14102 1 UNITED STATES OF AMERICA BEFORE THE 2 OFFICE OF THRIFT SUPERVISION DEPARTMENT OF THE TREASURY 3 In the Matter of: ) 4 ) UNITED SAVINGS 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 21 TRIAL PROCEEDINGS FOR JULY 13, 1998 22 14103 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 PAUL LEIMAN, Esquire SCOTT SCHWARTZ, Esquire 5 BRUCE RINALDI, Esquire RICHARD STEARNS, Esquire (Not present) 6 and BRYAN VEIS, Esquire (Not Present) of: Office of Thrift Supervision 7 Department of the Treasury 1700 G Street, N.W. 8 Washington, D.C. 20552 (202) 906-7395 9 ON BEHALF OF RESPONDENT MAXXAM, INC.: 10 FRANK J. EISENHART, Esquire 11 of: Dechert, Price & Rhoads 1500 K Street, N.W. 12 Washington, D.C. 20005-1208 (202) 626-3306 16 13 DALE A. HEAD (in-house) 14 Managing Counsel MAXXAM, Inc. 15 5847 San Felipe, Suite 2600 Houston, Texas 77057 16 (713) 267-3668 17 ON BEHALF OF RESPONDENT FEDERATED DEVELOPMENT CO. AND CHARLES HURWITZ: 18 RICHARD P. KEETON, Esquire 19 KATHLEEN KOPP, Esquire of: Mayor, Day, Caldwell & Keeton 20 1900 NationsBank Center, 700 Louisiana Houston, Texas 77002 21 (713) 225-7013 22 14104 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 ON BEHALF OF JENARD M. GROSS: 6 PAUL BLANKENSTEIN, Esquire 7 MARK A. PERRY, Esquire of: Gibson, Dunn & Crutcher 8 1050 Connecticut Avenue, N.W. Washington, D.C. 20036-5303 9 (202) 955-8500 10 ON BEHALF OF BERNER, CROW, MUNITZ AND HUEBSCH: 11 JOHN K. VILLA, Esquire MARY CLARK, Esquire 12 PAUL DUEFFERT, Esquire (Not present) of: Williams & Connolly 13 725 Twelfth Street, N.W. Washington, D.C. 20005 14 (202) 434-5000 15 OTS COURT: 16 HONORABLE ARTHUR L. SHIPE Administrative Law Judge 17 Office of Financial Institutions Adjudication 1700 G Street, N.W., 6th Floor 18 Washington, D.C. 20552 Jerry Langdon, Judge Shipe's Clerk 19 REPORTED BY: 20 Ms. Marcy Clark, CSR 21 Ms. Shauna Foreman, CSR 22 14105 1 2 INDEX OF PROCEEDINGS 3 Page 4 RON HUEBSCH 5 Further Examination by Mr. Guido........14125 6 Examination by Mr. Villa................14266 7 Further Examination by Mr. Guido........14306 8 LOIS SUDER 9 Examination by Mr. Veis.................14318 10 11 12 13 14 15 16 17 18 19 20 21 22 14106 1 P-R-O-C-E-E-D-I-N-G-S 2 (9:00 a.m.) 3 THE COURT: Be seated, please. We'll 4 be back on the record. The hearing will come to 5 order. 6 Mr. Guido, how long are you going to 7 take with this witness? 8 MR. GUIDO: I'm going to try and finish 9 well before noon, Your Honor. 10 Before we call the witness back to the 11 stand, to speed matters up, at this point in time 12 I'd like to introduce a number of performance 13 reports for USAT and a number of the investment 14 committee minutes. I think that will speed it up 15 without having to ask the witness any questions 16 about them. 17 Over the weekend, we requested the 18 witness to review a packet of materials of 19 investment committee minutes so that we could -- 20 we could speed up the process by asking him 21 whether or not the so-called value trades appear 22 in these -- in these minutes. We want to put the 14107 1 minutes into the record, and then we will ask the 2 witness a few questions about those. I will be 3 asking the witness questions about the performance 4 reports that we're putting into the record. But 5 by putting them into the record at the outset, we 6 will avoid the delay of having to pull out a 7 document, show the witness, introduce the 8 document, and all of that. 9 So, at this point in time, I'd like to 10 move into the record a number of performance 11 reports and a number of the investment committee 12 minutes. 13 In addition, I was going to ask the 14 witness some questions about testimony of 15 Ms. Sandy Ore. I gave counsel a list of the pages 16 that I thought I would have him read and ask 17 about. I thought that that would also speed up 18 the process. 19 Apparently, counsel for the other side 20 has decided that they would not ask him to read 21 those pages so that I could direct his attention 22 to those pages quickly and ask him some questions 14108 1 about that. So, that may slow up the proceeding. 2 But at this point in time, depending on some of 3 his answers, I put that back into the examination 4 and, depending on his answers, I may or may not 5 need to ask him specific questions from that 6 transcript. But at this point in time, he 7 testified that he had previously read that 8 transcript. I asked counsel to direct his 9 attention over the weekend to specific pages so 10 that we could speed up the proceeding, and 11 apparently, they chose not to do so, Your Honor. 12 I do not think that that will delay the proceeding 13 unduly, but it may require me to at some point in 14 time ask the Court for an order to direct the 15 witness to review those pages since he had 16 previously reviewed them so that it could speed up 17 the process. 18 MR. NICKENS: Your Honor, we did 19 receive the designations from the investment 20 committee minutes. We have gone back, and we gave 21 to Mr. Huebsch some highlighted portions dealing 22 with mortgage-backed securities. So, he ought to 14109 1 be in a position to say that he has reviewed those 2 portions. I wouldn't want the record to reflect 3 that he reviewed the entire binder full of 4 investment committee reports. He reviewed those 5 dealing with mortgage-backed securities. 6 With regard to the issue of 7 Ms. Laurenson's testimony, Mr. Guido did yesterday 8 afternoon give me designations. We object to the 9 procedure of asking a witness to agree or disagree 10 with some prior witness' testimony. We believe 11 that's not a proper procedure. We've had 15,000 12 pages of transcript. And if we're going to review 13 with each witness what everybody else has said 14 before, we will not get there. So, we did not ask 15 the witness to read that material for the reason 16 that, when it comes up, we're going to object to 17 that procedure. And I informed Mr. Guido of our 18 thinking on that point. 19 THE COURT: Well, what's your thinking 20 of -- 21 MR. GUIDO: Your Honor -- 22 THE COURT: What do you want him to do? 14110 1 State whether he agrees or disagrees with somebody 2 else? 3 MR. GUIDO: Your Honor, what I was 4 going to ask is whether or not it refreshed his 5 recollection. That's basically the question that 6 I was going to ask the witness. And I was going 7 to ask him follow-up questions depending on 8 that -- that response. It seems to me that we're 9 dealing with respondents here, Your Honor. We're 10 not dealing with third-party witnesses. And these 11 people are the people who have been charged with 12 the violations that are in the notice of charges. 13 I believe the OTS is entitled to confront them 14 with the testimony that has been given in this 15 proceeding and ask them, you know, if they have a 16 response to it, if they don't agree with it, so 17 that we can have a complete record because as I 18 think it should be apparent by now, given a case 19 of this nature, most of the evidence comes from 20 adverse witnesses and from the respondents 21 themselves. 22 And so, we believe that we're entitled 14111 1 to confront them with that testimony, ask them 2 what their views are about that testimony, and 3 whether or not they have any evidence to 4 contradict that testimony. I don't think that 5 there's anything inappropriate about it. 6 The Court, when it issued its ruling on 7 these issues, expressed to the respondents that 8 they could be here so they could hear what people 9 have to say and they could respond to it. It 10 seems to me that the government, under those 11 circumstances, particularly in the case where a 12 witness has been given a previous witness' 13 testimony, to give the witness that testimony or 14 ask that witness to review that testimony, can ask 15 the witness questions about the same subject 16 matter that's in there and confront the witness 17 with that testimony. 18 THE COURT: The same subject matter. 19 But I'm not sure of this business about going over 20 and reviewing somebody else's testimony. I don't 21 know if that's helpful or not. I'll see what the 22 questions are. I'm very encouraged by the 14112 1 indication that you will finish by noon. 2 MR. GUIDO: We've been working on that 3 over the weekend with counsel for the respondents 4 so that we could figure out a way to collapse the 5 proceeding so that we could finish before noon, 6 Your Honor. 7 THE COURT: All right. Let's get to 8 the questioning. 9 MR. GUIDO: At this point, Your 10 Honor -- these will be somewhat out of order, Your 11 Honor, because it turned out that the OTS set that 12 I had these duplicated from had documents missing. 13 So, Mr. Nickens had to have somebody over the 14 weekend retrieve from their archives a set so that 15 we could make additional copies of them. 16 So, when I do these investment 17 committee minutes, Your Honor, they will be 18 somewhat out of order. But I'll indicate where 19 that is as we're going through. So, there will 20 be -- this is a binder that we had prepared 21 previously in Washington that we brought down, and 22 we will have additions to this binder that I -- 14113 1 when we get to the gaps, I will point that out and 2 then I'll give you some additional copies. 3 At the outset, the first document, 4 1430, you can ignore in that binder and we'll move 5 to A1442, which are the minutes of May 13th, 1987, 6 of the investment committee. 7 We would like to move their admission 8 into the record, Your Honor. 9 Would it be more convenient for counsel 10 if I read all of the exhibits that are in the 11 binder and then move their admission? 12 MR. VILLA: Yes. 13 MR. NICKENS: Whatever is quicker, Your 14 Honor. We don't anticipate any objections to 15 these investment committee minutes. 16 THE COURT: All right. Read them off. 17 MR. GUIDO: A1442, which are the 18 minutes of May 13th, 1987, of the investment 19 committee. 20 The second is A1443, which are the 21 minutes of May 20, 1987, of the investment 22 committee, Your Honor. 14114 1 The next is A1444, which are the 2 minutes of May 27, 1987, Your Honor. 3 The next is A1445, which are the 4 minutes of the investment committee of May 27, 5 1987, Your Honor. 6 MR. VILLA: Excuse me. Did you just 7 say -- what's A1444? 8 MR. GUIDO: A1444 are the minutes of 9 May 27, 1987. Excuse me. The minutes of -- A1445 10 are the minutes of the special meeting of the 11 investment committee of the same date. 12 MR. VILLA: Thank you. I hang on your 13 every word as you know. 14 MR. GUIDO: Thank you very much, 15 Mr. Villa. 16 The next is A1446, Your Honor, which 17 are the minutes of June 3rd, 1987. 18 The next, Your Honor, is A1447 which 19 are the minutes of June 11th, 1987. 20 The next is A1448, which are the 21 minutes of June 16, 1987. 22 The next is A1449, which are the 14115 1 minutes of June 25, 1987, Your Honor. 2 The next is A1450, which are the 3 minutes of the investment committee of July 8th, 4 1987, Your Honor. 5 The next is A1451, which are the 6 minutes of July 25th, 1987, Your Honor. 7 The next is A1452, which are the 8 minutes of July 22nd, 1987. 9 The next is -- 10 MR. VILLA: Sir, could you check the 11 date on 1451? 12 MR. GUIDO: It's July 15th. Did I say 13 the 22nd? 14 MR. NICKENS: 25th. 15 MR. VILLA: Thank you. 16 MR. GUIDO: A1452, which are the 17 minutes of July 22nd, 1987. A1453, which are the 18 minutes of July 29th, 1987, Your Honor. 19 Then we have some additional 20 exhibits -- I'll be handing these up to the court 21 as I read them, Your Honor. The next one is 22 A1454, which are the minutes of the investment 14116 1 committee of August 25, 1987. 2 The next -- 3 MR. VILLA: August what, sir? 4 MR. GUIDO: I'm sorry. 5th. I'm 5 sorry. 6 The next is a packet of materials that 7 were prepared in the absence of the meeting of the 8 investment committee, and they are dated August 9 12th, 1987, and they are A1455, Your Honor. 10 The next is A1456, Your Honor, and 11 those are the minutes of the subcommittee of the 12 investment committee of August 18th, 1987, Your 13 Honor. 14 The next is A1457. Those are the 15 minutes of the investment committee of August 16 19th, 1987, Your Honor. 17 Now I'd like to go back to the binder 18 that I've given to the Court. The next, Your 19 Honor, is A1458, which are the investment 20 committee minutes of August 26th, 1987. 21 The next is A1460, which are the 22 minutes of the investment committee of September 14117 1 3rd, nineteen -- 2 MR. RINALDI: 2nd. 3 MR. GUIDO: September 2nd, 1987. I'm 4 sorry. Then the next is Exhibit -- which is a 5 document that I skipped over, Your Honor. It's 6 Exhibit A1459. It's dated September 1st, 1987. 7 It's a memo from Sandy Laurenson to the investment 8 committee, subcommittee approval of investment 9 contract, Your Honor. And the next is A1461, Your 10 Honor, which was dated September 11th, 1987. It 11 indicates there was no meeting of the investment 12 committee and it says, "Enclosed are various 13 reports relating to the portfolios and a memo from 14 Art Berner to the investment committee." 15 The next one is A1462, which is dated 16 September 16th, 1987. Those are the minutes of 17 the investment committee, Your Honor. 18 Now, going back to the binder, Your 19 Honor -- 20 MR. BLANKENSTEIN: Your Honor, it 21 appears that A1460 is already in evidence. It was 22 introduced during the -- during Ms. Ore's 14118 1 testimony. 2 THE COURT: A1460? 3 MR. BLANKENSTEIN: Yes. The minutes of 4 the investment committee of September 2nd, 1987. 5 MR. GUIDO: Do you have a tab number 6 for that? 7 MR. BLANKENSTEIN: Yes. 386. 8 THE COURT: Okay. I'm told that also 9 A1489 is also in evidence. 10 MR. GUIDO: Do you have a tab number on 11 it? 385? 12 MR. BLANKENSTEIN: (Nods head 13 affirmatively.) 14 MR. GUIDO: Am I up to 1463? 15 MR. NICKENS: Yes. 16 MR. GUIDO: Which are the minutes of 17 September 23rd, 1987. And then I have A1464, 18 which are the minutes of September 30, 1987. 19 Then I have A1465, which are the 20 minutes of October 8th, 1987, of the investment 21 committee. 22 Then I have A1466, which are the 14119 1 minutes of a subcommittee of the investment 2 committee of October 8th, 1987. 3 And the next is A1467, which are the 4 minutes of the investment committee of October 5 14th, 1987. 6 I will be asking the witness questions 7 about investment committee minutes subsequent to 8 that period of time and up until the end of the 9 year, Your Honor, which are already in evidence. 10 MR. BLANKENSTEIN: Your Honor, it 11 appears that A1465 is already in evidence. It's 12 at Tab 322 in our system. 13 MR. GUIDO: 1465? 14 MR. BLANKENSTEIN: 1465, the investment 15 committee minutes of October 8th, 1987. 16 MR. GUIDO: Okay. Now, Your Honor, I'd 17 like to move to the performance reports. 18 THE COURT: All right. I think I 19 should have the record reflect that the exhibits 20 that have been identified -- and I don't think we 21 need to go back through. I believe the record 22 will reflect which ones they are -- are received. 14120 1 I gather there's no objection to any of 2 them; is that right? 3 A. That's correct, Your Honor, except we 4 have not -- we did not have in our package 1463, 5 64, or 66. If we could just see them. 6 7 (Discussion held off the record.) 8 9 MR. NICKENS: Your Honor, we have no 10 objection to these investment committee minutes as 11 listed by Mr. Guido. 12 THE COURT: They are received, and the 13 record will reflect their identification as 14 Mr. Guido read them off. 15 MR. GUIDO: Now, Your Honor, I'd like 16 to move the admission of various performance 17 reports; and I think I have all of those that were 18 not admitted into the record. There may be a 19 little overlap, but I think that I have them. 20 The first is the performance report of 21 June 1986, which is A5011, Your Honor. 22 Then -- 14121 1 THE COURT: I'm informed that's in 2 evidence. 3 MR. GUIDO: Okay. I don't have a 4 record of the tab number. 5 Do we have a tab number for 5011? 6 MR. BLANKENSTEIN: Is it A5011? 558, 7 Tab 558. 8 MR. GUIDO: Thank you. 9 The next one I have which, I believe, 10 has not been admitted into the record, Your Honor, 11 is in these binders. The binders also have what 12 has previously been admitted into the record. I 13 figured it was easier to have it all in one spot 14 so -- the binders that I'm passing out to the 15 Court now have both tab numbers and exhibit 16 numbers on those that have previously been 17 admitted. But if you look at Volume 1, the very 18 last document in that is A5018, which is the 19 performance report of January 1987. I believe 20 that that has not been admitted into the record, 21 Your Honor. 22 The next one is A5019, which is the 14122 1 performance report of February 1987, Your Honor. 2 Then I have some additions, Your Honor. 3 THE COURT: I think we'd better take 4 these one at a time. The first one you offered 5 was A5018? 6 MR. GUIDO: That's correct, Your Honor. 7 THE COURT: There is no objection to it 8 being received? 9 MR. NICKENS: (Shakes head negatively.) 10 MR. GUIDO: 5019, Your Honor, which is 11 the February 1987 performance report. 12 THE COURT: Received. 13 MR. GUIDO: The next, Your Honor, is 14 5020, Your Honor, which is the performance report 15 for March 1987. 16 THE COURT: Received. 17 MR. GUIDO: Next is A5021, which is the 18 performance report for April of 1987. 19 THE COURT: Received. 20 MR. GUIDO: The next is A5022, which is 21 the performance report of May of 1987, Your Honor. 22 THE COURT: Received. 14123 1 MR. GUIDO: The next is A5023, which is 2 the performance report of June of 1987, Your 3 Honor. 4 THE COURT: Received. 5 MR. GUIDO: The next is A5024, Your 6 Honor, which is the performance report of August 7 1987. 8 THE COURT: Received. 9 MR. GUIDO: Next is A5025, which is the 10 performance report of September 1987, Your Honor. 11 THE COURT: Received. 12 MR. GUIDO: The next is the performance 13 report of October 1987, A5026, Your Honor. 14 THE COURT: Received. 15 MR. GUIDO: The next is A5027, which is 16 the performance report of November 1987. 17 THE COURT: Received. 18 MR. GUIDO: The next is A5028, which is 19 the performance report of December of 1987, Your 20 Honor. 21 THE COURT: I'm told that 5028 is in 22 evidence. 14124 1 MR. VILLA: Your Honor -- 2 MR. GUIDO: Do we have a tab number for 3 5028? 4 MR. VILLA: Your Honor, I don't know 5 that we were given all the numbers of these 6 performance reports. We got some performance 7 report numbers which we brought to court and 8 reviewed through, I think, June of 1987. There 9 were three of them: 5021, 5020 -- I think June of 10 1987. But after that, I don't think we have the 11 numbers. 12 So, we neither have a record of those 13 nor have we reviewed them. I don't anticipate any 14 problems, but we would like the opportunity to 15 perhaps review them at the break and make sure 16 that we have no objections. 17 MR. GUIDO: That's 5024 to 5028? 18 MR. VILLA: Well, anything after 5023 I 19 don't believe -- 2052 through 2053 we have 20 reviewed and have no objections to. After that, 21 we would like to review them. 22 MR. GUIDO: Mr. Villa may be correct. 14125 1 I don't have the list. I gave them the document 2 list periodically; and he may be right because on 3 my list, they are on the back of the page. So, it 4 could be that they were added subsequently. So, I 5 will not ask the witness any questions, and I 6 don't think I'll get to 5024 until after the break 7 anyway. 8 So, they will have an opportunity to 9 review them. So, at this point in time, 5024 10 through 5027 I think are being held for them to 11 have an opportunity to review the documents. 12 We're ready to continue the examination 13 of Mr. Huebsch now, Your Honor. 14 THE COURT: All right. Mr. Huebsch, 15 would you resume the witness stand, please? 16 17 FURTHER EXAMINATION 18 19 Q. (BY MR. GUIDO) Mr. Huebsch, I have 20 put before you a binder of investment committee 21 minutes, and I'd like to direct your attention to 22 A1442 and -- to the investment committee minutes 14126 1 of May 13th, 1987. And I'd direct your attention 2 to the sensitivity analysis which is at Bates 3 stamp US3005766. 4 Have you found that sensitivity 5 analysis? 6 A. Yes, I have. 7 Q. What does that show in terms of the 8 loss in the -- what does that show with regard to 9 the status of the portfolio with interest rates 10 unchanged? 11 A. It shows -- the grand total is minus 12 217,161,000. 13 Q. Now, do you remember when we looked at 14 the January 21st, 1987 performance report the 15 other day when we talked about the portfolio 16 positions for interest rate decline? 17 Do you recall that? 18 A. I remember generally about that, yes. 19 Q. And that showed a deficit of 20 approximately $100 million. 21 Do you recall that? 22 A. I recall a deficit number. I -- 14127 1 Q. You don't recall that specific number 2 from -- 3 A. No, I don't. 4 Q. -- that performance report? 5 A. No, I don't. 6 MR. VILLA: Excuse me. I couldn't hear 7 the answer. 8 THE WITNESS: I don't recall that 9 specific number. 10 Q. (BY MR. GUIDO) Now, let me ask the 11 question a little differently. 12 Between January of 1987 and May of 13 1987, do you recall that interest rates rose in 14 the order of magnitude of 100 basis points? 15 A. I remember the period as interest rates 16 rising. I don't recall precisely how much they 17 rose. 18 Q. Does the -- do you recall that there 19 was an increase in the deficit in the 20 mortgage-backed security portfolio over that time 21 period? 22 A. I believe this number is larger than 14128 1 the one at the beginning of the year. 2 Q. And do you recall having any 3 discussions in the investment committee about why 4 that had happened? 5 A. I don't recall, but I'm sure there 6 were. That was the kind of thing we would 7 discuss. 8 Q. This shows an order of magnitude of 100 9 percent increase in the deficit, does it not? 10 A. If that number of 100 is correct, yes. 11 Q. Just indulge me and assume that to be 12 correct. 13 A. Sure. Fine. 14 Q. Now, you don't recall any discussions 15 about why it happened? 16 A. Well, it's the kind of thing -- I don't 17 recall, but we were constantly talking, you know, 18 about interest rates, where they were going. We 19 had outside advisors who would, you know, 20 periodically come in and chat with us. Yes, we 21 would talk about things like that. 22 Q. Do you recall that we had discussions 14129 1 and I showed you documents about the order of 2 magnitude of the excess net worth at USAT in the 3 '85, '86 time period? 4 Do you recall that? 5 A. Yes, I do. 6 Q. And this figure, if it's correct, my 7 assumption is correct, of 100-million-dollar 8 increase over a five-month period of time in the 9 deficit in that account is many multiples of the 10 figure that we were talking about, wasn't it? 11 A. I believe so. I might -- one thing 12 that might affect -- we should consider in this, I 13 believe this was a period when we Ms. Laurenson's 14 portfolio greatly increased, if I'm not mistaken. 15 Q. Was she putting on a portfolio that 16 deliberately had $100 million worth of losses in 17 it? 18 A. No, I don't think that was her intent. 19 Q. Was she putting on a portfolio that was 20 intentionally positioned to take advantage of 21 declines in interest rates? 22 A. It seemed from those numbers that you 14130 1 gave me and -- that her portfolio would do better 2 if interest rates went down. It was a tilt. 3 Q. You mean a bias toward declining 4 interest rates? Is that what you mean? 5 A. I said "tilt." 6 Q. Okay. A tilt towards declining 7 interest rates? 8 A. Right. 9 Q. Okay. What do you mean by "a tilt 10 towards declining interest rates"? 11 A. Well, I think all portfolios are -- 12 most portfolios are never, you know, right down 13 the middle. There's always a slight tilt one way 14 or the other. 15 Q. Well, let's look at this portfolio in 16 May. Let's just use this as an example. 17 A. This is where we are, right. 18 Q. The sensitivities. This shows that 19 with interest rates unchanged, there is there is a 20 217,161,000 negative value to that portfolio. 21 Do you see that? 22 A. I see that. 14131 1 Q. And then it shows that if interest 2 rates go up 100 basis points, that 217 million 3 will increase to more than 296 million. 4 Do you see that? 5 A. Right, I see that. 6 Q. That's an 80-million-dollar increase in 7 the negative. Right? 8 A. Right. 9 Q. Then it shows a minus 100 basis points, 10 it will have a 196-million-dollar loss. 11 A. I see that. 12 Q. The loss will decline by about $20 13 million? 14 A. I see that, yes. 15 Q. And -- but if interest rates go up, the 16 loss will increase by approximately $80 million? 17 A. Yes, I see that. 18 Q. That's a ratio of four to one, isn't 19 it, Mr. Huebsch? 20 A. Yes, that is. 21 Q. Is that what you mean by a portfolio 22 that's tilted toward an interest rate decline? 14132 1 A. This would have a slight tilt that way, 2 yes, sir. 3 Q. Did -- and remember when we talked 4 about January, we talked about there was a 5 100-million-dollar embedded loss. And if the 6 interest rates went up 100 basis points, the loss 7 would be 147 million, I think, was the figure. 8 Do you recall that? 9 A. I don't recall that, but I have no 10 reason to doubt it. 11 Q. And that if interest rates went down, I 12 mean, that would be an increase of about 50 13 percent, wouldn't it, in terms of the 14 100-million-dollar loss? 15 A. 100 to 140 odd is almost 50. 16 Q. Then the figures showed that if 17 interest rates went down 100 basis points, that 18 that would be -- the loss would decline to about 19 $89 million. 20 Do you recall that? 21 A. That sounds logical. 22 Q. Okay. And so that there would be an 14133 1 improvement of the portfolio by about 11 million? 2 A. That's correct. 3 Q. So that, again, is about a four to one 4 ratio, isn't it? 5 A. That's right. 6 Q. Now, I think when we left, I asked you 7 whether or not USAT was speculating on the 8 direction of interest rates. 9 Do you recall that question? 10 A. It could well have been asked. Sure. 11 Q. Well, I'll ask it again. 12 Was USAT speculating on the direction 13 of interest rates? 14 A. No, I don't think they were. There was 15 a tilt here, but I don't think there was any -- 16 Q. Was it tilting the portfolio -- 17 MR. NICKENS: Your Honor, let the 18 witness finish his answer. 19 MR. GUIDO: Pardon me, Your Honor. 20 A. I think there was a tilt rather than, 21 you know, a decided, you know, bias or decided 22 intent to speculate on interest rates. 14134 1 Q. (BY MR. GUIDO) Okay. Let's use your 2 term "tilt." Okay? 3 Now, did Sandy Laurenson do anything 4 that the committee did not authorize? 5 A. I don't think so. I wasn't here at 6 this meeting, I guess. This is the things that 7 usually happened. She usually checked in and 8 presented her program, yes. 9 Q. And you received copies of the 10 investment committee -- 11 A. Yeah. Even if you were not there, you 12 would get it several days later, right. 13 Q. And did you receive the reports prior 14 to the meeting? 15 A. I don't -- you know, I don't really 16 know whether we -- we received the reports for the 17 prior week, the minutes, if you will, of the prior 18 week's meeting. She may have, from time to time, 19 sent us things that she was going to present at 20 the next meeting. I can't really remember that. 21 But I think largely, what she said was presented 22 at, you know, the meeting itself. 