17 A. Yes. They wrote a letter here, I see. 18 Q. And that would be Attachment C to what 19 is Document T1113? 20 A. Yes, sir. 21 Q. And it states in the second full 22 paragraph there, "such commitments that is 1226 1 referring to net-worth maintenance commitments are 2 viewed adversely because they make it difficult 3 for the financial community to evaluate the 4 financial condition and future prospects of the 5 issuer that have entered into such agreements." 6 Do you see that? 7 A. Yes, sir. 8 Q. And then on the second page, he 9 indicates that "In conclusion, I believe that the 10 inherent uncertainty of an open-ended net-worth 11 commitment could impact adversely on the holding 12 company's ability to raise funds in the capital 13 markets." 14 Do you see that? 15 A. Yes. 16 Q. Do you recall having discussions at MCO 17 at or about this point in time that it would 18 become difficult for MCO to raise money in the 19 capital markets if they had a net-worth 20 obligation? 21 A. If they had an open-ended net-worth 22 maintenance obligation, yes. 1227 1 Q. And that was of concern to MCO, was it 2 not? 3 A. Yes. 4 Q. And if the 300,000 shares underlying 5 the put call option had been deemed voting shares 6 of UFG that MCO acquired, it would have put MCO 7 over the 25 percent control of UFG and triggered 8 the condition, right? 9 MR. EISENHART: Your Honor, I object to 10 that. I believe he's asking this witness for a 11 legal opinion. Deemed by whom? 12 MR. RINALDI: I'm not asking for a 13 legal conclusion. I'm just asking him if MCO had 14 acquired -- or if those shares, the 300,000 shares 15 were deemed to be shares of MCO, that would have 16 put them over the 25 percent level, wouldn't it? 17 MR. EISENHART: The question is if they 18 were deemed by whom to acquire. 19 THE COURT: Well, I think it would have 20 to be by Mr. Schwartz. 21 Q. (BY MR. RINALDI) Mr. Schwartz, let me 22 ask you this: If the Federal Home Loan Bank Board 1228 1 considered that those option shares were shares of 2 MCO and that put MCO's ownership of UFG shares at 3 over 25 percent, that would have triggered the 4 net-worth condition, wouldn't it? 5 MR. EISENHART: Your Honor, that is 6 clearly asking him for a legal conclusion. I 7 mean, A, is the bank board right in deeming that? 8 B, would the effect of that be to trigger the 9 net-worth maintenance agreement? I mean, those 10 are legal issues that we're litigating in this 11 case. 12 THE COURT: All right. I'll sustain 13 the objection. I know that issue has been raised 14 in a motion. 15 Q. (BY MR. RINALDI) If MCO had a 16 net-worth obligation -- that is, if MCO had gone 17 out and purchased additional shares of UFG and 18 gone over the 25 percent level -- was it your 19 understanding that MCO then would have an 20 obligation to maintain the net-worth of UFG? 21 A. Yes. 22 Q. And in that event, MCO would have had 1229 1 to disclose that they were subject to the 2 net-worth commitment or that the commitment had 3 been triggered, correct? 4 A. There would have been a commitment to 5 disclose, yes. 6 Q. And such disclosure, at least according 7 to Solomon Brothers, could have prevented MCO from 8 raising funds in the capital markets. Right? 9 A. Made it more difficult, yes. 10 Q. And if that had happened, MCO would 11 have had more difficulty obtaining financing 12 through the issuance of high-yield bonds by Drexel 13 Burnham Lambert, correct? 14 A. More difficulty in borrowing generally 15 and more difficulty in specific on the example you 16 gave, yes. 17 Q. After MCO entered into the option 18 agreement, did MCO have occasion to obtain any 19 financing from the capital markets through the 20 issuance of high-yield bonds? 21 A. Yes. 22 Q. And did they have occasion to obtain 1230 1 that financing on more than one occasion after the 2 option arrangement had been entered into? 3 A. Yes. 4 Q. Did they have occasion to obtain 5 financing from the capital markets -- strike that. 6 Did MAXXAM Group obtain -- also obtain 7 financing through the capital markets after the 8 resolution was passed with respect to the 9 net-worth commitment at the end of 1984? 10 A. Yes, I believe so. 11 Q. Okay. And was one of those issues the 12 MAXXAM Group, Inc. thirteen and five-eighths 13 senior subordinated note that was due 5-15-92 with 14 a closing date of 5-21-85 in the amount of 15 $150 million? 16 A. Yes. 17 Q. And who underwrote that bond? 18 A. I believe that was Drexel Burnham. 19 Q. And on 7-31-85 did MCO Holdings, Inc. 20 also have a fourteen and a quarter senior 21 subordinated note that was due on 8-1-1992 in the 22 amount of $35 million? 1231 1 A. Yes. 2 Q. And on 12-2-85 -- and who underwrote 3 that, sir? 4 A. I believe that was Drexel Burnham, 5 also. 6 Q. Were there other investment bankers 7 asked to submit proposals with respect to either 8 of those issuances? 9 A. Not that I can recall. 10 Q. On 12-2-85 was there a 11 180 million-dollar MAXXAM Pacific Lumber Company 12 senior subordinated note that was due on 6-2-96? 13 A. I don't think MAXXAM issued any 14 debentures then. Perhaps that's someone else's 15 issuance. 16 Q. Well, this would have been in 1985. 17 So, perhaps it's MCO still. 18 A. I'm sorry. Could you -- 19 Q. 180 million. 20 A. Doesn't ring a bell to me. 21 Q. Let me hand you a copy of what's 22 previously been marked at the deposition of 1232 1 Mr. Lazard as Exhibit 19. 2 MR. RINALDI: I understand that you 3 have an agreement with Mr. Guido that we can use 4 the exhibits relating to the administrative 5 depositions and that we'll just use the numbers of 6 the administrative depositions? 7 MR. NICKENS: The agreement that I had 8 with Mr. Guido wasn't that they were admissible or 9 that -- merely that we would use those numbers as 10 identifying numbers to help us know what the 11 documents are. 12 MR. EISENHART: We have the same 13 practical problem, Your Honor, in that this was 14 not on their list of documents that they were 15 going to use. So, we don't have a copy of it here 16 so I can't tell what it is. 17 Q. (BY MR. RINALDI) Would you take a 18 look at what's been marked as Lazard Exhibit -- is 19 it 19 or 17? 20 A. 19 on mine. 21 Q. 19. Fine. And directing your 22 attention to the third entry on that list, it 1233 1 talks about a MAXXAM senior subordinated note due 2 6-2-96 in the amount of $180 million. 3 Do you recognize that as a financing 4 which MAXXAM acquired after the end of 1984? 5 A. No. I might recognize it as one that 6 Pacific Lumber did, but I don't remember MAXXAM 7 doing it. But I may be wrong about that. 8 Q. It says MAXXAM/Pacific Lumber. So, it 9 would be your understanding that that was Pacific 10 Lumber that acquired that? 11 A. Not MCO or MAXXAM, Inc. if I remember 12 correctly, but perhaps Pacific Lumber, perhaps 13 MAXXAM Group, Inc. I couldn't say for sure. 14 Q. And was Pacific Lumber an affiliate of 15 MAXXAM at this time? 16 A. Sometime during the period 1985, 1986, 17 MAXXAM Group, Inc. which I believe was then owned 18 38 percent by MCO, did make an acquisition of the 19 Pacific Lumber Company. Now, whether that 20 qualifies as one or another of those companies 21 being affiliated, I would leave to others to 22 decide. But that's my understanding of the 1234 1 relationship at the time. 2 Q. And do you know who the underwriter was 3 with respect to these high-yield bonds? 4 A. No, not for certain. 5 Q. And how about the next item there? Do 6 you recognize that as financing that was obtained 7 through the capital markets? It's a 8 MAXXAM/Pacific Lumber Company senior subordinated 9 zero coupon extendible note due 6-2-86 with a 10 closing date of 12-2-85 in the amount of 11 $270 million. 12 A. Again, I know there was some financing 13 going on at the time. I think at the MAXXAM 14 Group, Inc. level. I can't say for certain if 15 that's what this is in terms of the numbers and 16 the like. 17 Q. In your capacity at MCO, were you 18 involved at all in the various high-yield bond 19 financings that were acquired by MAXXAM and its 20 subsidiaries and affiliates? 21 A. Of MAXXAM, yes. Of subsidiaries and 22 affiliates, it would depend which. And in 1235 1 particular, MAXXAM Group, Inc., no. 2 Q. Okay. Then would you -- 3 A. Or its subsidiaries. 4 Q. Okay. Do you recognize -- 5 A. At this point in time. 6 Q. Sorry. I didn't mean to interrupt you. 7 Do you recognize then any of the 8 remaining issuances that are described in Lazard 9 Exhibit 19? 10 A. Yes. 11 MR. EISENHART: Your Honor, let me just 12 state for the record if I recall, Mr. Lazard's 13 deposition, I believe this was identified as a 14 document that was prepared by OTS for purposes of 15 that deposition. And I think the witness ought to 16 know that because there are question marks next to 17 some of these. 18 MR. RINALDI: Yeah. I will -- I'm 19 certainly not trying to mislead the witness. In 20 fact, it's clear to me that the one that's dated 21 6-26-96 is obviously a typo. Since I believe 22 that's a Drexel Burnham Lambert financing and 1236 1 since Drexel went out of business some six or 2 seven years prior to that, it would be unlikely 3 that that could have happened. 4 Q. (BY MR. RINALDI) This is merely to 5 sort of expedite the process. 6 Do you recognize any of those as 7 high-yield bond issuances involving MCO or MAXXAM? 8 A. I recognize some of them as involving 9 other companies, not necessarily MCO or MAXXAM. 10 Q. And when you say "other companies," 11 you're talking about companies affiliated with MCO 12 and MAXXAM? 13 A. Companies in which MCO or MAXXAM had 14 ownership interest, not necessarily a hundred 15 percent, yes. 16 Q. Okay. And which ones do you recognize, 17 sir? 18 A. I recognize, although I'm not sure it's 19 precise in its description, the 12 percent, the 20 20 percent, and the 12 and a half percent Pacific 21 Lumber Company financings which are the fourth, 22 fifth, and sixth from the bottom on your page. 1237 1 Q. And one of them is in the amount of 2 75 million. Another is in the amount of 3 355,472,000. The third is in the amount of 4 250 million. 5 Are those the three? 6 A. Well, those are the numbers on the 7 page. I'm not sure those are the correct numbers. 8 Q. Okay. Do you know who underwrote those 9 three issuances? 10 MR. EISENHART: Your Honor, Mr. 11 Rinaldi's initial question to the witness had been 12 which ones did he recognize and he had read off 13 those three and I believe he then said "and" -- 14 and then he was cut off. So, I don't believe he 15 had finished answering the questions of which ones 16 did he recognize. 17 Q. (BY MR. RINALDI) I'm sorry, sir. 18 A. And also I know that Kaiser Aluminum 19 and/or Kaiser Tech Corporation did financing in 20 the 1988, '89 period. And, here again, I couldn't 21 tell you if these are precise descriptions, but I 22 know that there was financing similar to if not 1238 1 precisely what you're showing as the last three 2 financings on this page. 3 Q. And do you know as to those last six 4 financings -- that is the three with respect to 5 Pacific Lumber and the three with respect to 6 Kaiser -- do you know who was the underwriter with 7 respect to those? 8 A. On the Pacific Lumber Company, I 9 believe Drexel Burnham was one of the 10 underwriters. I don't know if they were the sole 11 underwriter. And on the last three, Drexel 12 Burnham was one of the underwriters, if I remember 13 correctly. But, here again, there were several 14 other underwriters involved in this transaction 15 and I don't remember, by way of example, if 16 PaineWebber and/or Donaldson, Lufkin, Jennrette or 17 others might not have been involved in those three 18 financings. 19 Q. Now, what was the relationship of 20 MAXXAM at this point in time to Kaiser Tech? 21 A. At what point in time, sir? 22 Q. At the point in time when these 1239 1 financings were done. 10-28-88. 2 A. In 1988, '89, Drexel Burnham was one of 3 several investment banking firms with which MAXXAM 4 had done business and was talking about different 5 transactions. 6 Q. No. My question was: What was the 7 relationship between Kaiser Tech and MAXXAM at 8 that point in time? 9 A. In the 1988, '89 period, MAXXAM was in 10 the process of acquiring Kaiser Tech. 11 Q. Okay. And if MAXXAM had entered into a 12 net-worth obligation, would it have affected its 13 ability to go into the capital markets and to have 14 obtained financing of the nature that's described 15 in Lazard 19? 16 A. Well, I think if it had entered into an 17 unlimited net-worth maintenance obligation, I have 18 no reason to dispute Solomon's conclusions. If it 19 had entered into any type of a net-worth 20 maintenance obligation, I don't know what impact, 21 if any, it would have had. That would depend, I 22 would think, on what kind of an arrangement it 1240 1 made. 2 Q. So, from MAXXAM's point of view, it was 3 extremely important from the point of view of its 4 future acquisition activities that it not be 5 considered to be a holding company of UFG and have 6 a net-worth obligation to UFG? 7 A. Well, yes, it was important. But not 8 just for that reason. For many reasons. 9 Q. Well, I understand that. But that's 10 one of the reasons it was important, wasn't it? 11 A. Yes. 12 Q. And that's what's stated in the letter 13 to Julie Williams, isn't it? 14 A. Yes. 15 Q. And that's what Solomon Brothers said, 16 isn't it? 17 A. Yes. 18 Q. And that's why it was important that 19 you could structure the transaction to acquire the 20 option shares without those option shares being 21 treated as shares of MAXXAM or MCO; isn't that 22 correct? 1241 1 A. Yes. Without those shares being 2 considered owned by MAXXAM or MCO. 3 Q. Now, we talked earlier about the -- I 4 mean the preferred shares. Do you remember that? 5 A. The preferred shares of UFG? 6 Q. Yes, that were acquired by MAXXAM. I'm 7 sorry. Were acquired at that time by MCO. 8 Did anyone else acquire preferred 9 shares, other than MCO, of UFG? 10 A. I think so. 11 Q. Okay. And who would that have been, 12 sir? 13 A. I think there were several people who 14 availed themselves of the opportunity to do that. 15 I don't know all of them. 16 Q. What was your recollection of how that 17 issuance of preferred shares came about? 18 A. I only know what I read in the public 19 documents about that. That is to say the SEC 20 documents. 21 Q. Okay. And would you take a look at 22 what's been previously marked as A2075? This was 1242 1 an exhibit that was not given to you previously, 2 but it will -- 3 MR. EISENHART: Your Honor, that's 4 another one that's not on the list. 5 MR. RINALDI: Well, you should have it 6 because we gave it to you the other day. Here we 7 are. It's the proxy statement, Schedule 13G. But 8 I don't want to foul up these documents if they 9 are in order. Yes. It's the 13D. That would be 10 Amendment No. 14. 11 Q. (BY MR. RINALDI) Would you take a 12 look at what's been previously marked as Exhibit A 13 2075? And directing your attention to Page 12 of 14 that document, there is a discussion of what 15 appears to be the C preferred shares. 16 A. I'm sorry. What page did you ask me? 17 Q. Page 12. Well, before you even look at 18 that, maybe we can just save your counsel the 19 aggravation. 20 Did there come a time when MCO desired 21 to -- or when an issue arose of converting the C 22 preferred to a D preferred? 1243 1 A. I'm sorry. Could you repeat the 2 question, please? 3 Q. Did there come a time when the question 4 arose as to whether the C preferred stock -- that 5 is, the preferred stock of UFG which was owned by 6 MCO -- could be converted to a Series D preferred 7 stock? 8 A. I seem to remember that there were 9 exchanges or conversions of preferred stock owned 10 by MCO or others. I don't know if that was from C 11 to D or D to E or whatever. 12 Q. Well, take a look at Page 12 on Exhibit 13 A2075, and the second full paragraph describes a 14 transaction in which MCO and Federated entered 15 into an exchange agreement to exchange the shares 16 of C preferred to D preferred. 17 Do you see that? 18 A. Yes. 19 Q. And -- 20 A. I'm sorry. Is there a date to this 21 document because I couldn't see that on the front. 22 Q. I think if you probably turn to the 1244 1 last page of the actual document, it will indicate 2 a signature box by George Kozmetsky, Mr. Bressler, 3 Mr. Paulin, and Mr. Hurwitz. And all of those 4 gentlemen signed the document on June 29th, 1987. 5 And it talks here about the conversion of C 6 preferred shares to D preferred shares by 7 Federated and MCO. 8 Do you see that? 9 A. Yes. 10 Q. And at the bottom of that paragraph, it 11 says if the shares of D preferred were converted 12 into shares, the shares held by MCO and Federated 13 would aggregate approximately 35 percent of the 14 outstanding shares of the company. 15 Do you see that? 16 A. Yes. 17 Q. Do you recall that there came a time 18 when the C preferred shares, the date for their 19 conversion was coming up and there was concern at 20 MCO that if those shares were converted to common 21 stock that it would cause MCO to own more than 22 25 percent of the outstanding shares of -- common 1245 1 shares of UFG? 2 A. Well, I remember generally the issue 3 that there was a convertible stock. I know there 4 came a time when the -- when we were at MCO not 5 permitted to own more than 24.9 percent and did 6 not any longer have approval had -- as had 7 originally been granted under the H(e)-1 8 application. And I think at this point in time, 9 we were not then legally entitled to own more 10 common stock of UFG than we already owned other 11 than a few shares perhaps. 12 Q. Well, in fact -- well, in your 13 recollection, there came a time when the 14 approval -- the resolution which permitted MCO to 15 become a holding company and acquire additional 16 shares of UFG, that that resolution was allowed to 17 lapse; is that correct? 18 A. Yes. 19 Q. Okay. And I will, for purposes of this 20 discussion at this point, tell you that that did 21 not occur until sometime in December of 1987. 22 Do you recall that while MCO still had 1246 1 the ability to acquire shares of UFG under the 2 resolution that the issue arose that the C 3 preferred shares were going to be convertible in 4 about the middle of 1987 to common stock? 5 A. I don't remember the terms, per se, of 6 the preferred and whether they were automatically 7 convertible or not; but in general, I do remember 8 that there was an exchange done of C for D and 9 perhaps even for E for reasons relating to MCO's 10 ability to own shares of common stock of UFG. 11 Q. And if that conversion hadn't have 12 taken place, what would have happened with respect 13 to MCO's ownership of UFG shares? 14 A. If the conversion had occurred, then 15 MCO would own more than 24.9 percent in 16 combination with other people. 17 Q. And that would have triggered the 18 net-worth obligation of MCO; is that correct? 19 A. I'm not an attorney, but assuming that 20 what you said is right, that the letter was in 21 place and if they had willingly gone ahead and 22 done that, yes, I assume so. 1247 1 Q. Okay. I'm just asking for your 2 understanding because I know you're not an 3 attorney. 4 And if that net-worth condition had 5 been triggered, it would have impacted MCO's 6 ability to raise capital, correct? 7 A. Yes, among other things. 8 Q. So, it was important then to MCO that 9 the C preferred not be converted to 10 United Financial Group common stock? 11 A. Yes. 12 Q. Okay. And do you recall that MCO at 13 that point wrote a letter to the Federal Home Loan 14 Bank Board and sought approval of the bank board 15 to convert the shares from C preferred to D 16 preferred? 17 A. No, not specifically. 18 Q. Sir, did there come a time when the -- 19 some two and a half years after you entered into 20 the put call option arrangement that the option 21 agreement came to the point where the exercise 22 period was about to arrive? 1248 1 A. Yes. 2 Q. And that would have been, I guess, two 3 and a half years after entering into it sometime 4 in the middle of 1987, correct? I'm sorry. '88. 5 My math is bad. 6 A. Yes, I believe that's right. 7 Q. And did you participate at all in -- 8 well, let me ask you this. Was the -- when the 9 option matured or was exercisable two and a half 10 years later, did MCO exercise its call and call 11 the shares? 12 A. No, it did not. 13 Q. What -- if it didn't exercise the call 14 option, then did Drexel Burnham Lambert exercise 15 its put and put the shares back to MCO? 16 MR. EISENHART: Your Honor, I would 17 object to Mr. Rinaldi's question as phrased. He 18 assumes -- he has assumed for purposes of this 19 that there came a time two and a half years later, 20 i.e. in June of 1988, when the call option became 21 exercisable. And I don't think that that's been 22 established. As a matter of fact, I think the 1249 1 evidence is to the contrary. 2 MR. RINALDI: Well, the witness can 3 testify to this. I think that's the point we're 4 getting to, Your Honor. I'm not suggesting it 5 was. 6 THE COURT: All right. You may answer 7 the question. 8 A. I'm sorry. Could you please repeat the 9 question? 10 Q. (BY MR. RINALDI) Did the put call 11 option ever get to the point where it was 12 exercisable by either MCO or Drexel Burnham 13 Lambert? 