The American Banker
November 11, 2002, Monday
HEADLINE: In Focus: Did Agencies Blow $10M Maxxam Settlement?

The Federal Deposit Insurance Corp. was poised Friday to abandon its suit against the real estate mogul Charles Hurwitz
in an ignominious defeat that has already cost the agency millions in legal fees and could ultimately cost much more.

It is a story more fitting for a theater than a courtroom and may well stand as one of the most
personal and contentious legal battles ever fought by the FDIC or the Office of Thrift Supervision,
which had pursued a related case against Mr. Hurwitz. The fight was controversial from the start --
the FDIC's board had voted not to pursue a suit before abruptly changing its mind.

Perhaps the most dramatic moment came behind closed doors three years ago, when federal regulators
had a chance to accept a settlement offer of at least $10 million from Mr. Hurwitz, sources familiar
with the case said. The deal was scuttled because of mutual distrust, and the case dragged on until
last month, when the OTS walked away with only $206,000 from Mr. Hurwitz, who admitted no liability.

The FDIC appears unlikely to win any money at all. Moreover, it still faces a countersuit from Mr.
Hurwitz that could cost it more than $35 million.

Discovering the truth of what happened -- and why -- is not easy.

The case began in 1995, when both agencies accused Mr. Hurwitz -- the key investor in the parent
holding company of United Savings Association of Texas -- of helping to cause the thrift's 1988
failure, which cost the FDIC $1.6 billion. In 1999 Mr. Hurwitz filed his own suit against the FDIC,
claiming the charges were brought against him to pressure him into selling his valuable redwood
holdings in California.

However, multiple sources, who all spoke on the condition of anonymity, said that Mr. Hurwitz and his
company, Maxxam Inc., were still interested in settling. Representatives for Mr. Hurwitz approached
the FDIC and offered it a deal: If the cases were dropped and the real estate developer did not have
to admit liability, he would be willing to pay millions of dollars. Though an exact figure is hard to
pinpoint, sources agreed that the number discussed was between $10 million and $20 million. That
would have been far short of the $250 million for which the FDIC had sued, but consistent with agency
projections of a possible settlement.

At the time, FDIC General Counsel William Kroener agreed to discuss the potential deal with OTS
General Counsel Carolyn Buck, regulatory sources said. Ms. Buck reportedly said that she was
unwilling to take the discussion of any deal further without some type of written offer from Mr.
Hurwitz. FDIC lawyers appear to have been sympathetic to Ms. Buck's requirement and did not disagree
with it.

Regulatory sources said that they felt Mr. Hurwitz was acting in bad faith. They recounted earlier
offers, involving potential debt-for-nature swaps, that they said were withdrawn or significantly
altered at the last moment.  Moreover, Ms. Buck would have difficulty bringing any potential
settlement deal to OTS Director Ellen Seidman, who was required to distance herself from the case as
she could have served as its ultimate arbiter.

Mr. Hurwitz, meanwhile, refused to put the deal in writing because of his own distrust of regulators'
intentions. Sources said that he was afraid that if he put a number in writing, it could be leaked to
the press, or be seen as a sign that he was admitting guilt, and could be used against him. He was
unwilling to proceed with the deal until regulators made their own assurances that it would work.
Citing the OTS's objection, the FDIC refused to proceed, and the OTS could not be budged from its

An OTS spokesman said last week that it did not reject any deal and that it never had "an offer upon
which we could present to the director."

"We requested anything be put in writing, and that was never done," he said.

At that time, both agencies' lawyers appear to have been confident they would win at least the thrift
supervisor's administrative case. The OTS suit was heard by an administrative law judge, Arthur
Shipe, who tended to rule in favor of the regulator. Sources said it was rare for any administrative
law judge to rule against the agencies.

But both sides were shocked last year when Judge Shipe did just that.

In a blistering decision, he ruled against the OTS on all 12 counts and recommended that the agency
throw the case out. That left OTS Director James Gilleran -- who took office in December, three
months after that recommendation-- with little room to maneuver. He could either overrule Judge Shipe
and impose a penalty on Mr. Hurwitz that might get overturned in federal court, or take the judge's
recommendation and earn the ire of his own staff.

Mr. Gilleran embraced a third option and settled the case with Mr. Hurwitz separately.

That deal occurred despite an 11th-hour attempt from the FDIC to try and scuttle it, sources said. In
effect, the deal pulled the rug out from under the FDIC's own suit, which had always been contingent
on the outcome of the OTS administrative case, and left the FDIC facing Judge Lynn Hughes in the U.S.
District Court for the Southern District of Texas. Judge Hughes has accused that agency of using
draconian tactics in its battle with Mr. Hurwitz and has already indicated he expects the FDIC to
drop its case soon.

The fight is far from over.

A spokesman for Maxxam said last week that it will continue to press its countersuit and will attempt
to force the FDIC to pay its more than $35 million of legal expenses. (The FDIC has already spent at
least $12.5 million in its own legal expenses relating to the case.) Maxxam has also asked that the
FDIC pay an unspecified amount of punitive damages. While regulatory sources said they expect the
FDIC to prevail in the case, others said they expect Judges Hughes to issue a strong verdict against
the agency.

If that happens, observers will be left looking back at how the case began for some kind of

On Aug. 1, 1995, the FDIC board met behind closed doors to determine whether to sue Mr. Hurwitz.
According to an unedited transcript of the meeting obtained by American Banker, the case very nearly
did not happen at all.  At the meeting, three of the four board members -- FDIC Vice Chairman Andrew
"Skip" Hove Jr., Acting OTS Director Jonathan L. Fiechter, and Stephen R. Steinbrink, who attended
for Comptroller of the Currency Eugene Ludwig - initially refused to even make a motion adopting the
staff's recommendation to sue. According to early memos about the case, even the FDIC's own legal
staff recommended against filing suit, but changed its mind before the board meeting.

During the meeting, then-FDIC Chairman Ricki Helfer strongly argued that Mr.Hurwitz had acted
negligently in United Savings' failure and that the agency should act. At that time, the OTS had not
filed its suit, and the FDIC's chance to sue Mr. Hurwitz would have expired in one day. During the
meeting, staff members said they were still unsure if the OTS would pursue a case and that the FDIC
needed to stake a claim before its time expired.

Ms. Helfer made a motion to pursue the case, which was voted down by Mr. Hove and Mr. Fiechter. (Mr.
Steinbrink said he would defer to the chairman.) However, with only a 2-to-2 vote, the board had
failed to pass the motion to sue.

By the end of the meeting, Ms. Helfer and the FDIC staff successfully persuaded the other board
members to vote for the suit. Ultimately, all four board members endorsed the suit, something that
still makes sense to Ms. Helfer.

"I believed at the time the board voted to bring the case and believe today there was a strong case
on the merits that needed to be brought to address conduct affecting an insured financial
institution," she said in an interview last week.