14135 1 Q. Okay. And her report was attached to 2 the minutes of the meeting. Right? 3 A. Right. 4 Q. And you received copies of those 5 reports, correct? 6 A. Right. 7 Q. Now, when you made decisions about 8 purchasing stock as part of the equity arbitrage 9 portfolio, did you have some risk reward ratio in 10 mind when you made those decisions? 11 A. Well, we had -- we had a bogie that we 12 shot for. We generally thought that you should 13 make in an arbitrage portfolio maybe two times -- 14 two to three times the bill rate. And that's 15 really a standard we've used over the years. I 16 can -- I remember -- of course, the numbers we're 17 using now which go about five and a half, 18 hopefully to make -- 19 Q. What do you mean by the two to three 20 times the bill rate? Was that a percentage? 21 A. It's a times. Two times to three 22 times -- 14136 1 Q. What is the bill rate you're referring 2 to? 3 A. The 90-day treasury. Like it's five 4 and a half. 5 Q. So, it would be two to three times five 6 and a half? 7 A. That's the bogie I've generally used 8 throughout the years. I don't recall -- 9 obviously, the bill rate was higher in this period 10 of time. 11 Q. You were -- 12 A. That's the general thing I've always 13 used. I don't know where I got it, but it seemed 14 to satisfy everybody I worked with as a good 15 target. 16 Q. Would that be, let's say, 15 to 20 17 percent? 18 A. Yes. 19 Q. Okay. That was the target in terms of 20 the profit side? 21 A. Well, approaching each situation, I 22 would say, "Can we make this amount of money?" 15 14137 1 percent on an annualized basis. 2 Q. Okay. Now, when you make decisions -- 3 equity arbitrage decisions, do you enter those 4 transactions with a view of what the maximum 5 downside risk is that you're willing to bear? 6 A. Yes, we do. 7 Q. What is that? 8 A. I don't think we have any particular 9 standard downside point. We attempt to, you know, 10 get in the better deals. We don't buy all the 11 deals. We hope to insulate ourselves. But 12 there's -- I don't -- I have not worked with a 13 particular downside number. 14 Q. Well -- 15 A. I have occasionally -- only 16 occasionally, though, I have bought some puts to 17 protect ourselves on the downside. 18 Q. From what percentage decline did you 19 buy those puts to protect yourself? 20 A. This would largely depend on the 21 situation. I wouldn't buy them unless I thought 22 there might be over a 25 percent decline. But I 14138 1 mean, this is -- this is -- this is a standard 2 that would vary from situation to situation. I 3 mean, I would say if I would have one of one stock 4 that fell down 25 percent, I would say, "Well, 5 judging from what I know about the situation, we 6 can sell it out." Sometimes it goes 25 percent 7 down. I say, "I think somebody else will probably 8 come along and offer us -- there will be an offer 9 from somebody else and we'll make our money back." 10 But it really was and is a situational kind of 11 determination. 12 Q. Now, you said that you only bought the 13 better deals, into the better deals. 14 What is it that you meant by that? 15 A. Well, if it were -- a deal for a cash 16 payment, I'd make sure that the -- a buyer, you 17 know, was a substantial company capable of coming 18 up with the money. We'd try to avoid transactions 19 where there was a financing -- a financial 20 contingency to it. I'd like to have the buyer 21 having access to the money -- 22 Q. And why was that? Why did you -- 14139 1 A. I felt safer. 2 Q. You felt that there was less of a 3 downside risk? 4 A. Right, or less of any kind of risk to 5 deal with. 6 Q. Did you ever sell out of any of the 7 equity arbitrage portfolios at USAT or MAXXAM when 8 you were managing those portfolios because the 9 price had declined in the stock as opposed to 10 going up based on your expectations? 11 A. Well, if the price had declined for a 12 very good reason in my judgment, I would sell. If 13 it were -- the price declined because something 14 happened in the market, I may not have sold it. 15 It's a situation-by-situation judgment. 16 Q. Did you have any threshold other than 17 this 25 percent figure that you used as a maximum 18 threshold of loss that you were willing to bear in 19 any equity arbitrage transactions -- 20 A. No, I don't think I had any -- I don't 21 believe I had any. 22 Q. But you attempted to minimize the 14140 1 losses? 2 A. Oh, yes. 3 Q. And you didn't bear any losses greater 4 than 25 percent? 5 A. I may have in the bottom of the 6 500-point drop in October of 1987. There may have 7 been some stocks. But in normal markets -- 8 Q. In normal markets. Put aside -- 9 A. That was a good -- I probably didn't. 10 I may have, but -- 11 Q. So, that was the maximum downside risk 12 you were willing to bear? 13 A. Unless there were some other situation. 14 Q. I've just shown you this exhibit which 15 shows almost a 50 percent potential downside risk 16 on a 100 basis point move. Right? 17 A. Right. 18 MR. VILLA: Objection. 19 Mischaracterizes the exhibit. We're talking about 20 a 2 billion-dollar portfolio. I mean, it just 21 mischaracterizes it to suggest that the 100 22 million-dollar loss is 50 percent of a 2 14141 1 billion-dollar mortgage-backed security portfolio 2 is playing games with numbers. I object. It's 3 misleading. 4 MR. GUIDO: Your Honor, I'll rephrase 5 the question. 6 Q. (BY MR. GUIDO) Here you have a 7 portfolio that is under its book value or its cost 8 value by $200 million. And it shows that if 9 interest rates go up 100 basis points, that the 10 loss will increase to 296 million plus. 11 What was done at USAT to determine what 12 the risk/reward ratio was that it would bear in 13 making its decisions about how to manage its 14 portfolio? 15 A. Well, I believe the point you're 16 getting at is that every portfolio manager, I 17 think -- I know would have, you know, sort of a 18 downside target. I suggested what mine might be 19 in some situations. I'm sure that Ms. Laurenson 20 had the same. I mean, this was a very, you know, 21 bright, intelligent lady. I'm sure she had -- 22 Q. Did the investment committee have a 14142 1 downside target? 2 A. That, I don't recall. 3 Q. Did they ever discuss a downside 4 target? 5 A. Well, they discussed it in terms of -- 6 you know, if -- in changes of interest rates. 7 That's the frame of reference. 8 Q. But they only talked about what the 9 impact would be. Did they ever talk about what 10 the tolerable loss would be? 11 A. That, I don't recall. 12 Q. Do you recall back after the -- 13 A. I -- okay. 14 Q. I'm sorry. 15 A. I would think that a tolerable loss 16 would have to come from the senior management that 17 said, "This should be our tolerable loss." 18 I don't know whether this was ever 19 introduced into the investment committee. 20 Q. Well -- I mean, the investment 21 committee minutes do not have anything in them 22 that we've seen -- 14143 1 A. I have not seen anything about 2 tolerable loss or a number where you should sell 3 out everything and walk away. No, I haven't seen 4 that. 5 Q. Now, after the rolldown -- remember 6 Smith Breeden was brought in to do an analysis of 7 the portfolio? 8 A. Yes. 9 Q. And did anyone talk about, "Well, maybe 10 this is something we shouldn't be in"? 11 A. I -- I don't know whether that came up. 12 It's -- 13 Q. Do you recall -- 14 A. I just don't remember whether that came 15 up. 16 Q. Do you recall Jenard Gross raising 17 questions about "Do we have any idea where we 18 stand"? 19 A. Right. I remember that memo, yes. 20 Q. And do you remember Jenard Gross saying 21 "Do we have any idea to know what we're doing"? 22 A. Yes. And I think that -- 14144 1 MR. VILLA: Objection. He's 2 characterizing documents. I don't think that's a 3 fair characterization of the document. Mr. Gross' 4 memo was in the spring of 1986 talking about "do 5 we have any idea about what the profits are or 6 what our real return is on this portfolio because 7 of the roll-down?" And now he's moved the time 8 period up three or four months and changed the 9 tone of it. 10 If he's going to talk about particular 11 documents or particular events, I think he ought 12 to show this witness. This witness is trying to 13 be too nice to him and remember three days of 14 testimony in ways that are, I think, misleading. 15 I object to that question. If he wants 16 to ask him about a document, let him show it to 17 him again. 18 THE COURT: Either show him the 19 document or rephrase the question. 20 Q. (BY MR. GUIDO) Do you recall 21 Mr. Gross periodically phrasing questions about 22 "Do we have any idea what we're doing"? 14145 1 A. If I can just repeat the sense I got, 2 that Mr. Gross raised questions in the spring. 3 That's why the senior management contains Smith 4 Breeden. That's why there was a subcommittee and 5 an investment committee that specialized in 6 mortgage-backed securities. And then accompanying 7 that, there was a thought of hiring somebody to 8 specialize, somebody who had a lot of experience. 9 And that culminated with the hiring of 10 Ms. Laurenson. And I -- that, to me, is -- that's 11 what I heard -- not that I was a party to all 12 these things. This is what I heard from the 13 spring of '86 to September, October when 14 Ms. Laurenson came aboard. That's what I heard 15 from -- 16 Q. Ms. Laurenson was aboard January 21st, 17 1987, was she not? 18 A. Yes, sir. 19 Q. And the portfolio, if you look at this 20 set of May minutes, shows that the portfolio lost 21 an additional $100 million between January 21st, 22 1987, and May 13th, 1987, does it not? 14146 1 MR. NICKENS: Your Honor, I object to 2 the question. The portfolio didn't lose another 3 $100 million. This is a sensitivity analysis, a 4 mark-to-market analysis of a portfolio that was 5 not a mark-to-market portfolio. The estimates of 6 loss in market value which were unrealized is what 7 Mr. Guido was talking to. It was not a loss. 8 THE COURT: It was an unrealized loss. 9 MR. NICKENS: It was an unrealized 10 loss, Your Honor. It was -- on a portfolio that 11 is not a mark-to-market portfolio. 12 MR. GUIDO: The question of whether or 13 not it was properly not mark-to-market, Your 14 Honor, is one of the questions in this case. 15 Q. (BY MR. GUIDO) But in either case, it 16 was an unrealized loss increase of $100 million. 17 Right? 18 A. Yes. 19 Q. And did anyone say, "Does Ms. Laurenson 20 have any idea what she's doing"? 21 A. As far as I know through this period, 22 Ms. Laurenson was very highly regarded and we 14147 1 thought -- I thought and obviously other people 2 thought that she was doing as best a job as could 3 be done. 4 Q. Despite the fact that her portfolio 5 showed an unrealized loss of 100 percent over the 6 previous unrealized loss? 7 A. She was still thought to be doing her 8 job. 9 Q. Let's go to A1443, which is the next 10 document. 11 A. Okay. 12 Q. Which is May 20th, 1987. 13 Do you see that? 14 A. Right. I have it. 15 Q. It says, "A meeting in the investment 16 committee was held on May 20, 1987. All members 17 of the committee were present. Mr. Gross stated 18 that Dr. Barry Munitz was no longer a member of 19 the investment committee." 20 Do you see that? 21 A. I see that. 22 Q. Did Dr. Barry Munitz resign from the 14148 1 investment committee? 2 A. I don't know. I assume -- from what it 3 says here, I assume he resigned. 4 Q. Do you know why he resigned? 5 A. I have no idea. No idea. 6 Q. All right. Now, you testified that 7 trading in the portfolio was authorized by the 8 investment committee in order to increase the 9 yield of the portfolio. 10 Do you recall that testimony? 11 A. That would -- yes. 12 Q. And what did you mean by "yield"? 13 A. Yield would be interest -- net interest 14 income, I believe. 15 Q. So, that would be the difference 16 between the interest rate earned on the assets and 17 the interest rate paid on the liabilities? 18 A. No. That would be the spread. I would 19 call that the spread. 20 Q. Well, to increase the yield, was the 21 goal to increase the spread? 22 A. Yes. Yes, sure. 14149 1 Q. Now, let's take a look at Tab 350. 2 It's A1409. 3 MR. GUIDO: It's A1419, Your Honor. 4 It's the November 25th, 1986, minutes of the 5 investment committee. 6 Q. (BY MR. GUIDO) I'd like to direct 7 your attention to the memorandum from Bruce 8 Williams which is at US3006 -- I'm sorry -- 9 US30051123, I think. It's at the very end of the 10 packet. It's 5112 and 5113 at the end of the 11 packet, the last two pages. 12 Do you see on the second page of the 13 document it shows that the arbitrage portfolio was 14 approximately $1,127,000,000? 15 A. Yes. I see that. 16 Q. Do you see that it shows that the net 17 spread was .99 percent on that portfolio? 18 A. I see that. 19 MR. NICKENS: Negative .99. 20 Q. (BY MR. GUIDO) Negative .99. Now, 21 I'd like you to take a look at -- in the binder -- 22 A1449. And I'd direct your attention to the fifth 14150 1 or sixth page from the end of that packet. It's 2 US3006019. 3 Now, looking at the November document, 4 the Bruce Williams document, does that indicate 5 that that was as of October of 1987? 6 A. No. '86. 7 Q. Excuse me. October of 1986. Excuse 8 me. 9 A. October '86, right. 10 Q. And the document that's in A1449 is a 11 performance report for USAT investment portfolio 12 of May 1987. 13 Do you see that? 14 A. That's right. 15 Q. And it shows that that portfolio at 16 that time was approximately $1,026,000,000. 17 Do you see that? 18 A. Right. I see that. 19 Q. Now, do you recall that we went through 20 a number of transactions in the investment 21 committee minutes between October and May of -- 22 October 1986 and May of 1987 which you 14151 1 characterized as trades that were designed to 2 enhance the yield on the portfolio. 3 Do you see that? 4 A. Right. 5 Q. Look at the net interest spread in the 6 May 1987 report. 7 What does that show? 8 A. It says minus 1.80 percent. 9 Q. Okay. That's almost twice the negative 10 yield that was in the Bruce Williams memo of 11 October 1987. Right? 12 A. Right. 13 Q. If USAT, through Sandy Laurenson, was 14 trading its portfolio to increase its yield, why 15 did the net interest spread decline from .99 -- 16 negative .99 percent to a negative 1.80 percent? 17 MR. NICKENS: Your Honor, I object to 18 the question in this regard. There's no showing 19 that we're talking about the same portfolio. I 20 mean, if he wants to compare the two numbers -- 21 which I believe is what he's done -- but there has 22 been no foundation for establishing that we're 14152 1 talking about the same thing. In fact, we know 2 that there were changes in that era or period. 3 But that's my objection. As long as we all 4 understand what we're looking at. We're looking 5 at two numbers from two different reports, perhaps 6 having some of the same securities, perhaps 7 different securities. 8 THE COURT: All right. 9 MR. GUIDO: With that understanding, 10 Your Honor, the record will become clear. I 11 believe it is clear from Sandy Laurenson's 12 testimony but Mr. Nickens thinks there's a problem 13 with that. He can clarify it on 14 cross-examination. 15 THE COURT: All right. I think you'd 16 better restate your question. 17 Q. (BY MR. GUIDO) My question is: When 18 you look at these two figures, it shows a decline 19 in the net interest spread from a negative .99 20 percent, a further decline, to minus 1.80 percent? 21 A. That's what it shows. It says up here 22 this one excludes the new MBS subsidiary. 14153 1 Q. Right. 2 A. From Bruce Williams, right. 3 Q. And will you assume for purposes of my 4 question that the Chart 6019, Bates stamped 6019, 5 A1449, excludes the United MBS portfolio? 6 A. I'm happy to go along with that. 7 Q. If the purpose of the transactions was 8 to enhance the yield, why was it that the spread 9 went from negative .99 percent to negative 1.80 10 percent? 11 A. I can't tell from here. Perhaps there 12 were other factors. 13 Q. What do you mean there were other 14 factors? 15 A. Well, I don't know. There may be -- 16 maybe some of their trades didn't work out. I 17 don't know. 18 Q. Or maybe gains were taken out of the 19 portfolio that reduced the yield. Right? 20 A. Well, reduced the spread. 21 Q. Reduced the spread. 22 A. That could have happened. 14154 1 Q. And gains were -- I mean, there were 2 sales out of that portfolio that generated gains, 3 were there not? 4 A. From time to time, we saw that. 5 Q. Now, was it those trades that reduced 6 this net interest spread? 7 A. Those -- I can't tell what -- I can't 8 tell whether it was those trades. They could have 9 had an effect. 10 Q. Did cost of funds change during that 11 period of time? 12 A. Well, we just said that interest rates 13 had moved up during this period of time. I don't 14 recall how much. 15 Q. Okay. And were there swaps on the 16 portfolio to fix the funding costs? 17 A. There were swaps on -- left over from 18 Joe's portfolio, I believe. 19 Q. And those swaps, USAT was the 20 fixed-rate payor. Right? 21 A. In those original swaps, USAT was the 22 fixed-rate payor. 14155 1 Q. And it received a variable interest 2 rate. Right? 3 A. That's correct. 4 Q. So, in a rising interest rate 5 environment, its funding costs would decline. 6 Right? 7 A. Well, it's -- its net funding cost -- 8 the variable rate would -- they would be paid 9 more, but their -- of course, their repo rates 10 would also go up. So, I don't know whether it was 11 a wash or not. 12 Q. Okay. It could have been a wash -- 13 A. But it would go up -- 14 Q. So that -- 15 A. -- on the variable part of the swap, 16 the variable rate part of the swap, if there was. 17 Q. So that the funding costs, if they were 18 hedged with the swaps, you would assume would stay 19 the same. Right? 20 A. On the swap part, the funding would 21 stay the same. The bigger transaction, of course, 22 would include, you know, the repos and the repo 14156 1 rate would be going up. 2 MR. VILLA: I couldn't hear the end of 3 the answer. 4 THE WITNESS: The repo rate would be 5 going up, too. 6 Q. (BY MR. GUIDO) Do you know what 7 happened to the yield on the mortgage-backed 8 securities in the portfolio between October and -- 9 of '86 and May of 1987? 10 A. The yield on the mortgage-backs? 11 Q. Uh-huh. 12 A. Well, in a rising rate environment, I 13 mean, the yield would -- the interest rate would 14 be the same. I mean, if you had -- 15 Q. You would assume that to be the case? 16 A. -- a Freddie Mac 9 in November and a 17 Freddie Mac 9 in May, it would be paying 9. 18 Q. Back to my question then of why did the 19 net interest spread go from the minus .99 percent 20 to a minus 1.80 percent? 21 A. It could have happened for a number of 22 reasons, and it could -- you know, if gains were 14157 1 taken -- 2 Q. Well, we talked -- 3 A. -- the funds would shrink. 4 Q. We talked about the funding costs. 5 Right? 6 A. Yeah. But we really didn't talk about 7 the repo rate going up that was carrying these. 8 Q. But the repo -- I mean, weren't the 9 swaps there -- 10 MR. NICKENS: Your Honor, does the 11 witness know about why this happened? 12 THE COURT: Well, if he doesn't, he can 13 say so. 14 MR. NICKENS: I'm afraid that he's 15 somehow reluctant to say that he doesn't know and 16 that we're, therefore, getting all these 17 questions. If we can just find out if he knows 18 the reasons why -- 19 THE WITNESS: I don't know the reasons. 20 You know, I -- I can speculate on some of the 21 reasons which we've talked about. I don't for 22 sure know the reasons. 14158 1 Q. (BY MR. GUIDO) But in a rising 2 interest rate environment which occurred during 3 this time period -- right? 4 A. Right. 5 Q. -- if swaps were on the portfolio to 6 protect against variable interest rates, the 7 interest rates, you would assume, are fixed. 8 Right? 9 A. Right. 10 Q. And the swaps were designed to protect 11 against rising interest rates, were they not? 12 A. Yes. You are right. 13 Q. So, it's fair to assume that this 14 wasn't caused by a rise in funding costs. Right? 15 MR. VILLA: Objection, Your Honor. The 16 funding cost is right on the next page. He didn't 17 show him the year-to-date funding cost for the 18 reverse repos on the next page. 19 Q. (BY MR. GUIDO) In fact, it's on that 20 page. It says "Reverse repo rate, 5.65." Right? 21 MR. VILLA: Excuse me. I'm at 22 US3006020, the year-to-date performance report in 14159 1 May of 1987 which shows a 36-million-dollar loss. 2 MR. GUIDO: Pardon? 3 MR. VILLA: 36-million-dollar 4 year-to-date loss on the funding costs. This is 5 pure speculation with this witness. He can show 6 him half a page, and I can show him the other half 7 of the page and we can just litter the record with 8 speculation. He doesn't know why a transaction -- 9 series of hundreds of transactions between mid-'86 10 and mid-'87 resulted in any particular spread 11 difference. I mean, he is such a cooperative 12 witness, it's painful; but the truth is it's just 13 speculation, Your Honor. And if he'd just ask him 14 whether he knows, we'd just get on with it. 15 MR. GUIDO: Your Honor, I think I'm 16 entitled to ask the witness with this exhibit. If 17 Mr. Villa has some questions that he wants to ask 18 the witness about this exhibit, he's perfectly 19 able to do so. 20 THE COURT: All right. What's your 21 question? 22 Q. (BY MR. GUIDO) The swaps were 14160 1 designed to fix the interest rate costs, were they 2 not? 3 A. Right. 4 Q. Were they effective in doing so? 5 A. I think they were effective in a rising 6 interest rate environment, yes. 7 Q. Did you have any discussions in the 8 middle of 1987 with anyone with regard to why the 9 net interest spread on the USAT investment 10 portfolio was becoming more negative than it had 11 been in October of 1986? 12 A. I don't recall specifically. I'm sure 13 in the investment committee meeting that question 14 came up. 15 Q. But you don't recall any discussions? 16 A. I can't recall them now, no. 17 Q. Now, these minutes periodically, when 18 they refer to the investment committee meeting, 19 they always say "a full discussion was had of 20 Sandy Laurenson's report." 21 Do you see that? 22 A. Right. 14161 1 Q. And so, if there was a discussion, it 2 would be reflected in those minutes, would it not? 3 A. I would think so. I would think there 4 probably were discussions outside the investment 5 committee. I would think there were these 6 discussions on interest rates and spreads in the 7 meeting. 8 Q. Did you ever have any discussions about 9 the inclusiveness of the investment committee 10 meeting minutes? 11 A. I don't recall any. They seem pretty 12 complete to me. 13 Q. Remember if I -- 14 A. Transactionwise. I mean, there were a 15 lot of transactions at each meeting. 16 Q. There were a number of transactions? 17 A. Yes. 18 Q. I'm just sticking to the 19 mortgage-backed security portfolio for these 20 purposes. 21 Do you remember we had some 22 questions -- I had questions for you. I showed 14162 1 you particular transactions, and I asked you 2 whether or not those transactions were done for 3 the purpose of generating accounting gains. 4 Do you recall those questions? 5 A. I recall those questions. 6 Q. And do you recall the objection was 7 there was nothing in the document which showed 8 what the purpose was. 9 Do you recall that? 10 A. Yes. 11 MR. VILLA: Objection. I believe that 12 was an observation by the Court. 13 MR. GUIDO: No. I think that it was an 14 objection that Mr. Keeton made repeatedly and the 15 witness, when asked specifically about the 16 document, agreed yes, it doesn't say what the 17 purposes were. 18 Q. (BY MR. GUIDO) And I think you 19 directed the Court and me to the trade tickets. 20 You said that that would be a good place to 21 look -- 22 A. Right, for the rationale. 14163 1 Q. -- for the rationale if it wasn't in 2 the investment committee minutes. Right? 3 A. Right. 4 Q. Was there any reason that the purposes 5 for the sales of the mortgage-backed securities 6 wasn't included in the investment committee 7 minutes? 8 A. Well, I think many of the purposes 9 were; but I don't think -- but generally, there 10 was no reason to exclude anything. I mean, it was 11 an open meeting. 12 Q. What do you mean, it was an open 13 meeting? 14 A. Well, anybody could, you know -- we 15 didn't -- open in the sense that nobody had 16 anything to hide. 17 Q. From each other? 18 A. Well, from the world. 19 Q. Well, did -- are you saying that the 20 minutes that you looked to that said -- didn't 21 include the purposes did include the purposes of 22 the sales? 14164 1 A. Sometimes they did. I don't know 2 whether every one had a rationale. 3 Q. We'll get to the -- back to that in a 4 minute. 5 A. Okay. 6 Q. You used the term that the portfolio -- 7 the sales were made out of the mortgage-backed 8 securities portfolio to generate gains from time 9 to time. 10 Do you recall using that phrase? 11 A. Yes. 12 Q. What do you mean by the phrase "from 13 time to time"? 14 A. I don't -- I think -- well, what I mean 15 is "from time to time" was when an opportunity 16 arose. They weren't done every day or every three 17 days. They just -- when an opportunity arose. 18 Q. Were they done to bolster quarterly 19 earnings? 20 A. That, I'm not aware of, Mr. Guido. 21 Q. Let's take a look at the performance 22 reports now. 14165 1 (Discussion held off the record.) 2 3 Q. (BY MR. GUIDO) Now, before I ask you 4 questions about the performance report, do you 5 recall that I had asked your counsel to show you 6 investment committee minutes subsequent to May of 7 1987 so that you could review those and I could 8 ask you some very brief questions so we could 9 speed up the process? 10 A. Yes, I recall that. 11 Q. And do you recall that that was between 12 the time period, I think, of May and October of 13 1987, those minutes? 14 A. I believe that period was included, 15 yes. 16 Q. And did it include any period after 17 October? 18 A. That, I can't remember. 19 Q. So, taking the period May through 20 October. And my question for you is: Did you see 21 any trades that were made during that time period 22 in order to increase the yield on the 14166 1 mortgage-backed security portfolio? 2 A. I don't recall specifically. 3 Q. You don't recall, or you didn't see 4 any? 5 A. I don't recall seeing any. 6 Q. If there were none -- 7 A. If there were none, yes. 8 Q. -- do you know why there were none? 9 A. No. That, you know, would be what 10 Ms. Laurenson thought. I don't -- I'm not into 11 her thinking. 12 Q. Well, I thought we could do this a 13 little more quickly. Take a look at that 14 investment committee minute sensitivity analysis 15 that I just showed you. It's A1442. That's 16 US3005766. 5766 is the Bates stamp number. 17 A. Yes, I have that again. 18 Q. Do you see the numbers under -- do you 19 see where it says DARTs and AMPs, treasury, and 20 investment? 21 Do you see those? 22 A. Yes, I see those three numbers. 