14 A. No. 15 Q. Okay. And why didn't it? 16 A. At that point in time, no. 17 Q. In 1988, yes. Why didn't it, sir? 18 Explain to the Court what took place. 19 A. Well, to the best of my recollection, 20 the put call periods never came to be exercisable 21 because the option was extended. 22 Q. I'm handing you a copy of what's been 1250 1 previously marked as T1144 and I'll ask you to 2 take a look at that document, sir. 3 THE COURT: What number again, 4 Mr. Rinaldi? 5 MR. RINALDI: It's T1144. And I'd also 6 ask you to look at T1146. And these were both put 7 into evidence previously. 8 Your Honor, while he is reading the 9 letter, I have a couple of housekeeping things. I 10 would move into evidence T1084. That's the memo 11 to Mr. Schwartz from Bob Pozen dated 12 December 21st, 1985. 13 MR. EISENHART: Your Honor, subject to 14 our previous statement that this was one of the -- 15 what I'll call them now, the special documents, we 16 have no objection to that. 17 MR. RINALDI: And I would also -- 18 THE COURT: Received. 19 MR. RINALDI: I would also move into 20 evidence T1109, which is the letter dated 21 December 3rd, 1985, with the telefax copy on the 22 front indicating it was sent to him on 1-17-86 by 1251 1 William Eckland. 2 MR. EISENHART: No objection. 3 THE COURT: Received. 4 MR. RINALDI: And I would also move 5 into evidence T1113, which is the letter dated 6 January 31st, 1986, to Julie Williams from 7 Mr. Eckland and has attached to it a December 3rd, 8 1985, letter with several attachments that we 9 looked at. 10 MR. EISENHART: No objection. 11 THE COURT: Received. 12 MR. RINALDI: Finally, I would move 13 into evidence the demonstrative exhibit of Lazard 14 No. 19, which is a list prepared by the OTS of 15 various high-yield -- 16 THE COURT: I believe you've already 17 indicate that had there is at least one error on 18 that, and that would be the Pacific Lumber. And, 19 so, that is probably '86 instead of '96? 20 MR. RINALDI: That is correct, sir. 21 MR. EISENHART: Your Honor, the witness 22 also testified that he has no knowledge that the 1252 1 amounts on that are accurate. There is another 2 date that's got a question mark next to it. I 3 just don't think this list is probative of much of 4 anything. 5 THE COURT: Well, I don't think it is 6 either, but I'm not sure there is much in dispute. 7 I have some misgivings about its accuracy and, if 8 it's not accurate, I don't know what purpose it's 9 serving. 10 MR. RINALDI: Well, I think it will be 11 difficult for the Court to understand his 12 testimony without having the document in the 13 record. I would state for the record that the 14 purpose of this is -- was only as a mechanism to 15 expedite his testimony and ask him about various 16 issuances without having to go through them in 17 detail. 18 THE COURT: All right. I'll receive it 19 for that purpose. 20 Q. (BY MR. RINALDI) Have you now had a 21 chance to look at T1144 and 1146, sir? 22 A. Yes. 1253 1 Q. Okay. Do you recognize those 2 documents? 3 A. Not specifically, but I think I 4 understanding something about them, yes. 5 Q. And are these -- what are these 6 documents, if you can describe them for the Court. 7 A. Well, T1144 would appear to be a letter 8 that was part of the process that led to T1146 9 which -- 10 Q. And T -- I'm sorry. 11 A. Which was essentially an extension of 12 the option agreement that you asked me about 13 before you provided me these two exhibits. 14 Q. So, in other words, before the option 15 could be exercised by either a call on the part of 16 MCO or a put on the part of Drexel Burnham 17 Lambert, the parties agreed to extend the option 18 for an additional period of time; is that correct? 19 A. Yes, sir. 20 Q. And 1144 is a letter agreement that 21 extends it for approximately a one-month period; 22 is that right? 1254 1 A. Yes, sir. 2 Q. And then do you recognize 1144 as a 3 second amendment to the stock option agreement 4 which extended the stock option agreement for a 5 period through -- into July of 1990? 6 A. If we're speaking of 1146 as the 7 extension -- 8 Q. Yes. 9 A. Yes, I recognize that as an extension 10 through July of 1990, yes. 11 Q. Now, did you have any involvement in 12 these extensions or the negotiations of the 13 extensions of the put call option? 14 A. Yes. 15 Q. Okay. How would you describe your 16 involvement, sir? 17 A. Well, in the course of preparing for my 18 depositions and also in the course of preparing 19 for today, I've seen from time to time things that 20 suggest that I may have written a letter or 21 otherwise spoken with people at Drexel regarding 22 the extension. 1255 1 Q. Now, under the second amendment to the 2 stock option agreement which is dated August the 3 2nd, 1988, did MCO agree to pay an additional 4 premium to Drexel Burnham Lambert for the 5 extension of the option? 6 A. Yes, sir. 7 Q. And do you recall the amount of that 8 premium or can you tell what it was from the 9 option arrangement? 10 A. I believe that was $524,664. 11 Q. Now, do you know how that premium was 12 arrived at? 13 A. Yes, I think I do. 14 Q. Okay. Can you tell me how it was 15 arrived at? 16 A. I think that premium was prorated in 17 respect of the time of the extension to the 18 original time of the option times the original 19 option period -- option amount. 20 Q. So, let me see if I've got it right. 21 A. I'm not sure I said that correctly. 22 Q. If you divided the original option 1256 1 period by two and a half, you'd get an option 2 amount for one year, right? 3 A. Yes. 4 Q. And then if you multiply that by two, 5 you would get the prorated amount for an 6 additional two years? 7 A. Yes. I think we might have actually 8 tried to come up with this number by days, but 9 that's the correct procedure that I recall. 10 Q. Okay. So, in other words, you could 11 have done it by dividing by the total number of 12 days of the original option and then coming up 13 with a number and multiplying it by the total 14 number of days of the extension? 15 A. Days or months or weeks, yes. 16 Q. Okay. And when you say "we tried to," 17 who is "we"? 18 A. Well, my recollection here is that I 19 had gone through a lot of arguing with Drexel 20 Burnham and I think I had testified earlier that 21 on the premium I spoke a lot to Art Bilger and, to 22 the best of my recollection, at some point in time 1257 1 I proposed and he agreed that rather than arguing 2 again about all the things we had argued about 3 before that wouldn't it be appropriate to consider 4 prorating the premium for the new time period. 5 Q. Okay. 6 A. And to the best of my recollection, he 7 agreed. 8 Q. Now, you say you had argued with 9 Mr. Bilger. What is it that you had argued about 10 with Mr. Bilger about before? 11 A. Well, I think I had indicated earlier 12 that I argued a lot with him about the premium 13 that we wanted to pay, as we always did when we 14 argued -- and we always did argue with Drexel 15 about money -- we wanted to pay the minimum 16 premium possible and he as he always did argue 17 that we should pay the maximum amount possible and 18 that at some point we had agreed to have the 19 premium of approximately -- I think it was 20 $600,000 for the initial option. And I think if 21 you brought it up, that I've also had a chance to 22 go over some of the things I had mentioned in my 1258 1 deposition earlier, and I think I may have 2 misstated something on Friday when I said that I 3 thought that the price at which the option was 4 struck was something that only others spoke about, 5 but I think that's incorrect. I think I also did 6 speak to Mr. Bilger from time to time about that. 7 But I don't recall ever agreeing with him on a 8 price. 9 Q. So, you don't to this day know how they 10 came up with a strike price? 11 A. Other than at some point I became aware 12 of it and it was agreed to, that's correct, sir, 13 yes. But I think I had reason to believe that I 14 spoke to Mr. Bilger about it and that I may have 15 said that in earlier deposition and I'm sorry for 16 any inconsistency. 17 Q. And who else were you -- was Mr. Bilger 18 talking to besides yourself? 19 A. I don't know who else he was speaking 20 with on my side. I don't know that he was 21 speaking with anybody else on my side. I don't 22 know who he spoke with at Drexel. I don't know 1259 1 who he spoke with. 2 Q. And was the premium intended to 3 compensate Drexel for holding the shares through 4 the option period? 5 A. Well, it was just intended to be a 6 premium for an option, just a premium that one 7 would pay for the right to have the ability at a 8 future date to buy shares. 9 Q. So, Drexel would continue to hold the 10 shares and continue to make them available to MCO 11 in the future and, in return for that, MCO paid 12 Drexel the premium, right? 13 A. I don't know that Drexel originally 14 held the shares, but they would certainly offer 15 MCO the right at a future time to buy the shares, 16 yes. 17 Q. If in the middle of the put call option 18 MCO had desired to shorten the exercise time on 19 the option, would that have been a problem with 20 Drexel Burnham Lambert? 21 A. I don't know. I haven't thought about 22 it. 1260 1 Q. Do you have any reason to believe that 2 if MCO had wanted to shorten the date for 3 exercising the options that DBL would not have 4 agreed to do so? 5 A. I think it would have depended on a lot 6 of factors. I'm not sure what DBL's position 7 would have been on something like that. 8 Q. Well, if they had shortened the option, 9 they would have certainly gotten the strike price 10 at an earlier date, wouldn't it? 11 A. Yes, they would have gotten that. I 12 don't know as a theoretical matter where they 13 would have come out because, as far as I know, no 14 one ever considered or discussed it with them. 15 Q. And the reason they never discussed it 16 would have been that MCO didn't want to acquire 17 the shares because it would have made them a 18 holding company, correct, and subjected them to a 19 net-worth obligation? 20 A. Well, originally, certainly MCO was 21 unwilling to go above the 24.9 percent for the 22 reasons we spoke about but then later at this 1261 1 point in time, MCO, if I remember correctly, did 2 not have the right to acquire them because, as I 3 think you reminded me, that ability expired 4 sometime before the date at which the option was 5 extended. 6 MR. EISENHART: Your Honor, let the 7 record reflect that when the witness said "at this 8 point in time" he referred back to the two 9 extension agreements which are dated in 1988. 10 MR. RINALDI: That's correct. 11 Q. (BY MR. RINALDI) And sir, ultimately, 12 do you recall what happened with respect to the 13 option? Was it ever exercised by MCO? 14 A. No, it was not. 15 Q. Do you recall what -- did DBL 16 ultimately exercise its put and put the shares 17 back to MCO? 18 A. Yes. Some years later, as I recall, 19 DBL exercised -- after MCO allowed the call to 20 expire unexercised, DBL went ahead and exercised 21 its put to the company I believe then known as 22 MAXXAM. 1262 1 Q. And at that point in time do you recall 2 what the value of the UFG shares was? 3 A. If I recall correctly, they were 4 virtually worthless. 5 Q. By that time, had USAT -- I mean UFG's 6 principal subsidiary, USAT, been placed in 7 receivership? 8 A. Yes, that's correct. 9 Q. Now, did there come a point in time 10 when you became a director of United Financial 11 Group? 12 A. Yes, sir. 13 Q. And when did that occur? 14 A. That was in early February of 1988, I 15 believe. 16 Q. And can you describe for the Court the 17 circumstances under which you became a director of 18 United Financial Group? 19 A. Generally, yes. At some point in time, 20 I was approached by someone -- I can't say for 21 certain who -- who wondered if I would be willing 22 to serve as a director of United Financial Group, 1263 1 Inc. And having from time to time had some 2 peripheral involvement in some of the things 3 regarding stock of United Financial Group, Inc., I 4 thought it might be interesting to serve on the 5 board of what was then a public company and I said 6 yes, I would be interested. 7 Q. And as you sit here today, you don't 8 know who approached you to sit on the board? 9 A. I couldn't say for certain, sir, no. 10 Q. Could it have been Barry Munitz? 11 A. Could have been. 12 Q. Could it have been Charles Hurwitz? 13 A. Could have been. 14 Q. And when you were offered an 15 opportunity to sit on the board, did you accept? 16 A. I did. 17 Q. And did you serve in any other capacity 18 than as a director of United Financial Group? 19 A. I'm sorry, sir. I don't understand the 20 question when you say "any other capacity." 21 Q. Did you serve as an officer? 22 A. Oh, sorry. Well, if I recall 1264 1 correctly, I was a director of United Financial 2 Group, Inc. I believe I was also a director of 3 United Savings Association of Texas. I don't 4 believe I was an officer or had any other capacity 5 with either of those organizations until sometime 6 after the receivership that you mentioned earlier 7 which occurred in December -- late December of 8 1988. So that I believe the only time I would 9 have had any capacity other than as a director 10 would have been sometime beginning in 1989. 11 Q. And do you recall -- 12 A. And I'm not sure exactly it began then. 13 It might have been a year or two later. 14 Q. Do you recall who you replaced on the 15 board of UFG? 16 A. No, I'm not sure who even to this day 17 exactly who necessarily I replaced. I think 18 several directors had left, if I recall correctly, 19 and several others left within months of the time 20 that I came on the board. So -- 21 Q. And this would have been at the end of 22 '87, the beginning of '88 that these directors 1265 1 left UFG? 2 A. Certainly I think at the beginning of 3 '88. I'm not certain about the end of '87. And 4 then I think into 1988. I think after February, 5 if I remember correctly, a couple of the people 6 who had originally been on the board at my first 7 meeting in February weren't there by the time I 8 got around to the spring or the summer. 9 Q. And was one of the directors that had 10 departed from United Financial Group at or about 11 the time that you went on the board, was one of 12 those directors Charles Hurwitz? 13 A. I believe that's correct, yes. 14 Q. And did you have occasion to discuss 15 with Mr. Hurwitz your assuming directorship on the 16 UFG board in as much as he had recently resigned? 17 A. Again, I couldn't say who asked me if I 18 would be interested. I don't recall discussing 19 with Mr. Hurwitz specifically anything regarding 20 that. 21 Q. Did your service on the board overlap 22 at all, do you recall? 1266 1 A. Overlap Mr. Hurwitz's? 2 Q. Yes. Or had he resigned before you 3 went on the board? 4 A. I believe he had resigned before I went 5 on the board. I couldn't say that for certain. 6 Q. See, I'm confused because Richard -- I 7 mean, the chart here indicates that there is a 8 year overlap. 9 MR. KEETON: I indicated in my 10 argument -- which maybe you weren't here -- that 11 there was an error in '88 and some people got off 12 early, some got on late, and '88 is not a year to 13 be relied upon. 14 Q. (BY MR. RINALDI) Okay. So, this 15 chart is not accurate then? 16 MR. KEETON: It is up to '88. 17 A. I observed coming into the courtroom to 18 someone early on that it seemed to be inaccurate 19 in respect of 1988 as I understand it, yes. 20 MR. RINALDI: Your Honor, in as much as 21 these charts are inaccurate and could potentially 22 mislead witnesses, it would be my request that 1267 1 they be removed from the courtroom because I think 2 we will have further witnesses who may be confused 3 by the inaccuracy of the charts. 4 MR. KEETON: If I show it to a witness, 5 I'll tell them what's inaccurate, Your Honor. 6 MR. RINALDI: Well, the problem is I 7 can't prevent people from looking at the charts 8 and I think the charts do convey a message and the 9 message, by counsel's own admission, is that they 10 are not accurate. And I think it's inappropriate 11 to have these things available in the courtroom if 12 they don't accurately depict what went on at the 13 institution in terms of the board of directors. 14 MR. KEETON: Your Honor, it was 15 intended to be demonstrative as I argued in my 16 opening, but I'll tell you what. We'll get '88 17 cleaned up here, update the stuff. 18 THE COURT: All right. You may leave 19 them, I suppose, if they are -- are you going to 20 get a new chart? 21 MR. KEETON: I think probably all we'll 22 have to do, Your Honor, is get some white -- you 1268 1 know, like if a man gets off in January, white him 2 out the rest of '88. If a man, as Mr. Schwartz 3 did, comes on late, we'll just white off the first 4 part of '88 so then it'll indicate a split year as 5 you see with, for instance, Mr. Bentley and 6 Mr. Gross on there. 7 THE COURT: Well, you have some records 8 that are accurate? 9 MR. KEETON: Oh, of course, Your Honor. 10 THE COURT: All right. 11 Q. (BY MR. RINALDI) Mr. Schwartz, when 12 you went on the board of UFG, how would you 13 describe the financial condition of that 14 institution? 15 A. I believe there was some debate as to 16 the condition of it at the time that I went on. 17 Q. A debate in what sense? 18 A. To the best of my recollection, when I 19 got on the board, my first meeting, I heard 20 discussions which were then still underway, I 21 believe, as to what the -- I believe the term was 22 RAP net-worth of the institution was as opposed to 1269 1 GAAP net-worth. 2 Q. And by "the institution," are you 3 making reference to United Saving Association of 4 Texas or UFG? 5 A. Of United Saving Association of Texas, 6 I think. 7 Q. Okay. But with respect to UFG, what 8 was the financial condition of that entity when 9 you got on the board? Did it have negative 10 shareholder equity? 11 A. Without looking at its balance sheet, I 12 couldn't say for certain. I know it had -- if I 13 remember correctly, it had some 50 or $60 million 14 worth of debt and some 30 odd million dollars 15 worth of cash and other assets and liabilities, 16 but I don't remember if it showed specifically a 17 negative net-worth at that time. 18 Q. Well, if it had liabilities that 19 exceeded its assets, would it not have negative 20 net-worth? 21 A. Well, I'm just saying I don't remember 22 the other numbers in terms of other assets and 1270 1 other liabilities. That's why I'm hesitating to 2 answer. 3 Q. Let me hand you a copy just so we have 4 this for the record and it's complete. This was a 5 document that I didn't have a moment ago which has 6 been handed to me. 7 Would you take a look at that and see 8 if you recognize that document? Have you had a 9 chance to look at what's been marked as T1150? 10 A. Yes, sir. 11 Q. And do you recognize what this document 12 is? 13 A. I think so, yes. 14 Q. And what is it? 15 A. This is an August 9th, 1990, letter 16 from Drexel Burnham to Howard Sobel in which 17 Drexel is electing to exercise its put option and 18 is delivering shares of United Financial Group, 19 Inc. and the letter of credit and asking for funds 20 to be wired to it in the amount of two and a half 21 or so million dollars. 22 Q. And as a result of Drexel's exercise of 1271 1 the put option, it received $2,577,000 for the 2 300,000 shares of UFG stock; is that correct? 3 A. Yes. 4 Q. Even though the stock was worthless at 5 this point in time? 6 A. Yes. 7 Q. So that as a result of the put call 8 option, MCO had borne the economic loss associated 9 with the decline in value of the shares of UFG 10 stock; is that correct? 11 A. Yes. At the end of the day, that's 12 what happened. 13 Q. And did there come a time when you were 14 on the United Financial Group board when it came 15 to your attention or was brought to your attention 16 that United Financial Group had an obligation to 17 infuse capital into United Savings Association of 18 Texas pursuant to a net-worth commitment that 19 United Financial Group had? 20 A. Yes, there did come a time when I came 21 to understand that, but I don't think it was at a 22 time when I was on the board of United Savings 1272 1 Association of Texas. 2 Q. Would you -- 3 MR. EISENHART: Your Honor, might we 4 know what document was just put in front of the 5 witness? 6 MR. RINALDI: We'll get to that. 7 Q. (BY MR. RINALDI) Would you take a 8 look at what's been marked as T2013? 9 MR. RINALDI: I'm just trying to move 10 the thing along, Frank. 11 MR. EISENHART: Your Honor, I don't 12 want to be picky about this, but it takes us a 13 second to find it. 14 MR. RINALDI: I'm sorry, Frank. The 15 next one will be T2014. 16 Q. (BY MR. RINALDI) Do you recognize 17 that document, sir? 18 A. Yes, I see it. I don't recall 19 specifically receiving it, but I may well have. 20 Q. Now, were you on the board of directors 21 on May 13th, 1988? 22 A. Yes, of United Financial Group, Inc. 1273 1 Q. In the normal course of your serving on 2 the board, is this a matter which would have been 3 brought to your attention as a board member? 4 A. Yes. 5 Q. Do you recall the substance of the 6 letter being brought to your attention as a board 7 member? 