14167 1 Q. And you see Arb 1, Arb 2, IOs, and POs? 2 A. Right. I see that. 3 Q. Those are all negative numbers, 4 correct? 5 A. Yes. 6 Q. The negative numbers indicate -- do 7 those indicate that at least those subcategories 8 of those portfolios in the aggregate do not have 9 any unrealized gains in them? 10 A. That's correct. 11 Q. Is that the reason why no value trades 12 were made after May of 1987? 13 A. It may have been. I don't know. 14 Q. Now let's go to the performance 15 reports. Let's start with -- I'm giving you two 16 volumes of performance reports to add to the stack 17 that I've given you. Let's start with the 18 Tab 50 -- Exhibit 5011, which is Tab 558. 19 And I want to direct your attention to 20 the -- the document says, the heading at the top, 21 "Gain on sale of investment securities, June 30, 22 1987." It's about halfway into the packet. 14168 1 MR. NICKENS: I'm assuming you meant 2 June 30th, 1986? 3 MR. GUIDO: June 30, 1986. Excuse me. 4 Q. (BY MR. GUIDO) Do you have the gain 5 on the sale? 6 A. DJ? 7 Q. Yeah. They are usually DJs. I'm not 8 sure if on this copy the "DJ" shows up. It's the 9 next page after the gain on sale of loans. 10 Do you see that page? 11 A. Yes, I do. 12 Q. Now, this has a number of entries under 13 the current month. 14 Do you see that? 15 A. Right. What does the first line say? 16 Q. Mine is cut off. I think that -- when 17 we get to the next one, we'll ascertain what it 18 is. Okay? 19 A. Okay. 20 Q. Now, looking down that column, you see 21 those various entries from Western Union to Turner 22 Broadcasting bonds? Do you see that? That first 14169 1 column? 2 A. Yes. I see that. 3 Q. Are those mostly high-yield bonds? 4 There is US treasury bills in it. 5 A. Treasury bills and GMAC -- 6 Q. What's GMAC? 7 A. That's probably General Motors 8 Acceptance. 9 Q. Okay. 10 A. Some kind of short-term papers. 11 Q. Corporate paper. Would that be fair to 12 call it? 13 A. Yes. High-grade. 14 Q. Now -- then it has -- see after Turner 15 Broadcasting, it says "Second quarter adjustment 16 of gains and sale of MBSs"? 17 Do you see that? 18 A. Right, I see that. 19 Q. Okay. It has 1,213,000,000. 20 Do you see that? 21 A. No. That's probably -- it was 1 22 million. 14170 1 Q. Yeah. The amount, 1,213,132,000? 2 A. Right. 3 Q. A lot of mortgage-backed securities. 4 Right? 5 A. A lot of sales. 6 Q. Now, Mr. Huebsch, this -- there was an 7 adjustment, okay, that was made in the accounting. 8 Okay? So that this could be -- this isn't 9 necessarily one month's transactions. I'm not 10 trying to get you to testify to that. Okay? So, 11 we're -- it has gain or loss, though, of $10 12 million. 13 Do you see that that are recorded 14 during that time period? 15 A. Right. I see that. 16 Q. Then it also has "Sales of MBS related 17 only to payoff, gains of 3,431,000." 18 Do you know what the "only payoff" 19 refers to? 20 A. No, I don't. I don't remember what 21 that is. 22 Q. Now, let me move ahead to July of 1986 14171 1 and look at Schedule DJ, which is Tab 559. 2 A. Yes, I have that. 3 Q. And what does that show with regard to 4 the amount of sales of mortgage-backed securities 5 for the month of July? 6 A. Well, I'm seeing a gain on a Fannie Mae 7 corporate, a gain on a Ginnie Mae, and a loss on a 8 Freddie Mac. 9 Q. So, a gain of 32,000 on the Fannie Mae 10 corporate bond? 11 A. Right. 12 Q. Gain of 771,000 on the Ginnie Maes? 13 A. Right. 14 Q. And a loss of 2,147,000 on the Freddie 15 Macs? 16 A. I see that. 17 Q. All right. Now, let's move to the next 18 page, 560, which is A5013, the same chart. 19 A. Yes, I have that. For August 31? 20 Q. August 31, 1986. And you see at the 21 top it says "United Financial Group, Inc., gain on 22 sales"? 14172 1 A. I see that. 2 Q. Does that help explain what this is 3 now? All right. Then it says "Freddie Mac." The 4 amount of sales, 80,548,000, for a gain of 5 315,000. 6 Do you see that? 7 A. I see that. 8 Q. Ginnie Mae, 5,868,000, for a gain of 9 329,000? 10 A. I see that. 11 Q. Fannie Maes, 86,106,000, for a gain of 12 181,000. 13 Do you see that? 14 A. I see that. 15 Q. Now I'd like to direct your attention 16 to -- and look at the bottom. You see the chart 17 at the bottom has totals under USAT for 18 year-to-date gains? 19 Do you see that? 20 A. I see that. 21 Q. It shows in June, gains of 9,302,000? 22 Now, this includes mortgage-backed securities and 14173 1 high-yield bonds and other corporate instruments. 2 Right, other investments? 3 A. So, this would be everything? 4 Q. This is everything. 5 A. Okay. 6 Q. And then I'm taking you through, just 7 isolating the portions of the mortgage-backed 8 securities and showing you the aggregate figure. 9 Okay? 10 A. I see. 11 Q. All right. And let's move now to 12 Tab 561, which is A5014. This is September 30, 13 1986. 14 A. I'm at the DJ page again? 15 Q. The DJ page again. 16 A. Yes, I have that. 17 Q. Okay. You see where it has Ginnie 18 Maes, Fannie Maes, and Freddie Macs? 19 A. Yes, I see is that. 20 Q. Okay. It shows sales of $21 million of 21 Ginnie Maes. 22 Do you see that? 14174 1 A. I see that. 2 Q. It shows sales of 264 million of Fannie 3 Maes. Right? 4 A. Uh-huh. (Witness nods head 5 affirmatively.) 6 Q. And it shows sales of $110 million of 7 Freddie Macs. Right? 8 A. I see that. 9 Q. For a total of about $400 million. 10 Do you see that? 11 A. On the proceeds, yes. 12 Q. Okay. The amount -- the dollar amount 13 of the sale, the proceeds from the sale. Right? 14 A. Right. 15 Q. Now, do you remember looking at the 16 Bruce Williams memorandum that I showed you that 17 was dated 11/24/87 from those investment committee 18 minutes and asked you what the size of the 19 portfolio was that was described there? Do you 20 recall that? 21 A. Yes. 22 Q. That was about a billion dollars. 14175 1 Right? A billion one, a billion two, right? 2 A. Right. 3 Q. So, this is $400 million of that 4 portfolio being sold. Right? 5 A. When was Bruce's -- when was that 6 report? 7 Q. It was effectively October of 1986. Do 8 you recall that? So, this is effectively a third 9 of the portfolio, right, if these figures are 10 correct? 11 A. Well, this 400 million is a third of a 12 billion one approximately. 13 Q. All right. Now, it shows a gain for 14 the Ginnie Maes, 1,675,000. Fannie Maes, 15 3,033,000. Freddie Macs, 2,848,000. 16 Do you see that? 17 A. Right. 18 Q. Okay. And that's -- for a total of 19 about $7.5 million gain? 20 A. Right. 21 Q. Which is half of the total gains 22 reported for that month. Right? 14176 1 A. These months being in here the months 2 when all the trades were cleared with Smith 3 Breeden. 4 Q. They may or may not have been. I don't 5 know. I mean -- 6 A. I just -- these may or may not have 7 been but, that was -- 8 Q. That was the time period that Smith 9 Breeden was still -- you believe Smith Breeden was 10 still retained? 11 A. I believe so, yes. 12 Q. And you -- 13 THE COURT: We'll take a short recess. 14 15 (Whereupon a short break was taken.) 16 17 THE COURT: Be seated, please. We'll 18 be back on the record. 19 MR. VILLA: Your Honor, with respect to 20 Exhibits A5024, A5025, A5026, A5027, and A5028, we 21 have no objections. They were tendered to us 22 during the break, and they were the performance 14177 1 reports we hadn't seen. 2 THE COURT: Received. 3 Q. (BY MR. GUIDO) This is the month of 4 September 30, 1986. 5 A. I have that DJ page, yes. 6 Q. Do you recall when we talked about the 7 high-yield bonds that we talked about you -- your 8 reference in the investment committee that if you 9 wanted to -- if they wanted to take gains out of 10 the high-yield bond portfolio that they should do 11 so quickly and that it was in relationship to a 12 discussion of making sales out of the high-yield 13 bond portfolio to generate gains toward quarter's 14 end? 15 Do you recall that? 16 A. I recall that. I would characterize it 17 slightly differently. 18 Q. Okay. How would you characterize it? 19 A. "If you're going to do this, why don't 20 we select a time when the market would forward us 21 a good price to get out and a good price to get 22 in?" I said, "Can't we let the market, you know, 14178 1 help us in making these decisions?" 2 MR. VILLA: Could you speak up, 3 Mr. Huebsch? Really, it's very difficult to hear. 4 THE WITNESS: Sorry. 5 Q. (BY MR. GUIDO) So, you recall the 6 contents where they asked you to -- 7 A. Yes. 8 Q. -- take gains for quarterly profits? 9 A. Yes. And I said, "Let's do it when 10 it's a good time in the market." 11 Q. And this was the quarter that's being 12 discussed in those minutes, isn't it? 13 A. I don't recall. Yes. No, I don't 14 think this is the quarter. 15 Q. It wasn't third quarter 1986? 16 A. No. I think I made that -- or Mr. Crow 17 wrote what he thought I said, I believe it was in 18 early November 86. 19 Q. Okay. So, you're referring to year 20 end, that quarter, the fourth quarter? 21 A. Well, I wasn't referring to any 22 quarter. I was saying "If you're going to do it 14179 1 in the first part of November" -- the market was 2 high and the opportunity -- "why don't we do it 3 now?" That's -- that was my only point. 4 Q. And was your point "don't wait till the 5 last minute," or is that the point you were 6 making? 7 A. That's also a point. Traders -- and if 8 you give a trader as much time as possible, he can 9 do a better -- the more time you give them, the 10 better job they can do for you. 11 Q. But it was in the context of making 12 sales in order to generate gains for quarter's 13 end? 14 A. Yeah. That was my contribution. 15 Q. Look at September 30th, 1986. 16 Does this refresh your recollection 17 that sales were made out of the mortgage-backed 18 securities portfolio from time to time in order to 19 generate quarterly gains? 20 A. Well, these sales were made toward the 21 end of the quarter; and there were profits on 22 them, yes. 14180 1 Q. Does it refresh your recollection that 2 sales were made out of the mortgage-backed 3 securities portfolio as well as the high-yield 4 bond portfolio at quarter's end to generate gains? 5 MR. VILLA: Objection. It's hard 6 enough -- we spent two days on the high-yield bond 7 portfolio. We don't need compound questions on 8 adding the two of them together. And it's quite 9 confusing to the witness. He inserts new words 10 every time, for quarterly gains from time to time, 11 mortgage-backed securities, and high-yield bonds. 12 You know, it gets to be a very compound question. 13 I object to the question. I think it ought to be 14 related to mortgage-backed securities so as not to 15 confuse this witness. 16 THE COURT: Which one do you want him 17 to answer? 18 Q. (BY MR. GUIDO) Let's take the 19 mortgage-backed securities. 20 Does this refresh your recollection 21 that sales were made out of the mortgage-backed 22 securities portfolio in order to generate gains at 14181 1 quarter's end? 2 A. So far as this quarter goes, these 3 numbers refresh my mind that gains were taken. 4 Q. Okay. Now, let's go to October 1986. 5 And I'd direct your -- that's A5015, which is 6 looking at DJ. 7 A. DJ again? 8 Q. Yes. "Gain on sale of investment 9 securities." 10 A. I have that. 11 Q. Do you see that? Do you see where it 12 says for the current month Freddie Macs, $32 13 million for a 97,000-dollar gain. Right? 14 A. Right. 15 Q. Then you look at the aggregate 16 year-to-date. It shows 225,000. 17 Do you see that? 18 A. Yes. 19 Q. Do you recall -- the September figure, 20 do you see that, the 14,507,000, that 7,500,000 of 21 that was mortgage-backed securities? 22 A. 14,504? 14182 1 Q. Yeah. 14,504. 2 A. Yes, I see that. 3 Q. Remember I asked you to total up the 4 Ginnie Mae, Freddie Macs, and Fannie Maes and that 5 came to about a 7.5-million-dollar profit? 6 A. I recall that. 7 Q. Does this refresh your recollection 8 that gains were taken out of the mortgage-backed 9 securities portfolio in order to generate profits 10 at quarter's end? 11 A. Now, you're talking about which 12 quarter? 13 Q. Well, quarter's end. I mean, USAT was 14 on a calendar year -- 15 A. Well, we just did September. We're in 16 October. 17 Q. Right. 18 A. And we're just barely -- 19 Q. They dropped down. Right? 20 A. They did drop down. 21 Q. My question was: Does that refresh 22 your recollection that gains were taken out of the 14183 1 mortgage-backed securities portfolio to bolster 2 quarterly profits? 3 A. They were from time to time. Other 4 gains resulted in the portfolio -- 5 Q. Let's look at -- 6 MR. VILLA: Excuse me. I can't hear 7 his answers. 8 A. Other gains were taken during the 9 rolldown of this in the early part. 10 Q. (BY MR. GUIDO) Put the rolldown 11 aside. I'm just talking about this time period 12 going forward. 13 Were sales made out of the 14 mortgage-backed securities portfolio in order to 15 generate quarterly gains? 16 A. This would indicate that there were 17 more gains taken in September and June than there 18 were in October, for example. 19 Q. Does that indicate to you -- does it 20 refresh your recollection that they were done so 21 for that purpose? 22 A. I can't tell whether it's the sole 14184 1 purpose or not. 2 Q. Well, let's go to November. Tab 563, 3 which is A5016. 4 A. I have that here. 5 Q. I want to direct your attention to Page 6 4 of the document. 7 A. All right. 8 Q. Do you see where it says net worth? 9 The amount, 233 million? 10 A. I see that down on the bottom. 11 Q. Within guidelines by 6 million? 12 A. I see that, yes. 13 Q. I want to direct your attention to Page 14 2. Do you see the net interest income? 15 A. Net interest income, yes. 16 Q. That shows a negative figure for 17 October of 1.3 million? 18 A. Yes, I see that. 19 Q. And in November, a negative figure of 20 .8 million. 21 Do you see that? 22 A. I see that. 14185 1 Q. Take a look at the first page. Do you 2 see where it says "November, actual"? 3 A. Hold it. "November, actual," yes. 4 I've got that. 5 Q. Look at the figures there. Do you see 6 the net interest income of .8 -- a negative .8 7 percent? 8 A. I see that. That's a dollar figure. 9 Q. Dollars. I'm sorry. 10 A. Yes. 11 Q. It's $800,000. Right? 12 A. Right. 13 Q. Then total non-interest income, do you 14 see that, of $10 million? 15 A. Negative, yes. 16 Q. Which includes a loss in the equity 17 arbitrage of $20 million. 18 Do you see that? 19 A. I see that. 20 Q. Okay. And a gain on sale of securities 21 of 8.9? 22 A. Yes, I see that. 14186 1 Q. Look at the footnote down at the 2 bottom. It says "Net of provision of losses of 3 15.5 million year-to-date"? 4 A. Right. I see that. 5 Q. Now let's take a look at Schedule DJ. 6 It says, "Gain on sale of investment securities." 7 Do you see the Freddie Mac PCs? 8 A. I see that. 9 Q. That's $509 million. Do you see that? 10 A. Right. 11 Q. And Fannie Mae PCs of $47 million? 12 A. I see that. 13 Q. The combination of the two is about 14 $7.5 million? 15 A. That would be right. 16 Q. Okay. And look at the bottom. The 17 total for November of gains is 8.86 million. 18 Do you see that? 19 A. I see that. 20 Q. Of which 7.5 million is mortgage-backed 21 securities. Right? 22 A. Right. 14187 1 Q. USAT had not recognized the gains on 2 those mortgage-backed securities and it was only 3 within its guidelines by $6 million at the end of 4 the year. 5 What would have happened if it hadn't 6 recognized those gains. 7 MR. VILLA: Objection, Your Honor. If 8 this is an issue of mathematics, it's one thing. 9 If it's an issue of what would have happened, it 10 depends on whether they would have sold some other 11 asset or sold the branches or sold their building. 12 It's total speculation. If he wants him to do a 13 mathematical calculation, he can ask him to do 14 that; but this is total speculation as to what 15 would have happened since they had plenty of 16 assets to sell. 17 MR. GUIDO: Excuse me, Your Honor. I 18 meant to make -- to ask him a mathematical 19 calculation. I'm sorry I phrased it 20 inappropriately. 21 THE COURT: All right. 22 Q. (BY MR. GUIDO) If you take the $7.5 14188 1 million out of the gain of $8.86 million in 2 November, is the mathematical result that you 3 would not be within the guidelines by $6 million, 4 that you would be below the net worth requirements 5 by $1.5 million? 6 A. Yes. 7 Q. Does that refresh your recollection 8 that sales were made out of the high-yield bond 9 portfolios to generate gains at quarter's end? 10 A. November -- 11 MR. NICKENS: We're back to high-yield 12 bonds? 13 MR. GUIDO: I'm sorry. 14 Q. (BY MR. GUIDO) Mortgage-backed 15 securities. 16 A. This is not quarter's end. 17 Q. I understand that. 18 A. Well, November. 19 Q. Well, let me rephrase the question. 20 Does this refresh your recollection 21 that sales were made out of the mortgage-backed 22 securities portfolio in order to generate gains to 14189 1 bolster net worth? 2 A. From time to time, gains were taken. 3 Q. To bolster net worth? 4 A. You know, I really -- I don't know 5 about net worth. I mean, I know what net worth 6 is; but in this -- it's an accounting/legal kind 7 of concept in a savings and loan. And I'm not -- 8 and I never was -- all that familiar with it. I 9 mean, I cannot disagree with your arithmetic; but 10 the concept of net worth, I'm sure, is phrase of 11 art. 12 Q. Do you know what the term "capital" 13 means -- 14 A. Yes. 15 Q. -- in an institution? 16 A. I know what the term "capital" means in 17 the general sense, yes. 18 Q. Okay. Were sales made out of the 19 mortgage-backed securities portfolio to generate 20 gains to bolster capital at USAT? 21 A. Well, they would do that, gains would. 22 Q. Were they done for that purpose? 14190 1 A. I would presume so. I don't know for 2 sure. I assume so. 3 Q. Based on your experience at USAT, do 4 you believe that that's to be the case? 5 A. Were gains -- all gains would bolster 6 capital, yes. 7 Q. Okay. And -- 8 A. And there were gains taken, yes. 9 Q. And they ended up bolstering capital? 10 A. Yes, they would. 11 Q. And was -- let's go to A5017, the 12 performance report of December of 1986. 13 Do you see the column under "current 14 month," Fannie Maes, 172,499,000 were sold for a 15 profit of 3,555,000? 16 Do you see that? 17 A. I see that. 18 Q. And Freddie Macs were sold, 613,755,000 19 were sold for a gain of 12,543,000? 20 A. I see that. 21 Q. And Ginnie Maes were sold, $48 million 22 worth of Ginnie Maes were sold for a gain of 14191 1 150,000. 2 Do you see that? 3 A. I see that. 4 Q. And does that show that more than 5 $8.2 million worth of mortgage-backed securities 6 were sold in the month of December 1986? 7 MR. SCHWARTZ: What number? 8 MR. GUIDO: 8 -- I'm sorry. 9 $820 million worth of mortgage-backed securities 10 were sold. 11 A. These three figures would indicate 12 that, yes. 13 Q. (BY MR. GUIDO) And does that show 14 that there is a gain of more than $16 million on 15 those? 16 A. Yes. 16 plus a little bit, yes. 17 Q. Okay. And look at December down at the 18 bottom under "year-to-date." It shows 19 14.498 million. 20 Do you see that? 21 A. I see that, yes. 22 Q. And was the majority or all of that 14192 1 14.498, based on this chart, attributable to the 2 gains in the mortgage-backed securities? 3 A. This table would indicate that, yes. 4 Q. Did you have any discussions with 5 anyone at year end 1986 that gains were being 6 taken out of the mortgage-backed securities 7 portfolio in order to generate gains to bolster 8 capital? 9 A. No. I -- I don't recall them 10 specifically. I'm sure they -- the investment 11 committee -- 12 Q. Were -- 13 MR. VILLA: I'm sorry. I didn't hear 14 his answer. 15 A. I don't know whether the investment 16 committee looked at them. 17 Q. (BY MR. GUIDO) Remember the 18 investment committee discussion that we talked 19 about in which you earlier testified that you 20 said, "Look, if we're going to take -- make sales 21 out of this portfolio to generate gains, let's 22 make sure that we don't do it in an untimely way"? 14193 1 Do you recall that? 2 A. I didn't use the word "untimely." I 3 said it would be a good time in the market. The 4 market's high right now. It would be a good time 5 to do it. Then I was talking about the beginning 6 of November period. 7 Q. Okay. Now we just looked at two 8 performance reports. One showed $7.5 million in 9 November, and the other one showed $16 million. 10 A. I think November was higher than 7.5. 11 Was it 8.8? 12 Q. It was 8.8 counting the high-yield 13 bonds. Remember that? 14 A. I stand corrected. 15 Q. There was $22 million worth of gains? 16 A. For both. 17 Q. November and December. 18 A. Yes. 19 Q. And you recall that we just looked at 20 it. It was somewhere around $800 million worth of 21 mortgage-backed securities were sold in December? 22 A. I saw that. 14194 1 Q. And it was 400 plus of mortgage-backed 2 securities that were sold in November? 3 A. I saw that, yes. 4 Q. Those two figures combined are as great 5 as the figure that Bruce Williams had in his 6 memorandum of what the mortgage-backed security 7 arbitrage portfolio was at USAT, are they not? 8 A. You know, I'm -- I take it you're going 9 back to that figure around 1.1 billion from Bruce 10 Williams. I recall that number. 11 Q. Okay. Now, assuming that both of those 12 are talking about the same mortgage-backed 13 securities, that's 100 percent turnover in that 14 portfolio in two months, is it not? 15 A. Yes. 16 Q. Did you consider that turnover to be 17 sizable? 18 A. You know, I just -- I don't know 19 whether it is sizable or not. We -- on the equity 20 side, I believe we turned over a portfolio about 21 four times a year, three or four times. 22 Q. The equity arbitrage portfolio? 14195 1 A. Right. 2 Q. Which was a portfolio that was intended 3 to be turned over. Right? 4 A. Yes. 5 Q. And it was a portfolio that was 6 marked-to-market because of that turnover. Right? 7 A. It was. 8 Q. Now, I'd like to direct your attention 9 to investment committee minutes that -- A1450. 10 Do you have A1450 in front of you? 11 A. Yes, I do. 12 Q. Okay. That's the minutes of July 8th, 13 1987. 14 Do you see that? 15 A. Yes, I have that. 16 Q. Now, this is after the interest rates 17 in 1987 had risen about 100 basis points, is it 18 not? 19 MR. NICKENS: Your Honor, he's already 20 asked him that question. He said that he 21 remembered that it rose, but he didn't know how 22 much. It's repetitive, and it's just another 14196 1 cycle of the same thing. I object that it's 2 repetitive. 3 THE COURT: All right. Sustained. 4 Q. (BY MR. GUIDO) Let me show you 5 Exhibit A11012 and direct your attention to Table 6 4.2.2. And look at the -- 7 A. These are -- 8 9 (Discussion held off the record.) 10 11 Q. (BY MR. GUIDO) We're looking at 12 4.2.2, which are zeros. Right? They are not 13 mortgage-backs where -- 14 A. The moment will be a little more 15 exaggerated both ways. 16 Q. As long as we understand that. Right? 17 Now, will you tell me -- when you look 18 at January of 1987, December 31, 1987, under the 19 10-year -- 20 MR. VILLA: '87 or '86? 21 MR. GUIDO: Oh, I'm sorry. '86. 22 Q. (BY MR. GUIDO) And then what does it 14197 1 do in March of '87? 2 A. It goes up about 9 basis points. 3 Q. Okay. And then June 30, 1987, what 4 does it do? 5 A. It hops up, oh, 90 -- a little less 6 than 80. 7 Q. Okay. Now, do you remember when we 8 looked at the May, the 1449, the sensitivity 9 chart, the May -- 10 A. I recall that. Yes, I recall that. 11 Q. And that showed that the assets had in 12 the aggregate a net negative value. 13 Do you recall that? 14 A. I recall that. 15 Q. Now, turn to the second page. 16 A. Of the investment committee? 17 Q. Of the investment committee minutes of 18 July 8th, 1987. 19 MR. NICKENS: For the record, Your 20 Honor, this record is titled the "preliminary 21 minutes of the investment committee." 22 Q. (BY MR. GUIDO) On Page 1 of 2 under 14198 1 "mortgage portfolio," it says, "Ms. Laurenson 2 reviewed her sale of 1,000 bond futures contracts 3 over the past week. The position is a hedge for 4 commercial and whole loans and was placed at an 5 average long bond yield of 8.39 percent." 6 Do you see that? 7 A. I see that. 8 Q. And let's go to A1451, which is the 9 next document in the binder. 10 It says, "Ms. Laurenson reviewed her 11 sale of 1,000 bond futures contracts over the past 12 week. The position is a hedge for commercial and 13 whole loans and was placed at an average long bond 14 yield of 8.39 percent." It says, "Ms. Laurenson 15 will inform a subcommittee of the committee of 16 plans to sell the remaining 1,000 (sic) contracts 17 authorized by the committee." 18 MR. VILLA: I believe it says 2,000 19 contracts. 20 MR. GUIDO: 2,000 contracts. 21 Q. (BY MR. GUIDO) Do you see that? 22 A. I see that. 14199 1 Q. Were those sales made to realize gains 2 that were in those futures contracts portfolios? 3 A. Well, it says the purpose was to hedge. 4 Q. It says that their initial purchase 5 was -- purpose was to hedge, does it not? 6 A. That's what it says in this paragraph, 7 right. 8 Q. Was to sell them a hedge, or was their 9 initial purpose a hedge in that paragraph? Can 10 you tell from that paragraph? 11 A. Well, I'm reading it that the position 12 is a hedge for commercial and whole loans. 13 Q. Pardon? 14 A. It was a hedge. 15 Q. It was initially a hedge for whole 16 loans? 17 A. I don't know initially. 18 Q. I mean, that specific transaction was 19 for the purpose of creating a hedge. 20 Is that your reading? 21 A. That's what I'm reading. 22 THE COURT: Mr. Guido, the last 14200 1 sentence refers to selling futures contracts, and 2 I think that means opening contract. Sounds to me 3 like they contemplated 3,000 positions. I don't 4 think the last sentence refers to closing 5 positions rather than open. You sell a futures 6 contract. If it's short, you're opening a 7 position. 8 MR. GUIDO: Your Honor, I wasn't 9 connecting the two transactions together. I think 10 that those are two separate transactions. In the 11 first sentence, she's discussing the sale of 12 futures contracts over the past week. And then 13 she's informing the subcommittee of the committee 14 of plans to sell the remaining 2,000 contracts. 15 It sounds to me like, Your Honor, that 16 these were positions that were already on and 17 these were closeouts of the position. But, you 18 know -- 19 THE COURT: It doesn't sound that way 20 to me. 21 MR. GUIDO: Whether it's a different 22 interpretation of the document -- 14201 1 MR. VILLA: Your Honor, I'd like to put 2 on the record that Mr. Guido's typical question is 3 "did it refresh your recollection," which it never 4 does, has not been asked here. He's simply asking 5 him to read a bunch of documents and the witness 6 is saying, "Yeah, I read it this way. I read it 7 that way." We can all read it, but the point of 8 the witness is does he recall anything or does 9 this bring to mind anything. I think that -- I 10 object because it's mere speculation on the part 11 of the witness as to what this means. 12 MR. GUIDO: Your Honor, I am asking 13 this witness to review a number of documents so I 14 can speed up the proceeding at Mr. Villa's request 15 and the Court's direction. I was saving the 16 question until I finished directing him to a 17 number of transactions. I thought that that would 18 be one way to save time. I tried to do the same 19 thing with the performance reports, and Mr. Villa 20 indicated that that was objectionable to him so I 21 had to go walk through each of the transactions. 22 I understand it is time-consuming to proceed in 14202 1 this way, but I don't know any other way to do it 2 in light of the witness' inability to recall. 3 THE COURT: All right. What's your 4 question now? 5 MR. GUIDO: I'm going to show him some 6 additional transactions, Your Honor, and I'm going 7 to ask him some questions. 8 Q. (BY MR. GUIDO) I'd like to direct 9 your attention now to A1460, which are the minutes 10 of September 2nd, 1987. 11 Do you have those in front of you? 12 A. Yes. I have them here. 13 Q. Okay. Now, I'd like to direct your 14 attention to the sixth paragraph which says, 15 "Ms. Laurenson then discussed proposed 16 recommendations for the portfolio. Her 17 recommendations were included in her report. 18 After full discussion, the committee approved 19 Recommendations 1, 2, and 4 and decided to defer 20 deciding on Recommendation Nos. 3 and 5 until 21 further information could be provided." 22 Do you see that? 14203 1 A. I see that. 2 Q. I want to direct your attention to 3 US3006348. It says "recommendations for upcoming 4 week." 5 Do you see that? 6 A. Yes. 7 Q. Okay. See under the line, it has 8 "30-year bonds"? Do you see that entry, that 9 line? 10 A. Yes, I see that. 11 Q. Then it has five bullet points, each of 12 which has a number next to it. 13 Do you see those? 14 A. Sort of, yes. It's a little -- but 15 there are five. 16 Q. They are numbered 1, 2, 3, 4, and 5. 17 A. Okay. 18 Q. And it says on the first page, 19 "Recommendations 1, 2, and 4 were approved." Look 20 at No. 2. "Remove bond futures hedge position for 21 a total gain of $15,368,750." 22 Do you see that? 14204 1 A. I see that. 2 Q. Now I want to jump ahead now to another 3 document, which is the September 30th minutes 4 which is at A1464. 5 A. I have that. 6 Q. Okay. I want to direct your attention 7 to Bates stamp US3006485. 8 A. Yes, I have that. 9 Q. That shows -- see under "MBS activity," 10 9/17 through 9/25? 11 A. 9/23, yes, I see that. 12 Q. That shows activity in futures and 13 caps, does it not? 14 A. Right, yes, it does. 15 Q. Does that show any sales being made 16 that generated gains? 17 A. Well, on the first one, on the caps? 18 Q. Uh-huh, on the caps. 19 A. There's some scroll here. I don't know 20 whether it's -- is it taking away the parens that 21 would indicate it a negative and making it a 22 positive? Is it? 14205 1 Q. I mean, I don't know. I mean, that's 2 what I'm asking you. 3 Do you know? 4 A. I don't know. That's unclear to me. 5 Q. Okay. Then the forward 9 and a half 6 caps, do you see that? 7 A. I see that. 8 Q. That indicates a purchase of 100. 9 Right? How do you generate a loss by the purchase 10 of a contract? 11 A. I don't know. 12 Q. Okay. Let's move on. I'm just trying 13 to go through these transactions, and I'm going to 14 ask you a question. 15 A. I'm having a lot of trouble with that, 16 too. 17 Q. Okay. A1465, which is October 8. 18 A. Are we into a new book? 19 MR. RINALDI: It's a loose document. 20 Q. (BY MR. GUIDO) Look at Exhibit A1465. 21 A. I have it here. 22 Q. And look at the sixth paragraph. It 14206 1 says, "Ms. Sandy Laurenson then reported on the 2 mortgage-backed security. Her report was ordered 3 attached to the minutes of the meeting. She 4 explained the plans for the next week. After full 5 discussion, Nos. 1 and 2 were approved by the 6 committee and it was decided that No. 3 would be 7 deferred for further study." 8 Now, I want to direct your attention to 9 the very last page of the exhibit, "Plans for next 10 week." 11 A. Yes, I have that. 12 Q. Can you tell us what Item No. 1 refers 13 to? 14 A. I can't tell you what that refers to. 15 Q. Can you tell us what Item No. 2 refers 16 to? 17 A. (Witness reviews the document.) She's 18 buying T note futures options. 19 Q. Does it indicate anything -- 20 A. The hedges something here -- I can't -- 21 there are handwritten notes here that I can't -- I 22 can't read. 14207 1 Q. Okay. Now, we looked at a number of 2 transactions and futures or caps contracts. Now I 3 want to show you Tab 304 which is Exhibit 5047. 4 It's a packet of trade tickets. 5 A. (Witness reviews the document.) 6 Q. These are a number of trade tickets for 7 the sale of caps. 8 Do you see that? 9 A. I see that. 10 Q. And they are all -- the first -- excuse 11 me. The transactions that are dated 11/2/1987 are 12 all sell tickets, are they not? 13 A. Yes, I see that. 14 Q. And there's one in there for 3/23/1987. 15 Do you see that one in the middle of 16 the packet, which is a buy? 17 A. Okay. 18 Q. I want you to ignore that one page. 19 Okay? 20 A. Okay. 21 Q. Let's just look at the sell -- the 22 settlement dates of 11/2/87 on the other 14208 1 transactions. It says -- under the trader, it has 2 a person's name. 3 Do you know whose signature that is? 4 A. Yeah. I believe it's Falconi. 5 Q. Who's he? 6 A. He was Sandy's assistant. 7 Q. Okay. Then it has "approved" 8 underneath it. 9 Do you see that? 10 A. Yes. 11 Q. And whose signature is that? 12 A. That is mine. 13 Q. What does "PC" mean over the 14 "approved"? Do you know? 15 A. That, I don't know. No, I don't know. 16 Q. So, you approved these transactions to 17 sell these caps? 18 A. I don't remember signing this. 19 Obviously, I did. It was not my custom to sign 20 these tickets. It must have been because Sandy or 21 Mike Crow weren't around. That's the only time I 22 would have signed these tickets or any tickets. 14209 1 Q. Do these tickets anywhere explain what 2 the purpose of the transaction was? 3 A. I don't see it here. 4 Q. Was the purpose -- 5 A. It should have, but I don't see it. 6 Q. Okay. Was the purpose of the sales out 7 of the cap portfolio and the futures portfolios 8 that we've seen made to generate profits to 9 bolster capital? 10 A. That, I cannot answer. Some of them 11 were perhaps, and some of them were not. 12 Q. But you can't tell by what you saw 13 today? 14 A. I can't tell. 15 Q. Now, I'd like to direct your attention 16 to another document which is A10716, which is at 17 Tab 897. 18 This is a memo from Mike Crow to Bruce 19 Williams dated January 12th, 1987. 20 A. I see that. 21 Q. And it says "Attached memo from 22 Peat Marwick on investment versus trading." I 14210 1 want to direct your attention to the very last 2 page of the document, Peat Marwick's 3 recommendation. "In order to document the 4 propriety of the accounting treatment for the junk 5 bond and mortgage-backed securities portfolio, we 6 would recommend, bullet, a clear statement of 7 strategy and intent for both the investment and 8 trading portfolios be developed. Such statement 9 should be retrospective for activity which has 10 occurred to date and incorporate those concerns as 11 would be appropriate as presented above and 12 prospective for future activity." 13 Then it goes on, "Documentation 14 relating to purchases should be expanded such that 15 it includes a statement as to the intent of 16 management in regards to the security purchased 17 and why the purchase is consistent with the 18 association's strategy." 19 Then it goes on, "Documentation 20 relating to sales resulting in significant gains 21 should be expanded such that it includes a 22 statement as to the intent and strategy supporting 14211 1 the sale." 2 Do you see that? 3 A. I see that. 4 Q. Do the trade tickets that we just 5 looked at do that? 6 A. They did not. 7 Q. Now, I'd like to move to another 8 subject matter and that's back to the equity 9 arbitrage transactions. And I'd like to direct 10 your attention to Exhibit T4620, which is at Tab 11 120. 12 Have you ever seen this before, this 13 document? 14 A. No, I haven't. 15 Q. Look at the second page of the 16 document. It has "companies that United Savings 17 of Texas would be interested in reviewing for 18 possible investment opportunities." 19 Do you see that? 20 A. I see that, yes. 21 Q. Do you see it says Castle & Cooke? 22 A. Yes, I see that. 14212 1 Q. Did you ever review Castle & Cooke to 2 ascertain whether or not it was a desirable 3 investment for USAT? 4 A. No, I did not. 5 Q. Did you ever do so for MAXXAM or 6 MAXXAM-related companies? 7 A. No, I didn't. 8 Q. Did you have any role in the 9 preparation of this list? 10 A. No, I didn't have a role. 11 Q. Do you recall the Castle & Cooke 12 transaction at MAXXAM? 13 A. Yes, I do recall it. 14 Q. What do you recall about it? 15 A. Well, I believe -- I believe that some 16 of the companies in the MAXXAM-United Savings 17 complex bought shares in Castle & Cooke. I 18 believe it was over 5 percent. 19 Q. Pardon? 20 A. I believe it was over 5 percent. 21 Q. Do you recall there was litigation? 22 A. Yes, I recall there was litigation. 14213 1 Q. And that USAT had initially tried to 2 take a controlling interest in Castle & Cooke 3 along with MAXXAM? 4 A. Well, I don't know whether it's 5 controlling in parentheses, but they took a large 6 position. 7 Q. And do you know whether or not it was 8 in an effort to take a controlling interest in 9 Castle & Cooke? 10 A. I don't recall, you know, the purpose. 11 Q. Okay. But you do recall that there was 12 litigation? 13 A. Yes, I do. 14 Q. And do you recall that there was 15 regulatory concern about USAT's involvement in 16 such activity? 17 A. I heard something about that. I can't 18 tell you exactly what. 19 Q. And do you recall, because of that, 20 there had been limitations placed on your equity 21 arbitrage activities? 22 A. Well, Castle & Cooke didn't have 14214 1 anything to do with equity arbitrage. There was 2 no connection. 3 Q. What do you mean there was no 4 connection? 5 A. Well, it was not in the equity arb 6 portfolio at any time. 7 Q. When was the equity arbitrage portfolio 8 at USAT first created? 9 A. I'm thinking in the middle of 1985. 10 Q. And is that the portfolio you said that 11 you needed -- you had the authority to make 12 purchases and then report to the investment 13 committee afterwards? 14 A. Right. It was quite honestly a trading 15 portfolio, not an investment kind of portfolio. 16 Q. And is that the portfolio you testified 17 that you did that included investments by 18 Federated in the portfolio and MAXXAM into the 19 portfolio? 20 A. Federated and MAXXAM, who also had 21 similar portfolios, right, that were dedicated to 22 equity risk arbitrage. 14215 1 Q. And that you managed those three 2 portfolios as a unit; is that correct? 3 A. Well, not as a unit. There may have 4 been actually more than three. They were -- they 5 generally bought the same stocks, but they 6 weren't. 7 Q. Did they -- 8 A. Excuse me. Their portfolios would look 9 similar. They might not be exactly alike, but 10 they would be similar. 11 Q. So, sometimes you purchased a security 12 for one portfolio and not the others? 13 A. Generally not. Generally not. 14 Q. But at times, you did? 15 A. Yes. It just might happen by 16 happenstance that, for example, if we were buying 17 one stock and Federated Development for some 18 reason didn't have any money at that time to 19 invest, they might not get any of that stock. You 20 know, different things could -- different things 21 could come up so that the portfolios weren't 22 exactly alike. They were similar. 14216 1 Q. Now, when you managed the portfolio, 2 the Federated and MAXXAM portfolio -- 3 A. Yes. 4 Q. -- excluding UFG and USAT -- 5 A. Right. 6 Q. -- what was the approval process there? 7 A. The approval process was to speak to 8 Charles Hurwitz or Barry Munitz, people like that. 9 Q. Prior to the transaction? 10 A. Sometimes, but usually not. They had 11 the same, you know, single focus that I told you 12 about for USAT. So, within that single focus, I 13 was allowed to operate. But if I had a problem or 14 something happened -- 15 MR. VILLA: I can't hear you. 16 A. If I had a problem or something 17 happened that I felt I needed guidance on, I would 18 speak to Charles Hurwitz or Barry Munitz. 19 Q. (BY MR. GUIDO) When they were 20 available, was it your practice to notify them 21 before you put the transactions on on behalf of 22 Federated and MAXXAM? 14217 1 A. I didn't usually. In the usual case, I 2 didn't have to preapprove them. 3 Q. All right. Now, when did the so-called 4 trading room get created? 5 A. I'm thinking sometime in 1985. Maybe 6 the latter part. 7 MR. VILLA: I'm sorry. I couldn't hear 8 you. 9 A. Maybe the latter part of 1985. I don't 10 recall. 11 Q. (BY MR. GUIDO) Where was that 12 located, that building? 13 A. That was located on Westheimer and 14 Bering Drive. 15 Q. Okay. And was that the 22nd floor of 16 the building? 17 A. I don't recall. Roughly in the 20s. 18 Q. Who were housed on that floor, that 19 suite that you were in in the trading room center? 20 A. The trading room was there with 21 Federated Development and some -- some of the same 22 people at Federated Development were involved with 14218 1 MAXXAM. 2 Q. Who were some of the people? 3 A. Well, they would be -- Charles Hurwitz 4 had his office there and Barry Munitz had his 5 office there. Jim Pollen had his office there. 6 Q. Who was Jim Pollen? 7 A. He worked for Federated as assistant to 8 Mr. Hurwitz. 9 Q. Now, when Joe Phillips was employed, 10 was he located in that same suite or floor? 11 A. I don't know -- initially, I don't 12 know. He had -- I think, at one time, he had two 13 offices out at the old headquarters of United 14 Savings out on Harwin, plus he had an office or a 15 trading space. So, he went back and forth for a 16 while. Eventually, he ended up -- 17 Q. What about Sandy Laurenson? 18 A. Well, by that time, it was -- the 19 trading room was well established at Westheimer 20 and Bering, and she, when she arrived, moved right 21 into the trading room. There was a place set up. 22 Q. What about Mr. Dorsey? 14219 1 A. Mr. Dorsey was in the general area. 2 The junk bond people -- the market for junk bonds 3 was negotiated largely in the sizes we were 4 talking about. So, most of the junk bond people, 5 you know, had offices. But Lauren Jordan, who was 6 the trader, she had space in the trading room. 7 But most of the content that went into junk bonds 8 was researched, and the trading was a negotiated 9 trade. There was no ticker, no auction market 10 going on all day long in junk bonds except nominal 11 markets on the New York Stock Exchange. 12 Q. Were they still on the same floor? 13 A. Yes, yes. 14 Q. And when Mr. Stodart came, was he on 15 the same floor? 16 A. Yes. 17 Q. Mr. Carlton, is that his name, Clint 18 Carlton? 19 A. Mr. Carlton, yes. 20 Q. So, they were all on the same floor and 21 the trading room was located on the same floor? 22 A. Yeah. Mr. Carlton was on the trading 14220 1 room. Mr. Stodart was outside. 2 Q. And Mr. Munitz was on that floor? 3 A. Mr. Munitz was on that floor but on the 4 other side of the building. 5 Q. And Mr. Hurwitz? 6 A. He was on the other side of the 7 building, also the same floor. 8 Q. From the junk bond people or from the 9 trading room? 10 A. From the trading room, yes. 11 Q. It was all on the same floor? 12 A. Right. 13 Q. Now, where was -- let's take Mr. Crow. 14 Where was he located? 15 A. Mr. Crow eventually came over and had 16 an office on that floor just outside the trading 17 room. 18 Q. Okay. Do you recall when that 19 occurred? 20 A. I can't recall exactly when. 21 Q. What about Gerald Williams? 22 A. Gerald Williams had an office 14221 1 originally at Harwin, and then eventually they 2 moved in the same building the trading room was 3 but maybe down ten floors. 4 Q. Okay. What about Mr. Gross? 5 A. He would have been down there, I 6 believe. He was down there on the same floor as 7 Mr. Gerry Williams, yes. 8 Q. And when did Mr. Crow get an office on 9 the same floor as the trading room? 10 A. I'm trying to remember. I just -- I 11 just -- I don't know. There was a gradual 12 movement from the Harwin location to the 13 Westheimer location. I don't remember the 14 sequence. 15 Q. Now, why did Sandy Laurenson report to 16 Michael Crow and not to you? 17 A. I don't know. I really -- in 1986, I 18 had -- in the summer, early fall, I was told 19 really to focus on equity arbitrage. Then I was, 20 for a short interim time, shared with Mr. Dorsey 21 on the junk bond operation in the latter part of 22 '86 and apparently senior management thought I had 14222 1 enough to do. 2 Q. Who told you to focus on equity 3 arbitrage? 4 A. I can't remember specifically who. I 5 think it came out in the minutes of some meeting. 6 Q. But you don't recall who it was that 7 told you? 8 A. No, I don't. 9 Q. Do you know who it was that made the 10 decision? 11 A. No, I don't. I don't. I don't know 12 who made the decision that I should take over junk 13 bonds on an interim basis sharing with Mr. Dorsey. 14 I don't know that either. 15 Q. Now, let's move to some of the other 16 documents that I've given to you there. Let's 17 look at Tab 607, B577. 18 Do you see that? It's a letter dated 19 8/29/85 from USAT to Mr. Anderson -- 20 A. Yes. 21 Q. -- at the Texas Savings and Loan? 22 A. I see that. 14223 1 Q. Look at the list of purchases there. 2 Do you see the list of purchases? 3 A. Yes, I see that. I see that. 4 Q. Do you see the reference to AMF? 5 A. Yes. 6 Q. Can you tell us what AMF was? 7 A. AMF was a bowling company, bowling 8 equipment. 9 Q. Was it a purchase that was made as part 10 of your equity arbitrage activities for USAT? 11 A. I don't know for sure, but this would 12 indicate it was. 13 Q. Is that a company that MAXXAM and 14 Federated were attempting to acquire a sizable 15 interest in? 16 A. That, I don't know. That, I don't 17 know. 18 Q. You don't know, or you don't recall? 19 A. I don't recall. I don't know, and I 20 don't recall. 21 Q. Is that a company that there was a 22 company called Minstar that was trying to acquire 14224 1 a controlling interest in? 2 A. That, I don't recall. 3 Q. Now, you indicated when you did these 4 equity arbitrage transactions, they were done with 5 an anticipation that somebody was trying to 6 acquire control. Right? 7 A. Well -- 8 MR. VILLA: Objection. I don't believe 9 that's his testimony. 10 A. That's not true. We usually waited for 11 a public announcement. We didn't try to jump the 12 gun at all. 13 Q. (BY MR. GUIDO) Okay. But you waited 14 for a public announcement of what? 15 A. That somebody intended to buy them out 16 at cash, merge with them, or the company itself 17 was going to restructure. 18 Q. There was going to be a change in 19 control of some sort? 20 A. Well, frequently a change in control. 21 Sometimes we were involved with management 22 buyout -- leverage buyouts with management where 14225 1 the control would remain the same: Gillette, 2 Macy's, companies like that. 3 Q. Do you recall whether or not there were 4 any suggestions to assist management in AMF in a 5 leveraged buyout? 6 A. I don't know whether -- I don't 7 remember whether AMF was a leveraged buyout or a 8 management restructure. I just don't recall at 9 this point. 10 Q. Do you recall whether or not the stocks 11 that were purchased in AMF -- what was the size of 12 the stockholding that's referred to there? 13 A. These -- it's 200 -- just short of 14 300,000 shares, 14-dollar stock. 15 Q. Okay. So, it's a -- 16 A. 4 million four -- a little over 17 $4 million. 18 Q. 4-million-dollar acquisition? 19 A. Yes. 20 Q. Okay. Now, was this -- do you know 21 whether or not MAXXAM or Federated had filed a 13D 22 with regard to acquiring AMF stock at the time? 14226 1 A. That, I don't recall. 2 Q. Do you recall whether or not you 3 purchased any AMF stock at that time on behalf of 4 Federated or MAXXAM? 5 A. I don't recall that. This refreshes my 6 memory to the extent that we bought it for the 7 arbitrage portfolio sometime around July 1985. 8 That's all I can -- 9 Q. That's all you can tell us. Okay. 10 Let's look at Tab 617, which is B816. This is 11 dated January 31, 1986. 12 What does that letter -- the text of 13 that letter say? 14 A. The Enclosure 2 -- he's correcting, 15 apparently, a prior letter and then says, "The 16 transactions shown were correct and accurate, 17 however the amounts invested and sold, and the 18 gains were incorrectly totaled. Please accept the 19 enclosed schedules in substitution for that 20 enclosure and discard the erroneous one." 21 Q. So, this is a correction to one that 22 had been filed previously? 14227 1 A. That's what it says. 2 Q. And this is dated January 31, 1986? 3 A. That's right. 4 Q. Look at the second page of the exhibit. 5 Does it have a list of purchases here? 6 A. It has a list of purchases, right. 7 Q. Is one of those purchases listed there 8 Pacific Lumber? 9 A. Yes. I see that. 10 Q. Did you make purchases of Pacific 11 Lumber on behalf of MAXXAM and Federated, as well? 12 A. I don't believe I did, but I can't 13 remember. But I'm pretty sure that I didn't. 14 Q. Do you know who made the purchases that 15 are referred to on Tab 617, B816, of Pacific 16 Lumber stock? 17 A. If it were -- if it was as indicated 18 for USAT, I made it or somebody in my department 19 made it for USAT. 20 Q. Do you recall whether or not those 21 purchases were made at someone's direction other 22 than you? 14228 1 A. I don't believe so. May have been, but 2 I don't believe so. 3 Q. Do you recall whether these purchases 4 were made -- strike that. 5 Do you recall whether there was any 6 litigation over MAXXAM and Federated's purchase of 7 Pacific Lumber stock at the time the purchases 8 were made that are referred to in Exhibit B816 at 9 Tab 617? 10 A. No, I don't. I don't recall at this 11 time. 12 Q. Do you recall that there were 13 shareholders' litigation against MAXXAM and MCO 14 for purchases of Pacific Lumber stock? 15 A. I believe at some time along the way 16 there was litigation. 17 Q. Do you recall that one of the 18 allegations is that the SEC filings that were 19 filed by MAXXAM and Federated were false in that 20 they did not include all of the stock that MAXXAM 21 and Federated had accumulated in conjunction with 22 others? 14229 1 A. That, I wouldn't know about. I would 2 not know about that. I don't know about it now. 3 Q. When were the purchases of the 4 Federated stock made, to your knowledge, in 5 Pacific Lumber or MAXXAM purchases made in Pacific 6 Lumber? 7 MR. VILLA: Objection. Could you just 8 restate the question? It's a little confusing. 9 Q. (BY MR. GUIDO) When were the 10 MAXXAM-Federated purchases of Pacific Lumber stock 11 made that generated litigation? 12 A. I can't pinpoint that. I'm sorry. 13 Q. Do you recall that there was an SEC 14 investigation over MAXXAM and Federated's 15 purchases of Pacific Lumber stock? 16 A. I can't recall. There may have been. 17 I can't recall. 18 Q. Did you testify in any SEC 19 investigation of MAXXAM and Federated's purchase 20 of Pacific Lumber stock? 21 A. I did not. 22 Q. Were you interviewed by anyone from the 14230 1 SEC regarding MAXXAM or Federated's or any of 2 their related entities purchases of Pacific Lumber 3 stock? 4 A. I don't believe so. 5 Q. Were you interviewed by anyone from any 6 Congressional committees investigating MAXXAM and 7 Federated's purchase of Federated (sic) stock? 8 A. No, I was not. 9 Q. Do you know why you made the purchases 10 or the purchases were made that are referred to in 11 B816 at Tab 617? 12 A. I can only -- I can only assume that I 13 did it -- that there was an announced deal and we 14 bought stock. That's the only -- I can only 15 believe it was one of our normal kind of 16 purchases. 17 Q. Now, what were the amount of number of 18 shares that were purchased? 19 A. This report says 30,000 at 37 20 million -- 1,120,000. 21 MR. VILLA: Excuse me. I couldn't hear 22 that answer. 14231 1 THE WITNESS: 1,120,000. 30,000 shares 2 at 37.333. 3 Q. (BY MR. GUIDO) Were these purchases 4 negotiated purchases? 5 A. I believe, to the best of my knowledge, 6 these would be purchases on the open market, New 7 York Stock Exchange, or over-the-counter market. 8 Q. Do you recall when the public 9 announcement was made for the purchase of Pacific 10 Lumber stock? 11 A. No, I do not know. 12 Q. Do you recall the dates of the purchase 13 of these Pacific Lumber shares on behalf of USAT? 14 A. This document says December 1985. I 15 don't know that -- I have no reason not to believe 16 it was December 1985. 17 Q. Okay. Do you know whether or not that 18 was before or after MAXXAM'S public announcement 19 or its related entities' public announcement that 20 it wanted to buy 100 percent of Pacific Lumber 21 stock? 22 A. I can't remember when that announcement 14232 1 was made. 2 Q. Okay. Now I'd like to move to Tab 616, 3 which is Bates stamped -- which is B796. This is 4 dated January 17th, 1987. 5 Do you see that? 6 A. Right. 7 MR. VILLA: Excuse me, sir. January 8 17th, what date? 9 MR. GUIDO: 1987. 10 MR. NICKENS: It says 1986. 11 MR. GUIDO: 1986. Excuse me. 12 Q. (BY MR. GUIDO) Do you see the 13 reference there to the purchases of stock on the 14 second page? 15 A. Yes, I do. 16 Q. Do you see a reference to a company 17 called Amsted? 18 A. I'm guessing it's -- I'm guessing it's 19 the second one down. 20 Q. Uh-huh. And what is the number of 21 shares? 22 A. 45,900. 14233 1 Q. And what was the price? 2 A. 46.352. 3 Q. And what was the -- what would the 4 total amount be? 5 A. $2,127,557. 6 Q. Was the purchase of that Amsted stock 7 part of an equity arbitrage purchase? 8 A. Yes, I believe it was. 9 Q. Okay. Do you recall the purchase? 10 A. No, but I have, you know, no doubt 11 to -- I have no doubt that this document is 12 correct. 13 Q. When you say it was part of the equity 14 arbitrage purchase and you say "I have no doubt 15 about it," is that because of this document or 16 something other than this document? 17 A. I remember reading about Amsted. 18 Q. At the time? 19 A. Yes. 20 Q. And do you recall whether or not MAXXAM 21 and Federated were attempting to acquire a sizable 22 stake in Amsted at the time? 14234 1 A. It has been pointed out that about six 2 months before, they had filed -- I believe it was 3 MAXXAM had filed a 13D on Amsted. 4 Q. Do you know whether or not that 13D was 5 amended to reflect the amounts mentioned in this 6 Exhibit B796 at Tab 616? 7 A. That, I don't know. 8 Q. Did you ever have any discussions with 9 anyone about amending the 13D? 10 A. No, I didn't. 11 Q. Now, I'd like to direct your attention 12 to a document that is at CT -- it's 13 Exhibit CT1072, which has not previously been 14 admitted in the record. This is a prospectus for 15 $150,000,000 of MAXXAM Group, Inc. senior 16 subordinated notes bearing a coupon of 13 and 17 five-eighths percent due May 15th, 1992. And it 18 has a date of the prospectus of May 21, 1985, 19 which was produced to the OTS by Dechert, Price 20 & Rhodes on behalf of the MAXXAM client group. 21 MR. GUIDO: I would move the admission 22 of C1072. 14235 1 MR. EISENHART: No objection, Your 2 Honor. 3 THE COURT: Received. 