8 A. Yes. 9 Q. And it indicates there in the first 10 full sentence that United Savings Association of 11 Texas, which is the subsidiary of UFG, the insured 12 depository subsidiary, had failed to meet its 13 minimum regulatory capital requirement as of 14 December 31st, 1988. 15 Do you see that? 16 MR. VILLA: Objection, Your Honor. I 17 can't see the date on that. December 31st, 1988? 18 A. My -- 19 MR. RINALDI: I'm sorry. '87. I 20 apologize. This is a bad copy. Perhaps if we 21 have a better copy, we can substitute. We know, 22 John, in our hearts that it says '87, right? 1274 1 MR. VILLA: That's why I was trying to 2 correct you, so we didn't confuse the witness. 3 MR. RINALDI: So we didn't confuse the 4 record. 5 A. Well, it is my understanding that a 6 letter was sent that advised of their opinion that 7 they failed to meet minimum regulatory capital as 8 of December 31st, 1987. 9 Q. (BY MR. RINALDI) And did it come to 10 your attention that UFG at that point had a 11 stipulation that as long as it controls -- 12 controlled USAT that it would maintain USAT's 13 net-worth? 14 A. No. 15 Q. But that's what it says in the next 16 paragraph of the letter, does it not? 17 A. Yes. 18 MR. VILLA: Objection. Misstates the 19 paragraph. 20 Q. (BY MR. RINALDI) In substance, is 21 that what the paragraph says, sir? 22 A. Well, it says that there had been a 1275 1 bank board resolution where UFG would stipulate 2 certain things in order to obtain final approval 3 for its acquisition of First American Financial of 4 Texas and to United Financial Group, Inc. But as 5 I think we went through in my deposition sometime 6 in the last several years, it was not clear to 7 members of the board of UFGI at this point in time 8 and it did not become clear to members of the 9 board of UFGI until perhaps seven or eight years 10 later that such stipulation had ever actually been 11 made by UFGI. 12 Q. And seven or eight years later, did 13 you, in fact, determine that such a stipulation 14 had been made by UFGI? 15 A. I saw a stipulation that was signed by 16 Sonny Bentley. I don't know if the language was 17 precisely the same as this, but it was similar in 18 some respects, yes. 19 Q. Do you have any reason to believe that 20 Mr. Bentley didn't enter such a stipulation on 21 behalf of UFG? 22 A. No. I don't doubt it. 1276 1 Q. Now, in the last full paragraph it says 2 "You are hereby directed to advise the agent of 3 the steps you will take to infuse capital into 4 United." 5 Did the board of directors ever infuse 6 capital into United? 7 A. They tried on several occasions, yes. 8 They never did accomplish it, no. 9 Q. And at this point in time, as you said, 10 UFGI had negative shareholder equity? 11 A. I think I said that its cash was, as I 12 remember, about $30 million. It had debt, if I 13 remember, of some 50 or $60 million, that there 14 were other asset and liability categories I don't 15 recall. If you'd want to show me the balance 16 sheet, though, I'd be happy to look at it and it 17 would, I'm sure, refresh my recollection whether 18 that ended up in providing it with negative 19 net-worth. 20 Q. Well, the only question is: You do 21 recall that UFGI at the point in time that we are 22 talking about here on May 13th, 1988, did have 1277 1 cash available to it that it could have infused 2 into USAT? 3 A. I do remember that at May, '88, it had 4 cash and I do remember it was available for a 5 variety of potential purposes, among which might 6 have been the one you're suggesting, yes. 7 Q. But none of that cash was infused to -- 8 infused to USAT by the directors of UFG? 9 A. Yes, that's correct. 10 Q. And I'm going to hand you -- I'm 11 handing you a copy -- 12 THE COURT: Mr. Rinaldi, how much more 13 time are you going to take on this witness? 14 MR. RINALDI: I don't have that much 15 more time, but I can probably finish this segment 16 and then there might be another half hour after 17 that. 18 THE COURT: All right. We'll adjourn 19 until 1:30. 20 21 (Luncheon recess.) 22 1278 1 THE COURT: Mr. Rinaldi. 2 Q. (BY MR. RINALDI) Mr. Schwartz, when 3 we broke we were, I believe, discussing the net 4 worth maintenance obligation of United Financial 5 Group. Let me hand you a copy of what's been 6 previously marked as T2021. Please pass that 7 along to the Court. 8 Do you recognize that document as 9 something you would have received as a member of 10 the board of UFG at or about December 8, 1988? 11 A. Yes. 12 Q. And who was Neil Twomey? 13 A. I gather he was the supervisory agent. 14 I don't know if it was with the Federal Home Loan 15 Bank of Dallas or not. 16 Q. Okay. And in his letter, he starts out 17 by making reference to the May 13th letter which 18 had previously been sent to you by Mr. Twomey and 19 that's the document that's previously been marked 20 as T2013? 21 A. Yes, sir. 22 Q. Okay. And then in the second full 1279 1 paragraph he says "At this time, you as members of 2 the board of UFG are directed to infuse additional 3 equity capital into United." 4 Do you see that? 5 A. Yes. 6 Q. Did UFG infuse any cash into United at 7 that point in time? 8 A. No. 9 Q. And shortly thereafter, was United 10 Savings Association of Texas then placed in 11 receivership? 12 A. Yes. 13 Q. And what happened with respect to 14 United Financial Group, Inc. after USAT was placed 15 into receivership? Did it continue to operate as 16 an operating company? 17 A. It tried to continue to operate. It 18 sat down and tried to settle with the federal 19 regulators beginning early in 1989, January I 20 think it was, of 1989 and continued that process 21 up through as recently as this year. 22 Q. Ultimately, was a bankruptcy proceeding 1280 1 initiated with respect to United Financial Group? 2 A. Yes, sir. 3 Q. And when approximately did the 4 bankruptcy proceeding commence? 5 A. I think that was filed at the beginning 6 of this year or perhaps late last year. 7 Q. You're talking about a plan of 8 reorganization that would have been filed as late 9 as this year? 10 A. Yes. 11 Q. Okay. But prior to the filing of the 12 actual plan of reorganization, had there been a 13 petition in bankruptcy filed with respect to 14 United Financial Group? 15 A. I'm sorry. I didn't understand the 16 question. Could you ask me specifically that 17 question again? 18 Q. Sure. Do you recall when 19 United Financial Group was put into bankruptcy 20 approximately? 21 A. Well, again, it was sometime in the 22 last year or so; but I think you're asking me 1281 1 something -- 2 Q. Well, had there been a petition for 3 bankruptcy filed prior to that? 4 A. There had been a petition filed by a 5 company called New West, and New West was the 6 holder of the Series B preferred stock of 7 United Financial Group, Inc., if I remember right, 8 and that petition was filed in I think the early 9 Nineties, if memory serves me correctly. But to 10 the best of my knowledge, I don't believe that 11 United was ever in bankruptcy until sometime in 12 the last 12 months. 13 Q. Okay. And what was the event that 14 caused New West to file the petition for 15 bankruptcy? 16 A. New West, as holder of the Series B 17 preferred, had not been receiving dividends or 18 sinking fund payments on their preferred stock 19 since sometime in the late 1980s. And, as I 20 recall, they met several times with myself and/or 21 other members of the board of United Financial 22 Group, Inc. after December 31st, 1988, in an 1282 1 effort to get some money from United Financial 2 Group, Inc. And I don't remember a specific event 3 that caused them to file -- involuntary bankruptcy 4 petition, I think, was what they filed, but I 5 viewed it at the time as part of an effort to put 6 pressure on United to give them something. 7 Q. Had United Financial Group defaulted on 8 any payments owed to New West in 1988 when you -- 9 in 1988 that you recall? 10 A. I couldn't speak with certainty about 11 the word "defaulted," but certainly had not made 12 dividend payments on its preferred. I don't 13 remember if it had the right to pass on them 14 without constituting the default and I do remember 15 that there were sinking fund payments that should 16 have been made. Here again, I know it didn't make 17 them. I don't remember if that was in '88 or a 18 later date, but I don't know if that technically 19 would constitute a default or not. 20 Q. Let me ask you to take a look at what's 21 been marked as 2012, T2012. It's a somewhat 22 lengthy document and there is a lot of financial 1283 1 information on it, but directing your attention to 2 the -- well, first of all, do you recognize the 3 signature on the front page of that document? 4 A. That of Art Berner, sir? 5 Q. Yes. 6 A. Looks like his mark, yes, sir. 7 Q. Okay. And this is being sent to George 8 Barclay, the president of the Federal Home Loan 9 Bank of Dallas, right? 10 A. Yes, sir. 11 Q. Do you recall seeing this document at 12 or about the time it is dated? 13 A. Again, as all of my other answers have 14 been, I don't remember specifically seeing this 15 document; but it's more than likely I did. And 16 I'm not saying I didn't. 17 Q. And if you look at the second full page 18 of the document or the second -- the memorandum 19 that's attached, it reflects pretty much what you 20 related earlier today about the condition of the 21 company, does it not? 22 A. I'm sorry, sir. Where was that? 1284 1 Q. On the first page of the memorandum 2 that's attached to the letter itself. It would 3 have the Bates stamp 28552 at the bottom or the 4 imaging stamp. And if you look at the second full 5 paragraph, it says that "UFG has approximately 6 54 million of debt outstanding." And then in the 7 next paragraph down it says "UFG and its 8 subsidiaries, excluding USAT, have approximately 9 34 approximately in cash." 10 You see that? 11 A. I do. 12 Q. And that's pretty much what you had 13 indicated earlier from your own recollection, 14 isn't it? 15 A. Yes, sir, uh-huh. 16 Q. Okay. Now, if you turn to Page 3 of 17 the memorandum, I direct your attention to the 18 footnote that appears at the bottom of that page. 19 Does that refresh your recollection as 20 to when the UFG failed to make the required 21 dividend and sinking fund payments on the 22 preferred shares. 1285 1 MR. VILLA: Objection. 2 THE COURT: What grounds? 3 MR. VILLA: The question is whether 4 it's required or not I think is a legal conclusion 5 that the witness was just talking about. 6 MR. RINALDI: I didn't say it was 7 required, I don't think. I just -- 8 THE COURT: Restate your question. 9 Q. (BY MR. RINALDI) Does that refresh 10 your recollection as to the fact that the UFG 11 board determined not to make scheduled dividend 12 and sinking fund payments on the preferred Series 13 B stock as of May 1st, 1988? 14 A. Yes. 15 Q. Is it your recollection, then, that it 16 was about that point in time when they ceased 17 making or determined not to make the dividend 18 payments? 19 A. I don't know if it was the first time 20 they had not made a dividend payment; but, yes,, 21 it certainly was no later than this date that they 22 first didn't make a dividend payment. 1286 1 Q. And is it your recollection that they 2 also did not make the sinking fund payment at or 3 about that date? 4 A. Yes. 5 Q. And were they -- do you recall whether 6 they were obligated under the terms of the 7 preferred share -- the preferred stock to make 8 those payments at that time? 9 A. My recollection is that the preferred 10 stock instrument spoke to their obligation. I 11 don't know, sitting here now, what kind of an 12 obligation that was. But in its terms, it 13 contained originally the notion that sinking fund 14 payments would be made, yes. 15 Q. And -- 16 A. And that dividends would be paid. 17 Q. And the purpose of the sinking fund 18 payments were to create a fund from which the 19 Series B preferred shareholders could ultimately 20 be repaid; is that correct? 21 A. I'm not sure. I don't know the 22 derivation of the instrument, but it would have 1287 1 had that effect as a practical matter. 2 Q. Okay. Now, we had talked earlier about 3 the conversion from C preferred to D preferred, 4 and I sort of interrupted the train of my 5 questioning because I did not have a complete 6 document available for all counsel. I now have 7 that document available, and I will hand a copy or 8 copies to counsel. It's T131, and I'm handing up 9 three copies to you and the Court. 10 Now, this is a letter to Julie Williams 11 dated March the 4th, 1987, and it's -- I'm advised 12 that several pages came off of one of the last 13 copies. Could you check your -- no, no. The last 14 document. Apparently, the staple came out. Yours 15 seems to be complete. Oh, no. It is yours that 16 is incomplete. I take that back. Let me just put 17 a paper clip on this. 18 MR. RINALDI: What number does your 19 Document T2012 end with, the Bates stamp number, 20 Your Honor? It should end with 68; is that right. 21 THE COURT: 67. 22 MR. VILLA: Your Honor, I think 1288 1 Mr. Rinaldi and I talked. I've got a better copy 2 of that document. 3 MR. RINALDI: No, no. This is T2012. 4 I'm sorry, Your Honor. Yours ends at Bates stamp 5 67? 6 THE COURT: Say the number again. 7 MR. RINALDI: I'm sorry. It's -- 8 THE COURT: I mean the number of the 9 exhibit. 10 MR. RINALDI: It's T2012. It's the 11 previous exhibit that he looked at. And the last 12 Bates stamp should be -- end with the digits 68. 13 THE COURT: Okay. Yes. 14 MR. RINALDI: Okay. Fine. Then all 15 the copies are complete. 16 Q. (BY MR. RINALDI) Do you recognize 17 what's been marked as T1131? 18 A. No, not specifically. 19 Q. Do you recall -- do you recognize the 20 subject matter that's discussed in the letter? 21 A. Yes, sir. 22 Q. Okay. And is this the conversion of 1289 1 the C preferred to D preferred that we talked 2 about earlier? 3 A. I think so. 4 Q. Now, at the bottom of the second page, 5 it says "UFG proposes to exchange shares of C 6 stock held by MCO and Federated for an equal 7 number of shares of D stock of UFG. Such exchange 8 would occur prior to June 15th, 1987." 9 And then it says that "The Series D 10 stock will have exactly the same rights and 11 preferences, terms, and conditions as the Series C 12 stock except the Series D stock will not be 13 convertible in the voting common stock of UFG 14 until July 1, 1988." 15 Do you see that? 16 A. Yes, sir. 17 Q. Do you recall why it was UFG -- I mean 18 MCO was interested in exchanging its C preferred 19 stock for D preferred stock? 20 A. Other than for anything we spoke about 21 earlier, no. 22 Q. Okay. And when you say "anything we 1290 1 spoke about earlier," you're referring to the fact 2 that if they hadn't converted it to D preferred, 3 that the C shares would have become convertible 4 into common stock of UFG? 5 A. That's basically my understanding. I 6 can't say it's a hundred percent correct. 7 Q. And was it your understanding that if 8 it was convertible to common stock, then MCO would 9 have exceeded the 24.9 percent level of stock 10 ownership and would have become a holding company? 11 A. Well, it would have exceeded 12 24.9 percent. I'm trying to remember the dates 13 that you showed me earlier on some of the 14 documents. 15 Q. The dates of -- which date in 16 particular are you referring to, sir? 17 A. The net worth/H(e)-1/other application 18 that was made in June of '83 and when that was 19 approved and when it expired. 20 Q. Well, we know that it was approved on 21 December the 6th, 1984. That's the resolution 22 you're making reference to? 1291 1 A. Okay. 2 Q. And I believe that that resolution 3 would appear as an attachment to a document you 4 looked at just a moment ago. 5 A. Okay. 6 Q. Or before we broke, which would have 7 been T1113. 8 A. Well, I guess my answer would be that 9 yes as to the 24.9 percent, that level would have 10 been exceeded. But I don't know that I'm 11 qualified to give you an answer whether that would 12 have meant technically they were a savings and 13 loan holding company. 14 Q. Okay. I just wanted your 15 understanding. Now, it says down here at the 16 bottom of Page 2 that in the bottom of the 17 penultimate paragraph, "If Federated and MCO both 18 converted their Series C stock in the voting 19 common stock, they would hold in the aggregate 20 34.99 percent of the voting common stock of UFGI." 21 Do you see that? 22 A. I'm sorry. No, I don't. Where is 1292 1 that? 2 Q. It's the next-to-the-last paragraph on 3 the second page of the letter. 4 A. Yes. 5 Q. Now, do you know -- did MCO request the 6 exchange from UFG so that MCO would not in the 7 aggregate control 34.99 percent of the voting 8 common stock of UFGI? 9 A. Well, I don't know who asked what of 10 anyone. I can only speak to what I spoke to 11 earlier about the conversion and what that would 12 have meant in terms of percentages, but I don't 13 know who asked what of whom. 14 Q. Okay. So, you didn't participate in 15 this transaction in terms of dealing with UFGI on 16 it? 17 A. No, sir. 18 Q. Okay. Do you know why it is that 19 MCO -- I mean -- and UFGI, that is, went to the 20 bank board and sought an opinion on the conversion 21 of the C and D preferred when they had not sought 22 such an opinion or MCO hadn't sought such an 1293 1 opinion when it acquired the option shares? 2 MR. EISENHART: Your Honor, I object to 3 the question to the extent that he implies that 4 this is MCO going to the bank board for a ruling. 5 The letter is written by United Financial Group. 6 MR. RINALDI: And I'm just asking him 7 if he knows why on this occasion United Financial 8 Group went to the bank board for permission to 9 convert the shares or for an opinion as to whether 10 they could convert the shares and no such -- no 11 such opinion had been sought on the earlier 12 occasion by MCO and Federated. 13 A. I can speculate as to why, but this is 14 '87. I wasn't a member of UFG's board or 15 otherwise involved with UFG other than as we have 16 spoken about. But this is a transaction in the 17 capital of UFG, which I think was at that time a 18 savings and loan holding company maybe with, maybe 19 without obligations depending upon one's view. 20 But this was a regulated entity as I understand 21 it, and MCO and Federated as I understood it were 22 not. 1294 1 Q. (BY MR. RINALDI) Now, we talked 2 earlier very briefly about the 260 million zero 3 coupon bond. I believe that was yesterday or 4 Friday we would have talked about it. 5 A. Yes. 6 Q. Okay. And at the time, I don't think I 7 had a copy of the bond. Let me hand you up a copy 8 and we'll put this into evidence. This should be 9 Exhibit 1 to the Lazard deposition. Here's a copy 10 for the Court. 11 Now, do you recognize that exhibit, 12 sir. 13 MR. EISENHART: Your Honor, we're not 14 sure we know the exhibit which he's referring? 15 MR. RINALDI: It's the zero coupon 16 bond. 17 MR. EISENHART: This is another one 18 that I don't think was on the list. 19 MR. RINALDI: We gave it to you Friday, 20 Frank. 21 Q. (BY MR. RINALDI) Have you had a 22 chance to look at what's been marked as -- or was 1295 1 previously marked as Lazard 1? 2 A. Yes. 3 Q. Now, it indicates on the second full 4 page that -- and we talked earlier that this was a 5 mechanism for raising money and I think there was 6 also some tax advantage aspect of it, as well. 7 Do you recall that? 8 A. Yes. 9 Q. Okay. But it talks on the front page 10 that the aggregate principal amount of the note at 11 a purchase price of 3,496,620 -- I think 11 cents. 12 Do you see that? 13 A. Yes. 14 Q. So, would that have been the amount 15 that MCO would have obtained from the sale of the 16 zero coupon senior subordinated note when it was 17 sold in 1982? 18 A. Yes. 19 Q. And do you recall who purchased the 20 senior subordinated note? 21 A. I believe it was Drexel Burnham. 22 Q. Okay. And can you tell -- we talked 1296 1 about the proceeds of the note, but would you take 2 a look at Page 17 and tell me if that accurately 3 reflects your recollection? It indicates that the 4 use of the proceeds and then under that it says 5 "the net proceeds from the sale of the notes will 6 be added to the company's working capital and will 7 be utilized for general corporate purposes." 8 Do you see that? 9 A. Yes. 10 Q. Now we take a look at what's been 11 marked previously as A2071. I'll hand you up a 12 copy of that rather than fish it out of the stack. 13 This is the form or the Schedule 13D that was 14 filed with respect to United Financial Group and 15 it's dated July 12th, 1983. 16 And directing your attention to Pages 4 17 and 5 of that document, on Page 4 it indicates 18 that the source and the amounts of other 19 consideration and it's talking about the source of 20 funds that were used by MCO and Federated to 21 acquire their 24.9 percent aggregate interest in 22 United Financial Group shares. 1297 1 Do you see that? 2 A. Yes. 3 Q. And then turning to the next page, it 4 indicates that among other things, the total 5 amount that was utilized by Federated and MCO to 6 acquire the UFG shares, $3,518,086 was obtained 7 from general corporate funds of MCO. 8 Do you see that? 9 A. Yes. 10 Q. So, is it fair to say that after MCO 11 obtained the three and a half million dollars from 12 DBL in the July, 1982, sale of the zero coupon 13 bond, those funds were then available to MCO for 14 general corporate purposes? 