4 Q. (BY MR. GUIDO) Now, when you 5 indicated that it was brought to your attention 6 that MAXXAM had -- or MAXXAM-related entities had 7 made an announcement and filed a 13D with regard 8 to Amsted, is this the document that you were 9 referring to? 10 A. Let me just check. (Witness reviews 11 the document.) 12 Q. I'll direct your attention to Page 8. 13 A. Yes, I see that here. 14 Q. Do you see Amsted Industries, 15 Incorporated? 16 A. Yes, I see that. 17 Q. And there was an indication that there 18 was a 13D that had been filed. Right? 19 A. Right. 20 Q. Was that what you were making reference 21 to when you said it was brought to your attention 22 that MAXXAM had filed a 13D? 14236 1 A. Yes, that's right. 2 Q. Now, I'd like to direct your attention 3 to Page 9 of that document. See at the top it 4 says "Transcontinental Services Group, NV. On 5 November 9, 1984, the company purchased in a 6 private offering 3,469,540 shares of 7 Transcontinental Services Group, NV, a Netherlands 8 Antilles corporation"? 9 A. Yes, I see that. 10 Q. What was Transcontinental Services 11 Group? 12 A. I can't really tell you what the 13 company did. I don't recall. I probably knew 14 then, but I don't recall. 15 Q. Now I'd like to direct your attention 16 to a document that's marked as T4374. 17 MR. VILLA: Excuse me. Mr. Guido, I 18 think we might have different documents. 19 Can you just describe that document for 20 me? 21 MR. GUIDO: This is a letter I gave to 22 you earlier today. 14237 1 MR. VILLA: Thank you. 2 Q. (BY MR. GUIDO) T4374 is a letter from 3 Laurence O'Connell to Jim Paulin. Look at the 4 second page. 5 Do you see the mention of Stanley 6 Cohen? 7 A. Yes. 8 Q. Is Stanley Cohen one of the principal 9 officers of Transcontinental Services Group? 10 A. I don't know. 11 Q. And who was Jim Paulin? 12 A. Jim Paulin was Mr. Hurwitz' assistant. 13 I believe he worked for Federated. 14 Q. Okay. Now, this letter -- exclude the 15 handwriting on the letter. This letter makes 16 reference to "the purchase of the above shares by 17 United Financial Group was effected last week." 18 And the reference is Transcontinental Services 19 Group, NV, purchases by United Financial 20 Corporation of 300,000 ordinary shares of fifteen 21 cents each. 22 Do you see that? 14238 1 A. 50 cents. 2 Q. Dated May 27, 1987. Do you see that? 3 A. Right. 4 Q. All right. Now, first of all, what was 5 United Financial Corporation? 6 A. That, I don't know. I don't know -- I 7 don't know exactly who they were. It's probably 8 in the United Savings or United Financial Group 9 family of companies. 10 Q. Was it a subsidiary of United Savings 11 Association of Texas? 12 A. It might be. I don't know. It might 13 be a subsidiary of the holding company. I just -- 14 I don't know. 15 Q. Did you have any role in the purchase 16 of these shares of Transcontinental Services 17 Group? 18 A. No. I think -- I did not. I think I 19 testified in one of the past days that I had a 20 role in selling them. 21 Q. In selling them? 22 A. In selling them. The shares were 14239 1 subsequently sold. 2 Q. And what was your role in selling the 3 shares? 4 A. Well, I just sold them because -- I was 5 told to sell them, and I think I was told to sell 6 them because nobody at the association had ever 7 sold anything on the London Stock Exchange. Not 8 that I had, but I was designated to sell the 9 shares. 10 Q. So, these were shares that weren't 11 created -- 12 A. Here. 13 Q. -- in the United States? 14 A. To the best of my memory, there may 15 have been a nominal market here; but I believe the 16 better market was on the London Stock Exchange. 17 Q. Do you know whether these securities 18 were registered for trading in the United States? 19 A. I don't recall. 20 Q. Do you know -- how did you sell them? 21 Did you call a broker and place them in London, or 22 did you negotiate with someone for them to 14240 1 purchase them from you? 2 A. I don't recall. 3 Q. Did you sell them to somebody in 4 London? 5 A. The best I recall is that I sold them 6 on the London Stock Exchange. I don't know what 7 happened after that. That's all I -- 8 Q. What do you mean you sold them to the 9 London Stock Exchange? 10 A. I sold them on the London Stock 11 Exchange. I don't know -- my best guess would be 12 I used a broker who was a member of the London 13 Stock Exchange, but I don't know for sure. 14 Q. You don't know, do you? 15 A. No. 16 Q. Did you negotiate with Mr. Stanley 17 Cohen for the purchase of those shares? 18 A. No. Not -- not to my knowledge. 19 Q. What about Mr. O'Connell? 20 A. No. I don't recall his role at all. 21 Q. What about Vincent Caruso? 22 A. No, I don't recall ever knowing him. 14241 1 Q. Who asked you to dispose of these 2 shares? 3 MR. VILLA: Your Honor, let me just say 4 that he's switched from sale to purchase, I think, 5 three questions ago. And I'm afraid that the 6 witness may have been confused. 7 MR. GUIDO: I'm sorry. I didn't 8 mean -- 9 MR. VILLA: Did you mean sales? 10 MR. GUIDO: I meant sales through all 11 the questions. I'll go back and ask the questions 12 to clarify the record. The witness testified he 13 had nothing to do with the purchases. It's my 14 understanding he's been responding to questions 15 about sales, not purchases. 16 MR. VILLA: If I'm correct, he switched 17 from sales to purchases three questions ago. So, 18 if you'd clarify the record, I'd appreciate it. 19 Q. (BY MR. GUIDO) Mr. Huebsch, is it 20 your understanding that for the last three 21 questions that you and I have been discussing the 22 sales and not the purchases? 14242 1 A. That is my understanding, Mr. Guido. 2 Q. Okay. Do you recall who told you to 3 dispose of the shares? 4 A. No, I do not recall that, Mr. Guido. 5 Q. Do you recall whether you were told the 6 reason for disposing of the shares? 7 A. The reason for what? 8 Q. The reason for disposing of the shares. 9 A. No, I don't know the reason. 10 Q. Now, this says, "I was informed by Jim 11 Paulin this morning that Charles had committed for 12 UFC to purchase 990,000 more of the TSG holdings." 13 Do you see that? 14 A. I see that. 15 Q. Do you know who the Charles is that's 16 referred to there? 17 A. No, I don't know. 18 Q. Then it says, "Art, please get in the 19 investment committee minutes." 20 Do you see that? 21 A. I see that, yes. 22 Q. Is this something that had occurred 14243 1 prior to the investment committee meeting to 2 discuss the purchase? 3 A. That, I can't tell from this. I don't 4 recall. 5 Q. Was this transaction part of what you 6 considered your equity arbitrage portfolio? 7 A. No. This was not part of the equity 8 arbitrage portfolio. 9 Q. There was no public announcement of 10 TSG, that someone was either trying to 11 restructure, acquire control of it? 12 A. Not that I'm aware of. 13 Q. Do you know how it came about that UFC 14 ended up acquiring these TSG shares? 15 A. No, I do not recall the details. 16 Q. I'd like to move to the high-yield bond 17 portfolio with you, if I may, and discuss that 18 portfolio. 19 You indicated that those transactions 20 were negotiated transactions? 21 A. That's correct. 22 Q. And what do you mean by "negotiated 14244 1 transactions"? 2 A. Well, they were -- the marketplace, if 3 you wanted to sell $50 million worth of bonds, you 4 would go out and find usually a dealer who would 5 buy them from you. There was no auction market 6 except a nominal one on the stock exchange. But 7 for any size, you really had to go through the 8 dealers who dealt in this particular bond. 9 MR. VILLA: Could you speak up, 10 Mr. Huebsch, please? 11 Q. (BY MR. GUIDO) Did you negotiate 12 purchases of high-yield bonds on behalf of USAT? 13 A. You know, I may have in a few 14 instances. It was really done by Joe Phillips. 15 And then when Lauren Jordan came aboard, she was 16 the junk bond trader. They did most of the 17 transactions. 18 Q. Were there ever any transactions in the 19 high-yield bond portfolio that did not go through 20 a broker? 21 A. I'm trying to think. I do not recall. 22 It's -- 14245 1 Q. When you say you don't recall, do you 2 mean you don't know or you don't think it 3 occurred? 4 A. Well, I don't know; but I would say 5 that probably, you know, 90 plus percent went 6 through the nominal. 7 Q. Did you attend the -- I think it's been 8 referred to as the road shows for presentations of 9 sales of high-yield bonds? 10 A. No, I didn't attend those. 11 Occasionally, the managements would come and visit 12 us. I remember once that -- when Macy's was doing 13 its management leverage buyout, they came and 14 chatted with us. It was part of a road show, but 15 they made a special stopover with us. 16 Q. Anyone else? 17 A. That's all I can remember. 18 Q. How about Occidental Petroleum? 19 A. Occidental, I don't recall. 20 Q. How about MDC Corporation? 21 A. MDC, I don't recall meeting at -- now, 22 all these -- all these companies would have road 14246 1 shows, and they were usually held at some, you 2 know, restaurant where all the institutional 3 investors from the Houston area would attend. But 4 it was my practice not to go to those meetings, 5 not that I didn't want to, but I had other things 6 to do. Mr. Phillips and Ms. Jordan would go to 7 those and the other -- and the analysts. There 8 were usually one or two junk bond analysts. 9 Q. What about American Continental 10 Corporation? 11 A. American Continental Corporation. I 12 don't even recall that, that name. 13 Q. Was American Continental Corporation a 14 holding company of Lincoln Savings and Loan? 15 A. It may have been. I don't recall. I 16 don't recall the names. 17 Q. What about Minstar? 18 A. Minstar is a name I've heard. I don't 19 recall anything about it, though. 20 Q. Did you have any discussions with 21 anyone about the purchases of the Golden Nugget 22 high-yield bonds? 14247 1 A. I personally didn't have any 2 discussions with anybody about Golden Nugget. 3 Q. Now -- I mean, you are listed as the 4 supervisor in the board minutes of the high-yield 5 bond portfolio management, are you not? 6 A. Right. 7 Q. Why don't you tell us what you did in 8 supervising their activity? 9 A. I just, you know, generally had to see 10 that the -- what I thought the investment policies 11 were, that they were carried out. I didn't 12 instruct them as to specific names. To the extent 13 I was on the investment committee, they had to 14 pre-present all names and little studies of each 15 company. And they came before us at the 16 investment committee, and the people 17 responsible -- Joe Phillips or Stabell or Mike Gil 18 or Jay Van Ert -- people in the department would 19 make the presentations. They would have a written 20 presentation and make an oral presentation. And 21 all these were pre-screened. And I felt that, you 22 know, really my duties were to see that they got 14248 1 their -- all their ducks in a row before they came 2 to the committee and it was really researched. 3 And that was really my function. But all these 4 things were presented in great detail to the 5 investment committee prepurchased. 6 Q. Now, when you say "pre-screened," do 7 you mean that they would do a run-through of their 8 presentation to you before they did it to the 9 investment committee? 10 A. Yeah. I might see it before. 11 Q. Okay. And that's what you mean by 12 "pre-screened"? 13 A. Well, what I really meant by 14 "pre-screened" was that the investment committee 15 pre-screened these before any money was committed. 16 Q. Oh, okay. Did you ever suggest to them 17 investments, high-yield bond investments that they 18 look to when they do an analysis on them? 19 A. I can't remember that. I can't 20 remember directing them that way. 21 Q. Do you know whether or not Charles 22 Hurwitz ever did so? 14249 1 A. That, I don't -- that, I don't know. 2 Q. Do you know whether or not Barry Munitz 3 ever did so? 4 A. That, I don't know. 5 Q. Do you know whether or not Jenard Gross 6 ever did so? 7 A. That, I don't know. 8 THE COURT: Mr. Guido, are you about -- 9 MR. GUIDO: Your Honor, I'm probably 10 ten minutes from finishing my questions. If you 11 want to break now, I can finish afterwards or I 12 can go ahead and finish and then we can break. 13 THE COURT: All right. We'll adjourn 14 until 2:00 o'clock. 15 16 (A luncheon recess was taken.) 17 18 THE COURT: Be seated, please. We'll 19 be back on the record. 20 Mr. Guido, I think you indicated you 21 had ten minutes left? 22 MR. GUIDO: Yes, Your Honor. And 14250 1 Mr. Nickens said that he was going to keep the 2 watch. 3 MR. NICKENS: For what it's worth, Your 4 Honor, I told him I would watch the clock for him. 5 MR. GUIDO: I'll do the best I can, 6 Your Honor. 7 Q. (BY MR. GUIDO) With regard to the 8 high-yield bonds, you indicated that those were 9 negotiated transactions primarily done through the 10 brokerage houses, not with the entities from whom 11 the high-yield bonds were purchased? 12 A. You mean the issuers? 13 Q. Yeah. The issuers. 14 A. Well, if it were a public offering, you 15 would buy through the underwriter representing the 16 issuer. 17 Q. Now, in terms of selling them, how was 18 that done, public offerings? 19 A. Excuse me? 20 Q. The purchases that USAT made of public 21 high-yield bond offerings, how were those sold? 22 A. Those were generally sold through a 14251 1 number of dealers. There were a number of 2 dealers: Merrill-Lynch, First Boston. 3 MR. VILLA: Could you speak up, 4 Mr. Huebsch? 5 Q. (BY MR. GUIDO) The non-public 6 offerings, how were those purchased? 7 A. Those would be also -- usually, there 8 was an underwriter involved in a non-public 9 offerings. 10 Q. Now, how were the sales of those 11 non-public high-yield bonds that were held by USAT 12 arranged? 13 A. Most of them were publicly traded. I'm 14 thinking of one that was bought -- it was ARA 15 Services, the vending machine people. We bought 16 it and it was private, but it became public within 17 two months. And we just sold a portion of it out 18 through the normal dealer channels. Most of the 19 bonds were publicly distributed. If they were 20 privately distributed, initially, they had the 21 intent and did, in fact -- most of them -- became 22 publicly traded within a few months. That was -- 14252 1 you know, I'm talking -- most if not all junk 2 bonds were dealt. 3 Q. Were any of the issuers of junk bonds 4 that were purchased by USAT purchases of junk 5 bonds that were issued by MAXXAM or its affiliated 6 entities? 7 A. No. We did not buy any of those. To 8 my knowledge, we didn't buy any of those. 9 Q. You didn't buy any of -- what do you 10 mean by "those"? 11 A. MAXXAM or -- 12 Q. That wasn't my question. 13 A. I'm sorry. 14 Q. My question was: Those companies from 15 whom USAT bought junk bonds -- 16 A. Right. 17 Q. -- which ones of those companies were 18 purchasers of junk bonds for MAXXAM or its related 19 entities? 20 A. MAXXAM and its related entities had 21 very little interest in junk bonds. 22 Q. That wasn't my question. Let me 14253 1 rephrase the question. 2 A. Okay. 3 Q. There were purchasers of junk -- there 4 were issuers of junk bonds -- 5 A. Right. 6 Q. -- that USAT made purchases from. 7 Okay? 8 A. Right. 9 Q. For example, MCI. 10 A. Right. 11 Q. I think we talked about Occidental 12 Petroleum. Right? 13 A. Right. 14 Q. Turner Broadcasting. Right? 15 A. Right. 16 Q. Taking those companies -- what I'm 17 referring to is the issuers of junk bonds that 18 USAT purchased. 19 A. Right. 20 Q. Did any of those purchase junk bonds 21 for MAXXAM? 22 MR. EISENHART: Your Honor, I would 14254 1 have to object to the question because I really 2 don't understand it. 3 Is he saying did those issuers buy them 4 from MAXXAM? 5 Q. (BY MR. GUIDO) Did the issuers of 6 junk bonds that were purchased on behalf of 7 MAXXAM, also were they purchasers -- those 8 individuals -- purchasers of junk bonds issued by 9 MAXXAM or any of its entities? 10 A. I'm sorry. I'm still -- I may be 11 dense, but I'm still having trouble. 12 Q. Well, I'll make it easier for you. 13 A. Okay. Thank you. 14 Q. I didn't mean to have to go through 15 this list, but I will. 16 Did Occidental Petroleum purchase junk 17 bonds issued by MAXXAM? 18 A. That, I don't know. 19 Q. Did MDC purchase any junk bonds issued 20 by MAXXAM? 21 A. That, I don't know. 22 Q. Did ACC or Lincoln purchase any junk 14255 1 bonds issued by MAXXAM? 2 A. That, I don't know, sir. 3 Q. Did Golden Nugget purchase any junk 4 bonds issued by MAXXAM? 5 A. That, I don't know. 6 Q. Did MCI purchase any junk bonds issued 7 by MAXXAM? 8 A. I don't know that, sir. 9 Q. Did Southmark or San Jacinto Savings 10 and Loan purchase any junk bonds issued by MAXXAM? 11 A. That, I don't know, sir. 12 Q. Did Hudson Funding purchase any junk 13 bonds issued by MAXXAM? 14 A. That, I don't know, sir. 15 Q. Did Turner Broadcasting purchase any 16 junk bonds issued by MAXXAM? 17 A. That, I don't know. I'm just not in a 18 position -- was not in a position of knowing this. 19 But the answer is, to the best of my knowledge, I 20 don't know. 21 Q. Did Occidental Petroleum purchase any 22 junk bonds issued by MAXXAM? 14256 1 A. I don't know. 2 Q. Did the Reliance Group purchase any 3 junk bonds issued by MAXXAM? 4 A. That, I don't know. 5 Q. Did Revlon purchase any junk bonds 6 issued by MAXXAM? 7 A. That, I don't know, sir. 8 Q. Did Charlie's Holdings purchase any 9 junk bonds issued by MAXXAM? 10 A. That, I don't know. 11 Q. Did Fruit of the Loom purchase any junk 12 bonds issued by MAXXAM? 13 A. That, I don't know, sir. 14 Q. Do you know what Charlie's Holdings 15 was? 16 A. I believe it's something to do with 17 Revlon. 18 Q. Okay. Now, did Hillsborough Holdings 19 Company purchase any junk bonds issued by MAXXAM? 20 A. Which one? 21 Q. Hillsborough Holdings? 22 A. That, I don't know. 14257 1 Q. Do you know what Hillsborough Holdings 2 relationship was to First Executive Life? 3 A. No, I don't recall. 4 Q. Have you ever heard of First Executive 5 Life? 6 A. Yes, I heard of it. 7 Q. Can you tell us what it was? 8 A. I don't know what kind of -- I don't 9 even know if it was a life insurance -- I don't 10 know what kind of an insurance company it was. 11 Q. Now, is your answer the same with 12 regard to these -- my question about purchases -- 13 with regard to any issuances of junk bonds by 14 MAXXAM and its related entities? 15 A. Yes. I wouldn't -- I would not know 16 who bought them. 17 Q. Now, when you traded or engaged in 18 purchases and sales of equity securities for USAT, 19 did you also engage in purchases and sales of the 20 same securities for your own account? 21 A. No, or if I did, it was at a different 22 time. 14258 1 Q. What do you mean at a different time? 2 A. Well, not -- we had a -- I believe 3 initially -- an informal rule that you couldn't 4 buy or sell any stocks that the companies -- USAT, 5 MAXXAM, or Federated -- were buying or selling. 6 That was the rule. It later got onto -- we kept, 7 you know, formalizing. 8 Then we had a rule where they had to 9 call me -- anybody who was buying arbitrage stocks 10 had to call me to see if USAT was buying stocks. 11 And then we formalized it even more 12 that I think all the principal -- all the officers 13 had to have their brokerage firms send in monthly 14 accounts to some fellow at USAT who was, you 15 know -- would be a double check if anybody was 16 buying -- 17 Q. I'd like to show you three documents. 18 Tabs 273, 274, 275 -- four documents -- 276. 19 Those are Tabs B -- Exhibit B1851 is Tab 273, 20 B1906 is Tab 274, B2021 is Tab 275, and B2030 is 21 Tab 276. 22 Do you recall you testified that the 14259 1 equity arbitrage purchases that you made were 2 primarily for securities where there had been some 3 public announcement that either there was going to 4 be a restructuring, a merger, or a takeover. 5 Right? 6 A. Yes. 7 Q. Now, I'd like you to take a look at the 8 transactions that are in Exhibit B1851, which is 9 Bates stamped TXS&L 106108. 10 A. 106 through 108? 11 Q. 106108. 12 A. Okay. I have it here. 13 Q. See the purchases there of shares of 14 stock? 15 A. Yes. They have purchases in here. 16 Q. Okay. Take a look at Tab 274. B1906 17 is the exhibit number. Tab 274. Look at the 18 Bates stamp TXS&L 107409. 19 Were those purchases purchases that 20 were made to take advantage of the difference 21 between the stock price at the time and a 22 publicly-announced takeover, restructuring, or 14260 1 merger? 2 A. I believe so, yes. 3 Q. Were any of those transactions 4 undertaken to take advantage of the 500 or so 5 stock market decline that you testified about 6 occurring in October and November of '87? 7 A. No. We tried to maintain our 8 discipline throughout all different kinds of 9 markets up and down. 10 Q. So that none of those transactions were 11 made to take advantage of the stock market 12 decline? 13 A. No, not to my knowledge. 14 Q. Now, I'd like to direct your attention 15 to Exhibit A1445 that we looked at, the investment 16 committee minutes. 17 Do you see that? 18 A. I see that. 19 Q. It's just a short set of minutes. Let 20 me -- it says "Special meeting of the investment 21 committee was held on May 27th, 1987. All members 22 of the committee were present. A discussion of 14261 1 the possible acquisition of additional shares of 2 Transcontinental Services Group was held among the 3 members of the committee. After full discussion, 4 it was determined to acquire an additional 300,000 5 shares at a price of $3.30 per share." 6 Did such a meeting actually take place? 7 A. I don't know, but this would -- this 8 would indicate that it had. 9 Q. Now, look at T4374, which was a 10 document that I showed you earlier today about the 11 TSG sales. And I direct your attention to the 12 handwritten note at the top. It says, "I was 13 informed by Jim Paulin this morning that Charles 14 had committed for UFC to purchase $990,000 more of 15 TSG holdings. Art, please get in the investment 16 committee minutes." 17 Do you see that? 18 A. I see that. 19 Q. Doesn't that seem to imply that the 20 transaction took place prior to a so-called 21 investment committee? 22 A. It could imply that. I don't know 14262 1 whether it does or it, in fact, happened that way. 2 Q. Now, let me direct your attention to 3 another matter now, Mr. Huebsch. 4 A. Yes. 5 Q. Do you remember my questions about 6 Caywood-Christian after the judge had asked you 7 about equity arbitrage a few days ago? 8 A. Well, I remember we were talking about 9 Caywood-Christian, yes. 10 Q. And do you know whether 11 Caywood-Christian had the authority to manage at 12 its own discretion a high-yield bond account for 13 USAT? 14 A. As best as I recall, they did -- they 15 did have discretion in the management of a small 16 part of USAT's high-yield bond effort. 17 Q. Did you know that Caywood-Christian -- 18 either half or 49 percent of Caywood-Christian was 19 observed by a savings and loan called Imperial 20 Savings and Loan? 21 A. I may have at the time. I've 22 forgotten -- if I did know, I have forgotten about 14263 1 it. 2 Q. Did you know that Imperial -- about 1.4 3 million shares of Imperial were held by Executive 4 Life or its affiliates? 5 A. No, I did not know that. 6 Q. Did you ever know whether Executive 7 Life had purchased high-yield bonds issued by 8 MAXXAM or its affiliates? 9 A. That, I don't know. 10 Q. Did you ever know? 11 A. I doubt it. I don't think I ever knew. 12 Q. Do you know whether or not 13 Caywood-Christian, at the time it was managing 14 USAT's high-yield bond portfolio at its 15 discretion, had recommended to its other clients 16 that they purchase MAXXAM or MAXXAM-related issued 17 junk bonds? 18 MR. EISENHART: Your Honor, I object to 19 the form of the question. The witness just 20 testified that Caywood-Christian managed a very 21 small portion of USAT's high-yield bond portfolio. 22 Q. (BY MR. GUIDO) With that 14264 1 clarification, Mr. Huebsch, did you know that? 2 A. I don't know whether Caywood and 3 Christian recommended to its other clients the 4 purchase of MAXXAM securities. I don't know. 5 Q. Do you know whether or not 6 Caywood-Christian, on behalf of other clients, had 7 purchased MAXXAM and MAXXAM-related junk bonds? 8 A. No. I would not know that, Mr. Guido. 9 Q. I'd like to switch the subject. 10 A. Okay. 11 Q. And that is did -- do you have an 12 agreement with MAXXAM or any MAXXAM-related 13 entities to indemnify you for any potential 14 liability from this litigation? 15 A. In my understanding, they are advancing 16 me the legal fees. 17 Q. And what about any potential liability? 18 Do you have an understanding about that with them? 19 A. The way I understand the agreement is 20 that if I am found -- if I am fined, I will -- if 21 I am found, how should I say, guilty, I'm no 22 longer -- I have to pay MAXXAM back. And if I am 14265 1 fined some money, I have to pay it myself. 2 Q. If -- was it your understanding if you 3 were ordered to pay restitution? 4 A. I would have to pay it myself. 5 MR. GUIDO: No further questions, Your 6 Honor. 7 THE COURT: Mr. Guido, did you offer 8 T4374? 9 MR. GUIDO: If I didn't, Your Honor, I 10 move T4374. I thought I moved T4374 and CT1072. 11 If not, I move their admission now, Your Honor. 12 MR. NICKENS: I didn't hear that. I'm 13 sorry. 14 MR. GUIDO: T4374, which is the letter. 15 MR. NICKENS: No objection. 16 MR. VILLA: No objection, Your Honor. 17 THE COURT: Received. Mr. Villa, are 18 you going to cross-examine? 19 MR. VILLA: Yes, I am, Your Honor. 20 21 22 14266 1 2 EXAMINATION 3 4 Q. (BY MR. VILLA) Good afternoon, 5 Mr. Huebsch. 6 A. Good afternoon, sir. 7 Q. For the record, I'm John Villa, and 8 I've been your attorney for about eight years in 9 this case, haven't I, sir? 10 A. About that long. 11 Q. How old are you, Mr. Huebsch? 12 A. I'm 67 years old. 13 Q. Are you married? 14 A. Yes, I am. 15 Q. Do you have any children? 16 A. Yes. I have two boys. 17 Q. Any grandchildren? 18 A. Two. A boy and a girl. 19 Q. Have you ever served in the military, 20 Mr. Huebsch? 21 A. Yes, I have. 22 Q. What branch? 14267 1 A. First the Army, then the Air Force. 2 Q. Have you ever practiced law? 3 A. No, I haven't. 4 Q. Now, you've told us something about 5 your work history in the securities industry. 6 Have you ever held any licenses to sell 7 securities? 8 A. Yes, I did at one time. 9 Q. And are you still licensed to sell 10 securities? 11 A. No. I believe the licenses lapsed. 12 Q. They lapsed. And why did you permit 13 them to lapse? 14 A. Because I was moving on to the, you 15 know, buy side of the business, the investment 16 advisory part, and I was no longer involved with a 17 company that was selling securities. I didn't 18 think I ever would be. 19 Q. And you've been in the securities 20 business for, you've told us, about 40 years? 21 A. Yes, just about. 22 Q. Have you ever had any complaints filed 14268 1 against you with respect to your professional 2 license or your professional conduct? 3 A. No, I haven't. 4 Q. In your life, other than arising out of 5 the OTS matter here, have you ever been sued for 6 anything? 7 A. Never. 8 Q. Now, prior to working for USAT, had you 9 ever worked for a federally-insured financial 10 institution? 11 A. No, I had not. 12 Q. Since working for USAT in 1988, have 13 you ever worked for a federally-insured financial 14 institution? 15 A. No. I have not worked for one. 16 Q. During the time period 1984 to 1988, 17 were you familiar with the law and regulations 18 governing the regulation of financial 19 institutions? 20 A. Not very specifically, no. 21 Q. That's not an area of your expertise; 22 is that right? 14269 1 A. It's not an area of my expertise. 2 Q. And what kind of -- you told us a 3 little bit about your current jobs. 4 What kind of portfolios do you 5 currently manage, Mr. Huebsch? 6 A. The portfolios are merger risk arb. 7 Q. Merger risk arbitrage portfolios; is 8 that right? 9 A. Yes. 10 Q. You told us also in response to 11 Mr. Guido's questions that MAXXAM and Federated 12 did not have -- I may be paraphrasing it -- 13 substantial holdings of mortgage-backed securities 14 in junk bonds. 15 Do you remember that? 16 A. That's correct, not that I was aware 17 of. 18 Q. Is there anything about the investment 19 philosophy of either of these two companies that 20 would explain that fact? 21 A. They -- those accounts had always been 22 equity-oriented. They seemed to always gravitate 14270 1 to equity investments which they felt comfortable 2 with. 3 Q. And today, MAXXAM and Federated are 4 primarily in equity investments, as well; isn't 5 that right? 6 A. Well, the part that I manage is still 7 all equities. 8 Q. What is your position at Bering? Is it 9 Bering or Berings the name of the company -- 10 A. Yes. 11 Q. -- you're currently employed by? 12 A. Right. 13 Q. What is your position? 14 A. Executive vice president. 15 Q. Executive vice president? 16 A. Right. 17 Q. In charge of investments? 18 A. That's correct. 19 Q. Approximately how many people, in round 20 numbers, report to you as executive vice president 21 in charge of investments? 22 A. Two. 14271 1 Q. Now, tell me your whole staff, 2 including the people who report directly to you. 3 A. Two. 4 Q. Do you have a separate office? 5 A. No. 6 Q. Do you have your own personal 7 secretary? 8 A. No. 9 Q. Let's -- let's hear about a day in the 10 life of somebody who's doing merger risk 11 arbitrage. Tell us what that's like beginning at 12 the start of the day and taking us through the 13 end. 14 A. The day starts about 7:00 o'clock, 15 which down here is about an hour and a half before 16 the market opens. We go in and check all the news 17 on the securities we hold. We check all the news 18 to see if there are any other announced deals that 19 day. We then check the openings of the market. 20 Another thing we do preliminary is we will check 21 all the spreads. In other words, between the 22 acquirer and the acquiree. We'll check maybe 25 14272 1 or 30 spreads to see if there are any 2 opportunities for investment that day. As I said, 3 at the same time, we'll be listening to conference 4 calls put on by companies that are involved in 5 mergers. 6 Then we will -- after screening all the 7 spreads, we will see which ones are particularly 8 attractive; and those will be the focal -- focus 9 of our transactions during the day. 10 So, now the market is open and we will, 11 again, monitor these spreads, particularly the 12 ones we're focusing on all day long. The spreads, 13 of course, will be affected by new news items 14 coming out on any of the companies. It will 15 depend on, you know, the movement of the overall 16 market. If the market goes down dramatically that 17 day, the spreads will, you know, tend to widen out 18 and become more attractive. 19 So, this is our -- besides the trading 20 all day long, we will be monitoring the market and 21 the spreads. 22 The trading is -- the execution of a 14273 1 trade can be quite tricky because we are -- 2 particularly in this day and age, we are shorting 3 one side of the transaction. Shorting requires an 4 uptake. We have to be very careful moving in 5 because we don't want to get overbalanced on one 6 side or the other. In other words, if we want a 7 50,000-share position, we have to inch in by doing 8 5,000 on a buy and then short 4,000 here. So, 9 we're legging in 5,000, 4,000, 5,000, 4,000 until 10 we get the whole position of 50,000 we wanted, and 11 this requires a little bit of finesse. It's a 12 little bit more complicated than, you know, buying 13 a mutual fund. 14 So, this is what goes on all day long. 15 At the end of the day, we will, you know, tabulate 16 what we've done, how much -- we'll also have to 17 consider what is running off that day because 18 these arbitrage portfolios are essentially 19 self-liquidating in that the deals complete 20 themselves. So, you always have some, you know, 21 deals running off as you're putting on new deals. 22 So, we'll tabulate that at the end of 14274 1 the day, collect all our transactions and send 2 them, you know, to our treasury department. We 3 will keep, you know, watching the news. And we 4 will probably break up around 4:00 o'clock in the 5 afternoon, and that's our day. 6 There is no -- there is no lunch. Your 7 lunch is eaten, you know, at your work station. 8 Q. Why do you eat lunch at your work 9 station? 10 A. So we can keep watching. You know, 11 news tape -- we're watching the news tape and then 12 we're watching the prices, and then we're watching 13 the spreads. 14 Q. Now -- 15 A. The lunches are still free because they 16 are eaten right there at the work station. 17 Q. There is a free lunch? 18 A. It's still there. 19 Q. Now, you talked to us about the 20 decision to actually make a purchase on a merger 21 risk arbitrage. 22 Is there some element of judgment that 14275 1 goes into that decision? 2 A. Well, there is. There is. There are, 3 you know, very -- there is a judgment as to the 4 quality of the deal, whether it will get done on 5 time. Time is our -- the lapsing of time is our 6 big enemy because we get a spread. We think a 7 deal will close in 30 days or, say, 90 days. And 8 for one reason or another, it's extended to 120 9 days. Our spread has been dented, and it's not 10 what we expect. 11 So, there will be a judgment as to the 12 quality of the deal. One of the quality of things 13 will be how likely is it to get done on time. So, 14 these things are assessed. 15 Q. How quickly do you have to make your 16 decision when a merger is announced? I mean, not 17 on all of them, but on occasion. 18 A. Well, it can be instantaneous, within 19 minutes. 20 Q. Because the market would otherwise 21 react and eliminate the spread? 22 A. Well, that's right. That's right. 14276 1 Q. Among other reasons? 2 A. Among other things. 3 Q. In an average day, how many meetings do 4 you attend? 5 A. None. 6 Q. In an average day, how many meetings do 7 you have with senior management where they give 8 you directions? 9 A. Usually none. 10 Q. How many meetings each week would you 11 estimate you have with people outside the office, 12 from outside the office, they come in to meet with 13 you? 14 A. Once every two weeks perhaps. 15 MR. GUIDO: Could we have a 16 clarification of a time frame? The last question 17 had a time frame as "what are you doing now"? 18 MR. VILLA: It will come. Believe me. 19 MR. GUIDO: Okay. 20 Q. (BY MR. VILLA) How many meetings each 21 week -- strike that. 22 Apart from memoranda that are 14277 1 addressing the formula for your compensation, do 2 you write many memoranda, sir? 3 A. No, I don't write any. 4 Q. Do you write many reports? 5 A. No. Very few. Very few. 6 Q. Do you do much strategic planning? 7 A. No strategic plan. 8 Q. Do you do much in the way of preparing 9 budgets? 10 A. No, I don't. 11 Q. What percentage of your time do you 12 devote to activities other than trading equity 13 securities, sir? 14 A. I suppose I spend 98 percent, 99 15 percent of my time on trading. 16 Q. And to what extent have your activities 17 changed over the past 20 years? And that takes 18 into account the time period at Federated in the 19 early 1980s and the time period at USAT from 1984 20 through 1988. 21 A. It really hasn't changed that much. 22 The machines have gotten better. 14278 1 Q. And you sit in front of a machine? 2 A. The machines, graphics, that's 3 improved, the work environment. 4 Q. Now, in 1984 through 1988, you did 5 attend some ALCO committee meetings; is that 6 right? 7 A. That's right. 8 Q. Remember that? And you did attend some 9 investment committee meetings. Right? 10 A. That's correct. 11 Q. But apart from that, are there any 12 discernible changes in the way you do your job now 13 as opposed to the way you did it in the 1980s? 14 A. No. Very little. Very little. It's 15 just about the same job. 16 Q. So, the name of the company could 17 change; but your work, your basic discipline, is 18 essentially the same? 19 A. It's essentially the same, yes, sir. 20 Q. Do you know Charles Hurwitz? 21 A. Yes, I do. 22 Q. Do you have any ownership in any -- do 14279 1 you have any ownership interest in any company 2 that's owned by Charles Hurwitz in part or in 3 whole? 4 A. No, I don't. 5 Q. Do you see Mr. Hurwitz outside the 6 office? 7 A. Occasionally. 8 Q. On what matters do you see him? 9 A. Usually a company function, retirement 10 party or something like that. 11 Q. How would you describe your 12 relationship with Charles Hurwitz? 13 A. We have and I've always had a good 14 business relationship. 15 Q. Now, you were employed by USAT during 16 the time period 1984 to 1988; isn't that right, 17 sir? 18 A. That's correct. Into '89. 19 Q. Were you ever a member of the board of 20 directors of UFG or USAT? 21 A. No, I was not. 22 Q. Were you ever a member of the executive 14280 1 committee of either company? 2 A. No, I was not. 3 Q. Were you ever a member of the strategic 4 planning committee of either company? 5 A. I was not. 6 Q. Was there a management committee? 7 A. There may have been. I don't know. 8 Q. Did you attend management committee 9 meetings? 10 A. No, I didn't. 11 Q. Were there occasional staff meetings? 12 A. That, we had, yes. There were staff 13 meetings. 14 Q. Did you attend any of those? 15 A. Occasionally, yes. 16 Q. Now, USAT expanded its investment 17 activities beginning in 1984. 18 Do you recall that, sir? 19 A. Yes, I do. 20 Q. Was that your decision to make as to 21 whether or not USAT expanded its investment 22 activities in 1984? 14281 1 A. No, that was not my decision. 2 Q. Now, do you recall whether you were an 3 officer or employee of United at the time that the 4 investment facility that we've been talking about 5 here over the last four or five days was formed? 6 Do you recall? 7 A. I believe I started work at United in 8 the latter part of 1984. 9 Q. Let me show you what's been marked as 10 Exhibit B3816, which is Tab 575 in evidence. 11 Do you recognize this document, 12 Mr. Huebsch? 13 A. Yes, sir. I can't quite read -- I 14 guess it's United Interest is the name of it. 15 Q. And what is this? 16 A. It's a publication for the employees of 17 United Savings. 18 Q. Let me direct your attention to the 19 bottom of the first column on the left, and I'll 20 read the last paragraph. It says, "Ron, (whose 21 last name is pronounced Huebsch, like Huebsch with 22 an H on the end) joined United on July 1, 1984, to 14282 1 set up the investment facility." 2 Do you see that, sir? 3 A. I see that. 4 Q. Now, does this help you refresh your 5 recollection as to the time you were first hired 6 as an employee of USAT? 7 A. That would be about the time I went to 8 work there. 9 Q. And do you have any basis for thinking 10 that this particular publication would accurately 11 reflect your date of hire? 12 A. Well, I assume it to be accurate. I 13 believe it's published by the human resources 14 department. 15 Q. The human resources department of 16 United Savings? 17 A. Right, yes. 18 Q. And they would also have your personnel 19 files to show the date of hire? 20 A. Presumably. 21 Q. Now, what significance do you place on 22 titles as to whether or not you are an employee or 14283 1 an officer? 2 A. I don't put any significance on it. 3 Q. Does it make any difference at all to 4 you in the execution of your duties as to whether 5 you were first elected an officer in February 1985 6 or February 1986 or at any particular date? 7 A. No. That would not make any difference 8 to me. 9 Q. Now, I think we've talked about the 10 various securities portfolios at USAT beginning in 11 1984 and 1985, and they are the mortgage-backed 12 securities portfolio, high-yield bonds, and I may 13 lapse into calling it equity arbitrage, but you 14 understand what I mean. Right, sir? 15 A. I do. 16 Q. Taking the time period early 1985 when 17 they all began being established, late 1984, 18 through the middle of 1986, that 18-month time 19 period, would you break down for the Court in your 20 estimation what percentage of your time you 21 devoted to each one of those three portfolios? 22 Hopefully, it will add up to 100 percent. 14284 1 A. I spent about 90 percent of my time on 2 the equity arbitrage and split the rest of my time 3 with mortgage-backs and junk bonds. 4 Q. Now, you have been discussing the three 5 portfolios -- junk bonds, mortgage-backs, and 6 equity risk arbitrages. 7 Are junk bonds an equity or 8 fixed-income portfolio? 9 A. Fixed income. 10 Q. How about mortgage-backed securities? 11 A. I would classify those as fixed income, 12 also. 13 Q. And risk arbitrage is what? 14 A. Equity largely. 15 Q. Do portfolio managers tend to fall into 16 two camps that tend to reflect the nature of the 17 securities in the portfolios they manage? 18 A. That's true, yes. 19 Q. And what are the two camps? 20 A. They would be equity and fixed income. 21 Q. And the different types of securities 22 have different risks. 14285 1 Would you agree with me? 2 A. Yes, they would. 3 Q. And it takes somewhat different skills 4 to manage the portfolio. 5 Isn't that also true? 6 A. That's also true. 7 Q. Which one is more mathematical, 8 requires more mathematics? 9 A. I would say the fixed income portfolio. 10 Q. Which camp do you fall in, sir? Are 11 you primarily an equity portfolio manager or a 12 fixed income portfolio manager? 13 A. Primarily an equity portfolio manager. 14 Q. Do you have any training in 15 mathematics? 16 A. Nothing more than what you get in 17 school and college. 18 Q. Your undergraduate degree is in 19 history, and you have a degree in law; is that 20 right? 21 A. That's right. 22 Q. You can understand fixed income 14286 1 concepts, can't you, sir? 2 A. Yes. I can understand most of them. 3 Q. Do you deal with them daily today? 4 A. No. I have not dealt with them really 5 in over 12 years. 6 Q. Hear those pages turning, sir? I'm 7 taking my lead from Mr. Guido and cutting my 8 examination down. 9 Now, in response to questions from 10 Mr. Guido, you said that at some time in mid-1986, 11 your responsibilities changed. 12 Do you remember that, sir? 13 A. Yes, I do. 14 Q. And that you were asked to focus on the 15 issue of the equity arbitrage and your 16 responsibilities and whatever oversight you had on 17 mortgage-backed securities and junk bonds was 18 essentially eliminated. 19 Do you remember that? 20 A. That's right. 21 Q. And you referred to some minutes that 22 you recalled seeing that memorialized that 14287 1 redeployment of your responsibilities? 2 A. Right. 3 Q. I'm showing you what's been introduced. 4 It's Exhibit A1640, and it is -- it's introduced 5 in evidence as Tab 522. 6 Do you have that before you, sir? 7 A. Yes, I do. 8 Q. And is that the ALCO minutes of August 9 22, 1986 that's reported in a memorandum dated 10 August 26th, 1986? 11 A. That's correct. 12 Q. And as I see from this memorandum, you 13 weren't present at that meeting; but would it have 14 been your practice to receive a copy of these 15 minutes? 16 A. Yes. I would receive them several days 17 later. 18 Q. Let me read Paragraph 2 of this and ask 19 you whether that refreshes your recollection as to 20 the time period at which you were redeployed into 21 equity arbitrage. Paragraph 2 on Page 1. 22 "Mortgage-backed security/investment 14288 1 responsibility. A general discussion was held 2 covering who was ultimately responsible for 3 investments in liquidity, mortgage-backed 4 securities, equity arbitrage, and high-yield 5 securities. After considerable discussions, it 6 was agreed that responsibility for these 7 investments would be delegated as follows. A, 8 high-yield corporate securities." And then it 9 goes through and talks about Joe Phillips and 10 Caywood-Christian, but your name nowhere appears. 11 "B, equity. Ron Huebsch would be responsible for 12 all equity arbitrage transactions and 13 investments." And then C, "Mortgage-backed 14 securities" and there is a reference to a number 15 of people which does not include you. And then D, 16 dollar rolls, not including you. 17 Do you see that, sir? 18 A. I see that. 19 Q. Now, does that help you refresh your 20 recollection as to the time -- strike that -- the 21 date at which your responsibility over the 22 mortgage-backed securities portfolio essentially 14289 1 ceased? 2 A. That's what this indicates to me. 3 Q. And is that consistent with your 4 recollection? 5 A. That is consistent with my 6 recollection. 7 Q. And prior to that, for several months, 8 there was a mortgage-backed securities committee, 9 wasn't there, sir? 10 A. I believe that started in -- sometime 11 in the summer. 12 Q. And you weren't on that committee, were 13 you? 14 A. No, I was not. 15 Q. Now, after that point, after August of 16 1986, you continued to attend investment committee 17 meetings, didn't you, sir? 18 A. Yes, I did. 19 Q. Now, what was your role at those 20 investment committee meetings? What did you spend 21 most of your time doing? 22 A. My primary role was to present the 14290 1 transactions that we had done in the prior week 2 and answer questions about them to give some 3 indication as best we could what we were going to 4 do in the following week and, again, answer any 5 questions. 6 Q. And when you say "transactions we did," 7 what kind of transactions are you talking about? 8 A. I'm talking about the equity risk 9 arbitrage transactions. 10 Q. Do you know Sandy Laurenson? 11 A. Yes. 12 Q. And what job did she take at United? 13 A. She was in charge of mortgage-back 14 investing when she came in in the latter part of 15 '86, I believe. 16 Q. Did she report to you, sir? 17 A. No, she did not. 18 Q. What did you understand her specialty 19 to be? 20 A. I think -- within the mortgage-back 21 area, I believe her specialty was in hedging. 22 Q. And is hedging determined primarily by 14291 1 mathematics? 2 A. It has a high mathematical content. 3 Q. What was your role in overseeing 4 mortgage-backed securities once Sandy Laurenson 5 was hired? 6 A. My role was as a member of the 7 committee, to listen to her proposals and ask 8 questions. 9 Q. Now, Mr. Huebsch, would it be fair to 10 say that after Sandy Laurenson came, you spent 11 virtually -- you devoted virtually all of your 12 time to equity risk arbitrage; is that right? 13 A. Right. Well, there was a period 14 where -- after Mr. Phillips left the association, 15 I helped out with mortgage-backs with Dr. Dorsey, 16 helping him run it for a few months until he got 17 up to speed in the junk bonds. And then by -- you 18 know, by the end of '86, he was -- he took them 19 over himself. 20 Q. Sir, sometimes I don't listen to 21 answers as well as I listen to questions. 22 Did you mean to say that you helped 14292 1 Dr. Dorsey with oversight of the mortgage-back 2 portfolio or junk bond? 3 A. Junk bond portfolio. I'm sorry. 4 Q. Now, sir, can you tell me, looking back 5 over the three and a half years of the equity risk 6 arbitrage portfolio, how that portfolio performed? 7 A. It performed profitably over the three 8 and a half years, yes. 9 Q. Do you recall exactly what the numbers 10 were, sir? 11 A. No. I don't recall exactly what the 12 numbers were. 13 Q. Sir, I'm going to provide you what's 14 been marked as Exhibit A5039. It's at Tab 1273. 15 It's a performance report for November 1988. 16 A1152 -- as well as A1152, which is not yet in 17 evidence. I misspoke. It's A11152, also known as 18 Crouser Exhibit 40. 19 Sir, we'll start with the performance 20 report, if you'll put that in front of you. Put 21 the performance report in front of you, sir. 22 A. (Witness complies.) 14293 1 Q. Is that the performance report for -- 2 do you have in front of you United Financial 3 Group, Inc. performance report November 1988? Is 4 that what you've got, sir? 5 A. That's what I have, yes. 6 Q. And that's Tab 1273, Exhibit A5039. 7 Right? 8 A. A5039, right. 9 Q. Let me direct your attention to Page -- 10 the first page -- full page of text after the 11 index which is the third page in under -- in the 12 table, it's the third entry which shows "trading 13 account net." 14 Do you see that, sir? 15 A. I see that. 16 Q. And under the year, November 17 year-to-date 1988. 18 Do you see that, sir? 19 A. I see that column. 20 Q. And what does that -- what's the number 21 you see there? 22 A. 49.3 million. 14294 1 Q. And let me now ask you to turn back to 2 Schedule DD. It's a little further in the 3 document. I think you and Mr. Guido may have 4 looked at one or another of these Schedule DDs. 5 Up in the upper right-hand corner, you'll see 6 "DD." 7 Do you see that? 8 A. DB? 9 Q. DD. "D" as in dog, "D" as in dog. 10 A. Yes, I have that. 11 Q. Look under "equity arbitrage" in the 12 middle -- it's probably about a third of the way 13 down the page. 14 Do you see that? 15 A. Yes. 16 Q. Okay. Do you see the year-to-date 17 amount, 60,389,000? 18 A. I see that number. 19 Q. And then the net number after cost of 20 carry at 49,289,000? 21 A. Yes, I see that. 22 Q. And it rounds to 49.3. Right? 14295 1 A. Yes. 2 Q. Does that refresh your recollection 3 that in the first 11 months of 1988, equity 4 arbitrage generated a net profit for USAT of $49.3 5 million? 6 A. That's what it says. 7 Q. Well, do you recall, sir -- 8 A. I don't recall a specific number, but 9 we -- we had a very good year that year. 10 Q. $49.3 million, is that in accord with 11 your recollection as to -- 12 A. That is in accordance with my 13 recollection. 14 Q. And that was generated by you and how 15 many other employees working with you? 16 A. Well, we had two traders and a backup 17 person. Four. 18 Q. A backup filing person? 19 A. Yes. 20 Q. Did the filing and -- 21 A. Yes. Telephone answerer. 22 Q. Answer telephones and make copies if 14296 1 necessary; is that right? 2 A. That's right. 3 Q. Apart from that, the costs incurred 4 were costs of a work station and portion of a 5 trading room desk; is that right? 6 A. Rent, yeah. 7 Q. Let me ask you to look at what's been 8 marked as A11152. 9 Do you see that, sir? 10 A. Yes, I see that. 11 Q. I'm going to go to the third page. I 12 have no reason to believe you've seen this 13 document, but I'm going to ask you if this 14 refreshes your recollection as to the total, over 15 the three and a half years of equity arbitrage, 16 what its profit contribution was to USAT. And 17 this is Bates stamp page No. OW125442? 18 MR. GUIDO: Has this document been 19 introduced into evidence as yet? 20 MR. VILLA: No. 21 MR. GUIDO: You want to describe the 22 document and introduce it into evidence before you 14297 1 ask any questions about it? 2 MR. VILLA: You know, I actually use 3 the rules of evidence like they are supposed to. 4 I'm going to read the witness a fact about the 5 history of equity arbitrage and ask him whether it 6 refreshes his recollection. When Ms. Crouser 7 comes, we can introduce it through her or we can 8 introduce it now. 9 MR. GUIDO: I object to the use of the 10 document that hasn't been introduced into evidence 11 nor has been authenticated in any way or described 12 in any way for the Court, Your Honor. 13 MR. VILLA: I move it into evidence, 14 Your Honor. it's part of the work papers of the 15 1988 examination of USAT provided to us by the 16 Office of Thrift Supervision and used in the 17 deposition of Ms. Crouser, who was the witness 18 that they were going to bring. 19 THE COURT: Received. 20 MR. GUIDO: Your Honor, I'd like to -- 21 is this a draft or part of an examination report 22 or is this a work paper? 14298 1 MR. VILLA: I believe this is a work 2 paper. 3 MR. GUIDO: Okay. 4 Q. (BY MR. VILLA) Let me direct your 5 attention to Bates stamp No. 125442. Down at the 6 bottom where they begin reviewing your equity 7 arbitrage portfolio, "Mr. Huebsch and his chief 8 analyst Diane Cunningham stated that they spent 9 about 75 percent of their time handling these 10 association service corporation portfolios and 25 11 percent of their time on Federated work, this 12 being portfolio work for other outside companies 13 of Charles E. Hurwitz. A review of association 14 records disclosed that these Federated companies 15 are billed quarterly" -- the next page is a blank 16 one -- "quarterly for proportionate share of costs 17 incurred managing their portfolios, including the 18 salaries of Mr. Huebsch and Ms. Cunningham." 19 Do you see that, sir? 20 A. Yes, I do. 21 Q. Now, does that refresh your 22 recollection about who paid for the proportionate 14299 1 share of your salary in connection with the equity 2 arbitrage work? 3 A. Yes. That would, yes. 4 Q. Now, let's jump down a paragraph to the 5 paragraph in the middle of the next -- of that 6 page, OW125444. 7 Do you see that, sir? 8 A. Yes. 9 Q. And I'll begin reading. "This program 10 has been financially successful to date. During 11 the three and one half years of its existence 12 through September 1988, the program has generated 13 net income of $60,014,000 from dividends and 14 profits on sales. This net income is after 15 deducting a calculated cost of money rate, 16 currently 8.5 percent, based on broker margin 17 rates and association certificate of deposit rates 18 but before operating expenses allocated to this 19 department. Operating expenses for the first six 20 months of 1988 were $220,706 of which $93,182 was 21 passed along to the Federated companies." 22 Do you see that, sir? 14300 1 A. I do. 2 Q. And then it goes on. 3 Does this refresh your recollection, 4 sir, about the total profit, at least through the 5 first three quarters of 1988, of the equity 6 arbitrage portfolio over which you had principal 7 control? 8 A. I believe this -- these numbers are in 9 line with my thinking. 10 Q. So, you and one or two analysts and one 11 file person generated $60 million of income for 12 USAT over a three-and-a-half-year period; is that 13 right, sir? 14 A. Yes, that's right. 15 Q. You're aware, sir, that you're not 16 named in the compensation count, aren't you, sir? 17 A. I am -- 18 Q. Of the notice of charges. 19 A. I am aware of that, yes, sir. 20 Q. Now, can you tell me, sir, how your 21 1988 bonus was determined? Do you remember that? 22 A. It was a mathematical formula based on 14301 1 profits that we made. 2 Q. And as we saw through November of 1988, 3 you earned $49.3 million in profits. Right? 4 A. That's right. 5 Q. Do you recall that USAT was placed into 6 receivership on December 31st, 1988? 