15 A. Yes. 16 Q. And among the general corporate 17 purposes for which the monies available to MCO at 18 that time were used was the purchase of the UFG 19 shares; is that correct? 20 A. Well, at some point monies were used 21 for that purpose. I don't know if it was -- I 22 don't know what date that was; but, yes, it says 1298 1 here that some three and a half million was 2 obtained from the general corporate funds of MCO. 3 Q. And the amount that obtained from the 4 general corporate funds was almost the precise 5 amount as the amount raised by the sale of the 260 6 medical-dollar zero coupon bond to Drexel Burnham 7 Lambert, isn't? 8 A. Well, the numbers are the same but I'm 9 not aware of any connection between the two. 10 Q. I didn't ask if there was a connection. 11 I just asked if the numbers are the same, sir? 12 A. Yes. They are very similar. 13 Q. I'm also handing you a copy of what's 14 been previously marked as T4107. This is a 35 15 medical-dollar zero coupon -- I'm sorry -- 16 subordinated note and ask you if you can tell 17 me -- 18 MR. RINALDI: Your Honor, before we 19 move on, I'd ask to move for admission of 20 Exhibits 2013, 20 -- 2013 is the May 13th, 1988 21 letter from Neil Twomey to the board of directors 22 regarding the net worth maintenance obligation of 1299 1 UFGI. 2 MR. VILLA: No objection. 3 THE COURT: Received. 4 MR. RINALDI: I would also move into 5 evidence 2021. This is the December 8th, 1988, 6 letter from Neil Twomey to the board of directors 7 in which it indicates that UFGI is directed to 8 infuse capital into United Savings Association of 9 Texas. 10 MR. VILLA: No objection. 11 THE COURT: Received. 12 MR. RINALDI: And I would also move 13 into evidence Exhibit T2012. This is the letter 14 to George Barclay from Arthur S. Berner dated 15 May 5th, 1988. 16 MR. VILLA: No objection. Your Honor, 17 we may consult with the OTS about putting in 18 better copies of two of these three documents, but 19 no objection to the substance. 20 THE COURT: All right. Received. 21 MR. RINALDI: And I would also move 22 into evidence the letter to Julie Williams from 1300 1 Arthur Berner dated March the 4th, 1987, which is, 2 I believe, T1131. 3 MR. VILLA: No objection. 4 THE COURT: Read that again, please. 5 MR. RINALDI: I'm sorry. It's T1131. 6 It's a letter to Julie Williams from Arthur Berner 7 and it's dated March the 4th, 1987. 8 THE COURT: All right. Received. 9 Q. (BY MR. RINALDI) Sir, have you had a 10 chance to look at the MCO Holdings, Inc. 35 11 medical-dollar senior subordinated note do you 12 August 1st, 1992? 13 A. Yes, sir. 14 Q. Okay. Do you know when this note was 15 issued? 16 A. It was issued on or about August 7th, 17 1985, I believe. 18 Q. Okay. And if you turn your attention 19 to Page 8, can you tell me what the proceeds of 20 the note were used for? 21 A. Net proceeds were to be added to 22 working capital for general corporate purposes 1301 1 including acquisitions of and investments in other 2 businesses, which may include consolidated and 3 consolidated subsidiaries of the company. 4 Q. Was United Financial Group, by virtue 5 of -- 6 A. There is an additional use, too, sir. 7 Q. Okay. 8 A. I'm sorry. "In addition, a portion of 9 the net proceeds may be used to acquire additional 10 real estate interests if appropriate opportunities 11 become available to the company." 12 And then it speaks to several other 13 things that were to happen pending that, and that 14 was to repay some borrowings of MCO properties and 15 I think about 8 million. Speaks to other 16 borrowing arrangements that I'm not currently 17 familiar with. Perhaps if you gave me a little 18 more time to read this, I could do better. 19 Q. Are you -- can you tell who underwrote 20 this particular holding on behalf of MCO? 21 A. Yes. I think you asked me earlier. It 22 was Drexel Burnham then and now, too. 1302 1 Q. And was UFGI considered an 2 unconsolidated subsidiary of MCO? 3 A. It's a question I think you would have 4 to ask the accountants. I know we had an 5 investment in the shares. I don't know what that 6 meant from an accounting perspective. 7 Q. And shortly after the issuance of 8 this -- or the sale of these notes by Drexel 9 Burnham Lambert to MCO holding, MCO holding and 10 Drexel Burnham entered into the put call option, 11 did they not? 12 A. Yes. Four or five months later, they 13 did. 14 Q. This says August the 7th. So, it would 15 have been a little over four months? 16 A. Yes, sir. 17 Q. Okay. So, is it fair to say that the 18 funds raised by this senior subordinated note 19 would have been funds that were available under 20 general working capital for the purpose of 21 entering into the put call arrangement? 22 A. Well, I'm not certain, sir. I haven't 1303 1 had a chance to read the whole use of proceeds 2 section. 3 Q. Well, would the purchase of the -- or 4 the payment of the premium under the put call 5 option, which was some $600,000, would that have 6 been -- come from the general working capital of 7 MCO? 8 A. Yes. 9 Q. And would that have been for the 10 corporate purposes of acquisition or investment in 11 other businesses? 12 A. Yes. 13 Q. So, that would have been a use that was 14 contemplated under the use of proceeds that's 15 described in -- on Page 17 of the senior 16 subordinated note. Is that reasonable? 17 A. Yes and no in the sense that I don't 18 know if all the money was expended under the 19 second paragraph. And I don't know that you could 20 trace money, but it seems to indicate here that 21 the company had intentions to use the money in the 22 meantime for other things. I don't know what 1304 1 happened with respect to those other things. 2 That's all I'm trying to say. 3 Q. Right. And I would have to get -- I 4 think -- strike that. 5 Sir, now, we've talked a lot about 6 MCO's involvement with Drexel Burnham Lambert. In 7 connection with the sale of high-yield bonds on 8 behalf of MCO, did you have occasion to assist 9 with the actual sale of MCO bonds that were 10 underwritten by Drexel Burnham Lambert? 11 A. My recollection is that we would 12 participate in presentations to sales groups 13 and/or on what was then called the road shows, if 14 that's what you're referring to in connection with 15 sales, yes. But no in the sense of speaking to 16 people on a sales desk or the like. 17 Q. Well, what is a road show as you use 18 the term, sir? 19 A. That's an organized visit to potential 20 purchasers of securities that one makes after one 21 has put out a preliminary prospectus usually 22 referred to as a red herring that looks similar to 1305 1 what you've given me here but has certain items 2 not yet filled in. It's not yet completed. It's 3 a contemplated offer. 4 Q. And when you say what I've given you 5 here, you're making reference to Exhibit T4107, 6 correct? 7 A. Yes. 8 Q. And how did these road shows work, sir? 9 A. If one agrees that one is going to try 10 to market debt, then one sits down with one's 11 investment bankers and they do due diligence and 12 one may be asked to then speak to sales groups 13 and/or clients, whether at the investment banker's 14 offices or in their -- in the purchaser's 15 locations. 16 Q. Now, when you say "speak to sales 17 groups," these are groups of people that are 18 trying to sell the bonds on behalf of the issuer 19 or -- 20 A. Yes. Employees in the employ of the 21 investment banker that is performing the 22 underwriting on behalf of the company. 1306 1 Q. And is that so that they have knowledge 2 of the company that's issuing the notes so that 3 they can market the notes? 4 A. Yes, in part. 5 Q. Now, you also said that in addition to 6 those kinds of groups you actually would talk to 7 potential purchasers? 8 A. Yes. 9 Q. And how would that work? 10 A. Sometimes you would do that via 11 conference calls. Sometimes you would do that by 12 having the road show, which was an organized tour 13 of several cities and sitting down and visiting 14 with specifically potential purchasers, specific 15 potential purchasers. 16 Q. Were these individual purchasers or 17 corporate purchasers or pension funds? How did 18 that work? 19 A. Oh, I don't remember particularly in 20 respect of this issue. But as a general matter, 21 yes, they might be wealthy individuals. They 22 might be people managing money on behalf of 1307 1 insurance companies or pension funds or, these 2 days, mutual funds or they might be 3 representatives of other corporations, a portion 4 of whose activities involve from time to time the 5 purchase of obligations similar to the ones that 6 we would be proposing to sell. 7 Q. And do you know who would invite these 8 people to the road show presentations? 9 A. That would be the responsibility of the 10 investment banking firm that conducted the 11 potential sale, the underwriting firm. 12 Q. Did you have occasion to go on more 13 than one road show? 14 A. I've had occasion to go on many road 15 shows, yes. 16 Q. Okay. And have you gone on road shows 17 with respect to Drexel Burnham Lambert in regard 18 to high-yield bonds that they had underwritten? 19 A. Yes, I think so. 20 Q. Have you gone on road shows with 21 respect to any other underwriters of high-yield 22 bonds? 1308 1 A. Oh, yes. 2 Q. And -- 3 A. Solomon Brothers, Bear Sterns, DLJ, 4 PaineWebber, Merrill-Lynch, and others. 5 Q. And do all of the road shows, are they 6 all operated the same, sir? 7 A. They are all different, but there is a 8 sameness after a while about them. 9 Q. Okay. Well, allow me to hand you a 10 copy of a document that's -- now, is your 11 participation in these road shows always the same? 12 A. No. 13 Q. How would you describe generally what 14 you do on the road show? 15 A. Usually try to explain something about 16 the company, what kinds of businesses it's 17 conducting, how we're doing in those businesses, 18 what the terms of the borrowings are, give them a 19 flavor for how we're doing and give them comfort 20 that we're going to be repaying the money at the 21 end of the day. 22 Q. Now, do you recognize what's been 1309 1 previously marked as, I believe, Schwartz 2 Exhibit 2? 3 A. Yes. 4 Q. And did you make a sales presentation 5 to potential purchasers of MAXXAM or MCO's 6 high-yield bonds at or about the date that appears 7 on this document? 8 A. Yes, I think I did. 9 Q. And was this presentation that's 10 referenced here on July 24th, 1985, with regard to 11 the 35 million-dollar note that we just were 12 discussing? 13 A. Yes. I believe it was. My exhibit 14 seems to be missing a page. I don't know if 15 everyone's is. DM014490 seems to be missing. 16 Q. Oh, I apologize. Mine has all the 17 pages. 18 MR. EISENHART: Mine is missing the 19 same page. 20 MR. RINALDI: Since I'm getting down to 21 the end of the questioning, perhaps what I could 22 do is have the missing page copied and we'll go on 1310 1 to another subject area and then come back to 2 this. 3 Q. (BY MR. RINALDI) If you'll take a 4 look at what's been marked as Exhibit T4540, sir. 5 While my secretary is out retrieving 6 that page, let me just ask you: Do you recognize 7 what's been marked as Exhibit 4540? 8 A. Well, again, I don't remember 9 specifically seeing it. It's got my name on it. 10 I have no reason to believe I didn't. I think 11 I've seen some of the pages. 12 Q. And can you describe to the Court what 13 it purports to represent? 14 A. These would seem to be, in Mr. Reman's 15 words, unofficial lists of corporate structure and 16 changes that track a period over -- it seems to 17 include 1987, 1988, and 1989. 18 Q. And I believe that about two -- the 19 sixth page in, there is a diagram of MCO Holdings, 20 Inc. and related companies, legal entities as of 21 12-31-86. 22 Do you see that? 1311 1 A. Yes. 2 Q. Do you know what the dotted line 3 signifies running from, let's say, Charles Hurwitz 4 over to MAXXAM Group? 5 MR. EISENHART: Your Honor, there is a 6 problem with this exhibit which is as one of my 7 co-counsels just pointed out to me. Apparently 8 part of the key to understanding this is being 9 able to see the various colors. If you'll look in 10 the lower left-hand corner of most of the charts 11 under the word words "stock ownership," it is 12 apparently color keyed or color coded in some 13 fashion. I don't know that we're going to be able 14 to make complete sense out of this document in 15 black and white form. I'm afraid it may be 16 misleading. 17 THE COURT: Well, does anybody have a 18 copy that's got the colors on it? 19 MR. RINALDI: I'm afraid they were 20 produced to us in this fashion, Your Honor, in 21 black and white. 22 MR. EISENHART: Well, I'm not 1312 1 quarreling with that, Your Honor. It's just that 2 I gather Mr. Rinaldi is going to make a point 3 concerning who owns what, and those points seem to 4 be color coded in this chart. 5 MR. RINALDI: Well, I'm not sure I'm 6 going to make much of a point at all, Your Honor. 7 I just wanted to ask him -- 8 MR. EISENHART: In that case, I'll make 9 a different objection, Your Honor. 10 Q. (BY MR. RINALDI) Do you know what the 11 dotted lines signify, sir? Do these diagrams 12 generally tend to reflect the MCO Holdings, Inc. 13 and its related companies at different points in 14 time that we've been discussing between about the 15 middle of 1988 or I think actually it starts 16 earlier, I guess. 6-1-88. There is actually 17 12-31-86 and then 6-1-88 and 10-1-88 and then 18 7-6-89? 19 A. Yes. 20 Q. And do you know who Ronald L. Reman is? 21 A. Yes. 22 Q. And who is he? 1313 1 A. He is and I believe he also was the 2 director of tax for MCO and/or MAXXAM. 3 Q. And it indicates these are historical 4 corporate charts; is that correct? 5 A. Unofficial historical corporate charts, 6 yes. 7 Q. Okay. And they are unofficial lists of 8 the corporate structure changes, the actual -- or 9 legal records should be examined if complete 10 accuracy is imperative, correct? 11 A. Yes, sir. 12 Q. But they make every effort to make 13 these as representative as possible of MCO 14 Holdings' corporate structure? 15 MR. EISENHART: Your Honor, I have not 16 objected to leading questions generally, but that 17 one gets into the area of counsel testifying for 18 the witness. He can answer it if he knows whether 19 it's accurate or not. 20 Q. (BY MR. RINALDI) Do you know whether 21 Mr. Ronald Reman makes every effort to make these 22 as accurate as possible? 1314 1 A. I have no reason to believe he does 2 anything but that in all his activities, yes. 3 MR. RINALDI: I'd ask -- move to admit 4 T4540 as an exhibit in this proceeding, Your 5 Honor, and I would further ask that MCO attempt to 6 find us a colored copy so that we can all fully 7 understand the corporate relationship between MCO 8 Holdings all of its related enterprises. 9 MR. EISENHART: I don't believe that 10 this is one of our documents, Your Honor. There 11 is no sticker on here indicating it was received 12 from us. I don't know where he got this. 13 Q. (BY MR. RINALDI) Well, does this 14 appear to be a document that was prepared by 15 MAXXAM? 16 A. Yes. 17 Q. And Mr. Ronald L Reman, did he work for 18 MAXXAM in 1989? 19 A. I'm not certain. He may have been an 20 employee of MAXXAM at that time, yes. 21 Q. Was he employed by MCO Holdings or -- 22 A. He had originally been a person 1315 1 employed by an outside accounting firm. I don't 2 know at what time he made the transition. I don't 3 recall if he wasn't at some point an employee of 4 MAXXAM Group, Inc. as opposed to MCO or MAXXAM, 5 Inc. and that's my hesitation in answering the 6 timing. 7 Q. Okay. And below, it indicates a 8 distribution list. Were all of those individuals 9 employees of MAXXAM at about April 17th, 1989? 10 A. Not the ones at the bottom, Kramer 11 Levin, Arthur Andersen, et cetera. But with those 12 exceptions, yes, I think so. 13 Q. Do you have any reason to doubt that 14 this is not a document prepared by MAXXAM 15 representing its corporate structure unofficially? 16 A. I have no reason to doubt it isn't, you 17 know, charts indicating what he calls historical 18 corporate charts. And you asked me what the 19 dotted lines are. I think the dotted lines 20 indicate ownership, but ownership that can't 21 easily be shown on a one-dimensional chart. 22 Q. Okay. 1316 1 MR. RINALDI: I would ask to admit 2 T4540 with -- 3 MR. EISENHART: I would object to it, 4 Your Honor. It's inaccurate in a number of 5 respects, and we don't know its source. And as I 6 mentioned, we have a problem with the color coding 7 on it. I would also mention that it's a document 8 that purports to have been created in 1989, yet I 9 see a listing on there that United Financial 10 Group, Inc. owns a hundred percent of United 11 Savings Association of Texas. United Savings 12 Association of Texas was placed into receivership 13 and sold on December 20th, 1988. 14 So, there are a number of inaccuracies 15 in the chart itself just on the face of it. 16 MR. RINALDI: I think the record 17 reflects that Mr. Reman, who works for MAXXAM, has 18 for several years, that the distribution list is 19 to all internal persons in MAXXAM and that this is 20 an unofficial list of corporate structures and 21 that actual legal records should be examined if 22 complete accuracy is, quote, imperative. 1317 1 MR. EISENHART: I don't know -- I don't 2 even know if these charts were attached to the 3 memo in its original form because I look at the 4 first chart. The memo is dated April 17th, 1989. 5 I look at the first chart. It says as of 6 July 6th, 1989. 7 A. The date of preparation would appear to 8 be July 31st, '89, in the lower right-hand corner. 9 MR. EISENHART: Yeah. So, we've got a 10 chart that was prepared three months after the 11 memo was written. 12 THE COURT: I say if these are disputed 13 matters, I suppose we should have another witness 14 to authenticate it. 15 MR. EISENHART: I don't know what they 16 are trying to make out of this, Your Honor, but I 17 just see so many inaccuracies on the face of it, I 18 don't think the document is reliable. 19 MR. RINALDI: Can we add this page to 20 Exhibit No. 2 to the Schwartz -- Schwartz 21 Exhibit 2? You may recall that when I first 22 started to examine Mr. Schwartz, he pointed out to 1318 1 me that the document was missing one page. We 2 have now obtained a replacement page and we can 3 continue with the examination with respect to that 4 document. 5 Q. (BY MR. RINALDI) Would you take a 6 look at Schwartz No. 2, sir? I think we're 7 finished with the previous exhibit, which is the 8 corporate structure, and Schwartz No. 2 is the 9 suggested outline for the Drexel Burnham Lambert 10 presentation. 11 Did you prepare this outline for the 12 presentation by Drexel Burnham Lambert? 13 A. I believe I had a hand in preparing it. 14 I don't know if I prepared everything here. I 15 don't know if I prepared, by way of example, the 16 charts and such on the back. I don't believe I 17 did. But as to the outline up front, I think so. 18 Q. And do you recall whether, in fact, a 19 presentation was made at or about the date that's 20 indicated on this document? 21 A. Yes, I think it was. 22 Q. And do you know where that presentation 1319 1 was made? 2 A. I think it was at the offices of Drexel 3 Burnham. 4 Q. And to whom was the presentation made? 5 A. My recollection is it was made to 6 salespeople, and I can't say if others weren't 7 tied in by phone. I'm not sure if anybody was 8 tied in by phone or, if so, who they were at this 9 point in time. 10 Q. And when you say "salespeople," are 11 these people that would be engaged in the activity 12 of selling high-yield bonds to potential buyers? 13 A. Yes. 14 Q. And besides employees of the high-yield 15 bonds sales department, were there any other 16 people in attendance? 17 A. There may have been. I'm not sure. 18 Q. Do you know if Mr. Hurwitz attended the 19 presentation? 20 A. I see reference to Mr. Iaco's name. I 21 don't know if Mr. Hurwitz or others were there or 22 not. I don't remember, if you're asking me with 1320 1 respect to the company. 2 Q. And do you know with respect to Drexel 3 Burnham, do you recall any of the individuals that 4 were present there? 5 A. Other than salespeople, I think the 6 corporate finance people would have been there, 7 but I don't have a specific recollection of any 8 one person. 9 Q. Do you recall if Carl De Remer was 10 there? 11 A. He was a salesperson. He might have 12 been there. I couldn't say for sure. 13 Q. And this presentation would have 14 occurred just about in the middle of the year span 15 in which you were negotiating the terms of the put 16 call option with Drexel Burnham Lambert, would it 17 not? 18 A. Well, it was in the middle of the final 19 year in which we were discussing with them a 20 series of transactions that could have given rise 21 to an opportunity to acquire shares, yes. 22 Q. Okay. Do you recall if Mr. Bilger was 1321 1 present at the presentation? 