7 A. I recall that, yes. 8 Q. Were you terminated by the federal 9 regulators at the time of the receivership? 10 A. No, I was not. 11 Q. They kept you on, didn't they? 12 A. Yes. 13 Q. And you began working for the new 14 thrift; is that right? 15 A. New United, right. 16 Q. New United. And there came a time when 17 New United asked you to leave; isn't that right? 18 A. That's right. 19 Q. And did you ask for your 1988 bonus? 20 A. Well, I found out some months later 21 that it was escrowed; and I made some calls but 22 could not find out, you know, where it was 14302 1 escrowed and who had charge of it. And I hired a 2 lawyer to track it down for me. 3 Q. So, despite the fact that you made 4 $50 million for USAT in 1988, the government 5 stopped -- would not permit the payment of your 6 bonus until you filed a lawsuit; isn't that right, 7 sir? 8 A. Well, they wouldn't release the amount 9 of money they had. And it was for the whole 10 department. The department wasn't that big. It 11 was for myself and Ms. Cunningham. 12 Q. And did you have to litigate with the 13 FDIC for several years for your bonus, sir? 14 A. Yes, I did. 15 Q. And did the FDIC eventually give up and 16 concede to you 100 percent of your bonus? 17 A. That's right, except for the escrow 18 fees. 19 MR. VILLA: Your Honor, I'm providing 20 the witness Exhibits B3033 and B3208, and we've 21 previously given copies to the OTS. 22 Q. (BY MR. VILLA) Mr. Huebsch, do these 14303 1 two documents reflect the settlement that you 2 entered into with the FDIC and the order of the 3 United States District Court here in Houston upon 4 that settlement? 5 A. Yes. This is -- this one from Elaine 6 Block was the one from mediator that the judge 7 appointed, and this -- 8 Q. Exhibit B3033 is the one you're 9 referring to that -- 10 A. Yes. And 3208 is the order from the 11 Court. 12 MR. VILLA: Your Honor, I move them 13 into evidence. 14 MR. GUIDO: No objection, Your Honor. 15 MR. VILLA: Mister -- 16 THE COURT: Received. 17 Q. (BY MR. VILLA) -- Huebsch, 18 Exhibit 3208 contains an order at the end and, 19 quote, "It is further order that had all claims by 20 each and every party in this case against each and 21 every other party are hereby dismissed with 22 prejudice by each party to bear their own costs 14304 1 and attorneys fees." 2 Do you see that? 3 A. I see that. 4 Q. Now, did you have to pay attorneys' 5 fees in order to collect your bonus for your 1988 6 services? 7 A. Yes, I did. 8 Q. What was the order of magnitude of 9 those fees? 10 A. I believe it was around $50,000. 11 Q. And nobody reimbursed you for that? 12 A. I was not reimbursed by anybody. 13 Q. In your career, Mr. Huebsch, have you 14 focused your attentions and energies on the 15 workings of committees, writing reports, 16 understanding accounting rules, or regulatory 17 issues? 18 A. No. I have not focused on those. 19 Q. What discipline have you devoted your 20 life to, sir? 21 A. Trading and trying to make money by 22 trading stocks. 14305 1 Q. Looking back at your four plus years at 2 USAT, did you do the best you could for the 3 company? 4 A. I felt that I did the best I could. 5 Q. And did you discharge the 6 responsibilities you were given to the best of 7 your abilities? 8 A. I felt I did. 9 Q. Mr. Huebsch, you told us that you're 67 10 years old; is that right? 11 A. That's right. 12 Q. Would it be fair to say that you're 13 nearing the end of your professional career? 14 A. I think you're right, yes. 15 Q. Do you expect in the near future to be 16 retiring and severing your connection with MAXXAM, 17 Federated, and Bering? 18 A. It's very likely, yes, Mr. Villa. 19 Q. And why is that, Mr. Villa? 20 A. Well, I've been at it 40 years. I have 21 had a bout with prostate cancer and an operation 22 in the last two years. I have a family. I have 14306 1 this cloud over me and I hope, you know, to retire 2 shortly. 3 Q. And hope to retire. Thank you, 4 Mr. Huebsch. No further questions. 5 THE COURT: Do the other respondents 6 have questions? 7 MR. BLANKENSTEIN: No questions, Your 8 Honor. 9 MR. EISENHART: I have no questions, 10 Your Honor. 11 MR. KEETON: No, Your Honor. 12 THE COURT: Do you have some redirect? 13 MR. GUIDO: I have a couple of 14 questions, Your Honor. 15 THE COURT: All right. 16 17 FURTHER EXAMINATION 18 19 Q. (BY MR. GUIDO) I'd like to show you a 20 couple of documents that are in the record, 21 Mr. Huebsch, and ask you about them. One is at 22 Tab 1306, which is the board of directors minutes 14307 1 of February 19th, 1987, and it's A1124. The other 2 is the business plan of United Financial Group of 3 August 29th, 1986. And it is at -- there's two 4 tabs. Tab -- one of the tabs, I think, is 91. 5 Let me show you the document which is at Tab 91, 6 which is the business plan. It's dated August 7 29th, 1986. 8 MR. GUIDO: I think it comes in in two 9 different places in two different forms, Your 10 Honor. One is at Tab 184, and that's in as 11 A10663. The Tab 91 is in at Twomey No. 21. 12 Q. (BY MR. GUIDO) I'd like to direct 13 your attention to Page 8 of the business plan and 14 the minutes of the board of directors of 15 United Financial Group of February 19th packet and 16 direct your attention to the list of members of 17 the -- it's Page 4 of 25, and that is at Bates 18 stamp US33094 (sic). 19 THE COURT: Which document is that last 20 one? 21 MR. GUIDO: A1124, which are the 22 minutes. That is at US303194. 14308 1 Q. (BY MR. GUIDO) Now, I direct your 2 attention to both of those in light of some 3 questions that your counsel asked you on 4 cross-examination about what your role was at USAT 5 between the time period 1984 through 1988. 6 Do you see in the minutes of the -- I 7 mean the business plan, the 1986 business plan, on 8 Page 8, the description of those people who are 9 executive officers of the association? 10 A. Yes, I see that. 11 Q. It says, "Information concerning the 12 principal occupations of the directors of the 13 executive office of the association for the past 14 five years is set forth below. And then it sets 15 out various responsibilities." 16 And if you flip over to Page 10, you 17 see where it says "Mr. Huebsch has been investment 18 manager and executive vice president since 19 February 1985." 20 Do you see that? 21 A. I see that. 22 Q. Anywhere in this document does it 14309 1 indicate anyone else is in charge of the 2 mortgage-backed security portfolio for the past 3 five years or in charge of investments? 4 A. I haven't had a chance to read it. I 5 don't see it in a quick perusal. 6 MR. VILLA: Well, whatever it says, it 7 says, Your Honor. On direct, he asked him if he 8 had ever seen the document before and he said he 9 never had. It's about 50 pages long. 10 Q. (BY MR. GUIDO) Well, let me read the 11 names to you that go from Page 8 to 10. Did 12 Mr. Duckett, did he have responsibility for 13 managing the mortgage-backed security portfolio? 14 A. Not that I'm aware of. 15 Q. Did Mr. Gross? 16 A. No, not that I'm aware of. 17 Q. Did Mr. Keltner? 18 A. No. 19 Q. Did Mr. Kozmetsky? 20 A. No. 21 Q. Did Mr. LeMaistre? 22 A. No. 14310 1 Q. Did Mr. Munitz, other than sitting on 2 the investment committee? 3 A. No. 4 Q. Did Mr. Silverman? 5 A. No. 6 Q. Did Mr. Sterling? 7 A. No. 8 Q. Did Mr. Whatley? 9 A. No. 10 Q. Did Mr. Williams? 11 A. No. 12 Q. Did Mr. Winters? 13 A. No. 14 Q. Did Mr. Berner? 15 A. No. 16 Q. Did Mr. Crow, prior to Sandy Laurenson 17 arriving? 18 A. No. 19 Q. Did Mr. Wolfe? 20 A. No. 21 Q. Did Mr. Williams? 22 A. No. 14311 1 Q. Did Mr. Patterson? 2 A. No. 3 Q. Did Mr. Childress? 4 A. No. 5 Q. Did Mr. Graham? 6 A. No. 7 Q. Mr. Jackson? 8 A. No. 9 Q. And did Mr. Gray? 10 A. No. 11 Q. Now, take a look at 1124, which are the 12 minutes of the board of directors setting out who 13 the officers are of the association. And I'd like 14 to direct your attention to, as I said, Bates 15 stamp 300-3194. 16 A. I see that. 17 Q. See under "investments," it says "Ron 18 Huebsch, executive vice president"? 19 A. Right. 20 Q. And under it, it has Sandy Laurenson, 21 senior vice president? 22 A. Right. 14312 1 Q. Clint Carlson, assistant 2 vice president? 3 A. Right. 4 Q. Lauren Jordan, assistant 5 vice president? 6 A. Right. 7 Q. Did Clint Carlson report to you? 8 A. Yes. 9 Q. Did Lauren Jordan report to you? 10 A. No, she didn't report to me. 11 Q. She didn't report to you? Who did she 12 report to? 13 A. She would report to whoever was then in 14 charge of high-yield bonds. 15 Q. Now -- 16 A. Probably either Dorsey or Stodart. I 17 don't know whether Stodart, though. 18 Q. In February of 1987, were you managing 19 the high-yield bond portfolio? 20 A. No. Dr. Dorsey had taken that over. 21 Q. Now, you were shown -- I think it's the 22 Exhibit B3816, the publication, the in-house 14313 1 publication? 2 A. Yes, yes. I remember that. 3 Q. And I'd like to direct your attention 4 to the first page of that document if you have it 5 in front of you. 6 A. Yeah, I've got it. Okay. I probably 7 have it here. Yeah. 8 Q. See in the far left-hand corner, the 9 bottom, it says "Ron (whose last name is 10 pronounced Huebsch)" -- 11 A. Yeah, that's me. 12 Q. It says "Joined United on July 1, 1984, 13 to set up the investment department." 14 Do you see that? 15 A. I see that. 16 Q. It says "He switched over from 17 Federated Development Company where he had managed 18 the investment operations for more than 15 years." 19 Do you see that? 20 A. I see that. 21 Q. Did you continue to manage Federated 22 Development Company's investment portfolio after 14314 1 July 1, 1984? 2 A. Well, I -- let me put it this way: 3 When they set up a risk arb portfolio -- I don't 4 know whether they had one at this time -- I 5 managed it. I don't know whether they had one at 6 this time. They -- 7 Q. Between July 1984 and the end of the 8 year 1985, did you manage any investments for 9 Federated Development? 10 A. Yes. I believe I did, yes. 11 Q. And did you manage investments for 12 MAXXAM? 13 A. I can't remember, though I might have. 14 Q. Now, you were shown a document, A1640, 15 which is Tab 522, which are the minutes of the 16 asset/liability committee. 17 A. Yes, I have that. 1640? 18 Q. 1640. 19 A. Yeah, I have it. 20 Q. You have that with you? Okay. 21 Who are the members of that committee? 22 A. Well, Mr. Crow, Huebsch, Jackson, 14315 1 Phillips, Patterson, and Hansen, it says here. 2 Q. Now, you testified a number of times 3 about what you've called senior management. 4 A. Yes. 5 Q. Were any of those individuals senior 6 management? 7 A. Well, I guess Mike Crow was. 8 Q. Did you report to Mike Crow? 9 A. No. 10 Q. Did you -- 11 A. Well, I may have, you know, on, you 12 know, financial and, you know, money matters. 13 Q. Did he do your performance evaluations? 14 A. No. 15 Q. Who did that? 16 A. Jerry Williams and Jenard. 17 Q. And I think you testified that you sent 18 your bonus proposals to Mr. Munitz and 19 Mr. Hurwitz. 20 Do you recall that? 21 A. Yes. 22 Q. Are those the four people that you have 14316 1 been referring to as senior management? 2 A. Well, they would certainly be included 3 in senior management, yes. 4 Q. Now, you sat on the -- not in addition 5 to the asset/liability committee, but you sat on 6 the investment committee, did you not? 7 A. That's right, yes. 8 Q. And did you actively participate in the 9 meetings of the investment committee? 10 A. I tried to, yes. 11 Q. Now, when you -- you've talked about 12 your responsibilities during the time period 1984 13 through '85, and you've indicated that you weren't 14 particularly familiar with regulatory matters. 15 Do you recall that testimony? 16 A. That's right. 17 Q. Did you ever attempt to ascertain what 18 the duties and responsibilities were under the 19 applicable regulations as they applied to officers 20 of insured depository institutions? 21 A. No, I didn't ascertain that. I was -- 22 I left those matters to our legal department. 14317 1 Q. So, you never yourself attempted to 2 ascertain what your personal responsibilities 3 were? 4 A. No. I'm sure they would have told me 5 if I was doing anything wrong. 6 MR. GUIDO: No further questions, Your 7 Honor. 8 MR. VILLA: No questions, Your Honor. 9 THE COURT: Thank you, Mr. Huebsch. 10 You may step down. 11 Are you calling another witness, 12 Mr. Guido? 13 MR. GUIDO: Your Honor, I think we need 14 to take a break. I have to go find Mr. Veis, I 15 think, and we will be calling one of our experts. 16 THE COURT: We'll take a short recess. 17 18 (Whereupon a short break was taken.) 19 20 THE COURT: We'll be back on the 21 record. Mr. Veis. 22 MR. VEIS: Good afternoon, Your Honor. 14318 1 The OTS calls Lois Suder. 2 THE COURT: Would you take the oath, 3 please? 4 5 LOIS SUDER, 6 7 called as a witness and having been first duly 8 sworn, testified as follows: 9 10 EXAMINATION 11 12 Q. (BY MR. VEIS) Would you please state 13 your full name? 14 A. Lois Macdonald Suder. 15 Q. Where do you live, Ms. Suder? 16 A. I live at 3116 Beacon Bay Place in 17 Davis, California. 18 Q. Who is your employer? 19 A. I work for LECG, Inc. 20 Q. And what's your business address? 21 A. 980 9th Street in Sacramento, 22 California. 14319 1 Q. What is your position with LECG, Inc.? 2 A. Well, I have two positions. One is the 3 director of the Sacramento office. The other is 4 as a senior managing consultant. 5 Q. Would you please describe your 6 educational background? 7 A. Yes. I have a bachelor's degree, cum 8 laude, from the University of California at Santa 9 Barbara. The degree was in classical Greek. Then 10 I went back to school at Sacramento State 11 University in Sacramento and did all of the core 12 course work for the accounting curriculum, about 13 two and a half years' worth, and then became a 14 CPA. 15 Q. When did you pass the CPA examination? 16 A. I passed it in 1983. 17 Q. When were you certified as a public 18 accountant? 19 A. Two years later, in 1985, after getting 20 my two years' experience. 21 Q. Would you describe briefly your 22 employment history since completing your work at 14320 1 California State University at Sacramento? 2 A. Yes. I worked for what was then known 3 as Peat Marwick Mitchell -- it's now KPMG 4 Peat Marwick -- for two years, and got certified 5 there. 6 Then from 1985 through 1989, I worked 7 for two different savings and loan associations as 8 controller and chief financial officer and 9 senior -- excuse me -- senior vice president of 10 finance. 11 In 1989 and 1990, I worked for an 12 Australian company that made cookies and crackers 13 as well as macadamia nuts, and I was their CFO. I 14 spent about a year with my own CPA practice doing 15 business consulting and a little bit of litigation 16 consulting. And then I joined LECG, my current 17 employer, in 1991. 18 Q. Would you please describe your 19 responsibilities at LECG? 20 A. Yes. As a senior project manager, I am 21 responsible for all aspects of litigation cases. 22 We are an economic consulting firm, and we 14321 1 primarily do litigation support. 2 So, I will be responsible for budgeting 3 a project, designing all of the work that will be 4 done in terms of supporting economic testimony, 5 supporting the expert in terms of report 6 preparation, deposition preparation. I manage 7 staff, frequently large staffs on large jobs, and 8 consult with attorneys as needed. 9 Q. What were your responsibilities when 10 you began to work at LECG? 11 A. When I first started, I was a staff 12 consultant and I worked primarily on savings and 13 loan related cases because my background is 14 definitely in savings and loans. 15 Q. Did there come a time when you became 16 familiar with a database relating to 17 below-investment grade bonds purchased by various 18 savings and loan associations? 19 A. Yes, I did. 20 Q. How did you become familiar with that 21 database? 22 A. Well, basically I helped create that 14322 1 database and manage that project. 2 Q. How was that database developed? 3 A. The database started as a database 4 compiled by the accounting firm of Kenneth 5 Leventhal. They had gone out to the field and 6 gathered the information related to 7 below-investment grade bonds for -- I think it was 8 53 plaintiff savings and loans in an action 9 against Milken and Drexel. 10 That information that they gathered was 11 given to LECG and asked if we could either make it 12 complete or make sense out of it because if you 13 took the buys and the sells, it just didn't make 14 sense. LECG used a number of different sources to 15 make a complete database that made sense. 16 Q. What were the sources that LECG used? 17 A. Well, the first thing we did was 18 gathered the information so that the population of 19 bonds that was even in that database could be 20 properly identified. We used the CUSIP directory, 21 directory CUSIP being the unique identifier for a 22 bond. We found out who the issuers actually were 14323 1 and the differences between the bonds so that we 2 could have a population that was uniform across 3 all these 53 savings and loans that we were 4 working on. 5 Then we went to the Drexel database 6 which we had access to and we ran the trading and 7 the accounts for the S&Ls that were there and 8 compared them to the information we had and 9 matched them. We got additional information from 10 people out in the field at the savings and loans 11 or at the successor organizations, whatever they 12 might be and input that information, as well, and 13 compared it and audited it. 14 Q. What kinds of information did you get 15 from the institutions themselves? 16 A. Well, we normally got records from the 17 institution. It might be an inventory showing the 18 bonds that they held at a particular point in time 19 or numerous points in time. 20 In the case of USAT, for instance, we 21 got all the trade tickets for the association. It 22 could be inventories as the association was taken 14324 1 over and went to -- at that time, it was the RTC, 2 the Resolution Trust Corporation. 3 Q. Now, you made reference to the Drexel 4 database? 5 A. Yes. 6 Q. Do you recall that? Could you explain 7 what the Drexel database was? 8 A. The Drexel database is a transaction 9 database from Drexel Burnham Lambert. It was 10 gathered by -- it was taken off the Drexel system 11 and gathered by Peat Marwick. Peat Marwick then 12 took the trading -- there were initially 13 apparently 400 tapes and they took the trading 14 down to 25 tapes that represented the 15 below-investment grade bond trading and related 16 equities. And then that -- those tapes were given 17 to LECG. 18 Q. Well, how did LECG use the information 19 obtained from the Drexel database? 20 A. We used it in various ways. As I 21 mentioned a minute ago, we used it to verify or to 22 augment information that was given to us from the 14325 1 Kenneth Leventhal database or information out in 2 the field. 3 Q. Did LECG take any action to determine 4 the reliability of the Drexel database? 5 A. Well, we did by the process of 6 comparing the information in the Drexel database 7 with the information that we had from other 8 sources, including field records, RTC records, 9 trade tickets, that type of thing, yes. 10 Q. Did LECG take any steps to assure 11 itself that the information it received from 12 Drexel was, in fact, consistent with the 13 information in Drexel's own records? 14 A. Well, to the extent that Drexel -- the 15 Drexel trading database had also been given to 16 Perot data systems in Texas, we were almost always 17 asked to compare the information that we had with 18 what was coming off the Perot system by other 19 attorneys who were doing research, and it was in 20 all cases the same. 21 I also had another savings and loan 22 case that I worked on, and the other side in that 14326 1 particular case went directly to the liquidating 2 trust and asked for information on junk bonds and 3 it was the same as what we had. 4 Q. Now, did LECG take any action to assure 5 the reliability of its own database? 6 A. Oh, yes. In fact, part of the reason 7 it was such a long, large project was because we 8 were trying to make absolutely certain that all of 9 the transactions we had captured we had done 10 correctly and that there would be no bias in any 11 direction for any savings and loan, and there were 12 53 of them. 13 We spent a lot of time what we refer to 14 as auditing, verifying the transactions with -- 15 against trade tickets, against the Drexel 16 database, against themselves for internal accuracy 17 and reasonableness, and we kept records of all of 18 this. We had what we refer to as audit -- audit 19 binders on each of them which would indicate the 20 transactions we were researching, what we did with 21 them, and why we did what we did and what the 22 support was. 14327 1 Q. Did LECG reconcile the information 2 obtained from all those various sources? 3 A. Yes, we did. That's what part of that 4 whole process -- what we refer to as the audit 5 process was. 6 Q. Now, how long did it take to compile 7 the savings and loan database? 8 A. I think the project took approximately 9 a year and three months or a year and four months 10 from beginning to end. 11 Q. And how many people were involved? 12 A. Oh, I would say I had as many as 13 probably 15 people working with me at the height 14 of the project when we were -- when we were really 15 working on a number of the institutions all at the 16 same time. 17 Q. And did you supervise the entire 18 project? 19 A. Yes, I did. 20 Q. Now, what was the purpose of LECG 21 developing its savings and loan database? 22 A. The purpose of this database was to 14328 1 allocate the proceeds from the Milken/Drexel 2 settlement. It was, I believe, approximately $900 3 million. And the RTC and the FDIC, for whom we 4 were working, wanted to have a consistent, 5 appropriate way to allocate those proceeds across 6 all of the institutions who had been plaintiffs in 7 this lawsuit, the 53. And so, this database was 8 developed so that there would be a consistent 9 methodology for the allocation process. 10 Q. Now, how did LECG determine what was a 11 Drexel underwritten bond? 12 A. Well, that was a reserve research in 13 and of itself. We spent quite a bit of time on 14 that project. The first thing obviously was to 15 identify the correct CUSIP and the information 16 about the bond. Once we had done that, then there 17 were a number of sources we used. We used the 18 Standard & Poors and the Moody's bond guides. We 19 used a database that we purchased, Securities Data 20 Corporation on non-convertible debt. We used 21 another source that is published by, I believe, 22 Bonds Investors Group of America, referred loosely 14329 1 to as the "big bond book" which is regarding 2 below-investment grade bond. 3 Q. Does the LECG savings and loan database 4 represent the best available compilation of 5 information with respect to the below-investment 6 grade bonds purchased by the 53 plaintiff savings 7 and loan associations? 8 A. Yes, I believe it does. 9 Q. Does the LECG savings and loan database 10 represent the best available compilation of 11 information with respect to Drexel underwritten 12 below-investment grade bonds purchased by the 13 plaintiff savings and loan associations? 14 A. Yes, I believe it does. 15 Q. Was United Savings Association of Texas 16 one of the 53 plaintiff savings and loan 17 associations? 18 A. Yes, it was. 19 Q. Now, with respect to United Savings 20 Association of Texas, what specific information 21 was available to LECG relating to purchases of 22 below-investment grade bonds? 14330 1 A. Initially, we had the information that 2 Kenneth Leventhal had gathered in the field, and 3 it was spotty. We did run the Drexel trading to 4 try to integrate that with what we had from the 5 field, and it was still pretty spotty. Someone, I 6 believe, sent by the attorneys who were working on 7 the case went back into the field and then we were 8 given all of the trading tickets for USAT, and we 9 input all of the trading tickets. So, that became 10 the real source for the database for USAT. 11 MR. VEIS: Your Honor, we offer Ms. 12 Suder as an expert on the contents and structure 13 of the Drexel data business and the LECG savings 14 and loan database. 15 MR. EISENHART: Your Honor, I have no 16 objection to her testifying on those subjects. 17 THE COURT: All right. Certified as an 18 expert. 19 Q. (BY MR. VEIS) Ms. Suder, have you 20 prepared a report concerning Drexel underwritten 21 below-investment grade bonds purchased by United 22 Savings Association of Texas? 14331 1 A. Yes. 2 Q. What is the subject matter of the 3 report that you've prepared? 4 A. The subject matter is the principal 5 loss on Drexel underwritten below-investment grade 6 bonds at USAT. 7 Q. And what specifically were you asked to 8 address in your report? 9 A. I was asked to address what was the 10 principal loss on those below-investment grade 11 bonds which were purchased by USAT. 12 Q. Ms. Suder, I show you a document that's 13 been marked as Exhibit A14001. 14 Do you recognize that document? 15 A. Yes, I do. 16 Q. What is it? 17 A. It's the expert report that we just 18 spoke -- of which we just spoke. 19 Q. And you prepared that document? 20 A. Yes, I did. 21 MR. VEIS: Your Honor, I move the 22 admission of Exhibit A14001. 14332 1 MR. EISENHART: I have no objection, 2 Your Honor. 3 THE COURT: Received. 4 Q. (BY MR. VEIS) Ms. Suder, did you 5 reach a conclusion as to the amount of the 6 aggregate principal losses suffered by United 7 Savings Association of Texas in connection with 8 Drexel underwritten below-investment grade bonds 9 purchased by it? 10 A. Yes, I did. 11 Q. What is that conclusion? 12 MR. EISENHART: Your Honor, I would 13 object to the expression of such a figure. That's 14 not what she has set forth in her report. That 15 figure is not -- not a figure set forth in the 16 report. As Mr. Veis has phrased the question, she 17 is being asked to give a number that represents 18 the so-called total losses on high-yield bonds. 19 That's not what her report sets forth. 20 THE COURT: I know this is an issue, 21 but I think we'll just proceed and hear cross on 22 that. Denied. 14333 1 Q. (BY MR. VEIS) What is your 2 conclusion, Ms. Suder? 3 A. The principal loss on Drexel 4 underwritten below-investment grade bonds 5 purchased by USAT was $347,096,688. 6 Q. Where is that set forth in your report? 7 A. That's in the third paragraph on 8 Page 1. 9 Q. Now, what factors does that calculation 10 reflect? 11 A. It reflects -- it reflects those bonds 12 which had a principal loss. 13 Q. And what factors does it exclude? 14 A. It excludes those Drexel underwritten 15 bonds which resulted in a principal gain, and it 16 excludes interest payments in kind and payments in 17 kind. 18 Q. Turning to the attachment to your 19 report, would you please explain to the Court the 20 process by which the data were compiled and your 21 calculations made? 22 A. Yes. This report is the result of 14334 1 querying the database and asking it to give 2 each -- the transactional information for each 3 transaction for those bonds. And when I say 4 "bonds," I'm talking about below-investment grade 5 bonds -- that resulted in a principal loss. 6 So, beginning with the left side of the 7 report, the first column says "CD" under 8 underwriter. That really says -- means confirmed 9 Drexel. This report is all entirely confirmed 10 Drexel. 