2 A. I know Mr. Bilger, but I don't remember 3 if he specifically was there, no. 4 Q. Do you recall if Michael Milkin was 5 there? 6 A. Well, I don't think so but only because 7 I'm thinking about a question I answered of you 8 earlier in a deposition when you asked me had I 9 ever met him, and I think I said I only met him 10 twice that I can remember. And I don't remember 11 seeing him here. Doesn't mean he wasn't there. 12 Q. And what specifically would have been 13 the purpose of your presentation? 14 A. Pretty much the same as what I 15 described to you earlier, describe the company, 16 its activities, its investments, its prospects as 17 best as we understood them. 18 Q. So that salesmen would be knowledgeable 19 about MCO and be able to be in a better position 20 to sell high-yield securities for MCO? 21 A. As a practical matter, yes. 22 Q. Why were the companies owned by MAXXAM 1322 1 described in the presentation? 2 A. Again, from the perspective of a buyer 3 of debt, they like to have some understanding of 4 your capability to pay the money back at a later 5 date and they are anxious to understand the things 6 you're involved in or the things you might be 7 involved in and how you view those and are they 8 going to work out and will you be in a position to 9 have the money to pay the interest as it comes due 10 and the principal as it comes due or otherwise 11 refinance the principal when it comes due. 12 Q. And I notice that they described in 13 here MCO resources. That was an entity owned by 14 MCO Holdings? 15 A. Yes, it was partially owned. 16 Q. And then you also decide Gas Cos.? 17 A. Yes. We own some gas processing and 18 transmission companies that were subsequently sold 19 Q. CUI? 20 A. Yes. That's CU1 venture. That was a 21 geothermal project underway in southern 22 California. 1323 1 Q. And then on the last page, I notice 2 that UFG is included. Why was UFG included in the 3 presentation? 4 A. Because it was an investment in shares 5 that MCO had and we felt there were good prospects 6 for it and we owned a fair number of shares and we 7 thought it would be worth speaking about. 8 Q. What were the advantages to MAXXAM of 9 owning UFG that you would have explained in that 10 presentation? 11 A. Well, hopefully, to convey that we were 12 optimistic about our investment in the shares and 13 we were optimistic that it would prove to be a 14 very good investment and that we would make a lot 15 of money through the ownership of those shares. 16 The shares would appreciate in price and we would 17 be the beneficiary of that share price 18 appreciation. 19 Q. And in the first full paragraph, it 20 says -- did you tell the attendees that, quote, 21 spreads improving? Do you see that? 22 A. I'm sorry, sir. I don't. Where was 1324 1 that? 2 Q. In the first full paragraph, it says 3 "spreads improving." 4 Do you see that? 5 A. I see the note, yes. 6 Q. Okay. Did you convey that information 7 to the attendees at the meeting? 8 A. Well, I see here I made a note to 9 myself. I don't know if it actually got conveyed 10 or not, but I assume it was something I was 11 thinking about at the time. 12 Q. Okay. And what did you mean by that 13 phrase, "spreads improving"? 14 A. Sitting here today, I couldn't say 15 specifically other than I see the previous line 16 that says "rates coming down," that as a result of 17 that UFG's costs of borrowing would be coming down 18 and, presumably, they would come down faster than 19 the return on its assets and that would improve 20 its spreads, its ability to earn money. 21 Q. And if it earned more money, what 22 result would that be for MAXXAM? 1325 1 A. Well, for all stockholders, the price 2 of the stock would increase and MAXXAM would enjoy 3 the benefits of that like every other stockholder. 4 Q. Did you tell the attendees that 5 additional branch sales were in the works? 6 A. Would appear I thought that at the 7 time. Again I don't know if I said it; but I 8 certainly made a note of that, sir. 9 Q. What was the significance of that from 10 the point of view of the investor? 11 A. Well, as best as I can recall, UFG had 12 made a large branch sale the year before and I 13 think they describe that as part of their 14 transition from a retail-oriented to a 15 wholesale-oriented institution. And I think at 16 the time they had felt that by doing that they 17 could more efficiently gather deposit monies by 18 other means than having retail branches. And here 19 again, that would reduce eventually their cost of 20 money and eventually add to their profits and 21 eventually make the price of the stock go up. 22 Q. But if MCO didn't control UFG, what 1326 1 would be the significance of telling all this to 2 the investors? I mean, MCO couldn't control what 3 went on at UFG, could it? 4 A. No. 5 Q. Did you tell the attendees the matched 6 book closer? Do you see that? 7 A. I think that says that the match book 8 was closer is what it meant to indicate; but, yes. 9 Q. What does matched book closer mean or 10 what did you mean by that? 11 A. Again, I don't know if I said it to 12 them. It certainly was in my notes, that the idea 13 was that the bank system -- the bank board and/or 14 the banks had published or were considering 15 publishing regulations regarding what it meant for 16 an institution to have a matched book where assets 17 and liabilities were in terms of their terms, 18 related to each other in ways so that, for 19 example, an institution didn't borrow short 20 through some kind of a passbook account and then 21 I'd say 5 percent, lend long on a mortgage of, 22 say, 30 years for 7 percent only to find that all 1327 1 of a sudden, a deregulated passbook rate caused 2 them to have short-term liabilities that moved 3 from 5 percent to 12 percent and all of a sudden 4 they were losing a lot of money. 5 So, there was a lot of emphasis at the 6 time or discussion at the time in trying to bring 7 the asset and liability portfolios into sync with 8 each other, and I think my understanding was that 9 they were working towards that at the time. I 10 don't remember specifically what was going on, but 11 that's what the note would have been intended to 12 mean to me. 13 Q. And so I understand, you were telling 14 all of this to investors in MAXXAM junk bonds or 15 high-yield bonds that because you felt that the 16 shares that MCO owned in UFG had the potential to 17 increase in value and that that potential for 18 those shares to increase in value would have been 19 a significant factor that potential investors 20 would take into account in deciding whether to buy 21 high-yield bonds from MAXXAM? 22 A. Certainly one of the many factors that 1328 1 you see here and certainly no less important than 2 some of its real estate activities that we talked 3 about or its ownership of shares in other 4 companies like MCO Resources, yes. 5 Q. But let me get this straight. MCO 6 Resources, they held 47 percent of the common and 7 100 percent of the preferred and were in a 8 position to control what went on at MCO Resources, 9 right? 10 A. Yes, presumably. 11 Q. And did you tell the attendees that UFG 12 was a 3.8 billion-dollar entity in 3-31-85 with 13 equity of 110 million? 14 A. Again, I have notes here. I don't know 15 if I said that to them, but I certainly made notes 16 to give me a basis for speaking or answering 17 questions. I can't say how much of it was 18 actually related. 19 Q. Well, what did you mean by that? What 20 was the importance of that? 21 A. A large institution, over a hundred 22 million dollars of equity, involved in a lot of 1329 1 interesting things at the time, hopefully things 2 that would turn out to be good things. The 3 institution would profit as a consequence, that 4 all stockholders, as we were, would benefit from 5 those activities. 6 Q. Did you tell the attendees that UFG was 7 the source of a large stock of money? What did 8 you mean by that? 9 A. $3.8 billion is -- was then a lot of 10 money. I don't know if I said that to them but, 11 to me, that's a lot of money, yes. 12 Q. And what would have been the 13 significance to MAXXAM of that source of money? 14 A. Again, that UFG could go about its 15 business in a way that, assuming it found good 16 opportunities, it would be able to take advantage 17 of a lot of them. By taking advantage of a lot of 18 them, it could make a lot of money. And in making 19 a lot of money, the stock price hopefully would 20 appreciate and we would be the beneficiaries of 21 that. 22 Q. So, there was a value to being able to 1330 1 control that $3.8 billion in assets? 2 A. There was a value to understanding that 3 the institution had $3.8 billion that it could 4 control. We didn't control the 3.8 billion. But 5 we owned a piece of stock in that institution that 6 could end up being very valuable if they went 7 about their business in a way that proved correct, 8 that proved to be profitable. 9 Q. And so, it was valuable from UFG's 10 perspective that they were able to control $3.8 11 billion in assets; is that correct? 12 A. Well, I guess it was valuable from 13 USAT's perspective because I think they are who 14 had the $3.8 billion. UFG didn't have $3.8 15 billion other than on a consolidated basis. But 16 for the institution itself to have a large deposit 17 base and to have its money to be able to make 18 investments was important to it, yes. 19 Q. And didn't UFG own a hundred percent of 20 the outstanding shares of USAT? 21 A. Yes. 22 Q. And so, as a consequence of that, UFG 1331 1 was in a position to exercise its control over the 2 3.8 billion-dollar assets of its insured 3 depository subsidiary? 4 A. Yes. 5 Q. Okay. Did you use the phrase merchant 6 banking in the July 24th presentation? 7 A. Can't say for certain, but it was 8 certainly here for me as a subject to consider 9 speaking about, yes. 10 Q. And what did you understand was meant 11 by the term merchant banking in connection with 12 United -- or UFG and its subsidiary, USAT? 13 A. It was my understanding that due to 14 changes in regulations regarding savings and loans 15 that they could now take savings and loans equity 16 positions in projects that they were otherwise 17 participating in as a lender and that that again 18 would hopefully enhance their returns over time 19 and allow them to make more money and hopefully 20 allow the institution to be more profitable and 21 the stock price to go up. 22 Q. And so, by putting this into the 1332 1 presentation, you were suggesting to potential 2 buyers that UFG would be in a position to engage 3 in a wider range of investment activities than -- 4 as a result of deregulation? 5 A. Yes. That was my impression then, yes. 6 My impression now. 7 Q. Did you mean by that phrase that UFG 8 was a joint venture partner in a number of 9 projects including 30 percent Weingarten Realty or 10 36 percent? I'm sorry. 11 A. I understood that Weingarten had played 12 a role. I don't know that I ever understood the 13 specifics of the role that they played -- that is 14 to say that USAT played with Weingarten. 15 Q. Well, were those some of the potential 16 merchant banking investments that UFG or USAT was 17 able to get into as a result of deregulation? 18 A. I don't know what they did in respect 19 of Weingarten other than own stock in Weingarten. 20 I don't know that they ever had other kinds of 21 participations. Can't say. 22 Q. Do you know how it was that USAT came 1333 1 to become involved in the Weingarten investment? 2 A. Not precisely, no. 3 Q. Do you know generally? 4 A. I've heard stories. 5 Q. When you say you've heard stories, are 6 these just around the water cooler or you have 7 been told stories by your superiors as to how that 8 investment came about? 9 A. I remember people who we've mentioned 10 earlier in this speaking about some aspects of how 11 UFG became involved with Weingarten, yes. 12 Q. Okay. And what did you hear about how 13 UFG became involved in Weingarten? 14 A. Well, I don't know the specifics but at 15 some point, I had heard that one or another people 16 in Houston had made introductions to people at UFG 17 or USAT of people that they understood at 18 Weingarten were interested in speaking with them. 19 And I don't know the details, but that had been my 20 understanding. 21 Q. And who did you understand had made 22 those introductions to USAT of the people at 1334 1 Weingarten? 2 A. Either Barry Munitz or Charles Hurwitz. 3 Q. And as a result of that introduction, 4 had an investment taken place between Weingarten 5 and USAT? 6 A. I believe there was a stock purchase at 7 some point by USAT in Weingarten, but I don't know 8 the details of it. 9 Q. It also makes reference to a position 10 in the Houstonian Hotel Club. 11 Do you know what that's making 12 reference to? 13 A. No, sir, I don't recall. 14 Q. And then it talks about a recent equity 15 kicker, 25 million financing of Remington Hotel. 16 Do you know what that's in reference 17 to? 18 A. I have a better recollection of that, 19 yes. That as a consequence of lending money to 20 people who I think were then purchasing the 21 Remington Hotel, USAT had been able to go ahead 22 and acquire an equity interest that kicked in at 1335 1 some point in time. And. Assuming that the hotel 2 performed well, they would not only make good 3 money on the money they loaned, they would not 4 only collect interest, not only get their money 5 paid back, but they would participate in the 6 growth of the value of the hotel. 7 Q. And do you know whether Mr. Munitz or 8 Mr. Hurwitz had been instrumental in bringing that 9 investment to USAT? 10 A. No, I don't know. 11 Q. No. 4 says -- did you describe UFG as, 12 quote, big leverage, big ups to the attendees at 13 that meeting? 14 A. I may have. 15 Q. And what did you mean by big leverage, 16 big ups? 17 A. Basically that here was a 3.8 18 billion-dollar in assets institution that had 19 equity of about 3 percent of that number. That's 20 the big leverage. And that the opportunities were 21 enormous. Therefore, the upside potential of UFG 22 to perform should be correspondingly enormous. 1336 1 Q. In effect, they had a 33 to 1 capital 2 to asset ratio? 3 A. I guess my understanding was that they 4 had about a 3 percent requirement, although I'm 5 not sure that didn't change at some point. 6 Q. And that coupled with expanded 7 investment powers pursuant to Garn-St. Germain, 8 did that make it an attractive opportunity for 9 investment? 10 A. It made the institution available -- it 11 made available to the institution numerous 12 investment opportunities that the institution 13 wouldn't have had before, yes. 14 Q. And that's what you were trying to 15 convey to the attendees? 16 A. Yes. If, in fact, I said that. I know 17 I was thinking about it. I don't know if I said 18 it. 19 Q. And was it your understanding that USAT 20 and UFG were planning on expanding their 21 investments into a wholesale strategy or a 22 merchant banking? 1337 1 A. Yes. Generally, that was my 2 understanding. 3 Q. And how did you come to that 4 understanding? 5 A. I had spoken to Dr. Munitz from time to 6 time. I think I had mentioned in a deposition or 7 the like that he had said to me it was a most 8 interesting opportunity that USAT had to do a 9 variety of things and I think I had given you an 10 example where I actually came down at one point or 11 another and was introduced to some of the people 12 at USAT and that Barry was saying to me, "Well, 13 why don't you consider becoming an employee of 14 USAT?" But USAT never made me an offer, and I 15 never did become an employee. 16 Q. And you told all of this information to 17 the attendees or all of these facts about UFG in 18 order to persuade them to buy bonds of MCO? 19 A. I think I talked to them about all the 20 things you see here, although I can't really say 21 in how much detail. But if we had the subjects 22 here, I feel reasonably certain that we covered 1338 1 them all one way or the other, including the ones 2 that weren't even alive anymore, yes. 3 Q. And that was to persuade people to buy 4 bonds of MCO? 5 A. So they could understand the company's 6 financial position and what it had used its money 7 for and hopefully have them have a better 8 appreciation of what MCO's prospects were, yes. 9 THE COURT: We'll take a short recess. 10 . 11 (A break was taken.) 12 . 13 THE COURT: We're back on the record. 14 Mr. Rinaldi. 15 MR. RINALDI: Thank you. 16 Q. (BY MR. RINALDI) Just a few more 17 questions. Mr. Schwartz, on the subject of the 18 road shows here, this particular road show that is 19 the DBL presentation on July 24th, 1985, you 20 attended that road show as a representative of the 21 issuer; is that correct? 22 A. Yes, sir. 1339 1 Q. Okay. Did you also attend road shows 2 as the representative of potential purchasers? 3 A. No, not that I remember. 4 Q. So that all the other road shows that 5 you attended that you discussed were instances in 6 which you were attending the road show as a 7 representative of the issuer whose notes were 8 being presented at that particular road show? 9 A. I think so, yes. 10 Q. And you never attended in the capacity 11 of one -- of a potential purchaser of high-yield 12 bonds? 13 A. No. 14 Q. Did MCO invest in high-yield bonds? 15 A. I think they did, but I'm not certain 16 they did. It's not something with which I had any 17 involvement. So, I really don't know for certain. 18 Q. Okay. Now, who would have invited the 19 people to this road show where you made this 20 presentation on July 24th, 1985? 21 A. The people, I believe, would have been 22 invited by Drexel Burnham. The Drexel Burnham 1340 1 people would have been invited by Drexel Burnham. 2 Q. And do you know how Drexel Burnham came 3 up with a list of names of persons who would 4 attend the road shows? 5 A. No, sir. Other than as I testified to 6 earlier, no. 7 Q. Were some of the invitees persons whose 8 companies had issued bonds that were purchased by 9 USAT? 10 A. Don't know. Don't know who they had 11 invited to this particular road show. I don't 12 remember who, if anyone, I visited subsequent to 13 this meeting and I don't know which of those, if 14 any, had bought bonds from -- was it Drexel you 15 said to me, sir? 16 Q. No. USAT. 17 A. I'm sorry. 18 Q. Had any of the persons who attended 19 these shows come from companies that had issued 20 bonds that were purchased by USAT? 21 A. Oh, I wouldn't know, sir. I don't 22 know. 1341 1 Q. Now, going back to what's previously 2 marked as Schwartz Exhibit 2 on the last page, C 3 at the top, it says MCO's ownership interest to 4 the attendees -- that is, their interest in UFG? 5 A. Well, yes, I think so, uh-huh. 6 Q. And it reflects there that -- did you 7 tell them that MCO was at 14 percent with 8 Federated at a little less than 25 percent? 9 A. Yes, sir, I believe I made that note. 10 Again, I don't know if I said it but I made the 11 note for myself, yes. 12 Q. Why did you tell them those facts? 13 A. To indicate the extent of ownership. 14 Q. Did you also tell them that MCO also 15 held most of the outstanding preferred convertible 16 two shares June, 1987, close to 35 percent 17 converted? Do you see that? 18 A. Yes, I see it. 19 Q. And did you tell the attendees that? 20 A. I may well have. Don't know 21 specifically, but I may have. 22 Q. Do you know what you meant by that 1342 1 phrase? 2 A. I'm sorry. Which phrase is that, sir? 3 Q. That is the convertible two shares 4 common June, 1987, close to 35 percent converted. 5 A. Well, I think that's referring to the 6 convertible stock that we talked about earlier. 7 That was the Series C, I think, that was owned by 8 either or both MCO and Federated that, if 9 converted, each share was convertible into two 10 shares of common and if that conversion was 11 affected, that then that would represent roughly a 12 35 percent ownership of common stock. 13 Q. And why do you think that that was an 14 important fact for potential investors to know? 15 A. Well, from the perspective that I 16 talked earlier about having an investment -- what 17 was the nature of that investment but also from 18 the perspective of what we were not then -- that 19 is to say the immediately subsequent phrase says 20 "we're not an S&L holding company" and to indicate 21 to them that we are not and, by virtue of that, by 22 way of example, we're not guaranteeing net worth. 1343 1 We're not limited in participation to certain 2 things. We're not limited by the amount of debt 3 we can incur. And other restrictions that would 4 be attendant to those who would be above the 5 25 percent if they were S&L holding companies. 6 Q. Well, then did you also tell the 7 attendees that MCO had the ability to become a 8 holding company? 9 A. Again, it says "have ability to do so." 10 I have no reason to think I didn't address it. 11 Whether I said those specific words or not, I 12 couldn't tell you. 13 Q. But if you had that ability and you 14 exercised it, that could have adversely affected 15 your ability to go into the capital markets, 16 couldn't it? 17 A. Yes. 18 Q. Did you also tell the attendees that -- 19 strike that. One moment. 20 When you said that MCO had the ability 21 to become a holding company, what did you mean by 22 that? 1344 1 A. Well, if I remember correctly -- and 2 I'm not sure I'm getting my dates straight here, 3 but please correct me if I'm wrong -- that in June 4 of '83 we had submitted an H(e)-1 application and 5 I think it was in December of the following year, 6 December of '84 that that was approved. But with 7 the conditions that we talked about earlier 8 regarding net worth maintenance and other 9 surrounding issues. And, so, I think what I was 10 referring to here is that, indirectly we had 11 received approval to acquire more but, you know, 12 we weren't willing to go do it. We had the 13 ability to go agree to it, but we didn't then and 14 we never did. 15 Q. But why did you think it was important 16 to emphasize the ability to become a holding 17 company? 18 A. Well, I don't think we were emphasizing 19 the ability to become one. As I understood it, we 20 were speaking basically to our investment but as 21 we saw earlier by the Solomon letter, we didn't 22 want people either to think that we were going to 1345 1 become one at that point in time; that is to say 2 questions had been raised, if I remember 3 correctly, even at this juncture about what it 4 meant to be one and about one's ability to issue 5 debt like the debt you see here, the $35 million 6 of 14 and a quarter percent subordinated notes 7 that we eventually did issue. 8 Q. Well -- and if you had the ability to 9 become a holding company, would that have meant 10 that you had the ability to control the $3.8 11 billion in assets that UFG and its subsidiary, 12 USAT, had available to them? 13 A. No. 14 MR. RINALDI: I have no further 15 questions, Your Honor. 16 THE COURT: Cross-examination? 17 MR. VILLA: Thank you, Your Honor. 18 THE COURT: Mr. Villa. 19 MR. VILLA: Yes, sir. 20 MR. RINALDI: Before Mr. Villa begins, 21 I have three documents I'd like to move into 22 evidence. There is Exhibit 1 Lazard. That's the 1346 1 260 million-dollar zero coupon bond. There is 2 also T4107. That's the 35 million-dollar 3 subordinated note. And there's Schwartz 2. 4 That's the memo that we've been discussing for the 5 last 20 or 30 minutes. 6 MR. EISENHART: No objection, Your 7 Honor. 8 MR. RINALDI: Thank you. 9 THE COURT: Received. 10 11 CROSS-EXAMINATION 12 13 14 Q. (BY MR. VILLA) Good afternoon, 15 Mr. Schwartz. I'm John Villa. I'm going to be 16 asking you some questions directed primarily to 17 the issue of UFG net worth maintenance. 18 Mr. Schwartz, you joined the board of 19 United Financial Group and USAT in February of 20 1988; is that right? 21 A. Yes, sir. 22 Q. And shortly after you joined the board, 1347 1 did UFG issue its Form 10K for the calendar year 2 1987? 3 A. Yes, sir. 4 Q. And as a director of UFG, would you 5 have reviewed and signed the Form 10K? 6 A. Yes, sir. 7 Q. I'm going to hand you three copies of 8 an exhibit marked A3023. If you'll take one and 9 then hand one to the court and one to Mr. Langdon. 10 Mr. Schwartz, I'll ask you to take a 11 look at what's been marked as A3023 and direct 12 your attention to Page 68. 13 Do you see a line for your signature, 14 sir? 15 A. Yes, sir. 16 Q. Can you identify this document as the 17 UFG Form 10K for the calendar year 1987? 18 A. Yes, sir. 19 MR. VILLA: Move it into evidence, Your 20 Honor. 21 THE COURT: Received. 22 Q. (BY MR. VILLA) Let me direct your 1348 1 attention, Mr. Schwartz, to the time period when 2 you joined UFG. 3 Do you recall, sir, that at or about 4 that time USAT fell below its minimum regulatory 5 net worth limits in the spring of 1988? 6 A. Yes, sir. 7 Q. Let me direct your attention to Page 19 8 of the Form 10K that you have before you, Exhibit 9 A 3023, and specifically to the third full 10 paragraph in the middle of the paragraph where it 11 reads -- I believe it's the second sentence reads 12 "However, management agrees as of December 31, 13 1987, the association was below its minimum 14 regulatory capital." 15 Do you see that, sir? 16 A. Yes, sir. 17 MR. RINALDI: I'm sorry. What page? 18 On Page 19? 19 MR. VILLA: 19 of the Form 10K, the 20 paragraph beginning with preliminary findings, the 21 third sentence. 22 Q. (BY MR. VILLA) And on Page 20 of the 1349 1 Form 10K, the last paragraph, do you see that, 2 sir? Last paragraph on the page? 3 A. Yes. 4 Q. The first sentence of the last 5 paragraph reads, quote, "The association was not 6 in compliance with its minimum capital 7 requirements as of December 31, 1987"; isn't that 8 right? 9 A. Yes. 10 Q. And on Page 58 of the Form 10K, 11 directing your attention to the last full 12 paragraph on Page 58, the first sentence reads, 13 quote, "Since USAT failed to meet its minimum 14 requirement, the FSLIC has the statutory right to 15 manage the affairs of USAT as it deems appropriate 16 for the protection of FSLIC, the depositors of 17 USAT, and USAT itself," close quote, period. 18 Do you see that? 19 A. Yes. 20 Q. Now, sir, in your view as a director of 21 UFG, is this Form 10K an attempt to give the 22 appearance that USAT was meeting its minimum 1350 1 regulatory capital requirements? 2 A. No, sir. 3 Q. It's obvious from this Form 10K that 4 it's not, isn't it? 5 A. To me, sir, it is, yes. 6 Q. Now, focusing your attention in the 7 spring of 1988, you saw a document which has been 8 marked as Exhibit T2013. Do you think you can 9 pull that out? It's a letter that Mr. Rinaldi 10 showed you dated May 13, 1988. It's a letter from 11 Mr. Neil Twomey to the board of directors of 12 United. It's a one-page letter. 13 A. Did you say 2013? 14 Q. 2013, I believe. 15 A. I have it. 16 Q. You have it before you? Would you 17 review that document for a moment, sir? 18 A. Yes, sir. 19 Q. Sir, when you received this document in 20 the spring of 1988, did you believe it to be a 21 demand that -- from Mr. Twomey or the Federal Home 22 Loan Bank of Dallas -- that the board of directors 1351 1 of United then infuse cash equity into USAT? 2 A. No, sir. 3 Q. Did there come a later point in time 4 when such a demand was made? 5 A. Yes, sir. 6 Q. Do you recall when that was? 7 A. Yes, sir, approximately. 8 Q. When was that? 9 A. Approximately December of 1988. I'm 10 not certain if we didn't see that letter earlier. 11 Q. And did you understand at some point 12 after this letter dated May 13, 1988, that such a 13 demand may be forthcoming? 14 A. Yes, sir. 15 Q. Do you recall, sir, in the spring of 16 1988 that UFG had outstanding debt to PennCorp and 17 other bond holders? 18 A. Yes, sir. I think that's part of the 19 50 or $60 million of debt I alluded to earlier in 20 my statement here today. 21 Q. Let me direct your attention, 22 Mr. Schwartz, to Page 52 of the 1987 Form 10K. 1352 1 And at the bottom of Page 52 -- do you see that, 2 sir? 3 A. Yes, sir. 4 Q. Do you see the description of other 5 borrowings? 6 A. Yes, sir. 7 Q. In reviewing that, is that the sum -- 8 at least some of the -- do you have it before you 9 now? 10 A. Just looking at the following page. 11 Q. Okay. Is that at least some of the 12 debt that we refer to occasionally as the PennCorp 13 debt? 14 A. Yes, sir, I believe it is. 15 Q. And these were obligations of UFG; is 16 that correct? It says parent only. Do you see 17 that, sir? 18 A. I was just looking for that to make 19 sure. Yes, there is it is. Yes, that's correct. 20 Q. What was securing the PennCorp debt? 21 A. My recollection is -- and it says here 22 as well -- that there was first and/or second 1353 1 liens on some of this debt, some of which I 2 believe is the PennCorp debt, on 51 percent or 3 thereabouts of the stock of United Savings 4 Association of Texas. 5 Q. So, United Financial Group had 6 outstanding substantial debt that was secured by 7 the stock of its subsidiary, United Savings 8 Association of Texas; is that right? 9 A. Yes, sir. That was my understanding. 10 Q. Now, do you recall, sir, concern 11 expressed at the board of directors of United in 12 the late spring of 1988 about the possibility that 13 United may not in the future be able to meet its 14 debt and obligations on the PennCorp debt? 15 A. Yes, under the PennCorp debt and other 16 debt obligations, as well. 17 Q. Can you describe what that concern 18 would be? 19 A. Well, the concern was that there was 20 some 50 or 60 million in debt, if I remember 21 correctly, although this number here is about 47 22 odd million in debt and that the amount of cash 1354 1 that the company had was something on the order of 2 $30 million, if memory serves me correctly, and 3 the concern was at some future point in time if 4 United Financial Group, Inc. did not stay current 5 with all the required payments on the debt, then 6 it might be that holders of that debt would move 7 to accelerate the note and/or foreclose against 8 the stock that was securing that debt and thereby 9 trigger a change of control for purposes of the 10 tax laws and that the effect of all that would be 11 to take approximately $140 million of tax benefits 12 that accrued to the benefit of either or both of 13 USAT and UFGI and eliminate them forever. 14 And that was of concern to the board 15 because at that point in time, we were all 16 scurrying about trying to come up with ways to 17 find new capital to infuse into UFGI and/or into 18 USAT, and one of the attractions, if you will, at 19 the time that we had to go and present to 20 potential investors was this 140 million or so of 21 tax advantages and actually that was one of the 22 biggest advantages we had at that point in time. 1355 1 And we were worried if it disappeared, how would 2 we ever come up with money of significant amount 3 to be able to infuse into either UFGI or USAT. 4 Q. So, if UFGI exhausted its financial 5 resources to infuse money into USAT, infuse 6 capital into USAT, that would impair its ability 7 to pay its bond holders; is that right? The first 8 step? 9 A. Yes, it might. Yes. 10 Q. And if the bond holders are were not 11 paid and they foreclosed, they would take a 12 majority of USAT's stock because that was pledged 13 to the bond holders; is that right? 14 A. Yes. 15 Q. And a change of control of USAT would 16 jeopardize the net operating loss that was a 17 significant asset of the association. Is that 18 also right? 19 A. Yes, that was my understanding. 20 Q. Now, let me direct your attention to 21 Page 60 of the Form 10K and ask you whether what's 22 described there is the 143 million-dollar net 1356 1 operating loss carry-forward that you've been 2 referring to. 3 Do you see that, sir? $143,230,000 of 4 tax net loss carried forward? 5 A. Yes, I see that. 6 Q. So, that was a concern of the directors 7 of United about exhausting its resources to infuse 8 additional capital into USAT; isn't that right? 9 A. Yes. 10 Q. Now, sir, if the directors of United 11 had exhausted its resources to infuse capital into 12 USAT and precipitated a default on the PennCorp 13 debt or the other debt of the holding company, 14 would that have had an effect, based upon your 15 experience in finance, on the Wall Street 16 investment banking houses willingness to extend 17 capital -- extend financing to United? 18 A. I think it would have sounded alarms in 19 many corners about extending credit of any kind to 20 the institution or to the holding company. 21 Q. Do you recall, sir, whether United 22 Savings Association of Texas had significant 1357 1 financings in the spring of 1988 with Wall Street, 2 particularly under repurchase and-dollar 3 repurchase agreements? 4 A. It's my recollection that there were 5 several billion dollars worth of what were then 6 referred to as repo lines which were then in-place 7 credit lines with various people on Wall Street 8 for the financing of the institution's activities. 9 Q. Let me direct your attention to Page 51 10 of the 1987 Form 10K under securities sold under 11 repurchased dollar repurchase agreements. 12 Do you see that, sir? 13 A. Yes. 14 Q. And the first full paragraph after the 15 table, actually the first line of the paragraph 16 after the table, says "At December 31, 1987, the 17 securities underlying the repurchase dollar 18 repurchase agreements consisted of 756,751,000 in 19 physical securities and $1,656,258,000 in book 20 entry securities." 21 Do you see that? 22 A. Yes, sir. 1358 1 Q. Is that consistent with what you 2 understood to be the approximate amount of the 3 financings on Wall Street by USAT at that time? 4 A. Yes. My understanding was it was 5 somewhere in the rage of two or $3 billion. 6 Q. And based upon your experience in 7 finance, those borrowings would be imperiled if 8 United Financial Group defaulted on its bond; 9 isn't that right, sir? 10 A. Any time the image of a borrower is 11 impaired, it can expect it's going to find 12 significant difficulty in borrowing from anyone, 13 yes. 14 Q. Now, sir, looking at the situation 15 solely from your position as a director of USAT 16 because you were a director of both USAT and UFG 17 in the spring of 1988, do you believe it would 18 have been in the best interest of USAT for UFG to 19 have expended its resources to put money into USAT 20 and precipitated a default on its bonds? 21 A. No, sir. 22 Q. Wouldn't you agree with me, sir, that 1359 1 no matter who owns USAT, it would not be 2 beneficial to precipitate pulling $2.25 billion in 3 financing? 4 A. Yes, sir, I would. 5 Q. And no matter who owns USAT, it would 6 not be beneficial to lose a 143 million-dollar net 7 operating loss carry-forward? 8 A. Yes, that's correct. 9 Q. Do you recall, sir, that there were 10 discussions about paying off the holding company 11 debt at a discount during this time period? 12 A. Yes, I do. 13 Q. And we call that the PennCorp debt; 14 isn't that right? It's sometimes referred to as 15 the PennCorp debt? 16 A. Yes. I'm not sure that all of it is 17 the PennCorp debt, but certainly some of it is. 18 Q. Now, if the holding company had 19 substantially reduced or eliminated the debt, 20 would that reduce the risk of default on the 21 bonds? 22 A. It would have eliminated it if they had 1360 1 repaid it. 2 Q. If you pay off a bond, it's not going 3 to go into default, right? 4 A. It would be gone forever, yes. 5 Q. Now, Mr. Rinaldi showed you a letter 6 from Art Berner dated May 5, 1988. 7 Do you see that, sir? It's 8 Exhibit T2012. 9 A. Yes. 10 Q. And there are attachments to this, as 11 well. Do you see those? 12 A. Yes, sir. 13 Q. I'd like you to take a quick look at 14 that and tell me, sir, whether the series of 15 events we have just talked about -- that is to say 16 that a risk to USAT and UFG of a default on the 17 PennCorp debt and the consequences of possibly 18 losing both the net operating loss and 19 jeopardizing United's ability to get financing -- 20 rollover its financing on its 2 billion plus 21 dollars on Wall Street -- are discussed in this 22 submission that Mr. Berner has made to the 1361 1 regulators. Would you look at that and see 2 whether those issues are addressed there? 3 A. I see a discussion beginning on Page 2 4 of the attachment that speaks to various of these 5 issues, including in the fourth full paragraph the 6 difficulty which would result from a default on 7 UFG debt because the debt was secured by over 8 51 percent of the common stock of USAT thereby 9 losing to USAT the benefits of the $143 million of 10 net operating loss carry-forwards. And I also see 11 the discussion in the following paragraph of the 12 substantial negative publicity that would impact 13 USAT's ability to raise deposits and utilize what 14 they call here alternative credit lines. And I 15 see reference, as well, to various other issues 16 resulting from cross defaults and other actions 17 that could arise. 18 Q. Does this refresh your recollection, 19 sir, that in the spring of 1988 UFG went to the 20 regulators, the Federal Home Loan Bank of Dallas, 21 and presented to them the scenario that we have 22 just talked about in connection with an 1362 1 application to use its resources, UFG's resources, 2 to pay down the PennCorp debt and other debt of 3 the holding company? 4 A. Yes. I remember that UFG went to the 5 regulators. I remember that there was 6 correspondence between Mr. Berner and the 7 regulators. Perhaps this correspondence, perhaps 8 other correspondence. I couldn't say for certain. 9 And I do recall, as well, that the regulators 10 responded in writing to Mr. Berner at one point or 11 another and, as best as I can remember, agreed 12 that it would be a good idea for UFG to proceed 13 with the payment at a substantial discount of the 14 debt and other interest that we're talking about 15 here today. 16 Q. Mr. Schwartz, I'm going to hand you 17 what's been marked as Exhibit B2252. There are 18 three copies. If you'd give two to the Court. 19 Mr. Schwartz, I've handed you what's 20 been marked as Exhibit B2252. It's a letter dated 21 June 24, 1988, from Ms. Jearlene Miller, 22 supervisory agent from the Federal Home Loan Bank 1363 1 of Dallas, to Art Berner, general counsel of 2 United Financial Group. I'd like you to take a 3 moment and review that document. 4 A. Yes, sir. 5 Q. Mr. Schwartz, is this the document you 6 were referring to when you said that there was 7 correspondence back from the federal regulators 8 approving United's application filed on May 5, 9 1988, to use its resources to pay off the PennCorp 10 debt at a discount? 11 A. Yes, I think this is the response to 12 the May 13th -- I beg your pardon -- to the -- 13 Q. I believe it's the May 5th letter. 14 Mr. Berner's letter with the analysis that we just 15 talked about, right? 16 A. To the May 5th letter of Mr. Berner, 17 yes. 18 Q. In fact, it refers to the May 5th 19 letter right in the first sentence, doesn't it? 20 A. Yes, it does. 21 Q. And in the end, it says, quote, "This 22 office takes no objection to the proposal as 1364 1 presented to this office," close quote. 2 Do you see that? 3 A. Yes, sir. 4 Q. Last line of the main paragraph. And 5 is that consistent with your recollection, sir, 6 that the regulators at that time believed that 7 United's proposal to use its resources to pay off 8 the PennCorp debt was in the best interest of 9 United? 10 A. In the best interest of United Savings 11 Association of Texas, yes, sir. 12 Q. I'm sorry. United Savings Association 13 of Texas, yes. 14 A. Yes. 15 MR. VILLA: Your Honor, I move B2252 16 into evidence. 17 THE COURT: Received. 18 Q. (BY MR. VILLA) Now, pursuant to this 19 authorization from the Federal Home Loan Bank of 20 Dallas, UFG did pay off some or all of its debt, 21 did it not? 22 A. Some of it, sir, yes. 1365 1 Q. And it tried to negotiate discounts on 2 all of its debt and not all of it was immediately 3 discountable; isn't that right, sir? 4 A. Yes, sir, that's correct. 5 Q. Now, at the time -- and I'm not talking 6 about at the time this lawsuit is filed -- but at 7 the time of the events in question, 8 contemporaneously, was it your understanding that 9 UFG's payoff of the holding company debt was 10 consistent or inconsistent with the views of the 11 regulators? 12 A. It was my understanding that the payoff 13 was totally consistent with the views of the 14 regulators. 15 Q. Now, did there come a time in December 16 of 1988 when the board of directors of UFG did 17 receive a letter directing it to infuse capital 18 into USAT? 19 A. Yes, sir. 20 Q. And I believe -- is this in evidence, 21 T2021. 22 A. Yes, that's the letter. 1366 1 Q. Do you have it before you, the letter 2 of December 8, 1988? 3 A. Yes, sir, I do. 4 Q. Now, there is no dispute in this case 5 as to what the capital deficiency of United 6 Savings Association of Texas was at or about that 7 time because Paragraph 91 on Page 35 of the notice 8 of charges states -- this is the OTS notice of 9 charges -- that "As of September 30, 1988, USAT 10 had a negative capital requirement -- I'm sorry -- 11 USAT had a negative capital of $165 million, 12 $380 million less than the regulatory capital 13 requirements of 215 million." 14 So, sir, I'm going to ask you: Does it 15 sound about right that USAT was $380 million below 16 its regulatory capital requirements near the end 17 of 1988? 18 A. I'm sorry. What were you reading to me 19 from there? 20 Q. This is the OTS notice of charges. 21 This is the facts that they allege in this case. 22 And they allege that at the end of the third 1367 1 quarter of 1988, as reflected in the 10Q, that 2 United Savings Association of Texas was 3 $380 million below its regulatory capital 4 requirements. 5 And my question to you, sir, is: Does 6 that sound about right to you from your 7 recollection as a director of UFG and USAT near 8 the end of 1988? 9 A. Well, I remember there was a large 10 number. I don't know that I can recall it was 11 specifically in that range, but there was a large 12 number that was negative in terms of the net worth 13 of USAT. 14 Q. Now, sir, in attempting to determine 15 the financial condition of UFG at or about the 16 time of Mr. Twomey's letter in December of 1988, I 17 have secured a copy of UFG's Form 10K which would 18 give its financial condition as of the end of 19 1988, and I'm going to hand three copies to you. 20 This has been marked as Exhibit A3024. 