11 The next column, "CUSIP," is the unique 12 identifier for the bond that I mentioned earlier. 13 Next is a description of the bond, 14 including who issued the bond, the coupon, and the 15 maturity date of that bond. 16 Then starting about the middle of the 17 page is the transactional data. So, it starts 18 with the date of the transaction. "B" or "S" 19 indicates it's either a buy or a sell. Then the 20 price of that particular transaction, the 21 principal amount of the transaction that was 22 either bought or sold, and then the column which 14335 1 says "amount" is simply an extension of price 2 times quantity. A negative sign meaning it was 3 money going out, you bought it. A positive 4 meaning that it was money coming in, you sold it 5 and you got money coming in. Then the gain or 6 loss is the calculation of gain or loss for each 7 security. 8 Q. Now, how did you calculate the loss on 9 each of the securities set forth in the attachment 10 to your report? 11 A. The methodology actually is we took the 12 weighted average buy price and then the weighted 13 average sell price and then took the difference 14 between those two, multiplied it times the 15 principal bought or sold, and got the loss that's 16 shown here. You could have done it -- you take 17 the first buy and then match it to the first sell 18 or you take the last sell and match it to the 19 first buy. That would be FIFO and LIFO 20 conventions. It's going to end up at the same 21 place. The thing is I don't know for each 22 association and for each transaction how they 14336 1 match their buys and sells. The important thing 2 is when you look at all the trading together for 3 the one bond, what's the total result of the buy 4 or sell. 5 Q. Now, were there instances where you had 6 no price information for transactions? 7 A. Yes, there were. And the reason that 8 we had that is our intent was to capture all of 9 the trading. There were times when we knew the 10 trading occurred and we could see the trading, but 11 we couldn't tell the price. And in order to 12 capture it, to have as complete a picture as 13 possible, we put it in at a zero price. For 14 instance, if you were going to go to Page 5 and if 15 you were to look at the last group of transactions 16 which is McCall, it says "Cell" -- Cellular 17 Communications is actually what that bond was 18 called. At the bottom of Page 5, you would see -- 19 the third transaction down, you would see a buy on 20 August 15th, 1988, at zero for a million-dollar 21 buy. 22 When a buy -- the convention that we 14337 1 use throughout this entire database which is all 2 53 savings and loans. The convention we used was 3 if we had a buy that was unpriced and we had one 4 or more buys that were priced, we applied the 5 weighted average buy price that we had for however 6 many buys there were and we used that for the buy 7 which was unpriced. 8 So, in other words, in this case, we do 9 have one buy at 100 and then we have one buy that 10 has no price on it. So, we applied the 100 price 11 to the second buy and calculated the gain or loss 12 on the entire principal amount. 13 Now, if it was a sell that was not 14 priced, the sells being the ones that have a lot 15 more fluctuation in price -- if you turn to 16 Page 8, I can show you an example of how that was 17 handled. The first set of transactions at the top 18 of the page, RJR Holdings, you will see -- the 19 last of those four transactions on August 15th, 20 1990, you'll see a sell with a zero for 1,750,000. 21 In this case, there was one buy for 22 6,750,000 and then there was a sell of 3 million 14338 1 and then a sell of 2 million, both of which have 2 prices. 3 So, in this case, what we would do is 4 we would take the weighted average sell price -- 5 in other words, I would just do a calculation. 6 $3 million were sold at 90 and $2 million were 7 sold at 95. That gives -- you have a weighted 8 average sell price of 92. And I would take the 9 difference between the weighted average sell price 10 of 92 and compare it to the buy price of 100. 11 That gave me an eight-point difference. But the 12 eight-point difference, the loss in this case is 13 only applied to the $5 million that we actually 14 had a price for. 15 So, the 1,750,000 that was sold but I 16 don't have a price for it, there is no gain or 17 loss associated with that 1,750,000. We believe 18 that to be the most conservative way to handle it 19 when we didn't have a sell price. 20 Q. So, in other words, you simply backed 21 out the principal amount of any buy that -- for 22 which you did not have a corresponding sale with a 14339 1 price? 2 A. Yes, yes. That's another way of saying 3 it. 4 Q. Now, how is the total principal loss 5 derived? 6 A. The total of the principal losses, 7 which is on Page 11 at the last number that's 8 written there, that total is just a sum of the 9 losses that were calculated for each bond. 10 Q. Ms. Suder, are you aware of an expert 11 report submitted in this case by Dr. Lawrence 12 Benveniste? 13 A. Yes, I am. 14 Q. Was Dr. Benveniste critical of your 15 report? 16 A. Yes, he was. 17 Q. Was he critical of the mathematical 18 accuracy of your report? 19 A. No, he was not. 20 Q. Was he critical of your report because 21 it included principal losses on Drexel 22 underwritten junk bonds that were purchased after 14340 1 the date USAT was placed in receivership? 2 A. Yes. 3 Q. If, hypothetically, principal losses 4 associated with those purchases were not legally 5 the responsibility of the respondents, would 6 you -- would it affect your calculation of 7 principal losses? 8 A. There were three of them, and I believe 9 they totaled $1.18 million. So, it would reduce 10 this 47-million-dollar loss by 1.18 million. 11 Q. Now, in your report, do you express an 12 opinion as to whether the respondents are or are 13 not responsible for losses on post receivership 14 purchases of Drexel underwritten junk bonds? 15 A. No, I don't. 16 Q. Why not? 17 A. I believe that to be a legal issue, and 18 I'm not an attorney. 19 Q. Was Dr. Benveniste critical of your 20 report because you did not mark the USAT portfolio 21 of Drexel underwritten junk bonds which incurred 22 principal losses to market as of the date of the 14341 1 receivership and limit your calculation of 2 principal losses to those principal losses that 3 were incurred prior to the date of the 4 receivership? 5 A. Yes, he was critical of that. 6 Q. Now, in your report, do you express an 7 opinion as to whether the respondents are or are 8 not responsible for post-receivership principal 9 losses on Drexel underwritten junk bonds purchased 10 by USAT prior to the receivership? 11 A. No. 12 Q. Why not? 13 A. Again, I believe that calls for a legal 14 opinion. 15 Q. Was Dr. Benveniste critical of your 16 report because in calculating principal losses you 17 did not take into account principal gains on sales 18 of Drexel underwritten junk bonds purchased by 19 USAT? 20 A. Yes. 21 Q. In your report, do you express an 22 opinion as to whether the respondents are or are 14342 1 not entitled to net principal gains on Drexel 2 underwritten junk bonds purchased by USAT against 3 principal losses on Drexel underwritten junk 4 bonds? 5 A. No. I don't express an opinion on 6 that. 7 Q. Why not? 8 A. I believe that was a legal issue, also. 9 Q. Was Dr. Benveniste critical of your 10 report because you did not take into account 11 interest earned and USAT's cost of funds and 12 assess the profitability or lack of profitability 13 in USAT's portfolio of Drexel underwritten junk 14 bonds? 15 A. Yes. 16 Q. In your report, do you express an 17 opinion as to whether interest earned and USAT's 18 cost of funds should reduce the amount of 19 principal losses attributable to Drexel 20 underwritten junk bonds owned by USAT? 21 A. No, I don't. 22 Q. Why not? 14343 1 A. I believe that to be a legal issue. 2 Q. Was Dr. Benveniste critical of your 3 report because you did not take into account 4 principal gains and losses, interest earned, and 5 USAT's cost of funds and assess the profitability 6 or lack of profitability in USAT's entire 7 portfolio of junk bonds? 8 A. Correct, yes. 9 Q. And in your report, do you express an 10 opinion as to whether the performance of USAT's 11 entire junk bond portfolio should or should not 12 reduce the amount of principal losses attributable 13 to Drexel underwritten junk bonds owned by USAT? 14 A. No. 15 Q. Why not? 16 A. Again, I think that calls for a legal 17 opinion. 18 Q. Were you asked by the Office of Thrift 19 Supervision to prepare another report? 20 A. Yes, I was. 21 Q. What was the subject matter of that 22 report? 14344 1 A. The holdings of Drexel and two 2 entities, their stock, MCO Holdings and Federated 3 Development Company. 4 Q. With respect to Drexel's holdings of 5 MCO stock, what did you do to determine Drexel's 6 ownership? 7 A. I compiled the information that I could 8 find from their SEC files, their 13F filings. 9 Q. What is a Form 13F? 10 A. 13F is a filing, quarterly filing, that 11 institutional investors need to file with the SEC. 12 Q. And what's required to be reported on 13 Form 13F? 14 A. The institutional investors' holdings 15 in publicly-traded SEC registered, traded 16 companies. 17 Q. Where did you obtain the form 13Fs that 18 you reviewed? 19 A. I got some of the Form 13Fs from a 20 third-party vendor by the name of CDA Spectrum, 21 and then I got the other 13Fs through the OTS from 22 Disclosure, Inc. 14345 1 Q. What's your understanding of the term 2 "firm account"? 3 A. "Firm account," as I understand it, are 4 those accounts that the reporting entity owns. 5 Q. Ms. Suder, I hand you a document that's 6 been marked as Exhibit A14002. 7 Do you recognize that document? 8 A. Yes, I do. 9 Q. What is it? 10 A. This is a printout of the -- of a 11 portion of the information that CDA Spectrum gave 12 us. We received it in electronic format. 13 Q. And this is a Form 13F in electronic 14 format? Is that your testimony? 15 A. Yes, it is. 16 Q. And what's the date on that? 17 A. This particular one is for September of 18 1986. 19 MR. VEIS: Your Honor, I move the 20 admission of Exhibit A14002. 21 MR. EISENHART: Your Honor, I have no 22 objection. 14346 1 THE COURT: Received. 2 Q. (BY MR. VEIS) Ms. Suder, directing 3 your attention to Page 17 of Exhibit A14002, does 4 it indicate on Page 17 the number of shares of MCO 5 Holdings, Inc. owned by Drexel on September 30, 6 1986? 7 A. Yes, it does. In the second column 8 from the right, that indicates the number of 9 shares. In this case, 233,600 shares. 10 MR. EISENHART: Your Honor, I think 11 we're on the wrong page here. I'm not finding it 12 on Page 6. 13 MR. VEIS: I apologize. This is a 14 reprint. Let me explain this on the record. The 15 deposition exhibit that they are looking at is -- 16 has a black line across the top, and that's the 17 reason that we have supplied -- I supplied 18 Mr. Nickens earlier this afternoon a copy of these 19 two documents. If you look at copies that I 20 supplied on Page 17, because of the duplicating 21 problems with the deposition exhibits, we 22 reprinted them and marked them separately. 14347 1 Q. (BY MR. VEIS) Returning now to 2 Page 17, you were saying? 3 A. Yes. The second column from the right, 4 it shows the number of shares, which in this case 5 was 233,600. 6 Q. And does that indicate the percentage 7 of shares of MCO Holdings owned by Drexel on 8 September 30, 1986? 9 A. The far right-hand column does, the 10 4.1744 11 Q. Ms. Suder, I show you a document that's 12 been marked Exhibit A14003. I'll represent that 13 this had a similar problem when duplicated by the 14 court reporter at the deposition, and I have 15 supplied a clean copy to Mr. Nickens' firm and 16 other counsel. 17 Do you recognize that document, 18 Ms. Suder? 19 A. Yes, I do. 20 Q. What is it? 21 A. This a printout of the 13F printout 22 received from CDA Spectrum for December 1986 for 14348 1 Drexel. 2 Q. Directing your attention to Page 14 of 3 Exhibit A14003, does Exhibit A14003 indicate the 4 number of shares of MCO Holdings, Inc. owned by 5 Drexel on December 31, 1986? 6 A. Yes, it does. Again, in the column 7 second from the right, the same 233,600 shares is 8 shown there. 9 Q. Now, are Exhibits A14002 -- I'm sorry. 10 Does it indicate the percentage of 11 shares of MCO Holdings owned by Drexel on December 12 31, 1986? 13 A. Yes. The far right-hand column shows 14 4.1744 percent. 15 Q. Are these exhibits, A14002 and 14003, 16 typical of the Forms 13F that you received from 17 CDA Spectrum? 18 A. Yes, they are. 19 Q. Ms. Suder, I show you a document dated 20 March 31, 1988, which has been marked as 21 Exhibit A14004. It appears to be a Form 13F. 22 Do you recognize that document? 14349 1 A. Yes, I do. 2 Q. What is it? 3 A. This is the 13F filing that came from 4 Disclosure, Inc. through the OTS. 5 Q. And directing your attention to Page 8 6 of the firm accounts section of Exhibit A14004, 7 does it indicate the number of shares of MCO 8 Holdings, Inc. owned by Drexel on March 31, 1988? 9 A. Yes, it does. It's hard to read here. 10 Q. What does it say? 11 A. It says 233,600. 12 Q. Is -- 13 MR. VEIS: Your Honor, I move the 14 admission of Exhibit A14004. 15 MR. EISENHART: No objection. 16 THE COURT: Received. Did you move 17 14003? 18 MR. VEIS: I thought I did; but if I 19 didn't, I so move it. 20 MR. EISENHART: I have no objection. 21 THE COURT: Received. 22 Q. (BY MR. VEIS) Ms. Suder, is 14350 1 Exhibit A14004 typical of the Forms 13F that you 2 received from Disclosure, Inc. through the OTS? 3 A. Yes. 4 Q. Ms. Suder, I hand you a document that's 5 been marked as Exhibit A14005. 6 Do you recognize that document? 7 A. Yes, I do. 8 Q. What is it? 9 A. This is the supplemental expert report 10 that I prepared. 11 MR. VEIS: Your Honor, I move the 12 admission of Exhibit A14005. 13 MR. EISENHART: No objection. 14 THE COURT: Received. 15 Q. (BY MR. VEIS) Ms. Suder, does 16 Exhibit A14005 contain a summary of the 17 information that you obtained from Forms 13F filed 18 by Drexel Burnham Lambert with the SEC? 19 A. Yes, it does. 20 Q. Where does it contain that information? 21 A. On Attachment A to the report, a 22 spreadsheet. 14351 1 Q. Would you please explain the 2 information set forth on Attachment A to the 3 supplemental report? 4 A. Yes. This is a summary of the 5 information that I received. In the far left 6 column, there are "As" in parens and "Bs." All 7 that indicates to you is that that particular 8 information marked with "A" came from CDA Spectrum 9 whereas the "Bs" came from Disclosure, Inc. 10 The report date of the 13Fs are listed 11 there. These are all the ones that I was able to 12 obtain. I didn't purposely exclude any. This was 13 what was available. 14 The next two columns show the firm 15 accounts. It shows the market value of the shares 16 held and the number of shares held taken directly 17 off the Form 13Fs. 18 The next two are the discretion 19 accounts, the markup value, and the number of 20 shares held. 21 Q. And could you briefly summarize the 22 information set forth concerning the dates and 14352 1 amounts of shares held by Drexel? 2 A. Yes. These indicate that as of -- 3 starting in March of 1980, it shows "NR" meaning 4 not reported, meaning that there was a 13F filed 5 but there were no reported holdings of MCO 6 Holdings. Drexel reported no holdings in MCO. 7 In March of 1985, they had 382 shares. 8 And then they reported none in March and June of 9 '86. And then beginning September 30th of '86, 10 they reported 233,600 shares that they held of 11 MCO. That stayed the same for December 1986, 12 March of '87, June of '87, September of '87, 13 December of '87, March of '88. And then at June 14 of '88, their holdings dropped to 225,100, 15 remained there through September of '88. And then 16 at December of '88, there were no recorded 17 holdings of MCO stock. 18 Q. And I take it that the column under 19 "market value of shares held" sets forth the 20 market value of those shares held by Drexel as of 21 each of the filing dates? 22 A. Yes, as reported by Drexel on their 14353 1 Form 13F. 2 Q. So then, for example, as of September 3 30th, 1986, it was $3,095,000? 4 A. That's correct. 5 Q. Ms. Suder, did Drexel's Form 13F 6 reflect ownership of shares of Federated 7 Development Company? 8 A. No. 9 Q. Do you know whether Federated 10 Development Company was registered with the SEC in 11 the period 1985 through 1988? 12 A. No, I don't believe it was. 13 Q. Do you know whether Drexel would have 14 been required to report holdings of an un 15 registered company on Form 13F? 16 A. No, they would not. 17 Q. Do you know whether Federated 18 Development Company went private at any time? 19 A. Yes. I -- well, yes, I do know that. 20 Mr. Griffith said in a comment before the Court 21 that it went private in 1987. 22 Q. Now, what's your understanding of the 14354 1 term "going private"? 2 A. That there are no more publicly-held 3 shares. 4 Q. Since there was no information 5 concerning Federated Development in Drexel's Form 6 13F, did you seek other information concerning any 7 holdings of or transactions in the stock of 8 Federated Development Company by Drexel Burnham 9 Lambert? 10 A. Yes, I did. 11 Q. Where did you seek that information? 12 A. We queried the Drexel transaction 13 database to find the transactions in the Federated 14 Development stock. 15 Q. Was there information concerning equity 16 securities in the Drexel database? 17 A. Yes, there was. 18 Q. And how did you compile the 19 information? 20 A. After we pulled the trading in 21 Federated Development stock, we were asked -- I 22 was asked by the OTS to concentrate my analysis on 14355 1 a particular account, which is the account shown 2 on Attachment B here, the Drexel account, which 3 was referred to as the high-yield common stock 4 account. 5 Q. All right. That's the Account 6 No. 0612942? 7 A. Yes, it is. 8 Q. Could you please explain the 9 transactional information set forth in Attachment 10 B to your report? 11 A. Yes. This is -- this is -- these are, 12 I should say, the transactions in this particular 13 account, the 0612942 account which was Drexel's 14 high-yield common stock account belonging to 15 Drexel. These are the transactions in the 16 Federated stock which has the CUSIP 3141230 -- 17 excuse me -- 3230. And it is in chronological 18 order. So, starting at the left-hand side, it 19 shows the trade date. The first trade on 20 July 2nd, 1981 was a buy. Purchasing account is 21 the account number in the Drexel account which, in 22 this case, the purchaser is this account that 14356 1 we're speaking of. The selling account, that 2 information was not given was $43 a share. There 3 were 43 shares traded. And then that would have 4 been -- and then it goes on to calculate the 5 assumed balance and the assumed cumulative 6 investment. 7 Q. Now, you stated that you were 8 instructed to limit your review to that particular 9 account. 10 Do you know the significance of the 06 11 prefix in that account number? 12 A. Well, 06 -- from our work on the Drexel 13 database during the two or three years we were 14 working with it, 06 was clearly a Drexel account 15 and was labeled so in the database in the names 16 portion of the database of the high-yield common 17 stock. Mr. Deignan also mentioned in his 18 testimony that 06 was a Drexel account. 19 Q. Now, could you please explain how you 20 arrived at the assumed balance information? 21 A. Yes. I was asked -- if you'd turn to 22 the last page of this, which is Page 4, I was 14357 1 asked to -- asked by the OTS attorneys to assume 2 that the very last transaction here which is on 3 May 18th, 1987, which is a sell of 69,432 shares, 4 that that sell zeroed out this account, that 5 zeroed out the holdings in that account. 6 So, therefore, we show it as zeroing 7 out the account. And then it's just a straight 8 arithmetic. Moving backwards, right before, there 9 was a sell of 40 shares. And so, you would 10 subtract that. It's just a straight plus or 11 minus, the buys or sells, and moving backwards. 12 Q. How did you arrive at the assumed 13 cumulative investment reflected in the right-hand 14 column? 15 A. The assumed cumulative investment was 16 calculated by taking the assumed balance backwards 17 at the point where that assumed balance became 18 zero or, in this case, it was negative 1, which is 19 on the first page, and it is the fourth 20 transaction down. You'll see the assumed balance 21 is a negative 1. If you assume that basically to 22 be the same as zero, we started the assumed 14358 1 cumulative investment there. So, the next 2 transaction, which is a buy of 26 shares at $45 a 3 share, we then did $26 times -- excuse me -- 26 4 shares times 45 and that gives you $1,170 would be 5 the assumed money that they had put out. And then 6 it's just arithmetic again going forward for each 7 buy. You'd have more money invested and, for each 8 sell, then you'd have a reduction which must be 9 invested. 10 Q. Now, does the date of the final 11 transaction, May 18, '87, coincide with the 12 approximate date of Federated going private 13 transaction? 14 A. Well, I believe so. Mr. Griffith 15 mentioned that it was in 1987 that they went 16 private. 17 MR. VEIS: My colleague informs me that 18 I haven't yet offered this exhibit in evidence, 19 Your Honor. I move the admission of Exhibit 20 A14005. 21 MR. EISENHART: No objection. 22 THE COURT: Received. 14359 1 Q. (BY MR. VEIS) Ms. Suder, I show you 2 four documents which have been marked as 3 Exhibit A14006 which purports to be a list of 4 shareholders of Federated Development Company, 5 redacted by Federated, dated 12/15/1982; 6 Exhibit A14007, which purports to be a redacted 7 shareholder list for Federated Development Company 8 dated November 26, 1986; Exhibit A14008, which 9 purports to be a redacted shareholder list for 10 Federated Development Company dated January 26, 11 1987; and Exhibit A14009, which purports to be a 12 redacted shareholder list for Federated 13 Development dated April 3rd, 1987. 14 Do you recognize those documents? 15 A. Yes. 16 Q. What are they? 17 A. These are the lists of shareholders of 18 Federated Development Company that were made 19 available to me. 20 21 (Discussion held off the record.) 22 14360 1 MR. VEIS: Your Honor, I move the 2 admission of Exhibits A14005, A14006 -- I'm sorry. 3 Let me start over again. A14006, A14007, A14008, 4 and A14009. 5 MR. EISENHART: Your Honor, I would 6 have an objection to these because I think you 7 will find they played absolutely no part in her 8 report. She did not consult these or use them in 9 the preparation of her report. So, I'm somewhat 10 at a loss as to why they are being offered. 11 MR. VEIS: Your Honor, I will ask a 12 question about what she did with them. They are, 13 however, documents provided by Federated, the 14 respondents, and purport to list, as Ms. Suder 15 stated, a holding of shares of Federated by Drexel 16 Burnham Lambert. They certainly seem to have some 17 bearing on the subject matter of her report. 18 MR. EISENHART: Well, I would agree 19 that they would, Your Honor, except I don't 20 believe she used them in the preparation of the 21 report. Actually, I think the only reason they 22 are being offered is as somewhat of a face-saving 14361 1 gesture by OTS since they relied on the 2 shareholder lists to justify the production of her 3 supplemental report long after the discovery had 4 closed. But, in fact, if you look at the 5 supplemental report and you look at the 6 attachments to it, she never used the shareholder 7 list. The material she used were 8 publicly-available documents or her own database 9 which, of course, could have been queried a year 10 or more ago. 11 So, I think the only reason the 12 shareholder lists are being offered is that they 13 feel a little embarrassed that they relied on 14 these to justify their late submission of the 15 reports and then they were never used. 16 THE COURT: All right. I'll receive 17 them. 18 Q. (BY MR. VEIS) Ms. Suder, did you 19 review those shareholders lists, Exhibits A14006, 20 14007, 14008, and 14009 -- 21 A. Yes, sir. 22 Q. -- in order to compare the balances 14362 1 reflected on them to those you calculated based 2 upon the transactions from the Drexel database 3 that are reflected in Attachment B? 4 A. Yes, I did compare them. 5 Q. What did you find? 6 A. I found that through November of '86, 7 the holdings listed on the shareholder lists were 8 slightly more than the holdings shown on 9 Attachment B. 10 Q. And subsequent? 11 A. Subsequently, the -- although the 12 holdings changed slightly on the shareholder list, 13 the Attachment B shows Drexel picking up about 14 29,000 additional shares starting December 4th of 15 1986. 16 Q. Can you account for that difference? 17 A. I can only assume that Drexel did not 18 report their additional holdings to the compiler 19 of the shareholder lists. 20 Q. And do you know how shareholder lists 21 are compiled in general? 22 A. Only that one has to report to the 14363 1 recordkeeper that one has bought the shares. 2 Q. So, in other words, you're saying that 3 unless it's reported, the recordkeeper won't know 4 or won't have it in the records? 5 A. I believe that's correct. 6 Q. Thank you. 7 MR. VEIS: I have nothing further, Your 8 Honor. 9 THE COURT: Mr. Eisenhart, are you 10 going to cross-examine? 11 MR. EISENHART: I am going to 12 cross-examine, Your Honor. I would expect my 13 cross-examination would take us past 5:00 o'clock. 14 We can start it now or we can -- 15 THE COURT: All right. We'll adjourn 16 until 9:00 o'clock. 17 18 (Whereupon at 4:28 p.m. 19 the proceedings were recessed.) 20 21 22 14364 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 13th day of July, 17 1998. 18 ____________________________ MARCY CLARK, CSR 19 Certified Shorthand Reporter In and for the State of Texas 20 Certification No. 4935 Expiration Date: 12-31-99 21 22 14365 1 STATE OF TEXAS COUNTY OF HARRIS 2 REPORTER'S CERTIFICATION 3 TO THE TRIAL PROCEEDINGS 4 I, Shauna Foreman, the undersigned 5 Certified Shorthand Reporter in and for the 6 State of Texas, certify that the facts stated 7 in the foregoing pages are true and correct 8 to the best of my ability. 9 I further certify that I am neither 10 attorney nor counsel for, related to nor employed 11 by, any of the parties to the action in which this 12 testimony was taken and, further, I am not a 13 relative or employee of any counsel employed by 14 the parties hereto, or financially interested in 15 the action. 16 SUBSCRIBED AND SWORN TO under my hand 17 and seal of office on this the 13th day of July, 18 1998. 19 _____________________________ SHAUNA FOREMAN, CSR 20 Certified Shorthand Reporter In and for the State of Texas 21 Certification No. 3786 Expiration Date: 12-31-98 22