21 Can you identify this, Mr. Schwartz, as 22 UFG's Form 10K for the year ending December 31, 1368 1 1988? 2 A. Yes, sir. 3 MR. VILLA: I move it into evidence, 4 Your Honor. 5 MR. RINALDI: No objection, Your Honor. 6 THE COURT: Received. 7 Q. (BY MR. VILLA) Now, this would show 8 United Financial Group's financial condition as of 9 about three weeks after the date of Mr. Twomey's 10 letter of December 8, 1988; isn't that right, sir? 11 It shows year end financial condition? 12 A. As I recall, we could show year end 13 financial condition of the holding company but not 14 necessarily with reference to the savings 15 association since the shares had already been 16 taken away from UFGI. 17 Q. Right. So, what we're looking at in 18 Exhibit A3024 is holding company only financials; 19 isn't that right? 20 A. That's my understanding. 21 Q. Let me direct your attention to Page 14 22 of Exhibit A3024. And in particular, the balance 1369 1 sheet there -- and can you tell me by reference to 2 that balance sheet what United Financial Group's 3 assets were as of December 31, 1988? 4 A. As stated here, it's $25,697,000 in 5 assets. 6 Q. And would you also look at the balance 7 sheet and tell me what its total liabilities are 8 as of December 31, 1988? 9 A. That was 32,030,000. 10 Q. So, in taking a look at its 11 liabilities, sir, can you determine whether it's 12 included in its liabilities any value placed upon 13 the net worth maintenance claim? 14 A. No, sir, I don't believe at this time 15 that there was. 16 Q. So, just looking at the balance sheet 17 of United, at the end of December, 1988, 21 days 18 after Mr. Twomey's letter, would you conclude that 19 its liabilities exceeded its assets by 20 approximately $7 million? 21 A. Yes, at least. 22 Q. Did you believe, sir, in December of 1370 1 1988 that United Financial Group had the financial 2 ability to infuse sufficient capital into USAT to 3 maintain USAT's regulatory net worth? 4 A. No, sir. 5 Q. In fact, United Financial Group's 6 liabilities exceeded its assets at that point; 7 isn't that right? 8 A. Yes, sir. 9 Q. In your position as a director of UFG, 10 were you required to consider the possible results 11 of various courses of action before you took them? 12 A. Yes, sir. 13 Q. Given the fact that UFG's liabilities 14 exceeded its assets by more than $7 million, what 15 did you regard as the likely result if UFG had 16 transferred all or most of its assets in December 17 of 1988 down to USAT? 18 A. Well, here again, there were the 19 concerns I enumerated earlier -- that we might 20 again face the issues respecting the tax losses, a 21 crisis in confidence with respect to credit lines, 22 and other issues regarding a potential 1371 1 recapitalization of United Savings Association of 2 Texas, which even at that late date we were still 3 trying to pursue as best we could. 4 Q. Now, sir, when a corporations 5 liabilities exceed its assets and it transfers all 6 of its liabilities, in your experience do the 7 other creditors challenge that in bankruptcy 8 proceedings? 9 A. I wonder if the question is when they 10 transfer their assets. 11 Q. I'm sorry. Transfer its assets. 12 A. Then certainly people would question 13 those transfers in bankruptcy proceedings, yes. 14 Q. So, in examining United Financial 15 Group's options in December of 1988, did you 16 consider that if you had transferred all of the 17 assets of UFG to infuse capital into USAT, a 18 bankruptcy proceeding could be initiated? 19 A. Yes. 20 Q. Now, sir, the May 13 letter that we 21 have previously looked at from Mr. Twomey, I think 22 you've already testified you did not read as a 1372 1 direction to the board of directors to infuse 2 capital into USAT; isn't that right? 3 A. Yes, that's right. We were to advise 4 them of the steps which would be taken as opposed 5 to the actual immediate infusion. 6 Q. And would it be fair to say that you 7 came to the conclusion that infusing the cash and 8 other liquid assets of UFG down into USAT in May 9 and June of 1988 was not desirable considering the 10 prospect of default? Do you recall that? 11 A. Yes. 12 Q. Did you consider other options or 13 avenues to address the issue of USAT's capital 14 deficiency? For example, soliciting third parties 15 to infuse capital into USAT? 16 A. Yes. That was one of many things that 17 I recall the board tried to accomplish in meeting 18 its fiduciary responsibilities and in trying to 19 come up with capital that would genuinely be 20 sufficient to recapitalize USAT. And if I 21 remember correctly, we went out and sought 22 investment bankers to help us in that regard. I 1373 1 think it was Merrill-Lynch, if I remember 2 correctly. And we may have spoken with others, 3 too, on the investment banking firm. And if I 4 recall correctly, we talked with the regulators 5 about all kinds of possible deals to go and, by 6 way of example, acquire failing institutions 7 elsewhere in the state and to -- or even out of 8 the state and to capitalize them and to then 9 perhaps merge them with USAT and to have a 10 reconstituted USAT or to participate in what was 11 then being discussed as the Southwest Plan which 12 would have been a means of the government in 13 combination with others providing assistance to 14 the institution. "The others" meaning private 15 parties putting in additional money, together with 16 assistance from the government in various ways 17 including forbearance and other forms of financial 18 assistance so that I think the board's 19 overwhelming preoccupation during the period was, 20 "Well, how do we bring capital to this 21 institution? What can we do to find interested 22 parties who will find this institution attractive 1374 1 enough to want to put money in it and to make it 2 successful on an ongoing basis?" 3 Q. And was -- 4 A. That is to say that everybody worked 5 very hard to try to do that even after the 6 December letter was received almost, as I remember 7 it, till the very, very end of December. 8 Q. Was one of the parties that you 9 solicited to infused capital into USAT MAXXAM? 10 A. Yes. 11 Q. And do you know whether they made a bid 12 on -- 13 A. Yes. 14 Q. -- USAT? 15 A. Yes. They did make a bid, as I 16 remember. 17 Q. And do you recall whether that bid was 18 accepted? 19 A. Well, I remember that at one point, it 20 was accepted and then at one point it was 21 rejected. 22 Q. And ultimately, it was rejected; isn't 1375 1 that right? 2 A. Yes. Ultimately, it was rejected. 3 Q. Now, Mr. Rinaldi asked you about the 4 time period after the receivership. 5 A. I'm sorry. If I could just clarify, I 6 think that there was a time when UFG accepted it 7 and in the sense that it was rejected, it wasn't 8 necessarily rejected by UFG. I believe it was 9 rejected by the regulators. 10 Q. Now, Mr. Rinaldi talked to you about 11 the -- or asked you a few questions about 12 post-receivership events with respect to UFG. I'd 13 like to now direct your attention to the period 14 after the receivership on December 30, 1988. 15 After that time period, did UFG 16 negotiate with federal agencies to resolve the net 17 worth maintenance claim? 18 A. Yes, for many years it negotiated with 19 them to try to do that. 20 Q. Let me hand you what's been marked as 21 Exhibit B3660 and ask you if you can identify 22 that. Sir, I think you previously had stated that 1376 1 a settlement was entered into. Is this the 2 settlement you were referring to, what's been 3 marked as Exhibit B3660? I'm sorry. Is this the 4 order reflecting the settlement? 5 A. This is the OTS's order, as I 6 understand it, reflecting that. 7 Q. Okay. 8 MR. VILLA: I move B3660 into evidence, 9 Your Honor. 10 THE COURT: Received. 11 Q. (BY MR. VILLA) Let me direct your 12 attention, Mr. Schwartz, to Page 2 of this 13 document and the second -- I guess the last 14 whereas clause where it reads, quote, "Whereas the 15 OTS has agreed to compromise its claims against 16 UFG through the payment by UFG to the FDIC of an 17 amount no less than $9,450,000," close quote. 18 Do you see that? 19 A. Yes, sir. 20 Q. Is that consistent with your 21 recollection of the amount of the settlement that 22 UFG ultimately paid to the FDIC on the net worth 1377 1 maintenance claim and other related claims? 2 A. I remember it a little bit differently. 3 I remember that UFG agreed to pay at least 4 $11 million, that in paying $11 million either the 5 OTS or the FDIC would then receive effectively not 6 less than 9,450,000 after distributing certain 7 amounts to other people, yes. 8 Q. Now, sir, in the spring of 1988, 9 Mr. Rinaldi asked you whether United Financial 10 Group had cash that it could have infused into 11 USAT. 12 Do you remember that? 13 A. I'm sorry. The question was a little 14 confusing to me. Yes, I remember him asking me 15 about the period of 1988 and whether UFG had cash. 16 Q. I believe he said did it have cash it 17 could infuse into USAT at the time that you 18 received the letter of May 13, 1988. 19 Do you recall that? 20 A. Yes, sir. 21 Q. It did have cash, didn't it, sir? 22 A. Yes, sir. 1378 1 Q. But the directors didn't infuse that 2 cash into USAT; isn't that right? 3 A. Yes, that's correct. 4 Q. And in making the decision not to 5 infuse that cash into USAT, did you believe that 6 you were acting in the best interest of both UFG 7 and USAT? 8 A. Yes, sir. 9 Q. And did you believe that you were 10 acting consistent with the directions of the 11 regulators? Did you believe, sir, that the 12 regulators wanted you to use your money -- the 13 cash of UFG to infuse it into USAT or to pay off 14 the PennCorp debt? 15 A. I'm sorry. Could you repeat the 16 question? 17 Q. You had a limited amount of cash in 18 UFG; isn't that right, sir? 19 A. Yes. 20 Q. And if you used the money to pay off 21 the PennCorp debt at a discount, you wouldn't have 22 that money to infuse into USAT; isn't that right? 1379 1 A. Yes. 2 Q. And when you presented it to the 3 regulators, which one of those options did they 4 approve? 5 A. They approved paying the debt off at a 6 discount, and I believe that that action was taken 7 in full knowledge and concurrence of the 8 regulators. 9 Q. Thank you, sir. 10 MR. VILLA: No further questions. 11 THE COURT: Mr. Eisenhart, are you 12 going to have some questions? 13 MR. EISENHART: I am. Thank you, Your 14 Honor. 15 THE COURT: Proceed. 16 17 CROSS-EXAMINATION 18 19 20 Q. (BY MR. EISENHART) Mr. Schwartz, I'm 21 going to touch base on a couple of things that 22 Mr. Rinaldi asked you about. 1380 1 Toward the end of his examination he 2 was going over, I think -- he mentioned something 3 with respect to the Weingarten Realty investment. 4 Do you remember that? 5 A. Yes, sir. 6 Q. And I think you said in response to a 7 question from him that UFG/USAT were introduced to 8 Weingarten Realty and then subsequently made an 9 investment in it? 10 A. Yes, sir. 11 Q. And I think you said that you thought 12 that either Mr. Hurwitz or Dr. Munitz had 13 introduced them to Weingarten; is that correct? 14 A. Yes, sir. 15 Q. How did that investment in Weingarten 16 Realty turn out? 17 A. My recollection is that it was very 18 profitable to United, that they made -- I don't 19 know that I've heard the exact number -- some 70 20 or $80 million is the discussion that I seem to 21 recall hearing. 22 Q. 70 to 80 million-dollar profit, 1381 1 something along those lines? 2 A. That was my understanding, yes. 3 Q. I noticed when you talked about that, 4 you were sitting up there as the chief financial 5 officer of MCO Holdings and there was a smile that 6 came to your face when you remembered that. Why 7 is that? 8 A. Well, because that's a lot of profit. 9 Q. And at that time, Mr. Hurwitz of course 10 was the chairman of MCO Holdings, was he not? 11 A. Yes, sir. 12 Q. He could have brought that investment 13 opportunity to MCO, could he not? 14 A. It's my assumption he could have, sir, 15 yes. 16 Q. And instead, he took that profitable 17 investment -- he or Dr. Munitz -- and introduced 18 it to USAT; is that correct? 19 A. That's my understanding, sir, yes. 20 Q. And as the chief financial man of MCO, 21 that still brings, I think, an ironic smile to 22 your face? 1382 1 A. It's still a lot of money, sir. 2 Q. Let me go back to this subject of 3 investment bankers that MCO used over the years. 4 You were asked a lot of questions by Mr. Rinaldi 5 about the relationship MCO had with Drexel Burnham 6 Lambert, and it's clear that that is an investment 7 banking firm you used; is that correct? 8 A. Yes, sir. 9 Q. You have mentioned certainly other 10 firms, as well, though. Did MCO, in fact, during 11 the Eighties use -- MCO and MAXXAM use other 12 investment banking firms? 13 A. Yes, sir. 14 Q. And you mentioned, I think, PaineWebber 15 and I think you mentioned Bear Sterns. Were there 16 a number of other such firms? 17 A. Yes, sir. I think there were other 18 such firms. Shearson Lehman, I think, was one 19 back in the very early Eighties, as well. I had 20 come to understand that there were dealings with 21 Solomon Brothers, as well. I think we saw today a 22 letter from Solomon Brothers. I'm trying to think 1383 1 of some others as we sit here besides the 2 Bear Sterns, PaineWebber, Merrill-Lynch. Oh, 3 Goldman Sachs. I think I said also DLJ. I don't 4 know exactly what point in time that was. 5 Q. That's Donaldson, Lufkin, and 6 Jennrette? 7 A. Yes, sir. And those are the ones that 8 come to mind at this instant. 9 Q. It's clear from the list you've just 10 recited that there was no exclusivity as far as 11 Drexel would go, that Drexel didn't have a lock on 12 the company's business. 13 Is that a fair statement? 14 A. Yes, sir. 15 Q. Now, in terms of things such as bond 16 financings, was Drexel recognized in that period 17 of time to have a certain expertise in that area? 18 A. Yes, sir. 19 Q. And was that particularly true with 20 what had been referred to as high-yield bond 21 financings? 22 A. Yes, sir. 1384 1 Q. Would it be fair to say that they were 2 viewed as one of the best if not the best in that 3 field? 4 A. One of the best and perhaps one of the 5 few, also. 6 Q. Now, did MCO or MAXXAM, to your 7 knowledge, have any kind of special arrangement or 8 understanding with Drexel over and above what are 9 reflected in the actual documents pertaining to 10 the transactions that they did for you? 11 A. No. No special arrangements at all 12 that I'm aware of ever. 13 Q. And you've described in your testimony 14 here some of the fee negotiations that took place 15 between MCO and MAXXAM and Drexel. 16 How would you characterize those? 17 A. Nasty. Very nasty. Unpleasant. Very 18 long. We used to tell a story that may have been 19 in my earlier deposition where one of the Drexel 20 bankers was on vacation in Bermuda with his family 21 and we had him in a phone booth for a day arguing 22 about the fee. 1385 1 Q. Now, in any of those -- 2 A. That was one of the more pleasant 3 negotiations. 4 Q. In any of those negotiations that you 5 had with the Drexel people over fees on MAXXAM or 6 MCO financings, did you ever use as a lever or an 7 argument with them, "Hey, you ought to cut us a 8 break because United Savings Association is buying 9 Drexel underwritten high-yield bonds"? 10 A. No, sir. Not ever. 11 Q. You don't recall ever making that 12 argument? 13 A. No. I remember the kinds of arguments 14 we did make and, no, that would not be one of 15 them. 16 Q. Do you think that would have gotten you 17 anywhere? 18 A. No, not a chance. Nowhere. What we 19 used to do was try to go and see what other people 20 had paid for similar deals. We'd drag out every 21 prospectus we could find that had the low end of 22 the range on the fees and we'd stick them all in 1386 1 front of their noses and say, "Look. You just did 2 that deal for this guy, did that deal for that guy 3 and we don't want to pay one penny more. In fact, 4 we want to pay less." And we'd just use that as a 5 beginning and just argue, argue, argue and just 6 stretch it out. 7 Q. And they, I gather, would have 8 prospectuses on the other side that showed that 9 they just got paid a big handsome fee over here 10 and, therefore, you ought to pay them at least 11 that if not something more? 12 A. Yes. That's one typical negotiating 13 tool. They would actually come in with charts, if 14 I remember right, from time to time or allude to 15 them anyway. 16 Q. And did they ever say to you, "Hey, if 17 that savings association that you-all have an 18 investment in buys some more of our high-yield 19 bonds, we'll give you a little bit of a break 20 here"? 21 A. No, sir. 22 Q. You don't recall them ever making that 1387 1 argument? 2 A. No, I don't recall them ever talking 3 about anything like that. I don't recall 4 extending to any of the other companies, not just 5 the savings and loans. I don't recall them 6 speaking to MGI, MAXXAM Group, Inc., or any other 7 companies that had done financings as being some 8 way for them to cut us a deal, no. 9 Q. Do you recall in any of those talks 10 that you had with Drexel, any of these 11 negotiations with Drexel over fees, the subject of 12 the option for UFG stock ever coming up? 13 A. During the subject of fee discussion, 14 sir? 15 Q. Yes, sir. 16 A. No. 17 Q. Those were never related in any of the 18 discussions you recall? 19 A. Every deal with them was a new deal. 20 Every deal with them was a new beginning, a new 21 argument, a new discussion, a new negotiation. 22 Every deal. 1388 1 Q. So, you didn't get any credit for them 2 today for anything you had done with them 3 yesterday? 4 A. No, sir. 5 Q. Was that a pretty consistent way that 6 these progressed? 7 A. Yes, sir. Right through the bitter 8 end, sir. 9 Q. Now, I want to talk to you for a moment 10 about the net worth maintenance obligation. I 11 gather from what you've said up here -- you just 12 tell me: Was there ever any thought at MCO during 13 the period of time that the approval resolution 14 was in place that MCO would be able to live with 15 an open-ended net worth maintenance obligation? 16 A. No, sir. 17 Q. Why not? 18 A. Well, it was just antithetical to 19 everything I had come to understand about how we 20 were to conduct our business, that we were not 21 going to have open-ended obligations or guarantees 22 or have them even come across company lines. Just 1389 1 wasn't the way we approached business, any kind of 2 business, not just savings and loan business. 3 Q. Now, did you have any governing 4 philosophy within MCO as to how your different 5 investments were to relate to each other or how 6 they were to stand or account for themselves on 7 your balance sheet? 8 A. On our balance sheet? 9 Q. Yes, sir. Let me phrase it another 10 way. You described in your testimony that there 11 was concern that a failure of the savings and loan 12 which was one part of your investments might lead 13 to a catastrophic result if a net worth 14 maintenance agreement was in place and bring down 15 the rest of your company, as well. 16 Was that a concern? 17 A. Yes, sir. I mean, there was a 18 compartmentalization, if you will, theory where if 19 there was a problem, one didn't want to have one 20 flooded compartment lead to other compartments 21 becoming flooded and bring the whole ship down. 22 You wanted to lock the doors off at the beginning. 1390 1 Q. And was it fair to say that at MCO 2 there was a philosophy that your investments ought 3 to stand on their own? 4 A. Yes, sir. 5 Q. And did you view an open-ended net 6 worth maintenance obligation as something that 7 would be an exception to that philosophy? 8 A. Well, it would certainly be contrary to 9 it. I don't know if we ever looked at it as an 10 exception because I don't think ever really 11 seriously considered that. At least I didn't 12 seriously ever consider that we would seriously 13 consider that as a company. 14 Q. And did you as a company make this 15 position clear to the regulators from the start -- 16 that is, from the time that the approval 17 resolution was received? 18 A. Well, it was my sense that that was the 19 nature of the discussion, but I think I testified 20 earlier that I don't know that I could ever tell 21 you I was present at one of those actual 22 conversations. So, I don't know that I'm speaking 1391 1 firsthand at that. 2 Q. And it was primarily Dr. Munitz that 3 handled those discussions with the regulators? 4 A. That was my understanding, yes. 5 Q. But you discussed with him, as I 6 understand it, a number of alternative methods of 7 fortifying the capital without this open-ended 8 obligation? 9 A. Yes, sir. 10 Q. And those were pursued over a period 11 of, what, about three years from December, '84, to 12 December, '87? 13 A. Yes. I rather think actually we spoke 14 about it even earlier than the December, '84, 15 period but certainly through at least December of 16 '87, yes. 17 Q. Do I take it from that that even before 18 the actual approval resolution was received in 19 December, '84, you had some notion that there 20 might be this kind of net worth maintenance 21 obligation imposed? 22 A. It was certainly a subject of some 1392 1 discussion, yes. 2 Q. Now, you mentioned that you had some 3 difficulty when you saw the net worth maintenance 4 obligation understanding some of the terms and 5 concepts in it. I think you particularly 6 mentioned the notion of pro rata contribution? 7 A. That among others, yes, sir. 8 Q. And if I understood your testimony, it 9 was a concern that on day one you might infuse 10 your 30 or 35 percent but there was known left to 11 infuse the other 65 or 70 percent. Is that it? 12 A. Effectively, yes, and that the next day 13 you'd then be asked to go and infuse another 14 30 percent of the 70 percent that was still left 15 to be infused and so on and so on, kind of going 16 30 percent the way to the wall every time until 17 you finally reach it. 18 Q. And over the three years that you 19 pursued this with the regulators, were you ever 20 able to get a satisfactory answer or clarification 21 from them about how this pro rata notion would 22 work? 1393 1 A. No, sir. 2 Q. So, did you have any better idea after 3 three years what they meant by that than you did 4 when you first started? 5 A. No better idea today than when we first 6 started. 7 Q. In fact, that pro rata as you just 8 described it could lead you from actually 9 contributing 35 percent up to, presumably if you 10 play it all out, 99.999 to some large number of 11 decimal places percent, could it not? 12 A. Well, it was worse than that, I think, 13 because percent of what? I mean, percent of what? 14 Percent of a deficiency at one point in time or a 15 future point in time? I mean, on and on and on? 16 Q. And you were never able to get that 17 resolved? 18 A. No, sir. 19 Q. Now, there was some reference to a 20 proposal that you had with E.F. Hutton. Do you 21 recall that? 22 A. Yes, sir. 1394 1 Q. And the E.F. Hutton proposal was not 2 accepted, correct? 3 A. No, sir. 4 Q. And why not? 5 A. I think I said to you before that we 6 thought it was, among other things, expensive. I 7 don't know if there were other reasons, as well. 8 Q. The terms of that, as I recall -- and 9 we can pull the document out if you want -- were 10 that that was an option that was renewable every 11 six months. 12 Is that your recollection? 13 A. That's the way I remember it, yes. 14 Q. Was the six-month renewal period 15 something that was attractive or unattractive to 16 you? Do you have any recollection? 17 A. Well, sitting here today, I know we 18 wanted to resolve the issue of net worth 19 maintenance if we could, and I don't know that at 20 that point in time, the time that we were talking 21 to Hutton or the time we entered into the option 22 agreement, that we felt that six months would be 1395 1 necessarily sufficient. I don't know if that's 2 the question you're asking me. 3 Q. Sufficient to resolve your issues with 4 the regulators over net worth maintenance? 5 A. Yes, sir. 6 Q. I want to talk to you for a minute 7 about the actual option agreement with Drexel. I 8 think the testimony here was that the actual price 9 at which the stock would be purchased under that 10 option, if it ever was purchased, was about $8.59 11 a share. Is that your recollection? 12 A. Yes, sir. 13 Q. How did that price compare to the best 14 of your recollection with what UFG stock had been 15 trading for over the year more that you were 16 talking to Drexel about this option? 17 A. Well, I think I had said earlier that 18 over the -- was it I think roughly a two-year 19 period or more perhaps or maybe longer -- that 20 that was both higher and lower than the price at 21 which UFG had traded during that period. 22 Q. So that UFG stock had been trading in a 1396 1 range that was both above that and below it? 2 A. That's the way I remember it, sir, yes. 3 Q. Now, did you ever know exactly what 4 Drexel paid to acquire its shares of UFG? 5 A. No, sir. Don't know sitting here 6 today. 7 Q. Do you have any idea exactly when or 8 under what circumstances they acquired their UFG 9 portfolio? 10 A. Well, only to the extent that at some 11 point in time we showed -- you-all showed me an 12 exhibit that indicated that at some point -- I 13 came to understand they had 580 odd thousand 14 shares, but that's the extent of my knowledge 15 about when. 16 Q. To your knowledge, did anyone at MCO 17 ever request Drexel to acquire these shares for 18 them? 19 A. No, sir, not to my knowledge. 20 Q. Would you take a look again at a 21 document that you were shown earlier? It's T0 22 '88. The cover is a fax cover sheet from the law 1397 1 firm of Cahill, Gordon & Reindel. I'll just let 2 you have my copy for a second, Mr. Schwartz. It 3 might be easier. 4 A. Almost there, I hope. 5 Q. Now, the front page of that is a fax 6 form and attached to it, I believe, is the letter 7 that went to the NASD asking for their ruling on 8 the number of shares that could be optioned? 9 A. Yes. 10 Q. On the first page of the letter which 11 is actually the second page of an exhibit, you'll 12 see a sentence which at least on your copy I have 13 highlighted. Would you read that sentence? 14 A. Yes. It says "The shares were acquired 15 by DBL in its ordinary market operations." 16 Q. Now, this is a representation by 17 Drexel's lawyer to the NASD, is it not? 18 A. Yes, sir, I believe it is. 19 Q. Okay. Are you aware of anything -- any 20 fact inconsistent with that representation? 21 A. No, sir. 22 Q. Thank you. 1398 1 Now, during the time this option 2 agreement was outstanding, did you consider that 3 it was inevitable that at some point MCO or MAXXAM 4 would wind up owning these 300,000 shares? 5 A. No, sir. 6 Q. Why not? 7 A. Because it was never clear to me that 8 we'd ever be able to agree on acceptable terms and 9 conditions to become a savings and loan holding 10 company. It was never clear to me that we'd ever 11 get to the point where we'd find it acceptable to 12 agree with not just the net worth maintenance 13 issues that we talked about earlier but even those 14 items regarding debt and those items regarding the 15 range of our activities. 16 Q. Now, with respect to the option 17 agreement itself -- I know it's already in 18 evidence, but since I don't have it at my 19 fingertips, let me give you a document which is 20 marked with actually an OTS Exhibit No. T100. 21 This is the option agreement. 22 Do you recognize T1100, Mr. Schwartz? 1399 1 A. Yes, sir. 2 Q. And is that, in fact, the option 3 agreement with its various attachments? 4 A. Yes. It's the option agreement with my 5 signature, but it doesn't seem that the 6 attachments are signed. 7 Q. Okay. I think we've -- you've 8 testified before that under the terms of this 9 option agreement it was not -- the call option 10 that MCO had was not exercisable for about two and 11 a half years; isn't that correct? 12 A. Yes, sir. 13 Q. Now, turn to Page 8 of the option 14 agreement. Looking particularly at Paragraph 5B, 15 who during those two and a half years had the 16 right to vote the shares? 17 A. Drexel Burnham did, sir. 18 Q. And did Drexel Burnham have any 19 understanding or agreement with MCO as to how they 20 would vote those shares? 21 A. No, sir. 22 Q. Did Drexel ever issue any proxy to MCO 1400 1 as to how those shares would be voted? 2 A. Not that I'm aware of, sir. 3 Q. To your knowledge, did MCO -- or did 4 Drexel ever consult with MCO as to how those 5 shares should be voted? 6 A. I never heard of such a thing, sir. 7 Q. Do you have any idea as you sit here 8 today how Drexel Burnham ever voted those shares 9 during the years they owned them? 10 A. I have no idea whether they did vote 11 them or, if they did, how they voted them. 12 Q. Now, who had the right to the dividends 13 of those shares prior to the time the option was 14 exercised? 15 A. Drexel Burnham did. 16 Q. That's provided in Paragraph 5C of the 17 agreement, is it not? 18 A. Yes, sir. 19 Q. Was there any understanding to the 20 contrary as to who would receive those dividends? 21 A. No, sir. 22 Q. Mr. Schwartz, were there any 1401 1 understandings outside of the four corners of this 2 agreement as to how this arrangement would work? 3 A. No, sir. 4 Q. There were no side deals, anything of 5 that sort? 6 A. No, sir. 7 Q. The exercise price of the option, as I 8 read the agreement, would be $2,577,000 in cash; 9 is that correct? 10 A. Yes, sir. 11 Q. And you get to the strike -- the 12 so-called strike price by simply dividing that 13 number by 300,000? 14 A. Yes, sir. 15 Q. Were there any other agreements that 16 you're aware of with respect to the actual 17 exercise price? Was it any different than what's 18 set forth in the agreement here? 19 A. No, sir. 20 Q. Now, there is a section in this 21 agreement -- and I'll refer you specifically to 22 Page 9 headed representations and warranties of 1402 1 MCO. I'm sorry. Do you see the section headed 2 representations and warranties? 3 A. Yes, sir. 4 Q. Looking ahead to Paragraph E -- 5 Subparagraph E of that section, which I think is 6 on Page 11, do you see a representation there 7 concerning MCO's having become a savings and loan 8 holding company? 9 MR. RINALDI: I'll object, Your Honor. 10 That's not what it says. 11 THE COURT: Excuse me? 12 MR. RINALDI: He's misstated what the 13 agreement says. It says "Shall obtain the 14 approval of the Federal Home Loan Bank Board of 15 its application on Form H(e)-1." 16 Q. (BY MR. EISENHART) All right. And 17 let's read on a little further in that paragraph, 18 Mr. Schwartz. Three lines from the bottom, do you 19 see -- well, read into the record what appears 20 after the word "and." 21 A. "And be duly registered with the 22 Federal Home Loan Bank Board as a savings and loan 1403 1 holding company and MCO shall have delivered 2 certified copies thereof, if available, to DBL." 3 Q. What did you understand that to mean in 4 terms of representations and warranties that you 5 had to fulfill before you could exercise your 6 option to call these shares? 7 A. That MCO needed to be registered as a 8 savings and loan holding company, that MCO needed 9 to come to some agreement on acceptable terms and 10 conditions for its ability to go over 25 percent 11 of the stock of UFG. 12 Q. Put it more simply, you needed to have 13 closed your deal with the bank board. Is that, in 14 fact, what you're saying? 15 A. Yes, sir. 16 Q. You needed to have resolved the net 17 worth maintenance condition and you needed to be 18 in a position to actually go over 25 percent and 19 be registered as a holding company? 20 A. Yes, sir. 21 Q. And you had to make that representation 22 to Drexel as a term of this agreement before you 1404 1 could exercise the option? 2 A. Yes, sir. 3 Q. Now, during the time this option 4 existed did Drexel have the right or did MCO have 5 the right under this agreement to appoint 6 directors of UFG, to your knowledge? 7 A. No, sir. 8 Q. And Drexel had the right to vote the 9 shares, did it not? 10 A. Yes, sir. 11 Q. So, Drexel could vote the shares in 12 favor of specific directors, but it was given no 13 specific rights under the agreement to appoint 14 directors? 15 A. That's correct, sir. 16 Q. Now, you were asked a series of 17 questions about the indemnification agreement in 18 provision in this agreement. 19 Did you have anything to do with the 20 drafting of that indemnification provision 21 agreement? 22 A. No, sir. As I remember, that was 1405 1 something left to the attorneys. 2 Q. And your understanding of that 3 agreement was what? What did that cover, in your 4 view? 5 A. Well, as a general matter, the 6 indemnification agreement spoke to who paid costs 7 at the end of the day arising from disputes and 8 lawsuits and the like and that Drexel was seeking 9 MCO's contribution towards those possibilities. 10 Q. I want to cover just briefly with you 11 some questions about Exhibit T84. This is 12 Mr. Pozen's memo to you dated December 2nd, 1985. 13 A. Yes, sir. 14 Q. Now, in numbered Paragraph 1 of that 15 memo, Mr. Pozen suggested some additional language 16 to go in the agreement. Do you see what I refer 17 to? 18 A. Yes, sir. 19 Q. And one of the suggestions he makes in 20 there is that this agreement shall not confer on 21 MCO any voting interest in such shares unless and 22 until it exercises the option. Do you see that? 1406 1 THE COURT: Is that what it says, 2 Mr. Eisenhart? 3 MR. EISENHART: Well, it makes two 4 suggestions in there, Your Honor, and I am perhaps 5 taking them in the reverse order. 6 Q. (BY MR. EISENHART) It says "this 7 agreement shall not confer on MCO any economic 8 interest in the shares or any voting interest." 9 Let me just start with the voting interest, Mr. 10 Schwartz. 11 Do you see that suggestion? 12 A. Yes, sir. 13 Q. In your view, was that already covered 14 in the agreement? 15 A. Well, I thought it got covered in the 16 final agreement. I can't say whether whatever 17 draft he's referring to does or doesn't cover it. 18 Q. But in any event, comparing this with 19 the final agreement, there would have been no need 20 to add his language concerning voting. It was 21 already covered? 22 A. Yes, sir. 1407 1 Q. You also suggest some language to the 2 effect that "This agreement shall not confer on 3 MCO any economic interest in the shares unless and 4 until MCO exercises its option to purchase such 5 shares pursuant to this agreement." 6 Did you believe there was any need to 7 add that language? 8 A. No, sir. 9 Q. Why not? 10 A. Well, we didn't have the right to 11 acquire any shares until two and a half years in 12 the future, sir. 13 Q. In your view, would that have added 14 anything useful to the agreement? 15 A. I can't remember specifically at the 16 time; but sitting here today, no, I don't think 17 so. 18 Q. The agreement did what it did as far as 19 conveying economic interest; isn't that correct? 20 A. If any, sir, yes. 21 Q. Now, you've testified that the 22 agreement -- I'm sorry. One other thing I wanted 1408 1 to look at on here. Let's take a look at the last 2 paragraph. 3 Mr. Rinaldi had asked you some 4 questions about that and about Mr. Pozen's 5 calculations that if the -- if the conversion of 6 the preferred took place and if this option was 7 exercised, MCO would own up to 45 percent of 8 United Financial stock at that time. 9 Do you see what I'm referring to? 10 A. Yes, sir. 11 Q. Was it clear in your mind when you saw 12 this memo that he was projecting into the 13 future -- that is, he was saying "if these two 14 events took place, this is what it would be"? 15 A. Yes, sir. 16 Q. You testified that the option agreement 17 was closed on Christmas Eve 1985? 18 A. Yes, sir. 19 Q. And I think you were asked a question 20 about taking more than one check with you to the 21 closing. Do you recall that? 22 A. I don't recall the question. I 1409 1 remember taking more than one check, though, yes. 2 Q. Why did you take more than one check 3 with you? 4 A. Well, I think it was not until perhaps 5 when we were even sitting in the offices that we 6 came to understand how many shares we could 7 actually close upon and, as best as I can 8 remember, we took one check for 300,000 shares' 9 worth of options, if you will, and another check 10 for any additional amount that we might be able to 11 accomplish; but at the closing, what we found was 12 all we could do it for was 300,000 shares, that is 13 to say an option for 300,000 shares, and we gave 14 them the check for 300,000 representing the option 15 for 300,000 and took the other check back with us. 16 Q. And that -- what happened to that 17 second check, to the best of your knowledge? 18 A. I would imagine they voided it or 19 redeposited it or whatever they do with those 20 kinds of things. 21 MR. EISENHART: You can observe that 22 the human being was quicker than the computer in 1410 1 this instance. 2 Q. (BY MR. EISENHART) Mr. Schwartz, you 3 should have in front of you Exhibit T1085, which 4 are the minutes of the MCO Holdings board of 5 directors meeting on December 17th, 1985? 6 A. Yes, sir. 7 Q. You'll recall Mr. Rinaldi raised with 8 you in his direct examination a question as to how 9 these minutes which were dated December 17 came to 10 have attached to them the final copy of the option 11 agreement which wasn't done until December 24. I 12 think in response to that you said that you might 13 have an explanation, but he cut you off and never 14 asked you what that was. I'm going to ask you: 15 What is the explanation that you know of for that? 16 A. Well, as best as I understand it, that 17 oftentimes these minutes were drafted some number 18 of days after the board meeting and that by the 19 time they were drafted we actually had done an 20 option for 300,000 shares. And to me at least, in 21 attaching the agreement, the secretary was giving 22 the directors the opportunity to actually sign off 1411 1 on an actual agreement rather than a proposal 2 and -- 3 Q. Who -- I'm sorry. Go ahead. 4 A. Unfortunately what doesn't get 5 reflected which was my understanding was that they 6 actually had the authority to go and do an option 7 in respect of more than 300,000 shares but we 8 never could do that. We only did the 300,000. 9 Q. Who is the individual that actually 10 prepared these minutes? 11 A. Well, I see that Mr. Bressler signed 12 them. I don't know if he also prepared them. 13 Q. Was he the general counsel of MCO at 14 the time? 15 A. Yes. That's the way I remember it. 16 Q. And was it your understanding that at 17 the board of directors meeting on December 17th, 18 1985, you were authorized to do the Drexel option 19 deal for a number of shares larger than 300,000? 20 A. Yes, sir. 21 Q. And looking at the actual resolution 22 that was passed, it says in language that you see 1412 1 in many board minutes, "resolved that the proper 2 officers of the corporation be and each of them 3 hereby is authorized and directed to enter into in 4 the name and on behalf of the corporation a stock 5 option agreement" and then it goes on to describe 6 the one that's attached. 7 Was it your recollection that on 8 December 17 you were at least one of if not the 9 proper officer who was given authority to 10 negotiate and enter into a stock option agreement? 11 A. Yes, sir. 12 Q. And is it your testimony now that 13 actually you were given authority to enter into 14 one for more shares than you eventually entered 15 into? 16 A. Yes, sir. 17 Q. And would it be your conclusion that 18 the agreement that you actually entered into on 19 December 24th was within the range of the 20 authority that you had been given on 21 December 17th? 22 A. Yes, sir. 1413 1 Q. Since Mr. Rinaldi raised that question 2 with you, have you done any checking to see 3 whether your supposition about the minutes being 4 prepared sometime after the fact might, in fact, 5 be accurate? 6 A. Well, I think I asked one or another of 7 the attorneys if they knew anything more about it 8 and one of them had mentioned to me that they 9 thought that, indeed, was what Mr. Bressler had 10 reflected. 11 Q. And did you review any portion of 12 testimony that Mr. Bressler has given in 13 connection with this matter? 14 A. I believe I was shown an excerpt of one 15 of his depositions that spoke to that. 16 Q. And was his explanation as given in his 17 deposition consistent with what you've said here? 18 A. Yes. 19 MR. RINALDI: First of all, I'm going 20 to object, Your Honor. If they want to put 21 Mr. Bressler on, that's fine with me. This is the 22 very same objection they had earlier. They are 1414 1 putting on evidence that somebody else testified 2 in an administrative proceeding that I have no 3 recollection about myself through an individual 4 who wasn't present at the time of the 5 deposition -- that the deposition occurred. 6 MR. EISENHART: That's fine, Your 7 Honor. They have raised this as an issue. If 8 they feel this is an issue, I'll be glad to bring 9 Mr. Bressler in to testify to it. 10 MR. NICKENS: I would point out, Your 11 Honor, that Mr. Bressler has had a stroke, had a 12 brain tumor, brain surgery. His physical 13 condition is not good, although his mental 14 facility and faculties are fine. But for him to 15 travel here and appear in this proceeding is a 16 real burden. 17 THE COURT: Where is he? 18 MR. NICKENS: Arizona. 19 MR. HEAD: Los Angeles. 20 MR. RINALDI: Your Honor, if there is 21 something in the transcript to the administrative 22 or the investigative deposition that they wish to 1415 1 put in, I would certainly be happy to entertain 2 the question of putting that in. We can talk 3 about this over the break, and we'd be happy to 4 stipulate that the transcript of Mr. Bressler can 5 come in in its entirety. 6 MR. EISENHART: That's fine, Your 7 Honor. I'll talk to them over the break. I'm 8 sure we can work it out. 9 THE COURT: How much more cross do you 10 have? 11 MR. EISENHART: I have -- I will not 12 finish it by 5:00 o'clock, Your Honor. 13 THE COURT: All right. We'll adjourn 14 until 9:00 o'clock. 15 16 (Whereupon at 4:43 p.m. 17 the proceedings were recessed.) 18 19 20 21 22 1416 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 29th 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 1417 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 29th 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